As filed with the Securities and Exchange Commission on December 6, 2002
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)
------------------------------------------------
With copies to:
Larry R. Helms David R. Prechtel, Esq. M. Patricia Oliver, Esq.
Senior Vice President Bingham McHale LLP Squire, Sanders
First Merchants Corporation 2700 Market Tower & Dempsey L.L.P.
200 East Jackson Street 10 West Market Street 4900 Key Tower
Muncie, Indiana 47305 Indianapolis, Indiana 46204 127 Public Square
(765) 747-1530 (317) 635-8900 Cleveland, Ohio 44114
(216) 479-8500
(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 Proxy Statement-Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------
Title of each class Amount Proposed Proposed Amount of
of securities to be maximum offering maximum aggregate registration
to be registered registered(1) price per unit(2) offering price(2) fee(3)
----------------------------------------------------------------------------------------------------------------------
Common Stock, Up to
no par value 2,097,337 shares $26.98 $56,586,587 $5,206
(1) This represents the maximum number of shares to be offered to CNBC Bancorp
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 CNBC Bancorp common shares
as reported on the NASDAQ SmallCap Market on December 4, 2002 ($27.25) for
all 2,076,572 CNBC Bancorp common shares 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.
(3) The registration fee of $5,206 for the securities registered hereby has
been calculated pursuant to Rule 457(f) under the Securities Act of 1933,
as amended, as $56,586,587 multiplied by .000092.
-------------------------------------------------
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
CNBC BANCORP
YOUR VOTE IS VERY IMPORTANT
PROSPECTUS OF FIRST MERCHANTS CORPORATION FOR UP TO
2,097,337 SHARES OF COMMON STOCK
AND
PROXY STATEMENT OF CNBC BANCORP
Dear Shareholders of CNBC Bancorp:
The Board of Directors of CNBC Bancorp (CNBC) and the Board of Directors
of First Merchants Corporation (First Merchants) have agreed to merge CNBC into
First Merchants. This proposed strategic business combination will create a
company with approximately 70 banking branches and combined assets of $3
billion, $2.3 billion in loans, $2.3 billion in deposits and total shareholders'
equity of $316 million.
In the merger, each CNBC common share that you own will be converted into
the right to receive, at your election, either 1.01 shares of First Merchants
common stock, subject to possible upward or downward adjustment of the
conversion ratio as provided in the Merger Agreement and described in this
document, or $29.57 in cash. The amount of cash payable in connection with the
merger is subject to various limitations and prorations. Under certain
circumstances, an election to receive cash may be converted, in whole or in
part, into an election to receive First Merchants common stock. First Merchants
will pay cash for any fractional share interests resulting from an exchange of
your shares.
We cannot complete the merger unless the shareholders of CNBC approve it.
CNBC will hold a special meeting of its shareholders to vote on adoption of the
Merger Agreement. Your vote is very important. Whether or not you plan to attend
the special shareholders 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 date, time and place of the special shareholders meeting is as
follows:
________________, ________________, 2003, __:__ _.m., local time
CNBC Bancorp
3650 Olentangy River Road
Columbus, Ohio
This document provides you with detailed information about this meeting
and the proposed merger. You can also obtain information about CNBC and First
Merchants from publicly available documents that our companies have filed with
the Securities and Exchange Commission. First Merchants common stock is quoted
and traded on the NASDAQ National Market System under the symbol "FRME." CNBC
common shares are quoted and traded on the NASDAQ SmallCap Market System under
the symbol "CNBD."
We strongly support the merger of our companies. The CNBC Board of
Directors recommends that you vote in favor of the merger.
Thomas D. McAuliffe Michael L. Cox
Chairman and President President and Chief Executive Officer
CNBC BANCORP FIRST MERCHANTS CORPORATION
For a discussion of certain risk factors which you should consider in
evaluating the merger, see "Risk Factors" beginning on page 27. 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 proxy statement-prospectus or determined if this 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 obligations
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.
Proxy Statement-Prospectus dated _______, 2003.
and first mailed to shareholders on ________, 2003.
CNBC BANCORP
3650 Olentangy River Road
Columbus, Ohio 43214
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
__________, 2003
To Our Shareholders:
We will hold a special meeting of the shareholders of CNBC Bancorp on
___________, _______________, 2003, at _:__ _.m. local time, at CNBC Bancorp
located at 3650 Olentangy River Road, Columbus, Ohio.
The purposes of the special meeting are the following:
1. To consider and vote upon a proposal to adopt the Agreement of
Reorganization and Merger dated August 28, 2002, between First Merchants
Corporation and CNBC Bancorp, and to approve the transactions contemplated
thereby. Pursuant to the Merger Agreement, CNBC Bancorp will merge into First
Merchants Corporation and Commerce National Bank, CNBC Retirement Services,
Inc., and CNBC Statutory Trust I will become wholly-owned subsidiaries of First
Merchants Corporation. The merger is more fully described in this proxy
statement-prospectus and the Merger Agreement is attached as Appendix A to this
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 ________, 2003, 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 CNBC Bancorp common shares.
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
Thomas D. McAuliffe, Chairman of the Board
___________, 2003
Columbus, Ohio
ADDITIONAL INFORMATION
This document incorporates important business and financial information
about First Merchants Corporation (First Merchants) and CNBC Bancorp (CNBC) 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 CNBC Bancorp
200 East Jackson Street 3650 Olentangy River Road
Muncie, Indiana 47305 Columbus, Ohio 43214
Attention: Larry R. Helms, Attention: John A. Romelfanger,
Senior Vice President, General Counsel Vice President and Secretary
and Secretary Telephone: (614) 583-2200
Telephone: (765) 747-1530
If you would like to request documents, please do so by ______________,
2003, in order to receive them before the meeting.
See "Where You Can Find ADDITIONAL Information" on page 104.
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 CNBC 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 management.
Forward-looking statements are generally preceded by, followed by, or include
the words "will," "believes," "expects," "anticipates," "intends," "plans,"
"estimates," or similar expressions.
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 effect of the merger on First Merchants' financial
performance. These forward-looking statements describe certain risks and
uncertainties. Actual results may differ materially from those contemplated by
such forward-looking statements due to, among others, the following factors:
o expected cost savings from the merger that may not be fully
realized;
o deposit attrition, customer loss, or revenue loss following the
merger may be greater than expected;
o competitive pressure in the banking industry may increase
significantly;
o costs or difficulties related to the integration of the businesses
of First Merchants and CNBC may be greater than expected;
o changes in the interest rate environment may reduce margins;
o general economic conditions may continue to decline, either
nationally or regionally, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit; and
o changes may occur in the regulatory environment, business
conditions, inflation rate and the securities market.
Management of First Merchants and CNBC 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. 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 in this document. See "WHERE YOU CAN FIND
ADDITIONAL INFORMATION" on page 104.
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 CNBC's ability to control or predict. For those statements,
First Merchants and CNBC claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
TABLE OF CONTENTS
PAGE
----
FORWARD-LOOKING STATEMENTS.......................................................(precedes Table of Contents)
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE
SHAREHOLDERS MEETING........................................................................................1
SUMMARY.....................................................................................................5
The Companies...........................................................................................5
The Merger..............................................................................................6
Reasons for the Merger..................................................................................6
Opinion of Financial Advisor............................................................................7
What CNBC Shareholders Will Receive.....................................................................7
Conversion Ratio Adjustment.............................................................................7
Recommendation to Shareholders..........................................................................8
The Shareholders Meeting................................................................................8
Record Date; Votes Required.............................................................................8
Dissenters' Rights......................................................................................9
What We Need to Do to Complete the Merger...............................................................9
Regulatory Approval.....................................................................................9
Conduct of Business Pending Merger.....................................................................10
Agreements of First Merchants..........................................................................10
Management and Operations After the Merger.............................................................10
Interests of Directors and Officers in the Merger That Are Different
From Your Interests............................................................................11
Voting Agreement.......................................................................................11
Termination of the Merger..............................................................................11
Certain Federal Income Tax Consequences................................................................12
Accounting Treatment...................................................................................13
Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain CNBC Shareholders......................................................................13
Comparative Rights of First Merchants Shareholders and CNBC
Shareholders...................................................................................13
Recent Developments ...................................................................................14
Comparative Market Price Information...................................................................14
Comparative Per Share Data.............................................................................16
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA................................................................................19
RISK FACTORS...............................................................................................27
THE CNBC SPECIAL MEETING...................................................................................31
General Information....................................................................................31
i
Matters To Be Considered...............................................................................31
Votes Required.........................................................................................31
Proxies................................................................................................32
Solicitation of Proxies................................................................................32
Recommendation of the Board of Directors...............................................................33
Other Matters..........................................................................................33
THE MERGER.................................................................................................34
Description of the Merger..............................................................................34
Background of the Merger...............................................................................34
First Merchants' Reasons for the Merger................................................................37
CNBC's Reasons for the Merger..........................................................................37
Recommendation of the Board of Directors...............................................................38
Opinion of CNBC's Financial Advisor....................................................................38
Exchange of CNBC Common Shares.........................................................................46
Conversion Ratio Adjustment............................................................................49
Rights of Dissenting Shareholders......................................................................51
Resale of First Merchants Common Stock by CNBC Affiliates..............................................52
Representations and Warranties.........................................................................52
Conditions to Completion of the Merger.................................................................55
Termination; Waiver; Amendment.........................................................................57
Restrictions Affecting CNBC Prior to Completion of the Merger..........................................59
Regulatory Approval....................................................................................60
Effective Date of the Merger...........................................................................61
Fees and Expenses......................................................................................61
Management After the Merger............................................................................62
Indemnification and Insurance..........................................................................63
Treatment of Options to Acquire CNBC Common Shares.....................................................63
Employee Benefit Plans.................................................................................64
Interests of Certain Persons in the Merger.............................................................65
Voting Agreement.......................................................................................67
NASDAQ National Market Listing.........................................................................67
Accounting Treatment...................................................................................67
Registration Statement.................................................................................67
FEDERAL INCOME TAX CONSEQUENCES............................................................................68
Tax Consequences to CNBC and First Merchants...........................................................68
Tax Consequences to CNBC Shareholders..................................................................68
Tax Opinions...........................................................................................71
Reporting Requirements.................................................................................72
Backup Withholding.....................................................................................72
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL
INFORMATION................................................................................................73
ii
DESCRIPTION OF FIRST MERCHANTS.............................................................................83
Business...............................................................................................83
Acquisition Policy and Pending Transactions............................................................84
Recent Developments....................................................................................84
Incorporation of Certain Information by Reference......................................................84
DESCRIPTION OF CNBC........................................................................................86
Business...............................................................................................86
Incorporation of Certain Information by Reference......................................................86
COMPARISON OF COMMON STOCK.................................................................................87
Governing Law..........................................................................................87
Authorized But Unissued Shares.........................................................................87
Preemptive Rights......................................................................................88
Dividend Rights........................................................................................88
Voting Rights..........................................................................................90
Articles of Incorporation and Bylaw or Code of Regulation Amendments...................................91
Special Meetings of Shareholders.......................................................................92
Number of Directors and Term of Office.................................................................92
Nomination of Directors................................................................................93
Removal of Directors...................................................................................94
Dissenters' Rights.....................................................................................95
Liquidation Rights.....................................................................................96
Redemption.............................................................................................96
Anti-Takeover Provisions...............................................................................97
Director Liability....................................................................................100
Indemnification of Directors, Officers and Employees..................................................101
Anti-Greenmail........................................................................................102
LEGAL MATTERS.............................................................................................102
EXPERTS...................................................................................................102
INDEMNIFICATION...........................................................................................103
SHAREHOLDER PROPOSALS.....................................................................................103
WHERE YOU CAN FIND ADDITIONAL INFORMATION.................................................................104
APPENDICES
A. Agreement of Reorganization and Merger........................................................A-1
B. Ohio Revised Code ss. 1701.84 and 1701.85 (Persons entitled to
relief as dissenting shareholders; Dissenting shareholder's demand
for fair cash value of shares)................................................................B-1
iii
C. Fairness Opinion of Stifel, Nicholas & Company, Incorporated..................................C-1
D. CNBC Bancorp's Annual Report to Shareholders for
the year ended December 31, 2001..............................................................D-1
E. CNBC Bancorp's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2002..............................................................E-1
iv
QUESTIONS AND ANSWERS
ABOUT THE MERGER AND THE SHAREHOLDERS MEETING
Q: Why are CNBC and First Merchants proposing to merge?
A: We believe the merger is in the best interests of CNBC and our
shareholders. CNBC and First Merchants believe that the merger will bring
together two complementary institutions to create a strategically,
operationally and financially strong company that is positioned for
further growth. We believe the merger will also enhance our capabilities
to provide banking and financial services to our customers and strengthen
the competitive position of the combined organization.
You should review the background and reasons for the merger described in
greater detail at pages 34 and 37.
Q: What will CNBC shareholders receive in the merger?
A: For each CNBC common share you own before the merger, you will have the
right to elect, on a share-by-share basis, to receive:
o 1.01 shares of First Merchants common stock (subject to adjustment
as provided in the Merger Agreement), or
o $29.57 in cash.
CNBC 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 First Merchants is not required to pay
more than $24,561,693 in cash to CNBC shareholders. If CNBC shareholder
elections result in cash elections of $24,561,693 or more, your elections
may be subject to proration as described under "THE MERGER - Exchange of
CNBC Common Shares" on page 46. As a result of the proration, you may
receive a lesser amount of cash and a greater amount of First Merchants
common stock than you elected. It is also possible that you may receive no
cash and all stock.
As of _________, 2003, the closing price for a share of First Merchants
common stock was $____________ and for a CNBC common share was
$____________. You should obtain current market prices for shares of First
Merchants common stock and CNBC common shares. First Merchants common
stock is quoted and traded on the NASDAQ National Market System under the
symbol "FRME." CNBC common shares are quoted and traded on the NASDAQ
SmallCap Market System under the symbol "CNBD."
1
Q: What risks should I consider before I vote on the merger?
A: You should review "RISK FACTORS" beginning on page 27.
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 approval and the approval of CNBC
shareholders at the special shareholders meeting. We currently expect to
complete the merger during the first quarter of 2003.
Q: What are the tax consequences of the merger to me?
A: We have structured the merger so that First Merchants, CNBC and CNBC
shareholders will not recognize any gain or loss for federal income tax
purposes on the exchange of CNBC shares for First Merchants shares in the
merger. However, to the extent a CNBC shareholder receives cash (other
than for fractional shares) instead of First Merchants common stock, any
gain such CNBC shareholder realizes on the exchange will be taxed, but not
in an amount in excess of the cash received. To the extent a CNBC
shareholder receives cash in lieu of a fractional share of First Merchants
common stock, the shareholder may also be required to recognize gain. At
the closing, each of CNBC and First Merchants are to receive an opinion
confirming these tax consequences. See "Federal Income Tax Consequences"
beginning on page 68. 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: CNBC shareholders will be able to dissent from the proposed merger, but
only by strictly complying with the applicable provisions of the Ohio
Revised Code. See "THE MERGER- Rights of Dissenting Shareholders"
beginning on page 51 and Appendix B.
Q: What do I need to do now?
A: You should carefully read and consider the information contained in this
document and any information incorporated by reference. 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 special shareholders
meeting. 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. You should also complete your Election Form to specify the type
of merger consideration you prefer (or provide instructions to your broker
if you hold your shares in "street name").
2
Q: What if I don't vote or I abstain from voting?
A: If you do not vote or you abstain from voting, it 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: You should follow the directions provided by your broker to vote your
shares. Your broker will vote your shares only if you instruct your broker
on how to vote. 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: 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 CNBC at or before the special meeting. You should submit
your notice of revocation or new proxy card to CNBC Bancorp, 3650
Olentangy River Road, Columbus, Ohio 43214, Attention: John A.
Romelfanger. 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: How do I elect the form of payment that I prefer?
A: An Election Form is enclosed with this document. You should complete the
Election Form and send it in the envelope provided to the election 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
__________, 2003, the election deadline. Please read the instructions on
the Election Form prior to 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 CNBC common shares.
3
Q: 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: Can I change my election?
A: Yes. You can change your election by submitting a new Election Form to
First Merchants Bank, National Association, Attn: Brian Edwards. It must
be received prior to the election deadline set forth on the Election Form.
After the election deadline, no changes may be made.
Q: Are shareholders guaranteed they will 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 aggregate amount of cash First Merchants is
required to pay for CNBC's outstanding shares. Because First Merchants is
not required to pay more than $24,561,693 in cash to CNBC shareholders (a
value which correlates to approximately 40% of CNBC's outstanding shares),
it is possible that some shareholders may 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 approximately 40% of the outstanding
CNBC common shares elect to receive cash, you may receive all or a portion
of First Merchants common stock instead of the cash you elected. Please
read a more complete description of the proration procedures under "THE
MERGER - Exchange of CNBC Common Shares" on page 46.
There is no restriction on the percentage of First Merchants common stock
elections that may be made. All the holders of CNBC's outstanding common
shares electing to receive First Merchants common stock will receive
stock.
Q: Should I send in my stock certificate(s) now?
A: No. After the merger is completed, CNBC shareholders will receive written
instructions from First Merchants for exchanging their stock certificates
for the consideration to be received by them in the merger.
4
SUMMARY
This summary highlights selected information from this 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, its appendices and the documents we have referred you to before you
decide how to vote. See "Where You Can Find Additional Information" on page 104
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 83 and 86)
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 nine 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; Frances
Slocum Bank and Trust Company; and Lafayette Bank and Trust Company.
Through these subsidiaries, First Merchants operates a general banking
business. First Merchants also owns various non-bank subsidiaries that
engage in the title insurance and settlement services business, the
reinsurance business and the full-service property casualty, personal and
healthcare insurance business.
At September 30, 2002, on a consolidated basis, First Merchants had assets
of approximately $2.6 billion, deposits of approximately $2.0 billion, and
stockholders' equity of approximately $260 million. First Merchants common
stock is quoted and traded on the NASDAQ National Market System under the
symbol "FRME." See "DESCRIPTION OF FIRST MERCHANTS" on page 83.
CNBC Bancorp
3650 Olentangy River Road
Columbus, Ohio 43214
(614) 583-2200
CNBC is a financial holding company and a one bank holding company
incorporated under Ohio law and headquartered in Columbus, Ohio. Commerce
National Bank is a wholly-owned subsidiary of CNBC. Commerce National Bank
is a full-service national bank, primarily serving small- to medium-sized
businesses located in the Columbus, Ohio metropolitan area. CNBC also owns
CNBC Retirement Services, Inc. and CNBC
5
Statutory Trust I. CNBC Retirement Services, Inc. provides investment,
administration and accounting services to individuals and business
retirement plans. CNBC Statutory Trust I is a non-operating special
purpose subsidiary of CNBC that was formed in 2001 to complete an issuance
of trust preferred securities.
At September 30, 2002, on a consolidated basis, CNBC had assets of
approximately $324 million, deposits of approximately $258 million, and
shareholders' equity of approximately $24 million. CNBC common stock is
quoted and traded on the NASDAQ SmallCap Market System under the symbol
"CNBD." See "DESCRIPTION OF CNBC" on page 86.
The Merger (page 34)
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.
CNBC will merge with First Merchants and, thereafter, CNBC will cease to
exist. After the merger, Commerce National Bank, CNBC Retirement Services,
Inc. and CNBC Statutory Trust I will become wholly-owned subsidiaries of
First Merchants. We hope to complete the merger during the first quarter
of 2003.
Reasons for the Merger (page 37)
First Merchants. First Merchants' Board of Directors considered a number
of financial and nonfinancial factors in making its decision to merge with
CNBC, including its respect for the ability and integrity of the CNBC
Board of Directors, management and staff. The Board believes that
expanding First Merchants' operations in the Columbus, Ohio market in
which CNBC operates offers long-term strategic benefits to First
Merchants.
CNBC. In considering the merger with First Merchants, your 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 CNBC's Board of Directors, favorable factors
included:
o the attractiveness of First Merchants' offer from a financial
perspective;
o First Merchants' management, the compatibility of its markets to
those of CNBC and enhanced products and services for CNBC customers;
o increased liquidity to CNBC shareholders;
6
o an agreement to retain Commerce National Bank as a separate bank
subsidiary for at least 5 years; and
o the level of dividends paid by First Merchants to its shareholders.
In addition, your Board of Directors considered the opinion of CNBC's
financial advisor Stifel, Nicolaus & Company, Incorporated (Stifel), that
the consideration to be received by the CNBC shareholders under the Merger
Agreement is fair from a financial point of view.
Opinion of Financial Advisor (page 38)
The Board of Directors of CNBC received the written opinion of Stifel
dated August 27, 2002, stating that the terms of the merger are fair from
a financial point of view to the CNBC shareholders. We have attached a
copy of the fairness opinion to this document as Appendix C. CNBC
shareholders should read the fairness opinion in its entirety.
What CNBC Shareholders Will Receive (page 46)
As a CNBC shareholder, each of your CNBC common shares will be converted
into the right to receive, at your election, either (i) 1.01 shares of
First Merchants common stock, subject to possible upward or downward
adjustment of the conversion ratio as provided in the Merger Agreement, or
(ii) $29.57 in cash. 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 all or a portion of First
Merchants common stock. Cash will be paid in lieu of issuing any
fractional shares of First Merchants common stock.
Because the conversion 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 14.
Conversion Ratio Adjustment (page 49)
As mentioned above, the 1.01 conversion ratio is subject to possible
upward or downward adjustment, if a chain of certain events occurs. The
first of those events is 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 NASDAQ trading days preceding the 5th calendar day prior
to the effective date of the merger must be either less than $22.61 or
greater than $30.59. This calculation is defined in the Merger Agreement
as the First Merchants Average Price. Since this calculation will be made
just prior to the effective date of the merger, it is not possible to
determine the First Merchants Average Price as of
7
the date of this proxy statement-prospectus. The Merger Agreement may be
terminated by CNBC if the First Merchants Average Price falls below $22.61
or by First Merchants if the First Merchants Average Price increases above
$30.59. The second event that must occur in order for the conversion ratio
to be adjusted is either CNBC or First Merchants must exercise its right
to terminate the Merger Agreement based on fluctuation of the First
Merchants Average Price. Finally, if either party exercises its right to
terminate the Merger Agreement based on fluctuation of the First Merchants
Average Price, then the other party has the right to adjust the conversion
ratio according to a formula to avoid termination of the Merger Agreement.
For a more detailed discussion of how the conversion ratio can be
adjusted, see "THE MERGER - Conversion Ratio Adjustment."
Recommendation to Shareholders (pages 33 and 38)
The Board of Directors of CNBC believes that the merger is in your best
interests and recommends that you vote "FOR" the proposal to adopt the
Merger Agreement.
The Shareholders Meeting (page 31)
The special meeting of CNBC shareholders will be held on ___________,
_______ __, 2003, at _:__ _.m. local time, at CNBC Bancorp located at 3650
Olentangy River Road, Columbus, Ohio. You will be asked at the special
meeting to consider and vote upon the adoption of the Merger Agreement and
to act upon any other items of business that may be properly submitted to
vote at the special meeting.
Record Date; Votes Required (page 31)
You may vote at the CNBC special meeting of shareholders if you owned
common shares of CNBC at the close of business on _______, 2003. You are
entitled to cast one vote for each common share you owned on that date.
The holders of at least a majority of the outstanding CNBC common shares
must vote in favor of adoption of the Merger Agreement. 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.
As of ______, 2003, CNBC's executive officers, directors and their
affiliates owned ______ shares or approximately ______% of the CNBC common
shares outstanding. Each member of the Board of Directors of CNBC and
their affiliates as of August 28, 2002, the date the Merger Agreement was
executed, signed a voting agreement with First Merchants to cause all CNBC
common shares owned by them of record or beneficially to be voted in favor
of the merger. As of __________, 2003, the members of the CNBC Board of
Directors and their affiliates owned ________ shares or approximately
____% of the CNBC common shares outstanding.
8
Dissenters' Rights (page 51)
For shareholders of CNBC, if the merger is consummated, Ohio law permits
you to dissent from the merger and have the fair cash value of your shares
appraised by a court and paid to you in cash. To do this, you must follow
certain procedures, including giving CNBC certain notices and not voting
your shares in favor of the merger. You will not receive any common stock
in First Merchants if you dissent and follow all of the required
procedures. Instead, you will only receive the fair value of your CNBC
common shares in cash. The relevant sections of Ohio law governing this
process are attached to this document as Appendix B. See "THE MERGER -
Rights of Dissenting Shareholders" on page 51 and Appendix B.
What We Need to Do to Complete the Merger (page 55)
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:
o adoption of the Merger Agreement by the shareholders of CNBC;
o approval of the merger by the Board of Governors of the Federal
Reserve System and the expiration of any regulatory waiting period;
o the receipt by CNBC of an opinion of Squire, Sanders & Dempsey
L.L.P., 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 CNBC shareholders in the merger to the
extent they receive shares of First Merchants common stock as
consideration for their CNBC common shares;
o the receipt by First Merchants 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;
o other customary conditions and obligations of the parties set forth
in the Merger Agreement.
Regulatory Approval (page 60)
The merger must be approved by the Board of Governors of the Federal
Reserve System (Federal Reserve). We have filed the required application
with the Federal Reserve. We cannot assure you as to when or whether the
approval will be received.
9
Conduct of Business Pending Merger (page 59)
Under the Merger Agreement, CNBC 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 CNBC will continue to pay quarterly dividends at no
more than the current rate of $0.10 per share until the merger closes. We
will each cooperate to insure that CNBC shareholders will receive only one
quarterly dividend for the quarter in which the merger closes, and not one
from both First Merchants and CNBC.
Agreements of First Merchants (pages 55, 60, 62, 63 and 64)
In the Merger Agreement, First Merchants has agreed to:
o Proceed and use its best efforts to obtain any consents and
approvals and use its best efforts to raise any additional capital
that may be required in order to obtain regulatory approval of the
merger. See "THE MERGER - Regulatory Approval" on page 60.
o Continue to operate Commerce National Bank as a separate operating
subsidiary for at least five years after the effective date of the
merger and offer existing directors the opportunity to remain
directors of Commerce National Bank for the remainder of their
current one-year term. See "THE MERGER - Management After the
Merger" on page 62.
o Cover CNBC and subsidiaries' employees, no later than January 1,
2004, under any tax-qualified retirement plan that First Merchants
maintains for its employees, so long as such employees meet any
applicable participation requirements, and provide for waiver of all
restrictions and limitations for pre-existing conditions under First
Merchants health plans. See "THE MERGER - Employee Benefit Plans" on
page 64.
o Take the action necessary to cause Thomas D. McAuliffe (or such
other person as shall be agreed to by First Merchants and CNBC) to
be nominated for a position on the First Merchants Board of
Directors for a three-year term. See "THE MERGER - Management After
the Merger" on page 62.
o Provide, or allow for, director and officer liability insurance and
indemnification. See "THE MERGER - Indemnification and Insurance" on
page 63.
Management and Operations After the Merger (page 62)
CNBC's corporate existence will cease after the merger. Accordingly,
directors and officers of CNBC will not serve in such capacities after the
effective date of the merger. The directors and officers of Commerce
National Bank will continue in their respective positions after the
merger.
10
Upon completion of the merger, the current officers and directors of First
Merchants will continue to serve in such capacities. In addition, Thomas
D. McAuliffe, who currently serves as Chairman of the Board and President
of CNBC and Chief Executive Officer of Commerce National Bank (or such
other person as agreed to by First Merchants and CNBC) will be nominated
for election to the Board of Directors of First Merchants to serve for a
3-year term following the merger.
Interests of Directors and Officers in the Merger That Are Different
From Your Interests (page 65)
Some of CNBC's directors and officers have interests in the merger that
may differ from, or that may be in addition to, your interests as CNBC
shareholders. As mentioned above, it is expected Mr. McAuliffe will be
nominated for a director position at First Merchants after the merger.
Certain officers and directors of CNBC will have executive employment and
change of control agreements with First Merchants after the merger.
The members of your Board of Directors knew about these additional
interests, and considered them, when they approved the Merger Agreement.
Voting Agreement (page 67)
All members of the Board of Directors of CNBC and their affiliates
executed a voting agreement with First Merchants as of the date of the
Merger Agreement whereby such directors and their affiliates have agreed
to vote all of their CNBC common shares in favor of the merger.
Termination of the Merger (page 57)
We can mutually agree to terminate the Merger Agreement before we complete
the merger. In addition, either of us acting alone can terminate the
Merger Agreement under the circumstances described on page 57.
CNBC has agreed to pay First Merchants the amount of $1,200,000 in
liquidated damages if:
o CNBC'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;
o First Merchants terminates the Merger Agreement because CNBC's Board
of Directors withdraws or modifies its recommendation to CNBC's
shareholders to vote for the merger following receipt of a written
proposal for an acquisition from a third party; or
11
o First Merchants terminates the Merger Agreement because CNBC fails
to give First Merchants written notice that it intends to furnish
information to or enter into discussions or negotiations with a
third party relating to a proposed acquisition of CNBC or Commerce
National Bank, or if CNBC, within 20 days after giving such written
notice to First Merchants of CNBC's intent to furnish information to
or enter into discussions or negotiations with another person or
entity, does not terminate all discussions, negotiations and
information exchanges related to such acquisition proposal.
Certain Federal Income Tax Consequences (page 68)
Whether you will recognize income, gain, or loss, for federal income tax
purposes as a result of the merger will depend upon whether you receive
solely First Merchants common stock, part First Merchants common stock and
part cash, or solely cash for your CNBC common shares. 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 (other than cash for fractional shares as
discussed above) 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 your
particular circumstances. No loss (other than for fractional shares) will
be recognized by you if you receive part cash and part First Merchants
stock for your shares.
If a CNBC shareholder (who holds his CNBC common shares as a capital
asset) receiving both First Merchants stock and cash:
o Exchanges at least 15% of his CNBC common shares for cash, and
o Will not be involved in the management of First Merchants, and
o Does not own First Merchants shares, and
o Is not related (as defined in attribution rules of Section 318 of
the Code) to another person (i) who owns shares of First Merchants,
or (ii) who is a CNBC shareholder exchanging more than 85% of his
CNBC common shares for First Merchants stock;
such CNBC shareholder's taxable gain on the exchange should be treated as
a capital gain, and not as a dividend.
It is expected that most CNBC shareholders who do not meet all these
requirements will nonetheless be entitled to treat their taxable gain as
capital gain, and not ordinary income. However, because such treatment is
dependent upon the shareholder's individual circumstances (as well as on
the percentage of CNBC common shares that are exchanged for cash), each
CNBC shareholder who does not meet all these criteria is strongly urged
12
to consult with their own tax advisor regarding their particular tax
treatment of the cash he or she will receive in the merger.
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.
CNBC's obligation to complete the merger is conditioned on its 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.
For a more detailed description of certain federal income tax consequences
of the merger to CNBC shareholders, see "FEDERAL INCOME TAX CONSEQUENCES"
on page 68.
Accounting Treatment (page 67)
The merger will be accounted for as a purchase transaction. As a result,
CNBC'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 CNBC will
be recorded as goodwill on the financial statements of First Merchants.
Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain CNBC Shareholders (page 52)
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 CNBC in exchange for their CNBC common shares.
Comparative Rights of First Merchants Shareholders
and CNBC Shareholders (page 87)
The rights of shareholders of First Merchants and CNBC differ in some
respects. The rights of holders of First Merchants common stock are
governed by Indiana law and First Merchants Articles of Incorporation and
Bylaws. Your rights as holders of CNBC common shares are governed by Ohio
law and CNBC's Articles of Incorporation and Code of Regulations. Upon
completion of the merger, CNBC shareholders who receive First Merchants
common stock will take such stock subject to its terms and conditions.
13
See "COMPARISION OF COMMON STOCK" on page 87 to learn more about the
material differences between the rights of holders of First Merchants
common stock and holders of CNBC common shares.
Recent Developments (page 84)
On April 1, 2002, Lafayette Bancorporation, Lafayette, Indiana (Lafayette)
was merged into First Merchants pursuant to the terms of an Agreement of
Reorganization and Merger dated October 14, 2001, by and between Lafayette
and First Merchants. As a result of the merger, Lafayette's wholly-owned
subsidiary, Lafayette Bank and Trust Company, became a wholly-owned
subsidiary of First Merchants. Upon consummation of the merger, Lafayette
shareholders received First Merchants' common stock and/or cash with an
aggregate value of approximately $115.8 million, with an aggregate of
approximately 2,772,861 shares of First Merchants common stock being
issued to Lafayette shareholders and an aggregate of approximately
$50,871,000 in cash being paid to Lafayette shareholders.
On January ___, 2003, First Merchants formed Merchants Trust Company,
National Association (Merchants Trust), as a wholly-owned national banking
subsidiary. Upon formation, the trust departments of the following
subsidiaries of First Merchants: First Merchants Bank, National
Association, Lafayette Bank and Trust Company and The First National Bank
of Portland were consolidated by transferring their operations into
Merchants Trust.
Comparative Market Price Information
Shares of First Merchants common stock are quoted and traded on the NASDAQ
National Market System under the symbol "FRME." CNBC common shares are
quoted and traded on the NASDAQ SmallCap Market System under the symbol
"CNBD." The following table presents quotation information for First
Merchants common stock on the NASDAQ National Market System and for CNBC
common stock on the NASDAQ SmallCap Market System on August 27, 2002, the
business day before the merger was publicly announced, and _________,
2003, the last practicable trading day for which information was available
prior to the date of this proxy statement-prospectus.
14
First Merchants Common Stock CNBC Common Shares
---------------------------- ------------------
(Dollars Per Share)
High Low Close High Low Close
---- --- ----- ---- --- -----
August 27, 2002 $26.58 $25.61 $25.74 $24.02 $22.25 $24.01
_________, 2003 $_________ $_________ $_________ $_________ $_________ $_________
The market value of the aggregate consideration that CNBC shareholders
will receive in the merger is approximately $54 million (or $26.00 per
CNBC common share) based on 2,076,572 CNBC common shares outstanding,
First Merchants' closing stock price of $25.74 on August 27, 2002, the
business day before the merger was publicly announced, and all CNBC common
shares being exchanged for shares of First Merchants common stock in the
merger. The assumption of 2,076,572 CNBC common shares outstanding was
calculated by adding the outstanding stock options and the outstanding
common shares as of August 27, 2002, and then subtracting treasury shares
which will be repurchased with the cash received by CNBC as a result of
the option exercise. Using this same First Merchants' closing stock price
and number of outstanding CNBC common shares, but assuming that 60% of
CNBC's common shares are exchanged for First Merchants common stock and
40% of CNBC's common shares are exchanged for cash in the merger, the
market value of the aggregate consideration that CNBC shareholders will
receive in the merger is approximately $57 million (or $27.43 per CNBC
common share).
The market value of the aggregate consideration that CNBC shareholders
will receive in the merger is approximately $_____ million (or $___ per
CNBC common share) based on First Merchants' closing stock price of $____
on ________, 2003, the last practicable trading day for which information
was available prior to the date of this proxy statement-prospectus, and
all CNBC common shares being exchanged for shares of First Merchants
common stock in the merger. Using this same First Merchants' closing stock
price and number of outstanding CNBC common shares, but assuming that 60%
of CNBC's common shares are exchanged for First Merchants common stock and
40% of CNBC's common shares are exchanged for cash in the merger, the
market value of the aggregate consideration that CNBC shareholders will
receive in the merger is approximately $____ million (or $___ per CNBC
common share).
Also set forth below for each of the closing prices of First Merchants
common stock on August 27, 2002, and ______________, 2003, is the
equivalent pro forma price of CNBC common shares, which we determined by
multiplying the applicable price of First Merchants common stock by the
number of shares of First Merchants common stock we
15
are issuing for a CNBC common share in the merger, which is the conversion
ratio of 1.01. The equivalent pro forma price of CNBC common shares shows
the implied value to be received in the merger by CNBC shareholders who
receive First Merchants common stock in exchange for a CNBC common share
on these dates.
First Merchants CNBC CNBC Equivalent
Common Stock Common Shares Pro Forma
------------ ------------- ---------
August 27, 2002 $25.74 $24.01 $26.00
________, 2003 $_____ $_____ $_____
We urge you to obtain current market quotations for First Merchants common
stock and CNBC common shares. 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 CNBC
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. CNBC shareholders who receive cash will receive a fixed amount
of $29.57 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, which we refer to as "pro
forma" information. In presenting the comparative pro forma information,
we have assumed that we were merged through the periods shown in the
table. The pro forma information reflects the "purchase" method of
accounting. The information is presented under two separate assumptions
relating to the level of CNBC common shares which are exchanged for First
Merchants common stock in the merger. The financial information presented
under "Alternative A" was compiled assuming 100% of the outstanding CNBC
common shares are exchanged for shares of First Merchants common stock in
the merger. The financial information presented under "Alternative B" was
compiled assuming 60% of the outstanding CNBC common shares are exchanged
for shares of First Merchants common stock and 40% of the outstanding CNBC
common shares are exchanged for cash in the merger. For a more detailed
description of these assumptions and how we derived the First Merchants
and CNBC pro forma data, see "Notes to Unaudited Pro Forma Summary of
Selected Consolidated Financial Data" on page 25 and "UNAUDITED PRO FORMA
COMBINED CONSOLIDATED FINANCIAL INFORMATION" on page 73.
The information listed as "equivalent pro forma" was obtained by
multiplying the pro forma amounts by the conversion ratio of 1.01. This
information is presented to reflect the value of shares of First Merchants
common stock that CNBC shareholders will receive in the merger for each
share of CNBC common stock exchanged.
16
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 CNBC 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 CNBC is included in this document as Appendices D and E. Additional
historical financial information of CNBC has been incorporated into this
document by reference. See "Where You Can Find Additional Information" on
page 104 for a description of documents that we incorporate by reference
into this document and how to obtain copies of them.
17
FIRST MERCHANTS AND CNBC
HISTORICAL AND PRO FORMA PER SHARE DATA
First Merchants
----------------------------------------------------------
Historical (5) Pro Forma
-------------- ---------------------------------------
Alternative A(1) Alternative B(2)
---------------- ----------------
Net income per share
Nine months ended September 30, 2002
Basic ........................... $ 1.39 $ 1.21 $ 1.22
Diluted ......................... 1.37 1.20 1.21
Twelve months ended December 31, 2001
Basic ........................... 1.71 1.69 1.70
Diluted ......................... 1.69 1.68 1.69
Cash dividends per share
Nine months ended September 30, 2002 ... $ .69 $ .69 $ .69
Twelve months ended December 31, 2001 .. .88 .88 .88
Book value per share
At September 30, 2002 ................ $15.93 $17.16 $16.70
At December 31, 2001 ................. 13.47 N/A N/A
CNBC
---------------------------------------------------------------
Historical Equivalent Pro Forma
---------- ---------------------------------------------
Alternative A(1)(3) Alternative B(2)(4)
------------------- -------------------
Net income per share
Nine months ended September 30, 2002
Basic ........................... $ 1.19 $ 1.22 $ 1.23
Diluted ......................... 1.15 1.21 1.22
Twelve months ended December 31, 2001
Basic ........................... 1.62 $ 1.71 $ 1.72
Diluted ......................... 1.57 1.70 1.71
Cash dividends per share
Nine months ended September 30, 2002 ... $ .30 $ .70 $ .70
Twelve months ended December 31, 2001 .. .36 .89 .89
Book value per share
At September 30, 2002 ................ $12.25 $17.33 $16.87
At December 31, 2001 ................. 11.51 N/A N/A
-------------
(1) See Note (1) in "Notes to Unaudited Pro Forma Summary of Selected
Consolidated Financial Data" on page 25.
(2) See Note (2) in "Notes to Unaudited Pro Forma Summary of Selected
Consolidated Financial Data" on page 25.
(3) Calculated by multiplying the First Merchants Pro Forma -
Alternative A combined per share data by the assumed conversion
ratio of 1.01.
(4) Calculated by multiplying the First Merchants Pro Forma -
Alternative B combined per share data by the assumed conversion
ratio of 1.01.
(5) The First Merchants December 31, 2001 historical per share data has
been restated to give effect to the 5% stock dividend effected
August, 2002.
18
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The following tables set forth certain summary historical consolidated
financial data for First Merchants and CNBC. First Merchants' and CNBC's balance
sheet data and income statement data as of and for the five years in the period
ended December 31, 2001 are taken from each of their respective audited
consolidated financial statements. First Merchants' and CNBC's balance sheet
data and income statement data as of and for the nine months ended September 30,
2002 and 2001 are taken from their respective unaudited consolidated financial
statements. Results for the nine months ended September 30, 2002 do not
necessarily indicate results for the entire year.
The following tables also set forth certain summary unaudited pro forma
consolidated financial information for First Merchants and CNBC reflecting the
merger. The income statement information presented gives effect to the merger as
if it occurred on the first day of each period presented. The balance sheet
information presented gives effect to the merger as if it occurred on September
30, 2002. The information is presented under two separate assumptions relating
to the level of CNBC common shares which are exchanged for First Merchants
common stock in the merger. The financial information presented under
"Alternative A" was compiled assuming 100% of the outstanding CNBC common shares
are exchanged for shares of First Merchants common stock in the merger. The
financial information presented under "Alternative B" was compiled assuming 60%
of the outstanding CNBC common shares are exchanged for shares of First
Merchants common stock and 40% of the outstanding CNBC common shares are
exchanged for cash in the merger. For a more detailed description of these
assumptions, see "Notes to Unaudited Pro Forma Summary of Selected Consolidated
Financial Data" on page 25.
The pro forma information reflects the "purchase" method of accounting,
with CNBC's assets and liabilities recorded at their estimated fair values as of
September 30, 2002. The actual fair value adjustments to the assets and the
liabilities of CNBC 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.
This selected financial data is only a summary and you should read it in
conjunction with First Merchants' consolidated financial statements and related
notes incorporated into this document by reference and CNBC's consolidated
financial statements and related notes included in this document as Appendices D
and E and incorporated into this document by reference, and
19
in conjunction with the Unaudited Pro Forma Combined Consolidated Financial
Information appearing on page 73 in this document. See "Where You can Find
Additional Information" on page 104 for a description of documents that we
incorporate by reference into this document and how to obtain copies of such
documents.
20
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
------------------ ------------------------------------------------------------------
2002(4) 2001 2001 2000 1999 1998 1997
------- ---- ---- ---- ---- ---- ----
Summary of Operations
Interest income $ 107,417 $ 90,913 $ 120,435 $ 116,528 $ 100,463 $ 94,161 $ 88,184
Interest expense 39,629 43,691 56,074 60,546 46,898 44,465 41,392
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 67,788 47,222 64,361 55,982 53,565 49,696 46,792
Provision for loan losses 4,297 2,371 3,576 2,625 2,241 2,372 1,735
Noninterest income 19,861 13,642 18,543 16,634 14,573 12,880 10,146
Noninterest expense 51,129 32,959 45,195 40,083 36,710 32,741 30,016
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before income tax 32,223 25,234 34,133 29,908 29,187 27,463 25,187
Income tax expense 10,983 8,834 11,924 9,968 10,099 9,556 8,704
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 21,240 $ 16,700 $ 22,209 $ 19,940 $ 19,088 $ 17,907 $ 16,483
========== ========== ========== ========== ========== ========== ==========
Per Share Data (2)
Net income
Basic $ 1.39 $ 1.29 $ 1.71 $ 1.59 $ 1.44 $ 1.36 $ 1.27
Diluted 1.37 1.28 1.69 1.58 1.43 1.34 1.25
Cash dividends (3) 0.69 0.64 0.88 0.82 0.76 0.70 0.63
Balances End of Period
Total assets $2,629,486 $1,761,671 $1,787,035 $1,621,063 $1,474,048 $1,362,527 $1,181,359
Total loans 1,994,038 1,361,638 1,359,893 1,175,586 998,895 890,356 838,658
Total deposits 2,019,735 1,388,570 1,421,251 1,288,299 1,147,203 1,085,952 976,972
Securities sold under repurchase
agreements (long-term portion) 22,900 32,500 32,500 32,500 35,000 48,836 0
Trust preferred securities 53,188 0 0 0 0 0 0
Federal home loan bank advances 173,432 116,623 103,499 93,182 73,514 47,067 25,500
Stockholders' equity 259,873 177,585 179,128 156,063 126,296 153,891 141,794
Selected Ratios
Return on average assets 1.22% 1.35% 1.31% 1.30% 1.37% 1.43% 1.43%
Return on average equity 12.45% 13.66% 13.36% 14.10% 12.75% 12.09% 12.12%
21
(1) On April 1, 1999, First Merchants issued 1,211,422 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
893,733 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 1,558,965 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 935,535 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 all stock dividends and splits.
(3) Dividends per share are for First Merchants only, not restated for pooling
transactions.
(4) On April 1, 2002, First Merchants consummated the merger of Lafayette
Bancorporation, Lafayette, Indiana into First Merchants. As a result of
such merger, Lafayette Bank and Trust Company, a wholly-owned subsidiary
of Lafayette Bancorporation, became a subsidiary of First Merchants. The
historical consolidated financial data for the nine months ended September
30, 2002, includes the financial information and results of operations of
Lafayette Bank and Trust Company as a subsidiary of First Merchants for
the period from April 1, 2002 through September 30, 2002.
22
CNBC
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
------------------- --------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
Summary of Operations
Interest income $ 14,329 $ 15,800 $ 20,713 $ 18,904 $ 15,152 $ 12,727 $ 9,730
Interest expense 6,075 7,742 9,819 9,474 7,065 6,221 4,624
-------- -------- -------- -------- -------- -------- --------
Net interest income 8,254 8,058 10,894 9,430 8,087 6,506 5,106
Provision for loan losses 399 469 660 412 509 480 386
Noninterest income 585 541 798 542 361 248 189
Noninterest expense 4,814 4,362 5,918 4,960 4,250 3,481 2,769
-------- -------- -------- -------- -------- -------- --------
Net income before income tax 3,626 3,768 5,114 4,600 3,689 2,793 2,140
Income tax expense 1,253 1,310 1,778 1,590 1,291 969 745
-------- -------- -------- -------- -------- -------- --------
Net Income $ 2,373 $ 2,458 $ 3,336 $ 3,010 $ 2,398 $ 1,824 $ 1,395
======== ======== ======== ======== ======== ======== ========
Per Share Data (1)
Net income
Basic $ 1.19 $ 1.19 $ 1.62 $ 1.50 $ 1.28 $ 1.09 $ 0.87
Diluted 1.15 1.16 1.57 1.42 1.17 0.99 0.81
Cash dividends 0.30 0.18 0.36 0.32 0.27 0.23 0.17
Balances End of Period
Total assets $323,918 $280,969 $296,184 $263,900 $202,928 $175,113 $139,325
Total loans 273,607 239,061 244,801 217,436 175,670 148,881 117,078
Total deposits 258,270 229,648 243,158 218,875 169,068 151,480 119,105
Securities sold under repurchase
agreements (long-term portion) 0 0 0 0 0 0 0
Trust preferred securities 4,000 4,000 4,000 0 0 0 0
Federal home loan bank advances 36,007 23,044 23,922 20,483 11,685 8,685 6,860
Stockholders' equity 24,402 23,117 23,284 21,510 19,105 11,972 10,482
Selected Ratios
Return on average assets 1.06% 1.22% 1.22% 1.31% 1.21% 1.16% 1.20%
Return on average equity 13.21% 14.43% 14.53% 14.70% 14.82% 16.12% 15.18%
---------------
(1) Restated for all stock dividends and splits.
