As filed with the Securities and Exchange Commission on January 7, 1999March 24, 2000
Registration Statement No. 33-__________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------------------------------
FIRST MERCHANTS CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1544218
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6712
(Primary Standard Industrial Classification Code Number)
200 East Jackson Street
Muncie, Indiana 47305
(765) 747-1500
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
----------------------------------------------------------
Larry R. Helms With a copy to:
Senior Vice President David R. Prechtel, Esq.
First Merchants Corporation Bingham Summers Welsh &
200 East Jackson Street Spilman, LLP
Muncie, Indiana 47305 2700 Market Tower
(765) 747-1530 10 West Market Street
Indianapolis, Indiana 46204
(317) 635-8900
(Name, address, including zip code,
and telephone number, including area
John R. Zerkle, Esq.
code, of agent for service) Leagre Chandler & Millard
1400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204
(317) 808-3000
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this Registration
Statement and the effective time of the merger described in the accompanying
Proxy Statement/Prospectus.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /|_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /|_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
|_|
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Title of each class Amount Proposed Proposed Amount of
of securities to be maximum offering maximum aggregate registration
to be registered registered(1)registered price per unit(2) offering price (2)price(2) fee
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common Stock, Up to
no par value 810,6581,346,118 shares $9.337766 $7,569,735 $2,233.07$10.77804975 $14,508,526.77 $4,033.37
(1) This represents the maximum number of shares to be offered to Anderson
Community BankDecatur
Financial, Inc. shareholders.
(2) The maximum offering price is based on an estimate solely for the purpose
of calculating the registration fee and has been calculated in accordance
with Rule 457 (f)(2) on the basis of the book value on November 30, 1998February 29, 2000 of
the shares of common stock of Anderson Community
BankDecatur Financial, Inc. to be cancelled in
connection with the merger.
-----------------------------------------------------------
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ANDERSON COMMUNITY BANK
19 WEST 10TH STREET
ANDERSON, INDIANA 46016DECATUR FINANCIAL, INC.
520 North 13th Street
P.O. Box 988
Decatur, Indiana 46733
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD
_______________, 1999___________ __, 2000
Notice is hereby given that, pursuant to the call of the Board of
Directors, a Special Meeting of the Shareholders of Anderson Community Bank,Decatur Financial, Inc.,
will be held on ________________ ___, 1999,_________, _________, __, 2000, at ________:__ p.m. local time, at
the
Anderson Fine Arts Center_________________ located at 32 West 10th Street, Anderson,_________________, Decatur, Indiana 46016.46733.
The purposes of the Special Meeting are:
1. To consider and vote upon the transactions contemplated by the Agreement
of Reorganization and Merger dated October 27, 1998 (the "Agreement"),
amongJanuary 20, 2000, between First Merchants
Corporation Pendleton Banking Company, and Anderson
Community Bank.Decatur Financial, Inc. Pursuant to the Agreement, Anderson Community BankDecatur
Financial, Inc. will be merged into Pendleton BankingFirst Merchants Corporation and Decatur Bank
& Trust Company will become a wholly-owned subsidiary of First Merchants
Corporation, under the name of "The Madison Community Bank."Corporation. 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.
ShareholdersHolders of Anderson Community BankDecatur Financial, Inc. common stock of record at the close of
business on ______________ ___, 1999,__________, 2000, will be entitled to notice of, and to vote at, the
Special Meeting and any adjournment thereof.
Shareholders of Anderson Community BankDecatur Financial, Inc. are entitled to assert dissenters'
rights of appraisal in connection with the proposed merger in accordance withunder Chapter 44 of
the Indiana Code Section 28-1-7-21 under The Indiana Financial Institutions Act,Business Corporation Law, a copy of which is attached as Appendix B
to the accompanying Proxy Statement-Prospectus.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.Whether or not you plan to attend the Special Meeting in person, please
complete, date, sign and return the enclosed proxy card in the enclosed
envelope, which requires no postage if mailed in the United States. If you
attend the Special Meeting, you may vote in person if you wish, even if you have
previously returned your proxy card.
By Order of the Board of Directors
James F. Ault,Paul E. Strickler, Chairman of the Board
__________, 1999
Anderson,_____________, 2000
Decatur, Indiana
PROSPECTUS OF FIRST MERCHANTS CORPORATION FOR UP TO
810,6581,346,118 SHARES OF COMMON STOCK
AND
PROXY STATEMENT OF ANDERSON COMMUNITY BANKDECATUR FINANCIAL, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ____________, 1999___________, 2000
The Boards of Directors of First Merchants Corporation ("FIRST
MERCHANTS"), Pendleton Banking Company ("PENDLETON"First Merchants")
and Anderson Community BankDecatur Financial, Inc. ("ANDERSON"Decatur Financial") have agreed to merge AndersonDecatur
Financial with and into Pendleton under the
name of "The Madison Community Bank."First Merchants. This Proxy Statement-Prospectus serves
as a Prospectus with respect to a maximum of 810,6581,346,118 shares of First Merchants
common stock being offered to shareholders of AndersonDecatur Financial in connection
with the proposed merger. This Proxy Statement-Prospectus constitutes the Proxy
Statement of AndersonDecatur Financial in connection with the Special Meeting of
Shareholders to be held on __________________ ___, 1999___________, _________ __, 2000 for the purpose of
voting on the merger.
If AndersonDecatur Financial is merged into Pendleton,First Merchants, each share of AndersonDecatur
Financial common stock held by you shall be converted into the right to receive,
1.38at your election, either (i) 9.13 shares of First Merchants common stock or (ii)
$237.39 in cash. The amount of cash payable in connection with the merger is
subject to various limitations and prorations. Under certain circumstances, an
election to receive cash may be converted into an election to receive First
Merchants common stock. In addition, the 9.13 to 1 conversion ratio is subject
to adjustment under certain circumstances. These matters are described in
greater detail in this Proxy Statement-Prospectus. First Merchants will pay cash
for any fractional share interests resulting from the exchangeconversion ratio.
The merger cannot be completed unless the shareholders of AndersonDecatur Financial
approve it. AndersonDecatur Financial will hold a special meeting of its shareholders
for that purpose. YOUR VOTE IS VERY IMPORTANT.Your vote is very important. Whether or not you plan to attend
the Special Meeting, please take the time to vote by completing and returning
the enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the merger.
The Special Meeting of the Shareholders of AndersonDecatur Financial will be held
on ___________________ __, 19992000 at ____:__ p.m. local time, at the Anderson Fine Arts Center
located at 32 West 10th Street, Anderson,_______________, _____________,
Decatur, Indiana 46016.46733.
This document provides you with detailed information about the Special
Meeting and the proposed merger. We encourage you to read this entire document
carefully. You can also get information about First Merchants from publicly
available documents that First Merchants has filed with the Securities and
Exchange Commission. Additionally, shares of First Merchants common stock are
traded in the over-the-counter market and share prices are reported by the
NASDAQ National Market System under the symbol FRME.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED PURSUANT
TO THIS PROXY STATEMENT-PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT-PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROXY STATEMENT-PROSPECTUS DATED ___________, 1999
AND FIRST MAILED TO SHAREHOLDERS ON _______________, 1999.Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued pursuant
to this Proxy Statement-Prospectus or determined if this Proxy
Statement-Prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
Proxy Statement-Prospectus dated _________ __, 2000
and first mailed to shareholders on __________ __, 2000.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT FIRST MERCHANTS THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
DOCUMENT. THE INFORMATION INCORPORATED BY REFERENCE IS AVAILABLE WITHOUT CHARGE
TO EACH ANDERSON SHAREHOLDER UPON WRITTEN OR ORAL REQUEST TO LARRYThis Proxy Statement-Prospectus incorporates important business and financial
information about First Merchants that is not included in or delivered with this
document. The information incorporated by reference is available without charge
to each Decatur Financial shareholder upon written or oral request to Larry R.
HELMS,
SENIOR VICE PRESIDENT AND GENERAL COUNSEL, FIRST MERCHANTS CORPORATION,Helms, Senior Vice President and General Counsel, First Merchants Corporation,
200 EAST
JACKSON STREET, MUNCIE INDIANAEast Jackson Street, Muncie Indiana 47305, (765) 747-1530. TO OBTAIN TIMELY DELIVERY,
YOU SHOULD REQUEST SUCH INFORMATION BY __________, 1999.
TABLE OF CONTENTS
PAGE
SUMMARY.........................................................................................1
The Companies..........................................................................1
The Shareholders Meeting...............................................................2
Record Date; Vote Required.............................................................2
Reasons for the Merger.................................................................2
Recommendation to Shareholders.........................................................3
The Merger.............................................................................3
Exchange of Shares.....................................................................3
Opinion of Financial Advisor...........................................................3
What We Need to Do to Complete the Merger..............................................4
Termination of the Merger..............................................................4
Waiver and Amendment...................................................................5
Accounting Treatment...................................................................5
Regulatory Approvals...................................................................5
Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain Anderson Shareholders.................................................5
Comparative Rights of First Merchants Shareholders and Anderson Shareholders...........5
Stock Options..........................................................................6
Dissenters' Rights.....................................................................6
Certain Federal Income Tax Consequences................................................6
Management and Operations After the Merger.............................................6
Interests of Directors and Officers in the Merger that are Different
From Your Interests...........................................................6
Pro Forma Comparative Per Share Data...................................................7
SELECTED FINANCIAL DATA.........................................................................9
SPECIAL MEETING (Anderson Shareholders)........................................................16
General Information...................................................................16
Matters To Be Considered..............................................................16
Votes Required........................................................................16
Proxies...............................................................................16
Solicitation of Proxies...............................................................17
Recommendations of the Board of Directors.............................................17
(i)
MERGER.........................................................................................18
Description of the Merger.............................................................18
First Merchants' and Pendleton's Reasons for the Merger...............................18
Background and Anderson's Reasons for the Merger......................................19
Opinion of Financial Advisor..........................................................20
Recommendation of the Board of Directors..............................................24
Exchange of Anderson Common Stock.....................................................24
Rights of Dissenting Shareholders.....................................................25
Resale of First Merchants Common Stock by Anderson Affiliates.........................27
Conditions to Consummation of the Merger..............................................27
Termination; Waiver; Amendment........................................................28
Restrictions Affecting Anderson.......................................................29
Regulatory Approvals..................................................................30
Effective Date of the Merger..........................................................30
Management After the Merger...........................................................31
Interests of Certain Persons in the Merger............................................31
Stock Options.........................................................................32
Accounting Treatment..................................................................32
Registration Statement................................................................33
FEDERAL INCOME TAX CONSEQUENCES................................................................34
COMPARATIVE PER SHARE DATA.....................................................................36
Nature of Trading Market..............................................................36
Dividends.............................................................................37
DESCRIPTION OF FIRST MERCHANTS.................................................................38
Business..............................................................................38
Acquisition Policy and Pending Transactions...........................................38
Incorporation of Certain Information by Reference.....................................39
DESCRIPTION OF PENDLETON.......................................................................40
Business..............................................................................40
Properties............................................................................40
Litigation............................................................................40
Employees.............................................................................40
Management............................................................................40
Security Ownership of Management......................................................42
Certain Relationships and Related Transactions........................................43
DESCRIPTION OF ANDERSON........................................................................44
Business..............................................................................44
Properties............................................................................44
Litigation............................................................................44
Employees.............................................................................44
Management............................................................................44
Security Ownership of Certain Beneficial Owners and Management........................46
Certain Relationships and Related Transactions........................................48
(ii)
ANDERSON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................49
REGULATION AND SUPERVISION OF FIRST MERCHANTS
AND ITS SUBSIDIARIES AND ANDERSON..............................................................72
Bank Holding Company Regulation.......................................................72
Capital Adequacy Guidelines for Bank Holding Companies................................72
Bank Regulation.......................................................................73
Bank Capital Requirements.............................................................74
FDICIA................................................................................74
Deposit Insurance.....................................................................75
Brokered Deposits.....................................................................75
Interstate Banking And Branching......................................................76
Additional Matters....................................................................76
COMPARISON OF COMMON STOCK.....................................................................77
Governing Law.........................................................................77
Authorized But Unissued Shares........................................................77
Preemptive Rights.....................................................................78
Dividend Rights.......................................................................78
Voting Rights.........................................................................79
Dissenters' Rights....................................................................79
Liquidation Rights....................................................................80
Assessment and Redemption.............................................................80
Anti-Takeover Provisions..............................................................81
Director Liability....................................................................83
LEGAL OPINIONS.................................................................................83
EXPERTS........................................................................................83
OTHER MATTERS..................................................................................83To obtain timely
delivery, you should request such information by ______ __, 2000.
TABLE OF CONTENTS
PAGE
SUMMARY ................................................................... 1
The Companies .................................................... 1
The Shareholders Meeting ......................................... 1
Record Date; Vote Required ....................................... 2
Reasons for the Merger ........................................... 2
Recommendation to Shareholders ................................... 3
The Merger ....................................................... 3
Exchange of Shares ............................................... 3
Opinion of Financial Adviser ..................................... 4
What We Need to Do to Complete the Merger ........................ 4
Termination of the Merger ........................................ 4
Waiver and Amendment ............................................. 5
Accounting Treatment ............................................. 5
Regulatory Approvals ............................................. 5
Restrictions Placed on the Sale of First Merchants
Stock Issued to Certain Decatur Financial Shareholders .. 5
Comparative Rights of First Merchants Shareholders And Decatur
Financial Shareholders .................................. 5
Stock Options .................................................... 6
Dissenters' Rights ............................................... 6
Certain Federal Income Tax Consequences .......................... 6
Management and Operations After the Merger ....................... 6
Interests of Directors and Officers in the Merger that
are Different From Your Interests ....................... 7
Pro Forma Comparative Per Share Data ............................. 7
SELECTED FINANCIAL DATA ................................................... 9
SPECIAL MEETING (Decatur Financial Shareholders) .......................... 16
General Information .............................................. 16
Matters To Be Considered ......................................... 16
Votes Required ................................................... 16
Proxies .......................................................... 16
Solicitation of Proxies .......................................... 17
i
Recommendations .................................................. 17
MERGER .................................................................... 18
Description of the Merger ........................................ 18
First Merchants' Reasons for the Merger .......................... 18
Decatur Financial's Reasons for the Merger ....................... 19
Opinion of Financial Advisor ..................................... 20
Recommendation of the Board of Directors ......................... 25
Exchange of Decatur Financial Common Stock ....................... 25
Conversion Ratio Adjustment ...................................... 26
Rights of Dissenting Shareholders ................................ 27
Resale of First Merchants Common Stock by Decatur
Financial Affiliates .......................................... 29
Conditions to Consummation of the Merger ......................... 29
Termination; Waiver; Amendment ................................... 30
Restrictions Affecting Decatur Financial ......................... 31
Regulatory Approvals ............................................. 31
Effective Date of the Merger ..................................... 32
Management After the Merger ...................................... 33
Interests of Certain Persons in the Merger ....................... 33
Stock Options .................................................... 34
Accounting Treatment ............................................. 34
Registration Statement ........................................... 34
FEDERAL INCOME TAX CONSEQUENCES ........................................... 35
COMPARATIVE PER SHARE DATA ................................................ 37
Nature of Trading Market ......................................... 37
Dividends ........................................................ 38
DESCRIPTION OF FIRST MERCHANTS ............................................ 40
Business ......................................................... 40
Acquisition Policy and Pending Transactions ...................... 40
Incorporation of Certain Information by Reference ................ 41
DESCRIPTION OF DECATUR FINANCIAL .......................................... 42
Business ......................................................... 42
Properties ....................................................... 42
Litigation ....................................................... 42
Employees ........................................................ 42
Management ....................................................... 43
Security Ownership of Certain Beneficial Owners and Management ... 44
Certain Relationships and Related Transactions ................... 45
ii
REGULATION AND SUPERVISION OF FIRST MERCHANTS,
DECATUR FINANCIAL AND SUBSIDIARIES ........................................ 46
Bank Holding Company Regulation .................................. 46
Capital Adequacy Guidelines for Bank Holding Companies ........... 47
Bank Regulation .................................................. 47
Bank Capital Requirements ........................................ 48
FDICIA ........................................................... 48
Deposit Insurance ................................................ 49
Brokered Deposits ................................................ 50
Interstate Banking And Branching ................................. 50
Financial Services Modernization Act ............................. 50
Additional Matters ............................................... 51
COMPARISON OF COMMON STOCK ................................................ 52
Governing Law .................................................... 52
Authorized But Unissued Shares ................................... 52
Preemptive Rights ................................................ 53
Dividend Rights .................................................. 53
Voting Rights .................................................... 54
Dissenters' Rights ............................................... 54
Liquidation Rights ............................................... 55
Assessment and Redemption ........................................ 55
Anti-Takeover Provisions ......................................... 55
Director Liability ............................................... 57
LEGAL OPINIONS ............................................................ 58
EXPERTS ................................................................... 58
OTHER MATTERS ............................................................. 58
WHERE YOU CAN FIND ADDITIONAL INFORMATION......................................................84
FORWARD LOOKING STATEMENTS.....................................................................86
INDEX TO FINANCIAL STATEMENTS.................................................................F-1
APPENDICES
A. Agreement of Reorganization and Merger......................................A-1
B. Section 28-1-7-21 of The Indiana Financial Institutions Act
(Dissenters' Rights)........................................................B-1
C. Fairness Opinion of Professional Bank Services, Inc.........................C-1
(iii)
SUMMARY
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THE PROXY
STATEMENT-PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE ENTIRE PROXY
STATEMENT-PROSPECTUS AND THE OTHER DOCUMENTS TO WHICH THIS DOCUMENT REFERS TO
UNDERSTAND THE MERGER FULLY. SEE "WHERE YOU CAN FIND ADDITIONAL INFORMATION" ON
PAGE 84.
THE COMPANIES (PAGES 38,INFORMATION ................................. 58
FORWARD LOOKING STATEMENTS ................................................ 60
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 Renninger & Associates, LLC ................ C-1
iii
SUMMARY
This brief summary highlights selected information from the Proxy
Statement-Prospectus. It does not contain all of the information that is
important to you. You should carefully read the entire Proxy
Statement-Prospectus and the other documents to which this document refers to
understand the merger fully. See "Where You Can Find Additional Information" on
page 58.
The Companies (pages 40 AND 44)
FIRST MERCHANTS CORPORATIONand 42)
First Merchants Corporation
200 East Jackson Street
Muncie, Indiana 47305
(765) 747-1500
First Merchants is a multi-bank holding company organized under the laws of the
State of Indiana and headquartered in Muncie, Indiana. First Merchants has fivesix
banking subsidiaries,subsidiaries; First Merchants Bank, National Association,Association; First United
Bank, Pendleton Banking Company,Bank; The Madison Community Bank; The Union County National Bank of Liberty andLiberty; The
Randolph County Bank.Bank and The First National Bank of Portland. In addition, Pendleton Banking CompanyThe
Madison Community Bank owns First Merchants Insurance Services, Inc. See
"DESCRIPTION OF FIRST MERCHANTS."
First Merchants has also entered into a definitive agreement to merge JayDecatur Financial, Corporation into First Merchants. As a result of the merger, The First
National Bank of Portland will become a wholly-owned subsidiary of First
Merchants. See "DESCRIPTION OF FIRST MERCHANTS--Acquisition Policy and Pending
Transactions."
PENDLETON BANKING COMPANY
100 West StateInc.
520 North 13th Street
Pendleton,P.O. Box 988
Decatur, Indiana 46064
(765) 778-2132
Pendleton46733
(219) 724-2157
Decatur Financial is a one bank holding company organized and existing under the laws of the State of
Indiana and a wholly-owned subsidiary of First Merchants. Pendleton also
owns and operates a subsidiary, First Merchants Insurance Services, Inc. See
"DESCRIPTION OF PENDLETON."
ANDERSON COMMUNITY BANK
19 West 10th Street
Anderson, Indiana 46016
(765) 622-9773
Anderson is a bank organized and existing under the laws of the
State of Indiana. Decatur Bank & Trust Company is a wholly-owned subsidiary of
Decatur Financial. See "DESCRIPTION OF ANDERSON.DECATUR FINANCIAL."
1
THE SHAREHOLDERS MEETING (PAGEThe Shareholders Meeting (page 16)
The Special Meeting of Shareholders of AndersonDecatur Financial will be held on
________ __, 1999,2000, at _____:__ p.m. local time, at the Anderson Fine Arts Center, 32 West 10th
Street, Anderson,_____________________,
_________________, Decatur, Indiana 46016.46733. At the Special Meeting, AndersonDecatur
Financial shareholders will ask its
shareholders:be asked:
1. to approve the merger of AndersonDecatur Financial and Pendleton;First Merchants; and
2. to act on any other items that may be submitted to a vote at the
Special Meeting.
RECORD DATE; VOTE REQUIRED (PAGE1
Record Date; Vote Required (page 16)
You can vote at the Special Meeting of Shareholders if you owned common stock of
AndersonDecatur Financial at the close of business on _________ 1999.__, 2000. You can cast
one vote for each share of stock you owned on that date. To approve the merger,
the holders of a majority of the shares of AndersonDecatur Financial common stock
outstanding must vote in its favor. You can vote your shares by attending the
Special Meeting of Shareholders or you can mark the enclosed proxy card with
your vote, sign it and mail it in the enclosed return envelope. You can revoke
your proxy as late as the date of the Special Meetingmeeting either by sending in a new proxy
or by attending the Special Meetingmeeting and voting in person.
Anderson'sDecatur Financial's executive officers, directors and their affiliates controlown of
record or beneficially in the aggregate directly and indirectly, 296,33259,513 shares or approximately 48%40% of
the shares of AndersonDecatur Financial common stock outstanding. In addition, First Merchants owns
25,000 shares or approximately 4%Each member of the
Board of Directors of Decatur Financial as of January 20, 2000, the date the
Agreement of Reorganization and Merger was executed, has agreed to cause all
shares of AndersonDecatur Financial common stock outstanding. The Anderson Board anticipates that allowned by him of these shares willrecord or beneficially
to be voted in favor of the merger. If all such shares are voted in favorThe members of the merger, approvalDecatur Financial Board
of Directors as of January 20, 2000 own of record or beneficially 60,285 shares
or approximately 41% of the merger is assured.
REASONS FOR THE MERGER (PAGESshares of Decatur Financial common stock
outstanding.
Reasons for the Merger (pages 18 ANDand 19)
FIRST MERCHANTS AND PENDLETON.First Merchants. First Merchants' and Pendleton's BoardsBoard of Directors considered a number of
financial and nonfinancial factors in making theirits decision to merge Anderson with Pendleton,Decatur
Financial, including theirits respect for the ability and integrity of the AndersonDecatur
Financial Board of Directors, management and staff. The Boards believeBoard believes that
expanding First Merchants' operations in the areas AndersonDecatur Financial operates
offers long term strategic benefits to First Merchants.
Decatur Financial. In considering the merger with First Merchants, the Board of
Directors of Decatur Financial collected and evaluated a variety of economic,
financial and market information regarding First Merchants and Pendleton. Asits subsidiaries,
their respective businesses and First Merchants' reputation and future
prospects. In the opinion of the Board of Directors of Decatur Financial,
favorable factors included First Merchants' strong earnings and stock
performance, its management, the compatibility of its markets to those of
Decatur Financial and the attractiveness of First Merchants' offer from a
result,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 Decatur Financial common stock, which has no established public
trading market. In addition, the sole shareholder of Pendleton,
will approve the merger.
ANDERSON. The Anderson Board of Directors considered a numberthe opinion of
Renninger & Associates, LLC, the financial and
non-financial factors in reaching its decisionadvisor to approveDecatur Financial,
indicating that the consideration to be received by Decatur Financial's
shareholders under the Agreement and
merger. These factors included, among other things, the prospectsis fair from a financial perspective. The Board
of Anderson as
an independent bank in the current and anticipated competitive environment of
the financial services industry, the amount and form of the consideration First
Merchants offered to the Anderson shareholders, the tax-free nature ofDirectors believes that the merger the fairness opinion of Professionalwill have a positive, long-term impact on
Decatur Bank Services, Inc. and the
analysis underlying that opinion, and the potential effects of the merger on
Anderson& Trust Company's customers and employees and the communities
Anderson serves.served by Decatur Bank & Trust Company.
2
RECOMMENDATION TO SHAREHOLDERS (PAGESRecommendation to Shareholders (pages 17 AND 24)and 25 )
The Board of Directors of AndersonDecatur Financial believes that the merger is fair to you and in your
best interests and unanimously recommends that you vote "FOR" the proposal to
adopt the Agreement and approve the merger.
THE MERGER (PAGEThe Merger (page 18)
WE HAVE ATTACHED THE AGREEMENT OF REORGANIZATION AND MERGER (THE "AGREEMENT"We have attached the Agreement of Reorganization and Merger (the "Agreement") TO
THIS DOCUMENT AS APPENDIXto
this document as Appendix A. PLEASE READ THE AGREEMENT. IT IS THE LEGAL DOCUMENT
THAT GOVERNS THE MERGER.
AndersonPlease read the Agreement. It is the legal document
that governs the merger.
Decatur Financial will merge with Pendleton under the name of "The Madison Community
Bank"First Merchants and thereafter AndersonDecatur
Financial will cease to exist. AfterAs a result of the merger, the
resulting bank under the name of "The Madison Community Bank"Decatur Bank & Trust
Company will continue to
bebecome a wholly-owned subsidiary of First Merchants. We hope to
complete this merger in the firstsecond quarter of 1999.
EXCHANGE OF SHARES (PAGE 24)2000.
Exchange of Shares (page 25)
As an Andersona Decatur Financial shareholder, each of your shares of AndersonDecatur Financial
common stock will be converted into the right to receive, 1.38at your election,
either (i) 9.13 shares of First Merchants common stock or (ii) $237.39 in cash.
The amount of cash payable in connection with the merger is subject to various
limitations and prorations. Under certain circumstances, an election to receive
cash may be converted into an election to receive First Merchants common stock.
In addition, the 9.13 to 1 conversion ratio is subject to adjustment under
certain circumstances. Cash will be paid for fractional shares of First
Merchants common stock resulting from the 9.13 to 1 conversion ratio.
The exact number ofYou are being asked to complete the Election Form accompanying this Proxy
Statement- Prospectus to elect to receive either 9.13 shares of First Merchants
common stock thator $237.39 in cash for each share of Decatur Financial common stock
held by you. You may elect to receive cash for a portion of your shares and
First Merchants stock for a portion of your shares. To be effective, your
properly completed Election Form must be received by the Trust Department of
First Merchants Bank, National Association by 5:00 p.m. local time on __________
__, 2000. If a properly completed Election Form is not timely received, you will
be deemed to have elected to receive may be subject to adjustment under
certain circumstances describedFirst Merchants stock in detail later in this document.exchange for all
of your shares of Decatur Financial common stock.
There is currently no established trading market for shares of AndersonDecatur Financial
common stock. Shares of First Merchants common stock are traded in the
over-the-counter market and are reported on the NASDAQ National Market System.
The closing price of First Merchants common stock was $27.33$24.00 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),January 20, 2000, the business day before the merger was publicly announced, and
was $_______$__________ per share on __________________ __, 1999.2000. Based on the conversion ratio
of 1.38,9.13, the market value of the consideration that
Andersonto be received by Decatur
Financial shareholders willwho elect to receive First Merchants stock in the merger
for each share of AndersonDecatur Financial common stock would be $37.72$219.12 based on First
Merchants' closing stock price on August 19, 1998January 20, 2000 and $_______ based on First
Merchants' closing stock price
on3
On __________ __, 1999.2000. Of course, the market price of First Merchants' shares
will fluctuate prior to the merger, while the conversion ratio is fixed.
OPINION OF FINANCIAL ADVISOR (PAGEOpinion of Financial Adviser (page 20)
The Board of Directors of AndersonDecatur Financial has received the written opinion of
Professional Bank Services, Inc.Renninger & Associates, LLC dated OctoberJanuary 20, 1998,2000, that the terms of the merger
are fair from a financial point of view to the shareholders of Anderson.Decatur
Financial. The opinion was updated as of the date of this Proxy-Statement-Prospectus.Proxy
Statement-Prospectus. We have attached a copy of the opinion and update to this
document as Appendix C.
3
WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGE 27)What We Need to Do to Complete the Merger (page 29)
The completion of the merger depends on a number of conditions being met. In
addition to our compliance with the Agreement, these conditions include among
others:
1. approval of the Agreement by Anderson'sDecatur Financial shareholders;
2. approval of the Agreement by First Merchants, as the sole
shareholder of Pendleton;
3. approval of the merger by certain regulatory agencies; 4. the receipt of a letter from First Merchants' independent public
accountants as to its ability to account for the merger as a
"pooling of interests"; and
5.3. the receipt of an opinion of counsel with respect to certain federal
income tax matters.
TERMINATION OF THE MERGER (PAGE 28)Termination of the Merger (page 30)
The Agreement may be terminated before the merger becomes effective upon the
occurrence of certain events, including among others:
1. a material misrepresentation or breach of the Agreement;
2. a material adverse change in the financial condition of First
Merchants since September 30, 1999 or AndersonDecatur Financial since JuneNovember
30, 1998;1999;
3. the failure of the merger to qualify as a tax-free reorganization;
4. the failure of the merger to qualify for "pooling of interests"
accounting treatment;
5. the merger not having been completed before April 30, 1999;by October 2, 2000;
6. ifthe average daily closing price of First Merchants common stock for a
defined period before closing of the merger being less than $22.00 or
anygreater than $30.00, subject to the right of its subsidiaries (including
Pendleton) are acquiredthe nonterminating party
to preserve the Agreement by a third party;adjusting the conversion ratio;
7. if AndersonDecatur Financial furnishes information or enters into discussions
or negotiations with a third party relating to a proposed acquisition
of Anderson,Decatur Financial or Decatur Bank & Trust Company, if AndersonDecatur
Financial fails to give First Merchants written notice of any such
intention, or if Anderson'sDecatur Financial's
4
Board of Directors withdraws or modifies its recommendation to AndersonDecatur
Financial shareholders to vote for the merger following receipt of a
proposal for an acquisition from a third party;
4
8. if Anderson'sDecatur Financial's Board of Directors terminates the Agreement in
the exercise of its fiduciary duties after receipt of an unsolicited
acquisition proposal from a third party; or
9. if either party is unable to satisfy the conditions precedent to the
merger (providing such party is not then in material breach of the
Agreement).
If AndersonDecatur Financial terminates the Agreement in connection with an acquisition
proposal by a third party pursuant to items 7 or 8 above, AndersonDecatur Financial has
agreed to pay First Merchants the amount of $750,000$1,000,000 in liquidated damages.
WAIVER AND AMENDMENT (PAGE 28)Waiver and Amendment (page 30)
We can agree to amend the Agreement, and each of us can waive our right to
require the other party to adhere to the terms and conditions of the Agreement,
where the law allows. However, we may not do so after the AndersonDecatur Financial
shareholders approve the merger if the amendment or waiver would have a material
adverse effect on the AndersonDecatur Financial shareholders.
ACCOUNTING TREATMENT (PAGE 32)
We expect theAccounting Treatment (page 34)
The merger to qualifywill be accounted for as a "pooling of interests." This means that,
for accountingpurchase transaction. As a result, Decatur
Financial's assets and financial reporting purposes, weliabilities will treat our companies as
if they had always been one company.
REGULATORY APPROVALS (PAGE 30)be recorded by First Merchants at fair
values.
Regulatory Approvals (page 31)
The merger must be approved by the Board of Governors of the Federal Deposit Insurance CorporationReserve
System ("FDIC"Federal Reserve") and the Indiana Department of Financial Institutions
(the "Indiana("Indiana Department"). We have filed all of the required applications or
notices with the FDICFederal Reserve and the Indiana Department.
RESTRICTIONS PLACED ON THE SALE OF FIRST MERCHANTS STOCK ISSUED TO
CERTAIN ANDERSON SHAREHOLDERS (PAGE 27)Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain Decatur Financial Shareholders (page 29)
Certain resale restrictions apply to the sale or transfer of the shares of First
Merchants common stock issued to directors, executive officers and 10%
shareholders of AndersonDecatur Financial in exchange for their shares of AndersonDecatur
Financial common stock.
COMPARATIVE RIGHTS OF FIRST MERCHANTS SHAREHOLDERS
AND ANDERSON SHAREHOLDERS (PAGE 77)Comparative Rights of First Merchants Shareholders
And Decatur Financial Shareholders (page 52)
The rights of shareholders of First Merchants and AndersonDecatur Financial differ in
some respects. Upon completion of the merger, AndersonDecatur Financial shareholders who
receive First Merchants
5
common stock will take such stock subject to its terms and conditions. The
Articles of Incorporation of First Merchants contain certain anti-takeover
measures which may discourage or render more difficult a subsequent takeover of
First Merchants by another corporation.
In addition, First Merchants is
5
an Indiana business corporation whereas Anderson is an Indiana bank. Indiana law
differs as it relates to shares of a bank and shares of a corporation.
STOCK OPTIONS (PAGE 32)Stock Options (page 34)
Pursuant to the terms of the Agreement, Dennis A. Bieberich, the officers, directors and employeescurrent
President of Anderson areDecatur Financial, is required to exercise all of theirhis options to
acquire shares of AndersonDecatur Financial common stock prior to the consummation of
the merger.
DISSENTERS' RIGHTS (PAGE 25)Dissenters' Rights (page 27)
Indiana law permits you to dissent from the merger and have the fair value of
your stock determinedappraised by a court and paid to you in cash. To do this, you must
follow certain procedures, including giving AndersonDecatur Financial certain notices
and NOT VOTING
YOUR SHARES IN FAVOR OF THE MERGER.not voting your shares in favor of the merger. You will not receive any
stock in First Merchants if you dissent and follow all of the required
procedures. Instead, you will only receive the value of your stock in cash. The
relevant sections of Indiana law governing this process are attached to this
document as Appendix B.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 34)Certain Federal Income Tax Consequences (page 35)
Whether a gain or loss, for federal income tax purposes, will be recognized by
you as a result of the merger will depend upon whether you elect to receive for
your shares of Decatur Financial stock solely First Merchants stock, part First
Merchants stock and part cash, or solely cash. In general, no gain or loss, for
federal income tax purposes, will be recognized by you upon distributionif you elect to you ofreceive
only shares of First Merchants common stock. However, gain or loss, for federal income
tax purposes, will be recognized for cash payments received by you in lieu of
fractional share interests resulting from the 9.13 to 1 conversion ratio. If you
elect to receive part cash and part First Merchants stock for your shares, you
will recognize gain only, for federal income tax purposes, and whether such gain
is treated as a capital gain or dividend varies based on the circumstances. Gain
or loss, for federal income tax purposes, will be recognized, however, with
respect to cash payments received by you in lieu of fractional share interests
resulting from the conversion ratio.if you elect to solely receive cash.
Gain or loss will also be recognized with respect to cash payments received by
you if you perfect your dissenters' rights. You are urged to consult with your
own tax advisors with respect to the tax consequences of the merger to you.
Our obligation to complete the merger is conditioned on our receipt of a legal
opinion about the federal income tax consequences of the merger. The opinion
will not, however, bind the Internal Revenue Service which could take a
different view. Determining the actual tax consequences of the merger to you can
be complicated.
MANAGEMENT AND OPERATIONS AFTER THE MERGER (PAGE 31)
Anderson'sManagement and Operations After the Merger (page 33)
Decatur Financial's corporate existence will cease after the merger.
However, the resulting bank
from the merger, operating under the name of "The Madison Community Bank," will
have its principal office at the main office of Anderson. The currentAccordingly, directors and officers of Pendleton and Anderson, if they so choose,Decatur Financial will continue tonot serve as directors and officers of the resulting bankin such
capacities after the effective date of the
6
merger. INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT ARE DIFFERENT
FROM YOUR INTERESTS (PAGE 31)The directors and officers of Decatur Bank & Trust Company will continue
in their respective positions after the merger, subject to certain restrictions.
Interests of Directors and Officers in the Merger that are Different
From Your Interests (page 33)
Some of Anderson'sDecatur Financial's directors and officers have interests in the merger
that are different from, or in addition to, their interests as shareholders of
Anderson.Decatur Financial. These interests exist because of 6
agreements that the AndersonDecatur
Financial directors and officers have with First Merchants, including the
following:following.
When we complete the merger, James F. Ault,Dennis A. Bieberich, the current ChairmanPresident of
the Board of
Anderson,Decatur Financial, will be nominated for election as a director of First
Merchants to serve for a
three year term at the first annual meeting of First Merchant's shareholdersyears following the merger. The officers and
directors of AndersonDecatur Financial will remain officers and directors of the resulting bank after the merger. In addition,
Michael L. Baker, Bradley K. Condon, and Michael E. Stephens, the President and
Chief Executive Officer, Senior Vice President, and Senior Vice President and
Cashier, respectively, of Anderson shall be offered employment agreements with
the resulting bank after the merger.Decatur
Bank & Trust Company, subject to certain restrictions.
The members of the AndersonDecatur Financial Board of Directors knew about these
additional interests, and considered them, when they approved the Agreement.
PRO FORMA COMPARATIVE PER SHARE DATAPro Forma Comparative Per Share Data
The following tables show information about Anderson'sDecatur 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 theThe comparative pro forma information for certain
time periods, we assumed that Anderson hadhas been merged with Pendleton throughout
those periods.
We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes (apresented assuming
the merger has occurred. The pro forma information reflects the "purchase"
method known as
"pooling of interests" accounting).accounting.
The information listed as "equivalent pro forma" was obtained by multiplying the
pro forma amounts by the conversion ratio of 1.38.9.13. The pro forma information,
while helpful in illustrating the financial characteristics of the new company
under one settwo sets 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 AndersonDecatur Financial not included in this document and historical
financial information of First Merchants (including Pendleton) which it has presented in its prior
Securities and Exchange Commission filings. The historical financial information
of First Merchants has been incorporated into this document by reference. See
"WHERE YOU CAN FIND ADDITIONAL INFORMATION""Where You Can Find Additional Information" on page 84.58.
7
FIRST MERCHANTS AND ANDERSONDECATUR 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
------------------ ---- ---- ----First Merchants Decatur Financial
------------------------------------------- -----------------------------------------
Historical Pro Forma Historical Equivalent
---------- ------------------------------- ---------- ------------------------------
Assumption A(1) Assumption B(2) Assumption A(1) Assumption B(2)
-------------- -------------- -------------- ---------------
Net income per share
Twelve months ended December 31, 1999
Basic $1.15 $1.44 $1.33 $1.22............................... $ 1.59 $ 1.48 $ 1.50 $ 13.08 $ 13.52 $ 13.70
Diluted 1.13 1.43 1.32 1.21............................. 1.58 1.47 1.49 13.07 13.42 13.60
Cash dividends .57 .69 .59 .51per share
Twelve months ended December 31, 1999 ... $ .84 $ .80 $ .81 $ 4.00 $ 7.30 $ 7.40
Book value at period end 12.88 12.20 11.38 10.66
ANDERSON - HISTORICAL
Net income
Basic $1.30 $1.08 $.42 $(.28)
Diluted 1.29 1.08 .42 (.28)
Cash dividends --- --- --- ---
Book value at period end 12.42 11.06 9.93 9.50
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBERper share
At December 31, FIRST MERCHANTS - PRO FORMA (1) SEPTEMBER 30, 1998 1997 1996 1995
------------------ ---- ---- ----
Net income
Basic $1.13 $1.39 $1.26 $1.16
Diluted 1.11 1.38 1.25 1.11
Cash dividends .57 .69 .59 .51
Book value at period end 12.59 12.06 11.08 10.25
ANDERSON - EQUIVALENT (2)
Net income
Basic $1.56 $1.92 $1.74 $1.55
Diluted 1.53 1.90 1.73 1.53
Cash dividends .79 .95 .81 .70
Book value at period end 17.37 16.64 15.29 14.151999 ................... $ 11.55 $ 12.95 $ 12.43 $ 99.67 $118.23 $113.49
- ----------
(1) Restated for 3-for-2 stock splitsSee Note (1) in "Notes to Pro Forma Summary of First Merchants common stock effectedSelected Financial
Data" on page 15.
(2) See Note (2) in October 1995 and 1998.
(2) Computed by multiplying First Merchants pro forma per share information by
the indicated conversion ratio"Notes to Pro Forma Summary of 1.38.Selected Financial
Data" on page 15.
8
SELECTED FINANCIAL DATASelected Financial Data
The following tables show summarized historical financial data for each of
AndersonDecatur Financial and First Merchants and also show similar pro forma
information reflecting the merger. The pro forma information reflects the
"pooling of
interests""purchase" method of accounting.accounting, with Decatur Financial's assets and liabilities
recorded at fair values.
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 settwo sets of assumptions, does not take into account these
expected expenses or these anticipated financial benefits, or otherwise attempt
to predict or suggest future results.
The information in the following tables is based on historical financial
information of AndersonDecatur Financial not included in this document and historical
financial information of First Merchants (including Pendleton) that it has presented in its prior
Securities and Exchange Commission filings. All of the summary
financial information we provide in the following tables should be read in
connection with this historical financial information. The historical information of First
Merchants has been incorporated into this document by reference. See "WHERE YOU
CAN FIND ADDITIONAL INFORMATION" on page 84. First
Merchants' audited historical financial statements were audited by Olive, LLP,
independent certified public accountants, and Anderson's audited historical
financial statements were audited by Crowe, Chizek and Company LLP, independent
certified public accountants.58.
9
FIRST MERCHANTS
FIVE YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL
DATA (1) (Dollars in Thousands, Except perPer
Share Amounts)
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBERFor the Years Ended December 31
------------------------ ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1997 1996 1995 1994 1993
---- ----
---- ---- ---- ---- ----
SUMMARY OF OPERATIONSSummary of Operations
Interest income - tax equivalent $60,905 $57,669 $77,864 $71,607 $68,400 $59,738 $58,592$ 103,411 $ 96,928 $ 90,795 $ 82,565 $ 75,831
Interest expense 28,088 26,376 35,725 32,349 31,351 23,829 24,056
------- ------- ------- ------- ------- ------- -------46,898 44,465 41,392 37,134 34,510
---------- ---------- ---------- ---------- ----------
Net interest income- tax equivalent 32,817 31,293 42,139 39,258 37,049 35,909 34,53656,513 52,463 49,403 45,431 41,321
Tax equivalent adjustment 1,902 1,763 2,389 2,111 1,952 1,971 2,011
------- ------- ------- ------- ------- ------- -------2,948 2,767 2,611 2,312 2,243
---------- ---------- ---------- ---------- ----------
Net interest income 30,915 29,530 39,750 37,147 35,097 33,938 32,52553,565 49,696 46,792 43,119 39,078
Provision for loan losses 1,268 952 1,297 1,253 1,388 1,202 1,6542,241 2,372 1,735 1,790 1,543
Noninterest income 8,385 6,755 9,229 8,342 7,592 6,919 7,35014,573 12,880 10,146 9,317 8,188
Noninterest expense 20,358 19,104 25,748 24,135 22,992 22,632 22,108
------- ------- ------- ------- ------- ------- -------
Income36,710 32,741 30,016 27,596 25,585
---------- ---------- ---------- ---------- ----------
Net income before income tax and cumulative
effect of change in accounting
principle 17,674 16,229 21,934 20,101 18,309 17,023 16,11329,187 27,463 25,187 23,050 20,138
Income tax expense 6,161 5,557 7,561 6,959 6,261 5,660 5,250
------- ------- ------- ------- ------- ------- -------10,099 9,556 8,704 8,006 6,905
---------- ---------- ---------- ---------- ----------
Net Income before cumulative effect of change
in accounting principle 11,513 10,672 14,373 13,142 12,048 11,363 10,863
Cumulative effect of change in accounting
principle 260
------- ------- ------- ------- ------- ------- -------
NET INCOME $11,513 $10,672 $14,373 $13,142 $12,048 $11,363 $11,123
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
PER SHARE DATA (1)
Income before cumulative effect of change
in accounting principle$ 19,088 $ 17,907 $ 16,483 $ 15,044 $ 13,233
========== ========== ========== ========== ==========
Per Share Data(2)
Net income
Basic $ 1.151.59 $ 1.071.50 $ 1.441.40 $ 1.33 $ 1.221.29 $ 1.15
$ 1.09
Diluted 1.13 1.06 1.43 1.32 1.21 1.15 1.091.58 1.48 1.38 1.27 1.14
Cash dividends(3) 0.84 0.77 0.69 0.59 0.51
Balances End of Period
Total assets $1,474,048 $1,362,527 $1,181,359 $1,112,672 $1,037,509
Total loans 998,895 890,356 838,658 744,474 621,539
Total deposits 1,147,203 1,085,952 976,972 918,876 862,023
Securities sold under repurchase
agreements (long-term portion) 35,000 48,836 -- -- --
Federal home loan bank advances 73,514 47,067 25,500 10,150 9,000
Stockholders' equity 126,296 153,891 141,794 130,250 121,339
10
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBERFor the Years Ended December 31
------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1997 1996 1995 1994 1993
---- ----
---- ---- ---- ---- ----
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 RATIOSSelected Ratios
Return on average assets 1.47% 1.44% 1.45% 1.41% 1.35% 1.33%1.37% 1.43% 1.43% 1.39% 1.34%
Return on average equity 12.23 12.29 12.28 12.16 12.17 12.42 12.8912.75 12.09 12.12 11.95 11.44
- ----------
(1) On April 1, 1999, First Merchants issued 1,098,795 shares of its common
stock in exchange for all of the outstanding shares of Jay Financial
Corporation, Portland, Indiana. On April 21, 1999, First Merchants issued
810,642 shares of its common stock in exchange for all of the outstanding
shares of Anderson Community Bank, Anderson, Indiana. On August 1, 1996,
First Merchants issued 1,414,028 shares of its common stock in exchange for
all of the outstanding shares of Union National Bancorp, Liberty, Indiana.
