<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
420 South Buckeye Street
Osgood, Indiana 47037-0176
SPECIAL MEETING OF SHAREHOLDERS
A MERGER PROPOSAL -- YOUR
VOTE IS VERY IMPORTANT
The Board of Directors of Hoosier Hills Financial Corporation ("HHFC") has
unanimously approved a merger with National City Bancshares, Inc. ("NCBE"), a
$1.5 billion multi-bank holding company headquartered in Evansville, Indiana.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO
SHAREHOLDERS AND IS IN THEIR BEST INTERESTS. THE BOARD OF DIRECTORS
THEREFORE UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE AND ADOPT THE
MERGER AGREEMENT. A VOTE OF THE NCBE SHAREHOLDERS IS NOT REQUIRED TO APPROVE
AND ADOPT THE MERGER AGREEMENT.
HHFC is calling a Special Meeting of shareholders at which you will be asked
to approve and adopt the merger agreement. The affirmative vote of the
holders of a majority of the outstanding shares of HHFC common stock is
required.
If the merger is completed, holders of HHFC will receive shares of NCBE
common stock having a value of between $59.63 and $82.42 for each share of
HHFC common stock, subject to adjustment depending on the trading price of
NCBE common stock before the merger. The issuance of NCBE common stock in
the merger is expected to be tax-free for federal income tax purposes.
The date, time and place of the Special Meeting:
September 21, 1998
11:00 a.m.
The Ripley County Bank
420 South Buckeye Street
Osgood, Indiana
The attached Proxy Statement/Prospectus provides you with detailed
information about the proposed merger. In addition, you may obtain other
information about NCBE from documents filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
Whether or not you plan to attend the Special 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 without indicating how you wish to vote, your
proxy will count as a vote in favor of the approval and adoption of the
merger agreement. If you fail to return your proxy, the effect will be a vote
against approval and adoption of the merger agreement. YOUR VOTE IS VERY
IMPORTANT.
ON BEHALF OF THE BOARD OF DIRECTORS OF HHFC, I URGE YOU TO VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
FRED R. CRUM
President and
Chief Executive Officer
<PAGE>
TO THE SHAREHOLDERS OF HOOSIER HILLS FINANCIAL CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held
Monday, September 21, 1998
The Ripley County Bank
420 South Buckeye Street
Osgood, Indiana
The Board of Directors of Hoosier Hills Financial Corporation ("HHFC") asks
you to attend a Special Meeting of HHFC's shareholders. The Special Meeting
will be held at the offices of The Ripley County Bank, 420 South Buckeye
Street, Osgood, Indiana. At the Special Meeting, HHFC's shareholders will
vote on the following:
1. PROPOSED MERGER. Shareholders will be asked to approve and adopt the
Agreement and Plan of Merger dated April 21, 1998 that provides
for the merger of HHFC with National City Bancshares, Inc.
("NCBE"). In the merger, HHFC shareholders will receive shares of
NCBE common stock having a value between $59.63 and $82.42 for
each share of HHFC common stock, subject to adjustment depending
on the trading price of NCBE common stock before the merger. The
Agreement and Plan of Merger is attached as Appendix A to the
accompanying Proxy Statement/Prospectus; and
2. OTHER BUSINESS. Shareholders will also consider and vote on any
other matters that properly come before the Special Meeting or
any adjournments or postponements.
You are entitled to notice of and to vote at the Special Meeting (or any
adjournments or postponements of it) if you were a HHFC shareholder at the
close of business on July 31, 1998.
By Order of the Board of Directors,
Fred R. Crum, Secretary
August 14, 1998
Osgood, Indiana
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
THE PROXY STATEMENT/PROSPECTUS DESCRIBES YOUR RIGHTS TO DISSENT FROM THE
MERGER AND THE PROCEDURES YOU MUST FOLLOW TO EXERCISE THOSE RIGHTS.
WE INVITE YOU TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED. PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY IN
THE ACCOMPANYING POSTAGE-PAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY
VOTE IN PERSON, WHICH WILL REVOKE YOUR SIGNED PROXY. YOU MAY ALSO REVOKE
YOUR PROXY AT ANY TIME BEFORE THE VOTING THEREOF AT THE SPECIAL MEETING.
<PAGE>
Filed pursuant to Rule 424(b)(2)
Registration No. 333-60289
HOOSIER HILLS FINANCIAL CORPORATION
PROXY STATEMENT FOR SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD
SEPTEMBER 21, 1998
---------------------------
NATIONAL CITY BANCSHARES, INC.
PROSPECTUS
FOR UP TO 775,625 SHARES OF COMMON STOCK
National City Bancshares, Inc. ("NCBE") proposes to acquire Hoosier
Hills Financial Corporation ("HHFC") through the merger of HHFC into NCBE.
The parties cannot complete the merger unless HHFC's shareholders
approve the Agreement and Plan of Merger. HHFC shareholders will vote on the
Agreement and Plan of Merger at a Special Meeting of Shareholders of HHFC on
September 21, 1998. This Proxy Statement/Prospectus is being furnished to
HHFC shareholders in connection with the Board of Directors of HHFC's
solicitation of proxies for use at the Special Meeting.
If HHFC and NCBE merge, HHFC shareholders will receive shares of NCBE's
common stock with a value of between $59.63 and $82.42 for each share of HHFC
common stock, subject to adjustment depending on the trading price of NCBE's
common stock before the merger. This Proxy Statement/Prospectus is also a
Prospectus of NCBE relating to the shares of common stock NCBE will issue in
the merger.
NCBE's common stock trades on the Nasdaq National Market Tier of the
Nasdaq Stock Market under the symbol "NCBE".
THE "RISK FACTORS" SECTION OF THIS PROXY STATEMENT/PROSPECTUS (BEGINNING
ON PAGE 8) LISTS SOME OF THE FACTORS YOU SHOULD CONSIDER IN EVALUATING THE
MERGER.
- ------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the NCBE common stock to be issued in the merger or
determined if this Proxy Statement/Prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
- ------------------------------------------------------------------------------
Proxy Statement/Prospectus dated August 13, 1998, and first mailed to
shareholders on August 14, 1998.
<PAGE>
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT NCBE THAT IS NOT INCLUDED IN OR DELIVERED WITH
THIS DOCUMENT. THE INCORPORATED INFORMATION IS AVAILABLE WITHOUT CHARGE TO
HHFC SHAREHOLDERS UPON WRITTEN OR ORAL REQUEST. REQUESTS SHOULD BE DIRECTED
AS FOLLOWS:
NATIONAL CITY BANCSHARES, INC.
P.O. BOX 868
EVANSVILLE, INDIANA 47705-0868
ATTN: STEPHEN C. BYELICK, JR.
PH.: 812-464-9864
TO OBTAIN TIMELY DELIVERY, PLEASE REQUEST THE INFORMATION NO LATER THAN
SEPTEMBER 14, 1998.
TABLE OF CONTENTS
<TABLE>
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Page
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QUESTIONS AND ANSWERS
ABOUT THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Risks Associated with Acquisitions. . . . . . . . . . . . . . . . . . . . . . .8
Impact of Interest Rate Changes . . . . . . . . . . . . . . . . . . . . . . . .8
Credit Risk and Loan Concentration. . . . . . . . . . . . . . . . . . . . . . .8
Regulatory Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Exposure to Local Economic Conditions . . . . . . . . . . . . . . . . . . . . .9
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Status of NCBE as a Bank Holding Company. . . . . . . . . . . . . . . . . . . .9
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Date, Time, Place and Purpose . . . . . . . . . . . . . . . . . . . . . . . . 10
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Voting and Revocation of Proxies. . . . . . . . . . . . . . . . . . . . . . . 10
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
NCBE's Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . 13
HHFC's Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . 13
Fairness Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Recommendation of HHFC's
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Closing and Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Conversion of HHFC Common . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Procedures for Exchange of Certificates . . . . . . . . . . . . . . . . . . . 18
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . 22
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Conditions to the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Termination and Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
No Solicitation; Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . 24
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . 25
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Resale of NCBE Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Interests of Certain Persons in the Merger. . . . . . . . . . . . . . . . . . 27
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
COMPARATIVE STOCK PRICES
AND DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
INFORMATION CONCERNING NCBE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . . . . . . . . 40
INFORMATION CONCERNING
HOOSIER HILLS FINANCIAL
CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Selected Financial Data of HHFC . . . . . . . . . . . . . . . . . . . . . . . 42
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Management's Discussion and Analysis
of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 50
Risk-based Capital Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . . . . . . . . 56
DESCRIPTION OF NCBE CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 57
Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
NCBE Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
NCBE Preferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Certain Provisions of Articles of Incorporation
and By-Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Certain Provisions of the IBCL. . . . . . . . . . . . . . . . . . . . . . . . 58
Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
COMPARISON OF SHAREHOLDER
RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Classified Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 58
Business Combinations Not Involving an
Interested Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . 58
Business Combinations Involving an
Interested Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . 59
Removal of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Amendments to Articles of Incorporation . . . . . . . . . . . . . . . . . . . 59
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Special Meetings of Shareholders. . . . . . . . . . . . . . . . . . . . . . . 60
Control Share Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . 60
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Limitation of Liability of Directors. . . . . . . . . . . . . . . . . . . . . 61
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
WHERE YOU CAN FIND MORE
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
INDEX TO HHFC FINANCIAL
STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
APPENDIX A -
Agreement and Plan of Merger dated as of
April 21, 1998 between National City
Bancshares, Inc. and Hoosier Hills
Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
APPENDIX B -
Fairness Opinion of Professional Bank
Services, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-1
APPENDIX C -
Excerpts of the Indiana Business
Corporation Law (Dissenters' Rights). . . . . . . . . . . . . . . . . . . . .C-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL HHFC SHAREHOLDERS RECEIVE IN THE MERGER?
A: In the merger, NCBE expects to issue shares of its common stock having a
value between $59.63 and $82.42 for each outstanding share of HHFC common
stock. The value of the NCBE shares you will receive will depend upon an
average trading value of NCBE common stock prior to the merger. That value
(the "Average NCBE Value") will be the average of the means between the
highest and lowest per share trading sales prices for a share of NCBE
common stock over the 10 trading day period ending on or before the fifth
business day before the closing of the merger.
- - If the Average NCBE Value is $34.00 to $47.00, each HHFC share will convert
into 1.7537 shares of NCBE common stock.
- - If the Average NCBE Value is more than $47.00, each HHFC share will convert
into shares of NCBE common stock valued at the Average NCBE Value having an
aggregate value of $82.42.
- - If the Average NCBE Value is $32.00 or more but less than $34.00 (or less
than $32.00 and the HHFC Board elects not to terminate the merger
agreement), each HHFC share will convert into the lesser of (a) 1.8633
shares of NCBE common stock or (b) shares of NCBE common stock valued at
the Average NCBE Value having an aggregate value of $59.63.
- - If the Average NCBE Value is less than $32.00, HHFC's Board may terminate
the merger agreement unless NCBE agrees to issue shares of NCBE common
stock valued at the Average NCBE Value having an aggregate value of
$59.63.
- The HHFC Board is not required to resolicit shareholder approval
should it decide not to exercise this right. THEREFORE, HHFC
SHAREHOLDERS COULD RECEIVE SHARES OF NCBE COMMON STOCK HAVING A VALUE
OF LESS THAN $59.63 PER SHARE.
- The HHFC Board intends to make any decision whether to terminate the
merger agreement or to resolicit its shareholders, in consultation
with its financial and legal advisors, only after considering all
relevant facts and circumstances that exist at such time as the
Average NCBE Value declines to less than $32.00.
The actual value of the shares of NCBE common stock to be issued in the
merger cannot be determined at this time since it depends on trading prices
reported prior to the time the merger is closed. The last reported sales
price on August 7, 1998 for NCBE common stock as reported by the Nasdaq Stock
Market was $36.75. If the merger was closed on August 7, 1998, the Average
NCBE Value would have been $39.18, and the exchange ratio would have been
1.7537 shares of NCBE common stock for each share of HHFC common stock.
EXAMPLE: The number of shares of NCBE common stock you will receive will depend
on the Average NCBE Value, as follows:
<TABLE>
<CAPTION>
For an approximate
If the Average Then the value (based on the
NCBE Value exchange Average NCBE
is: ratio is: Value) of:
---------------------------------------------------------------------
<S> <C> <C>
$50.00 1.6484 $82.42
$47.00 1.7537 $82.42
$45.00 1.7537 $78.92
$39.50 1.7537 $69.27
$34.00 1.7537 $59.63
$32.00 1.8633 $59.63
$30.00* 1.8633 $55.90*
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</TABLE>
_______________
* Subject to HHFC's right to terminate the merger agreement unless NCBE
adjusts the number of NCBE shares issued to achieve a $59.63 per share
value.
1
<PAGE>
HHFC shareholders should note that the exact number of shares to be issued
in the merger is not likely to be known at the time of the Special Meeting.
Q: WHY IS HHFC PROPOSING TO MERGE WITH NCBE?
A: HHFC's Board has unanimously concluded that the proposed merger with NCBE
is in the best interests of HHFC and The Ripley County Bank (the "Bank"),
the shareholders of HHFC, the employees of HHFC and the Bank, and the
communities they serve. In reaching its conclusion, the HHFC Board
considered the factors set forth below. To review the reasons in greater
detail, see page 13.
- The HHFC Board believes the financial terms of the merger compare
favorably to the financial terms of recent transactions in which
financial institutions comparable to HHFC were acquired, based on
information provided by HHFC's financial advisor.
- The HHFC Board concluded, based on certain assumptions, that to
provide the same value to its shareholders as an independent
institution that the merger with NCBE would provide, HHFC would have
to achieve annual growth in its earnings per share significantly
higher than its historical rates.
- A stock-for-stock exchange with NCBE would give HHFC shareholders the
opportunity to acquire in a tax-free transaction stock of a publicly
traded company whose expected earnings per share growth is faster than
HHFC's own at a price representing a premium over the current book
value per share of HHFC common stock.
- In the view of the HHFC Board, HHFC would gain from NCBE's experience
in providing a broad range of modern banking services while retaining
the knowledge and experience of the current management of HHFC and the
Bank concerning the Ripley County community.
- Professional Bank Services, Inc. ("PBS"), HHFC's financial advisor,
has issued its opinion that the merger is fair to HHFC's shareholders
from a financial point of view.
Q: WHAT ARE THE TAX CONSEQUENCES TO HHFC SHAREHOLDERS?
A: The merger is intended to qualify as a tax-free reorganization for federal
income tax purposes. No gain or loss will be recognized by HHFC
shareholders upon receipt of shares of NCBE common stock. To review the
tax consequences in greater detail, see page 25.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy in the enclosed return envelope as soon as
possible, so that your shares may be represented at the special HHFC
shareholders' meeting. The HHFC Board unanimously recommends that you vote
FOR approval and adoption of the merger agreement.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, NCBE will send you written instructions
for exchanging your share certificates.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: Neither HHFC nor NCBE expects any changes in dividend policies before the
merger. After the merger, the NCBE annualized dividend rate is expected to
be $0.72 per share.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as quickly as possible. In
addition to the approval of HHFC shareholders, we must also obtain
regulatory approvals. We hope to complete the merger by September 30,
1998.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. TO UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE
DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU SHOULD READ CAREFULLY THIS
ENTIRE DOCUMENT AND THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU
CAN FIND MORE INFORMATION" ON PAGE 62. WE HAVE INCLUDED PAGE REFERENCES IN
PARENTHESES TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF THE TOPICS PRESENTED
IN THIS SUMMARY.
PARTIES TO THE MERGER
NATIONAL CITY BANCSHARES, INC.
227 MAIN STREET
EVANSVILLE, INDIANA 47708
(812) 464-9677
National City Bancshares, Inc. is an Indiana corporation that owned, as of
July 30, 1998, 14 financial institution subsidiaries. These subsidiaries
provide a wide range of banking services from 47 locations in the tri-state area
of Indiana, Kentucky and Illinois surrounding Evansville, Indiana. As of
March 31, 1998, NCBE had total consolidated assets of $1.5 billion, total loans
of $1.0 billion, total deposits of $1.2 billion and total shareholders' equity
of $149.8 million.
HOOSIER HILLS FINANCIAL CORPORATION
320 SOUTH BUCKEYE STREET
OSGOOD, INDIANA 47037
(812) 689-4202
Hoosier Hills Financial Corporation is an Indiana corporation that owns The
Ripley County Bank. As of March 31, 1998, HHFC had total consolidated assets of
$109.5 million, net loans of $85.6 million, total deposits of $86.6 million, and
total shareholders' equity of $11.4 million. The Bank has three banking offices
with one office in each of Osgood, Milan and Versailles, Indiana.
SPECIAL MEETING OF HHFC SHAREHOLDERS
MEETING INFORMATION (See page 10).
The Special Meeting of HHFC shareholders will be held at the office of the
Bank located at 420 South Buckeye Street, Osgood, Indiana on September 21, 1998,
at 11:00 a.m., local time, to vote to approve and adopt the merger agreement.
The affirmative vote of the holders of a majority of the issued and outstanding
shares of HHFC common stock is required to approve and adopt the merger
agreement. On the record date, there were 416,262 shares of HHFC common stock
outstanding.
If you owned shares of HHFC common stock as of the close of business on
July 31, 1998, the record date, you are entitled to vote. You will have one
vote for each share you owned on the record date.
SECURITY OWNERSHIP OF MANAGEMENT AND THE HHFC ESOP
As of the close of business on the record date, the directors and executive
officers of HHFC and their affiliates beneficially owned 204,889 shares of HHFC
common stock, or 49.2%, of all outstanding shares entitled to vote on the
merger. As of the close of business on the record date, the directors and
executive officers of NCBE and their affiliates did not beneficially own any
shares of HHFC common stock.
As of the close of business on the record date, HHFC's Employee Stock
Ownership Plan beneficially owned 144,540 shares of HHFC common stock, or 34.7%
of all outstanding shares entitled to vote on the Merger.
SUMMARY OF THE MERGER
THE MERGER AGREEMENT IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT, AS IT IS
THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
OPINION OF FINANCIAL ADVISOR TO HHFC (See page 14).
Professional Bank Services, Inc. issued an opinion to HHFC's Board of
Directors that the consideration to be issued in the merger is fair to HHFC
shareholders from a financial perspective. PBS has updated its opinion as of
the date of this Proxy Statement/Prospectus. A copy of the opinion
3
<PAGE>
is attached as Appendix B to this Proxy Statement/Prospectus.
RECOMMENDATION OF HHFC BOARD OF DIRECTORS (See page 17).
The HHFC Board of Directors believes that the merger is in the best
interests of HHFC shareholders and unanimously recommends that HHFC shareholders
vote FOR approval of the merger agreement.
CONDITIONS TO THE MERGER (See page 23).
HHFC and NCBE will not complete the merger unless:
- HHFC shareholders and regulatory authorities approve it;
- No legal restrictions prohibit it; and
- NCBE's legal counsel provides a satisfactory opinion concerning the
tax treatment of the merger.
NCBE will not have to complete the merger unless:
- HHFC's representations in the merger agreement remain accurate;
- HHFC's and the Bank's financial condition do not change materially;
and
- NCBE can account for the merger as a "pooling of interests."
HHFC will not have to complete the merger unless:
- NCBE's representations in the merger agreement remain accurate;
- NCBE's financial condition does not change materially; and
- The NCBE shares to be issued in the merger are listed on the Nasdaq
National Market.
TERMINATION OF THE MERGER AGREEMENT (See page 24).
The merger agreement may be terminated and the merger abandoned before or
after HHFC shareholders approve the merger agreement:
- by mutual consent of HHFC and NCBE;
- by HHFC if HHFC or its Board of Directors accepts or approves a
"competing transaction";
- by HHFC, if any of the conditions to its obligation to consummate the
merger have not been satisfied by December 31, 1998; or
- by NCBE, if any of the conditions to its obligation to consummate the
merger have not been satisfied by December 31, 1998.
REIMBURSEMENT OF EXPENSES (See page 24).
In the merger agreement, HHFC agreed not to seek any competing transaction
for an acquisition of HHFC or the Bank except where required by fiduciary duties
of HHFC's Board of Directors.
A competing transaction includes any of the following:
- - an offer by another person to acquire 25% or more of HHFC's or the Bank's
common stock;
- - a proposal for a merger, consolidation, share exchange, business
combination or similar transaction involving HHFC or the Bank; or
- - a proposal for a sale, lease, exchange, transfer, or other disposition of
25% or more of the assets of HHFC.
If the merger agreement is terminated under certain circumstances in
connection with a competing transaction, HHFC will reimburse NCBE's expenses
incurred in the merger up to $150,000.
REGULATORY APPROVALS (See page 19).
The merger has been approved by the Board of Governors of the Federal
Reserve System. The merger remains subject to challenge by the
4
<PAGE>
Department of Justice and the approval of the Indiana Department of Financial
Institutions. All approvals are expected to be received prior to the Special
Meeting.
ACCOUNTING TREATMENT (See page 26).
NCBE expects to account for the merger as a "pooling of interests." This
means that NCBE will carry forward HHFC's assets, liabilities and income in
NCBE's consolidated financial statements and that no goodwill will be recognized
in the transaction.
FEDERAL INCOME TAX CONSEQUENCES (See page 25).
The merger is intended to qualify as a tax-free reorganization for federal
income tax purposes. No gain or loss will be recognized by HHFC shareholders
upon receipt of shares of NCBE common stock.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES
OF THE MERGER TO YOU.
DISSENTERS' RIGHTS (See page 20).
Under Indiana law, HHFC shareholders can demand the fair value of their
HHFC shares if they deliver a written demand for payment and do not vote in
favor of the merger agreement. Appendix C contains the applicable portions of
Indiana law.
RISK FACTORS RELATING TO
NCBE COMMON STOCK
(See page 8).
An investment in NCBE common stock involves risks, including those
described in this document.
STOCK PRICE DATA
(See page 36).
The following table sets forth as of April 20, 1998 (the last trading day
before the public announcement of the proposed acquisition), the last sale price
per share for the NCBE common stock, and the pro forma equivalent for a share of
HHFC common stock. There is no public trading market for the HHFC common stock.
<TABLE>
<CAPTION>
PRO FORMA
HHFC
NCBE HHFC COMMON
COMMON COMMON STOCK
STOCK STOCK EQUIVALENT
------ ------ ----------
<S> <C> <C> <C>
Price Per Share
(as of April 20, 1998) $42.875 N/A $75.19*
</TABLE>
____________
* Assumes that each share of HHFC common stock is converted into
1.7537 shares of NCBE common stock.
COMPARISON OF SHAREHOLDER RIGHTS
(See page 58).
Although NCBE and HHFC are both Indiana corporations, the rights of HHFC
shareholders are different from NCBE shareholders in several respects, including
shareholder votes required to approve certain business combinations, removal of
directors, and the authorization of preferred stock (the terms of which may be
set by the board of directors).
5
<PAGE>
SUMMARY COMPARATIVE HISTORICAL AND COMBINED PER SHARE DATA
The following summary tables present selected comparative per share
data on (i) a historical basis for NCBE and HHFC, (ii) a pro forma combined
basis per share of NCBE common stock, giving effect to the Merger and (A) as of
March 31, 1998, all Other Pooling Acquisitions (as defined under "INFORMATION
CONCERNING NCBE--Recent Developments") and (B) for all prior periods, all Other
Pooling Acquisitions except for the acquisitions of Downstate Banking Co. and
Commonwealth Commercial Corp., which NCBE intends to account for as immaterial
poolings, (iii) an equivalent pro forma basis per share of HHFC Common, giving
effect to the Merger only, and (iv) an equivalent pro forma basis per share,
giving effect to the Merger and the Other Pooling Acquisitions to the extent
described above. As further described in "INFORMATION CONCERNING NCBE--Recent
Developments", NCBE consummated its acquisitions of the Mayfield Branch and
Vernois Bancshares, Inc. (the "Purchase Transactions") in the first quarter. The
Purchase Transactions are not individually or in the aggregate considered
material to NCBE from a financial statement presentation standpoint, and the pro
forma data does not include the Purchase Transactions (except to the extent they
are reflected in NCBE's first quarter information). The data presented is not
necessarily indicative of the results of the future operations of the combined
organization or the actual results that would have occurred if the Merger or
Other Pooling Acquisitions had been consummated prior to the periods indicated.