23
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, 2002(3) For The Year Ended December 31, 2001
-------------------------------------------- ------------------------------------
Alternative A(1) Alternative B(2) Alternative A(1) Alternative B(2)
---------------- ---------------- ---------------- ----------------
Summary of Operations
Interest income $ 132,480 $ 132,480 $193,687 $193,687
Interest expense 50,092 51,686 92,918 95,043
---------- ---------- -------- --------
Net interest income 82,388 80,794 100,769 98,644
Provision for loan losses 6,311 6,311 5,461 5,461
Noninterest income 22,669 22,669 26,795 26,795
Noninterest expense 65,450 65,450 76,130 76,130
---------- ---------- -------- --------
Net income before income tax 33,296 31,702 45,973 43,848
Income tax expense 10,981 10,335 15,446 14,585
---------- ---------- -------- --------
Net income $ 22,315 $ 21,367 $ 30,527 $ 29,263
========== ========== ======== ========
Per Share Data
Net income
Basic $ 1.21 $ 1.22 $ 1.69 $ 1.70
Diluted 1.20 1.21 1.68 1.69
Cash dividends declared .69 .69 .88 .88
Book value at end of period 17.16 16.70
Balances End of Period
Total assets $2,990,162 $2,992,754
Earning assets 2,671,890 2,671,890
Investment securities 350,062 350,062
Loans, net 2,251,975 2,251,975
Total deposits 2,280,352 2,280,352
Indebtedness
Borrowings 312,737 314,381
Trust preferred securities 58,996 82,352
Stockholders' equity 315,893 293,485
Allowance for loan losses 25,892 25,892
----------
Notes to Unaudited Pro Forma Summary of Selected Financial Data appear on the
following page.
24
NOTES TO UNAUDITED PRO FORMA SUMMARY OF SELECTED
CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
(1) Alternative A -- Issuance of 2,097,337 shares of First Merchants common
stock:
Assumes 2,076,572 shares (100%) of CNBC common shares 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 August 26, 27, 28, 29 and 30,
2002, the two days before public announcement of the merger, the day of such
public announcement, and the two days after such public announcement, was
$26.71. Such amount is less than $30.59 per share and greater than $22.61 per
share. Accordingly, it has been assumed for the purposes of this pro forma
consolidated financial data that there will be no adjustment to the conversion
ratio and 1.01 shares of First Merchants common stock will be issued for each
share of CNBC common stock subject to a stock election. Whether the conversion
ratio is actually adjusted will be determined at the time of closing of the
merger pursuant to the adjustment mechanism described in greater detail in "THE
MERGER - Conversion Ratio Adjustment," on page 49. Assuming 100% of the
outstanding CNBC common shares become subject to elections to receive First
Merchants common stock, no cash payments would be made to CNBC shareholders
except to the extent cash payments are made in lieu of the issuance of
fractional shares resulting from the 1.01 conversion ratio. Based on such
assumptions and a $26.71 per share price for First Merchants common stock, the
purchase price is computed as follows:
Common stock (2,097,337 shares at stated value of $.125 per share) $ 262
Capital surplus (2,097,337 shares at $26.585 per share) .......... 55,758
Total stock issued (2,097,337 shares at $26.71 per share) 56,020
Transaction costs (estimated) .................................... 400
Cash price ....................................................... 0
-------
Total purchase price ..................................... $56,420
=======
(2) Alternative B - Issuance of 1,258,402 shares of First Merchants common
stock:
Assumes 1,245,943 CNBC common shares (60%) become subject to stock elections and
830,629 CNBC common shares (40%) become subject to cash elections. The average
of the closing prices of First Merchants common stock on August 26, 27, 28, 29,
and 30, 2002, the two days before public announcement of the merger, the day of
such public announcement, and the two days after such public announcement, was
$26.71. Such amount is less than $30.59 per share and greater than $22.61 per
share. Accordingly, it has been assumed that there would be no adjustment to the
conversion ratio and 1.01 shares of First Merchants common stock would be issued
for each CNBC common share subject to a stock election and $29.57 cash is issued
for each CNBC common share subject to a cash election. Whether the conversion
ratio is actually adjusted will be determined at the time of closing of the
merger pursuant to the adjustment mechanism described in greater detail in "THE
MERGER - Conversion Ratio Adjustment," on page 49. Assuming 60% of the
outstanding CNBC common shares become subject to elections to receive First
Merchants common stock and a $26.71 per share price for First Merchants common
stock, the purchase price is computed as follows:
25
Common stock (1,258,402 shares at stated value of $.125 per share) $ 157
Capital surplus (1,258,402 shares at $26.585 per share) .......... 33,454
Total stock issued (1,258,402 shares at $26.71 per share) 33,611
Cash price:
830,629 CNBC common shares at $29.57 per share .......... 24,562
Transaction costs (estimated) .................................... 400
-------
Total purchase price ............................ $58,573
=======
(3) See Note (4) to "SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA - First Merchants Five Year Summary of Selected Historical
Consolidated Financial Data" on page 21.
26
RISK FACTORS
In addition to the other information in this document, you should
carefully consider the following risk factors in determining whether to vote to
adopt the Merger Agreement and the merger.
o The integration of CNBC'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 with a company
located outside of Indiana. Furthermore, First Merchants recently completed, on
April 1, 2002, a merger with Lafayette Bancorporation through which it acquired
Lafayette Bank and Trust Company. The Lafayette merger is the largest
acquisition ever completed by First Merchants. The success of the merger with
CNBC will depend on a number of factors, including, but not limited to, the
merged company's ability to:
o integrate CNBC's operations with the operations of First Merchants
while simultaneously completing the integration of Lafayette Bank
and Trust Company into its consolidated operations;
o maintain existing relationships with First Merchants' depositors and
the depositors of CNBC to minimize withdrawals of deposits
subsequent to the acquisition;
o maintain and enhance existing relationships with borrowers from
First Merchants and CNBC;
o achieve projected net income of CNBC 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 key and qualified management, lending and other
banking personnel; and
o compete effectively in the communities served by First Merchants and
CNBC, and in nearby communities.
The merged company's failure to successfully integrate CNBC and Lafayette
Bank and Trust Company with First Merchants may adversely affect its financial
condition and results of operations.
27
o CNBC shareholders who elect cash may instead receive First Merchants
common stock.
The Merger Agreement provides that CNBC shareholders may elect to receive
all First Merchants common stock for their shares, all cash for their shares or
a combination of First Merchants common stock for a portion of their shares and
cash for a portion of their shares. Although CNBC shareholders will have the
opportunity to elect the form of merger consideration they prefer to receive,
the Merger Agreement provides that First Merchants is not required to pay more
than $24,561,693 in aggregate cash payments in connection with the merger. You
may not receive all or a portion of the cash merger consideration you elect.
This may result in adverse financial or tax consequences to you. You will not
know the amount of cash you will receive until after we complete the merger.
If it is necessary to reduce the amount of cash elections under the Merger
Agreement, the 10 cash elections covering the largest number of CNBC common
shares would be converted to stock elections on a pro rata basis only to the
extent necessary to reduce the aggregate cash payment to less than $24,561,693.
Depending on the amount of cash elections, it is possible that converting the 10
largest cash elections entirely to First Merchants common stock would not be
sufficient. If that should occur, the next 10 largest cash elections would be
prorated. This methodology would continue until the aggregate cash payment is
less than $24,561,693. Therefore, if more cash elections are made than are
permitted under the Merger Agreement, those shareholders making the largest cash
elections would be more likely to have a portion or all of their cash elections
converted to First Merchants common stock.
o The value of merger consideration for those CNBC shareholders who
receive First Merchants common stock will fluctuate.
If the merger is completed, CNBC shareholders who do not receive $29.57 in
cash per share for their CNBC common shares will receive a number of shares of
First Merchants common stock based on a fixed exchange ratio of 1.01 shares of
First Merchants common stock for each CNBC common share, subject to the
possibility of an adjustment upward or downward to the conversion ratio as
provided in the Merger Agreement. Because the market value of First Merchants
common stock may fluctuate, the value of the consideration you receive for your
shares may also fluctuate. The market value of First Merchants common stock
could fluctuate for any number of reasons, including those specific to First
Merchants and those that influence trading prices of equity securities
generally.
We urge you to obtain current market quotations for First Merchants common
stock and CNBC common shares 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.
o The merged company will have increased its leverage and reduced its
borrowing capacity.
To fund the cash paid to CNBC shareholders in the merger, First Merchants
expects to incur approximately $25 million of additional indebtedness through a
private offering of trust
28
preferred securities. 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. In addition,
covenants the merged company makes in connection with the financing may 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 service requirements. If its subsidiaries
pay dividends to the merged company, they will have less capital to address
their capital expenditures and working capital needs.
o 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. Approximately 50% of the merged
company's loans are comprised of commercial real estate and commercial lines of
credit and term loans, which can result in higher loan loss experience than
residential loans in economic downturns. 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.
Each of First Merchants and CNBC make various assumptions and judgments
about the collectibility of 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. Increases
in the merged company's allowance for loan losses would decrease its net income.
o Changes in interest rates may reduce the merged company's net
interest income.
Like other financial institutions, the merged company's net interest
income is its primary revenue source. Net interest income is the difference
between interest earned on loans and investments and interest expense incurred
on deposits and other borrowings. The merged company's net interest income will
be affected 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.
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;
29
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.
Each of First Merchants and CNBC has policies and procedures designed to
manage the risks from changes in market interest rates; however, despite risk
management, changes in interest rates could adversely affect the merged
company's results of operations and financial condition.
o Changes in economic conditions and the geographic concentration of
the merged company's markets could adversely affect the merged
company's financial condition.
The merged company's success will depend to a great extent upon the
general economic conditions of the Central Indiana and Central Ohio areas.
Unlike larger banks that are more geographically diversified, the merged company
will provide banking and financial services to customers primarily in the
Central Indiana and Central Ohio areas. Favorable economic conditions may not
exist in the merged company's markets.
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 CNBC and First Merchants may
decline; and
o Collateral for loans made by CNBC 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.
o 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. See "COMPARISON OF COMMON STOCK - Anti-Takeover
Provisions" on page 97. 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.
30
THE CNBC SPECIAL MEETING
Special Meeting of Shareholders of
CNBC Bancorp
General Information
We are furnishing this document to the shareholders of CNBC in connection
with the solicitation by the Board of Directors of CNBC of proxies for use at
the CNBC special meeting of shareholders to be held on __________, _____ __,
2003, at _:__ _.m., local time, at CNBC Bancorp located at 3650 Olentangy River
Road, Columbus, Ohio 43214. This document is first being mailed to CNBC
shareholders on _____, 2003, and includes the notice of CNBC 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 Merger Agreement, by and between First Merchants and CNBC, 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, CNBC will merge into First Merchants, and
Commerce National Bank will become a wholly-owned subsidiary of First Merchants.
In addition, CNBC's other subsidiaries, CNBC Retirement Services, Inc. and CNBC
Statutory Trust I, will also become subsidiaries 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 34.
Votes Required
Adoption of the Merger Agreement requires the affirmative vote of at least
a majority of the outstanding CNBC common shares. CNBC has fixed ______, 2003,
as the record date for determining those CNBC shareholders entitled to notice
of, and to vote at, the special meeting. Accordingly, if you were a CNBC
shareholder of record at the close of business on _______, 2003, 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
CNBC common share 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 ___________, 2003, there were approximately _________ CNBC common shares
outstanding held by approximately ____ shareholders.
As of the record date, CNBC's executive officers, directors and their
affiliates had voting power with respect to an aggregate of _______ shares or
approximately ______% of the CNBC common shares outstanding. Each member of the
Board of Directors of CNBC and their affiliates as of August 28, 2002, the date
the Merger Agreement was executed, signed a voting agreement with First
Merchants to cause all CNBC common shares owned by them of record or
beneficially to be voted in favor of the merger. See "THE MERGER - Voting
Agreement" on
31
page 67. As of the record date, the members of the CNBC Board of Directors and
their affiliates had power to vote an aggregate of _______ CNBC common shares
outstanding. In addition, we also currently expect that the executive officers
of CNBC will vote all of their shares in favor of the proposal to adopt the
Merger Agreement.
Proxies
If you are a CNBC shareholder, you should have received a proxy card for
use at the CNBC special meeting with this 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 CNBC shareholders giving the proxies. Proxy cards that are
properly signed and returned but do not have voting instructions will be voted
"FOR" adoption of the Merger Agreement.
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 CNBC at or prior to the special
meeting a written notice of revocation addressed to John A.
Romelfanger, CNBC Bancorp, 3650 Olentangy River Road, Columbus, Ohio
43214; or
o delivering to CNBC at or prior to the special meeting a properly
executed proxy having a later date; or
o voting in person by ballot at the special shareholders meeting.
Therefore, your right to attend the special meeting and vote in person
will not be affected by executing a proxy. 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. In addition, to
be effective, CNBC must receive the revocation before the proxy is exercised.
Because adoption of the Merger Agreement requires the affirmative vote of
at least a majority of the outstanding CNBC common shares, abstentions and
broker non-votes will have the same effect as voting against adoption of the
Merger Agreement. Accordingly, your Board of Directors urges all CNBC
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.
Solicitation of Proxies
CNBC will bear the entire cost of soliciting proxies from CNBC
shareholders. In addition, CNBC will bear the cost of printing and mailing this
document. CNBC 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. CNBC will
32
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 CNBC, who will not be specially compensated for such soliciting. In
soliciting proxies, the directors, officers and employees of CNBC 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 CNBC regarding
the merger or the Merger Agreement should be relied upon except as expressly
stated in this document.
Recommendation of the Board of Directors
Your Board of Directors has approved the Merger Agreement and the merger.
Your Board believes that the merger is fair to and in the best interests of CNBC
and its shareholders. Your Board recommends that the CNBC shareholders vote
"FOR" the Merger Agreement. See "THE MERGER - CNBC's Reasons for the Merger" and
"THE MERGER - Recommendation of the Board of Directors."
Other Matters
The special meeting of CNBC shareholders has been called for the purposes
set forth in the Notice to CNBC shareholders included in this document. Your
Board of Directors is unaware of any other matter for action by shareholders at
the special meeting other than the proposal to adopt 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 your 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 CNBC.
33
THE MERGER
At the special meeting, the shareholders of CNBC will consider and vote upon
adoption of 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, CNBC will merge with First
Merchants and the separate corporate existence of CNBC will cease. As a result
of the merger, Commerce National Bank (Commerce Bank) will become a wholly-owned
subsidiary of First Merchants. First Merchants will continue to operate Commerce
Bank as a separate subsidiary for at least 5 years after the merger under its
current name or a substantially similar name. In addition, CNBC's other
subsidiaries, CNBC Retirement Services, Inc., and CNBC Statutory Trust I, will
become wholly-owned subsidiaries of First Merchants. The Articles of
Incorporation and Bylaws of First Merchants, as in effect prior to the merger,
will continue to be the Articles of Incorporation and Bylaws of First Merchants
after the merger.
Background of the Merger
Since the inception of Commerce Bank and CNBC, one of the long- term goals
of management has been to improve the liquidity of CNBC common shares. More
recent initiatives by management to achieve this goal include:
o April, 1999: Completion of a public offering of common shares, which
raised $5 million in new capital. Following completion of the
offering, CNBC became an SEC registrant, with appropriate public
financial reporting responsibilities.
o January, 2000: Approval of a formal, ongoing stock repurchase
program. To date, in excess of 120,000 shares have been repurchased
by CNBC in the open market totaling almost $2.5 million.
o February, 2001: Issuance of $4 million in trust preferred
securities. Approximately $2 million of these proceeds were used to
fund stock repurchases.
o July, 2001: Registration on the NASDAQ SmallCap Market System.
In spite of these efforts by management, prior to the announcement of the
merger, the average monthly trading volume for CNBC common shares had been only
about 1/2 percent of total shares outstanding. The Board remained concerned
about the depth of the market for CNBC common shares and the possible impact on
its price should larger amounts of common shares be sold in the marketplace.
34
In July, 2001, Tom McAuliffe, Chairman and President, requested that a
special committee of Board members be formed with the purpose of investigating
strategic initiatives that could address the issue of stock liquidity. It was
determined that the Mergers and Acquisition Committee (the "M&A Committee"),
comprised of Board members Tom McAuliffe, Mark Corna, Dave Ryan, Kent Rinker,
George Gummer and John Romelfanger would begin a process to evaluate these
issues.
In August, 2001, the M&A Committee met with the partner from Squire,
Sanders & Dempsey L.L.P. who has been primary legal counsel to CNBC. The purpose
of this meeting was to determine our general direction and confirm our
responsibilities to shareholders, employees and customers as we began the
process. Our attorney discussed our fiduciary duties and the ability under Ohio
law to fully consider the impact of our strategic direction on shareholders,
employees and customers. Mr. McAuliffe suggested we meet with a selected group
of investment banking firms to discuss their views on our strategic
alternatives. Each member shared his expectations for what this process should
achieve. General conclusions during this session included a consensus that there
was not a "sense of urgency" to this process. Given overall stock market
conditions, CNBC common shares have performed well throughout our history. It
was also a consensus that an outright sale of CNBC, which would involve the
transformation of Commerce Bank into a branch of a larger bank, was not
something the directors wanted to pursue at this time based on the probable
impact on employees and customers.
In September and October 2001, the M&A Committee met with two investment
banking firms, Friedman, Billings and Ramsey and Stifel. Both firms provided a
detailed analysis of the current financial services market and possible
strategic initiatives to improve the liquidity of CNBC common shares. These
initiatives included raising additional capital through an underwritten public
offering and utilizing a significant portion of the proceeds to purchase stock
of significant shareholders, purchasing another financial services organization,
merging with another financial organization or being acquired by another
company.
In November, 2001, the M&A Committee met to discuss the results of
meetings with the investment banking firms. It was the unanimous decision of the
committee that we should proceed with the strategic evaluation process discussed
by Stifel. The M&A Committee established the following general objectives as
guidance to determine the companies we would approach in this process:
o Improve liquidity for CNBC shareholders;
o Achieve appropriate consideration for shareholders;
o Retain autonomy in customer service issues and continue Commerce
Bank's small business focus;
o Preserve jobs and provide new employee growth opportunities; o
Select a strategic partner with a solid financial history; and
o Provide potential for new services, specifically in the areas of
trust and investment management services
35
The process would involve identifying potential partners that would merge
with CNBC to achieve all or substantially all of the above objectives. The
potential partner could range from an organization similar in size to CNBC or
larger. The committee authorized Mr. McAuliffe and Mr. Romelfanger to develop a
proposed engagement with Stifel for presentation and approval by the full Board
of Directors at our regularly scheduled December Board meeting.
In December, 2001, the Board of Directors reviewed the proposed engagement
of Stifel and the six profile characteristics that would be used to identify and
screen potential partners. The Board unanimously approved executing the
engagement letter with Stifel to proceed with this process. On the day following
the Board meeting, the engagement letter was executed and nine organizations
were approved by CNBC management for contact by Stifel.
During the months of February and March, 2002, Mr. McAuliffe and Mr.
Romelfanger met with five different financial organizations (of the nine
approved) to discuss a possible merger, including First Merchants. The remaining
four organizations approved were not interested in discussing a possible merger
with CNBC at that time. Throughout the process, the full Board of Directors was
updated monthly on the progress and results of our process.
Of the five organizations, both Mr. McAuliffe and Mr. Romelfanger
concluded that First Merchants was likely the best fit for consideration as a
merger partner. In May, 2002, Mr. McAuliffe, Mr. Romelfanger, Mr. Rinker, Mr.
Corna and Mr. Ryan attended a meeting in Muncie to engage in discussions with
First Merchants. In attendance for First Merchants were Mike Cox, President and
Chief Executive Officer, Stefan Anderson, Chairman and Roger Arwood, President
of First Merchants Bank, National Association. Mr. Cox led a slide presentation
and discussion on First Merchants and Mr. Arwood discussed their plans for trust
and investment management services. Many questions were raised by members of
both organizations regarding business philosophies and practices.
In June, 2002, the M&A Committee met to discuss the meeting with First
Merchants. A representative of Stifel also was in attendance. At the completion
of discussion, it was agreed that Stifel should approach First Merchants about
the potential terms of a merger between the two companies. In mid July, 2002,
First Merchants presented a non-binding letter of intent to CNBC to merge the
companies.
During the first three weeks of August, 2002, drafts of the Merger
Agreement were reviewed, negotiated and revised by the management and directors
of CNBC, First Merchants and the advisors to CNBC and First Merchants. On August
13, 2002, the First Merchants Board of Directors approved the terms of the
Merger Agreement and authorized its executive officers to complete any further
negotiations of the terms of the Merger Agreement within certain parameters. On
August 27, 2002, final terms of the Merger Agreement were reached and the CNBC
and Commerce Bank Boards of Directors, legal counsel and Stifel met to review
the final documents. At this meeting, legal counsel reviewed in detail the terms
of the Merger Agreement and the directors' fiduciary duties under Ohio law.
Stifel issued its written opinion, dated as of August 27, 2002, that the
transaction was fair to CNBC shareholders from a financial point of view.
Following this discussion of the proposed merger, the CNBC Board of Directors
voted to
36
approve the Merger Agreement. First Merchants and CNBC executed the Merger
Agreement on August 28, 2002, and issued press releases publicly announcing the
proposed merger.
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:
o First Merchants' respect for the ability and integrity of the
CNBC Board of Directors, management, and staff, and their
affiliates;
o First Merchants' belief that expanding its operations in the
Columbus, Ohio market area served by CNBC offers important
long-term strategic benefits to First Merchants;
o a review of (i) the business, operations, earnings, and
financial condition including the capital levels and asset
quality, of CNBC 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 CNBC operates,
including existing competition, history of the market areas
with respect to financial institutions, and average demand for
credit, on a historical and prospective basis, and (iii) the
results of First Merchants' due diligence review of CNBC; and
o a variety of factors affecting and relating to the overall
strategic focus of First Merchants, including First Merchants'
desire to expand into contiguous markets outside the State of
Indiana.
CNBC's Reasons for the Merger
In reaching its decision to approve the Merger Agreement, your Board of
Directors considered the following factors:
o The prospects of CNBC and First Merchants, as separate
institutions and as combined;
o the ability to offer additional services to Commerce Bank
customers with First Merchants' increased lending capacity,
enhanced trust and investment management services and
commercial insurance business;
o First Merchants' agreement to operate Commerce Bank as a
wholly-owned subsidiary of First Merchants for a period of at
least 5 years;
37
o the opinion of Stifel indicating that the consideration to be
received by CNBC's shareholders under the Merger Agreement is
fair from a financial point of view.
o the possibility of increased liquidity through ownership of
First Merchants common stock as compared to CNBC common shares
because First Merchants common stock has historically had
average trading volumes significantly higher than CNBC common
shares;
o the anticipated tax-free nature of the merger to the
shareholders of CNBC receiving First Merchants common stock in
exchange for their CNBC common shares;
o the level of dividends paid by First Merchants; and
o an analysis of alternatives to CNBC merging with First
Merchants.
Your Board of Directors also considered the effect the merger would have
on Commerce Bank's customers and employees and the communities served by
Commerce 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 Commerce Bank's employees within First Merchants or one of its
subsidiaries. The CNBC Board examined First Merchants' continuing commitment to
the communities served by the institutions it has previously acquired.
Additionally, as a subsidiary of First Merchants, Commerce Bank would be able to
offer more products and services to its customers because of First Merchants'
greater resources, especially in the areas of trust and investment management
services.
Based upon the foregoing factors, your Board of Directors unanimously
approved the Merger Agreement. In view of the variety of factors considered by
the Board of Directors, the Board did not quantify or otherwise attempt to
assign relative weights to the factors considered in making its determination,
nor did it evaluate whether these factors were of equal importance. In
considering the factors described above, individual members of the Board of
Directors may have given different weight to the various factors.
Recommendation of the Board of Directors
Your Board of Directors has carefully considered and unanimously approved
the Merger Agreement and recommends to CNBC shareholders that you vote FOR the
adoption of the Merger Agreement.
Opinion of CNBC's Financial Advisor
CNBC has retained Stifel as its financial advisor in connection with the
merger because Stifel is a nationally recognized investment-banking firm with
substantial expertise in transactions similar to the merger. Stifel is an
investment banking and securities firm with
38
membership on all principal United States securities exchanges. As part of its
investment banking activities, Stifel is regularly engaged in the independent
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
In connection with the August 27, 2002 meeting of the board of directors
of CNBC, Stifel rendered its opinion that, as of such date, the consideration
pursuant to the agreement was fair to the holders of CNBC common shares from a
financial point of view. On August 16th, First Merchants declared a 5% stock
dividend payable to its shareholders of record on August 30, 2002. Stifel's
analysis and related opinion were delivered after the declaration of the
dividend, but prior to issuance, and were based on the pre-dividend exchange
ratio of 0.96. Stifel's analysis considered that the Merger Agreement describes
the adjustment of the exchange ratio from 0.96 to 1.01 due to this stock
dividend. The full text of Stifel's opinion, which sets forth the assumptions
made, matters considered and limitations of the review undertaken, is attached
as Appendix C to this proxy statement-prospectus and is incorporated herein by
reference, and should be read in its entirety in connection with this proxy
statement-prospectus. The summary of the opinion of Stifel set forth in this
proxy statement-prospectus is qualified in its entirety by reference to the full
text of such opinion.
No limitations were imposed by CNBC on the scope of Stifel's investigation
or the procedures to be followed by Stifel in rendering its opinion. Stifel was
not requested to and did not make any recommendation to CNBC's board of
directors as to the form or amount of the consideration to be paid to CNBC or
its shareholders, which was determined through arm's length negotiations between
the parties. In arriving at its opinion, Stifel did not ascribe a specific range
of values to CNBC. Its opinion is based on the financial and comparative
analyses described below. Stifel's opinion was directed solely to CNBC's board
of directors for its use in connection with its consideration of the merger.
Stifel's opinion addressed only the fairness of the consideration to be received
from a financial point of view, did not address any other aspect of the merger,
and was not intended to be and does not constitute a recommendation to any
shareholder of CNBC as to how such shareholder should vote with respect to the
merger. Stifel was not requested to opine as to, and its opinion does not
address, CNBC's underlying business decision to proceed with or effect the
merger or the relative merits of the merger compared to any alternative
transaction that might be available to CNBC.
In connection with its August 27, 2002 opinion and its written opinion
dated the date hereof, Stifel, among other things:
o reviewed the form of the merger agreement as executed on August 28,
2002;
o reviewed the financial statements of CNBC and First Merchants
included in their respective 10-Ks for the five years ended December
31, 2001 and their respective 10-Qs for the quarter ended June 30,
2002;
o reviewed certain internal financial analyses and forecasts for CNBC
and First Merchants prepared by their respective managements;
39
o conducted conversations with CNBC's and First Merchants' senior
management regarding recent developments and management's financial
forecasts for CNBC and First Merchants;
o spoke to members of CNBC's and First Merchants' senior management
regarding factors which affect each entity's business;
o compared certain financial and securities data of CNBC and First
Merchants with various other companies whose securities are traded
in public markets and reviewed the historical stock prices and
trading volumes of the common stock of CNBC and First Merchants;
o reviewed the financial terms of certain other business combinations;
and
o conducted such other financial studies, analyses and investigations
as it deemed appropriate for purposes of its opinion.
Stifel also took into account its assessment of general economic, market
and financial conditions and its experience in other transactions, as well as
its experience in securities valuations and its knowledge of the commercial
banking industry generally.
In rendering its opinion, Stifel relied upon and assumed, without
independent verification, the accuracy and completeness of all of the financial
and other information that was provided to it or that was otherwise reviewed by
it and did not assume any responsibility for independently verifying any of such
information. With respect to the financial forecasts supplied to Stifel
(including without limitation, projected cost savings and operating synergies
resulting from the merger), Stifel assumed that they were reasonably prepared on
the basis reflecting the best currently available estimates and judgments of the
management of CNBC and First Merchants as to the future operating and financial
performance of CNBC and First Merchants, that they would be realized in the
amounts and time periods estimated and that they provided a reasonable basis
upon which Stifel could form its opinion. Stifel also assumed that there were no
material changes in the assets, liabilities, financial condition, results of
operations, business or prospects of either CNBC or First Merchants since the
date of the last financial statements made available to it. Stifel also assumed,
without independent verification and with CNBC's consent, that the aggregate
allowances for loan losses set forth in the financial statements of CNBC and
First Merchants are in the aggregate adequate to cover all such losses. Stifel
did not make or obtain any independent evaluation, appraisal or physical
inspection of CNBC's or First Merchants' assets or liabilities, the collateral
securing any of such assets or liabilities, or the collectibility of any such
assets nor did it review loan or credit files of CNBC or First Merchants. Stifel
relied on advice of CNBC's counsel as to all legal matters with respect to CNBC,
the agreement and the transactions and other matters contained or contemplated
therein. Stifel assumed, with CNBC's consent, that there are no factors that
would delay or subject to any adverse conditions any necessary regulatory or
governmental approval and that all conditions to the merger will be satisfied
and not waived.
In rendering its opinion, Stifel assumed that the merger will be
consummated as provided in the agreement, will constitute a tax-free
reorganization as contemplated by the agreement and
40
will be accounted for under the purchase accounting method. Stifel's opinion was
necessarily based on economic, market, financial and other conditions as they
existed on, and on the information made available to it as of, the date of its
opinion, and did not imply any conclusion as to the price or trading range of
the CNBC common shares or the First Merchants common stock, which may vary
depending upon various factors, including changes in interest rates, dividend
rates, market conditions, economic conditions and other factors that influence
the price of securities.
The financial forecasts furnished to Stifel for CNBC and First Merchants
and estimates of cost savings and operating synergies resulting from the merger
were prepared by the managements of CNBC and First Merchants and constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. As a matter of policy, CNBC and First Merchants
do not publicly disclose internal management forecasts, projections or estimates
of the type furnished to Stifel in connection with its analysis of the financial
terms of the merger, and such forecasts and estimates were not prepared with a
view towards public disclosure. These forecasts and estimates were based on
numerous variables and assumptions which are inherently uncertain and which may
not be within the control of the management of either CNBC or First Merchants,
including, without limitation, factors related to the integration of CNBC and
First Merchants and general economic, regulatory and competitive conditions.
Accordingly, actual results could vary materially from those set forth in such
forecasts and estimates.
In connection with rendering its August 27, 2002 opinion, Stifel performed
a variety of financial analyses that are summarized below. Such summary does not
purport to be a complete description of such analyses. Stifel believes that its
analyses and the summary set forth herein must be considered as a whole and that
selecting portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses and processes underlying its opinions. The preparation of a fairness
opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary description. In its
analyses, Stifel made numerous assumptions with respect to industry performance,
business and economic conditions, and other matters, many of which are beyond
the control of CNBC or First Merchants. Any estimates contained in Stifel's
analyses are not necessarily indicative of actual future values or results,
which may be significantly more or less favorable than suggested by such
estimates. Estimates of values of companies do not purport to be appraisals or
necessarily reflect the actual prices at which companies or their securities
actually may be sold. No company or transaction utilized in Stifel's analyses
was identical to CNBC or First Merchants or the merger. Accordingly, an analysis
of the results described below is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other facts that could affect the public
trading value of the companies to which they are being compared. None of the
analyses performed by Stifel was assigned a greater significance by Stifel than
any other. The analyses described below does not purport to be indicative of
actual future results, or to reflect the prices at which CNBC common shares or
First Merchants common stock may trade in the public markets.
The following is a summary of the financial analysis performed by Stifel
in connection with providing its opinion on August 27, 2002.
41
Pro Forma Effect of the Merger. Stifel reviewed certain estimated future
operating and financial information developed by CNBC and First Merchants and
certain estimated future operating and financial information for the pro forma
combined entity resulting from the merger for the twelve month periods ended
December 31, 2003 and December 31, 2004. Based on this analysis, Stifel compared
certain of CNBC's estimated future per share results with such estimated figures
for the pro forma combined entity. On a pro forma basis, the merger is forecast
to be accretive to CNBC's earnings per share for the twelve month periods ended
December 31, 2003 and December 31, 2004. Stifel also reviewed certain historical
financial information in order to determine the effect of the merger on CNBC's
book value and tangible book value. Based on this analysis, at June 30, 2002, on
a pro forma basis the merger is forecast to be accretive to CNBC's book value
per share and dilutive to CNBC's tangible book value per share. Stifel also
compared CNBC's stand-alone common stock dividends per share with such estimated
figures for the pro forma combined entity. On a pro forma basis, the merger is
forecast to be accretive to CNBC's dividends per share.
Analysis of Bank Merger Transactions. Stifel analyzed certain information
relating to recent transactions in the banking industry, consisting of (1) 160
acquisitions announced between June 30, 2001 and August 16, 2002, involving
sellers in all regions of the United States with announced transactions values
and excluding merger of equals transactions, referred to below as Group A, (2)
46 acquisitions announced between June 30, 2001 and August 16, 2002, involving
sellers in the midwestern region of the United States with announced
transactions values and excluding merger of equals transactions, referred to
below as Group B, and (3) 13 selected acquisitions announced between August 1,
2000 and August 16, 2002, involving sellers in the United States with announced
transactions values between $29 million and $300 million and excluding merger of
equals transactions, referred to below as Group C. Stifel calculated the
following ratios with respect to the merger and the selected transactions:
CNBC/ Group A Selected Transactions
First
Merchants
25th 75th
Ratios Percentile Median Percentile
------ ---------- ------ ----------
Deal Price Per Share/ Book Value
Per Share 232.2% 141.5% 176.8% 221.8%
Deal Price Per Share/Tangible Book
Value Per Share 232.4% 144.3% 179.3% 226.5%
Adjusted Deal Price/6.50% Equity 253.9% 157.3% 207.3% 269.9%
Deal Price Per Share/Last 12
Months Earnings Per Share 16.8x 15.7x 18.9x 24.4x
Deal Price/Assets 18.8% 13.2% 16.8% 21.1%
Premium over Tangible Book
Value/Deposits 12.8% 4.9% 8.4% 13.7%
Deal Price/Deposits 24.1% 15.4% 20.4% 24.6%
42
CNBC/ Group B Selected Transactions
First
Merchants
25th 75th
Ratios Percentile Median Percentile
------ ---------- ------ ----------
Deal Price Per Share/ Book Value
Per Share 232.2% 126.3% 152.7% 196.2%
Deal Price Per Share/Tangible Book
Value Per Share 232.4% 126.8% 176.7% 204.5%
Adjusted Deal Price/6.50% Equity 253.9% 139.5% 180.0% 216.8%
Deal Price Per Share/Last 12
Months Earnings Per Share 16.8x 15.2x 18.0x 22.5x
Deal Price/Assets 18.8% 12.5% 15.0% 19.6%
Premium over Tangible Book
Value/Deposits 12.8% 3.3% 6.2% 11.5%
Deal Price/Deposits 24.1% 15.3% 18.8% 23.0%
CNBC/
First
Merchants Group C Selected Transactions
25th 75th
Ratios Percentile Median Percentile
------ ---------- ------ ----------
Deal Price Per Share/ Book Value
Per Share 232.2% 172.4% 193.9% 244.4%
Deal Price Per Share/Tangible Book
Value Per Share 232.4% 179.3% 225.8% 255.3%
Adjusted Deal Price/6.50% Equity 253.9% 208.7% 218.8% 267.8%
Deal Price Per Share/Last 12
Months Earnings Per Share 16.8x 16.0x 16.6x 18.6x
Deal Price Per Share/2002
Estimated Earnings Per Share 15.9x 15.3x 16.3x 18.5x
Deal Price/Assets 18.8% 15.2% 17.9% 21.8%
Premium over Tangible Book
Value/Deposits 12.8% 9.4% 12.7% 14.3%
Deal Price/Deposits 24.1% 19.1% 21.5% 28.1%
This analysis resulted in a range of imputed values for CNBC common shares
of between $20.63 and $30.42 based on the median multiples for Group A, between
$17.81 and $28.91 based on the median multiples for Group B, and between $22.62
and $27.76 based on the median multiples for Group C.
Present Value Analysis. Applying discounted cash flow analysis to the
theoretical future earnings and dividends of CNBC, Stifel compared the
consideration to be received in exchange for one share of CNBC common stock
under the terms of the agreement as executed on August 28, 2002 to the
calculated future value of one share of CNBC's common stock on a stand-alone
basis. The analysis was based upon management's projected earnings growth, a
range of
43
assumed price/earnings ratios, and a 12.5%, 15.0%, 17.5% and 20.0% discount
rate. Stifel selected the range of terminal price/earnings ratios on the basis
of past and current trading multiples for other publicly traded comparable
commercial banks. The stand-alone present value of CNBC's common shares
calculated on this basis ranged from $17.00 to $29.00 per share.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
Stifel estimated the net present value of the future streams of after-tax cash
flow that CNBC could produce to benefit a potential acquiror, referred to below
as dividendable net income. In this analysis, Stifel assumed that CNBC would
perform in accordance with management's estimates and calculated assumed
after-tax distributions to a potential acquiror such that its tangible common
equity ratio would be maintained at 6.5 percent of assets. Stifel calculated the
sum of the assumed perpetual dividendable net income streams per share beginning
in the year 2002, discounted to present values at assumed discount rates ranging
from 12.5% to 17.5%. This discounted cash flow analysis indicated an implied
equity value reference range of $24.25 to $45.43 per share of CNBC's common
stock. This analysis did not purport to be indicative of actual future results
and did not purport to reflect the prices at which shares of CNBC's common
shares may trade in the public markets. A discounted cash flow analysis was
included because it is a widely used valuation methodology, but the results of
such methodology are highly dependent upon the numerous assumptions that must be
made, including estimated revenue enhancements, earnings growth rates, dividend
payout rates and discount rates.
Contribution Analysis. Stifel reviewed certain financial information for
CNBC and First Merchants for the twelve month period ended December 31, 2001,
six month period ended June 30, 2002 and three month period ended June 30, 2002
including net interest income, non-interest income, non-interest expense, net
income. In addition, Stifel reviewed financial information at June 30, 2002 for
total assets, total loans, loan loss reserves, total deposits, total equity and
total tangible equity. Stifel also reviewed projected net income for the twelve
month periods ended December 31, 2002 and December 31, 2003 and projected cash
net income for the twelve month period ended December 31, 2003 for CNBC and
First Merchants prepared by their respective managements. Stifel then compared
the financial information for CNBC to the pro forma combined figures for CNBC
and First Merchants. The contribution analysis for these financials indicated
that CNBC would contribute between 2% and 14% of the pro forma combined figures
for CNBC and First Merchants. This analysis resulted in a range of imputed
values for CNBC common shares of between $4.90 and $33.50 based on CNBC's
contribution to the pro forma combined figures for CNBC and First Merchants.
Analysis of Premium to Market Price for Merger Transactions. Stifel
analyzed the premiums paid to the then current market price one day, one week
and one month prior to the date of announcement of a transaction for 494
transactions in the bank and thrift industries announced in the United States
between August 13, 1997 and August 16, 2002. Stifel calculated the following
ratios with respect to the merger and such transactions:
44
CNBC/
First Transactions Announced Between
Merchants 8/13/97 & 8/16/02
25th 75th
Market Premium Data Percentile Median Percentile
------------------- ---------- ------ ----------
Premium to stock price 1 day prior to announcement 19.1% 12.5% 25.9% 42.9%
Premium to stock price 1 week prior to announcement 23.1% 17.1% 30.1% 46.4%
Premium to stock price 1 month prior to announcement 38.2% 19.8% 34.7% 51.9%
This analysis resulted in a range of imputed values for CNBC common shares
of between $26.40 and $28.63 based on the median premiums for such transactions.
Comparison of Selected Companies. Stifel reviewed and compared certain
multiples and ratios for the merger with a peer group of 8 selected banks with
assets between $500 million and $1.1 billion which Stifel deemed to be relevant.
The group of selected banks consisted of DCB Financial Corporation, Macatawa
Bank Corporation, Mercantile Bank Corporation, Monroe Bancorp, NB&T Financial
Group, Inc., Bank of the Ozarks, Inc., S.Y. Bancorp, Inc., and Wayne Bancorp,
Inc. In order to calculate a range of imputed values for a CNBC common share,
Stifel applied a 34.7% control premium to the trading prices of the selected
group of comparable companies and compared the resulting theoretical offer price
to each of book value, tangible book value, adjusted 6.5% equity, estimated 2002
earnings, estimated 2003 earnings as provided by Institutional Brokers Estimate
System ("IBES"), assets, tangible book value to deposits and deposits. Stifel
then applied the resulting range of multiples and ratios for the peer group
specified above to the appropriate financial results of CNBC. This analysis
resulted in a range of imputed values for CNBC common shares of between $18.55
and $54.82 based on the minimum and maximum multiples and ratios for the peer
group. The 34.7% control premium selected by Stifel was based on a 5 year
analysis of market premiums paid in bank and thrift merger transactions.
Additionally, Stifel calculated the following ratios with respect to the 8
selected comparable companies after application of the 34.7% control premium:
45
CNBC/
First
Merchants 8 Selected Comparable Companies
Ratios Minimum Maximum
------ ------- -------
Deal Price Per Share/ Book Value
Per Share 232.2% 159.0% 424.3%
Deal Price Per Share/Tangible Book
Value Per Share 232.4% 179.4% 427.9%
Adjusted Deal Price/6.50% Equity 253.9% 172.9% 506.3%
Deal Price Per Share/Estimated
2002 Earnings Per Share 15.9x 12.3x 23.3x
Deal Price Per Share/Estimated
2003 Earnings Per Share 14.0x 11.0x 20.5x
Deal Price/Assets 18.8% 14.0% 36.6%
Premium over Tangible Book
Value/Deposits 12.8% 8.5% 31.7%
Deal Price/Deposits 24.1% 20.0% 43.8%
As described above, Stifel's opinion was among the many factors taken into
consideration by the CNBC board of directors in making its determination to
approve the merger.
Pursuant to the terms of Stifel's engagement, CNBC paid Stifel a
nonrefundable cash fee of $100,000 upon the signing of the definitive agreement.
In addition, CNBC has agreed to pay Stifel a fee of 1.25% of the total aggregate
consideration paid in the transaction, less the fees already paid, subject to
and conditioned upon consummation of the merger. CNBC has also agreed to
reimburse Stifel for certain out-of-pocket expenses and has agreed to indemnify
Stifel, its affiliates and their respective partners, directors, officers,
agents, consultants, employees and controlling persons against certain
liabilities, including liabilities under the federal securities laws.
During the past year, Stifel has traded equity securities of CNBC and
First Merchants for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
In addition, in April, 2002, Stifel acted as an underwriter for First Merchants
in its public offering of approximately $53 million of trust preferred
securities, for which Stifel was paid approximately $929,564 in underwriting
commissions. First Merchants is also contemplating using Stifel as placement
agent for the private placement of up to $25 million in trust preferred
securities to fund the cash consideration payable to CNBC shareholders in
connection with the merger. For its services as placement agent, Stifel would be
paid approximately $750,000.
Exchange of CNBC Common Shares
As of the effective date of the merger, you will be entitled to receive
for each outstanding CNBC common share you own, other than for shares as to
which dissenters' rights have been exercised, at your election, either (i) 1.01
shares of First Merchants common stock (Option 1), or
46
(ii) $29.57 in cash (Option 2). You may also elect to receive a combination of
First Merchants common stock and cash for your shares. The 1.01 conversion ratio
is subject to upward or downward adjustment under certain circumstances. See
"THE MERGER - Conversion Ratio Adjustment."
You should obtain current market quotations for First Merchants common
stock and CNBC common shares. 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 First Merchants
common stock which you may elect to receive in exchange for each of your CNBC
shares is fixed, subject to upward or downward 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 you 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 1.01 conversion ratio. First Merchants declared a 5%
stock dividend on its shares of common stock payable on September 13, 2002, to
shareholders of First Merchants of record on August 30, 2002. The conversion
ratio of 1.01 takes into account such 5% stock dividend.
An Election Form is being mailed to you along with this document. You must
elect either Option 1 (stock) or Option 2 (cash) with respect to each of the
CNBC common shares you own by completing the Election Form. You may elect a
combination of Option 1 (stock) or Option 2 (cash) for your CNBC common shares.
To be effective, First Merchants Bank, National Association, must receive a
properly completed Election Form by 5:00 p.m. local time on ______, 2003.
If a properly completed Election Form is not timely received for your CNBC
shares, you will be treated as if you elected Option 1 (stock) for all shares
you own.
In the event the elections submitted by CNBC shareholders under Option 2
(cash) would entitle CNBC's shareholders to receive in the aggregate less than
$24,561,693 in cash, all valid Option 1 (stock) elections and Option 2 (cash)
elections of CNBC shareholders shall be honored. In the event (i) the elections
submitted by CNBC shareholders under Option 2 (cash) would entitle CNBC
shareholders to receive in the aggregate $24,561,693 or more 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
CNBC shareholders shall be converted into Option 1 (stock) elections.
The 10 Option 2 (cash) elections covering the largest number of CNBC
common shares will be converted into Option 1 (stock) elections on a pro rata
basis first; provided that such Option 2 (cash) elections shall be converted
into Option 1 (stock) elections only to the extent necessary so that the total
remaining number of CNBC common shares outstanding covered by Option 2 (cash)
elections is such that the merger will result in cash payments of less than
47
$24,561,693 in the aggregate and will satisfy the Continuity of Interest Rule.
In the event the conversion of the 10 largest Option 2 (cash) elections (in
their entirety) to the Option 1 (stock) elections does not result in the merger
satisfying the Continuity of Interest Rule and cash payments of less than
$24,561,693, the next 10 largest Option 2 (cash) elections shall also be
converted into Option 1 (stock) elections on the same pro rata basis as applied
to the 10 largest Option 2 (cash) elections. This methodology will continue to
be applied to Option 2 (cash) elections until the remaining number of CNBC
shares covered by Option 2 (cash) elections is such that the merger will result
in cash payments of less than $24,561,693 and will satisfy the Continuity of
Interest Rule. As a result of such provisions, certain CNBC shareholders may
receive less or no cash and more or all First Merchants common stock for their
shares than they elected based on the choices made by the other CNBC
shareholders.
First Merchants will not issue fractional shares of First Merchants common
stock to CNBC shareholders. Each CNBC 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 CNBC 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 30 NASDAQ trading days preceding the 5th
calendar day prior to the effective date of the merger (First Merchants Average
Price).
If you hold your CNBC common shares 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,
Attn: Brian Edwards.
After completion of the merger, your stock certificates previously
representing CNBC common shares 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 CNBC 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 CNBC will be closed
and no transfer of CNBC common shares will be made thereafter. If, after the
effective date of the merger, you present certificates representing CNBC common
shares for registration or transfer, the certificates will be cancelled and
exchanged for shares of First Merchants' common stock and/or cash, as
applicable.
Following completion of the merger, First Merchants will mail a letter of
transmittal to each CNBC shareholder. This transmittal letter will contain
instructions on how to surrender your certificates representing CNBC common
shares. You should not return your CNBC
48
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
CNBC 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 CNBC stock
certificates to First Merchants accompanied by a properly completed and executed
letter of transmittal. Delivery of CNBC 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 CNBC common shares 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 CNBC have the right to terminate the
Merger Agreement. See "THE MERGER - Termination; Waiver; Amendment" on page 57.