On October 2, 1996, First Merchants issued 848,558 shares of its common
stock in exchange for all of the outstanding shares of Randolph County
Bancorp, Winchester, Indiana. All of such transactions were accounted for
under the pooling-of-interests method of accounting. The financial
information for First Merchants presented above has been restated to
reflect these poolings-of-interests and reports the financial condition and
results of operations as though First Merchants had been combined with Jay
Financial Corporation, Anderson Community Bank, Union National Bancorp and
Randolph County Bancorp as of January 1, 1995.
(2) Restated for 3-for-2 stock splits effected January 1993 and October 1995 and 1998.
(2)(3) Dividends per share are for First Merchants only, not restated for pooling
transactions.
11
ANDERSONDECATUR FINANCIAL
FIVE YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30 DECEMBERFor the Years Ended December 31
MARCH 9,1995
----------------------------------- ------------------------- (DATE OF INCEPTION)------------------------------------------------------------------------
1999 1998 1997 1997 1996 TO DECEMBER 31, 1995
---- ---- ---- ---- ------------------------
SUMMARY OF OPERATIONSSummary of Operations
Interest income - tax equivalent (1) $4,182 $3,060 $4,307 $2,755 $1,168$ 9,817 $ 9,443 $ 8,790 $ 8,293 $ 7,645
Interest expense 1,835 1,368 1,877 1,254 528
----- ----- ----- ----- -----4,030 4,071 3,876 3,721 3,451
-------- -------- -------- -------- --------
Net interest income- tax equivalent 5,787 5,372 4,914 4,572 4,194
Tax equivalent adjustment 1,005 817 542 577 566
-------- -------- -------- -------- --------
Net interest income - tax equivalent (1) 2,347 1,692 2,430 1,501 640
Tax equivalent adjustment (1) (42) (16) (27) - -
----- ----- ----- ----- -----
Net interest income 2,305 1,676 2,403 1,501 6404,782 4,555 4,372 3,995 3,628
Provision for loan losses 103 155 197 256 21050 230 170 105 170
Noninterest income 267 138 200 120 44939 1,025 759 500 460
Noninterest expense 1,244 1,011 1,406 976 625
----- ----- ----- ----- -----
Income2,880 2,659 2,423 2,202 1,968
-------- -------- -------- -------- --------
Net income before income taxes 1,225 648 1,000 389 (151)tax 2,791 2,691 2,538 2,188 1,950
Income tax expense 462 248 375 157 -
----- ----- ----- ----- -----
NET INCOME $763 $400 $625 $232 $(151)
==== ==== ==== ==== ======
PER SHARE DATA928 933 902 760 674
-------- -------- -------- -------- --------
Net Income $ 1,863 $ 1,758 $ 1,636 $ 1,428 $ 1,276
======== ======== ======== ======== ========
Per Share Data
Net income
Basic earnings per share $1.30 $0.69 $1.08 $0.42 $(0.28)$ 13.08 $ 12.34 $ 11.48 $ 10.03 $ 8.96
Diluted earnings per share 1.29 0.69 1.08 0.42 (0.28)
Shareholders' equity, end13.07 12.34 11.48 10.03 8.96
Cash dividends 4.00 3.65 3.11 2.75 2.50
Balances End of period 12.42 10.65 11.06 9.93 9.50
BALANCES END OF PERIODPeriod
Total assets 75,713 54,368 62,837 45,969 27,262$128,140 $120,308 $113,228 $106,255 $104,473
Total loans 59,156 43,776 50,206 35,275 15,83986,407 80,453 78,171 72,024 62,572
Total deposits 67,672 47,816 55,894 40,052 21,918
Noninterest-bearing deposits 11,319 8,203 8,311 4,989 4,412
Interest-bearing deposits 56,362 39,613 47,583 35,063 17,506
Shareholders'109,955 99,961 94,636 82,714 81,672
Securities sold under repurchase
agreements (long-term portion)
-------- -------- -------- -------- --------
Federal home loan bank advances 1,900 4,500 2,500 2,500 2,500
Stockholders' equity 7,327 6,209 6,448 5,537 5,19914,253 13,181 11,880 10,622 9,581
12
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30 DECEMBERFor the Years Ended December 31
MARCH 9,1995
------------------------------- ----------------------------- (DATE OF INCEPTION)------------------------------------------------------------------------
1999 1998 1997 1997 1996 TO DECEMBER 31, 1995
---- ---- ---- ---- ------------------------
SELECTED RATIOSSelected Ratios
Return on average assets 1.48% 1.05% 1.19% 0.66% (0.96)%1.50% 1.51% 1.51% 1.38% 1.33%
Return on average equity 14.78 9.00 10.36 4.33 (3.46)13.58 14.03 14.35 13.98 14.11
(1)13
FIRST MERCHANTS
PRO FORMA SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
For The Year Ended
December 31, 1999
-----------------
Assumption A(1) Assumption B(2)
--------------- ---------------
Summary of Operations
Interest income - tax equivalent $ 113,157 $ 112,282
Interest expense 50,923 50,923
---------- ----------
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 tax62,234 61,359
Tax equivalent adjustment reverses the tax
equivalent basis in order to present net3,953 3,953
---------- ----------
Net interest income in accordance with
generally accepted accounting principles (GAAP), as reflected in58,281 57,406
Provision for loan losses 2,291 2,291
Noninterest income 15,512 15,512
Noninterest expense 40,761 40,821
---------- ----------
Net income before income tax 30,741 29,806
Income tax expense 11,000 10,645
---------- ----------
Net income $ 19,741 $ 19,161
========== ==========
Per Share Data
Net income
Basic $ 1.48 $ 1.50
Diluted 1.47 1.49
Cash dividends 0.80 0.81
Balances End of Period
Total assets $1,620,244 $1,621,149
Total loans 1,085,769 1,085,769
Total deposits 1,257,193 1,257,193
Securities sold under repurchase
agreements (long-term portion) 35,000 35,000
Federal home loan bank advances 75,414 75,414
Stockholders' equity 159,032 145,938
Selected Ratios
Return on average assets 1.28% 1.24%
Return on average equity 10.82 11.31
- ----------
Notes to Pro Forma Summary of Selected Financial Data appear on the financial
statements.
13following
page.
14
FIRST MERCHANTSNOTES TO PRO FORMA SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
(1) Assumption A -- Issuance of 1,346,118 shares of First Merchants common
stock:
Assumes 147,439 (100%) shares of Decatur Financial common stock become subject
to Option 1 elections and no shares become subject to Option 2 elections. The
average of the mid point between the bid and ask prices of First Merchants
common stock as reported in The Wall Street Journal (Midwest Edition) during the
ten (10) NASDAQ trading days ending on January 21, 2000 was as less than $30.00
per share and greater than $22.00 per share. Accordingly, it has been assumed
that no adjustment to the conversion ratio would be required and 9.13 shares of
First Merchants common stock would be issued for each share of Decatur Financial
common stock subject to Option 1 elections. Using this assumption, no cash
payments would be made to shareholders of Decatur Financial except to the extent
cash payments are made in lieu of the issuance of fractional shares resulting
from the 9.13 to 1 conversion ratio. The increase to First Merchants'
shareholders' equity would be as follows:
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
SEPTEMBER 30 -------------------------------
1998 1997 1996 1995
---- ---- ---- ----
SUMMARY OF OPERATIONS
Interest income - tax equivalent $65,087 $82,171 $74,362 $69,568
Interest expense 29,923 37,602 33,603 31,879
--------- --------- --------- ---------
Net interest income - tax equivalent 35,164 44,569 40,759 37,689
Tax equivalent adjustment 1,944 2,416 2,111 1,952
--------- --------- --------- ---------
Net interest income 33,220 42,153 38,648 35,737
Provision for loan losses 1,371 1,494 1,509 1,598
Noninterest income 8,652 9,429 8,462 7,636
Noninterest expense 21,602 27,154 25,111 23,617
--------- --------- --------- ---------
Income before income tax 18,899 22,934 20,490 18,158
Income tax expense 6,623 7,936 7,116 6,261
--------- --------- --------- ---------
NET INCOME $12,276 $14,998 $13,374 $11,897
--------- --------- --------- ---------
--------- --------- --------- ---------
PER SHARE DATA (1)
Net income
Basic $1.13 $1.39 $1.26 $1.12
Diluted 1.11 1.38 1.25 1.11Common stock (1,346,118 shares at stated value of $.125 per share) .. $ 168
Capital surplus (1,346,118 shares at $24.19375 per share) ........... 32,568
Total stock issued (1,346,118 shares at
$24.31875 per share) ..................................... 32,736
Cash dividends (2) .57 .69 .59 .51
BALANCES END OF PERIODprice .......................................................... 0
Estimated reorganization expenses ................................... 0
-------
Total assets $1,189,589 $1,082,970 $1,013,959 $969,415
Total loans 792,815 753,990 666,975 537,235
Total deposits 928,260 899,706 834,503 805,854
Securities sold under repurchase agreements 78,302 15,398 20,054 28,887
Federal Home Loan Bank advances 29,704 20,700 9,150 9,000
Stockholders' equity 137,151 128,414 118,221 110,163purchase price ....................................... $32,736
=======
14
(2) Assumption B - Issuance of 807,667 shares of First Merchants common stock:
Assumes 88,463 (60%) shares of Decatur Financial common stock become subject to
Option 1 elections and 58,976 (40%) shares become subject to Option 2 elections.
The average of the mid point between the bid and ask prices of First Merchants
common stock as reported in The Wall Street Journal (Midwest Edition) during the
ten (10) NASDAQ trading days ending on January 21, 2000 was less than $30.00 per
share and greater than $22.00 per share. Accordingly, it has been assumed that
no adjustment to the conversion ratio would be required and 9.13 shares of First
Merchants common stock would be issued for each share of Decatur Financial
common stock subject to Option 1 elections and $237.39 cash is issued for each
share of Decatur Financial common stock subject to Option 2 elections. The
increase to First Merchants' shareholders' equity would be as follows:
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
SEPTEMBER 30 -------------------------------
1998 1997 1996 1995
---- ---- ---- ----
SELECTED RATIOS
Return on average assets 1.47% 1.43% 1.38% 1.31%
Return on average equity 12.55 12.21 11.81 11.44Common stock (807,667 shares at stated value of $.125 per share) .... $ 101
Capital surplus (807,667 shares at $24.19375 per share) ............. 19,540
Total stock issued (807,667 shares at
$24.31875 per share) ..................................... 19,641
Cash price:
58,976 Decatur Financial shares at $237.39 per share ....... 14,000
Estimated reorganization expenses ................................... 0
-------
Total purchase price .............................. $33,641
=======
(1) Restated for 3-for-2 stock splits effected January 1993 and October 1995 and
1998.
(2) Dividends per share are for First Merchants only, not restated for
pooling transactions.
15
SPECIAL MEETING
SPECIAL MEETING OF SHAREHOLDERS OF
ANDERSON COMMUNITY BANK
GENERAL INFORMATIONSpecial Meeting of Shareholders of
Decatur Financial, Inc.
General Information
This Proxy Statement-Prospectus is furnished to the shareholders of Anderson Community BankDecatur
Financial, Inc. ("ANDERSON"Decatur Financial") in connection with the solicitation by the
Board of Directors of AndersonDecatur Financial of proxies for use at the Special
Meeting of Shareholders to be held on ___________________, 1999,_________, _______ __, 2000, at ________ o'clock_:__ p.m.,
local time, at the Anderson Fine Arts Center, 32 West 10th Street, Anderson,______________, ________________, Decatur, Indiana 46016.46733. This
Proxy Statement-Prospectus is first being mailed to AndersonDecatur Financial
shareholders on _______________________ ___, 1999.
MATTERS TO BE CONSIDERED_________ __, 2000.
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 October 27,
1998,January 20, 2000, by and
amongbetween First Merchants Corporation ("FIRST MERCHANTS"First Merchants"), Pendleton
Banking Company ("PENDLETON"), and Anderson.Decatur Financial.
Pursuant to the Agreement, AndersonDecatur Financial will merge with and into Pendleton, a wholly-owned subsidiary of First
Merchants under the name of "The Madison Community Bank." The resulting bankand Decatur Bank & Trust Company will bebecome a wholly-owned subsidiary
of First Merchants.
VOTES REQUIREDVotes Required
Approval of the Agreement requires the affirmative vote of a majority of the
outstanding shares of AndersonDecatur Financial common stock. Only holders of record of
AndersonDecatur Financial common stock at the close of business on _____________ ___, 1999,__________ __, 2000,
are entitled to notice of, and to vote at, the Special Meeting. AndersonDecatur
Financial had 589,784_______ shares of common stock issued and outstanding on the
record date, which shares were held of record by approximately 198400 shareholders.
Each share of AndersonDecatur Financial common stock is entitled to one vote.
Anderson'sDecatur Financial's executive officers, directors and their affiliates
controlown of record or beneficially in the aggregate directly and indirectly, 296,33259,513 shares or approximately
48%40% of the shares of AndersonDecatur Financial common stock outstanding. In addition, First Merchants
owns 25,000 shares or approximately 4%Each member of
the Board of Directors of Decatur Financial as of January 20, 2000, the date the
Agreement was executed, has agreed to cause all shares of AndersonDecatur Financial
common stock outstanding. The Anderson Board anticipates that allowned by him of these shares willrecord or beneficially to be voted in favor of the
merger. If all such shares are voted in favorThe members of the merger, approvalDecatur Financial Board of Directors as of January
20, 2000 own of record or beneficially 60,285 shares or approximately 41% of the
merger is assured.
PROXIESshares of Decatur Financial common stock outstanding.
Proxies
The shares represented by proxies properly signed and returned will be voted at
the Special Meeting. In the absence of specific instructions to the contrary,
proxies will be voted FOR approval of the Agreement described in this Proxy
Statement-Prospectus and in accordance with the judgment of the persons named as
proxies with respect to any other matter which may
16
properly come before the Special Meeting; provided, however, that in no event will a proxy that
16
has been voted against the merger be voted in favor of any motion to adjourn
the Special Meeting for the purpose of soliciting additional votes in favor
of the merger.Meeting. Any shareholder giving a proxy has the
right to revoke it before it is exercised. Therefore, execution of a proxy will
not affect a shareholder's right to vote in person if he or she attends the
Special Meeting. Revocation may be made by a later dated proxy delivered to
Anderson;Decatur Financial; by written notice sent to the Secretary of AndersonDecatur Financial
at 19 West 10th520 North 13th Street, Anderson,P.O. Box 988, Decatur, Indiana 46016;46733; or by personal
oral or written request at the Special Meeting. To be effective, any revocation
must be received before the proxy is exercised.
Because approval of the Agreement and the merger of AndersonDecatur Financial into PendletonFirst
Merchants requires the affirmative vote of a majority of the outstanding shares
of AndersonDecatur Financial common stock, abstentions and broker non-votes will have
the same effect as voting against approval of the Agreement. Accordingly, the
AndersonDecatur Financial Board urges the AndersonDecatur Financial shareholders to complete,
date and sign the accompanying proxy and return it promptly in the enclosed
postage-paid envelope.
SOLICITATION OF PROXIESSolicitation of Proxies
The cost of soliciting proxies will be borne by Anderson.Decatur Financial. In addition
to use of the mails, proxies may be solicited personally or by telephone or
telecopytelegraph by directors, officers and certain employees of Anderson,Decatur Financial, who
will not be specially compensated for such soliciting. RECOMMENDATIONS OF THE BOARD OF DIRECTORSIn soliciting proxies,
the directors, officers and employees of Decatur Financial have no authority to
make any representations and warranties about the merger or the Agreement in
addition to or contrary to the provisions stated in this Proxy
Statement-Prospectus. No statement made by a director, officer or employee of
Decatur Financial regarding the merger or the Agreement should be relied upon
except as expressly stated in this Proxy Statement-Prospectus.
Recommendations
The AndersonDecatur Financial Board has unanimously approved the Agreement and the
transactions contemplated thereby. The Board believes that the merger is in the
best interests of AndersonDecatur Financial and its shareholders. The Board unanimously
recommends that the AndersonDecatur Financial shareholders vote "FOR" the Agreement and
the transactions contemplated thereby. See "MERGER - Anderson'sDecatur Financial's Reasons
for the Merger - Recommendation of the Board of Directors."
17
MERGER
THE FOLLOWING SUMMARY OF CERTAIN ASPECTS OF THE AGREEMENT DOES NOT PURPORT TO BEThe 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 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 MERGERand is incorporated into this Proxy
Statement-Prospectus by reference.
Description of the Merger
Under the terms of the Agreement, AndersonDecatur Financial will merge with and into
Pendleton, a wholly-owned subsidiary of First Merchants under the name of "The
Madison Community Bank" and thereafter the separate corporate existence of AndersonDecatur Financial will
cease. After the merger, the resulting bank under the name of "The Madison
Community Bank"As a result, Decatur Bank & Trust Company (the "Bank") will continue to bebecome a
wholly-owned subsidiary of First Merchants. FIRST MERCHANTS' AND PENDLETON'S REASONS FOR THE MERGERIt is the present intention of First
Merchants to continue to operate the Bank as a subsidiary after the effective
date of the merger.
First Merchants' Reasons for the Merger
In adopting the Agreement and the merger, the First Merchants and
Pendleton BoardsBoard considered a
number of factors concerning theFirst Merchants' benefits of the merger. Without
assigning any relative or specific weights to the factors, the First Merchants
and Pendleton BoardsBoard considered the following material factors:
1. First Merchants' and Pendleton's respect for the ability and integrity of the AndersonDecatur
Financial Board of Directors, management, and staff, and their
affiliates and First Merchants' and Pendletons'
belief that expanding theirits operations
in the areas served by AndersonDecatur Financial offers important long range
strategic benefits to First Merchants and Pendleton;Merchants;
2. a review of (i) the business, operations, earnings, and financial
condition including the capital levels and asset quality, of AndersonDecatur
Financial on a historical, prospective, and pro forma basis in
comparison to other financial institutions in the area, (ii) the
demographic, economic, and financial characteristics of the market in
which AndersonDecatur 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
Anderson;Decatur 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.
18
BACKGROUND AND ANDERSON'S REASONS FOR THE MERGER
InDecatur Financial's Reasons for the spring of 1998, representatives of First Merchants and Anderson
first discussed informallyMerger
Among other items considered by the possibility of a merger between Anderson and
Pendleton. In its April meeting, theDecatur Financial Board of Directors of Anderson authorized
the Executive Committeein
evaluating whether to remain independent or whether to pursue discussions with Pendleton and First
Merchants. In late May, the Executive Committee engaged Professional Bank
Services, Inc. to perform a valuation of Anderson. Based on this valuation and
the ongoing but still preliminary conversationsmerger with
First Merchants were the Executive Committee decided to proceed with further discussions in order to
outline the parameters of a possible affiliation.
At the Anderson Board of Directors meeting in July, 1998,
representatives of First Merchants met with the Board to discuss the possibility
of a merger between Pendleton and Anderson. The Board thereafter adopted a
resolution authorizing the Executive Committee to work toward a letter of
intent. Negotiations continued in July and August, with a letter of intent being
executed on August 20, 1998, subject to due diligence, execution of a definitive
agreement, approval by the Anderson shareholders, receipt of a fairness opinion,
and approval of the appropriate bank regulatory agencies. Thereafter, the
Anderson Board retained Professional Bank Services, Inc. to provide a fairness
opinion in connection with the execution of a definitive agreement related to
the merger.
The negotiation of the definitive agreement, due diligence, and all
related work proceeded throughout September and October, 1998. During that time,
because of a decline in the stock price of First Merchants, the original
exchange ratio was adjusted from that originally set forth in the letter of
intent to provide for a greater number of shares to be issued to the Anderson
shareholders. In consideration for this increase in shares, Anderson agreed to a
fixed exchange ratio without any requirement that the First Merchants stock
price be at a certain point at closing.
At its meeting in October, 1998, the Board of Directors of Anderson met
with legal counsel and representatives of Professional Bank Services, Inc. The
Board considered carefully the terms and conditions of the merger proposal as
set forth in the proposed definitive agreement. Professional Bank Services, Inc.
provided its opinion that the merger was fair to the shareholders of Anderson
from a financial point of view. Based on the above and after lengthy discussion,
the Board authorized execution of the Agreement and the submission of the
Agreement to a vote of the Anderson shareholders and recommended that the
shareholders approve the Agreement and merger. First Merchants and Anderson
executed the Agreement on October 27, 1998.
The Anderson Board considered a number of financial and non-financial
factors in reaching its decision to approve the Agreement and merger. These
factors included, among other things,following factors:
1. the prospects of Anderson as an
independent bank in the currentDecatur Financial and anticipated competitive environment of the
financial services industry, the amount and form of the consideration First Merchants, offeredas separate
institutions and as combined;
2. the compatibility of First Merchants' subsidiary banks' markets to
that of Decatur Financial's market;
3. the Anderson shareholders, theanticipated tax-free nature of the merger to the fairnessshareholders of
Decatur Financial receiving solely First Merchants common stock in
exchange for their shares of Decatur Financial common stock;
4. the possibility of increased liquidity through ownership of First
Merchants common stock as compared to Decatur Financial common stock
because First Merchants common stock is traded in the over-the-counter
market and share prices are reported on the NASDAQ National Market
System;
5. the timeliness of a merger given the state of the economy and the
stock markets as well as anticipated trends in both;
6. regulatory requirements;
7. relevant price information involving recent comparable bank
acquisitions which occurred in the Midwest United States;
8. First Merchants' intention to operate the Bank as a wholly-owned
subsidiary of First Merchants;
9. an analysis of alternatives to Decatur Financial merging with First
Merchants, including other potential acquirors; and
10. the opinion of Professional Bank Services, Inc. andRenninger & Associates, LLC indicating that the
analyses underlying that opinion, andconsideration to be received by Decatur Financial's shareholders under
the potential effectsAgreement is fair from a financial perspective.
The Board of Directors of Decatur Financial also considered the impact of
the merger on AndersonDecatur Financial's and the Bank's customers and employees and the
communities Anderson serves.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 Decatur Financial examined First
Merchants' continuing commitment to the communities served by the institutions
previously acquired by
19
First Merchants. Further from the standpoint of the Bank's customers, it was
anticipated that more products and services would become available because of
First Merchants' greater resources.
Based upon the foregoing factors, the Board of Directors of AndersonDecatur
Financial concluded that it was in the best interests of Anderson and its shareholdersadvantageous to affiliatemerge with First Merchants. The
importance of the various factors discussed
above relative to one another cannot be precisely
determined or stated.
OPINION OF FINANCIAL ADVISOR
Professional Bank Services, Inc.measured.
Opinion of Financial Advisor
On October 15, 1999, Renninger & Associates, LLC ("PBS"Renninger") was engaged
by AndersonDecatur Financial to advise Anderson's Boardassess its strategic alternatives and to pursue an
affiliation with selected financial institutions. The scope of Directorsthese services
included, in the event of an affiliation with another financial institution, the
negotiation of the transaction structure and the negotiation of the financial
and non-financial terms of the transaction. In addition, in the event of an
affiliation with another financial institution, Renninger was engaged to render
an opinion as to the fairness of the consideration to be received by
shareholders of Decatur Financial, from a financial perspective,point of view. Prior to bethis
engagement, Renninger assisted Decatur Financial in initiating, negotiating and
consummating its 1999 acquisition of a bank branch for which Renninger was paid
by First Merchants to the Anderson
shareholders as set forth$15,000.
Renninger is a recognized specialist in the Agreement.
PBS is aarea of bank consulting firm with offices in Louisville, Chicago,
Nashville and Washington, D.C. As partthrift mergers
and acquisition, branch acquisition and divestiture, stock valuation, capital
management, and other financial advisory services. Prior to forming Renninger,
the principal was vice president of its investment banking business, PBS
is regularly engaged in reviewing the fairnessfor two regional
brokerage firms after having served as chief financial officer of financial institution
acquisition transactions from a financial perspective$350 million
community bank and in the valuation of
financial institutionsas an auditor with a Big 5 and other businesses and their securities in connection
with mergers, acquisitions, estate settlements, and other transactions. Neither
PBS nor any of its affiliates haslater a material financiallarge regional CPA
firm. Renninger does not have an ownership interest in AndersonDecatur Financial or
First Merchants. PBSRenninger was selected to advise Anderson'sDecatur Financial's Board of
Directors based upon itits familiarity with Indiana financial institutions and
knowledge of the banking industry as a whole.
PBSRenninger acted as financial advisor to Decatur Financial in connection
with the merger and participated in the negotiations leading to the Agreement.
Renninger also performed certain analyses described herein and presented the
range of values for AndersonDecatur Financial resulting from such analyses to the Board
of Directors of AndersonDecatur Financial in connection with its advice as to the
fairness of the consideration to be paid by First Merchants. The amount of
consideration payable to Decatur Financial shareholders in connection with the
merger was determined by Decatur Financial through arm's length negotiations
with First Merchants.
A Fairness Opinion of PBSRenninger was delivered to the Board of Directors of
AndersonDecatur Financial on OctoberJanuary 20, 1998,2000, at a meeting of the Board of Directors
and has been updated as of the date of this Prospectus/Proxy Statement. A copy
of the Fairness Opinion, which includes a summary of the assumptions made and
information analyzed in deriving the Fairness Opinion, and the update are
attached as Appendix C to this Proxy Statement-Prospectus and should be read in
its entirety.
The Fairness Opinion was delivered prior to First Merchants'
October, 1998 3-for-2 stock split and accordingly references an exchange ratio
of 0.92 rather than the actual exchange ratio of 1.38 as provided in the
Agreement.20
In arriving at its Fairness Opinion, PBSRenninger reviewed certain publicly
available business and financial information relating to AndersonDecatur Financial and
First Merchants. PBSRenninger considered certain financial and stock market data of
AndersonDecatur Financial and First Merchants, compared that data with similar data for
certain other publicly-held bank holding companies and considered the financial
terms of certain other comparable bank transactions in the State of Indiana and
contiguous states that had recently been effected. PBSRenninger 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, PBSRenninger 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 PBSRenninger
were based on assumptions believed by PBSRenninger to be reasonable and to reflect
currently available information. PBSRenninger did not make an independent
evaluation or appraisal of the assets of AndersonDecatur Financial or First Merchants.
20
Renninger took into consideration the results of the solicitation of indications
of interest from other financial institutions concerning their interest in a
possible affiliation with Decatur Financial. Renninger reviewed the
correspondence and information received from interested financial institutions
that were contacted. Renninger reviewed all offers received with Decatur
Financial's Board of Directors.
As part of preparing this updated Fairness Opinion, PBSRenninger performed a
due diligence review of First Merchants on August 19, 1998 and updated the review on
Octoberas of January 20, 1998.2000. As part of the
due diligence, PBSRenninger reviewed the following items: minutes of the meetings
of the Board of Directors of First Merchants for 19971998 and year to date 1998;through December,
1999; the most recent regulatory reports of examination of First Merchants
(commenced July 6, 1998) and First Merchants Bank, National Association;Association
(commenced February 23, 1999); December 31, 1995, 1996, 1997, and 19971998 audited annual
reports and supplemental management letters issued by First
Merchants' independent external auditors;reports; Forms 10-Q for the quarters ended March 31, 1999, June 30, 1998 Consolidated Reports
of Condition1999, and
Income for each of First Merchants' subsidiary banks; the
Consolidated Financial Statements for Bank Holding Companies (FR Y-9C);September 30, 1999; the Bank Holding Company Performance Report for March 31, 1998;June 30,
1999; the 1999 Third Party Loan Reports for each banking affiliate of First
Merchants and various other asset quality related reports; and the most recent
Allowance for Loan and Lease Loss analysis reports for First Merchants and each
affiliate bank; and independent internal
audit reports.
PBSbank as of September 30, 1999.
Renninger reviewed and analyzed the historical performance of AndersonDecatur
Financial and Decatur Financial's wholly-owned subsidiary, Decatur Bank & Trust
Company (the "Bank"), contained in: audited Annual Reports and financial
statements dated December 31, 1996, 1997 and 19971998 of Anderson; December 31, 1997,Decatur Financial; the
March 31, 1998 and1999, June 30, 19981999 and September 30, 1999 Consolidated Reports of
Condition and Income filed by Andersonthe Bank with the Federal Deposit Insurance
Corporation; December 31, 1997, March 31, 1998 and June 30, 19981999 Uniform Bank Performance Reports of Anderson;the Bank;
historical common stock trading activity of Anderson;Decatur Financial; and the premises
and other fixed assets. PBSRenninger reviewed and tabulated statistical data
regarding the loan portfolio, securities portfolio and other performance ratios
and statistics. Financial projections were prepared and analyzed as well as
other financial studies, analyses and investigations as deemed relevant for the
purposes of this opinion. In review of the aforementioned information, PBSRenninger
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.
21
In connection with rendering the Fairness Opinion and preparing its written
and oral presentation to Anderson'sDecatur Financial's Board of Directors, PBSRenninger
performed a variety of financial analyses, including those summarized herein.
The summary does not purport to be a complete description of the analyses
performed by PBSRenninger in this regard. The preparation of a Fairness Opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
summarized below, PBSRenninger 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, PBSRenninger made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond Anderson's ofDecatur Financial's or First Merchants' control. The analyses
performed by PBSRenninger 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:Acquisition Comparison Analysis: In performing this analysis, PBSRenninger
reviewed all bank acquisition transactions involving sellers in the State of
Indiana since 1990.
There were 65and contiguous states announced between January, 1997 and August, 1999
which had assets between $50 million and $200 million. Of the 39 bank
acquisition transactions in Indiana announced since 1990 for
whichmeeting this criteria, detailed financial information
was available.available for 32. The purpose of the analysis was to obtain an evaluation
range based on these Indiana
21
bank acquisition transactions. Median multiples of earnings
and book value implied by the comparable transactions were utilized in obtaining
a range for the acquisition value of Anderson. In addition to reviewing recent Indiana
bank transactions, PBS performed separate comparable analyses for
acquisitions of banks which, like Anderson, had an equity-to-asset ratio
between 10.00% and 12.00%, had total assets between $50.0 - $100.0 million,
had a return on average equity ("ROAE") between 12.00% - 14.00% and bank
transactions effected in Indiana since January 1, 1996. In addition, median
values for the 65 Indiana acquisitions expressed as multiples of both book
value and earnings were 1.70X and 17.87X, respectively.Decatur Financial. The median multiples of
tangible book value and earnings for acquisitions of Indiana banks which, like
Anderson, had an equity-to-asset ratio between 10.00%these comparable transactions were 2.45X
and 12.00% were 1.70X
and 21.55X,19.82X, respectively. For acquisitions of Indiana banks with assets
between $50.0 - $100.0 million,These multiples, when applied to the median multiples were 1.69X and 16.42X.
For Indiana acquisitions of banks with a ROAE between 12.00% - 14.00%, the
median multiples ofCompany's
tangible book value and earnings were 1.84Xas of and 15.96X,
respectively. The median multiples offor the year ending December 31, 1999
(as adjusted for outstanding stock options), suggest Decatur Financial shares
would be valued at $242.23 on a tangible book value basis and $250.20 on an
earnings for
acquisitions of Indiana banks since January 1, 1996, were 2.20X and 24.12X,
respectively.
The Agreement provides that, in the proposed transaction, Anderson
shareholders will receive 1.38 shares of First Merchants common stock for each
Anderson common share outstanding, as further defined in the Agreement. On
October 15, 1998, the closing price for First Merchants common stock on the
National Association of Securities Dealers Automated Quotation System was $34.00
per share. Such price does not reflect the effect of the 3-for-2 stock split of
First Merchants common stock effected later in October, 1998. Using this closing
price of $34.00 per share of First Merchants common stock, the proposed
consideration to be received represents a value of $31.28 per share of Anderson
common stock. The $31.28 per share of Anderson common stock represents a
multiple of Anderson's adjusted June 30, 1998 book value and a multiple of
Anderson's 1998 budgeted net income of 2.65X and 20.17X, respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Indiana comparable transaction
groups. Compared to all Indiana bank transactions, the acquisition value ranked
in the 94th percentile as a multiple of book value and in the 62nd percentile as
a multiple of earnings. Compared to Indiana bank transactions where the acquired
institution had an equity-to-asset ratio between 10.00% and 12.00%, the
acquisition value ranked in the 90th percentile as a multiple of book value and
the 27th percentile as a multiple of earnings. For Indiana bank acquisitions
where the acquired institution had between $50.0 - $100.0 million in assets, the
acquisition value ranked in the 100th percentile as a multiple of book value and
the 71st percentile as a multiple of earnings. For Indiana bank transactions
where the acquired institution had a ROAE between 12.00% and 14.00%, the
acquisition value ranked in the 80th percentile as a multiple of book value and
the 79th percentile as a multiple of earnings. For Indiana bank transactions
effected since January 1, 1996, the acquisition value ranked in the 79th
percentile as a multiple of book value and in the 24th percentile as a multiple
of earnings.
ADJUSTED NET ASSET VALUE ANALYSIS: PBSbasis.
Adjusted Net Asset Value Analysis: Renninger reviewed Anderson'sDecatur Financial's
balance sheet data to determine the amount of material adjustments required to
the
stockholders' equity of Anderson based on differences between the market value of Anderson's assets and
theirthe value reflected on Anderson'sthe Company's financial statements. PBSRenninger determined
that two adjustments were warranted.the only material adjustment relates to the core deposit intangible value
inherent in the Company's relatively low-rate deposit base. Equity 22
was decreased $21,000would be
increased $2,465,000 to reflect the intangible assets of Anderson. PBS also
reflected aafter-tax value of the non-interest bearing demand deposits of
approximately $2,257,000.recording such an
intangible asset. The aggregate adjusted net asset value of Anderson
was determined tothe Company would be
$9,469,000$17,186,000 or $15.46$116.56 per share of AndersonDecatur Financial common stock.
DISCOUNTED EARNINGS ANALYSIS:shares (adjusted to
reflect the exercise of outstanding stock options) as of December 31, 1999.
Discounted Earnings Analysis: A dividend discount analysis was performed by
PBSRenninger pursuant to which a range of values of AndersonDecatur Financial was
determined by adding (i) the present value of estimated future dividend streams
that AndersonDecatur Financial could generate over a five-year period and (ii) the
present value of the "terminal value" of Anderson'sDecatur Financial's earnings at the end
of the fifth year. The "terminal value" of Anderson's earnings at the end of the five-year
22
period was determined by applying a multiple of 17.8719.82 times the projected
terminal year's earnings. The 17.8719.82 multiple represents the median price paid as
a multiple of earnings for all Indianathe thirty-two comparable bank transactions since 1990.discussed
above.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of Anderson'sDecatur Financial's common
stock. The projection assumed an annual asset growth rate of 5.0%, a return on
assets of 1.50%, and a dividend pay-out ratio equal to 50.0% throughout the
analysis. The aggregate value of Anderson,Decatur Financial, determined by adding the
present value of the total cash flows, was $18,551,000$30,377,000 or $30.30$206.03 per share.
In addition, using the
five-year projection as a base, a twenty-year projection was prepared assuming
an annual growth rate of 10.0%, and a return on assets of 1.58% throughout the
analysis. Dividends were equal to 30.0% of income in years 1 through 8 and
increased to 50% of net income for the remaining periods. This long-term
projection resulted in an aggregate value of $18,156,000 or $29.65 per share of
Anderson common stock.
SPECIFIC ACQUISITION ANALYSIS: PBSSpecific Acquisition Analysis: Renninger valued AndersonDecatur Financial based on
an acquisition analysis assuming a "break-even" earnings scenario to an acquiroracquirer
as to price, current interest rates and amortization of the premium paid. This
analysis was based on a 60% stock / 40% cash transaction, funding cost of 7.0%
adjusted for taxes, amortization of tax deductible core deposit intangible
(assumed to equal 8.0% of deposits) over eight years, amortization of
non-deductible goodwill over fifteen years and a projected December 31, 1999
earnings level of $1,900,000. This analysis assumed a potential acquirer would
attain non-interest expense reductions and revenue enhancements totaling
$283,000 on an after-tax basis. Based on this analysis, anwhich assumes the
acquiring institution would pay in aggregate $13,150,000, or
$21.47 per share, assuming they wereis willing to accept no impact to their consolidated net
income, such an acquirer would pay in the initial year. Thisaggregate $24,843,000 or $168.50 per share
of Decatur Financial common stock. The same analysis was based on a funding cost of 6.5%
adjusted for taxes, amortization of the acquisition premium over 15 years and a
projected December 31, 1998 earnings level of $950,000. This analysis was
repeatedperformed assuming a
potential acquiror would attain non-interest expense
reductions of 10% in the transaction."cash break-even" scenario. Based on this analysis, anwhich assumes the acquiring
institution is willing to accept no impact to their consolidated cash flow, such
an acquirer would pay in aggregate $14,142,000$35,238,000 or $23.09$239.00 per share of AndersonDecatur
Financial common stock.
PRO FORMA MERGER ANALYSIS: PBSPro Forma Merger Analysis: Renninger compared the historical performance of
AndersonDecatur Financial to that of First Merchants and other regional holding
companies. This analysis included, among other things, a comparison of
profitability, asset quality and capital measures. In addition, the contribution
of AndersonDecatur 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 AndersonDecatur Financial was prepared and analyzed. Anderson'sDecatur Financial's
historical financial data was compared to the pro forma combined historical and
projected earnings, book value and dividends per share.
The Agreement provides that, in the proposed transaction, Decatur Financial
shareholders are entitled to receive in exchange for each share held, and at
their election, either (I) 9.13 shares of First Merchants' common stock; or (II)
$237.39 in cash; or (III) a combination of both, within certain limitations. The
cash portion of the transaction is limited to $14 million, in order to preserve
the opportunity for a tax-free exchange for shareholders electing to receive
shares.
If all shareholders elect to receive shares, an aggregate of 1,346,118
First Merchants common shares will be issued in exchange for all 147,439 Company
common shares currently outstanding and available under options. Based on recent
trading activity as reported on the National Association of Securities Dealers
Automated Quotation System, First Merchants' shares
23
have traded at approximately $24.00. At that price, the proposed consideration
to be received represents an aggregate value of $32,306,834 or $219.12 per
Company common share. This valuation represents a multiple of December 31, 1999
tangible book value (adjusted to reflect the exercise of outstanding options) of
2.22X and a multiple of 1999 net income of 17.34X.
The fixed cash price of $237.39 implies a $26.00 value of First Merchant's
shares. If the maximum number of Decatur shares are exchanged for cash, an
aggregate of 807,667 First Merchants common shares will be issued and the
aggregate value of the transaction will be $33,384,320. This valuation
represents a multiple of December 31, 1999 tangible book value (adjusted to
reflect the exercise of outstanding options) of 2.29X and a multiple of 1999 net
income of 17.92X.
Renninger also considered the pro forma impact of the proposed transaction
on the Company's shareholders from the perspective of tangible book value,
earnings and dividends. Decatur Financial shareholders electing to accept First
Merchants' stock are expected to achieve tangible book value accretion of 2.9%,
earnings accretion of 13.2% and a 101% increase in dividends (based on recent
dividend payments).
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Anderson'sDecatur Financial's shareholders under the
Agreement is fair and equitable from a financial 23
perspective and does not
constitute a recommendation to any AndersonDecatur Financial shareholder to vote in
favor of the affiliation. No limitations were imposed on PBSRenninger regarding the
scope of its investigation or otherwise by Anderson.Decatur Financial.
Based on the results of the various analyses described above, PBSRenninger
concluded that the consideration to be received by Anderson'sDecatur Financial's
shareholders under the Agreement is fair and equitable from a financial
perspective to the shareholders of Anderson.
PBS will receive fees of approximately $7,500Decatur Financial.
Renninger's compensation for all services performed in connection with the
sale of Decatur Financial and for the rendering of the Fairness Opinion.Opinion is based
on the value of the merger, which varies with First Merchants' share price upon
consummation of the merger and the mix of cash and shares of First Merchants
common stock received by Decatur Financial shareholders. In connection with the
sale of Decatur Financial, Renninger has received a consulting fee of $20,000
paid upon engagement by Decatur Financial and an additional fee of $80,000 paid
upon execution of the Agreement. In addition Andersonto such fees, Renninger will
receive a contingent fee equal to (i) 0.50% of the first $33,000,000 of the
consideration for the merger and (ii) 5.00% of the consideration for the merger
in excess of $33,000,000, to be paid upon consummation of the merger. In the
event that all Decatur Financial shareholders elect to receive First Merchants
shares valued at $24.00 per share, the closing price of First Merchants common
stock on January 20, 2000, the business day immediately preceding the public
announcement of the merger, the merger would be valued at $32.3 million and
Renninger would receive total fees of approximately $261,500 for his services to
Decatur Financial. In the event that all Decatur Financial shareholders elect to
receive First Merchants shares valued at $______ per share, the closing price of
First Merchants common stock on _____________, 2000, the merger would be valued
at $____ million and Renninger would receive total fees of approximately
$__________ for his services to Decatur Financial.
24
In addition to the above fees, Decatur Financial has agreed to indemnify
PBSRenninger and its directors, officers and employees, from liability in
connection with the transaction, and to hold PBSRenninger harmless from any losses,
actions, claims, damages, expenses or liabilities related to any of PBS'Renninger's
acts or decisions made in good faith and in the best interest of Anderson.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF ANDERSON HAS CAREFULLY CONSIDERED AND
UNANIMOUSLY APPROVED THE AGREEMENT AND UNANIMOUSLY RECOMMENDS TO THE ANDERSON
SHAREHOLDERS THAT THEY ADOPT AND APPROVE THE AGREEMENT.
EXCHANGE OF ANDERSON COMMON STOCKDecatur
Financial.
Recommendation of the Board of Directors
The Board of Directors of Decatur Financial has carefully considered and
unanimously approved the Agreement and unanimously recommends to the Decatur
Financial shareholders that they approve the Agreement.
Exchange of Decatur Financial Common Stock
Under the terms of the Agreement, as of the effective date of the merger,
each outstanding share of AndersonDecatur Financial common stock, other than shares as
to which dissenters' rights have been exercised, will be converted into the
right to receive, 1.38 sharesat the election of First Merchants common stock.