The data presented should be read in conjunction with the more detailed
information and financial statements included herein or incorporated by
reference in this Proxy Statement/Prospectus and with the unaudited pro forma
financial statements included elsewhere in this Proxy Statement/Prospectus. See
"WHERE YOU CAN FIND MORE INFORMATION," "SELECTED FINANCIAL DATA," "INFORMATION
CONCERNING HHFC" and "INDEX TO HHFC FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE:
NCBE:
Basic $0.48 $0.44 $1.72 $1.52 $1.30
Diluted 0.47 0.43 1.69 1.52 1.30
HHFC 0.38 0.69 2.00 2.46 2.13
NCBE pro forma (Other Pooling
Acquisitions and HHFC):
Basic 0.48 0.43 1.72 1.53 1.34
Diluted 0.47 0.43 1.70 1.53 1.34
HHFC equivalent pro forma
(NCBE only) (1):
Basic 0.89 0.82 3.20 2.83 2.42
Diluted 0.88 0.80 3.15 2.83 2.42
HHFC equivalent pro forma
(Other Pooling Acquisitions
and NCBE) (1):
Basic 0.89 0.80 3.20 2.85 2.50
Diluted 0.88 0.80 3.17 2.85 2.50
DIVIDENDS PER COMMON SHARE:
NCBE 0.18 0.15 0.64 0.55 0.40
HHFC 0.00 0.00 0.54 0.37 0.37
HHFC equivalent pro forma (1) 0.34 0.28 1.19 1.02 0.75
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
---- ----
<S> <C> <C>
BOOK VALUE PER COMMON SHARE:
NCBE $13.93 $13.69
HHFC with ESOP shares subject to put 28.41 28.27
HHFC without ESOP shares subject to put 26.59 25.87
NCBE pro forma (Other Pooling
Acquisitions and HHFC) 13.69 13.45
HHFC equivalent pro forma
(NCBE only) (1) 25.96 25.51
HHFC equivalent pro forma (Other
Pooling Acquisitions and NCBE) (1) 25.51 25.06
</TABLE>
(1) Equivalent pro forma per share data represents the pro forma per share
data for NCBE multiplied by 1.8633, the assumed number of shares of
NCBE common stock to be issued in the merger for each share of HHFC
common stock.
7
<PAGE>
RISK FACTORS
IN CONSIDERING WHETHER TO APPROVE THE MERGER AGREEMENT, HHFC SHAREHOLDERS
SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER INFORMATION CONTAINED AND
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS, THE FOLLOWING RISK
FACTORS. CERTAIN CAPITALIZED TERMS USED IN THIS SECTION ARE DEFINED IN OTHER
SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS.
RISKS ASSOCIATED WITH ACQUISITIONS
NCBE has grown significantly as a result of acquisitions. Since January 1,
1995, NCBE has completed numerous acquisitions of financial institutions or
their branches. As the banking industry continues to consolidate, NCBE expects
to pursue other acquisitions. NCBE is currently a party to definitive
agreements relating to seven separate pending acquisitions. See "INFORMATION
CONCERNING NCBE --Recent Developments." NCBE's pending acquisitions are subject
to various conditions, including shareholder and regulatory approval. No
assurance can be given that the pending acquisitions will be consummated.
The future profitability of NCBE will depend upon management's ability to
improve the profitability of acquired institutions and to realize expected
operational synergies. Acquisitions involve numerous risks, including
difficulties in assimilating operations of the acquired company, diversion of
management's attention from other business concerns, risks of entering new
geographic markets, loss of key employees of the acquired company and assumption
of undisclosed liabilities. Future acquisitions may result in dilutive
issuances of equity securities, the incurrence of additional debt and the
amortization of expenses related to goodwill and intangible assets, any of which
could have a material adverse effect on NCBE. In addition, as consolidation of
the banking industry continues, the competition for suitable acquisition
candidates will increase. NCBE competes with other banking companies for
acquisition opportunities and many of these competitors have greater financial
resources and acquisition experience than NCBE.
IMPACT OF INTEREST RATE CHANGES
NCBE's derives its results of operations from its subsidiaries' operations
and depends principally on net interest income, which is the difference between
interest earned on loans and investments and interest expense paid on deposits
and other borrowings.
Like other financial institutions, NCBE's interest income and interest
expense are affected by general, regional and local economic conditions and by
the policies of regulatory authorities, including the monetary policies of the
Federal Reserve Board. While management has taken measures intended to manage
the risks of operating in a changing interest rate environment, there can be no
assurance that such measures will effectively avoid undue interest rate risk.
CREDIT RISK AND LOAN CONCENTRATION
As a lender, NCBE is exposed to the risk that its customers will be unable
to repay their loans according to their terms and that the collateral securing
the payment of their such loans (if any) may not be sufficient to assure
repayment. Credit losses could have a material adverse effect on NCBE's
operating results.
As of March 31, 1998, NCBE's total loan portfolio was approximately
$1.0 billion or 69.6% of its total assets. The three components of the loan
portfolio are real estate loans, $566 million or 54.4% of total loans,
commercial and industrial loans, $316 million or 30.4% of total loans, and
consumer loans, $159 million or 15.2% of total loans. NCBE's credit risk with
respect to its consumer installment loan portfolio and commercial loan portfolio
relates principally to the general creditworthiness of individuals and
businesses within its local market area. NCBE's credit risk with respect to its
real estate mortgage and construction loan portfolio relates principally to the
general creditworthiness of individuals and the value of real estate serving as
security for the repayment of the loans.
8
<PAGE>
REGULATORY RISKS
The banking industry is heavily regulated. These regulations are primarily
intended to protect depositors and the FDIC, not NCBE shareholders or other
creditors. Regulations affecting financial institutions are undergoing
continuous change, and the ultimate effect of such changes cannot be predicted.
Regulations and laws affecting NCBE and its subsidiaries may be modified at any
time, and new legislation affecting financial institutions may be proposed and
enacted. There is no assurance that such modifications or new laws will not
materially and adversely affect the business, condition or operations of NCBE
and its subsidiaries.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The success of NCBE and its subsidiaries depends to a certain extent
upon the general economic conditions of the local geographic markets they
serve. Unlike larger banks which are more geographically diversified, NCBE's
subsidiaries provide financial and banking services to customers in the
tri-state area of Indiana, Kentucky and Illinois surrounding Evansville,
Indiana. No assurance can be given concerning the economic conditions that
will exist in such markets.
COMPETITION
NCBE's subsidiaries face substantial competition for deposit, credit and
trust relationships, as well as other sources of funding in the communities they
serve. Competing providers include other national and state banks, thrifts and
trust companies, insurance companies, mortgage banking operations, credit
unions, finance companies, money market funds and other financial and
nonfinancial companies which may offer products functionally equivalent to those
offered by NCBE's subsidiaries. Competing providers may have greater financial
resources than NCBE and offer services within and outside the market areas
served by NCBE's subsidiaries.
RISKS RELATING TO YEAR 2000 ISSUE
Many existing computer programs were designed to use only two digits to
identify a year in the date field without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results by or at the year 2000. NCBE is committed to a plan
for achieving compliance with the risks created by the "Year 2000" problem.
Management believes that the expenditures required to bring NCBE systems into
compliance will not have a materially adverse effect on NCBE's financial
condition or future performance. However, the Year 2000 problem is pervasive
and complex and can potentially effect any computer process. In addition, the
efforts of NCBE and its subsidiaries with respect to Year 2000 compliance are
subject to examination by banking regulatory agencies. An adverse rating could
result in the delay or deferral of regulatory applications seeking approval of
acquisitions or such approvals may only be given subject to additional
conditions. See "INFORMATION CONCERNING NCBE--Year 2000 Issue."
STATUS OF NCBE AS A BANK HOLDING COMPANY
NCBE is a legal entity separate and distinct from its subsidiaries,
although the principal source of NCBE's cash revenues is dividends from its
subsidiaries. The right of NCBE to participate in the assets of any subsidiary
upon the subsidiary's liquidation, reorganization or otherwise will be subject
to the claims of the subsidiary's creditors, which will take priority except to
the extent that NCBE may itself be a creditor with a recognized claim. NCBE's
principal source of funds is dividends received from its banking subsidiaries.
Regulations limit the amount of dividends without prior approval. During 1998,
the subsidiaries may pay approximately $3.3 million plus any 1998 net profits to
NCBE without prior regulatory approval.
9
<PAGE>
FORWARD-LOOKING STATEMENTS
This document, and the documents that have been incorporated herein by
reference (see, "WHERE YOU CAN FIND MORE INFORMATION" on page 62), include
forward-looking statements about NCBE that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
future results of operations of NCBE after the Merger, set forth under
"QUESTIONS AND ANSWERS ABOUT THE MERGER," "SUMMARY," "RISK FACTORS" and those
preceded by, followed by or that otherwise include the words "believes,"
"expects," "anticipates," "intends," "estimates" or similar expressions. For
those statements, NCBE claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
NCBE and HHFC participate in the financial services industry, which is
characterized by competition and consolidation. You should understand that the
factors discussed under "RISK FACTORS" on page 8, in addition to those discussed
elsewhere in this document and the documents which are incorporated by
reference, could affect the future financial results of NCBE and could cause
actual results to differ materially from those expressed in forward-looking
statements contained or incorporated by reference in this document.
SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
This Proxy Statement/Prospectus is being furnished to holders of the common
stock, without par value, of HHFC ("HHFC Common") in connection with the
solicitation of proxies by the Board of Directors of HHFC for use at the Special
Meeting to be held at the office of the Bank located at 420 South Buckeye
Street, Osgood, Indiana, on September 21, 1998, at 11:00 a.m., local time, and
at any adjournment or postponement thereof. At the Special Meeting, the
shareholders of HHFC will be asked to consider and vote upon the approval and
adoption of the Agreement and Plan of Merger dated April 21, 1998 (the "Merger
Agreement") with National City Bancshares, Inc. ("NCBE") relating to the merger
(the "Merger") of HHFC with and into NCBE.
RECORD DATE
The Board of Directors of HHFC has fixed July 31, 1998, as the record date
for determining the shareholders of HHFC entitled to receive notice of and to
vote at the Special Meeting (the "Record Date"). As of the close of business on
the Record Date, there were 416,262 shares of HHFC Common issued and
outstanding. Only holders of HHFC Common of record at the close of business on
the Record Date are entitled to notice of and to vote at the Special Meeting.
No shares of HHFC Common can be voted at the Special Meeting, unless the record
holder is present in person or represented by proxy at the Special Meeting.
VOTE REQUIRED
The presence, in person or by proxy, of holders of a majority of the issued
and outstanding shares of HHFC Common entitled to vote on the Record Date, or
208,132 shares, is necessary to constitute a quorum at the Special Meeting. The
affirmative vote of the holders of at least a majority of the issued and
outstanding shares of HHFC Common, or 208,132 shares, is required to approve the
Merger Agreement and the transactions contemplated thereby. Each holder of HHFC
Common is entitled to one vote per share of HHFC Common held at the close of
business on the Record Date.
VOTING AND REVOCATION OF PROXIES
Proxies for use at the Special Meeting accompany this Proxy
Statement/Prospectus. A shareholder may use his or her proxy if he or she is
unable to attend the Special Meeting in person or wishes to have his or her
shares voted by proxy even if he or she does attend the Special Meeting. Shares
of HHFC Common represented by a proxy properly
10
<PAGE>
signed and returned to HHFC no later than the time of the Special Meeting,
unless subsequently revoked, will be voted at the Special Meeting in
accordance with instructions thereon. If a proxy is properly signed and
returned without voting instructions, any shares of HHFC Common represented
by such proxy will be voted FOR approval of the Merger Agreement and the
transactions contemplated thereby, including the Merger. Any proxy given
pursuant to this solicitation may be revoked at any time before the voting on
the matters to be considered at the Special Meeting by filing with the
Secretary of HHFC a written revocation or a duly executed proxy bearing a
later date. All written notices of revocation and other communications with
respect to revocation of HHFC proxies should be addressed to Hoosier Hills
Financial Corporation, P.O. Box 176, Osgood, Indiana 47037-0176, Attention:
Corporate Secretary. A holder of HHFC Common who previously signed and
returned a proxy and who elects to attend the Special Meeting and to vote in
person may withdraw his or her proxy at any time before it is exercised by
giving notice of such revocation to the Secretary of HHFC at the Special
Meeting and voting in person by ballot at the Special Meeting; however,
attendance at the Special Meeting will not in and of itself constitute a
revocation of the proxy.
HHFC intends to count holders of shares of HHFC Common present in person at
the Special Meeting but not voting, and holders of shares of HHFC Common for
which HHFC has received proxies but with respect to which holders of shares have
abstained, as present at the Special Meeting for purposes of determining the
presence or absence of a quorum for the transaction of business. Brokers may
give a proxy to vote the shares they hold in street name for customers who are
the beneficial owners of such shares only if they receive specific instructions
from such customers. Since the affirmative vote of the holders of a majority of
the issued and outstanding shares of HHFC Common entitled to vote at the close
of business on the Record Date is required to approve and adopt the Merger
Agreement, abstentions and shares of HHFC Common that are not voted or for which
customers have not given specific voting instructions will have the effect of a
vote against the Merger Agreement.
If sufficient proxies are not obtained to approve and adopt the Merger
Agreement, the persons named as proxies in the enclosed form of proxy intend to
propose and vote for one or more adjournments or postponements of the Special
Meeting to permit further solicitation of proxies voting in favor of the Merger
Agreement. No proxy that is voted against the proposal to approve and adopt the
Merger Agreement will be voted in favor of any such adjournment or postponement.
SOLICITATION OF PROXIES
In addition to solicitation of proxies from shareholders of HHFC Common by
use of the mail, proxies also may be solicited personally or by telephone by
directors, officers and employees of HHFC, who will not be specifically
compensated for such services.
NCBE has agreed to bear the entire cost of printing this Proxy
Statement/Prospectus and all filing fees paid to the Securities and Exchange
Commission (the "SEC") and other regulatory filing fees incurred in connection
with the Merger.
THE MERGER
GENERAL
This section of the Proxy Statement/Prospectus describes certain aspects of
the proposed Merger, including the principal provisions of the Merger Agreement.
The following information is qualified in its entirety by reference to the other
information contained elsewhere in this Proxy Statement/Prospectus, including
the Appendices hereto and the documents incorporated herein by reference. A
copy of the Merger Agreement (excluding the Disclosure Schedule thereto) is
attached hereto as Appendix A and is incorporated by reference in this Proxy
Statement/Prospectus. Please refer to the Merger Agreement for a complete
description of the terms of the Merger. Shareholders of HHFC are urged to read
carefully the Merger Agreement in its entirety.
11
<PAGE>
BACKGROUND OF THE MERGER
In February 1997, the size of the HHFC Board of Directors was increased to
include four representatives of certain of HHFC's significant shareholders
including HHFC's Employee Stock Ownership Plan (the "ESOP") which owns 34.7% of
the HHFC Common. See "Security Ownership of Certain Beneficial Owners and
Management." In August 1997, the Board concluded it was appropriate to consider
HHFC's long-term strategic plan, in light of the absence of a trading market for
the HHFC Common and the increased competitiveness and consolidation among
financial institutions serving markets in South Central Indiana and in the U.S.
banking markets in general. The Board directed its Planning Committee to
identify and explore the range of strategic planning alternatives for HHFC and
the Bank.
On November 19, 1997, the Planning Committee of HHFC met to consider issues
related to the strategic planning process. Attending the meeting were Planning
Committee members Crum, Franklin, Underwood, and Vogel and a representative of
Investment Bank Services, Inc. ("IBS"), an affiliate of PBS, HHFC's financial
advisor. At the meeting, the Planning Committee analyzed the implications of
various strategic alternatives available to HHFC, focusing on the following:
(i) HHFC remaining independent and expanding the markets served and products
offered by HHFC and the Bank; (ii) merging with another financial institution of
similar size and serving markets in Southern Indiana; and (iii) being acquired
by a larger financial institution with a philosophy conducive to community
banking. After an extensive discussion, the Planning Committee authorized Mr.
Crum, Chairman of the Committee and President of the Corporation, to engage IBS
to more fully explore strategic planning possibilities for HHFC and the Bank.
IBS contacted several financial institutions to inquire about their
interest in discussing a possible transaction with HHFC. In February 1998, IBS
distributed a confidential information memorandum to six institutions that
expressed interest and entered into confidentiality agreements with HHFC. By
March 5, 1998, all six institutions had responded with preliminary bids.
On March 12, 1998, the Board met to review the terms of the preliminary
bids focusing on the terms of the offers from the three financial institutions
that submitted bids with the highest dollar values. The Board also discussed
with representatives of IBS and Brown, Todd & Heyburn PLLC ("BTH"), special
legal counsel to HHFC, other non-financial issues related to a transaction with
a potential acquiror, including, among other things, the effect of the
transaction on the employee stock ownership plan, the ability of shareholders to
sell their stock and the type of benefit plans the potential acquirors might
provide. The Board authorized IBS to arrange a meeting with three of the
financial institutions.
On March 16, 1998, representatives of the three institutions made
presentations to the Board. After the presentations, the Board discussed with
representatives from IBS and BTH a number of issues related to a transaction
with each of the institutions including previous acquisition experience, future
prospects for each institution, the aggregate value to HHFC's shareholders of
each transaction and the effect of the transactions on HHFC and the Bank, their
employees and customers, and the communities they serve. The Board then
authorized IBS to continue negotiations with two of the institutions. After
further discussions with the two institutions, the Board authorized IBS to
contact NCBE to convey the general terms and conditions on which HHFC would be
willing to negotiate and enter into a definitive agreement with NCBE.
Mr. Crum and Mr. Scholle, as well as representatives of IBS and BTH, held
several discussions with their counterparts at NCBE to negotiate the terms of
the Merger Agreement and other related matters.
The Merger Agreement and other related matters were presented for the
approval of the Board of Directors of HHFC on April 21, 1998. At the meeting,
representatives of BTH reviewed the terms of the proposed Merger Agreement, and
representatives of IBS presented its analysis of the financial terms of the
proposed Merger and orally delivered its opinion that the terms of the Merger
Agreement were fair from a financial perspective. After extensive discussion,
the Merger Agreement and other matters related to the proposed Merger were
approved unanimously by the Board of Directors of HHFC. The Merger Agreement
was signed on behalf of HHFC and NCBE shortly thereafter. NCBE and HHFC issued
a press release to announce the signing of the Merger Agreement on the following
day.
12
<PAGE>
NCBE'S REASONS FOR THE MERGER
In reaching its decision to approve the Merger Agreement, the Board of
Directors of NCBE considered the following factors, without assigning relative
weights to them: the consistency of the acquisition with NCBE's long-term goal
to grow through acquisitions of financials institutions in NCBE's primary
markets; the Merger Consideration to be paid relative to NCBE's valuation of
HHFC and consideration paid in other, recent, similar, reported transactions;
and information concerning the business, financial condition, results of
operations and prospects for HHFC.
HHFC'S REASONS FOR THE MERGER
In reaching its decision to approve the Merger Agreement, the Board of
Directors of HHFC consulted with its legal and financial advisors and with
HHFC's senior executives. The Board considered a number of factors in reaching
its decision, including the factors listed below that it deemed material, but
did not assign any specific weight or priority to the factors it considered.
1. THE FINANCIAL TERMS OF THE MERGER. The Board noted that stocks
of financial institutions were trading at historically high multiples of
earnings, and that in recent transactions, acquirors had paid historically
high premiums to acquire financial institutions similar to HHFC.
Information provided by IBS indicated that the conversion ratio compared
favorably to the consideration paid in recent acquisitions of comparable
institutions. The Board also noted that HHFC would have the right to
terminate the Merger Agreement if the average market trading price of
NCBE's common stock, without par value ("NCBE Common"), fell below $32 ,
subject to NCBE's right to negate the termination by issuing shares with an
Average NCBE value of $59.63. If such a decline in the price of NCBE
Common were to occur, the Board would have an opportunity to consult with
its financial and other advisors to determine the course of action best in
the interests of HHFC, its shareholders and the other constituencies.
2. THE EFFECT ON SHAREHOLDER VALUE OF HHFC CONTINUING AS AN
INDEPENDENT ENTITY COMPARED TO THE EFFECT OF THE MERGER WITH NCBE. The
Board considered that there was no organized trading market for HHFC Common
and that trading in recent years has been sporadic and at prices that
represented a discount from both book value and the trading values of other
banks or bank holding companies with similar operating results and capital
ratios. The Board believed that as a community-owned institution, it was
unlikely that HHFC would attract the level of investor interest that would
cause a substantial increase in its market value or earning multiples or
the prices that could be realized by a significant number of shareholders.
Moreover, analysis presented by IBS indicated that, based on certain
assumptions, HHFC would have to achieve annual growth in its earnings per
share significantly higher than its historical rates to provide the same
value to shareholders as the Merger would provide. It was noted that the
consolidation trend has reduced the number of financial institutions that
could be expected to have significant interest in HHFC. It was also
considered unlikely that HHFC could achieve the same value to shareholders
through a merger of equals with a financial institution of similar size.
3. MARKET, FINANCIAL, AND OTHER INFORMATION ABOUT NCBE. The Board
evaluated historical, financial and operational information about NCBE. It
was noted that NCBE Common is more liquid than HHFC Common and has
demonstrated good long-term appreciation over a ten-year business cycle. A
stock-for-stock exchange with NCBE would give HHFC shareholders an
opportunity to acquire in a tax-free transaction stock of a company whose
expected earnings per share growth is faster than HHFC's own and at a price
representing a premium over the current book value per share of HHFC
Common.
4. THE IMPACT OF THE MERGER GENERALLY ON THE CUSTOMERS, COMMUNITY
AND OTHER CONSTITUENCIES SERVED BY HHFC. The Board received presentations
by representatives of NCBE senior management concerning NCBE's operating
philosophy, employee benefit programs and community involvement. Based on
these discussions, the Board believed the affiliation would serve the other
constituencies served by HHFC including its customers, employees and
community. The Board believes HHFC will gain the experience of NCBE in
providing a broad
13
<PAGE>
range of modern banking services while retaining the experience in and
knowledge of HHFC's and the Bank's current management and employees in
the Ripley County community.
5. THE OPINION OF HHFC'S FINANCIAL ADVISOR THAT THE MERGER IS FAIR
TO HHFC SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW (SEE THE FOLLOWING
SECTION).
FAIRNESS OPINION
PBS was engaged by HHFC to advise the Board of Directors as to the fairness
of the Merger Consideration, from a financial perspective, to be paid by NCBE to
HHFC's shareholders. PBS is a bank consulting firm with offices in Louisville,
Atlanta, Chicago, Nashville and Washington, D.C. IBS was retained to service as
HHFC's investment banker in order to evaluate and facilitate the possible sale
of HHFC. As part of its investment banking business, PBS is regularly engaged in
reviewing the fairness of financial institution acquisition transactions from a
financial perspective and in the valuation of financial institutions and other
businesses and their securities in connection with mergers, acquisitions, estate
settlements, and other transactions. Neither PBS nor any of its affiliates has a
material financial interest in HHFC or NCBE. PBS and IBS were selected to advise
the Board of Directors based upon their familiarity with Indiana financial
institutions and knowledge of the banking industry as a whole.
PBS performed certain analyses described herein and discussed the range of
values for HHFC resulting from such analyses with the Board of Directors in
connection with PBS's advice as to the fairness of the consideration to be paid
by NCBE.
A Fairness Opinion of PBS was delivered to the Board of Directors on April
21, 1998, at a special meeting of the Board of Directors. A copy of the Fairness
Opinion, updated to the date of the mailing of this Proxy Statement/Prospectus,
which includes a summary of the assumptions made and information analyzed in
deriving the Fairness Opinion, is attached as Appendix B to this Proxy Statement
and should be read in its entirety.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to HHFC and NCBE. PBS
considered certain financial and stock market data of HHFC and NCBE, compared
that data with similar data for certain other publicly-held bank holding
companies and considered the financial terms of certain other comparable bank
transactions that had recently been effected. PBS also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria that it deemed relevant. In connection with its
review, PBS did not independently verify the foregoing information and relied on
such information as being complete and accurate in all material respects.
Financial forecasts prepared by PBS were based on assumptions believed by PBS to
be reasonable and to reflect currently available information. PBS did not make
an independent evaluation or appraisal of the assets of HHFC or NCBE. PBS took
into consideration the results of HHFC's solicitation of indications of interest
from other financial institutions concerning their interest in affiliation with
HHFC. PBS reviewed the correspondence and information received from the
financial institutions contacted regarding an interest in a merger or
acquisition of HHFC. PBS reviewed all offers received by HHFC.