If either party exercises its right of termination, the other party then has the
right to adjust the conversion ratio. If adjusted, the new conversion ratio will
be determined by taking the target price triggering the adjustment times the
existing conversion ratio of 1.01, divided by the First Merchants Average Price.
Provided below are a description of the target prices triggering a possible
termination of the Merger Agreement or adjustment in the conversion ratio,
followed by a scenario detailing how the conversion ratio may be adjusted. The
scenarios are provided only as examples to assist you in understanding the
conversion ratio adjustment provisions.
First, if the First Merchants Average Price is less than $22.61, then CNBC
may terminate the Merger Agreement. If CNBC'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 $22.61 times the existing conversion ratio of 1.01, 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 $22.61) and CNBC's Board elects to terminate the Merger
Agreement by providing the required notice, then, at First Merchants'
election, the conversion ratio would be adjusted as follows by First
Merchants and CNBC:
49
22.61 x 1.01 = 1.14
------------
20.00
Thus, the adjusted conversion ratio would be 1.14 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 CNBC common share you
own at your election, either (i) 1.14 shares of First Merchants common
stock under Option 1, or (ii) $29.57 in cash under Option 2.
Second, if the First Merchants Average Price is greater than $30.59, 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 CNBC 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, CNBC may elect to decrease the conversion ratio to
equal a number equal to $30.59 times the existing conversion ratio of 1.01,
divided by the First Merchants Average Price. If CNBC elects to adjust the
conversion ratio, the Merger Agreement will remain in effect with the adjusted
conversion ratio and will not be terminated. If CNBC 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 $32.00 (which is
greater than $30.59) and First Merchants Board elects to terminate the
Merger Agreement by providing the required notice, then, at CNBC's
election, the conversion ratio would be adjusted as follows by First
Merchants and CNBC:
30.59 x 1.01 = 0.97
------------
32.00
Thus, the adjusted conversion ratio would be 0.97 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 CNBC common share you
own at your election, either (i) 0.97 shares of First Merchants common
stock under Option 1, or (ii) $29.57 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 document to help you understand how the conversion
ratio adjustment works at various arbitrarily chosen prices. First Merchants and
CNBC will determine if an adjustment to the conversion ratio will be made in the
5 days preceding completion of the merger.
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Rights of Dissenting Shareholders
If the merger is consummated, you will have certain rights under the Ohio
Revised Code to dissent and to demand to receive payment in cash of the "fair
cash value" of your CNBC common shares. If you vote in favor of adoption of the
merger, you will not be entitled to relief as a dissenting shareholder. In order
to qualify for rights as a dissenting shareholder, you must:
o have been a record holder of CNBC common shares on ________ __,
2003, the record date for the special shareholders' meeting;
o not have voted your common shares in favor of the merger; and
o deliver to CNBC, not later than 10 days after the date of the
special shareholders meeting at which the Merger Agreement is
adopted, a written demand for payment of the fair cash value of your
CNBC common shares. Your written demand must state your address, the
number and class of the shares for which you are demanding payment,
and the amount you claim is the fair cash value of your shares.
A vote against adoption of the merger will not satisfy the requirement of
a written demand of payment.
After receiving your written demand for payment, CNBC may then request
that you submit to CNBC your certificates representing your CNBC common shares.
If requested, you must submit the certificates to CNBC within 15 days from the
date of the sending of such request so that CNBC may endorse them with a legend
stating that a demand for the fair cash value of such CNBC common shares has
been made. Your failure to deliver such certificates within the 15-day period
terminates your rights as a dissenting shareholder under Ohio law, at the option
of CNBC.
If you and CNBC cannot come to an agreement on the fair cash value of your
CNBC common shares, either you, CNBC or First Merchants, as the surviving
corporation to the merger, may file a complaint in the Court of Common Pleas of
Franklin County, Ohio requesting a determination of the fair cash value. If an
agreement on the fair cash value of your shares has not been reached and no
complaint is filed within 3 months following your delivery of a written demand
for payment to CNBC, your rights as a dissenting shareholder under Ohio law will
terminate.
The foregoing is a summary of the statutory rights of dissenting
shareholders under the Ohio Revised Code and does not purport to be a complete
statement of the procedures to be followed by a CNBC shareholder desiring to
exercise dissenters' rights. This summary is qualified in its entirety by
reference to the full text of Section 1701.84 and Section 1701.85 of the Ohio
Revised Code included herein as Appendix B and incorporated herein by this
reference. The preservation and exercise of dissenters' rights are conditioned
on strict adherence to the applicable provisions of the Ohio Revised Code.
51
If you wish to exercise dissenters' rights for the merger and you fail to
comply with the statutory requirements under the Ohio Revised Code for
exercising dissenters' rights, you will lose such rights. Accordingly, CNBC
shareholders who may wish to exercise dissenters' rights should consider seeking
independent legal advice.
Resale of First Merchants Common Stock by CNBC Affiliates
Shares of First Merchants common stock to be issued to CNBC 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 CNBC 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 CNBC "affiliate" under Rule 145 of the
Securities Act. Shares held by any person who is an "affiliate" of CNBC 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.
The Merger Agreement provides that CNBC will provide First Merchants with
a list identifying each affiliate of CNBC. Directors, executive officers and 10%
shareholders are generally deemed to be "affiliates" for purposes of Rule 145 of
the Securities Act. The Merger Agreement also requires that each CNBC affiliate
deliver to First Merchants a written transfer restriction agreement prior to
completion of the merger. The transfer restriction agreement provides 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 CNBC
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 CNBC, you should confer with
legal counsel regarding the transfer restrictions that may apply.
Representations and Warranties
The Merger Agreement contains some customary representations and
warranties made both by CNBC and First Merchants, including representations and
warranties relating to:
52
o due organization and existence;
o corporate power and authorization to enter into the transactions
contemplated by the Merger Agreement;
o capitalization;
o governmental filings, notices, authorizations, consents and
approvals required in connection with the transactions contemplated
by the Merger Agreement;
o third party filings, notices, authorizations, consents and approvals
required in connection with the transactions contemplated by the
Merger Agreement;
o corporate books and records;
o compliance with law;
o accuracy of statements made as part of representations and
warranties in the Merger Agreement;
o litigation and pending proceedings;
o financial statements;
o absence of certain material changes or events;
o absence of undisclosed liabilities;
o absence of default under material contracts and agreements;
o loans and investments;
o employee benefits plans and plan compliance;
o taxes, returns and reports;
o deposit insurance with the Federal Deposit Insurance Corporation;
o reports to regulatory agencies;
o environmental matters;
o compliance with the securities laws and filings with the Securities
and Exchange Commission; and
53
o brokerage fees.
In addition, CNBC made certain additional representations and warranties
to First Merchants relating to:
o subsidiaries;
o title to assets;
o certain obligations to employees;
o properties owned and leased by CNBC;
o shareholder rights plans; and
o indemnification agreements.
The representations and warranties in the Merger Agreement will not
survive the effective date of the merger or the termination of the Merger
Agreement. After the effective date of the merger or termination of the Merger
Agreement, neither CNBC and the officers and directors of CNBC and its
subsidiaries nor First Merchants and its officers and directors will have any
liability for any of their representations and warranties made in the Merger
Agreement unless a breach of a representation or warranty is willful or in the
case of fraud.
54
Conditions to Completion of the Merger
First Merchants' and CNBC's obligations to complete the merger are subject
to the satisfaction of the following conditions, among other things, at or prior
to the effective date of the merger:
o the adoption of the Merger Agreement by the shareholders of CNBC;
o the registration statement relating to the issuance of First
Merchants common stock being declared effective by the SEC and First
Merchants receiving any state securities and blue sky approvals
required for the offer and sale of First Merchants common stock to
CNBC shareholders;
o notification to the Nasdaq Stock Market, Inc. regarding the shares
of First Merchants common stock to be issued to the CNBC
shareholders in connection with the merger;
o the receipt of the approval of the Board of Governors of the Federal
Reserve System of the merger and the expiration of any regulatory
waiting period prior to consummation of the merger;
o there being no order, decree or injunction of any court or agency in
effect which enjoins or prohibits the consummation of the merger;
and
o 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:
o 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;
o the representations and warranties of CNBC set forth in the Merger
Agreement being true and correct as of the effective date of the
merger or any inaccuracies in any such representations and
warranties of CNBC set forth in the Merger Agreement not having a
material adverse effect on the financial position, results of
operations or business of CNBC and its subsidiaries taken as a
whole;
o the performance in all material respects by CNBC of all obligations
required by the Merger Agreement to be performed by it at or prior
to the effective date of the merger;
o the receipt by First Merchants of certain agreements from affiliates
of CNBC regarding the resale of any First Merchants common stock
received in the merger;
55
o the receipt by First Merchants of an officer's certificate, a legal
opinion and various closing documents;
o the exercise of all of the outstanding stock options of CNBC, no
stock options being outstanding and all stock option plans of CNBC
having been terminated;
o CNBC having no more than 2,076,572 shares of common stock issued and
outstanding as of the effective date of the merger; and
o Thomas D. McAuliffe and John A. Romelfanger having entered into
executive employment agreements and change in control agreements
with First Merchants prior to the effective date of the merger.
The obligation of CNBC to consummate the merger is also subject to the
fulfillment of other conditions, including the following:
o the receipt of an opinion of CNBC's counsel, Squire, Sanders &
Dempsey L.L.P., that the merger will be treated as a
"reorganization" for purposes of Section 368 of the Internal Revenue
Code of 1986, as amended, and that no gain or loss will be
recognized by CNBC shareholders to the extent they receive shares of
First Merchants common stock as consideration for CNBC common
shares;
o the representations and warranties of First Merchants set forth in
the Merger Agreement being true and correct as of the effective date
of the merger or any inaccuracies in any such representations and
warranties of First Merchants set forth in the Merger Agreement not
having a material adverse effect on the financial position, results
of operations or business of First Merchants and its subsidiaries
taken as a whole;
o the performance in all material respects by First Merchants of all
obligations required to be performed by it under the Merger
Agreement at or prior to the effective date of the merger;
o the receipt by CNBC of an officer's certificate, a legal opinion and
various closing documents; and
o First Merchants having entered into executive employment agreements
and change in control agreements with Thomas D. McAuliffe and John
A. Romelfanger prior to the effective date of the merger.
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 conditions are not satisfied or
waived, First Merchants and/or CNBC may terminate the Merger Agreement. See "THE
MERGER - Termination; Waiver; Amendment," "THE MERGER - Resale of First
Merchants Common Stock by CNBC Affiliates," "THE
56
MERGER - Regulatory Approval," "THE MERGER - Interests of Certain Persons in the
Merger," "FEDERAL INCOME TAX CONSEQUENCES," and Appendix A.
Termination; Waiver; Amendment
First Merchants and CNBC may terminate the Merger Agreement at any time
before the merger is completed, including after the CNBC shareholders have
adopted the Merger Agreement, if one of the events which gives the party the
right to terminate occurs. The Merger Agreement may be terminated:
1) by mutual consent of First Merchants and CNBC in writing, if the
Board of Directors of each company approves termination of the
Merger Agreement by a vote of a majority of its members;
2) by either First Merchants or CNBC, if there has been a 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, provided the breach,
individually or in the aggregate with other breaches, would result
in a material adverse effect on the financial position, results of
operations or business of the other party and its subsidiaries taken
as a whole;
3) by either First Merchants or CNBC, if there has been the occurrence
of an event, fact or circumstance which has or may have a material
and adverse effect on the financial position, results of operations
or business of the other party and its subsidiaries taken as a
whole;
4) by either First Merchants or CNBC, if the terminating party
determines in its sole discretion that completion of the merger is
inadvisable or impracticable due to the commencement of material
litigation or proceedings against one of the parties;
5) by either First Merchants or CNBC, if the merger has not been
completed by April 30, 2003 (provided that the terminating party is
not then in material breach of the Merger Agreement);
6) 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 effective date of the merger is
greater than $30.59 and CNBC does not elect to adjust the conversion
ratio, as described in more detail in this document under "THE
MERGER - Conversion Ratio Adjustment";
7) by CNBC, 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 effective date of the merger is less than $22.61
and First Merchants does not elect to adjust the conversion ratio,
as
57
described in more detail in this document under "THE MERGER -
Conversion Ratio Adjustment";
8) by First Merchants, if CNBC fails to give First Merchants written
notice that it intends to furnish information to or enter into
discussions or negotiations with a third party relating to a
proposed acquisition of CNBC or Commerce Bank prior to engaging in
discussions or negotiations, or if CNBC, within 20 days after giving
written notice to First Merchants of CNBC's intent to furnish
information to or enter into discussions or negotiations with
another person or entity, does not terminate all discussions,
negotiations and information exchanges related to such acquisition
proposal and provide First Merchants with written notice of such
termination;
9) by First Merchants, if CNBC's Board of Directors withdraws or
modifies its recommendation to CNBC's shareholders to vote in favor
of the merger following receipt of a written proposal for an
acquisition from a third party;
10) by CNBC, if CNBC's Board of Directors determines, in the appropriate
discharge of its fiduciary duties, that it must terminate the Merger
Agreement following receipt of an unsolicited acquisition proposal
from a third party;
11) by either First Merchants or CNBC, if such party is unable to
satisfy the conditions precedent to the merger by April 30, 2003
(providing such party is not then in material breach of the Merger
Agreement); or
12) by CNBC, if First Merchants enters into a definitive agreement in
which it is the company to be acquired which would result in a
change in control of First Merchants or require approval pursuant to
the Bank Holding Company Act of 1956, as amended.
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
CNBC 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 CNBC takes the action described in items 8 or 9 above or if CNBC
terminates the Merger Agreement in accordance with item 10 above, CNBC must pay
First Merchants $1,200,000 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 CNBC 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 CNBC cannot amend the Merger Agreement after the CNBC shareholders
adopt the Merger Agreement without their further approval if the amendment would
decrease the merger consideration or have a material adverse effect on the CNBC
shareholders.
58
Restrictions Affecting CNBC Prior to Completion of the Merger
The Merger Agreement contains a number of restrictions regarding the
conduct of the business of CNBC and its subsidiaries, including Commerce Bank,
until the merger is completed. Among other items, CNBC and its subsidiaries may
not take or agree to take any of the following actions, without the prior
written consent of First Merchants:
o change their capital structure including redeeming any CNBC common
shares;
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 August 28, 2002, except for the
issuance of CNBC common stock upon the exercise of CNBC stock
options outstanding as of August 28, 2002, up to a maximum number of
outstanding CNBC common shares of 2,076,572;
o declare or pay any dividends, authorize a stock split or make any
other distribution to their shareholders, except that (i) CNBC's
subsidiaries may pay cash dividends to CNBC to pay CNBC's expenses
of operation and payment of fees and expenses incurred in connection
with the merger, and (ii) CNBC may pay a cash dividend of no more
than $0.10 per share for any quarter prior to completion of the
merger, except that no dividend may be paid during the quarter in
which the merger is completed, if, during this quarter, CNBC
shareholders will be entitled to receive dividends on their shares
of First Merchants common stock received pursuant to the merger;
o merge, combine, consolidate with 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 $50,000 (except for property acquired or disposed of in
connection with foreclosures of mortgages, enforcement of security
interests and loans in the ordinary course of business or acceptance
of deposits and borrowings 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 CNBC or it
subsidiaries, except for promotions and increases in the ordinary
course of business and in accordance with their past practices;
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o amend their Articles of Incorporation or Association, Code of
Regulations, By-Laws, Certificate of Trust or Trust Agreement, as
applicable, from those in effect on August 28, 2002;
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 CNBC or its
subsidiaries;
o give, dispose, sell, convey, assign, hypothecate, pledge, encumber
or otherwise transfer or grant a security interest in any common
stock of any of CNBC's subsidiaries;
o execute, create, institute, modify or amend any employee benefit
plan or agreement for current or former directors, officers or
employees of CNBC or its subsidiaries, 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 make additions to Commerce Bank's reserve for loan losses or
any other reserve account in the ordinary course of business and in
accordance with past practices.
In addition, until the merger is consummated or the Merger Agreement is
terminated, CNBC and its subsidiaries shall carry on their business
substantially in the same manner as previously conducted and use their
reasonable best efforts to preserve their business organizations and existing
business relationships intact.
Regulatory Approval
The merger requires prior approval of the Board of Governors of the
Federal Reserve System, under the Bank Holding Company Act of 1956, as amended.
An application has been filed with the Federal Reserve. We cannot assure you as
to when or whether the approval will be received.
In reviewing the Federal Reserve application, the Federal Reserve
considers various factors including:
o the financial and managerial resources and future prospects of First
Merchants and its subsidiaries;
o the competitive effects of the merger; and
o the effect of the merger on the convenience and needs of the
community served by Commerce Bank.
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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 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 approval of the Federal Reserve is not the opinion of such regulatory
authority that the merger is favorable to the CNBC shareholders from a financial
point of view or that such regulatory authority has considered the adequacy of
the terms of the merger. The approval in no way constitutes an endorsement or a
recommendation of the merger by the Federal Reserve.
Effective Date of the Merger
The merger will be consummated if the Merger Agreement is adopted by the
CNBC 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 the State of Indiana and a Certificate of Merger is filed with the Secretary
of State of the State of Ohio or at such later date and time as may be specified
in the Articles and Certificate 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 during the first quarter
of 2003. However, completion of the merger could be delayed if there is a delay
in obtaining the required regulatory approval or in satisfying the conditions to
completion of the merger. CNBC and First Merchants have the right to terminate
the Merger Agreement if the merger is not completed by April 30, 2003.
Fees and Expenses
First Merchants and CNBC will pay their own fees, costs, and expenses
incurred in connection with the merger. For CNBC, these costs will include the
printing and postage expenses for this document in connection with the CNBC
special shareholders meeting. In addition, CNBC will pay for the cost of the
opinion of CNBC's financial advisor.
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Management After the Merger
First Merchants will be the surviving corporation in the merger and CNBC's
separate corporate existence will cease. Accordingly, the directors and officers
of CNBC will no longer serve in such capacities after the completion of the
merger.
Commerce Bank will operate as a separate bank subsidiary of First
Merchants for at least five years. The directors of Commerce Bank immediately
prior to the merger will continue to be the directors of Commerce Bank following
the merger until they resign or until their successors are duly elected and
qualified. Commerce Bank directors who desire to continue to serve in that
capacity shall serve for at least the remainder of the 1-year terms to which
they have been elected. However, Commerce 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 Commerce Bank's current directors
until 24 months after completion of the merger. Thus, 24 months after the
merger, all directors of Commerce Bank age 70 or older will retire.
The officers of Commerce Bank immediately prior to the merger will
continue to be the officers of Commerce Bank following the merger until they
resign or until their successors are duly elected and qualified. In addition,
First Merchants has agreed to enter into, prior to the effective date of the
merger, executive employment agreements and change in control agreements with
Thomas D. McAuliffe, currently the Chairman of the Board and President of CNBC
and Chief Executive Officer of Commerce Bank, and John A. Romelfanger, currently
Vice President and Secretary of CNBC and a director and Chief Operating Officer
of Commerce Bank. These executive employment agreements and change in control
agreements will supersede their current employment agreements with Commerce
Bank. The terms of these executive employment agreements and change in control
agreements have not yet been finalized, but will be on terms and conditions
agreed to by Messrs. McAuliffe and Romelfanger, respectively, and First
Merchants. See "THE MERGER - Interest of Certain Persons in the Merger".
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, Thomas D. McAuliffe, or such other person as agreed to by First
Merchants and CNBC, will either (i) be nominated for election as a member 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 a
director at the First Merchants Board's first meeting following completion of
the merger. As an appointed director, Mr. McAuliffe, or such other person as
agreed to, would serve as a director 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 will be chosen is the one that
can be accomplished first and will depend on the timing of the merger's
completion.
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.
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Indemnification and Insurance
First Merchants has agreed to indemnify and hold harmless each present and
former director and officer of CNBC and its subsidiaries for 6 years after the
effective date 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 CNBC or its
subsidiaries at or prior to the effective date 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 Ohio law, and by First Merchants or CNBC's Articles of
Incorporation, Code of Regulations or By-Laws as in effect on August 28, 2002
(whichever was more favorable to such officers and directors).
In addition, prior to the effective date of the merger, CNBC has agreed to
purchase and pay for tail coverage on its director's and officer's liability
insurance policy for a period of at least 3 years from the effective date of the
merger to cover the present and former directors and officers of CNBC and its
subsidiaries, which tail coverage will provide directors and officers with
coverage on substantially similar terms as currently provided by CNBC and its
subsidiaries. However, CNBC has no obligation to pay more than 2 times the
current annual amount spent by CNBC and its subsidiaries to maintain its current
director's and officer's insurance coverage. In the event CNBC is unable to
obtain such tail coverage, First Merchants has agreed to use its reasonable best
efforts to include CNBC's and its subsidiaries' present and former directors and
officers on its existing insurance, which will provide the directors and
officers with coverage on substantially similar terms as currently provided by
CNBC to such directors and officers for claims based on activity prior to the
effective date of the merger. However, First Merchants has no obligation to pay
more than 2 times the current annual amount spent by CNBC and its subsidiaries
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 for 2 times the current annual amount spent by CNBC and its
subsidiaries.
After the merger, CNBC and its subsidiaries' 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 CNBC Common Shares
Under CNBC's 2002 and 1999 Stock Option Plans, all outstanding stock
options that have not vested become vested and immediately exercisable in full
in connection with the merger.
The Merger Agreement provides that CNBC will use its best efforts to cause
each outstanding stock option to acquire CNBC common shares to be exercised by
the optionee on the effective date of the merger. CNBC has agreed to terminate
its stock option plans on or prior to the effective date of the merger. If
necessary, CNBC has also agreed to use its best efforts to obtain consents from
holders of vested unexercised options that remain outstanding on the effective
date of the merger, if any, to permit termination of such options.
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On the effective date of the merger, every stock option holder will have
the right to receive an amount equal to $29.57 less the applicable exercise
price per CNBC common share multiplied by the number of CNBC common shares
issuable upon exercise of such stock option. CNBC will pay all such cash amounts
to stock option holders on the effective date of the merger. These cash payments
do not impact the cash limitation of $24,561,693 stipulated in the Merger
Agreement. In the Merger Agreement, CNBC has agreed to use its best efforts to
cause each exercised non-qualified stock option to be exchanged for a cash
payment.
Stock option holders may exercise their vested stock options prior to the
effective date of the merger by paying the option exercise price to CNBC in
cash. Alternatively, CNBC has structured a "net issuance" stock option exercise
for those stock option holders that desire to exercise their vested stock
options prior to the merger effective date. For holders electing this
alternative, the CNBC common shares issued to the holder will equal the amount
of shares issuable under the stock option less the sum of the total exercise
price plus estimated taxes due upon exercise divided by the current market price
of CNBC shares, rounded to a whole number.
CNBC has committed to having no more than 2,076,572 common shares
outstanding immediately prior to the merger. CNBC has further agreed not to
issue additional stock options or stock appreciation rights after the date of
the Merger Agreement.
Employee Benefit Plans
o General
Following the effective date of the merger, employees of CNBC's
subsidiaries will receive employee benefits that in the aggregate are
substantially similar to the employee benefits provided to those employees by
CNBC or its subsidiaries on the effective date of the merger. The service of an
employee of CNBC or its subsidiaries with CNBC or its subsidiaries will be
treated as service with First Merchants for purposes of determining entry into a
First Merchants employee benefit plan. However, service of an employee of CNBC
or its subsidiaries with CNBC or its subsidiaries will not be treated as service
with First Merchants for purposes of benefit accrual under any employee pension
plan of First Merchants; in that case, service of a CNBC or subsidiary employee
with the subsidiaries will be recognized only on or after the effective date of
the merger.
o Coverage under First Merchants' Health Plan
First Merchants has agreed to waive all restrictions and limitations for
pre-existing conditions of employees of CNBC's subsidiaries who become
participants in First Merchants' health plan as described in the preceding
paragraph.
o Treatment of Tax-Qualified Retirement Plans
In lieu of CNBC's subsidiaries' current tax-qualified retirement plan, the
Merger Agreement provides that First Merchants will cover employees of CNBC's
subsidiaries under
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any tax-qualified retirement plans which First Merchants maintains for its
employees no later than January 1, 2004, provided that each such individual
employee meets the applicable participation requirements of such plan. Until
that time, CNBC's subsidiaries' current tax-qualified retirement plan will be
maintained by First Merchants at the same level with respect to benefit accruals
as provided for on the effective date of the merger. Once CNBC's subsidiaries'
employees are covered under First Merchants' tax-qualified retirement plans,
First Merchants, in its sole discretion, may decide to terminate CNBC's and its
subsidiaries' tax-qualified retirement plan or to merge such tax-qualified
retirement plan into First Merchants' plans.
o COBRA Coverage
First Merchants has agreed to be responsible for providing COBRA
continuation coverage to any qualified employee or former employee of CNBC or
its subsidiaries and to their respective qualified beneficiaries on and after
the effective date of the merger, regardless of when the qualifying event
occurred.
Interests of Certain Persons in the Merger
When considering the recommendation of your Board of Directors, you should
be aware that certain of the directors and officers of CNBC have interests in
the merger other than their interests as CNBC shareholders, pursuant to certain
agreements and understandings that are reflected in the Merger Agreement. These
interests are different from, or may conflict with, your interests as CNBC
shareholders. The members of your 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 CNBC, the officers and directors of CNBC do not have any material
interest in the merger apart from their interests as shareholders.
o Appointment of Thomas D. McAuliffe to the First Merchants Board of
Directors
In the Merger Agreement, First Merchants has agreed that it will cause
Thomas D. McAuliffe, who currently serves as Chairman of the Board and President
of CNBC and Chief Executive Officer of Commerce Bank, or such other person as
agreed to by First Merchants and CNBC, 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. Mr. McAuliffe will not be
separately compensated for his services as a director of First Merchants. If the
First Merchants Board meets after the merger but before the next annual meeting
of First Merchants' shareholders, the Board shall appoint Mr. McAuliffe or such
other person as agreed to as a director to serve until the next annual meeting
of First Merchants' shareholders and then nominate him for election to a 3 year
term as a director at such annual meeting. See "THE MERGER - Management After
the Merger."
o Positions as Officers and Directors of Commerce Bank
The Merger Agreement provides that the officers and directors of Commerce
Bank immediately prior to the merger will remain the officers and directors of
Commerce Bank after
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the merger until they resign or until their successors are duly elected and
qualified. Commerce Bank directors who desire to continue to serve in that
capacity shall serve for at least the remainder of the 1 year term to which they
have been elected.
All four executive officers of Commerce Bank have employment agreements
with Commerce Bank and CNBC. Except for employment agreements with Thomas D.
McAuliffe and John A. Romelfanger, these employment agreements will remain in
place after the merger.
Only Mr. McAuliffe and Mr. Romelfanger have employment agreements that
include change in control provisions. Their agreements require a funded
severance benefit in the event of a change in control and provide for an ongoing
deferred compensation program. Under the terms of these employment agreements,
after the effective date of a change in control, both Mr. McAuliffe and Mr.
Romelfanger would receive their respective severance benefits if their
employment with Commerce Bank would be terminated for any reason, including a
voluntary resignation. First Merchants has agreed, prior to the effective date
of the merger, to enter into change in control agreements substantially similar
to those executed with other key executive officers of First Merchants.
Additionally, First Merchants has agreed to establish a trust for the purpose of
maintaining the funded severance benefits for Mr. McAuliffe and Mr. Romelfanger
(as determined by their existing employment agreements). Mr. McAuliffe and Mr.
Romelfanger will receive payments from the trust under the following
circumstances:
o If either of them are "effectively discharged", either through
termination by First Merchants or an adverse change in their job
duties or compensation, or
o As long as they continue to be employed by Commerce Bank, they will
be paid the amounts held for their benefit in the trust in
substantially equal annual installments over five years, beginning
with the effective date of the merger.
In addition, the deferred compensation programs for Mr. McAuliffe and Mr.
Romelfanger will be terminated as of the effective date of the merger and all
funds accrued to date will be paid to them.
The terms of the new change in control agreements have not yet been
finalized as of the date of this proxy statement-prospectus. The execution of
the new change in control agreements with, and establishment of the trust for
the benefit of, Mr. McAuliffe and Mr. Romelfanger is a condition that must be
met prior to the completion of the merger. See "THE MERGER-Management After the
Merger."
o Indemnification and Insurance of CNBC and its Subsidiaries' Officers
The directors and officers of CNBC and its subsidiaries 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 CNBC and its Subsidiaries' Directors and
Officers".
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o Treatment of CNBC Stock Options
The Merger Agreement provides that CNBC shall use its best efforts to
cause each option to acquire CNBC common shares to be exercised prior to the
merger. Approximately 21,400 stock options held by officers and employees of
CNBC will vest early as a result of the merger. All of the officers of CNBC and
Commerce Bank have 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 will either own additional CNBC common shares at the
time of the merger and be entitled to receive the merger consideration for such
additional CNBC common shares upon consummation of the merger or will receive a
cash payment from CNBC prior to or at the time of the merger. See "THE MERGER -
Treatment of Options to Acquire CNBC Common Shares."
Voting Agreement
Each member of the Board of Directors of CNBC and their respective
affiliates have executed a voting agreement with First Merchants as of the date
of the Merger Agreement whereby the directors and their affiliates have agreed
to vote all of their CNBC common shares in favor of the merger with First
Merchants.
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, CNBC's assets and liabilities
will be recorded by First Merchants on its books at their fair market 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 CNBC
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 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 CNBC into First Merchants is completed as described
in the Merger Agreement and constitutes a statutory merger under Indiana and
Ohio law, then for United States federal income tax purposes, the merger will
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 CNBC and First Merchants
CNBC 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 CNBC acquired by First Merchants in the
merger will be the same as the basis of such assets in the hands of CNBC
immediately prior to the merger. Code Section 362(b).
Tax Consequences to CNBC Shareholders
o CNBC Shareholders Receiving Solely First Merchants Common Stock
In general, a CNBC shareholder who receives only First Merchants common
stock in exchange for CNBC common shares 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 CNBC shareholder in lieu of fractional share
interests resulting from the conversion ratio. See "Cash Received for Fractional
Shares" below 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 CNBC
shareholders in exchange for their CNBC common stock will be equal to the
shareholder's basis in the CNBC 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 CNBC common stock surrendered in the
exchange, provided that the CNBC common stock was held as a capital asset on the
date of the merger. Code Section 1223(1).
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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 CNBC shareholder in lieu of fractional
share interests resulting from the conversion ratio. A CNBC 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 CNBC 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 CNBC common shares 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 CNBC shareholder has held such CNBC common
shares for more than 1 year.
o CNBC Shareholders Receiving Part Cash And Part First Merchants
Common Stock
A CNBC shareholder who receives part cash and part First Merchants common
stock in exchange for CNBC common shares will recognize gain to the extent of
cash received. Code Sections 354(a)(1) and 356(a)(1). Whether such gain is
capital gain or a dividend will be determined under Section 302 of the Code, as
interpreted in the Supreme Court's decision in Commissioner v. Clark, 109 S.Ct.
1455 (1989).
Any realized gain (the recognition of which is limited to 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 CNBC'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.
If a CNBC shareholder (who holds his CNBC common shares as a capital
asset) receiving both First Merchants stock and cash:
o Exchanges at least 15% of his CNBC common shares for cash, and
o Will not be involved in the management of First Merchants, and
o Does not own First Merchants shares, and
o Is not related (as defined in attribution rules of Section 318 of
the Code) to another person (i) who owns shares of First Merchants,
or (ii) who is a CNBC shareholder exchanging more than 85% of his
CNBC common shares for First Merchants stock;
such CNBC shareholder's taxable gain on the exchange should be treated as a
capital gain, and not as a dividend.
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It is expected that most CNBC shareholders who do not meet all these
requirements will nonetheless be entitled to treat their taxable gain as capital
gain, and not ordinary income. However, because such treatment is dependent upon
the shareholder's individual circumstances (as well as on the percentage of CNBC
shares that are exchanged for cash), each CNBC shareholder who does not meet all
these criteria is strongly urged to consult with their own tax advisor regarding
their particular tax treatment of the cash they will receive in the merger. See
"Treatment of Taxable Gain as Dividend Income or Capital Gain" below for a more
detailed discussion of the circumstances under which the taxable gain recognized
by a CNBC shareholder will be treated as dividend income and not as a capital
gain.
The aggregate tax basis of the First Merchants common stock received by a
CNBC shareholder will be equal to the tax basis of CNBC common shares
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 CNBC common
shares were held as a capital asset as of the effective date of the merger.
Section 358 of the Code. The holding period of the First Merchants common stock
received by a CNBC shareholder will be the same as the period of the CNBC common
shares surrendered in exchange therefor, provided that the CNBC common shares
were held as capital assets as of the effective date of the merger. Section
1223(1) of the Code.
No loss will be recognized by a CNBC shareholder on receipt of First
Merchants common stock and cash in exchange for CNBC common shares. Code Section
356.
o CNBC Shareholders Receiving All Cash
A CNBC shareholder receiving all cash will recognize capital gain or loss
measured by the difference between the amount of cash received and the basis of
the CNBC common shares surrendered unless (because of the attribution rules of
Section 318 of the Code) such gain is treated as a dividend under Code Section
302. See "Treatment of Taxable Gain as Dividend Income or Capital Gain" below
for a more detailed discussion of the circumstances under which the taxable gain
recognized by a CNBC shareholder will be treated as dividend income and not as a
capital gain.
o Treatment of Taxable Gain as Dividend Income or Capital Gain
The discussion below is guidance on issues that need to be considered if
it is unclear whether an individual CNBC shareholder is required to treat his
taxable gain in connection with the merger as dividend income or capital gain.
The stock redemption provisions of Section 302 of the Code, as interpreted
by the United States Supreme Court in the Commissioner v. Clark case, apply in
determining whether cash received by a CNBC shareholder pursuant to the merger
has the effect of a dividend under Section 356 of the Code (Hypothetical
Redemption Analysis). Under the Hypothetical Redemption Analysis, a CNBC
shareholder will be treated as if the portion of the CNBC common stock exchanged
for cash in the merger instead had been exchanged for shares of First Merchants
common stock (Hypothetical Shares), followed immediately by a redemption of the
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Hypothetical Shares by First Merchants for cash (Hypothetical Redemption). Under
the principles of Section 302 of the Code, a CNBC 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 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 CNBC
shareholder, 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
CNBC 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 CNBC 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.
Tax Opinions
First Merchants has requested the law firm of Bingham McHale LLP to render
an opinion to First Merchants that the merger to be effected pursuant to the
Merger Agreement constitutes a tax-free reorganization under the Code. CNBC has
requested the law firm of Squire, Sanders & Dempsey L.L.P. to render an opinion
to CNBC that the merger to be effected pursuant to the Merger Agreement
constitutes a tax-free reorganization under the Code and that no gain or loss
will be recognized by shareholders of CNBC to the extent they receive shares of
First Merchants common stock in the merger in exchange for their CNBC shares,
other than gain or loss to be recognized as to cash received in lieu of
fractional share interests and cash received in exchange
71
for CNBC common shares. Under the Merger Agreement, receipt of their opinion
with respect to the above consequences is a condition to completion of the
merger for each of First Merchants and CNBC. In rendering its opinion, each of
Bingham McHale LLP and Squire, Sanders & Dempsey L.L.P. will rely upon
representations made by the management of First Merchants and CNBC. However,
these opinions 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.
Reporting Requirements
CNBC shareholders are required to file a statement with their United
States federal income tax return setting forth their tax basis in the CNBC
common stock exchanged in the merger and the fair market value of the First
Merchants common stock and the amount of cash received in the merger. In
addition, CNBC shareholders will be required to retain permanent records
relating to these facts.
Backup Withholding
Cash payments made to CNBC shareholders pursuant to the merger may, under
certain circumstances, be subject to backup withholding at a rate of 30%. There
is no withholding for CNBC shareholders who provide First Merchants Bank,
National Association, the conversion agent, with their correct United States
federal taxpayer identification number and who certify that no loss of exemption
from backup withholding has occurred on the Internal Revenue Service Form W-9 or
its substitute. A Substitute Form W-9 is included as part of the Election Form
accompanying this proxy statement-prospectus. Certain categories of CNBC
shareholders (for example, corporations and some foreign individuals) are not
subject to backup withholding. In order for a foreign individual to qualify as
an exempt recipient, such individual must generally provide First Merchants
Bank, National Association, as the conversion agent, with a completed Internal
Revenue Service Form W-8BEN or its substitute. Any amounts withheld from a CNBC
shareholder under the backup withholding rules are not an additional tax.
Rather, any such amounts will be allowed as a credit or refund against such
shareholder's United States federal income tax liability provided that the
shareholder furnishes to the Internal Revenue Service all required information.
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 CNBC
shareholder. First Merchants and CNBC urge you to consult with your own tax
advisor with respect to the specific tax consequences to you of the merger,
including the application and effect of existing and proposed federal, state,
local, foreign and other tax laws.
72
UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL INFORMATION
The following is the unaudited pro forma combined financial information
for First Merchants and for CNBC giving effect to the merger. The information is
presented under two separate assumptions relating to the level of CNBC common
shares which are exchanged for First Merchants common stock in the merger. The
financial information presented under "Alternative A" was compiled assuming 100%
of the outstanding CNBC common shares are exchanged for shares of First
Merchants common stock in the merger. The financial information presented under
"Alternative B" was compiled assuming 60% of the outstanding CNBC common shares
are exchanged for shares of First Merchants common stock and 40% of the
outstanding CNBC common shares are exchanged for cash in the merger. For a more
detailed description of these assumptions, see "Notes to Unaudited Pro Forma
Summary of Selected Consolidated Financial Data" on page 25.
The balance sheet information presented gives effect to the merger as if
it occurred on September 30, 2002. The income statement information presented
gives effect to the merger as if it occurred on the first day of each period
presented. The income statement information also includes the results of
operations of Lafayette Bancorporation for the year ended December 31, 2001 and
for the period between January 1, 2002 and its merger with First Merchants on
April 1, 2002.
The pro forma combined figures are simply arithmetical combinations of
First Merchants' and CNBC'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 CNBC 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 CNBC, 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 CNBC's Business With First Merchants' Business May Be Difficult."
The pro forma information reflects the "purchase" method of accounting,
with CNBC's assets and liabilities recorded at their estimated fair values as of
September 30, 2002. The actual fair value adjustments to the assets and the
liabilities of CNBC 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.
73
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 CNBC'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.
74
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
ALTERNATIVE A--100% STOCK ISSUED
(In Thousands)
First
Merchants CNBC Pro forma Pro forma
Corporation Bancorp Adjustments Combined
--------------------------------------------------------------
Assets
Cash and due from banks ........................ $ 73,223 $ 15,470 $ (1,200) (3) $ 87,093
(400) (4)
Interest-bearing deposits ...................... 294 294
Federal funds sold ............................. 8,750 23,028 31,778
---------------------------------------- ----------
Cash and cash equivalents .................... 81,973 38,792 (1,600) 119,165
Interest-bearing time deposits ................. 10,222 10,222
Investment securities
Available for sale ........................... 335,968 4,610 340,578
Held to maturity ............................. 9,484 9,484
---------------------------------------- ----------
Total investment securities ................ 345,452 4,610 350,062
Mortgage loans held for sale ................... 14,089 14,089
Loans, net of allowance ........................ 1,971,891 273,607 6,477 (5) 2,251,975
Premises and equipment ......................... 39,179 1,183 40,362
Federal Reserve and FHLB stock ................. 11,097 2,373 13,470
Interest Receivable ............................ 18,622 1,105 19,727
Core deposits intangible ....................... 20,329 6,115 (7) 26,444
Goodwill ....................................... 86,424 22,746 (6) 109,170
Other assets ................................... 30,208 2,248 3,020 (8) 35,476
---------------------------------------- ----------
Total assets .............................. $2,629,486 $ 323,918 $ 36,758 $2,990,162
======================================== ==========
Liabilities
Deposits
Noninterest-bearing .......................... $ 246,410 $ 36,585 $ $ 282,995
Interest-bearing ............................. 1,773,325 221,685 2,347 (5) 1,997,357
---------------------------------------- ----------
Total deposits ............................ 2,019,735 258,270 2,347 2,280,352
Borrowings ..................................... 275,745 36,007 2,629 (5) 314,381
Trust preferred ................................ 53,188 4,000 164 (5) 57,352
Other liabilities .............................. 20,945 1,239 22,184
---------------------------------------- ----------
Total liabilities ........................ 2,369,613 299,516 5,140 2,674,269
---------------------------------------- ----------
Stockholders' equity
Common stock ................................. 2,039 14,506 (14,506) (10) 2,301
262 (11)
Additional paid in capital ................... 116,204 55,758 (11) 171,962
Retained earnings ............................ 135,266 11,743 (11,743) (10) 135,266
Treasury stock ............................... (1,884) 1,884 (10)
Accumulated comprehensive income ............. 6,364 37 (37) (10) 6,364
---------------------------------------- ----------
Total stockholders' equity ............... 259,873 24,402 31,618 315,893
---------------------------------------- ----------
Total liabilities and stockholders equity $2,629,486 $ 323,918 $ 36,758 $2,990,162
======================================== ==========
The accompanying notes are an integral part of the unaudited pro forma combined
consolidated financial information.
75
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
For The Year Ended December 31, 2001
Alternative A--100% Stock Issued
(In Thousands except Share and Per Share Amounts)
Lafayette Bancorporation
First ------------------------
Merchants Pro forma
Corporation Historical Adjustments
----------------------------------------------------
Interest Income
Loans receivable .......................... $ 103,561 $ 46,853 $ (129) (12)
Investment securities ..................... 15,310 5,030
Other ..................................... 1,564 1,781
----------------------------------------------
Total interest income .................. 120,435 53,664 (129)
----------------------------------------------
Interest Expense
Deposits .................................. 45,856 22,650 (2,503) (12)
Securities sold under repurchase agreements 3,208 1,506
Borrowings ................................ 7,010 2,747 (135) (12)
4,964 (15)
----------------------------------------------
Total interest expense ................. 56,074 26,903 2,326
----------------------------------------------
Net Interest Income ......................... 64,361 26,761 (2,455)
Provision for loan losses ................ 3,576 1,225
----------------------------------------------
Net interest income after provision for
loan losses ............................... 60,785 25,536 (2,455)
----------------------------------------------
Other Income
Fiduciary activities ..................... 5,429 1,264
Service charges on deposit accounts ...... 5,729 2,352
Other customer fees ...................... 3,166 1,080
Net realized gains (losses) on sales of
available-for-sale securities .......... (200)
Commission income ........................ 1,945 398
Other income ............................. 2,474 2,360
----------------------------------------------
Total other income ..................... 18,543 7,454
----------------------------------------------
Other expenses
Salaries and employee benefits ........... 24,711 12,908
Net occupancy expenses ................... 2,729 1,293 (49) (16)
Equipment expenses ....................... 4,521 1,914
Goodwill amortization .................... 1,003 716 (716) (17)
Core deposit and other intangible
amortization ........................... 679 2,249 (13)
Other expenses ........................... 11,552 5,343
----------------------------------------------
Total other expenses ................... 45,195 22,174 1,484
----------------------------------------------
Income before income tax .................... 34,133 10,816 (3,939)
Income tax expense ....................... 11,924 3,401 (1,596) (18)
----------------------------------------------
Net Income .................................. $ 22,209 $ 7,415 $(2,343)
==============================================
Per Share Data
Basic earnings per common share ...... $ 1.71 $ 1.87
Diluted earnings per common share .... 1.69 1.84
Average common shares-basic .......... 13,019,984 3,959,582
Average common shares-diluted ........ 13,113,795 4,020,795
CNBC Bancorp
-------------------------
Pro forma Pro forma
Historical Adjustments Combined
-----------------------------------------------
Interest Income
Loans receivable .......................... $ 19,508 $ (996) (12) $ 168,797
Investment securities ..................... 434 20,774
Other ..................................... 771 4,116
----------------------------------------------
Total interest income .................. 20,713 (996) 193,687
----------------------------------------------
Interest Expense
Deposits .................................. 8,137 (1,565) (12) 72,575
Securities sold under repurchase agreements 4,714
Borrowings ................................ 1,682 (639) (12) 15,629
----------------------------------------------
Total interest expense ................. 9,819 (2,204) 92,918
----------------------------------------------
Net Interest Income ......................... 10,894 1,208 100,769
Provision for loan losses ................ 660 5,461
----------------------------------------------
Net interest income after provision for
loan losses ............................... 10,234 1,208 95,308
----------------------------------------------
Other Income
Fiduciary activities ..................... 6,693
Service charges on deposit accounts ...... 219 8,300
Other customer fees ...................... 4,246
Net realized gains (losses) on sales of
available-for-sale securities .......... 18 (182)
Commission income ........................ 273 2,616
Other income ............................. 288 5,122
----------------------------------------------
Total other income ..................... 798 26,795
----------------------------------------------
Other expenses
Salaries and employee benefits ........... 3,805 41,424
Net occupancy expenses ................... 401 4,374
Equipment expenses ....................... 6,435
Goodwill amortization .................... 1,003
Core deposit and other intangible
amortization ........................... 1,359 (13) 4,287
Other expenses ........................... 1,712 18,607
----------------------------------------------
Total other expenses ................... 5,918 1,359 76,130
----------------------------------------------
Income before income tax .................... 5,114 (151) 45,973
Income tax expense ....................... 1,778 (61) (18) 15,446
----------------------------------------------
Net Income .................................. $ 3,336 $ (90) $ 30,527
==============================================
Per Share Data
Basic earnings per common share ...... $ 1.62 $ 1.69
Diluted earnings per common share .... 1.57 1.68
Average common shares-basic .......... 2,052,939 18,029,034
Average common shares-diluted ........ 2,118,850 18,122,845
The accompanying notes are an integral part of the unaudited pro forma combined
consolidated financial information.