The exact number of shares to be received by each Anderson shareholder
may be adjusted if First Merchants issues a stock dividend with respect to
its common stock, combines, subdivides or splits up its outstanding shares of
common stock or takes any similar recapitalization action. If any of these
events happen, the exact number ofholder thereof, either (i) 9.13 shares
of First Merchants common stock that you will receive will("Option 1") or (ii) $237.39 in cash ("Option
2"). The conversion ratio is subject to adjustment under certain circumstances.
See "MERGER - Conversion Ratio Adjustment."
An Election Form is being mailed to all Decatur Financial shareholders
along with this Proxy Statement-Prospectus and is to be adjusted so that you will receive such numberused by Decatur
Financial shareholders to elect either Option 1 or Option 2 for shares of
Decatur Financial common stock held by them. A Decatur Financial shareholder may
elect Option 1 for all or a portion of the shares owned and/or Option 2 for all
or a portion of the shares owned. To be effective, the properly completed
Election Form must be received by the Trust Department of First Merchants shares as represents the same percentageBank,
National Association by 5:00 p.m. local time on ___________ __, 2000. Shares of
outstanding
shares of First MerchantsDecatur Financial common stock atfor which a properly completed Election Form is
not timely received will be treated as if the time of consummation ofshareholder elected Option 1 for
all shares owned.
In the merger as would have been represented byevent (i) the number of shares youof Decatur Financial common stock
covered by Option 2 elections would have
receivedotherwise entitle Decatur Financial
shareholders to receive more than $14 million in cash or (ii) the merger would
not satisfy the "continuity of interest" rule applicable to tax-free
reorganizations under the Internal Revenue Code of 1986, as amended (the
"Continuity of Interest Rule") due to the amount of cash that would otherwise be
issuable in connection with the merger, certain of the Option 2 elections of the
holders of Decatur Financial shares shall be eliminated and converted into
Option 1 elections. This will be accomplished by first eliminating and
converting the election which covers the smallest number of Decatur Financial
shares, and then eliminating and converting the election which covers the next
smallest number of shares and continuing this process until the total remaining
number of Decatur Financial shares covered by Option 2 elections is such that
the merger will result in cash payments of no more than $14 million and will
satisfy the Continuity of Interest Rule.
25
The Election Form will allow a Decatur Financial shareholder to elect
Option 1 if such event(s) had not occurred.there is an oversubscription in Option 2. Such elections shall be
the first shares reallocated, regardless of the number of shares, in the event
of an oversubscription as described above.
No fractional shares of First Merchants common stock will be issued to
AndersonDecatur Financial shareholders. Each shareholder who otherwise would be entitled
to a fractional interest in a First Merchants share as a result of the exchange9.13 to 1
conversion ratio will, upon surrender of all of the shareholder's certificates,
promptly receive cash for the fractional interest. The price of the fractional
interest will equal the average of the mid-point between the bid and ask prices
of the common stock of First Merchants' average closing price (asMerchants as reported by
NASDAQ)in The Wall Street Journal
(Midwest Edition) for the five businessten (10) NASDAQ trading days immediately preceding the effectivefifth (5th)
calendar day prior to the closing date of the merger.merger (the "First Merchants
Average Price").
After the effective date of the merger, stock certificates previously
representing AndersonDecatur Financial common stock will represent only the right to
receive shares of First Merchants common stock andand/or cash, as applicable. Prior
to the surrender of Decatur Financial stock certificates for any fractional shares,
or, in the case of dissenters, the rightexchange subsequent
to receive cash. After the effective date, of the merger and until holders of Andersonsuch shares entitled to receive shares of
First Merchants common stock exchange their
24
stock certificates for First Merchants certificates, they will not be entitled to receive First Merchants'payment of
dividends or other distributions.distributions declared on such shares of First Merchants
common stock. However, any accumulated dividends or other distributions
previously declared will be paid, without interest, upon the exchange of AndersonDecatur
Financial stock certificates for those of First Merchants. On the effective date
of the merger, the stock transfer books of AndersonDecatur Financial will be closed and
no transfer of shares of AndersonDecatur Financial common stock will thereafter be made.
If, after the effective date, certificates representing shares of AndersonDecatur
Financial common stock are presented for registration or transfer, they will be
cancelled and exchanged for shares of First Merchants' common stock andand/or cash,
as applicable.
Distribution of stock certificates representing shares of First Merchants
common stock andand/or cash payments for fractional shares will be made to each former shareholder of
AndersonDecatur Financial within 10ten days of the shareholder's delivery of his or her
certificates. Delivery of AndersonDecatur Financial shares for conversion will not be
taken until after the effective date of the merger. First Merchants Bank,
National Association will act as conversion agent in the merger. Instructions as
to delivery of stock certificates will be sent to each shareholder shortly after
the effective date of the merger.
RIGHTS OF DISSENTING SHAREHOLDERSConversion Ratio Adjustment
The Agreement provides that Decatur Financial may terminate the Agreement
if the First Merchants Average Price (as defined above) is less than $22.00 (a
"Decatur Financial Price Termination Event"). The Agreement also provides that
First Merchants may terminate the Agreement if the First Merchants Average Price
is greater than $30.00 (a "First Merchants Price Termination Event").
If a Decatur Financial Price Termination Event occurs and Decatur
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
26
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 $22.00 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 Decatur 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, Decatur 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 $30.00 and the conversion ratio (as then in effect) and the
denominator of which is the First Merchants Average Price. If Decatur 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).
"Determination Date" means the fifth calendar day prior to the closing date
of the merger.
Rights of Dissenting Shareholders
The Indiana Financial Institutions ActBusiness Corporation Law ("IFIA"IBCL") provides shareholders of
merging bankscorporations with certain dissenters' rights. The dissenters' rights of
AndersonDecatur Financial shareholders are set forth in Section 28-1-7-21Chapter 44 of the IFIA,IBCL, a copy
of which is attached to this Proxy Statement-Prospectus as Appendix B.
Shareholders will not be entitled to dissenters' rights absent strict compliance
with the procedures of Indiana law.
Section 28-1-7-21Chapter 44 of the IFIAIBCL provides that AndersonDecatur Financial shareholders have
the right to demand payment in cash for the fair value of their shares
immediately before the merger becomes effective. Such fair market value excludes
any appreciation or depreciation in anticipation of the merger, unless a court
determines that such exclusion would be inequitable. To claim this right, athe
shareholder must first:
1. deliver to AndersonDecatur Financial before the vote is taken, written notice
of the shareholder's intent to demand for payment in cash for the
shareholder's shares if the merger is effectuated; ANDand
2. not vote in favor of the merger in person or by proxy.
Dissenting shareholders may send their written notice to James F. Ault,Paul E. Strickler,
Chairman of the Board, Anderson Community Bank, 19 West 10thDecatur Financial, Inc., 520 North 13th Street, Anderson,P.O. Box
988, Decatur, Indiana 46016.46733.
27
If the merger is effected and a shareholder has complied with the above
conditions, First Merchants shall pay to the shareholder, upon surrender of
the stock certificates representing the shareholder's shares, the value of
the shareholder's shares as of the day before the date on which the vote was
taken approving the merger. Any shareholders failing to comply strictly with
the conditions described above will not be entitled to payment of the value
of their shares. Immediately after the merger is approved by the AndersonDecatur Financial shareholders, shareholders dissenting under this process will only be
entitled to payment of the value of their shares, will cease to be Anderson
shareholders, and are not entitled to exercise any rights as shareholders.
25
Once a shareholder has made a demand for payment as described above,
such demand for payment may not be withdrawn unless Anderson consents to the
withdrawal. Therefore, shareholders should carefully consider their decision
to dissent from the merger before making demands for payment.
AN ANDERSON SHAREHOLDER WHO DOES NOT STRICTLY COMPLY WITH EACH OF THE
CONDITIONS DESCRIBED ABOVE WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS
UNDER SECTION 28-1-7-21 OF THE IFIA. SHAREHOLDERS WHO EXECUTE AND RETURN THE
ENCLOSED PROXY BUT DO NOT SPECIFY A CHOICE ON THE MERGER PROPOSAL WILL BE
DEEMED TO HAVE VOTED IN FAVOR OF THE MERGER AND ACCORDINGLY TO HAVE WAIVED
THEIR DISSENTERS' RIGHTS, UNLESS THE SHAREHOLDERS REVOKE THE PROXY PRIOR TO
ITS BEING VOTED.
If the merger is effected, First
Merchants or Decatur Financial will, within 10 days after the merger is effected,shareholder approval,
send a written notice stating the date the merger was
effectedof dissenters' rights to those shareholders who have satisfied the
above conditions. The notice will also includestate the procedures that dissenting
shareholders must follow to exercise dissenters' rights under Indiana law.
A Decatur Financial shareholder who is sent such a written offer to those shareholders to paynotice must then:
1. demand payment for his or her shares of Decatur Financial common
stock;
2. certify that beneficial ownership of the shareholder'sDecatur Financial shares at a specified pricewas
acquired before the date set forth in such notice; and
3. deposit the Decatur Financial stock certificates in accordance with
the terms of the notice.
A Decatur Financial shareholder who does not strictly comply with each of
the 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 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, First Merchants will pay each dissenting
Decatur Financial shareholder who has complied with all of the requirements of
Chapter 44 and of the notice, First Merchants' estimate of the fair value of the
shares as determined by First Merchants.
Within 20 days afterof the time immediately prior to the merger, is effected,excluding any
appreciation in value in anticipation of the dissenting shareholder
must submitmerger. The determination of the
stock certificates representing the shareholder's shares to
First Merchants for notationestimate of "fair value" will be based on the certificates that a demand for payment
has been made by the shareholder. At the option of First Merchants, the
failure of a shareholder to do so terminates the shareholder's rights to
dissent under the process described herein, unless a court directs otherwise.
If the value of such shares of Decatur
Financial common stock on January 20, 2000, the shares is agreed uponday immediately prior to the
announcement of the merger.
Dissenters can object to the fair value established by the shareholder and First Merchants by
stating their estimate of the fair value and demand payment of the additional
amount within 30 days after the date on which the merger was effected,
First Merchants shall pay the value of the sharesmakes or offers payment to the
shareholder within
90 days after the date on which the merger was effected after the shareholder
has surrendered the shareholder's certificates representing the shares.
If the dissenting shareholder anddissenter. First Merchants do notcan elect to agree onto the dissenter's fair value
of the shares within 30 days after the merger is effected, then either
the dissenting shareholderdemand or First Merchants may commence an action within 9060 days afterof receipt of the merger is effecteddissenter's demand
in the Circuit or Superior Court of MadisonAdams County for a judicial determination of
the valuefair value. The Court may appoint appraisers to determine the fair value.
The costs of the shares.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 anthe amount, equal toif
any, by which the value of each dissenting share multiplied byCourt finds the number of
dissenting shares that any dissenting shareholder owns. Thefair value of the dissenter's shares, is payableplus
interest, exceeds the amount paid by First Merchants only upon endorsement and deliveryMerchants.
28
The foregoing summary of the rights of dissenting shareholders' stock certificatesshareholders addresses
all material features of the applicable Indiana dissenters' rights statute but
does not purport to the resulting bank. Any
party may appeal from the judgmentbe complete and is qualified in its entirety by the
court.
THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS ADDRESSES
ALL MATERIAL FEATURES OF THE APPLICABLE INDIANA DISSENTERS' RIGHTS STATUTE
BUT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE
STATUTORY PROVISION ATTACHED HERETO AS APPENDIXstatutory 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.
26
RESALE OF FIRST MERCHANTS COMMON STOCK BY ANDERSON AFFILIATESshareholder'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 Decatur Financial Affiliates
Generally, no restrictions on the sale or transfer of the shares of First
Merchants common stock issued pursuant to the merger will be imposed solely as a
result of the merger. However, certain restrictions will apply to the transfer
of First Merchants' shares owned by any shareholder deemed an
Andersona Decatur Financial
"affiliate" under Rule 145 of 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 AndersonDecatur Financial will provide First Merchants
with a list identifying each affiliate of Anderson.Decatur Financial. The Agreement also
requires that each AndersonDecatur Financial affiliate deliver to First Merchants, prior
to the effective date of the merger, a written transfer restriction agreement.
The transfer restriction agreement shall provide that the affiliate will not
sell, pledge, transfer or otherwise dispose or reduce such affiliate's market risk with
respect to theof any shares of First Merchants
common stock to be received:
1. during the period 30 days prior to the effective date of the
merger;
2. until such time as financial results covering at
least 30 days of combined operations of Anderson and
Pendleton have been published; and
3.received unless done pursuant to an effective registration
statement under the Securities Act or pursuant to Rule 145 or another exemption
from the registration requirements under the Securities Act.
The certificates representing First Merchants common stock issued to
AndersonDecatur Financial affiliates in the merger may contain a legend indicating these
resale restrictions. IF YOU ARE AN AFFILIATE OF ANDERSON, YOU SHOULD CONFER
WITH LEGAL COUNSEL REGARDING THE TRANSFER RESTRICTIONS THAT MAY APPLY.
CONDITIONS TO CONSUMMATION OF THE MERGERIf you are an affiliate of Decatur Financial, you should
confer with legal counsel regarding the transfer restrictions that may apply.
Conditions to Consummation of the Merger
Consummation of the merger is conditioned upon, among other things, the
satisfaction of each of the following conditions:
1. the approval of the Agreement by the affirmative vote of the holders
of a majority of the outstanding shares of common stock of Anderson;Decatur
Financial;
2. the approval of the Agreement by First Merchants, as the sole
shareholder of Pendleton;
3. the registration of First Merchants common stock with the Securities
and Exchange Commission and the receipt of all state securities and
blue sky approvals required for the offer and sale of First Merchants
common stock to AndersonDecatur Financial shareholders;
27
4.3. the receipt of all regulatory approvals required for the merger;
5.29
4. the receipt of an opinion of counsel with respect to certain federal
income tax matters; 6. the receipt by First Merchants of a letter from its
independent public accountants confirming its ability
to account for the merger as a "pooling of
interests"; and
7.5. the receipt by First Merchants of certain undertakings from affiliates
of Anderson.Decatur Financial.
Consummation of the merger is further conditioned upon both parties receipt
of certain officers' certificates and legal opinions, the accuracy of
representations and warranties contained in the Agreement and the fulfillment of
certain covenants set forth in the Agreement. The conditions to consummation of
the merger are requirements not subject to unilateral waiver and may be altered
only by the written consent of the parties. See "MERGER - Resale of First
Merchants Common Stock by AndersonDecatur Financial Affiliates," "MERGER -
Opinion of Financial Advisor," "MERGER - Regulatory
Approvals," "MERGER - Interests of Certain Persons in the Merger," "FEDERAL
INCOME TAX CONSEQUENCES" and Appendix A.
TERMINATION; WAIVER; AMENDMENTTermination; Waiver; Amendment
The Agreement may be terminated before the merger becomes effective under
the following conditions:
1. any of the partieseither party makes a material misrepresentation in or materially
breaches the Agreement;
2. any of the partieseither party reasonably determines that consummation of the merger is
inadvisable due to the commencement or threat of material legal
proceedings against one of the parties;
3. a material adverse change has occurredoccurs in the consolidated financial
condition or business of First Merchants since September 30, 1999 or
AndersonDecatur Financial since JuneNovember 30, 1998;1999;
4. the merger will not constitute a tax-free reorganization under the
Internal Revenue Code of 1986;
5. the merger cannot be accounted for as a "pooling of interests";
6. certain information provided pursuant to the Agreement by AndersonDecatur
Financial to First Merchants prior to consummation of the merger has
had or may have a material adverse effect on the financial condition
or business of Anderson;
7.Decatur Financial or Decatur Bank & Trust Company;
6. consummation of the merger has not occurred by April 30, 1999;
28
October 2, 2000;
7. as described under "MERGER - Conversion Ratio Adjustment;"
8. the occurrence of a merger, consolidation, share exchange, stock
transaction, or asset transaction in which First Merchants or
any of its subsidiary banks (including Pendleton) are acquired
by a third party, or First Merchants enters into an agreement for
such a transaction or such a transaction is publicly disclosed;
9. AndersonDecatur Financial furnishes information or enters into discussions or
negotiations with a third party relating to a proposed acquisition of
Anderson, Anderson30
Decatur Financial or Decatur Bank & Trust Company, Decatur Financial,
fails to give First Merchants written notice of any such intention, or
Anderson'sDecatur Financial's Board of Directors withdraws or modifies its
recommendation to AndersonDecatur Financial shareholders to vote for the
merger following receipt of a proposal for an acquisition from a third
party; 10. Anderson'sor
9. Decatur Financial's Board of Directors terminates the Agreement in the
exercise of its fiduciary duties after receipt of an unsolicited
acquisition proposal from a third party; or
11. any of the conditions to completion of the merger cannot be
satisfied by April 30, 1999.party.
Upon termination for any of these reasons, the Agreement will be void and
of no further force or effect. However, if any party to the Agreement willfully
breaches any of the provisions of the Agreement, then the other party to the
Agreement shall be entitled to recover appropriate damages for such breach. In
addition, in the event First Merchants or Pendleton
terminates the Agreement after AndersonDecatur
Financial takes the action described in item 98 above or AndersonDecatur Financial
terminates the Agreement in accordance with item 109 above, AndersonDecatur Financial is
required to pay First Merchants $750,000$1,000,000 as liquidated damages to reimburse
First Merchants for the considerable time and expense invested and to be
invested by First Merchants in furtherance of the Agreement and the merger.
The parties can agree to amend the Agreement and can waive their right to
require the other party to adhere to the terms and conditions of the Agreement,
where the law allows. However, no amendment to the Agreement is permissible
after the AndersonDecatur Financial shareholders approve the merger if the amendment or
waiver would have a material adverse effect on the AndersonDecatur Financial
shareholders.
RESTRICTIONS AFFECTING ANDERSONRestrictions Affecting Decatur Financial
The Agreement contains certain restrictions regarding the conduct of
business of Anderson.Decatur Financial and Decatur Bank & Trust Company. Among other
items, Andersonneither Decatur Financial nor the Bank may, not, without the prior written
consent of First Merchants, materially change its capital structure, issue stock
(except as contemplated by the Agreement), declare or pay any dividends or make
any other distribution to its shareholders. Notwithstanding, the above,Agreement
allows for Decatur Financial to make quarterly dividend payments on its common
stock in March, 2000, June, 2000 and September, 2000, which dividends shall not
exceed $1.03 per share, respectively. Decatur Financial may not pay any such
dividend with respect to the fiscal quarter in which the merger becomes
effective and in which Decatur Financial shareholders become entitled to receive
dividends on the shares of First Merchants received in the merger. Decatur Bank
& Trust Company is permitted under the Agreement requires that
certain options be exercised byto pay dividends to Decatur
Financial to cover its expenses of operations and expenses related to the
officers, directors and employees of
Anderson and that the related shares of Anderson common stock be issued
before the effective date of the merger to such persons.
29
REGULATORY APPROVALSmerger.
Regulatory Approvals
The merger is subject to the prior approval requirements of the Indiana
Financial Institutions Act and the Bank MergerHolding Company Act Section 18(c) of the
Federal Deposit Insurance Act.1956.
Applications thereunder have been filed with the Indiana Department of Financial
Institutions ("INDIANA DEPARTMENT"Indiana Department") and
31
with the Board of Governors of the Federal Deposit Insurance CorporationReserve System ("FDIC"Federal Reserve").
In reviewing the Indiana Department application, the Indiana Department
considers various factors including:
1. the managerial and financial resources of First Merchants and
Pendleton;Merchants;
2. whether First Merchants' subsidiaries, First Merchants Bank, National
Association, Pendleton, First United Bank, The Madison Community Bank, The Union
County National Bank of Liberty, and The Randolph County Bank and The
First National Bank of Portland, have met, and propose to continue to
meet, the credit needs of their communities; and
3. whether the interests of depositors, creditors, and the public
generally are jeopardized by the transaction.
In reviewing the FDICFederal Reserve application, the FDICFederal Reserve takes
into consideration various factors including applicable capital requirements, the financial and managerial
resources and future prospects of PendletonFirst Merchants and Anderson,its subsidiaries, as well
as the competitive effects of the acquisition and the convenience and needs of
the communitiescommunity served by Anderson and Pendleton.Decatur Bank & Trust Company. The FDICFederal 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 FDICFederal Reserve finds that the anti-competitive
effects of the proposed transaction are outweighed by the public interest and
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served.
After the FDIC'sFederal Reserve's approval is received, the merger cannot be
consummated for 30 days, during which time the United States Attorney GeneralDepartment of
Justice has the authority to challenge the merger on antitrust grounds. With the
approval of the FDICFederal Reserve and the Attorney General,Department of Justice, the waiting
period can be reduced.
Anyreduced to no later than 15 days.
The approvals that may be received fromof the Indiana Department and the FDICFederal Reserve are not to
be interpreted as the opinion of those regulatory authorities that the merger is
favorable to the shareholders of AndersonDecatur Financial from a financial point of
view or that those regulatory authorities have considered the adequacy of the
terms of the merger. The approvals in no way constitute an endorsement or a
recommendation of the merger by the Indiana Department or the FDIC.
EFFECTIVE DATE OF THE MERGERFederal Reserve.
Effective Date of the Merger
The merger will become effective in the month in which the last required
approval to consummate the merger is received or, if later, in which any
applicable waiting period following an approval expires. First Merchants Pendleton and
AndersonDecatur Financial currently anticipate that the effective date of the merger
will occur during the firstsecond quarter of 1999.
302000.
32
MANAGEMENT AFTER THE MERGER
PendletonManagement After the Merger
First Merchants will be the surviving corporation in the merger and Anderson'sDecatur
Financial's separate corporate existence will cease. Accordingly, the directors
and officers of AndersonDecatur Financial will no longer serve in such capacities after
the effective date of the merger.
However,The officers and directors of Decatur Bank & Trust Company immediately
prior to the Board of Directorsmerger will continue to be the officers and directors of the resulting bank afterBank
following the merger shall consist of allsubject to the provisions of the current membersBank's Articles of
the Board of Directors
of AndersonAssociation and the Board of Directors of PendletonBy-Laws. Bank directors who desire to continue to serve on
such Board.
Anderson's directors serving onin that
capacity shall do so for at least the Board of Directorsremainder of the resulting
bankone year terms to which
they have been elected. Decatur Bank & Trust Company's directors will becomebe subject
to First Merchants' policy of mandatory retirement at age 70; provided, however,
the policy of mandatory retirement will not apply to any of Anderson'sthe Bank's current
directors until 1218 months after the merger. Any members of the Board of Directors of the resulting bank subject
to such mandatory retirement policy may be designated as directors emeritus
to serve in an advisory non-voting capacity. The Chairman of the Board of
Directors of Anderson, James F. Ault, will serve as the Chairman of the Board
of Directors of the resulting bank. The Chairman of the Board of Directors of
Pendleton, George R. Likens, will serve as the Vice-Chairman of the Board of
Directors of the resulting bank.
The officers of Pendleton and Anderson immediately prior to the merger
shall continue as officers of the resulting bank in various positions. The
current President of Anderson, Michael L. Baker, shall serve as the President
and Chief Executive Officer of the resulting bank.
In accordance with the Agreement, First Merchants shall cause all necessary
action to be taken to cause the current ChairmanPresident of the Board of
Anderson, James F. Ault,Decatur Financial, Dennis
A. Bieberich, to either (i) be nominated for election as a member of the First
Merchants Board of Directors for a three year term at the first annual meeting
of First Merchants' shareholders following the merger, or (ii) be appointed as a
director at the Board's first meeting following the completion of the merger. INTERESTS OF CERTAIN PERSONS IN THE MERGERAs
an appointed director, Mr. Bieberich 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 AndersonDecatur Financial have interests
in the merger other than their interests as AndersonDecatur Financial shareholders,
pursuant to certain agreements and understandings.understandings that are reflected in the
Agreement. Those agreements and understandings are as follows:follows.
First Merchants has agreed that it will cause the current ChairmanPresident of
the Board of Anderson, James F. Ault,Decatur Financial, Dennis A. Bieberich, 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. Bieberich as a
director to serve until the first annual meeting of First Merchants.
The officers and directors of AndersonDecatur Financial will remain officers and
directors of the resulting bankDecatur Bank & Trust Company after the merger.
The current President of
Anderson, Michael L. Baker, shall serve as the President and Chief Executive
Officer of the resulting bank. The current Chairman of the Board of Directors
of Anderson, James F. Ault, will serve as the Chairman of the Board of
Directors of the resulting bank.
In connection with the merger, it is anticipated that Michael L. Baker,
Bradley K. Condon, and Michael E. Stephens, the President and Chief Executive
Officer, Senior Vice
31
President, and Senior Vice President, respectively, of Anderson will enter
into written employment agreements with the resulting bank after the merger.
In general, such employment agreements for Messrs. Baker, Condon and
Stephens shall provide for employment for a period of five (5) years as an
officer of First Merchants or as an officer of any of First Merchants'
subsidiaries (including the resulting bank) with such title and duties as
determined by the Board of Directors of First Merchants or the Board of
Directors of any respective subsidiary. As an employee, each such individual
shall be entitled to a base salary which is not less than their base salary
paid by Anderson at the time of execution of the Agreement and participation
in all other employee benefit programs offered by First Merchants to other
employees in similar positions. In addition, Messrs. Baker, Condon and
Stephens shall be entitled to receive deferred compensation in the amount of
$50,000, $37,500, and $37,500, respectively, per year for the first five (5)
years of the employment agreement payable at the end of each year if the
individual is still employed by First Merchants or any of First Merchants'
subsidiaries.
These employment agreements may be terminated prior to expiration of the
five (5) year term upon the death or disability of the employee, by First
Merchants or any of First Merchants' subsidiaries employing the employee with
or without cause, or by the employee. The employee shall have different
rights and obligations depending upon the cause of termination of the
employment agreement. Upon the occurrence of certain circumstances set forth
in the employment agreement, each such employee shall be prohibited from
working in an office or branch of a commercial banking institution located in
Madison County, Indiana during the employee's employment by First Merchants
or any of First Merchants' subsidiaries and for a period of one (1) year
after termination of such employment.
The members of the AndersonDecatur Financial Board of Directors knew about those
additional interests, and considered them, when they approved the Agreement.
STOCK OPTIONS33
Stock Options
Pursuant to the terms of the Agreement, the officers, directors and
employeesDennis A. Bieberich, President of
Anderson holding options to purchase Anderson common stock areDecatur Financial, is required to exercise suchall of his options to acquire shares
of Decatur Financial common stock prior to consummation of the merger.
ACCOUNTING TREATMENTAccounting Treatment
The merger is expected to qualifywill be accounted for as a "pooling of interests" for
accountingpurchase transaction. As a result,
Decatur Financial's assets and financial reporting purposes. It is a condition of the merger
thatliabilities will be recorded by 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.
32
REGISTRATION STATEMENTat fair values.
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.
3334
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 purport to cover all federal income tax
consequences relating to the merger and does not contain any information with
respect to state, local or other tax laws.
The merger is expected to qualify as a reorganization under Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "CODE""Code"). As
such, the following is a summary of the federal income tax consequences that
will result:
1. NoIn general, a Decatur Financial shareholder who elects to receive only
shares of First Merchants common stock will not recognize gain or loss
on the exchange, for federal income tax purposes. Code Section
354(a)(1). Gain or loss for federal income tax purposes will be
recognized, however, with respect to cash payments received by a
Decatur Financial shareholder in lieu of fractional share interests
resulting from the conversion ratio. Rev. Rul. 66-365, 1966-2 C.B.
116. Any cash received by a Decatur Financial Shareholder in lieu of a
fractional share interest will be treated as received by the
shareholder as a distribution in redemption of that fractional share
interest and will be treated as a distribution in full payment in
exchange for the fractional share interest redeemed, subject to the
provisions and limitations of Code Section 302.
2. A Decatur Financial shareholder who elects to receive part cash and
part First Merchants common stock, will recognize gain to the extent
of boot received. Code Sections 354(a)(1) and 356(a)(1). Whether such
gain is capital gain or a dividend will be determined based upon the
Supreme Court's decision in Commissioner v. Clark, 109 S.Ct. 1455
(1989). Pursuant to Commissioner v. Clark, in applying Code Section
356(a)(2), the transaction should be tested under the rules of Code
Section 302(b) as if a Decatur Financial shareholder received only
First Merchants common stock in the merger, and then surrendered some
of such First Merchants stock to First Merchants in a redemption for
the cash received in the merger. No loss will be recognized by Anderson shareholders
who exchange alla
Decatur Financial shareholder on the receipt of their Anderson common stock for First Merchants common
stock pursuant to the merger, except to the
extent ofand cash in exchange for Decatur Financial common stock. Code
Section 356(c).
3. A Decatur Financial shareholder receiving all cash will recognize gain
or loss attributable to anymeasured by the difference between the amount of cash received
and the basis of the Decatur Financial stock surrendered. After the
Commissioner v. Clark case, if a Decatur Financial shareholder
receives only cash in lieuexchange for Decatur Financial stock, the
transaction should be treated as if either (i) the shareholder sold
his or her Decatur Financial stock to First Merchants for cash, or
(ii) the Decatur Financial shareholder received First Merchants stock
in the merger after which First Merchants redeemed those shares (i.e.,
a stock redemption by First Merchants subject to the provisions and
limitations of receiptCode
35
Section 302). It is possible, however, especially in the case of a
fractional shareDecatur Financial shareholder who perfects dissenters rights and
receives solely cash, that the Internal Revenue Service could view the
transaction as stock redemption by Decatur Financial (subject to the
provisions and limitations of First Merchants
common stock;
2.Code Section 302).
4. The basis of First Merchants common stock received (including any
fractional share interests deemed received) by AndersonDecatur Financial
shareholders whoin exchange all offor their Anderson common stock
for First Merchants commonDecatur Financial stock will be
equal to such shareholder's basis in the same asDecatur Financial stock
exchanged, decreased by any cash received, and increased by any gain
recognized on the basis
of the Anderson common stock surrendered in exchange therefor;
3.exchange. Code Section 358(a)(1).
5. The holding period of the First Merchants common stock received
(including any fractional share interests deemed received) by Anderson shareholders who exchange all of their
Anderson common stock for First Merchants common stock will
include the period during which the Anderson commonDecatur Financial stock was held,
provided that the Anderson commonDecatur Financial stock was held as a capital asset
on the date of the exchange;
4. Where a cash payment is received by an Anderson shareholder in
lieu of fractional shares of First Merchants common stock, the
cash payment will be treated as a distribution in redemption
of the deemed fractional share interest, subject to the
provisions and limitations ofmerger. Code Section 302 of the Code. Where
such exchange qualifies under Section 302(a) of the Code, such
shareholder will recognize a capital gain or loss provided
that the Anderson common stock was held as a capital asset on
the date of the merger;
5. Any Anderson shareholder who perfects dissenter's rights and
receives solely cash in exchange for his or her Anderson
common stock shall be treated as having received such cash as
a distribution in redemption of the Anderson common stock
subject to the provisions and limitations of Section 302 of
the Code. Where such exchange qualifies under Section 302(a)
of the Code, such shareholder will recognize a capital gain or
loss provided that the Anderson common stock was held as a
capital asset as of the exchange. Under Section 1001 of the
Code, gain or loss (subject to any applicable limitations of
the Code) will be realized and recognized by such Anderson
shareholder in an amount equal to the difference between the
redemption price and the adjusted basis of the Anderson common
stock surrendered in exchange therefor;
34
1223(1).
6. No gain or loss will be recognized by Anderson, PendletonDecatur Financial or First
Merchants in connection with the transaction;transaction. Code Sections 361(a) and
1032.
7. The basis of the assets of AndersonDecatur Financial acquired by PendletonFirst
Merchants in the merger will be the same as the basis of such assets
in the hands of AndersonDecatur Financial immediately prior to the merger.
8. First Merchants' basis in Pendleton stock will be equal to its
prior basis in Pendleton stock plus the net basis of the
assets of Anderson acquired in the merger.Code Section 362(b).
Receipt of an opinion of tax counsel with respect to the above is a
condition precedent to consummation of the merger. The tax opinion will be based
upon representations made by the management of Decatur Financial and First
Merchants,
Pendleton and Anderson.Merchants. 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-freetax free nature of the merger.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT CONSIDER THE FACTS AND
CIRCUMSTANCES OF ANY PARTICULAR ANDERSON SHAREHOLDER. EACH SHAREHOLDER SHOULD
CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF EXISTING
AND PROPOSED FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
35The foregoing is only a general description of the material federal income
tax consequences of the merger and does not consider the facts and circumstances
of any particular Decatur Financial shareholder. Each shareholder should consult
with his or her own tax advisor with respect to the specific tax consequences of
the merger, including the application and effect of existing and proposed
federal, state, local, foregoing and other tax laws.
36
COMPARATIVE PER SHARE DATA
NATURE OF TRADING MARKETNature of Trading Market
Shares of First Merchants common stock are traded in the over-the-counter
market and share prices are reported by the NASDAQ National Market System under
the symbol FRME. On August 19, 1998,January 20, 2000, the business day immediately preceding the
public announcement of the merger, the closing price of First Merchants common
stock was $27.33$24.00 per share (as adjusted to
take into account a 3-for-2 stock split of First Merchants common stock
effected in October, 1998).share. On ____________, 1999,________, 2000, the closing price of First
Merchants common stock was $______$_______ per share. The following table sets forth,
for the periods indicated, First Merchants' high and low closing prices per
share. Prices reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent the actual transaction. All prices have been
adjusted to give effect to stock dividends and stock splits.
1996 HIGH LOW
- ---- ---- ---
First Quarter $18.33 $16.67
Second Quarter $18.33 $16.33
Third Quarter $17.33 $15.50
Fourth Quarter $17.83 $16.04
1997
- ----
First Quarter $20.00 $16.83
Second Quarter $20.50 $18.50
Third Quarter $21.59 $20.00
Fourth Quarter $25.33 $21.42
1998
- ----
First Quarter $27.67 $23.83
Second Quarter $31.17 $26.17
Third Quarter $30.83 $21.67
1997 HIGH LOW
- ---- ---- ---
First Quarter $20.00 $16.83
Second Quarter $20.50 $18.50
Third Quarter $21.58 $20.00
Fourth Quarter $25.33 $21.42
1998
First Quarter $27.67 $24.50
Second Quarter $31.83 $25.67
Third Quarter $30.83 $24.00
Fourth Quarter $28.75 $21.50
1999
First Quarter $26.13 $21.50
Second Quarter $24.75 $21.50
Third Quarter $25.69 $22.25
Fourth Quarter $29.25 $21.88
2000
First Quarter $_____ $_____
Second Quarter through $_____ $_____
_______, 2000
There is no established public trading market for shares of AndersonDecatur
Financial common stock. Most trades are isolated and occur after private
negotiations, with the result that management of AndersonDecatur Financial is not
directly informed of trades or prices. The best information available to Anderson'sDecatur
Financial's management indicates that in 1996, 1997, 1998, 1999 and 1998,2000, the
following number of shares of AndersonDecatur 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
---- ------ ------------- ---- ---
1996 0 0 $ 0.00 $ 0.00
1997 2,000 3 10.50 10.50
1998 15,727 16 13.25 12.00
(through September 30, 1998)
3637
Number of Sales Price
Shares Number of -----------
Year Traded Transactions High Low
---- ------ ------------- ---- ---
1997 430 6 $ 83.00 $ 83.00
1998 2,524 9 115.00 105.00
1999 1,258 5 115.00 115.00
2000 0 0 N/A N/A
(through _____, 2000)
Management of AndersonDecatur 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 AndersonDecatur Financial common stock
would trade and there may have been additional shares of AndersonDecatur Financial
common stock traded at higher or lower prices of which Anderson'sDecatur Financial
management is unaware. The last trade of AndersonDecatur Financial common stock, of
which Anderson'sDecatur Financial management is aware, occurred on or about April 10, 1998September 8,
1999 and involved the sale of 127150 shares at a price which, to the best of
AndersonDecatur Financial management's knowledge, was approximately $13.25$115.00 per share.
As of ________________, 199__,___________ __, 2000, there were approximately ____ holders of First
Merchants common stock and approximately 198400 holders of AndersonDecatur Financial common
stock, not including individual participants in security position listings.
DIVIDENDSDividends
The following table sets forth the per share cash dividends declared on
shares of First Merchants common stock and AndersonDecatur Financial common stock since
January 1, 1996.1997. All dividends have been adjusted to give effect to stock
dividends and stock splits.
First Merchants Anderson
1996 Common Stock (1) Common Stock (2)
- ----First Merchants Decatur Financial
Common Stock (1) Common Stock (2)
1997 ---------------- ----------------
First Quarter $0.13 $0.00
Second Quarter $0.13 $0.00
Third Quarter $0.16 $0.00
Fourth Quarter $0.16 $0.00
1997
- ----
First Quarter $0.16 $0.00
Second Quarter $0.16 $0.00
Third Quarter $0.19 $0.00
Fourth Quarter $0.19 $0.00
1998
- ----
First Quarter $0.19 $0.00
Second Quarter $0.16 $1.46
Third Quarter $0.19 $0.00
Fourth Quarter $0.19 $1.65
1998
First Quarter $0.19 $0.00
Second Quarter $0.19 $1.80
Third Quarter $0.20 $0.00
Fourth Quarter $0.20 $1.85
38
First Merchants Decatur Financial
Common Stock (1) Common Stock (2)
---------------- ----------------
1999
First Quarter $0.20 $0.00
Second Quarter $0.20 $1.95
Third Quarter $0.22 $0.00
Fourth Quarter $0.22 $2.05
2000
First Quarter $0.22 $1.03
- ----------
(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) AndersonDuring 1997, 1998, and 1999, Decatur Financial has never declared and paid
dividends on a semi-annual basis. The Agreement permits Decatur Financial
to pay dividends on its shareholders.
Furthermore,common stock in March, 2000, June, 2000, and
September, 2000, which dividends shall not exceed $1.03 per share,
respectively, provided that Decatur Financial may not pay any such dividend
during the fiscal quarter in which the merger becomes effective and in
which Decatur Financial shareholders become entitled to receive dividends
on the shares of First Merchants common stock into which their shares of
Decatur Financial common stock are to be converted. In accordance with the
termsAgreement, Decatur Financial paid a dividend of the Agreement, Anderson
may not declare, distribute or pay any dividends on its shares$1.03 per share of common
stock from the date of the Agreement through the date of
consummation of the merger without the approval of First Merchants.
37in March, 2000.
39
DESCRIPTION OF FIRST MERCHANTS
BUSINESSBusiness
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, a state chartered
commercial bank organized in 1872. On July 31, 1991, First Merchants acquired
First United Bank, a state chartered commercial bank organized in 1882. On
August 1, 1996, First Merchants acquired The Union County National Bank of
Liberty, a national banking association organized in 1872. On October 2, 1996,
First Merchants acquired The Randolph County Bank, a state chartered commercial
bank organized in 1865. On April 1, 1999, First Merchants acquired The First
National Bank of Portland, a national bank organized in 1904. On April 23, 1999,
First Merchants acquired Anderson Community Bank through a merger of Anderson
Community Bank with and into Pendleton Banking Company, with the resulting bank
being known as The Madison Community Bank.
First Merchants is headquartered in Muncie, Indiana and is presently
conducting commercial banking business through the 2633 offices of its fivesix bank
subsidiaries. These commercial banking activities include accepting demand,
savings and time deposits; making agricultural, commercial, industrial, consumer
and real estate loans; installment credit lending; collections, safe deposit
operations, performing fiduciary and trust services; and providing other
services relating to the general banking business.
First Merchants' bank subsidiaries make and service both secured and
unsecured loans to individuals, firms and corporations. Their installment loan
departments make direct loans to individuals and purchase installment
obligations from retailers without recourse. In addition, First Merchants'
subsidiaries make a variety of residential, industrial, commercial and
agricultural loans.
First Merchants is also conducting an insurance agency business through
First Merchants Insurance Services, Inc., a wholly-owned subsidiary of Pendleton.The
Madison Community Bank. First Merchants Insurance Services, Inc. commenced
operations in 1998.
ACQUISITION POLICY AND PENDING TRANSACTIONSAcquisition Policy and Pending Transactions
First Merchants anticipates that it will continue its policy of geographic
expansion through acquisitions of additional financial institutions. First
Merchants'Merchants management periodically reviews and analyzes potential acquisitions.
As of the date of this Proxy Statement-Prospectus, First Merchants is not a
party to a definitiveany other agreement pursuantrelating to which Jay
Financial Corporation will merge into First Merchants. As a resultan acquisition of additional financial
institutions, other than the merger, The First National BankAgreement with Decatur Financial.
40
Incorporation of Portland will become a wholly-owned
subsidiary of First Merchants. Jay Financial Corporation's and The First
National Bank of Portland's principal executive offices are located in
Portland, Indiana. As of September 30, 1998, Jay Financial Corporation had
assets of approximately $108.6 million, deposits of approximately $88.9
million, shareholders' equity of approximately $14.7 million and net income
for the nine month period then ended of approximately $1 million.
38
INCORPORATION OF CERTAIN INFORMATION BY REFERENCECertain Information by Reference
Additional information concerning First Merchants is included in the First
Merchants documents incorporated by reference in this Proxy Statement-Prospectus.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."
3941
DESCRIPTION OF PENDLETON
BUSINESS
PendletonDECATUR FINANCIAL
Business
Decatur Financial is an Indiana corporation which was incorporated in 1983
and which is a state chartered commercialregistered bank organized in 1872.
Pendleton'sholding company owning all of the issued and
outstanding common stock of Decatur Bank & Trust Company (the "Bank"). Decatur
Financial's principal office is located in Pendleton, Indiana. PendletonDecatur, Indiana and its business
consists primarily of the ownership, supervision and control of the Bank. The
common stock of the Bank is Decatur Financial's principal asset and dividends
paid by the Bank are Decatur Financial's principal source of income.
The Bank is a state chartered bank which was established in 1966 and which
has been in continuous operation since that date. The Bank provides various
commercial and consumer banking services to its customers located primarily in
MadisonAdams County, Indiana. These commercial banking services include accepting
demand, savings and time deposits; making commercial, consumer and real estate
loans; installment credit lending; administering trusts and estates; and
providing other services relating to the general banking business, such as, for
example, safe deposit facilities.
Pendleton is also conducting an insurance agency business through First
Merchants Insurance Services, Inc., a wholly-owned subsidiary of Pendleton.
First Merchants Insurance Services, Inc. commenced operations in 1998.
PROPERTIESProperties
The main office of PendletonDecatur Financial and the Bank is located at 100 West State520 North
13th Street, Pendleton,Decatur, Indiana. PendletonThe Bank also operates fivethree branches with a branch
located in each of Pendleton,at
103 East Monroe Street, Decatur, Indiana Anderson,(full service branch), 1045 South 13th
Street, Decatur, Indiana Ingalls,(full service branch), and 1300 Mercer Avenue, Decatur,
Indiana Lapel, Indiana, and Markleville, Indiana.(limited service branch). The main office and all of the two full service
branches are owned by Pendleton. First Merchants Insurance Services, Inc.,
the wholly-owned subsidiaryBank. The remaining branch is located in space leased
at no cost in the Campus Center of Pendleton, has its main office at 200 East
Jackson Street, Muncie, Indiana at the offices of First Merchants.
LITIGATIONWoodcrest Retirement Community.
Litigation
There is no pending litigation of a material nature in which PendletonDecatur
Financial or the Bank is a party or in which any of itstheir respective property is
subject, other than ordinary routine litigation incidental to the normal
business of Pendleton.Decatur Financial or the Bank. Further, there is no material legal
proceeding in which any director, executive officer, principal shareholder or
associate of any such director, executive officer, principal shareholder or
affiliate is a party or has a material interest adverse to Pendleton.Decatur Financial or
the Bank. None of the ordinary routine litigation in which PendletonDecatur Financial or
the Bank is involved is expected to have a material adverse impact upon the
financial condition or results of operation of Pendleton.
EMPLOYEESDecatur Financial or the Bank.
