As filed with the Securities and Exchange Commission on December 21, 2001
Registration Statement No. 33-__________
UNITED STATES 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 copies to:
Senior Vice President
First Merchants Corporation David R. Prechtel, Esq. Claudia V. Swhier, Esq.
200 East Jackson Street Bingham Summers Welsh Barnes & Thornburg
Muncie, Indiana 47305 & Spilman, LLP 11 South Meridian
(765) 747-1530 2700 Market Tower Indianapolis, Indiana 46204
10 West Market Street (317) 231-7231
Indianapolis, Indiana 46204
(317) 635-8900
(Name, address, including Zip Code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this Registration
Statement and upon the effective time of the merger described in the
accompanying Joint Proxy Statement-Prospectus.[X]
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.[X]
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.[X]
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.[X]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
Title of each class Amount Proposed Proposed Amount of
of securities to be maximum offering maximum aggregate registration
to be registered registered(1) price per unit(2) offering price(2) fee
- -------------------------------------------------------------------------------------------------
Common Stock, Up to
no par value 4,655,455 shares $23.85 $111,038,903.40 $27,760
(1) This represents the maximum number of shares to be offered to Lafayette
Bancorporation 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)(1) under the Securities Act of 1933, as amended, using
the average of the high and low prices of the common stock of
Lafayette Bancorporation as reported on the Over-the-Counter Bulletin
Board of the National Association of Securities Dealers, Inc. on
December 19, 2001 ($26,475)for all 4,194,104 shares of Lafayette
Bancorporation common stock to be exchanged in the merger. The proposed
maximum offering price per unit has been determined by dividing the
proposed maximum offering price by the number of shares being registered.
-------------------------------------------------
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.
FIRST MERCHANTS CORPORATION LAFAYETTE BANCORPORATION
MERGER PROPOSED-YOUR VOTE IS VERY IMPORTANT
PROSPECTUS OF FIRST MERCHANTS CORPORATION FOR UP TO
4,655,455 SHARES OF COMMON STOCK AND
JOINT PROXY STATEMENT OF LAFAYETTE BANCORPORATION
AND FIRST MERCHANTS CORPORATION
The Board of Directors of First Merchants Corporation (First Merchants)
and the Board of Directors of Lafayette Bancorporation (Lafayette) have agreed
to merge Lafayette into First Merchants. This proposed strategic business
combination will create the fourth largest banking institution headquartered in
the State of Indiana. Following the merger, the merged company will have assets
of $2.5 billion, $1.9 billion in loans and over $2.0 billion in deposits, with
total shareholders' equity of $236 million, with approximately 74 banking
branches.
In the merger, each share of Lafayette common stock that you own will be
converted into the right to receive, at your election, either 1.11 shares of
First Merchants common stock, or $30 in cash, subject to possible upward or
downward adjustment of the conversion ratio, as provided in the Merger
Agreement. 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 conversion ratio is subject to adjustment under
certain circumstances. This document describes these adjustments in greater
detail. First Merchants will pay cash for any fractional share interests
resulting from the conversion ratio.
We cannot complete the merger unless the shareholders of both of our
companies approve it. Each of us will hold a meeting of our shareholders to vote
on this merger proposal. Your vote is very important. Whether or not you plan to
attend your shareholder meeting, please take the time to vote by completing and
mailing the enclosed proxy card to us. 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. Not returning your card or not instructing your
broker how to vote any shares held for you in "street name" will have the same
effect as a vote against the merger.
The dates, times and places of the meetings are as follows:
For LAFAYETTE Shareholders: For FIRST MERCHANTS Shareholders
_______, 2002, _:__ _.m., local time _______, 2002, _:__ _.m., local time
133 North 4th Street 200 East Jackson Street
Lafayette, Indiana Muncie, Indiana
This document provides you with detailed information about these meetings
and the proposed merger. You can also get information about our companies from
publicly available documents that our companies have filed with the Securities
and Exchange Commission. First Merchants common stock is quoted and traded
over-the-counter on the NASDAQ National Market System under the symbol "FRME."
Lafayette common stock is traded on the Over-the-Counter Bulletin Board of the
National Association of Securities Dealers, Inc. under the symbol "LAYB."
We strongly support the merger of our companies and join with all of the
other members of our Boards of Directors in enthusiastically recommending that
you vote in favor of the merger.
Robert J. Weeder Michael L. Cox
President and Chief Executive Officer President and Chief Executive Officer
LAFAYETTE BANCORPORATION FIRST MERCHANTS CORPORATION
For a discussion of certain risk factors which you should consider in
evaluating the merger, see "Risk Factors" beginning on page 25. We encourage you
to read this entire document carefully.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued pursuant
to this joint proxy statement-prospectus or determined if this joint proxy
statement-prospectus is truthful or complete. Any representation to the contrary
is a criminal offense. These securities are not savings or deposit accounts or
other obligation of any bank or non-bank subsidiary of either of our companies,
and they are not insured by the Federal Deposit Insurance Corporation, the bank
insurance fund or any other federal or state governmental agency.
Joint Proxy Statement-Prospectus dated _______, 2002.
and first mailed to shareholders on ________, 2002.
LAFAYETTE BANCORPORATION
133 North 4th Street
P.O. Box 1130
Lafayette, Indiana 47902
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
__________, 2002
To Our Shareholders:
We will hold a special meeting of the shareholders of Lafayette
Bancorporation on ___________, _______________, 2002, at _:__ _.m. local time,
at Lafayette Bancorporation's principal office located at 133 North 4th Street,
Lafayette, Indiana.
The purposes of the special meeting are the following:
1. To consider and vote upon a proposal to approve and adopt the Agreement
of Reorganization and Merger dated October 14, 2001, between First Merchants
Corporation and Lafayette Bancorporation, and to approve the transactions
contemplated thereby. Pursuant to the Merger Agreement, Lafayette Bancorporation
will merge into First Merchants Corporation and Lafayette Bank and Trust Company
will become a wholly-owned subsidiary of First Merchants Corporation. The merger
is more fully described in this joint proxy statement-prospectus and the Merger
Agreement is attached as Appendix A to this joint proxy statement-prospectus;
and
2. To transact such other business which may properly be presented at the
special meeting or any adjournment or postponement of the special meeting.
We have fixed the close of business on ________, 2002, as the record date
for determining those shareholders who are entitled to notice of, and to vote
at, the special meeting and any adjournment or postponement of the special
meeting. Adoption of the Merger Agreement requires the affirmative vote of at
least a majority of the outstanding shares of Lafayette common stock.
Our shareholders are entitled to assert dissenters' rights of appraisal in
connection with the proposed merger under Chapter 44 of the Indiana Business
Corporation Law, a copy of which is attached as Appendix B to the accompanying
joint proxy statement-prospectus.
Whether or not you plan to attend the special meeting in person, please
complete, date, sign and return the enclosed proxy card in the enclosed
envelope, which requires no postage if mailed in the United States. If you
attend the special meeting, you may vote in person if you wish, even if you have
previously returned your proxy card.
By Order of the Board of Directors
Joseph A. Bonner, Chairman of the Board
___________, 2002
Lafayette, Indiana
FIRST MERCHANTS CORPORATION
200 East Jackson Street
P.O. Box 792
Muncie, Indiana 47305
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
__________, 2002
To Our Shareholders:
We will hold a special meeting of the shareholders of First Merchants
Corporation on _________, ____________, 2002, at _:___ _.m. local time, at First
Merchants Corporation's principal office located at 200 East Jackson Street,
Muncie, Indiana.
The purposes of the special meeting are the following:
1. To consider and vote upon a proposal to approve and adopt the Agreement
of Reorganization and Merger dated October 14, 2001, between First Merchants
Corporation and Lafayette Bancorporation, and to approve the transactions
contemplated thereby. Pursuant to the Merger Agreement, Lafayette Bancorporation
will merge into First Merchants Corporation and Lafayette Bank and Trust Company
will become a wholly-owned subsidiary of First Merchants Corporation. The merger
is more fully described in this joint proxy statement-prospectus and the Merger
Agreement is attached as Appendix A to this joint proxy statement-prospectus;
and
2. To transact such other business which may properly be presented at the
special meeting or any adjournment or postponement of the special meeting.
We have fixed the close of business on ________, 2002, as the record date
for determining those shareholders who are entitled to notice of, and to vote
at, the special meeting and any adjournment or postponement of the special
meeting. Adoption of the Merger Agreement requires the affirmative vote of at
least a majority of the outstanding shares of First Merchants common stock.
Our shareholders are not entitled to assert dissenters' rights of appraisal
in connection with the proposed merger under Chapter 44 of the Indiana Business
Corporation Law, a copy of which is attached as Appendix B to the accompanying
joint proxy statement-prospectus, since First Merchants common stock is quoted
and traded over-the-counter on the NASDAQ National Market System.
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
Stefan S. Anderson, Chairman of the Board
___________, 2002
Muncie, Indiana
ADDITIONAL INFORMATION
This document incorporates important business and financial information
about First Merchants and Lafayette from other documents filed with the
Securities and Exchange Commission that are not delivered with or included in
this document. This information (including documents incorporated by reference)
is available to you without charge upon your written or oral request. You may
request these documents in writing or by telephone from the appropriate company
at the following addresses and telephone numbers:
First Merchants Corporation Lafayette Bancorporation
200 East Jackson Street 133 North 4th Street
Muncie, Indiana 47305 Lafayette, Indiana 47902
Attention: Larry R. Helms, Attention: Robert J. Weeder,
Senior Vice President and President and Chief
General Counsel Executive Officer
Telephone: (765) 747-1530 Telephone: (765) 423-7100
If you would like to request documents, please do so by ______________,
2002, in order to receive them before the meetings.
See "Where You Can Find More Information" on page 105.
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE
SHAREHOLDER MEETINGS...........................................................1
SUMMARY........................................................................5
The Companies.........................................................5
The Lafayette Shareholders Meeting....................................6
Lafayette Record Date; Votes Required.................................6
Lafayette Recommendation to Shareholders..............................6
The First Merchants Shareholders Meeting..............................6
First Merchants Record Date; Votes Required...........................7
First Merchants Recommendation to Shareholders........................7
The Merger............................................................7
Reasons for the Merger................................................7
What Lafayette Shareholders Will Receive..............................8
What First Merchants Shareholders Will Receive........................9
Opinion of Lafayette's Financial Advisor..............................9
What We Need to Do to Complete the Merger.............................9
Termination of the Merger............................................10
Waiver and Amendment.................................................11
Completion of the Merger.............................................11
Fees and Expenses....................................................11
Conduct of Business Pending Merger...................................11
Dissenters' Rights...................................................12
Management and Operations After the Merger...........................12
Interests of Directors and Officers in the Merger
That Are Different From Your Interests..............................12
Accounting Treatment.................................................13
Regulatory Approvals.................................................13
Certain Federal Income Tax Consequences..............................13
Restrictions Placed on the Sale of First Merchants Stock
Issued to Certain Lafayette Shareholders....................14
Comparative Rights of First Merchants Shareholders
and Lafayette Shareholders..................................14
Recent Developments .................................................14
Comparative Market Price Information.................................15
Comparative Per Share Data...........................................16
SELECTED CONSOLIDATED FINANCIAL DATA..........................................19
RISK FACTORS..................................................................25
FORWARD-LOOKING STATEMENTS....................................................35
i
THE LAFAYETTE SPECIAL MEETING.................................................37
General Information..................................................37
Matters To Be Considered.............................................37
Votes Required.......................................................37
Proxies..............................................................38
Solicitation of Proxies..............................................39
Recommendation of the Lafayette Board of Directors...................39
Other Matters........................................................39
THE FIRST MERCHANTS SPECIAL MEETING...........................................40
General Information..................................................40
Matters To Be Considered.............................................40
Votes Required.......................................................40
Proxies..............................................................41
Solicitation of Proxies..............................................41
Recommendation of the First Merchants Board of Directors.............42
Other Matters........................................................42
THE MERGER....................................................................43
Description of the Merger............................................43
Background of the Merger.............................................43
First Merchants' Reasons for the Merger..............................45
Lafayette's Reasons for the Merger...................................46
Effect of the Merger on First Merchants Shareholders.................47
Opinion of Lafayette's Financial Advisor.............................47
Recommendation of the Lafayette Board of Directors...................57
Recommendation of the First Merchants Board of Directors.............57
Exchange of Lafayette Common Stock...................................57
Conversion Ratio Adjustment..........................................59
Rights of Dissenting Shareholders....................................61
Resale of First Merchants Common Stock by Lafayette Affiliates.......63
Conditions to Completion of the Merger...............................63
Termination; Waiver; Amendment.......................................65
Restrictions Affecting Lafayette Prior to Completion
of the Merger.......................................................67
Regulatory Approvals.................................................69
Effective Date of the Merger.........................................70
Fees and Expenses....................................................70
Management After the Merger..........................................70
Indemnification and Insurance of Lafayette Directors
and Officers........................................................72
Treatment of Options to Acquire Shares of Lafayette
Common Stock........................................................72
Treatment of Lafayette Stock Appreciation Rights.....................73
ii
Employee Benefit Plans...............................................73
Interests of Certain Persons in the Merger...........................75
NASDAQ National Market Listing.......................................77
Accounting Treatment.................................................77
Registration Statement...............................................77
FEDERAL INCOME TAX CONSEQUENCES...............................................78
Tax Consequences to Lafayette and First Merchants....................78
Tax Consequences to Lafayette Shareholders...........................78
Tax Consequences to First Merchants Shareholders.....................81
Tax Opinion..........................................................81
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL
INFORMATION...................................................................82
DESCRIPTION OF FIRST MERCHANTS................................................92
Business.............................................................92
Acquisition Policy and Pending Transactions..........................93
Recent Developments..................................................93
Incorporation of Certain Information by Reference....................93
DESCRIPTION OF LAFAYETTE......................................................94
Business.............................................................94
Incorporation of Certain Information by Reference....................94
COMPARISON OF COMMON STOCK....................................................95
Governing Law........................................................95
Authorized But Unissued Shares.......................................95
Preemptive Rights....................................................96
Dividend Rights......................................................96
Voting Rights........................................................97
Article and Bylaw Amendments.........................................97
Special Meetings of Shareholders.....................................98
Number of Directors and Term of Office...............................98
Removal of Directors.................................................99
Dissenters' Rights...................................................99
Liquidation Rights..................................................100
Assessment and Redemption...........................................100
Anti-Takeover Provisions............................................101
Director Liability..................................................104
LEGAL MATTERS................................................................104
EXPERTS......................................................................104
SHAREHOLDER PROPOSALS........................................................105
iii
WHERE YOU CAN FIND ADDITIONAL INFORMATION....................................105
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 RBC Capital Markets....................C-1
D. Lafayette Bancorporation's Annual Report to
Shareholders for the year-ended December 31, 2000..........D-1
E. Lafayette Bancorporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001...................E-1
iv
QUESTIONS AND ANSWERS
ABOUT THE MERGER AND THE SHAREHOLDER MEETINGS
Q: Why are the two companies proposing to merge?
A: We believe the merger is in the best interests of both companies and our
respective shareholders. First Merchants' Board of Directors believes that
the merger with Lafayette will bring together two complementary
institutions to create a strategically, operationally and financially
strong company that is positioned for further growth. Lafayette's Board of
Directors believes that merging with First Merchants provides significant
value to Lafayette shareholders and the option to participate in the
opportunities for growth offered by the merged company.
You should review the background and reasons for the merger described in
greater detail at pages 43, 45 and 46.
Q: What will Lafayette shareholders receive in the merger?
A: For each share of Lafayette common stock you own before the merger, you
will have the right to elect, on a share-by-share basis, to receive:
o 1.11 shares of First Merchants common stock (subject to adjustment as
provided in the Merger Agreement), or
o $30.00 in cash.
Lafayette shareholders may elect to receive First Merchants common stock
for some or all of their shares and/or cash for some or all of their
shares. First Merchants will also pay cash in lieu of issuing fractional
shares. The Merger Agreement provides that no more than $50,329,248 in cash
will be paid to Lafayette shareholders. If Lafayette shareholder elections
result in cash elections of more than $50,329,248, your elections may be
subject to proration as described under "THE MERGER - Exchange of Lafayette
Common Stock" on page 57. As a result of the proration, you may not receive
cash to the full extent that you elect to receive that form of merger
consideration.
As of _________, 2002, the closing price for a share of First Merchants
common stock was $____________ and for a share of Lafayette common stock
was $____________. You should obtain current market prices for shares of
First Merchants common stock and Lafayette common stock. First Merchants
common stock is quoted and traded over-the-counter on the NASDAQ National
Market System under the symbol "FRME." Lafayette common stock is traded on
the Over-the-Counter Bulletin Board of the National Association of
Securities Dealers, Inc. under the symbol "LAYB."
Q: What risks should I consider before I vote on the merger?
A: You should review "Risk Factors" beginning on page 25.
1
Q: Will First Merchants shareholders receive any shares or cash as a result of
the merger?
A: No. After the merger, First Merchants shareholders will continue to own the
same number of First Merchants shares they owned before the merger.
Q: When is the merger expected to be completed?
A: We are working to complete the merger as quickly as possible. We must first
obtain the necessary regulatory approvals and the approvals of the
Lafayette shareholders and First Merchants shareholders at the special
meeting that each company will hold for its shareholders to vote on the
merger. We currently expect to complete the merger at the beginning of the
second quarter of 2002.
Q: What are the tax consequences of the merger to me?
A: We have structured the merger so that First Merchants, Lafayette and
Lafayette shareholders will not recognize any gain or loss for federal
income tax purposes on the exchange of Lafayette shares for First Merchants
shares in the merger. First Merchants shareholders will have no tax
consequences as a result of the merger. Taxable income will result,
however, to the extent a Lafayette shareholder receives cash instead of
First Merchants common stock (including cash received in lieu of fractional
shares of First Merchants common stock or upon the exercise of dissenters'
rights) and the cash received exceeds the shareholder's adjusted basis. At
the closing, Lafayette and First Merchants are to receive an opinion
confirming these tax consequences. See "FEDERAL INCOME TAX CONSEQUENCES"
beginning on page 78. Your tax consequences will depend on your personal
situation. You should consult your tax advisor for a full understanding of
the tax consequences of the merger to you.
Q: Will I have dissenters' rights?
A: Lafayette shareholders will be able to dissent from the proposed merger,
but only by complying with the applicable provisions of the Indiana
Business Corporation Law. First Merchants shareholders have no dissenters'
rights or other rights to demand the fair value in cash for their shares of
First Merchants common stock as a result of the merger.
Q: What do I need to do now?
A: You should carefully read and consider the information contained in this
document. Then, please fill out, sign and mail your proxy card in the
enclosed return envelope as soon as possible so that your shares can be
voted at the ___________, 2002 First Merchants shareholder meeting, if you
are a First Merchants shareholder, or at the _________, 2002 Lafayette
shareholder meeting, if you are a Lafayette shareholder. If you are a
Lafayette shareholder, you should also complete your Election Form to
specify the type of merger consideration you prefer (or provide
instructions to your broker if you
2
hold your shares in "street name"). If a returned proxy card is signed but
does not specify a choice, your proxy will be voted "FOR" the merger
proposal considered at the meeting.
Q: What if I don't vote or I abstain from voting?
A: If you do not vote or you abstain from voting, your abstention will count
as a "NO" vote on the merger.
Q: If my shares are held by my broker in "street name," will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker to vote
your shares. If you do not provide your broker with instructions on how to
vote your shares held in "street name," your broker will not be permitted
to vote your shares, which will have the effect of a "NO" vote on the
merger.
Q: As a Lafayette shareholder, how do I elect the form of payment that I
prefer?
A: An Election Form is enclosed with this document to Lafayette shareholders.
If you wish to make an election, you should complete this Election Form and
send it in the envelope provided to the conversion agent, First Merchants
Bank, National Association. For you to make an effective election, your
properly executed Election Form must be received by First Merchants Bank,
National Association before 5:00 p.m. local time on __________, 2002, the
election deadline. Please read the instructions on the Election Form for
information on completing the form. If you do not return a completed,
properly executed Election Form by the election deadline, then you will
receive First Merchants common stock for all of your shares of Lafayette
common stock.
Q: As a Lafayette shareholder, which form of payment should I choose? Why?
A: The form of payment you should elect will depend upon your personal
financial and tax circumstances. We urge you to consult your financial or
tax advisor if you have any questions about the form of payment you should
elect.
Q: As a Lafayette shareholder, if I am voting against the merger, should I
still make an election?
A: Yes. If the merger is approved by the First Merchants and Lafayette
shareholders and becomes effective, you will receive merger consideration
based on the Election Form you submit. If you fail to submit an Election
Form, your Lafayette shares will be treated as if you elected to receive
First Merchants common stock for all such shares. If you are a Lafayette
shareholder and vote against the merger, you may still exercise your
dissenters' rights even though you have submitted an Election Form,
although your right to do so depends on your strict compliance with the
requirements of the Indiana Business Corporation Law.
3
Q: As a Lafayette shareholder, can I change my election?
A: Yes. You can change your election by submitting a new Election Form to
First Merchants Bank, National Association so it is received prior to the
election deadline set forth on the Election Form. After the election
deadline, no changes may be made.
Q: Are Lafayette shareholders guaranteed to receive the form of merger
consideration - cash, common stock or a combination thereof - they request
on their Election Forms?
A: No. There is a limit on the amount of cash to be paid for Lafayette's
outstanding shares. Because a maximum of approximately 40% of Lafayette's
outstanding shares will be converted into cash, some shareholders likely
will receive a form of consideration they did not elect. For example, if
you elect to receive all or a portion of cash and the holders of more than
40% of the outstanding shares of Lafayette's common stock elect to receive
cash, you may receive stock instead of the cash you elected. There are no
restrictions on the exchange of Lafayette's outstanding shares for First
Merchants common stock. For example, the holders of all of Lafayette's
outstanding shares could elect and receive First Merchants common stock.
The reallocation procedures are described in greater detail in this
document under "THE MERGER - Exchange of Lafayette Common Stock" on page
57.
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy is voted at the
meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy
card to your company before its meeting. If you are a First Merchants
shareholder, submit your notice of revocation or new proxy card to First
Merchants Corporation, 200 East Jackson Street, Muncie, Indiana 47305,
Attention: Larry R. Helms. If you are a Lafayette shareholder, submit your
notice of revocation or new proxy card to Lafayette Bancorporation, 133
North 4th Street, Lafayette, Indiana 47902, Attention: Michelle D.
Turnpaugh. Third, you may attend the meeting and vote in person. Simply
attending the meeting, however, will not revoke your proxy. You must
request a ballot and vote the ballot at the meeting. If you have instructed
a broker to vote your shares, you must follow directions received from your
broker to change your vote.
Q: Should I send in my stock certificate(s) now?
A: No. After the merger is completed, Lafayette shareholders will receive
written instructions from First Merchants for exchanging their stock
certificates for the consideration to be received by them in the merger.
First Merchants shareholders need not do anything. If you are a First
Merchants shareholder, you should retain your certificates, as you will
continue to hold the First Merchants shares you currently own.
4
SUMMARY
This brief summary highlights selected information from this joint proxy
statement-prospectus. Because this is a summary, it does not contain all of the
information that is important to you. You should carefully read this entire
document and the other documents to which we have referred you before you decide
how to vote. See "WHERE YOU CAN FIND ADDITIONAL INFORMATION" on page 105 for a
description of documents that we incorporate by reference into this document.
Each item in this summary includes a page reference that directs you to a more
complete description in this document of the topic discussed.
The Companies (pages 92 and 94)
First Merchants Corporation
200 East Jackson Street
Muncie, Indiana 47305
(765) 747-1500
First Merchants is a multi-bank holding company and a financial holding company,
incorporated under Indiana law and headquartered in Muncie, Indiana. First
Merchants has eight banking subsidiaries: First Merchants Bank, National
Association; First United Bank; The Madison Community Bank; The Union County
National Bank of Liberty; The Randolph County Bank; The First National Bank of
Portland; Decatur Bank & Trust Company; and Frances Slocum Bank and Trust
Company. Through these subsidiaries, First Merchants operates a general banking
business. First Merchants also owns various nonbank subsidiaries that engage in
the title insurance, insurance agency, and reinsurance business.
At September 30, 2001, on a consolidated basis, First Merchants had assets of
approximately $1.8 billion, deposits of approximately $1.4 billion, and
stockholders' equity of approximately $178 million. First Merchants common stock
is quoted and traded over-the-counter on the NASDAQ National Market System under
the symbol "FRME." See "DESCRIPTION OF FIRST MERCHANTS."
Lafayette Bancorporation
133 North 4th Street
P.O. Box 1130
Lafayette, Indiana 47902
(765) 423-7100
Lafayette is a one bank holding company, incorporated under Indiana law and
headquartered in Lafayette, Indiana. Lafayette Bank and Trust Company is a
wholly-owned subsidiary of Lafayette.
At September 30, 2001, on a consolidated basis, Lafayette had assets of
approximately $748 million, deposits of approximately $603 million, and
stockholders' equity of approximately $59 million. Lafayette common stock is
traded on the Over-the-Counter Bulletin Board of the
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National Association of Securities Dealers, Inc. under the symbol "LAYB." See
"DESCRIPTION OF LAFAYETTE."
The Lafayette Shareholders Meeting (page 37)
The special meeting of Lafayette shareholders will be held on ___________,
_______ __, 2002, at _:__ _.m. local time, at Lafayette's principal office
located at 133 North 4th Street, Lafayette, Indiana.
At the special meeting, Lafayette shareholders will be asked:
1. to approve the Merger Agreement and the merger of Lafayette and First
Merchants; and
2. to act on any other items that may be submitted to a vote at the
special meeting.
Lafayette Record Date; Vote Required (page 37)
You can vote at the Lafayette special meeting of shareholders if you owned
common stock of Lafayette at the close of business on _______, 2002. You can
cast one vote for each share of stock you owned on that date. To approve the
merger and the Merger Agreement, the holders of at least a majority of the
shares of Lafayette common stock outstanding must vote in its favor. You can
vote your shares by attending the special meeting or you can mark the enclosed
proxy card with your vote, sign it and mail it in the enclosed return envelope.
You can revoke your proxy as late as the date of the special meeting by sending
in a new proxy or written notice of revocation or by attending the special
meeting and voting in person.
As of ______, 2002, Lafayette's executive officers, directors and their
affiliates owned with the power to vote ______ shares or approximately ______%
of the shares of Lafayette common stock outstanding.
Lafayette Recommendation to Shareholders (pages 39 and 57)
The Board of Directors of Lafayette believes that the merger is in your best
interests and recommends that you vote "FOR" the proposal to approve the merger.
The First Merchants Shareholders Meeting (page 40)
The special meeting of First Merchants shareholders will be held on ___________,
________ __, 2002, at _:__ _.m. local time, at First Merchants' principal office
located at 200 East Jackson Street, Muncie, Indiana.
At the special meeting, First Merchants shareholders will be asked:
1. to approve the Merger Agreement and the merger of First Merchants and
Lafayette; and
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2. to act on any other items that may be submitted to a vote at the
special meeting.
First Merchants Record Date; Vote Required (page 40)
You can vote at the First Merchants special meeting of shareholders if you owned
common stock of First Merchants at the close of business on _______, 2002. You
can cast one vote for each share of stock you owned on that date. To approve the
merger and the Merger Agreement, the holders of at least a majority of the
shares of First Merchants common stock outstanding must vote in its favor. You
can vote your shares by attending the special meeting or you can mark the
enclosed proxy card with your vote, sign it and mail it in the enclosed return
envelope. You can revoke your proxy as late as the date of the special meeting
by sending in a new proxy or written notice of revocation or by attending the
special meeting and voting in person.
As of ______, 2002, First Merchants' executive officers, directors and their
affiliates owned with the power to vote _________ shares or approximately
______% of the shares of First Merchants common stock outstanding.
First Merchants Recommendation to Shareholders (pages 42 and 57)
The Board of Directors of First Merchants believes that the merger is in your
best interests and recommends that you vote "FOR" the proposal to approve the
merger.
The Merger (page 43)
We have attached the Agreement of Reorganization and Merger (Merger Agreement)
to this document as Appendix A. Please read the Merger Agreement. It is the
legal document that governs the merger.
Lafayette will merge with First Merchants and, thereafter, Lafayette will cease
to exist. After the merger, Lafayette Bank and Trust Company will be a
wholly-owned subsidiary of First Merchants. We hope to complete the merger at
the beginning of the second quarter of 2002.
Reasons for the Merger (pages 45 and 46)
First Merchants. First Merchants' Board of Directors considered a number of
financial and nonfinancial factors in making its decision to merge with
Lafayette, including its respect for the ability and integrity of the Lafayette
Board of Directors, management and staff. The Board believes that expanding
First Merchants' operations in the areas Lafayette operates offers long-term
strategic benefits to First Merchants.
Lafayette. In considering the merger with First Merchants, Lafayette's Board of
Directors collected and evaluated a variety of economic, financial and market
information regarding First Merchants and its subsidiaries, their respective
businesses and First Merchants' reputation and future prospects. In the opinion
of Lafayette's Board of Directors, favorable factors included First Merchants'
strong earnings and stock performance, its management, the compatibility of its
markets to those of Lafayette, the level of dividends paid by First Merchants to
its shareholders,
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First Merchants' agreement to retain Lafayette Bank and Trust Company as a
separate bank subsidiary for at least 5 years, and the attractiveness of First
Merchants' offer from a financial perspective. Consideration was further given
to the potential benefits of ownership of First Merchants common stock, which is
traded in the over-the-counter market and reported on the NASDAQ National Market
System, as compared to Lafayette common stock, which is traded in the
over-the-counter market and reported on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers, Inc. In addition, the Board of
Directors considered the opinion of Dain Rauscher Wessels, now rebranded as RBC
Capital Markets effective as of November 1, 2001, the financial advisor to
Lafayette, indicating that the consideration to be received by Lafayette's
shareholders under the Merger Agreement is fair from a financial point of view.
The Board of Directors believes that the merger will have a positive, long-term
impact on Lafayette Bank and Trust Company's customers and employees and the
communities served by Lafayette Bank and Trust Company.
What Lafayette Shareholders Will Receive (page 57)
As a Lafayette shareholder, each of your shares of Lafayette common stock will
be converted into the right to receive, at your election, either (i) 1.11 shares
of First Merchants common stock, or (ii) $30 in cash, subject to possible upward
or downward adjustment of the conversion ratio, as provided in the Merger
Agreement. You may also elect to receive a combination of First Merchants common
stock and cash for your shares. 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 conversion ratio is
subject to adjustment under certain circumstances. Cash will be paid for
fractional shares of First Merchants common stock resulting from the conversion
ratio.
You are being asked to complete the Election Form accompanying this document to
elect to receive either 1.11 shares of First Merchants common stock or $30 in
cash for each share of Lafayette common stock you own. You may elect to receive
cash for a portion of your shares and First Merchants common 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 _________, 2002. If a properly completed Election
Form is not timely received, you will be deemed to have elected to receive First
Merchants stock in exchange for all of your shares of Lafayette common stock.
After we complete the merger, Lafayette shareholders will receive instructions
on how to surrender their Lafayette stock certificates and receive their cash
and/or First Merchants common stock certificates.
Because the exchange ratio is fixed within certain parameters and because the
market price of common stock of First Merchants will fluctuate, the market value
of the stock of First Merchants you will receive in the merger is not fixed. See
"SUMMARY - Comparative Market Price Information" on page 15.
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What First Merchants Shareholders Will Receive (page 47)
First Merchants shareholders will not receive any consideration in the merger.
After the merger, First Merchants shareholders will continue to own the same
number of First Merchants shares owned before the merger.
Opinion of Lafayette's Financial Advisor (page 47)
The Board of Directors of Lafayette received the written opinion of Dain
Rauscher Wessels, now rebranded as RBC Capital Markets effective as of November
1, 2001, dated October 14, 2001, that the terms of the merger are fair from a
financial point of view to the Lafayette shareholders. RBC Capital Markets
subsequently updated its October 14, 2001 opinion by delivering to the Lafayette
Board of Directors an opinion dated as of the date of this document. We have
attached a copy of the updated fairness opinion to this document as Appendix C.
Lafayette shareholders should read the fairness opinion in its entirety.
What We Need to Do to Complete the Merger (page 63)
Completion of the merger depends on a number of conditions being met. In
addition to our compliance with the Merger Agreement, these conditions include
among others:
1. approval of the Merger Agreement by the shareholders of Lafayette and
First Merchants;
2. approval of the merger by certain regulatory agencies and the
expiration of any regulatory waiting periods;
3. the receipt of an opinion of Bingham McHale LLP, that the merger will
be treated, for U.S. federal income tax purposes, as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended, and that no gain or loss will be recognized by
Lafayette shareholders in the merger to the extent they receive shares
of First Merchants common stock as consideration for their shares of
Lafayette common stock;
4. notification to the Nasdaq Stock Market, Inc. regarding the common
stock that First Merchants will issue in the merger;
5. the receipt of all third party consents required for consummation of
the merger; and
6. other customary conditions and obligations of the parties set forth in
the Merger Agreement.
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Termination of the Merger (page 65)
Either Lafayette or First Merchants may call off the merger under certain
circumstances, including among others:
1. we both consent in writing;
2. the other party breaches in a material manner any of the
representations or warranties or any covenant or agreement it has made
under the Merger Agreement and the breach is not cured within thirty
(30) days of receiving written notice;
3. the Lafayette shareholders or the First Merchants shareholders do not
approve the Merger Agreement;
4. a material adverse change in the financial condition of First
Merchants or Lafayette since June 30, 2001 (other than for reasons
relating to the general business and interest rate environment
including the consequences of the September 11, 2001 terrorist attacks
on the United States or to the payment of merger-related expenses);
5. the merger does not qualify as a tax-free reorganization in the
opinion of counsel to First Merchants or Lafayette;
6. the merger is not completed by June 30, 2002;
7. we are not able to obtain required regulatory approvals;
8. the average of the mid-point between the bid and ask prices of First
Merchants common stock for a defined period before closing of the
merger being less than $22.05 or greater than $26.95, subject to the
right of Lafayette or First Merchants, respectively, to preserve the
Merger Agreement by adjusting the conversion ratio;
9. if Lafayette gives First Merchants notice that it intends to furnish
information to or enter into discussions or negotiations with a third
party relating to a proposed acquisition of Lafayette or Lafayette
Bank and Trust Company, if Lafayette fails to give First Merchants
written notice of any such intention, or if Lafayette's Board of
Directors withdraws or modifies its recommendation to Lafayette
shareholders to vote for the merger following receipt of a proposal
for an acquisition from a third party;
10. if Lafayette's Board of Directors terminates the Merger Agreement in
the exercise of its fiduciary duties after receipt of an unsolicited
acquisition proposal from a third party;
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11. if either party is unable to satisfy any conditions to a party's
obligations under the Merger Agreement (providing such party is not
then in material breach of the Merger Agreement); or
12. if either party determines the merger is inadvisable due to the
commencement or credible threat of material litigation or proceedings
against one of the parties.
If Lafayette terminates the Merger Agreement in connection with an acquisition
proposal by a third party pursuant to item 10 above or if First Merchants
terminates the Merger Agreement in connection with item 9 above, Lafayette has
agreed to pay First Merchants the amount of $2,500,000 in liquidated damages.
Waiver and Amendment (page 65)
We can agree to amend the Merger Agreement, and each of us can waive our right
to require the other party to adhere to the terms and conditions of the Merger
Agreement, where the law allows. However, we may not amend the Merger Agreement
after the Lafayette and First Merchants shareholders approve the merger without
their further approval if the amendment would decrease the merger consideration
or have a material adverse effect on the Lafayette or First Merchants
shareholders.
Completion of the Merger (page 70)
The merger of Lafayette into First Merchants will become effective when we file
Articles of Merger with the Secretary of the State of Indiana, or at such later
date and time as may be set forth in the Articles of Merger. We expect the
merger to become effective at the beginning of the second quarter of 2002.
Fees and Expenses (page 70)
First Merchants and Lafayette will pay their own fees, costs, and expenses
incurred in connection with the merger except that printing and postage expenses
for this document in connection with the First Merchants and Lafayette
shareholder meetings will be paid by First Merchants. Lafayette will pay for the
cost of the opinion of Lafayette's financial advisor.
Conduct of Business Pending Merger (page 67)
Under the Merger Agreement, Lafayette must carry on its business in the ordinary
course and may not take certain extraordinary actions without first obtaining
First Merchants' approval.
We have agreed that Lafayette will continue to pay quarterly dividends at no
more than the current rate of $0.11 per share until the merger closes, provided
that Lafayette may also declare a special year-end dividend of up to $0.05 per
share. We will each cooperate to insure that Lafayette shareholders will receive
only one quarterly dividend for the quarter in which the merger closes, and not
one from both First Merchants and from Lafayette.
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Dissenters' Rights (page 61)
For shareholders of Lafayette, Indiana law permits you to dissent from the
merger and have the fair value of your stock appraised by a court and paid to
you in cash. To do this, you must follow certain procedures, including giving
Lafayette certain notices and not voting your shares in favor of the merger. You
will not receive any stock in First Merchants if you dissent and follow all of
the required procedures. Instead, you will only receive the value of your stock
in cash. Shareholders of First Merchants do not have the right to dissent from
the merger. The relevant sections of Indiana law governing this process are
attached to this document as Appendix B. See "THE MERGER - Rights of Dissenting
Shareholders" and Appendix B.
Management and Operations After the Merger (page 70)
Lafayette's corporate existence will cease after the merger. Accordingly,
directors and officers of Lafayette will not serve in such capacities after the
effective date of the merger. The directors and officers of Lafayette Bank and
Trust Company will continue in their respective positions after the merger,
subject to certain restrictions.
Upon completion of the merger, the current directors of First Merchants will
continue to serve in such capacities. In addition, Richard A. Boehning, who
currently serves as a director of Lafayette and of Lafayette Bank and Trust
Company, and Robert T. Jeffares, who currently serves as a director of Lafayette
Bank and Trust Company, will be nominated for election to the Board of Directors
of First Merchants to serve for three (3) years following the merger. One of
such new directors shall also be elected as Vice Chairman of the Executive
Committee of the Board of Directors of First Merchants. In the event any one or
more of such new directors is not able to serve, another director or directors
of Lafayette or Lafayette Bank and Trust Company selected by agreement between
First Merchants and Lafayette shall serve in his or their place. Within one year
after the effective time of the merger, First Merchants has agreed to make a
good faith effort to expand the size of the Boards of Directors of First
Merchants and of Lafayette Bank and Trust Company by adding two new directors
who are residents of Tippecanoe County, Indiana. Upon completion of the merger,
the current officers of First Merchants will continue to serve in such
capacities. In addition, Robert J. Weeder, the current President and Chief
Executive Officer of Lafayette and Lafayette Bank and Trust Company, will become
Senior Vice President of First Merchants.
Interests of Directors and Officers in the Merger That Are Different From Your
Interests (page 75)
Some of Lafayette's directors and officers have interests in the merger that may
differ from, or that may be in addition to, their interests as Lafayette
shareholders. These interests exist because of agreements that the Lafayette
directors and officers have with First Merchants and rights that Lafayette
directors and officers have under Lafayette's benefit plans. These agreements
provide certain officers and directors with various management and/or director
positions at First Merchants after the merger and continued management and/or
director positions at Lafayette Bank after the merger. In addition, the merger
causes the accelerated vesting and payment of certain benefits under Lafayette's
benefit plans.
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The members of the Lafayette Board of Directors and First Merchants Board of
Directors knew about these additional interests, and considered them, when they
approved the Merger Agreement.
Accounting Treatment (page 77)
The merger will be accounted for as a purchase transaction. As a result,
Lafayette's assets and liabilities will be recorded by First Merchants at their
estimated fair values. Any excess payment by First Merchants over the fair
market value of the net assets and identifiable intangibles of Lafayette will be
recorded as goodwill on the financial statements of First Merchants.
Regulatory Approvals (page 69)
The merger must be approved by the Board of Governors of the Federal Reserve
System (Federal Reserve) and the Indiana Department of Financial Institutions
(Indiana Department). We have filed all of the required applications or notices
with the Federal Reserve and the Indiana Department. We cannot assure you as to
when or whether the approvals will be received.
Certain Federal Income Tax Consequences (page 78)
Whether income, gain, or loss, for federal income tax purposes, will be
recognized by Lafayette shareholders as a result of the merger will depend upon
whether you elect to receive for your shares of Lafayette 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 if you receive only shares of First Merchants 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 conversion
ratio.
If you 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. No
loss will be recognized by you if you receive part cash and part First Merchants
stock for your shares.
Unless treated as a dividend, gain or loss, for federal income tax purposes,
will be recognized, however, with respect to cash payments received by you if
you receive only cash. Unless treated as a dividend, gain or loss will also be
recognized with respect to cash payments received by you if you perfect your
dissenters' rights.
Determining the actual tax consequences of the merger to you can be complicated.
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.
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The shareholders of First Merchants will not incur any tax consequences from the
proposed merger.
Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain Lafayette Shareholders (page 63)
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 Lafayette in exchange for their shares of Lafayette common
stock.
Comparative Rights of First Merchants Shareholders
and Lafayette Shareholders (page 95)
The rights of shareholders of First Merchants and Lafayette differ in some
respects. Upon completion of the merger, Lafayette shareholders who receive
First Merchants common stock will take such stock subject to its terms and
conditions. Although both corporations are organized under Indiana law, the
corporate governance documents of Lafayette and First Merchants differ in
several respects.
Certain provisions of First Merchants' Articles of Incorporation reduce First
Merchants' vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its Board of Directors. The
Board of Directors of First Merchants believes that it is in the best interests
of First Merchants and its shareholders to encourage potential acquirors to
negotiate directly with First Merchants' Board of Directors and that these
provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the view of First Merchants' Board of Directors
that these provisions should not discourage persons from proposing a merger or
other transaction at prices reflective of the true value of First Merchants and
which is in the best interests of all shareholders. These provisions may,
however, also have the effect of discouraging a future takeover attempt which
would not be approved by First Merchants' Board of Directors, but pursuant to
which shareholders may receive a premium for their shares over the then current
market prices. As a result, shareholders who might desire to participate in such
a transaction may not have an opportunity to do so. Such provisions will also
render the removal of First Merchants' Board of Directors and management more
difficult.
Recent Developments (page 93)
On December 21, 2001, First Merchants filed a registration statement on Form S-3
with the Securities and Exchange Commission. The registration statement is a
"shelf" filing pursuant to which certain business trusts wholly-owned by First
Merchants may issue up to $70 million of trust preferred securities to the
public for cash. In the event trust preferred securities are issued, proceeds
from the sale will be invested in an identical amount of junior subordinated
debentures to be issued by First Merchants to the applicable business trust and
First Merchants shall guaranty the payment of the trust preferred securities. It
is anticipated that on or about the date of consummation of the merger, First
Merchants will cause trust preferred securities in the approximate amount of
$57.5 million to be issued to finance the cash portion of the consideration to
be paid by First Merchants to the shareholders of Lafayette in the merger. Any
such offering
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of trust preferred securities would be made only by means of a
prospectus and related prospectus supplement, and would be subject to the
registration statement becoming effective, compliance with applicable state
securities laws and favorable market conditions. This joint proxy
statement-prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any trust preferred securities.
Comparative Market Price Information
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." Shares of Lafayette common stock are traded in the
over-the-counter market and share prices are reported on the Over-the-Counter
Bulletin Board of the National Association of Securities Dealers, Inc. under the
symbol "LAYB." The following table presents quotation information for First
Merchants common stock on the NASDAQ National Market System and for Lafayette
common stock on the Over-the-Counter Bulletin Board of the National Association
of Securities Dealers, Inc. on October 12, 2001, the business day before the
merger was publicly announced, and _________, 2002, the last practicable trading
day for which information was available prior to the date of this joint proxy
statement-prospectus.
First Merchants Common Stock Lafayette Common Stock
---------------------------- ----------------------
(Dollars Per Share)
High Low Close High Low Close
---- --- ----- ---- --- -----
October 12, 2001 $23.50 $22.90 $23.43 $16.50 $16.47 $16.47
_______, 2002 $_________ $_________ $_________ $_________ $_________ $_________
The market value of the aggregate consideration that Lafayette shareholders will
receive in the merger is approximately $109 million (or $26.01 per share of
Lafayette common stock) based on 4,194,104 shares of Lafayette common stock
outstanding, First Merchants' closing stock price of $23.43 on October 12, 2001,
the business day before the merger was publicly announced, and all shares of
Lafayette common stock being exchanged for shares of First Merchants common
stock in the merger. Using this same First Merchants' closing stock price and
number of outstanding shares of Lafayette common stock, but assuming that 60% of
Lafayette's shares of common stock are exchanged for First Merchants common
stock and 40% of Lafayette's shares of common stock are exchanged for cash in
the merger, the market value of the aggregate consideration that Lafayette
shareholders will receive in the merger is approximately $116 million (or $27.60
per share of Lafayette common stock).
The market value of the aggregate consideration that Lafayette shareholders will
receive in the merger is approximately $_____ million (or $___ per share of
Lafayette common stock) based on First Merchants' closing stock price of $____
on ________, 2002, the last practicable trading day for which information was
available prior to the date of this joint proxy statement-prospectus, and all
shares of Lafayette common stock being exchanged for shares of First
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Merchants common stock in the merger. Using this same First Merchants' closing
stock price and number of outstanding shares of Lafayette common stock, but
assuming that 60% of Lafayette's shares of common stock are exchanged for First
Merchants common stock and 40% of Lafayette's shares of common stock are
exchanged for cash in the merger, the market value of the aggregate
consideration that Lafayette shareholders will receive in the merger is
approximately $____ million (or $___ per share of Lafayette common stock).
Also set forth below for each of the closing prices of First Merchants common
stock on October 12, 2001, and ______________, 2002, is the equivalent pro forma
price of Lafayette common stock, which we determined by multiplying the
applicable price of First Merchants common stock by the number of shares of
First Merchants common stock we are issuing for a share of Lafayette common
stock in the merger, which is the exchange ratio of 1.11. The equivalent pro
forma price of Lafayette common stock shows the implied value to be received in
the merger by Lafayette shareholders who receive First Merchants common stock in
exchange for a share of Lafayette common stock on these dates.
First Merchants Lafayette Lafayette Equivalent
Common Stock Common Stock Pro Forma
------------ ------------ ---------
October 12, 2001 $23.43 $16.47 $26.01
_________, 2002 $_____ $_____ $_____
We urge you to obtain current market quotations for First Merchants common stock
and Lafayette common stock. We expect that the market price of First Merchants
common stock will fluctuate between the date of this document and the date on
which the merger is completed and thereafter. Because the market price of First
Merchants common stock is subject to fluctuation, the value of the shares of
First Merchants common stock that Lafayette shareholders will receive in the
merger may increase or decrease prior to and after the merger, while the
conversion ratio is fixed within certain parameters. Lafayette shareholders who
receive cash will receive a fixed amount of $30.00 per share.
Comparative Per Share Data
The following table shows historical information about our companies' earnings
per share, dividends per share and book value per share, and similar information
reflecting the merger and the related issuance of the First Merchants trust
preferred securities, which we refer to as "pro forma" information. In
presenting the comparative pro forma information, we have assumed that we were
merged and the related offering of the First Merchants trust preferred
securities completed through the periods shown in the table. The pro forma
information reflects the "purchase" method of accounting. We derived the First
Merchants and Lafayette pro forma data as described under "UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL INFORMATION" on page 82.
The information listed as "equivalent pro forma" was obtained by multiplying the
pro forma amounts by the conversion ratio of 1.11. First Merchants and Lafayette
present this information
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to reflect the value of shares of First Merchants common stock that Lafayette
shareholders will receive in the merger for each share of Lafayette common stock
exchanged.
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 two sets of assumptions, does not take into account these
expected expenses or these anticipated financial benefits, and does not attempt
to predict or suggest future results. It also does not necessarily reflect what
the historical results of the merged company would have been had our companies
been merged during the periods presented.
The information in the following table is based on historical financial
information of Lafayette and of First Merchants which are included in each
company's respective prior Securities and Exchange Commission filings. The
historical financial information of First Merchants has been incorporated into
this document by reference. Certain historical financial information for
Lafayette is included in this document as Appendices D and E. Additional
historical financial information of Lafayette has been incorporated into this
document by reference. See "WHERE YOU CAN FIND ADDITIONAL INFORMATION" on page
105 for a description of documents that we incorporate by reference into this
document and how to obtain copies of them.
We urge you to obtain current market quotations for First Merchants common stock
and Lafayette common stock. We expect that the market price of First Merchants
common stock will fluctuate between the date of this document and the date on
which the merger is completed and thereafter. Because the market price of First
Merchants common stock is subject to fluctuation, the value of the shares of
First Merchants common stock that Lafayette shareholders will receive in the
merger may increase or decrease prior to and after the merger.
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FIRST MERCHANTS AND LAFAYETTE
HISTORICAL AND PRO FORMA PER SHARE DATA
First Merchants Lafayette
----------------------------------------------- ------------------------------------------------
Historical (5) Pro Forma Historical Equivalent Pro Forma
-------------- -------------------------------- ---------- -------------------------------------
Assumption A(1) Assumption B(2) Assumption A(1)(3) Assumption B(2)(4)
--------------- --------------- ------------------ ------------------
Net income per share
Nine months ended
September 30, 2001
Basic ......................... $1.36 $1.35 $1.37 $1.41 $1.50 $1.52
Diluted ....................... 1.35 1.34 1.36 1.40 1.49 1.51
Twelve months ended
December 31, 2000
Basic ......................... $1.67 $1.67 $1.68 $1.75 $1.85 $1.86
Diluted ....................... 1.66 1.66 1.67 1.74 1.84 1.85
Cash dividends per share
Nine months ended
September 30, 2001 .............. $0.67 $0.67 $0.67 $0.31 $0.74 $0.74
Twelve months ended
December 31, 2000 ............... 0.86 0.86 0.86 0.43 0.95 0.95
Book value per share
At September 30, 2001 ............. $14.01 $16.55 $15.72 $14.81 $18.37 $17.45
At December 31, 2000 .............. 12.80 16.31 15.38 13.37 18.10 17.07
----------
(1) See Note (1) in "Notes to Unaudited Pro Forma Summary of Selected
Consolidated Financial Data" on page 24.
(2) See Note (2) in "Notes to Unaudited Pro Forma Summary of Selected
Consolidated Financial Data" on page 24.
(3) Calculated by multiplying the First Merchants Pro Forma - Assumption A
combined per share data by the assumed conversion ratio of 1.11.
(4) Calculated by multiplying the First Merchants Pro Forma - Assumption B
combined per share data by the assumed conversion ratio of 1.11.
(5) The First Merchants December 31, 2000 historical per share data has
been restated to give effect to the 5% stock dividend effected August,
2001.
18
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain summary historical consolidated
financial data for each of our companies. First Merchants' and Lafayette's
balance sheet data and income statement data as of and for the five years in the
period ended December 31, 2000 are taken from each of our respective audited
consolidated financial statements. First Merchants' and Lafayette's balance
sheet data and income statement data as of and for the nine months ended
September 30, 2001 and 2000 are taken from our respective unaudited consolidated
financial statements. Results for the nine months ended September 30, 2001 do
not necessarily indicate results for the entire year.
The following tables also set forth certain summary unaudited pro forma
consolidated financial information for our companies reflecting the merger and,
under Assumption B in such pro forma financial information, the related issuance
of the First Merchants trust preferred securities to finance the cash portion of
the consideration to be paid by First Merchants to the shareholders of Lafayette
in the merger. See "SUMMARY - Recent Developments." The income statement
information presented gives effect to the merger and, under Assumption B, the
related issuance of the First Merchants trust preferred securities as if each
occurred on the first day of each period presented. The balance sheet
information presented gives effect to the merger and, under Assumption B, the
related issuance of the First Merchants trust preferred securities as if each
occurred on September 30, 2001.
The pro forma information reflects the "purchase" method of accounting,
with Lafayette's assets and liabilities recorded at their estimated fair values
as of September 30, 2001. The actual fair value adjustments to the assets and
the liabilities of Lafayette will be made on the basis of appraisals and
evaluations that will be made as of the date the merger is completed. Thus, the
actual fair value adjustments may differ significantly from those reflected in
these pro forma financial statements. In the opinion of First Merchants'
management, the estimates used in the preparation of these pro forma financial
statements are reasonable under the circumstances.
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 two sets of assumptions, does not take into account these
expected expenses or these anticipated financial benefits, and does not attempt
to predict or suggest future results.
You should read this selected financial data in conjunction with First
Merchants' consolidated financial statements and related notes incorporated into
this document by reference and Lafayette's consolidated financial statements and
related notes included in this document as Appendices D and E and incorporated
into this document by reference, and in conjunction with the Unaudited Pro Forma
combined consolidated financial information appearing beginning on page 82 in
this document. See "WHERE YOU CAN FIND ADDITIONAL INFORMATION" on page 105 for a
description of documents that we incorporate by reference into this document and
how to obtain copies of them.
19
FIRST MERCHANTS
FIVE YEAR SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (1)
(Dollars In Thousands, Except Per Share Amounts)
For the Nine Months
Ended September 30 For the Years Ended December 31
------------------------ ------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Summary of Operations
Interest income $ 90,913 $ 85,287 $ 116,528 $ 100,463 $ 94,161 $ 88,184 $ 80,523
Interest expense 43,691 43,810 60,546 46,898 44,465 41,392 37,134
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 47,222 41,477 55,982 53,565 49,696 46,792 43,119
Provision for loan losses 2,371 1,747 2,625 2,241 2,372 1,735 1,790
Noninterest income 13,642 12,183 16,634 14,573 12,880 10,146 9,317
Noninterest expense 32,959 29,481 40,083 36,710 32,741 30,016 27,596
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before income tax 25,234 22,432 29,908 29,187 27,463 25,187 23,050
Income tax expense 8,834 7,334 9,968 10,099 9,556 8,704 8,006
---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 16,700 $ 15,098 $ 19,940 $ 19,088 $ 17,907 $ 16,483 $ 15,044
========== ========== ========== ========== ========== ========== ==========
Per Share Data (2)
Net income
Basic $ 1.36 $ 1.28 $ 1.67 $ 1.51 $ 1.43 $ 1.33 $ 1.23
Diluted 1.35 1.27 1.66 1.50 1.41 1.31 1.21
Cash dividends (3) 0.67 0.64 0.86 0.80 0.73 0.66 0.56
0.67
Balances End of Period
Total assets $1,761,671 $1,600,938 $1,621,063 $1,474,048 $1,362,527 $1,181,359 $1,112,672
Total loans 1,361,638 1,165,430 1,175,586 998,895 890,356 838,658 744,474
Total deposits 1,388,570 1,241,121 1,288,299 1,147,203 1,085,952 976,972 918,876
Securities sold under repurchase
agreements (long-term portion) 32,500 32,500 32,500 35,000 48,836 -- --
Federal home loan bank advances 116,623 103,163 93,182 73,514 47,067 25,500 10,150
Stockholders' equity 177,585 152,870 156,063 126,296 153,891 141,794 130,250
Selected Ratios
Return on average assets 1.35% 1.32% 1.30% 1.37% 1.43% 1.43% 1.39%
Return on average equity 13.66 14.61 14.10 12.75 12.09 12.12 11.95
20
(1) On April 1, 1999, First Merchants issued 1,153,735 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 851,174 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 1,484,729 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 890,986 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, 1996.
(2) Restated for 3-for-2 stock split effected October, 1998 and 5% stock
dividend effected August, 2001.
(3) Dividends per share are for First Merchants only, not restated for
pooling transactions.
21
LAFAYETTE
FIVE YEAR SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
For the Nine Months
Ended September 30 For the Years Ended December 31
--------------------- -----------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Summary of Operations
Interest income $ 40,904 $ 38,428 $ 52,386 $ 44,390 $ 34,745 $ 31,911 $ 28,215
Interest expense 21,281 19,821 27,405 21,543 16,963 15,525 14,012
-------- -------- -------- -------- -------- -------- --------
Net interest income 19,623 18,607 24,981 22,847 17,762 16,386 14,203
Provision for loan losses 900 900 1,200 1,060 980 620 240
Noninterest income 5,315 4,289 5,825 5,125 4,916 4,168 3,422
Noninterest expense 15,855 14,083 19,176 17,534 13,610 12,557 11,191
-------- -------- -------- -------- -------- -------- --------
Net income before income tax 8,183 7,193 10,430 9,378 8,088 7,377 6,194
Income tax expense 2,580 2,674 3,514 3,027 2,711 2,569 2,103
-------- -------- -------- -------- -------- -------- --------
Net Income $ 5,603 $ 5,239 $ 6,916 $ 6,351 $ 5,377 $ 4,808 $ 4,091
======== ======== ======== ======== ======== ======== ========
Per Share Data (1)
Net income
Basic $ 1.41 $ 1.33 $ 1.75 $ 1.61 $ 1.36 $ 1.22 $ 1.04
Diluted 1.40 1.31 1.74 1.57 1.34 1.21 1.04
Cash dividends 0.31 0.28 0.43 0.39 0.34 0.31 0.25
Balances End of Period
Total assets $747,553 $686,329 $741,147 $645,149 $483,969 $439,029 $414,391
Total loans 555,238 534,325 537,725 489,070 353,828 312,227 268,940
Total deposits 603,460 557,681 578,297 522,247 395,546 355,195 341,550
Securities sold under repurchase
agreements (long-term portion) 1,603 2,342 1,916 3,433 2,003 6,687 3,124
Federal home loan bank advances 35,066 30,823 35,737 30,027 23,854 19,886 9,265
Stockholders' equity 58,654 50,552 52,801 45,785 42,614 38,469 34,646
Selected Ratios
Return on average assets 1.01% 1.05% 1.02% 1.06% 1.18% 1.15% 1.08%
Return on average equity 13.43 14.52 14.11 14.27 13.17 13.16 12.35
- --------
(1) Restated for all stock dividends and splits.
22
FIRST MERCHANTS
UNAUDITED PRo forma summary of selected CONSOLIDATED financial data
(Dollars In Thousands, Except Per Share Amounts)
For The Nine Months Ended September 30, 2001 For The Year Ended December 31, 2000
-------------------------------------------- ------------------------------------
Assumption A(1) Assumption B(2) Assumption A(1) Assumption B(2)
--------------- --------------- --------------- ---------------
Summary of Operations
Interest income $131,301 $131,356 $168,227 $168,300
Interest expense 61,118 64,841 82,813 87,777
-------- -------- -------- --------
Net interest income 70,183 66,515 85,414 80,523
Provision for loan losses 3,271 3,271 3,825 3,825
Noninterest income 18,957 18,957 22,459 22,459
Noninterest expense 51,154 51,154 62,355 62,355
-------- -------- -------- --------
Net income before income tax 34,715 31,047 41,693 36,802
Income tax expense 11,818 10,287 14,031 12,049
-------- -------- -------- --------
Net income $ 22,897 $ 20,755 $ 27,662 $ 24,753
======== ======== ======== ========
Per Share Data
Net income
Basic $1.35 $1.37 $1.67 $1.68
Diluted 1.34 1.36 1.66 1.67
Cash dividends 0.67 0.67 0.86 0.86
Balances End of Period
Total assets $2,576,327
$2,576,803
Total loans 1,899,664 1,899,664
Total deposits 1,996,829 1,996,829
Indebtedness
Short-term borrowings 32,519 32,519
Federal home loan bank
advances 185,530 185,530
Other 43,000 98,200
Stockholders' equity 286,895 243,171
Asset Quality Ratios
Nonperforming loans to total
loans .63% .63%
Nonpeforming assets to total
assets .47% .47%
Allowance for loan losses to
total loans 1.06% 1.06%
Allowance for loan losses to
nonperforming loans 167.93% 167.93%
Net charge-offs to average loans .18% .18%
- ----------
Notes to Pro Forma Summary of Selected Financial Data appear on the following
page.
23
NOTES TO UNAUDITED PRO FORMA SUMMARY OF SELECTED
CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
(1) Assumption A -- Issuance of 4,655,455 shares of First Merchants common
stock:
Assumes 4,194,104 shares (100%) of Lafayette common stock become subject to
stock elections and no shares become subject to cash elections. The average of
the closing prices of First Merchants common stock on October 11, 12, 15, 16,
and 17, 2001, the two days before public announcement of the merger, the day of
such public announcement, and the two days after such public announcement, was
$23.48. Such amount is less than $26.95 per share and greater than $22.05 per
share. Accordingly, it has been assumed that there would be no adjustment to the
conversion ratio and 1.11 shares of First Merchants common stock would be issued
for each share of Lafayette common stock subject to a stock election. Using this
assumption, no cash payments would be made to Lafayette shareholders except to
the extent cash payments are made in lieu of the issuance of fractional shares
resulting from the 1.11 conversion ratio. Based on such assumptions and a $23.48
per share price for First Merchants common stock, the purchase price is computed
as follows:
Common stock (4,655,455 shares at stated value of
$.125 per share)............................................ $ 582
Capital surplus (4,655,455 shares at $23.355 per share)...... 108,728
Total stock issued (4,655,455 shares at $23.48
per share)......................................... 109,310
Transaction costs (estimated)................................ 400
Cash price.................................................. 0
---------
Total purchase price .............................. $ 109,710
=========
(2) Assumption B - Issuance of 2,793,273 shares of First Merchants common
stock:
Assumes 2,516,462 shares (60%) of Lafayette common stock become subject to stock
elections and 1,677,642 shares (40%) of Lafayette common stock become subject to
cash elections. The average of the closing prices of First Merchants common
stock on October 11, 12, 15, 16, and 17, 2001, the two days before public
announcement of the merger, the day of such public announcement, and the two
days after such public announcement, was $23.48. Such amount is less than $26.95
per share and greater than $22.05 per share. Accordingly, it has been assumed
that there would be no adjustment to the conversion ratio and 1.11 shares of
First Merchants common stock would be issued for each share of Lafayette common
stock subject to a stock election and $30.00 cash is issued for each share of
Lafayette common stock subject to a cash election. Based on such assumptions and
a $23.48 per share price for First Merchants common stock, the purchase price is
computed as follows:
Common stock (2,793,273 shares at stated value of $.125
per share)................................................. $ 349
Capital surplus (2,793,273 shares at $23.355 per share)..... 65,237
Total stock issued (2,793,273 shares at $23.48
per share)........................................ 65,586
Cash price:
1,677,642 Lafayette shares at $30.00 per share..... 50,329
Transaction costs (estimated)............................... 400
---------
Total purchase price...................... $ 116,315
=========
24
RISK FACTORS
In addition to the other information in this document, including the
matters discussed in "FORWARD-LOOKING STATEMENTS," you should carefully consider
the following risk factors in determining whether to vote to approve the Merger
Agreement and the merger. See "FORWARD-LOOKING STATEMENTS" on page 35.
Risk Factors Relating to the Merged Company and Its Industry
- Recent events may adversely affect financial markets and the merged
company.
On September 11, 2001, the United States was subjected to multiple
terrorist attacks, resulting in the loss of many lives and massive property
damage and destruction in New York City, Washington, D.C. and Pennsylvania.
Since that date, various persons have received letters infected with anthrax
bacteria resulting in a number of deaths. As a result, there has been
considerable uncertainty in the world financial markets. The full impact of
these events on financial markets is not yet known but could include, among
other things, increased volatility in the prices of securities. According to
publicly available reports, the financial markets are in part responding to
uncertainty with regard to the scope, nature and timing of possible military
responses led by the United States, as well as disruptions in air travel,
substantial losses by various companies including airlines, insurance providers
and aircraft makers, the need for heightened security across the country and
decreases in consumer confidence that could cause a general slowdown in economic
growth. These disruptions and uncertainties could adversely affect world
financial markets, the value of the common stock of the merged company and the
merged company's financial condition and results of operations.
- The merged company's allowance for loan losses may not be adequate to
cover actual loan losses.
The merged company's loan customers may not repay their loans according to
their terms, and the customers' collateral securing the payment of their loans
may be insufficient to assure repayment. Credit losses are inherent in the
lending business and could harm the merged company's operating results.
Each of our managements make various assumptions and judgments about the
collectibility of our respective loan portfolios and provide allowances for
potential losses based on a number of factors. If the assumptions are wrong, the
allowance for loan losses may not be sufficient to cover the merged company's
loan losses. The merged company may have to increase the allowance in the
future. Additions to the merged company's allowance for loan losses would
decrease its net income.
- The merged company's exposure to credit risk is increased by its
commercial real estate, construction and business lending.
Commercial real estate, commercial business and construction lending
generally involve a higher degree of credit risk than single-family residential
lending. These loans involve larger
25
loan balances to a single borrower or groups of related borrowers. These loans
are also more susceptible to a risk of loss during a downturn in the business
cycle. The underwriting, review and monitoring that will be performed by the
merged company's officers and directors cannot eliminate all of the risks
related to these loans.
- The merged company's commercial real estate loans will generally have
higher principal amounts and may have balloon payments.