76
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
For The Nine Months Ended September 30, 2002
Alternative A--100% Stock Issued
(In Thousands except Share and Per Share Amounts)
Lafayette Bancorporation
First -----------------------------
Merchants Historical Pro forma
Corporation (2) Adjustments
---------------------------------------------------
Interest Income
Loans receivable $ 94,907 $ 9,998 $ (32) (12)
Investment securities 11,436 1,331
Other 1,074 121
-------------------------------------------
Total interest income 107,417 11,450 (32)
-------------------------------------------
Interest Expense
Deposits 29,766 3,973 (512) (12)
Securities sold under repurchase
agreements 134
Borrowings 9,863 602 (34) (12)
1,222 (15)
-------------------------------------------
Total interest expense 39,629 4,709 676
-------------------------------------------
Net Interest Income 67,788 6,741 (708)
Provision for loan losses 4,297 1,615 (19)
-------------------------------------------
Net interest income after provision for
loan losses 63,491 5,126 (708)
-------------------------------------------
Other Income
Fiduciary activities 4,471 323
Service charges on deposit accounts 6,635 742
Other customer fees 2,328 451
Net realized gains (losses) on sales of
available-for-sale securities 162
Commission income 1,617 575
Other income 4,648 132
-------------------------------------------
Total other income 19,861 2,223
-------------------------------------------
Other expenses
Salaries and employee benefits 28,301 3,651
Net occupancy expenses 2,699 346 (12) (16)
Equipment expenses 4,848 914
Core deposit and other intangible 1,837 171 511 (13)
amortization (171) (17)
Other expenses 13,444 3,205
-------------------------------------------
Total other expenses 51,129 8,287 328
-------------------------------------------
Income before income tax 32,223 (938) (1,036)
Income tax expense 10,983 (600) (420) (18)
-------------------------------------------
Net Income $ 21,240 $ (338) $ (616)
===========================================
Per Share Data
Basic earnings per common share $ 1.39 $ (0.08)
Diluted earnings per common share 1.37 (0.08)
Average common shares-basic 15,340,528
Average common shares-diluted 15,482,682
CNBC Bancorp
-------------------------
Pro forma Pro forma
Historical Adjustments Combined
---------------------------------------------
Interest Income
Loans receivable $ 13,890 $ (685) (12) $ 118,078
Investment securities 231 12,998
Other 209 1,404
---------------------------------------------
Total interest income 14,330 (685) 132,480
---------------------------------------------
Interest Expense
Deposits 4,556 (581) (12) 37,202
Securities sold under repurchase
agreements 134
Borrowings 1,519 (416) (12) 12,756
---------------------------------------------
Total interest expense 6,075 (997) 50,092
---------------------------------------------
Net Interest Income 8,255 312 82,388
Provision for loan losses 399 6,311
---------------------------------------------
Net interest income after provision for
loan losses 7,856 312 76,077
---------------------------------------------
Other Income
Fiduciary activities 4,794
Service charges on deposit accounts 208 7,585
Other customer fees 2,779
Net realized gains (losses) on sales of
available-for-sale securities 7 169
Commission income 217 2,409
Other income 153 4,933
---------------------------------------------
Total other income 585 22,669
---------------------------------------------
Other expenses
Salaries and employee benefits 3,024 34,976
Net occupancy expenses 370 3,403
Equipment expenses 5,762
Core deposit and other intangible 892 (13) 3,240
amortization
Other expenses 1,420 18,069
---------------------------------------------
Total other expenses 4,814 892 65,450
---------------------------------------------
Income before income tax 3,627 (580) 33,296
Income tax expense 1,253 (235) (18) 10,981
---------------------------------------------
Net Income $ 2,374 $ (345) $ 22,315
=============================================
Per Share Data
Basic earnings per common share $ 1.19 $ 1.21
Diluted earnings per common share 1.15 1.20
Average common shares-basic 2,000,068 18,408,437
Average common shares-diluted 2,071,400 18,550,591
The accompanying notes are an integral part of the unaudited pro forma combined
consolidated financial information.
77
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
ALTERNATIVE B-60% STOCK ISSUED
(Dollars In Thousands)
First
Merchants CNBC Pro forma Pro forma
Corporation Bancorp Adjustments Combined
--------------------------------------------------------------
Assets
Cash and due from banks ........................ $ 73,223 $ 15,470 $ (1,200) (3) $ 87,531
(400) (4)
438 (1)
Interest-bearing deposits ...................... 294 294
Federal funds sold ............................. 8,750 23,028 31,778
------------------------------------------ ----------
Cash and cash equivalents .................... 81,973 38,792 (1,162) 119,603
Interest-bearing time deposits ................. 10,222 10,222
Investment securities
Available for sale ........................... 335,968 4,610 340,578
Held to maturity ............................. 9,484 9,484
------------------------------------------ ----------
Total investment securities ................ 345,452 4,610 350,062
Mortgage loans held for sale ................... 14,089 14,089
Loans, net of allowance ........................ 1,971,891 273,607 6,477 (5) 2,251,975
Premises and equipment ......................... 39,179 1,183 40,362
Federal Reserve and FHLB stock ................. 11,097 2,373 13,470
Interest Receivable ............................ 18,622 1,105 19,727
Core deposit intangible ........................ 20,329 6,115 (7) 26,444
Goodwill ....................................... 86,424 24,900 (6) 111,324
Other assets ................................... 30,208 2,248 3,020 (8) 35,476
------------------------------------------ ----------
Total assets .............................. $2,629,486 $ 323,918 $ 39,350 $2,992,754
========================================== ==========
Liabilities
Deposits
Noninterest-bearing .......................... $ 246,410 $ 36,585 $ $ 282,995
Interest-bearing ............................. 1,773,325 221,685 2,347 (5) 1,997,357
------------------------------------------ ----------
Total deposits ............................ 2,019,735 258,270 2,347 2,280,352
Borrowings ..................................... 275,745 36,007 2,629 (5) 314,381
Trust preferred ................................ 53,188 4,000 164 (5)
25,000 (9) 82,352
Other liabilities .............................. 20,945 1,239 22,184
------------------------------------------ ----------
Total liabilities ........................ 2,369,613 299,516 30,140 2,699,269
------------------------------------------ ----------
Stockholders' equity
Common stock ................................. 2,039 14,506 (14,506) (10) 2,196
157 (11)
Additional paid in capital ................... 116,204 33,455 (11) 149,659
Retained earnings ............................ 135,266 11,743 (11,743) (10) 135,266
Treasury stock ............................... (1,884) 1,884 (10)
Accumulated comprehensive income ............. 6,364 37 (37) (10) 6,364
------------------------------------------ ----------
Total stockholders' equity ............... 259,873 24,402 9,210 293,485
------------------------------------------ ----------
Total liabilities and stockholders' equity $2,629,486 $ 323,918 $ 39,350 $2,992,754
========================================== ==========
The accompanying notes are an integral part of the unaudited pro forma combined
consolidated financial information.
78
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
For The Year Ended December 31, 2001
Alternative B--60% Stock Issued
(In Thousands except Share and Per Share Amounts)
Lafayette Bancorporation
First ------------------------
Merchants Pro forma
Corporation Historical Adjustments
-------------------------------------------------------
Interest Income
Loans receivable $ 103,561 $ 46,853 $ (129) (12)
Investment securities 15,310 5,030
Other 1,564 1,781
--------------------------------------------
Total interest income 120,435 53,664 (129) (12)
--------------------------------------------
Interest Expense
Deposits 45,856 22,650 (2,503) (12)
Securities sold under repurchase
agreements 3,208 1,506
Borrowings 7,010 2,747 (135) (12)
4,964 (15)
--------------------------------------------
Total interest expense 56,074 26,903 2,326
--------------------------------------------
Net Interest Income 64,361 26,761 (2,455)
Provision for loan losses 3,576 1,225
--------------------------------------------
Net interest income after provision for
loan losses 60,785 25,536 (2,455)
--------------------------------------------
Other Income
Fiduciary activities 5,429 1,264
Service charges on deposit accounts 5,729 2,352
Other customer fees 3,166 1,080
Net realized gains (losses) on sales of
available-for-sale securities (200)
Commission income 1,945 398
Other income 2,474 2,360
--------------------------------------------
Total other income 18,543 7,454
--------------------------------------------
Other expenses
Salaries and employee benefits 24,711 12,908
Net occupancy expenses 2,729 1,293 (49) (16)
Equipment expenses 4,521 1,914
Goodwill amortization 1,003 716 (716) (17)
Core deposit and other intangible
amortization 679 2,249 (13)
Other expenses 11,552 5,343
--------------------------------------------
Total other expenses 45,195 22,174 1,484
--------------------------------------------
Income before income tax 34,133 10,816 (3,939)
Income tax expense 11,924 3,401 (1,596) (18)
--------------------------------------------
Net Income $ 22,209 $ 7,415 $(2,343)
============================================
Per Share Data
Basic earnings per common share $ 1.71 $ 1.87
Diluted earnings per common share 1.69 1.84
Average common shares-basic 13,019,984 3,959,582
Average common shares-diluted 13,113,795 4,020,795
CNBC Bancorp
----------------------------
Pro forma Pro forma
Historical Adjustments Combined
-------------------------------------------------
Interest Income
Loans receivable $ 19,508 $ (996) (12) $ 168,797
Investment securities 434 20,774
Other 771 4,116
-------------------------------------------------
Total interest income 20,713 (996) 193,687
-------------------------------------------------
Interest Expense
Deposits 8,137 (1,565) (12) 72,575
Securities sold under repurchase
agreements 4,714
Borrowings 1,682 (639) (12)
2,125 (14) 17,754
-------------------------------------------------
Total interest expense 9,819 (79) 95,043
-------------------------------------------------
Net Interest Income 10,894 (917) 98,644
Provision for loan losses 660 5,461
-------------------------------------------------
Net interest income after provision for
loan losses 10,234 (917) 93,183
-------------------------------------------------
Other Income
Fiduciary activities 6,693
Service charges on deposit accounts 219 8,300
Other customer fees 4,246
Net realized gains (losses) on sales of
available-for-sale securities 18 (182)
Commission income 273 2,616
Other income 288 5,122
-------------------------------------------------
Total other income 798 26,795
-------------------------------------------------
Other expenses
Salaries and employee benefits 3,805 41,424
Net occupancy expenses 401 4,374
Equipment expenses 6,435
Goodwill amortization 1,003
Core deposit and other intangible
amortization 1,359 (13) 4,287
Other expenses 1,712 18,607
-------------------------------------------------
Total other expenses 5,918 1,359 76,130
-------------------------------------------------
Income before income tax 5,114 (2,276) 43,848
Income tax expense 1,778 (922) (18) 14,585
-------------------------------------------------
Net Income $ 3,336 $ (1,354) $ 29,263
=================================================
Per Share Data
Basic earnings per common share $ 1.62 $ 1.70
Diluted earnings per common share 1.57 1.69
Average common shares-basic 2,052,939 17,190,099
Average common shares-diluted 2,118,850 17,283,910
The accompanying notes are an integral part of the unaudited pro forma combined
consolidated financial information.
79
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
For The Nine Months Ended September 30, 2002
Alternative B--60% Stock Issued
(In Thousands except Share and Per Share Amounts)
Lafayette Bancorporation
First --------------------------
Merchants Historical Pro forma
Corporation (2) Adjustments
-----------------------------------------------
Interest Income
Loans receivable $ 94,907 $ 9,998 $ (32) (12)
Investment securities 11,436 1,331
Other 1,074 121
---------------------------------------
Total interest income 107,417 11,450 (32)
---------------------------------------
Interest Expense
Deposits 29,766 3,973 (512) (12)
Securities sold under repurchase
agreements 134
Borrowings 9,863 602 (34) (12)
1,222 (15)
---------------------------------------
Total interest expense 39,629 4,709 676
---------------------------------------
Net Interest Income 67,788 6,741 (708)
Provision for loan losses 4,297 1,615 (19)
---------------------------------------
Net interest income after provision for
loan losses 63,491 5,126 (708)
---------------------------------------
Other Income
Fiduciary activities 4,471 323
Service charges on deposit accounts 6,635 742
Other customer fees 2,328 451
Net realized gains (losses) on sales of
available-for-sale securities 162
Commission income 1,617 575
Other income 4,648 132
---------------------------------------
Total other income 19,861 2,223
---------------------------------------
Other expenses
Salaries and employee benefits 28,301 3,651
Net occupancy expenses 2,699 346 (12) (16)
Equipment expenses 4,848 914
Core deposit and other intangible 1,837 171 511 (13)
amortization (171) (17)
Other expenses 13,444 3,205
---------------------------------------
Total other expenses 51,129 8,287 328
---------------------------------------
Income before income tax 32,223 (938) (1,036)
Income tax expense 10,983 (600) (420) (18)
---------------------------------------
Net Income $ 21,240 $ (338) $ (616)
=======================================
Per Share Data
Basic earnings per common share $ 1.39 $ (0.08)
Diluted earnings per common share 1.37 (0.08)
Average common shares-basic 15,340,528
Average common shares-diluted 15,482,682
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME
For The Nine Months Ended September 30, 2002
Alternative B--60% Stock Issued
(In Thousands except Share and Per Share Amounts)
CNBC Bancorp
----------------------------
Pro forma Pro forma
Historical Adjustments Combined
-----------------------------------------------
Interest Income
Loans receivable $ 13,890 $ (685) (12) $ 118,078
Investment securities 231 12,998
Other 209 1,404
----------------------------------------------
Total interest income 14,330 (685) 132,480
----------------------------------------------
Interest Expense
Deposits 4,556 (581) (12) 37,202
Securities sold under repurchase
agreements 134
Borrowings 1,519 (416) (12)
1,594 (14) 14,350
----------------------------------------------
Total interest expense 6,075 597 51,686
----------------------------------------------
Net Interest Income 8,255 (1,282) 80,794
Provision for loan losses 399 6,311
----------------------------------------------
Net interest income after provision for
loan losses 7,856 (1,282) 74,483
----------------------------------------------
Other Income
Fiduciary activities 4,794
Service charges on deposit accounts 208 7,585
Other customer fees 2,779
Net realized gains (losses) on sales of
available-for-sale securities 7 169
Commission income 217 2,409
Other income 153 4,933
----------------------------------------------
Total other income 585 22,669
----------------------------------------------
Other expenses
Salaries and employee benefits 3,024 34,976
Net occupancy expenses 370 3,403
Equipment expenses 5,762
Core deposit and other intangible 892 (13) 3,240
amortization
Other expenses 1,420 18,069
----------------------------------------------
Total other expenses 4,814 892 65,450
----------------------------------------------
Income before income tax 3,627 (2,174) 31,702
Income tax expense 1,253 (881) (18) 10,335
----------------------------------------------
Net Income $ 2,374 $ (1,293) $ 21,367
==============================================
Per Share Data
Basic earnings per common share $ 1.19 $ 1.22
Diluted earnings per common share 1.15 1.21
Average common shares-basic 2,000,068 17,569,502
Average common shares-diluted 2,071,400 17,711,656
The accompanying notes are an integral part of the unaudited pro forma combined
consolidated financial information.
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Notes to Unaudited Pro Forma Combined Consolidated Financial Information
Note 1 - Basis of Presentation
First Merchants has agreed to acquire CNBC for a fixed exchange ratio of
1.01 shares of First Merchants stock for each CNBC common share, subject
to possible upward or downward adjustment as provided for in the Merger
Agreement, or a fixed payment of $29.57 per share for each share of CNBC
stock up to 2,076,572 shares. The acquisition will be accounted for under
the purchase method of accounting and, accordingly, the assets and
liabilities of CNBC have been marked to estimated fair value based upon
conditions as of September 30, 2002. Since these are pro forma 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 the proceeds from issuance of mandatorily redeemable capital
securities of subsidiary trust in excess of cash payment necessary for
CNBC common shares.
(2) Represents the activity of Lafayette Bancorporation for the period of
January 1, 2002 through March 31, 2002. Activity of Lafayette Bank and
Trust Company for the period of April 1, 2002 through September 30, 2002
is included in the operations of First Merchants for that period. (3) To
record payment by CNBC for estimated transaction costs.
(4) To record payment by First Merchants for estimated transaction costs.
(5) To adjust interest-earning assets and interest-bearing liabilities of CNBC
to approximate fair value.
(6) To record goodwill for the cost of acquisition over the estimated fair
value of net assets acquired as follows:
Alternative A Alternative B
Purchase Price:
Common stock $ 262 $ 157
Additional paid in capital 55,758 33,455
Acquisition costs 400 400
Cash paid to CNBC shareholders 24,562
-------- --------
Total purchase price paid 56,420 58,574
-------- --------
Allocated to:
Historical book value of CNBC's net assets 24,402 24,402
Record transaction costs of CNBC (1,200) (1,200)
-------- --------
Adjusted book value of CNBC 23,202 23,202
-------- --------
Core deposit intangible 6,115 6,115
Adjustments to record assets and liabilities at fair value:
Loans 6,477 6,477
Deposits (2,347) (2,347)
Borrowings (2,793) (2,793)
Deferred taxes 3,020 3,020
-------- --------
Total allocation 10,472 10,472
-------- --------
Goodwill $ 22,746 $ 24,900
======== ========
Additional intangible assets may be identified and recorded, as
appropriate, at the merger date based upon the information available at
that time.
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(7) To record core deposit intangible.
(8) To record deferred taxes on the purchase accounting adjustments.
(9) To record additional issuance of mandatorily redeemable capital securities
of subsidiary trust to fund the cash payment of $29.57 per share for CNBC
common shares.
(10) To eliminate CNBC's equity accounts.
(11) To record issuance of 2,097,337 shares of First Merchants stock under
Alternative A and the issuance of 1,258,402 shares of First Merchants
stock under Alternative B.
(12) To record effect of amortization of purchase accounting adjustments in a
manner that approximates the level yield method. (Lafayette purchase
accounting adjustment amortization is based upon actual purchase
accounting adjustments recorded by First Merchants on April 1, 2002.)
(13) To record amortization of core deposit premium.
(14) To record interest expense on issuance of mandatorily redeemable capital
securities of subsidiary trust related to the cash payment for CNBC common
shares.
(15) To record interest expense on additional borrowings related to the
acquisition of Lafayette Bancorporation.
(16) To record amortization of purchase accounting adjustment related to
premises and equipment.
(17) To eliminate Lafayette Bancorporation's amortization of core deposit
intangible and goodwill.
(18) To record tax effect of purchase accounting adjustments at an effective
rate of 40.525%.
(19) Lafayette Bancorporation changed the methodology of determining the
allowance for loan losses effective January 1, 2002 to conform to the
methodology utilized 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, Frances Slocum Bank &
Trust Company and Lafayette Bank and 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, Howard, Tippecanoe, Jasper, White, Carroll, and Boone counties in
the State of Indiana and Butler County in the State of Ohio, through the 69
offices of its 9 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.
83
As of September 30, 2002, First Merchants had consolidated assets of
approximately $2.6 billion, consolidated deposits of approximately $2.0 billion,
and stockholders' equity of approximately $260 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 CNBC.
Recent Developments
On April 1, 2002, Lafayette Bancorporation, Lafayette, Indiana (Lafayette)
was merged into First Merchants pursuant to the terms of an Agreement of
Reorganization and Merger dated October 14, 2001, by and between Lafayette and
First Merchants. As a result of the merger, Lafayette's wholly-owned subsidiary,
Lafayette Bank and Trust Company, became a wholly-owned subsidiary of First
Merchants. Upon consummation of the merger, Lafayette shareholders received
First Merchants' common stock and/or cash with an aggregate value of
approximately $115.8 million, with an aggregate of approximately 2,772,861
shares of First Merchants common stock being issued to Lafayette shareholders
and an aggregate of approximately $50,871,000 in cash being paid to Lafayette
shareholders.
On January ___, 2003, First Merchants formed Merchants Trust Company,
National Association (Merchants Trust), as a wholly-owned national banking
subsidiary. Upon formation, the trust departments of the following subsidiaries
of First Merchants: First Merchants Bank, National Association, Lafayette Bank
and Trust Company and The First National Bank of Portland were consolidated by
transferring their operations into Merchants Trust.
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
84
contact First Merchants at its address or telephone number indicated under
"WHERE YOU CAN FIND ADDITIONAL INFORMATION" on page 104.
85
DESCRIPTION OF CNBC
Business
CNBC is an Ohio corporation that was incorporated in 1996. It is a
financial holding company and a registered bank holding company that owns all of
the issued and outstanding common stock of Commerce National Bank (Commerce
Bank). CNBC's executive office is located in Columbus, Ohio and its business
consists primarily of the ownership, supervision and control of Commerce Bank.
The common stock of Commerce Bank is CNBC's principal asset and dividends paid
by Commerce Bank are CNBC's principal source of income.
Commerce Bank is a nationally chartered bank that was established in 1991
and has been in continuous operation since that date. Commerce Bank is a
full-service national bank primarily serving small- to medium-sized businesses
located in the Central, Ohio metropolitan area. Commerce Bank provides various
commercial and consumer banking services to its customers through one office
located in Franklin County, Ohio. These services include:
o demand, savings and time deposits;
o commercial, consumer and real estate loans;
o safe deposit facilities;
o installment credit lending; and
o other general services related to the banking business.
CNBC also has two wholly-owned nonbank subsidiaries, CNBC Retirement
Services, Inc. and CNBC Statutory Trust I. CNBC Retirement Services, Inc. was
acquired by CNBC in 2000, and provides investment, administration and accounting
services to individuals and business retirement plans. CNBC Statutory Trust I is
a non-operating subsidiary of CNBC, which was formed as a special purpose
subsidiary in 2001 to issue trust preferred securities.
As of September 30, 2002, CNBC had consolidated assets of approximately
$324 million, consolidated deposits of approximately $258 million, and
stockholders' equity of approximately $24 million.
Incorporation of Certain Information by Reference
The foregoing information concerning CNBC does not purport to be complete.
Certain additional information relating to CNBC's business, management,
executive officer and director compensation, voting securities and certain
relationships is incorporated by reference in this document from documents filed
by CNBC 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 104.
86
COMPARISON OF COMMON STOCK
The following summary comparison of First Merchants common stock and CNBC common
shares 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 CNBC`s Articles of Incorporation and Code of
Regulations.
Governing Law
Following the merger, the rights of former CNBC 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 CNBC
shareholders are presently governed by the laws of the State of Ohio, the state
in which CNBC is incorporated, and by CNBC's Articles of Incorporation and Code
of Regulations. The rights of CNBC shareholders differ in certain respects from
the rights they will have as First Merchants shareholders. The following is a
brief discussion of certain of those material differences.
Authorized But Unissued Shares
o First Merchants
First Merchants' Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, of which ________________ shares were
outstanding as of ______________, 2003. 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 _______________, 2003, 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 ________________, 2003, 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.
87
o CNBC
CNBC's Articles of Incorporation authorize the issuance of 3,000,000
common shares, without par value, of which ___________ shares were outstanding
as of ____________, 2003. CNBC has authorized 200,000 shares of serial preferred
stock, with a par value of $10.00 per share. The shares of serial preferred
stock are available to be issued in different classes with rights, privileges
and preferences determined for each class by the Board of Directors. No serial
preferred shares are outstanding. CNBC's Board of Directors may authorize the
issuance of additional shares of common or serial preferred stock up to the
amounts authorized in CNBC's Articles of Incorporation without shareholder
approval.
As of __________________, 2003, CNBC had ___________ common shares
reserved and remaining available for issuance under its 2002 Stock Option Plan
and ________________ common shares reserved and remaining available for issuance
under its 1999 Stock Option Plan.
Preemptive Rights
o First Merchants
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.
o CNBC
Under Ohio law, subject to certain limitations, shareholders of
corporations incorporated prior to March 17, 2000 (CNBC was incorporated in
1996) have preemptive rights unless the corporation's articles of incorporation
provide otherwise. CNBC's Articles of Incorporation have eliminated preemptive
rights for shareholders.
Dividend Rights
o First Merchants
The holders of First Merchants common stock are entitled to dividends and
other distributions when, as and if declared by its Boards of Directors.
Generally, First Merchants may not pay a dividend if, after giving effect to the
dividend:
o First Merchants would not be able to pay its debts as they become
due in the usual course of business; or
o First Merchants' 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.
88
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.
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 to First Merchants 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 are not currently
subject to such a restriction.
o CNBC
Under Ohio law, CNBC's Board of Directors may declare dividends on the
outstanding CNBC common shares. Generally, CNBC may not pay a dividend if the
dividend exceeds the combination of the surplus of CNBC and the difference
between:
o the reduction in surplus that results from the immediate recognition
of the transition obligations under statement of financial
accounting standards no. 106 (SFAS no. 106), issued by the financial
accounting standards board; and
o the aggregate amount of the transition obligation that would have
been recognized as of the date of the declaration of a dividend if
the corporation had elected to amortize its recognition of the
transition obligation under SFAS no. 106.
Ohio law also places other restrictions on the payment of dividends by
CNBC, including the following:
o dividends may not be paid to shareholders of any class in violation
of the rights of shareholders of any other class;
o dividends may not be paid when the corporation is insolvent or when
there is reasonable ground to believe that payment of the dividend
would result in insolvency; and
89
o if any portion of a dividend is paid out of capital surplus, the
corporation must notify each shareholder receiving the dividend of
the kind of surplus out of which the dividend is being paid.
Similar to First Merchants, Commerce Bank may pay cash dividends to CNBC
on its common stock only out of adjusted retained net profits for the year in
which the dividend is paid and the two preceding years. As with First Merchants,
Commerce Bank will ordinarily be restricted to paying dividends to CNBC in a
lesser amount than is legally permissible because of the need for Commerce Bank
to maintain adequate capital consistent with the capital adequacy guidelines. If
a bank's capital levels are deemed inadequate by the regulatory authorities,
payment of dividends to its parent holding company may be prohibited. Presently,
Commerce Bank is not subject to any such restriction.
Voting Rights
o First Merchants
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.
First Merchants 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."
o CNBC
The holders of outstanding CNBC common shares are entitled to one vote per
share on all matters presented for shareholder vote. Under Ohio law, you have
the right to make a request, in accordance with applicable procedures, to
cumulate your votes in the election of directors unless a corporation's articles
of incorporation are amended to eliminate that right. CNBC's Articles of
Incorporation have not been amended to eliminate cumulative voting in the
election of its Directors.
Under Ohio law, mergers must generally be approved by the affirmative vote
of shareholders who hold two-thirds (2/3) of the outstanding shares entitled to
vote on the merger unless the corporation's articles of incorporation provide
for a greater or lesser vote; however,
90
the articles of incorporation must require the vote of at least a majority of
outstanding shares entitled to vote. CNBC's Articles of Incorporation have
reduced the shareholder vote required to approve a merger to a majority of the
outstanding shares entitled to vote.
Articles of Incorporation and Bylaw or Code of Regulation Amendments
o First Merchants
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 amendments. See "COMPARISON OF COMMON
STOCK - Number of Directors and Term of Office," "COMPARISON OF COMMON STOCK -
Removal of Directors," and "COMPARISON OF COMMON STOCK - Anti-Takeover
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.
o CNBC
Under Ohio law, shareholders may adopt amendments to the articles of
incorporation by the affirmative vote of two-thirds (2/3) of the shares entitled
to vote on the proposal unless the corporation's articles of incorporation
provide for a greater or lesser vote; however, the articles of incorporation
must require the vote of at least a majority of shares entitled to vote. CNBC's
Articles of Incorporation provide that, except for specific provisions relating
to an amendment with respect to CNBC serial preferred shares or control share
acquisitions, shareholders may amend the Articles of Incorporation by the
affirmative vote of a majority of the outstanding CNBC common shares. If,
however, the amendment to the Articles of Incorporation is inconsistent with or
would have the effect of amending certain provisions of the Code of Regulations,
then adoption of the amendment would require the same vote as would be required
to amend the Code of Regulations. Amendments to the provisions of CNBC's
Articles of Incorporation affecting control share acquisitions require the
approval of 75% of the outstanding voting shares. Amendments to the provisions
of CNBC's Articles of Incorporation affecting its serial preferred shares
require the affirmative vote of two-thirds (2/3) of the outstanding serial
preferred shares.
91
Under Ohio law, shareholders may amend or adopt regulations consistent
with the law and the corporation's articles of incorporation, by the affirmative
vote of a majority of shares entitled to vote if done at a shareholders meeting.
For shareholders to amend the code of regulations without a meeting requires the
affirmative vote of the holders of two-thirds (2/3) of the shares entitled to
vote on the proposal. Ohio law provides that a corporation's articles of
incorporation or code of regulations may increase or decrease the required
shareholder vote, but may not allow approval by less than a majority of the
voting power. With few exceptions, CNBC's Code of Regulations requires the
affirmative vote of a majority of shares entitled to vote to amend the Code of
Regulations. Any amendment to CNBC's Code of Regulations with respect to the
number, classification, election, term of office or removal of directors
requires the affirmative vote of at least 75% of the shares entitled to vote.
Special Meetings of Shareholders
o First Merchants
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.
o CNBC
Pursuant to Ohio law and CNBC's Code of Regulations, a special meeting of
shareholders may be called by the President, a Vice President, the directors by
action at a meeting, a majority of the directors acting without a meeting or the
holders of CNBC common shares representing at least 50% of the outstanding
shares entitled to vote at the special meeting.
Number of Directors and Term of Office
o First Merchants
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 16. 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 3 classes with 5 directors in 2 of
the classes and 6 directors in the other 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 2
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.
92
o CNBC
Under Ohio law, a corporation's articles of incorporation or code of
regulations determines the number of directors, but, in most circumstances, the
number may not be less than 3. Unless the articles of incorporation or code of
regulations provide otherwise, the shareholders may fix or change the number of
directors at a shareholders meeting for the election of directors by the
affirmative vote of a majority of the shares represented at the meeting and
entitled to vote. CNBC's Code of Regulations provide for no less than 9 and no
more than 25 directors, the specific number of which is established by a
majority of the CNBC shareholders or a majority of the Board of Directors from
time-to-time. The CNBC Board of Directors has established the current number of
directors at 17. Under Ohio law, a corporation's articles of incorporation or
code of regulations may provide for the classification of directors into either
2 or 3 classes so long as no director serves a term of office greater than 3
years. CNBC's Code of Regulations classifies the board of directors into 3
classes with approximately 1/3 of the directors elected each year. Because
CNBC's Board of Directors is divided into classes, a majority of CNBC's
directors can be replaced only after 2 annual meetings of shareholders. A vote
of 75% of the outstanding voting shares is required to amend this provision of
CNBC's Code of Regulations.
Nomination of Directors
o First Merchants
Under First Merchants' By-Laws, either the Board of Directors or any
shareholder entitled to vote in the election of directors may nominate a
candidate for the Board of Directors. Nominations, other than those made by or
on behalf of existing management of First Merchants, must be made in writing and
must be mailed to the President at First Merchants' principal executive offices
no less than 10 and no more than 50 days prior to the shareholders meeting at
which directors are to be elected. A notice to First Merchants nominating any
person must set forth:
o the name and address of each nominee;
o the principal occupation of each nominee;
o the total number of shares of First Merchants capital stock that
will be voted for each nominee;
o the name and residence address of the notifying shareholder;
o the number of shares of capital stock of First Merchants owned by
the notifying shareholder; and
o any other information relating to each nominee that is required to
be disclosed in solicitations for proxies for election of directors
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
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o CNBC
Similarly, under CNBC's Code of Regulations, the Board of Directors or any
shareholder entitled to vote in the election of directors may nominate a
candidate for the Board of Directors. Shareholder nominations must be made in
writing and must include the written consent of each proposed nominee to serve
as a director if elected. Shareholder nominations and the required consents must
be received at CNBC's principal executive offices no less than 60 and no more
than 90 days prior to the shareholders meeting at which directors are to be
elected. If, however, notice of the meeting is mailed or disclosed to
shareholders less than 75 days before the meeting date, shareholder nominations
and required consents must be received by the close of business on the 15th day
after notice is mailed or public disclosure is made. A shareholder's notice to
CNBC nominating any person who is not an incumbent director must set forth:
o as to the nominee:
o the name, age, business address and residence address of each
nominee;
o the principal occupation or employment of each nominee;
o the class and number of CNBC common shares that are
beneficially owned by each nominee; and
o any other information relating to each nominee that is
required to be disclosed in solicitations for proxies for
election of directors pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
o as to the notifying shareholder:
o the name and record address of such shareholder; and
o the number of shares beneficially owned by such shareholder.
Removal of Directors
o First Merchants
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 shareholders 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
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First Merchants' Articles of Incorporation requires the approval of
three-fourths (3/4) of the voting stock.
o CNBC
CNBC's Code of Regulations provide that any director or all directors may
be removed, with or without cause, at an annual meeting of shareholders or a
special meeting called expressly for that purpose upon the affirmative vote of
seventy-five percent (75%) of the outstanding shares entitled to vote on the
election of directors. Amendment of this provision of CNBC's Code of Regulations
requires the approval of seventy-five percent (75%) of the outstanding voting
stock.
Dissenters' Rights
o First Merchants
Under Indiana law, a shareholder of a corporation is entitled to dissent
from and obtain payment of the fair value of the shareholder's shares in the
following events:
o Consummation of a plan of merger to which the corporation is a
party, if shareholder approval is required and the shareholder is
entitled to vote thereon;
o Consummation of a plan of share exchange by which the corporation's
shares will be acquired, if the shareholder is entitled to vote on
the plan;
o Consummation of a sale or exchange of all, or substantially all, the
property of the corporation other than in the usual course of
business, if the shareholder is entitled to vote on the sale or
exchange;
o Approval of a control share acquisition under Indiana law; and
o Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, by-laws or a resolution of the
board of directors provides that voting or non-voting shareholders
are entitled to dissent and obtain payment for their shares.
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 presently have dissenters' rights
because First Merchants' shares are traded on the NASDAQ National Market System.
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o CNBC
Under Ohio law, shareholders are entitled to dissent from and obtain
payment of the fair value of the shareholder's shares in the event of certain
mergers and other transactions. For a detailed discussion of the dissenters'
rights of CNBC shareholders in connection with the merger, see the discussion
under "THE MERGER - Rights of Dissenting Shareholders" on page 51 and also
Appendix B hereto.
Liquidation Rights
o First Merchants
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.
o CNBC
In the event of any liquidation or dissolution of CNBC, 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 CNBC's
liabilities and any rights of creditors and holders of shares of CNBC serial
preferred stock then outstanding.
Redemption
o First Merchants
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.
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 redemptions 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.
o CNBC
Under Ohio law, CNBC may not redeem its shares if, immediately thereafter,
its assets would be less than its liabilities plus its stated capital, if any,
if CNBC is insolvent, or if there is
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reasonable ground to believe that by such purchase or redemption CNBC would be
rendered insolvent.
As a bank holding company, CNBC is subject to the same restrictions on
redemption as First Merchants.
Anti-Takeover Provisions
The anti-takeover measures applicable to First Merchants and CNBC
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 their 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.
o First Merchants
Under Indiana law, 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, 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. First
Merchants has adopted the protection provided by the business combination
provision of Indiana law.
In addition to the business combination provision, Indiana law 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. First Merchants is
subject to the control share
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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.
In addition to the protection afforded by Indiana law, 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 also 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 of First Merchants' Articles
of Incorporation regarding directors may only be amended by approval of
three-fourths (3/4) of the voting stock.
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 First Merchants common stock in the 2 years preceding the business
combination, and (b) the per share book value for First Merchants common 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 stock and preferred stock
of First Merchants may also 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 of Directors may issue shares of
common stock and/or preferred stock at any time without shareholder approval.
Prior to issuance, the Board of Directors would determine the relative rights,
preferences, limitations and restrictions of the preferred stock. The Board of
Directors would also determine whether any voting rights would attach to the
preferred stock. The Board of Directors 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.
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o CNBC
Ohio law contains a control share acquisition provision that applies to a
corporation unless the corporation's articles of incorporation or code of
regulations state that the control share acquisition provision does not apply.
The Ohio control share acquisition provision prohibits a control share
acquisition unless the shareholders of the corporation approve the acquisition
by vote of a majority of shares represented at the meeting and of a majority of
disinterested shares represented at the meeting. A control share acquisition is
the acquisition, directly or indirectly, by a person of shares that, when added
to the voting power the person already has, would entitle the person to cast,
for the first time, a percentage of votes within particular ranges as defined by
statute or the articles of incorporation.
CNBC's Articles of Incorporation provide that the relevant statutory
control share acquisition provision does not apply to CNBC, but do provide for
similar shareholder approval in the event of a control share acquisition.
Under Ohio law, an issuing public corporation is prohibited from entering
into a "Chapter 1704 transaction," as defined below, with the direct or indirect
beneficial owner of 10% or more of the corporation's shares for at least 3 years
after the shareholder attains 10% ownership unless, before the shareholder
attains 10% ownership, the board of directors approves either the Chapter 1704
transaction or the purchase of shares resulting in 10% ownership. A Chapter 1704
transaction is broadly defined to include, among other things:
o a merger or consolidation involving the corporation and the 10%
shareholder;
o a sale or purchase of substantial assets between the corporation and
the 10% shareholder;
o a reclassification, recapitalization or other transaction proposed
by the 10% shareholder that results in an increase in the proportion
of shares beneficially owned by the 10% shareholder; and
o the receipt by the 10% shareholder of a loan, guarantee, other
financial assistance or tax benefit not received proportionately by
all shareholders.
Ohio law restricts these types of transactions between a corporation and a
10% shareholder even after the 3-year period. At that time, such a transaction
may proceed only if:
o the board of directors had approved the purchase of shares that gave
the shareholder the 10% ownership;
o the transaction is approved by the holders of shares of the
corporation with at least two-thirds (2/3) of the voting power of
the corporation, or such other percent as the articles of
incorporation specify, and at least a majority of the disinterested
shares; or
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o the transaction results in shareholders other than the 10%
shareholder receiving a prescribed fair price plus interest for
their shares.
CNBC is currently subject to this provision of Ohio law.
In addition, CNBC's Code of Regulations provides that the directors of
CNBC are divided into 3 classes, each serving 3-year terms with one class to be
elected at each annual meeting of shareholders. CNBC's Code of Regulations also
provides that directors may be removed with or without cause by the consent of
seventy-five percent (75%) 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 of CNBC's Code of Regulations
regarding directors may only be amended by the consent of seventy-five percent
(75%) of the shares entitled to vote.
The existence of authorized but unissued common and serial preferred stock
of CNBC may also have an anti-takeover effect. The issuance of additional CNBC
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 CNBC. The Board
of Directors may issue shares of common stock and/or serial preferred stock at
any time without shareholder approval. The serial preferred stock also has
preferential rights to the common stock in terms of approval of corporate
action, payment of dividends and payment of distributions upon liquidation,
dissolution or winding up of CNBC. The Board of Directors has no present plans
to issue any serial preferred stock or additional common stock. The issuance of
serial preferred or common stock in the future could result in the dilution of
ownership and control of CNBC by shareholders. Since CNBC shareholders have no
preemptive rights, there is no guarantee that shareholders would have an
opportunity to purchase any of the serial preferred or common stock when and if
it is issued.
Director Liability
o First Merchants
Under Indiana law, a director of First Merchants will not be liable to
shareholders for any action taken as a director, or any failure to take any
action, unless:
o 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
o Such breach or failure to perform constitutes willful misconduct or
recklessness.
o CNBC
Under Ohio law, a director of an Ohio corporation shall not be found to
have violated his or her fiduciary duties to the corporation or its shareholders
unless there is proof by clear and convincing evidence that the director has not
acted in good faith, in a manner he or she
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reasonably believes to be in or not opposed to the best interests of the
corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In addition, under Ohio law, a
director is liable in damages for any action or failure to act as a director
only if it is proved by clear and convincing evidence that such act or omission
was undertaken either with deliberate intent to cause injury to the corporation
or with reckless disregard for the best interests of the corporation, unless the
corporation's articles of incorporation or code of regulations make this
provision inapplicable by specific reference. CNBC's Articles of Incorporation
and Code of Regulations do not make this provision inapplicable.
Indemnification of Directors, Officers and Employees
o First Merchants
Under Indiana law and First Merchants' Articles of Incorporation, First
Merchants may indemnify any director, officer, employee or agent for any and all
liability and expense incurred in connection with a proceeding which such person
is involved in by reason of such person's position with First Merchants in which
(a) the person is wholly successful or (b) the person acted in good faith in
what the person reasonably believed to be in or at least not opposed to the best
interests of First Merchants. If the proceeding is a criminal proceeding, the
person must have had no reasonable cause to believe that the person's conduct
was unlawful. If the person is wholly successful with respect to the claim or
proceeding, the indemnification by First Merchants is mandatory. Finally, First
Merchants' Articles of Incorporation permit First Merchants to advance expenses
to a person prior to final disposition of the proceeding if the person
undertakes to repay any advanced amounts, if it is ultimately determined that he
or she is not entitled to indemnification, or if the person furnishes to First
Merchants a written affirmation of the person's good faith belief that he or she
is entitled to indemnification.
o CNBC
Under Ohio law, generally, a corporation may indemnify any director,
officer, employee or agent for reasonable expenses incurred in connection with
the defense or settlement of any threatened, pending or completed action or suit
related to the person's position with the corporation if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation. With respect to a criminal action or
proceeding, the person must also have had no reasonable cause to believe his or
her conduct was unlawful. Ohio law requires a corporation to indemnify any
person for reasonable expenses incurred if he or she was successful in the
defense of any action, suit or proceeding or part thereof. Ohio law and CNBC's
Code of Regulations prohibit indemnification of a person finally judged to have
been knowingly fraudulent or deliberately dishonest or who has acted with
willful misconduct or in violation of applicable law. Finally, Ohio law requires
a corporation to provide expenses to a person in advance of final disposition of
the action, suit or proceeding if the person undertakes to repay any advanced
amounts if it is ultimately determined that he or she is not entitled to
indemnification. CNBC's Code of Regulations provides for indemnification to the
fullest extent permitted by law.
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Anti-Greenmail
o First Merchants
Indiana law and First Merchants' Articles of Incorporation and By-Laws do
not contain an anti-greenmail provision.
o CNBC
Under Ohio law, subject to certain exceptions, a corporation may recover
any profit realized from the disposition of equity securities by a person who,
within 18 months before disposition, made a proposal or publicly disclosed the
intention or possibility of making a proposal to acquire control of the
corporation. Ohio law allows a corporation to opt out of this provision by
specifically stating in its articles of incorporation or code of regulations
that this provision does not apply. CNBC is currently subject to this provision
of Ohio law.
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 CNBC by
the law firm of Squire, Sanders & Dempsey L.L.P., 4900 Key Tower, 127 Public
Square, Cleveland, Ohio 44114-1304.
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 CNBC for the five years
ended December 31, 2001 and 2000, included herein and attached hereto as
Appendix D, 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 included herein and attached hereto as
Appendix D, in reliance upon such report of Crowe, Chizek and Company LLP given
on the authority of such firm as experts in auditing and accounting.
Representatives of Crowe, Chizek and Company LLP are not expected to be
present at the CNBC special shareholders meeting.
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INDEMNIFICATION
As an Indiana corporation, First Merchants is subject to Indiana law.
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. This indemnification is to the full extent and
according to the procedures and requirements of Indiana law.
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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling First
Merchants pursuant to the foregoing provisions, First Merchants has been
informed that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
SHAREHOLDER PROPOSALS
Any proposal which a First Merchants shareholder intends to have presented
at the 2003 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, 2002, 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 2003 annual meeting of First Merchants that were not
submitted for inclusion in the proxy statement will be considered untimely
unless they are received by the Secretary of First Merchants at First Merchants'
principal office by January 9, 2003.
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Any shareholder who intended to present a proposal at the 2003 Annual
Meeting of Shareholders must have delivered the proposal to CNBC no later than
November 21, 2002, in order to have the proposal included in CNBC's proxy
material for that meeting. Any shareholder proposal submitted other than for
inclusion in CNBC's proxy materials for that meeting must be delivered to CNBC
not less than 60 days nor more than 90 days prior to the annual meeting;
provided, however, that in the event that less than 75 days' notice or prior
public disclosure of the date of the meeting is given or made to the
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 15th day following the earlier of the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. If a shareholder proposal is not received during this time
period, such proposal will be considered untimely. CNBC may vote in its
discretion all of the shares for which it has received proxies for the 2003
Annual Meeting of Shareholders as to any untimely shareholder proposals.
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 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 proxy statement-prospectus, reference is made to the registration
statement. Statements contained in this 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 CNBC 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 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 CNBC on its website at http://www.cnbcbank.com.
Both First Merchants and CNBC "incorporate by reference" into this 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 proxy statement-prospectus. Some information contained in
this proxy statement-prospectus updates the information
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incorporated by reference and some information we file subsequently with the
Securities and Exchange Commission will automatically update this 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, 2001;
o First Merchants' Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002;
o First Merchants' Current Report on Form 8-K filed on April 2, 2002,
announcing the consummation of the merger of Lafayette
Bancorporation with First Merchants;
o First Merchants' Current Report on Form 8-K filed on April 19, 2002,
announcing issuance by First Merchants Capital Trust I of 1,850,000
8.75% Cumulative Trust Preferred Securities;
o First Merchants' Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002;
o First Merchants' Current Report on Form 8-K filed on August 16,
2002, announcing a 5% stock dividend declared on shares of its
outstanding common stock;
o First Merchants' Current Report on Form 8-K filed on August 28,
2002, announcing the execution of the Merger Agreement with CNBC;
o First Merchants' Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002;
o The information under the following captions in First Merchants'
Form 10-K for the fiscal year ended December 31, 2001: (a)
"Directors and Executive Officers of the Registrant" at page 27, (b)
"Executive Compensation" at page 27, and (c) "Certain Relationships
and Related Transactions" at page 27; and
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 made 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 proxy statement-prospectus and before the date of
the CNBC shareholders meeting.
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CNBC incorporates by reference the documents and information listed below:
o CNBC's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2001;
o CNBC's Quarterly Report on Form 10-QSB for the quarter ended March
31, 2002;
o CNBC's Quarterly Report on Form 10-QSB for the quarter ended June
30, 2002;
o CNBC's Current Report on Form 8-K filed on August 28, 2002,
announcing the execution of the Merger Agreement with First
Merchants;
o CNBC's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2002;
o The following information in the specified pages of CNBC's Annual
Report to Shareholders for its fiscal year ended December 31, 2001:
(a) "Description of Business" at page 3, (b) "Market for
Registrant's Common Equity and Related Shareholder Matters" at page
12, (c) "Selected Financial Data" at page 2, and (d) "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" at pages 6-12; and
o The following information under the following captions in CNBC's
Form 10-KSB for the fiscal year ended December 31, 2001: (a)
"Security Ownership of Certain Beneficial Owners and Management" at
page 12, (b) "Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act" at page
12, (c) "Executive Compensation" at page 12, and (d) "Certain
Relationships and Related Transactions" at page 12.
You may request, either orally or in writing, a copy of the documents
incorporated by reference in this proxy statement-prospectus without charge by
requesting them in writing or by telephone from the appropriate company at the
following addresses and telephone numbers:
First Merchants Corporation CNBC Bancorp
200 East Jackson Street 3650 Olentangy River Road
Muncie, Indiana 47305 Columbus, Ohio 43214
Attention: Larry R. Helms, Attention: John A. Romelfanger,
Senior Vice President, General Counsel Vice President and Secretary
and Secretary Telephone: (614) 583-2200
Telephone: (765) 747-1530
If you would like to request documents, please do so by _____, 2003, in
order to receive them before the meeting.
You should rely only on the information incorporated by reference or
provided in this proxy statement-prospectus. We have authorized no one to
provide you with different
106
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
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 proxy statement-prospectus is required to be delivered, this proxy
statement-prospectus will be supplemented or amended.
All information regarding First Merchants in this proxy
statement-prospectus has been provided by First Merchants and all information in
this proxy statement-prospectus regarding CNBC has been provided by CNBC.
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APPENDIX A
AGREEMENT OF REORGANIZATION AND MERGER
BETWEEN
FIRST MERCHANTS CORPORATION
AND
CNBC BANCORP
THIS AGREEMENT OF REORGANIZATION AND MERGER (the "Agreement"), is entered
into as of this 28th day of August, 2002, by and between FIRST MERCHANTS
CORPORATION ("First Merchants") and CNBC BANCORP ("CNBC").