Employees
As of September 30, 1998, PendletonDecember 31, 1999, the Bank had 4238 full-time equivalent employees to
whom it provides a variety of benefits. Management of Pendletonthe Bank considers its
relations with its employees to be good. MANAGEMENTAs of the same date, Decatur Financial
had one employee, who is an
42
executive officer of both Decatur Financial and the Bank and is not separately
compensated by Decatur Financial for his services to Decatur Financial.
Management
The following table contains certain information about each director
and executive officer of PendletonDecatur Financial as of the date of this Proxy
Statement-Prospectus:
40
DIRECTORS:Directors:
PRINCIPAL OCCUPATION FOR SERVED AS DIRECTOR
NAME AGE LASTPrincipal Occupation for Served as Director
Name Age Last 5 YEARS CONTINUOUSLY SINCEyears Continuously Since (1)
---- --- ------------ ----------------------------------------
George R. Likens 56
Phillip H. Barger 59 Self-employed Farmer 1985
Larry R. Helms 58 Senior Vice President, Secretary and General 1989
Counsel of First Merchants and Senior Vice1984 (1978)
Dennis A. Bieberich 49 President of First Merchantsthe Bank N.A.
Attorney at Law and Partner at Baker &
John S. Keeler 49 Daniels 1976
Attorney at Law
Joseph Kilmer 53 19891984 (1982)
Richard T. Doermer 77 Vice Chairman of Avis Industrial 1984 (1967)
Corporation
Gregory Fleming 40 President of Pendleton
Norman Locke 57 1991
Attorney at Law and President of Madison
G. Douglass Owens 65 County Abstract and Title Corporation 1963
CurtisFleming Excavating, Inc. 2000 (2000)
L. Stephenson 38 Owner of Pendleton Insurance Co., Inc. 1995
EXECUTIVE OFFICERS:
NAME AGE OFFICE
---- --- ------
George R. Likens 56 ChairmanDale Gagle 68 Retired Cashier of the Board of Directors of Pendleton since 1993
Norman Locke 57 President of Pendleton since 1993
Ed ArmantroutBank 1984 (1970)
Wayne M. Porter 43 Vice President of Pendleton since 1993Sales of 1988 (1988)
Thunderbird Products
John L. Schultz 50 President of Baker & Schultz, Inc. 1988 (1988)
Paul E. Strickler 83 Retired President of Strickler Family 1984 (1967)
Enterprises, Inc.
- ----------
(1) Years in parenthesis relate to service as a director of the Bank. All of
Pendleton'sDecatur Financial's directors are also directors of the Bank.
Executive Officers:
Name Age Office
---- --- ------
Dennis A. Bieberich 49 President of Decatur Financial and
President of the Bank
All of Decatur 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
Pendleton'sDecatur Financial's or the Bank's directors or executive officers have been
selected for their respective positions.
4143
SECURITY OWNERSHIP OF MANAGEMENTIn accordance with the Agreement, First Merchants shall cause all necessary
action to be taken to cause the current President of Decatur Financial, Dennis
A. Bieberich, to either (i) be nominated for election as a member of the First
Merchants Board of Directors for a three year term at the first annual meeting
of First Merchants' shareholders following the merger, or (ii) be appointed as a
director at the First Merchants Board's first meeting following the completion
of the merger. As an appointed director, Mr. Bieberich would serve until the
next annual meeting of First Merchants' shareholders and then would 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 First MerchantsDecatur Financial's
common stock beneficially owned on October 31, 1998,as of February 29, 2000, by each beneficial
owner of more than five percent of Decatur Financial's common stock, by each
director of Pendleton,Decatur Financial, by each executive officer of Pendleton,Decatur 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
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------- ----------------------- ----------------
Ed Armantrout 184 *
Larry R. Helms 32,783 (2) *
John S. Keeler 33,024 *
Joseph Kilmer 13,126 (3) *
George R. Likens 26,983 *
Norman Locke 19,239 (4) *
G. Douglass Owens 32,252 (5) *
Curtis L. Stephenson 33Amount and Nature
Beneficial Owner of Beneficial Ownership (1) Percent of Class
---------------- ----------------------- ----------------
Philip H. Barger 8,615(2) 6.02%
Dennis A. Bieberich 11,404(3) 7.73%
Richard T. Doermer 6,490(4) 4.54%
Gregory Fleming 1,312 *
L. Dale Gagle 2,113(5) 1.48%
Wayne M. Porter 754(6) *
John L. Schultz 2,652(7) 1.85%
Paul E. Strickler 26,173(8) 18.30%
Directors and Executive Officers 157,624 1.56% as 59,513(9) 40.36%
a Group (8 Individuals)
- ----------
(1) The information contained in this column is based upon information
furnished to PendletonDecatur Financial by the persons and entities named above and
shareholder records of First Merchants. The shares shown include the
following shares which may be acquired within the 60 day period
following October 31, 1998 under a stock option plan by the executive
officers of First Merchants and Pendleton named above: Mr. Helms,
17,924 shares; and Mr. Locke, 14,737 shares. The shares shown for
directors and executive officers as a group include 32,661 shares which
may be acquired within the 60 day period following October 31, 1998
under a stock option plan.Decatur Financial.
(2) Includes 14,8591,413 shares held by his spouse, Carolyn Barger; 4,070 shares held
by Barger Farms, Inc. over which he has voting and investment power; 1,084
shares held by him in
44
a self-directed IRA account; and 742 shares held by his spouse, Carolyn
Barger, in a self-directed IRA account. Mr. Barger's mailing address is
2656 N. US Highway 33, Decatur, Indiana 46733.
(3) Includes 3,184 shares held by his spouse, Melanie Bieberich; and 4,444
stock options outstanding to Mr. Bieberich which he shall exercise prior to
consummation of the merger. Mr. Bieberich's mailing address is 4704 W 500
N, Decatur, Indiana 46733.
(4) Includes 900 shares held by his spouse, Mary Louise Doermer.
(5) Includes 440 shares held by his spouse, Janet Gagle; 460 shares held
jointly with Mr. Helms' spouse.
(3) Includes 1,903his spouse, Janet Gagle; 480 shares held by him in the name of Mr. Kilmer's wife. Mr.
Kilmer also owns 1,900a
self-directed IRA account; and 41 shares of common stock of Anderson.
(4)held by his spouse, Janet Gagle,
in a self-directed IRA account.
(6) Includes 4,180315 shares held jointly with Mr. Locke's spouse.
42
(5)his spouse, Karen Porter.
(7) Includes 16,7712,350 shares held in the estate of Mr. Owens' wife forby Baker & Schultz, Inc. over which Mr. Owens is the personal representative, 15,253he has
voting and investment power.
(8) Includes 5,776 shares held in
Mr. Owens' wife's trust, 60by his spouse, Kathryn Strickler; and 6,732
shares held inby Strickler Family Enterprises, Inc. over which he has voting
and investment power. Mr. Strickler's mailing address is 1209 Cross Pointe,
Decatur, Indiana 46733.
(9) Includes 4,444 stock options outstanding to Mr. Bieberich which he shall
exercise prior to consummation of the name of Jonathan D.
Owens with Mr. Owens as custodian, 52 shares held in the name of
Katrina H. Owens with Mr. Owens as custodian, and 7 shares held
in the name of Zayda D. Owens with Mr. Owens as custodian. Mr. Owens
also owns 1,000 shares of common stock of Anderson.merger.
* Percentage beneficially owned is less than 1% of the outstanding shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCertain Relationships and Related Transactions
Certain directors and executive officers of PendletonDecatur Financial and the Bank
are customers of and have had transactions with PendletonDecatur 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.
43
DESCRIPTION OF ANDERSON
BUSINESS
Anderson is a state chartered commercial bank organized in 1995.
Anderson's principal office is located in Anderson, Indiana. Anderson
provides various commercial and consumer banking services to its customers
located primarily in Madison County, Indiana. These services include
accepting demand, savings and time deposits; making commercial, consumer and
real estate loans; administering trusts and estates; and providing other
services relating to the general banking business, such as, for example, safe
deposit facilities.
PROPERTIES
The main office of Anderson is located at 19 West 10th Street, Anderson,
Indiana. Anderson also operates three branches located in Anderson, Indiana.
The main office and one branch of Anderson are leased; the other two branches
of Anderson are owned by Anderson.
LITIGATION
There is no pending litigation of a material nature in which Anderson is
a party or in which any of its property is subject, other than ordinary
routine litigation incidental to the normal business of Anderson. Further,
there is no material legal proceeding in which any director, executive
officer, principal shareholder or associate of any such director, executive
officer, principal shareholder or affiliate is a party or has a material
interest adverse to Anderson. None of the ordinary routine litigation in
which Anderson is involved is expected to have a material adverse impact upon
the financial condition or results of operation of Anderson.
EMPLOYEES
As of September 30, 1998, Anderson had 26 full-time equivalent
employees to whom it provides a variety of benefits. Management of Anderson
considers its relations with its employees to be good.
MANAGEMENT
The following table contains certain information about each director and
executive officer of Anderson as of the date of this Proxy
Statement-Prospectus:
44
DIRECTORS:
PRINCIPAL OCCUPATION FOR SERVED AS DIRECTOR
NAME AGE LAST 5 YEARS CONTINUOUSLY SINCE
---- --- ------------ ------------------
James F. Ault 63 Chairman of the Board of Directors of Anderson, 1995
Retired executive of General Motors Corporation
Michael L. Baker 38 President and Chief Executive Officer of Anderson 1995
R. Glenn Falls 77 Investment Counselor at Anderson University
Edward L. Foggs 64 Executive Director of Leadership Council of the 1995
Church of God, Inc. and Trustee of Community
Hospital of Madison County
William H. Hardacre 67 Self-employed real estate developer 1995
Jeffrey A. Jenness 43 Executive Secretary, Treasurer and Chief Executive 1995
Operator of Board of Pensions of the Church of
God, Inc.
C. David Kleinhenn 47 Chief Executive Officer of Kleinhenn Company, Inc. 1995
and President and Chief Executive Operator of Duo
Company, Inc.
Herbert G. Likens 54 Farmer and Owner of Likens Farm, Inc. 1996
Robert J. Pensec 56 President of Carbide Grinding Co., Inc. 1995
Eric R. Retrum 48 Physician with Madison County Imaging, P.C. 1995
Kurt Retrum 45 Physician with Madison County Imaging, P.C. 1995
Stephen D. Skaggs 46 Vice President of Perfecto Tool & Engineering Co., 1995
Inc.
Leland R. Symonds 99 Retired from Emge Packing Co., Inc. 1995
45
EXECUTIVE OFFICERS:
NAME AGE OFFICE
---- --- -------
James F. Ault 63 Chairman of the Board of Directors of Anderson since 1995
Jeffrey A. Jenness 42 Vice Chairman of the Board of Directors of Anderson since 1995 and
Executive Secretary, Treasurer, and Chief Executive Operator of
Board of Pensions of the Church of God, Inc. since 1994
Michael L. Baker 38 President and Chief Executive Officer of Anderson since 1995
Bradley K. Condon 34 Senior Vice President of Anderson since 1995
Michael E. Stephens 45 Senior Vice President and Cashier of Anderson since 1995
All of Anderson's directors and executive officers hold office for a
term of one year or until their respective successors are duly elected and
qualified. There are no arrangements or understandings between any of the
directors or executive officers and any other persons according to which any
of Anderson's directors or executive officers have been selected for their
respective positions.
For a discussion concerning interests which certain officers and
directors of Anderson have in the merger other than their interests as
Anderson shareholders, see "MERGER - Interests of Certain Persons in the
Merger."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following is a summary of the amount and percent of Anderson's
common stock beneficially owned on October 31, 1998, by each beneficial owner
of more than five percent of Anderson's common stock, by each director of
Anderson, by each executive officer of Anderson, and by all directors and
executive officers as a group. Unless otherwise noted, the beneficial owner
has sole voting and investment power.
46
AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------- ----------------------- ----------------
James F. Ault 13,997 (2) 2.29%
Michael L. Baker 12,162 (3) 1.99%
Bradley K. Condon 3,000 (4) *
R. Glenn Falls 8,437 (5) 1.38%
Edward L. Foggs 2,760 (6) *
William H. Hardacre 8,410 (7) 1.37%
Jeffrey A. Jenness 14,860 (8) 2.43%
C. David Kleinhenn 11,207 1.83%
Herbert G. Likens 360 *
Robert J. Pensec 70,776 11.56%
Eric R. Retrum 46,189 (9) 7.54%
Kurt Retrum 33,436 (10) 5.46%
Stephen D. Skaggs 7,738 (11) 1.26%
Michael E. Stephens 6,675 (12) 1.09%
Leland R. Symonds 56,325 9.20%
Directors and Executive Officers 296,332 48.39%
as a Group (15 Individuals)
(1) The information contained in this column is based upon information
furnished to Anderson by the persons and entities named above and
shareholder records of Anderson. All numbers and percentages are
presented fully diluted to include unexercised options to purchase in
the aggregate of 22,650 shares of Anderson's common stock.
(2) Includes 9,000 shares held jointly with Mr. Ault's spouse.
47
(3) Includes 750 shares held jointly with by Mr. Baker's spouse and 5,262
shares held by Mr. Baker in his self-directed IRA. Also includes
options to purchase 5,650 shares.
(4) Includes 1,250 shares held jointly with Mr. Condon's spouse, and
options to purchase 750 shares.
(5) Includes options to purchase 660 shares.
(6) Includes 2,000 shares held by Dr. Foggs in his self-directed IRA and
options to purchase 660 shares.
(7) Includes options to purchase 2,410 shares.
(8) Includes 6,000 shares held by Mr. Jenness in his self-directed IRA,
and options to purchase 7,860 shares.
(9) Includes 8,000 shares for which Dr. Eric Retrum is acting as custodian
for his four children.
(10) Includes 10,000 shares for which Dr. Kurt Retrum is acting as
custodian for his four children.
(11) All 7,738 shares are held jointly with Mr. Skaggs' spouse.
(12) Includes 500 shares held jointly with Mr. Stephens' spouse and 3,675
shares owned by Mr. Stephens in his self-directed IRA. Also includes
options to purchase 2,500 shares.
* Percentage beneficially owned is less than 1% of the outstanding
shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of Anderson are customers of
and have had transactions with Anderson from time to time in the ordinary
course of business. Similar transactions may be expected to take place in the
ordinary course of business in the future. All loans included in such
transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve more than the normal risk
of collectibility or present other unfavorable features.
48
ANDERSON MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar
amounts in thousands, except per share data)
THE FOLLOWING DISCUSSION AND ANALYSIS REVIEWS THE OPERATING RESULTS AND
FINANCIAL CONDITION OF ANDERSON. THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS, NOTES THERETO AND OTHER FINANCIAL
INFORMATION PRESENTED THEREIN WHICH ARE INCLUDED IN THIS PROXY
STATEMENT-PROSPECTUS.
CERTAIN STATEMENTS IN THIS SECTION CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF ANDERSON TO DIFFER MATERIALLY
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS.
Anderson conducts business from four offices in Anderson, Indiana in Madison
County, Indiana. Anderson provides a range of commercial and personal banking
activities, including accepting individual and commercial deposits and making
commercial, mortgage and consumer loans.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
RESULTS OF OPERATIONS
NET INCOME
Anderson earned $625, or $1.08 per share, for 1997 compared to $232, or $.42
per share, for 1996. This increase was driven by increased net interest
income which more than offset higher operating expenses during 1997.
Return on average assets (ROA) was 1.19% and .66% for 1997 and 1996, while
return on average equity (ROE) was 10.36% and 4.33% for those same periods.
NET INTEREST INCOME
Net interest income is the most significant component of Anderson's earnings.
Net interest income is the difference between interest and fees realized on
earning assets, primarily loans, securities and short-term investments and
interest paid on deposits. The net interest margin is this difference
expressed as a percentage of average earning assets. Net interest income is
determined by several factors, including the volume of earning assets and
liabilities, the mix of earning assets and liabilities, and interest rates.
For 1997, net interest income was $2,403, representing a $902, or 60.1%
increase over 1996 net interest income of $1,501. The increase in net
interest income for 1997 resulted from the continued growth of Anderson.
49
Total interest income for 1997 was $1,525, or 55.4%, greater than in 1996.
Interest and fees on loans increased $1,421, or 60.4%, to $3,774 for 1997,
compared to $2,353 for 1996. Significant growth in Anderson's loan portfolio
accounted for the increase in total interest income, as average loan balances
were $15,589, or 59.8% higher in 1997 than in 1996. The average balances of
all categories of loans increased during the year. The average yield on total
loans increased modestly to 9.06% for 1997 from 9.02% in 1996. Interest
income on securities and short-term investments, on a tax equivalent basis,
increased to $533 for 1997 from $402 in 1996 due to a $924 increase in
average balance, and an increase in average yield to 6.11% for 1997 from
5.16% in 1996. Prior to 1997, Anderson's only interest earning investments,
other than loans, were federal funds sold and securities purchased under
agreements to resell, essentially short-term money market investments. During
1997, Anderson began acquiring securities, primarily taxable issuances of US
Government agencies and municipal bonds, in an effort to increase the yield
on the investment portfolio.
Total interest expense for 1997 increased $623, or 49.7%, compared to 1996.
The increase was primarily attributable to increased volume, as average
deposits, in all categories, increased $13,275, or 52.0% during 1997. The
average cost of deposits declined slightly to 4.84% for 1997 from 4.92% in
1996. This decline resulted primarily from a slight shift in deposit
composition as higher cost interest bearing time deposits declined to 61.0%
of average deposits in 1997 from 64.6% in 1996.
See Tables 2 and 3 for an analysis of Anderson's net interest income (on a
tax-equivalent basis) for 1997 and 1996.
Net interest income, on a tax equivalent basis, for 1997 was $929, or 61.9%
higher than for 1996. The net interest margin, on a tax equivalent basis, for
1997 and 1996 was 4.82% and 4.43%. The net interest margin increased due to
continued strong loan growth, changes made in the investment portfolio to
increase yield and controlling the interest cost of deposit funds.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
The provision for loan losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an
amount believed by management to be sufficient to absorb losses inherent in
the credit portfolio. Management conducts, on a quarterly basis, a detailed
evaluation of the adequacy of the allowance.
See Table 4 for a summary of the activity in and the composition of the
allowance for loan losses. The provision for loan losses was $197 for 1997
and $256 for 1996. A lower provision was recorded in 1997 due to a slight
slowdown in loan growth. Charge-offs have been negligible since the formation
of Anderson and asset quality has been good. Management maintains the reserve
at a level believed appropriate based on their ongoing analysis of the risk
in the portfolio. Individual loans identified as possible problems are
analyzed and portions of the allowance allocated to those loans, if needed,
and portions of the allowance are allocated to "good" loans based upon
industry averages, adjusted by management in consideration of growth, the
local economy and other factors. The allowance for loan losses at year end
1997 was $658, or 1.31% of total loans, compared to $466, or 1.32% of total
loans, at year end 1996.
50
Nonperforming loans include nonaccrual loans, restructured loans, and loans
delinquent 90 days or more. Loans are classified as nonaccrual when
management believes that collection of interest is doubtful, typically when
payments are past due 90 days, unless the loans are well secured and in the
process of collection.
See Table 5 for a summary of nonperforming loans. Nonperforming loans were
nominal in 1997 and 1996 and were $0 at year end.
Impaired loans are those loans for which full payment in accordance with the
contractual terms is not expected. No loans were designated as impaired
during 1997 or 1996.
Management designates certain loans for internal monitoring purposes on a
watch list. Loans may be placed on management's watch list as a result of
delinquent status, concern about the borrower's financial condition or the
value of the collateral securing the loan, substandard classification during
regulatory examinations, or simply as a result of management's desire to
monitor more closely a borrower's financial condition and performance. Watch
category loans may include loans with loss potential that are still
performing and accruing interest and may be current under the terms of the
loan agreement; however, management may have a significant degree of concern
about the borrowers' ability to continue to perform according to the terms of
the loan. Loss exposure on these loans is typically evaluated based primarily
upon the estimated liquidation value of the collateral securing the loan.
Also, watch list loans may include credits which, although adequately secured
and performing, reflect a past delinquency problem or unfavorable financial
trends exhibited by the borrower.
At December 31, 1997, Anderson had one loan with a balance of $493 graded
substandard and included on its watch list. The loan was not considered
impaired and was performing as agreed.
NONINTEREST INCOME AND EXPENSE
See Table 6 for an analysis of changes in noninterest income and expense.
Noninterest income increased $80, or 66.7%, to $200 for 1997 compared to $120
in 1996. This increase was volume driven as the number of accounts,
particularly demand deposits, increased. Other income increased $27 due
primarily to an arrangement, begun in mid-1997 whereby Anderson receives
finders fees for taking mortgage loan applications for a mortgage company.
The loans are closed by the mortgage company and Anderson incurs no interest
rate risk. Noninterest expense for 1997 was $1,406, up $430 (44.1%). The
increases are due to increased staffing (up $233 or 47.1%), premises and
equipment (up $61 or 37.0%) and data processing (up $33 or 49.3%) costs
incurred as Anderson grows. The financial results for 1997 reflect a full
year's operations for a branch opened in mid-1996. Data processing costs are
tied to volume and the number of accounts.
51
INCOME TAXES
The provision for income taxes, as a percent of income before income taxes,
was 37.5% for 1997 and 40.4% for 1996. Further tax information regarding
Anderson can be found in Notes 1 and 7 to Anderson's financial statements
included in this Proxy Statement-Prospectus (the "Financial Statements").
FINANCIAL CONDITION
Total assets were $62,837 at year end 1997 compared to $45,969 at year end
1996, an increase of $16,868 or 36.7%. Increased loan totals were funded by
increased deposits and, as discussed above, short-term investments were
reduced and replaced with available for sale securities.
SECURITIES
See Note 2 to the Financial Statements and Table 7 for information about
Anderson's securities. Prior to 1997, Anderson invested available funds in
federal funds sold and securities purchased under agreements to resell. The
repurchase agreements were, essentially, loans to another financial
institution, secured by securities with a fair value greater than the loan
amount. They were for short terms, generally less than one month. During
1997, to increase investment yield and generate tax exempt income, Anderson
acquired U.S. Government and Agency securities and securities of states and
political subdivisions. Anderson classifies all securities as available for
sale, but did not sell securities during 1997.
Other than securities of the U.S. Government and its agencies, Anderson has
no security concentrations greater than 10% of shareholders' equity at
December 31, 1997.
LOANS
See Note 3 to the Financial Statements and Table 8 for information about
Anderson's loan portfolio. Total loans increased $14,931 or 42.3% from year
end 1997 to year end 1996. This growth occurred in all categories with the
largest percentage increase, but smallest dollar increase, being a $1,464, or
82.2%, increase in consumer loans. Since its founding, Anderson has realized
strong loan growth and focuses on small commercial business and commercial
real estate lending. Commercial real estate loans comprise $20,636, or 41.1%
of total loans, at December 31, 1997. The percent is down slightly from 46.8%
of total loans at the prior year end. Commercial loans increased to $11,899,
or 23.7% of the portfolio, at December 31, 1997 from $6,464, or 18.3%, at
year end 1996. The percentage of consumer loans to total loans increased
slightly while the percentage of residential real estate loans to total loans
has decreased slightly.
DEPOSITS
See Note 6 to the Financial Statements and Tables 2 and 9 for more
information about Anderson's deposits. Average deposits increased to $46,172
for 1997 from $29,559 for 1996, an increase of $16,613, or 56.2%. Average
noninterest-bearing deposits increased to $7,398 for
52
1997 from $4,060 in 1996. Anderson seeks commercial deposit relationships and
offers sweep products, account analysis and other features to attract them.
Year end total deposits increased $15,842, or 39.6%, from 1996 to 1997.
Noninterest-bearing deposits increased to $8,311 from $4,989. At December 31,
1997, $14,391, or 48.2%, of Anderson's time deposits had balances of greater
than $100. For 1997, average time deposits issued in amounts greater than
$100 totaled $10,214 or 43.2% of average total time deposits. Anderson has
historically had significant balances of large denomination time deposits.
The majority of these funds are from public entities with whom Anderson has
had an ongoing relationship. Management believes these deposit sources to be
stable.
CAPITAL
Anderson is subject to various regulatory capital guidelines as required by
federal banking agencies. These guidelines define the various components of
core capital and assign risk weights to various categories of assets.
Tier 1 capital consists of shareholders' equity excluding unrealized gains
and losses on securities available for sale, as defined by Anderson
regulators. The definition of Tier 2 capital includes the amount of allowance
for loan losses which does not exceed 1.25% of gross risk weighted assets.
Total capital is the sum of Tier 1 and Tier 2 capital.
The minimum requirements under the capital guidelines are generally at least
a 4.00% leverage ratio (Tier 1 capital divided by average assets excluding
unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1
capital divided by risk-weighted assets), and a 8.00% total capital ratio
(Tier 1 capital plus Tier 2 capital divided by risk-weighted assets).
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio
of at least 6.00%, a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure
to meet capital requirements can initiate regulatory action that could have a
direct material effect on Anderson's financial statements. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth, and expansion is
limited, in addition to the institution being required to submit a capital
restoration plan.
Management believes Anderson met all the capital requirements as of December
31, 1997, and was well-capitalized under the guidelines established by
banking regulators. To be well-capitalized, Anderson must maintain the prompt
corrective action capital guidelines described above.
At December 31, 1997, management was not aware of any current recommendations
by banking regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material effect on Anderson's
consolidated liquidity, capital resources or operations.
53
Anderson's actual capital amounts and ratios are presented in Note 10 to the
Financial Statements.
LIQUIDITY AND RATE SENSITIVITY
Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. Anderson has
many sources of liquid funds, including cash and cash equivalents, payments
and maturities of loans and securities, growth in deposits, and net income.
In addition, Anderson has the ability to sell securities available for sale,
and Anderson may borrow from the Federal Reserve and the Federal Home Loan
Bank.
The statement of cash flows and Table 10 illustrate the sources and uses of
Anderson's cash and cash equivalents. Management believes Anderson has
sufficient liquidity to meet reasonable borrower, depositor, and creditor
needs in the present economic environment. Anderson has not received any
recommendations from regulatory authorities which would materially affect
liquidity, capital resources or operations.
Anderson's interest rate sensitivity position is influenced by the timing of
the maturity or repricing of interest earning assets and interest-bearing
liabilities. One method of gauging sensitivity is by a static gap analysis,
as presented in Table 11. Rate sensitivity gap is defined as the difference
between the repricing of interest earning assets and the repricing of
interest bearing liabilities within certain defined time frames. Rising
interest rates are likely to increase net interest income in a positive gap
position, while declining rates are likely to be beneficial in a negative gap
position.
As seen in Table 11, Anderson has a negative cumulative gap position for the
1 to 90 day and the 91 to 365 day time periods. This suggests that Anderson
may earn more net interest income if rates fall, or less net interest income
if rates rise. However, a limitation of the traditional static gap analysis
is that it does not consider the timing or magnitude of noncontractual
repricing. In addition, the static gap analysis treats demand and savings
deposits as repriceable within the earliest time category due to the lack of
contractual maturity; however, experience suggests that these deposits are
actually somewhat resistant to rate sensitivity. As a practical matter,
Anderson has the ability to adjust rates on deposit accounts in an effort to
achieve a neutral interest rate sensitivity position.
INFLATION
The effects of price changes and inflation on a financial institution vary
considerably from an industrial organization. Changes in interest rates,
rather than changes in the prices of goods and services, is the primary
determinant of profitability of a financial institution. Inflation affects
the growth of total assets, but it is difficult to assess its impact because
neither the timing nor the magnitude of the changes in the consumer price
index directly coincide with changes in interest rates. During periods of
high inflation, there are normally corresponding increases in the money
supply. During such times, financial institutions often experience above
average growth in loans and deposits. Also, general increases in the price of
goods and services will result in increased operating expenses. Over the past
few years, the rate of inflation has been relatively low, and its
54
impact on the growth in the balance sheets and increased levels of income and
expense has been nominal.
YEAR 2000
Anderson's Board of Directors and management is aware of the possible
consequences the Year 2000 may pose with regard to the computer systems
utilized to conduct business on a daily basis. A "Year 2000 Committee"
prepared a detailed plan to address this issue. Prior to the pending merger,
replacement and testing of specific system applications and hardware was
scheduled to be completed by the end of 1998. However, due to the pending
merger, Anderson now plans to convert its mission critical systems to First
Merchants' systems, which is expected to occur early in the second quarter of
1999. Anderson's contingency plan in the event the merger does not occur is
to proceed with the previously planned system upgrade with the current system
vendor. Certain other systems that are not dependent upon the merger are
expected to be Year 2000 compliant by year end 1998. Anderson has
communicated with customers to promote awareness of the Year 2000 issue, and
a risk assessment process has also been implemented to evaluate the Year 2000
preparedness of certain significant commercial borrowers of Anderson.
Management does not believe the remaining necessary steps involved to resolve
this issue will significantly impair the organization's ability to operate
and conduct business in a normal fashion, and Anderson does not expect the
total cost to address this issue to be significant to operations.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
NET INCOME
Anderson earned $280, or $.47 per share for the third quarter of 1998
compared to $168, or $.29 per share for the third quarter of 1997. Net income
increased $363, or 90.7% to $763 for the nine month period ending September
30, 1998 compared to the same period in 1997. Diluted earnings per share were
$1.29 and $.69 for the nine month periods ended September 30, 1998 and 1997,
respectively. As in 1997, increased net interest income drove the increase
for the period and more than offset higher operating costs.
Annualized return on average assets (ROA) was 1.48% and 1.05% for the periods
ending September 30, 1998 and 1997, respectively, while annualized return on
average equity (ROE) was 14.78% and 9.00% for those same periods.
55
NET INTEREST INCOME
For the nine months ended September 30, 1998 and 1997, net interest income
was $2,305 and $1,676, respectively. This represents a $629, or 37.5%
increase over the prior year. Net interest income for the third quarter of
1998 was $206, or 33.1% higher than for the same 1997 period. The increase in
net interest income during 1998 is attributable to the continued growth of
Anderson and both loans and securities have increased since December 31, 1997.
Total interest income increased $1,096, or 36.0%, for the nine month period
ending September 30, 1998, and $372, or 33.4%, for the third quarter of 1998.
Interest and fees on loans increased $984, or 37.1%, to $3,634 for the first
nine months of 1998, compared to $2,650 for the first nine months of 1997.
For the third quarter of 1998, interest and fees on loans increased $316, or
32.3%, compared to the third quarter of 1997. Growth in Anderson's loan
portfolio accounted for the majority of the increase in total interest
income, as average loan balances were $14,526, or 36.6% higher for the nine
months ended September 1998 than the same period in 1997. The annualized
average yield on loans increased 8.94% for 1998 from 8.91% in 1997. Interest
income on securities and short-term investments increased $112 during the
first nine months of 1998, due primarily to a $2,420 increase in average
outstanding balance.
Total interest expense increased $467, or 34.1% for the nine month period
ending September 30, 1998, and $166, or 33.9% for the third quarter of 1998.
The increase was attributable to a $13,580, or 36.1% increase in average
deposit balances in 1998, as compared to 1997. The average cost of deposits
declined nominally.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
See Table 4 for a summary of the activity in and composition of the allowance
for loan losses, and see Table 5 for a summary of nonperforming assets. The
provision for loan losses was $103 for the first nine months of 1998 and $155
for the same period in 1997. The reduction in provision results from a slight
slowdown in loan growth as asset quality remains good. The allowance for loan
losses at September 30, 1998 was $761, or 1.29% of total loans compared to
$658, or 1.31% of total loans at December 31, 1997. Nonperforming loans were
$492 at September 30, 1998. This was one loan that management believes to be
well secured and in the process of resolution.
NONINTEREST INCOME AND EXPENSE
Noninterest income totaled $267 for the first nine months of 1998, compared
to $138 for the same period of 1997, an increase of $129, or 93.5%.
Noninterest income for the third quarter increased $52, or 106.1% to $101
compared to the prior year. The increases come from deposit account service
charges and fees, driven by the continued growth in deposits, and fees earned
from mortgage loan finders fees.
Noninterest expense totaled $1,244 for the first nine months of 1998,
compared to $1,011 for that same period of 1997, an increase of $233, or
23.0%. Noninterest expense for the third quarter of 1998 was $104, or 30.3%
higher than the prior year.
56
These increases are primarily growth driven. Anderson opened a new branch in
March, 1998, and increased volume result in higher data processing fees.
Factors increasing other noninterest expense include increased advertising
costs, higher attorneys' fees and a $10 expense related to the settlement of
a lawsuit related to a dispute about a letter of credit.
INCOME TAXES
The effective income tax rates for the first nine months of 1998 and 1997
were 37.7% and 38.3%. The decrease in effective tax rate was primarily
attributable to increased income on non-taxable securities.
FINANCIAL CONDITION
Total assets were $75,713 at September 30, 1998 compared to $62,837 at
December 31, 1997, an increase of $12,876, or 20.5%. An $11,778 (21.1%)
increase in deposits was used to fund increases in loans of $8,950 (17.8%)
and securities of $3,185 (47.9%).
CAPITAL
Management believes Anderson met all the capital requirements as of September
30, 1998, and was well-capitalized under the guidelines established by the
banking regulators.
At September 30, 1998, management was not aware of any current
recommendations by banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material effect
on Anderson's consolidated liquidity, capital resources or operations.
Anderson's actual capital amounts and ratios are presented in the following
table.
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
September 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- ------------------ -------- ----- -------- ----- -------- -----
Total capital (to risk weighted assets) $ 7,963 13.8% $ 4,627 8.0% $ 5,783 10.0%
Tier 1 capital (to risk weighted assets) 7,240 12.5 2,313 4.0 3,470 6.0
Tier 1 capital (to average assets) 7,240 9.7 2,988 4.0 3,735 5.0
LIQUIDITY
Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. Anderson has
many sources of liquid funds, including cash and cash equivalents, payments
and maturities of loans and securities, growth in deposits, and net income.
In addition, Anderson has the ability to sell securities available for sale,
and Anderson may borrow from the Federal Reserve and the Federal Home Loan
Bank.
57
Management believes Anderson has sufficient liquidity to meet reasonable
borrower, depositor, and creditor needs in the present economic environment.
Anderson has not received any recommendations from regulatory authorities
which would materially affect liquidity, capital resources or operations.
58
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - ANDERSON FINANCIAL SUMMARY
(Dollar amounts in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED MARCH 9,1995
NINE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, (DATE OF INCEPTION)
1998 1997 1997 1996 TO DECEMBER 31, 1995
---- ---- ---- ---- --------------------
SUMMARY OF OPERATIONS
Interest income - tax equivalent (1) $ 4,182 3,060 $4,307 $ 2,755 $1,168
Interest expense 1,835 1,368 1,877 1,254 528
-------- ------- -------- --------- ------
Net interest income - tax equivalent (1) 2,347 1,692 2,430 1,501 640
Tax equivalent adjustment (1) (42) (16) (27) -- --
-------- ------- -------- --------- ------
Net interest income 2,305 1,676 2,403 1,501 640
Provision for loan losses 103 155 197 256 210
Noninterest income 267 138 200 120 44
Noninterest expense 1,244 1,011 1,406 976 625
-------- ------- -------- --------- ------
Income before income taxes 1,225 648 1,000 389 (151)
Income tax expense 462 248 375 157 --
-------- ------- -------- --------- ------
NET INCOME $ 763 $ 400 $ 625 $ 232 $ (151)
======== ======= ======== ======== ======
PER SHARE DATA
Basic earnings per share $ 1.30 $ 0.69 $ 1.08 $ 0.42 $(0.28)
Diluted earnings per share 1.29 0.69 1.08 0.42 (0.28)
Shareholders' equity, end of period 12.42 10.65 11.06 9.93 9.50
SELECTED ACTUAL PERIOD-END BALANCES
Total assets 75,713 54,368 62,837 45,969 27,262
Earning assets 72,438 50,645 56,989 43,084 25,788
Securities available-for-sale 9,830 6,633 6,645 -- --
Loans 59,156 43,776 50,206 35,275 15,839
Allowance for loan losses (761) (616) (658) (466) (210)
Total deposits 67,672 47,816 55,894 40,052 21,918
Noninterest-bearing deposits 11,310 8,203 8,311 4,989 4,412
Interest-bearing deposits 56,362 39,613 47,583 35,063 17,506
Shareholders' equity 7,327 6,209 6,448 5,537 5,199
59
SELECTED RATIOS
Loans to deposits 87.42% 91.55% 89.82% 88.07% 72.26%
Return on average assets 1.48% 1.05% 1.19% 0.66% -0.96%
Return on average equity 14.78% 9.00% 10.36% 4.33% -3.46%
Leverage capital ratio 9.69% 11.08% 10.92% 12.81% 18.87%
Efficiency ratio (2) 47.59% 55.25% 53.46% 60.21% 91.37%
OTHER DATA
Number of employees 26 26 25 21 12
Shares outstanding at period end 589,784 583,144 583,144 557,744 547,044
Shares used to compute basic earnings per share 588,257 579,407 580,409 553,497 547,044
Shares used to compute diluted earnings per share 591,313 580,393 581,325 553,497 547,044
(1) Net interest income has been presented on both a tax equivalent and
non-tax equivalent basis. The tax equivalent basis was calculated using a 34%
tax rate for all periods presented. The tax equivalent adjustment reverses
the tax equivalent basis in order to present net interest income in
accordance with generally accepted accounting principles (GAAP), as reflected
in the financial statements.
(2) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income, on a fully tax equivalent basis, and noninterest
income.
60
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 2 - ANDERSON AVERAGE BALANCE SHEETS AND INTEREST RATES
(Dollar amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996
--------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------------------
ASSETS
INTEREST EARNING ASSETS
Securities
Taxable $ 3,995 $ 266 6.66% $ -- $ -- 0.00%
Non-taxable (1) 1,104 79 7.14% -- -- 0.00%
Federal funds sold and repurchase agreements 3,623 188 5.19% 7,791 402 5.16%
Unrealized loss on AFS securities (7) -- 0.00% -- -- 0.00%
-------- -------- ------ -------- ------- -----
Total securities 8,715 533 6.11% 7,791 402 5.16%
Loans (1)(2)
Commercial 26,379 2,459 9.32% 17,472 1,616 9.25%
Real estate 11,778 977 8.30% 6,504 540 8.30%
Installment and other consumer 3,509 338 9.63% 2,101 197 9.38%
-------- -------- ------ -------- ------- -----
Total loans 41,666 3,774 9.06% 26,077 2,353 9.02%
-------- -------- ------ -------- ------- -----
TOTAL EARNING ASSETS 50,381 4,307 8.55% 33,868 2,755 8.13%
-------- -------- ------ -------- ------- -----
NONINTEREST EARNING ASSETS
Allowance for loan losses (556) (326)
Premises and equipment 639 527
Cash and due from banks 1,668 846
Accrued interest and other assets 458 299
-------- --------
TOTAL ASSETS $ 52,590 $35,214
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $ 6,297 163 2.59% $ 3,480 87 2.50%
Savings deposits 8,829 400 4.53% 5,550 258 4.65%
Time deposits 23,648 1,314 5.56% 16,469 909 5.52%
-------- -------- ------ -------- ------- ------
Total interest-bearing deposits 38,774 1,877 4.84% 25,499 1,254 4.92%
61
Borrowed funds
Short-term borrowings -- -- 0.00% -- -- 0.00%
Long-term debt -- -- 0.00% -- -- 0.00%
-------- -------- ------ -------- ------- ------
Total borrowed funds -- -- 0.00% -- -- 0.00%
-------- -------- ------ -------- ------- ------
TOTAL INTEREST-BEARING LIABILITIES 38,774 1,877 4.84% 25,499 1,254 4.92%
-------- -------- ------ -------- ------- ------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 7,398 4,060
Accrued interest and other liabilities 386 292
Shareholders' equity 6,032 5,363
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 52,590 $ 35,214
-------- --------
-------- --------
INTEREST MARGIN RECAP
NET INTEREST INCOME AND
INTEREST RATE SPREAD $ 2,430 3.71% $ 1,501 3.22%
NET INTEREST INCOME MARGIN ======== 4.82% ======== 4.43%
(1) Interest income on tax-exempt securities have been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34% for all
years.
(2) Nonaccrual loans are included in average loan balance and loan fees are
included in interest income.
62
- -------------------------------------------------------------------------------
TABLE 3 - ANDERSON VOLUME/RATE ANALYSIS
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------
1997-1996
------------------------------------------------
Change Change
Total Due To Due To
Change Volume Rate
------------------------------------------------
INTEREST INCOME
Loans $1,421 $1,412 $ 9
Securities
Taxable 266 266 -
Tax-exempt 79 79 -
Short-term investments (214) (216) 2
------ ------ --
TOTAL INTEREST INCOME
1,552 1,541 11
------ ------ --
INTEREST EXPENSE
Interest-bearing DDA 76 73 3
Savings deposits 142 149 (7)
Time deposits 405 399 6
Short-term borrowings - - -
Long-term borrowings - - -
----- ------ --
TOTAL INTEREST EXPENSE 623 621 2
----- ------ --
NET INTEREST INCOME $ 929 $ 920 $9
====== ====== ==
63
- --------------------------------------------------------------------------------
TABLE 4 - ANDERSON ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
---- ---- ---- ----
BALANCE AT BEGINNING OF PERIOD $658 $466 $466 $210
LOANS CHARGED-OFF
Commercial 0 0 0 0
Real estate-residential 0 0 0 0
Consumer 0 (5) (5) 0
----- ----- ----- ----
TOTAL CHARGE-OFFS 0 (5) (5) 0
----- ----- ----- ----
CHARGE-OFFS RECOVERED
Commercial 0 0 0 0
Real estate-residential 0 0 0 0
Consumer 0 0 0 0
----- ----- ----- ----
TOTAL RECOVERIES 0 0 0 0
----- ----- ----- ----
Net loans charged-off 0 (5) (5) 0
Current year provision 103 155 197 256
----- ----- ----- ----
BALANCE AT END OF PERIOD $761 $616 $658 $466
===== ===== ===== =====
Loans at period end $59,156 $43,776 $50,206 $35,275
Ratio of allowance to loans
at period end 1.29% 1.41% 1.31% 1.32%
Average loans $54,245 $39,690 $41,666 $26,077
Ratio of net loans charged-off
to average loans 0.00% 0.01% 0.01% 0.00%
Allocation of Allowance for Loan Losses
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
----- ----- ----- -----
Commercial $529 $436 $468 $317
Real estate-residential 126 106 118 80
Consumer 95 65 72 48
Unallocated 11 9 - 21
----- ----- ----- -----
Total $761 $616 $658 $466
===== ===== ===== =====
64
- --------------------------------------------------------------------------------
TABLE 5 - ANDERSON NONPERFORMING ASSETS
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
---- ---- ----
PRINCIPAL BALANCE
Nonaccrual $0 $0 $0
90 days or more past due 492 0 0
---- ---- ----
TOTAL NONPERFORMING LOANS $492 $0 $0
==== ==== ====
Nonperforming loans as a percent
of loans 0.83% 0.00% 0.00%
Other real estate owned $0 $0 $0
OREO as a percent of loans 0.00% 0.00% 0.00%
Allowance as a percent of
nonperforming loans 154.67% N/A N/A
65
- --------------------------------------------------------------------------------
TABLE 6 - ANDERSON NONINTEREST INCOME & EXPENSE
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
% CHANGE
1997 FROM '96 1996
---- -------- ----
NONINTEREST INCOME
Service charges on deposit accounts $ 153 53.00% $ 100
Other 47 135.00% 20
----------- ------- ----------
TOTAL NONINTEREST INCOME $ 200 66.67% $ 120
=========== ======= ==========
% CHANGE
1997 FROM '96 1996
---- -------- ----
NONINTEREST EXPENSE
Salaries and employee benefits $ 728 47.07% $ 495
Occupancy and equipment 226 36.97% 165
Data Processing 100 49.25% 67
Other 352 41.37% 249
----------- ------- ----------
TOTAL NONINTEREST EXPENSE $ 1,406 44.06% $ 976
=========== ======= ==========
66
- --------------------------------------------------------------------------------
TABLE 7 - ANDERSON SECURITIES MATURITY SCHEDULE
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1997
--------------------
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years
------------------- ------------------- --------------------------------------- Total
AVAILABLE-FOR-SALE Balance Rate Balance Rate Balance Rate Balance Rate Balance
- ------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
U.S. Government & agencies $1,008 6.30% $3,896 6.50% $ - - - - $4,904
States and political subdivisions(1) 55 8.98% 605 9.47% 1,081 10.03% - - 1,741
------ ------ ------ ------ ------
TOTAL AVAILABLE-FOR-SALE $1,063 $4,501 $1,081 $6,645
====== ====== ====== ====== ======
(1) Average rates were calculated on a tax equivalent basis using a marginal
federal income tax rate of 34%.