As part of preparing this Fairness Opinion, PBS performed a due diligence
review of NCBE on March 3, 1998. As part of the due diligence, PBS reviewed the
following items: minutes of the Board of Directors Meeting from January 17, 1996
through January 21, 1998; reports filed with the Securities and Exchange
Commission by NCBE on forms 10-K, 8-K and 10-Q for the years ending December 31,
1995, 1996, 1997 and year to date 1998; reports of independent auditors and
management letters and response thereto, for the year ending December 31, 1996;
the most recent analysis and calculation of allowance for loan and lease losses
for each subsidiary bank; internal loan review reports; investment portfolio
activity reports; asset quality reports; Uniform Holding Company Report for NCBE
for December 31, 1996 and September 30, 1997; December 31, 1997 Reports of
Condition and Income and September 30, 1997 Uniform Bank or Thrift Performance
Report for each subsidiary bank; discussion of pending litigation, the Year 2000
issue and other issues with senior management of NCBE.
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<PAGE>
PBS reviewed and analyzed the historical performance of HHFC and the
Bank, as set forth in: HHFC Annual Reports as of December 31, 1997 and 1996;
December 31, 1997 Consolidated Reports of Condition and Income filed by the
Bank with the FDIC; December 31, 1997 Uniform Bank Performance Report of the
Bank; and the premises and other fixed assets of HHFC. PBS reviewed and
tabulated statistical data regarding the loan portfolio, securities portfolio
and other performance ratios and statistics. Financial projections were
prepared and analyzed as well as other financial studies, analyses and
investigations as deemed relevant for the purposes of this opinion. In review
of the aforementioned information, PBS took into account its assessment of
general market and financial conditions, experience in other transactions,
and knowledge of the banking industry generally.
In connection with rendering the Fairness Opinion and preparing its various
written and oral presentations to the Board of Directors, PBS performed a
variety of financial analyses, including those summarized herein. The summary
does not purport to be a complete description of the analyses performed by PBS
in this regard. The preparation of a Fairness Opinion involves various
assumptions as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized below,
PBS believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, could create an incomplete view of the
evaluation process underlying its Fairness Opinion. In performing its analyses,
PBS made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond HHFC or NCBE's
control. The analyses performed by PBS are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to the values of
businesses do not purport to be appraisals or to reflect the process by which
businesses actually may be sold.
ACQUISITION COMPARISON ANALYSIS: PBS reviewed bank acquisition
transactions in Indiana. There were 63 bank acquisition transaction in Indiana
announced since 1990 for which detailed financial information was available. The
purpose of the analysis was to obtain an evaluation range based on these Indiana
bank acquisition transactions. Median multiples of earnings and book value
implied by the comparable transactions were utilized in obtaining a range for
the acquisition value of HHFC. In addition to reviewing recent Indiana bank
transactions, PBS performed separate comparable analyses for acquisition of
Indiana banks which, like HHFC, had an equity-to-asset ratio between 9.0% and
12.0%, had assets between $75.0 and $125.0 million, had a return on equity
between 9.75% and 12.5%, were located in Southern Indiana or were announced
since January 1, 1996. Median values for the 63 Indiana acquisitions expressed
as multiples of both book value and earnings were 1.70 and 17.86, respectively.
The median multiples of book value and earnings for acquisition of Indiana banks
with equity-to-asset ratios between 9.0% and 12.0% were 1.70 and 21.21,
respectively. For acquisitions of Indiana banks with deposits between $75.0 and
$125.0 million the median multiples of book value and earnings were 1.70 and
20.81, respectively. Median multiples for Indiana banks with a return on equity
of between 9.75% and 12.5% were 1.87 and 18.06, respectively. The median
multiples of book value and earnings for acquisition of Indiana banks located in
Southern Indiana were 1.69 and 18.85, respectively. In those transactions which
were announced since January 1, 1996, the median multiples of book value and
earnings were 2.02 and 24.73, respectively.
In the proposed transaction, HHFC shareholders will receive 1.7537 shares
of NCBE Common per share of HHFC Common, subject to adjustment as further
defined in the Agreement. On April 17, 1998, the average of the bid/ask price
for NCBE Common on the National Association of Securities Dealers Automated
Quotation Systems was $42.875 per share. Using this average price of $42.875 per
share of NCBE Common, the proposed consideration to be received represents an
aggregate value of $31,298,750 or $75.19 per share of HHFC Common. This
represents a multiple of HHFC's December 31, 1997 adjusted book value and
multiple of 1997 adjusted earnings of 2.81 and 26.46, respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Indiana comparable group.
Compared to all Indiana bank transactions, the acquisition value ranked in the
98th percentile as a multiple of book value and in the 89th percentile as a
multiple of earnings. Compared to Indiana bank transactions where the acquired
institution had an equity-to-asset ratio between 9.0% and 12.0%, the acquisition
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value ranked in the 97th percentile as a multiple of book value and in the
84th percentile as a multiple of earnings. For Indiana bank transactions where
the acquired institution had between $75.0 and $125.0 million in assets, the
acquisition value ranked in the 100th percentile as a multiple of book value and
in the 80th percentile as a multiple of earnings. For Indiana bank transactions
where the acquired institution was located in Southern Indiana, the acquisition
value ranked in the 99th percentile as a multiple of book value and in the
85th percentile as a multiple of earnings. For Indiana bank transactions that
have been announced since January 1, 1996, the acquisition value ranked in the
88th percentile as a multiple of book value and in the 75th percentile as a
multiple of earnings.
ADJUSTED NET ASSET VALUE ANALYSIS: PBS reviewed HHFC's balance sheet data
to determine the amount of material adjustments required to the stockholder's
equity of HHFC based on differences between the market value of HHFC's assets
and their value reflected on HHFC's financial statements. PBS determined that
two adjustments were warranted. Shareholders equity was increased by $370,000
for termination of the Employee Stock Ownership Plan ("ESOP"). PBS also
reflected a value of the non-interest bearing demand deposits of $2,342,000. The
adjusted net asset value was determined to be $33.28 per share of HHFC Common.
DISCOUNTED EARNINGS ANALYSIS: A dividend discount analysis was performed
by PBS pursuant to which a range of stand-alone values of HHFC was determined by
adding the present value of estimated future dividend streams that HHFC could
generate over a five-year period beginning in 1998 and ending in 2002, and the
present value of the "terminal value" of HHFC's earnings at the end of the year
2002. The "terminal value" of HHFC's earnings at the end of the five-year period
was determined by applying a multiple of 17.86 times the projected terminal
year's net income. The 17.86 multiple represents the median price paid as a
multiple of earnings for all Indiana bank transactions since 1990.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of HHFC Common. The value of HHFC,
determined by adding the present value of the total cash flows, was $53.32 per
share. In addition, using the five-year projection as a base, a twenty-year
projection was prepared assuming an annual growth rate of 8% and assuming return
on assets reaches 1.50% by year ten and remains constant thereafter. Dividends
also were assumed to be 25% of income for years one through five and 40%
thereafter. This long-term projection resulted in a value of $51.87 per share.
SPECIFIC ACQUISITION ANALYSIS: PBS valued HHFC based on an acquisition
analysis assuming a "break-even" earnings scenario to an acquiror which factored
in price, current interest rates and amortization of the premium paid. Based on
this analysis, an acquiring institution would pay $43.02 per share of HHFC
Common, assuming they were willing to accept no impact to their net income in
the initial year. If an overhead reduction of 10% is assumed, an acquiring
company would pay $46.86 per share of HHFC Common. This analysis was based on a
funding cost of 6.5% adjusted for taxes, amortization of the acquisition premium
over 15 years and a projected earnings level for HHFC of $1,183,000 in 1997.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by HHFC's shareholders under the Acquisition
Agreement is fair and equitable from a financial perspective and does not
constitute a recommendation to any HHFC shareholder to vote in favor of the
Merger. No limitations were imposed on PBS regarding the scope of its
investigation or otherwise by HHFC or any of its affiliates.
Based on the results of the various analyses described above, PBS concluded
that the consideration to be received by HHFC's shareholders under the
Acquisition Agreement, is fair and equitable from a financial perspective to the
shareholders of HHFC.
Pursuant to the terms of its agreement with PBS and IBS, HHFC has paid or
expects to pay the following fees to PBS and IBS: (i) $10,000 upon engagement of
IBS and PBS; (ii) $10,000 upon the execution of the Merger Agreement; and (iii)
0.75% of the total consideration received. In addition, PBS and IBS will be
reimbursed for travel and related expenses up to a maximum of $1,000. Based on
a NCBE stock price of $42.875 per share, for example, PBS would receive fees in
the amount of approximately $254,750 for all services performed in connection
with the sale of HHFC
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<PAGE>
and the rendering of the Fairness Opinion. In addition, HHFC has agreed to
indemnify PBS and IBS and their directors, officers and employees, from
liability in connection with the Merger, and to hold PBS and IBS harmless
from any losses, actions, claims, damages, expenses or liabilities related to
any PBS' or IBS' acts or decisions made in good faith and in the best
interest of HHFC.
RECOMMENDATION OF HHFC'S BOARD OF DIRECTORS
For the reasons described above, the Board of Directors of HHFC believes
that the affiliation through the Merger of HHFC with NCBE is in the best
interest of HHFC and its shareholders and in the best interest of the customers
and communities that the Bank serves.
THE HHFC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF HHFC
COMMON VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
Certain members of the management and Board of Directors of HHFC have
interests in the Merger in addition to their interests as shareholders of HHFC.
See "-- Interests of Certain Persons in the Merger."
CLOSING AND EFFECTIVE TIME
The Merger Agreement provides that, unless otherwise agreed and assuming
all conditions have been satisfied or waived, the closing of the Merger (the
"Closing") will be held on the date fixed by agreement of NCBE and HHFC as soon
as practicable following the date on which all required approvals are received
and any required waiting periods have expired.
If the Merger Agreement is approved by the requisite vote of HHFC
shareholders, all other conditions of the Merger Agreement are satisfied or
waived and the Closing is held, the Merger will become effective at the date and
time (the "Effective Time") specified in the Articles of Merger that are
required by the Merger Agreement to be filed with the Office of the Secretary of
State of Indiana. It is presently contemplated that the Effective Time will
occur during the third or fourth quarter of 1998. The Merger Agreement may be
terminated by either party if, among other things, the Closing does not occur on
or before December 31, 1998. See "-- Termination and Waiver."
CONVERSION OF HHFC COMMON
As a result of the Merger, each share of HHFC Common issued and outstanding
immediately before the Effective Time, other than shares whose holders have
properly exercised their dissenters' rights under the Indiana Business
Corporation Law (the "IBCL"), will be converted into the right to receive NCBE
Common and cash in lieu of fractional shares as specified in the Merger
Agreement. The Merger Agreement provides that each eligible share of HHFC
Common will be converted into the right to receive shares of NCBE Common with an
Average NCBE Value of not less than $59.63 and not more than $82.42, except that
holders of HHFC Common may receive shares of NCBE Common worth less than $59.63
if the Average NCBE Value is less than $32.00 and HHFC does not elect to
terminate the Merger. The actual number of shares of NCBE Common to be issued
in the Merger will depend upon the Average NCBE Value which is defined as the
average of the means between the highest and lowest per share trading prices for
NCBE Common as reported by the Nasdaq National Market for the ten (10) trading
days on which NCBE Common is traded ended on or prior to the fifth business day
prior to the Closing. A trading day means a day on which at least 100 shares of
NCBE Common are traded on the Nasdaq National Market.
- - If the Average NCBE Value is $34.00 to $47.00, each share of HHFC Common
will convert into 1.7537 shares of NCBE Common.
- - If the Average NCBE Value is more than $47.00, each share of HHFC Common
will convert into shares of NCBE Common valued at the Average NCBE Value
having an aggregate value of $82.42.
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<PAGE>
- - If the Average NCBE Value is $32.00 or more but less than $34.00 (or less
than $32.00 and the HHFC Board elects not to terminate the Merger
Agreement), each share of HHFC Common will convert into the lesser of
(a) 1.8633 shares of NCBE Common or (b) shares of NCBE Common valued at the
Average NCBE Value having an aggregate value of $59.63.
- - If the Average NCBE Value is less than $32.00, HHFC's Board may terminate
the Merger Agreement unless NCBE agrees to issue shares of NCBE Common
valued at the Average NCBE Value having an aggregate of $59.63. The HHFC
Board is not required to exercise this right. THEREFORE, HHFC SHAREHOLDERS
COULD RECEIVE SHARES OF NCBE COMMON HAVING A VALUE OF LESS THAN $59.63 PER
SHARE.
EXAMPLE: The number of shares of NCBE Common depends on the Average NCBE Value,
as follows:
<TABLE>
<CAPTION>
If the Average Then the For an approximate value
NCBE Value exchange (based on the NCBE
is: ratio is: Average Value) of:
---------------------------------------------------------------------
<S> <C> <C>
$50.00 1.6484 $82.42
$47.00 1.7537 $82.42
$45.00 1.7537 $78.92
$39.50 1.7537 $69.27
$34.00 1.7537 $59.63
$32.00 1.8633 $59.63
$30.00* 1.8633 $55.90*
</TABLE>
_______________
* Subject to HHFC's right to terminate the merger agreement unless NCBE
adjusts the number of shares of NCBE Common issued to achieve a $59.63 per
share value.
If the Average NCBE Value declines to less than $32.00, which would entitle
the HHFC Board to terminate the Merger Agreement, the HHFC Board intends to
consider all relevant facts and circumstances that exist at such time, in
consultation with its legal and financial advisors, before reaching any decision
to terminate the Merger Agreement or to resolicit shareholders concerning the
possible termination of the Merger Agreement.
The actual value of NCBE Common to be issued in the Merger cannot be
determined at this time since it depends on trading prices reported before
the Merger is closed. The last reported sales price on August 7, 1998 for
NCBE Common as reported by the Nasdaq Stock Market was $36.75. If the Merger
was closed on August 7, 1998, the Average NCBE Value would have been $39.18,
and the exchange ratio would have been 1.7537 shares of NCBE Common for each
share of HHFC Common.
No fractional shares of NCBE Common will be issued in the Merger. In lieu
of any fractional share, holders of shares of HHFC Common who would otherwise be
entitled to a fractional share of NCBE Common (after taking into account all
shares of HHFC Common held by such holder) will be paid an amount in cash equal
to the product of such fractional interest and the Average NCBE Value. The
shares of NCBE Common to be issued in the Merger and cash paid in lieu of
fractional interests is referred to as the "Merger Consideration."
PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of HHFC Common into the right to receive the Merger
Consideration will occur by operation of law at the Effective Time. After the
Effective Time, certificates that represented shares of HHFC Common before the
Effective Time will be deemed, for all corporate purposes other than the payment
of dividends and other distributions on such shares, to evidence ownership of
and entitlement to receive such shares of NCBE Common. Within five (5)
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<PAGE>
business days after the Effective Time, an exchange agent appointed by NCBE
(the "Exchange Agent"), will send a transmittal letter and instructions to
each record holder of certificates for HHFC Common whose shares were
converted into the right to receive the Merger Consideration, advising such
holder of the number of shares of NCBE Common such holder is entitled to
receive pursuant to the Merger, the amount of cash such holder is due in lieu
of any fractional share of NCBE Common, and the procedures for surrendering
HHFC stock certificates in exchange for a certificate for the number of whole
shares of NCBE Common, and a check for the cash amount (if any) such holder
is entitled to receive in lieu of a fractional share. The letter of
transmittal will also specify that delivery will be effected, and risk of
loss and title to the certificates for HHFC Common will pass, only upon
proper delivery of the certificates for HHFC Common to the Exchange Agent.
The letter of transmittal will be in such form and have such other provisions
as the Merger Agreement contains and as NCBE may reasonably specify. After
the receipt by the Exchange Agent of a holder's certificates for HHFC Common,
together with a duly executed letter of transmittal and any other required
documents, the Exchange Agent will deliver to such holder the Merger
Consideration such holder is entitled to receive under the Merger Agreement.
SHAREHOLDERS OF HHFC ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL AND RELATED
INSTRUCTIONS. Unless and until a shareholder delivers his or her
certificates for HHFC Common to the Exchange Agent, together with a duly
executed letter of transmittal and any other required documents, dividends or
other distributions on the shares of NCBE Common issuable to the shareholder
and any cash payments for fractional shares that would otherwise be payable
will not be delivered to the shareholder. In such a case, cash payment for
fractional shares and any dividends or other distributions on such shares of
NCBE Common with a record date following the Effective Time will be paid to
the shareholder only upon surrender of the certificates for HHFC Common,
together with a duly executed letter of transmittal and any other required
documents. No interest on any such cash payment or dividends will accrue or
be paid.
If a shareholder has lost his or her certificate for HHFC Common, the
Exchange Agent will issue the Merger Consideration payable on the shares
represented by the lost certificate only upon receipt of an affidavit as to such
loss, and an indemnity agreement, if required by NCBE.
REGULATORY APPROVALS
NCBE agreed, in the Merger Agreement, to file all regulatory applications
to obtain the requisite regulatory approvals for the Merger. The Merger cannot
proceed in the absence of such regulatory approvals.
The Merger is subject to approval by the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act
provides that the Federal Reserve Board may not approve any transaction (i) that
would result in a monopoly, or that would be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, or (ii) the effect of which in any section of
the country may be substantially to lessen competition, or to tend to create a
monopoly, or that in any other manner would be in restraint of trade, unless the
Federal Reserve Board finds that the anticompetitive effects of the proposed
transaction are clearly outweighed in the public interest by the probable effect
of the transaction in meeting the convenience and needs of the communities to be
served. In conducting its review of any application for approval, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the company or companies and the banks concerned, and the
convenience and needs of the communities to be served. Under the BHC Act as
interpreted by the Federal Reserve Board and the courts, the Federal Reserve
Board may deny any application if it determines that the financial or managerial
resources of the acquiring bank holding company are inadequate.
The Merger is subject to approval by the Indiana Department of Financial
Institutions (the "DFI") under the Indiana Financial Institutions Act (the
"IFIA"). The IFIA provides that, in deciding whether to approve an acquisition,
the DFI shall consider the following factors: (i) whether the banks already
controlled by NCBE are operated in a safe, sound, and prudent manner; (ii)
whether the financial condition of NCBE or any of its affiliates will jeopardize
the financial stability of HHFC or the Bank; (iii) whether the Merger will
result in the Bank's having inadequate capital, unsatisfactory management, or
poor earning prospects; (iv) whether NCBE's subsidiaries have provided adequate
and
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<PAGE>
appropriate services, including services contemplated by the Community
Reinvestment Act of 1977 (the "CRA"), to the communities in which they are
located; (v) whether NCBE proposes to provide adequate and appropriate
services, including services contemplated by the CRA in the Bank's community;
(vi) whether the management or principals of NCBE are qualified by character
and financial responsibility to control and operate in a legal and proper
manner the Bank; (vii) whether the interest of the depositors and creditors
and the public generally will be jeopardized by the proposed transaction;
(viii) whether NCBE furnishes all information required by the DFI to reach
its decision; and (ix) whether, if the DFI holds a public hearing in
connection with the Merger, it finds that the terms of the Merger and
issuance and exchange of stock are fair and reasonable to the shareholders of
HHFC.
The Federal Reserve Bank of St. Louis, acting on delegated authority,
approved the merger on July 22, 1998. NCBE filed an application with the DFI on
June 18, 1998. As of the date of mailing of this Proxy Statement/Prospectus, the
DFI has not approved the Merger and its approval cannot be assured.
The Merger may not be consummated until 30 days following Federal Reserve
Board approval, during which time the Department of Justice ("DOJ") may
challenge the Merger on antitrust grounds and seek the divestiture of certain
assets and liabilities. With the approval of the Federal Reserve Board and the
DOJ, the waiting period may be reduced to no less than fifteen days. The
commencement of an antitrust action by the DOJ would stay the effectiveness of
Federal Reserve Board approval of the Merger unless a court specifically orders
otherwise. In reviewing the Merger, the DOJ could analyze the effect of the
Merger on competition differently than the Federal Reserve Board and, thus, it
is possible that the DOJ could reach a different conclusion than the Federal
Reserve regarding the competitive effects of the Merger.
DISSENTERS' RIGHTS
The rights of HHFC shareholders who choose to dissent from the Merger are
governed by the provisions of the IBCL. The IBCL provisions relating to
dissenters' rights (Ind. Code Sections 23-1-44-1 to -20) are attached hereto as
Appendix C.
Any shareholder who wishes to assert dissenters' rights must deliver to
HHFC a written notice stating that shareholder's intent to demand payment for
the shareholder's shares. This notice should be addressed to Hoosier Hills
Financial Corporation, P.O. Box 176, Osgood, Indiana 47037-0176. The
shareholder's notice must be delivered to HHFC before the vote is taken at the
Special Meeting and the shareholder must not vote in favor of the proposed
Merger. Shareholders who wish to exercise dissenters' rights must exercise them
as to all shares they own. Shareholders who own shares beneficially but not of
record must, in addition to the other requirements described herein, submit to
HHFC the consent of the record holders of such shares no later than the time
dissenters' rights are asserted. Any shareholder who fails to deliver the
shareholder's notice or votes in favor of the proposed Merger will not be
entitled to payment for his shares under dissenters' rights according to the
IBCL.
If the Merger is approved at the special meeting, HHFC will deliver a
written dissenters' notice to all shareholders who notified HHFC that they
intended to demand payment for their shares and who did not vote in favor of the
Merger. This dissenters' notice must be sent no later than 10 days after
approval of the Merger by shareholders and must (i) state where demand for
payment should be sent and where and when certificates for certificates shares
should be deposited; (ii) inform holders of uncertificated shares of the extent
of transfer restrictions imposed upon such shares after the demand for payment
is received; (iii) supply a form for demanding payment for shares that includes
the date of the first announcement to the news media or to shareholders of the
terms of the proposed Merger, which in the case of this proposed Merger was
April 21, 1998, and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date; (iv) establish a date by which HHFC must receive a demand for
payment, which date shall be no less than 30 nor more than 60 days after the
dissenters' notice is delivered; and (v) be accompanied by a copy of the
provisions of the IBCL pertaining to dissenters' rights. A dissenting
shareholder must demand payment, certify whether beneficial ownership of his
shares was acquired before the date set forth in the dissenters' notice and
deposit his certificates in accordance with the terms of such notice. Any
shareholder who demands payment and deposits shares in accordance with the terms
of the dissenters' notice shall retain all other
20
<PAGE>
rights as a shareholder until the rights are canceled or modified by
consummation of the Merger. Any shareholder who fails to demand payment or
deposit shares as required by the dissenters' notice by the respective dates
set forth therein will not be entitled to payment for his shares and shall be
considered to have voted in favor of the proposed Merger.
If a dissenting shareholder was the beneficial owner of his shares on or
before April 20, 1998 (a "Pre-announcement Shareholder"), the IBCL requires HHFC
to pay such shareholder the amount HHFC estimates to be the fair value of his
shares. Payment shall be made as soon as the Merger is consummated and must be
accompanied by year-end and interim financial statements of HHFC, a statement of
HHFC's estimate of the fair value of the shares, a statement of the dissenting
shareholder's right to demand payment, and a copy of the provisions of the IBCL
pertaining to dissenters' rights. If a dissenting shareholder was not the
beneficial owner of his shares prior to April 20, 1998 (a "Post-announcement
Shareholder"), HHFC may elect to withhold payment of the fair value of the
dissenting shareholder's shares. To the extent such payment is withheld, HHFC
is required to estimate the fair value of the dissenting shareholder's rights
and offer to pay this amount to each Post-announcement Shareholder who agrees to
accept it in full satisfaction of his demand. The offer must be accompanied by
a statement of HHFC's estimate of value and a statement of the dissenting
shareholder's right to demand payment under the IBCL.
The IBCL provides that a dissenting shareholder may notify HHFC in writing
of his estimate of the fair value of his shares and demand payment of the amount
of such estimate (less any payment already made by HHFC), or reject HHFC's offer
(if a Post-announcement Shareholder) and demand payment of the fair value of his
shares if (i) the dissenter believes the amount paid or offered is less than the
fair value of his shares, (ii) HHFC fails to pay Pre-announcement Shareholders
within 60 days after the date set for demanding payment, or (iii) if the
proposed Merger is not consummated, HHFC fails to return the deposited
certificates or release transfer restrictions imposed on uncertificated shares
within 60 days after the date set for demanding payment. In order to exercise
these rights, a dissenter must notify HHFC in writing within 30 days after HHFC
made or offered payment for the dissenter's shares.