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, CNBC is a corporation duly organized and existing under the laws
of the State of Ohio and a registered bank holding company under the Bank
Holding Company Act of 1956, as amended, with its principal place of business in
Worthington, Franklin County, Ohio;
WHEREAS, Commerce National Bank (the "Bank") is a national bank duly
organized and existing under the laws of the United States and a wholly-owned
subsidiary of CNBC with its principal banking office in Worthington, Franklin
County, Ohio;
WHEREAS, CNBC Retirement Services, Inc. ("CNBC Retirement Services") is a
corporation duly organized and existing under the laws of the State of Ohio and
a wholly-owned subsidiary of CNBC with its principal place of business in
Worthington, Franklin County, Ohio;
WHEREAS, CNBC Statutory Trust I ("CNBC Trust") is a statutory business
trust duly organized and existing under the laws of the State of Connecticut and
a wholly-owned subsidiary of CNBC with its principal place of business in
Worthington, Franklin County, Ohio;
WHEREAS, the Bank, CNBC Retirement Services and CNBC Trust are hereinafter
collectively referred to as the "Subsidiaries" and individually as a
"Subsidiary";
WHEREAS, it is the desire of First Merchants and CNBC to effect a
transaction whereby the Subsidiaries will become wholly-owned subsidiaries of
First Merchants through a statutory merger of CNBC with and into First
Merchants; and
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WHEREAS, a majority of the entire Board of Directors of First Merchants
and a majority of the entire Board of Directors of CNBC 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 CNBC hereby make
this Agreement and prescribe the terms and conditions of the merger of CNBC 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), CNBC shall be merged with
and into First Merchants, which shall be the "Continuing Company" and shall
continue its corporate existence under the laws of the State of Indiana,
pursuant to the provisions of and with the effect provided in Indiana Code
Chapter 23-1-40 and Ohio Revised Code Section 1701.79 (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 CNBC 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 CNBC; 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 CNBC shall cease and
the Continuing Company shall possess all of the assets of CNBC, including all of
the issued and outstanding shares of capital stock of the Subsidiaries and all
of its rights, privileges, immunities, powers, and franchises, and shall assume
all of the duties and liabilities of CNBC.
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 8.06 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. The
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officers of First Merchants immediately prior to the Effective Date shall
continue as the officers of the Continuing Company.
2.03. Capital Structure. The amount of capital stock of the Continuing
Company shall not be less than the capital stock of First Merchants immediately
prior to the Effective Date, increased by the amount of capital stock issued in
accordance with Section 3 hereof.
2.04. Articles of Incorporation and Bylaws. The Articles of Incorporation
and 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 CNBC shall vest in the Continuing
Company without reversion or impairment. All liabilities of CNBC shall be
assumed by the Continuing Company.
2.06. Statutory Agent. The Continuing Company hereby consents to be sued
and served with process in the State of Ohio and hereby irrevocably appoints the
Secretary of State of the State of Ohio as its agent to accept service of
process in any proceeding in the State of Ohio to enforce against the Continuing
Company any obligation of CNBC or to enforce the rights of a dissenting
shareholder of CNBC.
2.07. Qualification to do Business. As of the date of this Agreement, the
Continuing Company intends to qualify to do business in the State of Ohio as of
the Effective Date of the Merger and may appoint CT Corporation, located at 1300
East Ninth Street, Cleveland, Ohio 44114, as its agent for service of process,
notice or demand.
2.08. 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 CNBC or the Subsidiaries, or (b) otherwise carry out the
purposes of this Agreement, CNBC and the Subsidiaries 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 CNBC or the Subsidiaries or otherwise to take any and
all such action.
SECTION 3
Consideration To Be
Distributed To Shareholders Of CNBC
3.01. Consideration. Upon and by reason of the Merger becoming effective,
the shareholders of CNBC of record on the Effective Date who have not dissented
to the Merger in accordance with Ohio Revised Code ss. 1701.84 and ss. 1701.85,
as amended, shall be entitled to
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receive in exchange for CNBC's common shares held and at their election (subject
to the limitations and prorations set forth in this Section 3) either (i) 1.01
(the "Conversion Ratio") shares of First Merchants' common stock for each CNBC
common share held ("Option 1"), or (ii) cash in the amount of $29.57 for each
CNBC common share held, subject to the provisions and limitations of Section
3.07 ("Option 2"). A CNBC 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 from the Conversion Ratio. Each CNBC
shareholder who would otherwise have been entitled to a fraction of a First
Merchants share, upon surrender of all such shareholder's certificates
representing CNBC'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 CNBC 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, reclassifies or splits up its
outstanding shares or takes any similar recapitalization action, then the
Conversion Ratio shall be adjusted so that each CNBC 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. First
Merchants and CNBC acknowledge that First Merchants declared a 5% stock dividend
on its shares of common stock payable on September 13, 2002 to shareholders of
record on August 30, 2002, and that the Conversion Ratio set forth in Section
3.01 hereof and the dollar amounts set forth in Sections 3.04(b) and 3.04(c)
hereof take such stock dividend into account and shall not be adjusted as a
result thereof.
3.04. Termination Rights.
(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 and the
dollar amounts set forth in Sections 3.04(b) and 3.04(c) shall be
appropriately and proportionately adjusted to reflect any share adjustment
as contemplated by Section 3.03 hereof.
(b) CNBC 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 $22.61;
subject to the following two provisions. If CNBC elects to exercise its
right of termination pursuant to the immediately preceding sentence, it
shall give written notice to First Merchants within
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twenty-four (24) hours of the Determination Date. Within two 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 $22.61 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 CNBC 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 $30.59; subject to the following two provisions. If First
Merchants elects to exercise its right of termination pursuant to the
immediately preceding sentence, it shall give written notice to CNBC
within twenty-four (24) hours of the Determination Date. Within two
business days after the date of receipt of such notice, CNBC shall have
the option of adjusting the Conversion Ratio to equal a number equal to a
quotient, the numerator of which is the product of $30.59 and the
Conversion Ratio (as then in effect) and the denominator of which is the
First Merchants Average Price. If CNBC 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 CNBC's common shares as of the record date fixed for the
special shareholders' meeting at which the Merger will be submitted to a vote of
CNBC'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 CNBC between the Special Record Date and the Election Deadline
(as defined below). CNBC 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 CNBC's shareholders. The
Election Forms shall be mailed to each record holder of CNBC's common shares 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 CNBC's
shareholders. The Election Form will permit each holder of record of CNBC's
common shares 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
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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 CNBC
and First Merchants to receive elections, to receive outstanding CNBC 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 CNBC hereby appoint the Trust
Department of First Merchants Bank, National Association to act as agent (the
"Election Agent") of CNBC's shareholders for the purposes of mailing and
receiving the Election Forms, tabulating the results and notifying First
Merchants and CNBC of the results.
3.07. All Cash Payments.
(a) In the event the number of CNBC common shares covered by Option
2 elections would entitle CNBC's shareholders to receive less than
$24,561,693 in cash, all Option 1 and Option 2 elections of the holders of
CNBC's common shares shall be honored (each in its entirety). In the event
that the amount of cash to be received by shareholders of CNBC pursuant to
the terms of this Agreement would result in cash payments of $24,561,693
or more, the ten (10) Option 2 elections which cover the largest number of
CNBC's common shares (the "Ten Largest Option 2 Elections") shall be
converted into Option 1 elections on a pro rata basis based on the number
of CNBC common shares covered by such Option 2 elections; provided that
such Option 2 elections shall be converted into Option 1 elections only to
the extent necessary so that the total remaining number of outstanding
CNBC common shares covered by Option 2 elections is such that the Merger
will (i) result in cash payments of no more than $24,561,693, 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. Option 2
elections which are partially converted into Option 1 elections shall
remain as Option 2 elections to the extent they are not so converted. In
the event the conversion of the Ten Largest Option 2 Elections (in their
entirety) to Option 1 elections does not result in the Merger satisfying
the conditions of provisos (i) and (ii) above of this Section 3.07(a), the
next ten (10) largest Option 2 elections shall also be converted into
Option 1 elections on the same pro rata basis as applied to the Ten
Largest Option 2 Elections described above, and such methodology shall
continue to be applied to Option 2 elections until such time as the Merger
satisfies the conditions of provisos (i) and (ii) above of this Section
3.07(a).
(b) CNBC's common shares 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) CNBC and First Merchants shall mutually determine the validity
of elections submitted by CNBC's shareholders.
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(d) A holder of CNBC'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 CNBC 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 CNBC may, upon mutual agreement, apply the
adjustments set forth in this Section 3.07 only to such extent and to such
number of CNBC's shareholders as is necessary to accomplish the objectives
of this Section 3.07.
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
CNBC 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 CNBC's common shares 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 CNBC's
common shares and for fractional shares shall be made by First Merchants
to each former shareholder of CNBC 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 such shareholder's certificates representing
CNBC common shares, 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
CNBC 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
CNBC's common shares 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 such shareholder's certificates for CNBC's
common shares 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.
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(d) At or after the Effective Date, there shall be no transfers on
the stock transfer books of CNBC of any CNBC common shares. If, after the
Effective Date, certificates are presented for transfer to CNBC, 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 CNBC to establish the persons entitled to receive cash
and shares of common stock of First Merchants, which books, in the absence
of actual knowledge by First Merchants of any adverse claim thereto, shall
be conclusive with respect to the ownership of such stock.
(f) With respect to any certificate for CNBC's common shares 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 CNBC's
shareholder with all procedures historically required by CNBC in
connection with lost, stolen, or destroyed certificates.
SECTION 4
Dissenting Shareholders
Shareholders of CNBC shall have the rights accorded to dissenting
shareholders under Ohio Revised Code ss. 1701.84 and ss. 1701.85, as amended.
SECTION 5
Representations and
Warranties of CNBC
CNBC represents and warrants to First Merchants with respect to itself and
the Subsidiaries 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 CNBC and
delivered to and executed by an authorized executive officer of First Merchants
contemporaneous with the execution of this Agreement.)
5.01. Standard. No representation or warranty of CNBC contained in Section
5 of this Agreement shall be deemed untrue or incorrect, and no party hereto
shall be deemed to have breached a representation or warranty, as a consequence
of the existence of any fact, event or circumstance unless such fact, event or
circumstance (either individually or taken together with all other facts, events
or circumstances inconsistent with such or with any representation or warranty
contained in Section 5) has had, or is reasonably likely to have, a Material
Adverse Effect (as defined in Section 13.10).
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5.02. Organization and Authority. CNBC is a corporation duly organized and
validly existing under the laws of the State of Ohio. The Bank is a national
bank duly organized and validly existing under the laws of the United States.
CNBC Retirement Services is a corporation duly organized and validly existing
under the laws of the State of Ohio. CNBC Trust is a statutory business trust
duly organized and validly existing under the laws of the State of Connecticut.
CNBC and each of the Subsidiaries 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,
CNBC's only subsidiaries are the Subsidiaries, and the Bank has no subsidiaries.
The Bank is subject to primary federal regulatory supervision and regulation by
the Office of the Comptroller of the Currency.
5.03. Authorization.
(a) CNBC 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 CNBC's shareholder approval. This
Agreement, when executed and delivered, will have been duly authorized and
will constitute a valid and binding obligation of CNBC, 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 CNBC's Articles of Incorporation or Code
of Regulations; (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 CNBC or any of the Subsidiaries is
subject or bound; (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 CNBC or any of the Subsidiaries; (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 CNBC or any of the Subsidiaries 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, CNBC or
any of the Subsidiaries 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 and Ohio 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 CNBC
of the transactions contemplated by this Agreement.
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(d) Other than those filings, authorizations, consents and approvals
referenced in Section 5.03(c) above and except as set forth in the
Disclosure Letter, no notice to, filing with, authorization of, exemption
by, or consent or approval of, any third party is necessary for the
consummation by CNBC of the transactions contemplated by this Agreement.
5.04. Capitalization.
(a) The authorized capital stock of CNBC as of the date hereof
consists, and on the Effective Date will consist, of 3,000,000 common
shares, without par value. On the date of this Agreement, 1,991,572 common
shares are issued and outstanding. Such issued and outstanding CNBC common
shares have been duly and validly authorized by all necessary corporate
action of CNBC, are validly issued, fully paid and nonassessable and have
not been issued in violation of any preemptive rights of any shareholders.
CNBC has no capital stock authorized, issued or outstanding other than as
described in this Section 5.04(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) All outstanding shares of capital stock of the Bank are owned
directly by CNBC. 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 Bank common stock is owned by
CNBC, 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 5.04(b) and has no intention or
obligation to authorize or issue any other shares of capital stock.
(c) All outstanding shares of capital stock of CNBC Retirement
Services and CNBC Trust are owned directly by CNBC. Such shares have been
duly and validly authorized by all necessary corporate action, are validly
issued, fully paid and nonassessable, and have not been issued in
violation of any preemptive rights. Such shares are owned by CNBC, free
and clear of any 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. Neither CNBC Retirement Services nor CNBC Trust have any other
shares of capital stock authorized, issued or outstanding except as set
forth in the Disclosure Letter, and neither CNBC Retirement Services nor
CNBC Trust have any intention or obligation to authorize or issue any
other shares of capital stock.
(d) 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 CNBC nor any Subsidiary by which CNBC or any Subsidiary is
or may become bound. Neither CNBC nor any Subsidiary has any
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outstanding contractual or other obligation to repurchase, redeem or
otherwise acquire any of its respective outstanding shares of capital
stock.
(e) Except as set forth in the Disclosure Letter, to the knowledge
of CNBC, no person or entity beneficially owns 5% or more of CNBC's
outstanding common shares.
5.05. Organizational Documents. The respective Articles of Incorporation
or Association, Code of Regulations or By-Laws, Certificate of Trust and Trust
Agreement, as applicable, of CNBC and the Subsidiaries have been delivered to
First Merchants and represent true, accurate and complete copies of such
corporate documents of CNBC and the Subsidiaries in effect as of the date of
this Agreement.
5.06. Compliance with Law. Except as set forth in the Disclosure Letter,
neither CNBC nor any Subsidiary has engaged in any activity nor taken or omitted
to take any action which has resulted, or to the knowledge of CNBC 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. CNBC and each Subsidiary possess all
licenses, franchises, permits and other authorizations necessary for the
continued conduct of their respective businesses without 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 CNBC or the Subsidiaries, including all correspondence 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, CNBC has
received no inquiries from any regulatory agency or government authority
relating to its compliance with any securities laws applicable to CNBC.
5.07. Accuracy of Statements. The representations and warranties contained
in this Section 5 do not contain any untrue statements of material fact or omit
to state a material fact necessary to make the statements contained in this
Section 5, in light of the circumstances in which they are made, not misleading.
5.08. 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 CNBC
or any Subsidiary threatened, in any court or before any government agency or
body, arbitration panel or otherwise (nor does CNBC or any Subsidiary have any
knowledge of a basis for any claim, action, suit, proceeding, arbitration or
investigation) against or by CNBC or any Subsidiary. There are no uncured
violations, or violations with respect to which refunds or restitutions may be
required, cited in any compliance report to CNBC or the Bank as a result of an
examination by any regulatory agency or body.
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5.09. Financial Statements.
(a) CNBC's consolidated balance sheets as of the end of the two
fiscal years ended December 31, 2001 and 2000 and for the six (6) month
period ended June 30, 2002 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 CNBC as of the respective dates thereof and the consolidated
results of operations of CNBC 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 2001 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, 2002, (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.
5.10. Absence of Certain Changes. Except for events and conditions
relating to the business and interest rate environment in general, the accrual
or payment of Merger-related expenses, or as set forth in the Disclosure Letter,
since June 30 2002, no events have occurred, or to the knowledge of CNBC, can
reasonably be expected to occur, which could reasonably be expected to have a
Material Adverse Effect. Between the period from June 30, 2002 to the date of
this Agreement, CNBC and each Subsidiary 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 CNBC's common
shares (other than normal quarterly cash dividends) or any split, combination or
reclassification of any stock of CNBC or any Subsidiary or any issuance or the
authorization of any issuance of any securities in respect of, or in lieu of, or
in substitution for CNBC's common shares.
5.11. Absence of Undisclosed Liabilities. Neither CNBC nor any Subsidiary
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 CNBC 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.
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5.12. Title to Assets.
(a) Except as set forth in the Disclosure Letter, CNBC and the
Subsidiaries have good and marketable title to all personal property
reflected in the June 30, 2002 Financial Information, good and marketable
title to all other properties and assets which CNBC or the Subsidiaries
purport to own, good and marketable title to or right to use by terms of
any lease or contract all other property used in CNBC's or any
Subsidiary's business, and good and marketable title to all property and
assets acquired since June 30, 2002, 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
CNBC or any Subsidiary, 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 CNBC and the Subsidiaries 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.
5.13. 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 opinion of CNBC and the Bank, adequate 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 CNBC or any Subsidiary since June 30, 2002 is subject
to any restrictions, whether contractual or statutory, which impairs the
ability of CNBC or any Subsidiary to dispose freely of such investment at
any time. Except as set forth in the Disclosure Letter, neither CNBC nor
the Bank is a party to any repurchase agreements with respect to
securities.
5.14. 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
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maintained, administered or contributed to by CNBC or any Subsidiary and
covers any employee, director or former employee or director of CNBC or
any Subsidiary under which CNBC or any Subsidiary 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
compliance with all applicable laws, regulations, rulings and other
requirements. 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 CNBC nor any Subsidiary 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.
(d) To the knowledge of CNBC and the Subsidiaries, 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 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, CNBC and/or the Subsidiaries, as applicable, sought and received
favorable determination letters from the IRS within the applicable
remedial amendment
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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 CNBC or any Subsidiary.
(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, CNBC or any Subsidiary, with
respect to an Employee Plan, (other than normal benefit claims) have been
asserted or, to the knowledge of CNBC or any Subsidiary, 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 CNBC or any Subsidiary 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 knowledge of CNBC and the Subsidiaries, no event has
occurred that would cause the imposition of the tax described in Code
Section 4980B. To the knowledge of CNBC and the Subsidiaries, 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 CNBC or any
Subsidiary, and (iii) covers any employee, director or former employee or
director of CNBC or any Subsidiary. 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 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 CNBC nor
any Subsidiary has any present or future liability in respect of
post-retirement health and medical benefits for former employees or
directors of CNBC or any Subsidiary.
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(n) Except as set forth in the Disclosure Letter, there has been no
amendment to, written interpretation or announcement (whether or not
written) by CNBC or any Subsidiary relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement
which would increase 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, 2001.
(o) For purposes of this Section 5.14, references to CNBC or the
Subsidiaries are deemed to include (i) all predecessors of CNBC or the
Subsidiaries, (ii) any subsidiary of CNBC or the Subsidiaries, (iii) all
members of any controlled group (as determined under Code Section 414(b)
or (c)) that includes CNBC or any Subsidiary, and (iv) all members of any
affiliated service group (as determined under Code Section 414(m) or (n))
that includes CNBC or any Subsidiary.
5.15. Obligations of Employees. Except as set forth in the Disclosure
Letter, all accrued obligations and liabilities of CNBC and the Subsidiaries,
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 CNBC or the Subsidiaries for
their current or former directors, officers, employees and agents have been and
are being paid to the extent required by law or by the plan or contract, and
adequate actuarial accruals and/or reserves for such payments have been and are
being made by CNBC or the Subsidiaries in accordance with generally accepted
accounting and actuarial principles. All obligations and liabilities of CNBC and
the Subsidiaries, 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.
All accruals and reserves referred to in this Section 5.15 are correctly and
accurately reflected and accounted for in the books, statements and records of
CNBC and the Subsidiaries.
5.16. Taxes, Returns and Reports. CNBC and the 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; (b) paid all taxes, assessments and other governmental charges due
and payable or claimed to be due and payable 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 CNBC's and the 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, 2002.
Neither CNBC nor any Subsidiary 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, 2002, up to and including the Effective
Date, except to the extent
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reflected on financial statements of CNBC or the Subsidiaries subsequent to such
date. Neither CNBC nor any Subsidiary is currently under audit by any state or
federal taxing authority. Except as set forth in the Disclosure Letter, neither
the federal, state nor local tax returns of CNBC or any Subsidiary have been
audited by any taxing authority during the past five (5) years.
5.17. 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.
5.18. Reports. Since January 1, 1997, each of CNBC 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 Reserve Board"), (ii) the
Office of the Comptroller of the Currency, and (iii) any federal, state,
municipal or local government, securities, banking, environmental, insurance and
other governmental or regulatory authority, and the agencies and staffs thereof
(collectively, the "Regulatory Authorities"), having jurisdiction over the
affairs of either CNBC or the Bank. All such reports filed by CNBC and the Bank
complied with all the rules and regulations promulgated by the applicable
Regulatory Authorities and are true, accurate and complete and were prepared in
conformity with generally accepted regulatory accounting principles applied on a
consistent basis. Except as set forth in the Disclosure Letter, there is no
unresolved violation with respect to any report or statement filed by, or any
examinations of, CNBC or the Bank.
5.19. Absence of Defaults. Neither CNBC nor any Subsidiary is in violation
of its charter documents, Code of Regulations 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.
5.20. Tax and Regulatory Matters. Neither CNBC nor any Subsidiary 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) impede or delay receipt of any regulatory approval required for
consummation of the transactions contemplated by this Agreement.
5.21. Real Property.
(a) Neither CNBC nor any Subsidiary owns any real property (other
than real property acquired in foreclosure or in lieu of foreclosure in
the course of the collection of loans and being held by CNBC or the Bank
for disposition as required by law). A list of the locations of each
parcel of real property leased by CNBC or any Subsidiary is 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").
CNBC shall update the Disclosure Letter within ten (10) days after
acquiring or leasing any real property after the date hereof.
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(b) There is no pending action involving CNBC or any Subsidiary as
to the leasehold title of or the right to use any of the Leased Real
Property.
(c) Neither CNBC nor any Subsidiary has any interest in any other
real property except interests as a mortgagee, and except for any real
property acquired in foreclosure or in lieu of foreclosure and being held
for disposition as required by law.
(d) None of the buildings, structures or other improvements located
on the Leased Real Property encroaches upon or over any adjoining parcel
of real estate or any easement or right-of-way or "setback" line and all
such buildings, structures and improvements are located and constructed in
conformity with all applicable zoning ordinances and building codes.
(e) None of the buildings, structures or improvements located on the
Leased 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 knowledge of CNBC, threatened, with respect to any
such building, structure or improvement. The Leased 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 Leased Real Property has been
used and operated in compliance with all applicable laws, statutes, rules,
regulations and ordinances applicable thereto.
(f) Neither CNBC nor any Subsidiary has caused or allowed the
generation, treatment, storage, disposal or release at any Leased Real
Property of any Toxic Substance, except in compliance 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.
(g) Neither CNBC nor any Subsidiary owns or operates any underground
storage tank at any Leased Real Property and no such Leased Real Property
has previously contained an underground storage tank. No Leased Real
Property is or has been listed on the CERCLIS.
(h) No Toxic Substance has been released, spilled, discharged or
disposed at, in, on or under any Leased Real Property nor are there any
other conditions or circumstances affecting any Leased Real Property, in
each case, that would require remediation, corrective action or clean-up
under applicable laws or regulations.
(i) Except as set forth in the Disclosure Letter, there are no
mechanic's or materialman's liens against the Leased Real Property, and no
unpaid claims for labor performed, materials furnished or services
rendered in connection with constructing,
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improving or repairing the Leased Real Property in respect of which liens
may or could be filed against the Leased Real Property.
5.22. Securities Law Compliance. CNBC's common shares are traded on the
NASDAQ Small Cap market under the symbol of "CNBD." CNBC has complied with all
state, federal or foreign securities laws, statutes, rules, regulations or
orders, injunctions or decrees of any government agency relating thereto. CNBC
has complied 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. CNBC 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 CNBC's Annual Report on Form 10 KSB for the
year ended December 31, 2001, and Quarterly Report on Form 10 QSB for the
quarter ended June 30, 2002, 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.
5.23. Broker's or Finder's Fees. Except for Stifel, Nicolaus & Company,
Incorporated, no agent, broker or other person acting on behalf of CNBC or any
Subsidiary or under any authority of CNBC or any Subsidiary 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.
5.24. Shareholder Rights Plan. Except as otherwise provided in CNBC's
Articles of Incorporation and Code of Regulations, CNBC has no shareholder
rights plan or any other plan, program or agreement involving, restricting,
prohibiting or discouraging a change in control or merger of CNBC or which may
be considered an anti-takeover mechanism.
5.25. Indemnification Agreements. Except as set forth in the Disclosure
Letter, neither CNBC nor any Subsidiary is a party to any indemnification,
indemnity or reimbursement agreement, 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 charter documents of CNBC or the Subsidiary.
5.26. Bring Down of Representations and Warranties. Subject to Section
5.01 hereof, all representations and warranties of CNBC and the Subsidiaries
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.
5.27. 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 CNBC and the
Subsidiaries and all directors and officers of CNBC and the Subsidiaries shall
have no further liability with respect thereto unless a court of
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competent jurisdiction should determine that any misrepresentation or breach of
a warranty was willfully or intentionally made or is deemed to be fraudulent.
SECTION 6
Representations and
Warranties of First Merchants
First Merchants hereby represents and warrants to CNBC 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 executed
by an authorized executive officer of CNBC contemporaneous with the execution of
this Agreement.)
6.01. Standard. No representation or warranty of First Merchants contained
in Section 6 of this Agreement shall be deemed untrue or incorrect, and no party
hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
fact, event or circumstance (either individually or taken together with all
other facts, events or circumstances inconsistent with such or with any
representation or warranty contained in Section 6) has had, or is reasonably
likely to have, a Material Adverse Effect (as defined in Section 13.10).
6.02. Organization and Qualification. First Merchants is a corporation
duly organized and validly 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.
6.03. Authorization.
(a) First Merchants has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder subject to
certain required regulatory approvals. The Agreement, when executed and
delivered, will have been duly authorized and will constitute a valid and
binding obligation of First Merchants, enforceable in accordance with its
terms, except to the extent limited by insolvency, reorganization,
liquidation, readjustment of debt, or other laws of general application
relating to or affecting the enforcement of creditor's rights.
(b) Neither the execution of this Agreement, nor the consummation of
the transactions contemplated hereby, does or will (i) conflict with,
result in a breach of, or constitute a default under First 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; (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
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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 6.03(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.
6.04. Capitalization.
(a) As of August 20, 2002, First Merchants had 50,000,000 shares of
common stock authorized, no par value, of which 15,495,804 shares were
issued and outstanding. Such issued and outstanding shares of First
Merchants' common stock have been duly and validly authorized by all
necessary corporate action of First Merchants, are validly issued, fully
paid and nonassessable and have not been issued in violation of any
preemptive rights of any shareholders.
(b) First Merchants has 500,000 shares of Preferred Stock
authorized, no par value, no shares of which have been issued and no
commitments exist to issue any of such shares.
(c) The shares of First Merchants' common stock to be issued
pursuant to the Merger will be duly authorized, fully paid, validly issued
and nonassessable and subject to no preemptive rights.
6.05. Organizational Documents. The Articles of Incorporation and By-laws
of First Merchants in force as of the date hereof have been delivered to CNBC.
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.
6.06. 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
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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. There are no uncured violations, or violations with respect to
which 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.
6.07. Financial Statements.
(a) First Merchants' consolidated balance sheets as of the end of
the two fiscal years ended December 31, 2001 and 2000 and the six (6)
months ended June 30, 2002 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, 2001 and 2000 are
audited financial statements.
(b) All loans reflected in the First Merchants Financial Information
and which have been made, extended or acquired since June 30, 2002, (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
a banking subsidiary of First Merchants has a security interest in
collateral or a mortgage securing such loans, are secured by perfected
security interests or mortgages naming the banking subsidiary as the
secured party or mortgagee.
6.08. Loans and Investments.
(a) Except as set forth in the Disclosure Letter, as of June 30,
2002, 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,
2002, 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 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 since
June 30, 2002 is subject to any restrictions, whether contractual or
statutory, which 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.
6.09. 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 CNBC 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 compliance with all applicable laws, regulations, rulings and
other requirements. 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.
(d) To the 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 with the
applicable
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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 CNBC 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 knowledge of First Merchants, threatened.
(i) To the knowledge of First Merchants, no event has occurred that
would cause the imposition of the tax described in Code Section 4980B. To
the 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 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, 2001.
(k) For purposes of this Section 6.09, 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.
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6.10. 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; (b) paid all taxes, assessments and other
governmental charges due and payable or claimed to be due and payable 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, 2002. Neither First Merchants nor 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, 2002, up to and including the Effective Date, except
to the extent reflected on financial statements of First Merchants subsequent to
such date. 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.
6.11. Reports. Since January 1, 1997, 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 with all the rules and regulations promulgated by the applicable
Regulatory Authorities and are true, accurate and complete and were prepared in
conformity with generally accepted regulatory accounting principles applied on a
consistent basis. 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.
6.12. 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.
6.13. Accuracy of Statements. The representations and warranties contained
in this Section 6 do not contain any untrue statements of a material fact or
omit to state a material fact necessary to make the statements contained in this
Section 6, in light of the circumstances in which they are made, not misleading.
6.14. 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. First
Merchants possesses all licenses, franchises, permits and other authorizations
necessary for the continued conduct of its business without interference or
interruption. There are no agreements or understandings with, nor any orders or
directives of, any regulatory
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agencies or government authorities, which would have a Material Adverse Effect.
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.
6.15. Absence of Certain Changes. Except for events and conditions
relating to the business and interest rate environment in general and the
accrual or payment of Merger-related expenses, since June 30, 2002, no events
have occurred, or, to the knowledge of First Merchants, can reasonably be
expected to occur, which could reasonably be expected to have a Material Adverse
Effect.
6.16. First Merchants Securities and Exchange Commission Filings. First
Merchants has complied 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, 2001, and Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, copies of which have previously been delivered
to CNBC. All such Securities and Exchange Commission ("SEC") 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.
6.17. 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, that would require
remediation, corrective action or clean-up under applicable laws or
regulations.
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6.18. Absence of Undisclosed Liabilities. First Merchants has no
liabilities or obligations of any type (whether accrued, contingent, absolute,
fixed or otherwise) that are required by generally accepted accounting
principles to be reflected or reserved against on a balance sheet prepared in
accordance with generally accepted accounting principles or the notes thereto
that were not (i) fully reflected against or otherwise disclosed in the First
Merchants Financial Information or (ii) incurred in the ordinary course of
business since December 31, 2001.
6.19. Deposit Insurance. The deposits of First Merchants' bank
subsidiaries are insured by the FDIC in accordance with the Federal Deposit
Insurance Act, and its bank subsidiaries have paid all premiums and assessments
with respect to such deposit insurance.
6.20. Broker's or Finder's Fees. No agent, broker or other person acting
on behalf of First Merchants or under any authority of First Merchants 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 or fees payable to third parties in connection with the
financing of the cash portion of the consideration to be paid in connection with
the Merger, in connection with any of the transactions contemplated by this
Agreement.
6.21. Bring Down of Representations and Warranties. Subject to Section
6.01 hereof, 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.
6.22. 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.
SECTION 7
Covenants of CNBC
CNBC covenants and agrees with First Merchants, and covenants and agrees
to cause the Subsidiaries to act, as follows:
7.01. Shareholder Approval. CNBC 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 Code of Regulations of CNBC
at the earliest possible reasonable date, and, subject to Section 7.05 hereof,
the Board of Directors of CNBC shall recommend to the shareholders of CNBC that
such shareholders approve this Agreement and shall not thereafter withdraw or
modify its recommendation. The Board of Directors of CNBC shall use its
reasonable best efforts to obtain any vote of its shareholders necessary for the
approval of this Agreement.
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7.02. Other Approvals. CNBC and the Subsidiaries shall cooperate fully and
use their reasonable 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 CNBC nor any Subsidiary shall, without the prior written consent
of First Merchants, (i) make any changes in their capital structure
including, but not limited to, the redemption of any CNBC common shares;
(ii) authorize a class of stock or, except for the issuance of common
shares upon the exercise of stock options as described in Section 7.12
hereof, issue, or authorize the issuance of, stock other than or in
addition to the outstanding stock as set forth in Section 5.04 hereof;
(iii) declare, distribute or pay any dividends on their common shares, or
authorize a stock split, or make any other distribution to their
shareholders, except for (a) the payment by CNBC prior to the Effective
Date of quarterly cash dividends on its common shares in the amount of
$0.10 per share (provided the declaration of the last dividend by CNBC
prior to the Effective Date and the payment thereof shall be coordinated
with First Merchants so that the holders of CNBC common shares do not
receive dividends on both CNBC common shares 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 CNBC common shares or First Merchants
common stock received in the Merger in respect of such quarter), and (b)
the payment by the Subsidiaries to CNBC of dividends to pay CNBC'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 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 $50,000.00 (except for personal or real
property acquired or disposed of in connection with foreclosures on
mortgages, enforcement of security interests and loans made or sold by the
Bank in the ordinary course of business or acceptance of deposits and
borrowings 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 CNBC or any Subsidiary (except for promotions and
increases in the ordinary course of business and in accordance with past
practices); (viii) except as set forth in the Disclosure Letter or
otherwise specifically authorized by this Agreement, execute, create,
institute, modify or amend any pension, retirement, savings, stock
purchase, stock bonus, stock ownership, stock option, stock appreciation
or depreciation
A-28
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 CNBC or any
Subsidiary, 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 Association, Code
of Regulations, By-Laws, Certificate of Trust or Trust Agreement, as
applicable, from those in effect on the date of this Agreement; (x) except
as set forth in the Disclosure Letter or otherwise specifically authorized
by this Agreement, 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 CNBC or Subsidiary
directors, officers or employees; (xi) give, dispose, sell, convey,
assign, hypothecate, pledge, encumber or otherwise transfer or grant a
security interest in any capital stock of any Subsidiary; (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 past
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) CNBC and the Subsidiaries shall maintain, or cause to be
maintained, in full force and effect insurance on its properties and
operations and on the Leased Real Property and fidelity coverage on its
directors, officers and employees in such amounts and with regard to such
liabilities and hazards as currently in effect and in accordance with past
practices.
(c) CNBC and the Subsidiaries 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, CNBC and the Subsidiaries each shall (a) carry on their business
substantially in the same manner as heretofore conducted; (b) use their
reasonable 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, CNBC and the Subsidiaries 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
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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 CNBC or any Subsidiary or similar transaction
involving CNBC or any Subsidiary (all such transactions hereinafter referred to
as an "Acquisition Transaction"). CNBC and the Subsidiaries shall promptly
communicate to First Merchants the terms of any written proposal or offer which
any of them may receive with respect to an Acquisition Transaction and any
written indication of interest or letter of intent on the part of any third
party with respect to initiation of any Acquisition Transaction. The above
provisions of this Section 7.05 notwithstanding, nothing contained in this
Agreement shall prohibit (i) CNBC 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 CNBC, after consultation with legal counsel and its
investment banker, determines in good faith that such action is required for the
directors of CNBC to fulfill their fiduciary duties and obligations to CNBC's
shareholders and other constituencies under Ohio law, and (b) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, CNBC provides prompt 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 CNBC 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 CNBC, 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 CNBC to fulfill their fiduciary duties
and obligations to CNBC's shareholders and other constituencies under Ohio law.
7.06. Restrictions Regarding Affiliates. CNBC 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 CNBC 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 CNBC for purposes of the 1933 Act shall deliver to First Merchants, at least
thirty-one (31) days prior to the Effective Date, a written agreement, in form
and substance satisfactory to counsel to First Merchants, regarding compliance
by each such person with the provisions of such Rule 145.
7.07. Press Release. Except as required by law, neither CNBC nor any
Subsidiary 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. CNBC shall supplement, amend and update 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.
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7.09. Confidentiality. CNBC and the Subsidiaries shall use their best
efforts to cause their respective officers, employees, and authorized
representatives to, hold in strict confidence all confidential data and
information obtained by them from First Merchants, unless such information (i)
was already known to CNBC and the Subsidiaries, (ii) becomes available to CNBC
and the Subsidiaries from other sources, (iii) is independently developed by
CNBC and the Subsidiaries, (iv) is disclosed outside of CNBC and the
Subsidiaries with and in accordance with the terms of prior written approval of
First Merchants, or (v) is or becomes readily ascertainable from public or
published information or trade sources or public disclosure of such information
is required by law or requested by a court or other governmental agency,
commission, or regulatory body. CNBC and the Subsidiaries further agree that in
the event this Agreement is terminated, it will return to First Merchants all
information obtained by CNBC and the Subsidiaries regarding First Merchants,
including all copies made of such information by CNBC and the Subsidiaries. This
provision shall survive the Effective Date or the earlier termination of this
Agreement.
7.10. Cooperation. CNBC 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) CNBC 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) CNBC shall furnish First Merchants
with all information concerning itself and the Subsidiaries 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), CNBC agrees to
disclose to First Merchants in writing any fact or matter that comes to the
attention of CNBC that might indicate that any of the representations or
warranties of CNBC may be untrue, incorrect, or misleading in any material
respect and such disclosure shall be made by CNBC promptly upon discovery of
such fact or matter.
7.11. Letter to CNBC's Shareholders. Within five (5) business days after
execution of this Agreement by CNBC and First Merchants, CNBC shall deposit in
the United States mail a letter to each of the shareholders of record of CNBC 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 CNBC shall be in a form mutually agreed to by First
Merchants and CNBC.
7.12. Exercise of Options. CNBC shall use its best efforts to cause the
stock options disclosed pursuant to Section 5.04(d) hereof to be exercised on or
immediately before the Effective Date. CNBC shall use its best efforts to cause
each exercised non-qualified stock option to be exchanged for a cash payment to
each holder thereof to be paid on or before the Effective Date by CNBC in an
amount equal to $29.57 minus the applicable exercise price per CNBC common share
issuable upon exercise of such non-qualified stock option, multiplied by the
number of CNBC common shares issuable upon exercise of such non-qualified
option. In respect of incentive stock options, each holder thereof shall have
the option to surrender for cash on or prior to the Effective Date, as specified
above, or surrender the option on a net issuance
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basis exercise and receive CNBC common shares issuable upon such exercise on or
prior to the Effective Date. Immediately prior to the Effective Date, CNBC shall
have no more than 2,076,572 common shares outstanding. On or prior to the
Effective Date, CNBC shall take all action necessary to terminate all stock
option plans of CNBC and shall use its best efforts, including using its best
efforts to obtain necessary consents from optionees, to permit termination of
any outstanding CNBC stock options at the Effective Date. From and after the
date hereof, CNBC covenants that no additional stock options or stock
appreciation rights shall be granted by CNBC under any stock option plans of
CNBC or otherwise.
7.13. SEC and Other Reports.
(a) Promptly upon its becoming available, CNBC shall furnish to
First Merchants one (1) copy of each financial statement, report, notice,
or proxy statement sent by CNBC to its shareholders generally and of each
regular or periodic report, registration statement or prospectus filed by
CNBC with NASDAQ or the SEC or any successor agency, of any order issued
by any Governmental Authority in any proceeding to which CNBC is a party,
and of any notice or communication received by CNBC 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 CNBC or any of its respective businesses, operations or
properties.
(b) None of the information supplied or to be supplied by CNBC for
inclusion or incorporation by reference in (i) the Registration Statement
(as defined in Section 8.01 hereof) will, at the time the Registration
Statement and each amendment or supplement thereto, if any, becomes
effective under the Securities Act of 1933, as amended, contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements contained therein, in light of the circumstances in
which they are made, not misleading, and (ii) the Proxy Statement (as
defined in Section 8.01 hereof) and any amendment or supplement thereto
will, at the date of mailing, contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
contained therein, in light of the circumstances in which they are made,
not misleading.
7.14. Adverse Actions. CNBC 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 material 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 material delay in the consummation of the Merger
except, in each case, as may be required by applicable law or regulation.
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SECTION 8
Covenants of First Merchants
First Merchants covenants and agrees with CNBC as follows:
8.01. Approvals. First Merchants shall proceed expeditiously, cooperate
fully and use its best efforts to procure upon reasonable terms and conditions
all consents, authorizations, approvals, registrations and certificates, to
complete all filings and applications and to satisfy all other requirements
prescribed by law which are necessary for consummation of the Merger on the
terms and conditions provided in this Agreement 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 CNBC with copies of
proposed regulatory filings in connection with the Merger and afford CNBC 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 CNBC constituting a part thereof (the "Proxy
Statement") and all related documents). The Proxy Statement shall fully disclose
that CNBC's shareholders have dissenters' rights under Ohio Revised Code ss.
1701.84 and ss. 1701.85. First Merchants agrees to advise CNBC, 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 CNBC common shares in the Merger.
8.02. Employee Benefit Plans.
(a) Coverage Under First Merchants' Plans. No later than January 1,
2004, First Merchants will cover the Subsidiaries' employees under any
tax-qualified retirement plan First Merchants maintains for its employees,
provided that such an employee meets the applicable participation
requirements, in lieu of the Subsidiaries' current tax-qualified
retirement plan. Until that time, the Subsidiaries' current tax-qualified
retirement plan will be maintained at the same level, with respect to
benefit accruals, provided for on the Effective Date. Following the
Effective Date, the Subsidiaries' employees will otherwise receive
employee benefits that in the aggregate are substantially similar to the
employee benefits provided to those employees by CNBC or the Subsidiaries
on the Effective Date. For purposes of determining a CNBC or Subsidiaries'
employee's service under a First Merchants' employee benefit plan that the
employee is permitted to enter, service with CNBC or the Subsidiaries will
be treated as service with First Merchants; provided, however, that except
as set forth in the next sentence, service with CNBC or the Subsidiaries
shall not be treated as service with First Merchants for purposes of
benefit
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accrual under any employee pension benefit plan (as defined in ERISA
Section 3(2)) of First Merchants. For purposes of such employee pension
benefit plan benefit accrual, service with the Subsidiaries on or after
the Effective Date will be treated as service with First Merchants. Once
the Subsidiaries' employees are covered under First Merchants'
tax-qualified retirement plans, First Merchants, in its sole discretion,
shall determine whether CNBC's and the Subsidiaries' tax-qualified
retirement plan(s) are terminated or merged into First Merchants' plan(s).
(b) Coverage Under First Merchants' Health Plan. With respect to
First Merchant's health plans under which employees of the Subsidiaries
become participants under the provisions of Section 8.02(a) above, First
Merchants agrees to waive all restrictions and limitations for
pre-existing conditions.
(c) COBRA. First Merchants shall be responsible for providing COBRA
continuation coverage to any qualified employee or former employee of CNBC
or the Subsidiaries and to their respective qualified beneficiaries, on
and after the Effective Date, regardless of when the qualifying event
occurred.
(d) Severance. First Merchants does not intend to terminate any
employees of CNBC or its Subsidiaries 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 8.02(d) shall be deemed to limit or modify First Merchants at-will
employment policy.
8.03. 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 CNBC, which approval will
not be unreasonably withheld.
8.04. Confidentiality. First Merchants shall, and shall use its best
efforts to cause its officers, employees, and authorized representatives to,
hold in strict confidence all confidential data and information obtained by it
from CNBC or the Subsidiaries, unless such information (i) was already known to
First Merchants, (ii) becomes available to First Merchants from other sources,
(iii) is independently developed by First Merchants, (iv) is disclosed outside
of First Merchants with and in accordance with the terms of prior written
approval of CNBC or the Subsidiaries, or (v) is or becomes readily ascertainable
from public or published information or trade sources or public disclosure of
such information is required by law or requested by a court or other
governmental agency, commission, or regulatory body. First Merchants further
agrees that in the event this Agreement is terminated, it will return to CNBC
all information obtained by First Merchants regarding CNBC or the Subsidiaries,
including all copies made of such information by First Merchants. This provision
shall survive the Effective Date or the earlier termination of this Agreement.
8.05. Covenants Regarding the Bank. Upon consummation of the Merger, the
Bank shall be a national bank organized under the laws of the United States and
the officers and directors of the Bank in office immediately prior to the
consummation of the Merger shall be the officers and directors of the Bank at
the Effective Date subject to the Bank's Articles of
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Association and By-Laws. Thereafter, the Bank directors who desire to continue
to serve in that capacity shall do so for at least the remainder of the one (1)
year terms to which they have been elected. The Bank directors will be subject
to First Merchants' policy of mandatory retirement at age seventy (70);
provided, however, the policy of mandatory retirement will not apply to any of
the Bank's current directors until 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 "Commerce National Bank" or a name
substantially similar thereto for a period of at least five (5) years following
the Effective Date.
8.06. Board of Directors of First Merchants. First Merchants shall cause
all necessary action to be taken to cause Thomas D. McAuliffe, or such other
person as shall be agreed to by First Merchants and CNBC, to either (i) be
nominated for election as a member of the First Merchants' Board of Directors
for a three (3) year term at the first annual meeting of the shareholders of
First Merchants following the Effective Date; or (ii) to be appointed as a
member of the First Merchants' Board of Directors at the next meeting of the
First Merchants' Board of Directors following the Effective Date to serve until
the first annual meeting of the shareholders of First Merchants following the
Effective Date and then to be nominated for election as a member of the First
Merchants' Board of Directors for a three (3) year term at the first annual
meeting of the shareholders of First Merchants following the Effective Date,
whichever can be effected first depending on the timing of the occurrence of the
Effective Date.
8.07. Directors and Officers Insurance.
(a) Prior to the Closing, CNBC shall purchase and pay for tail
coverage on its director's and officer's liability insurance policy for a
period of at least three years from the Effective Date to cover the
present and former officers and directors of CNBC and the Subsidiaries (as
determined immediately prior to the Closing) with respect to claims
against such directors and officers arising from facts or events which
occurred before the Effective Date, which tail coverage shall contain at
least the same coverage and amounts, and contain terms and conditions no
less advantageous, as that coverage currently provided by CNBC and the
Subsidiaries; provided, however, that in no event shall CNBC expend for
such tail coverage more than two (2) times the current annual amount spent
by CNBC and the Subsidiaries to maintain or procure its current directors'
and officers' insurance coverage.
In the event CNBC is unable to obtain such tail coverage, First
Merchants shall use its reasonable best efforts to obtain an endorsement
to its directors and officers liability insurance policy to cover the
present and former officers and directors of CNBC and the Subsidiaries (as
determined immediately prior to the Closing) 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 CNBC and the
Subsidiaries; provided, however, that in no event shall First Merchants
expend for such insurance more than two (2) times the current annual
amount spent by CNBC and the Subsidiaries to maintain or procure such
insurance; provided, further, that if First Merchants is unable to
maintain or obtain the insurance called for by this Section 8.07, First
Merchants shall use its reasonable best
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efforts to obtain as much comparable insurance as is available for two (2)
times the current annual amount spent by CNBC and the Subsidiaries;
provided, further, that officers and directors of CNBC and the
Subsidiaries 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 CNBC and the Subsidiaries 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 Ohio General
Corporate Law and by First Merchants' or CNBC's and the Subsidiaries'
Articles of Incorporation or Code of Regulations or By-Laws as in effect
on the date hereof (whichever is more favorable to the officers and
directors of CNBC and the Subsidiaries), 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
CNBC and the Subsidiaries' 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, 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 8.07.
8.08. SEC and Other Reports.
(a) Promptly upon its becoming available, First Merchants shall
furnish to CNBC 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.