Commercial real estate loans involve greater risk because they generally
involve higher principal amounts and are dependent, in large part, on sufficient
income from the property securing the loan to cover operating expenses and loan
payments. In addition, many commercial real estate loans are not fully amortized
over the loan period, but have balloon payments due at maturity. A borrower's
ability to make a balloon payment typically will depend on being able to either
refinance the loan or timely sell the underlying property. Because these loans
depend on the successful operation, sale and refinancing of property, they may
be affected to a greater extent than residential loans by adverse conditions in
real estate markets or the economy. As of September 30, 2001, First Merchants
had $189,385,000 and Lafayette had $183,813,000 in commercial real estate loans,
including multifamily residential loans.
- The merged company's construction loans will be based upon estimates
of construction costs and property values, and these estimates may be
inaccurate.
Risk of loss on a construction loan depends largely upon whether the merged
company properly estimates construction costs and a property's value at
completion of construction. Construction loans often require disbursement of
substantial funds with repayment dependent in part on the success of the
ultimate project and the borrower's ability to sell or lease the property or
refinance the indebtedness. During the construction phase, a number of factors
can result in delays and cost overruns. If the estimate of value is inaccurate,
the value of the property securing the merged company's loans may be
insufficient to ensure full repayment when completed through sale, a permanent
loan or seizure of collateral. As of September 30, 2001, First Merchants had
$57,949,000 and Lafayette had $64,171,000 in construction loans.
- Business borrowers' ability to repay the merged company's loans will
substantially depend upon their commercial success and the value of
their collateral may be difficult to appraise and may change over
time.
Unlike residential mortgage loans that are based on the borrower's ability
to repay the loan from the borrower's income and are secured by real property
with a value that is usually readily ascertainable, commercial business loans
are typically based on the borrower's ability to repay the loan from the cash
flow of the business. These loans involve greater risk because the availability
of funds to repay the loan depends substantially on the success of the business
itself. In addition, the collateral securing the loans may depreciate over time,
be difficult to appraise and fluctuate in value based on the success of the
business. As of September 30, 2001, First Merchants had $298,804,000 and
Lafayette had $95,530,000 in commercial business loans.
26
- Changes in the economic conditions could adversely affect the merged
company's loan portfolio.
The merged company's success will depend to a great extent upon the general
economic conditions of the Central Indiana area. Unlike larger banks that are
more geographically diversified, the merged company will provide banking and
financial services to customers primarily in the Central Indiana area. The
merged company's commercial, real estate and construction loans, the ability of
the borrowers to repay these loans and the value of the collateral securing
these loans will be impacted by local economic conditions. Favorable economic
conditions may not exist in the merged company's market.
An economic slowdown could have the following consequences:
o Loan delinquencies may increase;
o Problem assets and foreclosures may increase;
o Demand for the products and services of Lafayette and First Merchants
may decline; and
o Collateral for loans made by Lafayette and First Merchants may decline
in value, in turn reducing customers' borrowing power, and reducing
the value of assets and collateral associated with existing loans of
First Merchants.
In addition to local economic conditions in the Central Indiana area, the
merged company's success will also depend in part upon the state of the national
economy. A general turn down in the national economy may impact the merged
company's operations. In addition, in the wake of the acts of September 11,
2001, the effect of those acts and possible future terrorist attacks on the
merged company or the national economy cannot be known or predicted.
- The merged company may experience difficulties in managing its growth.
As part of its overall growth strategy following the merger, the merged
company may decide to acquire banks and related businesses which its board of
directors believes provide a strategic fit with its business. To the extent that
the merged company does grow, it may not be able to adequately and profitably
manage its growth. In addition, the merged company may not obtain regulatory
approval for future acquisitions proposed to be undertaken in the future. The
merged company will account for the proposed merger and possible future
acquisitions under the purchase method of accounting which could adversely
affect future results of operations.
- The merged company and its shareholders will be subjected to special
risks if it effects future acquisitions.
Acquiring other banks and businesses will involve risks commonly associated
with acquisitions, including:
27
o potential exposure to liabilities of any banks or other businesses
acquired by the merged company;
o difficulty and expense of integrating the operations and personnel of
any banks or other businesses acquired by the merged company;
o possible increases in leverage resulting from borrowings needed to
finance an acquisition or augment regulatory capital;
o potential disruption to the merged company's business;
o potential diversion of the merged company's management's time and
attention;
o impairment of relationships with and the possible loss of key
employees and customers of any banks or other businesses acquired by
the merged company; and
o incurrence of expense if the merged company accounts for an
acquisition as a purchase and dilution to its shareholders if it uses
it common stock as consideration for the acquisition.
- It may be difficult for the merged company to maintain First
Merchants' historical growth rate.
First Merchants has completed various acquisitions and opened additional
branches in the past few years that enhanced its rate of growth. The merged
company may not continue to sustain this rate of growth or grow at all.
Competition for suitable acquisition candidates is intense. The merged company
may target acquisition candidates that a variety of larger financial
institutions with substantially greater resources than it also may be interested
in acquiring, which may make it more difficult or expensive for the merged
company to acquire any such candidate.
- The loss of certain key personnel could adversely affect the merged
company's operations.
The merged company's success will depend in large part on the retention of
a limited number of key management, lending and other banking personnel. The
merged company will likely undergo a difficult transition period if it loses the
services of any of these individuals. The merged company's success also depends
on the experience of its banking facilities' managers and lending officers and
on their relationships with the customers and communities they serve. The loss
of these key persons could negatively impact the affected banking operations.
The merged company may not be able to retain its current key personnel or
attract additional qualified key persons as needed.
- Changes in interest rates may reduce the merged company's net interest
income.
Like other financial institutions, net interest income will affect the
merged company's results of operations. Net interest income is the difference
between interest earned on loans and
28
investments and interest expense incurred on deposits and other borrowings. The
merged company's net interest income will be impacted by changes in market rates
of interest, the interest rate sensitivity of its assets and liabilities,
prepayments on its loans and investments and limits on increases in the rates of
interest charged on its residential real estate loans.
- Changes in market rates of interest will be beyond the merged
company's control.
The merged company will not be able to predict or control changes in market
rates of interest. Market rates of interest are affected by regional and local
economic conditions, as well as monetary policies of the Federal Reserve Board.
The following factors also may affect market interest rates:
o inflation;
o slow or stagnant economic growth or recession;
o unemployment;
o money supply;
o international disorders;
o instability in domestic and foreign financial markets; and
o others factors beyond the merged company's control.
Market rates of interest will impact the amounts earned on the merged
company's assets such as loans and securities and the amounts paid on its
liabilities such as deposits and borrowings.
- The merged company's net interest income will be affected by the
interest rate sensitivity of its assets and liabilities.
Certain assets and liabilities customarily held by financial institutions
may react in different degrees to changes in market interest rates. In addition,
interest rates on some types of assets and liabilities may fluctuate prior to
changes in broader market interest rates, while rates on other types may lag
behind. First Merchants and Lafayette continually take measures intended to
manage the risks from changes in market interest rates, and management will
continue to do so for the merged company.
- We cannot predict how changes in technology will impact the merged
company's business.
The financial services industry, including the banking sector, is
increasingly affected by advances in technology, including developments in:
29
o telecommunications;
o data processing;
o automation;
o Internet banking;
o telebanking; and
o debit cards and so-called "smart cards."
The merged company's ability to compete successfully in the future will
depend on whether it can anticipate and respond to technological changes. To
develop these and other new technologies, the merged company will likely make
additional capital investments. Although First Merchants continually invests in
new technology and First Merchants' management will continue to do so for the
merged company, the merged company may not have sufficient resources or access
to the necessary technology to remain competitive in the future.
- The banking business is highly competitive.
The merged company will operate in a competitive environment. In the
Central Indiana area, other commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking firms and other financial intermediaries offer similar
services. Many of these competitors have substantially greater resources and
lending limits and may offer certain services that the merged company will not
provide. In addition, the extensive regulations that will govern the merged
company and its banks may not apply to some of our non-bank competitors. The
merged company's profitability will depend upon the ability of its banks to
compete in their market area.
- The merged company will be subject to extensive and constantly
changing regulation.
The banking industry is heavily regulated under both federal and state law.
These regulations are primarily intended to protect depositors and the Federal
Deposit Insurance Corporation, not creditors or shareholders. The merged
company, and any non-bank subsidiaries, will be subject to the supervision of
the Federal Reserve, in addition to other regulatory organizations. Regulations
affecting banks and financial services companies undergo continuous change, and
the ultimate effect of such changes cannot be predicted. Federal and state
governments may modify regulations and laws at any time, and may enact new
legislation. These modifications or new laws may harm the merged company.
30
Risk Factors Relating To The Merger
- First Merchants' proposed acquisition of Lafayette is subject to a
number of conditions, many of which are beyond either company's
control.
The completion of the merger depends on a number of conditions being
satisfied. These conditions include the following:
o approval by First Merchants shareholders of the Merger Agreement and
the related transactions;
o approval by Lafayette shareholders of the Merger Agreement and the
related transactions;
o approval of the acquisition by the necessary federal and state
regulatory authorities;
o the absence of any order, injunction, or decree that would enjoin or
prohibit the acquisition; and
o receipt by Lafayette and First Merchants of an opinion that, for U.S.
federal income tax purposes, Lafayette shareholders to the extent they
receive their merger consideration in the form of First Merchants
common stock will not recognize any gain or loss.
The merger will be completed only if all conditions to the merger are
satisfied or waived. Many of the conditions to the merger are beyond either
party's control. First Merchants and Lafayette cannot be certain when, or if,
the conditions to the acquisition will be satisfied or waived, or that the
merger will be completed.
- First Merchants will need to obtain outside financing in order to
raise the cash portion of the merger consideration.
The cash consideration to be paid in the merger and estimated transaction
costs and expenses will approximate $51 million. First Merchants intends,
shortly before the merger, to publicly offer trust preferred securities in an
amount sufficient to finance such costs. First Merchants makes no assurance that
it will be successful in this issuance of securities.
- The merged company will have increased its leverage and diminished
liquidity.
To pay for the Lafayette acquisition, First Merchants expects to offer
trust preferred securities and/or to borrow money from a bank. Through these
transactions, First Merchants expects to incur additional indebtedness of
approximately $51 million. Increased indebtedness may reduce the merged
company's flexibility to respond to changing business and economic conditions or
fund the capital expenditure or working capital needs of its subsidiaries
because the merged company will require additional funds to service its
indebtedness. In addition, covenants
31
the merged company makes in connection with the financing will limit the merged
company's ability to incur additional indebtedness, and the leverage may cause
potential lenders to be unwilling to loan funds to the merged company in the
future. To the extent permitted by the merged company's regulators, it will
require greater dividends from its subsidiaries than those historically received
in order to satisfy its debt services requirements. If its subsidiaries pay
dividends to the merged company, they will have less capital to address their
capital expenditure and working capital needs.
- The integration of Lafayette's business with First Merchants' business
may be difficult.
Even though First Merchants has acquired other financial services
businesses in the past, it has not completed an acquisition as large as the
merger with Lafayette. The success of this merger will depend on a number of
factors, including, but not limited to, the merged company's ability to:
o integrate Lafayette's operations with the operations of First
Merchants;
o maintain existing relationships with First Merchants' depositors and
the depositors of Lafayette to minimize withdrawals of deposits
subsequent to the acquisition;
o maintain and enhance existing relationships with borrowers to limit
unanticipated losses from First Merchants' loans and the loans of
Lafayette;
o achieve projected net income of Lafayette and expected cost savings
and revenue enhancements from the merged company;
o control the incremental non-interest expense to maintain overall
operating efficiencies;
o retain and attract qualified personnel; and
o compete effectively in the communities served by First Merchants and
Lafayette, and in nearby communities.
The merged company's failure to successfully integrate Lafayette with First
Merchants may harm its financial condition and results of operations.
- Lafayette shareholders may not receive the form of merger
consideration they select.
The Merger Agreement provides that Lafayette shareholders may elect to
receive all common stock for their shares, all cash for their shares or a
combination of common stock for a portion of their shares and cash for a portion
of their shares. Although Lafayette shareholders will have the opportunity to
elect the form of merger consideration they prefer to receive, the Merger
Agreement provides that cash payments of no more than $50,329,248 (including
cash
32
payments for fractional shares and payments to dissenting shareholders) will be
made in connection with the merger.
If you are a Lafayette shareholder, depending on which form of merger
consideration you elect to receive and which form of merger consideration other
Lafayette shareholders elect to receive, you may not receive all or a portion of
the cash merger consideration you elect. This may result in adverse tax
consequences to you. You will not know which form of merger consideration you
will receive until after we complete the merger.
- The fixed exchange ratio may adversely affect the value of your
shares.
If the merger is completed, Lafayette shareholders who do not receive $30
cash per share for their Lafayette shares will receive a number of shares of
First Merchants common stock based on a fixed exchange ratio of 1.11 shares of
First Merchants common stock for each share of Lafayette's common stock, subject
to the possibility of an adjustment in the amount of the conversion ratio, as
provided in the Merger Agreement. Because the market value of First Merchants
and Lafayette common stock may fluctuate, the value of the consideration you
receive for your shares may also fluctuate. The market value of the First
Merchants and Lafayette common stock could fluctuate for any number of reasons,
including those specific to First Merchants and Lafayette and those that
influence trading prices of equity securities generally.
We urge you to obtain current market quotations for First Merchants common
stock and Lafayette common stock because the value of the shares you receive may
be more or less than the value of such shares as of the date of this document.
- The 1.11 exchange ratio may be adjusted downward after you elect to
receive First Merchants common stock in exchange for your Lafayette
common stock.
The Merger Agreement provides that the 1.11 conversion ratio may be
adjusted downward, upon the agreement of Lafayette, if the average of the
mid-point between the bid and ask prices of First Merchants common stock for a
defined period before consummation of the merger is greater than $26.95. See
"THE MERGER - Conversion Ratio Adjustment." If this happens, Lafayette
shareholders who elected to receive First Merchants common stock for their
shares of Lafayette common stock will receive less than 1.11 shares of First
Merchants common stock for each share of Lafayette common stock held. At the
time any such downward adjustment to the 1.11 conversion ratio would be made,
Lafayette shareholders would not be able to change their election to receive
First Merchants common stock in the merger. The market value of First Merchants
common stock could fluctuate for any number of reasons. It cannot be known
whether a downward adjustment to the 1.11 conversion ratio will occur.
- Persons who receive all cash in the merger will not participate in
future growth.
Lafayette shareholders who elect and receive all cash in the merger will
not own any interest in the merged company, which will not afford them the
opportunity to participate in future growth, if any, in the value of the merged
company.
33
- The merged company's shares of common stock will not be FDIC insured.
Neither the Federal Deposit Insurance Corporation nor any other
governmental agency will insure the shares of First Merchants common stock.
Therefore, the value of your shares in First Merchants will be based on their
market value and may decline to zero.
- There will be a substantial number of shares eligible for future
resale.
Assuming the maximum number of shares of Lafayette common stock are
converted into the right to receive cash in the merger, the merged company will
have outstanding an aggregate of approximately 15,468,476 shares of common stock
upon consummation of the merger. If all shares of Lafayette common stock are
exchanged for shares of First Merchants common stock, the merged company will
have outstanding an aggregate of approximately 17,330,658 shares of common stock
upon consummation of the merger. As a result, future sales of substantial
amounts of First Merchants common stock, including shares issued upon the
exercise of stock options, by First Merchants' or Lafayette's current
shareholders, or the perception that such sales could occur, could adversely
affect the market price of First Merchants common stock. We make no prediction
as to the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on market price of First Merchants common
stock.
- Anti-takeover defenses may delay or prevent future mergers.
Provisions contained in First Merchants' Articles of Incorporation and
Bylaws and certain provisions of Indiana law could make it more difficult for a
third party to acquire First Merchants, even if doing so might be beneficial to
First Merchants shareholders. These provisions could limit the price that some
investors might be willing to pay in the future for shares of First Merchants
common stock and may have the effect of delaying or preventing a change in
control.
- Quarterly operating results may vary.
First Merchants' and Lafayette's quarterly operating results have varied in
the past and the merged company's quarterly operating results may continue to
vary in future periods. Quarterly operating results may vary for a number of
reasons, including demand for the merged company's products and services,
inflation and other factors described in this document.
- First Merchants stock price may be volatile.
The trading price of First Merchants common stock may be volatile. The
market for First Merchants common stock may experience significant price and
volume fluctuations in response to a number of factors including actual or
anticipated quarterly variations in operating results, changes in expectations
of future financial performance, changes in estimates by securities analysts,
governmental regulatory action, banking industry reform measures, customer
relationship developments and other factors, many of which will be beyond the
merged company's control.
34
Furthermore, the stock market in general, and the market for banks and bank
holding companies in particular, has experienced extreme volatility that often
has been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the trading price of
First Merchants common stock, regardless of actual operating performance.
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements with respect to
the financial condition, results of operations, and business of First Merchants
and Lafayette and of First Merchants following completion of the merger. These
statements are based on the beliefs and assumptions of each company's
management, and on information currently available to such management.
Forward-looking statements are generally preceded by, followed by, or include
the words "will," "believes," "expects," "anticipates," "intends," "plans,"
"estimates," or similar expressions. Forward-looking statements include the
information concerning possible or assumed future results of operations of First
Merchants and/or Lafayette set forth under "QUESTIONS AND ANSWERS ABOUT THE
MERGER AND THE SHAREHOLDER MEETINGS," "SUMMARY," "RISK FACTORS," "THE MERGER,"
and " UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION."
In particular, we have made statements in this document 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. Actual results may differ materially from those contemplated by
such forward-looking statements due to, among others, the following factors:
(i) expected cost savings from the merger that may not be fully
realized;
(ii) deposit attrition, customer loss, or revenue loss following the
merger may be greater than expected;
(iii) competitive pressure in the banking industry may increase
significantly;
(iv) costs or difficulties related to the integration of the businesses
of First Merchants and Lafayette may be greater than expected;
(v) changes in the interest rate environment may reduce margins;
(vi) general economic conditions, either nationally or regionally, may be
less favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit;
(vii) changes may occur in the regulatory environment;
(viii) changes may occur in business conditions and inflation; and
35
(ix) changes may occur in the securities markets.
Management of First Merchants and Lafayette believe these forward-looking
statements are reasonable. However, you should not place undue reliance on such
forward-looking statements, which are based on current expectations.
The forward-looking earnings estimates included in this document have not
been examined or compiled by the independent public accountants of First
Merchants and Lafayette, nor have such accountants applied any procedures
thereto. Accordingly, such accountants do not express an opinion or any other
form of assurance on them. Further information on other factors that could
affect the financial results of First Merchants after the merger is included in
the Securities and Exchange Commission filings incorporated by reference herein.
See "WHERE YOU CAN FIND ADDITIONAL INFORMATION."
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties, and assumptions. The future results and shareholder values
of First Merchants following completion of the merger may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results and values are beyond First Merchants' and
Lafayette's ability to control or predict. For those statements, First Merchants
and Lafayette claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
36
THE LAFAYETTE SPECIAL MEETING
Special Meeting of Shareholders of
Lafayette Bancorporation
General Information
We are furnishing this document to the shareholders of Lafayette
Bancorporation (Lafayette) in connection with the solicitation by the Board of
Directors of Lafayette of proxies for use at the Lafayette special meeting of
shareholders to be held on __________, _____ __, 2002, at _:__ _.m., local time,
at Lafayette's principal office located at 133 North 4th Street, Lafayette,
Indiana. This document is first being mailed to Lafayette shareholders on _____,
2002, and includes the notice of Lafayette special meeting, and is accompanied
by a form of proxy, and an Election Form.
Matters To Be Considered
The purposes of the special meeting are for you to consider and vote upon
adoption of the Agreement of Reorganization and Merger (Merger Agreement), dated
October 14, 2001, by and between First Merchants Corporation (First Merchants)
and Lafayette, and to consider and vote upon any other matters that properly
come before the special meeting or any adjournment or postponement of the
special meeting. Pursuant to the Merger Agreement, Lafayette will merge into
First Merchants, and Lafayette Bank and Trust Company will become a wholly-owned
subsidiary of First Merchants. The Merger Agreement is attached to this document
as Appendix A and is incorporated in this document by this reference. For a
description of the Merger Agreement, see "THE MERGER," beginning on page 43.
Votes Required
Approval of the Merger Agreement and the merger requires the affirmative
vote of at least a majority of the outstanding shares of Lafayette common stock.
Lafayette has fixed ______, 2002, as the record date for determining those
Lafayette shareholders entitled to notice of, and to vote at, the special
meeting. Accordingly, if you were a Lafayette shareholder of record at the close
of business on _______, 2002, you will be entitled to notice of and to vote at
the special meeting. If you are not the record holder of your shares and instead
hold your shares in a "street name" through a bank, broker or other record
holder, that person will vote your shares in accordance with the instructions
you provide them on the enclosed proxy. Each share of Lafayette common stock you
own on the record date entitles you to one vote on each matter presented at the
special meeting. At the close of business on the record date of ___________,
2002, there were approximately _________ shares of Lafayette common stock
outstanding held by approximately ____ shareholders.
As of the record date, Lafayette's executive officers, directors and their
affiliates had voting power with respect to an aggregate of _______ shares or
approximately ______% of the shares of Lafayette common stock outstanding. We
currently expect that the directors and
37
executive officers will vote all of their shares in favor of the proposal to
approve the Merger Agreement and the merger.
Proxies
If you are a Lafayette shareholder, you should have received a proxy card
for use at the Lafayette special meeting with this joint proxy
statement-prospectus. The accompanying proxy card is for your use at the special
meeting if you are unable or do not wish to attend the special meeting in
person. The shares represented by proxies properly signed and returned will be
voted at the special meeting as instructed by the Lafayette shareholders giving
the proxies. Proxy cards that are properly signed and returned but do not have
voting instructions will be voted FOR approval of the Merger Agreement and the
merger. Properly signed and returned proxy cards will also confer on the persons
named as proxies the power to vote in the discretion of such persons as to any
other matter which may properly come before the special meeting. The Board of
Directors of Lafayette is unaware of any other matters that may be presented for
action at the special meeting.
If you deliver a properly signed proxy cared, you may revoke your proxy at
any time before it is exercised by:
o delivering to the Secretary of Lafayette prior to the special meeting
a written notice of revocation addressed to Michelle D. Turnpaugh,
Lafayette Bancorporation, 133 North 4th Street, P.O. Box 1130,
Lafayette, Indiana 47902; or
o delivering to Lafayette prior to the special meeting a properly
executed proxy having a later date; or
o personal oral or written request at the special meeting. If your
shares are held in the name of your broker, bank or other nominee, and
you wish to vote in person, you must bring an account statement and
authorization from your nominee so that you may vote your shares in
person or by proxy at the special meeting.
Therefore, your right to attend the special meeting and vote in person will
not be affected by executing a proxy. In addition, to be effective, Lafayette
must receive the revocation before the proxy is exercised.
Because approval of the Merger Agreement and the merger requires the
affirmative vote of at least a majority of the outstanding shares of Lafayette
common stock, abstentions and broker non-votes will have the same effect as
voting against approval of the Merger Agreement. Accordingly, your Board of
Directors urges all Lafayette shareholders to complete, date and sign the
accompanying proxy and return it promptly in the enclosed postage-paid envelope.
You should not send stock certificates with your proxy card.
38
Solicitation of Proxies
Lafayette will bear the entire cost of soliciting proxies from Lafayette
shareholders. First Merchants will bear the cost of printing and mailing this
document. Lafayette will request that banks, brokers and other record holders
send proxies and proxy material to the beneficial owners of stock held by them
and secure their voting instructions, if necessary. Lafayette will reimburse
these banks, brokers and other record holders for their reasonable expenses. In
addition to solicitation of proxies by mail, proxies may be solicited personally
or by telephone by directors, officers and certain employees of Lafayette, who
will not be specially compensated for such soliciting. In soliciting proxies,
the directors, officers and employees of Lafayette have no authority to make any
representations and warranties about the merger or the Merger Agreement in
addition to or contrary to the provisions stated in this document. No statement
made by a director, officer or employee of Lafayette regarding the merger or the
Merger Agreement should be relied upon except as expressly stated in this
document.
Recommendation of the Lafayette Board of Directors
The Lafayette Board of Directors has approved the Merger Agreement and the
merger. The Board believes that the merger is fair to and in the best interests
of Lafayette and its shareholders. The Board recommends that the Lafayette
shareholders vote "FOR" the Merger Agreement and the merger. See "THE MERGER -
Lafayette's Reasons for the Merger" and "THE MERGER - Recommendation of the
Lafayette Board of Directors."
Other Matters
The special meeting of Lafayette shareholders is called for the purposes
set forth in the Notice to Lafayette shareholders included in this document. The
Board of Directors of Lafayette is unaware of any other matter for action by
shareholders at the special meeting other than the proposals to approve the
merger and the Merger Agreement. However, the enclosed proxy will give
discretionary authority to the persons named in the proxy with respect to
matters which are not known to the Board of Directors as of the date hereof 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 the management of Lafayette.
39
THE FIRST MERCHANTS SPECIAL MEETING
Special Meeting of Shareholders of
First Merchants Corporation
General Information
We are furnishing this document to the shareholders of First Merchants in
connection with the solicitation by the Board of Directors of First Merchants of
proxies for use at the special meeting of First Merchants shareholders to be
held on __________, _____ __, 2002, at _:__ _.m., local time, at First
Merchants' principal office located at 200 East Jackson Street, Muncie, Indiana.
This document is first being mailed to First Merchants shareholders on _____,
2002, and includes the notice of First Merchants special meeting, and is
accompanied by a form of proxy.
Matters To Be Considered
The purposes of the special meeting are for you to consider and vote upon
adoption of the Merger Agreement, and to consider and vote upon any other
matters that properly come before the special meeting or any adjournment or
postponement of the special meeting. Pursuant to the Merger Agreement, Lafayette
will merge into First Merchants, and Lafayette Bank and Trust Company will
become a wholly-owned subsidiary of First Merchants. The Merger Agreement is
attached to this document as Appendix A and is incorporated in this document by
this reference. For a description of the Merger Agreement, see "THE MERGER,"
beginning on page 43.
Votes Required
Approval of the Merger Agreement and the merger requires the affirmative
vote of at least a majority of the outstanding shares of First Merchants common
stock. First Merchants has fixed ______, 2002, as the record date for
determining those First Merchants shareholders entitled to notice of, and to
vote at, the special meeting. Accordingly, if you were a First Merchants
shareholder of record at the close of business on _______, 2002, you will be
entitled to notice of and to vote at the special meeting. If you are not the
record holder of your shares and instead hold your shares in a "street name"
through a bank, broker or other record holder, that person will vote your shares
in accordance with the instructions you provide them on the enclosed proxy. Each
share of First Merchants common stock you own on the record date entitles you to
one vote on each matter presented at the special meeting. At the close of
business on the record date of ___________, 2002, there were approximately
_________ shares of First Merchants common stock outstanding held by
approximately ____ shareholders.
As of the record date, First Merchants executive officers, directors and
their affiliates had voting power with respect to an aggregate of _______ shares
or approximately ______% of the shares of First Merchants common stock
outstanding. We currently expect that the directors and executive officers will
vote all of their shares in favor of the proposal to approve the merger
agreement and the merger.
40
Proxies
If you are a First Merchants shareholder, you should have received a proxy
card for use at the First Merchants special meeting with this joint proxy
statement-prospectus. The accompanying proxy card is for your use at the special
meeting if you are unable or do not wish to attend the special meeting in
person. The shares represented by proxies properly signed and returned will be
voted at the special meeting as instructed by the First Merchants shareholders
giving the proxies. Proxy cards that are properly signed and returned but do not
have voting instructions will be voted FOR approval of the Merger Agreement and
the merger. Properly signed and returned proxy cards will also confer on the
persons named as proxies the power to vote in the discretion of such persons as
to any other matter which may properly come before the special meeting. The
Board of Directors of First Merchants is unaware of any other matters that may
be presented for action at the special meeting.
If you deliver a properly signed proxy card, you may revoke your proxy at
any time before it is exercised by:
o delivering to the Secretary of First Merchants prior to the special
meeting a written notice of revocation addressed to Larry R. Helms,
First Merchants Corporation, 200 East Jackson Street, P.O. Box 792,
Muncie, Indiana 47305; or
o delivering to First Merchants prior to the special meeting a properly
executed proxy having a later date; or
o personal oral or written request at the special meeting. If your
shares are held in the name of your broker, bank or other nominee, and
you wish to vote in person, you must bring an account statement and
authorization from your nominee so that you may vote your shares in
person or by proxy at the special meeting.
Therefore, your right to attend the special meeting and vote in person will
not be affected by executing a proxy. In addition, to be effective, First
Merchants must receive the revocation before the proxy is exercised.
Because approval of the Merger Agreement and the merger requires the
affirmative vote of at least a majority of the outstanding shares of First
Merchants common stock, abstentions and broker non-votes will have the same
effect as voting against approval of the Merger Agreement. Accordingly, your
Board of Directors urges all First Merchants shareholders to complete, date and
sign the accompanying proxy and return it promptly in the enclosed postage-paid
envelope.
Solicitation of Proxies
First Merchants will bear the entire cost of soliciting proxies from First
Merchants shareholders. In addition, First Merchants will bear the cost of
printing and mailing this document. First Merchants will request that banks,
brokers and other record holders send proxies and proxy material to the
beneficial owners of stock held by them and secure their voting
41
instructions, if necessary. First Merchants will reimburse these banks, brokers
and other record holders for their reasonable expenses. In addition to
solicitation of proxies by mail, proxies may be solicited personally or by
telephone by directors, officers and certain employees of First Merchants, who
will not be specially compensated for such soliciting. In soliciting proxies,
the directors, officers and employees of First Merchants have no authority to
make any representations and warranties about the merger or the Merger Agreement
in addition to or contrary to the provisions stated in this document. No
statement made by a director, officer or employee of First Merchants regarding
the merger or the Merger Agreement should be relied upon except as expressly
stated in this document.
Recommendation of the First Merchants Board of Directors
The First Merchants Board of Directors has approved the Merger Agreement
and the merger. The Board believes that the merger is in the best interests of
First Merchants and its shareholders. The Board recommends that the First
Merchants shareholders vote "FOR" the Merger Agreement and the merger. See "THE
MERGER - First Merchants' Reasons for the Merger" and "THE MERGER -
Recommendation of the First Merchants Board of Directors."
Other Matters
The special meeting of First Merchants shareholders is called for the
purposes set forth in the Notice to First Merchants shareholders included in
this document. The Board of Directors of First Merchants is unaware of any other
matter for action by shareholders at the special meeting other than the
proposals to approve the merger and the Merger Agreement. However, the enclosed
proxy will give discretionary authority to the persons named in the proxy with
respect to matters which are not known to the Board of Directors as of the date
hereof 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 the management of First Merchants.
42
THE MERGER
At the special meetings, the shareholders of First Merchants and Lafayette will
consider and vote upon adoption of the Agreement of Reorganization and Merger
dated October 14, 2001, between First Merchants and Lafayette (the Merger
Agreement). The following summary highlights some of the terms of the Merger
Agreement. Because this is a summary of the Merger Agreement, it does not
contain a description of all of the terms of the Merger Agreement and is
qualified in its entirety by reference to the Merger Agreement. To understand
the merger, you should read carefully the entire Merger Agreement, which is
attached to this document as Appendix A and is incorporated herein by reference.
Description of the Merger
Under the terms of the Merger Agreement, Lafayette will merge with First
Merchants and the separate corporate existence of Lafayette will cease. As a
result of the merger, Lafayette Bank and Trust Company (Lafayette Bank) will
become a wholly-owned subsidiary of First Merchants. First Merchants shall
continue to operate Lafayette Bank as a separate subsidiary for at least 5 years
after the merger under its current name or a substantially similar name. The
Articles of Incorporation and Bylaws of First Merchants, as in effect prior to
the merger, will be the Articles of Incorporation and Bylaws of First Merchants
after the merger.
Background of the Merger
Because of various changes to the banking laws, as well as other factors,
acquisition activity among financial institutions located in Indiana and in
other states during the last fifteen years has increased. This acquisition
activity has resulted in regional and large financial institutions entering
Indiana and other markets in the midwestern United States. In addition,
developments and deregulation in the financial services industry generally have
led to increases in competition for bank services. Further, recent increases in
bank regulatory burdens have resulted in increased costs to most financial
institutions. These increased costs and competitive factors have created an
environment in which it is increasingly difficult for banks such as Lafayette
Bank to compete effectively with other larger financial institutions and
financial services providers.
As part of its continuing efforts to maximize shareholder value, the
directors of Lafayette and of Lafayette Bank have considered various options to
enhance shareholder value. Lafayette has also in the past considered (and
consummated) various mergers and acquisitions of companies and branches to
enhance shareholder value. Lafayette has from time to time received overtures
from larger banking institutions, including First Merchants, interested in
expanding into the Lafayette market or combining their existing franchise with
Lafayette.
In the late spring of 2001, the directors of Lafayette and Lafayette Bank
decided to obtain independent assistance in a strategic review of available
options. On May 21, 2001, Lafayette retained outside financial advisors, Biche
Advisors LLC, to assist it in reviewing market conditions, Lafayette's strategic
alternatives, and the related risks and rewards of these options, and the
current market for acquisitions.
43
Biche Advisors LLC presented its strategic review materials to the
directors of Lafayette and Lafayette Bank on June 19, 2001. After careful and
thorough discussion, the directors of Lafayette and Lafayette Bank identified
certain factors which could limit the ability of Lafayette to continue the
historical earnings per share and stock price growth of Lafayette in the future.
These factors included:
o shrinking profit margins;
o prospective lower earnings during the start-up periods of new
branches;
o the highly competitive and rapidly changing financial services
industry;
o the likely earnings dilution of additional capital that may be needed
to pursue additional asset growth;
o the limited number of acquisition opportunities;
o the competitive environment for acquisitions; and
o the lack of trading activity, research coverage and sponsorship in
Lafayette's common stock.
During July and August, 2001, Biche Advisors LLC, the directors of
Lafayette and Lafayette Bank and their counsel met to review the merger
evaluation process as well as to review a list of possible partners. During this
time period, representatives of Biche Advisors LLC had preliminary discussions
with several institutions, including First Merchants, about their interest in
Lafayette and their preliminary views on structuring merger transactions.
On July 13, 2001, the directors of Lafayette and of Lafayette Bank met with
their counsel to discuss their fiduciary duties to shareholders and ways in
which they should respond to and evaluate any offers to acquire Lafayette. On
August 27, 2001, the combined boards of Lafayette and Lafayette Bank met with
their financial advisor and counsel to discuss at length various strategic
options available to Lafayette. Among other options discussed were likely
acquirors and their probable approaches to an affiliation with Lafayette. The
Board of Lafayette concluded that it would be appropriate to pursue discussions
with First Merchants to determine how it would address pricing, social and other
financial issues in a possible merger.
A confidentiality agreement was signed by Lafayette and First Merchants on
August 28, 2001. An engagement letter was signed by Lafayette with its financial
advisor, Dain Rauscher Wessels, now rebranded as RBC Capital Markets effective
November 1, 2001. First Merchants was provided information concerning Lafayette
on September 7, 2001. On September 13, 2001, the First Merchants Board of
Directors met to evaluate a possible merger with Lafayette. At such meeting, the
First Merchants Board of Directors approved the proposed merger with Lafayette,
authorizing its executive officers to submit a non-binding indication of
interest to Lafayette. On September 18, 2001, First Merchants submitted a
non-binding indication of
44
interest for an affiliation with Lafayette. On September 24, 2001, the directors
of Lafayette and Lafayette Bank met to analyze and discuss this letter.
RBC Capital Markets, the financial advisor of Lafayette, provided an
analysis of the merger consideration proposed and the impact of the merger on
the operating results and financial condition of the resulting organization. The
non-financial aspects of the letter were also discussed. The directors
authorized their financial and legal advisors to begin negotiations on their
behalf for a definitive merger agreement with First Merchants, addressing
specific points raised at the Board meeting.
A due diligence investigation of Lafayette by First Merchants was conducted
on September 27, 2001, and during the following week. Lafayette conducted due
diligence concerning First Merchants during the week of October 7, 2001.
During the first two weeks of October, 2001, drafts of the Merger Agreement
were reviewed, negotiated and revised by the management and directors of
Lafayette, First Merchants and the advisors to Lafayette and First Merchants. On
October 12, 2001, final terms of the Merger Agreement were reached. On October
13, 2001, the First Merchants Board of Directors approved the terms of the
Merger Agreement. On October 14, 2001, the Lafayette and Lafayette Bank Boards
of Directors, their counsel and RBC Capital Markets met to review the final
documents. At this meeting, legal counsel reviewed in detail the terms of the
Merger Agreement and RBC Capital Markets issued its oral opinion that the
transaction was fair to Lafayette shareholders from a financial point of view.
Following this discussion of the proposed merger, the Lafayette Board of
Directors voted to approve the Merger Agreement. RBC Capital Markets later
provided the Lafayette Board of Directors with a written fairness opinion on the
transaction dated October 14, 2001.
First Merchants' Reasons for the Merger
In reaching its decision to approve the Merger Agreement and the merger,
the First Merchants Board of Directors considered a number of factors concerning
First Merchants' benefits from the merger. Without assigning any relative or
specific weights to the factors, the First Merchants Board considered the
following material factors:
1. First Merchants' respect for the ability and integrity of the
Lafayette Board of Directors, management, and staff, and their
affiliates;
2. First Merchants' belief that expanding its operations in the areas
served by Lafayette offers important long-term strategic benefits to
First Merchants;
3. a review of (i) the business, operations, earnings, and financial
condition including the capital levels and asset quality, of Lafayette
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
Lafayette operates, including existing competition, history of the
market areas with respect to financial
45
institutions, and average demand for credit, on a historical and
prospective basis, and (iii) the results of First Merchants' due
diligence review of Lafayette; and
4. a variety of factors affecting and relating to the overall strategic
focus of First Merchants, including First Merchants' desire to expand
into contiguous markets.
Lafayette's Reasons for the Merger
Among other items considered by the Lafayette Board of Directors in
evaluating whether to remain independent or whether to pursue a merger with
First Merchants were the following factors:
1. the prospects of Lafayette and First Merchants, as separate
institutions and as combined;
2. the compatibility of First Merchants' subsidiary banks' markets to
that of Lafayette's market;
3. the anticipated tax-free nature of the merger to the shareholders of
Lafayette receiving First Merchants common stock in exchange for their
shares of Lafayette common stock;
4. the possibility of increased liquidity through ownership of First
Merchants common stock as compared to Lafayette 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 Lafayette Bank as a wholly-owned
subsidiary of First Merchants;
9. an analysis of alternatives to Lafayette merging with First Merchants;
10. the level of dividends paid by First Merchants; and
46
11. the opinion of RBC Capital Markets indicating that the consideration
to be received by Lafayette's shareholders under the Merger Agreement
is fair from a financial point of view.
The Lafayette Board also considered the impact of the merger on Lafayette's
and Lafayette Bank's customers and employees and the communities served by
Lafayette 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 Lafayette Bank's employees within First Merchants or one of its
subsidiaries. The Lafayette Board examined First Merchants' continuing
commitment to the communities served by the institutions previously acquired by
First Merchants. Additionally, as a subsidiary of First Merchants, Lafayette
Bank would be able to offer more products and services to its customers because
of First Merchants' greater resources.
Based upon the foregoing factors, the Board of Directors of Lafayette
concluded it was advantageous to merge with First Merchants. The importance of
the various factors relative to one another cannot be precisely determined or
measured.
Effect of the Merger on First Merchants Shareholders
The approval of the First Merchants shareholders of the Merger Agreement
and the merger are required in order to complete the merger. However, First
Merchants shareholders will not be entitled to exchange their shares for any
consideration as a result of the merger. After the merger, First Merchants
shareholders will continue to own the same number of First Merchants shares they
owned before the merger.
Opinion of Lafayette's Financial Advisor
Merger-General. Pursuant to an engagement letter dated September 4, 2001
between Lafayette and Dain Rauscher Wessels, now rebranded as RBC Capital
Markets effective November 1, 2001, Lafayette retained RBC Capital Markets to
act as its sole financial advisor in connection with the merger and related
matters. As part of its engagement, RBC Capital Markets agreed, if requested by
Lafayette, to render an opinion with respect to the fairness, from a financial
point of view, to the holders of Lafayette's common stock, of the consideration
offered in the merger as set forth in the Merger Agreement. RBC Capital Markets
is a nationally recognized specialist in the financial services industry, in
general, and in Midwestern banks and thrifts in particular. RBC Capital Markets
is regularly engaged in evaluations of similar businesses and in advising
institutions with regard to mergers and acquisitions, as well as raising debt
and equity capital for such institutions. Lafayette selected RBC Capital Markets
as its financial advisor based upon RBC Capital Markets' qualifications,
expertise and reputation in such capacity.
RBC Capital Markets acted as financial advisor to Lafayette in connection
with the merger and participated in the negotiations leading to the Merger
Agreement. RBC Capital Markets also performed certain analyses described below
and presented the range of values for Lafayette resulting from such analyses to
the Lafayette Board of Directors in connection with its
47
advice as to the fairness of the consideration to be paid by First Merchants in
the merger. However, Lafayette and First Merchants determined the amount of
consideration payable to Lafayette shareholders in connection with the merger
through arm's length negotiations.
On October 14, 2001, RBC Capital Markets delivered to the Lafayette Board
of Directors its oral opinion, which RBC Capital Markets subsequently confirmed
in writing, that the consideration offered in the merger was fair to the holders
of Lafayette common stock, from a financial point of view, as of the date of
such opinion. RBC Capital Markets has also delivered to the Lafayette Board of
Directors a written opinion as of the date of this document (RBC Capital Markets
Opinion), which is substantially similar to the opinion delivered on October 14,
2001. No limitations were imposed by Lafayette on RBC Capital Markets with
respect to the investigations made or the procedures followed in rendering its
opinion.
The full text of the RBC Capital Markets Opinion, which sets forth the
assumptions made, matters considered and extent of review by RBC Capital
Markets, is attached as Appendix C to this document and is incorporated herein
by reference. It should be read carefully and in its entirety in conjunction
with this document. The following summary of the RBC Capital Markets Opinion is
qualified in its entirety by reference to the full text of the opinion. The RBC
Capital Markets Opinion is addressed to the Lafayette Board and relates only to
the fairness of the consideration provided for in the Merger Agreement from a
financial point of view, does not address any other aspect of the proposed
merger or any related transactions and does not constitute a recommendation to
any shareholders of Lafayette as to how such shareholders should vote at the
Lafayette special meeting described in this document.
RBC Capital Markets, in connection with rendering its October 14, 2001
opinion:
(i) Reviewed Lafayette's Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the years ended December 31, 2000,
December 31, 1999 and December 31, 1998, including the audited
financial statements contained therein, and Lafayette's Quarterly
Reports on Form 10-Q for each of the quarters ended March 31, 2001
and June 30, 2001;
(ii) Reviewed First Merchants' Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the years ended December 31, 2000,
December 31, 1999 and December 31, 1998, including the audited
financial statements contained therein, and First Merchants'
Quarterly Reports on Form 10-Q for each of the quarters ended March
31, 2001 and June 30, 2001;
(iii) Reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses,
earnings, assets and prospects of Lafayette and First Merchants
provided to RBC Capital Markets or publicly available;
(iv) Participated in meetings and telephone conferences with members of
senior management of Lafayette and First Merchants concerning the
financial condition, business, assets, financial forecasts and
prospects of the respective companies, as well as other matters RBC
Capital Markets believed relevant to its inquiry;
48
(v) Reviewed certain stock market information for Lafayette common stock
and First Merchants common stock, and compared it with similar
information for certain companies, the securities of which are
publicly traded, which RBC Capital Markets deemed to be relevant for
purposes of its Opinion;
(vi) Compared the results of operations and financial condition of
Lafayette and First Merchants with that of certain companies, which
RBC Capital Markets deemed to be relevant for purposes of its
Opinion;
(vii) Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions, which RBC Capital Markets deemed
to be relevant for purposes of its Opinion;
(viii) Reviewed the Merger Agreement and certain related documents; and
(ix) Performed such other reviews and analyses, as RBC Capital Markets
deemed appropriate.
The oral and written opinion provided by RBC Capital Markets to Lafayette
was necessarily based upon economic and market conditions and other
circumstances on, and information made available to RBC Capital Markets as of,
the date thereof.
In connection with its review and analysis and in arriving at its opinion,
RBC Capital Markets assumed and relied upon the accuracy and completeness of all
financial information and other pertinent information provided by First
Merchants and Lafayette to RBC Capital Markets for purposes of rendering its
opinion. RBC Capital Markets did not assume any obligation to independently
verify any of the information provided as being complete and accurate. With
regard to the internal financial forecasts provided to RBC Capital Markets by
management of Lafayette and First Merchants as well as projections of cost
savings, revenue enhancements and operating synergies, RBC Capital Markets
assumed that these materials had been reasonably prepared in good faith
reflecting the best available estimates and judgments of Lafayette and First
Merchants as to the future performance of the separate and combined entities and
that such estimates and judgments were reasonable at the time made and as of the
date of its opinion, that they would be realized in the amounts and time periods
estimated and that they provided a reasonable basis upon which RBC Capital
Markets could formulate its opinion. The internal management projections were
based upon numerous variables and assumptions made by management that are
inherently uncertain, including, among others, factors relative to the general
economic and competitive conditions facing Lafayette and First Merchants.
Accordingly, actual results could vary significantly from those set forth in the
respective projections.
RBC Capital Markets assumed, without independent verification, that the
aggregate allowances for loan losses for Lafayette and First Merchants are in
aggregate adequate to cover all such losses. RBC Capital Markets did not make or
obtain any independent evaluation, appraisal or physical inspection of
Lafayette's or First Merchants' assets or liabilities (contingent or otherwise),
the collateral securing any of such assets or liabilities, or the collectability
of any such assets nor did RBC Capital Markets review loan or credit files of
Lafayette or First Merchants. Furthermore, RBC Capital Markets assumed that all
the conditions to the
49
consummation of the merger as set forth in the Merger Agreement, including the
tax-free treatment of the merger to the holders of Lafayette common stock who
elect to receive payment for their shares in shares of First Merchants common
stock will be satisfied and not waived, that there are no factors that would
delay or subject to any adverse conditions any necessary regulatory or
governmental approval, that First Merchants will be able to finance the cash
portion of the merger consideration, and that the merger will be consummated on
a timely basis in the manner contemplated by the Merger Agreement.
In connection with rendering its October 14, 2001 opinion to the Lafayette
Board of Directors, RBC Capital Markets performed a variety of financial and
comparative analyses, which are briefly summarized below. Such summary of
analyses does not purport to be a complete description of the analyses performed
by RBC Capital Markets. Moreover, RBC Capital Markets believes that these
analyses must be considered as a whole and that selecting portions of such
analyses and the factors considered by it, without considering all such analyses
and factors, could create an incomplete understanding of the scope of the
process underlying the analyses and, more importantly, the opinion derived from
them. The preparation of a financial advisor's opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analyses or a summary description of such analyses. In its full analysis, RBC
Capital Markets also included assumptions with respect to industry performance,
general economic, financial market and other financial conditions many of which
are beyond the control of Lafayette and First Merchants. Furthermore, RBC
Capital Markets drew from its past experience in similar transactions, as well
as its experience in the valuation of securities and its general knowledge of
the banking industry as a whole. Any estimates in RBC Capital Markets' analyses
were not necessarily indicative of actual future results or values, which may
significantly diverge favorably or adversely from such estimates. Estimates of
company valuations do not purport to be appraisals nor to necessarily reflect
the prices at which companies or their respective securities actually may be
sold at the present time or in the future. None of the analyses performed by RBC
Capital Markets were assigned a greater significance by RBC Capital Markets than
any other in deriving its October 14, 2001 opinion. Such analyses were provided
to the Board of Directors of Lafayette in connection with the delivery of RBC
Capital Markets' October 14, 2001 opinion and such opinion and presentation were
among the many factors taken into consideration by the Lafayette Board in
approving the Merger Agreement.
Comparable Company Analysis. RBC Capital Markets reviewed and compared
actual stock market data and actual and estimated selected financial information
for First Merchants with corresponding information for 12 publicly traded banks
headquartered in either Indiana, Ohio or Michigan with total assets between $1.0
billion and $2.2 billion (First Merchants Peer Group). The First Merchants Peer
Group is listed below (ranked by asset size):
1. First Indiana Corporation....................Indianapolis, IN
2. First Financial Corporation..................Terre Haute, IN
3. Capitol Bancorp Ltd..........................Lansing, MI
4. Independent Bank Corporation.................Ionia, MI
5. Second Bancorp, Incorporated.................Warren, OH
6. BancFirst Ohio Corp..........................Zanesville, OH
7. MBT Financial Corporation....................Monroe, MI
50
8. Indiana United Bancorp.......................Greensburg, IN
9. Peoples Bancorp, Inc.........................Marietta, OH
10. Lakeland Financial Corporation...............Warsaw, IN
11. UNB Corporation..............................Canton, OH
12. German American Bancorp......................Jasper, IN
The table below represents a summary analysis of the First Merchants Peer
Group based on market prices as of October 12, 2001, and the latest publicly
available financial data as of or for the twelve months ended June 30, 2001:
- ---------------------------------------------------------------------------------------------------
Mean Median First
Merchants
- ---------------------------------------------------------------------------------------------------
Price to Last Twelve Months Earnings Per Share 14.5x 12.0x 13.8x
- ---------------------------------------------------------------------------------------------------
Price to 2001 Estimated Earnings Per Share 11.1x 11.0x 12.9x
- ---------------------------------------------------------------------------------------------------
Price to 2002 Estimated Earnings Per Share 9.7x 9.8x 11.0x
- ---------------------------------------------------------------------------------------------------
Price to Book Value Per Share 161% 150% 172%
- ---------------------------------------------------------------------------------------------------
Price to Tangible Book Value Per Share 183% 174% 212%
- ---------------------------------------------------------------------------------------------------
Dividend Yield 3.19% 3.12% 3.74%
- ---------------------------------------------------------------------------------------------------
Return on Average Assets 0.99% 0.99% 1.30%
- ---------------------------------------------------------------------------------------------------
Return on Average Equity 13.2% 13.5% 13.4%
- ---------------------------------------------------------------------------------------------------
Leverage Ratio 8.3% 8.0% 7.9%
- ---------------------------------------------------------------------------------------------------
Efficiency Ratio 58% 59% 52%
- ---------------------------------------------------------------------------------------------------
RBC Capital Markets reviewed and compared actual stock market data and
actual and estimated selected financial information for Lafayette with
corresponding information for 14 publicly traded banks headquartered in either
Indiana, Ohio or Michigan with total assets between $500 million and $1.0
billion (Lafayette Peer Group). The Lafayette Peer Group is listed below (ranked
by asset size):
1. Firstbank Corporation............................Alma, MI
2. Oak Hill Financial, Inc..........................Jackson, OH
3. Rurban Financial Corp............................Defiance, OH
4. North Country Financial Corporation..............Traverse City, MI
5. LNB Bancorp, Inc.................................Lorain, OH
6. Farmers National Banc Corporation................Canfield, OH
7. Mercantile Bank Corporation......................Grand Rapids, MI
8. NB&T Financial Group Inc.........................Wilmington, OH
9. Macatawa Bank Corporation........................Holland, MI
10. Ohio Valley Banc Corp............................Gallipolis, OH
11. Wayne Bancorp, Inc...............................Wooster, OH
12. Horizon Bancorp..................................Michigan City, IN
13. Franklin Bank, National Association..............Southfield, MI
14. DCB Financial Corporation........................Delaware, OH
The table below represents a summary analysis of the Lafayette Peer Group
based on market prices as of October 12, 2001, and the latest publicly available
financial data as of or for the twelve months ended June 30, 2001:
51
- -------------------------------------------------------------------------------------------------
Mean Median Lafayette
- -------------------------------------------------------------------------------------------------
Price to Last Twelve Months Earnings Per Share 13.0x 12.7x 9.5x
- -------------------------------------------------------------------------------------------------
Price to 2001 Estimated Earnings Per Share 12.6x 13.0x 8.9x
- -------------------------------------------------------------------------------------------------
Price to 2002 Estimated Earnings Per Share 10.6x 10.6x 8.1x
- -------------------------------------------------------------------------------------------------
Price to Book Value Per Share 141% 132% 116%
- -------------------------------------------------------------------------------------------------
Price to Tangible Book Value Per Share 147% 149% 149%
- -------------------------------------------------------------------------------------------------
Dividend Yield 3.37% 3.50% 2.67%
- -------------------------------------------------------------------------------------------------
Return on Average Assets 0.95% 0.85% 0.96%
- -------------------------------------------------------------------------------------------------
Return on Average Equity 11.8% 11.1% 13.1%
- -------------------------------------------------------------------------------------------------
Leverage Ratio 9.1% 8.5% 5.9%
- -------------------------------------------------------------------------------------------------
Efficiency Ratio 61% 61% 60%
- -------------------------------------------------------------------------------------------------
Comparable Transaction Analysis. RBC Capital Markets reviewed and compared
actual information for groups of comparable pending and completed transactions
it deemed pertinent to an analysis of the merger, including the following: (i)
nationwide transactions completed after January 1, 2000, or still pending where
the seller was a bank and had total assets between $400 million and $10 billion,
the sellers' assets contributed 25% to 50% of the combined companies assets,
including UNB Corporation's pending acquisition of BancFirst Ohio Corp.
(Nationwide Screen I), and (ii) nationwide transactions completed after January
1, 2000, or still pending where the seller was a bank and had total assets
between $400 million and $1.0 billion, the implied transaction value was between
$50 million and $150 million and the seller's return on average assets was 0.75%
or greater (Nationwide Screen II). The range, mean and median ratios of (i)
price to last twelve months earnings, (ii) price to book value, (iii) price to
tangible book value, and (iv) price to assets for each group were compared to
the same ratios of the merger. The information analyzed was compiled by RBC
Capital Markets from a data firm that monitors and publishes transaction
summaries and descriptions in the financial services industry.
The following is the list of the Nationwide Screen I Transactions:
- ---------------------------------------------------------------------------------------------------
Buyer Seller
- ---------------------------------------------------------------------------------------------------
UNB Corporation BancFirst Ohio Corp.
- ---------------------------------------------------------------------------------------------------
NBT Bancorp Inc. CNB Financial Corp.
- ---------------------------------------------------------------------------------------------------
F.N.B. Corporation Promistar Financial Corporation
- ---------------------------------------------------------------------------------------------------
Virginia Financial Corporation Virginia Commonwealth Financial
- ---------------------------------------------------------------------------------------------------
Financial Federal MHC, Inc. Success Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------
Allegiant Bancorp, Inc. Southside Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------
Prosperity Bancshares, Inc. Commercial Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------
Chemical Financial Corporation Shoreline Financial Corporation
- ---------------------------------------------------------------------------------------------------
Niagara Bancorp Inc. (MHC) Iroquois Bancorp, Inc.
- ---------------------------------------------------------------------------------------------------
BancorpSouth, Inc. First United Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------
Sterling Financial Corporation Hanover Bancorp, Inc.
- ---------------------------------------------------------------------------------------------------
Carolina First Corporation Anchor Financial Corporation
- ---------------------------------------------------------------------------------------------------
Peoples Heritage Financial Group Banknorth Group, Inc.
- ---------------------------------------------------------------------------------------------------
First Charter Corporation Carolina First BancShares, Inc.
- ---------------------------------------------------------------------------------------------------
BankIllinois Financial Corporation First Decatur Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------
Gold Banc Corporation, Inc. American Bancshares, Inc.
- ---------------------------------------------------------------------------------------------------
Gold Banc Corporation, Inc. CountyBank Holding Company
- ---------------------------------------------------------------------------------------------------
NBT Bancorp Inc. Lake Ariel Bancorp, Inc.
- ---------------------------------------------------------------------------------------------------
52
Citizens Financial Group, Inc. UST Corporation
- --------------------------------------------------------------------------------
The following table represents a summary analysis of the Nationwide Screen
I Transactions based on announced or completed transaction values, whichever is
appropriate, compared to this merger.
- ----------------------------------------------------------------------------------------------------------
Range Mean Median Lafayette* Lafayette**
- ----------------------------------------------------------------------------------------------------------
Price to Last Twelve Months Earnings Per 10.8x to 22.6x 17.2x 18.1x 16.0x 15.0x
Share
- ----------------------------------------------------------------------------------------------------------
Price to Book Value Per Share 153% to 263% 200% 193% 205% 194%
- ----------------------------------------------------------------------------------------------------------
Price to Tangible Book Value Per Share 153% to 342% 226% 231% 265% 250%
- ----------------------------------------------------------------------------------------------------------
Price to Assets 8% to 23% 16% 16% 16% 15%
- ----------------------------------------------------------------------------------------------------------
* Lafayette's pricing analysis is based on a 60% stock and 40% cash
transaction and a First Merchants share price of $23.43, the closing share
price on October 12, 2001.
** Lafayette's pricing analysis is based on a 100% stock transaction and a
First Merchants share price of $23.43, the closing share price on October
12, 2001.
The following is a list of Nationwide Screen II Transactions:
- -----------------------------------------------------------------------------------------------------------
Buyer Seller
- -----------------------------------------------------------------------------------------------------------
NBT Bancorp Inc. CNB Financial Corp.
- -----------------------------------------------------------------------------------------------------------
SouthTrust Corporation Community Bankshares, Incorporated
- -----------------------------------------------------------------------------------------------------------
Virginia Financial Corporation Virginia Commonwealth Financial Corporation
- -----------------------------------------------------------------------------------------------------------
First National of Nebraska, Incorporated Castle BancGroup, Incorporated
- -----------------------------------------------------------------------------------------------------------
Allegiant Bancorp, Inc. Southside Bancshares Corp.
- -----------------------------------------------------------------------------------------------------------
First Virginia Banks, Inc. James River Bankshares, Inc.
- -----------------------------------------------------------------------------------------------------------
Community Bank Systems, Inc. First Liberty Bank Corp.
- -----------------------------------------------------------------------------------------------------------
Trustmark Corporation Barret Bancorp, Inc.
- -----------------------------------------------------------------------------------------------------------
BOK Financial Corporation CNBT Bancshares, Inc.
- -----------------------------------------------------------------------------------------------------------
Niagara Bancorp Inc. (MHC) Iroquois Bancorp, Inc.
- -----------------------------------------------------------------------------------------------------------
U.S. Bancorp Scripps Financial Corporation
- -----------------------------------------------------------------------------------------------------------
Sterling Financial Corporation Hanover Bancorp, Inc.
- -----------------------------------------------------------------------------------------------------------
NBT Bancorp Inc. Pioneer American Holding Company
- -----------------------------------------------------------------------------------------------------------
Huntington Bancshares Incorporated Empire Banc Corporation
- -----------------------------------------------------------------------------------------------------------
BB&T Corporation First Banking Company of Southeast Georgia
- -----------------------------------------------------------------------------------------------------------
BB&T Corporation Hardwick Holding Company
- -----------------------------------------------------------------------------------------------------------
Wells Fargo & Company 1st Choice Financial Corporation
- -----------------------------------------------------------------------------------------------------------
First Sterling Banks, Incorporated Main Street Banks, Inc.
- -----------------------------------------------------------------------------------------------------------
BankIllinois Financial Corporation First Decatur Bancshares, Incorporated
- -----------------------------------------------------------------------------------------------------------
Gold Banc Corporation, Inc. CountyBanc Holding Company
- -----------------------------------------------------------------------------------------------------------
City National Corporation Pacific Bank, N.A.
- -----------------------------------------------------------------------------------------------------------
NBT Bancorp Inc. Lake Ariel Bancorp, Inc.
- -----------------------------------------------------------------------------------------------------------
Old Kent Financial Corporation Merchants Bancorp, Inc.
- -----------------------------------------------------------------------------------------------------------
U.S. Bancorp Peninsula Bank of San Diego
- -----------------------------------------------------------------------------------------------------------
53
The following table represents a summary analysis of the Nationwide Screen
II Transactions based on announced or completed transaction values, whichever is
appropriate, compared to this merger.
- ---------------------------------------------------------------------------------------------------------
Range Mean Median Lafayette* Lafayette**
- ---------------------------------------------------------------------------------------------------------
Price to Last Twelve Months Earnings Per 11.6x to 31.3x 18.6x 17.9x 16.0x 15.0x
Share
- ---------------------------------------------------------------------------------------------------------
Price to Book Value Per Share 120% to 300% 202% 191% 205% 194%
- ---------------------------------------------------------------------------------------------------------
Price to Tangible Book Value Per Share 137% to 300% 214% 203% 265% 250%
- ---------------------------------------------------------------------------------------------------------
Price to Assets 11% to 28% 18% 18% 16% 15%
- ---------------------------------------------------------------------------------------------------------
* Lafayette's pricing analysis is based on a 60% stock and 40% cash
transaction and a First Merchants share price of $23.43, the closing share
price on October 12, 2001.
** Lafayette's pricing analysis is based on a 100% stock transaction and a
First Merchants share price of $23.43, the closing share price on October
12, 2001.
Premiums Analysis. RBC Capital Markets reviewed and compared the per share
stock premiums relative to the respective per share transaction values, when
available, for Nationwide Screen I, Nationwide Screen II and the Lafayette
transaction at various time intervals including (i) one day, (ii) one month,
(iii) three month, and (iv) one year. The following table represents a summary
of the analysis, reflecting the median per share premiums for each respective
interval and screen:
- ---------------------------------------------------------------------------------------------------------
Nationwide Nationwide Lafayette* Lafayette**
Screen I Screen II
- ---------------------------------------------------------------------------------------------------------
One Day 33% 33% 65% 55%
- ---------------------------------------------------------------------------------------------------------
One Month 34% 38% 65% 55%
- ---------------------------------------------------------------------------------------------------------
Three Month 39% 50% 90% 79%
- ---------------------------------------------------------------------------------------------------------
One Year 43% 43% 104% 93%
- ---------------------------------------------------------------------------------------------------------
* Lafayette's pricing analysis is based on a 60% stock and 40% cash
transaction and a First Merchants share price of $23.43, the closing share
price on October 12, 2001.
** Lafayette's pricing analysis is based on a 100% stock transaction and a
First Merchants share price of $23.43, the closing share price on October
12, 2001.
Contribution Analysis. RBC Capital Markets analyzed the financial
contribution of Lafayette and First Merchants to the pro forma combined company
relative to the approximate ownership of their respective shareholders of the
pro forma combined company. The analysis indicated that Lafayette's shareholders
would hold approximately 26.004% of the pro forma diluted shares assuming a 100%
stock consideration transaction. Lafayette's approximate financial contributions
to the pro forma combined company are listed below.
1. Shareholders' Equity............................................24.599%
2. Tangible Shareholders' Equity...................................23.813%
3. LTM Net Income..................................................24.964%
4. 2001 Estimated Earnings.........................................24.692%
5. 2002 Estimated Earnings.........................................23.269%
6. Assets..........................................................29.289%
54
7. Loans...........................................................29.185%
8. Deposits........................................................29.318%
Accretion/Dilution Analysis. On the basis of financial projections and
estimates of on-going cost savings accruing to the pro forma combined company
provided to RBC Capital Markets by Lafayette and First Merchants, as well as
estimated one-time costs related to the merger, RBC Capital Markets compared pro
forma equivalent per share calculations with respect to earnings, cash
dividends, book value and tangible book value to the stand-alone per share
projections for Lafayette.
The accretion/dilution analysis, assuming that closing would occur on
January 1, 2002 demonstrated, among other things, that the merger would result
in:
o accretion to earnings per share for Lafayette's shareholders in 2002,
with increasing amounts of accretion in 2003 and 2004;
o significantly higher cash dividends per share for Lafayette's
shareholders, assuming First Merchants maintained its dividend policy;
o accretion to book value per share for Lafayette's shareholders in
2002, with increasing amounts of accretion in 2003 and 2004, assuming
a 60% stock and 40% cash transaction and accretion to book value per
share for Lafayette's shareholders in 2002, with decreasing amounts of
accretion in 2003 and 2004, assuming a 100% stock transaction; and
o dilution to tangible book value per share for Lafayette's shareholders
in 2002, with decreasing amounts of dilution in 2003 and 2004,
assuming a 60% stock and 40% cash transaction and accretion to
tangible book value per share for Lafayette's shareholders in 2002,
with decreasing amount of accretion in 2003 and an increasing amount
of accretion in 2004, assuming a 100% stock transaction.
Discounted Cash Flow Analysis. RBC Capital Markets performed a discounted
cash flow analysis with regard to Lafayette on a stand-alone basis. This
analysis utilized a range of discount rates of 11% to 15% and a range of
earnings trading and takeout multiples from 10.0x to 18.0x. The analysis
resulted in a trading range of present values from $15.14 to $24.26 and a
takeout range of $23.12 to $30.61 for Lafayette on a stand-alone basis. As
indicated above, this analysis was based on Lafayette's senior management's
estimates and is not necessarily indicative of the actual values or actual
future results and does not purport to reflect the prices at which any
securities may trade at the present or any time in the future. RBC Capital
Markets noted that the discounted cash flow analysis was included because it is
a widely used valuation methodology, but noted that the results of such
methodology are highly dependent upon numerous assumptions that must be made,
including earnings growth rates, dividend payout rates, terminal values and
discount rates.