67
- --------------------------------------------------------------------------------
TABLE 8 - ANDERSON LOAN COMPOSITION AND LIQUIDITY
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
LOAN PORTFOLIO COMPOSITION BALANCE % BALANCE %
------- -- ------- --
Residential real estate $14,425 28.7% $10,504 29.8%
Commercial real estate 20,636 41.1% 16,525 46.8%
Commercial 11,899 23.7% 6,464 18.3%
Consumer 3,246 6.5% 1,782 5.1%
------- ------ ------- ------
$50,206 100.0% $35,275 100.0%
======= ====== ======= ======
The following tables present the contractual maturities of loans and, by
maturity bucket, the breakdown between fixed and variable rate loans.
CONTRACTUAL LOAN MATURITIES AT DECEMBER 31, 1997
---------------------------------------------------------------------------------
1 Year 1 - 5 Over 5
LOANS DUE IN: and Less Years Years Total
-------- ----- ----- -----
BALANCE $25,179 $23,753 $1,274 $50,206
======= ======= ====== =======
SENSITIVITY TO CHANGES IN
INTEREST RATES
Fixed rates $8,011 $4,481 $375 $12,867
Variable rates 17,168 19,272 899 37,339
------- ------- ------ -------
TOTAL $25,179 $23,753 $1,274 $50,206
======= ======= ====== =======
68
- --------------------------------------------------------------------------------
TABLE 9 - ANDERSON MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE AT DECEMBER 31
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
1997
----
3 months or less $ 6,644
3 through 6 months 4,329
6 through 12 months 2,762
Over 12 months 656
----------
TOTAL $ 14,391
==========
69
- --------------------------------------------------------------------------------
TABLE 10 - ANDERSON FUNDING USES AND SOURCES
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
1997 1996
---------------------------------------------- ----------------
Increase/(decrease)
Average -------------------- Average
Balance Amount Percent Balance
---------------------------------------------- ----------------
FUNDING USES
Loans, total $41,666 $15,589 59.78% $26,077
Taxable securities 3,995 3,995 N/A -
Tax-exempt securities 1,104 1,104 N/A -
Short-term investments 3,623 (4,168) -53.50% 7,791
------- ------- -------
TOTAL USES $50,388 $16,520 48.78% $33,868
======= ======= =======
FUNDING SOURCES
Noninterest-bearing deposits $7,398 $3,338 82.22% $4,060
Interest-bearing demand 6,297 2,817 80.95% 3,480
Savings deposits 8,829 3,279 59.08% 5,550
Time deposits 23,648 7,179 43.59% 16,469
------- ------- -------
TOTAL SOURCES $46,172 $16,613 56.20% $29,559
======= ======= =======
70
- --------------------------------------------------------------------------------
TABLE 11 - ANDERSON LIQUIDITY AND INTEREST RATE SENSITIVITY
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1997
1 - 90 91 - 365 1 - 5
Days Days Years Over 5 Years Total
----------------- ----------------- ----------------- ----------------- -----------------
INTEREST EARNING ASSETS
Loans $ 19,550 $ 8,375 $ 21,905 $ 376 $ 50,206
Securities available-for-sale
Taxable 0 1,008 3,896 0 4,904
Tax-exempt 55 0 605 1,081 1,741
------------ ---------- ----------- ----------- ------------
Total Securities 55 1,008 4,501 1,081 6,645
Restricted stock 0 0 0 138 138
------------ ---------- ----------- ----------- ------------
TOTAL EARNING ASSETS $ 19,605 $ 9,383 $ 26,406 $ 1,595 $ 56,989
============ ========== =========== =========== ============
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits $ 7,282 $ - $ - $ - $ 7,282
Savings deposits 10,478 12 0 0 10,490
Time Deposits 8,902 16,626 4,270 13 29,811
Short-term borrowings 0 0 0 0 -
Long-term borrowings 0 0 0 0 -
------------ ---------- ----------- ----------- ------------
-
TOTAL INTEREST BEARING LIABILITIES $ 26,662 $ 16,638 $ 4,270 $ 13 $ 47,583
============ ========== =========== =========== ============
Rate sensitive gap $ (7,057) $ (7,255) $ 22,136 $ 1,582 $ 9,406
Rate sensitive cumulative gap $ (7,057) $ (14,312) $ 7,824 $ 9,406
Cumulative gap as a percentage of
earning assets (12.38)% (25.11)% 13.73% 16.50%
71
REGULATION AND SUPERVISION
OF FIRST MERCHANTS, DECATUR FINANCIAL AND ITS SUBSIDIARIES
AND ANDERSON
BANK HOLDING COMPANY REGULATIONBank Holding Company Regulation
First Merchants isand Decatur Financial are registered as bank holding
companycompanies and isare subject to the regulations of the Federal Reserve Board
("FEDERAL RESERVE"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. Thus, it is the policy of the Federal Reserve that, a bank
holding company should stand ready to use its resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity. Additionally, under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a bank holding company is required to
guarantee the compliance of any subsidiary bank that may become
"undercapitalized" (as defined in the FDICIA) with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
that is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with such capital restoration plan. Under the BHC Act, the
Federal Reserve has the authority to require a bank holding company to terminate
any activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the determination that such activity constitutes a
serious risk to the financial stability of any bank subsidiary.
The BHC Act prohibits First Merchants and Decatur Financial from doing any
of the following without the prior approval of the Federal Reserve:
1. Acquiring direct or indirect control of more than 5% of the
outstanding shares of any class of voting stock or substantially all
of the assets of any bank or savings association.
2. Merging or consolidating with another bank holding company.
3. Engaging in or acquiring ownership or control of more than 5% of the
outstanding shares of any class of voting stock of any company engaged
in a nonbanking business unless such business is determined by the
Federal Reserve to be closely related to banking.
The BHC Act does not place territorial restrictions on such nonbanking-related
activities.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES46
Capital Adequacy Guidelines for Bank Holding Companies
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. These guidelines require a minimum ratio of
capital to risk-weighted assets of
72
8% (including certain off-balance sheet
activities such as standby letters of credit). At least half of the total
required capital must be "Tier 1 capital," consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock and minority interest in the equity
accounts of consolidated subsidiaries, less certain goodwill items. The
remainder may consist of a limited amount of subordinate debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal Reserve has
adopted a Tier 1 (leverage) capital ratio under which the bank holding company
must maintain a minimum level of Tier 1 capital to average total consolidated
assets. The ratio is 3% in the case of bank holding companies which have the
highest regulatory examination ratings and are not contemplating significant
growth or expansion. All other bank holding companies are expected to maintain a
ratio of at least 1% to 2% above the stated minimum.
The following are First Merchants' and Decatur Financial's regulatory
capital ratios as of September 30, 1998:
First Merchants
---------------
Tier 1 Capital: 16.30%
Total Capital: 17.24
Leverage Ratio: 11.94
BANK REGULATIONDecember 31, 1999:
First Merchants Decatur Financial
--------------- -----------------
Tier 1 Capital: 12.7% 17.7%
Total Capital: 13.7 18.9
Leverage Ratio: 9.2 10.6
Bank Regulation
First Merchants Bank, andNational Association, The Union County National Bank,
and The First National Bank of Portland are national banks and are supervised,
regulated and examined by the Office of the Comptroller of the Currency (the
"OCC"). First United Bank, Pendleton,The Madison Community Bank, The Randolph County Bank
and AndersonDecatur Bank & Trust Company are state banks chartered in Indiana and are
supervised, regulated and examined by the Indiana Department. In addition, three
of First Merchants' subsidiaries, Pendleton Banking Company,The Madison Community Bank, First United Bank
and The Randolph County Bank, as well as Anderson are supervised and regulated by the FDIC.FDIC as well
as Decatur Financial's subsidiary, Decatur Bank & Trust Company. 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
47
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 73
that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards.
BANK CAPITAL REQUIREMENTSBank Capital Requirements
The FDIC and the OCC have adopted risk-based capital ratio guidelines to
which state-chartered banks and national banks are subject. The guidelines
establish a framework that makes regulatory capital requirements more sensitive
to differences in risk profiles. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet commitments to four
risk-weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve, these
guidelines divide a bank's capital into tiers. Banks are required to maintain a
total risk-based capital ratio of 8%. The FDIC or OCC may, however, set higher
capital requirements when a bank's particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
In addition, the FDIC and the OCC established guidelines prescribing a
minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as
specified in the guidelines). These guidelines provide for a minimum Tier 1
leverage ratio of 3% for banks that meet specified criteria, including that they
have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier 1 leverage
ratio of 3% plus an additional 100 to 200 basis points.
All of First Merchants' affiliate banks as well as AndersonDecatur Bank & Trust
Company exceed the risk-based capital guidelines of the FDIC and/or the OCC as
of September
30, 1998.December 31, 1999.
The Federal Reserve, the FDIC and the OCC have adopted rules to incorporate
market and interest rate risk components into their risk-based capital
standards. Amendments to the risk-based capital requirements, incorporating
market risk, became effective January 1, 1998. Under the new market risk
requirements, capital will be allocated to support the amount of market risk
related to a financial institution's ongoing trading activities.
FDICIA
FDICIA requires, among other things, federal bank regulatory authorities to
take "prompt corrective action" with respect to banks which do not meet minimum
capital requirements. For these purposes, FDICIA establishes five capital tiers:
well capitalized,
48
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. The FDIC has adopted regulations to implement the
prompt corrective action provisions of FDICIA.
"Undercapitalized" banks are subject to growth limitations and are required
to submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by the bank's parent holding company. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. "Significantly undercapitalized" banks are
subject to one or more restrictions, including an order by the FDIC to sell
sufficient voting stock 74
to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after become
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
As of September 30, 1998,December 31, 1999, each bank subsidiary of First Merchants as
well as Andersonand
Decatur Financial was "well capitalized" based on the "prompt corrective action"
ratios and deadlines described above. It should be noted, however, that a bank's
capital category is determined solely for the purpose of applying the OCC's (or
the FDIC's) "prompt corrective action" regulations and that the capital category
may not constitute an accurate representation of the bank's overall financial
condition or prospects.
DEPOSIT INSURANCEDeposit Insurance
First Merchants' and Decatur Financial's affiliated banks and Anderson are insured up to
regulatory limits by the FDIC and, accordingly, are subject to deposit insurance
assessments to maintain the Bank Insurance Fund (the "BIF") and the Savings
Association Insurance Fund ("SAIF") administered by the FDIC. The FDIC has
adopted regulations establishing a permanent risk-related deposit insurance
assessment system. Under this system, the FDIC places each insured bank in one
of nine risk categories based on (i) the bank's capitalization, and (ii)
supervisory evaluations provided to the FDIC by the institution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it is classified by the FDIC.
Effective January 1, 1997, the annual insurance premiums on bank deposits
insured by the BIF and the SAIF vary between $0.00 per $100 of deposits for
banks classified in the highest capital and supervisory evaluation categories to
$0.27 per $100 of deposits for banks classified in the lowest capital and
supervisory evaluation categories.
The Deposit Insurance Funds Act of 1996 provides for assessments to be
imposed on insured depository institutions with respect to deposits insured by
the BIF and the SAIF (in addition to assessments currently imposed on depository
institutions with respect to BIF- and SAIF-insured deposits) to pay for the cost
of Financing Corporation ("FICO") funding. The FDIC established the FICO
assessment rates effective January 1, 1997 at $0.013 per $100 annually for
BIF-assessable deposits and $0.0648 per $100 annually for SAIF-assessable
49
deposits. The FICO assessments do not vary depending upon a depository
institution's capitalization or supervisory evaluations.
BROKERED DEPOSITSBrokered Deposits
Under FDIC regulations, no FDIC-insured depository institution can accept
brokered deposits unless it (i) is well capitalized, or (ii) is adequately
capitalized and received a waiver from the FDIC. In addition, these regulations
prohibit any depository institution that is not well capitalized from (a) paying
an interest rate on deposits in excess of 76 basis points over certain
75
prevailing market rates or (b) offering "pass through" deposit insurance on
certain employee benefit plan accounts unless it provides certain notice to
affected depositors.
INTERSTATE BANKING AND BRANCHINGInterstate Banking And Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("RIEGLE-NEAL"Riegle-Neal") subject to certain concentration limits, required
regulatory approvals and other requirements, (i) bank holding companies such as
First Merchants and Decatur Financial are permitted to acquire banks and bank
holding companies located in any state; (ii) any bank that is a subsidiary of a
bank holding company is permitted to receive deposits, renew time deposits,
close loans, service loans and receive loan payments as an agent for any other
bank subsidiary of that holding company; and (iii) banks are permitted to
acquire branch offices outside their home states by merging with out-of-state
banks, purchasing branches in other states, and establishing de novo branch
offices in other states.
ADDITIONAL MATTERSFinancial Services Modernization Act
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
general effect of the Financial Services Modernization Act is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the existing BHC Act. Under this legislation, bank holding
companies would be permitted to conduct essentially unlimited securities and
insurance activities as well as other activities determined by the Federal
Reserve Board to be financial in nature or related to financial services. As a
result, First Merchants would be able to provide securities and insurance
services. Furthermore, under this legislation, First Merchants would be able to
acquire, or be acquired by, brokerage and securities firms and insurance
underwriters. In addition, the Financial Services Modernization Act broadens the
activities that may be conducted by national banks through the formation of
financial subsidiaries. Finally, the Financial Services Modernization Act
modifies the laws governing the implementation of the Community Reinvestment Act
and addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
First Merchants has not had an opportunity to assess the impact of the
legislation on its operations, but at the present time does not believe that the
legislation will have a material adverse effect on its operations in the near
future. In addition, First Merchants does not
50
anticipate significant changes in its products or services as a result of this
legislation. However, to the extent that this legislation permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation and may increase the amount of
competition that First Merchants faces from larger institutions and other types
of companies offering financial products.
Additional Matters
In addition to the matters discussed above, First Merchants' affiliate
banks and AndersonDecatur Bank & Trust Company are subject to additional regulation of
their activities, including a variety of consumer protection regulations
affecting their lending, deposit and collection activities and regulations
affecting secondary mortgage market activities.
The earnings of financial institutions are also affected by general
economic conditions and prevailing interest rates, both domestic and foreign,
and by the monetary and fiscal policies of the United States Government and its
various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, state legislatures and
various regulatory agencies, including those referred to above. It cannot be
predicted with certainty whether such legislation or administrative action will
be enacted or the extent to which the banking industry in general or First
Merchants and its affiliate banks or Anderson in particular would be affected thereby.
7651
COMPARISON OF COMMON STOCK
THE FOLLOWING SUMMARY COMPARISON OF FIRST MERCHANTS COMMON STOCK AND ANDERSON
COMMON STOCK INCLUDES ALL MATERIAL FEATURES OF SUCH STOCKS BUT DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FIRST
MERCHANTS' ARTICLES OF INCORPORATION AND BY-LAWS AND ANDERSON'S ARTICLES OF
INCORPORATION AND BY-LAWS.
GOVERNING LAWThe following summary comparison of First Merchants common stock and Decatur
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 Decatur Financial's
Articles of Incorporation and By-Laws.
Governing Law
The rights of holders of AndersonDecatur Financial common stock who receive First
Merchants common stock in the merger will be governed by the Indiana Business
Corporation Law (the "IBCL"), the state in which First Merchants is
incorporated, and by First Merchants' Articles of Incorporation ("FIRST
MERCHANTS' ARTICLES"First
Merchants' Articles") and By-Laws. The rights of AndersonDecatur Financial shareholders
are also governed by the Indiana banking statutes,IBCL, the state in which AndersonDecatur Financial is
incorporated, and by Anderson'sDecatur Financial's Articles of Incorporation ("ANDERSON'S
ARTICLES"Decatur
Financial's Articles") and By-Laws. The rights of AndersonDecatur Financial shareholders
differ in certain respects from the rights they would have as First Merchants
shareholders, as
First Merchants is an Indiana corporation and Anderson is an Indiana bank.
Several ways in which the rights of Anderson shareholders will differ from
their rights as First Merchants shareholders includeincluding certain anti-takeover measures, the vote percentage
required for the amendment of certain significant provisions of the articles of
incorporation and for the approval of certain significant corporate
transactions.
AUTHORIZED BUT UNISSUED SHARESAuthorized But Unissued Shares
First Merchants' Articles authorizeauthorizes the issuance of 20,000,00050,000,000 shares of
common stock, of which 10,079,54010,936,617 shares were outstanding as of November 30, 1998.December 31,
1999. The remaining authorized but unissued shares of common stock may be issued
upon authorization of the Board of Directors of First Merchants without prior
shareholder approval. First Merchants has 500,000 shares of preferred stock
authorized. These shares are available to be issued, without prior shareholder
approval, in classes with relative rights, privileges and preferences determined
for each class by the Board of Directors of First Merchants. No shares of
preferred stock have currently been issued.
As of November 30, 1998,December 31, 1999, First Merchants had 162,977250,000 shares of its common
stock reserved and remaining available for issuance under its 1999 Employee
Stock Purchase Plan, and 34,8291,427,177 shares of its common stock reserved and remaining
available for issuance under its 1999 Long-term Equity Incentive Plan, 253,125
shares of its common stock reserved and remaining available for issuance under
its 1994 Employee Stock OptionsPurchase Plan, 472,500 shares of its common stock
reserved and remaining available for issuance under its 1994 Stock Option Plan,
253,125 shares of its common stock reserved and remaining available for issuance
under its 1989 Stock Option Plan and 476,063 shares of its common stock reserved
and remaining available for issuance under its Dividend Reinvestment and Stock
Purchase Plan.
The issuance of additional shares of First Merchants common stock or the
issuance of First Merchants preferred stock may adversely affect the interests
of First Merchants shareholders.
Anderson's52
Decatur Financial's Articles authorize the issuance of 2,000,000750,000 shares of
common stock. Each outstanding share of stock is entitled to one vote on all
matters to which shareholders are entitled to vote. There are 589,784As of December 31, 1999,
Decatur Financial had 142,995 shares of stock issued and outstanding as of the date hereof and there
will be 612,434147,439 shares of stock issued and outstanding after the exercise of all
options for AndersonDecatur Financial stock held by the officers, directors and employees of
Anderson.
77
PREEMPTIVE RIGHTSMr. Bieberich.
Preemptive Rights
As permitted by Indiana law, neither First Merchants' Articles nor Anderson'sDecatur
Financial's Articles provide for preemptive rights to subscribe for any new or
additional First Merchants or AndersonDecatur Financial shares of common stock.
Preemptive rights may be granted to First Merchants or AndersonDecatur Financial
shareholders if First Merchants' or Anderson'sDecatur Financial's Articles are amended
accordingly.
DIVIDEND RIGHTSDividend Rights
The holders of common stock of First Merchants and AndersonDecatur Financial are
entitled to dividends and other distributions when, as and if declared by their
respective Board of Directors. With respect to First Merchants and Decatur
Financial, a dividend generally MAY NOTmay not be paid if:
1. The corporation would not be able to pay its debts as they become due
in the usual course of business; or
2. The corporation's total assets would be less than the sum of its total
liabilities plus preferential rights of shareholders payable upon
dissolution.
Anderson may declare a dividend of so much of its undivided profits as
is considered expedient by the Anderson Board. With respect to Anderson, a
dividend generally MAY NOT be paid:
1. If payment of the dividend would impair Anderson's capital stock; or
2. In an amount greater than the remainder of undivided profits of
Anderson on hand after deducting losses, bad debts, depreciation and
all other expenses.
Anderson must also obtain the approval of the Indiana Department for the
payment of a dividend if the total of all dividends declared during a year
would exceed the sum of the retained net income for the year to date combined
with Anderson's retained net income for the previous two years.
The amount of dividends, if any, that may be declared by First Merchants in
the future will necessarily depend upon many factors, including, without
limitation, future earnings, capital requirements, business conditions and
capital levels of subsidiaries (since First Merchants is primarily dependent
upon dividends paid by its subsidiaries for revenues), the discretion of First
Merchants' Board of Directors and other factors that may be appropriate in
determining dividend policies.
Similar to Anderson, First Merchants' national bank subsidiaries and its Indiana-chartered
affiliate banks may pay dividends to First Merchants in cash on their common
stock only out of adjusted retained net profits for the year in which the
dividend is paid and the two preceding years.
78
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, DECATUR FINANCIAL AND
ITS
SUBSIDIARIES AND ANDERSON.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. Neither First Merchants' present affiliate banks are notnor Decatur Bank
& Trust Company is subject to such a restriction.
VOTING RIGHTS53
Voting Rights
The holders of the outstanding shares of First Merchants common stock are
entitled to one vote per share on all matters presented for shareholder vote.
AndersonSimilarly, the holders of outstanding shares mayof Decatur Financial common stock
also are entitled to one vote per share on all matters presented for shareholder
approval.vote. Neither First Merchants shareholders nor AndersonDecatur Financial shareholders
have cumulative voting rights in the election of directors.
Indiana law with respect to corporations and banks generally requires that mergers, consolidations, sales, leases,
exchanges or other dispositions of all or substantially all of the assets of an entitya
corporation be approved by a shareholder vote of a majority of votes entitled to
be cast at the shareholders meeting, subject to provision 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. See "COMPARISON OF COMMON
STOCK--Anti-Takeover Provisions."
Anderson's Articles do not contain any similar provisions.
Indiana law with respect to corporations and banks requires shareholder approval for most amendments to a
corporation's or bank's articles of incorporation by a majority of a quorum at a
shareholder's meeting (and, in certain cases, a majority of all shares held by
any voting group entitled to vote). Indiana law permits a corporation or bank in its
articles of incorporation to prescribe a higher shareholder vote requirement for
certain amendments. First Merchants' Articles require a super-majority
shareholder vote of seventy-five percent of the outstanding shares of common
stock for the amendment of certain significant provisions. Anderson'sDecatur Financial's
Articles require a majority vote to amend any provision.
DISSENTERS' RIGHTS
AndersonDissenters' Rights
Decatur Financial shareholders possess dissenters' rights in connection
with certain mergers and acquisitions.other significant corporate actions. Under Indiana law,
a bank's shareholder is entitled to dissent from and obtain payment of the fair value
of the shareholder's shares in the following events:
1. Consummation of a plan of merger or consolidation to which the
bankDecatur Financial is a
party, if shareholder approval is required and the shareholder is
entitled to vote thereon and the surviving entity is organized under the laws
of the State of Indiana;thereon.
2. Consummation of a plan of share exchange for formation of a bank
holding company for the bank pursuant toby which the bank'sDecatur Financial'
shares will be acquired, if the shareholder is entitled to vote
thereon;thereon.
3. Consummation of a sale or exchange of all, or substantially all, the
property of Decatur Financial other than in the usual course of
business, if the shareholder is entitled to vote thereon.
4. Approval of a control share acquisition under Indiana law; and
7954
3.5. 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.
First Merchants shareholders do not have dissenters' rights because its
shares are traded on the NASDAQ National Market System. With respect to
dissenters' rights of AndersonDecatur Financial shareholders in connection with the
merger, see the discussion under "MERGER -- Rights of Dissenting Shareholders"
and also Appendix B.
LIQUIDATION RIGHTSB hereto.
Liquidation Rights
In the event of any liquidation or dissolution of First Merchants, its
shareholders are entitled to receive pro rata, according to the number of shares
held, any assets distributable to shareholders, subject to the payment of First
Merchants' liabilities and any rights of creditors and holders of shares of
First Merchants preferred stock then outstanding. In the event of any
liquidation or dissolution of Anderson,Decatur Financial, its shareholders are entitled
to receive pro rata, according to the number of shares held, any assets
distributable to shareholders, subject to the payment of Anderson'sDecatur Financial's
liabilities and any rights of creditors.
ASSESSMENT AND REDEMPTIONAssessment and Redemption
Under Indiana law, neither the shares of First Merchants common stock nor
of AndersonDecatur 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 such redemption it would not be
able to pay its debts as they become due. Additionally, First Merchants may not
redeem its shares if its total assets would be less than the sum of its total
liabilities plus preferential rights of shareholders payable upon dissolution.
Decatur Financial has similar redemption rights under Indiana law.
First Merchants and Decatur Financial must give prior notice to the Federal
Reserve if the consideration to be paid by itthem for any redemption or
acquisition of itstheir respective shares, when aggregated with the consideration
paid for all redemption or acquisitions for the preceding 12 months, equal or
exceeds 10% of the consolidated net worth of First Merchants.
Anderson has similar redemption rights as First Merchants, but must
follow a different procedure and obtain certain approvals. To redeem its
stock, the Board of Directors of Anderson must pass a resolution approving
the redemption of its shares. Furthermore, prior to such redemption, the
adopted resolution of the Anderson Board of Directors must be submitted to
and approved by the Indiana Department. If the resolution of the Anderson
Board of Directors prohibits the reissue of such acquired shares, the number
of authorized shares must be reduced by an amendment to Anderson's Articles.
Amendments to Anderson's Articles must be approved by the Indiana Department
and delivered to the Indiana Secretary of State. Reacquired shares may also
be cancelled by a resolution of the Anderson Board of Directors and the
Indiana Department.
80
Redemption of shares may not be made when First Merchants or
Anderson is insolvent or would be rendered insolvent by the redemption.
ANTI-TAKEOVER PROVISIONScompany involved.
Anti-Takeover Provisions
The anti-takeover measures applicable to First Merchants and Anderson,Decatur
Financial, as described below, may have the effect of discouraging a person or
other entity to acquire control of either company. These measures may have the
effect of discouraging certain tender offers for shares of either company's
common stock which might otherwise be made at premium prices or certain other
acquisition transactions which might be viewed favorably by a significant number
of shareholders.
FIRST MERCHANTS AND INDIANA LAW.55
Indiana Law. Under the business combinations provisions of the IBCL, which are applicable to First Merchants, any
10% shareholder of an Indiana corporation, with a class of voting shares
registered under Section 12 of the Securities Exchange Act of 1934 or which has
specifically adopted this provision in the corporation's articles of
incorporation, is prohibited for a period of five years from completing a
business combination with the corporation unless, prior to the acquisition of
such 10% interest, the board of directors approved either the acquisition of
such interest or the proposed business combination. Further, the corporation and
a 10% shareholder may not consummate a business combination unless all
provisions of the articles of incorporation are complied with and a majority of
disinterested shareholders approve the transaction or all shareholders receive a
price per share as determined by Indiana law.
An Indiana corporation may elect to remove itself from the protection
provided by the Indiana business combinations provision, but such an election
remains ineffective for 18 months and does not apply to a combination with a
shareholder who acquired a 10% ownership position prior to the election. First
Merchants is covered by the business combinations provisions of the IBCL and
Decatur Financial is not covered. The constitutional validity of the business
combinations provisions of Indiana law has been upheld by the United States
Supreme Court.
First Merchants is covered by the business combinations provisions of the
IBCL. Such provisions are not applicable to Anderson as an Indiana bank.
In addition to the business combinations provision, the IBCL also contains
a "control share acquisition" provision which, although different in structure
from the business combinations provision, may have a similar effect of
discouraging or making more difficult a hostile takeover of an Indiana
corporation. This provision, however, also may have the effect of discouraging
premium bids for outstanding shares. The IBCL provides that, unless otherwise
provided in the corporation's articles of incorporation or by-laws, certain
acquisitions of shares of the corporation's common stock will be accorded voting
rights only if a majority of the disinterested shareholders approves a
resolution granting the potential acquiror the ability to vote such shares. Upon
disapproval of the resolution, the shares held by the acquiror shall be redeemed
by the corporation at the fair market value of the shares as determined by the
control share acquisition provision.
This provision does not apply to a plan of affiliation and merger if the
corporation complies with the applicable merger provisions and is a party to the
agreement of merger or plan 81
of share exchange. Both First Merchants isand Decatur
Financial are subject to the control share acquisition provision.
Again, such provisions are not applicable to Anderson
as an Indiana bank.
FIRST MERCHANTS' ARTICLES.First Merchants' Articles. In addition to the protection afforded by the
IBCL, First Merchants' Articles provide that the directors of First Merchants
shall be divided into three classes, each serving three year terms with one
class to be elected at each annual meeting of shareholders. First Merchants'
Articles provide that directors may be removed with or without cause by a 2/3rds
vote of the shares entitled to vote; provided, however, that if the Board by
2/3rds vote recommends removal of a director, that director may be removed by a
majority of the shares entitled to vote.
First Merchants' Articles also require the approval of the holders of
3/4ths of the voting stock as a condition of certain business combinations
involving any shareholder holding more
56
than 10% of the voting stock. "Business combinations" include, but are not
limited to, mergers, consolidations, sales, leases, liquidations, dissolutions,
certain reorganizations, and agreements relating to the foregoing. An exception
exists if the transaction is approved by a 2/3rds vote of the Board or the
shareholders are to receive fair consideration for their shares. "Fair
consideration" generally means, an amount per share equal to the higher of (a)
the highest per share price paid for the stock in the two years preceding the
business combination, and (b) the per share book value for the stock. In the
event 2/3rds Board approval is obtained or fair consideration is to be paid,
then approval of the business combination would only require the approval of the
holders of 2/3rds of the voting stock.
The above referred to provision of First Merchants' Articles can be amended
only with the approval of 3/4ths of the voting stock.
The existence of authorized but unissued common and preferred stock of
First Merchants may have an anti-takeover effect as the issuance of additional
First Merchants shares with sufficient voting power could have a dilutive effect
on its stock and may result in the defeat of an attempt to acquire control of
First Merchants. The Board may issue shares of common stock and/or preferred
stock at any time without shareholder approval. The relative rights,
preferences, limitations and restrictions attendant with the ownership of the
preferred stock would be determined by the Board prior to the issuance thereof.
The Board would determine whether any voting rights would attach to the
preferred stock. The Board has no present plans to issue any preferred stock or
common stock other than in connection with the merger. The issuance of preferred
or common stock in the future could result in the dilution of ownership and
control of First Merchants by common shareholders. There is no guarantee that
current shareholders would have an opportunity to purchase any of the preferred
or common stock when and if it is issued since they do not have preemptive
rights.
ANDERSON'S ARTICLES.Decatur Financial's Articles. The existence of authorized but unissued
shares of AndersonDecatur Financial common stock may have an anti-takeover effect as the
issuance of additional AndersonDecatur Financial shares with sufficient voting power
could have a dilutive effect on Anderson'sDecatur Financial's stock and may result in the
defeat of an attempt to acquire control of the bank.corporation. The Board of
Directors of AndersonDecatur Financial may issue shares of common stock at any time
without shareholder approval. The Agreement prohibits the issuance by AndersonDecatur
Financial of additional shares of common stock.
82
DIRECTOR LIABILITYDirector Liability
Under the IBCL, a director of First Merchants or Decatur Financial will not
be liable to shareholders for any action taken as a director, or any failure to
take any action, unless:
1. The director has breached or failed to perform his duties as a
director in good faith with the care an ordinarily prudent person in a
like position would exercise under similar circumstances and in a
manner the director reasonably believes to be in the best interests of
the corporation; and
2. Such breach or failure to perform constitutes willful misconduct or
recklessness.
Similar provisions are applicable to the liability of a director of
Anderson under Indiana banking statutes.57
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, LLP,
2700 Market Tower, 10 West Market Street, Indianapolis, Indiana 46204 and for
AndersonDecatur Financial by the law firm of Leagre Chandler & Millard, 1400
FirstKrieg, DeVault, Alexander and Capehart,
LLP, One Indiana Plaza, 135 North Pennsylvania,Square, Suite 2800, Indianapolis, IndianaIN 46204. Frank A. Bracken is
of counsel with Bingham Summers Welsh & Spilman, LLP and a director of First
Merchants.
EXPERTS
The consolidated financial statements of First Merchants, incorporated by
reference in this Proxy Statement-Prospectus, have been audited by Olive, LLP,
independent public accountants, to the extent and for the periods indicated in
their report thereon, and have been so incorporated by reference in this Proxy
Statement-Prospectus in reliance upon such report of Olive, LLP given on the
authority of such firm as experts in auditing and accounting.
The financial statements of Anderson included in this Proxy
Statement -Prospectus have been audited by Crowe, Chizek and Company LLP,
independent public accountants, to the extent and for the periods indicated
in their report thereon, and have been so included in this Proxy
Statement-Prospectus in reliance upon such report of Crowe, Chizek and
Company LLP given on the authority of such firm as experts in auditing and
accounting.
OTHER MATTERS
The Special Meeting of Shareholders is called for the purposes set forth in
the Notice. The Board of Directors of AndersonDecatur 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
with respect to such matters in accordance with the recommendations of
management of Anderson.
83
Decatur Financial.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
First Merchants has filed with the Securities and Exchange Commission (the
"COMMISSION""Commission") a Registration Statement under the Securities Act that registers
the distribution to AndersonDecatur 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 AndersonDecatur 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 and copy 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
58
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330.
The Commission also maintains an Internet world wide web site that contains
reports, proxy and information statements and other information about issuers,
like First Merchants, who file electronically with the Commission. The address
of that site is http://www.sec.gov.
The Commission allows First Merchants to "incorporate by reference"
information into this Proxy Statement-Prospectus. This means that it can
disclose important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
considered to be a part of this Proxy Statement-Prospectus, except for any
information that other information included directly in this document
supersedes.
This Proxy Statement-Prospectus incorporates by reference the documents
listed below that First Merchants has previously filed with the Commission. They
contain important information about First Merchants and its financial condition.
84
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
First Merchants SEC Filings Period
- --------------------------- ------
Annual Report on Form 10-K.................. Year ended December 31, 1999
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 AndersonDecatur 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, and Pendleton, as
well as all pro forma financial information, and AndersonDecatur Financial has supplied
all such information relating to Anderson.Decatur 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
documents incorporated by reference in this Proxy Statement-Prospectus by
requesting them in writing or by telephone from:
FIRST MERCHANTS CORPORATION59
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_________, 2000 to
insure timely delivery before the Special Meeting. If you request any
incorporated documents from us, we will mail them to you by first class mail, or
another equally prompt means, within one business day after we received your
request.
85
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.We have not authorized anyone to give any information or make any
representation about the merger or our companies that is different from, or in
addition to, that contained in this Proxy Statement-Prospectus or in any of the
materials that we have incorporated into this document. Therefore, if anyone
does give you information of this sort, you should not rely on it. If you are in
a jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these types of activities, then the offer presented in this
document does not extend to you. The information contained in this document
speaks only as of the date of this document unless the information specifically
indicates that another date applies.
FORWARD LOOKING STATEMENTS
This Proxy Statement-Prospectus contains certain forward-looking statements
with respect to the financial condition, results of operations, and business of
First Merchants Pendleton and AndersonDecatur Financial and of First Merchants and Pendleton following the
consummation of the merger, including statements relating to the cost savings
and revenue enhancements that are expected to be realized from the merger and
the expected impact of the merger on First Merchants' financial performance.
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among other things, the
following possibilities: (i) expected cost savings from the merger cannot be
fully realized; (ii) deposit attrition, customer loss, or revenue loss following
the merger is greater than expected; (iii) competitive pressure in the banking
industry increases significantly; (iv) costs or difficulties related to the
integration of the businesses of First Merchants Pendleton and AndersonDecatur 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; and (ix) changes occur in
the securities markets; and (x) disruptions of the operations of First Merchants,
Pendleton, Anderson or any of their subsidiaries, or any other governmental
or private entity as a result of the "Year 2000 Problem."markets. The forward-looking earnings estimates included in this
Proxy Statement-Prospectus have not been examined or compiled by the independent
public accountants of First Merchants and Anderson,Decatur Financial, nor have such
accountants applied any procedures thereto. Accordingly, such accountants do not
60
express an opinion or any other form of assurance on them. Further information
on other factors that could affect the financial results of First Merchants
and Pendleton after the merger is included in the Commission filings incorporated by reference
herein. See "WHERE YOU CAN FIND ADDITIONAL INFORMATION."
86
INDEX TO FINANCIAL STATEMENTS
ANDERSON COMMUNITY BANK
Balance Sheets as of September 30, 1998 and 1997 (unaudited).......................F-2
Statements of Income and Comprehensive Income for the
Three Months Ended September 30, 1998 and 1997 (unaudited)....................F-3
Statements of Income and Comprehensive Income for the
Nine Months Ended September 30, 1998 and 1997 (unaudited)..................F-4
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (unaudited).......................................F-5
Notes to Financial Statements......................................................F-6
Report of Independent Auditors.....................................................F-8
Balance Sheets as of December 31, 1997 and 1996....................................F-9
Statements of Income for the Years Ended
December 31, 1997 (audited) and 1996 (unaudited)..............................F-10
Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997 (audited) and 1996 (unaudited)..........F-11
Statements of Cash Flows for the Years Ended
December 31, 1997 (audited) and 1996 (unaudited)..............................F-12
Notes to Financial Statements......................................................F-13
F-1
ANDERSON COMMUNITY BANK
BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
(Unaudited)
- ----------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 2,333 $ 5,297
Federal funds sold and securities purchased under
agreement to resell 3,071 -
----------- -----------
Total cash and cash equivalents 5,404 5,297
Securities available for sale 9,830 6,645
Loans 59,156 50,206
Less: Allowance for loan losses (761) (658)
------------ ------------
Loans, net 58,395 49,548
Premises, equipment and improvements, net 1,058 620
Accrued interest receivable and other assets 1,026 727
----------- -----------
$ 75,713 $ 62,837
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing deposits $ 11,310 $ 8,311
Interest-bearing demand and savings deposits 23,485 17,772
Interest-bearing time deposits 32,877 29,811
----------- -----------
67,672 55,894
Accrued interest payable and other liabilities 714 495
----------- -----------
Total liabilities 68,386 56,389
----------- -----------
Shareholders' equity
Common stock, $1 par value, 2,000,000 shares authorized,
589,784 and 583,144 shares outstanding 590 583
Surplus 5,200 5,128
Undivided profits 1,468 705
Net unrealized gain on securities available for sale 69 32
----------- -----------
Total shareholders' equity 7,327 6,448
----------- -----------
$ 75,713 $ 62,837
=========== ===========
See accompanying notes.
F-2
ANDERSON COMMUNITY BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 30, 1998 and 1997
(Dollar amounts in thousands, except per share data)
(Unaudited)
- ---------------------------------------------------------------------------------------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees $ 1,293 $ 977
Federal funds sold 52 39
Securities
Taxable 109 81
Tax exempt 31 16
------------ ------------
1,485 1,113
INTEREST EXPENSE
Deposits 656 490
------------ ------------
NET INTEREST INCOME 829 623
Provision for loan losses 33 60
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 796 563
NONINTEREST INCOME
Service charges on deposit accounts 50 39
Other 51 10
------------ ------------
101 49
NONINTEREST EXPENSES
Salaries and employee benefits 236 191
Occupancy and equipment 64 56
Data processing 33 24
Other 114 72
------------ ------------
447 343
------------ ------------
INCOME BEFORE INCOME TAXES 450 269
Income taxes 170 101
------------ ------------
NET INCOME 280 168
Other comprehensive income, net of tax:
Change in unrealized gains/losses on securities 57 15
------------ ------------
COMPREHENSIVE INCOME $ 337 $ 183
============ ============
Basic earnings per share $ .47 $ .29
============ ============
Diluted earnings per share $ .47 $ .29
============= ============
See accompanying notes.
F-3
ANDERSON COMMUNITY BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 1998 and 1997 (Dollar
amounts in thousands, except per share data)
(Unaudited)
- -------------------------------------------------------------------------------------------------------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees $ 3,634 $ 2,650
Federal funds sold 132 90
Securities
Taxable 293 272
Tax exempt 81 32
------------ ------------
4,140 3,044
INTEREST EXPENSE
Deposits 1,835 1,368
------------ ------------
NET INTEREST INCOME 2,305 1,676
Provision for loan losses 103 155
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,202 1,521
NONINTEREST INCOME
Service charges on deposit accounts 138 112
Other 129 26
------------ ------------
267 138
NONINTEREST EXPENSES
Salaries and employee benefits 655 545
Occupancy and equipment 198 174
Data processing 95 72
Other 296 220
------------ ------------
1,244 1,011
------------ ------------
INCOME BEFORE INCOME TAXES 1,225 648
Provision for income taxes 462 248
------------ ------------
NET INCOME 763 400
Other comprehensive income, net of tax:
Change in unrealized gains/losses on securities 37 18
------------ ------------
COMPREHENSIVE INCOME $ 800 $ 418
============ ============
Basic earnings per share $ 1.30 $ .69
============ ============
Diluted earnings per share $ 1.29 $ .69
============= ============
See accompanying notes.
F-4
ANDERSON COMMUNITY BANK
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Dollar amounts in thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 763 $ 400
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 110 79
Stock awards expense 10 9
Provision for loan losses 103 155
Changes in assets and liabilities:
Accrued interest receivable and other assets (299) (999)
Accrued interest payable and other liabilities 200 (46)
------------ -------------
Net cash from operating activities 887 (402)
CASH FLOWS FROM INVESTING ACTIVITIES
Loans made to customers and payments received (8,950) (8,506)
Purchase of securities available for sale (3,629) (6,607)
Proceeds from principal payments and maturities
of securities available for sale 500 -
Purchases of premises and equipment, net (548) (92)
------------- -------------
Net cash from investing activities (12,627) (15,205)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 11,778 7,764
Issuance of stock 69 245
------------ ------------
Net cash from financing activities 11,847 8,009
------------ ------------
Net change in cash and cash equivalents 107 (7,598)
Cash and cash equivalents at beginning of period 5,297 10,225
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,404 $ 2,627
============ ============
See accompanying notes.
F-5
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The significant accounting policies followed by Anderson Community Bank (the
"Company") for interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. The consolidated interim
financial statements have been prepared in accordance with Generally Accepted
Accounting Principles and in accordance with instructions to Form 10-QSB and
may not include all information and footnotes normally disclosed for full
annual financial statements. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
reported have been included in the accompanying unaudited financial
statements and all such adjustments are of a normal recurring nature.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income includes the changes in
unrealized gains and losses on securities available-for-sale, net of tax.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted
average shares outstanding during the period. Diluted earnings per share
further assume the effect of potentially dilutive common stock equivalents.
The following table presents the number of shares used to compute per share
data:
Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares outstanding used
to compute basic earnings per share 588,257 579,407 589,784 583,144
Effect of stock options 3,056 986 2,717 791
------- ------- ------- -------
Weighted average shares used
to compute diluted earnings per share 591,313 580,393 592,501 583,935
======= ======= ======= =======
F-6
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - PENDING BUSINESS COMBINATION
On October 27, 1998, the Company agreed to merge with Pendleton Banking
Company (Pendleton), a wholly-owned subsidiary of First Merchants Corporation
(First Merchants). First Merchants is a bank holding company located in
Muncie, Indiana. Under the terms of the agreement, each outstanding common
share of the Company will be converted into 1.38 common shares of First
Merchants. The proposed transaction requires approval by regulatory
authorities and both the shareholders of the Company and Pendleton. The
proposed transaction is expected to be consummated in the first quarter of
1999.