If a demand for payment by a dissenting shareholder remains unsettled
within 60 days after HHFC's receipt of the demand for payment, HHFC must
commence a proceeding in the circuit or superior court of Ripley County, Indiana
and petition the court to determine the fair value of the shares. If such a
proceeding is not commenced within the 60-day period, HHFC must pay each
dissenting shareholder whose demand remains unsettled the amount demanded. All
dissenting shareholders whose demands remain unsettled must be made parties to
the proceeding and must be served with a copy of the petition. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. In any such proceeding, each dissenting
shareholder made a party is entitled to a judgment in the amount of the
difference between the fair value found by the court and the amount paid by HHFC
plus interest on such difference, in the case of a Pre-announcement Shareholder;
or the fair value, plus accrued interest, of the dissenting shareholder's shares
for which HHFC elected to withhold payment in the case of a Post-announcement
Shareholder. The court in an appraisal proceeding has the authority to
determine and assess the costs of the proceeding, including the compensation and
expenses of court-appointed appraisers, in such amounts and against such parties
as it deems equitable. The court may also assess fees and expenses of attorneys
and experts for the parties against HHFC if the court finds that HHFC did not
substantially comply with the requirements of the IBCL regarding dissenters'
rights, or against any party if the court finds that such party acted
arbitrarily, vexatiously or not in good faith. The IBCL also makes provision
for compensation of attorneys for any dissenting shareholder whose services
benefitted other dissenting shareholders similarly situated to be paid out of
the amounts awarded the dissenting shareholders who were benefitted, if not
assessed against HHFC.
If the holders of more than approximately 9% of the outstanding shares of
HHFC Common properly exercise their dissenters' rights, the Merger would not
qualify as a "pooling of interests" for accounting and financial reporting
purposes, which qualification is a condition to the obligation of NCBE to
proceed with the Merger. See "-- Accounting Treatment."
THE FOREGOING SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE
PROVISIONS OF THE IBCL RELATING TO THE RIGHTS OF DISSENTING SHAREHOLDERS OF
HHFC, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX C.
21
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of the parties. The representations and warranties made by NCBE
relate to, among other things: (i) the organization and corporate power of NCBE,
the authorization, execution and delivery of the Merger Agreement and the Merger
Agreement's noncontravention of charter documents, material agreements, laws and
regulations; (ii) the absence of any requirement to obtain the approval of
NCBE's shareholders in connection with the Merger; (iii) capitalization;
(iv) the delivery and accuracy of reports filed by NCBE under the Exchange Act;
(v) the conformity of financial statements in such reports to generally accepted
accounting principles ("GAAP"); (vi) the absence of any undisclosed material
liabilities and any material adverse change in NCBE's financial condition,
results of operations or business; (vii) the absence of any litigation, claim,
investigation, or other proceeding which, if adversely determined, would have a
material adverse effect; (viii) the authorization and nonassessability of the
shares of NCBE Common to be issued in the Merger; (ix) the absence of any
circumstances that would prevent the Merger from qualifying as a pooling of
interests or as a reorganization for federal income tax purposes and the absence
of any factor, other than the "needs improvement" rating assigned (at the time
of the Merger Agreement's execution) to NCBE's Year 2000 compliance efforts,
that would adversely affect regulatory approval of the Merger; and (x) the
absence of any untrue statements or omissions of material fact on the part of
NCBE in the Merger Agreement and related documents.
The representations and warranties made by HHFC relate to, among other
things: (i) the organization and corporate power of HHFC, the capitalization of
HHFC, the organization of the Bank, and the capitalization of the Bank; (ii) the
authorization, execution and delivery of the Merger Agreement and the Merger
Agreement's noncontravention of charter documents of HHFC and the Bank;
(iii) ownership and organization of subsidiaries; (iv) delivery of financial
statements of HHFC and the conformity of such financial statements to GAAP;
(v) the filing of tax returns and payment of taxes; (vi) contracts, commitments
or other agreements in excess of $50,000 to which HHFC or the Bank is a party;
(vii) ownership of real estate; (viii) the absence of any material adverse
change in the business financial condition, properties, results of operations or
capitalization of HHFC or the Bank; (ix) the absence of any litigation, claim,
investigation or other proceeding which, if adversely determined, would have a
material adverse effect on the business or financial condition of HHFC or the
Bank and the absence of any investigations, actions or other legal proceedings
involving any director, officer or employee of HHFC or the Bank; (x) insurance;
(xi) substantial compliance with applicable laws and regulations; (xii) the
absence of any obligation to pay broker's or finder's fees in connection with
the Merger except to IBS; (xiii) compliance of employee benefit plans with
applicable laws, rules and regulations; (xiv) labor-related matters; (xv) the
absence of knowledge of certain environmental related conditions or events;
(xvi) the absence of enforcement actions and other regulatory related matters;
(xvii) the absence of any circumstances that would prevent the Merger from
qualifying as a pooling of interests or as a reorganization for federal income
tax purposes and the absence of any factor, other than the "needs improvement"
rating assigned (at the time of the Merger Agreement's execution) to NCBE's
Year 2000 compliance efforts, that would adversely affect regulatory approval;
and (xviii) the absence of any untrue statements or omissions of material fact
on the part of HHFC in the Merger Agreement and related documents.
COVENANTS
The Merger Agreement contains covenants that the parties will take or
refrain from taking certain actions prior to the Effective Time. As to NCBE,
these covenants include, among other things, agreements to: (i) file, at its
sole expense, and prepare all regulatory applications required to consummate the
Merger, keep HHFC informed of the status of such applications and use its best
efforts to remedy any Year 2000 compliance issues raised by regulatory agencies;
(ii) file a Registration Statement on Form S-4 with the Commission relating to
the shares of NCBE Common to be issued in the Merger; (iii) use its best efforts
to list the shares of NCBE Common to be issued in the Merger on the Nasdaq
National Market; (iv) provide HHFC with access during regular business hours to
books and records relating to NCBE's assets, properties, operations and
liabilities; (v) not knowingly take any action that would adversely affect the
ability to account for the Merger as a pooling of interests or to qualify as a
reorganization for federal income tax purposes or that would adversely affect
regulatory approval of the Merger; (vi) notify HHFC of any event that may
reasonably have
22
<PAGE>
a material adverse effect on NCBE or if NCBE determines it may be unable to
fulfill the conditions to the Merger; (vii) indemnify HHFC directors and
officers for certain liabilities after the Effective Time of the Merger (see
"-- Interests of Certain Persons in the Merger"); (viii) make available
adequate current public information about NCBE within the meaning of Rule
144(c) under the Securities Act; and (ix) take certain actions with respect
to HHFC's and NCBE's employee benefit and welfare plans.
The covenants made by HHFC include, among other things, agreements by HHFC
and the Bank to: (i) conduct their business in the ordinary course, not default
in any obligations under material contracts, maintain insurance and existing
business organization and relationships; and comply with applicable laws;
(ii) notify NCBE of any event that may have a material adverse effect on the
financial condition, operations, business or assets of HHFC and the Bank or
would interfere with HHFC's ability to satisfy any conditions to its obligation
to consummate the Merger; (iii) not incur any obligation or liability other than
in the ordinary course of business, amend any material contract, acquire any
interest in another entity, sell or dispose of real property, expand or enhance
its data processing system, make any loan, commitment or line of credit to a
single borrower in excess of $1,000,000, make any capital expenditures except
for repairs, renewals or replacements in excess of $50,000 individually or
$100,000 in the aggregate, issue, sell, pledge or redeem any capital stock of
HHFC or the Bank, pay cash dividends on the HHFC Common in excess of $0.27 per
share, payable semi-annually in accordance with past practices (however, HHFC
and NCBE agree to cooperate with respect to the payment of dividends so that
holders of HHFC Common may receive cash dividends attributable either to HHFC or
NCBE, not both, for the quarter in which the Effective Time occurs), amend the
articles of incorporation or by-laws or similar documents of HHFC or the Bank,
enter into or amend an employment agreement, pay any extraordinary bonus,
establish any general increase in salaries, compromise or settle a tax claim,
open a new office, close any existing office, or knowingly take any action that
would adversely affect the ability to account for the Merger as a pooling of
interests; (iv) not modify its practices relating to loans to directors,
officers and employees; (v) not knowingly violate any laws, regulations,
judgments or orders; (vi) maintain all books and records in accordance with
GAAP; (vii) provide NCBE with access during regular business hours to books and
records relating to HHFC's and the Bank's assets, properties, operations and
liabilities; (viii) provide NCBE with copies of certain reports to the Board of
Directors of HHFC or the Bank and monthly financial statements and confer with
NCBE on the general status of ongoing operations; (ix) notify NCBE of any
material change in operations or certain complaints, investigations or
threatened litigation; (x) furnish NCBE with the information in HHFC's
possession that is required for any regulatory applications in connection with
the Merger; (xi) obtain and deliver to NCBE at least 31 days prior to the
Closing, an agreement from each person who may reasonably be deemed an
"affiliate" of HHFC for purposes of Rule 145 under the Securities Act, an
agreement regarding compliance with Rule 145 and restricting transfers of NCBE
Common following the Merger; (xii) cause a special meeting of HHFC shareholders
to be held and recommend approval of the Merger Agreement and the Merger; and
(xii) take certain actions with respect to HHFC's employee stock ownership plan.
CONDITIONS TO THE MERGER
In addition to the approval of HHFC shareholders, the obligations of both
parties to consummate the Merger are subject to the satisfaction or waiver of
certain other conditions, including, among others: (i) that all required
regulatory approvals have been obtained; (ii) that no action or proceeding has
been commenced to restrain the Merger; (iii) the absence of any notice from any
governmental agency indicating that the Merger would violate any law; (iv) the
effectiveness of the Registration Statement and the absence of a stop order with
respect thereto; and (v) the receipt of an opinion of Baker & Daniels to the
effect that the Merger will constitute a tax-free reorganization.
The obligation of NCBE to consummate the Merger is further conditioned on
the following: (i) the continued accuracy in all material respects of the
representations and warranties of HHFC in the Merger Agreement, the performance
or satisfaction in all material respects of all covenants to be performed by
HHFC under the Merger Agreement, and the absence of any material adverse change
prior to Closing in the business, assets, properties, financial condition or
results of operations of HHFC or the Bank; (ii) the receipt of opinions of
counsel to HHFC as to certain matters relating to HHFC and the Merger; and
(iii) the determination by NCBE that the Merger may be accounted for as a
pooling of interests.
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<PAGE>
The obligation of HHFC to consummate the Merger is further conditioned on
the following: (i) the continued accuracy in all material respects of the
representations and warranties of NCBE in the Merger Agreement, the performance
or satisfaction in all material respects of all covenants to be performed by
NCBE under the Merger Agreement and the absence of any material adverse change
prior to the Closing in the business assets, properties, financial conditions of
NCBE and its subsidiaries, taken as a whole; (ii) the receipt of opinions of
counsel to NCBE as to certain matters relating to NCBE and the Merger; (iii) the
listing on the Nasdaq Stock Market of the shares of NCBE Common to be issued on
the Merger; and (iv) the receipt, as of the date of mailing this Proxy
Statement/Prospectus of an opinion from its financial advisor to effect that the
Merger Consideration is fair, from a financial viewpoint, to the HHFC
shareholders.
TERMINATION AND WAIVER
The Merger Agreement may be terminated and the Merger abandoned prior to
the Effective Time, before or after approval of the Merger Agreement by the HHFC
shareholders: (i) by mutual consent of HHFC and NCBE; (ii) by HHFC if HHFC or
its Board of Directors accepts or approves a "Competing Transaction"; (iii) by
NCBE, if any of the conditions to its obligation to consummate the Merger have
not been satisfied by December 31, 1998; (iv) by HHFC, if any of the conditions
to its obligation to consummate the Merger have not been satisfied by
December 31, 1998; or (v) by HHFC within three (3) business days prior to the
Closing if the Average NCBE Value is less than $32.00; however, NCBE may negate
HHFC's termination by written notice to HHFC, in which event, the amount of the
NCBE Common to be issued in the Merger (based on the Average NCBE Value) for
each share of HHFC Common will be equal to $59.63.
HHFC and NCBE may, by written instrument, amend or modify the Merger
Agreement in whole or in part, or waive compliance with any of the covenants or
conditions of the Merger Agreement, before or after approval of the Merger
Agreement by the HHFC shareholders, to the extent authorized by applicable law.
NO SOLICITATION; FEES AND EXPENSES
The Merger Agreement prohibits HHFC, the Bank and their officers, directors
and representatives, from soliciting or authorizing the solicitation of
inquiries or proposals from third parties regarding an acquisition of HHFC, the
Bank, or all or substantially all of their assets, unless HHFC's Board of
Directors has reasonably determined, based on the written advice of counsel,
that the failure to do so would breach its fiduciary duties. The foregoing
prohibition also extends to conducting discussions or negotiations with third
parties or furnishing confidential information to any person relating to an
acquisition proposal. HHFC is required to communicate to NCBE the terms of any
such proposal.
Except as described below or as otherwise expressly provided in the Merger
Agreement, each party is to pay its own fees and expenses incurred in connection
with the Merger, the Merger Agreement and the transactions contemplated therein.
Upon the occurrence of a Triggering Event, HHFC is required to reimburse
NCBE for all out-of-pocket expenses incurred by NCBE in connection with the
transactions contemplated by the Merger Agreement up to a maximum of $150,000.
"Triggering Event" means the termination of the Merger Agreement for any reason
other than certain specified conditions to the Merger and the occurrence of any
of the following events within one year: (i) HHFC enters into an agreement with
a third party for a Competing Transaction; (ii) the recommendation of a
Competing Transaction by the HHFC Board of Directors; or (iii) the withdrawal or
modification of the recommendation of the Merger Agreement by the HHFC Board of
Directors following the announcement of a Competing Transaction. "Competing
Transaction" means any of the following (other than the transactions
contemplated by the Merger Agreement): (i) an offer for 25% or more of the
outstanding capital stock of HHFC or the Bank; (ii) a proposal for a merger,
consolidation, share exchange, business combination or similar transaction
involving HHFC or the Bank; or (iii) a proposal for the sale, lease, exchange or
other disposition of 25% or more of HHFC's assets.
24
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the Merger to certain HHFC shareholders and does not purport to
be a complete analysis or listing of all potential tax considerations or
consequences relevant to a decision whether to vote for the approval of the
Merger Agreement. The discussion does not address all aspects of federal income
taxation that may be applicable to HHFC shareholders in light of their status or
personal investment circumstances, nor does it address the federal income tax
consequences of the Merger that are applicable to HHFC shareholders subject to
special federal income tax treatment including, without limitation, foreign
persons, insurance companies, tax-exempt entities, retirement plans, dealers in
securities, persons who acquired their HHFC Common pursuant to the exercise of
employee stock options or otherwise as compensation. In addition, the
discussion does not address the effect of any applicable state, local or foreign
tax laws, or the effect of any federal tax laws other than those pertaining to
the federal income tax. As a result, each HHFC shareholder is urged to consult
his or her own tax advisor to determine the specific tax consequences of the
Merger to such shareholder. The discussion assumes that shares of HHFC Common
are held as capital assets (within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code")) at the Effective Time.
It is a condition to the Merger that as of the Closing the parties receive
an opinion from Baker & Daniels, counsel to NCBE ("Counsel"), to the effect
that, assuming the Merger occurs in accordance with the Merger Agreement, the
Merger will constitute a reorganization for federal income tax purposes under
Section 368(a) of the Code, with the following federal income tax consequences:
(i) HHFC shareholders will recognize no gain or loss as a result of
the exchange of their HHFC Common solely for shares of NCBE Common pursuant
to the Merger, except with respect to cash received in lieu of fractional
share interests, if any, as discussed below.
(ii) The aggregate adjusted tax basis of the shares of NCBE Common
received by each HHFC shareholder in the Merger (including any fractional
share of NCBE Common deemed to be received, as described in paragraph (iv)
below) will be equal to the aggregate adjusted tax basis of the shares of
HHFC Common surrendered.
(iii) The holding period of the shares of NCBE Common received by
each HHFC shareholder in the Merger (including any fractional share of NCBE
Common deemed to be received, as described in paragraph (iv) below) will
include the holding period of the shares of HHFC Common exchanged therefor.
(iv) An HHFC shareholder who receives cash in lieu of a fractional
share of NCBE Common will be treated as if the fractional share had been
received by such shareholder in the Merger and then redeemed by NCBE in
return for the cash amount. The receipt of such cash will cause the
recipient to recognize capital gain or loss equal to the difference between
the amount of cash received and the portion of such holder's adjusted tax
basis in the shares of NCBE Common allocable to the fractional share.
(v) Cash received by HHFC shareholders exercising dissenters' rights
will be treated as (a) a distribution in full payment of such shares,
resulting in capital gain or loss, or (b) ordinary income, as the case may
be, depending upon such shareholder's individual situation.
Counsel's opinion will be subject to certain conditions and customary
assumptions and will rely upon various representations made by NCBE, HHFC and
certain shareholders of HHFC. If any of these representations or assumptions is
inaccurate, the tax consequences of the Merger could differ from those described
herein. Counsel's opinion will also be based upon the Code, regulations
proposed or promulgated thereunder, judicial precedent relating thereto, and
current administrative rulings and practice, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences discussed herein. An opinion of counsel, unlike a private letter
ruling from the Internal Revenue Service ("Service"), has no binding effect.
The Service could take a position contrary to Counsel's opinion and, if the
matter were litigated, a court could reach a decision contrary to the
25
<PAGE>
opinion. Neither NCBE nor HHFC has requested an advance ruling as to the
federal income tax consequences of the Merger, and the Service is not
expected to issue such a ruling.
Based upon the advice of Counsel, the parties believe that the Merger will
qualify as a reorganization for federal income tax purposes. Accordingly, the
material federal income tax consequences to a holder of HHFC Common will be as
described in (i) through (v) above.
THE FOREGOING IS A GENERAL SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO SHAREHOLDERS OF HHFC WITHOUT REGARD TO THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S TAX SITUATION AND
STATUS. EACH SHAREHOLDER OF HHFC SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE
POSSIBLE EFFECT OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under the pooling of interests
method of accounting, the assets and liabilities of NCBE and HHFC will be
carried forward after the Effective Time into the consolidated financial
statements of NCBE at their recorded amounts, the consolidated income of NCBE
will include income of NCBE and HHFC for the entire fiscal year in which the
Merger occurs, the separately reported income of NCBE and HHFC for prior periods
will be combined and restated as consolidated income of NCBE, and no goodwill
will be recognized.
The Merger Agreement provides that NCBE must determine that the Merger will
qualify as a pooling of interests as a condition to NCBE's obligation to
consummate the Merger. If this condition is not met, the Merger would not be
consummated unless the condition was waived by NCBE. As of the date of this
Proxy Statement/Prospectus, NCBE and HHFC are not aware of any existing facts or
circumstances which would preclude the Merger from qualifying as a pooling of
interests.
The unaudited pro forma financial information contained in this Proxy
Statement/Prospectus has been prepared using the pooling of interests accounting
method to account for the Merger.
RESALE OF NCBE COMMON
The shares of NCBE Common issuable pursuant to the Merger will be freely
transferable under the Securities Act except for shares issued to any HHFC
shareholder who may be deemed to be an "affiliate" of NCBE for purposes of Rule
144 under the Securities Act or an "affiliate" of HHFC for purposes of Rule 145
under the Securities Act. Persons who may be deemed to be affiliates of HHFC or
NCBE generally include individuals who, or entities which, control, are
controlled by or are under common control with HHFC or NCBE and will include
directors and certain officers of HHFC and NCBE and may include principal
shareholders of HHFC and NCBE, if any.
Rules 144 and 145 under the Securities Act will restrict the sale of NCBE
Common received in the Merger by affiliates and certain of their family members
and related interests. Generally, during the first year following the Effective
Time, those persons who are affiliates of HHFC at the time of the Special
Meeting, provided they are not affiliates of NCBE at or following the Effective
Time, may publicly resell any NCBE Common received by them in the Merger,
subject to certain limitations as to, among other things, the amount of NCBE
Common sold by them in any three-month period and as to the manner of sale.
After the one year period, such affiliates may resell their shares without such
restrictions so long as there is adequate current public information with
respect to NCBE as required by Rule 144 under the Securities Act.
26
<PAGE>
The ability of affiliates to resell shares of NCBE Common received in the
Merger under Rule 144 or 145 under the Securities Act generally will be subject
to NCBE's having satisfied its Exchange Act reporting requirements for specified
periods prior to the time of sale. Affiliates also would be permitted to resell
shares of NCBE Common received in the Merger that have been registered under the
Securities Act or are exempt from the Securities Act registration requirements.
Guidelines of the Commission regarding qualifying for the pooling of
interests method of accounting also limit sales of shares of the acquiring and
acquired company by affiliates of either company in a business combination.
Guidelines of the Commission indicate further that the pooling of interests
method of accounting will generally not be challenged on the basis of sales by
affiliates of the acquiring or acquired company if they do not dispose of any of
the shares of the corporation they own or shares of a corporation they receive
in connection with a merger during the period beginning 30 days before the
merger and ending when financial results covering at least 30 days of
post-merger operations of the combined entity have been published.
The Merger Agreement provides that HHFC will obtain and deliver to NCBE an
agreement from each person who may reasonably be deemed an affiliate of HHFC
providing that such affiliate will not transfer any shares of NCBE Common
received in the Merger except in compliance with the Securities Act and in
compliance with the requirements described in the preceding paragraph regarding
the non-disposition of any shares of HHFC Common or NCBE Common (or any interest
therein) during the period commencing 30 days prior to the Effective Time
through the date on which financial results covering at least 30 days of
combined operations of NCBE and HHFC after the Merger have been published.
This Proxy Statement/Prospectus does not cover resales of shares of NCBE
Common received by any person who may be deemed to be an affiliate of HHFC or
NCBE.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the HHFC Board of Directors have certain interests in
the transactions contemplated by the Merger Agreement that are in addition to
their interests as HHFC shareholders, including those referred to below.
NCBE has agreed to indemnify and hold harmless the present and former
directors, officers, employees and agents of HHFC and the Bank against all
liabilities arising out of actions or omissions occurring at or prior to the
Effective Time to the fullest extent permitted by Indiana law or by the charter
documents of HHFC and the Bank, including provisions relating to advancement of
expenses in connection with any related legal proceedings. NCBE has also agreed
to pay the reasonable costs, including attorneys' fees, that any indemnified
person incurs in enforcing the indemnity provisions of the Merger Agreement.
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<PAGE>
SELECTED FINANCIAL DATA
The following tables present selected unaudited consolidated historical
financial data for NCBE. The data presented is derived from the consolidated
financial statements of NCBE and should be read in conjunction with the more
detailed information and financial statements incorporated by reference in this
Proxy Statement/Prospectus. See "WHERE YOU CAN FIND MORE INFORMATION."