(b) None of the information supplied or to be supplied by First
Merchants for inclusion or incorporation by reference in (i) the
Registration Statement (as defined in Section 8.01 hereof) will, at the
time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act of 1933, as
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amended, contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements contained therein, in
light of the circumstances in which they are made, not misleading, and
(ii) the Proxy Statement (as defined in Section 8.01 hereof) and any
amendment or supplement thereto will, at the date of mailing, contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in light of the
circumstances in which they are made, not misleading.
8.09. Disclosure Letter. First Merchants shall supplement, amend and
update 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.
8.10. 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 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 material 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 material delay in the consummation of the
Merger except, in each case, as may be required by applicable law or regulation.
8.11. Access. First Merchants shall continue to give to CNBC 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.
8.12. Cooperation. First Merchants shall generally cooperate with CNBC 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. Prior to
the Closing (as defined in Section 12 hereof), First Merchants agrees to
disclose to CNBC in writing any fact or matter that comes to the attention of
First Merchants that might indicate that any of the representations or
warranties of First Merchants may be untrue, incorrect, or misleading in any
material respect and such disclosure shall be made by First Merchants promptly
upon discovery of such fact or circumstance.
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 CNBC shall have approved,
ratified and confirmed this Agreement as required by applicable law.
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9.02. Registration Statement Effective. First Merchants shall have
registered its shares of common stock to be issued to shareholders of CNBC 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 Opinions.
(a) CNBC shall have obtained an opinion of Squire, Sanders & Dempsey
L.L.P. dated on or about the Effective Date to the effect that the Merger
effected pursuant to this Agreement shall constitute a reorganization
within the meaning of Section 368(a) of the Code, and that no gain or loss
will be recognized by shareholders of CNBC to the extent they receive
shares of First Merchants common stock in the Merger in exchange for their
CNBC common shares, other than the gain or loss to be recognized as to
cash received in lieu of fractional share interests and cash received in
exchange for CNBC common shares. Such opinions shall be based upon factual
representations received by counsel from CNBC and First Merchants, which
representations may take the form of written certifications.
(b) First Merchants shall have obtained an opinion of Bingham McHale
LLP dated on or about the Effective Date to the effect that the Merger
effected pursuant to this Agreement shall constitute a reorganization
within the meaning of Section 368(a) of the Code. Such opinions shall be
based upon factual representations received by counsel from CNBC and First
Merchants, which representations may take the form of written
certifications.
9.04. Affiliate Agreements. First Merchants shall have obtained (a) from
CNBC, a list identifying each affiliate of CNBC and (b) from each affiliate of
CNBC, 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 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 CNBC 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
(subject to Section 5.01 and Section 6.01) on and as of the Effective Date; (b)
all the covenants of their respective corporations have been complied with in
all material respects from the date of this Agreement through and as of the
Effective Date; and (c) their
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respective corporations have satisfied and fully complied with all conditions
necessary to make this Agreement effective as to them.
9.07. Fairness Opinion. CNBC shall have obtained an opinion from Stifel,
Nicolaus & Company, Incorporated, to the effect that the consideration paid in
the Merger is fair to the shareholders of CNBC from a financial viewpoint. Such
opinion shall be (a) in form and substance reasonably satisfactory to CNBC, (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 CNBC, any Subsidiary 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 5.04(d) of the
Disclosure Letter shall have been exercised pursuant to Section 7.12 hereof and
CNBC shall have no more than 2,076,572 shares of common stock issued and
outstanding. CNBC shall have no commitment to issue any additional shares of
common stock. All stock option plans of CNBC shall have been terminated.
9.11. Executive Employment Agreements. First Merchants shall have entered
into Executive Employment Agreements and change in control agreements with
Thomas D. McAuliffe and John Romelfanger immediately prior to the Effective Date
that supersede their current employment agreements upon terms and conditions
satisfactory to Mr. McAuliffe, Mr. Romelfanger and First Merchants,
respectively.
9.12. Opinions. The parties shall have received the respective opinions of
counsel described in Section 12.03 of this Agreement.
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 CNBC or by CNBC to First
Merchants only for the following reasons:
(a) By the mutual consent of First Merchants and CNBC, if the Board
of Directors of each so determines by vote of a majority of the members of
its entire Board;
(b) By First Merchants or CNBC, if its respective Board of Directors
so determines by vote of a majority of the members of its entire Board, in
the event of either: (i) a breach by the other party of any representation
or warranty contained herein (subject to the standard set forth in Section
5.01 and Section 6.01), which breach cannot
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be or has not been cured within 30 days after the giving of written notice
to the breaching party of such breach; (ii) a breach by the other party of
any of the covenants or agreements contained 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 such breach (whether
under (i) or (ii)) would be reasonably likely, individually or in the
aggregate with other breaches, to result in a Material Adverse Effect; or
(iii) any event, fact or circumstance shall have occurred that has had or
may have a Material Adverse Effect;
(c) By CNBC 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 of material
litigation or proceedings against any of the parties;
(d) By CNBC or First Merchants, if the transaction contemplated
herein has not been consummated by April 30, 2003 (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 or CNBC, pursuant to their respective
termination rights set forth in Section 3.04 hereof;
(f) By CNBC, if the appropriate discharge of the fiduciary duties of
the Board of Directors of CNBC consistent with Section 7.05 requires that
CNBC terminate this Agreement;
(g) By First Merchants, if CNBC's Board of Directors fails to make,
withdraws or modifies its recommendation to CNBC's shareholders to vote in
favor of the Merger following receipt of a written proposal for an
Acquisition Transaction;
(h) By First Merchants, if CNBC fails to give any written notice as
required by Section 7.05 or if within twenty (20) days after giving First
Merchants written notice pursuant to Section 7.05 of its intent to furnish
information to or enter into discussions or negotiations with another
person or entity, CNBC does not terminate all discussions, negotiations
and information exchanges related to such Acquisition Transaction and
provide First Merchants with written notice of such termination;
(i) 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; or
(j) By CNBC, if First Merchants enters into a definitive agreement
in which it is the target company or the company to be acquired which
would result in a change of control of First Merchants or require approval
pursuant to the Bank Holding Company Act of 1956, as amended.
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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(b) 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 CNBC in accordance with Section
10.01(f) or by First Merchants in accordance with Section 10.01(g) or 10.01(h),
CNBC shall pay First Merchants the sum of $1,200,000 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. CNBC
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 CNBC as compensation to First Merchants for its time and
expense and not as a penalty to CNBC, 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 CNBC its reasonable attorneys' fees incurred in the
enforcement of this provision.
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 CNBC
with and into First Merchants as filed with the Secretary of State of the States
of Indiana and Ohio (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 CNBC.
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 CNBC.
12.02. Articles of Merger. Subject to the provisions of this Agreement, on
or prior to the Effective Date, the Articles of Merger and Certificate of Merger
shall be duly filed with the
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Secretary of State of the States of Indiana and Ohio specifying that the Merger
shall be effective as of the Effective Date.
12.03. Opinions of Counsel. At the Closing, CNBC shall deliver an opinion
of its counsel, Squire, Sanders & Dempsey L.L.P., to First Merchants, and First
Merchants shall deliver an opinion of its counsel, Bingham McHale LLP, to CNBC,
dated as of the date of the Closing. The form of such opinions shall be as
mutually agreed to by the parties hereto and their respective counsel.
SECTION 13
Miscellaneous
13.01. Effective Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns but none of the provisions thereof shall inure to the benefit
of any other person, firm, or corporation whomsoever. 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 CNBC may, by an instrument in writing
executed in the same manner as this Agreement: (i) extend the time for the
performance of any of the covenants or agreements of the other party under
this Agreement; (ii) waive any inaccuracies in the representations or
warranties of the other party contained in this Agreement or in any
document delivered pursuant hereto or thereto; (iii) waive the performance
by the other party of any of the covenants or agreements to be performed
by it or them under this Agreement; or (iv) waive the satisfaction or
fulfillment of any condition the nonsatisfaction or nonfulfillment of
which is a condition to the right of the party so waiving to terminate
this Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any other or subsequent breach hereunder.
(b) Notwithstanding the prior approval by the shareholders of CNBC,
this Agreement may be amended, modified or supplemented by the written
agreement of CNBC 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 CNBC 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
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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 McHale 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 CNBC: With a copy to:
100 East Wilson Bridge Road Squire, Sanders & Dempsey L.L.P.
Worthington, Ohio 43085 127 Public Square
Attn: Thomas D. McAuliffe Cleveland, Ohio 44114
Chairman, President and CEO Attn: M. Patricia Oliver, Esq.
(614) 848-8700 (216) 479-8717
or to such substituted address as any of them have given to the other in
writing. Notwithstanding the foregoing, all notices required to be given
pursuant to Sections 3.04(b) and 3.04(c) hereof shall be given in the time
periods specified in such sections by either hand delivery or facsimile
transmission to the specified parties.
13.04. Headings. The headings in this Agreement have been inserted solely
for the ease of reference and should not be considered in the interpretation or
construction of this Agreement.
13.05. Severability. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision or provisions
had never been contained herein.
13.06. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument. In addition, this Agreement and
the documents to be delivered hereunder may be executed by the parties hereto
either manually or by facsimile signatures, each of which shall constitute an
original signature.
13.07. Governing Law. This Agreement is executed in and shall be construed
in accordance with the laws of the State of Indiana, without regard to choice of
law principles.
13.08. Entire Agreement. This Agreement supersedes any other agreement,
whether oral or written, between First Merchants and CNBC relating to the
matters contemplated hereby, and constitutes the entire agreement between the
parties hereto.
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13.09. Expenses. First Merchants and CNBC shall each pay their own
expenses incidental to the transactions contemplated hereby. It is understood
that the fees of Stifel, Nicolaus & Company, Incorporated and the cost of the
fairness opinion referenced in Section 9.07, shall be borne by CNBC whether or
not the Merger is consummated. This provision shall survive the Effective Date
or the earlier termination of this Agreement.
13.10. Material Adverse Effect. The phrase "Material Adverse Effect"
means, with respect to First Merchants or CNBC, any effect that (i) is material
and adverse to the financial position, results of operations or business of
First Merchants and its subsidiaries taken as a whole, or CNBC and its
Subsidiaries taken as a whole, respectively, or (ii) would materially impair the
ability of either First Merchants or CNBC to perform its obligations under this
Agreement or otherwise materially threaten or materially impede the consummation
of the Merger and the other transactions contemplated by this Agreement;
provided, however, that Material Adverse Effect shall not be deemed to include
the impact of (a) changes in banking and similar laws of general applicability
or interpretations thereof by courts or governmental authorities or other
changes affecting depository institutions generally, including changes in
general economic conditions and changes in prevailing interest and deposit
rates, (b) any modifications or changes to valuation policies and practices in
connection with the Merger or restructuring charges taken in connection with the
Merger, in each case in accordance with generally accepted accounting
principles, (c) changes resulting from expenses (such as legal, accounting and
investment bankers' fees) incurred in connection with this Agreement or the
transactions contemplated herein, and (d) actions or omissions of a party that
have been waived in accordance with Section 13.02 hereof.
13.11. Survival of Contents. The provisions of Sections 7.09, 8.04, 10.02,
13.09 and this Section 13.11 shall survive beyond the termination of this
Agreement. The provisions of Sections 7.09, 8.02, 8.04, 8.05, 8.06, 8.07, 13.09
and this Section 13.11 shall survive beyond the Effective Date.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, First Merchants and CNBC 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
CNBC BANCORP
ATTEST:
/s/ John A. Romelfanger By: /s/ Thomas D. McAuliffe
--------------------------- ------------------------------------
John A. Romelfanger, Thomas D. McAuliffe, Chairman,
Secretary President and Chief Executive Officer
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APPENDIX B
OHIO REVISED CODE
SECTIONS 1701.84 AND 1701.85
ss. 1701.84 PERSONS ENTITLED TO RELIEF AS DISSENTING SHAREHOLDERS.
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant to
section 1701.78, 1701.781, 1701.79, 1701.791, or 1701.801 of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders of
the surviving corporation who under section 1701.78 or 1701.781 of the Revised
Code are entitled to vote on the adoption of an agreement of merger, but only as
to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign parent
corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the shares
so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one or
more domestic or foreign corporations are being merged pursuant to section
1701.801 of the Revised Code.
ss. 1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF SHARES.
(A) (1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the
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shares as to which he seeks relief, which demand shall state his address, the
number and class of such shares, and the amount claimed by him as the fair cash
value of the shares.
(3) The dissenting shareholder entitled to relief under division (C)
of section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled to
relief under division (E) of section 1701.84 of the Revised Code in the case of
a merger pursuant to section 1701.801 of the Revised Code shall be a record
holder of the shares of the corporation as to which he seeks relief as of the
date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 of the Revised Code, the dissenting shareholder
shall deliver to the corporation a written demand for payment with the same
information as that provided for in division (A) (2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which he seeks relief, the dissenting shareholder, within fifteen
days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the
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proposal was adopted by the shareholders of the corporation, or, if the proposal
was not required to be submitted to the shareholders, was approved by the
directors. Other dissenting shareholders, within that three-month period, may
join as plaintiffs or may be joined as defendants in any such proceeding, and
any two or more such proceedings may be consolidated. The complaint shall
contain a brief statement of the facts, including the vote and the facts
entitling the dissenting shareholder to the relief demanded. No answer to such a
complaint is required. Upon the filing of such a complaint, the court, on motion
of the petitioner, shall enter an order fixing a date for a hearing on the
complaint and requiring that a copy of the complaint and a notice of the filing
and of the date for hearing be given to the respondent or defendant in the
manner in which summons is required to be served or substituted service is
required to be made in other cases. On the day fixed for the hearing on the
complaint or any adjournment of it, the court shall determine from the complaint
and from such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value of any shares and, if so,
the number and class of such shares. If the court finds that the dissenting
shareholder is so entitled, the court may appoint one or more persons as
appraisers to receive evidence and to recommend a decision on the amount of the
fair cash value. The appraisers have such power and authority as is specified in
the order of their appointment. The court thereupon shall make a finding as to
the fair cash value of a share and shall render judgment against the corporation
for the payment of it, with interest at such rate and from such date as the
court considers equitable. The costs of the proceeding, including reasonable
compensation to the appraisers to be fixed by the court, shall be assessed or
apportioned as the court considers equitable. The proceeding is a special
proceeding and final orders in it may be vacated, modified, or reversed on
appeal pursuant to the Rules of Appellate Procedure and, to the extent not in
conflict with those rules, Chapter 2505 of the Revised Code. If, during the
pendency of any proceeding instituted under this section, a suit or proceeding
is or has been instituted to enjoin or otherwise to prevent the carrying out of
the action as to which the shareholder has dissented, the proceeding instituted
under this section shall be stayed until the final determination of the other
suit or proceeding. Unless any provision in division (D) of this section is
applicable, the fair cash value of the shares that is agreed upon by the parties
or fixed under this section shall be paid within thirty days after the date of
final determination of such value under this division, the effective date of the
amendment to the articles, or the consummation of the other action involved,
whichever occurs last. Upon the occurrence of the last such event, payment shall
be made immediately to a holder of uncertificated securities entitled to such
payment. In the case of holders of shares represented by certificates, payment
shall be made only upon and simultaneously with the surrender to the corporation
of the certificates representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders
of the corporation, fair cash value as to those shareholders shall be determined
as of the day prior to the day on which the vote by the shareholders was taken
and, in the case of a merger pursuant to section 1701.80 or 1701.801 of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing
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such fair cash value, any appreciation or depreciation in market value resulting
from the proposal submitted to the directors or to the shareholders shall be
excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the
shareholders rescind their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come
to an agreement as to the fair cash value per share, and
neither the shareholder nor the corporation has filed or
joined in a complaint under division (B) of this section
within the period provided in that division.
(2) For purposes of division (D) (1) of this section, if the merger
or consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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APPENDIX C
Fairness Opinion
[Stifel's opinion was delivered to the Board of Directors of CNBC on August 27,
2002. On August 16th, First Merchants declared a 5% stock dividend to its
shareholders of record payable on August 30, 2002. Stifel's analysis and related
opinion were delivered after the declaration of the dividend, but prior to
issuance, and were based on the pre-dividend exchange ratio of 0.96. Stifel's
analysis considered that the Merger Agreement describes the adjustment of the
exchange ratio from 0.96 to 1.01 due to this stock dividend.]
August 27, 2002
Board of Directors
CNBC Bancorp
100 East Wilson Bridge Road
Suite 100
Worthington, OH 43085
Members of the Board:
You have requested our opinion as to the fairness from a financial point of view
to the shareholders of CNBC Bancorp ("CNBC") of the consideration to be received
by such shareholders pursuant to the Agreement of Reorganization and Merger (the
"Agreement"), dated as of August 28, 2002, between CNBC Bancorp and First
Merchants Corporation ("First Merchants"). The Agreement provides for the merger
(the "Merger") of CNBC with and into First Merchants Corporation, with First
Merchants Corporation as the surviving corporation (sometimes referred to herein
as the "Surviving Corporation").
Subject to the terms of the Agreement, at the effective time of the Merger, each
share of common stock, without par value per share, of CNBC (collectively, the
"CNBC Common Stock"), will be converted into one of the following: (a) the right
to receive an amount in cash equal to $29.57 (the "Cash Distribution"); or (b)
the right to receive 0.96 shares of common stock, no par value per share, of the
Surviving Corporation (the "Surviving Corporation Common Stock") (the "Stock
Distribution"); or (c) the right to receive a combination of the Cash
Distribution and Stock Distribution (the "Combined Distribution"), in each case
as the holder thereof may elect or be deemed to have elected pursuant to the
Agreement (the aggregate of the Cash Distributions, Stock Distributions and the
Combined Distributions, payable and/or issuable upon conversion of the CNBC
Common Stock pursuant to the Agreement at the effective time of the Merger is
referred to as the "CNBC Merger Consideration").
For the purposes of our opinion, we have assumed that the Merger will be
consummated as provided in the Agreement and will constitute a tax-free
reorganization to the extent contemplated by the Agreement.
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Stifel, Nicolaus & Company, Incorporated ("Stifel"), as part of its investment
banking services, is regularly engaged in the independent valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. We
are familiar with CNBC and First Merchants and have completed our financial
analysis of this transaction. In the past year, Stifel has traded equity
securities of CNBC and First Merchants for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
In rendering our opinion, we have reviewed, among other things: the form of the
Agreement as executed on August 28, 2002; the financial statements of CNBC and
First Merchants included in their respective 10-Ks for the 5 years ended
December 31, 2001, and their respective 10-Qs for the quarter ended June 30,
2002; and certain internal financial analyses and forecasts for CNBC and First
Merchants prepared by their respective management. We have conducted
conversations with CNBC's and First Merchants' senior management regarding
recent developments and management's financial forecasts for CNBC and First
Merchants. In addition, we have spoken to members of CNBC's and First Merchants'
senior management regarding factors which affect each entity's business. We have
also compared certain financial and securities data of CNBC and First Merchants
with various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the common stock of
CNBC and First Merchants, reviewed the financial terms of certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion. We also
took into account our assessment of general economic, market and financial
conditions and our experience in other transactions, as well as our experience
in securities valuations and our knowledge of the commercial banking industry
generally.
In rendering our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all of the financial and other
information that was provided to us or that was otherwise reviewed by us and
have not assumed any responsibility for independently verifying any of such
information. With respect to the financial forecasts supplied to us (including
without limitation, projected cost savings and operating synergies resulting
from the Merger), we have assumed that they were reasonably prepared on the
basis reflecting the best currently available estimates and judgments of the
management of CNBC and First Merchants as to the future operating and financial
performance of CNBC and First Merchants, that they would be realized in the
amounts and time periods estimated and that they provided a reasonable basis
upon which we could form our opinion. We also assumed that there were no
material changes in the assets, liabilities, financial condition, results of
operations, business or prospects of either CNBC or First Merchants since the
date of the last financial statements made available to us. We have also
assumed, without independent verification and with your consent, that the
aggregate allowances for loan losses set forth in the financial statements of
CNBC and First Merchants are in the aggregate adequate to cover all such losses.
We did not make or obtain any independent evaluation, appraisal or physical
inspection of CNBC's or First Merchants' assets or liabilities, the collateral
securing any of such assets or liabilities, or the collectibility of any such
assets nor did we review loan or credit files of CNBC or First Merchants. We
relied on advice of CNBC's counsel as to certain legal matters with respect to
CNBC, the Agreement and the
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transactions and other matters contained or contemplated therein. We have
assumed, with your consent, that there are no factors that would delay or
subject to any adverse conditions any necessary regulatory or governmental
approval and that all conditions to the Merger will be satisfied and not waived.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. Our opinion is directed to the Board of Directors of
CNBC for its information and assistance in connection with its consideration of
the financial terms of the Merger and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed
transaction, nor have we expressed any opinion as to the prices at which any
securities of CNBC or First Merchants might trade in the future. Except as
required by applicable law, including without limitation federal securities
laws, our opinion may not be published or otherwise used or referred to, nor
shall any public reference to Stifel be made, without our prior written consent.
Based upon the foregoing and such other factors as we deem relevant, we are of
the opinion, as of the date hereof, that the CNBC Merger Consideration to be
received by the shareholders of CNBC pursuant to the Agreement is fair to such
shareholders from a financial point of view.
Very truly yours,
STIFEL, NICOLAUS & COMPANY, INCORPORATED
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APPENDIX D
CNBC Bancorp
2001 Annual Report to Shareholders
D-1
CNBC BANCORP
2001 ANNUAL REPORT TO SHAREHOLDERS
INDEX
CONSOLIDATED FINANCIAL STATEMENTS
AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Financial Data...................................................... 2
Description of Business...................................................... 3
Average Balance Sheet and Rate Volume Analysis............................... 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 6
Market for Common Equity and Related Shareholder Matters..................... 12
Report of Independent Auditors............................................... 13
Consolidated Financial Statements............................................ 14
Directors and Executive Officers of CNBC Bancorp............................. 35
D-2
Selected Financial Data
Year Ended December 31,
2001 2000 1999 1998 1997
----------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Selected Operating Data:
Interest income ................................ $ 20,713 $ 18,904 $ 15,152 $ 12,727 $ 9,730
Interest expense ............................... 9,819 9,474 7,065 6,221 4,624
---------- ---------- ---------- ---------- ----------
Net interest income ............................ 10,894 9,430 8,087 6,506 5,106
Provision for loan losses ...................... (660) (412) (509) (480) (386)
Noninterest income ............................. 798 542 361 248 189
Noninterest expenses ........................... (5,918) (4,960) (4,250) (3,481) (2,769)
Income tax expense ............................. (1,778) (1,590) (1,291) (969) (745)
---------- ---------- ---------- ---------- ----------
Net income ..................................... $ 3,336 $ 3,010 $ 2,398 $ 1,824 $ 1,395
========== ========== ========== ========== ==========
Selected Per Share Data: (1)
Basic earnings per common share ................ $ 1.62 $ 1.50 $ 1.28 $ 1.09 $ .87
Diluted earnings per common share .............. $ 1.57 $ 1.42 $ 1.17 $ .99 $ .81
Dividends declared per common
share ..................................... $ .36 $ .32 $ .27 $ .23 $ .17
Book value per share ........................... $ 11.51 $ 10.54 $ 9.62 $ 7.15 $ 6.29
Shares outstanding ............................. 2,022,135 2,040,087 1,986,798 1,675,458 1,667,670
Selected Operating Ratios:
Return on average assets ....................... 1.22% 1.31% 1.21% 1.16% 1.20%
Return on average shareholders' equity ......... 14.53% 14.70% 14.82% 16.12% 15.18%
Dividend payout (2) ............................ 22.93% 22.64% 22.73% 22.97% 20.66%
Average equity to average assets ............... 8.39% 8.92% 8.16% 7.20% 7.83%
Selected Financial Condition Data:
Total assets ................................... $ 296,184 $ 263,900 $ 202,928 $ 175,113 $ 139,325
Loans, net ..................................... 244,801 217,436 175,670 148,881 117,078
Securities available-for-sale .................. 7,336 7,100 11,010 5,218 4,051
Deposits ....................................... 243,158 218,875 169,068 151,480 119,105
Borrowed funds ................................. 27,922 22,170 13,573 10,685 8,860
Shareholders' equity ........................... 23,284 21,510 19,105 11,972 10,482
(1) As adjusted for stock splits and dividends
(2) Dividends per share divided by diluted earnings per share
D-3
Description of Business
CNBC Bancorp ("CNBC") was incorporated in Ohio on August 23, 1996. CNBC was
formed for the purpose of reorganizing Commerce National Bank ("Commerce
National"), a national bank established in 1991, to become its wholly-owned
subsidiary and for CNBC to become a bank holding company under the Bank Holding
Company Act of 1956, as amended. This reorganization was completed effective
November 30, 1996. Effective in April 2000, CNBC became a financial holding
company, as defined by the Gramm-Leach-Bliley Act. As a financial holding
company, CNBC has the ability to expand the types of businesses it or its
wholly-owned subsidiaries can engage in. As a condition of CNBC continuing to
qualify as a financial holding company, Commerce National must remain a "well
capitalized" bank and continue to achieve at least a satisfactory Community
Reinvestment Act rating. Effective June 1, 2000, CNBC acquired The Puppel
Companies, and formed CNBC Retirement Services, Inc. ("CRS, Inc."), a
wholly-owned subsidiary of CNBC. Effective February 2001, CNBC formed CNBC
Statutory Trust I, a special purpose subsidiary formed to complete the issuance
of trust preferred securities. Services provided by CRS, Inc. include
investment, administration and accounting services to business retirement plans
and individuals.
Substantially all of CNBC's consolidated revenues and net income of CNBC are
generated by the business activities of Commerce National. Commerce National is
a full service national bank, primarily serving small- to medium-sized
businesses located in the Columbus, Ohio metropolitan area. Commerce National
has experienced steady growth in asset size, number of customers served and net
income over the past five years.
Banking deposit products offered by Commerce National include checking accounts,
NOW accounts, savings accounts and certificates of deposit for both businesses
and individuals. Loan products include residential and commercial real estate
loans, business lines of credit, business term loans and consumer home equity
lines of credit. Commerce National participates in many government sponsored
lending programs including the Small Business Administration and Columbus
Countywide Development Corporation. Commerce National also offers business and
consumer credit cards and business credit card processing services.
Commerce National's banking services include providing courier pickup of banking
transactions, daily processing of deposit transactions through its wholesale
lockbox department, telephone banking, PC banking, wire transfers and direct
deposit payroll and electronic tax payments. Commerce National began offering
Internet banking services to its existing customers in early 2001.
The market served by Commerce National is dominated by four large national bank
holding companies which control over 75% of the deposits in the Columbus, Ohio
metropolitan area. Total banking deposits approximate $23 billion, with Commerce
National holding about a 1% market share. While its larger competitors have a
significant influence on the pricing of loans and deposits, Commerce National
believes that its history of delivering high quality service is its primary
competitive advantage in obtaining new customers and retaining existing
customers.
CNBC is a bank holding company and financial holding company subject to the
supervision of and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). CNBC is required to file periodic reports with
the Federal Reserve.
Commerce National is a nationally chartered bank and is subject to the direct
supervision and regulation and is regularly examined by the Office of the
Comptroller of the Currency. Additionally,
D-4
Commerce National is a member of the Federal Reserve System and its deposits are
insured by the FDIC to applicable limits.
Commerce National's only office is located at 100 East Wilson Bridge Road,
Worthington, Ohio, which is located directly north of Columbus near the
intersection of Rt. 23 and I-270. Commerce National and CRS, Inc. utilize
approximately 22,000 square feet of this facility, which CNBC owns, with the
remaining 2,500 square feet leased to an unrelated business.
D-5
Distribution of Balance Sheet Items; Interest Rates and Interest Differential
The following tables set forth certain information relating to CNBC's average
balance sheets and the statements of income for the years ended December 31,
2001, 2000, and 1999, and reflect the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
daily balances. The yields and costs include fees which are considered
adjustments to yields.
For the Year Ended December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ----------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(dollars in thousands)
Assets:
Interest-earning assets:
Money market funds,
federal funds sold
and interest-earning
deposits................ $ 20,820 $ 771 3.70% $ 14,251 $ 865 6.07% $ 16,451 $ 805 4.89%
Securities available
for sale, net (2).......... 7,665 434 5.69 8,549 558 6.51 7,689 426 5.53
Loans, net (1)............. 233,965 19,508 8.34 196,482 17,481 8.90 165,444 13,921 8.41
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets....... 262,450 20,713 7.89 219,282 18,904 8.62 189,584 15,152 7.99
Noninterest-earning
assets................... 11,373 10,149 8,779
-------- -------- --------
Total assets............... $273,823 $229,431 $198,363
======== ======== ========
Liabilities and
Shareholders' Equity:
Interest-bearing liabilities:
NOW deposits.......... $ 13,355 152 1.14 $ 10,997 204 1.86 $ 10,365 148 1.43
Savings deposits...... 76,210 2,206 2.89 69,755 3,245 4.65 68,076 2,530 3.72
Certificates of deposit 105,010 5,779 5.50 84,189 5,026 5.97 65,725 3,558 5.41
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total deposits.... 194,575 8,137 4.18 164,941 8,475 5.14 144,166 6,236 4.33
Trust Preferred Securities. 3,428 349 10.18 -- -- -- -- -- --
Borrowed Funds............. 22,216 1,333 6.00 16,634 999 6.01 13,868 829 5.98
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities.. 220,219 9,819 4.46 181,575 9,474 5.22 158,034 7,065 4.47
------- ----- ------- ----- ------- -----
Noninterest-bearing
liabilities............. 30,643 27,384 24,150
------- ------- -------
Total liabilities. 250,862 208,959 182,184
Shareholders' equity....... 22,961 20,472 16,179
------- ------- -------
Total liabilities
and shareholders'
equity............ $273,823 $ 229,431 $198,363
======== ========= ========
Net interest income/interest
rate spread(3).......... $10,894 3.43% $ 9,430 3.40% $ 8,087 3.52%
======= ===== ======== ===== ======= =====
Net interest margin(4)..... 4.15% 4.30% 4.27%
===== ===== =====
Ratio of interest-earning
assets to interest-bearing
liabilities............. 119.2% 120.8% 120.0%
===== ===== =====
---------
(1) Amount is net of deferred loan fees and includes nonperforming loans.
D-6
(2) Average balance is shown using the carrying value of securities. The
average yield has been computed using the historical amortized cost
average balance.
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
D-7
Rate/Volume Analysis
The following table represents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected CNBC's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (change in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume) and (iii) the net change. Changes attributable to the combined
impact of volume and rate have been allocated proportionately to separately
reflect the changes due to volume and the changes due to rate.
Year Ended Year Ended
December 31, 2001 December 31, 2000
Compared to Compared to
Year Ended Year Ended
December 31, 2000 December 31, 1999
-------------------------------- --------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(dollars in thousands)
Interest-Earning Assets:
Money market funds, federal funds
sold and interest-earning deposits . $ 314 $ (408) $ (94) $ (117) $ 177 $ 60
Securities available for sale, net ....... (54) (70) (124) 51 81 132
Loans receivable, net(1) ................. 3,177 (1,150) 2,027 2,726 834 3,560
-------- -------- -------- -------- -------- --------
Total interest-earning assets ...... 3,437 (1,628) 1,809 2,660 1,092 3,752
Interest-Bearing Liabilities:
Deposits:
NOW deposits ............................ 38 (90) (52) 9 47 56
Savings deposits ........................ 278 (1,317) (1,039) 64 651 715
Certificates of deposit ................. 1,169 (416) 753 1,075 393 1,468
-------- -------- -------- -------- -------- --------
Total deposits ....................... 1,485 (1,823) (338) 1,148 1,091 2,239
Trust Preferred Securities .............. 349 -- 349 -- -- --
Borrowed funds .......................... 335 (1) 334 166 4 170
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ........................ 2,169 (1,824) 345 1,314 1,095 2,409
-------- -------- -------- -------- -------- --------
Net Interest Income ........................ $ 1,268 $ 196 $ 1,464 $ 1,346 $ (3) $ 1,343
======== ======== ======== ======== ======== ========
--------
(1) Amount is net of deferred loan fees and includes nonperforming loans.
D-8
Management's Discussion and Analysis of Financial Condition and Results of
Operation
The following discussion presents an analysis of CNBC's financial condition and
results of operations as of and for the year ended December 31, 2001 compared to
December 31, 2000. This discussion is designed to provide the reader with a more
comprehensive review of the operating results and financial position than could
be obtained from reading the financial statements alone. This analysis should be
read in conjunction with the financial statements and related footnotes and the
selected financial data included elsewhere in this document.
When used in this discussion or future filings by CNBC with the Securities and
Exchange Commission or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," "believe," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. CNBC wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors, including
regional and national economic conditions, changes in levels of market interest
rates, credit risks of lending activities and competitive and regulatory
factors, could affect CNBC's financial performance and could cause CNBC's actual
results for future periods to differ materially from those anticipated or
projected. CNBC does not undertake, and specifically disclaims, any obligation
to publicly release any revisions which may be made to any forward-looking
statements to reflect occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
CNBC is not aware of any trends, events or uncertainties that will have or are
reasonably likely to have a material effect on its liquidity, capital resources
or operations except as discussed herein. In addition, CNBC is not aware of any
current recommendations by regulatory authorities that would have such effect if
implemented.
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
Total assets increased $32 million, or 12.2%, to $296 million at December 31,
2001. The two largest components of this increase were an increase in cash and
cash equivalents of $5 million and an increase of $27 million in net loans
outstanding.
The increase in cash and cash equivalents at December 31, 2001 was due to
increased liquidity from strong deposit growth at the end of the year. The
average growth in interest-bearing liabilities also exceeded average loan growth
by approximately 2.2% in 2001 over 2000. The cash and cash equivalents balance
is consistent with historical levels at 13.1% and 12.9% of total assets at
December 31, 2001 and 2000.
The $27 million increase in net loans outstanding was comprised primarily of an
$11 million increase in commercial investment and owner-occupied real estate
loans and an $11 million increase in investment residential and multi-family
real estate loans. With the historic low rate environment that occurred during
2001, the local investment real estate market for refinancing and purchases
remained strong. The increase in net loans outstanding in 2001 was down from the
$42 million increase that occurred in 2000. However, the percentage increase in
average loans outstanding was greater in 2001, at 19.1%, than in 2000, at 18.8%,
due to strong growth in the fourth quarter of 2000.
D-9
Management believes opportunities are good for continued growth due to CNBC's
small business focus, commitment to service, and a diversified local economy.
This growth, however, may be at a slower pace due to the current recessionary
environment.
At December 31, 2001, the allowance for loan losses was $3.3 million, or 1.33%
of total loans outstanding, compared to an allowance at December 31, 2000 of
$2.8 million, or 1.25% of total loans outstanding. This increase in the
allowance was due to the growth in the loan portfolio from year-end December 31,
2000 to 2001 and the current economic recessionary environment. CNBC maintains
an allowance for loan losses at a level adequate to absorb management's estimate
of probable losses inherent in the loan portfolio. Management performs an
analysis of the loan portfolio on a quarterly basis to assess the adequacy of
the allowance for loan losses. The allowance balance and the provision charged
to expense are determined by management based upon past loan loss experience,
economic conditions, and various other circumstances that are subject to change
over time. The analysis also takes into account the fact that CNBC's average
loan size and level of large aggregate borrowing relationships is much higher
than other similarly sized financial companies due to CNBC's small business
focus. The collectibility of certain specific loans is evaluated based upon
factors including the financial position of the borrower, the estimated market
value of the collateral at the current time of evaluation, the existence of
guarantees, and CNBC's collateral position versus other creditors. Historical
loss information of CNBC and its peer banks and local economic conditions are
considered in establishing allowances on the remaining portfolio. The allowance
is reduced by charging off loans deemed uncollectible by management and
increased by provisions charged to expense and recoveries of previous
charge-offs. Collection efforts continue for loans which have been charged-off.
Net charge-offs for the past two years were $124,666, or .05%, of loans for
December 31, 2001, compared to $202,050, or .09%, for December 31, 2000. While
management of CNBC places a strong emphasis on loan underwriting and loan review
procedures and CNBC has, to date, experienced low levels of loan charge-offs,
management has continued to increase the balance in its allowance for loan
losses due to its loan growth.
The primary funding source for the asset growth during 2001 was a $24 million
increase in deposit accounts. Savings and interest-bearing demand balances grew
$11 million as a result of Commerce National's small business focus and
available cash management products for its customers. As interest rates
decreased during 2001, some customers transferred deposit balances from
certificates of deposit to savings in order to enhance their liquidity. As a
result, Commerce National's local customer base of certificates of deposit
decreased $6 million. Certificates of deposit grew $9 million, however, due to
$15 million of growth that was achieved through solicitation of deposits on the
national rate-listing network to which Commerce National subscribes. These
out-of-area deposits are utilized to support CNBC's growth and are generally
offered at similar rates paid on new certificates of deposit issued to local
customers with balances greater than $100,000 and terms generally ranging from
12 months to 4 years.
In February 2001, CNBC participated in a pooled transaction involving the
issuance of Trust Preferred Securities. These securities carry a tax-deductible
interest rate of 10.2% and qualify for inclusion in Tier 1 capital. A total of
$4 million in securities was issued, resulting in $3.85 million in net proceeds
to CNBC. CNBC immediately contributed $2.0 million of the proceeds to Commerce
National through the purchase of subordinated debentures. Remaining proceeds
were used to repay CNBC debt from another financial institution and to purchase
CNBC stock in accordance with a stock repurchase program, which was approved by
CNBC's directors in January, 2001. The repurchase of up to 75,000 shares was
approved under the plan, with 62,894 shares being repurchased throughout the
year at a cost of $1,359,000.
D-10
Results of Operations for the Year Ended December 31, 2001, Compared to the Year
Ended December 31, 2000
Net income for the year ended December 31, 2001 was $3,335,816, a 10.8% increase
over the $3,009,735 reported in 2000. The increase in net income was driven by a
$1,464,000 increase in net interest income and a $255,000 increase in
noninterest income, offset by a $958,000 increase in noninterest expenses, a
$248,000 increase in provision for loan losses and a $187,000 increase in
federal income tax expense.
The 15.5% increase in net interest income was primarily the result of an
increase in average loans outstanding of 19.1% for 2001, compared to an increase
in average interest-bearing deposits of 18.0%. Loan growth was most significant
in the commercial real estate and residential investment and multi-family
investment loan categories. Management attributes loan growth to a number of
factors, including Commerce National's small business focus and personal
service, a relatively strong local economy, and the historic low interest rates
of 2001. The net interest spread improved slightly from 3.40% in 2000 to 3.43%
in 2001 as the yield on earning assets declined at a slightly slower pace than
funding costs as interest rates declined during the year. Total interest income
for 2001 increased 9.6% over 2000, compared to a 3.6% increase for the same
period in interest expense. The net interest margin was 4.15% for 2001, compared
with 4.30% for the previous year. The margin decline in 2001 was the result of
several factors, including a decrease in the percent of average loans to average
earning assets for 2001 compared to 2000, a higher percentage in 2001 compared
to 2000 of CNBC's funding sources in certificates of deposit and borrowings,
which carry higher interest rates, greater reliance on certificates of deposit
generated through a national rate listing network, and the issuance of $4
million in trust preferred securities in February of 2001. Total average earning
assets as a percentage of total assets improved from 95.6% in 2000 to 95.9% in
2001.
Noninterest income for the year ended December 31, 2001 increased $255,000, or
47.13%, over 2000. This increase was the result of a $63,000 increase in service
charges on deposits, mainly as a result of declining earnings credit throughout
the year, a $26,000 increase in fees on credit cards and merchant processing due
to growth in the number of accounts and volume of transactions processed, an
increase in money fund service fees of $45,000 due to an increase in average
balances maintained and an increase of $116,000 in fee income from CRS, Inc.
Effective June 1, 2000, CNBC acquired The Puppel Companies, (renamed CNBC
Retirement Services, Inc.) which is a wholly-owned subsidiary of CNBC. In 2001,
CNBC received twelve months of fee income from CRS, Inc., versus seven months in
2000. In 2001, there were also gains of $18,000 due to calls of available for
sale investment securities.
Noninterest expense increased $958,000, or 19.3%, in 2001 over 2000. Increases
in salaries and benefits of $602,000 accounted for 62.8% of the total increase
in operating expenses and was an 18.8% increase over 2000. In addition to normal
salary increases and staff additions to support CNBC's growth, the acquisition
of CRS, Inc. in June 2000 added four additional employees. Thus, 2001 contained
a full year of salary expense for these employees while 2000 was only a partial
year. CNBC's full time equivalent employees increased from 62 at December 31,
2000 to 69 at December 31, 2001.
Occupancy expense increased $39,000, or 10.8%, in 2001 due to a drop in rent
income received from leasing a portion of Commerce National's main office
facility during the first half of 2000. CNBC now occupies approximately 90% of
its office building.
D-11
Professional services increased $45,000, or 23.2%, in 2001 due to investment
service fees paid by CRS, Inc. for the entire year in 2001 versus seven months
in 2000 and increased legal fees. The increase in legal fees was mainly the
result of fees related to loan collections and consultation related to general
corporate matters.
State franchise taxes increased $45,000, or 26.5%, in 2001 due to the increase
in undistributed earnings of Commerce National.
The $209,000, or 24.0%, increase in other expenses in 2001 was widespread among
various items, including increases in expenditures on employee education and
training costs and customer check fraud losses. The remaining increases in
expenses were due to Commerce National's continued growth. CNBC's efficiency
ratio, computed by dividing noninterest expenses by net interest income plus
noninterest income, was 50.6% for 2001 as compared to 49.7% for 2000.
Federal income tax expense was up $187,000, or 11.8%, for the year ended
December 31, 2001. The increase in federal income tax expense was the result of
CNBC's increased profitability. The effective tax rate increased slightly from
34.6% for 2000 to 34.8% for 2001.
Liquidity
CNBC's objective in managing liquidity is to maintain the ability to continue to
meet the cash flow needs of its customers, such as new loans or deposit
withdrawals, as well as its own financial commitments. The principal sources of
liquidity are new deposit accounts, loan principal payments, money market mutual
funds, securities available for sale, federal funds sold and cash and deposits
with banks. Along with its liquid assets, CNBC has additional sources of
liquidity available to ensure that adequate funds are available as needed which
include, but are not limited to, the sale of loan participations to other
financial institutions, the purchase of federal funds and borrowing from the
Federal Home Loan Bank and Federal Reserve Bank. Management believes that it has
the capital adequacy, profitability and reputation to meet its current and
foreseeable liquidity needs.
The two primary liquidity needs of Commerce National are funding loans and net
withdrawals from deposit accounts. Net increases in loans totaled $27.4 million
and $41.8 million in 2001 and 2000, respectively. These loan growth totals
represented 97% and 109%, respectively, of net cash flows used in investing
activities. Loans are primarily funded through deposit growth, supplemented by
long-term borrowings. While loan growth from year-end to year-end can fluctuate,
average loans outstanding to average assets has remained fairly stable, ranging
from 83% to 86% during the last five years. Commerce National's commitments, as
further detailed in Note 13 to the financial statements, are primarily
commitments to fund loans. Monthly new loan commitments for 2001 totaled between
$13 million and $23 million. Net loans grew by a smaller amount due to normal
principal repayments and unscheduled loan payoffs. Although Commerce National
has approved but not yet advanced lines of credit aggregating $54,389,000,
management does not believe this to be a significant liquidity risk. Management
has tracked the utilization percentage on its lines of credit which have ranged
between 36% and 46% of the total committed lines. At December 31, 2001 and 2000,
utilization was 38% and 46%, respectively. The reduction in utilization in 2001
is believed to be the result of a slowdown in the economy and customers' ability
to fund reduced operations internally.
D-12
Listed below is a summary of the primary net cash flows from financing
activities which have funded loan growth. Deposits are broken down between those
generated from Commerce National's customers located in its primary market area
("Primary") and those generated through the national rate listing network
("Brokered").
2001 2000
------------ ------------
Deposits, Primary ....................... $ 8,872,000 $ 39,346,000
Deposits, Brokered ...................... 15,411,000 10,460,000
Net Borrowings .......................... 1,752,000 8,597,000
Proceeds from Issuance of Trust Preferred
Securities .............................. 3,873,000 --
Proceeds from Common Stock Issuance ..... 514,000 427,000
Purchase of Treasury Stock .............. (1,359,000) (423,000)
Dividends Paid .......................... (699,000) (585,000)
------------ ------------
Total Funds Provided .................... $ 28,364,000 $ 57,822,000
============ ============
Although Commerce National has experienced net deposit growth since its
inception, deposit balances fluctuate during the month and seasonally in the
first quarter of the year. At December 31, 2001, Commerce National had $68
million in available short-term funding sources to mitigate any risks from
changes in deposit account balances, which represented 51% of checking and
savings deposits which can be immediately withdrawn. These sources are detailed
as follows:
Cash and short-term investments .............. $30,229,000
Unused borrowing capacity with the
Federal Home Loan Bank ................... 26,930,000
Federal funds lines of credit with other banks 8,400,000
Unpledged investment securities .............. 2,008,000
-----------
Total ........................................ $67,567,000
===========
Commerce National also has collateral pledged to the Federal Reserve Bank that
would allow borrowings at the discount window of $51,587,000. No borrowings were
outstanding at December 31, 2001. Commerce National has never had any
outstanding discount window borrowings from the Federal Reserve.
Additionally, Commerce National could accept approximately $20 million in
additional brokered certificates of deposit before it would reach its internally
set maximum of 30% of total deposits and borrowings.
Management of Interest Rate Risk
The principal objective of Commerce National's asset/liability management ("A/L
Mgt") is to provide for a stable net interest margin which is the primary
component of Commerce National's revenues. The objective of A/L Mgt is to
monitor the amount of assets with variable and fixed rates and fund them with
similar liabilities. This process affects loan pricing and prepayment decisions
as
D-13
well as deposit and borrowing interest rates. Guidelines for A/L Mgt have been
established by the Funds Management Committee of the Board of Directors and a
review is completed on a quarterly basis.
D-14
The following gap table summarizes Commerce National's dollar amount of
interest-earning assets and interest-bearing liabilities, in thousands, which
either mature or have an interest rate which will adjust within the timeframes
noted. At December 31, 2001, total interest-earning assets exceeded
interest-bearing liabilities by $43.3 million. These assets are funded by
noninterest-bearing checking account balances and Commerce National's capital.
Within 91 Days Over 1 Year Over 3 Years
Category 90 Days to 1 Year to 3 Years to 5 Years Over 5 Years
-------- ------- --------- ---------- ---------- ------------
Interest-Earning Assets
Loans ...................... $ 79,098 $ 46,787 $ 68,998 $ 46,566 $ 6,647
Investments ................ 31,834 758 3,054 990 331
--------- --------- --------- --------- ---------
Totals ..................... $ 110,932 $ 47,545 $ 72,052 $ 47,556 $ 6,978
Interest-bearing Liabilities
Deposits ................... $ 135,799 $ 33,188 $ 36,429 $ 7,082 $ 0
Borrowings ................. 72 3,216 8,576 1,577 15,861
--------- --------- --------- --------- ---------
Total ...................... $ 135,871 $ 36,404 $ 45,005 $ 8,659 $ 15,861
--------- --------- --------- --------- ---------
Net Position ............... $ (24,939) $ 11,141 $ 27,047 $ 38,897 $ (8,883)
========= ========= ========= ========= =========
At December 31, 2001, 85% of Commerce National's loans had interest rates that
will contractually adjust at least once within a five-year time period.