F-7
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Anderson Community Bank
Anderson, Indiana
We have audited the accompanying balance sheets of Anderson Community Bank as of
December 31, 1997 and 1996 and the related statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Anderson Community Bank as of
December 31, 1997 and 1996 and the results of its operations and cash flows for
the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
December 9, 1998
F-8
ANDERSON COMMUNITY BANK
BALANCE SHEETS
December 31, 1997 and 1996
(Dollar amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
Cash and due from banks $ 5,297 $ 2,416
Federal funds sold and securities purchased under
agreement to resell - 7,809
----------- -----------
Total cash and cash equivalents 5,297 10,225
Securities available for sale 6,645 -
Loans 50,206 35,275
Less: Allowance for loan losses (658) (466)
----------- -----------
Loans, net 49,548 34,809
Premises, equipment and improvements, net 620 606
Accrued interest receivable and other assets 727 329
----------- -----------
$ 62,837 $ 45,969
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing deposits $ 8,311 $ 4,989
Interest-bearing demand and savings deposits 17,772 10,251
Interest-bearing time deposits 29,811 24,812
----------- -----------
55,894 40,052
Accrued interest payable and other liabilities 495 380
----------- -----------
Total liabilities 56,389 40,432
Shareholders' equity
Common stock, $1 par value, 2,000,000 shares authorized,
583,144 and 557,744 shares outstanding 583 558
Surplus 5,128 4,899
Undivided profits 705 80
Net unrealized gain on securities available for sale 32 -
----------- ----------
Total shareholders' equity 6,448 5,537
----------- -----------
$ 62,837 $ 45,969
=========== ===========
See accompanying notes.
F-9
ANDERSON COMMUNITY BANK
STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
(UNAUDITED)
1997 1996
---- ----
INTEREST INCOME
Loans, including fees $ 3,774 $ 2,353
Federal funds sold and short term
money market investments 188 402
Securities
Taxable 266 -
Tax Exempt 52 -
------------ ----------
4,280 2,755
INTEREST EXPENSE
Deposits 1,877 1,254
---------- ----------
NET INTEREST INCOME 2,403 1,501
Provision for loan losses 197 256
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,206 1,245
Noninterest income
Service charges on deposit accounts 153 100
Other 47 20
---------- ----------
200 120
Noninterest expense
Salaries and employee benefits 728 495
Occupancy and equipment 226 165
Data processing 100 67
Other 352 249
---------- ----------
1,406 976
---------- ----------
INCOME BEFORE INCOME TAXES 1,000 389
Income taxes 375 157
---------- ----------
NET INCOME $ 625 $ 232
========== ==========
PER SHARE DATA
Basic earnings per share $ 1.08 $ .42
Diluted earnings per share $ 1.08 $ .42
See accompanying notes.
F-10
ANDERSON COMMUNITY BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
(Unaudited)
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------------------------
Net Total
Common Undivided Unrealized Shareholders'
Stock Surplus Profits Gain Equity
----- ------- ------- ---- ------
BALANCE AT JANUARY 1, 1996 $ 547 $ 4,803 $ (152) $ - $ 5,198
Net income for 1996 232 232
Issuance of 10,700 shares
of common stock 11 96 107
------- -------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1996 558 4,899 80 - 5,537
Net income for 1997 625 625
Issuance of 25,400 shares
of common stock 25 229 254
Change in net unrealized
gain on securities available
for sale 32 32
------- -------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1997 $ 583 $ 5,128 $ 705 $ 32 $ 6,448
======= ======== ======== ========== ========
See accompanying notes.
F-11
ANDERSON COMMUNITY BANK
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------------
(UNAUDITED)
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 625 $ 232
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 98 70
Stock awards expense 9 5
Provision for loan losses 197 256
Changes in assets and liabilities:
Accrued interest receivable and other assets (398) (99)
Accrued interest payable and other liabilities 99 258
--------- ---------
Net cash from operating activities 630 722
CASH FLOWS FROM INVESTING ACTIVITIES
Loans made to customers, net of payments collected (14,936) (19,436)
Purchase of securities available for sale (6,596) -
Net premises and equipment purchases (112) (320)
--------- --------
Net cash from investing activities (21,644) (19,756)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 15,842 18,097
Issuance of stock 244 102
--------- --------
Net cash from financing activities 16,086 18,199
--------- --------
Net change in cash and cash equivalents (4,928) (835)
Cash and cash equivalents at beginning of year 10,225 11,060
--------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,297 $10,225
========= ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,839 1,168
Income taxes 422 16
See accompanying notes.
F-12
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Anderson Community Bank is a de-novo bank, which was
formed March 9, 1995. The Bank is engaged in the business of commercial and
retail banking, with operations conducted through its main office and three
branches located in Madison County, Indiana. The majority of the Bank's income
is derived from commercial and retail business lending activities and
short-term investments. The Bank generates commercial, mortgage and installment
loans, and receives deposits from customers primarily in the Madison County,
Indiana area. The majority of the Bank's loans are secured by specific items of
collateral including business assets, real property and consumer assets.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided, and
future results could differ. The estimate for allowance for loan losses is
particularly subject to change.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are written down to fair value when a decline in
fair value is not temporary. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgement, should be charged-off.
F-13
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: (Continued) Loan impairment is reported when full
payment under the loan terms is not expected. Impairment is evaluated in total
for smaller-balance loans of similar nature such as residential mortgage,
consumer, and credit card loans, and on an individual loan basis for other
loans. If a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future cash flows
using the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when it is probable that
all principal and interest amounts will not be collected according to the
original terms of the loan.
PREMISES, EQUIPMENT AND IMPROVEMENTS: Premises, equipment and improvements are
stated at cost less accumulated depreciation and are depreciated over estimated
useful lives using straight-line and accelerated methods.
EMPLOYEE BENEFITS: In 1997 the Bank implemented a 401(k) profit sharing plan
covering substantially all employees. Employee contributions are voluntary and
employer contributions include both matching and discretionary contributions.
The Bank's matching contribution to the plan for 1997 totaled $6.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgement regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
DIVIDEND RESTRICTION: Banking regulations require the maintenance of certain
capital levels which may limit the amount of dividends available to be paid to
shareholders.
F-14
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows.
EARNINGS PER SHARE: Basic earnings per share is based on weighted-average
common shares outstanding. Diluted earnings per share further assumes issue of
any dilutive potential common shares. The accounting standard for computing
earnings per share was revised for 1997, and all earnings per share previously
reported are recalculated to follow the new standard.
CASH FLOWS: Cash and cash equivalents include cash on hand, demand deposits
with other financial institutions and federal funds sold. Cash flows are
reported net for customer loan and deposit transactions, interest-bearing time
deposits with other financial institutions and short-term borrowings with
maturities of 90 days or less.
FINANCIAL STATEMENT PRESENTATION: Certain items in the 1996 financial
statements have been reclassified to correspond with the 1997 presentation.
FUTURE ACCOUNTING CHANGES: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus changes in
holding gains and loses on securities available for sale) and may require
redetermination of industry segment financial information.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available for sale at year-end
1997 are as follows.
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury $ 499 $ 4 $ - $ 503
U.S. Government
agencies 4,379 22 - 4,401
States and
political subdivisions 1,719 23 (1) 1,741
---------- ---------- --------- ---------
$ 6,597 $ 49 $ (1) $ 6,645
========== ========== ========= =========
F-15
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of debt securities available for sale at
year-end 1997, by contractual maturity, are shown below.
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 1,061 $ 1,063
Due after one year through five years 4,470 4,501
Due after five years through ten years 1,066 1,081
Due after ten years - -
---------- ----------
$ 6,597 $ 6,645
========== ==========
No securities were sold in 1997.
Securities with amortized cost of $1,012 at year-end 1997 were pledged to
secure public deposits and securities sold under agreements to repurchase.
Securities purchased under agreements to resell at December 31, 1996 totaled
$6,809. The advances earn interest from 5.00% to 5.07% and mature at various
dates during the month of January 1997. All repurchase agreements were with one
institution. These agreements are secured by U.S. government agency bonds with
fair market values greater than or equal to the amount of the advance.
Securities purchased under agreements to resell averaged approximately $6,336
during 1996, and the maximum amounts outstanding at any month-end during 1996
was $8,635.
F-16
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Year-end loans are as follows:
1997 1996
---- ----
Residential real estate $ 14,425 $ 10,504
Commercial real estate 20,636 16,525
Commercial 11,899 6,464
Consumer 3,246 1,782
---------- ----------
$ 50,206 $ 35,275
========== ==========
Certain of the Bank's directors, executive officers or principal shareholders,
including their immediate families and companies in which they are principal
owners, were loan customers of the Bank. Loans to these individuals totaled
$933 and $572 at year-end 1997 and 1996.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
1997 1996
---- ----
Balance, January 1 $ 466 $ 210
Provision for loan losses 197 256
Loans charged off (5) -
Recoveries on loans previously charged off - -
--------- --------
Balance, December 31 $ 658 $ 466
========= ========
F-17
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES, EQUIPMENT AND IMPROVEMENTS
Year-end premises, equipment and improvements are as follows:
1997 1996
---- ----
Building premises $ 213 $ 183
Land 12 12
Leasehold improvements 170 165
Furniture and equipment 435 358
---------- ----------
Total 830 718
Accumulated depreciation (210) (112)
---------- ----------
$ 620 $ 606
========== ==========
Some facilities are leased under operating leases. Rental expense was $49 and
$25 in 1997 and 1996 respectively. The Bank currently has one operating lease
which expires in 1998 and requires future minimum lease payments of $5.
NOTE 6 - INTEREST-BEARING DEPOSITS
Time deposits issued in denominations of $100 or more or greater totaled
$14,391 and $12,489 at year-end 1997 and 1996.
At year-end, 1997, scheduled maturities of time deposits are as follows:
1998 $ 25,528
1999 3,914
2000 109
2001 143
2002 104
Thereafter 13
-----------
$ 29,811
===========
F-18
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES
The provision for income taxes consists of:
1997 1996
---- ----
Current federal $ 293 $ 196
Current state 89 55
Deferred federal (4) (74)
Deferred state (3) (20)
--------- ---------
$ 375 $ 157
========= =========
The effective tax rate differs from the statutory federal income tax rate as
follows:
1997 1996
---- ----
Statutory rates $ 340 $ 132
Effect of:
Tax exempt income (15) -
State tax expense, net 57 23
Other, net (7) 2
--------- --------
$ 375 $ 157
========= ========
F-19
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
The year end composition of deferred tax assets and liabilities was as follows:
1997 1996
---- ----
Deferred tax assets
Bad debt provision $ 168 $ 121
Other 11 14
--------- ---------
179 135
Deferred tax liabilities
Accrual to cash basis (37) (7)
Depreciation (24) (16)
Deferred loan fees (23) (10)
Unrealized gain on securities (16) -
--------- ---------
(100) (33)
Less: valuation allowance - -
--------- ---------
Net deferred tax asset $ 79 $ 102
========= =========
F-20
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
Some financial instruments are used to meet customer financing needs and to
reduce exposure to interest rate changes These financial instruments include
commitments to extend credit and standby letters of credit. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount reported
in the balance sheets.
Commitments at year-end are as follows.
Unused open end revolving lines of credit $ 7,697 $ 3,572
Standby letters of credit 135 90
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
and letters of credit generally have fixed expiration dates of no more than one
year or are variable rate. Standby letters of credit are conditional
commitments to guarantee a customer's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount of these items. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of the
commitments are expected to expire without being used.
F-21
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTION AND AWARD PLANS
Pursuant to a stock award plan, key employees are granted stock each year based
on the Bank's profitability. During 1997 and 1996, 900 and 500 shares were
awarded under the stock award plan.
The Bank's stock option plan reserved 21,000 shares of common stock for the
purpose of grants to officers and other employees under an incentive stock
option plan and 50,000 shares of common stock for grants to directors under a
non-qualified plan. Options are granted at the fair value of stock at the date
of the grant. All options granted have 10 year terms, vest immediately and are
fully exercisable upon grant.
A summary of stock option activity and related per share information is as
follows:
1997 1996
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- --------- -------- ---------
Outstanding beginning of year 38,500 $ 10.00 16,150 $ 10.00
Granted 2,500 10.00 32,450 10.00
Exercised (24,500) (10.00) (10,100) (10.00)
Forfeited - -
-------- --------
Outstanding - end of year 16,500 $ 10.00 38,500 $ 10.00
======== ========= ======== =========
Exercisable at end of year 16,500 $ 10.00 38,500 $ 10.00
======== ========= ======== =========
Weighted average fair value per
option granted during the year $ 1.50 $ .58
F-22
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTION AND AWARD PLANS (Continued)
The fair value of options granted are estimated using the following
weighted-average information: risk-free interest rate of 5.18% (1997) and
5.81% (1996), expected life of 1 year, dividend rate of 0% and expected
volatility of stock price of .001.
At year-end, options outstanding were as follows:
1997 1996
---- ----
Number of options 16,500 38,500
Range of exercise price per option share $10 $10
Weighted-average exercise price per option $10 $10
Weighted-average remaining option life (years) 8.10 9.21
For options now exercisable:
Number 16,500 38,500
Weighted-average exercise price per share $10 $10
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock option plans. Compensation cost actually recognized for stock options was
$0 for 1997 and 1996.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period, which in this case is
immediate. The Company's pro forma information follows.
1997 1996
---- ----
Pro forma net income $ 621 $ 214
Pro forma earnings per share $ 1.07 $ .39
F-23
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative and qualitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
As a newly chartered bank, the Bank is required to maintain through March 31,
1998, a Tier 1 capital to average assets of 8% based upon the FDIC's statement
of policy. At year end, the capital requirements were met and the Bank was
designated as "well capitalized." Actual capital levels and minimum required
levels were:
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1997
- ----
Total capital (to Risk
Weighted Assets) $ 6,985 14.65% $ 3,814 8% $ 4,767 10%
Tier I Capital (to Risk
Weighted Assets) $ 6,388 13.40% $ 1,907 4% $ 2,860 6%
Tier 1 Capital (to
Average Assets) $ 6,388 10.92% $ 2,339 4% $ 2,924 5%
F-24
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at year-end were as follows:
---------1997--------- ---------1996---------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
Cash and cash equivalents $ 5,297 $ 5,297 $10,225 $10,225
Securities available-for-sale 6,645 6,645 - -
Loans, net 49,548 49,479 34,809 34,753
Accrued interest receivable 442 442 253 253
Financial liabilities
Deposits 55,894 56,117 40,052 40,204
Accrued interest payable 188 188 150 150
Estimated fair value approximates carrying value for all items except those
described. The fair value for securities is based on quoted market values for
the individual securities or for equivalent securities. The fair value for loans
is based on estimates of the difference in interest rates that the Bank would
charge the borrowers for similar such loans with similar maturities made at
December 31, applied for an estimated time period until the loan is assumed to
reprice or be paid. The fair value for certificates of deposit is based on
estimates of the rates that the Company would pay on such maturity. The
estimated fair value for off-balance-sheet loan commitments are considered
nominal.
F-25
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 12 - PER SHARE DATA
The following table presents the number of shares used to compute basic and
diluted earnings per share:
1997 1996
---- ----
Weighted average shares
outstanding during the year 580,409 553,497
Dilutive effect of stock options 916 -
---------- ---------
Weighted average shares used to
compute diluted earnings
per share 581,325 553,497
========== =========
NOTE 13 - PENDING BUSINESS COMBINATION
On October 27, 1998, the Company agreed to merge with Pendleton Banking Company
(Pendleton), a wholly-owned subsidiary of First Merchants Corporation (First
Merchants). First Merchants is a bank holding company located in Muncie,
Indiana. Under the terms of the agreement, each outstanding common share of the
Company will be converted into 1.38 common shares of First Merchants. The
proposed transaction requires approval by regulatory authorities and both the
shareholders of the Company and Pendleton. The proposed transaction is expected
to be consummated in the first quarter of 1999.
F-2661
APPENDIX A
AGREEMENT OF REORGANIZATION AND MERGER
AMONGBETWEEN
FIRST MERCHANTS CORPORATION
PENDLETON BANKING COMPANY
AND
ANDERSON COMMUNITY BANKDECATUR FINANCIAL, INC.
THIS AGREEMENT OF REORGANIZATION AND MERGER (the "Agreement"), is entered
this 27th20th day of October, 1998,January, 2000, by and among FIRST MERCHANTS CORPORATIONbetween First Merchants Corporation
("First Merchants"), PENDLETON BANKING COMPANY and Decatur Financial, Inc. ("Pendleton"), and ANDERSON
COMMUNITY BANK ("Anderson"Decatur Financial").
W I T N E S S E T H:
WHEREAS, First Merchants is a corporation duly organized and existing under
the laws of the State of Indiana and a registered bank holding company under the
Bank Holding Company Act of 1956, as amended, with its principal place of
business in Muncie, Delaware County, Indiana;
WHEREAS, PendletonDecatur Financial is a statecorporation 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 Decatur, Adams County, Indiana;
WHEREAS, Decatur Bank & Trust Company (the "Bank") is a bank duly organized
and existing under the laws of the State of Indiana and a wholly-owned
subsidiary of First
MerchantsDecatur Financial with its principal banking office in Pendleton, Madison County,
Indiana;
WHEREAS, Anderson is a state bank duly organized and existing under
the laws of the State of Indiana with its principal banking office in
Anderson, MadisonDecatur,
Adams County, Indiana;
WHEREAS, it is the desire of First Merchants Pendleton and AndersonDecatur Financial to
effect a transaction whereby the Bank will become a wholly-owned subsidiary of
First Merchants through a statutory merger of AndersonDecatur Financial with and into
Pendleton
under the name of "The Madison Community Bank";First Merchants; and
WHEREAS, a majority of the entire Board of Directors of First Merchants and
Pendleton and a majority of the entire Board of Directors of AndersonDecatur Financial have approved
this
A-1
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 Pendleton, and AndersonDecatur Financial
hereby make this Agreement and prescribe the terms and conditions of the merger
of AndersonDecatur Financial with and into PendletonFirst Merchants and the mode of carrying the
transaction into effect as follows:
SECTION 1
THE MERGERThe Merger
1.01. MERGER.Merger. Subject to the terms and conditions of this Agreement, on the
Effective Date (as defined in Section 11 hereof), AndersonDecatur Financial shall be
merged withinto and into Pendleton, under the Articles of Incorporation of Pendleton, and
PendletonFirst Merchants, which
shall be the "Continuing Bank"Company" and which shall continue its corporate
existence under the laws of the State of Indiana, pursuant to the provisions of
and with the effect provided in the Indiana Financial Institutions ActBusiness Corporation Law and
particularly Indiana Code Chapter 28-1-723-1-40 (the "Merger").
1.02. RIGHT TO REVISE MERGER.Right to Revise Merger. First Merchants and Pendleton may, at any time, change the
method of effecting the Merger if and to the extent First Merchants and Pendleton deemdeems such
change to be desirable;desirable, including, without limitation, to provide for the merger
of Decatur 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
AndersonDecatur Financial specified in Section 3 hereof as a result of the Merger,
except in accordance with the terms of Section 3 hereof, (ii) adversely affect
the tax treatment to the shareholders of Anderson,Decatur 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 MERGEREffect Of The Merger
Upon the Merger becoming effective:
2.01. GENERAL DESCRIPTION.General Description. The separate existence of AndersonDecatur Financial
shall cease and the Continuing BankCompany shall possess all of the assets of
AndersonDecatur 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 Anderson.Decatur Financial.
2.02. NAME AND OFFICES. Subject to regulatory approval, theName, Offices, and Management. The name of the Continuing BankCompany
shall continue to be "First Merchants Corporation." Its principal banking office
shall be changed to be "The Madison Community Bank," with 19
West 10th Street beinglocated at
A-2
the principal office of the Continuing Bank. After the Effective Date, all
offices of Pendleton and Anderson shall be operated as branches of the
Continuing Bank except for the principal office of the Continuing Bank.
2.03. DIRECTORS OF THE CONTINUING BANK.200 E. Jackson Street, Muncie, Indiana. The Board of Directors of the Continuing
Bank,Company, until such time as their successors arehave been elected and qualified,
shall consist of all of the current members of the Board of Directors of Anderson and the Board of Directors of Pendleton who desire to serve on the
Board of Directors of the Continuing Bank; provided, however, that all such
directors of the Continuing Bank shall be subject to First Merchants' policy of
mandatory retirement at age seventy (70); provided, further, that the policy of
mandatory retirement shall not apply to any of Anderson's current directors
until twelve (12) months after the Effective Date. Any members of the Board of
Directors of the Continuing Bank subject to such mandatory retirement policy
may be designated by the Continuing Bank's Board of Directors as directors
emeritus to serve in an advisory non-voting capacity and to attend meetings of
the Continuing Bank's Board of Directors. The Chairman of the Board of
Directors of Anderson shall serve as the Chairman of the Board of Directors of
the Continuing Bank and the Chairman of the Board of Directors of Pendleton
shall serve as the Vice-Chairman of the Board of Directors of the Continuing
Bank, until such time as their successors are elected and qualified.
2.04. OFFICERS OF THE CONTINUING BANK.Merchants. The officers
of Pendleton and
AndersonFirst Merchants immediately prior to the Effective Date shall continue as the
officers of the Continuing Bank until such time as their successors are elected and
qualified; provided, however, that the current PresidentCompany.
2.03. Capital Structure. The amount of Anderson, Michael
L. Baker, shall serve as the President and Chief Executive Officercapital stock of the Continuing
Bank until such time as his successor is electedCompany 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 qualified.
2.05 ARTICLES OF INCORPORATION AND BYLAWS.Bylaws. The Articles of Incorporation
and the Bylaws of the Continuing BankCompany shall be those of PendletonFirst Merchants
immediately prior to the Effective Date until the same shall be further amended
as provided by law.
The Bylaws of Pendleton in effect immediately prior to the
Effective Date shall be amended as of the Effective Date (i) to increase the
size of the Board of Directors consistent with Section 2.03, (ii) to provide
for directors emeritus consistent with Section 2.03,2.05. Assets and (iii) to change the
name of the Continuing Bank pursuant to Section 2.02.
2.06. ASSETS AND LIABILITIES.Liabilities. The title to all assets, real estate and
other property owned by PendletonFirst Merchants and AndersonDecatur Financial shall vest in the
Continuing BankCompany without reversion or impairment. All liabilities of Pendleton and AndersonDecatur
Financial shall be assumed by the Continuing Bank.
2.07. ADDITIONAL ACTIONS.Company.
2.06. Additional Actions. If, at any time after the Effective Date, the
Continuing BankCompany shall consider or be advised that any further deeds,
assignments or assurances in law or any
A-3
other acts are necessary or desirable
(a) to vest, perfect or confirm, of record or otherwise, in the Continuing
BankCompany its right, title or interest in, to or under any of the rights,
properties or assets of Anderson,Decatur Financial or the Bank, or (b) otherwise carry
out the purposes of this Agreement, AndersonDecatur Financial and itsthe Bank and their
respective officers and directors shall be deemed to have granted to the
Continuing BankCompany an irrevocable power of attorney to execute and deliver all
such deeds, assignments or assurances in law and to do all acts necessary or
proper to vest, perfect or confirm title to and possession of such rights,
properties or assets in the Continuing Bank,Company and otherwise to carry out the
purposes of this Agreement, and the officers and directors of the Continuing
BankCompany are authorized in the name of AndersonDecatur Financial or the Bank or otherwise
to take any and all such action.
SECTION 3
CONSIDERATION TO BE
DISTRIBUTED TO SHAREHOLDERS OF ANDERSONConsideration To Be
Distributed To Shareholders Of Decatur Financial
3.01. CONSIDERATION.Consideration. Upon and by reason of the Merger becoming effective,
the shareholders of AndersonDecatur Financial of record on the Effective Date who have
not dissented to the Merger in accordance with Indiana Code Section 28-1-7-21,ss. 23-1-44, as
amended, shall be entitled to receive 1.38 shares of
First Merchants common stockin exchange for each share of AndersonDecatur
Financial's common stock held and at their election (subject to the limitations
and prorations set forth in this Section 3) either (i) 9.13 (the "Conversion
Ratio") shares of First Merchants' common stock ("Option 1") or (ii) cash in the
amount of $237.39 ("Option 2"). A Decatur Financial shareholder shall be
entitled to elect
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Option 1 for all shares held of record, Option 2 for all shares held of record
or Option 1 for a portion of the shares held of record and Option 2 for a
portion of the shares held of record. The Conversion Ratio shall be subject to
adjustment as set forth in Sections 3.03 and 3.04.
3.02. NO FRACTIONAL FIRST MERCHANTS COMMON SHARES.No Fractional First Merchants' Common Shares. Certificates for
fractional shares of common stock of First Merchants shall not be issued in
respect of fractional interests arising from the Conversion Ratio. Each AndersonDecatur
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 AndersonDecatur Financial's common shares, shall be paid in cash (without
interest) in an amount equal to the fraction of the average of the closing price of First Merchants common stock as quoted by the NASDAQ National Market System for the
five (5) business days preceding the Effective Date.Average
Price (as defined below). No such shareholder of AndersonDecatur Financial shall be
entitled to dividends, voting rights or any other rights in respect of any
fractional share.
3.03. RECAPITALIZATION.Recapitalization. If, between the date of this Agreement and the
Effective Date, First Merchants issues a stock dividend with respect to its
shares of common stock, combines, subdivides, or splits up its outstanding
shares or takes any similar recapitalization action, then the number of shares
of First Merchants common stock into which each outstanding Anderson share will
be converted under Section 3.01 hereofConversion Ratio
shall be adjusted so that each AndersonDecatur Financial shareholder electing Option 1
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 mid point between the bid and ask
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) Decatur 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 $22.00; subject, however, to the following two provisions. If
Decatur 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
$22.00 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 Decatur 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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3.04. DISTRIBUTION OF FIRST MERCHANTS COMMON STOCK AND CASH.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 $30.00; 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 Decatur
Financial within twenty-four (24) hours of the Determination Date. Within
two (2) business days after the date of receipt of such notice, Decatur
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
$30.00 and the Conversion Ratio (as then in effect) and the denominator of
which is the First Merchants Average Price. If Decatur 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 Election. An election form and letter of transmittal (the "Election
Form") shall be mailed to each record holder of Decatur Financial's common stock
as of the record date fixed for the special shareholders' meeting at which the
Merger will be submitted to a vote of Decatur Financial's shareholders (the
"Special Record Date"). In addition, reasonable efforts will be made to make the
Election Form available to all persons who become shareholders of Decatur
Financial between the Special Record Date and the Election Deadline (as defined
below). Decatur Financial and First Merchants shall also establish a deadline
for receipt of such Election Forms (the "Election Deadline"), which deadline
shall be the close of business on the date of the special meeting at which the
Merger will be submitted to a vote of Decatur Financial's shareholders. The
Election Forms shall be mailed to each record holder of Decatur Financial's
common stock as of the Special Record Date along with the proxy materials for
the special shareholders' meeting at which the Merger will be submitted to a
vote of Decatur Financial's shareholders. The Election Form will permit each
holder of record of Decatur Financial's common stock as of the Special Record
Date to elect, subject to Section 3.07, to have all of such holder's shares
converted in the Merger into either Option 1, Option 2 or a combination of
Option 1 and Option 2. The Election Form shall permit a Decatur Financial's
shareholder to elect Option 1 if there is an oversubscription in Option 2 as
described in Section 3.07. Such elections shall be the first shares reallocated,
regardless of the number of shares, in the event of oversubscription. The
Election Form shall also permit direct deposit of cash in each holder's account
in either the Bank or First Merchants Bank, National Association. An election
shall be duly made by completing the Election Form and any other required
documents
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in accordance with the instructions set forth therein and delivering them to the
Election Agent (as defined below) or to such other person or persons selected by
Decatur Financial and approved by First Merchants to receive elections, to
receive outstanding Decatur Financial's shares, to deliver cash or cash and
shares of First Merchants' common stock and to carry out the other procedures
set forth herein.
3.06. Election Agent. First Merchants and Decatur Financial hereby appoint
the Trust Department of First Merchants Bank, National Association to act as
agent (the "Election Agent") of Decatur Financial's shareholders for the
purposes of mailing and receiving the Election Forms, tabulating the results and
notifying First Merchants and Decatur Financial of the results.
3.07. Oversubscriptions.
(a) In the event (i) the number of shares of Decatur Financial common
stock covered by Option 2 elections would otherwise entitle Decatur
Financial's shareholders to receive more than $14,000,000 in cash
(including cash payments for fractional shares and payments to dissenting
shareholders) or (ii) the condition set forth in Section 9.03 of this
Agreement cannot be satisfied due to the amount of cash which would
otherwise be received by Decatur Financial's shareholders, the Option 2
elections of the holders of Decatur Financial's common stock shall be
eliminated (each in its entirety) and converted to Option 1 elections (each
in its entirety) by first eliminating and converting the election which
covers the smallest number of shares of Decatur Financial's common stock,
and then eliminating and converting the election which covers the next
smallest number of shares and continuing this process until the total
remaining number of outstanding Decatur Financial's shares covered by
Option 2 elections is such that the Merger will (i) result in cash payments
of no more than $14,000,000 (including cash payments for fractional shares
and payments to dissenting shareholders), and (ii) satisfy the "continuity
of interest" requirement applicable to tax-free reorganizations under the
Code.
(b) Notwithstanding anything to the contrary in this Section 3, if (i)
a shareholder of Decatur Financial certifies in writing at the time of
filing an Option 2 election (the "Certifying Cash Elector"), that his
outstanding Decatur Financial's shares are deemed to be constructively
owned by another shareholder of Decatur Financial (the "Constructive
Owner") under the provisions of Section 318(a) of the Code, (ii) the
Certifying Cash Elector supplies such information in support of his
certification to Decatur Financial's legal counsel as such counsel may
request and such legal counsel does not disagree with the certification,
and (iii) the Constructive Owner has filed a valid Option 2 election, then
the elections of the Certifying Cash Elector or Electors and the
Constructive Owner or Owners shall be treated as a single election, and
their shares shall be aggregated for purposes of determining priority for
conversion into cash.
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(c) Shares of Decatur Financial's common stock with respect to which
no Election Form is timely received or ever received or which are the
subject of otherwise invalid elections (the "Non-Electing Shares") will be
treated as if the holders thereof elected Option 1 for all shares held of
record. This Section 3.07(c) shall be given effect prior to the
reallocation provided for in Section 3.07(a).
(d) Decatur Financial and First Merchants shall mutually determine the
validity of elections submitted by Decatur Financial's shareholders.
(e) A holder of Decatur Financial's shares that is a bank, trust
company, security broker-dealer or other recognized nominee, may submit one
or more Election Forms for the persons for whom it holds shares as nominee
provided that such bank, trust company, security broker-dealer or nominee
certifies to the satisfaction of Decatur Financial and First Merchants the
names of the persons for whom it is so holding shares (the "Beneficial
Owners"). In such case, each Beneficial Owner for whom an Election Form is
submitted shall be treated as a separate owner for purposes of the election
procedure and allocation of shares set forth herein.
(f) First Merchants and Decatur Financial may, upon mutual agreement,
apply the adjustments set forth in this Section 3.07 only to such extent
and to such number of Decatur Financial's shareholders as is necessary to
accomplish the objectives of this Section 3.07 to assure that the Merger
will qualify as a tax-free reorganization.
3.08. Distribution of First Merchants' Common Stock and Cash.
(a) Each share of common stock of PendletonFirst Merchants outstanding
immediately prior to the Effective Date shall remain outstanding unaffected
by the Merger, except that such shares shall be converted
into shares of the Continuing Bank.Merger.
(b) Following the Effective Date, distribution of stock certificates
representing First MerchantsMerchants' common stock and cash payments for Decatur
Financial's common stock and for fractional shares shall be made by First
Merchants to each former shareholder of AndersonDecatur Financial within ten (10)
days of such shareholder's delivery of his/her certificates representing
common stock of AndersonDecatur Financial to the conversion agent, First Merchants
Bank, National Association (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 AndersonDecatur Financial shall not be exchanged
until First Merchants has received a written agreement from such affiliate
as required pursuant to Section 7.06 hereof. Interest shall not accrue or
be payable with respect to any cash payments.
(c) Following the Effective Date, stock certificates representing
AndersonDecatur Financial's common stock shall be deemed to evidence only the right
to receive cash and/or ownership of First MerchantsMerchants' common stock (for all
corporate purposes other than the payment of dividends) and cash for
fractional shares, as applicable. No dividends or other distributions
otherwise payable subsequent to the Effective Date on
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stock of First Merchants shall be paid to any shareholder entitled to
receive the same until such shareholder has surrendered his/her
certificates for AndersonDecatur Financial's common stock to the Conversion Agent
in exchange for certificates representing First MerchantsMerchants' common stock
andand/or cash. Upon surrender, there shall be paid to the recordholder of the
new certificate(s) evidencing shares of First MerchantsMerchants' common stock the
amount of all dividends and other distributions, without interest thereon,
withheld with respect to such common stock.
(d) At or after the Effective Date, there shall be no transfers on the
stock transfer books of AndersonDecatur Financial of any shares of the common stock
of Anderson.Decatur Financial. If, after the Effective Date, certificates are
presented for transfer to Anderson,Decatur 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 AndersonDecatur 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.
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(f) With respect to any certificate for shares of AndersonDecatur Financial's
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
AndersonDecatur Financial's shareholder with all procedures historically required
by AndersonDecatur Financial in connection with lost, stolen, or destroyed
certificates.
SECTION 4
DISSENTING SHAREHOLDERS
If any holdersDissenting Shareholders
Shareholders of Anderson common stock perfect their dissenters'Decatur Financial shall have the rights in accordance with Indiana Code Section 28-1-7-21, as amended, any issued
and outstanding shares of Anderson common stock held by such dissenting holders
shall not be converted as described in Section 3 but shall from and after the
Effective Date represent the right to receive such consideration as may be accorded to
dissenting shareholders under Indiana Code Section 28-1-7-21,ss. 23-1-44, as amended.
SECTION 5
REPRESENTATIONS AND
WARRANTIES OF ANDERSON
AndersonRepresentations and
Warranties of Decatur Financial
Decatur Financial represents and warrants to First Merchants with respect
to itself and Pendletonthe 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
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authorized executive officer of AndersonDecatur Financial and delivered to and initialed
by an authorized executive officer of each of First Merchants and
Pendleton contemporaneous with the
execution of this Agreement.)
5.01. ORGANIZATION AND AUTHORITY. AndersonOrganization and Authority. Decatur Financial is a statecorporation duly
organized and validly existing under the laws of the State of Indiana, and the
Bank is a bank duly organized and validly existing under the laws of the State
of Indiana. Anderson
hasDecatur Financial and the Bank have the power and authority
(corporate and other) to conduct its businesstheir respective businesses in the manner and
by the means utilized as of the date hereof. AndersonDecatur Financial's only subsidiary
is the Bank, and the Bank has no subsidiaries. AndersonThe Bank is subject to primary
federal regulatory supervision and regulation by the Federal Deposit Insurance
Corporation.
5.02. AUTHORIZATION.Authorization.
(a) AndersonDecatur 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 Anderson,Decatur 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.
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(b) Neither the execution of this Agreement, nor the consummation of
the transactions contemplated hereby, does or will (i) conflict with,
result in a breach of, or constitute a default under Anderson'sDecatur Financial's
Articles of Incorporation or By-Laws; (ii) conflict with, result in a
breach of, or constitute a default under any federal, foreign, state or
local law, statute, ordinance, rule, regulation or court or administrative
order or decree, or any note, bond, indenture, mortgage, security
agreement, contract, arrangement or commitment, to which AndersonDecatur Financial
or the Bank is subject or bound, the result of which would materially
affect the business or financial condition of Anderson;Decatur Financial or the
Bank; (iii) result in the creation of or give any person, corporation or
entity, the right to create any lien, charge, encumbrance, security
interest, or any other rights of others or other adverse interest upon any
right, property or asset of Anderson;Decatur Financial or the Bank; (iv) terminate
or give any person, corporation or entity, the right to terminate, amend,
abandon, or refuse to perform any note, bond, indenture, mortgage, security
agreement, contract, arrangement or commitment to which AndersonDecatur Financial
or the Bank is subject or bound; or (v) accelerate or modify, or give any
party thereto the right to accelerate or modify, the time within which, or
the terms according to which, AndersonDecatur 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
applicablethe Bank Holding Company Act of 1956, federal and state securities laws and
applicable Indiana and federal banking and corporate statutes, all as amended, and the
rules and regulations
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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 AndersonDecatur Financial of the transactions
contemplated by this Agreement.
5.03. CAPITALIZATION.Capitalization.
(a) As of June 30, 1998, AndersonDecember 31, 1999, Decatur Financial had 2,000,000750,000 shares of
common stock authorized, $1.00no par value per share, 589,784142,995 shares of which
were issued and outstanding. Such issued and outstanding shares of AndersonDecatur
Financial's common stock have been duly and validly authorized by all
necessary corporate action of Anderson,Decatur Financial, are validly issued, fully
paid and nonassessable and have not been issued in violation of any
preemptive rights of any shareholders. Except as disclosed pursuant to
Section 5.03(b) below, Andersonset forth in the
Disclosure Letter, Decatur Financial has no intention or obligation to
authorize or issue additional shares of its common stock. AndersonDecatur Financial
has not authorized the issuance of any other class of stock. AsOn a
consolidated basis as of JuneNovember 30, 1998, Anderson1999, Decatur Financial had total
capital of $6,988,299,$14,466,299, which consisted of common stock of $589,784, additional$1,424,390,
capital surplus of $5,199,554,$1,446,854, retained earnings of $1,186,990$11,703,325, and
unrealized gainloss on securities of $11,901.
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$108,270.
(b) As of December 31, 1999, the Bank had 5,827 shares of common stock
authorized, no par value per share, all of which shares are issued and
outstanding to Decatur 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 Decatur 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 November
30, 1999, the Bank had total capital of $14,409,674, which consisted of
common stock of $582,700, capital surplus of $4,394,296, retained earnings
of $9,540,948, and unrealized loss on securities of $108,270.
(c) Except as set forth in the Disclosure Letter, there are no
options, commitments, calls, agreements, understandings, arrangements or
subscription rights regarding the issuance, purchase or acquisition of
capital stock, or any securities convertible into or representing the right
to purchase or otherwise receive the capital stock or any debt securities,
of AndersonDecatur Financial nor the Bank by which AndersonDecatur Financial or the Bank is
or may become bound. AndersonNeither Decatur Financial nor the Bank has noany
outstanding contractual or other obligation to repurchase, redeem or
otherwise acquire any of its respective outstanding shares of capital
stock.
(c)(d) Except as set forth in the Disclosure Letter, no person or entity
beneficially owns 5% or more of Anderson'sDecatur Financial's outstanding shares of
common stock.
(d) Anderson has not taken or agreed to take any action nor
has any knowledge of any fact or circumstance and Anderson will not
take any action that would prevent the Merger from qualifying for
pooling-of-interests accounting treatment.A-10
5.04. ORGANIZATIONAL DOCUMENTS.Organizational Documents. The respective Articles of Incorporation or
Association and By-Laws of AndersonDecatur Financial and the Bank have been delivered to
First Merchants and represent true, accurate and complete copies of such
corporate documents of AndersonDecatur Financial and the Bank in effect as of the date
of this Agreement.
5.05. COMPLIANCE WITH LAW. AndersonCompliance with Law. Neither Decatur Financial nor the Bank has not
engaged in any activity nor taken or omitted to take any action which has
resulted or, to the knowledge of AndersonDecatur 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 Anderson. Anderson possessesDecatur Financial or the Bank. Decatur Financial and the Bank possess all
licenses, franchises, permits and other authorizations necessary for the
continued conduct of its businesstheir respective businesses without material interference
or interruption and such licenses, franchises, permits and authorizations shall
be transferred to the Continuing BankFirst 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 Anderson,Decatur Financial or the Bank, including all correspondence,
communications and commitments related thereto, are set forth in the Disclosure
Letter. AndersonThe 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.Accuracy of Statements. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by AndersonDecatur Financial or the Bank to First Merchants in connection with this
Agreement or any of the transactions contemplated hereby (including, without
limitation, any information which has been or shall be supplied by AndersonDecatur
Financial or the Bank with
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respect to its business,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.Litigation and Pending Proceedings. Except as set forth in the
Disclosure Letter, there are no claims of any kind, nor any action, suits,
proceedings, arbitrations or investigations pending or to the knowledge of
AndersonDecatur Financial or the Bank threatened in any court or before any government
agency or body, arbitration panel or otherwise (nor does AndersonDecatur 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
AndersonDecatur Financial or its business,the Bank or their respective businesses, prospects,
conditions (financial or otherwise), results of operations or assets, or which
would prevent the performance of this Agreement or declare the same unlawful or
cause the rescission hereof. There are no material
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uncured violations, or violations with respect to which material refunds or
restitutions may be required, cited in any compliance report to AndersonDecatur
Financial or the Bank as a result of an examination by any regulatory agency or
body.
5.08. FINANCIAL STATEMENTS.Financial Statements.
(a) Anderson'sDecatur Financial's consolidated balance sheets as of the end of
the two fiscal years ended December 31, 1996 and 1997 and the six months ended June
30, 1998 and the eleven months
ended November 30, 1999 and the related consolidated statements of income,
comprehensive 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 AndersonDecatur Financial as of the respective dates thereof and the
consolidated results of operations of AndersonDecatur Financial for the respective
periods covered thereby and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis.
(b) All loans reflected in the Financial Information and which have
been made, extended or acquired since JuneNovember 30, 1998,1999, (i) have been made
for good, valuable and adequate consideration in the ordinary course of
business; (ii) constitute the legal, valid and binding obligation of the
obligor and any guarantor named therein; (iii) are evidenced by notes,
instruments or other evidences of indebtedness which are true, genuine and
what they purport to be; and (iv) to the extent that Andersonthe Bank has a
security interest in collateral or a mortgage securing such loans, are
secured by perfected security interests or mortgages naming Andersonthe 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 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.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 JuneNovember 30, 1998,
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1999, no events or conditions of any character, whether
actual, threatened or contemplated, have occurred, or, to the knowledge of
Anderson,Decatur Financial, can reasonably be expected to occur, which materially
adversely affect Anderson'sDecatur 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, Anderson'sDecatur Financial's or the
Bank's business to be conducted in a materially less profitable manner than
prior to JuneNovember 30, 1998.1999.
5.10. ABSENCE OF UNDISCLOSED LIABILITIES. AndersonAbsence of Undisclosed Liabilities. Neither Decatur Financial nor the
Bank is not a party to any agreement, contract, obligation, commitment, arrangement,
liability, lease or license which individually exceeds $10,000 per year or which
may not be terminated within one year from the date of this Agreement, except as
set forth in the Disclosure Letter and except for unfunded loan commitments made
in the ordinary course of Anderson'sthe Bank's business consistent with past practices,
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nor to the knowledge of AndersonDecatur 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.Title to Assets.
(a) Except as set forth in the Disclosure Letter, Anderson hasDecatur Financial
and the Bank have good and marketable title in fee simple absolute to all
personal property reflected in the JuneNovember 30, 19981999 Financial Information,
good and marketable title to all other properties and assets which Anderson purportsDecatur
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 Anderson'sDecatur
Financial's or the Bank's business, and good and marketable title to all
property and assets acquired since JuneNovember 30, 1998,1999, free and clear of all
mortgages, liens, pledges, restrictions, security interests, charges,
claims or encumbrances of any nature.
(b) All furniture, fixtures, machinery, equipment, computer software
and hardware, and all other tangible personal property owned or used by
Anderson,Decatur 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 AndersonDecatur Financial or the Bank of such
properties and assets is in compliance with all applicable laws,
ordinances, rules and regulations of any governmental authority having
jurisdiction over such use.use except for such noncompliance that would not
have a material adverse effect on the business of Decatur Financial or the
Bank.
5.12. LOANS AND INVESTMENTS.Loans and Investments.
(a) Except as set forth in the Disclosure Letter, there is no loan of
Andersonthe 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 Andersonthe Bank in excess of $10,000 that has
been identified by accountants or A-10
auditors (internal or external) as having
a significant risk of uncollectibility. Anderson'sThe Bank's loan watch list and all
loans in excess of $10,000 that Anderson'sthe Bank's management has determined to be
ninety (90) days or more past due with respect to principal or interest or
has placed on nonaccrual status are set forth in the Disclosure Letter.