NCBE
(Dollar amounts other than per share data in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income $13,903 $12,528 $51,995 $48,606 $44,433 $39,933 $38,010
Provision for loan losses 229 366 1,891 2,704 399 78 736
---------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 13,674 12,162 50,104 45,902 44,034 39,855 37,274
Noninterest income 2,714 2,533 10,088 8,606 7,117 5,209 6,707
Noninterest expense 8,995 7,899 34,390 29,966 28,968 28,644 28,343
---------------------------------------------------------------------------------------
Income before income taxes 7,393 6,796 25,802 24,542 22,183 16,420 15,638
Income taxes 2,280 2,123 7,451 8,046 7,784 5,668 4,861
---------------------------------------------------------------------------------------
Net income $5,113 $4,673 $18,351 $16,496 $14,399 $10,752 $10,777
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
PER SHARE DATA
Net income
Basic $0.48 $0.44 $1.72 $1.52 $1.30 $0.97 $0.97
Diluted 0.47 0.43 1.69 1.52 1.30 0.97 0.97
Book value 13.93 12.79 13.69 12.12 11.71 10.47 10.23
Cash dividends declared 0.18 0.15 0.64 0.55 0.40 0.40 0.38
SUMMARY OF FINANCIAL
CONDITION
Total assets $1,496,247 $1,227,643 $1,298,260 $1,172,057 $1,081,921 $1,004,160 $993,468
Securities 320,679 290,894 279,328 282,894 258,895 268,103 269,098
Loans, net 1,031,647 835,014 908,387 793,433 730,821 639,485 574,028
Deposits 1,158,831 947,488 964,046 913,350 864,136 849,306 844,808
Shareholders' equity 149,763 129,800 146,803 129,694 130,606 114,750 113,975
SELECTED FINANCIAL RATIOS
Net income to average assets 0.38% 0.40% 1.47% 1.48% 1.40% 1.09% 1.09%
Net income to average equity 3.55 3.62 13.42 12.89 11.74 9.39 9.79
Cash dividend payout ratio 37.85 34.05 36.74 37.05 30.05 36.77 31.65
Average equity to average assets 10.73 10.93 10.98 11.48 11.93 11.59 11.14
Weighted average shares (basic) 10,744,301 10,684,348 10,679,448 10,843,295 11,095,116 11,040,906 11,146,280
Weighted average shares (diluted) 10,893,547 10,803,886 10,832,943 10,843,295 11,095,116 11,040,906 11,146,280
</TABLE>
28
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following tables contain unaudited pro forma condensed consolidated
financial statements including a balance sheet as of March 31, 1998, and
statements of earnings for the three months ended March 31, 1998 and the
years ended December 31, 1997, 1996, and 1995. These statements present
information for NCBE and on a pro forma combined basis giving effect to the
Merger and (A) as of March 31, 1998, for all Other Pooling Acquisitions (as
defined under "INFORMATION CONCERNING NCBE" --"Recent Developments") and (B)
for all other periods, all Other Pooling Acquisitions except for the
acquisitions of Downstate Banking Co. and Commonwealth Commercial Corp.,
which NCBE intends to account for as immaterial poolings. As further
described in "INFORMATION CONCERNING NCBE" -- "Recent Developments," NCBE
consummated the Purchase Transactions in the first quarter. The Purchase
Transactions are not individually or in the aggregate considered material to
NCBE from a financial statement presentation standpoint, and the pro forma
data does not include the Purchase Transactions (except to the extent they
are reflected in NCBE's first quarter information). The data presented is not
necessarily indicative of the results of the future operations of the
combined organization or the actual results that would have occurred if the
Merger or Other Pooling Acquisitions had been consummated prior to the
periods indicated. The data presented should be read in conjunction with the
more detailed information and financial statements included herein or
incorporated by reference in this Proxy Statement/Prospectus and with the
unaudited pro forma financial statements included elsewhere in this Proxy
Statement/Prospectus. See "WHERE YOU CAN FIND MORE INFORMATION," "SUMMARY
COMPARATIVE HISTORICAL AND COMBINED PER SHARE DATA," "SELECTED FINANCIAL
DATA," "INFORMATION CONCERNING HHFC" and "INDEX TO HHFC FINANCIAL
STATEMENTS."
29
<PAGE>
NCBE
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS, OTHER THAN SHARE DATA)
<TABLE>
<CAPTION>
NCBE AND
OTHER
POOLING PRO FORMA
NCBE ACQUISITIONS HHFC ADJUSTMENTS TOTAL
----- ------------ ------ ------------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $44,319 $60,176 $2,344 $62,520
Time deposits in banks 1,391 4,784 626 5,410
Federal funds sold 18,118 3,850 21,968
Securities held to maturity 6,881 6,881
Securities available for sale 307,409 437,080 13,500 450,580
Nonmarketable equity securities 13,270 16,958 964 17,922
Loans 1,031,647 1,420,015 85,607 1,505,622
Premises and equipment 35,881 43,690 1,390 45,080
Intangible assets 39,898 42,744 0 42,744
Other Assets 22,432 29,637 1,239 30,876
----------- ----------- ---------- ----------- -----------
TOTAL ASSETS $1,496,247 $2,080,083 $109,520 $2,189,603
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
LIABILITIES
Deposits
Noninterest-bearing $138,591 $225,085 $11,186 $236,271
Interest-bearing 1,020,240 1,422,742 75,367 1,498,109
----------- ----------- ---------- ----------- -----------
Total deposits 1,158,831 1,647,827 86,553 1,734,380
----------- ----------- ---------- ----------- -----------
Short-term borrowings 51,516 57,657 295 57,952
Other borrowings 84,991 109,644 10,441 120,085
Guaranteed preferred beneficial interests in the
Corporation's subordinated debenture 34,500 34,500 34,500
Dividends payable 1,935 1,935 1,935
Deferred income taxes 4,109 4,241 4,241
Other liabilities 10,602 15,544 821 16,365
----------- ----------- ---------- ----------- -----------
TOTAL LIABILITIES 1,346,484 1,871,348 98,110 1,969,458
----------- ----------- ---------- ----------- -----------
Common stock owned by ESOP subject to put options 4,186 (4,186) (1)
EQUITY
Class A nonvoting preferred 361 (361) (2)
Class B nonvoting preferred 9 (9) (2)
Common stock 10,752 17,862 149 370 (2) 18,381
Treasury stock (2,103) (292) 2,395 (3)
Capital surplus 79,969 89,082 3,418 92,500
Unearned ESOP shares (63) (295) (358)
Retained earnings 56,036 99,840 8,200 (2,395) (3) 105,645
Common stock owned by ESOP subject
to put redemption (4,186) 4,186 (1)
Unrealized gain on securities available for
sale 3,006 3,747 230 3,977
----------- ----------- ---------- ----------- -----------
TOTAL EQUITY 149,763 208,735 7,224 4,186 220,145
----------- ----------- ---------- ----------- -----------
TOTAL LIABILITIES AND EQUITY $1,496,247 $2,080,083 $109,520 0 $2,189,603
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
</TABLE>
Proforma adjustment explanations:
(1) Shares of HHFC Common held by the ESOP subject to the put option will be
exchanged for shares of NCBE Common. The ESOP will be terminated and the
NCBE Common will be distributed to the participants.
(2) Preferred stock issued by Community First Financial, Inc. will be exchanged
for 79,916 shares of NCBE Common.
(3) Reflects the retirement of treasury shares reflected on the
financial statements of HHFC, 1st Bancorp Vienna, Inc. and Illinois One
Bancorp, Inc.
30
<PAGE>
NCBE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, OTHER THAN SHARE DATA)
<TABLE>
<CAPTION>
NCBE AND
OTHER
POOLING
NCBE ACQUISITIONS HHFC TOTAL
------- -------------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $21,656 $31,240 $1,905 $33,145
Interest and dividends on securities 4,057 5,692 241 5,933
Interest on federal funds sold 37 283 41 324
Interest on other income 50 130 130
---------- ---------- ---------- ------------
TOTAL INTEREST INCOME 25,800 37,345 2,187 39,532
---------- ---------- ---------- ------------
INTEREST EXPENSE
Interest on deposits 10,047 14,872 910 15,782
Interest on short-term borrowings 1,850 1,870 8 1,878
Interest on other borrowings 388 163 551
---------- ---------- ---------- ------------
TOTAL INTEREST EXPENSE 11,897 17,130 1,081 18,211
---------- ---------- ---------- ------------
NET INTEREST INCOME 13,903 20,215 1,106 21,321
Provision for loan losses 229 359 45 404
---------- ---------- ---------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,674 19,856 1,061 20,917
---------- ---------- ---------- ------------
NONINTEREST INCOME
Trust income 483 483 483
Service charges on deposit accounts 1,081 1,675 54 1,729
Other service charges and fees 47 47
Securities gains (losses) 68 60 5 65
Other 1,082 1,652 51 1,703
---------- ---------- ---------- ------------
TOTAL NONINTEREST INCOME 2,714 3,917 110 4,027
---------- ---------- ---------- ------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 4,768 6,828 562 7,390
Occupancy expense 1,276 1,743 180 1,923
Other 2,951 4,493 178 4,671
---------- ---------- ---------- ------------
TOTAL NONINTEREST EXPENSE 8,995 13,064 920 13,984
---------- ---------- ---------- ------------
INCOME BEFORE INCOME TAXES 7,393 10,709 251 10,960
Income tax expense 2,280 3,186 99 3,285
---------- ---------- ---------- ------------
NET INCOME $5,113 $7,523 $152 $7,675
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Earnings per share:
Basic $0.48 $0.49 $0.48
Diluted $0.47 $0.49 $0.47
Weighted shares:
Basic 10,744,301 15,261,245 16,036,870
Diluted 10,893,547 15,410,491 16,186,116
</TABLE>
31
<PAGE>
NCBE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, OTHER THAN SHARE DATA)
<TABLE>
<CAPTION>
NCBE AND
OTHER
POOLING
NCBE ACQUISITIONS HHFC TOTAL
-------- -------------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $18,103 $26,230 $1,756 $27,986
Interest and dividends on securities 4,282 5,856 306 6,162
Interest on federal funds sold 39 236 14 250
Interest on other income 48 123 123
--------- --------- -------- ---------
TOTAL INTEREST INCOME 22,472 32,445 2,076 34,521
--------- --------- -------- ---------
INTEREST EXPENSE
Interest on deposits 8,436 12,580 879 13,459
Interest on other borrowings 1,508 1,851 149 2,000
--------- --------- -------- ---------
TOTAL INTEREST EXPENSE 9,944 14,431 1,028 15,459
--------- --------- -------- ---------
Provision for loan losses 366 595 38 633
--------- --------- -------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,162 17,419 1,010 18,429
--------- --------- -------- ---------
NONINTEREST INCOME
Trust income 429 436 436
Service charges on deposit accounts 918 1,500 51 1,551
Securities gains (losses) 469 476 6 482
Other 717 944 40 984
--------- --------- -------- ---------
TOTAL NONINTEREST INCOME 2,533 3,356 97 3,453
--------- --------- -------- ---------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 4,557 6,347 493 6,840
Occupancy expense 1,088 1,478 148 1,626
Other 2,254 3,411 119 3,530
--------- --------- -------- ---------
TOTAL NONINTEREST EXPENSE 7,899 11,236 760 11,996
--------- --------- -------- ---------
INCOME BEFORE INCOME TAXES 6,796 9,539 347 9,886
Income tax expense 2,123 2,942 132 3,074
--------- --------- -------- ---------
NET INCOME $4,673 $6,597 $215 $6,812
--------- --------- -------- ---------
--------- --------- -------- ---------
Earnings per share:
Basic $0.44 $0.44 $0.43
Diluted $0.43 $0.44 $0.43
Weighted shares:
Basic 10,684,348 14,894,960 15,670,585
Diluted 10,803,886 15,014,498 15,790,123
</TABLE>
32
<PAGE>
NCBE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, OTHER THAN SHARE DATA)
<TABLE>
<CAPTION>
NCBE AND
OTHER
POOLING
NCBE ACQUISITIONS HHFC TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $77,215 $111,354 $7,345 $118,699
Tax-exempt 924 924 924
Interest and dividends on securities:
Taxable 8,775 14,492 318 14,810
Tax-exempt 8,282 9,556 446 10,002
Interest on federal funds sold 218 941 65 1,006
Interest on other income 214 252 318 570
---------- ----------- --------- ----------
TOTAL INTEREST INCOME 95,628 137,519 8,492 146,011
---------- ----------- --------- ----------
INTEREST EXPENSE
Interest on deposits 36,118 53,175 3,572 56,747
Interest on short-term borrowings 3,165 3,198 59 3,257
Interest on other borrowings 4,350 6,219 595 6,814
---------- ----------- --------- ----------
TOTAL INTEREST EXPENSE 43,633 62,592 4,226 66,818
---------- ----------- --------- ----------
NET INTEREST INCOME 51,995 74,927 4,266 79,193
Provision for loan losses 1,891 2,538 150 2,688
---------- ----------- --------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 50,104 72,389 4,116 76,505
---------- ----------- --------- ----------
NONINTEREST INCOME
Trust income 1,927 1,927 1,927
Service charges on deposit accounts 3,981 6,169 218 6,387
Other service charges and fees 2,631 2,770 2,770
Securities gains (losses) 794 793 11 804
Other 755 1,653 231 1,884
---------- ----------- --------- ----------
TOTAL NONINTEREST INCOME 10,088 13,312 460 13,772
---------- ----------- --------- ----------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 19,479 26,986 2,254 29,240
Occupancy expense 4,611 6,266 555 6,821
Other 10,300 15,278 520 15,798
---------- ----------- --------- ----------
TOTAL NONINTEREST EXPENSE 34,390 48,530 3,329 51,859
---------- ----------- --------- ----------
INCOME BEFORE INCOME TAXES 25,802 37,171 1,247 38,418
Income tax expense 7,451 10,997 477 11,474
---------- ----------- --------- ----------
NET INCOME $18,351 $26,174 $770 $26,944
---------- ----------- --------- ----------
---------- ----------- --------- ----------
Earnings per share:
Basic $1.72 $1.70 $1.72
Diluted $1.69 $1.68 $1.70
Weighted shares:
Basic 10,679,448 14,890,060 15,665,685
Diluted 10,832,943 15,043,555 15,819,180
</TABLE>
33
<PAGE>
NCBE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, OTHER THAN SHARE DATA)
<TABLE>
<CAPTION>
NCBE AND
OTHER
POOLING
NCBE ACQUISITIONS HHFC TOTAL
-------- -------------- ------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $69,372 $100,203 $6,625 $106,828
Tax-exempt 695 695 695
Interest and dividends on securities:
Taxable 11,069 16,747 288 17,035
Tax-exempt 4,887 6,054 508 6,562
Interest on federal funds sold 253 817 125 942
Interest on other income 273 602 347 949
--------- ---------- --------- ---------
TOTAL INTEREST INCOME 86,549 125,118 7,893 133,011
--------- ---------- --------- ---------
INTEREST EXPENSE
Interest on deposits 33,041 48,756 3,595 52,351
Interest on short-term borrowings 2,277 2,296 85 2,381
Interest on other borrowings 2,625 4,372 282 4,654
--------- ---------- --------- ---------
TOTAL INTEREST EXPENSE 37,943 55,424 3,962 59,386
--------- ---------- --------- ---------
NET INTEREST INCOME 48,606 69,694 3,931 73,625
Provision for loan losses 2,704 3,546 150 3,696
--------- ---------- --------- ---------
Net interest income after provision for loan losses 45,902 66,148 3,781 69,929
--------- ---------- --------- ---------
NONINTEREST INCOME
Trust income 1,748 1,818 0 1,818
Service charges on deposit accounts 3,650 5,870 180 6,050
Other service charges and fees 2,358 2,581 0 2,581
Securities gains (losses) 42 18 3 21
Other 808 1,500 184 1,684
--------- ---------- --------- ---------
TOTAL NONINTEREST INCOME 8,606 11,787 367 12,154
--------- ---------- --------- ---------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 16,694 23,882 1,954 25,836
Occupancy expense 4,338 6,056 462 6,518
Other 8,934 13,663 480 14,143
--------- ---------- --------- ---------
Total noninterest expense 29,966 43,601 2,896 46,497
--------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES 24,542 34,334 1,252 35,586
Income tax expense 8,046 10,961 357 11,318
--------- ---------- --------- ---------
NET INCOME $16,496 $23,373 $895 $24,268
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Earnings per share:
Basic $1.52 $1.55 $1.53
Diluted $1.52 $1.55 $1.53
Weighted shares:
Basic 10,843,295 15,053,907 15,829,532
Diluted 10,843,295 15,053,907 15,829,532
</TABLE>
34
<PAGE>
NCBE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, OTHER THAN SHARE DATA)
<TABLE>
<CAPTION>
NCBE AND
OTHER
POOLING
NCBE ACQUISITIONS HHFC TOTAL
------- ------------ ------ -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $61,615 $89,809 $6,040 $95,849
Tax-exempt 693 693 693
Interest and dividends on securities:
Taxable 12,226 16,597 666 17,263
Tax-exempt 2,859 5,299 517 5,816
Interest on federal funds sold 855 1,360 87 1,447
Interest on other income 596 820 820
------- ------------ ------ -------
TOTAL INTEREST INCOME 78,844 114,578 7,310 121,888
------- ------------ ------ -------
INTEREST EXPENSE
Interest on deposits 32,291 46,628 3,275 49,903
Interest on short-term borrowings 1,218 1,218 183 1,401
Interest on other borrowings 902 2,247 116 2,363
------- ------------ ------ -------
TOTAL INTEREST EXPENSE 34,411 50,093 3,574 53,667
------- ------------ ------ -------
Net interest income 44,433 64,485 3,736 68,221
Provision for loan losses 399 988 150 1,138
------- ------------ ------ -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 44,034 63,497 3,586 67,083
------- ------------ ------ -------
NONINTEREST INCOME
Trust income 1,503 1,608 1,608
Service charges on deposit accounts 2,959 5,107 167 5,274
Other service charges and fees 1,814 1,973 1,973
Securities gains (losses) 26 27 10 37
Other 815 1,589 113 1,702
------- ------------ ------ -------
TOTAL NONINTEREST INCOME 7,117 10,304 290 10,594
------- ------------ ------ -------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 16,577 23,944 1,809 25,753
Occupancy expense 4,062 5,449 488 5,937
Other 8,329 12,889 516 13,415
------- ------------ ------ -------
Total noninterest expense 28,968 42,292 2,813 45,105
------- ------------ ------ -------
INCOME BEFORE INCOME TAXES 22,183 31,509 1,063 32,572
Income tax expense 7,784 10,686 328 11,014
------- ------------ ------ -------
NET INCOME $14,399 $20,823 $735 $21,558
------- ------------ ------ -------
------- ------------ ------ -------
Earnings per share:
Basic $1.30 $1.36 $1.34
Diluted $1.30 $1.36 $1.34
Weighted shares:
Basic 11,095,116 15,305,728 16,081,353
Diluted 11,095,116 15,305,728 16,081,353
</TABLE>
35
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDENDS
Shares of NCBE Common are traded on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol "NCBE". The following table sets
forth the high and low sales prices of NCBE Common and cash dividends
declared for the periods indicated. Prices and dividends have been adjusted
to reflect stock dividends and splits. There is no established public
trading market for the shares of HHFC Common. Management of HHFC is not
aware of any transactions involving HHFC Common during the past two years.
<TABLE>
<CAPTION>
NCBE COMMON HHFC COMMON
------------------------------------------ --------------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
LOW HIGH DECLARED LOW (1) HIGH (1) DECLARED
--- ---- -------- --- ---- --------
<S> <C> <C> <C> <C> <C> <C>
1996
First Quarter $21.54 $27.10 $0.11 N/A N/A 0
Second Quarter 25.17 26.76 0.14 1/2 N/A N/A 0.18 1/2
Third Quarter 25.17 26.42 0.15 1/2 N/A N/A 0
Fourth Quarter 25.40 28.57 0.15 N/A N/A 0.18 1/2
1997
First Quarter 27.86 32.26 0.15 1/4 N/A N/A 0
Second Quarter 30.24 40.24 0.15 1/4 N/A N/A 0.27
Third Quarter 38.57 41.67 0.15 1/4 N/A N/A 0
Fourth Quarter 40.00 51.19 0.18 N/A N/A 0.27
1998
First Quarter 38.50 45.50 0.18 N/A N/A 0.00
Second Quarter 37.00 45.00 0.18 N/A N/A 0.27
Third Quarter (2) -- N/A N/A --
</TABLE>
____________
(1) There is no established public trading market for HHFC Common. The market
(to the extent one can be said to exist) for HHFC Common has generally been
one local to the Ripley County, Indiana area. Trading of HHFC Common has
been conducted primarily through private transactions and transfers within
families or estates. Price information for these private transactions has
not been made available to HHFC.
(2) Through August 7, 1998.
On April 20, 1998, the last trading day before the public announcement of
the proposed acquisition, the closing sale price of NCBE Common, was $42.875 per
share. Based upon the per share price of NCBE Common on such date, the
equivalent per share price of HHFC Common would have been $75.19. The
equivalent per share price for HHFC Common is calculated by multiplying the
specified closing sale price of NCBE Common by the number of shares of NCBE
Common to be issued for each share of HHFC Common in the Merger. The foregoing
illustration assumes that each share of HHFC Common was converted into
1.7537 shares of NCBE Common.
On August 7, 1998, the closing sale price of NCBE Common was $36.75 per
share. Based on the per share price of NCBE Common on such date, the equivalent
per share price for HHFC Common would have been $64.45, assuming that each
share of HHFC Common was converted into 1.7537 shares of NCBE Common.
As of July 31, 1998, there were 2,227 and 138 holders of record of NCBE
Common and HHFC Common, respectively.
Both NCBE and HHFC depend upon dividends from their financial institution
subsidiaries to pay dividends to their shareholders. The ability of the
financial institution subsidiaries to pay such dividends is limited by
applicable banking laws and regulations.
Shareholders of HHFC are advised to obtain current market quotations for
NCBE Common.
36
<PAGE>
INFORMATION CONCERNING NCBE
BUSINESS
NCBE was organized in 1985 to act as a bank holding company for The
National City Bank of Evansville ("NCB"), which remains NCBE's principal banking
subsidiary. As of July 30, 1998, NCBE owned 13 commercial banks (including
NCB), one savings bank, a leasing subsidiary and a property management company.
As of March 31, 1998, NCBE had total consolidated assets of $1.5 billion, total
loans of $1.0 billion, total deposits of $1.2 billion and total shareholders'
equity of $149.8 million. As of July 30, NCBE's financial institution
subsidiaries provide a wide range of banking services from 47 locations in the
tri-state area of Indiana, Kentucky, and Illinois surrounding Evansville,
Indiana.
RECENT DEVELOPMENTS
The following is a brief description of the three acquisitions that NCBE
has completed since December 31, 1997:
MAYFIELD BRANCH. On January 8, 1998, NCBE's subsidiary, First Kentucky
Bank, through an affiliate acquired the Mayfield, Kentucky Branch of Republic
Bank & Trust Company. First Kentucky Bank assumed deposit liabilities of
$65.7 million in consideration of a deposit premium of $4.6 million. First
Kentucky Bank also purchased the office facility and certain loans of the
branch.
BANK OF ILLINOIS IN MT. VERNON. On March 6, 1998, NCBE acquired Vernois
Bancshares, Inc., the holding company for Bank of Illinois in Mt. Vernon
("BOI"), an Illinois banking corporation with three offices in Mount Vernon,
Illinois. NCBE paid $27.5 million in cash for all of the outstanding stock of
the holding company. As of December 31, 1997, BOI had total assets of
$163.5 million, net loans of $109.3 million and total deposits of
$127.7 million. The acquisition was accounted for using the purchase method of
accounting and the results of operations of BOI will be included in NCBE's
consolidated results of operations from the date of acquisition.
ILLINOIS ONE BANK, NATIONAL ASSOCIATION. On May 31, 1998, NCBE acquired
Illinois One Bancorp., Inc. ("IOBI"), the holding company for Illinois One Bank,
National Association ("IOB"), a national banking association with offices in
Shawneetown, Elizabethtown and Golconda, Illinois. NCBE issued 572,737 shares
of NCBE Common in the transaction. As of March 31, 1998, IOB had total assets
of $87.8 million, and total shareholders' equity of $10.9 million.
The following is a brief description of seven pending acquisitions
(together with the IOBI acquisition, the "Other Pooling Acquisitions"):
TRIGG COUNTY FARMERS BANK. NCBE is a party to an Agreement and Plan of
Merger dated February 11, 1998, with Trigg Bancorp, Inc. ("TBI"), the holding
company for Trigg County Farmers Bank ("TCFB"), a Kentucky banking corporation,
which has three offices in Cadiz, Kentucky. The agreement relates to the
acquisition of TBI in a merger transaction in which up to 736,278 shares of NCBE
Common would be issued. As of March 31, 1998, TCFB had total assets of
$97.4 million and total shareholders equity of $8.6 million. The acquisition
is expected to qualify for the pooling of interests method of accounting.
The parties expect to close the merger in the third quarter of 1998.
COMMUNITY FIRST BANK OF KENTUCKY AND COMMUNITY FIRST BANK, N.A. NCBE is a
party to an Agreement and Plan of Merger dated March 9, 1998, with Community
First Financial, Inc. ("CFF"), the holding company for Community First Bank of
Kentucky, a Kentucky banking corporation, which has two offices in Warsaw and
Dry Ridge, Kentucky, and Community First Bank, National Association, a national
banking association, which has six offices in Maysville, May's Lick and Mount
Olivet, Kentucky and Aberdeen and Ripley, Ohio. The agreement relates to the
acquisition of CFF in a merger transaction in which up to 1,441,862 shares of
NCBE Common would be issued to shareholders of CFF. As of March 31, 1998, CFF's
subsidiary banks had total assets of $135.2 million and total
37
<PAGE>
shareholders' equity of $12.7 million. The acquisition is expected to
qualify for the pooling of interests method of accounting. The parties
expect to close the merger in the third quarter of 1998.
FIRST STATE BANK OF VIENNA. NCBE is a party to an Agreement and Plan of
Merger dated May 21, 1998 with 1st Bancorp Vienna, Inc. ("Bancorp"), the holding
company for First State Bank of Vienna ("FSBV"), an Illinois banking corporation
with a single office in Vienna, Illinois. The agreement relates to the
acquisition of Bancorp in a transaction in which Bancorp would be merged into
NCBE, FSBV would be merged into IOB, and approximately 264,000 shares of NCBE
Common would be issued. As of March 31, 1998, FSBV had total assets of
$39.5 million and total shareholders equity of $5.0 million. The acquisition is
subject to regulatory approval and the approval of shareholders of Bancorp. The
acquisition is expected to qualify for the pooling of interests method of
accounting. The parties expect to close the merger in the third or fourth
quarter of 1998.