Other Analyses. RBC Capital Markets compared the relative financial and
market performance of Lafayette and First Merchants to a variety of relevant
industry peer groups and
55
indices. RBC Capital Markets also reviewed certain other information including
pro forma estimated balance sheet composition and pro forma financial
performance.
No other company or transaction used as a comparison in the above analyses
is identical to Lafayette, First Merchants or the combined entity and no
transaction is identical to the merger. Accordingly, an analysis of the results
of the foregoing is not purely mathematical; rather, such analyses involve
complex considerations and judgments concerning differences in financial market
and operating characteristics of the companies, the timing of the relevant
transactions, and prospective buyer interest, as well as other factors that
could affect the public trading volume of the companies to which Lafayette,
First Merchants and the combined entity are being compared.
The summary set forth above is not a complete description of the
presentation by RBC Capital Markets to Lafayette's Board of Directors or of the
analysis performed by RBC Capital Markets.
In connection with rendering the RBC Capital Markets Opinion, RBC Capital
Markets performed procedures to update, as necessary, certain of the analyses
described above and reviewed the assumptions on which such analyses described
above were based and the factors considered in connection therewith. RBC Capital
Markets did not perform any analyses in addition to those described above in
connection with rendering the RBC Capital Markets Opinion.
RBC Capital Markets is a member of all principal securities exchanges in
the United States and in the conduct of its broker-dealer activities, RBC
Capital Markets may actively trade securities of Lafayette and First Merchants
for its own accounts and for the accounts of customers and, accordingly, RBC
Capital Markets may at any time hold a long or short position in such
securities. In addition, RBC Capital Markets will be acting as co-manager in the
sale of the trust preferred securities of First Merchants to finance the cash
portion of the consideration to be paid by First Merchants to shareholders of
Lafayette in the merger. In consideration for serving as co-manager, RBC Capital
Markets will receive customary fees from First Merchants, the amount of which
will depend on RBC Capital Market's role in the offering.
Lafayette paid RBC Capital Markets a $50,000 retainer at the time RBC
Capital Markets was engaged to serve as Lafayette's financial advisor, $75,000
for its services in rendering the fairness opinion delivered on October 14,
2001, and a $75,000 fee for its services in rendering the RBC Capital Markets
Opinion included in this document. Lafayette has also agreed to pay RBC Capital
Markets a transaction fee at closing based on the value of the consideration to
be received by Lafayette's shareholders. Fees previously paid to RBC Capital
Markets by Lafayette in connection with its engagement will be credited against
the amount of the transaction fee payable to RBC Capital Markets at closing. The
unpaid balance of this transaction fee is contingent upon consummation of the
merger. Assuming a 60% stock, 40% cash transaction, and using an average closing
price for First Merchants' stock of $___ per share, the amount of the
transaction fee payable to RBC Capital Markets would be approximately $___
million. Lafayette has also agreed to reimburse RBC Capital Markets for
reasonable out of pocket
56
expenses incurred in connection with its engagement, and to indemnify RBC
Capital Markets against certain liabilities under the federal securities laws.
Recommendation of the Lafayette Board of Directors
The Board of Directors of Lafayette has carefully considered and approved
the Merger Agreement and the merger and recommends to the Lafayette shareholders
that they approve the Merger Agreement.
Recommendation of the First Merchants Board of Directors
The Board of Directors of First Merchants has carefully considered and
approved the Merger Agreement and the merger and recommends to the First
Merchants shareholders that they approve the Merger Agreement.
Exchange of Lafayette Common Stock
As of the effective date of the merger, for each Lafayette shareholder, you
will be entitled to receive for each outstanding share of Lafayette common stock
you own, other than for shares as to which dissenters' rights have been
exercised, at your election, either (i) 1.11 shares of First Merchants common
stock (Option 1), or (ii) $30.00 in cash (Option 2). You may also elect to
receive a combination of First Merchants common stock and cash for your shares.
The 1.11 conversion ratio is subject to adjustment under certain circumstances.
See "THE MERGER - Conversion Ratio Adjustment."
Lafayette shareholders should obtain current market quotations for First
Merchants common stock and Lafayette common stock. We expect that the market
price of First Merchants common stock will fluctuate between the date of this
document and the date of the merger and thereafter. Because the number of shares
of Lafayette common stock which Lafayette shareholders may elect to receive in
exchange for each Lafayette share is fixed, subject to adjustment as described
below, and the market price of First Merchants common stock may fluctuate, the
value of the shares of First Merchants common stock that Lafayette shareholders
may elect to receive in the merger may increase or decrease prior to and after
the merger.
If First Merchants changes the number of outstanding shares of First
Merchants common stock before the merger through any stock split, stock
dividend, recapitalization or similar transaction, then First Merchants will
proportionately adjust the 1.11 conversion ratio.
An Election Form is being mailed to Lafayette shareholders along with this
document. You must elect to receive either Option 1 or Option 2 for each of your
shares of Lafayette common stock you own by completing the Election Form. You
may elect a combination of Option 1 or Option 2 for your Lafayette shares. To be
effective, the Trust Department of First Merchants Bank, National Association
must receive a properly completed Election Form by 5:00 p.m. local time on
______, 2002. If a properly completed Election Form is not timely received for
your Lafayette shares, you will be treated as if you elected Option 1 for all
shares you own.
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In the event the elections submitted by Lafayette shareholders under Option
2 would entitle Lafayette's shareholders to receive in the aggregate less than
$50,329,248 in cash (including cash payments for fractional shares and payments
to dissenting shareholders), all valid Option 1 stock elections and Option 2
cash elections of Lafayette shareholders shall be honored. In the event (i) the
elections submitted by Lafayette shareholders under Option 2 would entitle
Lafayette shareholders to receive in the aggregate more than $50,329,248 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 (Continuity of Interest Rule), due to the amount of cash that would
be issuable in connection with the merger, certain of the Option 2 cash
elections of the Lafayette shareholders shall be converted into Option 1 stock
elections. The Option 2 cash election covering the largest number of Lafayette
shares will be converted into an Option 1 stock election first, followed by the
Option 2 cash election which covers the next largest number of Lafayette shares
being converted into an Option 1 stock election and continuing this process
until the total remaining number of Lafayette shares covered by Option 2 cash
elections is such that the merger will result in cash payments of no more than
$50,329,248 and will satisfy the Continuity of Interest Rule. As a result of
such provisions, certain Lafayette shareholders may receive less cash and more
First Merchants common stock for their shares than they elected based on the
choices made by the other Lafayette shareholders.
First Merchants will not issue fractional shares of First Merchants common
stock to Lafayette shareholders. Each Lafayette shareholder who otherwise would
be entitled to a fractional interest in a First Merchants share as a result of
the conversion ratio will be paid a cash amount for the fractional interest. The
amount of cash Lafayette shareholders will receive for any fractional interest
will be calculated by multiplying the fractional interest by the average of the
mid-point between the bid and ask prices of the common stock of First Merchants
as reported in Bloomberg, L.P. for the thirty (30) NASDAQ trading days preceding
the fifth (5th) calendar day prior to the effective date of the merger (First
Merchants Average Price).
If you hold your shares of Lafayette common stock in a "street name"
through a bank or broker, your bank or broker is responsible for ensuring that
the certificate or certificates representing your shares are properly
surrendered and that the appropriate amount of cash or number of First Merchants
shares are credited to your account. However, you must complete and return the
Election Form to your bank or broker for transmittal to First Merchants Bank,
National Association.
After completion of the merger, your stock certificates previously
representing Lafayette common stock will represent only the right for you to
receive shares of First Merchants common stock and/or cash, as applicable. Prior
to the surrender of Lafayette stock certificates for exchange subsequent to
completion of the merger, the holders of such shares entitled to receive shares
of First Merchants common stock will not be entitled to receive payment of
dividends or other distributions declared on such shares of First Merchants
common stock. However, upon the subsequent exchange of such certificates, First
Merchants will pay, without interest, any accumulated dividends or distributions
previously declared and withheld on the shares of First Merchants common stock.
On the effective date of the merger, the stock transfer books of Lafayette will
be closed and no transfer of shares of Lafayette common stock will be made
thereafter. If, after the effective date of the merger, you present certificates
representing shares
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of Lafayette common stock for registration or transfer, the
certificates will be cancelled and exchanged for shares of First Merchants'
common stock and/or cash, as applicable.
Immediately after completion of the merger, First Merchants will mail a
letter of transmittal to each Lafayette shareholder. This transmittal letter
will contain instructions on how to surrender your certificates representing
shares of Lafayette common stock. You should not return your Lafayette stock
certificates with the enclosed proxy or Election Form, but should retain them
until you receive a letter of transmittal from First Merchants.
First Merchants will distribute stock certificates representing shares of
First Merchants common stock and/or cash payments to each former shareholder of
Lafayette within 15 business days after the later of (i) the effective date of
the merger or (ii) the date the shareholder delivers his/her/its Lafayette stock
certificates to First Merchants accompanied by a properly completed and executed
letter of transmittal. Delivery of Lafayette shares for conversion will not be
taken until after completion of the merger. First Merchants Bank, National
Association will act as conversion agent in the merger.
If your certificate for your shares of Lafayette common stock has been
lost, stolen or destroyed, First Merchants will issue the First Merchants common
stock and/or make any cash payments to you after First Merchants receives from
you an agreement to indemnify First Merchants against loss from such lost,
stolen or destroyed certificate and an affidavit evidencing the loss, theft or
destruction of your certificates.
Conversion Ratio Adjustment
If the First Merchants Average Price (as defined above in the preceding
section) is less than or greater than certain target prices set forth in the
Merger Agreement, then First Merchants and Lafayette may agree to adjust the
conversion ratio or terminate the Merger Agreement. See "THE MERGER -
Termination; Waiver; Amendment." If adjusted, the new conversion ratio will be
determined by taking the target price triggering the adjustment times the
existing conversion ratio of 1.11, divided by the First Merchants Average Price.
Provided below are a description of the target prices triggering a possible
adjustment in the conversion ratio or termination of the Merger Agreement,
followed by a scenario detailing how the conversion ratio may be adjusted. The
scenarios are provided only as possible examples to assist Lafayette
shareholders in understanding the conversion ratio adjustment provisions.
First, if the First Merchants Average Price is less than $22.05, then
Lafayette may terminate the Merger Agreement. If Lafayette's Board exercises its
right to terminate the Merger Agreement, it must give written notice to First
Merchants of its election to terminate the merger within 24 hours after the 5th
day prior to the closing date of the merger. Within 2 business days after the
receipt of such notice, First Merchants may elect to increase the conversion
ratio to equal a number equal to $22.05 times the existing conversion ratio of
1.11, divided by the First Merchants Average Price. If First Merchants elects to
adjust the conversion ratio, the Merger Agreement will remain in effect with the
adjusted conversion ratio and will not be terminated. If First Merchants does
not elect to adjust the conversion ratio within such 2 business days, then the
Merger Agreement will terminate.
SCENARIO 1: If the First Merchants Average Price is $20.00 (which is
less than $22.05), then, at First Merchants' election, the conversion ratio
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would be adjusted as follows by First Merchants and Lafayette:
22.05 x 1.11 = 1.22
------------
20.00
Thus, the adjusted conversion ratio would be 1.22 to 1, which would
impact the number of shares of First Merchants common stock you would
receive under Option 1. The amount of cash to be received under Option 2
would not be changed. Thus, under this scenario, after adjustment, you
would be entitled to receive for each outstanding share of Lafayette common
stock you own, other than for shares as to which dissenters' rights have
been exercised, at your election, either (i) 1.22 shares of First Merchants
common stock under Option 1, or (ii) $30.00 in cash under Option 2.
Second, if the First Merchants Average Price is greater than $26.95, then
First Merchants may terminate the Merger Agreement. If First Merchants' Board
exercises its right to terminate the Merger Agreement, it must give written
notice to Lafayette of its election to terminate the merger within 24 hours
after the 5th day prior to the closing date of the merger. Within 2 business
days after the receipt of such notice, Lafayette may elect to decrease the
conversion ratio to equal a number equal to $26.95 times the existing conversion
ratio of 1.11, divided by the First Merchants Average Price. If Lafayette elects
to adjust the conversion ratio, the Merger Agreement will remain in effect with
the adjusted conversion ratio and will not be terminated. If Lafayette does not
elect to adjust the conversion ratio within such 2 business days, then the
Merger Agreement will terminate.
SCENARIO 2: If the First Merchants Average Price is $29.00 (which is
greater than $26.95), then, at Lafayette's election, the conversion ratio
would be adjusted as follows by First Merchants and Lafayette:
26.95 x 1.11 = 1.03
------------
29.00
Thus, the adjusted conversion ratio would be 1.03 to 1, which would
impact the number of shares of First Merchants common stock you would
receive under Option 1. The amount of cash to be received under Option 2
would not be changed. Thus, under this scenario, after adjustment, you
would be entitled to receive for each outstanding share of Lafayette common
stock you own, other than for shares as to which dissenters' rights have
been exercised, at your election, either (i) 1.03 shares of First Merchants
common stock under Option 1, or (ii) $30.00 in cash under Option 2.
The scenarios set forth above are provided as examples only and do not
reflect what the actual First Merchants Average Price will be. The scenarios
have been included in this
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document to help you understand how the conversion ratio adjustment works at
various arbitrarily chosen prices. First Merchants and Lafayette will determine
if an adjustment to the conversion ratio will be made in the 5 days preceding
completion of the merger.
Rights of Dissenting Shareholders
The Indiana Business Corporation Law (IBCL) provides shareholders of some
merging corporations with certain rights to dissent to a merger. Under the
provisions of the IBCL, First Merchants shareholders have no dissenters' rights
to demand the fair value for their shares of First Merchants common stock as a
result of the merger since First Merchants common stock is traded
over-the-counter and reported on the NASDAQ National Market System. Under the
provisions of the IBCL, Lafayette shareholders are entitled to dissenters'
rights.
The dissenters' rights of Lafayette shareholders are set forth in Chapter
44 of the IBCL, a copy of which is attached to this document as Appendix B. To
be entitled to dissenter's rights, Lafayette shareholders must strictly comply
with the procedures of Indiana law set forth in the IBCL. This document
summarizes the procedures for Lafayette shareholders to dissent to the merger
under Indiana law.
As a Lafayette shareholder, Chapter 44 of the IBCL provides that you have
the right to demand payment in cash for the fair value of the shares you own
immediately before the merger is completed. Such fair market value excludes any
appreciation or depreciation on the value of your shares in anticipation of the
merger, unless a court determines that such exclusion would be inequitable. To
claim dissenters' rights, you must first:
1. deliver to Lafayette before the vote on the merger is taken, written
notice of your intent to demand payment in cash for your shares if the
merger is completed; and
2. you must not vote in favor of the merger. To not vote in favor of the
merger, you must either vote against the merger or abstain from voting
on the merger in person or by proxy or simply take no action at all
with respect to voting your shares.
If you desire to dissent to the merger, you may send your written notice to
Robert J. Weeder, President and Chief Executive Officer, Lafayette
Bancorporation, 133 North 4th Street, P.O. Box 1130, Lafayette, Indiana 47902.
If the merger is approved by the Lafayette shareholders, within 10 days
after shareholder approval, First Merchants or Lafayette will send a notice of
dissenters' rights to those Lafayette shareholders who have satisfied the above
conditions. The notice will state the procedures that dissenting shareholders
must follow to exercise dissenters' rights under Indiana law.
If you receive such a notice, to exercise your dissenters' rights, you must
then:
1. demand payment for the shares of Lafayette common stock you own;
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2. certify that you owned the Lafayette shares before the date set forth
in such notice; and
3. deposit your Lafayette stock certificates in accordance with the
instructions in such notice.
If a Lafayette shareholder does not strictly comply with each of the
conditions described above, he/she/it will not be entitled to dissenters' rights
under Chapter 44 of the IBCL. If you execute and return the enclosed proxy but
do not specify a choice on the merger proposal, you will be deemed to have voted
in favor of the merger and accordingly to have waived your dissenters' rights,
unless you revoke the proxy prior to its being voted. Accordingly, if you return
the enclosed proxy and wish to dissent to the merger, you must vote your
Lafayette shares against the merger or abstain from voting.
Upon completion of the merger, First Merchants will pay each dissenting
Lafayette shareholder who has complied with all of the requirements of Chapter
44 of the IBCL and of the notice, First Merchants' estimate of the fair value of
their shares as of the time immediately prior to the merger, excluding any
appreciation in value in anticipation of the merger. The determination of the
estimate of "fair value" will be based on the value of your shares of Lafayette
common stock on October 12, 2001, the day immediately prior to the announcement
of the merger.
Dissenters can object to the fair value established by First Merchants by
stating their estimate of the fair value and demanding payment of the additional
amount within 30 days after First Merchants makes or offers payment to the
dissenter. First Merchants can elect to agree to the dissenter's fair value
demand or commence an action within 60 days of receipt of the dissenter's demand
in the Circuit or Superior Court of Tippecanoe County for a judicial
determination of the fair value. The Court may appoint appraisers to determine
the fair value. The Court will assess the costs of the proceeding, including
compensation and expenses of the appraisers, counsel for the parties and
experts, against all parties to the action in such amounts as the Court finds
equitable. Each dissenter made a party to the action will be entitled to receive
the amount, if any, by which the Court finds the fair value of the dissenter's
shares, plus interest, exceeds the amount paid by First Merchants.
This summary of the rights of dissenting shareholders addresses all
material features of the applicable Indiana dissenters' rights statute, but does
not contain a description of all requirements of the dissenters' rights statute
and is qualified in its entirety by the statutory provisions attached to this
document as Appendix B.
If you wish to exercise dissenters' rights for the merger and you fail to
comply with the statutory requirements for exercising dissenters' rights, you
will lose such rights. Accordingly, Lafayette shareholders who may wish to
exercise dissenters' rights should consider seeking legal counsel.
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Resale of First Merchants Common Stock by Lafayette Affiliates
Shares of First Merchants common stock to be issued to Lafayette
shareholders in the merger have been registered under the Securities Act of
1933, as amended (Securities Act). These shares may be traded freely and without
restriction by those Lafayette shareholders not considered to be "affiliates"
(as defined below). However, certain restrictions apply to the transfer of First
Merchants shares owned by any shareholder deemed a Lafayette "affiliate" under
Rule 145 of the Securities Act. Shares held by any person who is an "affiliate"
of Lafayette at the time the merger is submitted for vote at the special meeting
will not, under existing law, be permitted to sell or transfer those shares
without:
o further registration under the Securities Act of the shares of First
Merchants common stock to be transferred;
o compliance with Rule 145 promulgated under the Securities Act which
permits limited sales in certain circumstances; or
o the availability of another exemption from registration of such
shares.
Directors, executive officers and 10% shareholders are generally deemed to
be "affiliates" for purposes of Rule 145 of the Securities Act.
The Merger Agreement provides that Lafayette will provide First Merchants
with a list identifying each affiliate of Lafayette. The Merger Agreement also
requires that each Lafayette affiliate deliver to First Merchants a written
transfer restriction agreement prior to completion of the merger. The transfer
restriction agreement shall provide that the affiliate will not sell, pledge,
transfer or otherwise dispose of any shares of First Merchants common stock to
be 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 Lafayette affiliates in the
merger may contain a legend indicating these resale restrictions.
This is only a general statement of certain restrictions regarding the sale
or transfer of the shares of First Merchants common stock to be issued in the
merger. If you are or may be an affiliate of Lafayette, you should confer with
legal counsel regarding the transfer restrictions that may apply.
Conditions to Completion of the Merger
First Merchants' and Lafayette's obligations to complete the merger are
subject to the satisfaction of the following conditions, among other things, at
or prior to the effective time of the merger:
1. the approval of the Merger Agreement by the shareholders of both First
Merchants and Lafayette;
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2. the registration of First Merchants common stock to be issued in
connection with the merger with the Securities and Exchange Commission
and the receipt of any state securities and blue sky approvals
required for the offer and sale of First Merchants common stock to
Lafayette shareholders;
3. notification to the Nasdaq Stock Market, Inc. regarding the shares of
First Merchants common stock to be issued to the Lafayette
shareholders in connection with the merger;
4. the receipt of all regulatory approvals required for the merger and
the expiration of any regulatory waiting periods prior to consummation
of the merger;
5. the receipt of an opinion of First Merchants' counsel, Bingham McHale
LLP, that the merger will be treated as a "reorganization" for the
purposes of Section 368 of the Internal Revenue Code of 1986, as
amended, and that no gain or loss will be recognized by Lafayette
shareholders to the extent they receive shares of First Merchants
common stock as consideration for shares of Lafayette common stock;
6. no order, decree or injunction of any court or agency will be in
effect which prohibits the consummation of the merger; and
7. the receipt of all consents and approvals of persons other than
governmental and regulatory authorities that are required for
consummation of the merger.
The obligation of First Merchants to consummate the merger is also subject
to fulfillment of other conditions, including the following:
1. The representations and warranties of Lafayette set forth in the
Merger Agreement shall be true and correct as of the effective time of
the merger;
2. Lafayette shall have performed all obligations required by the Merger
Agreement to be performed by it at or prior to the effective time of
the merger;
3. First Merchants shall have received certain undertakings from
affiliates of Lafayette regarding the resale of any First Merchants
common stock received in the merger;
4. First Merchants shall have received a certain officer's certificate, a
legal opinion and various closing documents;
5. All of the outstanding stock options of Lafayette shall have been
exercised, no stock options shall be outstanding and all stock option
plans of Lafayette shall have been terminated; and
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6. All of the stock appreciation rights of Lafayette shall have been
exercised and shall cease to exist and all stock appreciation right
plans of Lafayette shall have been terminated.
The obligations of Lafayette to consummate the merger are also subject to
the fulfillment of other conditions, including the following:
1. The representations and warranties of First Merchants set forth in the
Merger Agreement shall be true and correct as of the effective time of
the merger;
2. First Merchants shall have performed all obligations required to be
performed by it under the Merger Agreement at or prior to the
effective time of the merger; and
3. Lafayette shall have received a certain officer's certificate, a legal
opinion and various closing documents.
The conditions to completion of the merger are subject to waiver by the
party benefiting from such condition. The conditions may also be altered by the
written agreement of both parties. If these and other conditions are not
satisfied or waived, First Merchants and/or Lafayette may terminate the Merger
Agreement. See "THE MERGER - Termination; Waiver; Amendment," "THE MERGER -
Resale of First Merchants Common Stock by Lafayette Affiliates," "THE MERGER -
Regulatory Approvals," "THE MERGER - Interests of Certain Persons in the
Merger," "FEDERAL INCOME TAX CONSEQUENCES," and Appendix A.
Termination; Waiver; Amendment
First Merchants and Lafayette may terminate the Merger Agreement at any
time before the merger is completed, including after the Lafayette and First
Merchants shareholders have approved the merger, if one of the events which
gives the party the right to terminate occurs. The Merger Agreement may be
terminated:
1. by either mutual consent of First Merchants and Lafayette in writing;
2. by either First Merchants or Lafayette if there has been a material
breach by the other of any of the covenants or any of the
representations or warranties set forth in the Merger Agreement, which
is not cured within 30 days following written notice given by the
non-breaching party to the party committing the breach;
3. by either First Merchants or Lafayette if the terminating party
determines in its sole discretion that completion of the merger is
inadvisable or impracticable due to the commencement or credible
threat of material litigation or proceedings against one of the
parties;
4. by either First Merchants or Lafayette, if there has been a material
adverse change in the financial condition or business of the other
party since June 30, 2001 (other than for reasons relating to the
general business and interest rate environment
65
including the consequences of the September 11, 2001 terrorist attacks
on the United States or to the payment of merger-related expenses);
5. by either First Merchants or Lafayette if, in the opinion of counsel
to First Merchants or Lafayette, the merger will not constitute a
tax-free reorganization under the Internal Revenue Code of 1986, as
amended;
6. by First Merchants in the event that information required to be
provided pursuant to the Merger Agreement by Lafayette to First
Merchants prior to completion of the merger has had or may have (as
determined by First Merchants in good faith) a material adverse effect
on the financial condition or business of Lafayette or Lafayette Bank;
7. by Lafayette in the event that information required to be provided
pursuant to the Merger Agreement by First Merchants to Lafayette prior
to completion of the merger has had or may have (as determined by
Lafayette in good faith) a material adverse effect on the consolidated
financial condition or business of First Merchants and its
subsidiaries;
8. by either First Merchants or Lafayette if the merger has not been
completed by June 30, 2002 (provided that the terminating party is not
then in material breach of the Merger Agreement);
9. by First Merchants in the event that the average of the mid-point
between the bid and ask prices of First Merchants common stock as
reported in Bloomberg, L.P. for the 30 trading days preceding the 5th
calendar day prior to the closing date of the merger is greater than
$26.95 and Lafayette does not elect to adjust the conversion ratio, as
described in more detail in this document under "THE MERGER -
Conversion Ratio Adjustment";
10. by Lafayette in the event that the average of the mid-point between
the bid and ask prices of First Merchants common stock as reported in
Bloomberg, L.P. for the 30 trading days preceding the 5th calendar day
prior to the closing date of the merger is less than $22.05 and First
Merchants does not elect to adjust the conversion ratio, as described
in more detail in this document under "THE MERGER - Conversion Ratio
Adjustment";
11. by First Merchants if Lafayette gives First Merchants notice that it
intends to furnish information to or enter into discussions or
negotiations with a third party relating to a proposed acquisition of
Lafayette or Lafayette Bank, or Lafayette fails to give First
Merchants written notice of any such intention, or Lafayette's Board
of Directors withdraws or modifies its recommendation to Lafayette
shareholders to vote for the merger following receipt of a proposal of
an acquisition from a third party;
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12. by Lafayette's Board of Directors if it determines it must terminate
the Merger Agreement and exercise its fiduciary duties after receipt
of an unsolicited acquisition proposal from a third party; or
13. by either First Merchants or Lafayette if such party is unable to
satisfy the conditions precedent to the merger by June 30, 2002
(providing such party is not then in material breach of the Merger
Agreement).
Upon termination for any of these reasons, the Merger Agreement will be
void and of no further force or effect. However, if either First Merchants or
Lafayette willfully breaches any of the provisions of the Merger Agreement, then
the other party will be entitled to recover appropriate damages for the breach.
Notwithstanding the foregoing, if First Merchants terminates the Merger
Agreement after Lafayette takes the action described in item 11 above or if
Lafayette terminates the Merger Agreement in accordance with item 12 above,
Lafayette must pay First Merchants $2,500,000 as liquidated damages to reimburse
First Merchants for the considerable time and expense invested by First
Merchants in furtherance of the merger in lieu of the damages described above.
First Merchants and Lafayette can agree to amend the Merger Agreement and
can waive their right to require the other party to adhere to the terms and
conditions of the Merger Agreement, where the law allows. However, First
Merchants and Lafayette cannot amend the Merger Agreement after the Lafayette
and First Merchants shareholders approve the merger without their further
approval if the amendment would decrease the merger consideration or have a
material adverse effect on the Lafayette or First Merchants shareholders.
Restrictions Affecting Lafayette Prior to Completion of the Merger
The Merger Agreement contains a number of restrictions regarding the
conduct of the business of Lafayette and Lafayette Bank until the merger is
completed. Among other items, Lafayette and Lafayette Bank may not take any of
the following actions, without the prior written consent of First Merchants:
o materially change their capital structure;
o authorize any additional class of stock or issue or authorize the
issuance of stock other than or in addition to the stock which was
issued and outstanding as of October 14, 2001, except for the issuance
of Lafayette common stock upon the exercise of Lafayette stock options
outstanding as of October 14, 2001;
o declare or pay any dividends, authorize a stock split or make any
other distribution to their shareholders, except that (i) Lafayette
Bank may pay cash dividends to Lafayette to pay Lafayette's expenses
of operation and payment of fees and expenses incurred in connection
with the merger, and (ii) Lafayette may pay a cash dividend of no more
than $0.11 per share for any quarter prior to completion of the merger
and a year-end special dividend of up to $0.05 per share, except that
no dividend may be paid during the quarter in which the merger is
completed, if, during this quarter, Lafayette
67
shareholders will be entitled to receive dividends on their shares of
First Merchants common stock received pursuant to the merger;
o merge, combine, consolidate or sell their assets or securities to any
other person or entity or effect a share exchange or enter into any
transaction not in the ordinary course of business;
o incur any indebtedness for borrowed money or assume, guarantee,
endorse or become responsible or liable for the obligations of any
other individual or entity, except in the ordinary course of business
consistent with past practice;
o incur any liability or obligation, make any commitment, payment or
disbursement, enter into any contract or agreement, or acquire or
dispose of any property or asset having a fair market value in excess
of $10,000 (except for property acquired or disposed of in connection
with foreclosures of mortgages or enforcement of security interests
and loans in the ordinary course of business);
o subject any of their assets or properties to any mortgage, lien, or
encumbrance;
o promote or increase or decrease the rate of compensation or enter into
any agreement to promote or increase or decrease the rate of
compensation of any director, officer, or employee of Lafayette or
Lafayette Bank, except for year-end bonuses in an aggregate amount not
to exceed $550,000 and promotions and non-material increases in the
ordinary course of business and in accordance with their past
practices;
o amend their Articles of Incorporation or By-Laws from those in effect
on October 14, 2001;
o modify, amend or institute new employment practices or enter into,
renew or extend any employment or severance agreement with any present
or former directors, officers or employees of Lafayette or Lafayette
Bank;
o give, dispose, sell, convey, assign, hypothecate, pledge, encumber or
otherwise transfer or grant a security interest in any common stock of
Lafayette Bank;
o execute, create, institute, modify or amend any employee benefit plan
or agreement for current or former directors, officers or employees of
Lafayette or Lafayette Bank, change the level of benefits or payments
under any such employee benefit plan or agreement or increase or
decrease any severance or termination pay benefits or any other fringe
or employee benefits other than as required by law or regulatory
authorities or as specifically provided in the Merger Agreement; or
o fail to maintain Lafayette Bank's reserve for loan losses or any other
reserve account in the ordinary course of business and in accordance
with sound banking practices.
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In addition, until the merger is consummated or the Merger Agreement is
terminated, Lafayette and Lafayette Bank shall carry on their business
diligently and in the ordinary course of business and use their best efforts to
preserve their business organizations and existing business relationships
intact.
This discussion of the restrictions imposed by the Merger Agreement is not
intended to be exhaustive, but includes material restrictions imposed on
Lafayette and Lafayette Bank. Please refer to the Merger Agreement, attached as
Appendix A, for a complete listing of the restrictions.
Regulatory Approvals
The merger requires prior approval of the Indiana Department of Financial
Institutions (Indiana Department) under the Indiana Financial Institutions Act
and the Board of Governors of the Federal Reserve System (Federal Reserve) under
the Bank Holding Company Act of 1956. Applications have been filed with the
Indiana Department and with the Federal Reserve. We cannot assure you as to when
or whether the approvals will be received.
In reviewing the Indiana Department application, the Indiana Department
considers various factors including:
1. the managerial and financial resources of First Merchants;
2. whether First Merchants' subsidiaries, First Merchants Bank, National
Association, First United Bank, The Madison Community Bank, The Union
County National Bank of Liberty, The Randolph County Bank, The First
National Bank of Portland, Decatur Bank & Trust Company, and Frances
Slocum Bank & Trust Company 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 merger.
In reviewing the Federal Reserve application, the Federal Reserve considers
various factors including:
1. the financial and managerial resources and future prospects of First
Merchants and its subsidiaries;
2. the competitive effects of the merger; and
3. the convenience and needs of the community served by Lafayette Bank.
The Federal Reserve may not approve the merger if it finds that the effect
of the merger substantially lessens competition, tends to create a monopoly or
results in a restraint of trade, unless the Federal Reserve finds that the
anti-competitive effects of the proposed merger are
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outweighed by the public interest and the probable effect of the merger in
meeting the convenience and needs of the communities to be served.
After the Federal Reserve's approval is received, the merger cannot be
completed for 30 days. During this 30-day waiting period, the United States
Department of Justice has the authority to challenge the merger on antitrust
grounds. With the approval of the Federal Reserve and the Department of Justice,
the waiting period can be reduced to 15 days.
The approvals of the Indiana Department and the Federal Reserve are not the
opinion of those regulatory authorities that the merger is favorable to the
Lafayette and First Merchants shareholders 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 Federal Reserve.
Effective Date of the Merger
The merger will be consummated if the Merger Agreement is approved by the
First Merchants and Lafayette shareholders, all required consents and approvals
are obtained and all other conditions to the merger are either satisfied or
waived. The merger will become effective when Articles of Merger are filed with
the Secretary of State of Indiana or at such later date and time as may be
specified in the Articles of Merger. The closing of the merger will occur in the
month in which any applicable waiting period following the last approval of the
merger expires or on such other date as agreed to by the parties. We currently
anticipate that the merger will be completed at the beginning of the second
quarter of 2002. However, completion of the merger could be delayed if there is
a delay in obtaining the required regulatory approvals or in satisfying the
conditions to completion of the merger. Lafayette and First Merchants have the
right to terminate the Merger Agreement if the merger is not completed by June
30, 2002.
Fees and Expenses
First Merchants and Lafayette will pay their own fees, costs, and expenses
incurred in connection with the merger except that printing and postage expenses
for this document in connection with the First Merchants and Lafayette
shareholder meetings will be paid by First Merchants. Lafayette will pay for the
cost of the opinion of Lafayette's financial advisor.
Management After the Merger
First Merchants will be the surviving corporation in the merger and
Lafayette's separate corporate existence will cease. Accordingly, the directors
and officers of Lafayette will no longer serve in such capacities after the
completion of the merger.
The directors of Lafayette Bank immediately prior to the merger will
continue to be the directors of Lafayette Bank following the merger until they
resign or until their successors are duly elected and qualified. Lafayette Bank
directors who desire to continue to serve in that capacity shall serve for at
least the remainder of the term to which they have been elected. In addition,
First Merchants has agreed to cause these Lafayette Bank directors to be
renominated
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to the Lafayette Bank Board for additional term(s) which extend at least 5 years
after the effective time of the merger. However, Lafayette Bank's directors will
be subject to First Merchants' policy of mandatory retirement at age 70, but the
policy of mandatory retirement will not apply to any of Lafayette Bank's current
directors until 24 months after the merger. Thus, 24 months after the merger,
all directors of Lafayette Bank age 70 or older will retire. For service as
directors, the Lafayette Bank directors will be entitled to directors fees no
lower than the fees paid to them by Lafayette Bank at the time of the merger.
The officers of Lafayette Bank immediately prior to the merger will
continue to be the officers of Lafayette Bank following the merger until they
resign or until their successors are duly elected and qualified. Robert J.
Weeder, currently President and Chief Executive Officer of Lafayette and
Lafayette Bank, shall remain as President and Chief Executive Officer of
Lafayette Bank after the merger until he reaches age 65. During such time, Mr.
Weeder shall earn compensation no less than what he is currently earning at the
effective time of the merger. Upon Joseph A. Bonner's retirement as Chairman of
the Lafayette Bank Board, First Merchants shall use its best efforts to cause
Mr. Weeder to be selected as Chairman of the Lafayette Bank Board until Mr.
Weeder reaches age 70. In such position, Mr. Weeder would be entitled to
compensation and bonuses of no less than that received by Mr. Bonner at the
effective time of the merger. Upon Mr. Weeder's retirement as President and
Chief Executive Officer of Lafayette Bank, First Merchants has agreed to
consider all qualified candidates, both internal and external.
The directors of First Merchants immediately prior to the merger will
continue to be the directors of First Merchants following the merger until they
resign or until their respective successors are duly elected and qualified. In
addition, Richard A. Boehning, who currently serves as a director of Lafayette
and Lafayette Bank, and Robert T. Jeffares, who currently serves as a director
of Lafayette Bank, will either (i) be nominated for election as members of the
First Merchants Board of Directors for a 3 year term at the first annual meeting
of First Merchants' shareholders following the merger, or (ii) be appointed as
directors at the First Merchants Board's first meeting following completion of
the merger. As appointed directors, Messrs. Boehning and Jeffares would serve as
directors until the next annual meeting of First Merchants shareholders and then
be nominated for election to a 3-year term as a director at such annual meeting.
The option that is chosen depends on the timing of the merger's completion. One
of such new directors of First Merchants shall also be elected as Vice Chairman
of the Executive Committee of the Board of Directors of First Merchants. Such
new directors of First Merchants will be subject to First Merchants' policy of
mandatory retirement at age 70, but the policy of mandatory retirement will not
apply to such new directors until 24 months after the merger. In the event one
or more of such new directors is not able to serve, another director or
directors of Lafayette or Lafayette Bank selected by agreement between First
Merchants and Lafayette shall serve in his or their place.
The officers of First Merchants immediately prior to the merger will
continue to be the officers of First Merchants following the merger until they
resign or until their successors are duly elected and qualified. In addition,
Robert J. Weeder, the current President and Chief Executive Officer of Lafayette
and Lafayette Bank, will become Senior Vice President of First Merchants as of
the effective time of the merger. In such position, Mr. Weeder shall be invited
to attend all First Merchants Board of Directors meetings.
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Within one year after the effective time of the merger, First Merchants has
agreed to make a good faith effort to expand the size of both the First
Merchants Board of Directors and the Lafayette Bank Board of Directors to add 2
additional members to each Board. The same 2 individuals will be appointed to
both the First Merchants and Lafayette Bank Boards. The individuals appointed
will be residents of Tippecanoe County, Indiana. First Merchants will select
such individuals to be appointed to the First Merchants and Lafayette Bank
Boards, but Lafayette Bank may recommend names of potential candidates to First
Merchants. If First Merchants has not appointed such 2 new directors within 1
year after the effective time of the merger, First Merchants will appoint 2
directors of Lafayette Bank not currently on the First Merchants Board to the
First Merchants Board.
Indemnification and Insurance of Lafayette Directors and Officers
First Merchants has agreed to indemnify and hold harmless each director and
officer of Lafayette and Lafayette Bank for 6 years after the effective time of
the merger in connection with any losses arising out of the fact that any such
person is or was a director or officer of Lafayette or Lafayette Bank at or
prior to the effective time of the merger, including all indemnified liabilities
based on, or arising out of, or pertaining to the merger or the transactions
contemplated by the Merger Agreement, to the full extent permitted under Indiana
law, and by First Merchants or Lafayette's Articles of Incorporation as in
effect on October 14, 2001 (whichever was more favorable to such officers and
directors).
In addition, First Merchants has agreed to use its reasonable best efforts
to include Lafayette's and Lafayette Bank's present and former directors and
officers on its existing insurance, or to obtain directors' and officers'
liability insurance "tail" policy coverage for Lafayette's and Lafayette Bank's
present and former directors and executive officers, for a period of 3 years,
which will provide the directors and officers with coverage on substantially
similar terms as currently provided by Lafayette to such directors and officers
for claims based on activity prior to the effective time of the merger. However,
First Merchants has no obligation during the 3-year period to pay an aggregate
amount in premiums which is more than 1.5 times the current annual amount spent
by Lafayette to maintain its current directors' and officers' insurance
coverage. If First Merchants is unable to obtain the coverage described above,
First Merchants has agreed to use its reasonable best efforts to obtain as much
comparable insurance as is available.
After the merger, Lafayette and Lafayette Bank officers, directors and
employees who become officers, directors or employees of First Merchants or its
subsidiaries shall have the same directors and officers insurance coverage and
indemnification protection that First Merchants provides to other officers,
directors and employees of First Merchants or its subsidiaries.
Treatment of Options to Acquire Shares of Lafayette Common Stock
The Merger Agreement provides that Lafayette shall cause each option to
acquire shares of Lafayette common stock to be exercised and the related shares
of Lafayette common stock to be issued immediately before the effective time of
the merger. No cash shall be paid to any
72
person exercising Lafayette stock options. The Merger Agreement requires
Lafayette to terminate all Lafayette stock option plans prior to consummation of
the merger. Individuals who exercise such stock options and acquire Lafayette
common stock shall be entitled to receive the merger consideration described in
this document in exchange for those shares of Lafayette common stock upon
consummation of the merger.
Treatment of Lafayette Stock Appreciation Rights
The Merger Agreement provides that Lafayette shall cause each stock
appreciation right outstanding at the effective time of the merger under
Lafayette's Officers' Stock Appreciation Rights Plan to be converted into the
right to receive from Lafayette, at the effective time of the merger, an amount
in cash equal to the excess of $30.00 over the per share base price for the
stock appreciation right for each share of Lafayette common stock to which a
stock appreciation right relates. Any taxes required to be withheld by law will
be withheld from such cash payments. Each stock appreciation right will be
canceled and cease to exist upon the making of such cash payment. The Merger
Agreement requires Lafayette to terminate all Lafayette stock appreciation right
plans prior to consummation of the merger. As of the date of this document,
there are 38,104 Lafayette stock appreciation rights outstanding, with a per
share base price of $3.66.
Employee Benefit Plans
General. The Merger Agreement provides that the current employees of
Lafayette and Lafayette Bank who continue as employees of First Merchants or its
subsidiaries on a date no later than January 1, 2004 will be provided with
benefits under First Merchants' benefit plans that are no less favorable than
the benefits provided to similarly situated employees of First Merchants'
subsidiaries. In addition, the Merger Agreement requires First Merchants, to the
extent necessary, to amend each of its employee benefit plans in which former
Lafayette and Lafayette Bank employees are to participate so that such plans
will take into account for eligibility, vesting and benefit accrual purposes,
the service of such persons with Lafayette and Lafayette Bank and to exempt such
persons from any waiting periods or pre-existing condition limitations under the
medical, dental and health plans of First Merchants or its subsidiaries in which
they are eligible to participate. The Merger Agreement further provides that
employees of Lafayette or Lafayette Bank who become employees of First Merchants
following the merger will retain credit for unused sick leave and vacation time
accrued during their service with Lafayette or Lafayette Bank. The service of
former Lafayette or Lafayette Bank employees with Lafayette or Lafayette Bank
will be treated as service with First Merchants for purposes of determining
entitlement of former Lafayette or Lafayette Bank employees to sick leave and
vacation pay as employees of First Merchants or its subsidiaries.
Treatment of 401(k) Plan. Lafayette Bank currently maintains an Employees'
Salary Savings Plan for the benefit of Lafayette Bank employees. The Merger
Agreement provides that after the merger Lafayette Bank may maintain its
existing Employees' Salary Savings Plan with its current level of employer
matching contributions. Currently, Lafayette Bank matches employee contributions
at 50% on the first 4% of employee compensation contributed by Lafayette Bank
employees. However, the Merger Agreement permits First Merchants to amend
73
its existing 401(k) plan or to merge Lafayette Bank's Employees' Salary Savings
Plan with First Merchants' existing 401(k) plan as long as First Merchants
continues the 50% employer match of up to 4% of employee compensation described
above for at least 5 years after the merger, unless prohibited by law.
Treatment of Group Insurance Program. The Merger Agreement provides that
after the merger Lafayette Bank will honor all obligations under Lafayette
Bank's group insurance program for health, life, dental and accident and
disability insurance, including all obligations owed to present retirees of
Lafayette Bank, to current employees of Lafayette Bank who retire before January
1, 2005, and to two former directors and a widow of a former director of
Lafayette Bank, who currently receive benefits under such group insurance
program. However, the Merger Agreement permits First Merchants to replace
Lafayette Bank's group insurance program with its own insurance program, so long
as it continues in effect for all present retirees of Lafayette Bank, current
employees of Lafayette Bank who retire before January 1, 2005, and two former
directors and a widow of a former director of Lafayette Bank a comparable level
of insurance coverage at no greater cost than that being paid or received at the
effective time of the merger.
Treatment of Pension Plan. Lafayette Bank maintains a defined benefit
pension plan which will be frozen after the merger on a date on or before
January 1, 2004. This means that all benefits under Lafayette Bank's pension
plan will become fully vested as of such date, and no further benefits will
accrue after such date. First Merchants also maintains a defined benefit pension
plan, and all Lafayette Bank employees will become eligible to participate in
First Merchants' pension plan after the merger on a date on or before January 1,
2004. Prior service with Lafayette Bank will be treated as service with First
Merchants for purposes of eligibility, vesting and benefit accrual with respect
to those Lafayette Bank employees employed as of the effective date of the
merger. However, benefits under First Merchants' pension plan will be reduced
(but not below zero) by the amount of the benefit payable under Lafayette Bank's
pension plan (excluding cost of living adjustments accruing on or after the
entry date into First Merchants' pension plan).
Treatment of Director Emeritus Supplemental Retirement Benefits Plan. The
Merger Agreement provides that after the merger First Merchants will honor all
obligations under Lafayette's Director Emeritus Supplemental Retirement Benefits
Plan to Messrs. Robert T. Jeffares, Roy D. Meeks, Vernon N. Furrer, Joseph A.
Bonner, Wilbur L. Hancock, Eric P. Meister, Robert J. Weeder, Richard A.
Boehning, Jeffrey L. Kessler, Gordon G. Beemer and Charles E. Maki. This plan
provides supplemental retirement compensation to directors of Lafayette and
Lafayette Bank upon retirement from the Board of Directors of either Lafayette
or Lafayette Bank until the time of death of such directors. However, subject to
obtaining the consents of Messrs. Beemer and Maki as to their benefits, the
Director Emeritus Supplemental Retirement Benefits Plan will be amended prior to
the effective time of the merger to provide for the payment to each participant
the present value of all future benefits payable under such plan determined as
of the effective time of the merger based on the directors fees then payable as
to directors not yet retired and on the life-expectancies of the participants in
the plan. The present value of each participant's benefits under such plan will
be paid in 3 substantially equal annual
74
installments with interest, with the first payment being made 30 days after the
effective time of the merger.
Treatment of Deferred Compensation Plan. The Merger Agreement provides that
after the merger Lafayette Bank will honor all obligations under Lafayette
Bank's Director Deferred Compensation Plan until the obligations are paid in
full to Messrs. Robert T. Jeffares, Roy D. Meeks, Vernon N. Furrer, Joseph A.
Bonner, Wilbur L. Hancock, Eric P. Meister, Robert J. Weeder, and Richard A.
Boehning.
Interests of Certain Persons in the Merger
When considering the recommendation of the Lafayette Board of Directors,
you should be aware that certain of the directors and officers of Lafayette have
interests in the merger other than their interests as Lafayette shareholders,
pursuant to certain agreements and understandings that are reflected in the
Merger Agreement. These interests are different from, or in conflict with, your
interests as Lafayette shareholders. The members of the Lafayette Board of
Directors and the First Merchants Board of Directors knew about these additional
interests, and considered them, when they approved the Merger Agreement. Except
as described below, to the knowledge of Lafayette, the officers and directors of
Lafayette do not have any material interest in the merger apart from their
interests as shareholders.
Appointment of Messrs. Richard A. Boehning and Robert T. Jeffares to the
First Merchants Board of Directors. In the Merger Agreement, First Merchants has
agreed that it will cause Richard A. Boehning, who currently serves as a
director of Lafayette and Lafayette Bank, and Robert T. Jeffares, who currently
serves as a director of Lafayette Bank, to be nominated for election to the
First Merchants Board of Directors for a 3-year term at the first annual meeting
of First Merchants' shareholders following the merger. If the First Merchants
Board meets after the merger but before the next annual meeting of First
Merchants' shareholders, the Board shall appoint Messrs. Boehning and Jeffares
as directors to serve until the first annual meeting of First Merchants'
shareholders. One of such new directors of First Merchants will also be elected
as Vice Chairman of the Executive Committee of the Board of Directors of First
Merchants. Such new directors of First Merchants will be subject to First
Merchants' policy of mandatory retirement at age 70, but the policy of mandatory
retirement will not apply to such new directors until 24 months after the
merger. See "THE MERGER - Management After the Merger."
Appointment of Mr. Robert J. Weeder as Executive Officer of First
Merchants. The Merger Agreement provides that Robert J. Weeder, the current
President and Chief Executive Officer of Lafayette, will be appointed by First
Merchants as Senior Vice President of First Merchants after the merger. In such
position, Mr. Weeder shall be invited to attend all First Merchants Board of
Directors meetings.
Positions as Officers and Directors of Lafayette Bank. The Merger Agreement
provides that the officers and directors of Lafayette immediately prior to the
merger will remain the officers and directors of Lafayette Bank after the merger
until they resign or until their successors are duly elected and qualified.
Lafayette Bank directors who desire to continue to
75
serve in that capacity shall serve for at least the remainder of the term to
which they have been elected. In addition, First Merchants will cause these
Lafayette Bank directors to be renominated to the Lafayette Bank Board for
additional term(s) which extend at least 5 years after the effective time of the
merger. However, Lafayette Bank's directors will be subject to First Merchants'
policy of mandatory retirement at age 70, but the policy of mandatory retirement
will not apply to any of Lafayette Bank's current directors until 24 months
after the merger. The Merger Agreement further provides that Robert J. Weeder,
the current President and Chief Executive Officer of Lafayette and Lafayette
Bank, shall continue as President and Chief Executive Officer of Lafayette Bank
until he reaches age 65 and shall receive compensation no less than his current
compensation prior to the merger. Upon the retirement of Joseph A. Bonner as
Chairman of the Lafayette Bank Board, First Merchants has agreed to use its best
efforts to cause Mr. Weeder to be appointed as Mr. Bonner's replacement as
Chairman of the Lafayette Bank Board, earning compensation in such position no
less than Mr. Bonner received prior to the merger. See "THE MERGER - Management
After the Merger."
Indemnification and Insurance of Lafayette Directors and Officers. The
directors and officers of Lafayette will benefit from the insurance and
indemnification obligations of First Merchants set forth in the Merger
Agreement, which benefits are described above. See "THE MERGER - Indemnification
and Insurance of Lafayette Directors and Officers."
Benefits under Lafayette's Director Emeritus Supplemental Retirements
Benefits Plan. The Merger Agreement provides that First Merchants will honor all
obligations of Lafayette's Director Emeritus Supplemental Retirement Benefits
Plan to the following current and former directors of Lafayette and Lafayette
Bank covered by such plan: Messrs. Robert T. Jeffares, Roy D. Meeks, Vernon N.
Furrer, Joseph A. Bonner, Wilbur L. Hancock, Eric P. Meister, Robert J. Weeder,
Richard A. Boehning, Jeffrey L. Kessler, Gordon G. Beemer and Charles E. Maki.
This plan provides supplemental retirement compensation to directors of
Lafayette and Lafayette Bank upon retirement from the Board of Directors of
either Lafayette or Lafayette Bank. Such supplemental retirement compensation is
paid each year until the death of the applicable director. However, subject to
obtaining the consents of Messrs. Beemer and Maki as to their benefits, the
Director Emeritus Supplemental Retirement Benefits Plan will be amended prior to
the effective time of the merger to provide for the payment to each participant
the present value of all future benefits payable under such plan determined as
of the effective time of the merger. The present value of each participant's
benefits under such plan will be paid in 3 substantially equal annual
installments with interest, with the first payment being made 30 days after the
effective time of the merger. Thus, as a result of the merger, each of the
directors listed above will receive payments in each of the 3 years after the
merger that otherwise would have been received over more years in smaller
amounts. See "THE MERGER - Employee Benefit Plans."
Treatment of Lafayette Stock Options. The Merger Agreement provides that
Lafayette shall cause each option to acquire shares of Lafayette common stock to
be exercised prior to the merger. A number of the stock options held by
directors, officers and employees of Lafayette will vest early as a result of
the merger. All of the officers and directors of Lafayette and Lafayette Bank
have some unvested stock options as of the date hereof. Upon exercise of these
stock options in accordance with the terms of the Merger Agreement, each of
these individuals
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will own additional shares of Lafayette common stock at the time of the merger
and be entitled to receive the merger consideration for such additional shares
of Lafayette common stock upon consummation of the merger. See "THE MERGER -
Treatment of Options to Acquire Shares of Lafayette Common Stock."
Treatment of Lafayette Stock Appreciation Rights. The Merger Agreement
provides that Lafayette shall cause each stock appreciation right outstanding to
be converted into the right to receive from Lafayette an amount of cash equal to
the excess of $30.00 over the per share base price for the stock appreciation
right as specified at the time of the award of the stock appreciation right by
the Lafayette Board of Directors. Currently, Robert J. Weeder, the current
President and Chief Executive Officer of Lafayette and Lafayette Bank, and
Robert J. Ralston, the current Executive Vice President and Senior Operations
Officer of Lafayette Bank, are the only individuals with Lafayette stock
appreciation rights outstanding. Based on the cash merger consideration of
$30.00 per share, Messrs. Weeder and Ralston may be entitled to more cash for
their stock appreciation rights as a result of the Merger Agreement provisions,
than would have been received under the current Lafayette stock appreciation
right plan in effect prior to the merger. See "THE MERGER - Treatment of
Lafayette Stock Appreciation Rights."
NASDAQ National Market Listing
First Merchants will file a notification with the Nasdaq Stock Market, Inc.
regarding the issuance of First Merchants common stock in the merger. This
notification must be made for the merger to proceed.
Accounting Treatment
The merger will be accounted for as a purchase transaction for accounting
and financial reporting purposes. As a result, Lafayette's assets and
liabilities will be recorded by First Merchants on its books at their fair
estimated values and added to those of First Merchants. Any excess payment by
First Merchants over the fair market value of the net assets and identifiable
intangibles of Lafayette will be recorded as goodwill on the financial
statements of First Merchants.
Registration Statement
First Merchants has filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission registering under the Securities Act the
shares of First Merchants common stock to be issued pursuant to the merger.
While First Merchants common stock is quoted and traded over-the-counter on the
NASDAQ National Market System, it 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 state laws.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material federal income tax
consequences of the merger. The following represents general information only
and is based on the Internal Revenue Code of 1986, as amended (Code), the
regulations thereunder, published rulings and decisions, all as currently in
effect and which may be subject to change, and case law. 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 foreign tax
laws.
Assuming the merger of Lafayette into First Merchants is completed as
described in the Merger Agreement and constitutes a statutory merger under
Indiana law, then for United States federal income tax purposes, the merger is
expected to constitute a tax-free reorganization under Section 368(a)(1)(A) of
the Code. The following is a summary of the federal income tax consequences of
the merger:
Tax Consequences to Lafayette and First Merchants
Lafayette and First Merchants will not recognize gain or loss as a result
of the merger for federal income tax purposes. Code Sections 361(a) and 1032. In
addition, the basis of the assets of Lafayette acquired by First Merchants in
the merger will be the same as the basis of such assets in the hands of
Lafayette immediately prior to the merger. Code Section 362(b).
Tax Consequences to Lafayette Shareholders
o Lafayette Shareholders Receiving Solely First Merchants Common Stock
In general, a Lafayette shareholder who elects to receive only First
Merchants common stock in exchange for shares of Lafayette common stock will not
recognize any gain or loss on the exchange for federal income tax purposes. Code
Section 354(a)(1). However, gain or loss for federal income tax purposes will be
recognized with respect to cash payments received by a Lafayette shareholder in
lieu of fractional share interests resulting from the conversion ratio. See
following paragraph concerning "Cash Received for Fractional Shares" for a more
detailed discussion of the tax consequences of the receipt of cash in lieu of
fractional share interests of First Merchants common stock.
The basis of First Merchants common stock received (including any
fractional share interests deemed received as described below) by Lafayette
shareholders in exchange for their Lafayette common stock will be equal to the
shareholder's basis in the Lafayette common stock exchanged, decreased by any
cash received, and increased by any gain recognized on the exchange. Code
Section 358(a)(1).
In addition, the holding period of the First Merchants common stock
received (including any fractional share interests deemed received as described
below) will include the holding period of Lafayette common stock surrendered in
the exchange, provided that the Lafayette stock was held as a capital asset on
the date of the merger. Code Section 1223(1).
78
o Cash Received For Fractional Shares
Gain or loss for federal income tax purposes will be recognized with
respect to cash payments received by a Lafayette shareholder in lieu of
fractional share interests resulting from the conversion ratio. A Lafayette
shareholder who receives cash for a fractional share interest of First Merchants
common stock as a result of the conversion ratio should be treated (consistent
with the case of Commissioner v. Clark, described below) as having received such
fraction of a share of First Merchants common stock and then as having received
cash in redemption of the fractional share interest, subject to the provisions
and limitations of Section 302 of the Code. The Lafayette shareholder will
recognize capital gain or loss equal to the difference between the amount of
cash received and the portion of the basis of the shares of Lafayette common
stock allocable to the fractional interest. This capital gain or loss will be
long term gain or loss if, as of the date of the merger, the Lafayette
shareholder has held such shares of Lafayette common stock for more than 1 year.
o Lafayette Shareholders Receiving Part Cash And Part First Merchants
Common Stock
A Lafayette shareholder who receives part cash and part First Merchants
common stock in exchange for shares of Lafayette common stock will recognize
gain to the extent of boot (cash) 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).
Any recognized gain (limited, again, by the amount of cash received) will
be eligible for capital gain treatment (assuming the shareholder's shares of
common stock are held as a capital asset by the shareholder) unless such receipt
of cash has the effect of a distribution of a dividend, as provided in Section
356 of the Code, in which case such gain will be taxable as ordinary income to
the extent of the shareholder's ratable share of Lafayette's accumulated
earnings and profits. Any capital gain will be long-term capital gain if, as of
the date of the exchange, the shareholder's holding period for such shares is
greater than one year.
The stock redemption provisions of Section 302 of the Code, as interpreted
by the United States Supreme Court in the Clark case, apply in determining
whether cash received by a Lafayette shareholder pursuant to the merger has the
effect of a dividend under Section 356 of the Code (the "Hypothetical Redemption
Analysis"). Under the Hypothetical Redemption Analysis, a Lafayette shareholder
will be treated as if the portion of the Lafayette common stock exchanged for
cash in the merger instead had been exchanged for shares of First Merchants
common stock (the "Hypothetical Shares"), followed immediately by a redemption
of the Hypothetical Shares by First Merchants for cash. Under the principles of
Section 302 of the Code, a Lafayette shareholder will recognize capital gain
rather than dividend income with respect to the cash received if the
Hypothetical Redemption is (1) "substantially disproportionate," or (2) "not
essentially equivalent to a dividend" with respect to such shareholder. In
applying the principles of Section 302 of the Code, the constructive ownership
rules of Section 318 of the Code will apply in comparing a shareholder's
ownership interest in
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First Merchants both immediately after the merger (but before the Hypothetical
Redemption) and after the Hypothetical Redemption.
The Hypothetical Redemption by First Merchants of the Hypothetical Shares
for cash would be "substantially disproportionate," and therefore, would not
have the effect of a distribution of a dividend with respect to a Lafayette
shareholder who owns less than 50% of the voting power of the outstanding First
Merchants common stock, if the percentage of First Merchants common stock
actually and constructively owned by such shareholder immediately after the
Hypothetical Redemption is less than 80% of the percentage of First Merchants
common stock actually, hypothetically, and constructively owned by such
shareholder immediately before the Hypothetical Redemption.
Whether the Hypothetical Redemption by First Merchants of the Hypothetical
Shares for cash is "not essentially equivalent to a dividend" with respect to a
Lafayette shareholder will depend upon such shareholder's particular
circumstances. However, the Hypothetical Redemption must, in any event, result
in a "meaningful reduction" in such shareholder's percentage ownership of First
Merchants common stock. In determining whether the Hypothetical Redemption by
First Merchants results in a meaningful reduction in the shareholder's
percentage ownership of First Merchants common stock, and therefore does not
have the effect of a distribution of a dividend, a Lafayette shareholder should
compare his or her interest in First Merchants (including interest owned
actually, hypothetically, and constructively) immediately after the merger (but
before the Hypothetical Redemption) to his or her interest after the
Hypothetical Redemption. The Internal Revenue Service has indicated, in Rev.
Rul. 76-385, 1976-2 C.B. 92, that a shareholder in a publicly held corporation
whose relative stock interest in the corporation is minimal and who exercises no
"control" over corporate affairs is generally treated as having had a meaningful
reduction in his or her stock after a redemption transaction, if his or her
percentage stock ownership in the corporation has been reduced to any extent,
taking into account the shareholder's actual and constructive ownership before
and after the redemption. In Revenue Ruling 76-385, the Internal Revenue Service
found a reduction from .0001118% to .0001081% to be a meaningful reduction.
The aggregate tax basis of the First Merchants common stock received by a
Lafayette shareholder will be equal to the tax basis of Lafayette common stock
surrendered in exchange therefor, decreased by the amount of cash received, and
increased by the amount of gain (including any amount which is characterized as
a dividend) which was recognized on the exchange, provided the shares of
Lafayette common stock were held as a capital asset as of the effective time of
the merger. Section 358 of the Code. The holding period of the First Merchants
common stock received by a Lafayette shareholder will be the same as the period
of the Lafayette common stock surrendered in exchange therefor, provided that
the shares of Lafayette common stock were held as capital assets as of the
effective time of the merger. Section 1223(1) of the Code.
No loss will be recognized by a Lafayette shareholder on receipt of First
Merchants common stock and cash in exchange for Lafayette common stock. Code
Section 356.
80
o Lafayette Shareholders Receiving All Cash
A Lafayette shareholder receiving all cash will recognize gain or loss
measured by the difference between the amount of cash received and the basis of
the Lafayette stock surrendered unless such cash distribution is treated as a
dividend under Code Section 302. After the Commissioner v. Clark case, if a
Lafayette shareholder receives only cash in exchange for Lafayette common stock,
the transaction should be treated as if either (i) the shareholder sold his or
her Lafayette common stock to First Merchants for cash, or (ii) the Lafayette
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 Code Section 302). However, in the
case of a Lafayette shareholder who perfects dissenters rights and receives
solely cash, the cash received should be treated as a stock redemption by
Lafayette (subject to the provisions and limitations of Code Section 302).
Tax Consequences to First Merchants Shareholders
As First Merchants shareholders will not receive any consideration in the
merger, First Merchants shareholders will have no tax consequences resulting
from the merger.
Tax Opinion
First Merchants and Lafayette have each requested the law firm of Bingham
McHale LLP to render an opinion to First Merchants and Lafayette that the merger
to be effected pursuant to the Merger Agreement constitutes a tax-free
reorganization under the Code. Under the Merger Agreement, receipt of this
opinion with respect to the above consequences is a condition to completion of
the merger. In rendering its opinion, Bingham McHale LLP will rely upon
representations made by the management of First Merchants and Lafayette.
However, this opinion will not bind the Internal Revenue Service, which could
take a different view. No ruling on the merger has been sought from the Internal
Revenue Service regarding the tax-free nature of the merger.
The Internal Revenue Service has not verified the federal income tax
consequences discussion set forth above. 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 Lafayette or
First Merchants shareholder. First Merchants and Lafayette urge you to consult
with your 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.
81
UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL INFORMATION
The following is the unaudited pro forma combined financial information for
First Merchants and for Lafayette giving effect to the merger. The information
is presented under two separate assumptions relating to the level of shares of
Lafayette common stock which are exchanged for First Merchants common stock in
the merger. The financial information presented under "Assumption A" was
compiled assuming 100% of the outstanding shares of Lafayette common stock are
exchanged for shares of First Merchants common stock in the merger. The
financial information presented under "Assumption B" was compiled assuming 60%
of the outstanding shares of Lafayette common stock are exchanged for shares of
First Merchants common stock and 40% of the outstanding shares of Lafayette
common stock are exchanged for cash in the merger, as financed through the
issuance of the First Merchants trust preferred securities. For a more detailed
description of these assumptions, see "Notes to Unaudited Pro Forma Summary of
Selected Consolidated Financial Data" on page 24. See "SUMMARY - Recent
Developments" for a description of the issuance of the First Merchants trust
preferred securities.
The balance sheet information presented gives effect to the merger and,
under Assumption B, the related issuance of the First Merchants trust preferred
securities as if each occurred on September 30, 2001. The income statement
information presented gives effect to the merger and, under Assumption B, the
related issuance of the First Merchants trust preferred securities as if each
occurred on the first day of each period presented.
The pro forma combined figures are simply arithmetical combinations of
First Merchants' and Lafayette's separate financial results in order to assist
you in analyzing the future prospects of First Merchants. The pro forma combined
figures illustrate the possible scope of the change in First Merchants'
historical figures caused by the merger. You should not assume that First
Merchants and Lafayette would have achieved the pro forma combined results if
the merger had actually occurred during the periods presented.
The combined company expects to achieve merger benefits in the form of
operating cost savings. The pro forma earnings, which do not reflect any
potential savings that are expected to result from the consolidation of the
operations of First Merchants and Lafayette, are not indicative of the results
of future operations. No assurances can be given with respect to the ultimate
level of expense savings. See "FORWARD-LOOKING STATEMENTS" and "RISK FACTORS-The
Integration Of Lafayette's Business With First Merchants' Business May Be
Difficult."