(b) Each of the reserves and allowances for possible loan losses and
the carrying value for real estate owned which are shown on the Financial
Information is, in the opinion of Anderson,Decatur 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.
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(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 AndersonDecatur Financial or the Bank since JuneNovember 30, 19981999
is subject to any restrictions, whether contractual or statutory, which
materially impairs the ability of AndersonDecatur Financial or the Bank to dispose
freely of such investment at any time. Except as set forth in the
Disclosure Letter, Anderson is notneither Decatur Financial nor the Bank are a party to
any repurchase agreements with respect to securities.
5.13. EMPLOYEE BENEFIT PLANS.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 AndersonDecatur Financial or the Bank and covers any employee, director or
former employee or director of AndersonDecatur Financial or the Bank under which
AndersonDecatur 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)(A) of ERISA are identified
in the list referred to above.
(b) The Employee Plans comply with and have been operated in
accordance with all applicable laws, regulations, rulings and other
requirements the breach or violation of which could materially affect
AndersonDecatur 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.
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(c) To the knowledge of Anderson, noNo "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, for which a notice is required to be filed, has occurred with
respect to any Employee Plan. ToNeither Decatur Financial nor the knowledge of
Anderson, AndersonBank has
noany liability to the Pension Benefit Guaranty Corporation ("PBGC"), to the
Internal Revenue Service ("IRS"), to the Department of Labor ("DOL") or to
an employee or Employee Plan beneficiary under Section 502 of ERISA.
(d) To the best knowledge of Anderson,Decatur Financial and the Bank, no
"fiduciary," as defined in Section (3)(21)3(21) of ERISA, of an Employee Plan has
failed to comply with the requirements of Section 404 of ERISA.
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(e) Each of the Employee Plans which is intended to be qualified under
Code Section 401(a) has been amended to comply in all material respects
with the applicable requirements of the Code, including the Tax Reform Act
of 1986, the Revenue Act of 1987, the Technical and Miscellaneous Revenue
Act of 1988, the Omnibus Budget Reconciliation Act of 1989, the Revenue
Reconciliation Act of 1990, the Tax Extension Act of 1991, the Unemployment
Compensation Amendments of 1992, the Omnibus Budget Reconciliation Act of
1993, and the Retirement Protection Act of 1994 and any rules, regulations
or other requirements promulgated thereunder (the "Acts"). In addition,
each such Employee Plan has been and is being operated in substantial
conformance with the applicable provisions of ERISA and the Code, as
amended by the Acts, including operational compliance with the Uruguay
Round Agreements Act, the Uniformed Services Employment and as amended byReemployment
Rights Act of 1994, the Small Business Job Protection Act of 1996, and the
Taxpayer Relief Act of 1997, evenand the Internal Revenue Service Restructuring
and Reform Act of 1998 (even though such Employee Plans areactual plan amendments do not yet requiredhave to
be amended for such legislation.made until the last day of the 2000 plan year). Except as set forth in
the Disclosure Letter, AndersonDecatur Financial and/or the Bank, as applicable,
sought and received favorable determination letters from the IRS within the
applicable remedial amendment periods under Code Section 401(b), and has
furnished to First Merchants copies of the most recent IRS determination
letters with respect to any such Employee Plan.
(f) No Employee Plan owns any security of Anderson.Decatur 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 (eithertermination(either voluntarily or involuntarily).
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(i) No claims against an Employee Plan, Decatur Financial or Anderson,the Bank,
with respect to an Employee Plan, (other than normal benefit claims) have
been asserted or to the knowledge of Anderson, threatened.
(j) ThereExcept as set forth in the Disclosure Letter, there is no
contract, agreement, plan or arrangement covering any employee, director or
former employee or director of AndersonDecatur 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.Code, except as set forth in the Disclosure Letter.
(k) NoTo the best knowledge of Decatur Financial and the Bank, no event
has occurred that would cause the imposition of the tax described in Code
Section 4980B.
AllA-15
To the best knowledge of Decatur 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
AndersonDecatur Financial or the Bank and (iii) covers any employee, director or
former employee or director of Anderson.Decatur 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) AndersonExcept as set forth in the Disclosure Letter, neither Decatur
Financial nor the Bank has noany present and knows of noor future liability in respect of
post-retirement health and medical benefits for former employees or
directors of Anderson.Decatur 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
written) by AndersonDecatur Financial or the Bank relating to, or change in
employee participation or coverage under, any Employee Plan or Benefit
Arrangement which would increase materially the expense of maintaining such
Employee Plans or Benefit Arrangements above the level of the expense
incurred in respect thereof for the fiscal year ended December 31, 1997.1998.
(o) For purposes of this Section 5.13, references to AndersonDecatur Financial
or the Bank are deemed to include (i) all predecessors of Anderson,Decatur Financial
or the Bank, (ii) any subsidiary of Anderson,Decatur Financial or the Bank, (iii)
all
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members of any controlled group (as determined under Code Section
414(b) or (c)) that includes Anderson,Decatur Financial or the Bank, and (iv) all
members of any affiliated service group (as determined under Code Section
414(m) or (n)) that includes Anderson.
5.14 OBLIGATIONS TO EMPLOYEES.Decatur Financial or the Bank.
5.14. Obligations to Employees. Except as set forth in the Disclosure
Letter, all accrued obligations and liabilities of Anderson,Decatur 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
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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 AndersonDecatur Financial or the Bank for itstheir
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 AndersonDecatur 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
Decatur Financial or the Bank or their respective businesses, prospects,
conditions (financial or otherwise), results of operations or assets. All
obligations and liabilities of Anderson,Decatur 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 itstheir 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 Decatur 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
Anderson.Decatur Financial and the Bank, except where the failure to correctly and
accurately reflect and account for such accruals and reserves would not
materially adversely affect Decatur Financial or the Bank or their respective
businesses, prospects, conditions (financial or otherwise), results of
operations or assets.
5.15. TAXES, RETURNS AND REPORTS. Anderson hasTaxes, Returns and Reports. Decatur 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 materialsmaterial
respects all taxes, assessments and other governmental charges due or claimed to
be due upon itthem or any of itstheir income, properties or assets; and (c) not
requested an extension of time for any such payments (which extension is still
in force). Except for taxes not yet due and payable, the reserve for taxes on
the Financial Information is adequate to cover all of Anderson'sDecatur 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 JuneNovember 30, 1998.
Anderson1999. Neither Decatur Financial
nor the Bank has no or will not have, any liability for taxes of any nature for or with
respect to the operation of itstheir business, including the assets of any
subsidiary, from JuneNovember 30, 19981999 up to and including the Effective Date,
except to the extent reflected on thetheir Financial Information or on financial
statements of AndersonDecatur Financial or the Bank subsequent to such date and as set
forth in the Disclosure Letter. AndersonNeither Decatur Financial nor the Bank is not
currently under audit by any state or federal taxing authority. Except as set
forth in the Disclosure Letter, neither the federal, state, or local tax returns
of AndersonDecatur Financial or the Bank have been audited by any taxing authority
during the past five (5) years.
A-14A-17
5.16. DEPOSIT INSURANCE.Deposit Insurance. The deposits of Andersonthe Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") in accordance with the Federal
Deposit Insurance Act, and Andersonthe Bank has paid all premiums and assessments due with
respect to such deposit insurance.
5.17. REPORTS.Reports. Since January 1, 1995, Anderson haseach of Decatur 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 Indiana Department of Financial Institutions,
(ii)(iii) the FDIC, and (iii)(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 Anderson.either
Decatur Financial or the Bank. All such reports filed by AndersonDecatur 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, Anderson.Decatur
Financial or the Bank.
5.18. ABSENCE OF DEFAULTS. AndersonAbsence of Defaults. Neither Decatur Financial nor the Bank is not in
violation of its charter documents or By-Laws or in default under any material
agreement, commitment, arrangement, lease, insurance policy or other instrument,
whether entered into in the ordinary course of business or otherwise and whether
written or oral, and there has not occurred any event that, with the lapse of
time or giving of notice or both, would constitute such a default.
5.19. YEAR 2000 COMPLIANCE. Todefault, except for
defaults which would not have a material adverse effect on the best knowledgebusiness of
Anderson, all
computer software and hardware utilized by Anderson is Year 2000 compliant,
which, for purposes of this Agreement, shall mean that the data outside the
range 1990-1999 will be correctly processed in any level of computer hardware or
software, including, but not limited to, microcode, firmware, applications
programs, files and databases. All computer software used by Anderson is
designed to be used prior to, during and after the calendar year 2000 A.D., and
that such software will operate during each such time period without error
relating to date data, specifically including any error relating to,Decatur Financial or the product of, date data that represents or references difference centuries or more
than one century.
5.20. TAX AND REGULATORY MATTERS. AndersonBank.
5.19. Tax and Regulatory Matters. Neither Decatur Financial nor the Bank
has not taken or agreed to take any action or has any knowledge of any fact or
circumstance that would (i) prevent the transactions contemplated hereby from
qualifying as a reorganization within the meaning of Section 368 of the Code or
(ii) materially impede or delay receipt of any regulatory approval required for
consummation of the transactions contemplated by this Agreement.
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5.21. REAL PROPERTY.5.20. Real Property.
(a) The legal description of each parcel of real property owned by
AndersonDecatur 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 AndersonDecatur 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 AndersonDecatur 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"). AndersonDecatur
Financial shall update the Disclosure Letter
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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 AndersonDecatur Financial or the Bank
as to the title of or the right to use any of the Real Property.
(c) AndersonNeither Decatur Financial nor the Bank has noany interest in any
other real property except interests as a mortgagee, and except for any
real property acquired in foreclosure or in lieu of foreclosure and being
held for disposition as required by law.
(d) None of the buildings, structures or other improvements located on
the Real Property encroaches upon or over any adjoining parcel of real
estate or any easement or right-of-way or "setback" line and all such
buildings, structures and improvements are located and constructed in
conformity with all applicable zoning ordinances and building codes.
(e) None of the buildings, structures or improvements located on the
Real Property are the subject of any official complaint or notice by any
governmental authority of violation of any applicable zoning ordinance or
building code, and there is no zoning ordinance, building code, use or
occupancy restriction or condemnation action or proceeding pending, or, to
the best knowledge of Anderson,Decatur Financial, threatened, with respect to any
such building, structure or improvement. The Real Property is in good
condition for its intended purpose, ordinary wear and tear excepted, and
has been maintained in accordance with reasonable and prudent business
practices applicable to like facilities. The Real Property has been used
and operated in compliance with all applicable laws, statutes, rules,
regulations and ordinances applicable thereto.
(f) Except as may be reflected in the Financial Information or with
respect to such easements, liens, defects or encumbrances as do not
individually or in the aggregate materially adversely affect the use or
value of the Owned Real Property, A-16
Anderson has,Decatur Financial and the Bank have, and
at the Closing Date will have, good and marketable title to thetheir
respective Owned Real Property.
(g) AndersonNeither Decatur Financial nor the Bank has not caused or allowed the
generation, treatment, storage, disposal or release at any Real Property of
any Toxic Substance, except in accordance with all applicable federal,
state and local laws and regulations. "Toxic Substance" means any
hazardous, toxic or dangerous substance, pollutant, waste, gas or material,
including, without limitation, petroleum and petroleum products, metals,
liquids, semi-solids or solids, that are regulated under any federal, state
or local statute, ordinance, rule, regulation or other law pertaining to
environmental protection, contamination, quality, waste management or
cleanup.
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(h) Except as disclosed in the Disclosure Letter, there are no
underground storage tanks located on, in or under any Owned Real Property.
Anderson does notNeither Decatur 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. AndersonNeither Decatur Financial nor the Bank is not
required to provide a "disclosure document" to First Merchants and Pendleton as a result
of the Merger pursuant to the Indiana Responsible Property Transfer Law
(I.C. Sectionss. 13-25-3-1 ET SEQ.et seq.).
(j) There are no mechanic's or materialman's liens against the Real
Property, and no unpaid claims for labor performed, materials furnished or
services rendered in connection with constructing, improving or repairing
the Real Property in respect of which liens may or could be filed against
the Real Property.
5.22. BROKER'S OR FINDER'S FEES.5.21. Broker's or Finder's Fees. Except as set forth in the Disclosure
Letter,for Renninger & Associates, LLC, no
agent, broker or other person acting on behalf of AndersonDecatur Financial or the Bank
or under any authority of AndersonDecatur 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.
5.23. BRING DOWN OF REPRESENTATIONS AND WARRANTIES.5.22. Bring Down of Representations and Warranties. All representations and
warranties of AndersonDecatur 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.
5.24. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES.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 AndersonDecatur Financial and
the Bank and all directors, officers and employees of AndersonDecatur Financial and the
Bank shall have no further liability with respect thereto unless a court of
A-17
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 MERCHANTSRepresentations and
Warranties of First Merchants
First Merchants hereby represents and warrants to Anderson with respect to
itself and PendletonDecatur Financial as
follows:
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6.01. ORGANIZATION AND QUALIFICATION.Organization and Qualification. First Merchants is a corporation
organized and existing under the laws of the State of Indiana and Pendleton is
a state bank duly organized and validly existing underhas the
laws of the State of
Indiana. First Merchants and Pendleton have thecorporate power and authority (corporate
and other) to conduct their respective businessesits business in the manner and by the
means utilized as of the date hereof.
6.02. AUTHORIZATION.Authorization.
(a) First Merchants and Pendleton havehas the corporate power and authority to enter
into this Agreement and to carry out their
respectiveits obligations hereunder subject to
certain required regulatory approvals. The Agreement, when executed and
delivered, will have been duly authorized and will constitute a valid and
binding obligation of First Merchants, and Pendleton, enforceable in accordance with its
terms, except to the extent limited by insolvency, reorganization,
liquidation, readjustment of debt, or other laws of general application
relating to or affecting the enforcement of creditor's rights.
(b) Neither the execution of this Agreement, nor the consummation of
the transactions contemplated hereby, does or will (i) conflict with,
result in a breach of, or constitute a default under First Merchant's
or Pendleton's Articles of Incorporation or By-laws; (ii) conflict with, result in a
breach of, or constitute a default under any federal, foreign, state, or
local law, statute, ordinance, rule, regulation, or court or administrative
order or decree, or any note, bond, indenture, mortgage, security
agreement, contract, arrangement, or commitment, to which First Merchants or Pendleton
is subject or bound, the result of which would materially affect the
business or financial condition of First Merchants; (iii) result in the
creation of or give any person, corporation or entity, the right to create
any lien, charge, claim, encumbrance, security interest, or any other
rights of others or other adverse interest upon any right, property or
asset of First Merchants or Pendleton;Merchants; (iv) terminate or give any person, corporation or
entity the right to terminate, amend, abandon, or refuse to perform any
note, bond, indenture, mortgage, security agreement, contract, arrangement,
or A-18
commitment to which First Merchants or Pendleton is a party or by which First
Merchant or PendletonMerchants is subject or bound; or (v) accelerate or modify, or give any
party thereto the right to accelerate or modify, the time within which, or
the terms according to which, First Merchants
or Pendleton is to perform any duties or
obligations or receive any rights or benefits under any note, bond,
indenture, mortgage, security agreement, contract, arrangement, or
commitment.
(c) Other than in connection or in compliance with the provisions of
applicablethe Bank Holding Company Act of 1956, federal and state securities laws,
and applicable Indiana and federal banking and corporate statutes, all as amended, and
the rules and regulations promulgated thereunder, no notice to, filing
with, authorization of, exemption by, or consent or approval of, any public
body or authority is necessary for the consummation by First Merchants and Pendleton of
the transactions contemplated by this Agreement.
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6.03. CAPITALIZATION.Capitalization.
(a) As of June 30, 1998,December 31, 1999, First Merchants had 20,000,00050,000,000 shares of
common stock authorized, no par value, of which 6,697,65610,936,617 shares were
issued and outstanding. The shares of common stock are
validly issued, fully paid and nonassessable. Such issued and outstanding shares of First
MerchantsMerchants' common stock have been duly and validly authorized by all
necessary corporate action of First Merchants, are validly issued, fully
paid and nonasssessablenonassessable and have not been issued in violation of any
preemptive rights of any shareholders.
(b) First Merchants has 500,000 shares of Preferred Stock authorized,
no par value, no shares of which have been issued and no commitments exist
to issue any of such shares.
(c) The shares of First Merchants' common stock to be issued pursuant
to the Merger will be fully paid, validly issued and nonassessable.
(d) As of June 30, 1998, Pendleton had 114,000 shares of
common stock authorized, $10 par value per share, of which 114,000
shares were issued and outstanding. Such issued and outstanding shares
of Pendleton common stock are owned by First Merchants, have been duly
and validly authorized by all necessary corporate action of Pendleton,
are validly issued, fully paid and nonassessable, and have not been
issued in violation of any preemptive rights of any Pendleton
shareholders.
6.04. ORGANIZATIONAL DOCUMENTS.Organizational Documents. The respective Articles of Incorporation or Association and By-laws
of First Merchants and Pendleton in force as of the date hereof have been delivered to Anderson.Decatur
Financial. The documents delivered by themit represent complete and
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accurate copies
of the corporate documents of First Merchants and Pendleton in effect as of the date of this
Agreement.
6.05. ACCURACY OF STATEMENTS.Accuracy of Statements. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by First Merchants or Pendleton to AndersonDecatur 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 or Pendleton
with respect
to their businesses,its business, operations and financial condition for inclusion in the proxy
statement and registration statement relating to the Merger) contains or shall
contain (in the case of information relating to the proxy statement at the time
it is mailed and to the registration statement at the time it becomes effective)
any untrue statement of a material fact or omits or shall omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading.
6.06. COMPLIANCE WITH LAW. NeitherCompliance With Law. First Merchants nor Pendleton havehas 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 and Pendleton possesspossesses all licenses, franchises, permits and other
authorizations necessary for the continued conduct of their respective businessesits business without
material interference or interruption. There are no agreements or understandings
with, nor any orders or directives of, any regulatory agencies or government
authorities, which would have a material adverse effect on the consolidated
financial position of First Merchants. PendletonFirst Merchants has received no written
inquiries from
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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.Financial Statements. First Merchants'Merchants consolidated balance sheets as
of the end of the three (3)two fiscal years ended December 31, 1995, 1996
and 1997 and 1998 and the sixnine
months ended JuneSeptember 30, 19981999 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 1999, 1998, 1997
1996 and 1995,1996, and all of such reports are true, accurate and complete in all
material respects and have been prepared in conformity with generally accepted
regulatory accounting principles applied on a consistent basis.
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6.08. ABSENCE OF CERTAIN CHANGES.Absence of Certain Changes. Except for events and conditions relating
to the business environment in general, since JuneSeptember 30, 1998,1999, 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
JuneSeptember 30, 1998.1999.
6.09. FIRST MERCHANTS SECURITIES AND EXCHANGE COMMISSION FILINGS.First Merchants Securities and Exchange Commission Filings. First
Merchants has filed all reports and other documents required to be filed by it
under the Securities Exchange Act of 1934 and the Securities Act of 1933,
including First Merchants' Annual Report on Form 10-K for the year ended
December 31, 1997,1998, and Quarterly Report on Form 10-Q for the quarter ended
JuneSeptember 30, 1998,1999, copies of which have previously been delivered to Anderson.
6.10 LITIGATION AND PENDING PROCEEDINGS. There areDecatur
Financial. All such Securities and Exchange Commission filings were true,
accurate and complete in all material respects as of the dates of the filings,
and no claims ofsuch filings contained any kind, nor any action, suits, proceedings, arbitrations or investigations pending
or to the knowledge of First Merchants threatened in any court or before any
government agency or body, arbitration panel or otherwise (nor does First
Merchants have any knowledgeuntrue statement of a basis for any claim, action, suit, proceeding,
arbitrationmaterial fact or investigation) against, byomitted
to state a material fact necessary in order to make the statements, at the time
and in the light of the circumstances under which they were made, not false or
materially adversely affecting
First Merchants or its business, prospects, conditions (financial or otherwise),
resultsmisleading.
6.10. Bring Down of operations or assets, or which would prevent the performance of this
Agreement or declare the same unlawful or cause the recission hereof. There are
no material uncured violations, or violations with respect to which material
refunds or restitutions may be required, cited in any compliance report to First
Merchants as a result of an examination by any regulatory agency or body.
6.11 YEAR 2000 COMPLIANCE. To the best knowledge of First Merchants,
all computer softwareRepresentations and hardware utilized by First Merchants is Year 2000
compliant, which, for purposes of this Agreement, shall mean that the data
outside the range 1990-1999 will be correctly processed in any level of computer
hardware or software, including, but not limited to, microcode, firmware,
applications programs, files and databases. All computer software used by First
Merchants is designed to be used prior to, during and after the calendar year
2000 A.D., and that such software will operate during each such time period
without error relating to date data, specifically including any error relating
to, or the product of, date data that represents or references different
centuries or more than one century.
6.12. SEPARATE EXISTENCE OF THE CONTINUING BANK. First Merchants
acknowledges that its present intention is to retain the Continuing Bank as a
separate banking subsidiary of First Merchants for a period of five (5) years
after the Effective Date.
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6.13. BRING DOWN OF REPRESENTATIONS AND WARRANTIES.Warranties. All representations and
warranties of First Merchants and Pendleton contained in this Section 6 shall be true,
accurate and correct on and as of the Effective Date except as affected by the
transactions contemplated by and specified within the terms of this Agreement.
6.14. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES.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
Pendleton and all directors, officers and employees of First Merchants and Pendleton shall have no further
liability with respect thereto unless a court
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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 7
COVENANTS OF ANDERSON
AndersonCovenants of Decatur Financial
Decatur Financial covenants and agrees with First Merchants, and Pendletoncovenants
and agrees to cause the Bank to act, as follows:
7.01. SHAREHOLDER APPROVAL. AndersonShareholder Approval. Decatur 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
AndersonDecatur Financial at the earliest possible reasonable date. Thedate, and the Board of
Directors of AndersonDecatur Financial shall recommend to the shareholders of AndersonDecatur
Financial that such shareholders approve this Agreement and shall not thereafter
withdraw or modify its recommendation. The Board of Directors of AndersonDecatur
Financial shall use its best efforts to obtain any vote of its shareholders
necessary for the approval of this Agreement.
7.02. OTHER APPROVALS. AndersonOther Approvals. Decatur Financial and the Bank shall proceed
expeditiously, cooperate fully and use itstheir 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.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,
Andersonneither Decatur Financial nor the Bank shall, not, without the prior written
consent of First Merchants, (i) make any material changes in itstheir capital
structure; (ii) authorize a class of stock or, except upon the exercise of
stock options disclosed pursuant to Section 5.03(b)5.03(c), issue, or authorize
the issuance of, stock other than or in addition to the outstanding stock
as set forth in Section 5.03 hereof; (iii) declare, distribute or pay any
dividends on itstheir shares of common stock, or authorize a
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stock split, or
make any other distribution to their shareholders, except for (a) the
payment by Decatur Financial prior to the Effective Date of cash dividends
on its shareholders;common stock in March, 2000, June, 2000 and September, 2000, which
dividends shall not exceed $1.03 per share, respectively, provided that
Decatur Financial shall not pay any such dividend during the fiscal quarter
in which the Merger shall become effective and in which Decatur Financial
shareholders will become entitled to receive dividends on the shares of
First Merchants into which the shares of Decatur Financial have been
converted or in any subsequent
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fiscal quarter, and (b) the payment by the Bank to Decatur Financial of
dividends to pay Decatur 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 its sasetstheir assets or any of itstheir 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
Andersonthe Bank in the ordinary course of business); (vi) subject any of itstheir
properties or assets to a mortgage, lien, claim, charge, option,
restriction, security interest or encumbrance; (vii) except for the actions
specifically described in the Disclosure Letter which First Merchants
acknowledges it has approved, promote or increase or decrease the rate of
compensation (except for promotions and non-material increases in the
ordinary course of business and in accordance with past practices) or enter
into any agreement to promote or increase or decrease the rate of
compensation of any director, officer or employee of Anderson;Decatur Financial or
the Bank; (viii) except for the actions specifically described in the
Disclosure Letter which First Merchants acknowledges it has approved,
execute, create, institute, modify or amend any pension, retirement,
savings, stock purchase, stock bonus, stock ownership, stock option, stock
appreciation or depreciation right or profit sharing plans, any employment,
deferred compensation, consultant, bonus or collective bargaining
agreement, group insurance contract or other incentive, welfare or employee
benefit plan or agreement for current or former directors, officers or
employees of Anderson,Decatur 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 itstheir
Articles of Incorporation or By-Laws from those in effect on the date of
this Agreement; (x) except for the actions specifically described in the
Disclosure Letter which First Merchants acknowledges it has approved,
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 AndersonDecatur 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 Anderson;the Bank; (xii) fail to make additions to Anderson'sthe Bank's reserve for
loan losses, or any other reserve account, in the ordinary course of
business and in accordance with sound banking practices; (xiii) other than
in the ordinary course of business consistent with past practice, incur any
indebtedness for borrowed money or assume, guarantee, endorse or otherwise
as an accommodation become responsible or liable for the obligations of any
other individual, corporation or other entity; and (xiv) agree in writing
or otherwise to take any of the foregoing actions.
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(b) AndersonDecatur 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.
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(c) AndersonDecatur Financial and the Bank shall continue to give to First
Merchants and Pendleton and their respectiveits employees, accountants, attorneys and other authorized
representatives reasonable access during regular business hours and other
reasonable times to all itstheir premises, properties, statements, books and
records.
7.04. PRESERVATION OF BUSINESS.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, AndersonDecatur Financial and the Bank each shall (a) carry on itstheir business
diligently, substantially in the same manner as heretofore conducted, and in the
ordinary course of business; (b) use itstheir best efforts to preserve itstheir
business organizations intact, to keep itstheir present officers and employees and
to preserve itstheir present relationship with customers and others having business
dealings with them; and (c) not do or fail to do anything which will cause a
material breach of, or material default in, any contract, agreement, commitment,
obligation, understanding, arrangement, lease or license to which it isthey are a
party or by which it isthey are or may be subject or bound.
7.05 OTHER NEGOTIATIONS.7.05. Other Negotiations. Except with the prior written approval of First
Merchants, and Pendleton, on and after the date of this Agreement and until the Effective Date,
AndersonDecatur Financial and the Bank shall not, and shall not permit or authorize
itstheir 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 AndersonDecatur Financial or the Bank or similar transaction involving
AndersonDecatur Financial or the Bank (all such transactions hereinafter referred to as
an "Acquisition Transactions"Transaction"). AndersonDecatur Financial and the Bank shall promptly
communicate to First Merchants and Pendleton the terms of any proposal, written or oral, which
iteither may receive with respect to an Acquisition Transaction and any request by
or indication of interest on the part of any third party with respect to
initiation of any Acquisition Transaction or discussion with respect thereto.
The above provisions of this Section 7.05 notwithstanding, nothing contained in
this Agreement shall prohibit (i) AndersonDecatur Financial from furnishing information
to, or entering into discussions or negotiations with, any person or entity that
makes an unsolicited proposal of an Acquisition Transaction if and to the extent
that (a) the Board of Directors of Anderson,Decatur Financial, after consultation with
and based upon the written advice of legal counsel, determines in good faith
that such action is required for the directors of AndersonDecatur Financial to fulfill
their fiduciary duties and obligations to the AndersonDecatur Financial's shareholders and
other constituencies under Indiana law, and (b) prior to furnishing such
information to, or entering into discussions or negotiations
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with, such person or entity, AndersonDecatur Financial provides immediate written notice
to First Merchants and Pendleton to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity, or (ii)
notwithstanding the provisions of Section 7.01, the Board of Directors of
AndersonDecatur Financial from failing to make, withdrawing or modifying its
recommendation to
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shareholders regarding the Merger following receipt of a
proposal for an Acquisition Transaction if the Board of Directors of Anderson,Decatur
Financial, after consultation with and based upon the written advice of legal
counsel, determines in good faith that such action is required for the directors
of AndersonDecatur Financial to fulfill their fiduciary duties and obligations to
the AndersonDecatur Financial's shareholders and other constituencies under Indiana law.
7.06. RESTRICTIONS REGARDING AFFILIATES. AndersonRestrictions Regarding Affiliates. Decatur Financial shall, within
thirty (30) days after the date of this Agreement and promptly thereafter until
the Effective Date to reflect any changes or upon the request of First
Merchants, provide First Merchants with a list identifying each person who may
reasonably be deemed to be an "affiliate" of AndersonDecatur Financial within the
meaning of such term as used in Rule 145 under the Securities Act of 1933, as
amended (the "1933 Act"). Each director, executive officer and other person who
is an "affiliate" of AndersonDecatur Financial for purposes of the 1933 Act shall
deliver to First Merchants, at least thirty-one (31) days prior to the Effective
Date, a written agreement, in form and substance satisfactory to counsel to
First Merchants, regarding compliance by each such person with (i) the provisions of
such Rule 145, and (ii)145.
7.07. Press Release. Neither Decatur Financial nor the requirements of Accounting Principles Board Opinion No. 16 regarding the
disposition of shares (or reduction of risk with respect thereto) of Anderson
common stock during the thirty (30) days preceding the Effective Date, or First
Merchants common stock until such time as financial results covering at least
thirty (30) days of post-Merger operations have been published.
7.07. PRESS RELEASE. AndersonBank shall not issue any
press releases or make any other public announcements or disclosures relating to
the Merger without the prior approval of First Merchants and Pendleton.Merchants.
7.08. DISCLOSURE LETTER UPDATE. AndersonDisclosure Letter. Decatur Financial shall promptly supplement, amend
and update monthly and as of the Effective Date the Disclosure Letter with
respect to any matters hereafter arising which, if in existence or having
occurred as of the date of this Agreement, would have been required to be set
forth or described in the Disclosure Letter.
7.09 CONFIDENTIALITY. AndersonConfidentiality. Decatur Financial and the Bank shall use itstheir best
efforts to cause itstheir respective officers, employees, and authorized
representatives to, hold in strict confidence all confidential data and
information obtained by itthem from First Merchants, and Pendleton, unless such information (i)
was already known to Anderson,Decatur Financial and the Bank, (ii) becomes available to
AndersonDecatur Financial and the Bank from other sources, (iii) is independently
developed by Anderson,Decatur Financial and the Bank, (iv) is disclosed outside of
AndersonDecatur Financial and the Bank with and in accordance with the terms of prior
written approval of First Merchants, or
Pendleton, or (v) is or becomes readily ascertainable
from public or published information or trade sources or public disclosure of
such information is required by law or requested by a court or other
governmental agency, commission, or regulatory body. AndersonDecatur Financial and the
Bank further agreesagree that in the event this Agreement is terminated, itthey will
return to First Merchants and Pendleton all information obtained by AndersonDecatur Financial and the
Bank regarding First Merchants, and Pendleton,
including
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all copies made of such information by
Anderson.Decatur Financial and the Bank. This provision shall survive the Effective Date
or the earlier termination of this Agreement.
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7.10 COOPERATION. AndersonCooperation. Decatur Financial shall generally cooperate with First
Merchants and Pendleton and their respectiveits 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) AndersonDecatur Financial shall cooperate and
assist First Merchants and Pendleton in preparation of and/or filing of all regulatory
applications, the registration statement for registration of First Merchants'
shares, and all other documentation required to be prepared for consummation of
the Merger and obtaining all necessary approvals, and (ii) AndersonDecatur Financial
shall furnish First Merchants and Pendleton with all information concerning itself and the
Bank that First Merchants and Pendleton may request in connection with the preparation of the
documentation referenced above. Prior to the Closing (as defined in Section 12
hereof), AndersonDecatur Financial agrees to disclose to First Merchants and Pendleton any fact or
matter that comes to the attention of AndersonDecatur Financial that might indicate that
any of the representations or warranties of AndersonDecatur Financial may be untrue,
incorrect, or misleading in any material respect.
7.11. ENVIRONMENTAL REPORTS. Anderson,Environmental Reports. Decatur Financial, at its sole cost and
expense, shall provide to First Merchants, and Pendleton, as soon as reasonably practical, but
not later than thirty (30) days after the date hereof, a copyreport of any and alla phase one
environmental reports currently in Anderson's possession or which Anderson can
obtain without undue effortinvestigation on all real property owned, leased or operated by
AndersonDecatur Financial or the Bank as of the date hereof (but excluding space in
retail and similar establishments leased by AndersonDecatur 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 Decatur Financial or the Bank after the date
hereof (but excluding space in retail and similar establishments leased by
Decatur 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). Anderson shall not beIf required by this
Section 7.11the phase one
investigation in First Merchants' reasonable opinion, Decatur Financial shall
provide to causeFirst 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 new environmental investigationssuch
phase one or phase two investigation report to be conducted or
environmental reports to be prepared.notify Decatur Financial of any
dissatisfaction with the contents of such report. Should the cost of taking all
remedial or other corrective actions and measures relating to real property owned, leased or
operated by Anderson (i) required by applicable law
or reasonable likely to be required by applicable law, or (ii) recommended or
suggested by anysuch report or reports as prudent in light of serious life, health
or safety concerns, in the aggregate, exceed the sum of $100,000$250,000 as reasonably
estimated by an environmental expert retained for such purpose by First
Merchants and Pendleton
and reasonably acceptable to Anderson,Decatur 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 Anderson.
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7.12. LETTER TO ANDERSON SHAREHOLDERS.Letter to Decatur Financial's Shareholders. Within five (5)two (2) business
days after execution of this Agreement by Anderson, PendletonDecatur Financial and First Merchants,
AndersonDecatur Financial shall deposit in the United States mail a letter to each of
the shareholders of record of AndersonDecatur 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 AndersonDecatur
Financial shall be in a form mutually agreed to by First Merchants Pendleton and Anderson.Decatur
Financial.
7.13. EXERCISE OF OPTIONS. AndersonExercise of Options. Decatur Financial shall cause the stock options
disclosed pursuant to Section 5.03(b)5.03(c) hereof to be exercised and the related
shares of AndersonDecatur Financial's common stock to be issued on or before the
Effective Date. AndersonDecatur Financial commits that no cash shall be paid to option
holders in connection with the exercise of such options and that immediately
prior to the effective timeEffective Date of the Merger, AndersonDecatur Financial will have 612,434147,439
shares of common stock outstanding.
SECTION 8
COVENANTS OF FIRST MERCHANTS AND PENDLETONCovenants of First Merchants
First Merchants covenants and Pendleton covenant and agreeagrees with AndersonDecatur Financial as follows:
8.01. APPROVALS.Approvals. First Merchants and Pendleton shall proceed expeditiously, cooperate
fully and use theirits best efforts to procure upon reasonable terms and conditions
all consents, authorizations, approvals, registrations and certificates, to
complete all filings and applications and to satisfy all other requirements
prescribed by law which are necessary for consummation of the Merger on the
terms and conditions provided in this Agreement. First Merchants and Pendleton shall provide
AndersonDecatur Financial with copies of proposed regulatory filings in connection with
the Merger and afford AndersonDecatur Financial the opportunity to offer comment on the
filings before filing. The approval of the shareholders of First Merchants of
the transactions contemplated by this Agreement is not required.
8.02. PENDLETON SHAREHOLDER APPROVAL.Employee Benefit Plans.
(a) Coverage Under First Merchants, as the sole
shareholder of Pendleton, shall approve the Merger and the terms of this
Agreement as required by law.
8.03. EMPLOYEE BENEFIT PLANS.Merchants' Plans. No later than January 1,
2000,2001, First Merchants will permit Andersoncover 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 Anderson'sthe Bank's current tax-qualified retirement plan(s).plan.
Until that time, Anderson'sthe Bank's current tax-qualified retirement plan(s)plan will be
maintained at the same level, with respect to benefit accruals, provided
for on the Effective Date. Following the Effective Date, Andersonthe Bank employees
will otherwise participate inreceive employee benefit plansbenefits that in the aggregate are
substantially comparable to the employee benefit plansbenefits provided to those
employees by Anderson
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Decatur Financial or the Bank on the Effective Date. Each Anderson employee who is still employed by
Anderson on the Effective Date and is a participant in the Anderson 401(k)
plan shall be fully vested with respect to all contributions made by or on
behalf of such employee under the Anderson 401(k) plan. For
purposes of determining an Andersona Decatur Financial or Bank employee's eligibility
and vesting service under a First Merchant's employee
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benefit plan that the employee is permitted to enter, service with AndersonDecatur
Financial or the Bank will be treated as service with First Merchants;
provided, however, that service with AndersonDecatur Financial or the Bank shall
not be treated as service with First Merchants for purposes of benefit
accrual underaccrual.
(b) Coverage Under First Merchants' defined benefit pension plan. In addition, service with Anderson will be
counted for seniority purposes for determining applicable vacation time, sick
days, and years of service awards with First Merchants.
8.04. FIRST MERCHANTS' BOARD OF DIRECTORS. In connection with the first
annual meetingHealth Plan. Those employees of
the shareholders ofBank who become covered by the health plan sponsored by First Merchants
followingunder the provisions of subsection (a) and who have a condition which
constitutes a pre-existing condition subject to exclusion or limitation
under the health plan sponsored by First Merchants shall receive credit for
their period of coverage under a Bank health plan towards the satisfaction
under the First Merchants health plan of any limitation period imposed with
respect to such pre-existing condition exclusion or limitation.
(c) COBRA. First Merchants shall be responsible for providing COBRA
continuation coverage to any qualified employee or former employee of
Decatur Financial or the Bank and to their respective qualified
beneficiaries, on and after the Effective Date, First Merchants shall cause all necessary action to be taken to causeregardless of when the
current Chairman of the Board of Anderson, James F. Ault, to be nominated for
election as a member of the First Merchants' Board of Directors for a three
(3)-year term.
8.05. PRESS RELEASE.qualifying event occurred.
8.03. Press Release. Except as required by law, neither First Merchants nor Pendleton shall not
issue any press release to any national wire service relating solely to the
Merger without the prior approval of Anderson.
8.06. CONFIDENTIALITY.Decatur Financial.
8.04. Confidentiality. First Merchants and Pendleton shall, and shall use theirits best
efforts to cause their respectiveits officers, employees, and authorized representatives to,
hold in strict confidence all confidential data and information obtained by themit
from Anderson,Decatur Financial or the Bank, unless such information (i) was already
known to First Merchants, or Pendleton, (ii) becomes available to First Merchants or Pendleton from other
sources, (iii) is independently developed by First Merchants, or Pendleton, (iv) is disclosed
outside of First Merchants or
Pendleton with and in accordance with the terms of prior
written approval of Anderson,Decatur 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
and Pendleton further agreeagrees that in the event this Agreement is terminated, theyit will return to
AndersonDecatur Financial all information obtained by First Merchants and Pendleton regarding Anderson,Decatur
Financial or the Bank, including all copies made of such information by First
Merchants and Pendleton.Merchants. This provision shall survive the Effective Date or the earlier
termination of this Agreement.
8.07. ANDERSON EMPLOYEES. On8.05. Covenants Regarding the Bank. Upon consummation of the Merger, the
Bank shall be a state bank organized under the laws of the State of Indiana and
the officers and directors of the Bank in office immediately prior to the
consummation of the Merger shall be the officers and directors of the Bank at
the Effective Date subject to the provisions of the Bank's Articles of
Association and By-Laws. Thereafter, the Bank directors who desire to continue
to serve in that capacity shall do so for at least the remainder of the one (1)
year terms to which they have been elected. The Bank directors will be subject
to First Merchants'
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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 eighteen (18) months after the Effective Date. First Merchants
intends to continue to operate the Bank as an operating subsidiary of First
Merchants under the name "Decatur Bank & Trust Company" with no changes in the
number or locations of branches.
8.06. First Merchants Board of Directors. First Merchants shall cause all
necessary action to be taken to cause an individual selected by the Board of
Directors of Decatur Financial on or before the Effective Date it isto either (i) be
nominated for election as a member of the First Merchants' present intention to offer to employ all employeesBoard of Anderson, who
are currently actively employed by Anderson,Directors
for a position eitherthree (3) year term at the Anderson
Community Banking Centersfirst annual meeting of the Continuing Bank or some other position within
theshareholders of
First Merchants organization commencing onfollowing the Effective Date; provided such
Anderson employees satisfy all employment application and qualification
requirements applicableor (ii) to all prospective First Merchants employees. In the
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event any offer of employment by First Merchants is accepted by any Anderson
employees, First Merchants shall not be obligated to continue any employment
relationship with any former Anderson employee for any specific period of time
and such former Anderson employees shall be employees at will with First
Merchants. This Section 8.07 expresses the current intentions of First Merchants
with respect to the employees of Anderson, but shall not be construedappointed as a
binding obligationmember of the First Merchants or a guaranteeMerchants' Board of employmentDirectors at the next meeting of all
Anderson employees.
8.08. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) After the
Effective Date, First Merchants and Pendleton shall
indemnify, defend and hold harmless the present and former officers and
directorsMerchants' Board of Anderson against all losses, expenses, claims, damages and
liabilities arising out of actions or omissions (arising from their present or
former status as officers or directors) occurring on or prior toDirectors following the Effective Date to serve until
the full extent permitted underfirst annual meeting of the applicable provisionsshareholders of Indiana law
and under the articles of incorporation and bylaws of Anderson, as in effect on
the date hereof.
(b) If, afterFirst Merchants following the
Effective Date and then to be nominated for election as a member of the First
Merchants or Pendleton or anyMerchants' Board of its or their successors or assigns (i) shall consolidate with or merge into
any other corporation or entity and shall not beDirectors for a three (3) year term at the continuing or surviving
corporation or entityfirst annual
meeting of such consolidation or merger or (ii) shall transfer all
or substantially all of its properties and assets to any individual, corporation
or other entity, then and in each such case, proper provision shall be made so
that the successors and assignsshareholders of First Merchants and/or Pendleton shall assume
the obligations set forth in this Section 8.08.
8.09 ACCESS. On and after the date of this Agreement and untilfollowing the Effective Date,
or until this Agreement is terminated as provided herein, First
Merchants and Pendleton shall continue to give Anderson and its employees,
accountants, attorneys and other authorized representatives reasonable access
during regular business hours and other reasonable times to all its premises,
properties, statements, books and records.whichever can be effected first depending on the timing of the occurrence of the
Effective Date.
SECTION 9
CONDITIONS PRECEDENT TO THE MERGERConditions Precedent To The Merger
The obligation of each of the parties hereto to consummate the transactions
contemplated by this Agreement is subject to the satisfaction and fulfillment of
each of the following conditions on or prior to the Effective Date:
9.01. SHAREHOLDER APPROVAL.Shareholder Approval. The shareholders of Anderson shall have
approved, ratified and confirmed this Agreement as required by applicable law.
First Merchants, as the
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sole shareholder of Pendleton,Decatur Financial shall
have approved, ratified and confirmed this Agreement as required by applicable
law.
9.02. REGISTRATION STATEMENT EFFECTIVE.Registration Statement Effective. First Merchants shall have
registered its shares of common stock to be issued to shareholders of AndersonDecatur
Financial in accordance with this Agreement with the Securities and Exchange
Commission pursuant to the 1933 Act, and all state securities and "blue sky"
approvals and authorizations required to offer and sell such shares shall have
been received by First Merchants. The registration statement with respect
thereto shall have been declared effective by the Securities and Exchange
Commission and no stop order shall have been issued or threatened.
9.03. TAX OPINION.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.
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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.Affiliate Agreements. First Merchants and the Bank shall have
obtained (a) from Anderson,Decatur Financial, a list identifying each affiliate of
AndersonDecatur Financial and (b) from each affiliate of Anderson,Decatur Financial, the
agreements contemplated by Section 7.06 hereof.
9.05. REGULATORY APPROVALS.Regulatory Approvals. The FDICBoard 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.Officer's Certificate. First Merchants Pendleton and AndersonDecatur 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 entitiescorporations are true,
accurate and correct on and as of the Effective Date; (b) all the covenants of
their respective entitiescorporations have been complied with from the date of this
Agreement through and as of the Effective Date; and (c) their respective
entitiescorporations have satisfied and fully complied with all conditions necessary to
make this Agreement effective as to them.