Approximately 53% of these variable rate loans will re-price within one year or
less. Variable rate loans primarily use prime rate, U.S. Treasury rates or FHLB
advance rates as the index which dictates changes in the loan interest rate.
Deposits and borrowings interest rates are primarily influenced by changes in
U.S. Treasury rates and U.S. Government agency rates.
Commerce National uses an interest rate risk projection model which calculates
the potential change in its net interest income over the succeeding one-year
period which would result from an instantaneous and sustained interest rate
change of plus or minus 1.00% and 2.00%. Different assumptions are made
regarding anticipated loan prepayments depending on the direction and magnitude
of the interest rate change. At December 31, 2001, management's projection model
estimated that Commerce National's net interest income over the succeeding
one-year period would be affected as follows:
Potential Change in
Budgeted Net Interest Income
(in thousands)
Change Changes in Interest Rates Dollar Change Percentage Change
------ ------------------------- ------------- -----------------
Up 2.00% $ (265) (2.56)%
Up 1.00% $ (129) (1.25)%
Down 1.00% $ 94 0.90%
Down 2.00% $ 59 0.57%
D-15
Capital Resources
CNBC and Commerce National are both subject to regulatory capital requirements.
These requirements measure capital levels utilizing three different
calculations. Based on these calculations, CNBC and Commerce National are
assigned to a capital category which, among other things, dictates certain
business practices of the organization, the level of Commerce National's FDIC
insurance premiums and the process that is followed in obtaining regulatory
approvals necessary for branch applications, mergers and similar transactions.
CNBC's capital requirements are measured on a combined basis with Commerce
National, using consolidated totals. Commerce National is measured
independently. As of December 31, 2001, both CNBC and Commerce National were
classified in the "well capitalized" category. It is management's policy to
manage the growth of Commerce National and provide for the appropriate capital
resources that will result in Commerce National maintaining its classification
as a "well capitalized" institution. Similarly, it is management's policy to
maintain the classification of CNBC as either "adequately capitalized" or "well
capitalized." For further information on capital requirements, see Note 15 to
the Consolidated Financial Statements.
CNBC received additional capital of $512,000 in 2001 and $425,000 in 2000 from
the exercise of stock options and warrants.
In 2000 and 2001, CNBC approved common stock repurchase programs. Stock
repurchased pursuant to these programs may be used for general corporate
purposes and may be reissued from time to time. The shares will be purchased
from time to time in the open market or through private transactions at market
price. CNBC repurchased 62,894 shares in 2001 and 14,000 shares in 2000 under
this authorization.
In February 2001, CNBC issued $4.0 million of Obligated Mandatorily Redeemable
Capital Securities through a special purpose subsidiary in a private offering.
These securities are included in CNBC Bancorp's Tier 1 regulatory capital
calculation; however, the interest paid is deductible for tax purposes. CNBC
contributed $2.0 million of the net proceeds into Commerce National through the
purchase of subordinated debentures.
On April 24, 2001, CNBC's shareholders approved an increase in its authorized
shares from two million to three million, which provided the necessary shares
for its Board of Directors to approve a three-for-two stock split effected in
the form of a 50% stock dividend paid on May 10, 2001. All shares and per share
amounts have been restated to reflect the three-for-two stock split.
In September 2001, Commerce National paid-off $2.9 million of Subordinated Notes
held by CNBC. CNBC then injected $2.0 million of the proceeds into Commerce
National as capital and used the remaining proceeds to pay-off borrowings from
another financial institution. This capital injection effectively increased Tier
One capital of Commerce National by $2.0 million, and decreased its total
capital by $900,000.
Inflation
Substantially all of CNBC's assets and liabilities relate to banking activities
and are monetary in nature. The consolidated financial statements and related
financial data are presented in accordance with Generally Accepted Accounting
Principles ("GAAP"). GAAP currently requires CNBC to
D-16
measure several of CNBC's assets and liabilities in terms of historical dollars.
Changes in the value of money due to rising inflation can cause purchasing power
loss.
Management's opinion is that a movement in interest rates affects the financial
condition and results of operations to a greater degree than changes in the rate
of inflation. It should be noted that interest rates and inflation do affect
each other, but do not always move in correlation with each other. CNBC's
ability to match the interest sensitivity of its financial assets to the
interest sensitivity of its liabilities in its asset/liability management may
tend to minimize the effect of changes in interest rates on performance.
New Accounting Pronouncements
A new accounting standard requires all business combinations to be recorded
using the purchase method of accounting for any transaction initiated after June
30, 2001. Under the purchase method, all identifiable tangible and intangible
assets and liabilities of the acquired company must be recorded at fair value as
of date of acquisition, and the excess of cost over fair value of net assets
acquired is recorded as goodwill. Identifiable intangible assets must be
separated from goodwill. Identifiable intangible assets with finite useful lives
will be amortized under the new standard, whereas goodwill, both amounts
previously recorded and future amounts purchased, will cease being amortized
starting in 2002. Annual impairment testing will be required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its implied
fair value. Adoption of this standard on January 1, 2002 will not materially
impact CNBC's financial statements.
D-17
Market for Registrant's Common Equity and Related Shareholder Matters
The common stock of CNBC began trading in July 2001 on the NASDAQ SmallCap
market under the symbol CNBD. Prior to this date, the stock was listed on the
Over-The-Counter Bulletin Board (OTCBB). Prior to trading on the NASDAQ SmallCap
market, three brokers offered a bid price for CNBC's stock: Stifel, Nicolaus &
Company, Sweney Cartwright & Co. and Monroe Securities.
Information below for 2001 is the range of high and low stock prices.
Information below for 2000 is the range of high and low transaction prices as
reported by Sweney, Cartwright & Co.. These transactions are without retail
mark-up, mark-down or commission. Actual volume reported by Sweney, Cartwright &
Co. was 26,871 in 2000.
2001 2000
---- ----
1st Qtr. $17.50 to $20.17 $19.50 to $22.00
2nd Qtr. $18.00 to $22.00 $19.67 to $20.67
3rd Qtr. $18.75 to $20.85 $20.00 to $22.00
4th Qtr. $18.00 to $21.00 $18.83 to $20.83
For 2000, 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.
CNBC has 3,000,000 authorized and 2,022,135 outstanding shares of common stock
held by approximately 399 shareholders at December 31, 2001. At year-end, CNBC
has 183,147 options outstanding to purchase shares of its common stock. CNBC
declared cash dividends of $0.18 per share in June and December of 2001 and
$0.16 per share in June and December of 2000, resulting in total dividends
declared of $0.36 and $0.32 per share in 2001 and 2000.
D-18
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF CNBC BANCORP:
We have audited the accompanying consolidated balance sheets of CNBC Bancorp as
of December 31, 2001 and 2000 and the related consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of CNBC
Bancorp's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 CNBC Bancorp as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
CROWE, CHIZEK AND COMPANY LLP
Columbus, Ohio
February 6, 2002
D-19
CNBC BANCORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
ASSETS
2001 2000
---- ----
Cash and Noninterest-bearing Balances ................... $ 9,103,065 $ 9,107,952
Interest-bearing Balances ............................... 193,670 651,350
Federal Funds Sold ...................................... 10,000,000 7,000,000
Money Market Funds ...................................... 19,437,871 17,380,994
------------- -------------
Total Cash and Cash Equivalents ........ 38,734,606 34,140,296
Securities Available for Sale ........................... 7,335,626 7,100,324
Loans, Net .............................................. 244,800,650 217,435,649
Premises and Equipment .................................. 2,304,231 2,432,078
Accrued Interest Receivable ............................. 1,080,106 1,229,957
Deferred Federal Income Taxes ........................... 949,000 820,000
Other Assets ............................................ 980,200 741,468
------------- -------------
Total Assets ............................................ $ 296,184,419 $ 263,899,772
============= =============
LIABILITIES
Deposits:
Noninterest-bearing ............................ $ 31,124,719 $ 26,856,234
Interest-bearing ............................... 212,033,098 192,018,536
------------- -------------
Total Deposits ........... 243,157,817 218,874,770
Borrowings .............................................. 23,921,730 22,169,773
Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust ..................... 4,000,000 --
Other Liabilities ....................................... 1,821,271 1,345,457
------------- -------------
Total Liabilities ....................................... 272,900,818 242,390,000
SHAREHOLDERS' EQUITY
Common Stock, No Par Value:
Authorized Shares - 3,000,000 in 2001 and
2,000,000 in 2000
Issued - 2,084,559 in 2001 and 1,362,058 in 2000 14,488,619 14,030,897
Retained Earnings ....................................... 10,001,724 7,521,199
Treasury Stock at Cost, 62,424 Shares in 2001 and
2,000 Shares in 2000 ............................... (1,243,692) (60,000)
Accumulated Other Comprehensive Income .................. 36,950 17,676
------------- -------------
Total Shareholders' Equity .............................. 23,283,601 21,509,772
------------- -------------
Total Liabilities and Shareholders' Equity .............. $ 296,184,419 $ 263,899,772
============= =============
See Accompanying Notes to Consolidated Financial Statements
D-20
CNBC BANCORP
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
INTEREST INCOME
Loans, including Fees .......................... $19,508,136 $17,480,817
Taxable Securities ............................. 434,382 557,555
Money Market Funds ............................. 513,672 589,379
Federal Funds Sold ............................. 203,603 151,907
Deposits with Banks ............................ 53,193 124,093
----------- -----------
Total Interest Income ............................... 20,712,986 18,903,751
INTEREST EXPENSE
Deposits ....................................... 8,136,678 8,474,384
Borrowings ..................................... 1,682,187 999,278
----------- -----------
Total Interest Expense .............................. 9,818,865 9,473,662
----------- -----------
Net Interest Income ............................ 10,894,121 9,430,089
Provision for Loan Losses ........................... 659,666 412,050
----------- -----------
Net Interest Income after Provision for Loan Losses . 10,234,455 9,018,039
NONINTEREST INCOME
Service Charges on Deposits .................... 218,651 155,795
Retirement Plan Investment and
Administrative Fees ........................ 273,451 157,501
Net Gains on Calls of Securities ............... 17,706 --
Other Income ................................... 287,629 228,701
----------- -----------
Total Noninterest Income ............................ 797,437 541,997
NONINTEREST EXPENSES
Salaries and Benefits .......................... 3,804,787 3,202,975
Occupancy and Equipment, Net ................... 400,771 361,867
Data Processing ................................ 178,526 160,267
Professional Services .......................... 241,178 195,826
State Franchise Tax ............................ 214,705 169,708
Other Expenses ................................. 1,078,284 869,358
----------- -----------
Total Noninterest Expenses .......................... 5,918,251 4,960,001
----------- -----------
Income Before Income Taxes .......................... 5,113,641 4,600,035
Income Tax Expense .................................. 1,777,825 1,590,300
----------- -----------
Net Income ..................................... $ 3,335,816 $ 3,009,735
=========== ===========
EARNINGS PER COMMON SHARE
Basic .......................................... $ 1.62 $ 1.50
=========== ===========
Diluted ........................................ $ 1.57 $ 1.42
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
D-21
CNBC BANCORP
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
2001 2000
---- ----
Net Income ........................... $ 3,335,816 $3,009,735
Other Comprehensive Income:
Unrealized Holding Gains on
Securities Available for Sale .... 46,909 58,244
Reclassification Adjustments for Gains
Later Recognized in Net Income ... (17,706) --
----------- ----------
Net Unrealized Gains ................. 29,203 58,244
Tax Expense .......................... 9,929 19,783
----------- ----------
Total Other Comprehensive Income 19,274 38,461
----------- ----------
Comprehensive Income ............ $ 3,355,090 $3,048,196
=========== ==========
See Accompanying Notes to Consolidated Financial Statements
D-22
CNBC BANCORP
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 and 2000
Accumulated
Number Other
of Common Retained Treasury Comprehensive
Shares Stock Earnings Stock Income (Loss) Total
---------- ----------- ----------- ----------- ------------ -----------
Balances at January 1, 2000 ................ 1,324,532 $13,672,131 $ 5,453,333 $ -- $ (20,785) $19,104,679
Treasury Shares Purchased .................. (14,000) (423,000) (423,000)
Proceeds from Exercise of Warrants ......... 33,702 147,350 (192,284) 236,360 191,426
Proceeds and Tax Benefit from Exercise
of Stock Options ..................... 15,774 209,916 (102,511) 126,640 234,045
Net Income ................................. 3,009,735 3,009,735
Cash Dividends Declared ($.32 per Share) ... (647,074) (647,074)
Other Comprehensive Income ................. 38,461 38,461
Stocks Issued as Employee Compensation ..... 50 1,500 1,500
---------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 .............. 1,360,058 14,030,897 7,521,199 (60,000) 17,676 21,509,772
Treasury Shares Purchased .................. (62,894) (1,358,715) (1,358,715)
Proceeds and Tax Benefit from Exercise
of Stock Options ..................... 34,831 456,057 (119,099) 175,023 511,981
Net Income ................................. 3,335,816 3,335,816
Cash Dividends Declared ($.36 per share) ... (735,656) (735,656)
Other Comprehensive Income ................. 19,274 19,274
Three-for-Two Stock Split Effected in the
Form of a 50% Stock Dividend, Net of
Cash Paid in Lieu of Fractional Shares 690,080 (536) (536)
Stocks Issued as Employee Compensation ..... 60 1,665 1,665
---------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2001 .............. $2,022,135 $14,488,619 $10,001,724 $(1,243,692) $ 36,950 $23,283,601
========== =========== =========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
D-23
CNBC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ................................................. $ 3,335,816 $ 3,009,735
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses ................ 659,666 412,050
Depreciation ............................. 331,919 309,178
Net Gain Realized from Calls of Securities
Available for Sale .................. (17,706) --
Deferred Income Taxes .................... (139,000) (60,000)
Net Amortization/Accretion on Securities . 8,858 (21,822)
Federal Home Loan Bank Stock Dividend .... (94,700) (96,200)
Goodwill Amortization .................... 6,400 6,620
Changes in:
Interest Receivable ............. 149,851 (231,478)
Other Assets .................... (118,347) (332,551)
Other Liabilities ............... 438,244 102,136
------------ ------------
Net Cash Provided by Operating Activities ......... 4,561,001 3,097,668
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Securities Available for Sale ................. (13,937,551) (3,463,950)
Maturities of Securities Available for Sale ................ 1,500,000 7,550,000
Calls of Securities Available for Sale ..................... 12,335,000 --
Capitalization of CNBC Retirement Services, Inc. ........... -- (150,000)
Net Increase in Loans ...................................... (28,024,667) (42,178,162)
Purchase of Premises and Equipment ......................... (204,071) (353,797)
------------ ------------
Net Cash Flows Used in Investing Activities ....... (28,331,289) (38,595,909)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits ................................... 24,283,047 49,806,488
Purchase of Treasury Shares ................................ (1,358,715) (423,000)
Net Proceeds from Issuance of Common Stock ................. 513,646 426,971
Cash Paid in Lieu of Fractional Shares in Stock Split ...... (536) --
Maturities of Federal Home Loan Bank Advances .............. (3,000,000) (750,000)
Advances from Federal Home Loan Bank ....................... 7,000,000 10,000,000
Principal Payments on Federal Home Loan Bank Advances ...... (561,563) (451,489)
Proceeds from Issuance of Trust Preferred Securities ....... 3,873,284 --
Repayment of Loans Payable ................................. (1,686,479) (201,726)
Dividends Paid ............................................. (698,086) (585,566)
------------ ------------
Net Cash Flows Provided by Financing Activities ... 28,364,598 57,821,678
------------ ------------
Net Change in Cash and Cash Equivalents ........... 4,594,310 22,323,437
Cash and Cash Equivalents at Beginning of Year ............. 34,140,296 11,816,859
------------ ------------
Cash and Cash Equivalents at End of Year ................... $ 38,734,606 $ 34,140,296
============ ============
Cash Paid During the Year for
Interest .......................................... $ 9,761,891 $ 9,361,031
Income Taxes ...................................... 1,640,000 1,600,000
See Accompanying Notes to Consolidated Financial Statements
D-24
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
the preparation of the financial statements.
Basis of Presentation: The consolidated financial statements include the
accounts of CNBC Bancorp ("CNBC") and its wholly-owned subsidiaries, Commerce
National Bank ("Commerce National"), CNBC Retirement Services, Inc. ("CRS,
Inc.") and CNBC Statutory Trust I, together referred to as the "Corporation."
All significant intercompany balances and transactions have been eliminated in
consolidation.
CNBC acquired CRS, Inc. effective June 1, 2000. The acquisition was accounted
for as a purchase.
CNBC Statutory Trust I was formed in February 2001. The trust is a special
purpose subsidiary trust of CNBC and holds the trust preferred securities.
Nature of Operations: Revenues and assets are primarily derived from the banking
industry, serving small business customers in the central Ohio region. Banking
deposit products include checking and savings accounts and certificates of
deposit. Business loans are secured by real estate, accounts receivable,
inventory, equipment and other types of collateral and are expected to be repaid
from cash flows from operations of businesses. Personal loans are secured by
real estate, stocks and other collateral. A small portion of loans are
unsecured. Management considers the Corporation to operate primarily in one
business segment--banking.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
certain estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided. Future results could differ from these
estimates. The allowance for loan losses, fair values of financial instruments
and status of contingencies are more susceptible to change.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold prior to maturity. Available for sale securities are reported at fair
value, with unrealized holding gains and losses reported in other comprehensive
income or loss. Other securities such as Federal Home Loan Bank and Federal
Reserve Bank stock are carried at cost. Trading securities are reported at fair
value with unrealized gains or losses included in earnings.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
D-25
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan origination fees
and costs and the allowance for loan losses. Loans held for sale are reported at
the lower of cost or market, on an aggregate basis.
Interest income on loans is reported on the interest method and includes
amortization of net deferred loan origination fees and costs over the loan term.
The accrual of interest on loans will be suspended when a loan is 90 days or
more past due, unless the loan is well collateralized or in the process of
collection. When a loan is placed on nonaccrual status, accrued and unpaid
interest at risk is charged against income. Payments received on nonaccrual
loans will be applied against principal until recovery of the remaining balance
is reasonably assured.
D-26
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 loan portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions, and other factors.
Many of these factors are subjective and may change over time. 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 the loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller balance loans of similar nature
such as residential mortgage, consumer and credit card loans, and on an
individual basis for other loans. Loans considered to be impaired are reduced to
the present value of expected future cash flows, or to the fair value of
collateral securing the loan if repayment is expected solely from the
collateral, by allocating a portion of the allowance for loan losses to such
loans. Loans are evaluated for impaired status when payments are past due 90
days or more or when management's grading system indicates a doubtful
classification. Interest received on impaired loans that are not on nonaccrual
status is recorded as interest income.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
life of the asset. Maintenance and repairs are charged to expense as incurred,
and major improvements are capitalized. Assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
Employee Benefits: A trusteed 401(k) savings plan covers all employees who have
attained the age of 20 1/2 and work a minimum of 1,000 hours per calendar year.
An employer contribution for each participant equal to three percent of the
participant's compensation is made annually. The plan also allows employee
contributions, with contributions up to six percent of the participant's
compensation matched 50 percent by the employer. Expense related to the plan was
$132,000 and $92,400 in 2001 and 2000. The 401(k) plan is the only
post-retirement benefit provided to employees, with the exception of those to
executive officers as discussed in Note 12.
Stock Compensation: Employee compensation expense under stock options is
reported only if options are granted below the market value of the stock on the
grant date. Pro forma disclosures of net income and earnings per share are shown
using the fair value method of SFAS No. 123 to measure expense for options
granted after 1994, using an option pricing model to estimate fair value.
D-27
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include off-balance-sheet 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. Such financial instruments are recorded when they are funded.
D-28
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Common Share: Basic Earnings per Share ("EPS") is net income
divided by the weighted-average number of common shares outstanding. Diluted EPS
is the weighted-average number of common shares outstanding during the year and
the assumed exercise of dilutive stock options and warrants less the number of
treasury shares assumed to be purchased from the proceeds using the average
market price of CNBC's common stock. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
financial statements. The calculation for weighted average shares is as follows:
2001 2000
---- ----
Weighted average shares for basic EPS .. 2,052,939 2,010,929
Add dilutive effect of:
Exercise of warrants ................ -- 22,023
Exercise of stock options ........... 65,911 93,054
--------- ---------
Weighted averages shares for diluted EPS 2,118,850 2,126,006
========= =========
In 2001 and 2000, 10,345 and 10,580 weighted shares of common stock under option
were excluded from the diluted earnings per common share calculation, as they
were antidilutive.
On April 24, 2001, the CNBC Board of Directors declared a three-for-two stock
split effected in the form of a 50% stock dividend payable on May 10, 2001. All
shares and per share amounts have been restated to reflect the three-for-two
stock split.
Statements of Cash Flows: Cash and cash equivalents include cash and
noninterest-bearing and interest-bearing balances with other financial
institutions, federal funds sold and money market funds. Money market funds
consist of investments in money market mutual funds that buy and sell at a
constant $1 per share value; therefore, cost and fair value are the same. Cash
flows are reported net for customer loan and deposit transactions.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income or loss. Other comprehensive income or loss includes
unrealized gains and losses on securities available for sale, net of tax, which
are also recognized as a separate component of shareholders' equity.
New Accounting Pronouncements: A new accounting standard requires all business
combinations to be recorded using the purchase method of accounting for any
transaction initiated after June 30, 2001. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of the acquired
company must be recorded at fair value at date of acquisition, and the
D-29
excess of cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets must be separated from goodwill. Identifiable
intangible assets with finite useful lives will be amortized under the new
standard, whereas goodwill, both amounts previously recorded and future amounts
purchased, will cease being amortized starting in 2002. Annual impairment
testing will be required for goodwill with impairment being recorded if the
carrying amount of goodwill exceeds its implied fair value. Adoption of this
standard on January 1, 2002 will not materially impact CNBC's financial
statements.
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 now are such matters that will have
a material effect on the financial statements.
D-30
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restrictions on Cash: The Bank was required to have $1,384,000 and $1,264,000 of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year-end 2001 and 2000. These balances do
not earn interest.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by Commerce National to CNBC or by CNBC
to its shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. 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 these estimates.
Reclassifications: Certain items in the financial statements have been
reclassified to conform with the current presentation.
NOTE 2 - MONEY MARKET FUNDS
Balances in money market funds were as follows:
2001 2000
---- ----
Liquid Cash Trust (LCT) ...................... $ -- $ 8,102,164
Automated Government Money Trust (AGMT) ...... 1,385,670 8,905,032
Government Obligations Fund .................. 10,576,061 --
Treasury Obligations Fund .................... 6,933,459 --
Money Market Flex Fund ....................... 542,681 373,798
----------- -----------
Total ........................................ $19,437,871 $17,380,994
=========== ===========
LCT has approximately $449 million in assets which consist of federal funds sold
to banks and repurchase agreements secured by U.S. Treasury securities which are
held in safekeeping by a third-party custodian.
AGMT has approximately $1.8 billion in assets which consist of short term U.S.
Treasury obligations and repurchase agreements secured by U.S. Treasury
securities which are held in safekeeping by a third-party custodian.
D-31
Government Obligations Fund has approximately $10.6 billion in assets which
consist of short-term U.S. government agency securities and repurchase
agreements secured by U.S. agency securities.
Treasury Obligation Fund has approximately $12.3 billion in assets which consist
of short-term U.S. Treasury obligations and repurchase agreements secured by
U.S. Treasury securities.
The Flex Fund has approximately $221 million in assets which consist of
commercial paper, corporate bonds, and U.S. Government Agency securities.
D-32
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Securities available for sale were as follows:
Amortized Unrealized Unrealized Fair
Cost Gross Gains Gross Losses Value
----------- ----------- ----------- -----------
December 31, 2001
U.S. Agency Securities ..... $ 5,481,641 $ 56,220 $ (235) $ 5,537,626
Federal Reserve Bank Stock . 331,200 -- -- 331,200
Federal Home Loan Bank Stock 1,466,800 -- -- 1,466,800
----------- ----------- ----------- -----------
Total ...................... $ 7,279,641 $ 56,220 $ (235) $ 7,335,626
=========== =========== =========== ===========
December 31, 2000
U.S. Agency Securities ..... $ 5,429,642 $ 28,380 $ (1,598) $ 5,456,424
Federal Reserve Bank Stock . 271,800 -- -- 271,800
Federal Home Loan Bank Stock 1,372,100 -- -- 1,372,100
----------- ----------- ----------- -----------
Total ...................... $ 7,073,542 $ 28,380 $ (1,598) $ 7,100,324
=========== =========== =========== ===========
Contractual maturities of debt securities were as follows:
December 31, 2001
-----------------
Amortized Fair
Cost Value
----------- -----------
Due Within One Year .......................... $ 1,503,865 $ 1,513,159
Due in One to Five Years ..................... 3,977,776 4,024,467
----------- -----------
Total Debt Securities ........................ $ 5,481,641 $ 5,537,626
=========== ===========
No sales of securities occurred in 2001 or in 2000.
D-33
At December 31, 2001 and 2000, there were no holdings of securities of any one
issuer, other than the U.S. Government or U.S. Government agencies, in an amount
greater than 10 percent of shareholders' equity.
Securities pledged at December 31, 2001 and 2000 had a carrying amount of
$3,530,000 and $5,001,000, and were pledged to secure public funds or other
obligations.
D-34
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 4 - LOANS
Loans at year-end were as follows:
2001 2000
---- ----
Residential Real Estate Loans ............... $ 22,125,862 $ 25,591,579
Real Estate Construction Loans .............. 11,157,283 6,712,955
Commercial Real Estate Loans ................ 67,143,434 55,700,774
Investment Residential Real Estate Loans .... 47,909,549 39,486,711
Investment Multi-Family Real Estate Loans ... 17,701,665 15,361,448
Business Loans .............................. 68,961,721 64,487,080
Personal Loans .............................. 13,629,043 13,257,976
------------- -------------
Subtotal ........................... 248,628,557 220,598,523
Allowance for Loan Losses ................... (3,295,000) (2,760,000)
Net Deferred Loan Origination Fees and Costs (532,907) (402,874)
------------- -------------
Net Loans ................................... $ 244,800,650 $ 217,435,649
============= =============
Activity in the allowance for loan losses for the year was as follows:
2001 2000
---- ----
Beginning Balance ........................... $ 2,760,000 $ 2,550,000
Loan Loss Provision ......................... 659,666 412,050
Loans Charged-Off ........................... (172,200) (313,062)
Recoveries on Loans Previously Charged-Off .. 47,534 111,012
------------- -------------
Ending Balance .............................. $ 3,295,000 $ 2,760,000
============= =============
Impaired loans were as follows:
2001 2000
------------- -------------
Impaired Loans with No Allowance
for Losses Allocated ........................ $ 30,168 $ 297,307
Impaired Loans with Allowance
for Loan Losses Allocated ................... 644,762 921,027
------------- -------------
Total ....................................... $ 674,930 $ 1,218,334
============= =============
D-35
Amount of Allowance for Loan Losses
Allocated to Impaired Loan Balance .......... $ 250,000 $ 177,000
Average Investment in
Impaired Loans .............................. 1,287,124 707,886
Interest Income Recognized
During Impairment ........................... 108,657 65,344
Cash Basis Interest Income
Recognized on Impaired Loans ................ 104,500 57,309
Nonperforming loans were as follows:
2001 2000
---- ----
Loans Past Due Over 90 Days
and Accruing Interest ....................... $ 21,450 $ --
Nonaccrual Loans ............................ 30,168 162,699
D-36
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 5 - RELATED PARTY TRANSACTIONS
Deposits from principal officers, directors and their affiliates at year-end
2001 and 2000 were $7,516,000 and $11,617,000. Loans to principal officers,
directors and their affiliates in 2001 were as follows:
Beginning of Year................................ $ 4,675,000
New Loans........................................ 2,897,000
Repayments....................................... (2,296,000)
-------------
End of Year...................................... $ 5,276,000
=============
At December 31, 2001, there were unadvanced lines of credit of $5,066,000 and
letters of credit of $348,000 outstanding to principal officers, directors and
their affiliates. These commitments are included in Note 13, Commitments and
Contingencies.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment was as follows:
2001 2000
---- ----
Land and Building................................ $ 2,037,543 $ 1,989,947
Equipment, Software and Furniture................ 1,642,708 1,486,233
------------- -------------
3,680,251 3,476,180
Less Accumulated Depreciation.................... (1,376,020) (1,044,102)
------------- -------------
Premises and Equipment, Net...................... $ 2,304,231 $ 2,432,078
============= =============
At December 31, 2001, the Bank occupies approximately 90 percent of the building
it owns, with a portion of the remaining space leased to other businesses.
Rental income received during the years ended December 31, 2001 and 2000 totaled
$35,262 and $63,459.
NOTE 7 - DEPOSITS
Interest-bearing deposits were as follows:
2001 2000
---- ----
Interest-bearing Demand.......................... $ 20,718,714 $ 17,726,364
Savings.......................................... 80,150,595 71,955,397
Time, Balances Under $100,000.................... 42,976,781 41,909,195
Time, Balances $100,000 and Over................. 68,187,008 60,427,580
-------------- --------------
Total Interest-bearing Deposits.................. $ 212,033,098 $ 192,018,536
============== ==============
D-37
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 7 - DEPOSITS (Continued)
Total deposit accounts with balances of $100,000 and over, including
noninterest-bearing demand accounts, totaled $160,910,000 and $140,775,000 at
December 31, 2001 and 2000. The Bank accepts time deposits from customers
outside its primary market area, which are primarily solicited through a
national rate-listing network. The total balances of these time deposits were
$65,983,000 and $50,572,000 at December 31, 2001 and 2000. At December 31, 2001
and 2000, the average weighted remaining maturity of these deposits was 16.9
months and 13.9 months, and the weighted average interest rate paid was 5.09
percent and 6.12 percent.
Stated maturities of time deposits were as follows:
2002 $ 67,652,000
2003 25,476,000
2004 10,953,000
2005 5,087,000
2006 1,996,000
------------
Total $111,164,000
============
NOTE 8 - BORROWINGS
Borrowings were as follows:
2001 2000
---- ----
FHLB Term Advances.......................... $ 12,500,000 $ 9,500,000
FHLB Mortgage Matched Advances.............. 3,421,730 2,983,294
FHLB Convertible Fixed Rate Advances........ 8,000,000 8,000,000
Loan Payable................................ -- 1,686,479
------------- ------------
Total....................................... $ 23,921,730 $ 22,169,773
============= ============
Term advances, mortgage-matched advances and convertible fixed rate advances
from The Federal Home Loan Bank ("FHLB") are used as a longer term funding
source. Mortgage-matched advances with original maturities ranging from 10 to 20
years are utilized to fund specific fixed rate loans with certain prepayment of
principal permitted without penalty. Interest rates on mortgage-matched advances
ranged from 5.31 percent to 7.70 percent at December 31, 2001 and amortize
through September 2017. Term advances cannot be prepaid without penalty.
Interest rates on term advances ranged from 3.49 percent to 6.70 percent at
December 31, 2001 and mature between September 2002 and January 2008. Interest
rates on the convertible fixed-rate advances are fixed for a specified number of
years, then are convertible at the option of the FHLB. If the convertible
D-38
option is exercised, the advance may be prepaid without penalty. Interest rates
on the convertible advances ranged from 4.68 percent to 6.84 percent at December
31, 2001, are convertible between January 2002 and June 2005 and mature January
2009 and June 2010.
Additionally, a $13 million cash management advance revolving line of credit was
approved with the FHLB. At December 31, 2001 and 2000, no advances were
outstanding on the line. Minimum collateral for FHLB advances outstanding at
December 31, 2001 and 2000 totaled $32,346,228 and $27,652,447 and consists of a
blanket pledge of all first mortgage loans secured by 1-4 family residential
properties and all FHLB stock.
At December 31, 2001 and 2000, $64,484,000 and $60,133,000 of business and
commercial real estate loans are pledged to the Federal Reserve Bank ("FRB") as
collateral for advances from the FRB. At December 31, 2001 and 2000, no
borrowings were outstanding with the FRB.
D-39
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 8 - BORROWINGS (Continued)
At December 31, 2001, required principal payments on all borrowings were as
follows:
Principal Average
Payments Interest Rate
-------- -------------
2002 $ 3,437,846 6.24%
2003 4,423,135 5.63%
2004 4,524,980 4.13%
2005 372,165 6.22%
2006 1,368,479 5.19%
2007 & thereafter 9,795,125 5.31%
-----------
Total $23,921,730
===========
NOTE 9 - OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST
In February 2001, CNBC issued $4.0 million of 10.20% Obligated Mandatorily
Redeemable Capital Securities through a special purpose subsidiary as part of a
pooled transaction. CNBC's capital securities may be redeemed by CNBC, in whole
or in part, at CNBC's option commencing February 22, 2011 at a redemption price
of 105.10% of the outstanding principal amount and, thereafter, at a premium
which declines annually. On or after February 22, 2021, the securities may be
redeemed at face value. These securities are included in CNBC's regulatory
capital calculations as Tier 1 capital.
NOTE 10 - INCOME TAXES
Income tax expense was as follows:
2001 2000
---- ----
Current ...................................... $ 1,916,825 $ 1,650,300
Deferred ..................................... (139,000) (60,000)
----------- -----------
Total Income Tax Expense ..................... $ 1,777,825 $ 1,590,300
=========== ===========
The income tax benefit from the exercise of non-qualified stock options was
recognized for financial reporting purposes by crediting common stock for
$223,230 in 2001 and $122,646 in 2000.
D-40
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2001 2000
---- ----
Tax Expense at Statutory Rate of 34%............. $1,738,638 $1,564,012
Increase in Taxes Resulting from
Nondeductible Expenses............... 39,187 26,288
---------- ----------
Income Tax Expense............... $1,777,825 $1,590,300
========== ==========
D-41
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 10 - INCOME TAXES (Continued)
Deferred tax assets and liabilities at year-end were as follows:
2001 2000
---- ----
Deferred Tax Assets
Allowance for Loan Losses ........... $ 1,085,000 $ 909,000
Deferred Compensation Expense ....... 161,000 143,000
Deferred Loan Origination Fees ...... 6,000 8,000
Other ............................... 18,000 11,000
----------- -----------
Total ........................ 1,270,000 1,071,000
Deferred Tax Liabilities
Nontaxable Stock Dividend ........... (193,000) (160,000)
Accumulated Depreciation ............ (36,000) (34,000)
Other ............................... (92,000) (57,000)
----------- -----------
Total ........................ (321,000) (251,000)
----------- -----------
Total, Net ................... $ 949,000 $ 820,000
=========== ===========
There was no deferred tax asset valuation allowance at December 31, 2001 or
2000.
NOTE 11 - COMMON STOCK WARRANTS
In connection with the initial stock offering in 1991, warrants were issued to
all shareholders. Each warrant was freely transferable and entitled the holder
to purchase a share of common stock at $5.68 per share. The warrants expired on
October 11, 2000. In 2000, 33,702 warrants were exercised.
NOTE 12 - BENEFIT PLANS
CNBC's Stock Option plans provide non-qualified and incentive stock options to
reward employees and directors and to provide them with an additional equity
interest in CNBC. Options granted prior to 1996 have a 20-year expiration and
were 100 percent vested on the grant date. Options granted in 1996 and later
were issued with a 10-year expiration with vesting occurring over either a 3- or
5-year period, depending on the employee's years of service. In the event of a
change in control, options become immediately exercisable in full. At December
31, 2001 and 2000, 9,904 and 28,167 shares were authorized for future grants.
Information about option grants follows.
D-42
Number Weighted-Average
of Options Exercise Price
---------- ----------------
Outstanding, Beginning of 2000 229,532 $ 7.01
Granted 17,265 19.53
Exercised (23,661) 4.81
Forfeited (4,349) 18.29
--------
Outstanding, End of 2000 218,787 8.01
Granted 19,200 19.07
Exercised (50,622) 5.70
Forfeited (4,218) 19.46
--------
Outstanding, End of 2001 183,147 9.54
========
Options exercisable totaled 148,745 and 189,786 at December 31, 2001 and 2000 at
weighted average exercise prices of $7.28 and $6.28, respectively.
D-43
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 12 - BENEFIT PLANS (Continued)
The following pro forma information presents net income and earnings per share,
had Statement of Financial Accounting Standards No. 123's fair value method been
used to measure compensation cost for stock option plans. No compensation cost
was recognized for stock option plans for 2001 or 2000.
2001 2000
---- ----
Net Income as Reported ....................... $ 3,335,816 $ 3,009,735
Pro Forma Net Income ......................... $ 3,246,301 $ 2,974,534
Basic Earnings per Share as Reported ......... $ 1.62 $ 1.50
Pro Forma Basic Earnings Per Share ........... $ 1.58 $ 1.48
Diluted Earnings per Share as Reported ....... $ 1.57 $ 1.42
Pro Forma Diluted Earnings per Share ......... $ 1.53 $ 1.40
All options are granted at the market price of the stock on the date of grant.
For options granted during 2001 and 2000, the weighted-average fair values at
grant date were calculated to be $4.87 and $6.10.
The fair value of options granted during 2001 and 2000 is estimated using the
following weighted-average information: risk-free interest rate of 5.03% and
5.25%, expected life of 10 years, 13.28% and 17.04% volatility of stock price
and an expected dividend yield of 1.90% and 1.66%.
The following table summarizes information about stock options outstanding at
December 31, 2001:
Weighted-Average Outstanding
Range of Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable
--------------- ----------- ---------------- -------------- -----------
$ 3.79 - $ 4.85 62,620 10.5 Years $ 4.58 62,620
$ 5.45 - $ 7.17 55,890 12.6 Years $ 5.81 55,890
$10.25 - $13.33 16,242 5.4 Years $11.53 15,450
$18.33 - $19.33 31,461 7.8 Years $19.01 9,932
$19.55 - $21.67 16,934 8.0 Years $20.72 4,853
D-44
A new stock option plan for 2002 was approved in February 2002 by CNBC's Board
of Directors. The plan authorizes up to 75,000 shares available for grant and is
subject to shareholder approval. All other provisions of the 2002 plan are
similar to the existing plan.
CNBC maintains supplemental post-retirement plans for the benefit of executive
officers. The plan is designed to provide post-retirement benefits to supplement
other sources of retirement income such as social security and 401(k) benefits.
CNBC has either funded contributions to a deferred compensation plan or
purchased insurance contracts on the lives of certain participants in the
supplemental post-retirement benefit plan. The cash surrender value, net of
premiums paid, or the balance in deferred compensation accounts will be paid-out
over a number of years upon retirement. Additionally, CNBC's Board of Directors
may defer up to 100% of director's fees under a deferred compensation plan.
Amounts contributed to deferred compensation plans are deposited by CNBC to
specified mutual fund and savings accounts and earn the rate of return equal to
the return of the chosen funds. Deferred compensation expense related to the
above plans totaled $53,000 in 2001.
D-45
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met. Usually, the agreements
have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral, if deemed appropriate at exercise of the commitment.
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk was as follows:
2001 2000
---- ----
Approved, Unadvanced Lines of Credit ........ $54,389,000 $40,587,000
Unadvanced Draw Notes ........................ 6,303,000 13,572,000
New Loan Commitments:
Secured by Real Estate .............. 17,847,000 14,129,000
Other ............................... 1,920,000 5,825,000
Letters of Credit ............................ 1,462,000 3,684,000
Available Lines for Credit Cards ............. 2,645,000 2,037,000
At year-end 2001 and 2000, and included above, commitments to make fixed-rate
loans at current market rates totaled $3,418,000 and $820,000, with rates
ranging from 6.25% to 8.50% and 8.50% to 10.00%, respectively. Also included
above are $5,154,000 and $4,404,000 of three and five-year adjustable rate loans
with fixed starting rates ranging from 6.11% to 7.88% and 8.00% to 9.50%,
respectively.
Employment agreements exist for certain officers of CNBC, Commerce National and
CRS, Inc. The agreements provide for a term of employment for up to ten years
and a salary and performance review not less often than annually, as well as
inclusion of the employee in any formally established employee benefit plan for
which such personnel are eligible. The employment agreements also contain
certain provisions with respect to a change in control.
D-46
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Estimated fair values of financial instruments and the related carrying values
were as follows at year-end.
2001 2000
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial Assets (In Thousands)
Cash and Cash Equivalents ............. $ 38,735 $ 38,735 $ 34,140 $ 34,140
Securities Available for Sale ......... 7,336 7,336 7,100 7,100
Loans, Net of Allowance for Loan Losses 244,801 247,914 217,436 214,887
Accrued Interest Receivable ........... 1,080 1,080 1,230 1,230
Financial Liabilities
Demand and Savings Deposits ........... $(131,994) $(131,994) $(116,538) $(116,538)
Time Deposits ......................... (111,164) (112,287) (102,337) (102,978)
Borrowings ............................ (23,922) (24,773) (22,170) (21,746)
Trust Preferred Securities ............ (4,000) (3,981) -- --
Accrued Interest Payable .............. (491) (491) (434) (434)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents is
considered to approximate cost. The estimated fair value for securities is based
on quoted market values for the individual securities or for equivalent
securities. Carrying value is considered to approximate fair value for accrued
interest receivable, for deposit liabilities subject to immediate withdrawal,
and for accrued interest payable. The fair values of loans, time deposits, and
borrowings are approximated by calculating the sum of the carrying value for
amounts that contractually reprice at intervals less than six months and the
present value of cash flows using an estimated market discount interest rate for
amounts that reprice less frequently than every six months. The fair value of
trust preferred securities is approximated by calculating the present value of
cash flows using an estimated market discount interest rate. The fair value of
off-balance-sheet items is based on the current fees or costs that would be
charged to enter into or terminate such arrangements. These amounts are not
material at December 31, 2001 or 2000.
While these estimates are based on management's judgment of the appropriate
evaluation factors, there is no assurance that were such items liquidated the
estimated fair values would necessarily have been realized. The estimated fair
values should not be considered to apply at subsequent dates.
D-47
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 15 - REGULATORY MATTERS
Commerce National and CNBC are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, 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 judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
The prompt corrective action regulations provide five regulatory capital
classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. These terms are
not intended to represent overall financial condition. Commerce National and
CNBC met the requirements of a well capitalized institution as defined above, at
December 31, 2001 and 2000. If the Bank's capital classification were to change
to adequately capitalized, it would need to obtain regulatory approval to
continue to accept brokered deposits.
Actual and required capital amounts and ratios are presented below at year-end.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Millions)
2001
Total Capital to Risk Weighted Assets
CNBC...................................... $30.1 13.0% $18.5 8.0% $23.2 10.0%
Commerce National......................... $29.3 12.7% $18.5 8.0% $23.1 10.0%
Tier 1 (Core) Capital to Risk Weighted Assets
CNBC...................................... $27.2 11.8% $9.3 4.0% $13.9 6.0%
Commerce National......................... $21.0 9.1% $9.3 4.0% $13.9 6.0%
Tier 1 (Core) Capital to Average Assets
CNBC...................................... $27.2 9.6% $11.4 4.0% $14.3 5.0%
Commerce National......................... $21.0 7.4% $11.4 4.0% $14.2 5.0%
D-48
2000
Total Capital to Risk Weighted Assets
CNBC...................................... $24.2 10.9% $17.8 8.0% $22.3 10.0%
Commerce National......................... $25.1 11.3% $17.8 8.0% $22.2 10.0%
Tier 1 (Core) Capital to Risk Weighted Assets
CNBC...................................... $21.5 9.6% $8.9 4.0% $13.4 6.0%
Commerce National......................... $16.0 7.2% $8.9 4.0% $13.3 6.0%
Tier 1 (Core) Capital to Average Assets
CNBC...................................... $21.5 8.5% $10.1 4.0% $12.6 5.0%
Commerce National......................... $16.0 6.4% $10.0 4.0% $12.5 5.0%
The Office of the Comptroller of the Currency ("OCC") must approve the
declaration of any dividends for Commerce National in excess of available
retained earnings and in excess of the sum of profits for the year combined with
Commerce National's retained earnings from the two preceding years, less any
required transfer to surplus. In addition, dividends may not reduce capital
levels below the minimum regulatory requirements disclosed above. Under the most
restrictive of these requirements, CNBC estimates retained earnings available
for payment of dividends by Commerce National to CNBC approximates $6,200,000 in
order to maintain the well capitalized status at year-end 2001.
D-49
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed parent company only financial statements for CNBC
Bancorp.
CONDENSED BALANCE SHEETS
2001 2000
---- ----
ASSETS
Cash and Cash Equivalents .................... $ 538,540 $ 507,820
Investment in Bank Subsidiary:
Equity .................................. 21,023,264 16,048,216
Subordinated Notes ...................... 5,380,000 6,300,000
Investment in Nonbank Subsidiaries ........... 219,372 105,708
Dividend Receivable from Bank Subsidiary ..... 400,000 325,000
Loan Receivable From Nonbank Subsidiary ...... 15,000 25,000
Other Assets ................................. 698,945 538,332
----------- -----------
Total Assets ........................ $28,275,121 $23,850,076
=========== ===========
LIABILITIES
Loan Payable ................................. $ -- $ 1,686,479
Other Liabilities ............................ 867,520 653,825
Subordinated Note Payable to CNBC
Statutory Trust I ....................... 4,124,000 --
-----------
Total Liabilities ................... 4,991,520 2,340,304
TOTAL SHAREHOLDERS' EQUITY ................... 23,283,601 21,509,772
----------- -----------
Total Liabilities and
Shareholders' Equity ................ $28,275,121 $23,850,076
=========== ===========
D-50
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED INCOME STATEMENTS
2001 2000
---- ----
Income
Dividends from Bank Subsidiary .......... $ 400,000 $ 675,000
Interest Income ......................... 542,546 451,854
Other Income ............................ 20,896 4,296
----------- -----------
Total Income ........................ 963,442 1,131,150
Expenses
Interest Expense ........................ 442,786 134,889
Other Expense ........................... 89,405 43,384
----------- -----------
Total Expenses ...................... 532,191 178,273
----------- -----------
Income Before Income Taxes and Equity in
Undistributed Net Income of Subsidiaries ..... 431,251 952,877
Income Tax Expense ........................... 10,875 89,500
----------- -----------
Income Before Equity in Undistributed Net
Income of Subsidiaries ....................... 420,376 863,377
Undistributed Net Income of Bank Subsidiary .. 2,975,774 2,190,651
Undistributed Net (Loss) of Nonbank Subsidiary (60,334) (44,293)
----------- -----------
Net Income ................................... $ 3,335,816 $ 3,009,735
=========== ===========
D-51
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
2001 2000
---- ----
Cash Flows from Operating Activities
Net Income .................................. $ 3,335,816 $ 3,009,735
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Undistributed Net Income of Subsidiaries . (2,915,440) (2,146,358)
Amortization ............................. 6,400 6,400
Change in Other Assets and Liabilities ... (55,886) (259,093)
----------- -----------
Net Cash from Operating Activities ...... 370,890 610,684
Cash Flows from Investing Activities
Purchase of Subordinated Notes .............. (2,000,000) --
Repayment of Subordinated Notes ............. 2,920,000 --
Investment in Bank Subsidiary ............... (1,980,000) --
Investment in CNBC Statutory Trust I ........ (124,000) --
Investment in CNBC Retirement Services, Inc. (50,000) (150,000)
----------- -----------
Net Cash from Investing Activities ...... (1,234,000) (150,000)
Cash Flows from Financing Activities
Cash Dividends Paid to Shareholders ......... (698,086) (585,566)
Cash Paid in Lieu of Fractional
Shares in Stock Split .................... (536) --
Repayment of Loans Payable .................. (1,686,479) (201,726)
Issuance of Subordinated Debt to CNBC
Statutory Trust I ........................ 4,124,000 --
Proceeds from Stock Issuance ................ 513,646 426,971
Purchase of Treasury Shares ............... (1,358,715) (423,000)
----------- -----------
Net Cash from Financing Activities ...... 893,830 (783,321)
----------- -----------
Net Change in Cash and Cash Equivalents .......... 30,720 (322,637)
Cash and Cash Equivalents
Beginning of Year ........................... 507,820 830,457
----------- -----------
End of Year ................................. $ 538,540 $ 507,820
=========== ===========
D-52
Directors and Executive Officers of CNBC Bancorp
The following information is furnished with respect to directors and executive
officers of CNBC and Commerce National as of December 31, 2001. Unless noted
otherwise, all serve as directors of both organizations.