The pro forma information reflects the "purchase" method of accounting,
with Lafayette's assets and liabilities recorded at their estimated fair values
as of September 30, 2001. The actual fair value adjustments to the assets and
the liabilities of Lafayette will be made on the basis of appraisals and
evaluations that will be made as of the date the merger is completed. Thus, the
actual fair value adjustments may differ significantly from those reflected in
these pro forma financial statements. In the opinion of First Merchants'
management, the estimates used in the preparation of these pro forma financial
statements are reasonable under the circumstances.
82
You should read the unaudited pro forma combined consolidated financial
information in conjunction with the accompanying notes and with First Merchants'
historical financial statements and related notes which are incorporated by
reference in this document and Lafayette's historical financial statements and
related notes which are included as part of this document as Appendices D and E
and incorporated by reference in this document.
83
UNAUDITED PROFORMA COMBINED CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
ASSUMPTION A--100% STOCK ISSUED
(Dollars In Thousands)
First Proforma Proforma
Merchants Lafayette Adjustments Combined
----------------------------------------------------------------
Assets
Cash and due from banks .............. $ 46,149 $ 22,416 $ (1,400) (1) $ 69,064
(400) (2)
3,303 (3)
(1,004) (4)
Interest-bearing deposits ............ 14,942 14,942
Federal funds sold ................... 18,525 8,800 27,325
--------------------------------------- ------------
Cash and cash equivalents .......... 64,674 46,158 499 111,331
Interest-bearing time deposits ....... 3,119 3,119
Investment securities
Available for sale ................. 241,080 94,235 335,315
Held to maturity ................... 8,942 3,918 177 (5) 13,037
--------------------------------------- ------------
Total investment securities ...... 250,022 98,153 177 348,352
Mortgage loans held for sale ......... 830 9,253 165 (5) 10,248
Loans, net of allowance .............. 1,346,731 549,793 3,140 (5) 1,899,664
Premises and equipment ............... 27,184 10,756 9,441 (6) 47,381
Federal Reserve and FHLB stock ....... 7,856 2,344 10,200
Interest Receivable .................. 13,556 7,411 20,967
Core deposit intangible and goodwill . 32,795 12,470 30,156 (7) 79,151
(12,470) (8)
16,200 (9)
Other assets ......................... 14,904 11,215 755 (10) 34,914
9,957 (11)
(1,917)(15)
--------------------------------------- ------------
Total assets .................... $1,761,671 $747,553 $ 56,103 $ 2,565,327
======================================= ============
Liabilities
Deposits
Noninterest-bearing ................ $ 163,689 $ 65,432 $ 229,121
Interest-bearing ................... 1,224,881 538,028 4,799 (5) 1,767,708
--------------------------------------- ------------
Total deposits .................. 1,388,570 603,460 4,799 1,996,829
Borrowings ........................... 182,455 78,085 509 (5) 261,049
Trust preferred ......................
Other liabilities .................... 13,061 7,354 139 (16) 20,554
--------------------------------------- ------------
Total liabilities .............. 1,584,086 688,899 5,447 2,278,432
Stockholders' equity
Preferred stock-no par value
Common stock ....................... 1,584 3,962 (3,962)(13) 2,166
582 (14)
Additional paid in capital ......... 50,817 38,119 (38,119)(13) 159,545
108,728 (14)
Retained earnings .................. 121,711 15,461 (15,461)(13) 121,711
Accumulated comprehensive income ... 3,473 1,112 (1,112)(13) 3,473
--------------------------------------- ------------
Total stockholders' equity ....... 177,585 58,654 50,656 286,895
--------------------------------------- ------------
Total liabilities and stockholders
equity ......................... $1,761,671 $747,553 $ 56,103 $ 2,565,327
======================================= ============
The accompanying notes are an integral part of the unaudited proforma combined
consolidated financial information.
84
UNAUDITED PROFORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
ASSUMPTION A--100% STOCK ISSUED
(Dollars In Thousands except Share and Per Share Amounts)
First Proforma Proforma
Merchants Lafayette Adjustments Combined
---------------------------------------------------------------------
Interest Income
Loans receivable ............................... $ 96,109 $ 46,620 $ (648)(17) $ 142,081
Investment securities .......................... 19,065 4,982 (39)(17) 24,008
Other .......................................... 1,354 784 2,138
-------------------------------------------------- -----------
Total interest income ....................... 116,528 52,386 (687) 168,227
-------------------------------------------------- -----------
Interest Expense
Deposits ....................................... 49,607 23,016 (4,799)(17) 67,824
Securities sold under repurchase agreements .... 4,263 1,773 6,036
Federal Home Loan Bank advances & other ........ 6,676 2,616 (339)(17) 8,953
-------------------------------------------------- -----------
Total interest expense ...................... 60,546 27,405 (5,138) 82,813
-------------------------------------------------- -----------
Net Interest Income ................................. 55,982 24,981 4,451 85,414
Provision for loan losses ...................... 2,625 1,200 3,825
-------------------------------------------------- -----------
Net interest income after provision for loan losses . 53,357 23,781 4,451 81,589
-------------------------------------------------- -----------
Other Income
Fiduciary activities ........................... 4,972 1,187 6,159
Service charges on deposit accounts ............ 4,776 1,880 6,656
Other customer fees ............................ 3,519 1,042 4,561
Net realized losses on sales of
available-for-sale securities ............... (107) (12) (119)
Commission income .............................. 1,950 758 2,708
Other income ................................... 1,524 970 2,494
-------------------------------------------------- -----------
Total other income .......................... 16,634 5,825 22,459
-------------------------------------------------- -----------
Other expenses
Salaries and employee benefits ................. 21,418 10,681 32,099
Net occupancy expenses ......................... 2,471 1,247 236(18) 3,954
Equipment expenses ............................. 4,299 1,731 6,030
Goodwill and core deposit amortization ......... 896 740 3,600(20) 4,496
(740)(22)
Other expenses ................................. 10,999 4,777 15,776
-------------------------------------------------- -----------
Total other expenses ........................ 40,083 19,176 3,096 62,355
-------------------------------------------------- -----------
Income before income tax ............................ 29,908 10,430 1,355 41,693
Income tax expense ........................... 9,968 3,514 549(19) 14,031
-------------------------------------------------- -----------
Net income .......................................... $ 19,940 $ 6,916 $ 806 $ 27,662
================================================== ===========
Per Share Data
Basic earnings per common share ............... $ 1.67 $ 1.75 $ 1.67
Diluted earnings per common share ............. 1.66 1.74 1.66
Average common shares-basic ................... 11,909,457 3,950,297 16,564,912
Average common shares-diluted ................. 11,992,231 3,985,521 16,647,686
The accompanying notes are an integral part of the unaudited proforma combined
consolidated financial information.
85
UNAUDITED PROFORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
ASSUMPTION A--100% STOCK ISSUED
(Dollars In Thousands except Share and Per Share Amounts)
First Proforma Proforma
Merchants Lafayette Adjustments Combined
--------------------------------------------------------------------
Interest Income
Loans receivable ........................... $ 77,632 $ 35,581 $ (486)(17) $ 112,727
Investment securities ...................... 12,426 3,752 (30)(17) 16,148
Other ...................................... 855 1,571 2,426
----------------------------------------------- -----------
Total interest income ................... 90,913 40,904 (516) 131,301
Interest Expense
Deposits ................................... 35,817 17,876 (3,599)(17) 50,094
Securities sold under repurchase agreements 2,665 1,291 3,956
Federal Home Loan Bank advances and other .. 5,209 2,114 (255)(17) 7,068
----------------------------------------------- -----------
Total interest expense .................. 43,691 21,281 (3,854) 61,118
----------------------------------------------- -----------
Net Interest Income ............................. 47,222 19,623 3,338 70,183
Provision for loan losses .................. 2,371 900 3,271
----------------------------------------------- -----------
Net interest income after provision for loan .... 44,851 18,723 3,338 66,912
----------------------------------------------- -----------
Other Income
Fiduciary activities ....................... 4,117 890 5,007
Service charges on deposit accounts ........ 4,106 1,551 5,657
Other customer fees ........................ 231 793 1,024
Net realized losses on sales of
available-for-sale securities ........... (167) (167)
Commission income .......................... 1,465 308 1,773
Other income ............................... 3,890 1,773 5,663
----------------------------------------------- -----------
Total other income ...................... 13,642 5,315 18,957
----------------------------------------------- -----------
Other expenses
Salaries and employee benefits ............. 18,094 9,226 27,320
Net occupancy expenses ..................... 2,037 965 177 (18) 3,179
Equipment expenses ......................... 3,282 1,395 4,677
Goodwill and core deposit amortization ..... 1,181 537 2,700 (20) 3,881
(537)(22)
Other expenses ............................. 8,365 3,732 12,097
----------------------------------------------- -----------
Total other expenses .................... 32,959 15,855 2,340 51,154
----------------------------------------------- -----------
Income before income tax ........................ 25,534 8,183 998 34,714
Income tax expense ......................... 8,834 2,580 404 (19) 11,818
----------------------------------------------- -----------
Net income ...................................... $ 16,700 $ 5,603 $ 594 $ 22,897
=============================================== ===========
Per Share Data
Basic earnings per common share ........... $ 1.36 $ 1.41 $ 1.35
Diluted earnings per common share ......... 1.35 1.40 1.34
Average common shares-basic ............... 12,306,708 3,958,906 16,962,163
Average common shares-diluted ............. 12,390,142 3,997,540 17,045,597
The accompanying notes are an integral part of the unaudited proforma combined
consolidated financial information.
86
UNAUDITED PROFORMA COMBINED CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
ASSUMPTION B-60% STOCK ISSUED
(Dollars In Thousands)
First Proforma Proforma
Merchants Lafayette Adjustments Combined
------------------------------------------------------------------
Assets
Cash and due from banks ........................ $ 46,149 $ 22,416 $ (1,400) (1) $ 69,064
(400) (2)
3,303 (3)
(1,004) (4)
Interest-bearing deposits ...................... 14,942 14,942
Federal funds sold ............................. 18,525 8,800 4,871 (12) 32,196
------------------------------------------- ------------
Cash and cash equivalents .................... 64,674 46,158 5,370 116,202
Interest-bearing time deposits ................. 3,119 3,119
Investment securities
Available for sale ........................... 241,080 94,235 335,315
Held to maturity ............................. 8,942 3,918 177 (5) 13,037
------------------------------------------- ------------
Total investment securities ................ 250,022 98,153 177 348,352
Mortgage loans held for sale ................... 830 9,253 165 (5) 10,248
Loans, net of allowance ........................ 1,346,731 549,793 3,140 (5) 1,899,664
Premises and equipment ......................... 27,184 10,756 9,441 (6) 47,381
Federal Reserve and FHLB stock ................. 7,856 2,344 10,200
Interest Receivable ............................ 13,556 7,411 20,967
Core deposit intangible and goodwill ........... 32,795 12,470 36,761 (7) 85,756
(12,470) (8)
16,200 (9)
Other assets ................................... 14,904 11,215 755 (10) 34,914
9,957 (11)
(1,917)(15)
------------------------------------------- ------------
Total assets .............................. $1,761,671 $747,553 $ 67,579 $ 2,576,803
=========================================== ============
Liabilities
Deposits
Noninterest-bearing .......................... $ 163,689 $ 65,432 $ 229,121
Interest-bearing ............................. 1,224,881 538,028 4,799 (5) 1,767,708
------------------------------------------- ------------
Total deposits ............................ 1,388,570 603,460 4,799 1,996,829
Borrowings ..................................... 182,455 78,085 509 (5) 261,049
Trust preferred ................................ 55,200 (12) 55,200
Other liabilities .............................. 13,061 7,354 139 (16) 20,554
------------------------------------------- ------------
Total liabilities ........................ 1,584,086 688,899 60,647 2,333,632
Stockholders' equity
Preferred stock-no par value .................
Common stock ................................. 1,584 3,962 (3,962)(13) 1,933
349 (14)
Additional paid in capital ................... 50,817 38,119 (38,119)(13) 116,054
65,237 (14)
Retained earnings ............................ 121,711 15,461 (15,461)(13) 121,711
Accumulated comprehensive income ............. 3,473 1,112 (1,112)(13) 3,473
------------------------------------------- ------------
Total stockholders' equity ............... 177,585 58,654 6,932 243,171
------------------------------------------- ------------
Total liabilities and stockholders' equity $1,761,671 $747,553 $ 67,579 $ 2,576,803
=========================================== ============
The accompanying notes are an integral part of the unaudited proforma combined
consolidated financial information.
87
UNAUDITED PROFORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
ASSUMPTION B--60% STOCK ISSUED
(Dollars In Thousands except Share and Per Share Amounts)
First Proforma Proforma
Merchants Lafayette Adjustments Combined
------------------------------------------------------------------------
Interest Income
Loans receivable ........................... $ 96,109 $ 46,620 $ (648)(17) $ 142,081
Investment securities ...................... 19,065 4,982 (39)(17) 24,008
Other ...................................... 1,354 784 73 (23) 2,211
--------------------------------------------------- -----------
Total interest income ................... 116,528 52,386 (614) 168,300
--------------------------------------------------- -----------
Interest Expense
Deposits ................................... 49,607 23,016 (4,799)(17) 67,824
Securities sold under repurchase agreements 4,263 1,773 6,036
Federal Home Loan Bank advances & other .... 6,676 2,616 (339)(17) 8,953
Trust Preferred ............................ 4,964 (21) 4,964
--------------------------------------------------- -----------
Total interest expense .................. 60,546 27,405 (174) 87,777
--------------------------------------------------- -----------
Net Interest Income ............................... 55,982 24,981 (440) 80,523
Provision for loan losses .................. 2,625 1,200 3,825
--------------------------------------------------- -----------
Net interest income after provision for loan losses 53,357 23,781 (440) 76,698
--------------------------------------------------- -----------
Other Income
Fiduciary activities ....................... 4,972 1,187 6,159
Service charges on deposit accounts ........ 4,776 1,880 6,656
Other customer fees ........................ 3,519 1,042 4,561
Net realized losses on sales of
available-for-sale securities ........... (107) (12) (119)
Commission income .......................... 1,950 758 2,708
Other income ............................... 1,524 970 2,494
--------------------------------------------------- -----------
Total other income ...................... 16,634 5,825 22,459
--------------------------------------------------- -----------
Other expenses
Salaries and employee benefits ............. 21,418 10,681 32,099
Net occupancy expenses ..................... 2,471 1,247 236 (18) 3,954
Equipment expenses ......................... 4,299 1,731 6,030
Goodwill and core deposit amortization ..... 896 740 3,600 (20) 4,496
(740)(22)
Other expenses ............................. 10,999 4,777 15,776
--------------------------------------------------- -----------
Total other expenses .................... 40,083 19,176 3,096 62,355
--------------------------------------------------- -----------
Income before income tax .......................... 29,908 10,430 (3,536) 36,802
Income tax expense ......................... 9,968 3,514 (1,433)(19) 12,049
--------------------------------------------------- -----------
Net income ........................................ $ 19,940 $ 6,916 $ (2,103) $ 24,753
=================================================== ===========
Per Share Data
Basic earnings per common share ........... $ 1.67 $ 1.75 $ 1.68
Diluted earnings per common share ......... 1.66 1.74 1.67
Average common shares-basic ............... 11,909,457 3,950,297 14,702,730
Average common shares-diluted ............. 11,992,231 3,985,521 14,785,504
The accompanying notes are an integral part of the unaudited proforma combined
consolidated financial information.
88
UNAUDITED PROFORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
ASSUMPTION B--60% STOCK ISSUED
(Dollars In Thousands except Share and Per Share Amounts)
First Proforma Proforma
Merchants Lafayette Adjustments Combined
--------------------------------------------------------------------
Interest Income
Loans receivable ............................. $ 77,632 $ 35,581 $ (486)(17) $ 112,727
Investment securities ........................ 12,426 3,752 (30)(17) 16,148
Other ........................................ 855 1,571 55 (23) 2,481
------------------------------------------------- ----------
Total interest income ..................... 90,913 40,904 (461) 131,356
------------------------------------------------- ----------
Interest Expense
Deposits ..................................... 35,817 17,876 (3,599)(17) 50,094
Securities sold under repurchase agreements .. 2,665 1,291 3,956
Federal Home Loan Bank advances and other .... 5,209 2,114 (255)(17) 7,068
Trust Preferred .............................. 3,723 (21) 3,723
------------------------------------------------- ----------
Total interest expense .................... 43,691 21,281 (131) 64,841
------------------------------------------------- ----------
Net Interest Income ............................... 47,222 19,623 (330) 66,515
Provision for loan losses .................... 2,371 900 3,271
------------------------------------------------- ----------
Net interest income after provision for loan losses 44,851 18,723 (330) 63,244
------------------------------------------------- ----------
Other Income
Fiduciary activities ......................... 4,117 890 5,007
Service charges on deposit accounts .......... 4,106 1,551 5,657
Other customer fees 231 793 1,024
Net realized losses on sales of
available-for-sale securities ............. (167) (167)
Commission income ............................ 1,465 308 1,773
Other income ................................. 3,890 1,773 5,663
------------------------------------------------- ----------
Total other income ........................ 13,642 5,315 18,957
------------------------------------------------- ----------
Other expenses
Salaries and employee benefits ............... 18,094 9,226 27,320
Net occupancy expenses ....................... 2,037 965 177(18) 3,179
Equipment expenses ........................... 3,282 1,395 4,677
Goodwill and core deposit amortization ....... 1,181 537 2,700(20) 3,881
(537)(22)
Other expenses ............................... 8,365 3,732 12,097
------------------------------------------------- ----------
Total other expenses ...................... 32,959 15,855 2,340 51,154
------------------------------------------------- ----------
Income before income tax .......................... 25,534 8,183 (2,670) 31,047
Income tax expense ........................... 8,834 2,580 (1,082)(19) 10,332
------------------------------------------------- ----------
Net income ........................................ $ 16,700 $ 5,603 $ (1,588) $ 20,755
================================================= ==========
Per Share Data
Basic earnings per common share ............. $ 1.36 $ 1.41 $ 1.37
Diluted earnings per common share ........... 1.35 1.40 1.36
Average common shares-basic ................. 12,306,708 3,958,906 15,099,981
Average common shares-diluted ............... 12,390,142 3,997,540 15,183,415
The accompanying notes are an integral part of the unaudited proforma combined
consolidated financial information.
89
Notes to Unaudited Pro Forma Combined Consolidated Financial Information
Note 1 - Basis of Presentation
First Merchants has agreed to acquire Lafayette for a fixed exchange
ratio of 1.11 shares of First Merchants Corporation stock for each
share of Lafayette stock, subject to possible upward or downward
adjustment as provided for in the Merger Agreement, or a fixed payment
of $30.00 per share for each share of Lafayette stock up to 1,677,642
shares. The acquisition will be accounted for under the purchase
method of accounting and, accordingly, the assets and liabilities of
Lafayette have been marked to estimated fair value based upon
conditions as of September 30, 2001. Since these are proforma
statements, we cannot assure that the amounts reflected in these
financial statements would have been representative of the actual
amounts earned had the companies been combined at the time.
Note 2 - Pro Forma Adjustments
(1) To record payment by Lafayette for estimated transaction costs.
(2) To record payment by First Merchants for estimated transaction costs.
(3) To record receipt of cash for stock options exercised.
(4) To record payment of stock appreciation rights.
(5) To adjust interest-earning assets and interest-bearing liabilities of
Lafayette to estimated fair value.
(6) To record premises and equipment at estimated fair value.
(7) To record goodwill for the cost of acquisition over the estimated fair
value of net assets acquired as follows:
Assumption A Assumption B
------------ ------------
Purchase Price:
Common stock $ 582 $ 349
Additional paid in capital 108,728 65,237
Acquisition costs 400 400
Cash paid to Lafayette stockholders 50,329
--------- ---------
Total purchase price paid 109,710 116,315
--------- ---------
Allocated to:
Historical book value of Lafayette's assets and
liabilities 58,654 58,654
Record transaction costs of Lafayette (1,400) (1,400)
Record payment of stock appreciation rights (1,004) (1,004)
Cash received for stock options exercised 3,303 3,303
Write off of Lafayette's historical goodwill and core
deposit intangible (12,470) (12,470)
--------- ---------
Adjusted book value of Lafayette 47,083 47,083
--------- ---------
Core deposit intangible 16,200 16,200
Adjustments to record assets and liabilities at fair value:
Securities 177 177
Mortgage loans held for sale 165 165
Loans 3,140 3,140
Premises and equipment 9,441 9,441
Other assets 755 755
Deposits (4,799) (4,799)
Borrowings (509) (509)
Deferred taxes 9,957 9,957
Pension assets/Liability (2,056) (2,056)
--------- ---------
Total allocation 32,471 32,471
--------- ---------
Goodwill $ 30,156 $ 36,761
========= =========
90
Notes to Unaudited Pro Forma Combined Consolidated Financial
Information (Continued)
(8) To eliminate Lafayette's historical goodwill and core deposit
intangible.
(9) To record core deposit intangible.
(10) To record other assets at fair value.
(11) To record deferred taxes on the purchase accounting adjustments.
(12) To record issuance of the trust preferred securities by First
Merchants and investing of excess funds.
(13) To eliminate Lafayette's equity accounts.
(14) To record issuance of 4,655,455 shares of First Merchants' stock under
Assumption A and the issuance of 2,793,273 shares of First Merchants'
stock under Assumption B.
(15) To eliminate Lafayette's prepaid pension costs.
(16) To recognize Lafayette's pension liability.
(17) To record effect of amortization of purchase accounting adjustments in
a manner that approximates the level yield method.
(18) To record amortization of purchase accounting adjustment related to
premises and equipment.
(19) To record tax effect of purchase accounting adjustments at an
effective rate of 40.525%.
(20) To record amortization of core deposit premium intangible.
(21) To record interest expense on the trust preferred securities issued by
First Merchants.
(22) To eliminate Lafayette's goodwill and core deposit intangible
amortization expense.
(23) To record interest income on investment of excess proceeds from
issuance of trust preferred securities by First Merchants.
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DESCRIPTION OF FIRST MERCHANTS
Business
First Merchants, headquartered in Muncie, Indiana, is a multi-bank holding
company organized in 1982 under the laws of the State of Indiana. First
Merchants is also a financial holding company.
First Merchants was originally formed as the bank holding company for First
Merchants Bank, National Association. Since that time, First Merchants has
acquired Pendleton Banking Company, First United Bank, The Union County National
Bank of Liberty, The Randolph County Bank, The First National Bank of Portland,
Anderson Community Bank, Decatur Bank & Trust Company and Frances Slocum Bank &
Trust Company. Each of such banks operates as a wholly-owned subsidiary of First
Merchants with the exception of Pendleton Banking Company and Anderson Community
Bank which were merged and operate under the name "The Madison Community Bank."
First Merchants presently conducts its commercial banking business in
Delaware, Hamilton, Adams, Madison, Henry, Union, Wayne, Fayette, Randolph, Jay,
Wabash, Miami and Howard counties in the State of Indiana, through the 54
offices of its 8 bank subsidiaries. These banks provide a wide range of
commercial banking services, including:
o demand, savings and time deposits;
o agricultural, commercial, industrial, consumer and real estate loans;
o installment credit lending;
o safe deposit facilities;
o collections;
o fiduciary and trust services; and
o other general services related to the 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.
Through various nonbank subsidiaries, First Merchants also engages in the
general insurance agency business, the title insurance agency business and the
reinsurance of credit life, accident and health insurance.
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As of September 30, 2001, First Merchants had consolidated assets of
approximately $1.8 billion, consolidated deposits of approximately $1.4 billion,
and stockholders' equity of approximately $178 million.
First Merchants' principal office is located at 200 East Jackson Street,
Muncie, Indiana 47305. Its telephone number is (765) 747-1500.
Acquisition Policy and Pending Transactions
First Merchants anticipates that it will continue its policy of geographic
expansion of its banking business through the acquisition of additional
financial institutions whose operations are consistent with its community
banking philosophy. First Merchants' management routinely explores opportunities
to acquire financial institutions and other financial services-related
businesses and to enter into strategic alliances to expand the scope of its
services and its customer base. As of the date of this document, First Merchants
is not a party to any other agreement relating to an acquisition of additional
financial institutions, other than the Merger Agreement with Lafayette.
Recent Developments
On December 21, 2001, First Merchants filed a registration statement on
Form S-3 with the Securities and Exchange Commission. The registration statement
is a "shelf" filing pursuant to which certain business trusts wholly-owned by
First Merchants may issue up to $70 million of trust preferred securities to the
public for cash. In the event trust preferred securities are issued, proceeds
from the sale will be invested in an identical amount of junior subordinated
debentures to be issued by First Merchants to the applicable business trust and
First Merchants shall guaranty the payment of the trust preferred securities. It
is anticipated that on or about the date of consummation of the merger, First
Merchants will cause trust preferred securities to be issued in an amount
sufficient to finance the cash portion of the consideration to be paid by First
Merchants to the shareholders of Lafayette in the merger. Any such offering of
trust preferred securities would be made only by means of a prospectus and
related prospectus supplement, and would be subject to the registration
statement becoming effective, compliance with applicable state securities laws
and favorable market conditions. This joint proxy statement-prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any trust
preferred securities.
Incorporation of Certain Information by Reference
The foregoing information concerning First Merchants does not purport to be
complete. Certain additional information relating to First Merchants' business,
management, executive officer and director compensation, voting securities and
certain relationships is incorporated by reference in this document from other
documents filed by First Merchants with the Securities and Exchange Commission
and listed under "WHERE YOU CAN FIND ADDITIONAL INFORMATION" in this document.
If you desire copies of any of these documents, you may contact First Merchants
at its address or telephone number indicated under "WHERE YOU CAN FIND
ADDITIONAL INFORMATION" on page 105.
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DESCRIPTION OF LAFAYETTE
Business
Lafayette is an Indiana corporation which was incorporated in 1984 and
which is a registered bank holding company owning all of the issued and
outstanding common stock of Lafayette Bank and Trust Company (Lafayette Bank).
Lafayette's principal office is located in Lafayette, Indiana and its business
consists primarily of the ownership, supervision and control of Lafayette Bank.
The common stock of Lafayette Bank is Lafayette's principal asset and dividends
paid by Lafayette Bank are Lafayette's principal source of income.
Lafayette Bank is a state chartered bank which was established in 1899 and
which has been in continuous operation since that date. Lafayette Bank provides
various commercial and consumer banking services to its customers located
primarily in Tippecanoe, Jasper, White, and Carroll counties in the State of
Indiana, through 20 offices. These commercial bank services include:
o demand, savings and time deposits;
o commercial, consumer and real estate loans;
o safe deposit facilities;
o installment credit lending;
o fiduciary and trust services; and
o other general services related to the banking business.
As of September 30, 2001, Lafayette had consolidated assets of
approximately $748 million, consolidated deposits of approximately $603 million,
and stockholders' equity of approximately $59 million.
Incorporation of Certain Information by Reference
The foregoing information concerning Lafayette does not purport to be
complete. Certain additional information relating to Lafayette's business,
management, executive officer and director compensation, voting securities and
certain relationships is incorporated by reference in this document from
documents filed by Lafayette with the Securities and Exchange Commission and
from documents which are included in this document in Appendices D and E. See
"WHERE YOU CAN FIND ADDITIONAL INFORMATION" in this document on page 105.
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COMPARISON OF COMMON STOCK
The following summary comparison of First Merchants common stock and Lafayette
common stock includes the material features of such stocks and the material
differences in the rights of holders of shares of such stocks. Because this is a
summary, it does not contain all of the information that is important to you and
is qualified in its entirety by reference to First Merchants' Articles of
Incorporation and By-Laws and Lafayette's Articles of Incorporation and By-Laws.
Governing Law
Following the merger, the rights of former Lafayette shareholders who
receive First Merchants common stock in the merger will be governed by the laws
of the State of Indiana, the state in which First Merchants is incorporated, and
by First Merchants' Articles of Incorporation and By-Laws. The rights of
Lafayette shareholders are presently governed by the laws of the State of
Indiana, the state in which Lafayette is incorporated, and by Lafayette's
Articles of Incorporation and By-Laws. The rights of Lafayette shareholders
differ in certain respects from the rights they will have as First Merchants
shareholders, including certain anti-takeover measures, the vote required for
the amendment of certain significant provisions of the Articles of Incorporation
and for the approval of certain significant corporate transactions.
Authorized But Unissued Shares
First Merchants' Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, of which ________ shares were outstanding as
of January 31, 2002. First Merchants' Board of Directors may authorize the
issuance of additional shares of common stock up to the amounts authorized in
First Merchants' Articles of Incorporation without 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 the
rights, privileges and preferences determined for each class by the Board of
Directors of First Merchants. No shares of preferred stock are presently
outstanding.
As of January 31, 2002, First Merchants had _______ shares of its common
stock reserved and remaining available for issuance under its 1999 Employee
Stock Purchase Plan, __________ shares of its common stock reserved and
remaining available for issuance under its 1999 Long-term Equity Incentive Plan
and ________ shares of its common stock reserved and remaining available for
issuance under its Dividend Reinvestment and Stock Purchase Plan. In addition,
as of January 31, 2002, First Merchants had ______ options granted, but
unexercised, under its 1989 Stock Option Plan and _______ options granted, but
unexercised, under its 1994 Stock Option Plan, with shares reserved and
remaining available equal to the outstanding options under each 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 by diluting their voting and ownership
interests.
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Lafayette's Articles of Incorporation authorize the issuance of 20,000,000
shares of common stock. Each outstanding share of stock is entitled to one vote
on all matters to which shareholders are entitled to vote. As of January 31,
2002, Lafayette had 3,961,589 shares of stock issued and outstanding.
Lafayette's Board of Directors may authorize the issuance of additional shares
of common stock up to the amounts authorized in Lafayette's Articles of
Incorporation without shareholder approval.
As of January 31, 2002, Lafayette had ___ shares of its common stock
reserved and remaining available for issuance under its 1998 Nonqualified Stock
Option Plan. In addition, as of January 31, 2002, Lafayette had ____ options
granted, but unexercised, under its 1995 Nonqualified Stock Option Plan, with
shares reserved and remaining available equal to the outstanding options under
such plan. As of January 31, 2002, Lafayette also had _____ stock appreciation
rights granted, but unexercised, under its Officers' Stock Appreciation Rights
Plan, under which all available rights have been granted.
Preemptive Rights
As permitted by Indiana law, First Merchants' Articles of Incorporation do
not provide for preemptive rights for shareholders to subscribe for any new or
additional First Merchants shares of common stock. Preemptive rights may be
granted to First Merchants shareholders if First Merchants' Articles of
Incorporation are amended to permit such rights. Similarly, Lafayette's Articles
of Incorporation do not provide for preemptive rights for shareholders, but its
Articles of Incorporation may also be amended to permit such rights.
Dividend Rights
The holders of common stock of First Merchants and Lafayette are entitled
to dividends and other distributions when, as and if declared by their
respective boards of directors. Generally, First Merchants and Lafayette may not
pay a dividend if, after giving effect to the dividend:
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 the amount that would be needed to satisfy
preferential rights of shareholders payable upon dissolution.
The amount of dividends, if any, that may be declared by First Merchants in
the future will necessarily depend upon many factors, including, among other
things, 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.
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First Merchants' national bank subsidiaries and its Indiana-chartered bank
subsidiaries may pay cash dividends to First Merchants 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.
First Merchants' bank subsidiaries will ordinarily be restricted to paying
dividends in 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.
If a bank's capital levels are deemed inadequate by the regulatory authorities,
payment of dividends to its parent holding company may be prohibited. First
Merchants' present bank subsidiaries and Lafayette Bank are not currently
subject to such a restriction.
Voting Rights
The holders of the outstanding shares of First Merchants common stock are
entitled to one vote per share on all matters presented for shareholder vote.
Similarly, the holders of outstanding shares of Lafayette common stock also are
entitled to one vote per share on all matters presented for shareholder vote.
First Merchants shareholders and Lafayette shareholders do not have cumulative
voting rights in the election of directors. Under cumulative voting, the number
of shares a shareholder is entitled to vote is multiplied by the number of
directors to be elected to the board. A shareholder may then cast this number of
votes for the election of directors. A shareholder may cast all of his/her/its
votes for one candidate or distribute them among two or more candidates.
Indiana law generally requires that mergers, consolidations, sales,
leases, exchanges or other dispositions of all or substantially all of the
assets of a corporation be approved by the affirmative vote of a majority of the
issued and outstanding shares entitled to vote at the shareholders meeting,
subject to provision in the corporation's articles of incorporation requiring a
higher percentage vote. First Merchants' Articles of Incorporation 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."
Similarly, Lafayette's Articles of Incorporation provide that certain business
combinations may, under certain circumstances, require approval of more than a
majority of the outstanding voting shares of Lafayette common stock. See
"COMPARISON OF COMMON STOCK - Anti-Takeover Provisions."
Article and Bylaw Amendments
Indiana law generally requires shareholder approval for most amendments to
a corporation'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). However, Indiana law permits a corporation
in its articles of incorporation to specify a higher shareholder vote
requirement for certain amendments. First Merchants' Articles of Incorporation
require a super-majority shareholder vote of 75% of its outstanding shares of
common stock for the amendment of certain significant provisions and a majority
of its outstanding shares for all other
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amendments. Lafayette's Articles of Incorporation require a super-majority
shareholder vote of 80% of its outstanding voting stock, 75% of the outstanding
voting stock held by shareholders who own less than 10% of the outstanding
shares of Lafayette common stock, and a three-fourths (3/4) vote of the entire
Board of Directors for the amendment of certain significant provisions.
Indiana law permits a board of directors to amend a corporation's by-laws
unless the articles of incorporation provide otherwise. First Merchants' By-Laws
may generally be amended by an affirmative vote of a majority of the entire
Board of Directors. However, several provisions of First Merchants' By-Laws
require two-thirds (2/3) vote of the entire Board of Directors to approve
amendments, including the provision regarding removal of directors and setting
the number and classes of directors. In addition, First Merchants' Articles of
Incorporation provide that its By-Laws may not be amended to repeal, modify or
amend certain provisions of its Articles of Incorporation. Lafayette' s By-Laws
may be amended by an affirmative vote of a majority of the entire Board of
Directors.
Special Meetings of Shareholders
First Merchants' By-Laws provide that a special meeting of shareholders may
be called by the Board of Directors, the President, at the written request of a
majority of the Board of Directors or at the written request of shareholders
holding at least one-fourth (1/4) of all shares outstanding and entitled to vote
on business for which the meeting is called. Lafayette's By-Laws provide that
special shareholder meetings may be called by the Board of Directors, pursuant
to a resolution adopted by a majority of the total Board, or by the President.
Number of Directors and Term of Office
First Merchants' Articles of Incorporation provide that the number of
directors shall be set in the By-Laws by the Board of Directors and shall be at
least 9 and no more than 21. First Merchants' Articles of Incorporation also
provide for classes of directors with staggered terms. Amendment of this
provision of First Merchants' Articles of Incorporation requires the approval of
three-fourths (3/4) of the voting stock. First Merchants' By-Laws specify that
the number of directors is 14. The By-Laws provide that the number of directors
may be amended only by a two-thirds (2/3) vote of the entire Board of Directors.
Consistent with its Articles of Incorporation, First Merchants' By-Laws provide
that the Board of Directors is divided into three classes with 4 directors in
two of the classes and 5 directors in one class. The directors in each class are
elected for 3-year staggered terms. Thus, approximately only one-third (1/3) of
First Merchants' Board of Directors is elected at each annual meeting of
shareholders. Because First Merchants' Board of Directors is divided into
classes, a majority of First Merchants' directors can be replaced only after two
annual meetings of shareholders. A two-thirds (2/3) vote of the entire Board of
Directors is required to amend this provision of First Merchants' By-Laws.
Lafayette's Articles of Incorporation provide that the number of directors
shall be set in its By-Laws by the Board of Directors and if not set in its
By-Laws, the number of directors shall be 5. The By-Laws provide that the number
of directors shall be at least 5 and no more than 9. Currently, there are 5
directors of Lafayette. Similar to First Merchants, Lafayette's Board of
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Directors is divided into 3 classes. The directors in each class are elected for
3-year staggered terms. Thus, like First Merchants, approximately only one-third
(1/3) of Lafayette's Board of Directors is elected at each annual meeting.
Lafayette's By-Laws require directors to be citizens of the United States
and at least three-fourths (3/4) of the directors must reside in the State of
Indiana or within 50 miles of Lafayette's principal office. In addition, each
director must own at least one unpledged share of Lafayette common stock.
Removal of Directors
First Merchants' Articles of Incorporation and By-Laws provide that any
director or all directors may be removed, with or without cause, at a meeting of
shareholders upon the vote of the holders of not less than two-thirds (2/3) of
the outstanding shares entitled to vote on the election of directors. However,
if two-thirds (2/3) of the entire Board of Directors recommends removal of a
director to the shareholders, then such director may be removed by the
affirmative vote of the holders of at least a majority of the outstanding shares
entitled to vote on the election of directors at a shareholder meeting. A
two-thirds (2/3) vote of the entire Board of Directors is required to amend this
provision of First Merchants' By-Laws. Amendment of this provision of First
Merchants' Articles of Incorporation requires the approval of three-fourths
(3/4) of the voting stock.
Lafayette's By-Laws provide that any director or all directors may be
removed, with or without cause, at a meeting of shareholders called expressly
for that purpose upon the affirmative vote of a majority of the outstanding
shares entitled to vote on the election of directors.
Dissenters' Rights
Lafayette shareholders possess dissenters' rights in connection with
certain mergers and other significant corporate actions. Under Indiana law, a
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 to which Lafayette is a party, if
shareholder approval is required and the shareholder is entitled to
vote thereon;
2. Consummation of a plan of share exchange by which Lafayette's 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, the
property of Lafayette other than in the usual course of business, if
the shareholder is entitled to vote on the sale or exchange;
4. Approval of a control share acquisition under Indiana law; and
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
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voting or non-voting shareholders are entitled to dissent and obtain
payment for their shares.
Under Indiana law, dissenters' rights are not available to holders of
shares with respect to any transaction if the shares were registered in a
national securities exchange or traded on the NASDAQ National Market System.
Thus, First Merchants shareholders do not have dissenters' rights because First
Merchants' shares are traded on the NASDAQ National Market System. With respect
to dissenters' rights of Lafayette shareholders in connection with the merger,
see the discussion under "THE MERGER - Rights of Dissenting Shareholders" and
also Appendix B 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 Lafayette, 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 Lafayette's liabilities
and any rights of creditors. Thus, shareholders of Lafayette have similar
liquidation rights to shareholders of First Merchants.
Assessment and Redemption
Under Indiana law, the shares of First Merchants common stock and of
Lafayette common stock are not 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.
Lafayette has similar redemption rights under Indiana law.
In addition, as a bank holding company, First Merchants must give prior
notice to the Federal Reserve if the consideration to be paid by First Merchants
for any redemption or acquisition of its shares, when aggregated with the
consideration paid for all redemption or acquisitions for the preceding 12
months, equals or exceeds 10% of its consolidated net worth, unless First
Merchants is well-capitalized before and after the redemption, is well-managed
and is not subject to any unresolved supervisory issues. As a bank holding
company, Lafayette is subject to the same restriction.
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Anti-Takeover Provisions
The anti-takeover measures applicable to First Merchants and Lafayette
described below may have the effect of discouraging a person or other entity
from acquiring 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.
- Indiana Law
Under the business combination provision of the Indiana Business
Corporation Law (IBCL), any 10% shareholder of an Indiana corporation, with a
class of voting shares registered under Section 12 of the Securities Exchange
Act of 1934, such as First Merchants and Lafayette, is prohibited for a period
of 5 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. If
such prior approval is not obtained, the corporation and a 10% shareholder may
not consummate a business combination unless all provisions of the articles of
incorporation are complied with and either a majority of disinterested
shareholders approve the transaction or all shareholders receive a price per
share as determined by Indiana law. A corporation may specifically adopt
application of the business combination provision in its Articles of
Incorporation and obtain the protection provided by this provision.
An Indiana corporation may elect to remove itself from the protection
provided by the Indiana business combination 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. Both
First Merchants and Lafayette are covered by the business combination provision
of the IBCL.
In addition to the business combination provision, the IBCL also contains a
"control share acquisition" provision which, although different in structure
from the business combination provision, may have a similar effect of
discouraging or making more difficult a hostile takeover of an Indiana
corporation. This provision also may have the effect of discouraging premium
bids for outstanding shares. Under this provision, unless otherwise provided in
the corporation's articles of incorporation or by-laws, if a shareholder
acquires a certain amount of shares, approval of a majority of the disinterested
shareholders must be obtained before the acquiring shareholder may vote the
control shares. Under certain circumstances, the shares held by the acquiror may
be redeemed by the corporation at the fair market value of the shares as
determined by the control share acquisition provision. Both First Merchants and
Lafayette are subject to the control share acquisition provision. The
constitutional validity of the control share acquisition statute has been
challenged in the past and has been upheld by the United States Supreme Court.
The control share acquisition provision does not apply to a plan of
affiliation and merger if the corporation complies with the applicable merger
provisions and is a party to the agreement of merger or plan of share exchange.
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- First Merchants' Articles of Incorporation
In addition to the protection afforded by the IBCL, First Merchants'
Articles of Incorporation provide that the directors of First Merchants are
divided into 3 classes, each serving 3-year terms with one class to be elected
at each annual meeting of shareholders. First Merchants' Articles of
Incorporation provide that directors may be removed with or without cause by a
two-thirds (2/3) vote of the shares entitled to vote. However, if the Board by
two-thirds (2/3) vote recommends removal of a director, that director may be
removed by a majority of the shares entitled to vote. These provisions help
prevent hostile shareholders from replacing a majority of the Board of Directors
at one time. In addition, both of these provisions regarding directors may only
be amended by a two-thirds (2/3) vote of the Directors.
First Merchants' Articles of Incorporation also require the approval of the
holders of three-fourths (3/4) of the voting stock to approve certain business
combinations involving any shareholder holding more than 10% of the voting stock
unless the transaction is approved by a two-thirds (2/3) vote of the Board or
the shareholders are to receive fair consideration for their shares. "Business
combination" is defined to include mergers, consolidations, sales, leases,
liquidations, dissolutions, certain reorganizations, and agreements relating to
the foregoing. "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 2
years preceding the business combination, and (b) the per share book value for
the stock. In the event two-thirds (2/3) 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 two-thirds (2/3) of the voting
stock. Amendment of this provision of First Merchants' Articles of Incorporation
requires the approval of three-fourths (3/4) of the voting stock.
The existence of authorized but unissued common and preferred stock of
First Merchants may have an anti-takeover effect. 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. Prior to issuance, the Board
would determine the relative rights, preferences, limitations and restrictions
of the preferred stock. The Board would also 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 the common stock to be issued in 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 shareholders. Since
First Merchants shareholders have no preemptive rights, there is no guarantee
that shareholders would have an opportunity to purchase any of the preferred or
common stock when and if it is issued.
- Lafayette's Articles of Incorporation
Similar to First Merchants' Articles of Incorporation, Lafayette's Articles
of Incorporation provide additional protection beyond the protections provided
by the IBCL. Similar to First Merchants' Articles of Incorporation, Lafayette's
Articles of Incorporation provide that the directors of Lafayette may be divided
into classes as provided in the By-Laws, but does not
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require classes of directors as First Merchants' Articles of Incorporation do.
Lafayette's By-Laws require such staggered Board.
In addition, Lafayette's Articles of Incorporation require any shareholder
who wants to nominate an individual for election to the Board of Directors
(other than a candidate proposed by Lafayette's management) to notify the
President of Lafayette not less than 14 days nor more than 50 days prior to any
shareholder meeting at which directors will be elected. The notice must contain
certain information specified in Lafayette's Articles of Incorporation. If less
than 21 days notice of the shareholder meeting is given to shareholders, the
notice must be given not later than the 7th day following the day on which
notice of the shareholder meeting was mailed. Any director nominations not made
in accordance with this provision of Lafayette's Articles of Incorporation may
be disregarded by Lafayette. This provision of Lafayette's Articles of
Incorporation regarding nominations for directors may only be amended by 80% of
the outstanding voting stock of Lafayette, 75% of the outstanding voting stock
held by shareholders who own less than 10% of the outstanding shares of
Lafayette common stock, and a three-fourths (3/4) vote of the entire Board of
Directors. Lafayette's By-Laws require such notice to be provided to Lafayette's
Secretary at least 60 days before the meeting. These provisions make it more
difficult for hostile shareholders to nominate individuals for election to the
Lafayette Board of Directors. First Merchants' By-Laws contain a similar
provision restricting director nominations, but this provision may be amended by
the affirmative vote of a majority of its Board of Directors, and therefore,
does not provide the same protection as the provision in Lafayette's Articles of
Incorporation. Lafayette also has a similar provision in its By-Laws requiring
prior notice of business to be brought before its annual shareholder meetings.
Lafayette's Articles of Incorporation contain a provision similar to First
Merchants' Articles of Incorporation regarding super-majority approval of
certain business combinations. Lafayette's Articles of Incorporation require the
approval of the holders of 80% of the outstanding stock and 75% of the
outstanding voting stock held by shareholders who own less than 10% of the
outstanding shares of Lafayette common stock to approve certain business
combinations involving any shareholder holding more than 10% of the voting stock
unless the transaction or the acquisition of shares by the 10% shareholder is
approved by a three-fourths (3/4) vote of the Board before the 10% shareholder
becomes such or the shareholders are to receive not less than the highest per
share price paid by the 10% shareholder to acquire any of its Lafayette common
stock. "Business combination" is defined to include mergers, consolidations,
sales, leases, reclassification of Lafayette's common stock, recapitalizations
and agreements relating to the foregoing. Amendment of this provision of
Lafayette's Articles of Incorporation requires the approval of three-fourths
(3/4) of the entire board of Directors, 80% of the outstanding voting stock, and
75% of the outstanding voting stock held by shareholders who own less than 10%
of the outstanding shares of Lafayette common stock.
Lafayette's Articles of Incorporation contain a provision permitting its
directors to consider factors other than price when evaluating certain business
combinations. The Board of Directors may consider social and economic effects of
the transaction, the business and financial condition of the acquiring person,
and the competence, experience and integrity of the acquiring person and its
management. Amendment of this provision of Lafayette's Articles of Incorporation
requires the approval of three-fourths (3/4) of the entire Board of Directors,
80%
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of the outstanding voting stock, and 75% of the outstanding voting stock held by
shareholders who own less than 10% of the outstanding shares of Lafayette common
stock.
The existence of authorized but unissued shares of Lafayette common stock
may have an anti-takeover effect. The issuance of additional Lafayette shares
with sufficient voting power could have a dilutive effect on Lafayette's stock
and may result in the defeat of an attempt to acquire control of the
corporation. The Board of Directors of Lafayette may issue shares of common
stock at any time without shareholder approval. The Merger Agreement prohibits
the issuance by Lafayette of additional shares of common stock.
Director Liability
Under Indiana law, a director of First Merchants or Lafayette 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.
LEGAL MATTERS
Certain legal matters in connection with the Merger Agreement will be
passed upon for First Merchants by the law firm of Bingham McHale LLP, 2700
Market Tower, 10 West Market Street, Indianapolis, Indiana 46204 and for
Lafayette by the law firm of Barnes & Thornburg, 11 South Meridian,
Indianapolis, Indiana 46204.
EXPERTS
The audited consolidated financial statements of First Merchants and its
affiliates, incorporated by reference into this document, have been audited by
BKD, LLP, independent certified public accountants, to the extent and for the
periods indicated in their report thereon, and have been so incorporated by
reference in this document in reliance upon such report of BKD, LLP given on the
authority of such firm as experts in auditing and accounting. Olive LLP and
Baird, Kurtz & Dobson merged effective June 1, 2001, to become BKD, LLP.
The audited consolidated financial statements of Lafayette, incorporated by
reference into this document, have been audited by Crowe, Chizek and Company
LLP, independent certified public accountants, to the extent and for the periods
indicated in their report thereon, and have been so incorporated by reference in
this document in reliance upon such report of Crowe, Chizek and Company LLP
given on the authority of such firm as experts in auditing and accounting.
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Representatives of BKD, LLP are not expected to be present at the First
Merchants special shareholder meeting. Representatives of Crowe, Chizek and
Company LLP are not expected to be present at the Lafayette special shareholder
meeting.
SHAREHOLDER PROPOSALS
Any proposal which a First Merchants shareholder intended to have presented
at the 2002 annual meeting of First Merchants and included in the proxy
statement and form of proxy relating to that meeting must have been received by
the Secretary of First Merchants at First Merchants' principal office no later
than October 29, 2001, for inclusion in First Merchants' proxy statement and
form of proxy relating to that meeting. Shareholder proposals, if any, intended
to be presented at the 2002 annual meeting of First Merchants that were not
submitted for inclusion in the proxy statement will be considered untimely
unless they were received by the Secretary of First Merchants at First
Merchants' principal office by January 9, 2002.
If the merger takes place, Lafayette will have no more annual meetings. If
the merger does not take place, any proposal which a Lafayette shareholder
intended to have presented at the 2002 annual meeting of Lafayette and included
in the proxy statement and form of proxy relating to that meeting must have been
received by the Secretary of Lafayette at Lafayette's principal office no later
than a reasonable time before Lafayette prints and mails its proxy materials for
such meeting, for inclusion in Lafayette's 2002 proxy statement and form of
proxy relating to that meeting. Shareholder proposals, if any, intended to be
presented at the 2002 annual meeting of Lafayette that were not submitted for
inclusion in the proxy statement will be considered untimely unless they were
received by the Secretary of Lafayette at Lafayette's principal office by a
reasonable time before Lafayette prints and mails its proxy materials for such
meeting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
First Merchants has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended,
with respect to the common stock of First Merchants being offered in the merger.
This joint proxy statement-prospectus does not contain all the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information with respect to First Merchants and the
securities offered by this joint proxy statement-prospectus, reference is made
to the registration statement. Statements contained in this joint proxy
statement-prospectus concerning the provisions of such documents are necessarily
summaries of such documents and each such statement is qualified in its entirety
by reference to the copy of the applicable documents filed with the Securities
and Exchange Commission.
First Merchants and Lafayette file annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission. Our filings are available to the public over the Internet at the
Securities and Exchange Commission's website at http://www.sec.gov. You may also
inspect and copy these materials at the Public Reference Room of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. Copies of such material can be obtained at prescribed rates from the
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Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. You may also obtain additional information about
First Merchants on its website at http://www.firstmerchants.com. You may also
obtain additional information about Lafayette on its website at
http:\\www.lbtbank.com.
Both First Merchants and Lafayette "incorporate by reference" into this
joint proxy statement-prospectus the information in documents we file with the
Securities and Exchange Commission, which means that we can disclose important
information to you through those documents. The information incorporated by
reference is an important part of this joint proxy statement-prospectus. Some
information contained in this joint proxy statement-prospectus updates the
information incorporated by reference and some information we file subsequently
with the Securities and Exchange Commission will automatically update this joint
proxy statement-prospectus.
First Merchants incorporates by reference the documents and information
listed below:
o First Merchants' Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (as amended by a Form 10-K/A filed October 29,
2001);
o First Merchants' Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001;
o First Merchants' Current Report on Form 8-K filed on April 19, 2001,
announcing its repurchase of 118,088 shares of its common stock;
o First Merchants' Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001;
o First Merchants' Current Report on Form 8-K filed on August 23, 2001,
announcing a 5% stock dividend declared on shares of its outstanding
common stock;
o First Merchants' Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (as amended by a Form 10-Q/A filed December 19,
2001);
o First Merchants' Current Report on Form 8-K filed on October 15, 2001,
announcing the execution of the Merger Agreement with Lafayette;
o First Merchants' Current Report on Form 8-K filed on December 21,
2001, containing consolidated financial statements of Lafayette and
pro forma financial information for First Merchants;
o The information under the following captions in First Merchants' Form
10-K for the fiscal year ended December 31, 2000: (a) "Security
Ownership of Certain Beneficial Owners and Management" at page 23, (b)
"Certain Relationships and Related Transactions" at page 24, (c)
"Directors and Executive Officers of the Registrant" at page 23, and
(d) "Executive Compensation" at page 23; and
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o 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 Securities and Exchange Commission for the
purpose of updating such description.
First Merchants also incorporates by reference any filings we make with the
Securities and Exchange Commission under Sections 13(a), 13(c), 14 and 15(d) of
the Securities Exchange Act of 1934 after the initial filing of the registration
statement that contains this joint proxy statement-prospectus and before the
date of the First Merchants shareholder meeting.
Lafayette incorporates by reference the documents and information listed
below:
o Lafayette's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000;
o Lafayette's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001;
o Lafayette's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001;
o Lafayette's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001;
o Lafayette's Current Report on Form 8-K filed on October 15, 2001,
announcing the execution of the Merger Agreement with First Merchants;
o The following information in the specified pages of Lafayette's Annual
Report to Shareholders for its fiscal year ended December 31, 2000:
(a) "Stock Information" at page 37, (b) "Five Year Financial Summary"
at page 11, (c) "Management's Discussion and Analysis of Financial
Condition and Results of Operations" at pages 10-23, and (d)
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quantitative and Qualitative Disclosures about
Market Risks" at page 22; and
o The following information under the following captions in Lafayette's
Form 10-K for the fiscal year ended December 31, 2000: (a) "Security
Ownership of Certain Beneficial Owners and Management" at page 16, (b)
"Certain Business Relationships and Related Transactions" at page 17,
(c) "Directors and Executive Officers of the Corporation" at page 16,
and (d) "Executive Compensation" at page 16.
You may request, either orally or in writing, a copy of the documents
incorporated by reference in this joint proxy statement-prospectus without
charge by requesting them in writing or by telephone from the appropriate
company at the following addresses and telephone numbers:
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First Merchants Corporation Lafayette Bancorporation
200 East Jackson Street 133 North 4th Street
Muncie, Indiana 47305 Lafayette, Indiana 47902
Attention: Larry R. Helms, Attention: Robert J. Weeder,
Senior Vice President and General President and Chief Executive
Counsel Officer
Telephone: (765) 747-1530 Telephone: (765) 423-7100
If you would like to request documents, please do so by _____, 2002, in
order to receive them before the meetings.
You should rely only on the information incorporated by reference or
provided in this joint proxy statement-prospectus. We have authorized no one to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this joint proxy statement-prospectus is accurate as of
any date other than the date on the front of this document. If any material
change occurs during the period that this joint proxy statement-prospectus is
required to be delivered, this joint proxy statement-prospectus will be
supplemented or amended.
All information regarding First Merchants in this joint proxy
statement-prospectus has been provided by First Merchants and all information in
this joint proxy statement-prospectus regarding Lafayette has been provided by
Lafayette.
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APPENDIX A
AGREEMENT OF REORGANIZATION AND MERGER
BETWEEN
FIRST MERCHANTS CORPORATION
AND
LAFAYETTE BANCORPORATION
THIS AGREEMENT OF REORGANIZATION AND MERGER (the "Agreement"), is entered
into as of this 14th day of October, 2001, by and between First Merchants
Corporation ("First Merchants") and Lafayette Bancorporation ("Lafayette").
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, Lafayette 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 Lafayette, Tippecanoe County, Indiana;
WHEREAS, Lafayette Bank and 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 Lafayette with its principal banking office in Lafayette,
Tippecanoe County, Indiana;
WHEREAS, it is the desire of First Merchants and Lafayette to effect a
transaction whereby the Bank will become a wholly-owned subsidiary of First
Merchants through a statutory merger of Lafayette with and into First Merchants;
and
WHEREAS, a majority of the entire Board of Directors of First Merchants and
a majority of the entire Board of Directors of Lafayette have approved this
Agreement, designated it as a plan of reorganization within the provisions of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), and authorized its execution.
NOW, THEREFORE, in consideration of the mutual promises, covenants, and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, First Merchants and Lafayette hereby
make this Agreement and prescribe
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the terms and conditions of the merger of Lafayette with and into First
Merchants and the mode of carrying the transaction into effect as follows:
SECTION 1
The Merger
1.01. Merger. Subject to the terms and conditions of this Agreement, on the
Effective Date (as defined in Section 11 hereof), Lafayette shall be merged into
and under the Articles of Incorporation of First Merchants, which shall be the
"Continuing Company" and which shall continue its corporate existence under the
laws of the State of Indiana, pursuant to the provisions of and with the effect
provided in the Indiana Business Corporation Law and particularly Indiana Code
Chapter 23-1-40 (the "Merger").
1.02. Right to Revise Merger. First Merchants may, at any time, change the
method of effecting the Merger if and to the extent First Merchants deems such
change to be desirable; provided, however, that no such change, modification or
amendment shall (a) provide for the merger of the Bank with and into a
subsidiary of First Merchants or another entity; (b) alter or change the amount
or kind of consideration to be received by the shareholders of Lafayette
specified in Section 3 hereof as a result of the Merger, except in accordance
with the terms of Section 3 hereof; (c) adversely affect the tax treatment to
the shareholders of Lafayette; or (d) materially impede or delay receipt of any
approvals referred to in this Agreement or the consummation of the transactions
contemplated by this Agreement.
SECTION 2
Effect Of The Merger
Upon the Merger becoming effective:
2.01. General Description. The separate existence of Lafayette shall cease
and the Continuing Company shall possess all of the assets of Lafayette
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 Lafayette.
2.02. Name, Offices, and Management. The name of the Continuing Company
shall continue to be "First Merchants Corporation." Its principal banking office
shall be located at 200 E. Jackson Street, Muncie, Indiana. Except as otherwise
provided in Section 8.07 hereof, the Board of Directors of the Continuing
Company, until such time as their successors have been elected and qualified,
shall consist of the current Board of Directors of First Merchants. Except as
otherwise provided in Section 8.08 hereof, the officers of First Merchants
immediately prior to the Effective Date shall continue as the officers of the
Continuing Company.
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2.03. Capital Structure. The amount of capital stock of the Continuing
Company shall not be less than the capital stock of First Merchants immediately
prior to the Effective Date increased by the amount of capital stock issued in
accordance with Section 3 hereof.
2.04. Articles of Incorporation and Bylaws. The Articles of Incorporation
and the Bylaws of the Continuing Company shall be those of First Merchants
immediately prior to the Effective Date until the same shall be further amended
as provided by law.
2.05. Assets and Liabilities. The title to all assets, real estate and
other property owned by First Merchants and Lafayette shall vest in the
Continuing Company without reversion or impairment. All liabilities of Lafayette
shall be assumed by the Continuing Company.
2.06. Additional Actions. If, at any time after the Effective Date, the
Continuing Company shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable
(a) to vest, perfect or confirm, of record or otherwise, in the Continuing
Company its right, title or interest in, to or under any of the rights,
properties or assets of Lafayette or the Bank, or (b) otherwise carry out the
purposes of this Agreement, Lafayette and the Bank and their respective officers
and directors shall be deemed to have granted to the Continuing Company an
irrevocable power of attorney to execute and deliver all such deeds, assignments
or assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Continuing Company and otherwise to carry out the purposes of this Agreement,
and the officers and directors of the Continuing Company are authorized in the
name of Lafayette or the Bank or otherwise to take any and all such action.
SECTION 3
Consideration To Be
Distributed To Shareholders Of Lafayette
3.01. Consideration. Upon and by reason of the Merger becoming effective,
the shareholders of Lafayette of record on the Effective Date who have not
dissented to the Merger in accordance with Indiana Code ss. 23-1-44, as amended,
shall be entitled to receive in exchange for the shares of Lafayette's common
stock held and at their election (subject to the limitations and prorations set
forth in this Section 3) either (i) 1.11 (the "Conversion Ratio") shares of
First Merchants' common stock for each share of Lafayette's common stock held
("Option 1"), or (ii) cash in the amount of $30.00 for each share of Lafayette's
common stock held, subject to the provisions and limitations of Section 3.07
("Option 2"). A Lafayette shareholder shall be entitled to elect 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. Certificates for
fractional shares of common stock of First Merchants shall not be issued in
respect of fractional interests arising
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from the Conversion Ratio. Each Lafayette shareholder who would otherwise have
been entitled to a fraction of a First Merchants share, upon surrender of all of
his/her/its certificates representing Lafayette's common shares, shall be paid
in cash (without interest) in an amount equal to the fraction of the First
Merchants Average Price (as defined below). No such shareholder of Lafayette
shall be entitled to dividends, voting rights or any other rights in respect of
any fractional share.
3.03. Recapitalization. If, between the date of this Agreement and the
Effective Date, First Merchants issues a stock dividend with respect to its
shares of common stock, combines, subdivides, or splits up its outstanding
shares or takes any similar recapitalization action, then the Conversion Ratio
shall be adjusted so that each Lafayette 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 Bloomberg,
L.P. for the thirty (30) days that First Merchants common stock trades on
NASDAQ preceding the fifth (5th) calendar day prior to the Effective Date
(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) Lafayette 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 $22.05;
subject, however, to the following two provisions. If Lafayette 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 $22.05 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 Lafayette of such election and the revised Conversion Ratio, whereupon
no termination shall have occurred pursuant to this Section 3.04(b) and
this Agreement shall remain in effect in accordance with its terms (except
as the Conversion Ratio shall have been so modified), and any references in
this Agreement to "Conversion Ratio" shall thereafter be deemed to refer to
the Conversion Ratio as adjusted pursuant to this Section 3.04(b).
(c) First Merchants may terminate this Agreement if its Board of
Directors so determines by a vote of a majority of the members of its
entire Board of Directors if the First Merchants Average Price shall be
greater than $26.95; subject, however, to the
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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 Lafayette within twenty-four (24) hours of the
Determination Date. Within two (2) business days after the date of receipt
of such notice, Lafayette 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 $26.95 and the Conversion Ratio (as then in effect) and the
denominator of which is the First Merchants Average Price. If Lafayette
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 (the "Election Form") shall be mailed to
each record holder of Lafayette'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 Lafayette'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 Lafayette between the Special Record Date and
the Election Deadline (as defined below). Lafayette 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 first day on
which the administrative offices of First Merchants are generally open for
business after the special meeting at which the Merger will be submitted to a
vote of Lafayette's shareholders. The Election Forms shall be mailed to each
record holder of Lafayette'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 Lafayette's shareholders. The Election
Form will permit each holder of record of Lafayette'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 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 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 mutually agreed upon by
Lafayette and First Merchants to receive elections, to receive outstanding
Lafayette 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 Lafayette hereby appoint the
Trust Department of First Merchants Bank, National Association to act as agent
(the "Election Agent") of Lafayette's shareholders for the purposes of mailing
and receiving the Election Forms, tabulating the results and notifying First
Merchants and Lafayette of the results.
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3.07. All Cash Payments.
(a) In the event the number of shares of Lafayette common stock
covered by Option 2 elections would entitle Lafayette's shareholders to
receive less than $50,329,248 in cash (including cash payments for
fractional shares and payments to dissenting shareholders), all Option 1
and Option 2 elections of the holders of Lafayette's common stock shall be
honored (each in its entirety). In the event that the amount of cash to be
received by shareholders of Lafayette pursuant to the terms of the
Agreement would result in cash payments of $50,329,248 or more (including
cash payments for fractional shares and payments to dissenting
shareholders), the Option 2 elections shall be honored in the following
order: the Option 2 election which covers the largest number of shares of
Lafayette's common stock shall be converted into an Option 1 election
first, followed by the election which covers the next largest number of
shares (each in its entirety) being converted into an Option 1 election and
continuing this process until the total remaining number of outstanding
Lafayette's shares covered by Option 2 elections is such that the Merger
will (i) result in cash payments of no more than $50,329,248 (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. Option 2 elections
which are not converted into Option 1 elections shall remain as Option 2
elections.
(b) Shares of Lafayette'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(b) shall be given effect prior to the reallocation
provided for in Section 3.07(a).
(c) Lafayette and First Merchants shall mutually determine the
validity of elections submitted by Lafayette's shareholders.
(d) A holder of Lafayette'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 Lafayette 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.
(e) First Merchants and Lafayette may, upon mutual agreement, apply
the adjustments set forth in this Section 3.07 only to such extent and to
such number of Lafayette'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.
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3.08. Distribution of First Merchants' Common Stock and Cash.
(a) Each share of common stock of First Merchants outstanding
immediately prior to the Effective Date shall remain outstanding unaffected
by the Merger.