9.07. FAIRNESS OPINION. AndersonFairness Opinion. Decatur Financial shall have obtained an opinion
from an investment banker of its choosing to the effect that the terms of the
Merger are fair to the shareholders of AndersonDecatur Financial from a financial
viewpoint. Such opinion shall be (a) in form and substance A-30
reasonably
satisfactory to Anderson,Decatur 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 and Pendleton shall have
obtained from their independent accountants, Olive, LLP, a letter stating that,
based upon their review of such documents and information which they deemed
relevant, such firm is currently unaware of any reason whyNo Judicial Prohibition. Neither Decatur Financial, the Merger cannot be
accounted for as a "pooling of interests."
9.09. NO JUDICIAL PROHIBITION. Neither Anderson, PendletonBank nor
First Merchants shall be subject to any order, decree or injunction of a court
or agency of competent jurisdiction which enjoins or prohibits the consummation
of the Merger.
9.10. OTHER CONSENTS AND APPROVALS.9.09. Other Consents and Approvals. All consents and other approvals
required for the transfer of any contracts, agreements, leases, loans, etc. as a
result of the Merger shall have been obtained.
A-32
SECTION 10
TERMINATION OF MERGERTermination of Merger
10.01. MANNER OF TERMINATION.Manner of Termination. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Effective Date by
written notice delivered by First Merchants or Pendleton to AndersonDecatur Financial or by AndersonDecatur
Financial to First Merchants and Pendleton:only for the following reasons:
(a) By Anderson,Decatur Financial or First Merchants, or Pendleton, if there has been a
material misrepresentation, a breach of warranty or a failure to comply
with any covenant on the part of any party in the representations,
warranties, and covenants set forth herein; provided that Andersonthe party in
default shall have no right to terminate for its own default,
thatdefault;
(b) By Decatur Financial or First Merchants, shall have no right to terminate for its own
default or a default by Pendleton, and that Pendleton shall have no
right to terminate for its own default or a default by First Merchants;
(b) By Anderson, First Merchants or Pendleton, if it shall determine in
its sole discretion that the transactions contemplated by this Agreement
have become inadvisable or impracticable by reason of commencement or
threat of material litigation or proceedings against any of the parties;
(c) By Anderson,Decatur Financial or First Merchants, if the financial
condition, business, assets, or results of operations of First Merchantsthe other party
shall have been materially and adversely changed from that in existence at
JuneSeptember 30, 1998, or by1999 (as to First Merchants or Pendleton, if the financial condition, business,
assets, or results of operations of Anderson shall have been materiallyMerchants) and adversely changed from that in existence at JuneNovember 30, 1998;
A-31
1999 (as to
Decatur Financial);
(d) By Anderson,Decatur Financial or First Merchants, or Pendleton, if the transaction
contemplated herein has not been consummated by April 30,
1999October 2, 2000 (provided
that if Anderson is the terminating party that it is not
then in material breach of any representation, warranty, covenant or
other agreement contained herein, if First Merchants is the terminating
party that neither it nor Pendleton is then in material breach of any
representation, warranty, covenant or other agreement contained herein,
or if Pendleton is the terminating party that neither it nor First
Merchants is then in material breach of any
representation, warranty, covenant or other agreement contained herein);
(e) By First Merchants or Pendleton if any of the items, events or information set
forth in any update to the Disclosure Letter has had or may have a material
adverse effect on the financial condition, results of operations, business,
or prospects of Anderson;Decatur Financial or the Bank;
(f) By First Merchants Pendleton or AndersonDecatur Financial if, in the opinion of
counsel to First Merchants and Pendleton or to Anderson,Decatur Financial, the Merger will not
constitute a tax-free reorganization under the Code;
(g) By First Merchants if the Merger cannot be accounted for
as a "pooling of interests";or Decatur Financial pursuant to their
respective termination rights set forth in Section 3.04 hereof;
(h) By Anderson, (i) if First Merchants or any of its
subsidiary banks (including Pendleton) is acquired by a third party in
a merger, consolidation, share exchange, stock transaction or asset
transaction, (ii) if First Merchants enters into an agreement
containing the terms and conditions of such a transaction, or (iii) if
the terms and conditions of such a transaction involving First
Merchants or any of its subsidiary banks (including Pendleton) are
publicly disclosed;
(i) By First Merchants pursuant to its termination rights set forth in
Section 7.11 hereof;
(j)A-33
(i) By Anderson,Decatur Financial if the appropriate discharge of the fiduciary
duties of the Board of Directors of AndersonDecatur Financial consistent with
Section 7.05 requires that AndersonDecatur Financial terminate this Agreement;
(k)(j) By First Merchants or Pendleton if it receives written notice under Section
7.05 that AndersonDecatur Financial intends to furnish information to or enter into
discussions or negotiations with a third party in connection with a
proposed Acquisition Transaction, if AndersonDecatur Financial fails to give any
such written notice as required in Section 7.05 or if A-32
Anderson'sDecatur Financial's
Board of Directors fails to make, withdraws or modifies its recommendation
to AndersonDecatur Financial's shareholders to vote in favor of the Merger
following receipt of a proposal for an Acquisition Transaction; or
(l)(k) By either party (provided that the terminating party is not then
in material breach of any representation or warranty contained in this
Agreement or in material breach of any covenant or other agreement
contained in this Agreement) in the event that any of the conditions
precedent to the obligations of such party to consummate the Merger cannot
be satisfied or fulfilled by the date specified in Section 10.1(d) of this
Agreement.
10.02. EFFECT OF TERMINATION.Effect of Termination. Except as provided below, in the event that
this Agreement is terminated pursuant to the provisions of Section 10.01 hereof,
no party shall have any liability to any other party for costs, expenses,
damages or otherwise; provided, however, that notwithstanding the foregoing, in
the event that this Agreement is terminated pursuant to Section 10.01(a) hereof
on account of a willful breach of any of the representations and warranties set
forth herein or any breach of any of the agreements set forth herein, then the
non-breaching party shall be entitled to recover appropriate damages from the
breaching party, including, without limitation, reimbursement to the
non-breaching party of its costs, fees and expenses (including attorneys',
accountants' and advisors' fees and expenses) incident to the negotiation,
preparation and execution of this Agreement and related documentation; provided,
however, that nothing in this proviso shall be deemed to constitute liquidated
damages for the willful breach by a party of the terms of this Agreement or
otherwise limit the rights of the non-breaching party. Notwithstanding the
foregoing, in the event of termination by First Merchants or Pendleton in accordance with
Section 10.01(k) or by Anderson in accordance with
Section 10.01(j) or by Decatur Financial in accordance with Section 10.01(i),
AndersonDecatur Financial shall pay First Merchants the sum of Seven Hundred Fifty
Thousand Dollars ($750,000)$1,000,000 as liquidated
damages. Such liquidated damages shall be in lieu of cost,costs, expenses and damages
otherwise recoverable under the first sentence of this Section 10.02. Such
payment shall be made within ten (10) days of the date of notice of termination.
AndersonDecatur Financial acknowledges the reasonableness of such amount in light of the
considerable time and expense invested and to be invested by First Merchants and
its representatives in furtherance of the Merger. Such amount was agreed upon by
First Merchants and AndersonDecatur Financial as compensation to First Merchants for its
time and expense and not as a penalty to Anderson,Decatur Financial, it being impossible
to ascertain the exact value of the time and expense to be invested. First
Merchants shall also be entitled to recover from AndersonDecatur Financial its
reasonable attorneyattorneys' fees incurred in the enforcement of this Section.
A-33A-34
SECTION 11
EFFECTIVE DATE OF MERGEREffective 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 AndersonDecatur
Financial with and into PendletonFirst Merchants as filed with the Secretary of State of
the State of Indiana (the "Effective Date"). The Effective Date shall occur no
later than the last business day of the month in which any waiting period
following the last approval of the Merger by a state or federal regulatory
agency or governmental authority expires.
SECTION 12
CLOSINGClosing
12.01. CLOSING DATE AND PLACE.Closing Date and Place. The closing of the Merger (the "Closing")
shall take place at the main office of First Merchants on the Effective Date or
at such other place as mutually agreed to by First Merchants Pendleton and Anderson.Decatur
Financial.
12.02. ARTICLES OF MERGER.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.Opinions of Counsel. At the Closing, AndersonDecatur Financial shall deliver
an opinion of its counsel, Leagre, ChandlerKrieg DeVault Alexander & Millard,Capehart, to First
Merchants, and First Merchants and Pendleton shall deliver an opinion of theirits counsel, Bingham
Summers Welsh & Spilman, LLP, to Anderson,Decatur Financial, dated as of the date of the
Closing. The form of such opinions shall be as mutually agreed to by the parties
hereto and their respective counsel.
SECTION 13
MISCELLANEOUSMiscellaneous
13.01. EFFECTIVE AGREEMENT.Effective Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns, but none of the provisions thereof shall inure to the benefit
of any other person, firm, or corporation whomsoever, except as expressly
applied to the current and former officers and directors of First Merchants Pendleton and Anderson and their beneficiaries.Decatur 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.
A-34A-35
13.02. WAIVER; AMENDMENT.Waiver; Amendment.
(a) First Merchants Pendleton and AndersonDecatur 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 anythe other
party under this Agreement; (ii) waive any inaccuracies in the
representations or warranties of anythe other party contained in this
Agreement or in any document delivered pursuant hereto or thereto; (iii)
waive the performance by anythe other party of any of the covenants or
agreements to be performed by it or them under this Agreement; or (iv)
waive the satisfaction or fulfillment of any condition the nonsatisfaction
or nonfulfillment of which is a condition to the right of the party so
waiving to terminate this Agreement. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed
as a waiver of any other or subsequent breach hereunder.
(b) Notwithstanding the prior approval by the shareholders of Anderson,Decatur
Financial, this Agreement may be amended, modified or supplemented by the
written agreement of Anderson, PendletonDecatur Financial and First Merchants without further
approval of such shareholders, except that no such amendment, modification
or supplement shall result in a decrease in the consideration specified in
Section 3 hereof, except in accordance with the terms of Section 3 hereof,
or shall materially adversely affect the rights of the shareholders of
AndersonDecatur Financial without the further approval of such shareholders.
13.03. NOTICES.Notices. Any notice required or permitted by this Agreement shall be
deemed to have been duly given if delivered in person, receipted for or sent by
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to First Merchants and Pendleton:Merchants: With a copy to:
200 E. Jackson Street, Box 792 Bingham Summers Welsh & Spilman, LLP
Muncie, IN 47305 2700 Market Tower
Attn: Stefan S. Anderson,Larry L. Helms, 10 West Market Street
Chairman and Chief ExecutiveGeneral Counsel Indianapolis, Indiana 46204-2982
Officer
Attn: David R. Prechtel, Esq.
If to Anderson:Decatur Financial: With a copy to:
19 West 10th520 North 13th Street Leagre, ChandlerKrieg DeVault Alexander & Millard
Anderson,Capehart, LLP
P. O. Box 988 One Indiana Square, Suite 2800
Decatur, IN 46016 9100 Keystone Crossing, Suite 800
Attn: James F. Ault, Chairman46733 Indianapolis, Indiana 4624046204
Attn: Michael L. BakerDennis A. Bieberich, Attn: John R. Zerkle,W. Tanselle, Esq.
A-35President
A-36
or to such substituted address as any of them have given to the other in
writing. Notwithstanding the foregoing, all notices required to be given
pursuant to Sections 3.04(b) and 3.04(c) hereof shall be given in the time
periods specified in such sections by either hand delivery or facsimile
transmission to the specified parties.
13.04. HEADINGS.Headings. The headings in this Agreement have been inserted solely
for the ease of reference and should not be considered in the interpretation or
construction of this Agreement.
13.05. SEVERABILITY.Severability. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision or provisions
had never been contained herein.
13.06. COUNTERPARTS.Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument. In addition, this Agreement and
the documents to be delivered hereunder may be executed by the parties hereto
either manually or by facsimile signatures, each of which shall constitute an
original signature.
13.07. GOVERNING LAW.Governing Law. This Agreement is executed in and shall be construed
in accordance with the laws of the State of Indiana.Indiana, without regard to choice of
law principles.
13.08. ENTIRE AGREEMENT.Entire Agreement. This Agreement supersedes any other agreement,
whether oral or written, between First Merchants Pendleton and AndersonDecatur Financial relating
to the matters contemplated hereby, and constitutes the entire agreement between
the parties hereto.
13.09. EXPENSES.Expenses. First Merchants Pendleton and AndersonDecatur Financial shall each pay their
own expenses incidental to the transactions contemplated hereby. It is
understood that the cost of the fairness opinion referenced in Section 9.07
shall be borne by AndersonDecatur Financial whether or not the Merger is consummated.
This provision shall survive the Effective Date or the earlier termination of
this Agreement.
13.10 SURVIVAL OF COVENANTS.13.10. Survival of Contents. The provisions of Sections 7.09, 8.06,8.04, 10.02, 10.03,
13.09 and this Section 13.10 shall survive beyond the termination of this
Agreement. The provisions of Sections 8.03,7.09, 8.02, 8.04, 8.08,8.05, 8.06, 13.09 and
this Section 13.10 shall survive beyond the Effective Date.
A-36A-37
IN WITNESS WHEREOF, First Merchants Pendleton and AndersonDecatur Financial have made and
entered into this Agreement as of the day and year first above written and have
caused this Agreement to be executed and attested by their duly authorized
officers.
FIRST MERCHANTS CORPORATION
ATTEST:
/s/ Larry R. Helms By:/s/ Stefan S. Anderson /s/ Michael L. Cox
- ------------------------------- ------------------------------------------------------------------- -----------------------------------
Larry R. Helms, Secretary Stefan S. Anderson, Chairman and Chief
Executive Officer
PENDLETON BANKING COMPANY
ATTEST:
/s/ Sherry Hazelbaker By:/s/ Norman Locke
- ------------------------------- -----------------------------------------
Sherry Hazelbaker, Secretary Norman Locke, President
ANDERSON COMMUNITY BANK
ATTEST:
/s/ Michael E. Stephens By:/s/ Michael L. Baker
- ------------------------------- -----------------------------------------
Michael E. Stephens, Secretary Michael L. Baker,Cox, President and Chief
Executive Officer
A-37DECATUR FINANCIAL, INC.
ATTEST:
/s/ L. Dale Gagle By: /s/ Dennis A. Bieberich
- -------------------------- -----------------------------------
L. Dale Gagle, Secretary Dennis A. Bieberich, President
A-38
APPENDIX B
INDIANA CODE 28-1-7-21CHAPTER 44
DISSENTERS' RIGHTS
OF DISSENTING SHAREHOLDERS23-1-44-1. "CORPORATION" DEFINED. - As used in this chapter, "corporation"
means the issuer of the shares held by a dissenter before the corporate action,
or the surviving or acquiring corporation by merger or share exchange of that
issuer. [P.L. 149-1986, Section 28.]
23-1-44-2. "DISSENTER" DEFINED. - As used in this chapter, "dissenter"
means a shareholder who is entitled to dissent from corporate action under
section 8 [IC 23-1-44-8] of this chapter and who exercises that right when and
in the manner required by sections 10 through 18 [IC 23-1-44-10 through IC
23-1-44-18] of this chapter. [P.L.149-1986, Section 28.]
23-1-44-3. "FAIR VALUE" DEFINED. - As used in this chapter, "fair value,"
with respect to a dissenter's shares, means the value of the shares immediately
before the effectuation of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable. [P.L. 149-1986, Section 28.]
23-1-44-4. "INTEREST" DEFINED. - As used in this chapter, "interest" means
interest from the effective date of the corporate action until the date of
payment, at the average rate currently paid by the corporation on its principal
bank loans or, if none, at a rate that is fair and equitable under all the
circumstances. [P.L. 149-1986, Section 28.]
23-1-44-5. "RECORD SHAREHOLDER" DEFINED. - As used in this chapter, "record
shareholder" means the person in whose name shares are registered in the records
of a corporation or the beneficial owner of shares to the extent that treatment
as a record shareholder is provided under a recognition procedure or a
disclosure procedure established under IC 23-1-30-4. [P.L. 149-1986, Section
28.]
23-1-44-6. "BENEFICIAL SHAREHOLDER" DEFINED. - As used in this chapter,
"beneficial shareholder" means the person who is a beneficial owner of shares
held by a nominee as the record shareholder. [P.L. 149-1986, Section 28.]
23-1-44-7. "SHAREHOLDER" DEFINED. - As used in this chapter, "shareholder"
means the record shareholder or the beneficial shareholder. [P.L. 149-1986,
Section 28.]
23-1-44-8. SHAREHOLDER DISSENT. - (a) A shareholder is entitled to vote on the adoption of an agreement of
merger or consolidation may dissent
from, the merger or consolidation and obtain payment of the fair value of the shareholder's shares in the
manner providedevent of, any of the following corporate actions:
B-1
(1) Consummation of a plan of merger to which the corporation is a
party if:
(A) Shareholder approval is required for the merger by IC
23-1-40-3 or the articles of incorporation; and
(B) The shareholder is entitled to vote on the merger.
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale
or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one (1) year after the date of
sale.
(4) The approval of a control share acquisition under IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) This section does not apply to the holders of shares of any class or
series if, on the date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting of shareholders at which the merger, plan of
share exchange, or sale or exchange of property is to be acted on, the shares of
that class or series were:
(1) Registered on a United States securities exchange registered under
the Exchange Act (as defined in IC 23-1-43-9); or
(2) Traded on the National Association of Securities Dealers, Inc.
Automated Quotations System Over-the-Counter Markets - National Market
Issues or a similar market.
(c) A shareholder:
(1) Who is entitled to dissent and obtain payment for the
shareholder's shares under this section.chapter; or
(2) Who would be so entitled to dissent and obtain payment but for the
provisions of subsection (b);
B-2
may not challenge the corporate action creating (or that, but for the
provisions of subsection (b), would have created) the shareholder's
entitlement. [P.L. 149-1986, Section 28; P.L. 107-1987, Section 19.]
23-1-44-9. BENEFICIAL SHAREHOLDER DISSENT. - (a) A record shareholder may
assert dissenters' rights as to fewer than all the shares registered in the
shareholder's name only if the shareholder dissents with respect to all shares
beneficially owned by any one (1) person and notifies the corporation in writing
of the name and address of each person on whose behalf the shareholder asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which the shareholder dissents and the
shareholder's other shares were registered in the names of different
shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if:
(1) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights and
(2) The beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the
beneficial shareholder has power to direct the vote. [P.L. 149-1986,
Section 28.]
23-1-44-10. NOTICE OF DISSENTERS' RIGHTS PRECEDING SHAREHOLDER VOTE. - (a)
If a proposed merger or consolidationcorporate action creating dissenters' rights under section 8 [IC
23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting,
the meeting notice must state that shareholders are or may be entitled to assert
dissenters' rights under this section.
(c) A shareholder who desireschapter.
(b) If corporate action creating dissenters' rights under section 8 of this
chapter is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in section 12 [IC
23-1-44-121 of this chapter. [P.L. 149-1986, Section 28; P.L. 107-1987, Section
20.]
23-1-44-11. NOTICE OF INTENT TO DISSENT. - (a) If proposed corporate action
creating dissenters' rights under section 8 [IC 23-1-44-8] of this section must:chapter is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(1) DeliverMust deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand for payment for the
shareholder's shares if the proposed action is effected;effectuated; and
(2) NotMust not vote the shareholder's shares in favor of the proposed
action.
(d) If the merger or consolidation is effected, the surviving or new
corporation shall pay to the shareholder, upon surrender of the certificate or
certificates representing the shareholder's shares, the value of the shares as
of the day before the date on which the vote was taken approving the merger or
consolidation.(b) A shareholder failing towho does not satisfy the requirements of subsection (c)(a)
is not entitled to payment for the shareholder's shares under this section.
Immediatelychapter.
[P.L. 149-1986, Section 28.]
B-3
23-1-44-12. NOTICE OF DISSENTERS' RIGHTS FOLLOWING ACTION CREATING RIGHTS.
- - (a) If proposed corporate action creating dissenters' rights under section 8
[IC 23-1-44-8] of this chapter is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of section 11 [IC 23-1-44-11] of this chapter.
(b) The dissenters' notice must be sent no later than ten (10) days after
approval by the voteshareholders, or if corporate action is taken approving the merger or consolidation, the
shareholder, except as otherwise provided in subsection (e), is entitled to
payment only as provided in this section, ceases to be a shareholder, and is not
entitled to vote or to exercise any other rights of a shareholder.
(e) A demand for payment made under subsection (c) may not be withdrawn
unless the corporation consents to the withdrawal. With respect to a shareholder
who has made a demand for payment, the right of the shareholder to be paid the
value of his shares ceases and his status as a shareholder is restored without prejudice to any corporate proceedings which may have been taken during the
interim, and the shares heldapproval
by the shareholder shall be treated for all
purposes as if no objection and demand had been made by the shareholder, if:
(1) The shareholder's request to withdraw the shareholder's
demand is consented to by the corporation;
(2) The merger or consolidation is abandoned;
B-1
(3) The shareholders, revoke the authority to effect the merger
or consolidation;
(4) A petition for the determination of value by a court is not
filed within the time provided in this section; or
(5) A court of competent jurisdiction determines that the
shareholder is not entitled to the relief provided by this
section.
(f) Withinthen ten (10) days after the merger or consolidationcorporate action was taken.
The dissenters' notice must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is effected,
the surviving or new corporation shall mail or deliver written notice ofreceived;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that actionthe person asserting
dissenters' rights certify whether or not the person acquired
beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than
sixty (60) days after the date the subsection (a) notice is delivered;
and
(5) Be accompanied by a copy of this chapter. [P.L. 149-1986, Section
28.]
23-1-44-13. DEMAND FOR PAYMENT BY DISSENTER. - (a) A shareholder sent a
dissenters' notice described in IC 23-1-42-11 or in section 12 [IC 23-1-44-12]
of this chapter must demand payment, certify whether the shareholder acquired
beneficial ownership of the shares before the date required to each dissentingbe set forth in
the dissenters' notice under section 12(b)(3) [IC 23-1-44-12(b)(3)] of this
chapter, and deposit the shareholder's certificates in accordance with the terms
of the notice.
(b) The shareholder who has made demand under
this section. For purposes of giving this notice, the corporation shall usedemands payment and deposits the shareholder's
address which appears onshares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate
records. Inaction.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, the
corporation shall include a written offeris not entitled to the shareholder to paypayment for the shareholder's shares atunder this
chapter and is considered, for purposes of this article, to have voted the
shareholder's shares in favor of the proposed corporate action. [P.L. 149-1986,
Section 28.]
B-4
23-1-44-14. TRANSFER OF SHARES RESTRICTED AFTER DEMAND FOR PAYMENT. - (a)
The corporation may restrict the transfer of uncertificated shares from the date
the demand for their payment is received until the proposed corporate action is
taken or the restrictions released under section 16 [IC 23-1-44-16] of this
chapter.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a specified price consideredshareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
[P.L. 149-1986, Section 28.]
23-1-44-15. PAYMENT TO DISSENTER. - (a) Except as provided in section 17
[IC 23-1-44-17] of this chapter, as soon as the proposed corporate action is
taken, or, if the transaction did not need shareholder approval and has been
completed, upon receipt of a payment demand, the corporation shall pay each
dissenter who complied with section 13 [IC 23-1-44-13] of this chapter the
amount the corporation estimates to be the fair value of them.the dissenter's shares.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment,
an income statement for that year, a statement of changes in
shareholders' equity for that year, and the latest available interim
financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares; and
(3) A statement of the dissenter's right to demand payment under
section 18 [IC 23-1-44-18] of this chapter. [P.L. 149-1986, Section
28; P.L. 107-1987, Section 21.]
23-1-44-16. RETURN OF SHARES AND RELEASE OF RESTRICTIONS. - (a) If the
corporation does not take the proposed action within sixty (60) days after the
date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 12 [IC 23-1-44-12] of this chapter and repeat
the payment demand procedure. [P.L. 149-1986, Section 28.]
23-1-44-17. OFFER OF FAIR VALUE FOR SHARES OBTAINED AFTER FIRST
ANNOUNCEMENT. - (a) A corporation may elect to withhold payment required by
section 15 [IC 23-1-44-15] of this chapter from a dissenter unless the dissenter
was the beneficial owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
B-5
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 [IC 23-1-44-18] of this chapter. [P.L. 149-1986, Section 28.]
23-1-44-18. DISSENTER DEMAND FOR FAIR VALUE UNDER CERTAIN CONDITIONS. - (a)
A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and demand payment of the
dissenter's estimate (less any payment under section 15 [IC 23-1-44-15] of this
chapter), or reject the corporation's offer under section 17 [IC 23-1-44-17] of
this chapter and demand payment of the fair value of the dissenter's shares, if:
(1) The dissenter believes that the amount paid under section 15 of
this chapter or offered under section 17 of this chapter is less than
the fair value of the dissenter's shares;
(2) The corporation fails to make payment under section 15 of this
chapter within sixty (60) days after the date set for demanding
payment; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty (60) days
after the date set for demanding payment.
(b) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (a) within thirty (30) days after the date on whichcorporation made
or offered payment for the mergerdissenter's shares. [P.L. 149-1986, Section 28.]
23-1-44-19. EFFECT OF FAILURE TO PAY DEMAND - COMMENCEMENT OF JUDICIAL
APPRAISAL PROCEEDING. - (a) If a demand for payment under IC 23-1-42-11 or consolidation was effectedunder
section 18 [IC 23-1-44-18] of this chapter remains unsettled, the corporation
shall commence a proceeding within sixty (60) days after receiving the payment
demand and petition the court to determine the fair value of shares is agreed upon between a
dissenting shareholder and the surviving or newshares. If the
corporation does not commence the surviving or
newproceeding within the sixty (60) day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall make payment tocommence the shareholder for the shares. The
surviving or new corporation shall make the payment within ninety (90) days
after the date on which the merger or consolidation was effected, upon surrender
of the certificate or certificates representing the shares. Upon payment of the
agreed value, the dissenting shareholder ceases to have any interestproceeding in the
shares.
(g) If within the period of thirty (30) days a dissenting shareholder
and the surviving or new corporation do not so agree, then either the
corporation or the dissenting shareholder may file a petition in any circuit or
superior court of the county where a corporation's principal office (or, if none
in Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the principalregistered office of the domestic
corporation is located requesting thatmerged with or whose shares were acquired by the court determineforeign corporation
was located.
B-6
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the valueproceeding as in an
action against their shares and all parties must be served with a copy of the
shares. However, the petition must be filed within ninety (90) days after the
effective date of the merger or consolidation. Two (2) or more dissenting
shareholders may join as plaintiffs or be joined as defendants in the action,
and two (2) or more actionspetition. Nonresidents may be transferred and consolidated to avoid
inconsistent results and promote judicial economy.served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. (h)The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment.
(1) For the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold
payment under section 17 [IC 23-1-44-17] of this chapter. [P.L.
149-1986, Section 28.]
23-1-44-20. JUDICIAL DETERMINATION AND ASSESSMENT OF COSTS. - (a) The court
in an appraisal proceeding commenced under section 19 [IC 23-1-44-19] of this
chapter shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
render judgmentassess the costs against such parties and in such amounts as the court finds
equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 10 through 18 [IC 23-1-44-10 through IC
23-1-44-18] of this chapter; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in
good faith with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the fees
for those services should not be assessed against the surviving or new
corporation, for payment of an amount equalthe court may
award to the value of each dissenting share
multiplied by the number of dissenting shares that any dissenting shareholder
who is a party is entitledthese counsel reasonable fees to require the surviving or new corporation to
purchase. The judgment is payable only upon the endorsement and delivery to the
surviving or new corporationbe paid out of the certificates foramounts awarded the
shares described in the
judgment. Any party may appeal from the judgment.
(i) Within twenty (20) days after the merger or consolidation is
effected, the shareholder shall submit the certificate or certificates
representing the shareholder's shares to the corporation for notation on the
certificate or certificates that demand for payment has been made.
B-2
The shareholder's failure to do so, at the option of the corporation,
terminates the shareholder's rights under this section unless a court of
competent jurisdiction, for good and sufficient cause shown, otherwise
directs. If shares represented by a certificate on which notation has been so
made are transferred, each new certificated issued for those shares shall
bear a similar notation together with the name of the original dissenting
holder of the shares, and a transferee of the shares acquires by the transfer
no rights in the corporation other than those which the original dissenting
shareholder had after making demand for payment of the value of the shares.
[Acts 1933, ch. 40, ss. 134, p. 176; 1965, ch. 356, ss. 9; P.L. 238-1983,
ss. 9; P.L. 33-1991, ss. 13; P.L. 14-1992, ss. 72; P.L. 262-1995, ss.10.dissenters who were benefited. [P.L. 149-1986, Section 28.]
B-3B-7
APPENDIX C
PROFESSIONAL BANK SERVICES, INC.
FAIRNESS OPINION AND UPDATE
OctoberRenninger & Associates, LLC
Fairness Opinion and Update
January 20, 19982000
Board of Directors
Anderson Community Bank
19 West 10thDecatur Financial, Inc.
520 N. 13th Street
Anderson,Decatur, Indiana 4601646733
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of Anderson Community Bank,
Anderson,Decatur Financial, Inc.,
Decatur, Indiana (the "Company") of the proposed merger of the Company with
Pendleton Banking Company, Pendleton, Indiana ("Pendleton"), a wholly-owned
subsidiary of First Merchants Corporation, Muncie, Indiana ("FRME"First Merchants"). In the
proposed merger, Company shareholders will receive 0.92 FRME common shares or an
aggregate of 563,439 FRME common shares for all Company common shares
outstanding, asAs further
defined in the Agreement of Reorganization and Merger between FRME, PendletonFirst Merchants
and the Company (the "Agreement"). On October 15, 1998,, Company shareholders are entitled to receive
in exchange for each share held of Decatur Financial's common stock, and at
their election, either (I) 9.13 shares of First Merchants' common stock; or (II)
$237.39 in cash; or (III) a combination of both, within certain limitations. The
cash portion of the transaction is limited to $14 million, in order to preserve
the opportunity for a tax-free exchange for shareholders electing to receive
shares.
If all shareholders elect to receive shares, an aggregate of 1,346,118 First
Merchants common shares will be issued in exchange for all 147,439 Company
common shares currently outstanding and available under options. Based on recent
trading activity as reported on the National Association of Securities Dealers
Automated Quotation System, First Merchants' shares have traded at approximately
$24.00. At that price, the proposed consideration to be received represents an
aggregate value of $19,156,936$32,306,834 or $31.28$219.12 per Company common share based onshare.
The fixed cash price of $237.39 implies a $26.00 value of First Merchant's
shares. If the closing pricemaximum number of Decatur shares are exchanged for FRMEcash, an
aggregate of 807,667 First Merchants common stockshares will be issued and the
aggregate value of $34.00 per share as quoted on the National Association of
Securities Dealers Automated Quotation System.
Professional Bank Services, Inc.transaction will be $33,384,320.
Renninger & Associates, LLC ("PBS"Renninger") is a recognized specialist in the area
of bank consulting firm and as part of
its investment banking business is continually engaged in reviewing the
fairness, fromthrift mergers and acquisition, branch acquisition and divestiture,
stock valuation, capital management, and other financial advisory services.
Renninger does not have a financial perspective,interest in First Merchants.
C-1
Board of bank acquisition transactionsDirectors
Decatur Financial, Inc.
January 20, 2000
Page 2
Renninger performed certain analyses described herein and inpresented the valuationrange of
banks and other businesses and their securitiesvalues for Decatur Financial resulting from such analyses to the Board of
Directors of Decatur Financial in connection with mergers, acquisitions, estate settlements and other purposes. We are
independent with respectits advice as to the partiesfairness
of the proposed transaction.consideration to be paid by First Merchants.
For purposes of this opinion, PBSRENNINGER performed a review and analysis of the
historic performance of the Company and its wholly owned subsidiary, Decatur
Bank & Trust Company (the "Bank"), contained in: (i) audited Annual Reports and
financial statements dated December 31, 1996, 1997 and 1998 of Decatur
Financial; (ii) the March 31, 1998 and1999, June 30, 19981999 and September 30, 1999
Consolidated Reports of Condition and Income filed by the CompanyBank with the FDIC; (ii) December 31, 1996 and 1997 audited annual
reports of the Company; andFederal
Deposit Insurance Corporation; (iii) December 31, 1997, March 31, 1998 and June 30, 19981999 Uniform Bank Performance
Reports of the Company.
C-1
BoardBank; and (iv) historical common stock trading activity of
Directors
Anderson Community Bank
October 20, 1998
Page 2Decatur Financial. We have reviewed and tabulated statistical data regarding the
loan portfolio, securities portfolio and other performance ratios and
statistics. Financial projections were prepared and analyzed as well as other
financial studies, analyses and investigations as deemed relevant for the
purposes of this opinion. In review of the aforementioned information, we have
taken into account our assessment of general market and financial conditions,
our experience in other transactions, and our knowledge of the banking industry
generally. We have also taken into consideration other offers received by the
Company.
For the purposes of this opinion, PBSRenninger reviewed and analyzed the historic
performance of FRMEFirst Merchants contained in: (i) December 31, 1995, 1996, 1997 and
19971998 audited annual reports of FRME;Annual Reports; and (ii) Forms 10-Q for the quarters ended March
31, 1999, June 30, 1997,1999, and September 30, 1997, March 31,
1998 and1999; (iii) the Bank Holding Company
Performance Report for June 30, 1998 unaudited financial data1999; (iv) the 1999 Third Party Loan Reports for
each banking affiliate of First Merchants and various other asset quality
related reports; and the Allowance for Loan and Lease Loss analysis reports filed on Form 10-Kfor
First Merchants and 10-Q with the Securities and Exchange Commission.each affiliate bank as of September 30, 1999.
We have not compiled, reviewed or audited the financial statements of the
Company or FRMEFirst Merchants nor have we independently verified any of the
information reviewed; we have relied upon such information as being complete and
accurate in all material respects. We have not made independent evaluation of
the assets of the Company or FRME.First Merchants.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by the shareholders of the Company under the Agreement is fair
and equitable from a financial perspective.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.RENNINGER & ASSOCIATES, LLC
C-2
___________________, 1999_________, 2000
Board of Directors
Anderson Community Bank
19 West 10thDecatur Financial Corporation
520 N. 13th Street
Anderson,Decatur, Indiana 4601646733
Dear Members of the Board:
To our knowledge, nothing of a material nature has occurred since the issuance
of our Fairness Opinion (the "Opinion") to the common shareholders of Anderson
Community Bank, Anderson,Decatur
Financial Inc., Decatur, Indiana (the "Company") dated OctoberJanuary 20, 1998,2000, that
would cause us to alter or rescind the Opinion. The Opinion is related to the
fairness from a financial point of view, to the common shareholders of the
Company, regarding the proposed transaction outlined in the Agreement of
Reorganization and Merger between First Merchants Corporation, Muncie, Indiana
Pendleton Banking Company, Pendleton, Indiana and the Company.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.RENNINGER & ASSOCIATES, LLC
C-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEMItem 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.Indemnification of Directors and Officers.
The Registrant's Articles of Incorporation provide that the Registrant will
indemnify any person who is or was a director, officer, employee or agent of the
Registrant or of any other corporation for which he is or was serving in any
capacity at the request of the Registrant against all liability and expense that
may be incurred in connection with or resulting from or arising out of any
claim, action, suit or proceeding with respect to which such director, officer
or employee is wholly successful or acted in good faith in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant or such other corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful. A
director, officer, employee or agent of the Registrant is entitled to be
indemnified as a matter of right with respect to those claims, actions, suits or
proceedings where he has been wholly successful. In all other cases, such
director, officer, employee or agent will be indemnified only if the Board of
Directors of the Registrant or independent legal counsel finds that he has met
the standards of conduct set forth above.
ITEMItem 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.Exhibits and Financial Statement Schedules.
(a) The following Exhibits are being filed as part of this Registration
Statement except those which are incorporated by reference:
Exhibit No. Description of Exhibit Form S-4 Page
- ----------- ---------------------- -------------
1. None
2. Agreement of Reorganization and Merger.................................................... Merger..............................(A)
3.a. First Merchants Corporation Articles of Incorporation and the
Articles of Amendment thereto............................................................. thereto.......................................(B)
b. First Merchants Corporation Bylaws and amendments thereto................................. (B)thereto...........(C)
4. None
5. Opinion of Bingham Summers Welsh & Spilman, LLP (legality)..................................... 171..........126
6-7. None
8. Opinion of Bingham Summers Welsh & Spilman, LLP
(tax matters)............................................................................. 172
10.a. First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan............................................ (C)
b. First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as Amended............................................................. (C)
II-1
c. First Merchants Corporation 1989 Stock Option Plan........................................ (D)
d. First Merchants Corporation 1994 Stock Option Plan........................................ (E)
e. First Merchants Corporation Change of Control Agreements.................................. (F)
f. First Merchants Corporation Unfunded Deferred Corporation Plan............................ (F)
g. First Merchants Corporation Supplemented Executive Retirement
Plan and amendments thereto............................................................... (G)
h. Agreement of Reorganization and Merger dated August 20, 1998,
between First Merchants Corporation and Jay
Financial Corporation..................................................................... 176
21. Subsidiaries of Registrant................................................................ 212
23.a. Consent of Olive, LLP..................................................................... 213
b. Consent of Crowe, Chizek and Company LLP.................................................. 214
c. Consent of Bingham Summers Welsh & Spilman (legality)..................................... (1)
d. Consent of Bingham Summers Welsh & Spilman
(tax matters)............................................................................. (1)
e. Consent of Professional Bank Services, Inc................................................ 215
24. Power of Attorney included in "Signatures" section........................................ 167
99. Form of Proxy............................................................................. 216.......................................................127
9. None
II-1
10.a. First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan......................(D)
b. First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as Amended.......................................(D)
c. First Merchants Corporation 1989 Stock Option Plan..................(E)
d. First Merchants Corporation 1994 Stock Option Plan..................(F)
e. First Merchants Corporation Change of Control Agreements............(B)
f. First Merchants Corporation Unfunded Deferred Corporation Plan......(G)
g. First Merchants Corporation Supplemented Executive Retirement
Plan and amendments thereto.........................................(H)
h. First Merchants Corporation 1999 Long-term Equity Incentive Plan....(I)
11-20. None
21. Subsidiaries of Registrant..........................................130
22. None
23.a. Consent of Olive, LLP...............................................131
b. Consent of Bingham Summers Welsh & Spilman, LLP (legality)..........(l)
c. Consent of Bingham Summers Welsh & Spilman, LLP
(tax matters).......................................................(l)
d. Consent of Renninger & Associates, LLC..............................132
24. Power of Attorney included in "Signatures" section..................121
25-28. None
99. Form of Proxy.......................................................133
(b) All schedules are omitted because they are not applicable or not
required or because the required information is included in the
consolidated financial statements or related notes.
(c) Fairness opinion furnished as part of prospectus.
(A) Included as Appendix A to the Prospectus.
(B) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 1999.
(C) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 1997.
(C)II-2
(D) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1996.
(D)(E) Incorporated by reference to Registrant's Registration
Statement on Form S-8 (SEC File No. 33-28901) effective
on May 24, 1989.
II-2
(E)(F) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1993.
(F)(G) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1996.
(G)(H) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1997.
(I) Incorporated by reference to Registrant's Registration
Statement on Form S-8 (SEC File No. 333-80117)
effective on June 7, 1999.
(1) Included in opinion.
ITEMItem 22. UNDERTAKINGS.Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through the use
of a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant hereby undertakes that every prospectus (i)
that is filed pursuant to paragraph (b)(1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933, and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for
II-3
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
II-3
Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(e) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(h) The undersigned registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Muncie, State of Indiana,
as of the 31st24th day of December, 1998.March, 2000.
FIRST MERCHANTS CORPORATION
By: /s/ Stefan S. Anderson
--------------------------------------
Stefan S. Anderson,/s/ Michael L. Cox
---------------------------------------
Michael L. Cox, Chief Executive Officer
and President
Each person whose signature appears below constitutes and appoints Stefan S. AndersonMichael
L. Cox and Larry R. Helms and each of them his true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any subsequent registration statement filed by First Merchants Corporation
pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 31st24th day of December, 1998March, 2000 by the
following persons in the capacities indicated.
/s/ Stefan S. AndersonMichael L. Cox
- -------------------------------
Stefan S. Anderson Chairman of the Board,--------------------------
Michael L. Cox Chief Executive Officer, President and
Director (Principal Executive Officer)
/s/ James L. Thrash
- ---------------------------------------------------------
James L. Thrash Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
/s/ Stefan S. Anderson
- --------------------------
Stefan S. Anderson Chairman of the Board and Director
/s/ James F. Ault
- --------------------------
James F. Ault Director
S-1
/s/ Frank A. Bracken
- ---------------------------------------------------------
Frank A. Bracken Director
S-1
/s/ Thomas B. Clark
- ---------------------------------------------------------
Thomas B. Clark Director
/s/ Michael L. Cox
- -------------------------------
Michael L. Cox Director
/s/ David A. Galliher
- ---------------------------------------------------------
David A. Galliher Director
/s/ Barry J. Hudson
- --------------------------
Barry J. Hudson Director
/s/ Norman M. Johnson
- ---------------------------------------------------------
Norman M. Johnson Director
/s/ Ted J. Montgomery
- ---------------------------------------------------------
Ted J. Montgomery Director
/s/ George A. Sissel
- ---------------------------------------------------------
George A. Sissel Director
/s/ Robert M. Smitson
- ---------------------------------------------------------
Robert M. Smitson Director
/s/ Michael D. Wickersham
- ---------------------------------------------------------
Michael D. Wickersham Director
/s/ John E. Worthen
- ---------------------------------------------------------
John E. Worthen Director
S-2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
EXHIBITS
To
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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FIRST MERCHANTS CORPORATION
EXHIBIT INDEX
(a) The following Exhibits are being filed as part of this Registration
Statement except those that are incorporated by reference:
Exhibit No. Description of Exhibit Form S-4 Page
- ----------- ---------------------- -------------
1. None
2. Agreement of Reorganization and Merger................................................ Merger..............................(A)
3.a. First Merchants Corporation Articles of Incorporation and the
Articles of Amendment thereto......................................................... thereto.......................................(B)
b. First Merchants Corporation Bylaws and amendments thereto............................. (B)thereto...........(C)
4. None
5. Opinion of Bingham Summers Welsh & Spilman, LLP (legality)................................. 171..........126
6-7. None
8. Opinion of Bingham Summers Welsh & Spilman, LLP
(tax matters).............................. 172.......................................................127
9. None
10.a. First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan........................................ (C)Plan......................(D)
b. First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as Amended......................................................... (C)Amended.......................................(D)
c. First Merchants Corporation 1989 Stock Option Plan.................................... (D)Plan..................(E)
d. First Merchants Corporation 1994 Stock Option Plan.................................... (E)Plan..................(F)
e. First Merchants Corporation Change of Control Agreements.............................. (F)Agreements............(B)
f. First Merchants Corporation Unfunded Deferred Corporation Plan........................ (F)Plan......(G)
g. First Merchants Corporation Supplemented Executive Retirement
Plan and amendments thereto........................................................... (G)thereto.........................................(H)
h. Agreement of Reorganization and Merger dated August 20, 1998,
between First Merchants Corporation and Jay Financial Corporation..................... 1761999 Long-term Equity Incentive Plan....(I)
11-20. None
21. Subsidiaries of Registrant............................................................ 212
23.a.Registrant..........................................130
22. None
23. a. Consent of Olive, LLP................................................................. 213LLP...............................................131
b. Consent of Crowe, Chizek and Company LLP.............................................. 214Bingham Summers Welsh & Spilman, LLP (legality)..........(l)
c. Consent of Bingham Summers Welsh & Spilman, (legality)................................. (1)
d. Consent of Bingham Summers Welsh & SpilmanLLP
(tax matters).............................. (1)
e. Consent of Professional Bank Services, Inc............................................ 215
24. Power of Attorney included in "Signatures" section.................................... 167.......................................................(l)