PRINCETON FEDERAL BANK, fsb. NCBE is a party to an Agreement and Plan of
Reorganization dated May 22, 1998 with Princeton Federal Bank, fsb ("PFB"), a
federal savings bank, with a single office in Princeton, Kentucky. The
agreement relates to the acquisition of PFB in a transaction in which PFB would
merge with an interim subsidiary of NCBE, and approximately 201,000 shares of
NCBE Common would be issued. As of March 31, 1998, PFB had total assets of
$32.3 million and total shareholders equity of $4.4 million. The acquisition is
subject to regulatory approval and the approval of shareholders of PFB. The
acquisition is expected to qualify for the pooling of interests method of
accounting. The parties expect to close the merger in the third or fourth
quarter of 1998.
BANK OF CRITTENDEN. NCBE is a party to an Agreement and Plan of Merger
dated June 30, 1998 with Commonwealth Commercial Corp. ("CCC"), the holding
company for Bank of Crittenden ("BC"), a Kentucky banking corporation with a
single office in Crittenden, Kentucky. The agreement relates to the acquisition
of CCC in a merger transaction in which approximately 209,000 shares of NCBE
Common would be issued. As of March 31, 1998, BC had total assets of $25.9
million, net loans of $18.4 million, total deposits of $22.1 million and total
shareholders' equity of $2.6 million. The acquisition is subject to the
approval of the Federal Reserve. The acquisition is expected to qualify for the
pooling of interests method of accounting. The parties expect the merger to
close in the fourth quarter of 1998.
DOWNSTATE NATIONAL BANK. NCBE is a party to an Agreement and Plan of
Merger dated July 9, 1998, with Downstate Banking Co. ("DBC"), the holding
company for Downstate National Bank ("DNB"), which has one office in Brookport,
Illinois. The agreement relates to the acquisition of DBC in a merger
transaction in which approximately 101,250 shares of NCBE Common would be
issued. DNB would concurrently merge into and become a branch of NCBE's
subsidiary, Illinois One Bank, National Association. As of March 31, 1998, DNB
had total assets of $21.9 million, net loans of $12.7 million, total deposits of
$19.6 million and total shareholders' equity of $2.0 million. The acquisition
is subject to the approval of the Office of the Comptroller of the Currency.
The acquisition is expected to qualify for the pooling of interests method of
accounting. The parties expect to close the merger in the fourth quarter of
1998.
THE PROGRESSIVE BANK, NATIONAL ASSOCIATION. NCBE is party to an Agreement
and Plan of Merger dated July 14, 1998, with Progressive Bancshares, Inc.
("PBI"), the holding company for The Progressive Bank, National Association
("TPB"), which has four offices in Lexington, Lawrenceburg and Owingsville,
Kentucky. The agreement relates to the acquisition of PBI in a merger
transaction in which approximately 975,700 shares of NCBE Common would be
issued. As of March 31, 1998, TPB had total assets of $142.9 million, net loans
of $114.5 million, total deposits of $125.7 million, and total shareholders'
equity of $11.1 million. The acquisition is subject to regulatory approval and
the approval of the shareholders of PBI. The acquisition is expected to qualify
for the pooling of interest method of accounting. The parties expect to close
the merger in the fourth quarter of 1998.
The following is a description of a recent securities offering:
TRUST PREFERRED OFFERING. On March 30, 1998, NCBE Capital Trust I (the
"Trust"), an affiliate of NCBE, completed a $34.5 million public offering of its
cumulative trust preferred securities. The Trust used the proceeds of
38
<PAGE>
the public offering and funds from NCBE to purchase $35.6 million principal
amount of subordinated debentures to be issued by NCBE. NCBE used the net
proceeds from the sale of its subordinated debentures to repay indebtedness
incurred in the acquisitions of BOI discussed above.
YEAR 2000 ISSUE
The Year 2000 poses a unique set of challenges to industries reliant on
information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the year 2000 from the year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems.
NCBE is committed to a plan for achieving Year 2000 compliance. Management
believes that the expenditures required to bring systems into compliance will
not have a materially adverse effect on NCBE's performance. However, the Year
2000 problem is pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that Year 2000 compliance can
be achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
NCBE and its banking subsidiaries are subject to examination with respect
to their Year 2000 compliance by various state and federal agencies, including
the Federal Reserve Board, the Comptroller of the Currency, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, and state banking
agencies. If NCBE does not maintain at least its current "satisfactory" rating
with respect to its Year 2000 compliance efforts, regulatory applications
seeking approval of acquisitions or such approvals may be deferred until the
rating becomes satisfactory or approvals may only be given subject to additional
conditions. While management expects to devote sufficient corporate resources to
satisfy regulatory concerns in this area, there can be no assurance thereof.
39
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of NCBE Common
beneficially owned as of the Record Date by (i) each person or group of persons
known to NCBE to be the beneficial owner of more than five percent (5%) of the
issued and outstanding shares of NCBE Common and (ii) each director and
executive officer of NCBE. Also set forth below is such information adjusted
for the Merger (assuming the issuance of 775,625 shares of NCBE Common). Except
as otherwise noted, each person or group identified below holds sole voting and
sole investment power with respect to the shares identified as beneficially
owned.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE MERGER AFTER THE MERGER
-------------------- -------------------
NAME SHARES PERCENT SHARES PERCENT
- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Janice L. Beesley 60,734 (1) * 60,734 *
Michael F. Elliott 340,895 (2) 3.0% 340,895 2.8%
Susanne R. Emge 24,580 (3) * 24,580 *
Donald G. Harris 12,095 * 12,095 *
H. Ray Hoops 1,015 * 1,015 *
Robert A. Keil 57,443 (4) * 57,443 *
John D. Lippert 71,797 (5) * 71,797 *
Ronald G. Reherman 9,105 (6) * 9,105 *
Curtis D. Ritterling 2,651 (7) 2,651
Laurence R. Steenberg 29,402 (8) * 29,402 *
Richard F. Welp 4,154 (9) 4,154
Stephen C. Byelick, Jr. 216 (7) * 216 *
All directors and
executive officers
as a group (12 persons) 613,901 (10) 5.4% 613,901 5.0%
</TABLE>
_______________
* Less than 1%.
(1) Includes 28,218 shares with sole voting and investment power, 28,106
shares with sole voting and investment power by spouse
and 4,410 shares that may be purchased pursuant to options exercisable
within 60 days.
(2) Includes 251,813 shares with sole voting and investment power;
19,262 shares with shared voting and investment power with spouse;
20,819 shares with sole voting and investment power by spouse; and
3,248 shares held by a trust with shared voting and investment power; and
45,753 shares subject to options exercisable within 60 days.
(3) Includes 2,028 shares with sole voting and investment power; 14,899 shares
with shared voting and investment power with spouse; and 7,658 shares with
sole voting and investment power by spouse.
(4) Includes 11,720 shares with shared voting and investment powers with
spouse; and 45,753 shares subject to options exercisable within 60 days.
(5) Includes 15,695 shares with sole voting and investment power; 8,274 shares
with sole voting and investment power by spouse; and 47,828 shares subject
to options exercisable within 60 days.
(6) Includes 3,401 shares with sole voting and investment power; and
5,704 shares with shared voting and investment power with spouse.
(7) Shares voting and investment power for all shares with spouse.
(8) All shares are held in trust for a limited partnership of which
Mr. Steenberg is a general partner with sole voting and investment power.
(9) Includes 1,960 shares with sole voting and investment power; and
2,194 shares with shared voting and investment power with spouse.
(10) Includes 143,744 shares subject to options exercisable within 60 days.
40
<PAGE>
INFORMATION CONCERNING
HOOSIER HILLS FINANCIAL CORPORATION
BUSINESS
Hoosier Hills Financial Corporation was incorporated under the laws of the
State of Indiana on December 2, 1982 to serve as a bank holding company for The
Ripley County Bank. The Bank is a state chartered bank that commenced business
in 1887. The business of HHFC consists solely of the ownership, supervision and
control of the Bank. The Bank has three locations. Its main banking office is
in Osgood, Indiana, with branches in Versailles, Indiana and Milan, Indiana. As
of March 31, 1998, HHFC had, on a consolidated basis, total assets of
$109.5 million, loans net of the allowance for loan losses of $85.6 million,
total deposits of $86.6 million and total stockholders equity of $11.4 million.
The Bank employs 47 full time employees and 2 part-time employees.
The Bank is a full-service community bank that offers banking services to
commercial and residential customers mostly in Ripley and surrounding counties
in southern Indiana. Such banking services include commercial, real estate, and
installment loans; checking, savings and time deposit accounts; and trust
services. The lending portion of the Bank's business relates primarily to the
activities of small to medium-sized businesses and local residents.
The Bank is subject to competition from other financial institutions in its
principal service area, such as commercial banks and one savings and loan
association.
HHFC is subject to supervision, regulation, and examination by the Federal
Reserve Board, and the Bank is subject to supervision, regulation, and
examination by the Indiana Department of Financial Institutions and the Federal
Deposit Insurance Corporation. The deposits of the Bank are primarily insured
by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation.
In the following pages, statistical information about HHFC is presented.
Such information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of HHFC included elsewhere herein.
41
<PAGE>
SELECTED FINANCIAL DATA OF HHFC
The selected consolidated data as of and for the two years ended December
31, 1997 and 1996 have been derived from financial statements audited by
independent public accountants, whose reports can be found elsewhere in this
Prospectus/Proxy Statement. This data should be read in conjunction with HHFC's
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------------- --------------------------
(DOLLAR AMOUNTS OTHER THAN
PER SHARE DATA IN THOUSANDS) 1998 1997 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net interest income $ 1,105 $ 1,048 $ 4,266 $ 3,931
Provision for loan losses 45 37 150 150
----------- ----------- ---------- ----------
Net interest income after
provision for loan losses 1,060 1,011 4,116 3,781
Noninterest income 110 97 460 367
Noninterest expense 918 718 3,329 2,896
----------- ----------- ---------- ----------
Income before income tax expense 251 390 1,247 1,252
Income tax expense 99 132 477 357
----------- ----------- ---------- ----------
Net income $ 152 $ 258 $ 770 $ 895
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
PER COMMON SHARE
Net income - basic $ 0.38 $ 0.69 $ 2.00 $ 2.46
Cash dividends declared 0.00 0.00 0.54 0.37
Book value 28.63 27.17 28.27 26.41
TOTALS
Loans $ 86,538 $ 81,528 $ 87,289 $80,647
Allowance for loan losses 931 892 909 905
Securities 14,466 16,994 14,325 18,507
Total assets 109,547 102,701 108,905 106,370
Deposits 86,553 82,044 85,698 86,518
Stockholders' equity 11,411 10,141 11,140 9,857
SELECTED FINANCIAL RATIOS
Net income to average assets 0.56% 1.00% 0.73% 0.90%
Net income to average equity 5.38 10.28 7.16 9.56
Cash dividend payout ratio 0.00 0.00 27.00 15.04
Average equity to average assets 10.41 9.65 10.19 9.44
Tangible equity to tangible assets 10.38 10.11 10.25 9.84
Total capital to risk weighted assets 16.83 16.81 16.48 16.22
OTHER DATA
Weighted average shares 396,321 373,245 383,658 363,681
Risk weighted assets 72,341 67,724 72,648 68,099
</TABLE>
42
<PAGE>
OTHER INFORMATION
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, AND
INTEREST RATES. The following table shows the condensed average balance sheets
for the periods presented and the percentage of each principal category of
assets, liabilities, and stockholders' equity to total assets. Also shown are
the average yield on each category of interest-earning assets and the average
rate paid on interest-bearing liabilities for each of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996
------------------------------------------- --------------------------------------------
PERCENT
OF AVERAGE PERCENT
AVERAGE TOTAL INCOME/ YIELD AVERAGE OF TOTAL INCOME/ AVERAGE
BALANCE ASSETS EXPENSE RATE BALANCE ASSETS EXPENSE RATE
------- ------ ------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 285 .27% $ 15 5.26% 797 .80 % $ 44 5.25%
Loans (1) 84,258 79.83 7,345 8.72 75,510 76.12 6,625 8.77
Taxable investment securities 9,037 8.56 636 7.04 9,369 9.44 635 6.78
Nontaxable investment
securities(2) 6,765 6.41 676 9.99 7,756 7.82 770 9.93
Federal funds sold 923 .88 50 5.42 1,486 1.50 81 5.45
------- ------ ------- ------- -------- ------- -------
Total interest-earning assets 101,268 95.95 8,722 8.61 94,918 95.68 8,155 8.59
Noninterest-earning assets:
Cash and due from banks 2,419 2.29 2,355 2.37
Premises and equipment, net 1,419 1.34 1,474 1.49
Other real estate 50 .05 53 .05
Other assets 1,289 1.22 1,256 1.27
Allowance for loan losses (896) (.85) (853) (.86 )
------- ------ ------- --------
Total assets $105,549 100.00% $99,203 100.00 %
------- ------ ------- --------
------- ------ ------- --------
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and money market
demand accounts $13,633 12.92% $ 377 2.77% $13,381 13.49 % $ 371 2.77%
Savings 10,666 10.11 320 3.00 10,909 11.00 328 3.00
Other time deposits 49,908 47.28 2,876 5.77 49,847 50.25 2,896 5.81
Notes payable 629 .60 59 9.38 925 .93 85 9.19
FHLB advances 9,605 9.10 590 6.14 4,634 4.67 278 6.00
Federal funds purchased 88 .08 5 5.68 59 .06 3 5.08
------- ------ ------- ------- ------- -------- ------- -------
Total interest-bearing
liabilities 84,529 80.09 4,227 5.00 79,755 80.40 3,961 4.97
------- -----
Noninterest-bearing liabilities
Demand deposits 9,709 9.20 9,229 9.30
Other liabilities 552 .52 858 .86
------- ------ ------- --------
Total liabilities 94,790 89.81 89,842 90.56
Equity 10,759 10.19 9,361 9.44
------- ------ ------- --------
Total Liabilities and
Equity $105,549 100.00% $99,203 100.00 %
------- ------ ------- --------
------- ------ ------- --------
Net interest income $ 4,495 $ 4,194
------- --------
------- --------
Interest rate spread 3.61% 3.62%
Net interest rate margin 4.44% 4.42%
Interest-bearing liabilities to
earning assets ratio 83.47% 84.03%
</TABLE>
(1) Average balances include nonaccrual loans. The income on such loans is
included in interest income and is recognized only upon receipt.
(2) Nontaxable investment income presented on a fully tax-equivalent basis.
The tax effect resulted in an increase in interest income of $230,000 and
$262,000 for the years ended December 31, 1997 and 1996, respectively.
43
<PAGE>
INTEREST DIFFERENTIAL. The following table sets forth, on a tax equivalent
basis for the periods presented, a summary of the changes in interest income and
expenses resulting from changes in yields-rates. The change in interest due to
both rate and volume has been allocated to rate and volume changes in proportion
to the relationship of the absolute dollar amounts of the changes in each.
<TABLE>
<CAPTION>
AMOUNT OF 1997 INCREASE (DECREASE) AMOUNT OF 1996 INCREASE (DECREASE)
COMPARED TO 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------- -----------------------------------
VOLUME(1) RATE(2) NET VOLUME(1) RATE(2) NET
----------- --------- ------ -------------- --------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits $ (27) (2) (29) $ (3) 16 13
Loans 758 (38) 720 681 (96) 585
Taxable investment securities (23) 24 1 14 (45) (31)
Nontaxable investment securities (99) (5) (94) (3) (11) (14)
Federal funds sold (31) 0 (31) (21) 47 26
-------- -------- -------- -------- -------- --------
Total interest-earning assets 588 (21) 567 668 (89) 679
Interest paid on:
NOW and money market
demand accounts 6 0 6 (23) 30 7
Savings (8) 0 (8) (8) 2 6
Other time deposits 3 (23) (20) 257 61 318
Notes payable (28) 2 (26) (23) (8) (31)
FHLB advances 306 6 312 171 (65) 106
Federal funds purchased 2 0 2 (7) 0 (7)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 281 (15) 266 367 20 387
-------- -------- -------- -------- -------- --------
Net interest income 297 (4) 301 301 (109) 192
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable investment securities are presented on a fully tax-equivalent
basis, assuming a tax rate of 34%.
INVESTMENT PORTFOLIO. The carrying value of investment securities is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
-------------------- --------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT SECURITIES AMOUNT SECURITIES
-------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities 0 0 $ 998 5.39%
U.S. Government agencies $ 1,500 10.47% 1,493 8.07
Obligations of states and
political subdivisions 6,021 42.03 7,894 42.65
Mortgage-backed securities 4,483 31.30 5,940 32.10
Corporate securities and other 2,321 16.20 2,182 11.79
--------- --------- --------- ---------
Total $ 14,325 100.00% $ 18,507 100.00%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
44
<PAGE>
The following table summarizes maturity and yield information on investment
securities at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MATURITY
---------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
IN ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT
------ -------- ------ -------- ------ -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities 0 0 0 0 0 0 0 0 0
Securities of U.S.
Government agencies $1,500 6.83% 0 0 0 0 0 0 $1,500
Obligations of states
and political
subdivisions 1,243 11.95 $2,741 11.06% $2,037 9.23 % 0 0 6,021
Mortgage-backed
securities 3,682 6.39 577 8.65 145 8.44 $79 8.48 % 4,483
Corporate securities 653 11.06 147 8.33 557 8.59 0 0 1,357
------ ------ ------ --- -------
Total $7,078 7.89% $3,465 10.54% $2,739 9.06 % $79 8.48 % $13,361
------ ------ ------ --- -------
------ ------ ------ --- -------
</TABLE>
(1) Nontaxable investment income presented on a full tax-equivalent basis,
assuming a tax rate of 34%.
(2) Equity securities of $874,300 in Federal Home Loan Bank stock and $90,000
in Federal Reserve Bank stock are not included in this table, as these
securities have no stated maturity.
Below is a table of investment securities by a single issuer whose book
value exceeds 10% of equity.
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ---------------------------- ----------------------------
ISSUER BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE
- ------------------------ ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
GNMA Pool #859291 $1,181,000 $1,193,000 $1,182,000 $1,200,000
FNMA Pool #409845 $1,727,000 $1,727,000
GNMA Pool #008900 $1,116,000 $1,113,000
FNMA Series 093-2 $1,000,000 $965,000
</TABLE>
LOAN PORTFOLIO. The composition of the loan portfolio is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
---- ----
PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial, $11,131 12.75% $9,789 12.14%
agricultural,
and overdrafts
Real estate mortgage 62,448 71.54 59,397 73.65
Installment and credit cards 13,710 15.71 11,461 14.21
------- ------ ------ ------
Total $87,289 100.00% 80,647 100.00%
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
45
<PAGE>
The following table summarizes maturity and yield information on loans at
December 31, 1997:
<TABLE>
<CAPTION>
IN ONE YEAR AFTER ONE THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIXED RATE LOANS:
Commercial, financial, agricultural
and overdrafts $10,178 $953 0 $11,131
Real estate mortgage 166 604 $13,007 13,777
Installment and credit cards 1,315 12,219 176 13,710
------- ------ ------ -------
Total 11,659 13,776 13,183 38,618
VARIABLE RATE LOANS:
Real estate mortgage 558 2,137 45,976 48,671
TOTAL LOANS:
Commercial, financial, agricultural
and overdrafts 10,178 953 0 11,131
Real estate mortgage 724 2,741 58,983 62,448
Installment and credit cards 1,315 12,219 176 13,710
------- ------ ------ -------
Total 12,217 15,913 59,159 87,289
</TABLE>
RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES. The following table details
the nonperforming asset information for the periods presented:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------- -----------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Impaired loans $176 $147 $293
Nonaccrual loans 2 50 52
Loans past due 90 days or more 270 130 187
---- ---- ----
Total nonperforming loans 448 327 532
Foreclosed property 26 76 50
Nonperforming loans to loans .52% .37% .66%
Nonperforming assets to loans .55% .46% .72%
plus foreclosed property
Nonperforming assets to .43% .37% .55%
total assets
</TABLE>
46
<PAGE>
It is generally the policy of HHFC to discontinue the accrual of interest
on loans when principal or interest is due and has remained unpaid for 90 days
or more, unless the loan is well secured and in the process of collection. If
interest on nonaccrual loans had been accrued, interest income would have
increased by $8,527 and $4,249 for the years ended December 31, 1997 and 1996,
respectively. HHFC did not receive any interest income on nonaccrual loans for
the years ended December 31, 1997 and 1996.
POTENTIAL PROBLEM LOANS. Certain loans may require frequent management
attention and are reviewed on a monthly or more frequent basis. Although
payments on these loans are less than 90 days past due or in many cases are
current, the borrowers have or have had a history of financial difficulties and
management has concern as to the borrower's ability to comply with present loan
repayment terms. As such, these loans may result in classification at some
future point as nonperforming. At March 31, 1998 and December 31, 1997, such
loans (excluding all nonperforming loans described above) amounted to $3,663,809
and $3,769,197, respectively.
FOREIGN LOANS OUTSTANDING. HHFC had no loans to any foreign countries on
any of the dates specified in the tables.
LOAN CONCENTRATIONS. The Bank grants commercial and agricultural, real
estate mortgage and installment loans to customers in the Bank's immediate
geographic lending area. Although the Bank has a diversified loan portfolio, a
substantial portion of its borrowers' abilities to honor their contractual
obligations is dependent upon the agribusiness economic sector in this
geographic lending area. Direct and indirect agricultural loans totaled
approximately $13,633,000 at December 31, 1997. Generally, such loans are
secured by farm assets and are expected to be repaid from cash flows of the farm
operations. The Bank's policy for requiring collateral and access to that
collateral is essentially the same as in extending credit to the Bank's other
customers.
SUMMARY OF LOAN LOSS EXPERIENCE. The following table summarizes changes in
the allowance for loan loss arising from loans charged off and recoveries from
loans previously charged off, by loan category, and additions to the allowance
that have been charged to expense.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------- ----------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $909 $905 $803
---- ---- ----
Loans charged off:
Commercial, financial, agricultural
and overdrafts 0 9 22
Real estate mortgage 29 7 24
Installment and credit cards 51 172 37
---- ---- ----
Total charge-offs 80 188 83
---- ---- ----
Recoveries of loans previously charged off:
Commercial, financial, agricultural
and overdrafts 1 1 3
Real estate mortgage 20 0 0
Installment and credit cards 36 41 32
---- ---- ----
Total recoveries 57 42 35
---- ---- ----
Net charge-offs 23 146 48
---- ---- ----
Provision for loan loss 45 150 150
---- ---- ----
Balance at end of period $931 $909 $905
---- ---- ----
---- ---- ----
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net charge-offs to average loans
(annualized for March 31, 1998) .11% .17% .06%
Allowance for loan losses to loans 1.07% 1.04% 1.12%
Allowance for loan losses to
nonperforming loans 207.81% 277.98% 170.11%
</TABLE>
The level of the allowance for loan losses is reviewed at least quarterly
by management. Management determines the amount of allowance for loan losses by
applying percentages to each major loan category based on historical loss
percentages to arrive at management's estimate of the risk of future losses
inherent in the loan portfolio. The percentages applied are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
ALLOWANCE REQUIRED
FOR FUTURE LOSSES
------------------
<S> <C>
Real estate mortgage .75%
Commercial, Financial, Agricultural and Overdrafts 1.75%
Installment 1.50%
Credit cards 2.00%
</TABLE>
Based on its review of adequacy, HHFC's management has estimated the
portions of the allowance attributable to major categories of loans as detailed
in the following table:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------------------- ---------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS LOANS LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL LOANS ALLOWANCE TO TOTAL LOANS ALLOWANCE TO TOTAL LOANS
--------- -------------- --------- -------------- --------- --------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial, $183 12.19% $192 12.75% $168 12.14%
Agricultural and
Overdrafts
Real estate mortgage 465 71.93 468 71.54 444 73.65
Installment and Credit 208 15.88 207 15.71 172 14.21
Cards
Unallocated 75 .00 42 121
---- ------ ---- ------ ---- ------
$931 100.00% $909 100.00% $905 100.00%
---- ------ ---- ------ ---- ------
---- ------ ---- ------ ---- ------
</TABLE>
Allocations estimated for the loan categories do not specifically represent
that loan charge-offs of that magnitude necessarily will be incurred.