(b) Following the Effective Date, First Merchants shall mail to each
Lafayette shareholder a letter of transmittal (the "Letter of Transmittal")
providing instructions as to the transmittal to the conversion agent, First
Merchants Bank, National Association (the "Conversion Agent"), of
certificates representing shares of Lafayette's common stock and the
issuance of shares of First Merchants' common stock and cash in exchange
therefor pursuant to the terms of this Agreement. Distribution of stock
certificates representing First Merchants' common stock and cash payments
for Lafayette's common stock and for fractional shares shall be made by
First Merchants to each former shareholder of Lafayette within fifteen (15)
business days of the later of the Effective Date or the date of such
shareholder's delivery to the Conversion Agent of his/her/its certificates
representing common stock of Lafayette, accompanied by a properly completed
and executed Letter of Transmittal. Certificates surrendered for exchange
by a person who is deemed to be an "affiliate" (as defined in Section 7.06
hereof) of Lafayette 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
Lafayette's common stock shall be deemed to evidence only the right to
receive cash and/or ownership of First Merchants' common stock (for all
corporate purposes other than the payment of dividends) and cash for
fractional shares, as applicable. No dividends or other distributions
otherwise payable subsequent to the Effective Date on stock of First
Merchants shall be paid to any shareholder entitled to receive the same
until such shareholder has surrendered his/her/its certificates for
Lafayette's common stock to the Conversion Agent in exchange for
certificates representing First Merchants' common stock and/or cash. Upon
surrender or compliance with the provisions of Section 3.08(f), there shall
be paid to the record holder of the new certificate(s) evidencing shares of
First Merchants' common stock the amount of all dividends and other
distributions, without interest thereon, withheld with respect to such
common stock.
(d) At or after the Effective Date, there shall be no transfers on the
stock transfer books of Lafayette of any shares of the common stock of
Lafayette. If, after the Effective Date, certificates are presented for
transfer to Lafayette, 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 Lafayette 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 Lafayette'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
Lafayette's shareholder with all procedures historically required by
Lafayette in connection with lost, stolen, or destroyed certificates.
SECTION 4
Dissenting Shareholders
Shareholders of Lafayette shall have the rights accorded to dissenting
shareholders under Indiana Code ss. 23-1-44, as amended. Shareholders of First
Merchants are not entitled to any dissenters' rights under Indiana Code ss.
23-1-44 since First Merchants common stock is quoted and traded on the NASDAQ
National Market System.
SECTION 5
Representations and
Warranties of Lafayette
Lafayette represents and warrants to First Merchants with respect to itself
and the Bank as follows: (For the purposes of this Section, a "Disclosure
Letter" is defined as a letter referencing Section 5 of this Agreement which
shall be prepared and executed by an authorized executive officer of Lafayette
and delivered to and initialed by an authorized executive officer of First
Merchants contemporaneous with the execution of this Agreement.)
5.01. Organization and Authority. Lafayette is a corporation 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.
Lafayette and the Bank have the power and authority (corporate and other) to
conduct their respective businesses in the manner and by the means utilized as
of the date hereof. Except as set forth in the Disclosure Letter, Lafayette's
only subsidiary is the Bank, and the Bank has no subsidiaries. The Bank is
subject to primary federal regulatory supervision and regulation by the Federal
Deposit Insurance Corporation.
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5.02. Authorization.
(a) Lafayette has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder subject to certain
required regulatory approvals and Lafayette's shareholder approval. This
Agreement, when executed and delivered, will have been duly authorized and
will constitute a valid and binding obligation of Lafayette, enforceable in
accordance with its terms except to the extent limited by insolvency,
reorganization, liquidation, readjustment of debt or other laws of general
application relating to or affecting the enforcement of creditors' rights.
(b) Except as set forth in the Disclosure Letter, 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 Lafayette'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, loan, mortgage, security agreement, contract, arrangement or
commitment, to which Lafayette or the Bank is subject or bound, the result
of which would materially affect the business or financial condition of
Lafayette 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 Lafayette 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, loan, mortgage,
security agreement, contract, arrangement or commitment to which Lafayette
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, Lafayette or the Bank is to perform any
duties or obligations or receive any rights or benefits under any note,
bond, indenture, loan, mortgage, security agreement, contract, arrangement
or commitment.
(c) Other than in connection or in compliance with the provisions of
the Bank Holding Company Act of 1956, federal and state securities laws and
applicable Indiana banking and corporate statutes, all as amended, and the
rules and regulations promulgated thereunder, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any public body
or authority is necessary for the consummation by Lafayette of the
transactions contemplated by this Agreement.
(d) Other than those filings, authorizations, consents and approvals
referenced in Section 5.02(c) above and except as set forth in the
Disclosure Schedule, no notice to, filing with, authorization of, exemption
by, or consent or approval of, any third party is necessary for the
consummation by Lafayette of the transactions contemplated by this
Agreement.
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5.03. Capitalization.
(a) The authorized capital stock of Lafayette as of the date hereof
consists, and on the Effective Date will consist, of 5,000,000 shares of
common stock, without par value, 3,961,589 shares of which are issued and
outstanding. Such issued and outstanding shares of Lafayette's common stock
have been duly and validly authorized by all necessary corporate action of
Lafayette, are validly issued, fully paid and nonassessable and have not
been issued in violation of any preemptive rights of any shareholders.
Lafayette has no capital stock authorized, issued or outstanding other than
as described in this Section 5.03(a) and, except as set forth in the
Disclosure Letter, has no intention or obligation to authorize or issue any
other shares of capital stock.
(b) The authorized capital stock of the Bank as of the date hereof
consists, and on the Effective Date will consist, of 2,000 shares of common
stock, $100.00 par value per share, all 2,000 shares of which are issued
and outstanding to Lafayette. 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 Lafayette, 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. The Bank has no capital stock
authorized, issued or outstanding other than as described in this Section
5.03(b) and has no intention or obligation to authorize or issue any other
shares of capital stock.
(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 Lafayette nor the Bank by which Lafayette or the Bank is or may become
bound. Neither Lafayette nor the Bank has any outstanding contractual or
other obligation to repurchase, redeem or otherwise acquire any of its
respective outstanding shares of capital stock.
(d) Except as set forth in the Disclosure Letter, to the knowledge of
Lafayette, no person or entity beneficially owns 5% or more of Lafayette's
outstanding shares of common stock.
(e) As of the date hereof, there are 38,104 stock appreciation rights
(an "SAR") granted and unexercised under the Lafayette Officers' Stock
Appreciation Rights Plan. Other than such granted and unexercised SARs,
there are, and at the Effective Date there will be, no other such rights
that have been granted by Lafayette or which could be exercised. The Base
Price (as such term is defined in the Lafayette Officers' Stock
Appreciation Rights Plan) for each such granted and unexercised SAR is
$3.66.
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5.04. Organizational Documents. The respective Articles of Incorporation
and By-Laws of Lafayette and the Bank have been delivered to First Merchants and
represent true, accurate and complete copies of such corporate documents of
Lafayette and the Bank in effect as of the date of this Agreement.
5.05. Compliance with Law. Except as set forth in the Disclosure Letter,
neither Lafayette nor the Bank has engaged in any activity nor taken or omitted
to take any action which has resulted or, to the knowledge of Lafayette 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 Lafayette or the Bank. Lafayette and the Bank possess all
licenses, franchises, permits and other authorizations necessary for the
continued conduct of their respective businesses without material interference
or interruption and such licenses, franchises, permits and authorizations shall
be transferred to First Merchants on the Effective Date without any restrictions
or limitations thereon or the need to obtain any consents of third parties. All
agreements and understandings with, and all orders and directives of, all
regulatory agencies or government authorities with respect to the business or
operations of Lafayette or the Bank, including all correspondence,
communications and commitments related thereto, are set forth in the Disclosure
Letter. Except as set forth in the Disclosure Letter, the Bank has received no
inquiries from any regulatory agency or government authority relating to its
compliance with the Bank Secrecy Act, the Truth-in-Lending Act or the Community
Reinvestment Act or any laws with respect to the protection of the environment
or the rules and regulations promulgated thereunder. Except as set forth in the
Disclosure Letter, Lafayette has received no inquiries from any regulatory
agency or government authority relating to its compliance with any securities
laws applicable to Lafayette.
5.06. Accuracy of Statements. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by Lafayette or the Bank to First Merchants pursuant to or in connection with
this Agreement or the transactions contemplated hereby (including, without
limitation, any information which has been or shall be supplied by Lafayette or
the Bank with respect to their businesses, operations and financial condition
for inclusion in the proxy statement and registration statement relating to the
Merger) contains or shall contain (in the case of information relating to the
proxy statement at the time it is mailed and for the registration statement at
the time it becomes effective) any untrue statement of a material fact or omits
or shall omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading.
5.07. Litigation and Pending Proceedings. Except as set forth in the
Disclosure Letter, there are no claims of any kind, nor any action, suits,
proceedings, arbitrations or investigations pending or, to the knowledge of
Lafayette or the Bank, threatened in any court or before any government agency
or body, arbitration panel or otherwise (nor does Lafayette or the Bank have any
knowledge of a basis for any claim, action, suit, proceeding, arbitration or
investigation) against, by or materially adversely affecting Lafayette or the
Bank or their respective businesses, prospects, conditions (financial or
otherwise), results of operations or assets, or which would prevent the
performance of this Agreement or declare the same unlawful or cause the
rescission
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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 Lafayette or the Bank as a result of an examination by any regulatory
agency or body.
5.08. Financial Statements.
(a) Lafayette's consolidated balance sheets as of the end of the two
fiscal years ended December 31, 1999 and 2000 and for the six (6) month
period ended June 30, 2001 and the related consolidated statements of
income, shareholders' equity and cash flows for the years or period then
ended (hereinafter collectively referred to as the "Financial Information")
present fairly the consolidated financial condition or position of
Lafayette as of the respective dates thereof and the consolidated results
of operations of Lafayette for the respective periods covered thereby and
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis. The Financial Information as of
and for the two (2) fiscal years ended 1999 and 2000 are audited financial
statements.
(b) All loans reflected in the Financial Information and which have
been made, extended or acquired since June 30, 2001, (i) have been made for
good, valuable and adequate consideration in the ordinary course of
business; (ii) constitute the legal, valid and binding obligation of the
obligor and any guarantor named therein; (iii) are evidenced by notes,
instruments or other evidences of indebtedness which are true, genuine and
what they purport to be; and (iv) to the extent that the Bank has a
security interest in collateral or a mortgage securing such loans, are
secured by perfected security interests or mortgages naming the Bank as the
secured party or mortgagee, except for such unperfected security interests
or mortgages naming the Bank as secured party or mortgagee which, on an
individual loan basis, would not materially adversely affect the value of
any such loan and the recovery of payment on any such loan if the Bank is
not able to enforce any such security interest or mortgage.
5.09. Absence of Certain Changes. Except for events and conditions relating
to the business and interest rate environment in general (including consequences
of the terrorist attack on the United States on September 11, 2001), the accrual
or payment of Merger-related expenses, or as set forth in the Disclosure Letter,
since June 30 2001, no events or conditions of any character, whether actual,
threatened or contemplated, have occurred, or, to the knowledge of Lafayette,
can reasonably be expected to occur, which materially adversely affect
Lafayette'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, Lafayette's or the Bank's business to be
conducted in a materially less profitable manner than prior to June 30, 2001.
Between the period from June 30, 2001 to the date of this Agreement, Lafayette
and the Bank have carried on their respective businesses in the ordinary and
usual course consistent with their past practices (excluding the incurrence of
fees and expenses of professional advisors related to this Agreement and the
transactions contemplated hereby) and there has not been any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to Lafayette's common stock (other than normal
quarterly cash dividends) or any split, combination or reclassification of any
stock of Lafayette or the Bank or
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any issuance or the authorization of any issuance of any securities in respect
of, or in lieu of, or in substitution for shares of Lafayette's common stock.
5.10. Absence of Undisclosed Liabilities. Neither Lafayette nor the Bank is
a party to any agreement, contract, loan, obligation, commitment, arrangement,
liability, lease or license which individually exceeds $50,000 per year or which
may not be terminated within one year from the date of this Agreement, except as
set forth in the Disclosure Letter and except for unfunded loan commitments made
in the ordinary course of the Bank's business consistent with past practices,
nor to the knowledge of Lafayette 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, loan, obligation,
commitment, arrangement, liability, lease or license.
5.11. Title to Assets.
(a) Except as set forth in the Disclosure Letter, Lafayette and the
Bank have good and marketable title in fee simple absolute to all personal
property reflected in the June 30, 2001 Financial Information, good and
marketable title to all other properties and assets which Lafayette 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 Lafayette's or the
Bank's business, and good and marketable title to all property and assets
acquired since June 30, 2001, 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
Lafayette 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 Lafayette or the Bank of such properties and
assets is in compliance with all applicable laws, ordinances, rules and
regulations of any governmental authority or third party having
jurisdiction over such use, except for such noncompliance that would not
have a material adverse effect on the business of Lafayette or the Bank.
5.12. Loans and Investments.
(a) Except as set forth in the Disclosure Letter, there is no loan of
the Bank in excess of $100,000 that has been classified by bank regulatory
examiners as "Other Loans Specially Mentioned," "Substandard," "Doubtful"
or "Loss," nor is there any loan of the Bank in excess of $100,000 that has
been identified by management, accountants or auditors (internal or
external) as having a significant risk of uncollectibility. The Bank's loan
watch list and all loans in excess of $100,000 that the Bank's management
has determined to be ninety (90) days or more past due with respect to
principal or interest or has placed on nonaccrual status are set forth in
the Disclosure Letter.
(b) Each of the reserves and allowances for possible loan losses and
the carrying value for real estate owned which are shown on the Financial
Information is, in the
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opinion of Lafayette and the Bank, adequate in all material respects under
the requirements of generally accepted accounting principles applied on a
consistent basis to provide for possible losses on loans outstanding and
real estate owned as of the date of such Financial Information.
(c) Except as set forth in the Disclosure Letter, none of the
investments reflected in the Financial Information and none of the
investments made by Lafayette or the Bank since June 30, 2001 is subject to
any restrictions, whether contractual or statutory, which materially
impairs the ability of Lafayette or the Bank to dispose freely of such
investment at any time. Except as set forth in the Disclosure Letter,
neither Lafayette nor the Bank are a party to any repurchase agreements
with respect to securities.
5.13. Employee Benefit Plans.
(a) The Disclosure Letter contains a list identifying each "employee
benefit plan," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), which (i) is subject to any
provision of ERISA, and (ii) is maintained, administered or contributed to
by Lafayette or the Bank and covers any employee, director or former
employee or director of Lafayette or the Bank under which Lafayette 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
Lafayette, 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 have
been timely given.
(c) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, for which no statutory or administrative
exemption exists, and no "reportable event," as defined in Section 4043(b)
of ERISA, for which a notice is required to be filed, has occurred with
respect to any Employee Plan. Neither Lafayette nor the Bank has any
outstanding liability to the Pension Benefit Guaranty Corporation ("PBGC"),
or any liability 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.
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(d) To the best knowledge of Lafayette and the Bank, no "fiduciary,"
as defined in Section 3(21) of ERISA, of an Employee Plan has failed to
comply with the requirements of Section 404 of ERISA.
(e) Each of the Employee Plans which is intended to be qualified under
Code Section 401(a) has been amended to comply in all material respects
with the applicable requirements of the Code, including the Tax Reform Act
of 1986, the Revenue Act of 1987, the Technical and Miscellaneous Revenue
Act of 1988, the Omnibus Budget Reconciliation Act of 1989, the Revenue
Reconciliation Act of 1990, the Tax Extension Act of 1991, the Unemployment
Compensation Amendments of 1992, the Omnibus Budget Reconciliation Act of
1993, and the Retirement Protection Act of 1994 and any rules, regulations
or other requirements promulgated thereunder (the "Acts"). In addition,
each such Employee Plan has been and is being operated in substantial
conformance with the applicable provisions of ERISA and the Code, as
amended by the Acts, including operational compliance with the Uruguay
Round Agreements Act, the Uniformed Services Employment and Reemployment
Rights Act of 1994, the Small Business Job Protection Act of 1996, the
Taxpayer Relief Act of 1997, and the Internal Revenue Service Restructuring
and Reform Act of 1998 (even though actual plan amendments do not have to
be made until the last day of the 2001 plan year). Except as set forth in
the Disclosure Letter, Lafayette 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 Lafayette or the Bank,
except the Bank's Employees' Pension Plan which holds 44,781 shares of
Lafayette common stock.
(g) Except as set forth in the Disclosure Letter, no Employee Plan has
incurred an "accumulated funding deficiency," as determined under Code
Section 412 and ERISA Section 302.
(h) Except as set forth in the Disclosure Letter, no Employee Plan has
been terminated or incurred a partial termination (either voluntarily or
involuntarily).
(i) No claims against an Employee Plan, Lafayette or the Bank, with
respect to an Employee Plan, (other than normal benefit claims) have been
asserted or, to the best knowledge of Lafayette or the Bank, threatened.
(j) Except 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 Lafayette or the Bank that, individually or
collectively, could give rise to the payment of any amount that would not
be deductible by reason of Section 280G or Section 162(a)(1) of the Code.
(k) To the best knowledge of Lafayette and the Bank, no event has
occurred that would cause the imposition of the tax described in Code
Section 4980B. To the best
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knowledge of Lafayette 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 rights 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 Lafayette or the Bank, and (iii) covers any employee,
director or former employee or director of Lafayette or the Bank. Such
contracts, plans and arrangements as are described above, copies or
descriptions of all of which have been furnished previously to First
Merchants, are hereinafter referred to collectively as the "Benefit
Arrangements." Each of the Benefit Arrangements has been maintained in
substantial compliance with its terms and with the requirements prescribed
by any and all statutes, orders, rules and regulations which are applicable
to such Benefit Arrangements.
(m) Except as set forth in the Disclosure Letter, neither Lafayette
nor the Bank has any present or future liability in respect of
post-retirement health and medical benefits for former employees or
directors of Lafayette 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 Lafayette 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, 2000.
(o) For purposes of this Section 5.13, references to Lafayette or the
Bank are deemed to include (i) all predecessors of Lafayette or the Bank,
(ii) any subsidiary of Lafayette or the Bank, (iii) all members of any
controlled group (as determined under Code Section 414(b) or (c)) that
includes Lafayette or the Bank, and (iv) all members of any affiliated
service group (as determined under Code Section 414(m) or (n)) that
includes Lafayette or the Bank.
5.14. Obligations to Employees. Except as set forth in the Disclosure
Letter, all accrued obligations and liabilities of Lafayette and the Bank,
whether arising by operation of law, by contract or by past custom, for payments
to trust or other funds, to any government agency or body or to any individual
director, officer, employee or agent (or his heirs, legatees or legal
representative) with respect to unemployment compensation or social security
benefits and all pension, retirement, savings, stock purchase, stock bonus,
stock ownership, stock option, stock appreciation rights or profit sharing plan,
any employment, deferred compensation, consultant, bonus or collective
bargaining agreement or group insurance contract or other incentive, welfare or
employee benefit plan or agreement maintained by Lafayette or the Bank for their
current or
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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
Lafayette or the Bank in accordance with generally accepted accounting and
actuarial principles, except where the failure to pay any such accrued
obligations or liabilities or to maintain adequate accruals and/or reserves for
payment thereof would not materially adversely affect Lafayette or the Bank or
their respective businesses, prospects, conditions (financial or otherwise),
results of operations or assets. All obligations and liabilities of Lafayette
and the Bank, whether arising by operation of law, by contract, or by past
custom, for all forms of compensation which are or may be payable to their
current or former directors, officers, employees or agents have been and are
being paid, and adequate accruals and/or reserves for payment therefor have been
and are being made in accordance with generally accepted accounting principles,
except where the failure to pay any such obligations and liabilities or to
maintain adequate accruals and/or reserves for payment thereof would not
materially adversely affect Lafayette 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 Lafayette and the Bank, except where the failure to
correctly and accurately reflect and account for such accruals and reserves
would not materially adversely affect Lafayette or the Bank or their respective
businesses, prospects, conditions (financial or otherwise), results of
operations or assets.
5.15. Taxes, Returns and Reports. Lafayette 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 material respects all
taxes, assessments and other governmental charges due or claimed to be due upon
them or any of their income, properties or assets; and (c) not requested an
extension of time for any such payments (which extension is still in force).
Except for taxes not yet due and payable, the reserve for taxes on the Financial
Information is adequate to cover all of Lafayette's and the Bank's tax
liabilities (including, without limitation, income taxes and franchise fees)
that may become payable in future years with respect to any transactions
consummated prior to June 30, 2001. Neither Lafayette nor the Bank has, or will
have, any liability for taxes of any nature for or with respect to the operation
of their business, including the assets of any subsidiary, from June 30, 2001,
up to and including the Effective Date, except to the extent reflected on their
Financial Information or on financial statements of Lafayette or the Bank
subsequent to such date and as set forth in the Disclosure Letter. Neither
Lafayette nor the Bank is currently under audit by any state or federal taxing
authority. Except as set forth in the Disclosure Letter, neither the federal,
state, or local tax returns of Lafayette or the Bank have been audited by any
taxing authority during the past five (5) years.
5.16. Deposit Insurance. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") in accordance with the Federal
Deposit Insurance Act, and the Bank has paid all premiums and assessments with
respect to such deposit insurance.
5.17. Reports. Since January 1, 1995, each of Lafayette 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 Board of
Governors of the Federal Reserve System (the "Federal
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Reserve Board"), (ii) the Indiana Department of Financial Institutions, (iii)
the FDIC, and (iv) any federal, state, municipal or local government,
securities, banking, environmental, insurance and other governmental or
regulatory authority, and the agencies and staffs thereof (collectively, the
"Regulatory Authorities"), having jurisdiction over the affairs of either
Lafayette or the Bank. All such reports filed by Lafayette 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 in all
material respects and were prepared in conformity with generally accepted
regulatory accounting principles applied on a consistent basis. Except as set
forth in the Disclosure Letter, 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, Lafayette or the Bank.
5.18. Absence of Defaults. Neither Lafayette nor the Bank is in violation
of its charter documents or By-Laws or in default under any material agreement,
commitment, arrangement, loan, 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, except for
defaults which would not have a material adverse effect on the business of
Lafayette or the Bank.
5.19. Tax and Regulatory Matters. Neither Lafayette nor the Bank has taken
or agreed to take any action or has any knowledge of any fact or circumstance
that would (i) prevent the transactions contemplated hereby from qualifying as a
reorganization within the meaning of Section 368 of the Code or (ii) materially
impede or delay receipt of any regulatory approval required for consummation of
the transactions contemplated by this Agreement.
5.20. Real Property.
(a) A list of the locations of each parcel of real property owned by
Lafayette 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 Lafayette 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").
A list of the locations of each parcel of real property leased by Lafayette
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"). Lafayette shall update the Disclosure Letter
within ten (10) days after acquiring or leasing any real property after the
date hereof. Collectively, the Owned Real Property and the Leased Real
Property are herein referred to as the "Real Property."
(b) There is no pending action involving Lafayette or the Bank as to
the title of or the right to use any of the Real Property.
(c) Neither Lafayette nor the Bank has any interest in any other real
property except interests as a mortgagee, and except for any real property
acquired in foreclosure or in lieu of foreclosure and being held for
disposition as required by law.
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(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. The
representation made in the immediately preceding sentence shall be deemed
to have been made to the knowledge of Lafayette and the Bank, except with
respect to the main downtown office of the Bank located at 133 North Fourth
Street, Lafayette, Indiana to which office such knowledge qualifier shall
not be applicable.
(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 Lafayette, 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, Lafayette and the Bank have, and at the
Closing Date will have, good and marketable title to their respective Owned
Real Property, free and clear of all liens, mortgages, security interests,
encumbrances and restrictions of any kind or character.
(g) Neither Lafayette nor the Bank has caused or allowed the
generation, treatment, storage, disposal or release at any Real Property of
any Toxic Substance, except in accordance with all applicable federal,
state and local laws and regulations. "Toxic Substance" means any
hazardous, toxic or dangerous substance, pollutant, waste, gas or material,
including, without limitation, petroleum and petroleum products, metals,
liquids, semi-solids or solids, that are regulated under any federal, state
or local statute, ordinance, rule, regulation or other law pertaining to
environmental protection, contamination, quality, waste management or
cleanup.
(h) Except as disclosed in the Disclosure Letter, there are no
underground storage tanks located on, in or under any Owned Real Property
and no such Owned Real Property has previously contained an underground
storage tank. Neither Lafayette nor the Bank own or operate any underground
storage tank at any Leased Real Property and no such Leased Real Property
has previously contained an underground storage tank. No Real Property is
or has been listed on the CERCLIS.
(i) No Toxic Substance has been released, spilled, discharged or
disposed at, in, on or under any Real Property nor are there any other
conditions or circumstances
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affecting any Real Property, in each case, which would pose a significant
risk to the environment or the health or safety of persons or otherwise
pose a material risk of liability for remediation, corrective action or
clean-up.
(j) The Real Property is not "property" within the definition of
Indiana Code 13-11-2-174. Neither Lafayette nor the Bank is required to
provide a "disclosure document" to First Merchants as a result of the
Merger pursuant to the Indiana Responsible Property Transfer Law (I.C. ss.
13-25-3-1 et seq.).
(k) Except as set forth in the Disclosure Letter, there are no
mechanic's or materialman's liens against the Real Property, and no unpaid
claims for labor performed, materials furnished or services rendered in
connection with constructing, improving or repairing the Real Property in
respect of which liens may or could be filed against the Real Property.
5.21. Securities Law Compliance. Lafayette's common stock is traded on the
over-the-counter bulletin board of the National Association of Securities
Dealers, Inc. under the symbol of "LAYB." Lafayette has complied in all material
respects with all state, federal or foreign securities laws, statutes, rules,
regulations or orders, injunctions or decrees of any government agency relating
thereto. Lafayette has complied in all material respects with all rules,
regulations, orders, injunctions or decrees of the National Association of
Securities Dealers, Inc. and all entities related or affiliated therewith and
has filed all reports and documents required to be filed with such entities.
Lafayette 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 Lafayette's Annual Report on Form 10-K for the year ended December 31,
2000, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
copies of which have previously been delivered to First Merchants. 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 such filings
contained any untrue statement of a material fact or omitted 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 misleading.
5.22. Broker's or Finder's Fees. Except for Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, no agent, broker or other person acting
on behalf of Lafayette or the Bank or under any authority of Lafayette 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. Shareholder Rights Plan. Except as otherwise provided in Lafayette's
Articles of Incorporation and By-Laws, Lafayette has no shareholder rights plan
or any other plan, program or agreement involving, restricting, prohibiting or
discouraging a change in control or merger of Lafayette or which may be
considered an anti-takeover mechanism.
5.24. Indemnification Agreements. Except as set forth in the Disclosure
Letter, neither Lafayette nor the Bank is a party to any indemnification,
indemnity or reimbursement agreement,
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contract, commitment or understanding to indemnify any present or former
director, officer, employee, shareholder or agent against any liability or hold
the same harmless from liability other than as expressly provided in the
Articles of Incorporation or By-Laws of Lafayette and the Bank.
5.25. Bring Down of Representations and Warranties. All representations and
warranties of Lafayette 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.
5.26. 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 Lafayette and the Bank
and all directors and officers of Lafayette and the Bank shall have no further
liability with respect thereto unless a court of competent jurisdiction should
determine that any misrepresentation or breach of a warranty was willfully or
intentionally made or is deemed to be fraudulent.
SECTION 6
Representations and
Warranties of First Merchants
First Merchants hereby represents and warrants to Lafayette as follows.
(For the purposes of this Section, a "Disclosure Letter" is defined as a letter
referencing Section 6 of this Agreement which shall be prepared and executed by
an authorized executive officer of First Merchants and delivered to and
initialed by an authorized executive officer of Lafayette contemporaneous with
the execution of this Agreement).
6.01. Organization and Qualification. First Merchants is a corporation
organized and existing under the laws of the State of Indiana and has the
corporate power and authority to conduct its business in the manner and by the
means utilized as of the date hereof.
6.02. Authorization.
(a) First Merchants has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder subject to
certain required regulatory approvals and First Merchants' shareholder
approval. The Agreement, when executed and delivered, will have been duly
authorized and will constitute a valid and binding obligation of First
Merchants, enforceable in accordance with its terms, except to the extent
limited by insolvency, reorganization, liquidation, readjustment of debt,
or other laws of general application relating to or affecting the
enforcement of creditor's rights.
(b) Neither the execution of this Agreement, nor the consummation of
the transactions contemplated hereby, does or will (i) conflict with,
result in a breach of, or
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constitute a default under First Merchants' 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 is subject or bound, the result of
which would materially affect the business or financial condition of First
Merchants; (iii) result in the creation of or give any person, corporation
or entity, the right to create any lien, charge, claim, encumbrance,
security interest, or any other rights of others or other adverse interest
upon any right, property or asset of First Merchants; (iv) terminate or
give any person, corporation or entity the right to terminate, amend,
abandon, or refuse to perform any note, bond, indenture, mortgage, security
agreement, contract, arrangement, or commitment to which First Merchants is
a party or by which First Merchants is subject or bound; or (v) accelerate
or modify, or give any party thereto the right to accelerate or modify, the
time within which, or the terms according to which, First Merchants is to
perform any duties or obligations or receive any rights or benefits under
any note, bond, indenture, mortgage, security agreement, contract,
arrangement, or commitment.
(c) Other than in connection or in compliance with the provisions of
the Bank Holding Company Act of 1956, federal and state securities laws,
and applicable Indiana banking and corporate statutes, all as amended, and
the rules and regulations promulgated thereunder, no notice to, filing
with, authorization of, exemption by, or consent or approval of, any public
body or authority is necessary for the consummation by First Merchants of
the transactions contemplated by this Agreement.
(d) Other than those filings, authorizations, consents and approvals
referenced in Section 6.02(c) above and filings and approvals relating to
the listing of the shares of First Merchants common stock to be issued in
the Merger on the National Market System of NASDAQ and certain other
filings and approvals with NASDAQ relating to the change in the number of
shares of First Merchants outstanding as a result of the Merger, no notice
to, filing with, authorization of, execution by, or consent or approval of,
any third party is necessary for the consummation by First Merchants of the
transactions contemplated by this Agreement.
6.03. Capitalization.
(a) As of October 14, 2001, First Merchants had 50,000,000 shares of
common stock authorized, no par value, of which 12,675,468 shares were
issued and outstanding. Such issued and outstanding shares of First
Merchants' common stock have been duly and validly authorized by all
necessary corporate action of First Merchants, are validly issued, fully
paid and nonassessable and have not been issued in violation of any
preemptive rights of any shareholders.
(b) First Merchants has 500,000 shares of Preferred Stock authorized,
no par value, no shares of which have been issued and no commitments exist
to issue any of such shares.
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(c) The shares of First Merchants' common stock to be issued pursuant
to the Merger will be fully paid, validly issued and nonassessable.
6.04. Organizational Documents. The Articles of Incorporation and By-laws
of First Merchants in force as of the date hereof have been delivered to
Lafayette. The documents delivered by it represent true, accurate and complete
copies of the corporate documents of First Merchants in effect as of the date of
this Agreement.
6.05. 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
First Merchants threatened, in any court or before any government agency or
body, arbitration panel or otherwise (nor does First Merchants have any
knowledge of a basis for any claim, action, suit, proceeding, arbitration or
investigation) against First Merchants or any of its subsidiaries which are
material to the business, prospects, condition (financial or otherwise), results
of operations or assets of First Merchants and its subsidiaries taken as a
whole. 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 or its subsidiary, First Merchants Bank, National
Association, as a result of an examination by any regulatory agency or body.
6.06. Financial Statements. First Merchants consolidated balance sheets as
of the end of the two fiscal years ended December 31, 1999 and 2000 and the six
(6) months ended June 30, 2001 and the related consolidated statements of
income, shareholders' equity and cash flows for the years or period then ended
("First Merchants Financial Information") 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. The
First Merchants financial statements as of and for the two (2) fiscal years
ended December 31, 1999 and 2000 are audited financial statements.
6.07. Loans and Investments.
(a) Except as set forth in the Disclosure Letter, as of June 30, 2001,
there was no loan of First Merchants Bank, National Association in excess
of $100,000 that had been classified by bank regulatory examiners as "Other
Loans Specially Mentioned," "Substandard," "Doubtful" or "Loss." All loans
of First Merchants Bank, National Association as of June 30, 2001, in
excess of $100,000 that 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 First
Merchants Financial Information is, in the opinion of First Merchants,
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 First Merchants Financial Information.
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(c) Except as set forth in the Disclosure Letter, none of the
investments reflected in the First Merchants Financial Information and none
of the investments made by First Merchants or its subsidiary, First
Merchants Bank, National Association, since June 30, 2001 is subject to any
restrictions, whether contractual or statutory, which materially impairs
the ability of First Merchants or its subsidiary, First Merchants Bank,
National Association, to dispose freely of such investment at any time.
Except as set forth in the Disclosure Letter, neither First Merchants nor
its subsidiary, First Merchants Bank, National Association, is a party to
any repurchase agreements with respect to securities.
6.08. 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 First Merchants or its subsidiaries and covers any employee, director or
former employee or director of First Merchants or its subsidiaries under
which First Merchants or any of its subsidiaries 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 Lafayette 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 a
"First Merchants Employee Plan" and collectively as the "First Merchants
Employee Plans." The First Merchants 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 First Merchants 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
First Merchants, any of its subsidiaries, or a First Merchants Employee
Plan. Each First Merchants Employee Plan has been administered in
substantial conformance with such requirements and all reports and
information required with respect to each First Merchants Employee Plan
have been timely given.
(c) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, for which no statutory or administrative
exemption exists, and no "reportable event," as defined in Section 4043(b)
of ERISA, for which a notice is required to be filed, has occurred with
respect to any First Merchants Employee Plan. Neither First Merchants nor
any of its subsidiaries has any outstanding liability to the Pension
Benefit Guaranty Corporation ("PBGC"), or any liability to the Internal
Revenue Service ("IRS"), to the Department of Labor ("DOL") or to an
employee or First Merchants Employee Plan beneficiary under Section 502 of
ERISA.
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(d) To the best knowledge of First Merchants, no "fiduciary," as
defined in Section 3(21) of ERISA, of a First Merchants Employee Plan has
failed to comply with the requirements of Section 404 of ERISA.
(e) Each of the First Merchants 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 First Merchants 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 Reemployment Rights Act of 1994, the Small Business Job
Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Internal
Revenue Service Restructuring and Reform Act of 1998 (even though actual
plan amendments do not have to be made until the last day of the 2001 plan
year). Except as set forth in the Disclosure Letter, First Merchants and/or
its subsidiaries, as applicable, sought and received favorable
determination letters from the IRS within the applicable remedial amendment
periods under Code Section 401(b), and have furnished to Lafayette copies
of the most recent IRS determination letters with respect to any such First
Merchants Employee Plan.
(f) No First Merchants Employee Plan has incurred an "accumulated
funding deficiency," as determined under Code Section 412 and ERISA Section
302.
(g) No First Merchants Employee Plan has been terminated or incurred a
partial termination (either voluntarily or involuntarily).
(h) No claims against a First Merchants Employee Plan, First
Merchants, or any of its subsidiaries, with respect to a First Merchants
Employee Plan (other than normal benefit claims), have been asserted or, to
the best knowledge of First Merchants, threatened.
(i) To the best knowledge of First Merchants, no event has occurred
that would cause the imposition of the tax described in Code Section 4980B.
To the best knowledge of First Merchants, all requirements of ERISA Section
601 have been met.
(j) Except as set forth in the Disclosure Letter, there has been no
amendment to, written interpretation or announcement (whether or not
written) by First Merchants or any of its subsidiaries relating to, or
change in employee participation or coverage under, any First Merchants
Employee Plan which would increase materially the expense of maintaining
such First Merchants Employee Plans above the level of the expense incurred
in respect thereof for the fiscal year ended December 31, 2000.
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(k) For purposes of this Section 6.08, references to First Merchants
or its subsidiaries are deemed to include (i) all predecessors of First
Merchants or its subsidiaries, (ii) all members of any controlled group (as
determined under Code Section 414(b) or (c)) that includes First Merchants
or any of its subsidiaries, and (iii) all members of any affiliated service
group (as determined under Code Section 414(m) or (n)) that includes First
Merchants or any of its subsidiaries.
6.09. Taxes, Returns and Reports. First Merchants and its subsidiaries 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 material
respects all taxes, assessments and other governmental charges due or claimed to
be due upon them or any of their income, properties or assets; and (c) not
requested an extension of time for any such payments (which extension is still
in force). Except for taxes not yet due and payable, the reserve for taxes on
the First Merchants Financial Information is adequate to cover all of First
Merchants' and its subsidiaries' tax liabilities (including, without limitation,
income taxes and franchise fees) that may become payable in future years with
respect to any transactions consummated prior to June 30, 2001. Neither First
Merchants not any of its subsidiaries has, or will have, any liability for taxes
of any nature for or with respect to the operation of their business, including
the assets of any subsidiary, from June 30, 2001, up to and including the
Effective Date, except to the extent reflected on their First Merchants
Financial Information or on financial statements of First Merchants subsequent
to such date and as set forth in the Disclosure Letter. Neither First Merchants
nor any of its subsidiaries is currently under audit by any state or federal
taxing authority. Except as set forth in the Disclosure Letter, neither the
federal, state, or local tax returns of First Merchants or its subsidiaries have
been audited by any taxing authority during the past five (5) years.
6.10. Reports. Since January 1, 1995, First Merchants and its subsidiaries
have timely filed all reports, registrations and statements, together with any
required amendments thereto, that it was required to file with the Regulatory
Authorities having jurisdiction over the affairs of either First Merchants or
its subsidiaries. All such reports filed by First Merchants and its subsidiaries
complied in all material respects with all the rules and regulations promulgated
by the applicable Regulatory Authorities and are true, accurate and complete in
all material respects and were prepared in conformity with generally accepted
regulatory accounting principles applied on a consistent basis. Except as set
forth in the Disclosure Letter, 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, First Merchants or its subsidiary,
First Merchants Bank, National Association.
6.11. Absence of Defaults. First Merchants is not in violation of its
charter documents or By-Laws or in default under any material agreement,
commitment, arrangement, loan, 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, except for
defaults which would not have a material adverse effect on the business of First
Merchants or its subsidiaries.
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6.12. Accuracy of Statements. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by First Merchants to Lafayette pursuant to or in connection with this Agreement
or the transactions contemplated hereby (including, without limitation, any
information which has been or shall be supplied by First Merchants with respect
to its business, operations and financial condition for inclusion in the proxy
statement and registration statement relating to the Merger) contains or shall
contain (in the case of information relating to the proxy statement at the time
it is mailed and to the registration statement at the time it becomes effective)
any untrue statement of a material fact or omits or shall omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading.
6.13. Compliance With Law. First Merchants has not engaged in any activity
nor taken or omitted to take any action which has resulted or, to the knowledge
of First Merchants, could result in the violation of any local, state, federal
or foreign law, statute, rule, regulation or ordinance or of any order,
injunction, judgment or decree of any court or government agency or body, the
violation of which could materially adversely affect the business, prospects,
condition (financial or otherwise) or results of operations of First Merchants.
First Merchants possesses all licenses, franchises, permits and other
authorizations necessary for the continued conduct of its business without
material interference or interruption. There are no agreements or understandings
with, nor any orders or directives of, any regulatory agencies or government
authorities, which would have a material adverse effect on the consolidated
financial position of First Merchants. First Merchants has received no written
inquiries from any regulatory agency or government authority relating to its
compliance with the Bank Secrecy Act, the Truth-in-Lending Act or the Community
Reinvestment Act or any laws with respect to the protection of the environment
or the rules and regulations promulgated thereunder. First Merchants has
received no inquiries from any regulatory agency or government authority
relating to its compliance with any securities laws applicable to First
Merchants.
6.14. Absence of Certain Changes. Except for events and conditions relating
to the business and interest rate environment in general (including consequences
of the terrorist attack on the United States on September 11, 2001) and the
accrual or payment of Merger-related expenses, since June 30, 2001, no events or
conditions of any character, whether actual, threatened or contemplated, have
occurred, or can reasonably be expected to occur, which materially adversely
affect First Merchants consolidated business, prospects, conditions (financial
or otherwise), assets or results of operations or which have caused, or can
reasonably be expected to cause, First Merchants business, on a consolidated
basis, to be conducted in a materially less profitable manner than prior to June
30, 2001.
6.15. First Merchants Securities and Exchange Commission Filings. First
Merchants has complied in all material respects with all state, federal or
foreign securities laws, statutes, rules, regulations or orders, injunctions or
decrees of any government agency relating thereto. 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, 2000, and Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, copies of which have
previously been delivered to Lafayette. All such Securities and Exchange
Commission ("SEC") filings were true, accurate
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and complete in all material respects as of the dates of the filings, and no
such filings contained any untrue statement of a material fact or omitted 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
misleading.
6.16. Environmental Matters.
(a) Neither First Merchants nor any of its subsidiaries has caused or
allowed the generation, treatment, storage, disposal or release at any real
property owned or leased by them of any Toxic Substance, except in
accordance with all applicable federal, state and local laws and
regulations.
(b) Except as disclosed in the Disclosure Letter, there are no
underground storage tanks located on, in or under any real property owned
by First Merchants or any of its subsidiaries and no such owned real
property has previously contained an underground storage tank. Neither
First Merchants nor any of its subsidiaries own or operate any underground
storage tank at any real property leased by them and no such leased real
property has previously contained an underground storage tank. No such
owned or leased real property is or has been listed on the CERCLIS.
(c) No Toxic Substance has been released, spilled, discharged or
disposed at, in, on or under any real property owned or leased by First
Merchants or any of its subsidiaries nor are there any other conditions or
circumstances affecting any real property owned or leased by First
Merchants or any of its subsidiaries, in each case, which would pose a
significant risk to the environment or the health or safety of persons or
otherwise pose a material risk of liability for remediation, corrective
action or clean-up.
6.17. Bring Down of Representations and Warranties. All representations and
warranties of First Merchants contained in this Section 6 shall be true,
accurate and correct on and as of the Effective Date except as affected by the
transactions contemplated by and specified within the terms of this Agreement.
6.18. Nonsurvival of Representations and Warranties. The representations
and warranties contained in this Section 6 shall expire on the Effective Date or
the earlier termination of this Agreement, and thereafter First Merchants and
all directors and officers of First Merchants shall have no further liability
with respect thereto unless a court of competent jurisdiction should determine
that any misrepresentation or breach of a warranty was willfully or
intentionally made or is deemed to be fraudulent.
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SECTION 7
Covenants of Lafayette
Lafayette covenants and agrees with First Merchants, and covenants and
agrees to cause the Bank to act, as follows:
7.01. Shareholder Approval. Lafayette 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 Lafayette at the
earliest possible reasonable date, and, subject to Section 7.05 hereof, the
Board of Directors of Lafayette shall recommend to the shareholders of Lafayette
that such shareholders approve this Agreement and shall not thereafter withdraw
or modify its recommendation. The Board of Directors of Lafayette shall use its
best efforts to obtain any vote of its shareholders necessary for the approval
of this Agreement.
7.02. Other Approvals. Lafayette and the Bank shall proceed expeditiously,
cooperate fully and use their best efforts to procure upon reasonable terms and
conditions all consents, authorizations, approvals, registrations and
certificates, to complete all filings and applications and to satisfy all other
requirements prescribed by law which are necessary for consummation of the
Merger on the terms and conditions provided in this Agreement at the earliest
possible reasonable date.
7.03. Conduct of Business.
(a) On and after the date of this Agreement and until the Effective
Date or until this Agreement shall be terminated as herein provided,
neither Lafayette nor the Bank shall, without the prior written consent of
First Merchants, (i) make any material changes in their capital structure;
(ii) authorize a class of stock or issue, or authorize the issuance of,
stock other than or in addition to the outstanding stock as set forth in
Section 5.03 hereof; (iii) declare, distribute or pay any dividends on
their shares of common stock, or authorize a stock split, or make any other
distribution to their shareholders, except for (a) the payment by Lafayette
prior to the Effective Date of quarterly cash dividends on its common stock
in the amount of $.11 per share plus a year-end special dividend of up to
$.05 per share (provided the declaration of the last dividend by Lafayette
prior to the Effective Date and the payment thereof shall be coordinated
with First Merchants so that the holders of Lafayette common stock do not
receive dividends on both Lafayette common stock and First Merchants common
stock received in the Merger in respect of such quarter or fail to receive
a dividend on at least one of the Lafayette common stock or First Merchants
common stock received in the Merger in respect of such quarter), and (b)
the payment by the Bank to Lafayette of dividends to pay Lafayette's
expenses of operations and its business and payment of fees and expenses
incurred in connection with the transactions contemplated by this
Agreement; (iv) except as set forth in the Disclosure Letter, merge,
combine or consolidate with or sell their assets or any of their securities
to any other person, corporation or entity, effect a share exchange or
enter into any other transaction not in the ordinary course of business;
(v) except as set forth in the Disclosure Letter, incur any liability or
obligation, make any commitment, payment or
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disbursement, enter into any contract, agreement, understanding or
arrangement or engage in any transaction, or acquire or dispose of any
property or asset having a fair market value in excess of $10,000.00
(except for personal or real property acquired or disposed of in connection
with foreclosures on mortgages or enforcement of security interests and
loans made or sold by the Bank in the ordinary course of business); (vi)
subject any of their properties or assets to a mortgage, lien, claim,
charge, option, restriction, security interest or encumbrance; (vii)
promote or increase or decrease the rate of compensation or enter into any
agreement to promote or increase or decrease the rate of compensation of
any director, officer or employee of Lafayette or the Bank (except for year
end bonuses in an aggregate amount not to exceed $550,000, and promotions
and non-material increases in the ordinary course of business and in
accordance with past practices); (viii) except as set forth in the
Disclosure Letter, 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 Lafayette or the Bank, change the level of
benefits or payments under any of the foregoing or increase or decrease any
severance or termination pay benefits or any other fringe or employee
benefits other than as required by law or regulatory authorities or
specifically provided for in this Agreement; (ix) amend their Articles of
Incorporation or By-Laws from those in effect on the date of this
Agreement; (x) modify, amend or institute new employment policies or
practices, or enter into, renew or extend any employment or severance
agreements with respect to any present or former Lafayette or Bank
directors, officers or employees; (xi) give, dispose, sell, convey, assign,
hypothecate, pledge, encumber or otherwise transfer or grant a security
interest in any common stock of the Bank; (xii) fail to make additions to
the Bank's reserve for loan losses, or any other reserve account, in the
ordinary course of business and in accordance with sound banking practices;
(xiii) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible or liable for
the obligations of any other individual, corporation or other entity; and
(xiv) agree in writing or otherwise to take any of the foregoing actions.
(b) Lafayette and the Bank shall maintain, or cause to be maintained,
in full force and effect insurance on its properties and operations and
fidelity coverage on its directors, officers and employees in such amounts
and with regard to such liabilities and hazards as customarily are
maintained by other companies operating similar businesses.
(c) Lafayette and the Bank shall continue to give to First Merchants
and its employees, accountants, attorneys and other authorized
representatives reasonable access during regular business hours and other
reasonable times to all their premises, properties, statements, books and
records.
7.04. Preservation of Business. On and after the date of this Agreement and
until the Effective Date or until this Agreement is terminated as herein
provided, Lafayette and the Bank
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each shall (a) carry on their business diligently, substantially in the same
manner as heretofore conducted, and in the ordinary course of business; (b) use
their best efforts to preserve their business organizations intact, to keep
their present officers and employees and to preserve their present relationship
with customers and others having business dealings with them; and (c) not do or
fail to do anything which will cause a material breach of, or material default
in, any contract, agreement, commitment, obligation, understanding, arrangement,
lease or license to which they are a party or by which they are or may be
subject or bound.
7.05. Other Negotiations. On and after the date of this Agreement and until
the Effective Date, Lafayette and the Bank shall not, and shall not permit or
authorize their respective directors, officers, employees, agents or
representatives to, directly or indirectly, initiate, solicit, encourage, or
engage in discussions or negotiations with, or provide information to, any
corporation, association, partnership, person or other entity or group
concerning any proposal by such corporation, association, partnership, person or
other entity or group for a 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 Lafayette or the Bank or similar transaction
involving Lafayette or the Bank (all such transactions hereinafter referred to
as an "Acquisition Transaction"). Lafayette and the Bank shall promptly
communicate to First Merchants the terms of any proposal, written or oral, which
either may receive with respect to an Acquisition Transaction and any request by
or indication of interest on the part of any third party with respect to
initiation of any Acquisition Transaction or discussion with respect thereto.
The above provisions of this Section 7.05 notwithstanding, nothing contained in
this Agreement shall prohibit (i) Lafayette 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 Lafayette, after consultation with legal counsel
and its investment banker, determines in good faith that such action is required
for the directors of Lafayette to fulfill their fiduciary duties and obligations
to Lafayette's shareholders and other constituencies under Indiana law, and (b)
prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, Lafayette provides immediate written
notice to First Merchants 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
Lafayette from failing to make, withdrawing or modifying its recommendation to
shareholders regarding the Merger following receipt of a proposal for an
Acquisition Transaction if the Board of Directors of Lafayette, after
consultation with and based upon the advice of legal counsel and its investment
banker, determines in good faith that such action is required for the directors
of Lafayette to fulfill their fiduciary duties and obligations to Lafayette's
shareholders and other constituencies under Indiana law.
7.06. Restrictions Regarding Affiliates. Lafayette 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 reasonable request of First
Merchants, provide First Merchants with a list identifying each person who may
reasonably be deemed to be an "affiliate" of Lafayette 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 Lafayette for purposes
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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 the provisions of such Rule 145.
7.07. Press Release. Except as required by law, neither Lafayette nor the
Bank shall issue any press releases or make any other public announcements or
disclosures relating to the Merger without the prior approval of First
Merchants, which approval will not be unreasonably withheld.
7.08. Disclosure Letter. Lafayette 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. Lafayette agrees to abide by the terms of the
Confidentiality Agreement between Lafayette and First Merchants executed as of
August 28, 2001. This provision shall survive the Effective Date or the earlier
termination of this Agreement.
7.10. Cooperation. Lafayette shall generally cooperate with First Merchants
and its officers, employees, attorneys, accountants and other agents, and,
generally, do such other acts and things in good faith as may be reasonable,
necessary or appropriate to timely effectuate the intents and purposes of this
Agreement and the consummation of the transactions contemplated hereby,
including, without limitation, (i) Lafayette shall cooperate and assist First
Merchants in preparation of and/or filing of all regulatory applications, the
registration statement for registration of First Merchants' shares, and all
other documentation required to be prepared for consummation of the Merger and
obtaining all necessary approvals, and (ii) Lafayette shall furnish First
Merchants with all information concerning itself and the Bank that First
Merchants may request in connection with the preparation of the documentation
referenced above. Prior to the Closing (as defined in Section 12 hereof),
Lafayette agrees to disclose to First Merchants any fact or matter that comes to
the attention of Lafayette that might indicate that any of the representations
or warranties of Lafayette may be untrue, incorrect, or misleading in any
material respect.
7.11. Letter to Lafayette's Shareholders. Within five (5) business days
after execution of this Agreement by Lafayette and First Merchants, Lafayette
shall deposit in the United States mail a letter to each of the shareholders of
record of Lafayette 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 Lafayette shall be in a form
mutually agreed to by First Merchants and Lafayette.
7.12. Exercise of Options and Stock Appreciation Rights. Lafayette shall
cause the stock options disclosed pursuant to Section 5.03(c) hereof to be
exercised and the related shares of Lafayette's common stock to be issued on or
immediately before the Effective Date. Lafayette 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 Date of the Merger, Lafayette shall have no
more than 4,194,104 shares of common stock outstanding. Thereafter, each option
to which this
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Section 7.12 applies will be exercised and cease to exist. Prior to the
Effective Date, Lafayette shall take all action necessary to cause each SAR
outstanding at the Effective Date under Lafayette's Officers' Stock Appreciation
Rights Plan as disclosed pursuant to Section 5.03(e), without any action on the
part of the holder thereof, to be converted into the right to receive from
Lafayette, at the Effective Date, cash equal to the difference between the Base
Price and $30.00 times the number of shares of Lafayette common stock to which
such SAR relates; provided, however, that the payer shall withhold from such
cash payment any taxes required to be withheld by applicable law. Each SAR to
which this Section 7.12 applies will be canceled and cease to exist by virtue of
such payment. On or prior to the Effective Date, Lafayette shall take all action
necessary to terminate all stock option and SAR plans of Lafayette. From and
after the date hereof, Lafayette covenants that no additional stock options or
SARs shall be granted by Lafayette under any stock option or SAR plans of
Lafayette or otherwise.
7.13. SEC and Other Reports. Promptly upon its becoming available,
Lafayette shall furnish to First Merchants one (1) copy of each financial
statement, report, notice, or proxy statement sent by Lafayette to its
shareholders generally and of each regular or periodic report, registration
statement or prospectus filed by Lafayette with NASDAQ or the SEC or any
successor agency, of any order issued by any Governmental Authority in any
proceeding to which Lafayette is a party, and of any notice or communication
received by Lafayette from NASDAQ or the SEC. For purposes of this provision,
"Governmental Authority" shall mean any government (or any political subdivision
or jurisdiction thereof), court, bureau, agency or other governmental entity
having or asserting jurisdiction over Lafayette or any of its respective
businesses, operations or properties.
7.14. Adverse Actions. Lafayette shall not (a) take any action while
knowing that such action would, or is reasonably likely to, prevent or impede
the Merger from qualifying as a reorganization within the meaning of Section 368
of the Code; or (b) knowingly take any action that is intended or is reasonably
likely to result in (i) any of its representations and warranties set forth in
this Agreement being or becoming untrue in any respect at any time at or prior
to the Effective Date, (ii) any of the conditions to the Merger set forth in
Section 9 not being satisfied, (iii) a material violation of any provision of
this Agreement, or (iv) a delay in the consummation of the Merger except, in
each case, as may be required by applicable law or regulation.
SECTION 8
Covenants of First Merchants
First Merchants covenants and agrees with Lafayette as follows:
8.01. Shareholder Approval. First Merchants 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 First
Merchants at the earliest possible reasonable date, and the Board of Directors
of First Merchants shall recommend to the shareholders of First Merchants that
such shareholders approve this Agreement and shall not thereafter withdraw or
modify its recommendation. The Board of Directors of First Merchants
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shall use its best efforts to obtain any vote of its shareholders necessary for
the approval of this Agreement.
8.02. Approvals. First Merchants shall proceed expeditiously, cooperate
fully and use its best efforts to procure upon reasonable terms and conditions
all consents, authorizations, approvals, registrations and certificates, to
complete all filings and applications and to satisfy all other requirements
prescribed by law which are necessary for consummation of the Merger on the
terms and conditions provided in this Agreement at the earliest possible
reasonable date. First Merchants agrees to use its best efforts to raise any
additional capital which might be required to obtain any required regulatory
approvals of the Merger. First Merchants shall provide Lafayette with copies of
proposed regulatory filings in connection with the Merger and afford Lafayette
the opportunity to offer comment on the filings before filing. Not in limitation
of the foregoing, First Merchants agrees to prepare a registration statement on
Form S-4 (the "Registration Statement"), to be filed by First Merchants with the
SEC in connection with the issuance of First Merchants common stock in the
Merger (including the proxy statements and prospectus and other proxy
solicitation materials of Lafayette and First Merchants constituting a part
thereof (the "Proxy Statement") and all related documents). The Proxy Statement
shall fully disclose that Lafayette's shareholders have dissenters' rights under
IND. CODE ss. 23-1-44 et. seq. First Merchants agrees to advise Lafayette,
promptly after First Merchants receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or amendment has
been filed, of the issuance of any stop order or the suspension of the
qualification of First Merchants common stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information. First Merchants agrees to
use its reasonable best efforts to list, prior to the Effective Date, on the
National Market System of NASDAQ (subject to official notice of issuance), the
shares of First Merchants common stock to be issued to the holders of Lafayette
common stock in the Merger.
8.03. Employee Benefit Plans.
(a) General. Except as otherwise provided in this Section 8.03, on a
date no later than January 1, 2004 (the "Entry Date"), First Merchants will
make available to the employees of Lafayette and the Bank who continue as
employees of First Merchants or any subsidiary of First Merchants no less
favorable employee benefits than First Merchants offers to similarly
situated employees of its banking subsidiaries from time to time. Except as
otherwise provided in this Section 8.03, as of the Entry Date, First
Merchants will amend or cause to be amended each employee benefit plan of
First Merchants and its subsidiaries in which former Lafayette or Bank
employees are eligible to participate, to the extent necessary, so that as
of such date (i) such plans take into account for purposes of eligibility,
vesting, and benefit accrual, the service of such employees with Lafayette
and the Bank as if such service were with First Merchants and its
subsidiaries, to the same extent that such service was credited under a
comparable plan of Lafayette and the Bank, (ii) former Lafayette and Bank
employees are not subject to any waiting periods or pre-existing condition
limitations under the medical, dental and health plans of First Merchants
or its subsidiaries in which they are eligible to participate and may
commence participation in such plans on the specified date, (iii)
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former Lafayette and Bank employees will retain credit for unused sick
leave and vacation pay which has been accrued as of the Entry Date, and
(iv) for purposes of determining the entitlement of former Lafayette and
Bank employees to sick leave and vacation pay following the Entry Date, the
service of such employees with Lafayette and the Bank shall be treated as
if such service were with First Merchants. Until such time as the employees
of Lafayette or the Bank become covered by First Merchants employee benefit
plans, they will remain covered by the benefit plans of Lafayette or the
Bank, subject to the terms of such plans.
(b) Employees' Salary Savings Plan. Following the Effective Date,
First Merchants agrees to cause the Bank, or any successor in interest to
the Bank, to maintain and honor all obligations (including the Bank's
matching contributions to the Lafayette employees at no less than its
current level of 50% of up to 4% of employee compensation contributed by
employees) under the Bank's Employees' Salary Savings Plan (the "Lafayette
401(k) Plan"). Notwithstanding the foregoing, First Merchants may amend or
merge the Lafayette 401(k) Plan with its existing 401(k) Plan provided it
continues an employer match at a level no less than the level set forth
above for former Lafayette employees for at least five years following the
Effective Date, to the extent it is permitted to do so under ERISA or the
Code.
(c) Group Insurance. Following the Effective Date, First Merchants
agrees to cause the Bank, or any successor in interest to the Bank, to
honor all obligations under the Bank's group insurance program for health,
life, dental and accident and disability insurance (the "Bank Insurance
Program"), including obligations owed under such plan to present retirees,
to employees of the Bank who retire before January 1, 2005, and to two
former directors and a widow of a former director of the Bank ("Retirees").
Notwithstanding the foregoing, First Merchants may replace the Bank
Insurance Program with its own program, subject to modifications it deems
appropriate, provided that it agrees (and agrees to cause any successor in
interest to agree) to continue in effect for all Retirees a comparable
level of insurance coverage at no greater cost (as determined by the same
methodology as currently being used by the Bank) than that being received
or paid by such Retirees at the Effective Date.
(d) Employees' Pension Plan. On the Entry Date, the Bank's Employees'
Pension Plan (the "Bank Pension Plan") will be frozen, and all accrued
benefits of participants in that Bank Pension Plan, including cost of
living increases provided for in the Plan as of the date of freezing of
such Plan, shall thereupon be fully vested and shall become payable at the
times and in the amounts provided for under that Plan. No amendments except
those required by law shall be made to the Bank Pension Plan prior to the
Entry Date. All Lafayette and Bank employees satisfying eligibility
requirements of such plan as of the Entry Date will be entitled to become
eligible to participate in First Merchants retirement plan on the Entry
Date, receiving credit for past service with Lafayette and the Bank for
vesting, eligibility and benefit purposes under the First Merchants
retirement plan. Benefits payable under the First Merchants retirement plan
to former Lafayette or Bank employees shall be offset (but not below zero)
by actuarial equivalent present values (as determined using the actuarial
factors set forth in the Bank
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Pension Plan) of the accrued benefit payable to them under the Bank Pension
Plan (excluding any cost of living adjustments accruing on or after the
Entry Date). First Merchants shall be responsible for freezing of the Bank
Pension Plan and for making any required or appropriate application to the
IRS for a determination letter to the effect that such freezing will not
adversely affect the tax-qualified status of such plan and for providing
any notices to the Pension Benefit Guaranty Corporation or other
governmental entity regarding the withdrawal.
(e) Director Emeritus Supplemental Retirement Benefits Plan. As of the
Effective Date, First Merchants agrees to honor all obligations (and to
cause any successor in interest to First Merchants to honor all
obligations) to the following individuals participating in Lafayette's
Director Emeritus Supplemental Retirement Benefits Plan (the "SDRP"):
Robert T. Jeffares, Roy D. Meeks, Vernon N. Furrer, Joseph A. Bonner,
Wilbur L. Hancock, Eric P. Meister, Robert J. Weeder, Richard A. Boehning,
Jeffrey L. Kessler, Gordon G. Beemer, George H. DeVault, and Charles E.
Maki; provided, however, that subject to obtaining the necessary consents
to such action by Mr. Beemer, Mr. DeVault and Mr. Maki, the SDRP shall be
amended on or before the Effective Date to provide for the payment to each
participant therein of the present value of future director fees payable to
such participant under the SDRP based on the directors fees payable at the
Effective Date as to directors of the Bank who have not yet retired from
the Board and based on the life expectancies of the participants in the
SDRP. In determining the present value and life expectancies, the same
actuarial assumptions currently used by the actuaries administering the
Bank Pension Plan shall be used. Such present value amount as determined
for each participant as of the Effective Date shall be paid in three
substantially equal annual installments commencing with the first payment
payable 30 days after the Effective Date. The unpaid installments shall
bear interest at an annual rate equal to the discount rate applied in
determining the present value of the benefits.
(f) Director Deferred Compensation Plan. Following the Effective Date,
First Merchants agrees to cause the Bank, or any successor in interest to
the Bank, to honor all obligations to the following individuals
participating in the Director Deferred Compensation Plan of the Bank, until
the obligations are paid in full thereunder to such individuals or their
beneficiaries: Robert T. Jeffares, Roy D. Meeks, Vernon N. Furrer, Joseph
A. Bonner, Wilbur L. Hancock, Eric P. Meister, Robert J. Weeder, and
Richard A. Boehning.
(g) Severance. First Merchants does not intend to terminate any
employees of Lafayette or the Bank in connection with the Merger. However,
should it decide to do so, it shall consult with the President and Chief
Executive Officer of the Bank about appropriate severance benefits payable
in connection with any such termination. Nothing in this Section 8.03(g)
shall be deemed to limit or modify First Merchants' at will employment
policy.
(h) COBRA. First Merchants shall be responsible for providing COBRA
continuation coverage to any qualified employee or former employee of
Lafayette or the
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Bank and to their respective qualified beneficiaries, on and after the
Effective Date, regardless of when the qualifying event occurred.
8.04. Press Release. Except as required by law, First Merchants shall not
issue any press releases or make any other public announcements or disclosures
relating to the Merger without the prior approval of Lafayette, which approval
will not be unreasonably withheld.
8.05. Confidentiality. First Merchants agrees to abide by the terms of the
Confidentiality Agreement between Lafayette and First Merchants executed as of
August 28, 2001. This provision shall survive the Effective Date or the earlier
termination of this Agreement.
8.06. Covenants Regarding the Bank. Upon consummation of the Merger, the
Bank shall be a state bank organized under the laws of the State of Indiana and
the directors of the Bank in office immediately prior to the consummation of the
Merger shall be the directors of the Bank at the Effective Date and entitled to
directors fees that are no lower than the directors fees in effect at the
Effective Date. Thereafter, the Bank directors who desire to continue to serve
in that capacity shall do so for at least the remainder of the terms to which
they have been elected, subject to First Merchants' policy of mandatory
retirement as described below. First Merchants will cause these directors to be
renominated to the Board of the Bank for additional terms which would extend to
at least a date five (5) years following the Effective Date, subject to First
Merchants' policy of mandatory retirement as described in the next sentence. The
Bank directors will be subject to First Merchants' policy of mandatory
retirement at age seventy (70); provided, however, the policy of mandatory
retirement will not apply to any of the Bank's current directors until
twenty-four (24) months after the Effective Date. First Merchants shall continue
to operate the Bank as an operating subsidiary of First Merchants under the name
"Lafayette Bank and Trust Company" or a name substantially similar thereto for a
period of at least five (5) years following the Effective Date.
8.07. Board of Directors of First Merchants. First Merchants shall cause
all necessary action to be taken to cause Richard A. Boehning and Robert T.