Directors
---------
Name Position
---- --------
Thomas D. McAuliffe Chairman of the Board and President, CNBC Bancorp;
Chairman of the Board, President and Chief Executive
Officer, Commerce National Bank
Loreto (Larry ) V. Canini President, Canini and Pellecchia, Inc.
(Residential construction and development company)
Mark S. Corna President, Corna/Kokosing Construction Company
(Commercial construction company)
Jameson Crane, Jr. Vice President, Fairwood Investment Co.
(Thermo plastic extrusions manufacturer)
Judith A. DeVillers President, Indec, Inc.
(Interior Design)
George A. Gummer Owner, G. A. Gummer & Assoc., Inc.
(Investment advisory services)
William L. Hoy Chief Executive Officer, Columbus Sign Company
(Sign manufacturing and design company)
Clark Kellogg Sports Broadcaster, CBS Sports
(Entertainment)
Donald R. Kenney President, Triangle Real Estate Services, Inc.
(Real estate development)
Samuel E. McDaniel President, McDaniel's Painting and Construction, Inc.
(General contractor)
Kent K. Rinker (2) Independent Investor
John A. Romelfanger Secretary, Treasurer and Vice President, CNBC Bancorp;
Chief Operating Officer, Commerce National Bank
Richard F. Ruhl Retired, Dick Ruhl Ford Sales, Inc.
(Automotive sales)
David J. Ryan Retired, Rimrock Corporation
(Industrial automation equipment manufacturer)
Peter C. Taub (1) President, Atlas Industrial Holdings, LLC
(Industrial construction company)
John A. Tonti President, West Penn Foods, Inc.
(Restaurant franchisee operating company)
Alan R. Weiler Chairman, Archer-Meek-Weiler Agency, Inc.
(Insurance agency)
Michael Wren Retired, M-E Engineering, Inc.
(Engineering consulting firm)
D-53
(1) Serves as CNBC director only.
(2) Serves only as a non-elected advisory director of CNBC.
D-54
Executive Officers
Name Position at CNBC Bancorp
---- ------------------------
Thomas D. McAuliffe Chairman of the Board and President
John A. Romelfanger Secretary, Treasurer and Vice President
Pamela S. Miller Assistant Treasurer and Vice President
Mark J. Sbrochi Vice President
Name Position at Commerce National Bank
---- ----------------------------------
Thomas D. McAuliffe Chairman of the Board, President and
Chief Executive Officer
John A. Romelfanger Chief Operating Officer
Pamela S. Miller Chief Financial Officer
Mark J. Sbrochi Chief Credit Officer
Name Position at CNBC Retirement Services, Inc.
---- ------------------------------------------
Dennis D. Puppel President
Form 10-KSB
A copy of CNBC's 2001 Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission is available upon written request to shareholders without
charge. To obtain a copy, direct your written request to Pamela S. Miller,
Assistant Treasurer, 100 E. Wilson Bridge Rd., Worthington, Ohio 43085.
D-55
APPENDIX E
CNBC Bancorp
Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002
E-1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2002
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _____.
Commission file number: 000-28203
CNBC BANCORP
(Exact name of small business issuer as specified in its charter)
Ohio 31-1478140
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3650 Olentangy River Road, Columbus, Ohio 43214
(Address of principal executive offices)
(614) 583-2200
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, without par value 1,992,345 common shares
outstanding at October 31, 2002
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
E-2
CNBC BANCORP
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2002
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets .............................. 3
Condensed Consolidated Income and Comprehensive Income Statements... 4
Condensed Consolidated Statements of Cash Flows .................... 5
Notes to the Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. Controls and Procedures............................................ 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 2. Changes in Securities and Use of Proceeds.......................... 18
Item 3. Defaults Upon Senior Securities.................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
SIGNATURES................................................................. 19
E-3
CNBC BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 December 31
2002 2001
---- ----
ASSETS
Cash and Noninterest-bearing Balances ............... $ 15,469,804 $ 9,103,065
Interest-bearing Balances ........................... 293,726 193,670
Federal Funds Sold .................................. 12,000,000 10,000,000
Money Market Funds .................................. 11,028,432 19,437,871
------------- -------------
Total Cash and Cash Equivalents ................ 38,791,962 38,734,606
Securities Available for Sale ....................... 6,982,976 7,335,626
Loans, Net .......................................... 273,607,312 244,800,650
Premises and Equipment .............................. 1,183,086 2,304,231
Accrued Interest Receivable ......................... 1,105,398 1,080,106
Other Assets ........................................ 2,247,507 1,929,200
------------- -------------
Total Assets ........................................ $ 323,918,241 $ 296,184,419
============= =============
LIABILITIES
Deposits ............................................ $ 258,269,781 $ 243,157,817
Borrowings .......................................... 36,007,134 23,921,730
Obligated Mandatorily Redeemable Capital Securities
of Subsidiary Trust ............................ 4,000,000 4,000,000
Other Liabilities ................................... 1,239,363 1,821,271
------------- -------------
Total Liabilities ................................... 299,516,278 272,900,818
SHAREHOLDERS' EQUITY
Common Stock No Par Value;
Authorized Shares - 3,000,000
Issued - 2,084,559 in 2002 and 2001 ............ 14,505,618 14,488,619
Retained Earnings ................................... 11,742,633 10,001,724
Treasury Stock, 92,214 shares at cost in
2002 and 62,424 shares at cost in 2001 ......... (1,883,648) (1,243,692)
Accumulated Other Comprehensive Income .............. 37,360 36,950
------------- -------------
Total Shareholders' Equity .......................... 24,401,963 23,283,601
------------- -------------
Total Liabilities and Shareholders' Equity .......... $ 323,918,241 $ 296,184,419
============= =============
See Notes to Consolidated Financial Statements
E-4
CNBC BANCORP
CONDENSED CONSOLIDATED INCOME AND COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Loans, including Fees ...................... $4,757,949 $4,898,211 $13,889,934 $14,804,726
Taxable Securities ......................... 72,080 111,039 230,815 345,613
Other Interest Income ...................... 75,785 148,166 208,649 649,998
---------- ---------- ----------- -----------
Total Interest Income ............................... 4,905,814 5,157,416 14,329,398 15,800,337
INTEREST EXPENSE
Deposits ................................... 1,524,853 2,000,021 4,556,204 6,483,059
Borrowings ................................. 565,210 440,653 1,518,806 1,258,597
---------- ---------- ----------- -----------
Total Interest Expense .............................. 2,090,063 2,440,674 6,075,010 7,741,656
---------- ---------- ----------- -----------
Net Interest Income ........................ 2,815,751 2,716,742 8,254,388 8,058,681
Provision for Loan Losses ........................... 164,500 130,100 398,500 468,900
---------- ---------- ----------- -----------
Net Interest Income after Provision for Loan Losses . 2,651,251 2,586,642 7,855,888 7,589,781
NONINTEREST INCOME
Service Charges on Deposits ................ 85,858 61,247 207,775 157,652
Retirement Plan Investment and
Administrative Fees ................... 71,382 61,924 216,600 194,558
Net Gains on Sales of Assets ............... -- 810 6,995 17,707
Other Income ............................... 32,756 40,206 153,354 170,586
---------- ---------- ----------- -----------
Total Noninterest Income ............................ 189,996 164,187 584,724 540,503
NONINTEREST EXPENSES
Salaries and Benefits ...................... 1,001,695 953,081 3,024,114 2,805,619
Occupancy and Equipment, Net ............... 160,680 98,291 370,325 287,639
Data Processing ............................ 48,464 43,582 146,139 131,391
Professional Services ...................... 57,587 59,409 169,694 183,201
State Franchise Tax ........................ 65,515 65,524 181,994 165,352
Merger Related Expenses ................... 172,086 -- 172,086 --
Other Expenses ............................. 247,284 254,938 750,014 788,468
---------- ---------- ----------- -----------
Total Noninterest Expenses .......................... 1,753,311 1,474,825 4,814,366 4,361,670
---------- ---------- ----------- -----------
Income Before Taxes ................................. 1,087,936 1,276,004 3,626,246 3,768,614
Income Tax Expense .................................. 375,100 443,366 1,252,600 1,310,395
---------- ---------- ----------- -----------
Net Income .......................................... 712,836 832,638 2,373,646 2,458,219
Other Comprehensive Income .......................... 797 19,548 410 26,802
---------- ---------- ----------- -----------
Comprehensive Income ................................ $ 713,633 $ 852,186 $ 2,374,056 $ 2,485,021
========== ========== =========== ===========
EARNINGS PER COMMON SHARE
Basic ............................................... $ 0.36 $ 0.40 $ 1.19 $ 1.19
========== ========== =========== ===========
Diluted ............................................. $ 0.35 $ 0.39 $ 1.15 $ 1.16
========== ========== =========== ===========
See Notes to Consolidated Financial Statements
E-5
CNBC BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Cash Provided by Operating Activities ..... $ 1,820,760 $$3,041,296
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Securities Available for Sale ............. (3,316,062) (12,613,463)
Maturities of Securities Available for Sale ............ 750,000 1,500,000
Calls of Securities Available for Sale ................. 3,480,000 10,935,000
Purchases of FHLB Stock ................................ (540,100) --
Net Increase in Loans .................................. (28,806,662) (22,094,127)
Net Proceeds from Sale of Building ..................... 1,673,443 --
Purchase of Premises and Equipment ..................... (780,947) (195,311)
------------ ------------
Net Cash Flows Used in Investing Activities ... (27,540,328) (22,467,901)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits ............................... 15,111,964 10,773,363
Net Proceeds from Issuance of Common Stock ............. 42,851 504,748
Cash Paid in Lieu of Fractional Shares in Stock Split .. -- (536)
Purchase of Treasury Shares ............................ (700,354) (1,010,923)
Principal Payments on Federal Home Loan Bank Advances .. (12,164,596) (1,439,245)
Advances from Federal Home Loan Bank ................... 24,250,000 4,000,000
Proceeds from Issuance of Trust Preferred Securities ... -- 3,873,283
Repayment of Loans Payable ............................. -- (1,686,480)
Dividends Paid ......................................... (762,941) (697,606)
------------ ------------
Net Cash Flows Provided by Financing Activities 25,776,924 14,316,604
------------ ------------
Net Change in Cash and Cash Equivalents ....... 57,356 (5,110,001)
Cash and Cash Equivalents at Beginning of Year ......... 38,734,606 34,140,296
------------ ------------
Cash and Cash Equivalents at End of Period ............. $ 38,791,962 $ 29,030,295
============ ============
See Notes to Consolidated Financial Statements
E-6
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the consolidated financial position of CNBC Bancorp ("CNBC") at September 30,
2002 and its results of operations and cash flows for the periods presented. All
such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions of Form 10-QSB and, therefore, do not purport to contain all
necessary financial disclosures required by accounting principles generally
accepted in the United States of America that might otherwise be necessary in
the circumstances, and should be read in conjunction with the consolidated
financial statements and notes thereto of CNBC Bancorp for the year ended
December 31, 2001, included in its 2001 Annual Report. Reference is made to the
accounting policies of CNBC Bancorp described in the notes to the consolidated
financial statements contained in its 2001 Annual Report. CNBC has consistently
followed these policies in preparing this Form 10-QSB.
The accompanying consolidated financial statements include the accounts of CNBC
and its wholly-owned subsidiaries, Commerce National Bank ("Commerce National"),
CNBC Retirement Services, Inc. ("CRS, Inc.") and CNBC Statutory Trust I. All
significant intercompany transactions and balances have been eliminated.
Revenues and assets are derived primarily from the banking industry, serving
small business customers in the central Ohio region. Banking deposit products
include checking and savings accounts and certificates of deposit. Business
loans are secured by real estate, accounts receivable, inventory, equipment and
other types of collateral and are expected to be repaid from cash flows from
operations of businesses. Personal loans are secured by real estate, stocks and
other collateral. A small portion of loans are unsecured. Management considers
CNBC to operate in one business segment, banking.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses, fair
values of financial instruments and the status of contingencies are particularly
subject to change.
Basic Earnings Per Share ("EPS") is net income divided by the weighted-average
number of common shares outstanding. Diluted EPS is net income divided by
weighted-average number of common shares outstanding during the year and the
assumed exercise of dilutive stock options less the number of treasury shares
assumed to be purchased from the proceeds using the average market price of
CNBC's common stock. The calculation for weighted average shares is as follows:
E-7
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Weighted averages shares for basic EPS..... 1,991,810 2,056,609 2,000,068 2,061,374
Add dilutive effect of
Exercise of Stock Options............... 73,833 64,840 71,332 65,829
--------- --------- --------- ---------
Weighted averages shares for diluted EPS... 2,065,643 2,121,449 2,071,400 2,127,203
========= ========= ========= =========
Stock options excluded from computation of
diluted earnings per common share
because they were antidilutive.......... -- 9,908 -- 10,283
On April 24, 2001, the CNBC Board of Directors declared a three-for-two stock
split effected in the form of a 50% stock dividend payable on May 10, 2001. All
shares and per share amounts have been restated to reflect the three-for-two
stock split.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
A new accounting standard requires identifiable intangible assets to be
separated from goodwill. Identifiable intangible assets with finite useful lives
will be amortized under the new standard, whereas goodwill, both amounts
previously recorded and future amounts purchased, will cease being amortized.
Annual impairment testing is required for goodwill with impairment being
recorded if the carrying amount of goodwill exceeds its implied fair value.
Adoption of this standard on January 1, 2002 did not materially impact CNBC's
financial statements. Amortization expense for all prior periods is considered
immaterial to CNBC's financial statements.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No.143, "Asset Retirement Obligations." The
provisions of this standard apply to asset retirement obligations beginning in
2003. CNBC does not believe this standard will have a material effect on its
financial position or results of operation.
Effective January 1, 2002, CNBC adopted SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets." The effect of this standard on the financial position and
results of operations of CNBC is not expected to be material.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses the timing of
recognition of a liability for exit
E-8
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and disposal cost at the time a liability is incurred, rather than at a plan
commitment date, as previously required. Exit or disposal costs will be measured
at fair value, and the recorded liability will be subsequently adjusted for
changes in estimated cash flows. This Statement is required to be effective for
exit or disposal activities entered after December 31, 2002, and early adoption
is encouraged. CNBC does not believe this statement will have a material effect
on its financial position or results of operations.
SFAS No. 147, "Acquisitions of Certain Financial Institutions" became effective
October 1, 2002. This standard requires any unidentifiable intangible assets
previously recorded as the result of a business combination to be reclassified
as goodwill and the amortization of this asset will cease. The effect of this
standard on the financial position and results of operations of CNBC was not
material, as CNBC does not have any unidentified intangible assets.
Certain items in the financial statements have been reclassified to conform with
the current presentation.
NOTE 2 - PENDING MERGER
On August 28, 2002, CNBC Bancorp signed a definitive agreement with First
Merchants Corporation, located in Muncie, Indiana, to merge with First Merchants
Corporation. Upon closing of this transaction, Commerce National Bank will
become a wholly-owned subsidiary of First Merchants Corporation. Under the terms
of the agreement, subject to certain conditions being met, CNBC shareholders
will receive 1.01 shares of stock in First Merchants Corporation for each share
of CNBC Bancorp or $29.57 in cash. The conversion ratio may be subject to
adjustment as more fully described in the merger agreement. The transaction is
subject to shareholder and regulatory approval and is expected to be effective
in the first quarter of 2003.
E-9
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - LOANS
Loans were comprised of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Residential Real Estate Loans.............. $ 25,809,615 $ 22,099,153
Business Real Estate Loans................. 162,302,563 143,911,931
Business Loans............................. 74,362,793 68,452,393
Personal Loans............................. 14,877,037 13,632,173
------------- -------------
Subtotal.......................... 277,352,008 248,095,650
Allowance for Loan Losses.................. (3,744,696) (3,295,000)
------------- -------------
Net Loans.................................. $ 273,607,312 $ 244,800,650
============= =============
Activity in the allowance for loan losses was as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Beginning Balance ........................ $3,565,979 $2,944,779 $ 3,295,000 $ 2,760,000
Loan Loss Provision ...................... 164,500 130,100 398,500 468,900
Loans Charged-Off ........................ -- -- (540) (164,637)
Recoveries on Loans Previously Charged-Off 14,217 5,602 51,736 16,218
---------- ---------- ----------- -----------
Ending Balance ........................... $3,744,696 $3,080,481 $ 3,744,696 $ 3,080,481
========== ========== =========== ===========
Information regarding nonperforming and impaired loans was as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Loans Past Due Over 90 Days
And Accruing Interest .............. $ 42,731 $ 21,450
Nonaccrual Loans ............................. 205,424 30,168
Impaired Loans with No Allowance
for Loan Losses Allocated .......... $ 924,270 $ 30,168
Impaired Loans with Allowance
for Loan Losses Allocated .......... 1,240,655 644,762
----------- -----------
Total ........................................ $ 2,164,925 $ 674,930
=========== ===========
Amount of Allowance for Loan Losses
Allocated to Impaired Loan Balance ........... $ 385,000 $ 250,000
E-10
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - DEPOSITS
Total deposits were classified as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Noninterest-bearing demand deposits.............. $ 36,584,925 $ 31,124,719
Interest-bearing Demand.......................... 20,123,929 20,718,714
Savings.......................................... 84,781,972 80,150,595
Time, Balances Under $100,000.................... 45,427,563 42,976,781
Time, Balances $100,000 and Over................. 71,351,392 68,187,008
-------------- --------------
Total Interest Bearing Deposits.................. 221,684,856 212,033,098
-------------- --------------
Total Deposits................................... $ 258,269,781 $ 243,157,817
============== ==============
Total deposit accounts with balances of $100,000 and over, including
noninterest-bearing demand accounts, totaled $172,165,000 at September 30, 2002
and $160,910,000 at December 31, 2001. Commerce National accepts time deposits
from customers outside its primary market area, which are primarily solicited
through brokers and national rate-listing networks. The total balances of these
time deposits were $78,960,000 at September 30, 2002 and $65,983,000 at December
31, 2001.
NOTE 5 - BORROWINGS
Borrowings were as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
FHLB Cash Management Advances.................... $ 2,000,000 $ --
FHLB Term Advances............................... 18,000,000 12,500,000
FHLB Mortgage Matched Advances................... 8,007,134 3,421,730
FHLB Convertible Fixed Rate Advances............. 8,000,000 8,000,000
------------- ------------
Total............................................ $ 36,007,134 $ 23,921,730
============= ============
Term advances, mortgage-matched advances and convertible fixed rate advances
from The Federal Home Loan Bank ("FHLB") are used as a longer term funding
source. Mortgage-matched advances with original maturities ranging from 5 to 20
years are utilized to fund fixed rate loans with certain prepayment of principal
permitted without penalty. Interest rates on mortgage-matched advances ranged
from 4.23 percent to 7.70 percent at September 30, 2002 and have maturity dates
through September 2017. Term advances cannot be prepaid without penalty.
Interest rates on term advances ranged from 2.56 percent to 6.70 percent at
September 30, 2002 and mature between October 2002 and January 2008. Interest
rates on the convertible fixed-rate advances are fixed for a specified number of
years, then are convertible at the option of the FHLB. If the convertible option
is exercised, the advance may be prepaid without penalty. Interest rates on the
convertible advances ranged from 4.68 percent to
E-11
6.84 percent at September 30, 2002, are convertible between October 2002 and
June 2005 and mature January 2009 and June 2010.
E-12
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Commerce National has entered into a ten-year agreement to lease 38,711 square
feet of an office building as its main office facility. The lease commenced
September 1, 2002 and requires minimum annual lease payments including tenant's
share of estimated operating expenses of $503,000 beginning in year one and
increasing over the lease term to $677,000 in year ten. On June 17, 2002,
Commerce National sold its existing office building, resulting in a gain of
$6,995. Upon the sale, Commerce National entered into a short-term lease with
the buyer which terminates on November 4, 2002, and calls for total lease
payments over the lease term of $118,000.
E-13
CNBC BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion focuses on the consolidated financial condition of CNBC
Bancorp ("CNBC") at September 30, 2002, compared to December 31, 2001, and the
consolidated results of operations for the three and nine months ended September
30, 2002 compared to the same periods in 2001. The purpose of this discussion is
to provide the reader with a more thorough understanding of the consolidated
financial statements. This discussion should be read in conjunction with the
interim consolidated financial statements and related footnotes.
When used in this Form 10-QSB or future filings by CNBC with the Securities and
Exchange Commission, in CNBC's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. CNBC wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors, including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities and
competitive and regulatory factors, could affect CNBC's financial performance
and could cause CNBC's actual results for future periods to differ materially
from those anticipated or projected. CNBC does not undertake, and specifically
disclaims, any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
CNBC is not aware of any trends, events or uncertainties that will have or are
reasonably likely to have a material effect on the liquidity, capital resources
or operations except as discussed herein. In addition, CNBC is not aware of any
current recommendations by regulatory authorities that would have such effect if
implemented.
FINANCIAL CONDITION
Total assets increased $27.7 million, or 9.4%, to $323.9 million at September
30, 2002. The two largest components of this increase were an increase of $28.8
million in net loans outstanding, offset by a decrease in premises and equipment
of $1.1 million.
Cash and cash equivalents at September 30, 2002 remained relatively unchanged
from December 31, 2001. Cash and cash equivalents declined from 13.1% of total
assets at December 31, 2001 to 12.0% of total assets at September 30, 2002.
The increase in loans was comprised primarily of an $18.4 million increase in
business real estate loans and a $5.9 million increase in other business loans.
With the low interest rate environment continuing through the first nine months
of 2002, the local real estate market for refinancing and purchases remained
active, offering opportunities to close new loans but also increasing the
prepayment speeds of our existing portfolio. Average loans outstanding for the
nine months ended September 30, 2002 were $264.7 million versus $230.8 million
for 2001, an increase of 14.6%. Management believes our pending merger with
First Merchants Corporation will allow us to continue to grow with our customer
base and develop larger relationships that we may not have been able to service
before.
E-14
CNBC BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Premises and equipment decreased by $1.1 million due to the sale of Commerce
National's office building in June 2002, offset by leasehold improvements
completed in the new facility leased by Commerce National.
Total deposit accounts increased $15.1 million during the first nine months of
2002. Both noninterest-bearing demand and savings accounts increased over the
nine months by $5.5 million and $4.6 million, respectively. Commerce National's
local customer base of certificates of deposit decreased $7.4 million, however
total certificates of deposit increased $5.6 million. This increase was driven
by the $13.0 million of growth achieved through solicitation of deposits through
brokers and national rate-listing networks to which Commerce National
subscribes. These out-of-area deposits are utilized to support CNBC's growth and
are generally offered at similar rates paid on new certificates of deposit
issued to local customers with balances greater than $100,000. Terms on these
deposits generally range from 3 months to 5 years with a weighted average
remaining maturity of 17.0 months and 16.9 months at September 30, 2002 and
December 31, 2001, respectively.
Borrowings increased $12.1 million for the nine months ended September 30, 2002.
$2.0 million of the increase was a short-term borrowing at the end of September
2002. The remaining $10.1 million increase was long-term FHLB borrowings. These
borrowings were advanced to fund loans generated in the first nine months of
2002.
In February 2001, CNBC participated in a pooled transaction involving the
issuance of Trust Preferred Securities. These securities carry a tax-deductible
interest rate of 10.2% and qualify for inclusion in Tier 1 capital for
regulatory capital purposes. A total of $4.0 million in securities was issued,
resulting in $3.9 million in net proceeds to CNBC. CNBC immediately injected
$2.0 million of the proceeds into Commerce National as subordinated debentures.
Remaining proceeds were used to repay CNBC debt from another financial
institution and to purchase CNBC stock in accordance with a stock repurchase
program, which was approved by CNBC's directors in 2001 and 2002.
On August 28, 2002, CNBC Bancorp signed a definitive agreement with First
Merchants Corporation, located in Muncie, Indiana, to merge with First Merchants
Corporation. Under the terms of the agreement, upon closing of this transaction,
Commerce National Bank will become 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 2003.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Net income for the nine-month period ended September 30, 2002 was $2,373,646, a
3.4% decrease, compared to $2,458,219 during the same period in 2001. The
decrease in earnings was primarily driven by an increase in noninterest expenses
of $453,000, offset by a $196,000 increase in net interest income, by a decrease
in the provision for loan losses of $70,000, by an increase in noninterest
income of $44,000 and by a decrease in federal income tax expense of $58,000.
NET INTEREST INCOME
Net interest income is the largest component of CNBC's income and is affected by
the interest rate environment and the volume and composition of interest-earning
assets, such as loans and securities, and interest-bearing liabilities, such as
deposits and borrowings. Net interest income increased by $196,000 for the
nine-month period ended September 30, 2002, compared to the same period in 2001.
This
E-15
CNBC BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
increase in net interest income was due to the growth in average
interest-bearing assets and liabilities reduced by the effects of lower market
interest rates and compressed interest spreads. Total interest income for the
nine months ended September 30, 2002 declined $1,471,000, or 9.3%, compared to
the nine months ended September 30, 2001, while interest expense decreased
$1,667,000, or 21.5%, for the same period. The net interest margin for the nine
months ended September 30, 2002 was 3.81%, compared to 4.17% for the same period
in 2001. The margin decline in 2002 was the result of the continuing compression
of interest rates, a higher percentage of CNBC's funding sources in borrowings,
and the inability to lower deposit rates to the level needed to offset declining
asset yields. Offsetting these factors was an increase in the percent of average
assets that earn interest and an increase in the percent of earning assets that
are loans.
PROVISION FOR LOAN LOSSES
The decrease in the provision for loan losses of $70,000 for the nine months
ended September 30, 2002 over the same period in the prior year was due to net
loan recoveries of $51,000 received during the first nine months of 2002 versus
net loan charge-offs of $148,000 incurred during the first nine months of 2001.
Impaired loans increased from $674,900 at December 31, 2001 to $2,164,925 at
September 30, 2002. The allowance allocated for such loans increased from
$250,000 to $385,000. Impaired loans are still low as a percentage of loans,
totaling 0.78% at September 30, 2002. The allowance for loan losses was 1.35% of
total loans outstanding, compared to 1.33% of total loans outstanding at
December 31, 2001.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 2002 increased
$44,000, representing an 8.2% increase over the same period in the prior year.
The increase was the result of a $50,000 increase in service charges on deposits
as a result of a declining earnings credit rate and an increase of $22,000 in
fee income from CNBC Retirement Services.
On June 17, 2002, Commerce National sold its office building at a gross sales
price of $1,750,000, resulting in a gain on the sale of the building in the
amount of $6,995. Gains on sales of assets in 2001 of $17,707 related to
investment securities that were called.
NONINTEREST EXPENSE
Noninterest expense increased $453,000, or 10.4% for the nine months ended
September 30, 2002 versus the nine months ended September 30, 2001. Increases in
salaries and benefits of $218,000 accounted for 48.3% of this increase. This
increase is the result of normal salary increases and staff additions to support
CNBC's growth.
In March 2002, Commerce National signed a ten-year lease agreement to lease two
floors of a four-story office building commencing September 1, 2002. Commerce
National has leased 38,700 square feet of space, which is approximately 75% more
space than its previous building utilization. Management anticipates that
Commerce National will sublease approximately 4,500 square feet of the new space
at a future date. On October 14, 2002, the move to our new office at 3650
Olentangy River Road was successfully completed. Management believes that the
new office facility will better accommodate CNBC's future growth and will
provide an excellent opportunity to expand our customer base and serve the needs
of the medical, university and new business communities of which CNBC will be a
part. Commerce National entered into a short-term lease with the buyer of our
old office building, which terminates on November 4, 2002. This lease calls for
total lease payments over the lease term of
E-16
CNBC BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
$118,000. As a result of these new lease agreements, occupancy costs increased
$83,000, or 28.7%, for the nine months ended September 30, 2002 as compared to
the same period in the prior year.
On August 28, 2002, CNBC Bancorp signed a definitive agreement with First
Merchants Corporation, located in Muncie, Indiana, to merge with First Merchants
Corporation. Merger related expenses of $172,000 accounted for 38.0% of the
increase in noninterest expense for the nine month period.
Federal income tax expense decreased $58,000 for the nine months ended September
30, 2002 versus the nine months ended September 2001. The decrease in federal
income tax expense was the result of CNBC's decreased profitability. CNBC's
effective tax rate was 34.5% for the nine months ended September 30, 2002
compared to 34.8% for the nine months ended September 30, 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Third quarter income in 2002 was $712,836, a 14.4% decrease over the $832,638
for the same period in 2001. The decrease in earnings was due to an increase in
the provision for loan losses of $34,000 and an increase in noninterest expense
of $278,000, offset by improved net interest income of $99,000, an increase in
noninterest income of $26,000, and decreased income tax expense of $68,000.
NET INTEREST INCOME
Interest income for the third quarter 2002 was $4,906,000, a decrease of
$252,000, or 4.9% over the same period in 2001. Interest expense for the third
quarter 2002 was $2,090,000, a decrease of $351,000, or 14.4%, over the same
period in 2001. Interest expense on savings balances declined $265,000 as the
result of a sharp decline in short-term interest rates. Interest expense on time
deposits declined $206,000 as higher rate time deposits are being renewed or
replaced at lower current rates. Interest expense on borrowings increased
$125,000 as quarterly average borrowings increased $13.6 million at September
30, 2002 as compared to September 30, 2001. The net interest margin for the
three months ended September 30, 2002, was 3.70% compared to 4.08% for the same
period in 2001.
NONINTEREST EXPENSE
Noninterest expense increased $278,000 for the three months ended September 30,
2002 versus the three months ended September 30, 2001. Increases in salaries and
benefits of $49,000 accounted for 17.6% of the increase in total noninterest
expense for the three months ended September 30, 2002 as compared to the same
period in the prior year. This increase is the result of normal salary increases
and staff additions to support CNBC's growth.
In March 2002, Commerce National signed a ten-year lease agreement to lease two
floors of a four-story office building commencing September 1, 2002. Commerce
National also entered into a short-term lease with the buyer of our old office
building which terminates on November 4, 2002, with a 30 day renewal option, and
calls for lease payments totaling $118,000. As a result of these new lease
agreements, occupancy costs increased $62,000, or 63.5%, for the three months
ended September 30, 2002 as compared to the same period in the prior year. This
increase accounted for 22.3% of the increase in noninterest expense in 2002 as
compared to 2001.
On August 28, 2002, CNBC Bancorp signed a definitive agreement with First
Merchants Corporation, located in Muncie, Indiana, to merge with First Merchants
Corporation. As previously stated, merger
E-17
CNBC BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
related expenses accounted for $172,000, or 61.8%, of the increase in
noninterest expense for the three month period.
LIQUIDITY
CNBC's objective in managing liquidity is to maintain the ability to meet the
cash flow needs of its customers, such as new loan requests or deposit
withdrawals, as well as its own financial commitments. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan prepayments are more influenced by interest rates, general
economic conditions and competition. The principal sources of liquidity are
deposits, loan principal payments, money market mutual funds, securities
available for sale, federal funds sold and cash and deposits with banks. Along
with its liquid assets, CNBC has additional sources of liquidity available to
ensure that adequate funds are available as needed. These sources include, but
are not limited to, the sale of loan participations to other financial
institutions, the purchase of federal funds and borrowing from the Federal Home
Loan Bank or Federal Reserve Bank. Management believes that it has the capital
adequacy, profitability and reputation to meet its current and foreseeable
liquidity needs.
At September 30, 2002, Commerce National had $54.7 million in available
short-term funding sources to mitigate risks from changes in deposit account
balances or other liquidity needs. These sources include cash and short-term
investments of $24.0 million and unpledged investment securities of $1.5
million. Other funding sources include $12.8 million available under a line of
credit with the Federal Home Loan Bank ("FHLB") and federal fund lines of $16.4
million with other banks. Commerce National has a blanket pledge on its 1-4
family real estate loans that would allow borrowings with the FHLB of an
additional $7.9 million.
In addition to the FHLB line of credit, Commerce National also has collateral
pledged to the Federal Reserve Bank that would allow borrowings at the discount
window of $66,799,000. No borrowings with the Federal Reserve were outstanding
at September 30, 2002.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions which affected CNBC's level of cash and cash equivalents, cash
flows and liquidity during the first nine months of 2002 were net increases of
loans of $28.8 million, net increases in deposits of $15.1 million, principal
payments on Federal Home Loan Bank advances of $12.2 million and advances from
Federal Home Loan Bank of $24.3 million.
CAPITAL RESOURCES
Total shareholders' equity increased $1,118,000 between December 31, 2001 and
September 30, 2002. The increase was primarily due to earnings retained net of
$700,000 in treasury stock purchases and $598,000 of dividends declared. In
2002, CNBC began paying its dividend quarterly versus semi-annually as in the
past.
CNBC and Commerce National are both subject to regulatory capital requirements.
These requirements measure capital levels utilizing three different
calculations. Based on these calculations, CNBC and Commerce National are
assigned to a capital category which, among other things, dictates certain
E-18
CNBC BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
business practices of the organization, the level of Commerce National's FDIC
insurance premiums and which process is followed in obtaining regulatory
approvals necessary for branch applications, mergers and similar transactions.
CNBC's capital requirements are measured on a combined basis with Commerce
National, CRS, Inc. and CNBC Statutory Trust I, using consolidated totals.
Commerce National is measured independently. As of September 30, 2002 and
December 31, 2001, CNBC and Commerce National were classified in the "well
capitalized" category. It is management's policy to manage the growth of
Commerce National and provide for the appropriate capital resources that will
result in Commerce National maintaining its classification as a "well
capitalized" institution. Similarly, it is management's policy to maintain the
classification of CNBC as either "adequately capitalized" or "well capitalized."
Actual capital ratios are as follows as of September 30, 2002:
Total Risk-based
Leverage Tier 1 Capital Capital
-------- ------- -------
Regulatory Capital Requirements:
Adequately Capitalized 4.0% 4.0% 8.0%
Well Capitalized 5.0% 6.0% 10.0%
CNBC 9.1% 11.1% 12.3%
Commerce National 7.2% 8.8% 12.1%
In 2002 and 2001, CNBC approved common stock repurchase programs. Stock
repurchased pursuant to these programs may be used for general corporate
purposes and may be reissued. The shares will be purchased from time to time in
the open market or through private transactions at market price. CNBC purchased
33,085 shares in the first nine months of 2002 and 62,894 shares during the year
ended December 31, 2001. In accordance with the merger agreement, CNBC must
obtain the consent of First Merchants Corporation prior to any future repurchase
of shares.
In February 2001, CNBC issued $4.0 million of Obligated Mandatorily Redeemable
Capital Securities through a special purpose subsidiary in a private offering.
These securities are included in Tier 1 Capital for CNBC Bancorp's regulatory
capital calculation, however the interest paid is deductible for tax purposes.
CNBC injected $2.0 million of the net proceeds into Commerce National in the
form of subordinated notes.
On April 24, 2001, CNBC's shareholders approved an increase in its authorized
shares from two million to three million which provided the necessary shares for
its Board of Directors to approve a three-for-two stock split effected in the
form of a 50% stock dividend payable on May 10, 2001. All shares and per share
amounts have been restated to reflect the three-for-two stock split.
Cash dividends declared by CNBC totaled $598,000, or $0.30 per share, during the
first nine months of 2002. This compares to dividends of $372,000, or $0.18 per
share, for the same period in 2001. In 2002, CNBC began paying its dividend
quarterly versus semi-annually in the past. CNBC is restricted by its merger
agreement from paying any quarterly dividend greater than $0.10 cents per share.
E-19
CNBC BANCORP
FORM 10-QSB
Quarter ended September 30, 2002
PART I - Item 3
CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of CNBC
Bancorp's management, including our President and Treasurer, of the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14(c) and 15d-14(c)). Based on their evaluation, our President and
Treasurer have concluded that CNBC Bancorp's disclosure controls and procedures
are, to the best of their knowledge, effective to ensure that information
required to be disclosed by CNBC Bancorp in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. Subsequent to the date of their evaluation, our President and Treasurer
have concluded that there were no significant changes in CNBC's internal
controls or in other factors that could significantly affect its internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
E-20
CNBC BANCORP
FORM 10-QSB
Quarter ended September 30, 2002
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a)(1) Exhibit 2 - Agreement of Reorganization and Merger between
First Merchants Corporation and CNBC Bancorp dated August 28,
2002. Reference is made to CNBC Bancorp's Current Report on
Form 8-K filed August 28, 2002.
(2) Exhibit 10.1 - CNBC Bancorp 2002 Stock Option Plan. Reference
is made to Exhibit 10.7 to Form 10-QSB dated March 31, 2002.
(3) Exhibit 10.2 - Employment Agreement dated as of April 1,
2002, by and between and among Commerce National Bank, CNBC
Bancorp and Pamela S. Miller. Reference is made to Exhibit
10.8 to Form 10-QSB dated March 31, 2002.
(4) Exhibit 10.3 - Employment Agreement dated as of April 1,
2002, by and between and among Commerce National Bank, CNBC
Bancorp and Mark Sbrochi. Reference is made to Exhibit 10.3
to Form 10-QSB dated June 30, 2002.
(5) Exhibit 11 - Computation of Earnings per Share. Reference is
made to CNBC Bancorp Form 10-QSB dated September 30, 2002,
Note 1, page 6, which is incorporated herein by reference.
(6) Exhibit 99.1 - Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
E-21
CNBC BANCORP
(7) Exhibit 99.2 - Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) A report on Form 8-K was filed August 28, 2002 regarding CNBC
Bancorp's definitive agreement with First Merchants Corporation,
located in Muncie, Indiana, to merge with First Merchants
Corporation.
E-22
CNBC BANCORP
SIGNATURES
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CNBC BANCORP
----------------------------------------------
(Registrant)
Date: November 13, 2002 /s/ Thomas D. McAuliffe
--------------------- ----------------------------------------------
(Signature)
Thomas D. McAuliffe
Chairman and President, CNBC Bancorp
Chief Executive Officer, Commerce
National Bank
Date: November 13, 2002 /s/ Pamela S. Miller
--------------------- ----------------------------------------------
(Signature)
Pamela S. Miller
Treasurer, CNBC Bancorp
Chief Financial Officer, Commerce
National Bank
--------------------------------------------------------------------------------
E-23
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-QSB
I, Thomas D. McAuliffe, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of CNBC Bancorp;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
E-24
Date: November 13, 2002
------------------
/s/ Thomas D. McAuliffe
-------------------------------------
Thomas D. McAuliffe, Chairman and President, CNBC Bancorp
Chief Executive Officer, Commerce National Bank
E-25
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-QSB
I, Pamela S. Miller, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of CNBC Bancorp;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
-------------------
/s/ Pamela S. Miller
------------------------------
Pamela S. Miller, Treasurer, CNBC Bancorp
Chief Financial Officer, Commerce National Bank
E-26
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
-------------- ----------- -----------
2 Agreement of Reorganization and Merger between Reference is made to CNBC
First Merchant's Corporation and CNBC Bancorp Bancorp's Current Report on
dated August 28, 2002. Form 8-K filed August 28, 2002,
which is incorporated herein by
reference.
10.1 CNBC Bancorp 2002 Stock Option Plan Reference is made to Exhibit 10.7 to
Form 10-QSB dated March 31,
2002, which exhibit is incorporated
herein by reference.
10.2 Employment Agreement dated as of April 1, 2002 Reference is made to Exhibit 10.8 to
by and between and among Commerce National Bank, Form 10-QSB dated March 31,
CNBC Bancorp and Pamela S. Miller 2002, which exhibit is incorporated
herein by reference.
10.3 Employment Agreement dated as of April 1, 2002 Reference is made to Exhibit 10.3 to
by and between and among Commerce National Bank CNBC's Form 10-QSB dated June
CNBC Bancorp and Mark Sbrochi 30, 2002.
11 Computation of Earnings per Share Reference is made to CNBC's
Form 10-QSB dated September 30,
2002, Note 1, page 6, which exhibit
is incorporated herein by reference.
99.1 Certification of Principal Executive Officer pursuant Reference is made to Exhibit 99.1 to
to 18 U.S.C. Section 1350, As Adopted Pursuant to CNBC's Form 10-QSB dated
Section 906 of the Sarbanes-Oxley Act of 2002. September 30, 2002.
99.2 Certification of Principal Financial Officer pursuant Reference is made to Exhibit 99.2 to
to 18 U.S.C. Section 1350, As Adopted Pursuant to CNBC's Form 10-QSB dated
Section 906 of the Sarbanes-Oxley Act of 2002. September 30, 2002.
E-27
Exhibit 99.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CNBC Bancorp ("CNBC") on Form 10-QSB
for the period ending September 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned Principal
Executive Officer of CNBC hereby certifies, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934: and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of CNBC.
/s/ Thomas D. McAuliffe
---------------------------------------------
Thomas D. McAuliffe, Chairman and President, CNBC Bancorp
Chief Executive Officer, Commerce National Bank
November 13, 2002
E-28
Exhibit 99.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CNBC Bancorp ("CNBC") on Form 10-QSB
for the period ending September 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned Principal
Financial Officer of CNBC hereby certifies, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934: and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of CNBC.
/s/ Pamela S. Miller
-------------------------------------
Pamela S. Miller, Treasurer, CNBC Bancorp
Chief Financial Officer, Commerce National Bank
November 13, 2002
E-29
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. None
5. Opinion of Bingham McHale LLP (legality)..................................269
6-7. None
8. a. Opinion of Bingham McHale LLP (tax matters)...........................271
b. Opinion of Squire, Sanders & Dempsey L.L.P. (tax matters)...............*
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), (C), (I)
e. First Merchants Corporation Unfunded Deferred Compensation
Plan..................................................................(D)
f. First Merchants Corporation Supplemental Executive
Retirement Plan and amendments thereto................................(F)
g. First Merchants Corporation 1999 Long-term Equity
Incentive Plan........................................................(G)
h. First Merchants Corporation Senior Management Incentive
Compensation Program..................................................(H)
11-20. None
21. Subsidiaries of
Registrant...............................................................273
22. None
23. a. Consent of BKD, LLP...................................................275
b. Consent of Crowe, Chizek and Company LLP..............................276
c. Consent of Crowe, Chizek and Company LLP..............................277
d. Consent of Bingham McHale LLP, LLP (legality).........................(L)
e. Consent of Bingham McHale LLP, LLP (tax matters)......................(L)
f. Consent of Squire, Sanders & Dempsey L.L.P. (tax matters).............(L)
g. Consent of Stifel, Nicholaus & Company, Incorporated..................278
24. Power of Attorney included in "Signatures" section.....................262
25-98. None
99. a. Form of Proxy for CNBC Bancorp Shareholders Meeting...................279
b. CNBC Bancorp's Annual Report to Shareholders for its fiscal year
ended December 31, 2001...............................................(J)
II-2
c. CNBC Bancorp's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2002......................................(K)
d. Consent of Director Nominee ..........................................280
e. Election Form for CNBC Bancorp Shareholders...........................281
f. Voting Agreement......................................................289
(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.
* To be filed by amendment.
(A) Included as Appendix A to the Prospectus.
(B) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 1999.
(C) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 2002.
(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, 1997.
(G) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (SEC File No. 333-80117) effective on June 7, 1999.
(H) Incorporated by reference to Registrant's Annual Report on Form 10-K for
year ended December 31, 2000.
(I) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
(J) Included as Appendix D to the Prospectus.
(K) Included as Appendix E to the Prospectus.
II-3
(L) Included in opinion.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) 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 (c)(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
II-4
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 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,
on the 30th day of November, 2002.
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 on the 30th day of November, 2002, 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/ Mark K. Hardwick
--------------------------------------------
Mark K. Hardwick 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/ Richard A. Boehning
--------------------------------------------
Richard A. Boehning 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/ Robert T. Jeffares
--------------------------------------------
Robert T. Jeffares 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-2
/s/ John E. Worthen
--------------------------------------------
John E. Worthen Director
S-3
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. None
5. Opinion of Bingham McHale LLP (legality)..................................................269
6.-7. None
8. a. Opinion of Bingham McHale LLP (tax matters)...........................................271
b. Opinion of Squire, Sanders & Dempsey L.L.P. (tax matters)...............................*
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), (C), (I)
e. First Merchants Corporation Unfunded Deferred Compensation Plan.......................(D)
f. First Merchants Corporation Supplemental Executive Retirement
Plan and amendments thereto...........................................................(F)
g. First Merchants Corporation 1999 Long-term Equity Incentive Plan......................(G)
h. First Merchants Corporation Senior Management Incentive Compensation
Program...............................................................................(H)
11-20. None
21. Subsidiaries of Registrant...............................................................273
22. None
23. a. Consent of BKD, LLP...................................................................275
b. Consent of Crowe, Chizek and Company LLP..............................................276
c. Consent of Crowe, Chizek and Company LLP..............................................277
d. Consent of Bingham McHale LLP, LLP (legality).........................................(L)
e. Consent of Bingham McHale LLP, LLP (tax matters)......................................(L)
f. Consent of Squire, Sanders & Dempsey L.L.P. (tax matters).............................(L)
g. Consent of Stifel, Nicholaus & Company, Incorporated..................................278
24. Power of Attorney included in "Signatures" section....................................262
25-99. None
99. a. Form of Proxy for CNBC Bancorp Shareholders Meeting...................................279
b. CNBC Bancorp's Annual Report to Shareholders for its fiscal
year ended December 31, 2001..........................................................(J)
c. CNBC Bancorp's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2002......................................................(K)
d. Consent of Director Nominee ..........................................................280
e. Election Form for CNBC Bancorp Shareholders...........................................281
f. Voting Agreement......................................................................289
(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.
* To be filed by amendment.
(A) Included as Appendix A to the Prospectus.
(B) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 1999.
(C) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 2002.
(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, 1997.
(G) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (SEC File No. 333-80117) effective on June 7, 1999.
(H) Incorporated by reference to Registrant's Annual Report on Form 10-K for
year ended December 31, 2000.
(I) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
(J) Included as Appendix D to the Prospectus.
(K) Included as Appendix E to the Prospectus.
(L) Included in opinion.