48
<PAGE>
DEPOSITS. The following table shows, for each type of deposit, the average
balance and average rate paid on each type of deposit for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
------------------ -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 9,709 $ 9,229
NOW and money market demand 13,633 2.77% 13,381 2.77%
accounts
Savings 10,666 3.00% 10,909 3.00%
Time deposits 49,908 5.77% 49,847 5.81%
</TABLE>
The following table shows the maturity of time deposits of $100,000 or more
at December 31, 1997:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less $2,215
Over three through six months 835
Over six through twelve months 1,163
Over twelve months 2,100
------
Total $6,313
------
------
</TABLE>
RETURN ON EQUITY AND ASSETS. The following ratios are among those commonly
used in analyzing the performance of banks and bank holding companies.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Return on average assets .73% .90%
Return on average equity with ESOP 7.16% 9.56%
shares subject to put option
Return on average equity without ESOP
shares subject to put option 10.37% 12.59%
Dividend payout ratio 27.00% 15.04%
Equity to assets ratio with ESOP shares
subject to put option 10.19% 9.44%
Equity to assets ratio without ESOP shares
subject to put option 7.03% 7.16%
</TABLE>
PROPERTIES. Both HHFC and The Ripley County Bank's principal offices are
located at 420 South Buckeye Street, Osgood, Indiana 47037. The Bank also
operates two branch facilities: its Versailles branch at 111 West Perry Street,
Versailles, Indiana 47042, and its Milan branch at 106 North Warpath Drive,
Milan, Indiana 47031.
LEGAL PROCEEDINGS. During the normal course of business, various legal
claims have arisen that, in the opinion of management of HHFC, will not result
in any material liability on the part of HHFC.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION. The following discussion and analysis is intended to review
the significant factors affecting the financial condition and results of
operations of HHFC for the three months ended March 31, 1998 and the years ended
December 31, 1997 and 1996. It provides a comprehensive review of factors not
otherwise apparent from the consolidated financial statements of HHFC alone.
This analysis should be read in conjunction with the consolidated financial
statements and selected financial data presented elsewhere herein to assist in
evaluating HHFC's performance.
NET INCOME ANALYSIS. HHFC's net income for the year ended December 31,
1997 was $769,874, compared to $894,885 for the year ended December 31, 1996.
The increase from 1996 to 1997 in net interest income and other income was
matched by an increase in other expenses. The decrease in net income was
attributable to an increase in income tax expense for 1997 due to a reduction in
tax exempt income and an increase in nondeductible ESOP compensation expense.
For the three months ended March 31, 1998 and 1997, net income was $151,780
and $214,909, respectively. The decrease was due primarily to an increase in
other expenses, partially offset by an increase in net interest income and a
decrease in income tax expense.
NET INTEREST INCOME. Net interest income is the largest component of
earnings and is affected by the volume of the sources and uses of funds, the
respective rates earned and paid on those funds, the mix of those funds, and the
volume of nonperforming assets. HHFC's net interest income increased 7.2% to
$4,495,000 on a tax equivalent basis for calendar year 1997 from calendar year
1996. The net interest margin, which is calculated by dividing tax-equivalent
net interest income by average interest-earning assets, was 4.44% in 1997,
compared to 4.42% in 1996. HHFC's yield on interest-earning assets increased to
8.61% in 1997 from 8.59% in 1996, while the cost of funds increased to 5.00% in
1997 from 4.97% in 1996. The increase in the net interest margin was
attributable to an increase in the loan portfolio during 1997.
During 1997, increases in the average outstanding volume of loans
resulted in an increase in interest income of $758,000. This increase was
offset by smaller decreases in interest income totalling $180,000 due to
decreases in the average volume of securities, interest-bearing deposits, and
federal funds sold. Changes in interest rates on the average volume of
interest-bearing deposits and loans reduced interest income by $40,000. This
decrease was offset by an increase in interest income of $29,000 due to an
increase in the rates on the volume of taxable and nontaxable investment
securities. An increase in the average volume of FHLB advances resulted in
an increase in interest expense of $306,000, which was partially offset by a
decrease in interest expense of $25,000 which is substantially due to a
volume change in notes payable. An additional decrease in interest expense
of $15,000 was experienced due to rate decreases in other time deposits,
partially offset by increases in the rates for notes payable, FHLB advances
and federal funds purchased. The net effect of the volume and rate changes
associated with all categories of interest-earnings assets during 1997 as
compared to 1996 increased interest income $567,000, while the net effect of
the volume and rate changes associated with all categories of
interest-bearing liabilities increased interest expense by $266,000.
Net interest income was $1,105,000 for the three-month period ended
March 31, 1998, a 5.4% increase from the same period in 1997. Interest
income increased $111,000 for the three-month period ending March 31, 1998,
and interest expense increased $54,000. The increase is attributable to a
continued increase in volume of loans, provided by a reduction in securities
and an increase in deposits and borrowings from the FHLB.
PROVISION FOR LOAN LOSSES. The provision for loan losses charged to
expense was $150,000 for both 1997 and 1996.
The provision for loan losses charged to expense for the three months
ended March 31, 1998 and 1997 was $45,000 and $37,500, respectively.
The allowance for loan losses is maintained at a level that management
believes is adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans and
prior loan
50
<PAGE>
loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, credit concentrations, review of specific impaired and nonperforming
loans, and current economic conditions and trends that may affect the
borrowers' ability to pay.
The allowance for loan loss has remained at the same level for the last
several years. Although loans have increased over that period of time,
nonperforming loans and impaired loans decreased from 1996 to 1997 due to the
write-off in 1997 of a large portion of the impaired loans at December 31,
1996. Therefore, the reserve requirement for the impaired loans at December
31, 1996 was eliminated during 1997.
NONINTEREST INCOME. HHFC's 1997 noninterest income was $460,000, as
compared to $367,000 in 1996. The increase is due primarily to increased
service charges on deposit accounts and an increase in credit life income.
Noninterest income for the three months ended March 31, 1998 was $110,000,
a 13% increase from the same period in 1997. The increase is attributable to an
increase in collection and exchange fees.
NONINTEREST EXPENSE. Noninterest expense increased 14.9% in 1997 to
$3,329,000. Increases in salaries, employee benefits, and occupancy expenses
accounted for 12.7% of the total increase in noninterest expense.
Noninterest expense for the three-month period ended March 31, 1998 was
$919,000, compared to $761,000 for the same period in 1997. The increase was
not due to any one particular type of expense but evenly spread among all
noninterest expenses.
INCOME TAXES. Income tax expense was $477,000 for 1997 and $357,000 for
1996. The effective income tax rates were 38.3% and 28.5% for these periods,
respectively. The increase in effective income tax rate primarily is
attributable to a decrease in the percentage of the investment portfolio
represented by tax-free securities and an increase in nondeductible ESOP
compensation expense.
Income tax expense of $100,000 and $132,000 was recorded for the three
months ended March 31, 1998 and 1997, respectively.
LIQUIDITY AND INTEREST RATE SENSITIVITY. Liquidity is provided to HHFC
through earning assets, including short-term investments in other bank deposits
and federal funds sold, and through maturities in the investment and loan
portfolios. In addition, liquidity is provided by borrowed funds and may be
supplemented by the ability to liquidate securities in the investment portfolio,
all of which are designated as available for sale.
The asset/liability management process, which involves management of the
components of the balance sheet to allow assets and liabilities to reprice at
approximately the same time, is a dynamic process essential to minimizing the
effect of interest rate fluctuation on net interest income. The following
tables reflect HHFC's gap analysis (rate-sensitive assets minus rate-sensitive
liabilities) as of March 31, 1998 and December 31, 1997, respectively.
51
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------------------------------------------
OVER
THREE 3 MONTHS OVER 1 YEAR
MONTHS THROUGH THROUGH OVER
OR LESS 12 MONTHS 5 YEARS 5 YEARS TOTAL
------- --------- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in debt &
equity securities $4,516 $2,102 $3,488 $3,395 $13,501
Loans 6,144 6,033 15,633 58,728 86,538
Federal funds sold 3,850 0 0 0 3,850
Interest-bearing deposits 626 0 0 0 626
------- --------- ------ ------ -------
Total interest-sensitive assets 15,136 8,135 19,121 62,123 104,515
------- --------- ------ ------ -------
LIABILITIES:
NOW and MMDA 12,004 0 0 0 12,004
Savings 9,812 0 0 0 9,812
Time deposits 8,748 20,615 24,189 0 53,552
FHLB notes payable 0 3,293 7,148 0 10,441
Notes payable 50 150 95 0 295
------- --------- ------ ------ -------
Total interest-sensitive
liabilities 30,614 24,058 31,432 0 86,104
------- --------- ------ ------ -------
Interest-sensitivity gap
Incremental (15,478) (15,923) (12,311) 62,123 18,411
Cumulative (15,478) (31,401) (43,712) 18,411
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------------------
OVER
THREE 3 MONTHS OVER 1 YEAR
MONTHS THROUGH THROUGH OVER
OR LESS 12 MONTHS 5 YEARS 5 YEARS TOTAL
------- --------- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in debt &
equity securities $4,467 $2,610 $3,465 $2,819 $13,361
Loans 5,755 6,464 15,930 59,140 87,289
Federal funds sold 1,950 0 0 0 1,950
Interest-bearing deposits 369 0 0 0 369
------- --------- ------ ------ -------
Total interest-sensitive assets 12,541 9,074 19,395 61,959 102,969
------- --------- ------ ------ -------
LIABILITIES:
NOW and MMDA 13,894 0 0 0 13,894
Savings 10,273 0 0 0 10,273
Time deposits 9,023 20,284 21,838 0 51,145
FHLB notes payable 1,500 3,293 6,148 0 10,941
Notes payable 50 150 170 0 370
------- --------- ------ ------ -------
Total interest-sensitive liabilities 34,740 23,727 28,156 0 86,623
------- --------- ------ ------ -------
Interest-sensitivity gap
Incremental (22,199) (14,653) (8,761) 61,959 16,346
Cumulative (22,199) (36,852) (45,613) 16,346
</TABLE>
As indicated in the preceding tables, HHFC was liability sensitive on a
cumulative basis in the near term (one year or less) at March 31, 1998 and
December 31, 1997, based on contractual maturities and earliest repricing
dates. In this regard, a decrease in the general level of interest rates
generally would have a positive effect on HHFC's net interest income, as the
repricing of the larger volume of interest-sensitive liabilities would create
a larger decrease in interest expense than the decrease in interest income
created by the repricing of the smaller volume of interest-sensitive assets.
52
<PAGE>
The following table summarizes certain trends in HHFC's consolidated
balance sheet at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total assets $ 108,905 $ 106,370
Earning assets $ 103,933 $ 100,416
Deposits $ 85,698 $ 86,518
Loans to deposits (net loans) 100.8% 92.2%
Loans to total assets (net loans) 79.3% 75.0%
Debt and equity securities to total assets 13.2% 17.4%
</TABLE>
The composition of total assets and earning assets changed during 1997 as
loans increased and deposits decreased to reflect both a decrease in total
investment securities and an increase in FHLB borrowings. HHFC's earning assets
increased $3,517,000 from December 31, 1996 to December 31, 1997. Loans, net of
the allowance for loan losses, were $86,381,000 at December 31, 1997, compared
to $79,742,000 at December 31, 1996. Deposits decreased $821,000 from December
31, 1996 to December 31, 1997. Investment and mortgage backed securities were
$14,325,000 at December 31, 1997, compared to $18,507,000 at December 31, 1996.
FHLB borrowings increased $2,441,000 from December 31, 1996 to December 31,
1997.
CAPITAL ADEQUACY. HHFC's equity capital was $11,411,000, $11,140,000, and
$9,857,000 at March 31, 1998 and December 31, 1997 and 1996, respectively. From
December 31, 1997 to March 31, 1998, equity capital increased $216,000 as a
result of net income and $139,472 for ESOP shares earned and decreased $21,000
as a result of unrealized losses on available for sale securities. From
December 31, 1996 to December 31, 1997, equity capital increased $770,000 as a
result of net income, $347,000 from ESOP shares earned, $298,000 for a market
value adjustment for earned ESOP shares, and $67,000 for unrealized gains on
available for sale securities. These increases were offset by a decrease for
dividends of $200,000.
Risk-based capital guidelines for financial institutions were adopted by
regulatory authorities and were effective January 1, 1991. These guidelines
were designed to relate regulatory capital requirements to the risk profile of
the specific institutions and to provide for uniform requirements from the
various regulators. Currently, the risk-based capital guidelines require the
Bank to meet a minimum total capital ratio of 8.0%, of which at least 4.0% must
consist of Tier 1 capital. Tier 1 capital generally consists of (a) common
shareholders' equity, (b) qualifying perpetual preferred stock and related
surplus, subject to certain limitations specified by the FDIC, and (c) minority
interest in the equity accounts of consolidated subsidiaries, less goodwill and
any other intangible assets and investments in subsidiaries that the FDIC
determines should be deducted from Tier 1 capital. The FDIC also requires a
minimum leverage capital ratio of 3.0%, defined as the ratio of Tier 1 capital
less purchased mortgaged servicing rights to total assets, for banking
organizations deemed the strongest and most highly rated by banking regulators.
A higher minimum leverage ratio is required of less highly rated banking
organizations.
The following table summarizes the Bank's risk-based capital and leverage
ratios:
RISK-BASED CAPITAL RATIOS:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
TOTAL 16.83% 16.48% 16.22%
TIER 1 15.55 15.23 14.96
LEVERAGE 10.38 10.25 9.84
</TABLE>
53
<PAGE>
RISK MANAGEMENT. HHFC's management objective in structuring the balance
sheet is to maximize the return on stockholders' equity while minimizing the
associated risks. The major risks involved in the banking industry are market,
credit, and liquidity risks. The following is a discussion of HHFC's management
of these risks.
MARKET RISK MANAGEMENT. HHFC's management believes its loan and investment
portfolios are sufficiently diversified to minimize the effect of a downturn in
any particular industry or market. Although HHFC has a diversified loan
portfolio, a substantial portion of its borrowers' abilities to honor their
contractual obligations is dependent upon the agribusiness economic sector in
its geographic lending area.
Commercial, financial, agricultural loans and overdrafts at December 31,
1997 totaled $11,131,000 or 12.75% of the loan portfolio, while real estate
loans totaled $62,448,000 or 71.54% of the loan portfolio; and installments and
credit cards totaled $13,710,000 or 15.71% of the loan portfolio. Included in
the previously described loan categories are direct and indirect agricultural
loans which totaled $13,633,000 or 15.62% of the total loan portfolio. The
commercial, financial and agricultural loan portfolio, which includes loans made
primarily to businesses located in Ripley and adjoining counties, generally is
secured by business assets such as farm equipment, crops, inventory, accounts
receivable, equipment and real estate.
At December 31, 1997, the total investment portfolio was $14,325,000. The
portfolio is composed of approximately 10% in U.S. Government agencies, 42% of
State and municipal bonds, 31% in mortgaged backed securities, and the remaining
portion in corporate and other securities.
CREDIT RISK MANAGEMENT. The risks HHFC's management assumes in providing
credit products to customers are fundamental to its business operation. Credit
risk management includes defining an acceptable level of risk in return,
establishing policies and procedures to govern the credit process, and managing
a thorough portfolio review function. Credit policies are ultimately the
responsibility of HHFC's Board of Directors and, as such, are reviewed and
approved by the Board of Directors. Of equal importance in this risk management
process are the ongoing monitoring procedures performed by management.
Nonperforming loans represented .44%, .37%, and .66% of total loans at
March 31, 1998, December 31, 1997 and 1996, respectively.
LIQUIDITY RISK MANAGEMENT. Liquidity is a measurement of HHFC's ability to
meet the borrowing needs and the deposit withdrawal requirements of its
customers. HHFC actively manages the composition of its assets and liabilities
to maintain the appropriate level of liquidity in the balance sheet. Management
is guided by regularly reviewed policies when determining the appropriate
portion of total assets that should constitute readily marketable assets
available to meet future liquidity needs. Additionally, the Bank's entire
investment portfolio is classified as available for sale under accounting
guidelines.
IMPACT OF NEW ACCOUNTING STANDARDS. ACCOUNTING FOR TRANSFERS AND SERVICING
OF FINANCIAL ASSETS. In June, 1996, the FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 125 establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on the consistent application of the financial components approach. This
approach requires the recognition of financial assets and servicing assets that
are controlled by the reporting entity, the derecognition of financial assets
when control is surrendered, and the derecognition of liabilities when they are
extinguished. Specific criteria are established for determining when control
has been surrendered in the transfer of financial assets. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. Subsequent to the issuance of
SFAS No. 125, the FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." This statement defers for one
year the effective date of SFAS No. 125 as applies to secured borrowings and
collateral and certain other transactions. HHFC has adopted the relevant
provisions of the statement during 1997, and will adopt the provisions of the
statement which become effective in 1998 at that time. The provisions of the
statement adopted in 1997 did not
54
<PAGE>
have a material effect on HHFC's financial position or operating results, and
management does not currently believe that the future adoption of additional
provisions of this statement will have such an effect.
EARNINGS PER SHARE. In February, 1997, the FASB issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. The statement simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
"Earnings per Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, and requires
a reconciliation of the two computations. This statement is effective for
financial statements issued for periods ending after December 15, 1997, with
earlier application not permitted. HHFC has adopted SFAS No. 128 effective for
the year ended December 31, 1997.
COMPREHENSIVE INCOME. In June, 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement requires that an
enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
statement is effective for fiscal years beginning after December 15, 1997.
The provisions of this statement are reflected in the accompanying financial
statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The management of HHFC plans to adopt the appropriate
provisions of the statement during 1998 as applicable, and does not currently
believe that the future adoption of this statement will have a material effect
on HHFC's financial position or operating results.
EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In
February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The management of HHFC plans to adopt the appropriate
provisions of the statements at January 1, 1998, and does not currently believe
that the future adoption of this statement will have a material effect on HHFC's
financial position or operating results.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. On June
15, 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". FAS 133 established a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing standards. FAS 133 is effective for fiscal years beginning after
June 15, 1999, but earlier application is permitted as of the beginning of
any fiscal quarters subsequent to June 15, 1998. Upon the statement's initial
application, all derivatives are required to be recognized in the statement
of financial position as either assets or liabilities and measured at fair
value. In addition, all hedging relationships must be designated, reassessed
and documented pursuant to the provisions of FAS 133. Adoption of FAS 133 is
not expected to have a material financial statement impact on HHFC.
EFFECT OF INFLATION. Persistent high rates of inflation can have a
significant effect on the reported financial condition and results of
operations of all industries. However, the asset and liability structure of
commercial banks is substantially different from that of an industrial
company in that virtually all assets and liabilities of commercial banks are
monetary in nature. Accordingly, changes in interest rates may have a
significant impact on a commercial bank's performance. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices
of goods and services.
Inflation does have an impact on the growth of total assets in the banking
industry, often resulting in a need to increase equity capital at higher than
normal rates to maintain an appropriate equity-to-assets ratio.
55
<PAGE>
YEAR 2000. Mid-year 1997, HHFC began assessing the potential problems
associated with the Year 2000. By early 1998, all areas (technical and
environmental) had been assessed, a policy had been written, as well as
timelines established, that would enable HHFC to meet the challenges of the new
millennium. Due to the impending merger with National City Bancshares, Inc. of
Evansville, HHFC's management now finds it prudent and necessary to change some
of the software packages and data processing venues, which will cause a revision
in the timeline. However, management still believes that HHFC is on target with
the federal regulators and plan on having all areas tested, either by The Ripley
County Bank or NCBE, by year-end.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as otherwise indicated, as of the Record Date, no person or group
was known by HHFC to be the beneficial owner of more than 5% of the issued and
outstanding shares of HHFC Common.
<TABLE>
<CAPTION>
AMOUNT & NATURE PERCENT OF
NAME BENEFICIAL OWNERSHIP(1) CLASS
------------------------------ ------------------------ -----------
<S> <C> <C>
Employee Stock Ownership Plan 144,540(2) 34.7%
William W. Vogel 69,300(3) 16.6
Fred R. Crum 46,520.59(4) 11.2
Martha Wright 22,500 5.4
All Directors and Executive
Officers as a Group 204,889 49.2
</TABLE>
- -------------------------
(1) For purposes of this table, in accordance with Rule 13d-3 under the
Securities and Exchange Act of 1934, as amended, the person is deemed to be
the beneficial owner of any shares of HHFC Common if he or she has or
shares voting or investment power with respect to such security, or has a
right to acquire beneficial ownership at any time within 60 days from the
Record Date. As used herein, "voting power" is the power to vote or direct
the voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Except as otherwise noted, ownership is
direct and the named individuals and group exercise sole voting and
investment power over the shares.
(2) HHFC's ESOP owns 144,540 shares of HHFC Common, or 34.7% of all outstanding
shares entitled to vote on the Merger. The ESOP is managed by a committee
of employees (the "ESOP Committee") who are appointed by the HHFC Board of
Directors. In 1994, HHFC borrowed $1,600,000 from a third party to loan to
the ESOP for the purchase of 144,540 shares of HHFC Common. The common
stock of the Bank was pledged as collateral for the debt. A portion of the
Bank common stock remains to be pledged as collateral for debt owed to HHFC
(the third party lender has been fully paid). The ESOP uses HHFC's annual
contributions and dividends received to service the debt. As the debt is
repaid, shares of HHFC Common are allocated to employees. The ESOP
trustee, which is the Bank, votes all allocated shares in accordance with
the instructions of the participating employees. Unallocated shares and
shares for which no instructions have been received are voted by the ESOP
trustee at the direction of the ESOP Committee. The ESOP Committee has
engaged independent counsel and an independent financial advisor in
connection with its evaluation of the proposed merger.
(3) Includes 42,650 shares held by Mr. Vogel's mother and 13,325 shares held by
Mr. Vogel's sister.
(4) Includes 1,035 shares owned by Mr. Crum's wife and 7,790.59 shares held by
the ESOP and allocated to Mr. Crum's account.
The HHFC Board believes that substantially all the shares owned by the
above-listed group will be voted in favor of the Merger. The belief is based on
the information furnished by the individuals.
56
<PAGE>
DESCRIPTION OF NCBE CAPITAL STOCK
AUTHORIZED SHARES
NCBE's Articles of Incorporation presently authorize the issuance of
29,000,000 shares of NCBE Common and 1,000,000 preferred shares, without par
value ("NCBE Preferred"). As of July 31, 1998, there were 11,341,256 shares of
NCBE Common issued and outstanding and no shares of NCBE Preferred issued and
outstanding.
NCBE COMMON
The holders of NCBE Common are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to any outstanding NCBE Preferred, holders of
NCBE Common are entitled to receive ratably such dividends as may be declared by
the NCBE Board out of funds legally available therefor. In the event of a
liquidation or dissolution of NCBE, holders of NCBE Common are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding NCBE Preferred.
Holders of NCBE Common have no preemptive rights and have no rights to
convert their NCBE Common into any other securities. All of the outstanding
shares of NCBE Common are, and the shares of NCBE Common issued pursuant to the
Merger will be, duly authorized, validly issued, fully paid and nonassessable.
NCBE PREFERRED
The NCBE Board is authorized to designate any series of NCBE Preferred and
the powers, preferences and rights of the shares of such series and the
qualifications, limitations or restrictions thereof without further action by
the holders of NCBE Common. As of the Record Date, no shares of NCBE Preferred
were issued or outstanding.
The NCBE Board may create and issue a series of NCBE Preferred with rights,
privileges or restrictions, and adopt a shareholder rights plan, having the
effect of discriminating against an existing or prospective holder of such
securities as a result of such security holder beneficially owning or commencing
a tender offer for a substantial amount of NCBE Common. One of the effects of
authorized but unissued and unreserved shares of capital stock may be to render
more difficult or discourage an attempt by a potential acquiror to obtain
control of NCBE by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of NCBE's management. The issuance of such
shares of capital stock may have the effect of delaying, deferring or preventing
a change in control of NCBE without any further action by the shareholders of
NCBE. NCBE has no present intention to adopt a shareholder rights plan, but
could do so without shareholder approval at any future time.
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of NCBE's Articles of Incorporation and By-laws may
delay or make more difficult unsolicited acquisitions or changes of control of
NCBE. Such provisions could have the effect of discouraging third parties from
making proposals involving an unsolicited acquisition or change in control of
NCBE, although such proposals, if made, might be considered desirable by a
majority of NCBE's shareholders. Such provisions may also have the effect of
making it more difficult for third parties to cause the replacement of the
current management of NCBE without the concurrence of the Board of Directors.