Jeffares, or such other replacements for such persons as shall be agreed to by
First Merchants and Lafayette, to either (i) be nominated for election as
members of the First Merchants' Board of Directors for a three (3) year term at
the first annual meeting of the shareholders of First Merchants following the
Effective Date; or (ii) to be appointed as members of the First Merchants' Board
of Directors at the next meeting of the First Merchants' Board of Directors
following the Effective Date to serve until the first annual meeting of the
shareholders of First Merchants following the Effective Date and then to be
nominated for election as members of the First Merchants' Board of Directors for
a three (3) year term at the first annual meeting of the shareholders of First
Merchants following the Effective Date, whichever can be effected first
depending on the timing of the occurrence of the Effective Date. The two (2)
individuals from the Board of Directors of Lafayette elected to the Board of
Directors of First Merchants shall be subject to First Merchants' policy of
mandatory retirement at age seventy (70); provided, however, the policy of
mandatory retirement will not apply to such individuals until twenty-four (24)
months after the Effective Date. First Merchants shall cause one of the two (2)
individuals from the Board of Directors of Lafayette elected to the Board of
Directors of First Merchants to be elected as the Vice Chairman of the Executive
Committee of First Merchants. In addition, First Merchants agrees that it shall
make a
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good faith effort to expand the size of the Board of Directors of the Bank and
the Board of Directors of First Merchants within one (1) year following the
Effective Date to add two (2) additional members to each such board. The same
two (2) individuals shall be added to both the Board of Directors of First
Merchants and the Board of Directors of the Bank. Such individuals must be
residents of Tippecanoe County, Indiana. The Bank may recommend the names of
potential candidates to be elected to the Board of Directors of First Merchants
and the Bank; provided, however, that First Merchants shall have the ultimate
authority to choose the two (2) individuals to be added to such boards in its
sole discretion. If First Merchants is unable to appoint (2) individuals who are
residents of Tippecanoe County to serve as Board members of the Bank and of
First Merchants within one (1) year following the Effective Date, it agrees to
appoint two of the Bank's directors of its choosing not currently on the First
Merchants Board to those positions on the Board of First Merchants.
8.08. Officers of the Bank and First Merchants. At the Effective Date, the
officers of the Bank in effect immediately prior to the Effective Date shall
remain the officers of the Bank. Robert J. Weeder, currently President and Chief
Executive Officer of the Bank, shall remain in such position earning
compensation no less than what he is earning at the Effective Date (subject to
normal and customary increases and bonuses) until he attains 65 years of age.
Effective upon Joseph A. Bonner's retirement as Chairman of the Board of the
Bank, First Merchants shall use its best efforts to cause the Bank's Board of
Directors to select Robert J. Weeder as Chairman of the Board of the Bank to
serve in such position, at compensation and customary bonuses of no less than
that which was being received at the Effective Date by Joseph A. Bonner, until
Mr. Weeder attains 70 years of age. Consideration will be given for the chief
executive officer replacement for Mr. Weeder upon his attainment of age 65 to
all qualified candidates, both internal and external. At the Effective Date,
Robert J. Weeder shall also be appointed Senior Vice President of First
Merchants and in that capacity shall be invited to attend all First Merchants
Board of Directors meetings.
8.09. Directors and Officers Insurance.
(a) For a period of at least three years from the Effective Date,
First Merchants shall use its reasonable best efforts to obtain an
endorsement to its director's and officer's liability insurance policy to
cover the present and former officers and directors of Lafayette and the
Bank (determined as of the Effective Date) with respect to claims against
such directors and officers arising from facts or events which occurred
before the Effective Date, which insurance shall contain at least the same
coverage and amounts, and contain terms and conditions no less
advantageous, as that coverage currently provided by Lafayette; provided
however, that if First Merchants is unable to obtain such endorsement, then
Lafayette may purchase tail coverage under its existing director and
officer liability insurance policy for such claims; provided further that
in no event shall First Merchants be required to expend in the aggregate
during each such three-year period more than one and one-half times the
current annual amount spent by Lafayette (the "Insurance Amount") to
maintain or procure its current directors' and officers' insurance
coverage; provided further, that if First Merchants is unable to maintain
or obtain the insurance called for by this Section 8.09, First Merchants
shall use its reasonable best efforts to obtain as much comparable
insurance as is available for the
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Insurance Amount; provided, further, that officers and directors of
Lafayette or the Bank may be required to make application and provide
customary representations and warranties to First Merchants' insurance
carrier for the purpose of obtaining such insurance.
(b) For six years after the Effective Date, the Continuing Company
shall indemnify, defend and hold harmless the present and former officers
and directors of Lafayette and the Bank against all losses, expenses
(including attorneys' fees), claims, damages or liabilities arising out of
actions or omissions occurring on or prior to the Effective Date
(including, without limitation, the transactions contemplated by this
Agreement) to the full extent then permitted under the Indiana Business
Corporation Law and by First Merchants' or Lafayette's Articles of
Incorporation as in effect on the date hereof (whichever is more favorable
to the officers and directors of Lafayette and the Bank), including
provisions relating to advances of expenses incurred in the defense of any
action or suit.
(c) Following the Effective Date, First Merchants will provide any
Lafayette or Bank officers, directors and employees who become officers,
directors and employees of the Continuing Company or its subsidiaries with
the same directors and officers liability insurance coverage and
indemnification protections that First Merchants provides to other
officers, directors and employees of First Merchants or its subsidiaries.
(d) If First Merchants shall consolidate with or merge into any other
entity and shall not be the continuing or surviving entity of such
consolidation or merger or shall transfer all or substantially all of its
assets to any entity (a "Change of Control"), then and in each case, proper
provision shall be made so that the successors and assigns of First
Merchants shall assume the obligations set forth in this Section 8.09.
8.10. SEC and Other Reports. Promptly upon its becoming available, First
Merchants shall furnish to Lafayette one (1) copy of each financial statement,
report, notice, or proxy statement sent by First Merchants to its shareholders
generally and of each regular or periodic report, registration statement or
prospectus filed by First Merchants with the SEC or any successor agency, of any
order issued by any Governmental Authority in any proceeding to which First
Merchants is a party, and of any notice or communication received by First
Merchants from the SEC. For purposes of this provision, "Governmental Authority"
shall mean any government (or any political subdivision or jurisdiction
thereof), court, bureau, agency or other governmental entity having or asserting
jurisdiction over First Merchants or any of its respective businesses,
operations or properties.
8.11. Disclosure Letter. First Merchants 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.
8.12. Adverse Actions. First Merchants shall not (a) take any action while
knowing that such action would, or is reasonably likely to, prevent or impede
the Merger from qualifying as a
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reorganization within the meaning of Section 368 of the Code; or (b) knowingly
take any action that is intended or is reasonably likely to result in (i) any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any respect at any time at or prior to the Effective Date, (ii) any of
the conditions to the Merger set forth in Section 9 not being satisfied, (iii) a
material violation of any provision of this Agreement, or (iv) a delay in the
consummation of the Merger except, in each case, as may be required by
applicable law or regulation.
SECTION 9
Conditions Precedent To The Merger
The obligation of each of the parties hereto to consummate the transactions
contemplated by this Agreement is subject to the satisfaction and fulfillment of
each of the following conditions on or prior to the Effective Date:
9.01. Shareholder Approval. The shareholders of Lafayette and First
Merchants shall have approved, ratified and confirmed this Agreement as required
by applicable law.
9.02. Registration Statement Effective. First Merchants shall have
registered its shares of common stock to be issued to shareholders of Lafayette
in accordance with this Agreement with the SEC 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 SEC and no stop order shall have been issued or threatened. The shares of
First Merchants common stock shall have been listed for trading on the NASDAQ
National Market System (subject to official notice of issuance).
9.03. Tax Opinion. The parties shall have obtained an opinion of Bingham
Summers Welsh & Spilman, LLP, dated on or about the Effective Date, 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, and that no gain or loss
will be recognized by shareholders of Lafayette to the extent they receive
shares of First Merchants common stock in the Merger in exchange for their
shares of Lafayette common stock. Such opinion shall be based upon factual
representations received by such counsel from the parties, which representations
may take the form of written certifications.
9.04. Affiliate Agreements. First Merchants shall have obtained (a) from
Lafayette, a list identifying each affiliate of Lafayette and (b) from each
affiliate of Lafayette, the agreements contemplated by Section 7.06 hereof.
9.05. Regulatory Approvals. The Federal Reserve Board 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
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clearances are required by law for consummation of the transactions contemplated
by this Agreement shall have been obtained.
9.06. Officer's Certificate. First Merchants and Lafayette shall have
delivered to each other a certificate signed by their Chairman or President and
their Secretary, dated the Effective Date, certifying that (a) all the
representations and warranties of their respective corporations are true,
accurate and correct on and as of the Effective Date; (b) all the covenants of
their respective corporations have been complied with from the date of this
Agreement through and as of the Effective Date; and (c) their respective
corporations have satisfied and fully complied with all conditions necessary to
make this Agreement effective as to them.
9.07. Fairness Opinion. Lafayette shall have obtained an opinion from Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, to the effect that
the consideration paid in the Merger is fair to the shareholders of Lafayette
from a financial viewpoint. Such opinion shall be (a) in form and substance
reasonably satisfactory to Lafayette, (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. No Judicial Prohibition. Neither Lafayette, the Bank nor First
Merchants shall be subject to any order, decree or injunction of a court or
agency of competent jurisdiction which enjoins or prohibits the consummation of
the Merger.
9.09. 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.
9.10. Options. All of the options disclosed in Section 5.03(c) of the
Disclosure Letter shall have been exercised pursuant to Section 7.12 hereof and
Lafayette shall have no more than 4,194,104 shares of common stock issued and
outstanding. Lafayette shall have no commitment to issue any additional shares
of common stock. All stock option plans of Lafayette shall have been terminated.
9.11. SARs. All of the SARs disclosed in Section 5.03(e) hereof shall have
been exercised pursuant to Section 7.12 hereof and such SARs shall be canceled
and cease to exist. All SAR plans of Lafayette shall have been terminated.
SECTION 10
Termination of Merger
10.01. Manner of Termination. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Effective Date by
written notice delivered by First Merchants to Lafayette or by Lafayette to
First Merchants only for the following reasons:
(a) By Lafayette or First Merchants, if there has been a material
breach of any representation, warranty or covenant on the part of any party
in the representations,
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warranties, and covenants set forth herein, which breach cannot be or has
not been cured within 30 days after the giving of written notice to the
breaching party of such breach; provided that the party in default shall
have no right to terminate for its own default;
(b) By Lafayette or First Merchants, if it shall determine in its sole
discretion that the transactions contemplated by this Agreement have become
inadvisable or impracticable by reason of commencement or credible threat
of material litigation or proceedings against any of the parties;
(c) By Lafayette or First Merchants, if the financial condition,
business, assets, or results of operations of the other party shall have
been materially and adversely changed from that in existence at June 30,
2001 (for reasons other than events and conditions relating to the business
and interest rate environment in general (including consequences of the
terrorist attack on the United States on September 11, 2001), the accrual
or payment of Merger-related expenses, or matters set forth in the parties'
Disclosure Letters);
(d) By Lafayette or First Merchants, if the transaction contemplated
herein has not been consummated by June 30, 2002 (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein);
(e) By First Merchants if any of the items, events or information set
forth in any update to the Disclosure Letter provided by Lafayette has had
or may have (as determined by First Merchants in good faith) a material
adverse effect on the financial condition, results of operations, business,
or prospects of Lafayette or the Bank;
(f) By Lafayette if any of the items, events or information set forth
in any update to the Disclosure Letter provided by First Merchants has had
or may have (as determined by Lafayette in good faith) a material adverse
effect on the financial condition, results of operations, business, or
prospects of First Merchants and its subsidiaries, on a consolidated basis.
(g) By First Merchants or Lafayette if, in the opinion of counsel to
First Merchants or Lafayette, the Merger will not constitute a tax-free
reorganization under the Code;
(h) By First Merchants or Lafayette pursuant to their respective
termination rights set forth in Section 3.04 hereof;
(i) By Lafayette if the appropriate discharge of the fiduciary duties
of the Board of Directors of Lafayette consistent with Section 7.05
requires that Lafayette terminate this Agreement;
(j) By First Merchants if it receives written notice under Section
7.05 that Lafayette intends to furnish information to or enter into
discussions or negotiations with a
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third party in connection with a proposed Acquisition Transaction, if
Lafayette fails to give any such written notice as required in Section 7.05
or if Lafayette's Board of Directors fails to make, withdraws or modifies
its recommendation to Lafayette's shareholders to vote in favor of the
Merger following receipt of a proposal for an Acquisition Transaction; or
(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. 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 in accordance with
Section 10.01(j) or by Lafayette in accordance with Section 10.01(i), Lafayette
shall pay First Merchants the sum of $2,500,000 as liquidated damages. Such
liquidated damages shall be in lieu of 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. Lafayette
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 Lafayette as compensation to First Merchants for its time
and expense and not as a penalty to Lafayette, 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 Lafayette its reasonable attorneys' fees
incurred in the enforcement of this Section.
SECTION 11
Effective Date Of Merger
Subject to the terms and upon satisfaction of all requirements of law and
the conditions specified in this Agreement, the Merger shall become effective at
the close of business on the day specified in the Articles of Merger of
Lafayette with and into First Merchants as filed with
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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, unless otherwise
agreed to by First Merchants and Lafayette.
SECTION 12
Closing
12.01. Closing Date and Place. The closing of the Merger (the "Closing")
shall take place at the main office of First Merchants on the Effective Date or
at such other place as mutually agreed to by First Merchants and Lafayette.
12.02. Articles of Merger. Subject to the provisions of this Agreement, on
or prior to the Effective Date, the Articles of Merger shall be duly filed with
the Secretary of State of the State of Indiana specifying that the Merger shall
be effective as of the Effective Date.
12.03. Opinions of Counsel. At the Closing, Lafayette shall deliver an
opinion of its counsel, Barnes & Thornburg, to First Merchants, and First
Merchants shall deliver an opinion of its counsel, Bingham Summers Welsh &
Spilman, LLP, to Lafayette, dated as of the date of the Closing. The form of
such opinions shall be as mutually agreed to by the parties hereto and their
respective counsel.
SECTION 13
Miscellaneous
13.01. Effective Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns but, except for Sections 8.03, 8.06, 8.07, 8.08 and 8.09
(which are intended to be for the benefit of those present and former officers,
directors and employees of Lafayette and the Bank affected thereby and may be
enforced by such persons), none of the provisions thereof shall inure to the
benefit of any other person, firm, or corporation whomsoever. Neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned or transferred by either party hereto without the prior written consent
of the other party.
13.02. Waiver; Amendment.
(a) First Merchants and Lafayette may, by an instrument in writing
executed in the same manner as this Agreement: (i) extend the time for the
performance of any of the covenants or agreements of the other party under
this Agreement; (ii) waive any inaccuracies in the representations or
warranties of the other party contained in this Agreement or in any
document delivered pursuant hereto or thereto; (iii) waive the performance
by the other party of any of the covenants or agreements to be performed by
A-44
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
Lafayette or First Merchants, this Agreement may be amended, modified or
supplemented by the written agreement of Lafayette 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 Lafayette or First Merchants without the further
approval of such shareholders.
13.03. Notices. Any and all notices or other communications required or
permitted under this Agreement shall be in writing and shall be deemed to be
given (i) when delivered in person, or (ii) on the day of transmission if sent
via facsimile transmission to the facsimile number given below, provided
telephonic confirmation of receipt is obtained promptly after completion of
transmission, or (iii) on the fifth (5th) day after sent by certified or
registered mail, postage prepaid, return receipt requested, addressed as
follows:
If to First Merchants: With a copy to:
200 E. Jackson Street, Box 792 Bingham Summers Welsh & Spilman, LLP
Muncie, IN 47305 2700 Market Tower
Attn: Larry L. Helms, 10 West Market Street
Senior Vice President and Indianapolis, Indiana 46204-2982
General Counsel Attn: David R. Prechtel, Esq.
(765) 741-7283 (317) 236-9907
If to Lafayette: With a copy to:
133 North 4th Street Barnes & Thornburg
P.O. Box 1130 11 South Meridian Street
Lafayette, IN 47902 Indianapolis, IN 46204
Attn: Robert J. Weeder, Attn: Claudia V. Swhier, Esq.
President and Chief (317) 231-7433
Executive Officer
(765) 423-7137
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.
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13.04. Headings. The headings in this Agreement have been inserted solely
for the ease of reference and should not be considered in the interpretation or
construction of this Agreement.
13.05. Severability. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision or provisions
had never been contained herein.
13.06. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument. In addition, this Agreement and
the documents to be delivered hereunder may be executed by the parties hereto
either manually or by facsimile signatures, each of which shall constitute an
original signature.
13.07. Governing Law. This Agreement is executed in and shall be construed
in accordance with the laws of the State of Indiana, without regard to choice of
law principles.
13.08. Entire Agreement. This Agreement and the Confidentiality Agreement
supersedes any other agreement, whether oral or written, between First Merchants
and Lafayette relating to the matters contemplated hereby, and constitutes the
entire agreement between the parties hereto.
13.09. Expenses. First Merchants and Lafayette shall each pay their own
expenses incidental to the transactions contemplated hereby. It is understood
that the fees of Dain Rauscher Wessels, including the cost of the fairness
opinion referenced in Section 9.07, shall be borne by Lafayette 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 Contents. The provisions of Sections 7.09, 8.05, 10.02,
13.09 and this Section 13.10 shall survive beyond the termination of this
Agreement. The provisions of Sections 7.09, 8.03, 8.05, 8.06, 8.07, 8.08, 8.09,
13.09 and this Section 13.10 shall survive beyond the Effective Date.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, First Merchants and Lafayette 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/ Michael L. Cox
- ---------------------------------- ------------------------------------
Larry R. Helms, Secretary Michael L. Cox, President and Chief
Executive Officer
LAFAYETTE BANCORPORATION
ATTEST:
/s/ Michelle D. Turnpaugh By: /s/ Robert J. Weeder
- ---------------------------------- -------------------------------------
Michelle D. Turnpaugh, Secretary Robert J. Weeder,
President and Chief Executive Officer
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APPENDIX B
CHAPTER 44
DISSENTERS' RIGHTS
23-1-44-1. "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 dissent
from, and obtain payment of the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
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(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 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 proposed corporate 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 chapter.
(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
23-1-44-12] 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 chapter is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated; and
(2) Must not vote the shareholder's shares in favor of the proposed
action.
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(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
[P.L. 149-1986, Section 28.]
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 shareholders, or if corporate action is taken without approval
by the shareholders, then ten (10) days after the corporate 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 received;
(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 the 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 be 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 demands payment and deposits the shareholder's
shares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate
action.
(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, is not entitled to
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payment for the shareholder's shares under 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.]
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 shareholder 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 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.]
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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) 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 corporation made
or offered payment for the dissenter'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 under
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 the shares. If the
corporation does not commence the proceeding within the sixty (60) day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
B-6
(b) The corporation shall commence the proceeding in the 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 registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation
was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be 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. 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
assess 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.
B-7
(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 corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. [P.L. 149-1986, Section 28.]
B-8
APPENDIX C
Fairness Opinion
___________ , 2002
Board of Directors
Lafayette Bancorporation
133 North Fourth Street
P.O. Box 1130
Lafayette, Indiana 47902
Members of the Board:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of common stock,
without par value ("Lafayette Common Stock"), of Lafayette Bancorporation
("Lafayette"), of the aggregate consideration, set forth in Section 3.01 of the
Agreement of Reorganization and Merger dated as of October 14, 2001 (the
"Agreement"), between Lafayette and First Merchants Corporation ("First
Merchants").
The Agreement provides for the merger (the "Merger") of Lafayette into
First Merchants. Pursuant to the Agreement at the Effective Date (as defined in
the Agreement), each outstanding share of Lafayette Common Stock, other than any
shares held in the treasury of Lafayette, will be exchanged for the right to
receive 1.11 shares (the "Conversion Ratio") of the common stock, without par
value, of First Merchants ("First Merchants Common Stock") or $30.00 cash,
subject to the provisions and limitations of Section 3.07 of the Agreement. The
terms and conditions of the Merger are more fully set forth in the Agreement.
RBC Capital Markets, as part of its investment banking business, is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
We have acted as Lafayette's financial advisor in connection with, and have
participated in certain negotiations leading to, the Agreement. In connection
with rendering our opinion set forth herein, we have among other things:
(i) Reviewed Lafayette's Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the years ended December 31, 2000,
December 31, 1999 and December 31, 1998, including the audited
financial statements contained therein, and Lafayette's Quarterly
Reports on Form 10-Q for each of the quarters ended
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Lafayette Bancorporation
___________, 2002
Page 2
March 31, 2001, June 30, 2001, and September 30, 2001, and
Lafayette's preliminary unaudited financial information for the
fourth quarter and twelve months ended December 31, 2001;
(ii) Reviewed First Merchants' Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the years ended December 31, 2000,
December 31, 1999 and December 31, 1998, including the audited
financial statements contained therein, and First Merchants'
Quarterly Reports on Form 10-Q for each of the quarters ended March
31, 2001, June 30, 2001, and September 30, 2001, and First
Merchants' preliminary unaudited financial information for the
fourth quarter and twelve months ended December 31, 2001;
(iii) Reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses,
earnings, assets and prospects of Lafayette and First Merchants
provided to us or publicly available;
(iv) Participated in meetings and telephone conferences with members of
senior management of Lafayette and First Merchants concerning the
financial condition, business, assets, financial forecasts and
prospects of the respective companies, as well as other matters we
believed relevant to our inquiry;
(v) Reviewed certain stock market information for Lafayette Common Stock
and First Merchants Common Stock, and compared it with similar
information for certain companies, the securities of which are
publicly traded, which we deemed to be relevant for purposes of this
opinion;
(vi) Compared the results of operations and financial condition of
Lafayette and First Merchants with that of certain companies, which
we deemed to be relevant for purposes of this opinion;
(vii) Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions, which we deemed to be relevant for
purposes of this opinion;
(viii) Reviewed the Agreement dated October 14, 2001 and certain related
documents; and
(ix) Performed such other reviews and analyses as we have deemed
appropriate.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all financial and other
information reviewed by us, whether obtained from public or private sources
(including Lafayette and First Merchants) and have
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Lafayette Bancorporation
____________, 2002
Page 3
relied upon the accuracy and completeness of the representations, warranties and
covenants of Lafayette and First Merchants contained in the Agreement. We have
not been engaged to undertake, and have not assumed any responsibility for, nor
have we conducted, an independent investigation or verification of such matters.
We have not been engaged to and we have not conducted a physical inspection of
any of the assets, properties or facilities of either Lafayette or First
Merchants, nor have we made or obtained or been furnished with any independent
valuation or appraisal of any such assets, properties or facilities or any of
the liabilities (contingent or otherwise) of Lafayette or First Merchants. With
respect to financial forecasts provided to us by management of Lafayette and
First Merchants for use in our analysis, we have assumed, with your permission,
that such forecasts have been reasonably prepared by management of Lafayette and
First Merchants, as the case may be, in good faith on a basis reflecting the
best currently available estimates and judgments of the respective managements
of Lafayette and First Merchants as to the future financial performance of
Lafayette, First Merchants, and Lafayette and First Merchants combined, as the
case may be, and that such estimates and judgements were reasonable at the time
made and remain reasonable as of the date hereof. We have not been engaged to
and we have not assumed any responsibility for, nor have we conducted any
independent investigation or verification of such matters, and we express no
view as to such financial forecasts or the assumptions on which they are based.
We have assumed that there were no material changes in the assets, liabilities
(contingent or otherwise), financial condition, results of operations, business
or prospects of either Lafayette or First Merchants since the date of the last
financial statements made available to us. We have also assumed, with your
consent, that all of the conditions to the consummation of the Merger, as set
forth in the Agreement, including the tax-free treatment of the Merger to the
holders of Lafayette Common Stock who elect to receive payment for their shares
in shares of First Merchants Common Stock will be satisfied and not waived, that
there are no factors that would delay or subject to any adverse conditions any
necessary regulatory or governmental approval, that First Merchants will have
financing adequate to complete the Merger in accordance with its terms and that
the Merger would be consummated on a timely basis in the manner contemplated by
the Agreement.
Our engagement was limited to providing financial advice to the Board of
Directors of Lafayette in connection with the Merger, and we were not requested
to, and did not, solicit indications of interest from any potential acquirors.
We will receive a fee for our services as financial advisor to Lafayette, a
substantial portion of which is contingent upon the closing of the Merger. We
will also receive a fee for our services in rendering this opinion, which is not
contingent upon the approval of the closing of the merger. In addition,
Lafayette has agreed to indemnify us for certain liabilities and to reimburse us
for our reasonable expenses incurred in connection with the performance of our
services.
In the ordinary course of business, we may actively trade securities of
Lafayette and First Merchants for our own account and for the accounts of
customers and, accordingly, we may at any time hold a long or short position in
such securities.
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Lafayette Bancorporation
_____________, 2002
Page 4
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness, as
of the date hereof, from a financial point of view, of the aggregate
consideration to the holders of Lafayette Common Stock, and does not address the
underlying business decision by Lafayette's Board of Directors to effect the
Merger, does not compare or discuss relative merits of any other terms of the
Merger, and does not constitute a recommendation to any Lafayette shareholder as
to how such shareholder should vote with respect to the Merger. This opinion
does not represent an opinion as to what the value of Lafayette Common Stock or
First Merchants Common Stock may be at the Effective Date of the Merger or as to
the prospects of Lafayette's business or First Merchants' business, nor does the
opinion compare the per share stock and cash consideration that stockholders may
elect to receive in the Merger or the allocation procedures in the event there
is an over-subscription of cash.
This opinion is directed to the Board of Directors of Lafayette and may
not be reproduced, summarized, described or referred to or given to any other
person without our prior written consent. Notwithstanding the foregoing, this
opinion may be included in the proxy statement to be mailed to the holders of
Lafayette Common Stock in connection with the Merger, provided that this opinion
will be reproduced in such proxy statement in full, and any description of or
reference to us or our actions, or any summary of the opinion in such proxy
statement, will be in a form reasonably acceptable to us and our counsel.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration offered in the Merger is fair to the holders of
Lafayette Common Stock from a financial point of view.
Very truly yours,
RBC CAPITAL MARKETS
By: RBC DAIN RAUSCHER INC.
C-4
APPENDIX D
Lafayette Bancorporation
Committed to Making Banking Better
2000 Annual Report
Committed to Making Banking Better
A seal of approval needs to come from both sides of the banking relationship.
[PICTURE]
Seeing the Situation
Each new year brings new hope and a determination to make the next 12 months
even better than the last.
This year also brings a new century and a new millennium. There's excitement at
Lafayette Bank and Trust Company as we enter 2001 and renew our commitment to
making banking even better. How do we accomplish this? What have we done to
improve on the past as we head toward the future?
We've kept ourselves attuned to all that's going on around us, but more
importantly, we've kept ourselves focused on the customer and are committed to
making banking better.
D-1
[PICTURE]
Robert J. Weeder, President and CEO
Joseph A. Bonner, Chairman
To Our Shareholders
It gives us great pleasure to report record earnings for the fifth consecutive
year. Year 2000 net income grew to $6,916,000, or $1.75 per share, representing
an 8.9% gain from 1999 earnings of $6,351,000, or $1.61 per share. Return on
average equity was 14.1%. We also experienced growth in assets. Total assets
were $741 million at the end of year 2000, an increase of $96 million, or 14.9%,
from $645 million at the end of 1999. Likewise, total loans and deposits
increased $49 million and $56 million respectively from 1999 year end. Total
shareholder equity, representing your ownership portion of the Corporation, was
$52,801,000 at the end of 2000 and reflects growth of 15.3% from the previous
year.
Dividends declared in 2000 amounted to $0.43 per share, up 10.3% from the $0.39
declared in 1999. Our Board continues to increase dividends in view of the
Corporation's earnings record and its strong capital position.
During the year we opened our 18th and 19th branches in the two new Super
Wal-Mart Centers located in Monticello and Lafayette. These "Super Center
Banking Stations" are full-service branches which are open seven days a week.
We continue our commitment to the community to provide friendly hometown service
that people have come to expect. With 19 branches throughout our three-county
market (four of which are open seven days a week) and 18 automatic teller
machines we are in a position to not only give excellent customer service, but
have the tools in place to offer convenient banking to the entire community.
Our commitment isn't just a financial one, but a personal one, too. Every year
bank employees volunteer countless hours in projects that make our community not
just a better place to do business, but a better place to live. We're always
willing to help people in our community: These are the people who not only bank
with us, but also go to church with us, shop with us, and whose children attend
school together with ours.
We appreciate the continued confidence of our shareholders. And we look forward
to continuing our mission of serving customers and communities while providing
our shareholders with growing profits and returns on their investments in
Lafayette Bancorporation.
Very truly yours,
LAFAYETTE BANCORPORATION
/s/ Joseph A. Bonner
Joseph A. Bonner
Chairman
/s/ Robert J. Weeder
Robert J. Weeder
President and CEO
D-2
Focusing on the Customer
The Bank's success is measured one customer at a time.
[PICTURE]
Who Is Our Customer?
Is it a young mother with small children, or perhaps someone uncomfortable with
ATMs? Is our customer a businessman who needs a line of credit, or a father with
tuition bills to pay? Is it a technologically savvy student or an astute senior
investor?
In trying to describe our typical customer one thing became apparent. We have no
typical customer; no targeted age, gender or income level. We simply have
various people whose needs are as different as their profiles; unique
individuals who often want different things from their financial situation.
But there is one universal desire that emerges regardless of the customer,
product or service, and that is clearly convenience.
[PICTURE]
Super Center Manager Kelly Seman can assist Kentucky
Fired Chicken Managers Kim and Tina Kramer with their
banking needs evenings and weekends.
D-3
Money is always close at hand with 19 convenient banking locations.
[PICTURE]
Providing Convenience
Time-saving convenience is a much sought after attribute with the hectic pace of
daily life. With 19 branch locations, we at Lafayette Bank and Trust believe
that if we are not in your neighborhood, we are probably on your way home.
We have located our branches conveniently around the community; in grocery
stores and this past year at two Super Wal-Marts in Monticello and Lafayette.
How convenient to make one stop to shop, as well as bank. How nice to be able to
offer seven-days-a-week financial services where its easiest for the customer.
To celebrate the opening of our 19th branch which opened on July 19, 2000, in
the Lafayette Super Wal-Mart, we had 19 straight days of give-aways. Prizes
ranged from car washes to local event tickets. The grand prize was gift
certificates to 19 area restaurants--all Lafayette Bank and Trust commercial
customers, of course. The exposure was tremendous and both Super Wal-Mart
branches are off to a great start, generating over two million dollars in new
deposits in less than a year.
Taking the bank to the people has also worked at the new Valley Lakes branch
which opened two years ago on the rapidly developing south side of Lafayette.
Proving the importance of a convenient location, Valley Lakes now has deposits
totaling more than seven million dollars.
Establishing Retail Banking
To better meet the ever-changing needs of our customers, a new Retail Banking
Division was created. One of its main goals was to assure that Lafayette Bank
and Trust products and services were convenient: Consumer loans are no longer
handled from just one location, for example, but are now available at the
customer's local branch.
Another goal was to make branches more sales-oriented by bringing our services
to the customers' attention, and cross-selling products to benefit both our
customer and the Bank.
Our customers have always been the key to our success, and it is our objective
to make sure each one knows how much they are appreciated. Educating them
regarding products or services from which they might benefit is one of the best
ways we can serve them. It's our way of saying thank you for banking with us.
Noting the success of promotions at our in-store branch locations, theme product
promotions are now a focal point in our traditional branches as well. These
promotions allow branch employees to get their creative juices flowing by
marketing a specific product. Each branch is given a goal as well as a way to
track and measure the success of their efforts. Not only have these promotions
such as the "Pick a Daisy Bump-Rate CD" increased deposits, but they have served
as fun motivators for employees through creative competition.
Bob Weeder anticipates great success from the convenient new Super Center
branches.
[PICTURE]
D-4
[PICTURE]
Well-trained employees simply serve the customer better.
Training for Better Service
Providing a full range of financial products and services is one thing.
Providing them in an efficient and professional manner is quite another.
Well-informed, trained and motivated employees is the obvious answer.
This year we began a major training effort to provide our employees with the
knowledge necessary to perform their various duties with efficiency, confidence
and competitiveness. Our bankers have had opportunities to obtain additional
training regarding bank products, computers, consumer lending, trusts, insurance
and investments.
Making Our Community Better
Lafayette Bank and Trust continues its long tradition of good corporate
citizenship as we proudly contribute, sponsor, donate and volunteer. One
excellent example is the historic Long Center for the Performing Arts. Not only
have we supported the project since it began with the rebuilding of the theatre
organ, but have continued through the total renovation of the building.
Our support has included many performances within the theatre too, such as the
Lafayette Symphony Orchestra. As an annual sponsor of the Lollipop Concert, we
continue to bring young children to this historic building and to expose them to
a symphony performance that is geared just for them.
We wrapped up the year of Long Center events by sponsoring 1964 The Tribute.
This Beatle Mania extravaganza has been rated the most authentic Beatles tribute
in the world! What a way to tell baby boomers, "We Want to Hold Your Hand."
Other ways Lafayette Bank and Trust has worked to make our community rich is
through cultural events, activities and festivities that allow people to come
together to enjoy and celebrate. Lafayette Bank and Trust proudly supports the
arts, the theatre, festivals and numerous fund-raising activities through both
our corporate contributions and
[PICTURE]
Joe Bonner is proud of our long heritage of corporate and employee support of
community events and activities.
D-5
[PICTURE]
Denny Stephen is confident that Farm Manager John Mandeville and Commercial
Lender tony Albrecht will help make sure the farm is there for his sons Travis
and Mark.
countless employee volunteer hours. Our people are very involved in
organizations such as the Girl Scouts, Boys and Girls Club, March of Dimes, and
Big Brothers Big Sisters, just to name a few, and have literally walked miles
and miles to help raise money for worthwhile organizations.
Highlighting the incredible importance of education, we annually sponsor the
Golden Apple Awards. By recognizing and commending high quality teachers, we are
helping to develop our future leaders.
Earning Your Trust
Although the Bank's Trust Department has been around for more than a century,
the new millennium brings with it new demands for professional trust services.
Where trusts have traditionally been set up to take care of financial affairs
after a death, more and more people are using the Trust Department to handle
their finances now so they can enjoy their lives more.
One area which has grown over 25 percent in the last two years is the Farm
Management Department. Preserving the family farm has become a challenge for
some as the new heirs live away from the farm. In some cases owners simply don't
have the time or expertise that today's farm operations require. They turn to
our professionals in order to make sure their agricultural investments and
decisions are the best ones possible.
Whether it is farm management, long-term financial planning or estate
settlement, the processes have become so challenging and complicated that more
customers are seeking professionals to help them sort out the options and keep
their affairs on track. This guidance can give assurance to customers that all
the years of hard work will reap the long-term benefits they desire.
D-6
Longstanding relationships are a true measure of success.
[PICTURE]
Making the House a Home
For the fourth year in a row, Lafayette Bank and Trust is the areas number one
mortgage lender. Our highly trained employees do their best to find ways to get
customers the loans they need. This past year a new Mortgage Alternative
Department was established to provide even more mortgage financing options. The
primary goal of this new division is creative financing for those who have had
some credit struggles in the past, or to make it possible for young couples with
little or no financial history to purchase a home. Everyone dreams of owning
their own home, and at Lafayette Bank and Trust we will do our best to find a
way.
Providing Investment Options
The Investment Center of Lafayette Bank and Trust, a full service brokerage
service offered exclusively through Raymond James Financial Services, Inc.
(member NASD-SIPC) continues to increase its account base as more customers look
for additional ways to make their money work for them. Knowing that social
security alone will not provide enough for retirement, we continue our
commitment to offering our customers some of the best investment options
available. Our knowledgeable staff is prepared to spend the time needed to make
sure we understand individual needs so that financial goals can be met.
Committing to Growth
The three-county area served by Lafayette Bank and Trust continues to enjoy
economic prosperity, and along with that comes an ever-increasing demand for
commercial and business loans. The incredible growth in our commercial lending
area clearly indicates that, for many people, we are the bank of choice.
Through restructuring and reorganizing of loan operations, Lafayette Bank and
Trust has made the entire lending process more efficient. This has allowed our
lenders to spend more time with customers, making sure we understand their goals
and can help meet their needs. If we truly are understanding and meeting the
needs of our customers, the needs of the bank are sure to be met as well. It is
personal service and attention that keep customers coming back.
One thing continues to be clear to us at Lafayette Bank and Trust; the public
still prefers to do business with a local bank, one that can make decisions
right here at home. When local businessman Jerry Brand had a last-minute
opportunity to purchase the Siemens Building, he needed a quick answer. Jerry
turned to Lafayette Bank and Trust, and within a week was able to set up the
financing necessary to arrange the purchase.
One phone call to a commercial lender made it all happen. He has a new building,
small businesses have access to a technology center, and there are further
developments for an entire industrial/technology complex in the future.
According to Jerry, this was all possible because of the personal attention and
fast response of a local bank with decision-making authority.
[PICTURE]
Local businessman Jerry Brand updates Lafayette Bank and Trust's Tony Albrecht,
Dave Chadwell, Todd Burklow, and Ellen Curtis on the progress of his technology
center.
D-7
Banking today for the future involves more than just protecting your nest egg.
[PICTURE]
Assuring the Future
Without the proper insurance, everything that weve worked so hard to obtain
could be lost in an instant. The Bank's continued partnership with MBAH
Insurance has allowed us to expand insurance offerings for our customers, adding
another dimension to the financial services we provide. We are helping protect
the customer and also protecting and preserving the financial relationship that
weve worked so hard to obtain.
As people continue to live longer and healthcare costs continue to rise, there
is a growing need for long-term healthcare coverage and asset protection. The
State of Indiana is a leader in developing a long-term care policy that protects
the assets that individuals have worked their entire lives to accumulate. The
Bank will continue to fulfill its responsibility to the public by providing
information, seminars and opportunities for insurance protection, helping to
guarantee that we will have something to leave for the next generation.
Committed to the Future
As we look beyond 2000 Lafayette Bank and Trust is committed to continuing our
long tradition of sound financial, corporate and civic responsibility. Future
generations will look for both convenience and the latest technology in
selecting a financial institution, and it is our desire to provide the services
they need in a timely, efficient and professional manner. Making banking better
and better is what Lafayette Bank and Trust is all about.
Bob Ralston oversees the implementation of the latest banking technology.
[PICTURE]
D-8
LAFAYETTE BANCORPORATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except
per share data) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
Net interest income $24,981 $22,847 $17,762 $16,386 $14,203
Noninterest income 5,825 5,125 4,916 4,168 3,422
Noninterest expense 19,176 17,534 13,610 12,557 11,191
Net income 6,916 6,351 5,377 4,808 4,091
PER COMMON SHARE (1)
Net income $1.75 $1.61 $1.36 $1.22 $1.04
Cash dividends 0.43 0.39 0.34 0.31 0.25
Book value 13.37 11.62 10.82 9.77 8.80
AT DECEMBER 31
Assets $741,147 $645,149 $483,969 $439,029 $414,391
Investment securities 83,341 84,434 81,835 71,845 94,362
Loans held for sale 5,949 3,174 10,086 7,640 5,877
Loans, total 537,725 489,070 353,828 312,227 268,940
Deposits 578,297 522,247 395,546 355,195 341,550
Shareholders' equity 52,801 45,785 42,614 38,469 34,646
AVERAGE BALANCES
Assets $674,736 $600,451 $455,268 $416,957 $377,623
Investment securities 83,868 98,489 76,928 80,606 91,802
Loans held for sale 3,392 5,967 6,095 5,522 4,989
Loans, total 517,010 440,615 327,412 289,197 242,286
Deposits 547,601 486,489 371,067 345,739 313,621
Shareholders' equity 49,017 44,499 40,814 36,530 33,133
KEY RATIOS
Return on average assets 1.02% 1.06% 1.18% 1.15% 1.08%
Return on average equity 14.11% 14.27% 13.17% 13.16% 12.35%
Efficiency ratio 60.45% 60.93% 58.46% 59.63% 61.66%
[BAR CHART] [BAR CHART] [BAR CHART] [BAR CHART]
(1) Per share data has been retroactively adjusted to reflect stock dividends
and splits. Amounts do not consider the dilutive effect of stock options
outstanding.
D-9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION AND OVERVIEW
Lafayette Bancorporation (Corporation) is a one-bank holding company located in
Lafayette, Indiana. The Corporation's wholly-owned subsidiary, Lafayette Bank
and Trust Company (Bank), conducts business in seventeen offices located in
Tippecanoe, White, and Jasper Counties, Indiana. The Bank is engaged in a
variety of financial services, including accepting deposits; making commercial
and consumer loans; originating mortgage loans; providing personal and corporate
trust services; providing investment advisory and brokerage services; and
providing auto, homeowners, and other insurance products.
On March 15, 2000, the Corporation opened a full-service branch located in the
Super Wal-Mart in Monticello, Indiana. Also, on July 19, 2000, a similar
full-service branch was opened in the Super Wal-Mart in Lafayette, Indiana. In
addition to these two new branches, the Corporation established a new mortgage
line of business during the second quarter of 2000, which assists customers who
do not meet the qualifications of conventional or traditional mortgage loan
programs to secure financing. The Mortgage Alternative Department only offers
mortgage products, such as first or second mortgages and lines of credit that
are secured by real estate. Loans originated in this department are pre-approved
for sale and are sold in the secondary mortgage market with no servicing
retained.
The information in this Management's Discussion and Analysis is presented as an
analysis of the major components of the Corporation's operations for the three
years ended December 31, 2000, 1999, and 1998, and financial condition as of
December 31, 2000 and 1999. This information should be read in conjunction with
the accompanying consolidated financial statements and footnotes contained
elsewhere in this report. The tables contained in the Management's Discussion
and Analysis include dollar amounts expressed in thousands.
MERGERS AND ACQUISITIONS
In March 1999, the Bank purchased three branches in Jasper County, Indiana,
located in the towns of DeMotte, Remington, and Rensselaer.
The fair value of assets acquired was $71,749,000, which consisted primarily of
commercial loans, the physical facilities, goodwill, and core deposit
intangibles. The fair value of liabilities assumed was $117,015,000, which
consisted primarily of customer deposits. Since the Bank acquired more
liabilities than assets in the transaction, the Bank received $45,266,000 of
cash as of the settlement date. See Note 18 for additional information regarding
this acquisition.
This transaction had a significant effect on the Corporation's results of
operations for the years ended December 31, 2000 and 1999, as the Corporation
had use of the earning assets and interest-bearing liabilities acquired for the
entire twelve months of 2000, and for approximately nine and one-half months of
1999.
RESULTS OF OPERATIONS
The major components of the Corporation's operating results for the past five
years are summarized in Table 1 - Five Year Financial Summary.
The Corporation earned $6,916,000, $6,351,000, and $5,377,000, or $1.75, $1.61,
and $1.36 per share for the years ended December 31, 2000, 1999, and 1998,
respectively. The increase in net interest income accounted for a significant
portion of the 8.9% and 18.1% earnings increases recorded by the Corporation in
2000 and 1999, respectively. In addition to the increase recorded in net
interest income, 2000 earnings were boosted by NSF and ATM income, as well as
investment product commissions generated by the Bank's investment brokerage
department. These noninterest income increases, however, were partially offset
by lower net gain on loan sales in the secondary mortgage market, along with
increases in the Corporation's provision for loan losses, salaries and benefits,
intangible amortization, depreciation, and other general operating expenses
incurred in connection with the opening of the two new branches and the new
mortgage lending department during the year. In general, 1999 earnings were
impacted in a similar fashion predominately due to the acquisition of the three
branch offices in March 1999.
Return on average assets (ROA) was 1.02%, 1.06%, and 1.18% for the periods
ending December 31, 2000, 1999, and 1998, respectively, while return on average
equity (ROE) was 14.11%, 14.27%, and 13.17% for those same time periods.
NET INTEREST INCOME
Net interest income is the most significant component of the Corporation's
earnings. Net interest income is the difference between interest and fees
realized on earning assets, primarily loans and securities, and interest paid on
deposits and other borrowed funds. 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 the overall level of
interest rates. Although some of these factors can be influenced by management
policies and actions, these factors are also influenced by elements beyond the
control of management, such as the general level of credit demand, Federal
Reserve Board monetary policy, and changes in tax laws. Tables 1 through 4 are
an integral part in analyzing the components of net interest income and the
changes which have occurred between the time periods presented. Table 1-Five
Year Financial Summary shows the Corporation's net interest income from 1996
through 2000. Table 2 - Average Balance Sheets and Interest Rates represent the
major components of interest-earning assets and interest-bearing liabilities.
For analytical purposes, interest income presented in the table has been
adjusted to a tax equivalent basis assuming a 34% tax rate for all years. The
tax equivalent adjustment recognizes the income tax savings when comparing
taxable and tax-exempt assets.
Table 3 - Net Interest Earning Assets illustrates net interest-earning assets
and liabilities for 2000, 1999, and 1998.
Table 4 - Volume and Rate Analysis depicts the dollar effect of volume and rate
changes from 1998 through 2000. Variances which were not specifically
attributable to volume or rate were allocated proportionately between rate and
volume using the absolute values of each as a basis for the allocation.
Nonaccrual loans were included in the average loan balances used in determining
the yields.
Net interest income on a tax equivalent basis for 2000 was 9.5% higher than that
for 1999, while the net interest margin for 2000 was 4.20%, or 7 basis points
lower than the prior year. Tax equivalent net interest income was 28.8% higher
in 1999 compared to 1998, while the net interest margin decreased 7 basis points
to 4.27% from that of 1998.
D-10
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - FIVE YEAR FINANCIAL SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
2000 1999 1998 1997 1996
------------- ------------ ----------- ---------- ----------
SUMMARY OF OPERATIONS
Interest income - tax equivalent(1) $53,303 $45,196 $35,329 $32,415 $28,739
Interest expense 27,405 21,543 16,963 15,525 14,012
------------- ------------ ----------- ---------- ----------
Net interest income - tax equivalent(1) 25,898 23,653 18,366 16,890 14,727
Tax equivalent adjustment(1) (917) (806) (604) (504) (524)
------------- ------------ ----------- ---------- ----------
Net interest income 24,981 22,847 17,762 16,386 14,203
Provision for loan losses (1,200) (1,060) (980) (620) (240)
Noninterest income 5,825 5,125 4,916 4,168 3,422
Noninterest expense 19,176 17,534 13,610 12,557 11,191
------------- ------------ ----------- ----------- ----------
Income before income taxes 10,430 9,378 8,088 7,377 6,194
Income tax expense 3,514 3,027 2,711 2,569 2,103
------------- ------------ ----------- ----------- ----------
NET INCOME $ 6,916 $ 6,351 $ 5,377 $ 4,808 $ 4,091
============= ============ =========== =========== ==========
PER SHARE DATA (2)
Net income $ 1.75 $ 1.61 $ 1.36 $ 1.22 $ 1.04
Cash dividends 0.43 0.39 0.34 0.31 0.25
Shareholders' equity, end of year 13.37 11.62 10.82 9.77 8.80
SELECTED ACTUAL YEAR-END BALANCES
Total assets $741,147 $645,149 $483,969 $439,029 $414,391
Earning assets 676,235 580,858 449,539 406,954 378,345
Investment securities available-for-sale 78,857 79,722 76,956 66,577 88,206
Investment securities held-to-maturity 4,484 4,712 4,879 5,268 6,156
Loans held for sale 5,949 3,174 10,086 7,640 5,877
Loans 537,725 489,070 353,828 312,227 268,940
Allowance for loan losses (5,071) (4,618) (4,241) (3,464) (3,198)
Total deposits 578,297 522,247 395,546 355,195 341,550
Noninterest-bearing demand deposits 70,866 63,206 48,657 42,752 43,579
Interest-bearing demand deposits 69,528 67,729 54,294 47,054 47,945
Savings deposits 161,456 161,573 116,014 96,974 87,938
Time deposits 276,447 229,739 176,581 168,415 162,088
FHLB advances 35,737 30,027 23,854 19,886 9,265
Note payable 11,550 12,950 - - -
Shareholders' equity 52,801 45,785 42,614 38,469 34,646
SELECTED AVERAGE BALANCES
Total assets $674,736 $600,451 $455,268 $416,957 $377,623
Earning assets 616,033 554,423 422,772 387,277 348,218
Securities 83,868 98,489 76,928 80,606 91,802
Loans held for sale 3,392 5,967 6,095 5,522 4,989
Loans 517,010 440,615 327,412 289,197 242,286
Allowance for loan losses (5,010) (4,319) (3,766) (3,254) (3,210)
Total deposits 547,601 486,489 371,067 345,739 313,621
Noninterest-bearing demand deposits 58,723 51,229 39,312 35,728 35,655
Interest-bearing demand deposits 69,024 62,858 48,777 47,945 45,086
Savings deposits 163,182 157,618 108,019 94,360 82,535
Time deposits 256,672 214,784 174,959 167,706 150,345
FHLB advances 26,142 23,359 22,101 13,940 8,458
Note payable 12,423 10,863 - - -
Shareholders' equity 49,017 44,499 40,814 36,530 33,133
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits (3) 94.41% 90.57% 88.24% 83.65% 77.25%
Return on average assets 1.02% 1.06% 1.18% 1.15% 1.08%
Return on average equity 14.11% 14.27% 13.17% 13.16% 12.35%
Dividend payout ratio 24.67% 24.25% 24.94% 24.98% 24.18%
Leverage capital ratio 5.79% 5.42% 8.82% 8.76% 8.59%
Efficiency ratio (4) 60.45% 60.93% 58.46% 59.63% 61.66%
OTHER DATA
Number of employees (FTE) 303 275 220 213 205
Average common shares outstanding (2) 3,950,297 3,940,024 3,940,123 3,937,399 3,937,531
Cash dividends declared $1,706 $1,540 $1,341 $1,201 $989
(1) Net interest income has been presented on both a tax equivalent and non-tax
equivalent basis. The tax equivalent basis was calculated using a 34% tax
rate for all periods presented. The tax equivalent adjustment reverses the
tax equivalent basis in order to present net interest income in accordance
with generally accepted accounting principles (GAAP), as reflected in the
consolidated financial statements.
(2) Per share data has been retroactively adjusted to reflect stock dividends
and splits. Amounts do not consider the dilutive effect of stock options
outstanding.
(3) The loan to deposit ratio calculation excludes loans held for sale.
(4) 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.
D-11
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCE SHEETS AND INTEREST RATES
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
2000 1999 1998
------------------------------ --------------------------- ----------------------------
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- -------- -------- -------- ------- -------- -------- -------
Interest earning assets
Securities
Taxable $52,089 $3,318 6.37% $66,538 $3,831 5.76% $55,973 $3,217 5.75%
Tax-exempt (1) 34,737 2,521 7.26% 33,438 2,317 6.93% 20,978 1,502 7.16%
Unrealized loss on AFS securities (2,958) - (1,487) - (23) -
--------- -------- -------- -------- -------- ------- -------- -------- -------
Total securities 83,868 5,839 6.96% 98,489 6,148 6.24% 76,928 4,719 6.13%
Loans (1)(2)
Commercial 301,930 27,766 9.20% 251,732 21,951 8.72% 153,030 13,916 9.09%
Real estate 166,930 13,753 8.24% 143,711 11,587 8.06% 129,380 11,012 8.51%
Installment and other consumer 51,379 5,150 10.02% 51,139 5,000 9.78% 51,097 4,975 9.74%
Other 163 11 6.75% - - 0.00% - - 0.00%
--------- -------- -------- -------- -------- ------- -------- -------- -------
Total loans 520,402 46,680 8.97% 446,582 38,538 8.63% 333,507 29,903 8.97%
Interest-bearing balances with
other financial institutions 2,335 144 6.17% 344 18 5.23% 153 8 5.23%
FHLB stock 2,123 175 8.24% 1,808 145 8.02% 1,464 117 7.99%
Federal funds sold 7,305 465 6.37% 7,200 347 4.82% 10,720 582 5.43%
--------- -------- -------- -------- -------- ------- -------- -------- -------
Total earning assets 616,033 $53,303 8.65% 554,423 $45,196 8.15% 422,772 $35,329 8.36%
======== ======== ======== ======= ======== =======
Noninterest earning assets
Allowance for loan losses (5,010) (4,319) (3,766)
Premises and equipment 11,112 9,087 6,417
Cash and due from banks 22,126 21,830 16,309
Accrued interest and other assets 30,475 19,430 13,536
--------- -------- --------
Total assets $674,736 $600,451 $455,268
========= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand deposits $69,024 $741 1.07% $62,858 $714 1.14% $48,777 $610 1.25%
Savings deposits 163,182 7,254 4.45% 157,618 5,994 3.80% 108,019 4,339 4.02%
Time deposits 256,672 15,021 5.85% 214,784 11,316 5.27% 174,959 9,957 5.69%
---------- -------- -------- -------- -------- ------- -------- -------- -------
Total interest-bearing deposits 488,878 23,016 4.71% 435,260 18,024 4.14% 331,755 14,906 4.49%
Borrowed funds
Short-term borrowings 32,482 1,773 5.46% 30,168 1,358 4.50% 15,581 712 4.57%
FHLB advances 26,142 1,609 6.15% 23,359 1,412 6.04% 22,101 1,345 6.09%
Note payable 12,423 1,007 8.11% 10,863 749 6.89% - - 0.00%
---------- -------- -------- -------- -------- ------- -------- -------- -------
Total borrowed funds 71,047 4,389 6.18% 64,390 3,519 5.47% 37,682 2,057 5.46%
---------- -------- -------- -------- -------- ------- -------- -------- -------
Total interest-bearing liabilities 559,925 $27,405 4.89% 499,650 $21,543 4.31% 369,437 $16,963 4.59%
======== ======== ======== ======= ======== =======
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 58,723 51,229 39,312
Accrued interest and other liabilities 7,071 5,073 5,705
Shareholders' equity 49,017 44,499 40,814
---------- -------- --------
Total liabilities and
shareholders' equity $674,736 $600,451 $455,268
========== ======== ========
Interest margin recap
Net interest income and
interest rate spread $25,898 3.76% $23,653 3.84% $18,366 3.76%
======== ======== ======== ======= ======== =======
Net interest income margin 4.20% 4.27% 4.34%
======== ======= =======
(1) Interest income on tax-exempt securities and loans has been adjusted to a
tax equivalent basis using a marginal federal income tax rate of 34% for
all years.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $1,309 for 2000, $1,192 for
1999 and $1,090 for 1988.
Table 3 - Net Interest Earning Assets illustrates net interest-earning assets
and liabilities for 2000, 1999, and 1998.
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - NET INTEREST-EARNING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
Average interest-earning assets $616,033 $554,423 $422,772
Average interest-bearing liabilities 559,925 499,650 369,437
----------------------- ----------------------- -----------------------
Net interest-earning assets $56,108 $54,773 $53,335
======================= ======================= =======================
D-12
The Corporation continued its loan growth in 2000, as average loans increased
$73,820,000, or 16.5%, which led to higher net interest income during the year.
At the same time the Corporation was adding to its loan portfolio, the Federal
Reserve's Open Market Committee (FOMC) was raising interest rates. The FOMC
increased interest rates three times during 2000 totaling 100 basis points.
Although the increased interest rates led to higher rates charged on loans being
booked, the interest rate increase had a more significant impact on the
Corporation's cost of funds, as interest-bearing liabilities repriced at a
faster pace than the interest-earning assets. While the interest rate increase
impacted the interest-bearing liabilities more than it did the interest-earning
assets, the increase in net earning asset volume more than offset the effect of
higher interest rates, leading to increased net interest income.
The growth experienced by the Corporation, predominately through the branch
acquisition in mid-March 1999, led to higher net interest income in 1999. The
key element in the branch acquisition was the successful deployment of funds
obtained in that transaction. Virtually all of the $45,266,000 cash received in
the branch acquisition was shifted into the loan portfolio, primarily commercial
loans, as of June 30, 1999. Even though the interest rate environment remained
relatively low during the first six months of 1999, the yields associated with
loans were at a higher rate than any other investment alternative. The interest
rate environment increased slightly during the latter half of the year, with the
most significant increase of 1999 occurring in November, when the FOMC raised
interest rates 50 basis points. However, the lower and more stable interest rate
environment that existed during the first ten and one-half months led to a lower
net interest margin for the year. Overall, the increase in net interest-earning
asset volume during the year more than adequately compensated for the lower
yields.
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 to be sufficient to absorb probable losses incurred in the credit
portfolio. Factors considered in establishing an appropriate allowance include:
past loan loss experience; the nature and volume of the portfolio; information
about specific borrower situations and estimated collateral values; economic
conditions, and other factors.
The Corporation maintains a comprehensive loan review program to evaluate loan
administration, credit quality, and loan documentation. This program also
includes a regular review of problem loan reports, delinquencies, and
charge-offs. The adequacy of the allowance for loan losses is evaluated on a
quarterly basis. This evaluation focuses on specific loan reviews, changes in
the type and volume of the loan portfolio given the current and forecasted
economic conditions, and historical loss experience. Any one of the following
conditions may necessitate a review of a specific loan: a question has been
raised whether the customer's cash flow or net worth are sufficient to repay the
loan; the loan has been criticized in a regulatory examination; the accrual of
interest has been suspended; or other reasons where either the ultimate
collectibility of the loan is in question, or the loan has other special or
unusual characteristics which require special monitoring.
Activity in the allowance for loan losses is reflected in Table 5 - Analysis of
Allowance for Loan Losses. The recorded values of loans and leases actually
removed from the consolidated balance sheets are referred to as charge-offs and,
after netting out recoveries on previously charged-off assets, become net
charge-offs. The Corporation's policy is to charge-off loans when, in
management's opinion, the loan is deemed uncollectible, although concerted
efforts continue to be made to maximize recovery.
Nonperforming assets and their relative percentages to loan balances are
presented in Table 6 - Nonperforming Assets. The level of nonperforming loans
and leases is an important element in assessing asset quality and the relevant
risk in the credit portfolio. Nonperforming loans include nonaccrual loans,
restructured loans and loans delinquent 90 days or more. Loans are evaluated for
nonaccrual when payments are past due over 90 days. Another element associated
with asset quality is other real estate owned (OREO), which represents
properties acquired by the Corporation through loan defaults by customers.
The consolidated provision for loan losses was $1,200,000, $1,060,000, and
$980,000 for 2000, 1999, and 1998, respectively. Although the Corporation
experienced an upward trend in loan delinquency ratios, charge-offs and
nonperforming loans, management continues to believe overall asset quality is
satisfactory. Historically, the Corporation has experienced relatively low
levels of nonperforming loans, and management believes the current levels of
nonperforming loans are manageable in the normal course of business. While
nonperforming loans as a percent of loans and as a percent of total assets
increased from 1999, these ratios were comparable to 1998. Additionally, while
charge-offs increased slightly in 2000, the ratio of net charge-offs to average
loans was slightly lower in 2000 compared to 1999.
Management increased the provision for loan losses to $1,200,000 for 2000 as a
result of continued loan growth and increased charge-offs. The increase in the
provision for loan loss kept pace with the increase in loan growth during the
year as the ratio of allowance to loans at year-end remained at .94%, the same
level as in 1999.
The $80,000 increase in the 1999 provision for loan losses was mainly due to the
Corporation's increased loan growth, offset to a certain degree by lower
nonperforming loan totals and declining delinquency ratios.
Total nonperforming loans increased $2,505,000 to $3,825,000 at December 31,
2000 as compared to December 31, 1999. The most significant changes occurred in
the nonaccrual and 90 days or more past due categories, where balances increased
$2,096,000 and $468,000, respectively. The majority of the nonaccrual increase
resulted from ten commercial loan relationships totaling approximately
$2,449,000 being added to the nonaccrual list, but nearly one-half of this
increase related to one borrower. Three loans totaling approximately $61,000
were removed from the list during the same period. Other nonperforming loan
activity during the year included charge-offs and paydowns, totaling
approximately $145,000 and $147,000, respectively. Of the total $468,000
increase in loans past due 90 days or more, approximately $276,000, or 59%, was
attributed to the mortgage loan portfolio, while approximately $157,000, or 34%,
represented an increase in the installment loan area.
As of December 31, 2000, the Corporation had twenty credits totaling
approximately $5,175,000 which management believed met the criteria for an
impaired loan. Impaired loan balances increased $4,529,000 from the prior year,
primarily as a result of the increased nonaccrual activity during the year.
Specific reserve allocations have been made in the allowance for loan losses for
the excess of the loan balance over the estimated discounted future cash flows
in accordance with Statements of Financial Accounting Standards No. 114 and 118.
D-13
The $415,000 change in OREO during 2000 was related to the sale of three 1999
foreclosed properties, offset by the addition of one property foreclosed in
August 2000. As of December 31, 2000, there were a total of three parcels of
other real estate held by the Corporation with a remaining total book value of
$72,000.
Management believes loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that are not included in nonperforming or
impaired loans do not represent or result from trends or uncertainties which
will have a material impact on future operating results, liquidity, or capital
resources.
In addition to loans classified for regulatory purposes, management also
designates certain loans for internal monitoring purposes in a watch category.
Loans may be placed on management's watch list as a result of delinquent status,
concern about the borrower's financial condition, a decline in 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 agreements; however,
management may have a significant degree of concern about the borrowers' ability
to continue to perform according to the terms of the loans. Loss exposure on
these loans is typically evaluated based primarily upon the estimated
liquidation value of the collateral securing the loans. Also, watch category
loans may include credits which, although adequately secured and performing,
reflect past delinquency problems or unfavorable financial trends exhibited by
the borrowers.
All watch list loans are subject to additional scrutiny and monitoring. The
Corporation's philosophy encourages loan officers to identify borrowers that
should be monitored in this fashion, and management believes this process
ultimately results in the identification of problem loans in a more timely
fashion.
As of December 31, 2000, the Corporation had loans totaling $4,514,000 on its
watch list which were not included in impaired or nonperforming loans.
NONINTEREST INCOME AND EXPENSE
A listing of noninterest income and expense from 1998 through 2000 and
percentage changes between years is included in Table 7 - Noninterest Income and
Expense.
Nearly all noninterest income and expense categories were significantly impacted
by the 1999 Jasper County branch acquisition, as the Corporation operated these
locations for the entire twelve months in 2000 and only nine and one-half months
during 1999.
Noninterest income increased 13.7% to $5,825,000 in 2000 compared to $5,125,000
in 1999. Primary sources of noninterest income were from fiduciary activities,
service charges, and net gain on secondary market mortgage loan sales. Excluding
the net loss on securities in 2000, noninterest income increased 10.8% to
$5,837,000.
Income from fiduciary activities increased 4.7% during 2000 primarily due to a
departmental fee schedule adjustment. Service charges on deposit accounts
increased 18.9% during the current year as a result of an increase in the number
of accounts being charged and an increase in the service charge fee schedule
that went into effect mid-June. Investment product commissions are gross fees
generated by the Bank's Investment Center, a full service brokerage operation
offered exclusively through Raymond James Financial Services, Inc., member
NASD/SIPC. Investment product commissions increased 138.4% to $758,000 during
2000 which was attributed to increased brokerage activity and the reallocation
of accumulated money market investments into the stock market throughout the
year. The Corporation continued to record an increasing number of ATM
transactions during 2000, and as a result, higher ATM fees accounted for a
significant portion of the 4.6% increase in other operating income.
Net gain on loan sales originated in the secondary mortgage market declined
30.0% in 2000, as annual sales volume declined 28.2% from the previous year. New
home growth in addition to home refinancing activities were slowed as the FOMC
tightened monetary policy and increased the borrowing rates of consumers on
three separate occasions during 2000. Activity from the origination and sales of
mortgage loans is extremely dependent upon the current interest rate environment
as well as customer demand. The Corporation has been developing relationships
with builders and real estate agents, and, given a stable or declining interest
rate environment, management expects this area of activity to be a continued
source of significant income. The statement in this paragraph relating to the
secondary market mortgage department and its operations is a forward-looking
statement which may or may not be accurate due to the impossibility of
predicting future economic and business events and the level of future interest
rates.
Noninterest income recorded in 1999 increased 4.3% compared to 1998. New
accounts secured, along with an adjustment in the fee schedule and higher market
values of trust assets due to the strong performance of the stock market, were
all factors in the 17.6% increase in income from fiduciary activities. Service
charges on deposit accounts increased 20.8% during 1999. The majority of this
increase related to higher volume as a result of the Jasper County branch
acquisitions. Investment product commissions declined 10.9% primarily due to a
lower number of transactions executed during the year. Increased ATM fees and a
secondary mortgage market department volume incentive received by the
Corporation from its loan investors accounted for the majority of the 26.2%
increase in other operating income.
Total noninterest expense rose 9.4% to $19,176,000 in 2000 compared to the 28.8%
increase recorded in 1999. Salaries and employee benefits increased 8.6% during
2000. A large portion of this increase was attributable to the staffing of the
two new branches and the new Mortgage Alternative Department opened during the
year. Increased commission expense, primarily due to the successful results
posted by the Investment Center, in addition to increased costs experienced in
health insurance coverage were also contributing factors in the higher expenses
incurred. However, partially offsetting these higher costs was a $376,000
reduction in the value of the officer's stock appreciation rights due to a
decline in the Corporation's stock price during the year.
Net occupancy and equipment expenses increased 16.2% and 31.7%, respectively,
during 2000. While a certain amount of these increases related to the opening of
the two new branches and the Mortgage Alternative Department, the majority of
the total increase was related to higher depreciation expense. The increased
depreciation expense was not only the result of the 1999 branch acquisitions and
the new branch and lending department openings during the current year, but also
the investment the Corporation has made in new technology. A new communication
system,
D-14
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 4 - VOLUME/RATE ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------------
2000-1999 1999-1998
-----------------------------------------------------------------------------------------------
Change Change Change Change
Total Due To Due To Total Due To Due To
INTEREST INCOME Change Volume Rate Change Volume Rate
-----------------------------------------------------------------------------------------------
Loans $8,142 $6,573 $1,569 $8,635 $9,796 ($1,161)
Securities
Taxable (513) (1,024) 511 614 534 80
Tax-exempt 204 92 112 815 865 (50)
Interest-bearing balances with
other financial institutions 126 122 4 10 10 -
FHLB stock 30 26 4 28 28 -
Federal funds sold and
overnight balances 118 5 113 (235) (175) (60)
-----------------------------------------------------------------------------------------------
Total interest income $8,107 $5,794 $2,313 $9,867 $11,058 ($1,191)
===============================================================================================
INTEREST EXPENSE
Interest-bearing DDA $27 $68 ($41) $104 $164 ($60)
Savings deposits 1,260 218 1,042 1,655 1,897 (242)
Time deposits 3,705 2,363 1,342 1,359 2,140 (781)
Short-term borrowings 415 110 305 646 657 (11)
FHLB advances 197 171 26 67 76 (9)
Note payable 258 116 142 749 749 -
-----------------------------------------------------------------------------------------------
Total interest expense $5,862 $3,046 $2,816 $4,580 $5,683 ($1,103)
===============================================================================================
Net Interest income $2,245 $2,748 ($503) $5,287 $5,375 ($88)
===============================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 5 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ------------------- ------------------ ---------------
Balance at beginning of year $4,618 $4,241 $3,464 $3,198 $3,200
Loans charged-off
Commercial and agricultural (503) (363) (37) (126) (202)
Real estate - (114) - - -
Installment (374) (352) (374) (424) (343)
------------------ ----------------- ------------------- ------------------ ---------------
Total charge-offs (877) (829) (411) (550) (545)
------------------ ----------------- ------------------- ------------------ ---------------
Charge-offs recovered
Commercial and agricultural 61 49 124 126 250
Real estate - 35 - - -
Installment 69 62 84 70 53
------------------ ----------------- ------------------- ------------------ ---------------
Total recoveries 130 146 208 196 303
------------------ ----------------- ------------------- ------------------ ---------------
Net loans charged-off (747) (683) (203) (354) (242)
Current year provision 1,200 1,060 980 620 240
------------------ ----------------- ------------------- ------------------ ---------------
Balance at end of year $5,071 $4,618 $4,241 $3,464 $3,198
================== ================= =================== ================== ===============
Loans at year end, excluding
loans held for sale $537,725 $489,070 $353,828 $312,227 $268,940
Ratio of allowance to loans
at year end 0.94% 0.94% 1.20% 1.11% 1.19%
Average loans $517,010 $440,615 $327,412 $289,197 $242,286
Ratio of net loans charged-off
to average loans 0.14% 0.16% 0.06% 0.12% 0.10%
Allocation of allowance for loan losses at December 31,
2000 1999 1998 1997 1996
------------------ ----------------- ------------------- ------------------ ---------------
Commercial and agricultural $3,829 $2,430 $2,499 $1,200 $1,245
Real estate 305 293 486 340 50
Installment 514 601 570 560 550
Unallocated 423 1,294 686 1,364 1,353
------------------ ----------------- ------------------- ------------------ ---------------
Total $5,071 $4,618 $4,241 $3,464 $3,198
================== ================= =================== ================== ===============
D-15
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 6 - NONPERFORMING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- --------------------- ------------------- ---------------- -----------
Principal balance
Nonaccrual $2,718 $622 $1,468 $127 $178
Restructured 55 114 197 350 482
90 days or more past due 1,052 584 775 505 735
----------------- --------------------- ------------------- ---------------- -----------
Total nonperforming loans $3,825 $1,320 $2,440 $982 $1,395
================= ===================== =================== ================ ===========
Nonperforming loans as a percent
of loans 0.71% 0.27% 0.69% 0.31% 0.52%
Other real estate owned $72 $487 $22 $230 $116
OREO as a percent of loans 0.01% 0.10% 0.01% 0.07% 0.04%
Allowance as a percent of
nonperforming loans 132.58% 349.85% 173.81% 352.75% 229.25%
For nonaccrual and restructured loans for the years ended December 31:
Interest income under
original terms $362 $53 $146 $55 $74
Interest income which
was recorded 150 20 17 27 56
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 7 - NONINTEREST INCOME & EXPENSE
- ---------------------------------------------------------------------------------------------------------------------------------
% change % change
2000 from '99 1999 from '98 1998
------------ ---------------- ------------ ---------------- ------------
Noninterest Income
Income from fiduciary activities $1,187 4.67% $1,134 17.63% $ 964
Service charges on deposit accounts 1,880 18.91% 1,581 20.78% 1,309
Investment product commissions 758 138.36% 318 -10.92% 357
Other operating income 1,353 4.56% 1,294 26.24% 1,025
------------ ---------------- ------------ ---------------- ------------
5,178 19.67% 4,327 18.39% 3,655
Net gain on loan sales 659 -30.04% 942 -24.94% 1,255
Net realized gain/(loss) on securities (12) -91.67% (144) -2500.00% 6
------------ ---------------- ------------ ---------------- ------------
Total noninterest income $5,825 13.66% $5,125 4.25% $4,916
============ ================ ============ ================ ============
% change % change
2000 from '99 1999 from '98 1998
------------ ---------------- ------------ ---------------- ------------
Salaries and employee benefits $10,681 8.59% $9,836 19.86% $8,206
Occupancy expenses, net 1,247 16.22% 1,073 20.43% 891
Equipment expenses 1,731 31.74% 1,314 24.67% 1,054
Other operating expenses 5,517 3.88% 5,311 53.54% 3,459
------------ ---------------- ------------ ---------------- ------------
Total noninterest expense $19,176 9.36% $17,534 28.83% $13,610
============ ================ ============ ================ ============
D-16
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 8 - SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31,
---------------------------------------------------------------------------
2000 1999 1998
------------------------- --------------------- ---------------------------
Securities available-for-sale
U.S. Government & agencies 4,193 $ 5,005 $14,110
States and political subdivisions 31,012 27,268 23,637
Corporate obligations 4,001 1,973 2,513
Mortgage-backed and asset-backed 37,105 42,888 36,696
Other securities 2,546 2,588 -
------------------------- --------------------- ---------------------------
Total securities available-for-sale $78,857 $79,722 $76,956
Securities held-to-maturity
States and political subdivisions $ 4,484 $ 4,712 $ 4,879
------------------------- --------------------- ---------------------------
Total securities held-to-maturity $ 4,484 $ 4,712 $ 4,879
------------------------- --------------------- ---------------------------
Total securities $83,341 $84,434 $81,835
========================= ===================== ===========================
SECURITIES MATURITY SCHEDULE
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years
---------------------- --------------------- --------------------- --------------------
Available-for-sale Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------
---------------------- --------------------- --------------------- --------------------
U.S. Treasury $ - - $ - - $ - - $ - -
Federal agencies - - - 1,201 6.50% 2,992 6.01% - -
State and municipal (1) - - 1,624 6.31% 6,762 7.15% 22,626 7.70%
Corporate obligations - - 4,001 6.60% - - - -
Mortgage-backed and asset-backed - - 240 6.24% 1,137 7.61% 35,728 6.87%
Other securities - - - - 1,515 5.79% 1,031 5.97%
---------------------- --------------------- --------------------- --------------------
Total available-for-sale $ - $7,066 $12,406 $59,385
========= ========= =========== ===========
Held-to-maturity
State and municipal (1) $415 7.02% $1,353 7.97% $ 1,632 8.17% $ 1,084 8.91%
--------- --------- ----------- -----------
Total held-to-maturity $415 $1,353 $ 1,632 $ 1,084
========= ========= =========== ===========
(1) Average rates were calculated on a tax equivalent basis using a marginal
federal income tax rate of 34%.
along with a wide-area network, teller system and proof imaging system have been
installed to enable the Corporation to remain competitive within the market area
while also improving overall operational efficiencies.
Other operating expenses increased 3.9% in 2000, with approximately 69% of the
increase attributable to the full-year effect of the intangible amortization
expense related to the 1999 Jasper County branch acquisitions. The remainder of
the increase related to ongoing operational expenses of the new branches and
mortgage department for items such as telephone, advertising, and employee
education, in addition to increased expenses associated with the higher ATM
transaction volumes.
Total noninterest expense increased 28.8% in 1999 compared to 1998 predominately
due to operational costs associated in the Jasper County branch acquisitions.
Salaries and employee benefits, net occupancy expenses, and other operating
expenses were all significantly impacted as a result of the increase in staffing
levels, improvements made at the branch facilities, and other ongoing
operational and transitional costs, including intangible amortization, incurred
with the operation of the Jasper County branches. While a portion of the
increase in the equipment category related to the branch acquisitions, the
majority of the increase was attributed to the infrastructure foundation and
Y2K-related technology upgrades implemented during the year.
INCOME TAXES
The Corporation records a provision for income taxes currently payable, along
with a provision for those taxes payable in the future. Such deferred taxes
arise from differences in the timing of certain items between financial
statement reporting and income tax reporting. The major difference between the
effective tax rate applied to the Corporation's financial statement income and
the federal statutory rate of 34% is the result of interest on tax-exempt
securities and loans, offset by state tax expense.
The Corporation had regular tax and alternative minimum tax net operating loss
carryforwards which were fully utilized during 1998.
The Corporation's effective tax rate was 33.7%, 32.3%, and 33.5% in 2000, 1999,
and 1998, respectively. Further tax information regarding the Corporation can be
found in Note 1 and Note 12 to the consolidated financial statements.
D-17
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 9 - LOANS OUTSTANDING
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------
Commercial and agricultural $215,087 $192,760 $115,198 $112,586 $96,276
Real estate - construction 54,768 47,375 28,043 17,117 12,194
Real estate - mortgage 212,190 197,181 160,655 127,574 104,547
Installment 50,696 51,754 49,932 54,950 54,924
Other 4,984 - - - 999
-------------------------------------------------------------------------------------------
Total loans $537,725 $489,070 $353,828 $312,227 $268,940
===========================================================================================
Composition of loan portfolio by type at December 31,
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------
Commercial and agricultural 40.00% 39.41% 32.56% 36.06% 35.80%
Real estate - construction 10.18% 9.69% 7.93% 5.48% 4.54%
Real estate - mortgage 39.46% 40.32% 45.40% 40.86% 38.87%
Installment 9.43% 10.58% 14.11% 17.60% 20.42%
Other 0.93% - - - 0.37%
-------------------------------------------------------------------------------------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
===========================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 10 - LOAN LIQUIDITY
- ---------------------------------------------------------------------------------------------------------------------------------
Loan Maturities at December 31, 2000
-----------------------------------------------------------------------------------------
1 Year 1 - 5 Over 5
and Less Years Years Total
----------------- ----------------- --------------- ---------------
Commercial and agricultural $ 92,514 $115,118 $7,455 $215,087
Real estate - construction 32,109 21,487 1,172 54,768
----------------- ----------------- --------------- ---------------
Total selected loans $124,623 $136,605 $8,627 $269,855
================= ================= =============== ===============
Sensitivity to Changes in Interest Rates
Fixed rates $ 24,239 $7,864
Variable rates 112,366 763
----------------- ---------------
Total selected loans $136,605 $8,627
================= ===============
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 11 - DEPOSIT INFORMATION
- ---------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ------------ ------------ ------------ ------------ ------------
Noninterest-bearing $58,723 - $51,229 - $39,312 -
Interest-bearing demand 69,024 1.07% 62,858 1.14% 48,777 1.25%
Savings deposits 163,182 4.45% 157,618 3.80% 108,019 4.02%
Time deposits 256,672 5.85% 214,784 5.27% 174,959 5.69%
------------ ------------ ------------ ------------ ------------ ------------
Total deposits $547,601 4.20% $486,489 3.70% $371,067 4.02%
============ ============ ============ ============ ============ ============
Maturity Ranges of Time Deposits
with Balances of $100,000 or More at December 31,
2000 1999 1998
---------------------- -------------------- ----------------------
<s>
3 months or less $12,730 $12,638 $9,273
3 through 6 months 7,462 4,422 4,287
6 through 12 months 13,108 6,372 4,230
Over 12 months 20,214 15,233 10,438
---------------------- -------------------- ----------------------
Total $53,514 $38,665 $28,228
====================== ==================== ======================
D-18
FINANCIAL CONDITION
SECURITIES
Securities held-to-maturity are those which the Corporation has both the
positive intent and ability to hold to maturity, and are reported at amortized
cost. Securities available-for-sale are those which the Corporation may decide
to sell if needed for liquidity, asset/liability management, or other reasons.
Securities available-for-sale are reported at fair value, with unrealized gains
and losses included as a separate component of equity, net of tax. The
Corporation does not maintain any securities for trading purposes.
Table 8 - Securities and Securities Maturity Schedule summarizes the carrying
values of securities from 1998 through 2000 and the maturity distribution at
December 31, 2000, by classification. Interest on tax-exempt securities has been
adjusted to a tax equivalent basis using a marginal federal tax rate of 34% for
all years.
The majority of the securities portfolio is comprised of federal agency
securities, state municipal securities (tax-exempt), corporate obligations, and
mortgage-backed and asset-backed securities.
The securities portfolio carries varying degrees of risk. Investments in U.S.
Treasury securities and federal agency securities have little or no credit risk.
Mortgage-backed and asset-backed securities are substantially issues of federal
agencies. Obligations of states and political subdivisions and corporate
securities are the areas of highest potential credit exposure in the portfolio.
This risk is minimized through the purchase of high quality investments. The
Corporation's investment policy requires that obligations of states and
political subdivisions and corporate bonds must have a rating of A or better
when purchased. The vast majority of these investments were rated A or better at
December 31, 2000. The risk of non-rated municipal bonds is minimized by
limiting the amounts invested and by investing in local issues. Management
believes the non-rated securities in the Corporation's portfolio are of high
quality. No securities of an individual issuer, excluding U.S. Government and
its agencies, exceeded 10% of the Corporation's shareholders' equity as of
December 31, 2000. The Corporation does not use off-balance sheet derivative
financial instruments as defined in SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments."
Total securities were $83,341,000 and $84,434,000 as of December 31, 2000 and
1999, respectively. Although the total securities balance decreased only 1.3%
during 2000, the average balance actually decreased $14,621,000, or 14.8%. This
decrease in the average balance was predominately attributed to the short-term
investments made in 1999 with the proceeds received in the Jasper County branch
acquisition. Those proceeds were ultimately utilized in funding the
Corporation's ongoing loan growth which is discussed in greater detail in the
"Loans" section. Proceeds of matured or called securities during the year were
reinvested into states and political subdivisions and corporate obligations
sector of the portfolio in order to take advantage of the higher yields given
the higher interest rate environment.
Management's security strategy includes utilizing short-term securities,
adjustable rate instruments, and easily marketable securities primarily to fund
the continuing growth of the loan portfolio. Tax-free and intermediate taxable
bonds are used to further enhance earnings. As of December 31, 2000,
approximately 94% of the total investment security portfolio was classified in
the available-for-sale category, which allows flexibility in the asset/liability
management function. Sell strategies are executed, on occasion, when the
interest rate environment provides the opportunity to boost the overall
portfolio performance. As a result of the higher interest rate environment that
existed, management completed a bond swap in July 2000. Although the transaction
resulted in a minimal net loss, the higher yields and additional earnings more
than offset the Corporation's loss by year-end.
As of December 31, 2000 and 1999, the security portfolio held structured notes
totaling $3,998,000 and $3,997,000, respectively. The investment policy has
specific guidelines describing total holdings, maturity, and price volatility
parameters regarding these types of security instruments. All structured notes
are U.S. Government agency issues.
The change which occurred in the unrealized gain/loss on securities between 2000
and 1999 was a result of the decrease in the interest rate environment in late
2000, in conjunction with the change in the portfolio mix. Although the
Corporation recorded small net losses in its investment activity during 2000 and
1999, it is not likely the Corporation will realize significant future losses in
the security portfolio to satisfy loan growth or liquidity needs. The change in
equity due to market value fluctuations in the available-for-sale portfolio are
not used in the regulatory capital calculation. This paragraph includes
forward-looking statements that are based on management's assumptions regarding
future economic and business conditions. Such economic and business assumptions
are inherently uncertain and subject to risk and may prove to be invalid,
causing management to respond to the present circumstances and conditions.
LOANS
The loan portfolio constitutes the major earning asset of the Corporation and
offers the best alternative for maximizing interest spread above the cost of
funds. The Corporation's loan personnel have the authority to extend credit
under guidelines established and approved by the Board of Directors. Any credit
which exceeds the authority of the loan officer is forwarded to the Bank's loan
committee for approval. The loan committee is comprised of various experienced
loan officers and three bank directors -- the President, and two outside
directors, one of which is the Chairman. Each outside director participates on
this committee on a monthly rotating basis. All credits which exceed the loan
committee's lending authority are presented to the full Board of Directors for
ultimate approval or denial. The loan committee not only acts as an approval
body to ensure consistent application of the Corporation's loan policy, but also
provides valuable insight through communication and pooling of knowledge,
judgment, and experience of its members.
The Corporation's primary lending area generally includes Tippecanoe, White,
Jasper, and contiguous counties in Northwest Indiana. The Corporation extends
out-of-area credit only to borrowers who are considered to be low risk, and only
on a very limited basis.
Table 9 - Loans Outstanding reflects outstanding balances by loan type for the
past five years. Additional loan information is presented in Note 3 to the
consolidated financial statements.
Much like the past four years, the Corporation continued its growth of the loan
portfolio. Although actual balances rose $48,655,000, or 9.9%, during 2000, the
average balances increased 16.5% from the prior year. The average balance
increase was due, in large part, to the Jasper County
D-19
branch acquisitions, as the excess deposits acquired in that transaction were
used to fund loan growth opportunities. These loans were on the Corporation's
books since the last six months of 1999.
The commercial and agricultural sector of the loan portfolio grew $22,327,000,
or 11.6%, in 2000, and was the largest sector within the portfolio. Supported by
the ongoing low unemployment rates, particularly in the Tippecanoe County
market, the continuing growth and economic prosperity has led the increase in
this category.
Real estate construction and mortgage loans grew 15.6% and 7.6%, respectively,
during 2000. Many of the same reasons for the growth in the commercial and
agricultural sector also apply to these two sectors of the loan portfolio. The
growth and expansion in and around the Greater Lafayette area has resulted in an
increasing number of construction projects, as well as new home ownership
opportunities.
The Corporation also experienced home equity loan balance increases in excess of
50% during 2000.
Management believes the degree of risk assumed on any loan is commensurate with
the interest rate assessed, and is thereby able to receive a higher rate of
return on commercial and real estate-construction loans as compared to
residential real estate loans. Although these loan types usually possess
increased elements of risk, the Corporation's lending practices, policies, and
procedures that are in place are intended to mitigate certain risks associated
with such loans. Conversely, because of the nature of the loan, real estate
mortgage and home equity loans carry a lower degree of risk.
Total installment loan balances declined 2.0% in 2000. The monitoring of the
indirect automobile line of business remained a priority of management, and
although net charge-offs increased for this loan type, overall installment loan
charge-offs increased only $15,000, or 5.2% from last year.
In general, as loan totals have grown over the past years, the loan portfolio
has remained diversified by loan type, borrower, and industry. As of December
31, 2000, there were no concentrations of credits in excess of 10.0%.
Table 10 - Loan Liquidity and Sensitivity to Changes in Interest Rates reflects
the maturity schedule of commercial and agricultural loans. Also indicated are
fixed and variable rate loans maturing after one year for the same loan
categories.
DEPOSITS
The Corporation offers a wide variety of deposit services to individual and
commercial customers, such as noninterest-bearing and interest-bearing checking
accounts, savings accounts, money market accounts, and certificates of deposit.
The deposit base provides the major funding source for earning assets. Total
average deposits grew $61,112,000, or 12.6%, in 2000. Influenced somewhat by the
rising interest rate environment, approximately 68.5% of the total increase
occurred in the time deposit category.
A three year schedule of average deposits by type, and maturities of time
deposits greater than $100,000 is presented in Table 11 - Deposit Information.
To provide temporary liquidity and as an alternative to borrowing federal funds,
the Corporation will acquire, from time to time, large balance certificates of
deposit, generally from public entities, for short-term time periods. The
Corporation had such funds totaling $4,303,000, $5,514,000, and $500,000 as of
December 31, 2000, 1999, and 1998, respectively.
BORROWINGS
Aside from the core deposit base and large denomination certificates of deposit
mentioned above, the Corporation's remaining funding sources include short-term
and long-term borrowings. Short-term borrowings consist of federal funds
purchased from other financial institutions on an overnight basis, retail
repurchase agreements which generally mature within thirty days, and U.S.
Treasury demand notes.
As presented in Table 12 - Short-term Borrowings, the balance of the
Corporation's short-term borrowings were comprised of retail repurchase
agreements and a treasury tax and loan open-end note as of December 31, 2000,
1999, and 1998. While the Corporation experienced growth in retail repurchase
agreements in 2000, one customer accounted for a significant part of the
increase over the prior year. This customer's account serves as a clearing-house
twice annually for state funds received. After being deposited into this
customer's account, these funds were distributed to other local municipalities.
In the past, these funds were on deposit with the Corporation only for a short
time, usually one week or less, with the funds fully distributed by the end of
the year. However, as of December 31, 2000, approximately $18,000,000 remained
on deposit with the Corporation and was subsequently disbursed on January 2,
2001. For the years presented, retail repurchase agreements accounted for
substantially the entire balance of short-term borrowings.
The Bank is a member of the Federal Home Loan Bank of Indianapolis (FHLBI) and
has the authority of the Board of Directors to borrow up to $40 million. All
current and any future borrowings are secured by a blanket collateral pledge of
the Bank's U.S. Government and U.S. Government agency securities, along with
one-to-four family residential loans. FHLBI advances as of December 31, 2000 and
1999 were $35,737,000 and $30,027,000, respectively. The Corporation increased
its net FHLBI advance borrowings during 2000 primarily to fund the continued
loan growth. The attractive interest rates along with the fixed rate feature of
the advances made this a more desirable source of funds, as opposed to the
short-term nature of certain repurchase agreement contracts.
The Corporation executed an unsecured long-term borrowing agreement on March 15,
1999 with The Northern Trust Company, located in Chicago, Illinois. The purpose
of the note was for the Corporation to contribute additional capital to the Bank
in order for the Bank to acquire the Jasper county branches and maintain its
well-capitalized capital status. The Corporation made a $13,000,000 capital
contribution to the Bank on March 15, 1999. Under the terms of the agreement,
the Corporation is required to make quarterly principal payments of $350,000,
with a final balloon payment due March 31, 2006. Interest is payable monthly at
an interest rate currently indexed to the federal funds rate plus an applicable
margin determined by the Corporation's existing capital ratios. The note is also
subject to various covenants, including a defined minimum return on average
assets, tangible net worth, capital ratios, indebtedness ratio, loan loss
allowance to loans ratio, and nonperforming asset ratios. Management believes
the Corporation was in compliance with all covenants of the loan agreement as of
December 31, 2000. The outstanding principal balance of the note payable at
December 31, 2000 was $11,550,000. Additional information regarding short-term
borrowings, FHLBI advances, and the note payable can be found in Note 7 and Note
8 of the consolidated financial statements.
D-20
- -------------------------------------------------------------------------------------------------------------------
TABLE 12 - SHORT-TERM BORROWINGS
- -------------------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
Repurchase agreements outstanding $54,275 $24,645 $15,788
Treasury tax and loan open-end note 1,297 2,628 614
-------------- --------------- ---------------
Total short-term borrowings $55,572 $27,273 $16,402
============== =============== ===============
Average balance of repurchase agreements
during year $30,521 $28,428 $14,671
Maximum month-end balance of repurchase
agreements during year 54,275 33,192 17,223
Weighted-average interest rate of
repurchase agreements during year 5.39% 4.36% 4.47%
Weighted-average interest rate of
repurchase agreements at end of year 5.76% 4.87% 4.20%
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 13 - FUNDING USES AND SOURCES
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
--------------- ----------- ----------- ------------- ---------- ------------
FUNDING USES
Loans, total $520,402 $73,820 16.53% $446,582 $113,075 33.90%
Taxable securities 52,089 (14,449) -21.72% 66,538 10,565 18.88%
Tax-exempt securities 34,737 1,299 3.88% 33,438 12,460 59.40%
Interest-bearing balances with
other financial institutions 2,335 1,991 578.78% 344 191 124.84%
FHLB stock 2,123 315 17.42% 1,808 344 23.50%
Federal funds sold and overnight balances 7,305 105 1.46% 7,200 (3,520) -32.84%
--------------- ----------- ----------- ------------- ---------- ------------
Total uses $618,991 $63,081 11.35% $555,910 $133,115 31.48%
=============== =========== =========== ============= ========== ============
FUNDING SOURCES
Noninterest-bearing deposits $58,723 $7,494 14.63% $51,229 $11,917 30.31%
Interest-bearing demand 69,024 6,166 9.81% 62,858 14,081 28.87%
Savings deposits 163,182 5,564 3.53% 157,618 49,599 45.92%
Time deposits 256,672 41,888 19.50% 214,784 39,825 22.76%
Short-term borrowings 32,482 2,314 7.67% 30,168 14,587 93.62%
FHLB advances 26,142 2,783 11.91% 23,359 1,258 5.69%
Note payable 12,423 1,560 14.36% 10,863 10,863 -
--------------- ----------- ----------- ------------- ---------- ------------
Total sources $618,648 $67,769 12.30% $550,879 $142,130 34.77%
=============== =========== =========== ============= ========== ============
D-21
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk of the Corporation encompasses exposure to both liquidity risk and
interest rate risk and is reviewed quarterly by the asset/liability committee
(ALCO) and the Board of Directors.
The liquidity of the parent company is dependent on the receipt of dividends
from the banking subsidiary. Certain restrictions exist regarding the transfer
of funds from the subsidiary as explained in Note 14 to the consolidated
financial statements. Management expects that in the aggregate, the banking
subsidiary will continue to have the ability to dividend adequate funds to the
parent company. The statement in this paragraph relating to the parent company
continuing to receive dividends from the subsidiary bank is a forward-looking
statement which may or may not be accurate due to the impossibility of
predicting future economic and business events, and in particular, the future
profitability of the Corporation's banking subsidiary.
The banking subsidiary's source of funding is predominantly core deposits
consisting of both commercial and individual deposits, maturities of securities,
repayments of loan principal and interest, federal funds purchased, securities
sold under agreements to repurchase, and FHLBI advances. The deposit base is
diversified between individual and commercial accounts which helps avoid
dependence on large concentrations of funds. The Corporation does not solicit
certificates of deposit from brokers. Table 13 - Funding Uses and Sources
details the main components of cash flows for 2000 and 1999.
The Corporation's interest rate risk is measured by computing estimated changes
in net interest income and the net portfolio value (NPV) of its cash flows from
assets and liabilities in the event of adverse movements in interest rates.
Interest rate risk exposure is measured using an interest rate sensitivity
analysis to determine the change in NPV in the event of hypothetical changes in
interest rates. Another method also used to enhance the overall process is
interest rate sensitivity gap analysis. This method is utilized to determine the
repricing characteristics of the Corporation's assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities. This particular analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 1% - 2% increase and decrease in interest rates. The
Corporation's Board of Directors adopted an interest rate risk policy which
established a 45% minimum and maximum increase and decrease in the NPV in the
event of a sudden and sustained 1% - 2% increase or decrease in interest rates.
The following table represents the Corporation's projected change in NPV for the
various rate shock levels as of December 31, 2000.
----------------------- Net Portfolio Value --------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change
-------- ------ ------ ------
+ 200 $ 51,812 $ (11,183) (17.75) %
+ 100 57,345 (5,650) (8.97)
Base 62,995 - -
- 100 68,085 5,090 8.08
- 200 72,626 9,631 15.29
The above table indicates that as of December 31, 2000, the Corporation's
estimated NPV would be expected to decrease in the event of sudden and sustained
increases in prevailing interest rates. Conversely, in the event of sudden and
sustained decreases in prevailing interest rates, the Corporation's estimated
NPV would be expected to increase. As of December 31, 2000, the Corporation's
estimated changes in NPV were within the approved guidelines established by the
Board of Directors.
Computations of prospective effects of hypothetical interest rate changes are
based on a number of assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. These computations do not contemplate any
actions management may undertake in response to changes in interest rates. The
NPV calculation is based on the net present value of discounted cash flows
utilizing certain prepayment assumptions and market interest rates.
Certain shortcomings are inherent in the method of computing the estimated NPV.
Actual results may differ from that information presented in the table above
should market conditions vary from the assumptions used in preparation of the
table information. If interest rates remain or decrease below current levels,
the proportion of adjustable rate loans in the loan portfolio could decrease in
future periods due to refinancing activity. Also, in the event of an interest
rate change, prepayment and early withdrawal levels would likely be different
from those assumed in the table. Lastly, the ability of many borrowers to repay
their adjustable rate debt may decline during a rising interest rate
environment.
CAPITAL ADEQUACY
The Corporation and Bank are subject to various regulatory capital guidelines as
required by federal and state 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 less goodwill and core deposit
intangibles, as defined by bank regulators. The definition of Tier 2 capital
includes the amount of allowance for loan losses which does not exceed 1.25% of
gross risk weighted assets. Total capital is the sum of Tier 1 and Tier 2
capital.
The minimum requirements under the capital guidelines are a 4.00% leverage ratio
(Tier 1 capital divided by average assets less intangible assets and 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)
required federal regulatory agencies to define capital tiers. These tiers are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of
at least 6.00%, and a total risk-based 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 result in the initiation of regulatory
action by the appropriate regulatory agency. If an institution is only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, the institution may be required to limit capital
distributions, limit asset growth and expansion, and submit a capital
restoration plan.
D-22
Consolidated capital amounts and ratios are presented in Table 14 - Capital
Ratios. Bank capital ratios appear in Note 14 of the consolidated financial
statements. In connection with the Bank's acquisition of the three Jasper County
branches on March 15, 1999, the consolidated and bank-only capital levels were
significantly reduced. In response, the Corporation borrowed $14,000,000 and
contributed $13,000,000 of capital to the Bank in order for the Bank to maintain
its well-capitalized status. As of December 31, 1999, the Bank was categorized
as well-capitalized under the regulatory framework for prompt corrective action.
However, the Corporation was categorized as undercapitalized as of December 31,
1999, as the total capital ratio was 7.99%, slightly below the 8.00% minimum.
Although the Corporation's capital was slightly below the minimum at December
31, 1999, no corrective regulatory action was initiated by the banking
regulatory authorities. The Corporation returned to adequately capitalized
status as of March 31, 2000 and has maintained that status through December 31,
2000, and management anticipates maintaining its adequately capitalized status
for the foreseeable future. The statement in this paragraph relating to the
Corporation maintaining its adequately capitalized status is a forward-looking
statement which may or may not be accurate due to the impossibility of
predicting future economic and business events, including the ability of the
Corporation to raise additional capital, if needed, as well as other factors
that are beyond the control of the Corporation.
Exclusive of the effect of the unrealized gains/losses on securities component,
which is driven by the interest rate environment, the Corporation's
shareholders' equity increased $5,323,000, or 11.1% in 2000 compared to the
$5,085,000, or 11.9% increase posted in 1999. The amount of dividends paid by
the Corporation was increased to $1,706,000 in 2000. Management's effort to
increase the value and return of each shareholder's investment in the
Corporation is reflected by the increased dollar dividend payout, in addition to
the stock splits and dividends declared in the past few years.
At December 31, 2000, 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 the Corporation's
consolidated liquidity, capital resources or operations.
INFLATION
For a financial institution, effects of price changes and inflation vary
considerably from an industrial organization. Changes in the prices of goods and
services are the primary determinant of an industrial company's profit, whereas
changes in interest rates have a major impact on a financial institution's
profitability. 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 last
few years the inflation rate has been relatively low, and its impact on the
balance sheets and levels of income and expense has been nominal.
- --------------------------------------------------------------------------------
TABLE 14 - CAPITAL RATIOS
- --------------------------------------------------------------------------------
At December 31,
2000 1999
--------------- -------------
Tier 1 capital
Shareholders' equity $52,801 $45,785
Less: Intangibles (13,007) (13,737)
Net unrealized losses on
available-for-sale equity securities (14) -
Add: Unrealized loss on securities 263 1,956
-------------- -------------
Total Tier 1 capital $40,043 $34,004
============== =============
Total risk-based capital
Tier 1 capital $40,043 $34,004
Allowance for loan losses 5,071 4,618
-------------- -------------
Total risk-based capital $45,114 $38,622
============== =============
Risk weighted assets $541,362 $483,307
============== =============
Average assets, fourth quarter $692,178 $627,045
============== =============
Risk-based ratios
Tier 1 7.40% 7.04%
============== =============
Total risk-based capital 8.33% 7.99%
============== =============
Leverage Ratios 5.79% 5.42%
============== =============
D-23
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Lafayette Bancorporation
Lafayette, Indiana
We have audited the accompanying consolidated balance sheets of Lafayette
Bancorporation as of December 31, 2000 and 1999 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Corporation'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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lafayette
Bancorporation as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 25, 2001
D-24
LAFAYETTE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollar amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
Cash and due from banks $ 26,452 $ 28,287
Interest-bearing deposits in other financial institutions 21,820 83
Federal funds sold 25,200 2,200
------------ ------------
Total cash and cash equivalents 73,472 30,570
Securities available-for-sale 78,857 79,722
Securities held-to-maturity (fair value
$4,580 and $4,709) 4,484 4,712
Loans held for sale 5,949 3,174
Loans 537,725 489,070
Less: Allowance for loan losses (5,071) (4,618)
------------ ------------
Net loans 532,654 484,452
FHLB stock, at cost 2,200 1,897
Premises, furniture and equipment, net 11,353 10,583
Intangible assets 13,007 13,747
Accrued interest receivable and other assets 19,171 16,292
------------ ------------
Total assets $ 741,147 $ 645,149
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 70,866 $ 63,206
Interest-bearing demand and savings deposits 230,984 229,302
Interest-bearing time deposits 276,447 229,739
------------ ------------
Total deposits 578,297 522,247
Short-term borrowings 55,572 27,273
FHLB advances 35,737 30,027
Note payable 11,550 12,950
Accrued interest payable and other liabilities 7,190 6,867
------------ ------------
Total liabilities 688,346 599,364
Shareholders' equity
Common stock, no par value: 5,000,000 shares
authorized; 3,953,616 and 3,586,140 shares issued and outstanding 3,954 3,586
Additional paid-in capital 38,024 32,886
Retained earnings 11,086 11,269
Accumulated other comprehensive income (263) (1,956)
------------ ------------
Total shareholders' equity 52,801 45,785
------------ ------------
Total liabilities and shareholders' equity $ 741,147 $ 645,149
============ ============
See accompanying notes to consolidated financial statements
D-25
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Interest income
Loans, including related fees $ 46,620 $ 38,520 $ 29,810
Taxable securities 3,318 3,831 3,217
Tax exempt securities 1,664 1,529 991
Other 784 510 707
------------ ------------ ------------
Total interest income 52,386 44,390 34,725
Interest expense
Deposits 23,016 18,024 14,906
Short-term borrowings 1,773 1,358 712
Other borrowings 2,616 2,161 1,345
------------ ------------ ------------
Total interest expense 27,405 21,543 16,963
------------ ------------ ------------
NET INTEREST INCOME 24,981 22,847 17,762
Provision for loan losses 1,200 1,060 980
------------ ------------ ------------
Net interest income after provision for loan losses 23,781 21,787 16,782
Noninterest income
Fiduciary activities 1,187 1,134 964
Service charges on deposit accounts 1,880 1,581 1,309
Net realized gain/(loss) on securities (12) (144) 6
Net gain on loan sales 659 942 1,255
Other service charges and fees 1,042 923 727
Investment product commissions 758 318 357
Other 311 371 298
------------ ------------ ------------
Total noninterest income 5,825 5,125 4,916
Noninterest expense
Salaries and employee benefits 10,681 9,836 8,206
Occupancy, net 1,247 1,073 891
Equipment 1,731 1,314 1,054
Intangible amortization 740 597 81
Other 4,777 4,714 3,378
------------ ------------ ------------
Total noninterest expenses 19,176 17,534 13,610
------------ ------------ ------------
Income before income taxes 10,430 9,378 8,088
Income taxes 3,514 3,027 2,711
------------ ------------ ------------
NET INCOME $ 6,916 $ 6,351 $ 5,377
============ ============ ============
Basic earnings per share $ 1.75 $ 1.61 $ 1.36
============ ============ ============
Diluted earnings per share $ 1.74 $ 1.57 $ 1.34
============ =========== ============
See accompanying notes to consolidated financial statements
D-26
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Shareholders'
Stock Capital Earnings Income Stock Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 1998 $ 2,174 $ 24,555 $ 11,927 $ (90) $ (97) $ 38,469
Comprehensive income
Net income 5,377 5,377
Change in net unrealized
gain/ (loss) on securities
available-for-sale 48 48
----------
Total comprehensive
income 5,425
Issue 2,825 shares under
stock option plan 2 67 69
10% Stock dividend,
217,640 shares 218 7,998 (8,216) -
Cash dividends
($.34 per share) (1,341) (1,341)
Purchase 188 treasury shares (8) (8)
----------- ----------- ----------- ----------- ----------- ----------
Balance, December 31, 1998 2,394 32,620 7,747 (42) (105) 42,614
Comprehensive income
Net income 6,351 6,351
Change in net unrealized
gain/ (loss) on securities
available-for-sale (1,914) (1,914)
----------
Total comprehensive
income 4,437
Issue 11,884 shares under
stock option plan 12 266 278
3-2 stock split,
1,200,738 shares 1,201 (1,201) -
Cash dividends
($.39 per share) (1,540) (1,540)
Purchase 105 treasury shares (4) (4)
Retire 20,517 treasury shares (21) (88) 109 -
----------- ----------- ----------- ----------- ----------- ----------
Balance, December 31, 1999 3,586 32,886 11,269 (1,956) - 45,785
Comprehensive income
Net income 6,916 6,916
Change in net unrealized
gain/ (loss) on securities
available-for-sale 1,693 1,693
----------
Total comprehensive income 8,609
Issue 8,448 shares under
stock option plan 9 108 117
10% Stock dividend
359,043 shares 359 5,030 (5,393) (4)
Cash dividends
($.43 per share) (1,706) (1,706)
----------- ----------- ----------- ----------- ----------- ----------
Balance, December 31, 2000 $ 3,954 $ 38,024 $ 11,086 $ (263) $ - $ 52,801
========== =========== =========== =========== =========== ==========
See accompanying notes to consolidated financial statements
D-27
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,916 $ 6,351 $ 5,377
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 1,339 948 646
Net amortization 722 726 311
Provision for loan losses 1,200 1,060 980
Net realized (gain)/loss on securities 12 144 (6)
Net realized (gain) loss on sale of
other real estate (5) - (43)
Change in assets and liabilities
Loans originated for sale (56,201) (67,547) (86,291)
Loans sold 53,426 74,459 83,845
Accrued interest receivable
and other assets (4,410) (1,947) (1,402)
Accrued interest payable
and other liabilities 323 1,314 446
------------ ------------ ------------
Net cash from operating activities 3,322 15,508 3,863
CASH FLOWS FROM INVESTING ACTIVITIES
Change in interest-bearing balances with
other financial institutions - 671 (671)
Purchase of securities available-for-sale (86,815) (172,049) (54,270)
Proceeds from sales of securities available-for-sale 82,375 56,027 3,592
Proceeds from maturities of securities
available-for-sale 8,119 109,826 40,176
Purchase of securities held-to-maturity - (2,000) (2,532)
Proceeds from maturities of securities
held-to-maturity 229 2,160 2,906
Loans made to customers, net of payments collected (49,452) (78,085) (41,804)
Purchase of Federal Home Loan Bank stock (303) (358) (297)
Property and equipment expenditures (2,109) (3,578) (2,416)
Proceeds from sales of other real estate 470 - 251
------------ ------------ ------------
Net cash from investing activities (47,486) (87,386) (55,065)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 56,050 $ 9,686 $ 40,351
Cash received in branch acquisition for
liabilities assumed, net of assets acquired - 45,266 -
Net change in short-term borrowings 28,299 10,871 (3,970)
Proceeds from other borrowings 22,000 30,000 4,800
Payments on other borrowings (17,690) (10,877) (832)
Common stock issued 117 278 69
Dividends paid (1,706) (1,540) (1,341)
Purchase of fractional shares from stock dividend (4) - -
Purchase of treasury stock - (4) (8)
------------ ------------ ------------
Net cash from financing activities 87,066 83,680 39,069
------------ ------------ ------------
Net change in cash and cash equivalents 42,902 11,802 (12,133)
Cash and cash equivalents at beginning of year 30,570 18,768 30,901
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 73,472 $ 30,570 $ 18,768
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 26,882 $ 20,765 $ 16,824
Income taxes 3,405 3,168 2,939
Non-cash investing and financing activities
Loans transferred to other real estate $ 50 $ 465 $ -
See also Note 18 regarding 1999 branch acquisition.
See accompanying notes to consolidated financial statements
D-28
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
(Dollar amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include the accounts of Lafayette Bancorporation (Corporation) and
its wholly owned subsidiary, Lafayette Bank and Trust Company (Bank), after
elimination of significant intercompany transactions and accounts.
The Corporation provides financial services to its customers, primarily
commercial and retail banking and trust services, with operations conducted
through its main office and 16 branches located in Tippecanoe, White, and Jasper
Counties in Indiana. The majority of the Corporation's revenue is derived from
commercial and retail business lending activities and investments. Although the
overall loan portfolio is diversified, the economy of Tippecanoe County is
heavily dependent on Purdue University, one of the area's largest employers, and
the economy of White and Jasper County is heavily dependent on the agricultural
industry. 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: Management must make estimates and assumptions in preparing
financial statements that affect the amounts reported therein and the
disclosures provided. These estimates and assumptions may change in the future
and future results could differ from these estimates. Estimates that are more
susceptible to change in the near term include the allowance for loan losses,
the fair value of securities and other financial instruments, and the
determination and carrying value of impaired loans.
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 reported at fair value,
with unrealized gains or losses included in other comprehensive income.
Realized gains or losses are determined based on the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premium or discount, is included in earnings.
Loans Held for Sale: The Bank sells certain fixed-rate first mortgage loans in
the secondary market on a servicing-released basis. Mortgage loans held for sale
are carried at the lower of cost or estimated market value determined on an
aggregate basis.
Loans: Interest on real estate, commercial and most installment loans is accrued
over the term of the loans based on the principal outstanding. The recognition
of interest income is discontinued when, in management's judgment, the interest
will not be collectible in the normal course of business. Loans are evaluated
for non-accrual when the loan is impaired or payments are past due over 90 days.
Interest received is recognized on the cash basis or cost recovery method until
qualifying for return to accrual status. Accrual is resumed when all
contractually due payments are brought current and future payments are
reasonably assured. The Bank defers loan fees, net of certain direct loan
origination costs. The net amount deferred is reported in the balance sheet as
part of loans and is recognized into interest income over the term of the loan
using a method which approximates a level-yield.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of 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 judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
Loan impairment is recognized if a loan's full principal or interest payments
are not expected to be received. Loans considered to be impaired are reduced to
the present value of expected future cash flows using the loans' existing rate
or to the fair value of collateral if repayment is expected solely from the
collateral, by allocating a portion of the allowance for loan losses to such
loans. Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential real estate loans secured by one to four family
residences and installment loans to individuals for household, family and other
personal expenditures. Commercial and agricultural loans are evaluated
individually for impairment.
Premises, Furniture and Equipment: Premises, furniture and equipment are stated
at cost less accumulated depreciation. Depreciation expense is recognized over
the estimated useful lives of the assets, principally on the straight-line
method.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense.
Holding costs after acquisition are expensed.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amounts may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance. The Bank
retains possession of and control over pledged securities.
Intangibles: Intangibles include goodwill and core deposit intangibles. Goodwill
is amortized on the straight-line method over 15 to 25 years, and core deposit
is amortized on an accelerated method over 10 years. Intangibles are assessed
for impairment based on estimated undiscounted cash flows, and written down if
necessary.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Opinion 25, with expense reported only if options are granted below
market price at grant date. Pro forma disclosures of net income and earnings per
share are provided as if the fair value method of Financial Accounting Standard
No. 123 were used for stock-based compensation.
Income Taxes: Deferred tax liabilities and assets are determined at each balance
sheet date. They are measured by applying enacted tax laws to future taxable
income or expense resulting from differences in the financial statement and tax
basis of assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Earnings Per Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
financial statements.
D-29
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flows: Cash and cash equivalents are defined to include cash
on hand, amounts due from banks, and federal funds sold. The Corporation reports
net cash flows for customer loan transactions, deposit transactions, and
short-term borrowings.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay.
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 judgment 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.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are now such matters that will have
a material effect on the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of equity.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
Industry Segments: Internal financial information is primarily reported and
aggregated in three lines of business, banking, mortgage banking and trust
services.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. Adoption of this
standard on January 1, 2001 did not have a material effect on the financial
statements.
Reclassifications: Some items in the prior financial statements were
reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities are as follows at December 31,
2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
SECURITIES AVAILABLE-FOR-SALE
U.S. Government and its agencies $ 4,201 $ 10 $ (18) $ 4,193
Obligations of states and political
subdivisions 30,880 418 (286) 31,012
Corporate obligations 3,953 48 - 4,001
Mortgage-backed and other
asset-backed securities 37,699 58 (652) 37,105
Other securities 2,560 515 (529) 2,546
------------ ------------ ------------ ------------
$ 79,293 $ 1,049 $ (1,485) $ 78,857
============ ============ ============ ============
Securities Held-to-Maturity
Obligations of states and political
subdivisions $ 4,484 $ 98 $ (2) $ 4,580
============ ============ ============ ============
The amortized cost and fair values of securities are as follows at December 31,
1999:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
SECURITIES AVAILABLE-FOR-SALE
U.S. Government and its agencies $ 5,207 $ - $ (202) $ 5,005
Obligations of states and political
subdivisions 28,785 10 (1,527) 27,268
Corporate obligations 2,000 - (27) 1,973
Mortgage-backed and other
asset-backed securities 44,402 35 (1,549) 42,888
Other securities 2,567 21 - 2,588
------------ ------------ ------------ ------------
$ 82,961 $ 66 $ (3,305) $ 79,722
============ ============ ============ ============
Securities Held-to-Maturity
Obligations of states and political
subdivisions $ 4,712 $ 40 $ (43) $ 4,709
============ ============ ============ ============
Gross gains of $2, $35 and $6 and gross losses of $14, $179 and $0 were realized
on sales of securities available-for-sale in 2000, 1999 and 1998.
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated market value of securities at December 31,
2000, by contractual maturity, are shown below. Securities not due at a single
maturity date are shown separately.
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- ---------- -----
Due in 1 year or less $ - $ - $ 415 $ 415
Due after 1 year through
5 years 6,805 6,826 1,353 1,394
Due after five years through
10 years 10,730 10,754 1,632 1,686
Due after 10 years 24,059 24,172 1,084 1,085
------------ ------------ ------------ ------------
Subtotal 41,594 41,752 4,484 4,580
Mortgage-backed and other asset-
backed securities 37,699 37,105 - -
------------ ------------ ------------ ------------
Total $ 79,293 $ 78,857 $ 4,484 $ 4,580
============ ============ ============ ============
Securities with a carrying value of $57,405 and $28,206 at December 31, 2000 and
1999 were pledged to secure public deposits and repurchase agreements. See Note
8 regarding additional securities pledges.
At December 31, 2000 and 1999, mortgage-backed securities include collateralized
mortgage obligations (CMO's) and real estate mortgage investment conduits
(REMIC's) with an amortized cost of $17,295 and $20,256 and fair value of
$16,753 and $19,144, all of which are issued by U.S. Government agencies. At
December 31, 2000 and 1999, approximately $8,481 and $8,432 are variable rate,
with the remainder fixed rate.
D-30
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
Loans are comprised of the following as of December 31:
2000 1999
---- ----
Commercial and agricultural loans $ 215,087 $ 192,760
Real estate construction 54,768 47,375
Residential real estate loans 212,190 197,181
Installment loans to individuals 50,696 51,754
Commercial paper 4,984 -
------------ ------------
Total $ 537,725 $ 489,070
============ ============
Non-performing loans consist of the following at December 31:
2000 1999
---- ----
Loans past due 90 days or more $ 1,052 $ 584
Non-accrual loans 2,718 622
Restructured loans 55 114
------------ ------------
Total $ 3,825 $ 1,320
============ ============
Information regarding impaired loans is as follows:
2000 1999
---- ----
Year-end impaired loans
With no allowance for loan losses allocated $ 25 $ 70
With allowance for loan losses allocated 5,151 576
Amount of the allowance allocated 1,658 151
Average balance of impaired loans during the year 2,885 697
Interest income recognized during impairment 55 3
Cash-basis interest income recognized 41 3
The Bank had $34 and $14 of loans on non-accrual at December 31, 2000 or 1999
that management did not deem to be impaired.
Certain directors and officers of the Corporation and Bank were customers of the
Bank in the ordinary course of business. Loan activity with these related
parties is as follows:
Balance as of January 1, 2000 $ 989
Change in persons included -
New loans 231
Loan payments (310)
------------
Balance as of December 31, 2000 $ 910
============
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
2000 1999 1998
---- ---- ----
Balance, January 1 $ 4,618 $ 4,241 $ 3,464
Provision charged to operations 1,200 1,060 980
Loans charged-off (877) (829) (411)
Recoveries on loans previously charged-off 130 146 208
------------ ------------ ------------
Balance, December 31 $ 5,071 $ 4,618 $ 4,241
============ ============ ============
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment by major category follows:
2000 1999
---- ----
Land $ 870 $ 870
Buildings and improvements 8,782 8,468
Leasehold improvements 1,786 1,296
Furniture and equipment 9,781 9,922
------------ ------------
Total 21,219 20,556
Accumulated depreciation (9,866) (9,973)
------------ ------------
Premises, furniture and equipment, net $ 11,353 $ 10,583
============ ============
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Time deposits of $100 or greater totaled $53,514 and $38,665 at December 31,
2000 and 1999.
At December 31, 2000, the scheduled maturities of time deposits are as follows:
2001 $ 147,135
2002 89,613
2003 34,173
2004 2,633
2005 2,401
Thereafter 492
------------
Total $ 276,447
============
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of the following at year-end:
2000 1999
---- ----
Balance of repurchase agreements outstanding $ 54,275 $ 24,645
Balance of treasury tax and loan open-end note 1,297 2,628
------------ ------------
Total short-term borrowings $ 55,572 $ 27,273
============ ============
At December 31, 2000 and 1999, the Corporation had $1,054 and $240 in related
party repurchase agreements.
NOTE 8 - FHLB ADVANCES AND NOTE PAYABLE
FHLB advances and note payable outstanding at December 31 consist of the
following:
2000 1999
---- ----
Federal Home Loan Bank advances; annual principal payments; various
maturities with final maturity May 15, 2008; interest payable monthly at
various fixed interest rates from 5.45% - 6.82%; secured by a blanket
pledge of the Bank's obligations of the U.S. Government and U.S. Government
agencies and one-to-four family residential mortgage loans. $ 8,737 $ 9,527
Federal Home Loan Bank advances; principal callable one year from date of
advance and quarterly thereafter, otherwise, principal payments due at
maturity, with final maturities in 2002 and 2010; interest payable monthly
at various fixed interest rates from 4.98%-6.20%; secured by a blanket
pledge of the Bank's obligations of the U.S. Government and U.S. Government
agencies and one-to-four family residential mortgage loans. 27,000 20,500
------------ ------------
Total FHLB advances 35,737 30,027
Note payable to Northern Trust Company; quarterly principal payments of $350
required; matures March 31, 2006; interest payable monthly at a variable rate,
which is currently 8.28% based on the Federal Funds rate plus an applicable
margin based on the Corporation's existing capital ratios; obligation is
unsecured but subject to various covenants, including defined minimum return on
average assets, tangible net worth, capital ratios, loan loss allowance to
non-performing loans ratio, and maximum non-performing assets. At year-end, the
Corporation was in compliance with all covenants. 11,550 12,950
------------ ------------
Total $ 47,287 $ 42,977
------------ ------------
D-31
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Annual principal payments required are as follows:
2001 $ 2,155
2002 7,399
2003 4,426
2004 1,479
2005 1,485
Thereafter 30,343
------------
Total FHLB advances and note payable $ 47,287
============
NOTE 9 - EMPLOYEE BENEFIT PLANS
The following sets forth the defined benefit pension plan's funded status and
amount recognized in the balance sheet at December 31 (amounts computed as of
September 30, 2000 and 1999):
2000 1999
---- ----
Change in benefit obligation:
Beginning benefit obligation $ 12,626 $ 12,240
Service cost 783 647
Interest cost 928 812
Actuarial (gain) loss (503) (648)
Benefits paid (520) (425)
--------------- --------------
Ending benefit obligation 13,314 12,626
Change in plan assets, at fair value:
Beginning plan assets 16,603 15,199
Actual return 258 1,829
Employer contribution - -
Benefits paid (520) (425)
--------------- --------------
Ending plan assets 16,341 16,603
--------------- --------------
Funded status 3,027 3,977
Unrecognized net actuarial (gain) loss (382) (1,134)
Unrecognized prior service cost 19 20
Unrecognized transition asset (631) (782)
--------------- --------------
Prepaid benefit cost $ 2,033 $ 2,081
=============== ==============
The components of pension expense and related actuarial assumptions were as
follows.
2000 1999 1998
---- ---- ----
Service cost $ 783 $ 647 $ 612
Interest cost 928 812 803
Expected return on plan assets (1,513) (1,386) (1,341)
Amortization of prior service cost 2 2 2
Amortization of transition asset (151) (151) (151)
-------------- --------------- --------------
$ 49 $ (76) $ (75)
============== =============== ==============
Discount rate on benefit obligation 7.50% 7.50% 6.75%
Long-term expected rate of return
on plan assets 9.25 9.25 9.25
Rate of compensation increase 4.00 4.00 4.00
At December 31, 2000 and 1999, the plan's assets include Lafayette
Bancorporation common stock of $582 and $1,028. At December 31, 2000 and 1999
the plan's assets also included Lafayette Bank and Trust Company certificates of
deposit of $436 and $421.
NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)
The Bank maintains a retirement savings plan covering substantially all
employees. The plan requires employees to complete one year of service and be 21
years of age before entering the plan. The plan allows for Bank contributions at
an annually determined matching percentage of the first 4% of employee salary
contributions, as well as an annual discretionary contribution. Total 401(k)
contributions charged to expense were $161, $140 and $116 for 2000, 1999 and
1998.
The Bank maintains a deferred compensation plan for the benefit of certain
directors. Under the plan, the Bank agrees, in return for the directors
deferring the receipt of a portion of their current compensation, to pay a
retirement benefit computed as the amount of the compensation deferred plus
accrued interest at a variable rate. Accrued benefits payable totaled $1,289 and
$1,049 at December 31, 2000 and 1999. Deferred compensation expense was $106 for
2000, and $90 for 1999 and 1998. In conjunction with the plan formation, the
Bank purchased life insurance on the directors. In November 2000 the Bank
purchased $2,995 in additional life insurance coverage. The cash surrender value
of that insurance is carried as an other asset on the consolidated balance
sheet, and was approximately $6,834 and $3,678 at December 31, 2000 and 1999.
NOTE 10 - POSTRETIREMENT BENEFITS
The Bank sponsors a postretirement benefit plan which provides defined medical
benefits. Retirees contribute an amount equal to their individual applicable
premium to provide the coverage, less 30%, which is paid monthly by the Bank.
Retirees must pay 100% of medical premiums for all dependent coverage. The plan
is not funded and has no assets.
NOTE 10 - POSTRETIREMENT BENEFITS (Continued)
The following sets forth the plan's benefit obligation and amounts recognized in
the balance sheet at December 31:
2000 1999
---- ----
Change in postretirement benefit obligation:
Beginning benefit obligation $ 550 $ 494
Unrecognized net actuarial (gain) loss (159) -
Service cost 35 31
Interest cost 38 34
Benefits paid, net (10) (9)
------------ ------------
Ending benefit obligation 454 550
Unrecognized net gain 302 153
------------ ------------
Accrued benefit obligation $ 756 $ 703
============ ============
Components of net periodic postretirement benefit cost as of December 31:
2000 1999 1998
---- ---- ----
Service cost $ 35 $ 31 $ 28
Interest cost 38 34 31
Amortization of unrecognized gain (10) (11) (14)
------------ ------------ ------------
Benefit cost $ 63 $ 54 $ 45
============ ============ ============
For measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits assumed was 8% for 2000, and 11.5% for 1999 and
1998, with the rate assumed to decrease to 6% over the next two years in the
2000 calculation, and to 5.5% over the next two years in the 1999 and 1998
calculation. The health care cost trend is a significant assumption. However,
either an increase or decrease in the assumed health care cost trend rates by 1%
in each year would affect the accumulated postretirement benefit obligation as
of December 31, 2000 and the aggregate service and interest cost components of
net periodic postretirement benefit cost for the year then ended by amounts not
considered to be material.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8% for 2000, and 7% for 1999 and 1998.
NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN
The Corporation maintains an Officers' Stock Appreciation Rights Plan for
granting rights to certain officers, under which all available rights have been
granted. Upon exercise of a stock appreciation right, the holder may receive
cash equal to the excess of the fair market value of common stock at the date of
exercise over the option price. Stock appreciation rights are vested at 20% per
year and must be exercised within 10 years of grant. The plan expires May 2002.
Granted rights outstanding were fully vested and consisted of 38,105 at an
option price of $3.66 for 2000, and 54,605 at an option price of $3.66 for 1999.
D-32
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2000, 16,500 rights were exercised when the fair market value was $23.18 per
share. In 1999, 18,150 rights were exercised when the fair market value was
$24.62 per share. The aforementioned amounts of rights and prices are adjusted
for stock dividends and splits. Compensation expense (benefit) charged to
operations in 2000, 1999 and 1998 was ($376), $14 and $450 and is based on an
increase (decrease) in market value. The liability at December 31, 2000 and 1999
was $356 and $1,053.
The Corporation has established two nonqualified stock option plans to provide
stock options to directors and key members of management. One plan was adopted
in 1995 ("1995 Plan") and the other in 1998 ("1998 Plan"). There are no shares
of common stock remaining available for grant under the 1995 Plan. The total
number of shares of common stock remaining available for grant to directors and
management under the 1998 Plan is 4,967 and 37,675, respectively. All shares for
both plans were available for grant at a price equal to the market price of the
stock at the date of grant.
Under the 1995 Plan, options granted to directors at the effective date are
exercisable any time after the date of grant, and options granted to directors
elected after the effective date are exercisable after two years. Under the 1998
Plan, options granted to directors at the effective date and directors elected
after the effective date are exercisable after two years. Options granted to
management under both plans become 20% exercisable after one year and 20% each
subsequent year. Both plans are effective for five years and options must be
exercised within ten years from the date of grant.
A summary of the Corporation's stock option activity, and related information
for the years ended December 31, follows (adjusted for stock dividends and
splits):
----------2 0 0 0--------- -----------1 9 9 9------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding beginning of year 215,337 $ 13.75 227,427 $ 12.89
Granted 20,075 15.23 14,834 24.70
Exercised (9,144) 11.37 (17,166) 11.26
Forfeited (8,441) 15.69 (9,758) 14.72
----------- ------------ ----------- --------------
Outstanding end of year 217,827 $ 13.91 215,337 $ 13.75
=========== ============ =========== ==============
Exercisable at end of year 159,867 $ 12.94 134,309 $ 12.00
=========== ============ =========== ==============
Weighted average fair value per
option granted during the year $ 2.19 $ 3.98
Options outstanding at December 31, 2000 include 169,479 with exercise prices
ranging from $10.39 to $15.23 (weighted average exercise price of $11.77) and a
weighted average remaining life of 6.23 years; and 48,348 with exercise prices
ranging from $17.63 to $24.70 (weighted average exercise price of $21.40) and a
weighted average remaining life of 8.27 years. Options exercisable at December
31, 2000 include 127,791 with exercise prices ranging from $10.39 to $13.34
(weighted average exercise price of $11.07); and 32,076 with exercise prices
ranging from $17.63 to $24.70 (weighted average exercise price of $20.39).
Pro forma information regarding net income and earnings per share has been
determined as if the Corporation had accounted for its stock options under the
fair value method. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for the years 2000, 1999 and 1998, respectively: risk-free
interest rates of 6.7%, 5.4% and 5.6%; dividend yields of 3% for 2000 and 2% for
1999 and 1998, respectively; volatility factors of the expected market price of
the Corporation's common stock of .24, .13 and .16; and a weighted average
expected life of the options of five years for management options and two years
for directors' options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Corporation's pro
forma information follows (in thousands except for earnings per share
information):
2000 1999 1998
---- ---- ----
Pro forma net income $ 6,859 $ 6,270 $ 5,242
Pro forma earnings per share
Basic $ 1.74 $ 1.59 $ 1.33
Diluted $ 1.72 $ 1.55 $ 1.30
In future years, the pro forma effect of not applying this standard may increase
if additional options are granted.
NOTE 12 - INCOME TAXES
Income taxes consist of the following:
2000 1999 1998
---- ---- ----
Currently payable $ 3,498 $ 3,004 $ 3,085
Deferred income taxes (benefit) 3 (50) (385)
Non-qualified stock option benefit
allocated to additional paid-in capital 13 73 11
------------ ------------ ------------
Total $ 3,514 $ 3,027 $ 2,711
============ ============ ============
The following is a reconciliation of statutory federal income taxes and the
amount computed by applying the statutory rate of 34% to income before income
taxes:
2000 1999 1998
---- ---- ----
Statutory rate applied to income before
income taxes $ 3,546 $ 3,188 $ 2,750
Add/(deduct)
Tax exempt interest income (486) (430) (337)
State tax expense (net of federal benefit) 474 417 358
Other (20) (148) (60)
------------ ------------ ------------
Total $ 3,514 $ 3,027 $ 2,711
============ ============ ============
The net deferred tax asset reflected in the consolidated balance sheet is
comprised of the following components as of December 31:
2000 1999
---- ----
Deferred tax assets
Allowance for loan losses $ 1,380 $ 1,053
Accrued stock appreciation rights 139 417
Accrued post-retirement benefit obligation 426 372
Deferred compensation 470 381
Deferred loan fees 57 42
Net unrealized loss on securities available-for-sale 173 1,283
------------ ------------
Total tax assets 2,645 3,548
Deferred tax liabilities
Depreciation (341) (280)
Net pension benefit (795) (825)
Intangible asset amortization (186) (93)
Other (248) (162)
------------ ------------
Total deferred tax liabilities (1,570) (1,360)
Valuation allowance - -
------------ ------------
Net deferred tax asset $ 1,075 $ 2,188
============ ============
D-33
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - PER SHARE DATA
The following table illustrates the computation of basic and diluted earnings
per share. Weighted average shares outstanding have been restated for all
periods for stock splits and dividends.
2000 1999 1998
---- ---- ----
Basic earnings per share
Net income $ 6,916 $ 6,351 $ 5,377
Weighted average shares outstanding 3,950,297 3,940,024 3,940,123
-------------- --------------- --------------
Basic earnings per share $ 1.75 $ 1.61 $ 1.36
============== ============== ==============
Diluted earnings per share
Net income $ 6,916 $ 6,351 $ 5,377
Weighted average shares outstanding 3,950,297 3,940,024 3,940,123
Diluted effect of assumed exercise
of stock options 35,224 94,364 87,137
-------------- --------------- --------------
Diluted average shares outstanding 3,985,521 4,034,388 4,027,260
-------------- --------------- --------------
Diluted earnings per share $ 1.74 $ 1.57 $ 1.34
============== ============== ==============
NOTE 14 - CAPITAL REQUIREMENTS
The Corporation and Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Capital adequacy guidelines
and prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgements by regulators. Failure to meet capital
requirements can initiate regulatory action.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined).
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, the institution may be required to limit capital
distributions, limit asset growth and expansion, and prepare capital restoration
plans.
On March 12, 1999 the Corporation's wholly-owned subsidiary bank acquired three
branches in Jasper County, Indiana. As a result of this transaction consolidated
and bank-only capital levels were reduced. The Corporation borrowed $14,000 and
contributed $13,000 to the Bank in order for the bank to maintain its
well-capitalized status. As of December 31, 2000, the Bank was categorized as
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. The Corporation was categorized as undercapitalized as of December 31,
1999, as the total capital ratio was slightly below the minimum required level
for capital adequacy purposes. The Corporation returned to adequately
capitalized status as of March 31, 2000 and has maintained that status through
December 31, 2000. Although the Corporation's capital was slightly below the
minimum at December 31, 1999, no corrective regulatory action was initiated by
the banking regulatory authorities and management anticipates maintaining its
adequately capitalized status in the foreseeable future.
The actual capital amounts and ratios are presented in the following table (in
millions) for the Corporation and the Bank.
Minimum Required To
Minimum Required Be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2000
Total capital to risk weighted assets
Consolidated $ 45.1 8.33% $ 43.3 8.00% $ 54.1 10.00%
Lafayette Bank and Trust 55.5 10.19 43.6 8.00 54.5 10.00
Tier 1 capital to risk weighted assets
Consolidated 40.0 7.40 21.7 4.00 32.5 6.00
Lafayette Bank and Trust 50.5 9.26 21.8 4.00 32.7 6.00
Tier 1 capital to average assets
Consolidated 40.0 5.79 27.7 4.00 34.6 5.00
Lafayette Bank and Trust 50.5 7.29 27.7 4.00 34.6 5.00
1999
Total capital to risk weighted assets
Consolidated $ 38.6 7.99% $ 38.7 8.00% $ 48.3 10.00%
Lafayette Bank and Trust 50.2 10.33 38.9 8.00 48.6 10.00
Tier 1 capital to risk weighted assets
Consolidated 34.0 7.04 19.3 4.00 29.0 6.00
Lafayette Bank and Trust 45.6 9.38 19.4 4.00 29.1 6.00
Tier 1 capital to average assets
Consolidated 34.0 5.42 25.1 4.00 31.4 5.00
Lafayette Bank and Trust 45.6 7.22 25.2 4.00 31.5 5.00
The Bank is also subject to state regulations restricting the amount of
dividends payable to the Corporation. At December 31, 2000, the Bank had $7,979
of retained earnings available for dividends under these regulations.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases branch facilities under operating leases expiring in various
years through 2007. Expense for leased premises was $281, $244 and $219 for
2000, 1999 and 1998. Future minimum lease payments are as follows:
2001 $ 282
2002 282
2003 261
2004 222
2005 161
Thereafter 90
------------
Total $ 1,298
============
In the ordinary course of business, the Bank has loans, commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the consolidated balance sheet. The Bank's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Bank uses the
same credit policy to make such commitments as it uses for on-balance sheet
items.
D-34
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, off-balance sheet financial instruments whose contract amount
represents credit risk are summarized as follows:
2000 1999
---- ----
Unused lines of credit $ 64,987 $ 59,753
Commitments to make loans 7,229 10,987
Standby letters of credit 1,585 4,235
Commercial letters of credit - 21
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower, and may include accounts receivable, inventory, property, land and
other items. These commitments are generally variable rate or carry a term of
one year or less.
The cash balance required to be maintained on hand or on deposit with the
Federal Reserve was $9,639 and $9,434 at December 31, 2000 and 1999. These
reserves do not earn interest.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of the Corporation's financial
instruments as of December 31 are as follows:
-----------2 0 0 0--------- -----------1 9 9 9---------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
Cash and cash equivalents $ 73,472 $ 73,472 $ 30,570 $ 30,570
Securities available-for-sale 78,857 78,857 79,722 79,722
Securities held-to-maturity 4,484 4,580 4,712 4,709
Loans held for sale 5,949 6,058 3,174 3,204
Loans, net 532,654 524,222 484,452 479,127
FHLB stock 2,200 2,200 1,897 1,897
Accrued interest receivable 7,830 7,830 6,833 6,833
Financial liabilities
Deposits $ (578,297) $ (580,115) $ (522,247) $ (522,033)
Short-term borrowings (55,572) (55,572) (27,273) (27,273)
FHLB advances (35,737) (35,903) (30,027) (29,602)
Note payable (11,550) (11,550) (12,950) (12,950)
Accrued interest payable (2,772) (2,772) (2,249) (2,249)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. The carrying amount is considered to estimate fair value for cash and
short-term instruments, demand deposits, short-term borrowings, accrued
interest, and variable rate loans, deposits and note payable that re-price
frequently and fully. Securities fair values are based on quoted market prices
or, if no quotes are available, on the rate and term of the security and on
information about the issuer. For loans held for sale, the fair value of loans
held for sale is based on quoted market prices. For commercial, real estate,
consumer, and other loans, fair value is estimated by discounting future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. FHLB stock is
restricted in nature and is not actively traded on a secondary market and the
carrying amount is a reasonable estimate of fair value. The fair value of
fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. For FHLB advances, fair
value is estimated using rates currently available to the Corporation for debt
with similar terms and remaining maturities. The estimated fair value for
off-balance sheet loan commitments approximates carrying value and are not
considered significant to this presentation.
NOTE 17 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets, statements of income and cash
flows for the parent company:
CONDENSED BALANCE SHEETS
December 31
2000 1999
---- ----
ASSETS
Cash on deposit with subsidiary $ 1,901 $ 2,568
Investment in bank 63,221 57,350
Other assets 265 490
------------ ------------
$ 65,387 $ 60,408
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 11,550 $ 12,950
Other liabilities 1,036 1,673
Shareholders' equity 52,801 45,785
------------ ------------
$ 65,387 $ 60,408
============ ============
CONDENSED STATEMENTS OF INCOME
Years ended December 31
2000 1999 1998
---- ---- ----
Operating income
Dividends received from subsidiary bank $ 3,200 $ 2,960 $ 1,850
Interest income 74 75 26
------------ ------------ ------------
3,274 3,035 1,876
Operating expenses
Interest expense 1,007 749 -
Compensation expense (benefit) (376) 14 450
Other operating expenses 119 111 93
------------ ------------ ------------
750 874 543
Income before income taxes and equity in
undistributed earnings of bank 2,524 2,161 1,333
Income tax benefit 215 389 205
------------ ------------ ------------
Income before equity in undistributed earnings of bank 2,739 2,550 1,538
Equity in undistributed earnings of bank 4,177 3,801 3,839
------------ ------------ ------------
Net income 6,916 6,351 5,377
Other comprehensive income, net of tax 1,693 (1,914) 48
------------ ------------ ------------
Comprehensive income $ 8,609 $ 4,437 $ 5,425
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net income $ 6,916 $ 6,351 $ 5,377
Adjustments to reconcile net income to net cash
from operating activities
Amortization of deferred costs 6 6 6
Equity in undistributed earnings of bank (4,177) (3,801) (3,839)
Other assets and other liabilities (419) (160) 466
------------ ------------ ------------
Net cash from operating activities 2,326 2,396 2,010
Cash flows from financing activities
Proceeds from note payable - 14,000 -
Principal payments on note payable (1,400) (1,050) -
Capital contribution to subsidiary bank - (13,000) -
Common stock issued 117 278 69
Dividends paid (1,706) (1,540) (1,341)
Purchase of fractional shares (4) - -
Purchase of treasury shares - (4) (8)
------------ ------------ ------------
Net cash from financing activities (2,993) (1,316) (1,280)
------------ ------------ ------------
Net change in cash and cash equivalents (667) 1,080 730
Cash and cash equivalents at beginning of year 2,568 1,488 758
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,901 $ 2,568 $ 1,488
============ ============ ============
NOTE 18 - BRANCH ACQUISITION
In March 1999, the Bank purchased three branches located in DeMotte, Remington,
and Rensselaer, Indiana.
The fair value of assets acquired was $71,749 (consisting primarily of goodwill
and core deposit intangibles of $13,510, and commercial loans, net of a $563
purchase adjustment for credit quality), the fair value of liabilities assumed
was $117,015 (consisting primarily of customer deposits), and the Bank received
$45,266 of cash at settlement.
D-35
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses) on
securities available-for-sale $ 2,791 $ (3,314) $ 85
Less: reclassification adjustments for gains
and losses later recognized in income 12 144 (6)
-------------- --------------- --------------
Net unrealized gains (losses) 2,803 (3,170) 79
Tax effect (1,110) 1,256 (31)
-------------- --------------- --------------
Other comprehensive income $ 1,693 $ (1,914) $ 48
============== =============== ==============
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings per Share
Interest Net Interest Net ------------------
Income Income Income Basic Fully Diluted
------ ------ ------ ----- -------------
2000
First quarter $ 12,123 $ 6,084 $ 1,798 $ .46 $ .45
Second quarter 12,878 6,297 1,807 .46 .46
Third quarter 13,427 6,226 1,634 .41 .41
Fourth quarter 13,958 6,374 1,677 .42 .42
1999
First quarter $ 9,483 $ 4,911 $ 1,519 $ .38 $ .37
Second quarter 11,267 5,815 1,650 .42 .41
Third quarter 11,693 6,022 1,750 .44 .43
Fourth quarter 11,947 6,099 1,432 .37 .36
Earnings per share amounts have been restated for subsequent stock dividends and
splits.
NOTE 21 - SEGMENT INFORMATION
The Corporation's operations include three primary segments: banking, mortgage
banking, and trust services. Through its banking subsidiary's locations in
Tippecanoe, Jasper and White Counties, the Corporation provides traditional
community banking services, such as accepting deposits and making commercial,
residential and consumer loans. Mortgage banking activities include the
origination of residential mortgage loans for sale on a servicing released basis
to various investors. The Corporation's trust department provides both personal
and corporate trust services.
The Corporation's three reportable segments are determined by the products and
services offered. Loans, investments and deposits comprise the primary revenues
and expenses of the banking operation, net gains on loans sold account for the
revenues in the mortgage banking segment, and trust administration fees provide
the primary revenues in the trust department.
The following segment financial information has been derived from the internal
profitability reporting system utilized by management to monitor and manage the
financial performance of the Corporation. The accounting policies of the three
segments are the same as those described in the summary of significant
accounting policies. The Corporation evaluates segment performance based on
profit or loss before income taxes. The evaluation process for the mortgage
banking and trust segments include only direct expenses, while certain indirect
expenses, including goodwill, are absorbed by the banking operation. The
difference between segment totals and consolidated totals are holding company
amounts and income tax expense.
NOTE 21 - SEGMENT INFORMATION (Continued)
2000
- ---- Mortgage Total
Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 25,769 $ 146 $ - $ 25,915
Net gain on loan sales - 659 - 659
Other revenue 3,973 6 1,187 5,166
Non-cash items:
Depreciation 1,243 48 48 1,339
Provision for loan loss 1,200 - - 1,200
Segment profit, before taxes 10,655 67 385 11,107
Segment assets 734,581 6,122 179 740,822
1999
- ---- Mortgage Total
Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 23,310 $ 211 $ - $ 23,521
Net gain on loan sales - 942 - 942
Other revenue 2,959 90 1,134 4,183
Noncash items:
Depreciation 868 42 38 948
Provision for loan loss 1,060 - - 1,060
Segment profit, before taxes 9,328 459 390 10,177
Segment assets 641,132 3,325 202 644,659
1998
- ---- Mortgage Total
Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 17,239 $ 497 $ - $ 17,736
Net gain on loan sales - 1,255 - 1,255
Other revenue 2,685 12 964 3,661
Noncash items:
Depreciation 594 27 25 646
Provision for loan loss 980 - - 980
Segment profit, before taxes 7,636 760 209 8,605
Segment assets 473,019 10,224 167 483,410
D-36
Corporate Vision
The vision of Lafayette Bancorporation is to be the bank of choice in the
markets served by delivering value-added products and services which help
customers achieve financial success.
In fulfilling its vision, the corporation is committed to the following
long-term objectives:
Shareholders
Maximize shareholder value, while maintaining the safety and soundness of the
bank.
Customers
Provide customer satisfaction by delivering, through effective distribution
channels, competitively priced, profitable value-added products and services
that exceed customers' expectations.
Employees
Attract and retain competent employees by developing their skills and core
competencies, maintaining a challenging and satisfying working environment and
providing ample opportunities for career growth.
Community
Enhance the corporation's leadership role in the communities it serves both as
an outstanding financial institution and a committed corporate citizen.
Stock Information
The common stock of Lafayette Bancorporation, Lafayette, Indiana, is traded on
the OTC Bulletin Board under the trading symbol of LAYB (Cusip No. 505893-10-7).
At the close of business on December 31, 2000, there were 3,953,616 shares
outstanding held by approximately 500 shareholders.
Management does not have knowledge of the prices paid in all transactions and
has not verified the accuracy of those prices that have been reported. Because
of the lack of an established market for the common shares of the Corporation,
these prices would not necessarily reflect the prices which the shares would
trade in an active market.
Stock Information
Price Per Share Dividend
------------------------ --------
High Low Declared
----------- --------- --------
2000
- --------------
First Quarter $ 24 5/16 $ 13 3/8 $ .09
Second Quarter 16 3/8 10 .09
Third Quarter 14 9/16 12 1/16 .10
Fourth Quarter 15 3/4 12 1/4 .15
1999
- --------------
First Quarter $ 24 13/16 $ 23 3/16 $ .08
Second Quarter 24 13/16 23 5/8 .08
Third Quarter 25 23 5/16 .09
Fourth Quarter 24 11/16 22 11/16 .14
* Data adjusted for all stock splits and dividends, including a 10% stock
dividend to shareholders of record on October 2, 2000, paid on November 1,
2000.
The following firms have transacted business in Lafayette Bancorporation common
stock during the past year:
o City Securities Corporation
o Herzog, Herne, Geduld, Inc.
o Hill Thompson Magid, L.P.
o Howe Barnes Investments, Inc.
o JJP Hilliard, WL Lyons, Inc.
o McDonald & Company Securities, Inc.
o Merrill Lynch
o Monroe Securities, Inc.
o MPI Financial
o Raymond James Financial Services, Inc.
located at Lafayette Bank and Trust Company
o Salomon Smith Barney, Inc.
Transfer Agent
Lafayette Bancorporation
133 North Fourth Street
P.O. Box 1130
Lafayette, IN 47902-1130
D-37
Locations:
Jasper County
Demotte Branch Super Wal-Mart Branch
437 North Halleck 4205 Commerce Drive
Demotte Lafayette
(219) 987-5812 (765) 423-2027
Remington Branch Tippecanoe Court Branch
101 East Division Pay Less Super Market
Remington 2513 Maple Point Drive
(219) 261-2161 Lafayette
(765) 423-3821
Rensselaer Branch
200 West Washington Street Valley Lakes Branch
Rensselaer 1803 East 350 South
(219) 866-7121 Lafayette
(765) 423-3841
Rensselaer Motor Bank
200 North Van Rensselaer West Lafayette Branch
Rensselaer 2329 North Salisbury Street
(219) 866-1455 West Lafayette
(765) 423-7162
Tippecanoe County
26 East Branch
Downtown Main Office 3901 S.R. 26 East
133 North Fourth Street Lafayette
Lafayette (765) 423-7167
(765) 423-7100
o Investment Center
o Trust Dept o Insurance Agency
o Mortgage Loan Dept
o Commercial Loan Dept White County
Downtown Motor Bank Brookston Branch
401 North Fourth Street S.R. 18 West and HWY 43
Lafayette Brookston
(765) 423-7165 (765) 563-6400
Elmwood Avenue Branch Monticello Branch
Pay Less Super Market 116 East Washington Street
1904 Elmwood Avenue Monticello
Lafayette (219) 583-4666
(765) 423-3831
Reynolds Branch
Elston Branch U.S. 24 West
2862 U.S. 231 South Reynolds
Lafayette (219) 984-5471
(765) 423-7166
Super Wal-Mart Branch
Lafayette Square Branch 1088 West Broadway Street
2504 Teal Road Monticello
Lafayette (219) 583-3078
(765) 423-7164
Other ATMs
Market Square Branch
2200 Elmwood Avenue Simpson Amoco Food Shop
Lafayette 1209 Sagamore Parkway
(765) 423-7163 West Lafayette
[PICTURE]
Seated (LtoR): W.L. Hancock, Joseph A. Bonner, Robert J. Weeder Standing (LtoR):
Richard A. Boehning, Jeffrey L. Kessler, Vernon N. Furrer, Robert T. Jeffares,
Eric P. Meister Not Pictured: Roy D. Meeks
Lafayette Bancorporation:
Board of Directors
RICHARD A. BOEHNING
Of counsel affiliation with
Bennett, Boehning & Clary
JOSEPH A. BONNER
Chairman of the Board
W.L. HANCOCK
Retired General Manager,
Customer Operations, PSI
Energy, A CINERGY Company
ROY D. MEEKS
President, Nelmeeks, Inc.
ROBERT J. WEEDER
President and
Chief Executive Officer
Lafayette Bank and Trust Company:
Board of Directors
RICHARD A. BOEHNING
JOSEPH A. BONNER
Chairman of the Board
VERNON N. FURRER
Self-employed farmer
W.L. HANCOCK
ROBERT T. JEFFARES
Retired, Executive Vice
President and Chief Financial
Officer, Great Lakes Chemical
Corporation
JEFFREY L. KESSLER
Co-owner, Stall & Kessler's
Diamond Center
ROY D. MEEKS
ERIC P. MEISTER
Retired Central Division
Manager, GTE North, Inc.
ROBERT J. WEEDER
President and Chief Executive
Officer
Directors Emeriti
GORDON G. BEEMER
Lafayette Bancorporation and
Lafayette Bank and Trust
Company
GEORGE H. DEVAULT
Chairman Emeritus, Lafayette
Bancorporation and Lafayette
Bank and Trust Company
CHARLES E. MAKI
Lafayette Bank and Trust
Company
D-38
Officers
Executive
Joseph A. Bonner, Chairman of the Board
Robert J. Weeder, President and Chief Executive Officer
Robert J. Ralston, Executive Vice President/Senior Operations Officer and
Secretary/Treasurer
Michelle D. Turnpaugh, Assistant Vice President and Assistant Secretary
Lending
Tony S. Albrecht, Senior Vice President and Manager, Commercial Loan Department
E. James Brisco, Jr., Senior Vice President and Manager, Mortgage Loan
Department
Todd A. Burklow, Vice President, Commercial Loans
David L. Chadwell, Vice President, Commercial Loans
Sherry L. Keith, Vice President and Manager, Loan Operations
Malcolm E. Stair, Vice President, Mortgage Loans
Ellen W. Curtiss, Assistant Vice President and Commercial Loan Officer
Tamara L. Hopkins, Assistant Vice President/Senior Mortgage Underwriter and
Mortgage Processing Manager
Connie L. Snider, Assistant Manager and Loan Operations Officer
Gregory E. Younce, Loan Review/Compliance Officer
Lori L. Bollock, Credit Officer
Trust
Lawrence A. Anthrop, Senior Vice President and Senior Trust Officer
John K. Mandeville, Vice President and Agri-business Officer
Douglas M. Wehrman, Vice President
Kimberly A. Loveless, Assistant Vice President
Mary Margaret Smith, Assistant Vice President and Manager, Trust Operations
M. Teresa Swaim, Assistant Vice President, Trust Investments
Craig R. Bailey, Trust Officer
Sue E. Atkinson, Assistant Trust Administration Officer
Insurance Agency
Edward D. Geisler, Manager
Investment
Arthur D. Grisez, Assistant Vice President and Manager, Investment Center
Elizabeth M. Veatch, Operations Manager/ Registered Representative, Investment
Center
Finance
Marvin S. Veatch, Vice President and Controller
Marketing/Business Development
J. Marty Filogamo, Vice President and Senior Marketing Officer
Brenda Combs, Marketing and Promotions Officer
Jasper County Market
Hal D. Job, Regional President
Dave F. Schrum, Senior Vice President and Commercial Loan Officer
Stanley B. Haines, Vice President and Commercial Loan Officer
John T. Price, Vice President and Commercial Loan Officer
Susan L. Benner, Assistant Vice President and Banking Center Manager, Rensselaer
Barbara Blaha, Assistant Vice President and Banking Center Manager, DeMotte
Maureen C. Foster, Assistant Vice President and Banking Center Manager,
Remington
Larry D. Wiley, Assistant Vice President and Commercial Loan Officer
Cara L. Nesius, Operations Officer, Security Officer and Assistant Banking
Center Manager, Rensselaer
Melissa J. Scheurich, Loan Operations Officer
White County Market
Charles E. Wise, Senior Vice President and Branch Manager, Reynolds Office
Bradley C. Brookshire, Vice President and Branch Manager, Brookston
Claude P. Martin, Vice President
Joe D. Coffing, Assistant Vice President/Loan Officer and Assistant Security
Officer
Julie A. Thompson Reel, Assistant Vice President and Branch Operations Manager
Paulette A. Waymouth, Assistant Vice President and Branch Manager, Monticello
Constance S. Stimmel, Customer Service Officer
Retail Banking Division
Daniel J. Gick, Senior Vice President and Manager
Cynthia K. Cox, Vice President and Branch Administrator
Marvin G. Blessing, Installment Loan Officer
Christopher Williams, Collections Manager and Installment Loan Officer
Nancy A. Naville, Installment Loan Officer
Tracey R. Linder, Assistant Vice President and Branch Manager, Main Office
Douglas G. Long, Assistant Vice President and Branch Manager, 26 East
Roberta C. Salway, Assistant Vice President and Branch Manager, Valley Lakes
Julie A. Smith, Assistant Vice President and Branch Manager, Lafayette Square
Tamara M. Spriggs, Assistant Vice President
William L. Strasburger, Assistant Vice President and Branch Manager, Market
Square
Paula M. Swank, Assistant Vice President and Branch Manager, Elston
Sue A. Brown, Branch Manager, West Lafayette
Jill D. Carpenter, Branch Manager, Elmwood
Sarah Hatfield, Branch Manager, Lafayette Wal-Mart Branch
Ann L. Wells, Customer Service Officer and Assistant Branch Manager, Market
Square
Human Resources
Mitzi K. Thomas, Vice President and Director of Human Resources
Operations/Technology
Michael R. Elston, Vice President and Director of Information Technology
Carol S. Rosentreter, Vice President/Operations and Coordinator of Disaster
Recovery
Debora K. Banes, Vice President and Manager, Deposit Operations
Edward R. Boes, Vice President/Facilities Officer and Assistant Security Officer
Renee D. Reed, Vice President, Director of Deposit Operations and Security
Officer
Kathy L. Arceneaux, Operations Officer, Information Technology
Patricia M. Cassidy, Operations Officer
Anna L. Keith, Operations Officer
Karen L. Ross, Operations Officer
D-39
[PICTURE OF BUILDING]
Main Office
133 North Fourth Street
P.O. Box 1130
Lafayette, IN 47902-1130
(765) 423-7100
(800) 755-2491
Web Site
www.lbtonline.com
Annual Meeting
The Annual Meeting of the shareholders of Lafayette Bancorporation will be held
on Monday, April 9, 2001, at 2:30 p.m. in the Main Office Building at 133 North
Fourth Street, Lafayette, Indiana. A formal notice of this meeting, together
with a proxy statement, is mailed to shareholders. Shareholders are urged to
sign and return their proxies promptly to assure that the stock of the
Corporation will be represented as fully as possible at the meeting.
Independent Auditors
Crowe, Chizek and Company LLP
3815 River Crossing Parkway
Suite 300
Indianapolis, IN 46240-0977
Form 10-K Upon Request
Lafayette Bancorporation, upon request and without charge, will furnish
shareholders a copy of the Annual Report or Form 10-K as filed with the
Securities and Exchange Commission. Contact: Michelle Turnpaugh, Secretary.
D-40
Lafayette Bancorporation
2000
Lafayette Bancorporation
133 North Fourth Street
P.O. Box 1130 Lafayette, Indiana 47902-1130
(765) 423-7100 or (800) 755-2491
Fax: (765) 423-7280
Web: www.lbtonline.com
APPENDIX E
Lafayette Bancorporation
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
LAFAYETTE BANCORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1605492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
133 North 4th Street, Lafayette, Indiana 47902
(Address of principal executive offices) (Zip Code)
(765) 423-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1994 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes (x) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at November 9, 2001
Common Stock, without par value 3,961,589 shares
E-1
LAFAYETTE BANCORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets -- September 30, 2001 and December 31, 2000
Consolidated Statements of Income and
Comprehensive Income -- Three Months Ended September 30, 2001 and 2000
Consolidated Statements of Income and
Comprehensive Income -- Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 2001 and 2000
Notes to Consolidated Financial Statements -- September 30, 2001
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
b) Reports on Form 8-K
SIGNATURES
E-2
ITEM 1.
LAFAYETTE BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(Unaudited)
September 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from banks $ 22,416 $ 26,452
Interest-bearing balances with other financial institutions 14,942 21,820
Federal funds sold 8,800 25,200
--------- ---------
Total cash and cash equivalents 46,158 73,472
Securities available-for-sale (at market) 94,235 78,857
Securities held-to-maturity (market value $4,095
and $4,580) 3,918 4,484
Loans held for sale 9,253 5,949
Loans 555,238 537,725
Less: Allowance for loan losses (5,445) (5,071)
--------- ---------
Loans, net 549,793 532,654
Federal Home Loan Bank stock (at cost) 2,344 2,200
Premises, furniture and equipment, net 10,756 11,353
Intangible assets 12,470 13,007
Accrued interest receivable and other assets 18,626 19,171
--------- ---------
Total assets $ 747,553 $ 741,147
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 65,432 $ 70,866
Interest-bearing demand and savings deposits 259,973 230,984
Interest-bearing time deposits 278,055 276,447
--------- ---------
Total deposits 603,460 578,297
Short-term borrowings 32,519 55,572
FHLB advances 35,066 35,737
Note payable 10,500 11,550
Accrued interest payable and other liabilities 7,354 7,190
--------- ---------
Total liabilities 688,899 688,346
Shareholders' equity
Common stock, no par value: 20,000,000 shares authorized;
3,961,589 and 3,953,616 shares issued and outstanding 3,962 3,954
Additional paid-in capital 38,119 38,024
Retained earnings 15,461 11,086
Accumulated other comprehensive income 1,112 (263)
--------- ---------
Total shareholders' equity 58,654 52,801
--------- ---------
Total liabilities and shareholders' equity $ 747,553 $ 741,147
========= =========
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
E-3
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 30, 2001 and 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
2001 2000
---- ----
Interest income
Loans $11,747 $ 12,036
Taxable securities 838 826
Tax exempt securities 427 413
Other 361 152
------- --------
Total interest income 13,373 13,427
Interest expense
Deposits 5,468 6,069
Short-term borrowings 393 416
Other borrowings 677 716
------- --------
Total interest expense 6,538 7,201
------- --------
Net interest income 6,835 6,226
Provision for loan losses 300 300
------- --------
Net interest income after provision for loan losses 6,535 5,926
Noninterest income
Income from fiduciary activities 296 245
Service charges on deposit accounts 541 507
Net realized gain on securities -- (12)
Net gain on loan sales 527 193
Other service charges and fees 267 271
Investment product commissions 93 135
Other operating income 126 64
------- --------
Total noninterest income 1,850 1,403
------- --------
Noninterest expense
Salaries and employee benefits 3,156 2,776
Occupancy expenses, net 320 325
Equipment expenses 466 446
Intangible amortization 179 185
Other operating expenses 1,279 1,203
------- --------
Total noninterest expense 5,400 4,935
------- --------
Income before income taxes 2,985 2,394
Income taxes 966 760
------- --------
Net income 2,019 1,634
------- --------
Other comprehensive income, net of tax:
Change in unrealized gains / (losses) on securities 709 460
------- --------
Comprehensive income $ 2,728 $ 2,094
======= ========
Basic earnings per share $ .51 $ .41
======= ========
Diluted earnings per share $ .50 $ .41
======= ========
Dividend per share $ .11 $ .10
======= ========
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
E-4
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 2001 and 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
2001 2000
---- ----
Interest income
Loans $35,581 $ 34,276
Taxable securities 2,473 2,508
Tax exempt securities 1,279 1,239
Other 1,571 405
------- --------
Total interest income 40,904 38,428
Interest expense
Deposits 17,876 16,696
Short-term borrowings 1,291 1,241
Other borrowings 2,114 1,884
------- --------
Total interest expense 21,281 19,821
------- --------
Net interest income 19,623 18,607
Provision for loan losses 900 900
------- --------
Net interest income after provision for loan losses 18,723 17,707
Noninterest income
Income from fiduciary activities 890 878
Service charges on deposit accounts 1,551 1,373
Net realized gain on securities -- (12)
Net gain on loan sales 1,397 464
Other service charges and fees 793 796
Investment product commissions 308 574
Other operating income 376 216
------- --------
Total noninterest income 5,315 4,289
------- --------
Noninterest expense
Salaries and employee benefits 9,226 7,806
Occupancy expenses, net 965 907
Equipment expenses 1,395 1,279
Intangible amortization 537 555
Other operating expenses 3,732 3,536
------- --------
Total noninterest expense 15,855 14,083
------- --------
Income before income taxes 8,183 7,913
Income taxes 2,580 2,674
------- --------
Net income 5,603 5,239
------- --------
Other comprehensive income, net of tax:
Change in unrealized gains / (losses) on securities 1,375 543
------- --------
Comprehensive income $ 6,978 $ 5,782
======= ========
Basic earnings per share $ 1.41 $ 1.33
======= ========
Diluted earnings per share $ 1.40 $ 1.31
======= ========
Dividend per share $ .31 $ .28
======= ========
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
E-5
LAFAYETTE BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001 and 2000
(Dollar amounts in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
2001 2000
---- ----
Cash flows from operating activities
Net income $ 5,603 $ 5,239
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 1,092 983
Net amortization 572 546
Provision for loan losses 900 900
Net realized (gain) loss on sale of:
Securities -- 12
Other real estate (5) (5)
Change in assets and liabilities:
Loans originated for sale (93,225) (37,190)
Loans sold 89,921 36,818
Accrued interest receivable and other assets (244) (1,206)
Accrued interest payable and other liabilities 164 442
-------- --------
Net cash from operating activities 4,778 6,539
Cash flows from investing activities
Purchase of securities available-for-sale (79,877) (49,160)
Proceeds from sales of securities available-for-sale -- 2,375
Proceeds from maturities of securities available-for-sale 66,746 49,520
Proceeds from maturities of securities held-to-maturity 566 229
Loans made to customers, net of payments collected (18,314) (45,687)
Purchase of Federal Home Loan Bank stock (144) (303)
Property and equipment expenditures (495) (1,975)
Proceeds from sales of other real estate 162 470
-------- --------
Net cash from investing activities (31,356) (44,531)
Cash flows from financing activities
Net change in deposit accounts 25,163 35,434
Net change in short-term borrowings (23,053) 791
Proceeds from FHLB advances -- 17,000
Payments on FHLB advances (671) (16,204)
Payments on note payable (1,050) (1,050)
Common stock issued 103 98
Dividends paid (1,228) (1,113)
-------- --------
Net cash from financing activities (736) 34,956
-------- --------
Net change in cash and cash equivalents (27,314) (3,036)
Cash and cash equivalents at beginning of period 73,472 30,570
-------- --------
Cash and cash equivalents at end of period $ 46,158 $ 27,534
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 21,694 $ 19,386
Income taxes 3,040 2,610
Non-cash investing activity
Loans transferred to other real estate $ 298 $ 50
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
E-6
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The significant accounting policies followed by Lafayette Bancorporation (the
"Corporation") 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-Q
and may not include all information and footnotes normally disclosed for full
annual financial statements. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
reported have been included in the accompanying unaudited consolidated financial
statements and all such adjustments are of a normal recurring nature. Certain
prior period information has been reclassified to correspond with the 2001
presentation.
NOTE 2 - PENDING MERGER
On October 15, 2001, Lafayette Bancorporation signed a definitive agreement with
First Merchants Corporation, located in Muncie, Indiana, to merge with and into
First Merchants Corporation.
Under the terms of the agreement, upon the closing of this transaction,
Lafayette Bank and Trust Company will be a wholly-owned subsidiary of First
Merchants Corporation.
The transaction is subject to shareholder and regulatory approval and is
expected to be effective in the first quarter of 2002.
NOTE 3 - PER SHARE DATA
The following illustrates the computation of basic and diluted earnings per
share, and includes the weighted average number of shares used in calculating
earnings and dividends per share amounts for the periods presented. The weighted
average number of shares has been retroactively restated for stock dividends and
splits.
Nine Months Ended
-----------------
September 30, September 30,
2001 2000
---- ----
Basic earnings per share
Net income $ 5,603 $ 5,239
Weighted average shares outstanding 3,958,906 3,949,445
---------- ----------
Basic earnings per share $ 1.41 $ 1.33
========== ==========
Diluted earnings per share
Net income $ 5,603 $ 5,239
Weighted average shares outstanding 3,958,906 3,949,445
Dilutive effect of assumed exercise
of Stock Options 38,634 40,400
---------- ----------
Diluted average shares outstanding 3,997,540 3,989,845
---------- ----------
Diluted earnings per share $ 1.40 $ 1.31
========== ==========
E-7
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
September 30, September 30,
2001 2000
---- ----
Basic earnings per share
Net income $ 2,019 $ 1,634
Weighted average shares outstanding 3,961,589 3,952,256
---------- ----------
Basic earnings per share $ .51 $ .41
========== ==========
Diluted earnings per share
Net income $ 2,019 $ 1,634
Weighted average shares outstanding 3,961,589 3,952,256
Dilutive effect of assumed exercise
of Stock Options 48,139 25,089
---------- ----------
Diluted average shares outstanding 4,009,728 3,977,345
---------- ----------
Diluted earnings per share $ .50 $ .41
========== ==========
NOTE 4 - SECURITIES
The amortized cost and estimated fair values of securities are as follows at
September 30, 2001:
Amortized Estimated
Cost Fair Value
----------- -----------
Securities Available-for-Sale
U.S. Government and its agencies $ 3,000 $ 3,030
Obligations of states and political subdivisions 31,352 32,109
Corporate obligations 10,108 10,534
Mortgage-backed and other asset-backed securities 45,379 45,996
Other securities 2,554 2,566
----------- -----------
$ 92,393 $ 94,235
=========== ===========
Securities Held-to-Maturity
Obligations of states and political subdivisions $ 3,918 $ 4,095
=========== ===========
The amortized cost and estimated fair values of securities are as follows at
December 31, 2000:
Amortized Estimated
Cost Fair Value
----------- -----------
Securities Available-for-Sale
U.S. Government and its agencies $ 4,201 $ 4,193
Obligations of states and political subdivisions 30,880 31,012
Corporate obligations 3,953 4,001
Mortgage-backed and other asset-backed securities 37,699 37,105
Other securities 2,560 2,546
----------- -----------
$ 79,293 $ 78,857
=========== ===========
Securities Held-to-Maturity
Obligations of states and political subdivisions $ 4,484 $ 4,580
=========== ===========
E-8
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans are comprised of the following:
September 30, December 31,
2001 2000
---- ----
Commercial and agricultural loans $228,914 $215,087
Real estate construction loans 64,171 54,768
Residential real estate loans 210,843 212,190
Installment loans to individuals 46,323 50,696
Commercial paper 4,987 4,984
-------- --------
Total loans $555,238 $537,725
======== ========
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
2001 2000
---- ----
Balance, January 1 $ 5,071 $ 4,618
Provision charged to operations 900 900
Loans charged-off (605) (527)
Recoveries on loans previously charged-off 79 95
------- -------
Balance, September 30 $ 5,445 $ 5,086
======= =======
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of the following:
September 30, December 31,
2001 2000
---- ----
Repurchase agreements $29,719 $54,275
Treasury tax and loan open-end note 2,800 1,297
------- -------
Total short-term borrowings $32,519 $55,572
======= =======
E-9
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - SEGMENT INFORMATION
The Corporation's operations include three primary segments: banking, mortgage
banking, and trust. Through its banking subsidiary's locations in Tippecanoe,
White, and Jasper Counties, the Corporation provides traditional community
banking services, such as accepting deposits and making commercial, residential
and consumer loans. Mortgage banking activities include the origination of
residential mortgage loans for sale on a servicing released basis to various
investors. The Corporation's trust department provides both personal and
corporate trust services.
The Corporation's three reportable segments are determined by the products and
services offered. Interest on loans, investments and deposits comprise the
primary revenues and expenses of the banking operation, net gains on loans sold
account for the revenues in the mortgage banking segment, and trust
administration fees provide the primary revenues in the trust department.
The following segment financial information has been derived from the internal
profitability reporting system utilized by management to monitor and manage the
financial performance of the Corporation. The accounting policies of the three
segments are the same as those described in the summary of significant
accounting policies of the annual report. The Corporation evaluates segment
performance based on profit or loss before income taxes. The evaluation process
for the mortgage banking and trust segments include only direct expenses, while
certain indirect expenses, including goodwill, are absorbed by the banking
operation. The difference between segment totals and consolidated totals are
holding company amounts and income tax expense.
Quarter ended September 30:
2001 Mortgage Total
- ---- Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 6,894 $ 81 $ -- $ 6,975
Net gain on loan sales -- 527 -- 527
Other revenue 1,027 -- 296 1,323
Noncash items:
Depreciation 347 14 12 373
Provision for loan loss 300 -- -- 300
Segment profit 2,864 287 92 3,243
Segment assets 737,532 9,408 145 747,085
2000 Mortgage Total
- ---- Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 6,434 $ 35 $ -- $ 6,469
Net gain on loan sales -- 193 -- 193
Other revenue 965 -- 245 1,210
Noncash items:
Depreciation 324 13 12 349
Provision for loan loss 300 -- -- 300
Segment profit 2,646 (21) 62 2,687
Segment assets 682,097 3,700 191 685,988
E-10
LAFAYETTE BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Nine months ended September 30:
2001 Mortgage Total
- ---- Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 19,912 $ 207 $ -- $ 20,119
Net gain on loan sales -- 1,397 -- 1,397
Other revenue 3,027 1 890 3,918
Noncash items:
Depreciation 1,013 43 36 1,092
Provision for loan loss 900 -- -- 900
Segment profit 8,018 692 230 8,940
Segment assets 737,532 9,408 145 747,085
2000 Mortgage Total
- ---- Banking Banking Trust Segments
------- ------- ----- --------
Net interest income $ 19,201 $ 105 $ -- $ 19,306
Net gain on loan sales -- 464 -- 464
Other revenue 2,941 6 878 3,825
Noncash items:
Depreciation 912 35 36 983
Provision for loan loss 900 -- -- 900
Segment profit 7,993 85 312 8,390
Segment assets 682,097 3,700 191 685,988
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT
In 2001, new accounting guidance was issued that will, beginning in 2002, revise
the accounting for goodwill and intangible assets. Intangible assets with
indefinite lives and goodwill will no longer be amortized, but will periodically
be reviewed for impairment and written down if impaired. Additional disclosures
about intangibles assets and goodwill may be required. An initial goodwill
impairment test is required during the first six months of 2002. The
Corporation's management is currently evaluating the impact of this new
guidance.
E-11
ITEM 2.
LAFAYETTE BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Lafayette Bancorporation (the "Corporation") is a one-bank holding company
located in Lafayette, Indiana. The Corporation's wholly-owned subsidiary,
Lafayette Bank and Trust Company ("Bank") conducts business from its main office
and seventeen offices in Tippecanoe, White, and Jasper Counties, Indiana. The
Corporation provides a wide range of commercial and personal banking activities,
including accepting deposits; making commercial and consumer loans; originating
mortgage loans; providing personal and corporate trust services; providing
investment advisory and brokerage services; and providing auto, homeowners, and
other insurance products.
On October 15, 2001, Lafayette Bancorporation signed a definitive agreement with
First Merchants Corporation, located in Muncie, Indiana, to merge with and into
First Merchants Corporation. Under the terms of the agreement, upon the closing
of this transaction, Lafayette Bank and Trust Company will be a wholly-owned
subsidiary of First Merchants Corporation. The transaction is subject to
shareholder and regulatory approval and is expected to be effective in the first
quarter of 2002.
On March 14, 2001, the Corporation established a loan production office in
Flora, Indiana. This Carroll County Loan Center, which provides a full-range of
lending products, is currently staffed by four individuals. In order to meet all
the banking needs of Carroll County residents, the Corporation plans to open a
full-service branch in Flora later this year.
On March 15, 2000, the Corporation opened a full-service branch located in the
Super Wal-Mart in Monticello, Indiana. Also, on July 19, 2000, a similar
full-service branch was opened in the Super Wal-Mart in Lafayette, Indiana. Both
of these locations are open seven days a week to serve the Corporation's
customers.
The Corporation established a new mortgage line of business during the second
quarter of 2000, which assists customers in securing financing who do not meet
the qualifications of conventional or traditional mortgage loan programs. The
Mortgage Alternative Department only offers mortgage products, such as first and
second mortgages and lines of credit, that are secured by real estate. Loans
originated in this department are pre-approved for sale and are sold in the
secondary mortgage market with no servicing retained.
RESULTS OF OPERATIONS
Net Income
The Corporation earned $2,019, or $.51 per share for the third quarter of 2001
compared to $1,634, or $.41 per share for the third quarter of 2000. Net income
increased $364, or 6.9% to $5,603 for the nine month period ending September 30,
2001 compared to the same 2000 time period. Basic earnings per share were $1.41
and $1.33 for the nine month periods ending September 30, 2001 and 2000.
Although the Federal Reserve reduced interest rates a total of 75 basis points
during the third quarter, the Corporation's net interest margin increased
slightly when compared to the net interest margin during the second quarter of
2001. This increased was primarily caused by approximately 20% of the
Corporation's interest-bearing time deposits maturing and ultimately repricing
at significantly lower rates, given the 350 basis point reduction in interest
rates through the nine months ended September 30, 2001. Also contributing to
2001 earnings were increases in service charges, net gain on loan sales, and
other operating income. The increase in 2001 noninterest income was partially
offset by lower investment product commissions and higher noninterest expenses.
Salaries and employee benefits and occupancy and equipment expenses increased,
predominately due to the full-year effect in 2001 of the two Wal-Mart branches
and Mortgage Alternative Department, in addition to the Carroll County Loan
Center, located in Flora, Indiana, which was established in March 2001.
E-12
Return on average assets (ROA) and return on average equity (ROE) are summarized
below.
Three Months Ending Nine Months Ending
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
ROA 1.08% .96% 1.01% 1.05%
ROE 14.03% 13.11% 13.43% 14.52%
The increase in ROA and ROE for the three months ending September 30, 2001 was
primarily due to the increased net interest margin. Although the net interest
margin increased for the three months ending September 30, 2001, the lower net
interest margin for the nine months ending September 30, 2001 accounted for the
lower ROA and ROE for that period.
Net Interest Income
Net interest income is the most significant component of the Corporation's
earnings. Net interest income is the difference between interest and fees
realized on earning assets, primarily loans and securities, and interest paid on
deposits and other borrowed funds. 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
the nine months ended September 30, 2001 and 2000, net interest income was
$19,623 and $18,607, respectively. The 2001 amount was a $1,016, or 5.5%
increase over the prior year and was attributed to the combination of the volume
of earning assets increasing at a faster pace than interest-bearing liabilities,
along with the volume of interest-bearing liabilities that repriced at a
significantly lower rate during 2001. From September 30, 2000 to September 30,
2001, total average earning assets increased approximately $61,424, or 9.9%,
while total interest-bearing liabilities increased approximately $50,808, or
8.9%. Net interest income for the third quarter of 2001 increased $609, or 9.8%
from that same three month period ending September 30, 2000.
Total interest income for the nine month periods ending September 30, 2001 and
2000 was $40,904 and $38,428, respectively, an increase in 2001 of $2,476, or
6.4%. Total interest income for the third quarter of 2001 decreased $54, or .4%
from that same 2000 quarter. Interest and fees on loans increased $1,305, or
3.8% to $35,581 for the first nine months of 2001 compared to $34,276 for the
first nine months of 2000. For the third quarter of 2001, interest and fees on
loans decreased $289, or 2.4% compared to the third quarter of 2000. Although
the Corporation's average loan balances have increased approximately $21,873, or
4.1% from September 30, 2000 to September 30, 2001, the lower rate environment
that existed resulted in lower interest and fees on loans recorded during the
third quarter of 2001. Other interest income increased $235 and $1,171,
respectively, for the three and nine month periods ending September 30, 2001.
The Corporation continued to experience a high level of liquidity during the
third quarter, apparently due to the instability of consumer's confidence and
the prolonged downturn in the economy. Management believes customers have placed
their funds in high interest-bearing money market accounts and short-term
certificate of deposits, rather than investing such funds in the stock market.
Because management believes these funds are short-term in nature, the
Corporation's strategy is not to fund longer-term loans or investment securities
with these particular deposits.
Total interest expense for the nine month period ending September 30, 2001 and
2000 was $21,281 and $19,821, respectively. For the third quarter of 2001, total
interest expense decreased $663, or 9.2%, compared to the third quarter of 2000.
From September 30, 2000 to September 30, 2001, total average interest-bearing
liabilities, including short-term and long-term borrowings, increased $50,808,
or 8.9%. In general, the increased volume of interest-bearing liabilities led to
the higher interest expense recorded for the nine month period ending September
30, 2001. This increase, however, was significantly offset during the third
quarter as a result of approximately $55,000, or 19.7% of total time deposits
maturing and repricing downward approximately 200-300 basis points.
E-13
The following table summarizes the Corporation's net interest income (on a
tax-equivalent basis) for each of the periods presented. A marginal federal
income tax rate of 34% for each period was used.
Nine Months Change from
Ended September 30, Prior Period
2001 2000 Amount Percent
---- ---- ------ -------
Interest income $41,624 $39,094 $2,530 6.5%
Interest expense 21,281 19,821 1,460 7.4%
------- ------ -----
Net interest income $20,343 $19,273 $1,070 5.6%
======= ======= ======
Three Months Change from
Ended September 30, Prior Period
2001 2000 Amount Percent
---- ---- ------ -------
Interest income $13,611 $13,661 ($ 50) (.4%)
Interest expense 6,538 7,201 (663) (9.2%)
------- ------- ----
Net interest income $ 7,073 $ 6,460 $ 613 9.5%
======= ======= ====
The net interest margin, on a tax equivalent basis for the nine months ending
September 30, 2001 and 2000 was 3.93% and 4.24%, respectively.
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.
The consolidated provision for loan losses was $900 for the nine months ending
September 30, 2001 and 2000. The allowance for loan losses was $5,445 and $5,071
at September 30, 2001 and December 31, 2000, respectively. The allowance as a
percentage of loans was .98% and .94% at September 30, 2001 and December 31,
2000, respectively. Although net charge-offs increased $94, or 21.8% in 2001,
the provision for loan losses remained unchanged from that of the prior year
primarily due to only a slight 3.26% increase in the outstanding loan balances
during the current year.
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.
E-14
The following table indicated the composition of nonperforming loans:
September 30, December 31,
2001 2000
---- ----
Loans past due 90 days or more $ 543 $1,052
Nonaccrual loans 2,355 2,718
Restructured loans 27 55
------ ------
Total nonperforming loans $2,925 $3,825
====== ======
Management believes overall asset quality remains satisfactory, as nonperforming
loan totals have declined $900 since year-end. Loans past due 90 days or more
have declined $509 since December 31, 2000, with approximately 47% of that
balance change related to two mortgage loans being placed on nonaccrual status.
Likewise, nonaccrual loan balances have declined $363 since year-end. A majority
of the decrease related to one large commercial loan being removed from
nonaccrual status and a portion charged-off to the allowance for loan losses.
Total nonperforming loans as a percentage of assets declined to .39% at
September 30, 2001, compared to .52% at December 31, 2000.
Noninterest Income and Expense
Noninterest income totaled $5,315 for the first nine months of 2001 compared to
$4,289 for the same period in 2000, an increase of $1,026, or 23.9%. Noninterest
income for the third quarter of 2001 increased $447, or 31.9%, to $1,850
compared to the prior year.
Income from fiduciary activities increased for the first nine months and also
for the third quarter of 2001 when compared to the same 2000 time periods. The
higher fees recorded were a direct result of the increases recognized in the
trust and farm management services provided.
Service charges on deposit accounts comprise the largest component of
noninterest income. The $178, or 13.0% increase in revenue for the first nine
months of 2001 was attributed to the combination of a larger deposit base being
assessed fees, along with the full period effect of an increase in the fee
structure made in June 2000. For the third quarter of 2001, service charges on
deposit accounts increased $34, or 6.7%, compared to the prior year.
Net gain on loans originated and sold in the secondary mortgage market were
$1,397 and $464 for the nine months ending September 30, 2001 and 2000,
respectively, an increase of $933, or 201.1%. For the third quarter of 2001, net
gain on loans sold in the secondary mortgage market was $334, or 173.1%, higher
than the 2000 time period. The continued lower interest rate environment led to
additional new home purchases and refinancing activities of existing homeowners,
and the increase in market activity has also increased profit margins on loan
sales. Loan fundings for the nine months ended September 30, 2001 increased
$53,103, or 144.2% compared to the prior year, while fundings for the three
months ended September 30, 2001 rose $19,898, or 143.3% when compared to that
same time period one year earlier.
For customers of the Investment Center, a full service brokerage operation
offered exclusively through Raymond James Financial Services, Inc., member
NASD/SIPC, the lackluster performance of the stock market resulted in a decline
in investor activity. This decline led to a 46.3% and 31.1% decrease in
investment product commissions recorded for the nine and three month periods
ending September 30, 2001.
Other operating income increased $160, or 74.1%, to $376 for the first nine
months of 2001, while also increasing $62, or 96.9% for the third quarter of
2001 when compared to the corresponding prior year time periods. These increases
were attributed to the income earned on the additional $2,995 director's life
insurance coverage purchased in November 2000.
E-15
Noninterest expense totaled $15,855 for the first nine months of 2001, compared
to $14,083 for that same 2000 period, an increase of $1,772, or 12.6%. Total
noninterest expense for the third quarter of 2001 increased $465, or 9.4% from
the prior year.
Salaries and employee benefits expense was $9,226 for the nine months ending
September 30, 2001, an increase of $1,420, or 18.2% from the $7,806 recorded in
the first nine months of 2000. Total salaries and benefits expense for the third
quarter of 2001 increased $380, or 13.7%, to $3,156 compared to $2,776 recorded
for the three months ending September 30, 2000. The valuation of the stock
appreciation rights granted to certain senior executives accounted for a large
portion of the increases reported in each of these periods, as an increase of
$450 and $31 was recorded for the nine months and three months ending September
30, 2001, respectively. The remaining increases were predominately associated
with staff additions in the new Wal-Mart branches, the Mortgage Alternative
Department, and the Carroll County Loan Center.
Occupancy and equipment expenses increased $58, or 6.4% and $116, or 9.1%,
respectively for the nine months ending September 30, 2001. For the three months
ending September 30, 2001, occupancy expenses decreased $5, or 1.5%, while
equipment expenses increased $20, or 4.5%. Expenses associated with the Wal-Mart
branches, the Mortgage Alternative Department, and the Carroll County Loan
Center, such as rent, depreciation, and utilities, accounted for the majority of
the recorded increases.
Other operating expenses increased $196, or 5.5% to $3,732 for the first nine
months of 2001 compared to the same 2000 time period. For the third quarter,
other operating expenses increased $76, or 6.3%, to $1,279 compared to $1,203
for the three months ending September 30, 2000. Accounting for the majority of
the increases in both periods were higher advertising, marketing, and legal
expenses, along with increased operational costs of the new Carroll County Loan
Center, such as telephone and postage. Mortality costs associated with the
additional $2,995 of director's life insurance coverage purchased and increased
fees associated with higher ATM volumes also led to higher costs incurred.
Income Taxes
The Corporation's effective tax rate for the nine months ended September 30,
2001 and 2000 was 31.5% and 33.8%, respectively. The current year-to-date
effective tax rate is lower primarily due to a change in state tax law reflected
beginning in late 2000. For the three months ended September 30, 2001 and 2000,
the effective tax rate for the Corporation was 32.4% and 31.7% respectively.
FINANCIAL CONDITION
Total assets were $747,553 at September 30, 2001 compared to $741,147 at
December 31, 2000, an increase of $6,406. Investment securities, loans held for
sale, and net loans increased $14,812, $3,304, and $17,139, respectively, while
cash and cash equivalents and accrued interest receivable and other assets
decreased $27,314 and $545, respectively.
Total deposits increased $25,163 to $603,460 at September 30, 2001 compared to
$578,297 at December 31, 2000. Short-term borrowings, consisting primarily of
repurchase agreements, and FHLB advances decreased $23,053 and $671,
respectively, while quarterly principal repayments on the note payable totaled
$1,050.
Capital
The Corporation and Bank are subject to various regulatory capital guidelines as
required by federal and state banking agencies. These guidelines define the
various components of core capital and assign risk weights to various categories
of assets.
E-16
Tier 1 capital consists of shareholders' equity less goodwill and core deposit
intangibles, as defined by bank regulators. The definition of Tier 2 capital
includes the amount of allowance for loan losses which does not exceed 1.25% of
gross risk weighted assets. Total capital is the sum of Tier 1 and Tier 2
capital.
The minimum requirements under the capital guidelines are a 4.00% leverage ratio
(Tier 1 capital divided by average assets less intangible assets and unrealized
gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1 capital divided
by risk-weighted assets), and an 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)
required 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. If an institution is only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions, asset growth, and
expansion may be limited, and the institution may be required to submit a
capital restoration plan.
At September 30, 2001, 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 the Corporation's
consolidated liquidity, capital resources or operations.
The Corporation's actual consolidated capital amounts are presented in the
following table.
September 30, December 31,
2001 2000
---- ----
Tier 1 capital
Shareholders' equity $ 58,654 $ 52,801
Less: Intangibles (12,470) (13,007)
Net unrealized losses on available-for-sale
equity securities -- (14)
Add/less: Unrealized loss/(gain) on securities (1,112) 263
--------- ---------
TOTAL TIER 1 CAPITAL $ 45,072 $ 40,043
========= =========
Total capital
Tier 1 capital $ 45,072 $ 40,043
Allowable allowance for loan losses 5,445 5,071
--------- ---------
TOTAL CAPITAL $ 50,517 $ 45,114
========= =========
RISK WEIGHTED ASSETS $ 562,410 $ 541,362
========= =========
AVERAGE ASSETS $ 735,872 $ 692,178
========= =========
E-17
The Corporation and Bank's actual capital ratios and minimum required levels are
presented in the following table.
Actual ratios as of Minimum
September 30, December 31, Capital Adequacy Well-Capitalized
2001 2000 Requirement Requirement
---- ---- ----------- -----------
Tier I Capital
(to average assets)
Consolidated 6.12% 5.79% 4.00% 5.00%
Lafayette Bank and Trust 7.45% 7.29% 4.00% 5.00%
Tier I Capital
(to risk weighted assets)
Consolidated 8.01% 7.40% 4.00% 6.00%
Lafayette Bank and Trust 9.71% 9.26% 4.00% 6.00%
Total Capital
(to risk weighted assets)
Consolidated 8.98% 8.33% 8.00% 10.00%
Lafayette Bank and Trust 10.68% 10.19% 8.00% 10.00%
Management believes the Bank met all the capital requirements as of September
30, 2001 and December 31, 2000, and was well-capitalized under the regulatory
framework for prompt corrective action. The Corporation was adequately
capitalized as of September 30, 2001 and December 31, 2000. While the
Corporation's total capital status was below the well-capitalized category as a
result of the Jasper County branch acquisitions in 1999, capital ratios have
improved each quarter since the transaction occurred, and management anticipates
maintaining its adequately capitalized status for the foreseeable future. The
Federal Reserve Bank considers the holding company capital adequacy in
connection with any application activity which requires their approval. Further,
since the Corporation's capital levels are below the well-capitalized category,
the use of expedited Federal Reserve Bank procedures in any application activity
which requires their approval will not be available to the Corporation until it
once again becomes well-capitalized. Certain statements in this paragraph
relating to future capital levels of the Corporation and Bank are
forward-looking which may or may not be accurate due to the impossibility of
predicting future economic and business events, including the ability of the
Corporation to raise additional capital, if needed, as well as other factors
that are beyond the control of the Corporation.
Liquidity
The consolidated statement of cash flows illustrates the elements which gave
rise to the change in the Corporation's cash and cash equivalents for the nine
months ended September 30, 2001 and 2000. Including net income of $5,603, the
net cash from operating activities for the nine months of 2001 generated $4,778
of available cash. Net cash from investing activities utilized $31,356 of
available cash primarily as a result of $12,565 of net purchases of securities
and $18,314 of net loan fundings by the Corporation. Net cash from financing
activities utilized $736 of available cash as a result of an $25,163 increase in
deposits, offset by a $23,053 decrease in short-term borrowings, $1,050 of note
payable principal repayments, and $1,228 in dividends paid.
Total cash outflows for the nine-month period in 2001 exceeded cash inflows by
$27,314 resulting in a cash and cash equivalent balance of $46,158 at September
30, 2001.
E-18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk of the Corporation encompasses exposure to both liquidity and
interest rate risk and is reviewed quarterly by the Funds Management Committee
and the Board of Directors. There have been no material changes in the
quantitative and qualitative disclosures about market risks as of September 30,
2001 from the analysis and disclosures provided in the Corporation's Form 10-K
for the year ended December 31, 2000.
E-19
PART II. OTHER INFORMATION
Item 5. Other Events
On October 15, 2001, Lafayette Bancorporation signed a definitive
agreement with First Merchants Corporation, located in Muncie, Indiana, to
merge with and into First Merchants Corporation.
Under the terms of the agreement, upon the closing of this transaction,
Lafayette Bank and Trust Company will be a wholly-owned subsidiary of
First Merchants Corporation.
The transaction is subject to shareholder and regulatory approval and is
expected to be effective in the first quarter of 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No exhibits were filed with the submission of Form 10-Q for the
quarter ended September 30, 2001
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended
September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 2001 By /s/ Robert J. Weeder
-----------------------------------
Robert J. Weeder
President and CEO
Date: November 9, 2001 By /s/ Marvin S. Veatch
-----------------------------------
Marvin S. Veatch
Vice President and Controller
E-20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers of First Merchants
Corporation
First Merchants Corporation (First Merchants) is an Indiana corporation.
Section 23-1-37-1 et seq. of the Indiana Business Corporation Law contains
detailed provisions on indemnification of directors and officers of an Indiana
corporation against expenses, judgments, settlements, penalties and fines
incurred with respect to certain proceedings.
First Merchants' Articles of Incorporation, as amended, and By-Laws, as
amended, provide that First Merchants will indemnify any person who is or was a
director, officer or employee of First Merchants or of any other corporation for
which he is or was serving in any capacity at the request of First Merchants
against all liability and expense that may be incurred in connection with,
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 First Merchants 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 or employee of First
Merchants 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 or employee will be indemnified only
if the Board of Directors of First Merchants (acting by a quorum consisting of
directors who are not parties to or who have been wholly successful with respect
to such action) or independent legal counsel finds that he has met the standards
of conduct set forth above.
The directors and officers of First Merchants are covered by an insurance
policy indemnifying them against certain civil liabilities, including
liabilities under the federal securities laws, which might be incurred by them
in such capacity.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following Exhibits are being filed as part of this Registration
Statement except those which are incorporated by reference:
Exhibit No. Description of Exhibit Form S-4 Page
- ----------- ---------------------- -------------
1. None
2. Agreement of Reorganization and Merger............................(A)
3.a. First Merchants Corporation Articles of Incorporation and the
Articles of Amendment thereto.....................................(B)
b. First Merchants Corporation By-Laws and amendments thereto........(C)
II-1
4. First Merchants Corporation Undertaking with respect to Long-Term
Debt Instruments..................................................251
5. Opinion of Bingham Summers Welsh & Spilman, LLP (legality)........252
6-7. None
8. Opinion of Bingham Summers Welsh & Spilman, LLP (tax matters).....253
9. None
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 1994 Stock Option Plan.................(E)
d. First Merchants Corporation Change of Control Agreements......(B), (I)
e. First Merchants Corporation Unfunded Deferred Compensation
Plan.............................................................(F)
f. First Merchants Corporation Supplemental Executive Retirement
Plan and amendments thereto........................................(G)
g. First Merchants Corporation 1999 Long-term Equity Incentive
Plan.............................................................(H)
h. First Merchants Corporation Management Incentive Compensation
Program............................................................(I)
11-20. None
21. Subsidiaries of Registrant.........................................256
22. None
23.a. Consent of BKD, LLP................................................258
b. Consent of Crowe, Chizek and Company LLP...........................259
c. Consent of Bingham Summers Welsh & Spilman, LLP (legality).........(l)
d. Consent of Bingham Summers Welsh & Spilman, LLP (tax matters)......(l)
e. Consent of RBC Capital Markets.....................................260
24. Power of Attorney included in "Signatures" section.................245
25-98. None
99.a. Form of Proxy for Lafayette Bancorporation Shareholder Meeting.....260
b. Form of Proxy for First Merchants Corporation Shareholder
Meeting..........................................................261
c. Lafayette Bancorporation's Annual Report to Shareholders for
its fiscal year ended December 31, 2000...........................(J)
II-2
d. Lafayette Bancorporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001...................................(K)
e. Consent of Director Nominees ......................................263
f. Election Form for Lafayette Bancorporation Shareholders............264
(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 September 30,
2001 (as amended by Form 10-Q/A filed on December 19,
2001).
(D) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1996.
(E) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1993.
(F) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1996.
(G) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1997.
(H) Incorporated by reference to Registrant's Registration
Statement on Form S-8 (SEC File No. 333-80117)
effective on June 7, 1999.
(I) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 2000.
(J) Included as Appendix D to the Prospectus.
(K) Included as Appendix E to the Prospectus.
(1) Included in opinion.
II-3
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and where, interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) (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 registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (b)(1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933, and is
used in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(d) 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 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
II-4
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
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(e) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this 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.
(2) 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.
II-5
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 21st day of December, 2001.
FIRST MERCHANTS CORPORATION
By:/s/ Michael L. Cox
-----------------------------------------
Michael L. Cox, Chief Executive Officer
and President
Each person whose signature appears below constitutes and appoints Michael
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 21st day of December, 2001 by
the following persons in the capacities indicated.
/s/ Michael L. Cox
- ---------------------------------
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/ Roger M. Arwood
- ---------------------------------
Roger M. Arwood Director
S-1
/s/ James F. Ault
- ---------------------------------
James F. Ault Director
/s/ Jerry M. Ault
- ---------------------------------
Jerry M. Ault Director
/s/ Dennis A. Bieberich
- ---------------------------------
Dennis A. Bieberich Director
/s/ Frank A. Bracken
- ---------------------------------
Frank A. Bracken Director
/s/ Blaine A. Brownell
- ---------------------------------
Blaine A. Brownell Director
/s/ Thomas B. Clark
- ---------------------------------
Thomas B. Clark Director
/s/ Barry J. Hudson
- ---------------------------------
Barry J. Hudson Director
/s/ Norman M. Johnson
- ---------------------------------
Norman M. Johnson Director
/s/ George A. Sissel
- ---------------------------------
George A. Sissel Director
/s/ Robert M. Smitson
- ---------------------------------
Robert M. Smitson 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
--------------------------
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............................(A)
3.a. First Merchants Corporation Articles of Incorporation and the
Articles of Amendment thereto.....................................(B)
b. First Merchants Corporation By-Laws and amendments thereto........(C)
4. First Merchants Corporation Undertaking with respect to Long-Term
Debt Instruments..................................................251
5. Opinion of Bingham Summers Welsh & Spilman, LLP (legality)........252
6-7. None
8. Opinion of Bingham Summers Welsh & Spilman, LLP (tax matters).....253
9. None
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 1994 Stock Option Plan.................(E)
d. First Merchants Corporation Change of Control Agreements......(B), (I)
e. First Merchants Corporation Unfunded Deferred Compensation
Plan.............................................................(F)
f. First Merchants Corporation Supplemental Executive Retirement
Plan and amendments thereto........................................(G)
g. First Merchants Corporation 1999 Long-term Equity Incentive
Plan.............................................................(H)
h. First Merchants Corporation Management Incentive Compensation
Program............................................................(I)
11-20. None
21. Subsidiaries of Registrant.........................................256
22. None
23.a. Consent of BKD, LLP................................................258
b. Consent of Crowe, Chizek and Company LLP...........................259
c. Consent of Bingham Summers Welsh & Spilman, LLP (legality).........(l)
d. Consent of Bingham Summers Welsh & Spilman, LLP (tax matters)......(l)
e. Consent of RBC Capital Markets.....................................260
24. Power of Attorney included in "Signatures" section.................245
25-98. None
99.a. Form of Proxy for Lafayette Bancorporation Shareholder Meeting.....260
b. Form of Proxy for First Merchants Corporation Shareholder
Meeting..........................................................261
c. Lafayette Bancorporation's Annual Report to Shareholders for
its fiscal year ended December 31, 2000...........................(J)
d. Lafayette Bancorporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001...................................(K)
e. Consent of Director Nominees ......................................263
f. Election Form for Lafayette Bancorporation Shareholders............264
(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 September 30,
2001 (as amended by Form 10-Q/A filed on December 19,
2001).
(D) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1996.
(E) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1993.
(F) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1996.
(G) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1997.
(H) Incorporated by reference to Registrant's Registration
Statement on Form S-8 (SEC File No. 333-80117)
effective on June 7, 1999.
(I) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 2000.
(J) Included as Appendix D to the Prospectus.
(K) Included as Appendix E to the Prospectus.
(1) Included in opinion.