These provisions include: (i) the classification of the Board of Directors into
three classes, each class serving "staggered" terms of office of three years;
(ii) the requirement that any business combination be approved by the holders of
80% of the shares entitled to vote thereon, unless the transaction has been
approved by NCBE's Board of Directors; and (iii) requirements for advance notice
for making nominations at shareholders' meetings. See "COMPARISON OF
SHAREHOLDER RIGHTS."
NCBE's By-laws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors. Although NCBE's By-laws do not give the
57
<PAGE>
Board of Directors any power to approve or disapprove shareholder nominations
for the election of directors or proposals for action, they may have the effect
of precluding a contest for the election of directors or the consideration of
shareholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its proposals without
regard to whether consideration of such nominees or proposals might be harmful
or beneficial to NCBE and its shareholders.
CERTAIN PROVISIONS OF THE IBCL
The IBCL applies to NCBE as an Indiana corporation. Certain provisions of
the IBCL may delay, prevent or make more difficult changes of control of NCBE.
Such provisions also may have the effect of preventing changes in the management
of NCBE. It is possible that such provisions could make it more difficult to
accomplish transactions which shareholders may otherwise deem to be in their
best interests. See "COMPARISON OF SHAREHOLDER RIGHTS -- Business Combinations
Involving Interested Shareholder" and "COMPARISON OF SHAREHOLDER RIGHTS --
Control Share Acquisitions."
TRANSFER AGENT
The transfer agent for shares of NCBE Common is Fifth Third Bank,
Cincinnati, Ohio.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of holders of shares of NCBE Common are governed by NCBE's
Articles of Incorporation and By-laws. The rights of holders of shares of HHFC
Common are governed by HHFC's Articles of Incorporation and By-laws. The rights
of shareholders of HHFC differ in certain respects from the rights which they
would have as shareholders of NCBE. A summary of the material differences
between the respective rights of the shareholders of NCBE and HHFC is set forth
below.
CLASSIFIED BOARD OF DIRECTORS
NCBE. The Articles of Incorporation and By-laws of NCBE divide the Board
of Directors into three classes, as nearly equal in number as possible, with
each class of directors serving a staggered term of three years. The purpose of
a classified Board of Directors is to promote stability and continuity within
the Board. However, a classified Board of Directors also has the effect of
decreasing the number of directors that may otherwise be elected by holders of
NCBE Common and, therefore, may have the effect of precluding a contest for the
election of directors or delay, prevent or make more difficult changes in
control of NCBE.
HHFC. HHFC also has a classified Board of Directors. The By-laws of HHFC
provide for a Board of Directors of thirteen members, with members in each of
the three classes of directors serving a three-year term of office.
BUSINESS COMBINATIONS NOT INVOLVING AN INTERESTED SHAREHOLDER
NCBE. Under the IBCL, a majority of the shares entitled to vote on a
proposed plan of merger or share exchange is required for approval unless any
class or series of shares is entitled to vote separately as a class on the
plan. However, the vote of the shareholders of the surviving corporation on
a plan of merger is not required if (i) the articles of incorporation of the
surviving corporation will not differ from its articles before the merger,
(ii) each shareholder of the surviving corporation whose shares were
outstanding immediately before the effective date of the merger will hold the
same proportionate number of shares held by all such shareholders (except for
shares of the surviving corporation received solely as a result of the
shareholder's proportionate shareholdings in the other corporations party to
the merger), with identical designations, preferences, limitations and
relative rights, immediately after the merger, (iii) the number of voting
shares outstanding immediately after the merger, plus the number of voting
shares issuable as a result of the merger (either by the conversion of
securities issued pursuant to the merger or the exercise of rights and
warrants issued
58
<PAGE>
pursuant to the merger), will not exceed by more than 20% the total number of
voting shares of the surviving corporation outstanding immediately before the
merger, and (iv) the number of participating shares outstanding immediately
after the merger, plus the number of participating shares issuable as a
result of the merger (either by the conversion of securities issued pursuant
to the merger or the exercise of rights and warrants issued pursuant to the
merger), will not exceed by more than 20% the total number of participating
shares of the surviving corporation outstanding immediately before the
merger. NCBE's Articles of Incorporation require the affirmative vote of 80%
of the shares entitled to vote on any merger, consolidation or acquisition of
NCBE by another corporation that is not approved by NCBE's Board of Directors.
HHFC. HHFC's Articles of Incorporation do not contain any voting
requirements for business combinations that are different from the statutory
requirements.
BUSINESS COMBINATIONS INVOLVING AN INTERESTED SHAREHOLDER
NCBE. The IBCL restricts the ability of a "resident domestic corporation"
to engage in any combination with an "interested shareholder" for five years
after the interested shareholder's date of acquiring shares unless the
combination or the purchase of shares by the interested shareholder on the
interested shareholder's date of acquiring shares is approved by the board of
directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested shareholder may effect a
combination after the five-year period only if such shareholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria. A "resident domestic corporation" means an Indiana
corporation that has 100 or more shareholders. "Interested shareholder" means
any person, other than the resident domestic corporation or its subsidiaries,
who is (i) the beneficial owner, directly or indirectly, of 10% or more of the
voting power of the outstanding voting shares of the resident domestic
corporation or (ii) an affiliate or associate of the resident domestic
corporation and at any time within the five-year period immediately before the
date in question was the beneficial owner of 10% or more of the voting power of
the outstanding shares of the resident domestic corporation. The above
provisions do not apply to a corporation that so elects in an amendment to its
articles of incorporation approved by a majority of the disinterested shares.
Such an amendment, however, would not become effective for 18 months after its
passage and would apply only to stock acquisitions occurring after its effective
date. NCBE's Articles of Incorporation do not exclude it from the restrictions
imposed by such provisions.
HHFC. The provisions of the IBCL described above apply to HHFC because
HHFC is also a "resident domestic corporation."
REMOVAL OF DIRECTORS
NCBE. Under the IBCL, directors may be removed in any manner provided
in the corporation's articles of incorporation. NCBE's Articles of
Incorporation provide that a member of the Board of Directors may be removed,
only for good cause and only at a meeting of the shareholders called
expressly for that purpose, by the affirmative vote of the holders of
outstanding shares representing at least sixty-six and two-thirds percent
(66-2/3%) of all the votes then entitled to be cast at an election of
directors.
HHFC. HHFC's By-laws provide that a member of the Board of Directors may
only be removed at a meeting of the shareholders called expressly for that
purpose, by the affirmative vote of the holders of not less than a majority of
the outstanding shares then entitled to vote at the election of directors.
AMENDMENTS TO ARTICLES OF INCORPORATION
NCBE. The IBCL provides that, unless a greater vote is required under a
specific provision of the IBCL or by a corporation's articles of incorporation
or its board of directors, a corporation may amend its articles of incorporation
upon the affirmative vote of the holders of a greater number of shares cast in
favor of the amendment than the holders of shares cast against the amendment,
unless the amendment would create dissenters' rights in which case a favorable
59
<PAGE>
vote of the holders of a majority of the outstanding shares is required.
Under the IBCL, a corporation's board of directors may condition its
submission of a proposed amendment to the shareholders of the corporation on
any basis, including the requirement of the affirmative vote of holders of a
greater percentage of the voting shares of the corporation than otherwise
would be required under the IBCL. NCBE's Articles of Incorporation provide
that any amendment to the provisions concerning business combinations must be
approved by the holders of eighty percent (80%) of the outstanding voting
shares.
HHFC. HHFC's Articles of Incorporation do not contain any provisions
requiring a greater or lesser vote than is required by statute for amendments.
VOTING RIGHTS
NCBE. Holders of shares of NCBE Common are entitled to one vote per share
on all matters to be voted upon by the shareholders.
HHFC. Holders of shares of HHFC Common are entitled to one vote per share
on all matters to be voted upon by the shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS
NCBE. The IBCL provides that a corporation with more than 50 shareholders
must hold a special meeting of shareholders on demand of its board of directors
or the persons specifically authorized to do so by the corporation's articles or
by-laws. NCBE's Articles of Incorporation and By-laws provide that the Chairman
of the Board of Directors, the President, or a majority of the Board of
Directors may call a special meeting of shareholders. Further, a special
meeting of the shareholders will be called upon the receipt of a written
request describing in reasonable detail the purposes of the meeting from the
holders of shares representing at least eighty percent (80%) of all the votes
entitled to be cast (so long as NCBE has more than 50 shareholders) on any issue
proposed to be considered at the proposed special meeting.
HHFC. HHFC's By-Laws provide that special meetings of the shareholders of
a corporation may be called at any time, for any purpose or purposes, by the
Board of Directors, the President or at the written request of the holders of
not less than 1/4 of the outstanding shares.
CONTROL SHARE ACQUISITIONS
NCBE. Pursuant to the IBCL, an "acquiring person" who makes a "control
share acquisition" in an "issuing public corporation" may not exercise voting
rights on any "control shares" unless such voting rights are conferred by a
majority vote of the disinterested shareholders of the issuing corporation at a
special meeting of such shareholders held upon the request and at the expense of
the acquiring person. Unless otherwise provided in a corporation's articles of
incorporation or by-laws before a control share acquisition has occurred, in the
event that control shares acquired in a control share acquisition are accorded
full voting rights and the acquiring person acquires control shares with a
majority or more of all voting power, all shareholders of the issuing
corporation have dissenters' rights to receive the fair value of their shares.
"Control shares" means shares acquired by a person that, when added to all other
shares of the issuing public corporation owned by that person or in respect of
which that person may exercise or direct the exercise of voting power, would
otherwise entitled that person to exercise voting power of the issuing public
corporation in the election of directors within any of the following ranges:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority or (iii) a majority or more. "Control share acquisition" means,
subject to certain exceptions, the acquisition, directly or indirectly, by any
person of ownership of, or the power to direct the exercise of voting power with
respect to, issued and outstanding control shares. Shares acquired within 90
days or pursuant to a plan to make a control share acquisition are considered to
have been acquired in the same acquisition. "Issuing public corporation" means
a corporation which is organized in Indiana, has 100 or more shareholders, its
principal place of business, its principal office or substantial assets within
Indiana and either (i) more than 10% of its shareholders resident in Indiana,
60
<PAGE>
(ii) more than 10% of its shares owned by Indiana residents or (iii) 10,000
shareholders resident in Indiana. The above provisions do not apply if, before
a control share acquisition is made, the corporation's articles of incorporation
or by-laws (including a board adopted by-law) provide that said provisions do
not apply. NCBE's Articles of Incorporation and By-laws do not exclude NCBE
from the restrictions imposed by such provisions. Further, NCBE's Articles of
Incorporation opt into a provision of the IBCL that allows NCBE to redeem an
acquiring person's control shares under certain circumstances, including the
person's failure to file an acquiring person statement regarding the control
shares.
HHFC. The provisions of the IBCL described above apply to HHFC because HHFC
is an "issuing public corporation."
INDEMNIFICATION
NCBE. Pursuant to the IBCL, NCBE is obligated to indemnify certain
officers and directors in connection with liabilities arising from legal
proceedings resulting from such person's service to NCBE in certain
circumstances. NCBE may also voluntarily undertake to indemnify certain
persons acting on NCBE's behalf in certain circumstances. The IBCL provides
for mandatory indemnification of directors and officers of Indiana
corporations and permissive indemnification of directors, officers, employees
and agents of corporations who are made parties to proceedings as a result of
their relationship with such corporation. The IBCL also applies to
individuals who are serving at such corporation's request as directors,
officers, employees and agents of such corporation's subsidiaries. The IBCL
requires corporations, unless limited by their articles of incorporation, to
indemnify any director or officer against reasonable expenses incurred in
connection with any proceeding to which such person was a party if the
individual is wholly successful on the merits. The IBCL authorizes
corporations to indemnify any director, officer, employee or agent against
liability incurred in such a proceeding generally if the individual's conduct
was in good faith and the individual reasonably believed, in the case of
conduct in the individual's official capacity, that his or her conduct was in
the corporation's best interests and in all other cases that his or her
conduct was not opposed to the best interests of such corporation. The IBCL
further authorizes any court of competent jurisdiction, unless the articles
of incorporation provide otherwise, to order indemnification generally if the
court determines a director or officer of a corporation is entitled to
mandatory indemnification or is otherwise fairly and reasonably entitled to
indemnification in view of all the relevant circumstances. The IBCL also
authorizes corporations to advance reasonable expenses in advance of final
disposition of a proceeding generally if the individual affirms in writing a
good faith belief that he satisfies the standard of conduct for permissive
indemnification, the individual undertakes in a signed writing to repay the
advance if it is determined he does not satisfy the standard of conduct for
permissive indemnification and the corporation determines that the facts then
known do not preclude indemnification. Finally, the IBCL authorizes further
indemnification to the extent that the corporation may provide in its
articles of incorporation, by-laws, a resolution of the board of directors or
the shareholders or any other authorization, whenever adopted, after notice,
by a majority vote of holders of all the voting shares then issued and
outstanding. NCBE's Articles of Incorporation do not contain provisions
altering the statutory provisions.
HHFC. HHFC's Articles of Incorporation generally provide for the
indemnification of HHFC's directors, officers and employees in accordance with
the statutory provisions.
LIMITATION OF LIABILITY OF DIRECTORS
NCBE. The IBCL provides that a director is not liable for any action
taken as a director, or any failure to act, unless the director has breached
or failed to perform the duties of the director's office in compliance with
the IBCL and the breach or failure to perform constitutes willful misconduct
or recklessness. Subject to this standard, a director who votes for or
assents to distributions in violation of the IBCL is personally liable to the
corporation for the amount of the illegal distribution and is entitled to
contribution from the other directors who voted for or assented to such
distribution and the shareholders who received the distribution. NCBE's
Articles of Incorporation do not contain any provisions that would alter the
statutory provisions.
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<PAGE>
HHFC. HHFC's Articles of Incorporation do not contain any provisions
that change the statutory provisions relating to director liability.
AUTHORIZATION OF PREFERRED SHARES
NCBE. NCBE's Articles of Incorporation authorize NCBE to issue up to
1,000,000 preferred shares, without par value, in multiple series without
shareholder approval. Prior to issuance, NCBE's Board would set the preferred
shares' voting rights (which may be limited our unlimited), dividend or
distribution rights, rights to priority in relation to common shares or other
series of preferred shares, redemption or conversion prices, liquidation
preferences, and sinking fund provisions. NCBE currently has no preferred
shares outstanding. Depending upon the terms of the preferred shares issued,
such issuance may result in the dilution of the voting rights of common
shareholders and in holders of preferred shares with preferences and other
rights superior to rights of holders of common shares. The authorized
preferred shares may also be viewed as having possible anti-takeover effects,
because the shares could be used in the adoption of a shareholder rights plan or
other defensive measures.
HHFC. HHFC's Articles of Incorporation do not authorize any preferred
shares.
LEGAL MATTERS
The legality of the securities offered hereby and certain tax consequences
of the Merger will be passed upon by Baker & Daniels, Indianapolis, Indiana.
Certain matters on behalf of HHFC in connection with the Merger will be passed
upon by Brown, Todd & Heyburn PLLC, Louisville, Kentucky, and New Albany,
Indiana.
EXPERTS
The consolidated financial statements of NCBE and subsidiaries as of
December 31, 1997 and 1996 and each of the three years in the three-year period
ended December 31, 1997, incorporated by reference to NCBE's Annual Report on
Form 10-K, have been audited by McGladrey & Pullen, LLP, independent certified
public accountants, as set forth in their report and incorporated herein by
reference. The financial statements referred to above are incorporated herein
by reference in reliance upon such reports and upon the authority of such firm
as experts in auditing and accounting.
The consolidated financial statements of HHFC as of December 31, 1997 and
1996 and the years then ended, included in this Proxy Statement/Prospectus have
been audited by Sherman, Barber & Mullikin, certified public accountants, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon by the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
NCBE files annual, quarterly and current reports, proxy statements and
other information with the SEC. Shareholders may read and copy any reports,
statements or other information that NCBE files at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. NCBE's public filings are also available from commercial
document retrieval services and at the Internet web site maintained by the SEC
at http://www.sec.gov.
NCBE has filed a Registration Statement to register with the SEC the shares
of NCBE common stock to be issued to shareholders in the Merger. This Proxy
Statement/Prospectus is a part of that Registration Statement and constitutes a
prospectus of NCBE, as well as a proxy statement of HHFC for the Special
Meeting.
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As allowed by SEC rules, this Proxy Statement/Prospectus does not contain
all the information that shareholders can find in the Registration Statement or
the exhibits to the Registration Statement.
The SEC allows NCBE to "incorporate by reference" information into this
Proxy Statement/Prospectus, which means that it can disclose important
information to shareholders by referring them to another document field
separately with the SEC. The information incorporated by reference is deemed to
be part of this Proxy Statement/Prospectus. This Proxy Statement/Prospectus
incorporates by references the documents set forth below that NCBE has
previously filed with the SEC. These documents contain important information
about NCBE and its financial condition.
NCBE SEC FILINGS (FILE NO. 0-13585) PERIOD OR DATE FILED
- ----------------------------------- --------------------------------------
Annual Report on Form 10-K and 10-K/A... Year ended December 31, 1997
Quarterly Report on Form 10-Q.......... Quarter ended March 31, 1998
Current Reports on Form 8-K............. Filed March 11, 1998, April 30, 1998,
May 27, 1998, June 10, 1998, and
August 7, 1998
Proxy Statement......................... Filed April 22, 1998
Additional documents that NCBE may file with the SEC between the date of
this Proxy Statement/Prospectus and the date of the Special Meeting are also
incorporated by reference. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, as well as proxy statements.
NCBE has supplied all information contained or incorporated by reference in
this Proxy Statement/Prospectus relating to NCBE, and HHFC has supplied all
information relating to HHFC.
Copies of any of these documents may be obtained from NCBE or the SEC or
the SEC's Internet web site described above. Documents incorporated by
reference are available from NCBE without charge, excluding all exhibits unless
NCBE has specifically incorporated by reference an exhibit in this Proxy
Statement/Prospectus, by requesting them in writing or by telephone from NCBE at
the following address:
National City Bancshares, Inc.
P. O. Box 868
Evansville, IN 47705-0868
Attention: Stephen C. Byelick, Jr.
Telephone: (812) 464-9864
Please request documents by September 14, 1998 to ensure receipt before the
Special Meeting.
HHFC SHAREHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE THEIR
SHARES AT THE SPECIAL MEETING. NO ONE HAS BEEN AUTHORIZED TO PROVIDE ANY
INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. HHFC SHAREHOLDERS SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT/PROSPECTUS TO
SHAREHOLDERS NOR THE ISSUANCE OF NCBE COMMON STOCK IN THE MERGER WILL CREATE ANY
IMPLICATION TO THE CONTRARY.
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INDEX TO HHFC FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Financial Condition as of March 31, 1998
(Unaudited), December 31, 1997 and December 31, 1996 . . . . . . . . . . F-3
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997 (Unaudited) and the Years Ended December 31,
1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 1997 and 1996 and the Three Months Ended March 31,
1998 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (Unaudited) and the Years Ended December 31,
1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements December 31, 1997 and 1996 . . . F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Hoosier Hills Financial Corporation
Osgood, Indiana
We have audited the accompanying Consolidated Statements of Financial Condition
of HOOSIER HILLS FINANCIAL CORPORATION AND ITS SUBSIDIARY, THE RIPLEY COUNTY
BANK, as of December 31, 1997 and December 31, 1996 and the related Consolidated
Statements of Income, Changes in Equity and Cash Flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements
based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HOOSIER
HILLS FINANCIAL CORPORATION AND SUBSIDIARY at December 31, 1997 and December 31,
1996 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Sherman, Barber & Mullikin
- ------------------------------
SHERMAN, BARBER & MULLIKIN
Certified Public Accountants
February 24, 1998
F-2
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Cash and Due from Banks $ 2,344,007 $ 2,853,553 $ 3,903,193
Federal Funds Sold 3,850,000 1,950,000 1,100,000
-------------- ------------- ------------
Total Cash & Cash Equivalents 6,194,007 4,803,553 5,003,193
Interest-Bearing Deposits in
Other Banks 626,120 368,641 161,606
Investment Securities:
U.S. Treasury 0 0 998,385
U.S. Agencies 0 1,500,370 1,493,265
States & Political Subdivisions 5,790,431 6,021,371 7,893,877
Corporate & Other Bonds 1,357,446 1,356,412 1,321,000
Federal Reserve Bank Stock 90,000 90,000 90,000
Federal Home Loan Bank Stock 874,300 874,300 770,700
-------------- ------------- ------------
Total Investment Securities 8,112,177 9,842,453 12,567,227
Mortgage-Backed Certificates 6,353,430 4,482,380 5,940,058
Loans 86,538,011 87,289,350 80,647,059
Less: Reserve for Loan Losses (930,978) (908,624) (905,096)
-------------- ------------- ------------
Net Loans 85,607,033 86,380,726 79,741,963
Premises and Equipment 1,389,668 1,421,381 1,415,215
Other Real Estate 25,669 75,669 50,000
Accrued Interest Receivable 1,139,981 1,417,462 1,424,387
Other Assets 72,231 113,020 65,887
-------------- ------------- ------------
TOTAL ASSETS $109,520,316 $108,905,285 $106,369,536
- ------------ -------------- ------------- ------------
-------------- ------------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Continued)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ----------------- -----------------
(UNAUDITED)
LIABILITIES AND EQUITY
<S> <C> <C> <C>
LIABILITIES
Deposits:
Demand Deposits $ 11,186,040 $ 10,386,004 $ 9,782,136
Money Market Demand Accounts 660,952 1,388,548 957,546
NOW Accounts 11,342,724 12,505,665 15,718,344
Savings & Other Time Deposits 56,404,398 55,103,959 54,147,490
C of D's Equal to or
Exceeding $100,000 6,959,307 6,313,475 5,912,886
------------ ------------ ------------
Total Deposits 86,553,421 $ 85,697,651 $ 86,518,402
Notes Payable 294,862 369,862 716,948
FHLB Advances 10,440,748 10,940,748 8,500,000
Accrued Interest Payable 611,999 658,901 676,733
Other Liabilities 208,664 98,018 99,974
------------ ------------ ------------
Total Liabilities 98,109,694 97,765,180 96,512,057
COMMON STOCK OWNED BY ESOP
(subject to put option) 4,185,878 4,110,878 2,559,774
EQUITY
Common Stock 148,860 148,860 148,860
Surplus 3,418,215 3,353,743 3,055,249
Unearned ESOP Shares (294,862) (369,862) (716,948)
Retained Earnings 8,200,203 8,048,425 7,478,858
Treasury Stock, at Cost (291,675) (291,675) (291,675)
Unrealized Gains on Securities
Available-for-Sale 229,881 250,614 183,135
Common Stock Owned by ESOP
(subject to put option) (4,185,878) (4,110,878) (2,559,774)
------------ ------------ ------------
Total Stockholders' Equity 7,224,744 7,029,227 7,297,705
------------ ------------ ------------
TOTAL LIABILITIES AND EQUITY $109,520,316 $108,905,285 $106,369,536
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
3-31-98 3-31-97 12-31-97 12-31-96
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest & Fees on Loans $1,904,875 $1,756,299 $7,344,615 $6,625,314
Interest on Federal Funds Sold
and Deposits at Other Banks 40,584 14,343 64,700 124,955
Interest on Investment Securities:
Taxable Interest Income 69,989 85,644 317,545 288,217
Tax Exempt Interest Income 92,501 127,642 446,072 507,840
Interest on Mortgage-Backed
Securities 78,978 92,159 318,471 346,943
---------- ---------- ---------- ----------
Total Interest Income 2,186,927 2,076,087 8,491,403 7,893,269
INTEREST EXPENSE
Interest on Deposits 909,980 878,887 3,571,962 3,595,489
Interest on Note Payable 8,267 16,008 58,812 84,876
Interest on FHLB Advances and
Other Borrowings 163,471 132,776 595,123 281,841
---------- ---------- ---------- ----------
Total Interest Expense 1,081,718 1,027,671 4,225,897 3,962,206
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,105,209 1,048,416 4,265,506 3,931,063
Provision for Loan Loss (45,000) (37,500) (150,000) (150,000)
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS 1,060,209 1,010,916 4,115,506 3,781,063
OTHER INCOME
Service Charges on Deposit Accounts 54,115 51,116 218,426 180,092
Other Operating Income 51,591 39,885 230,662 184,159
Securities Gains 4,542 5,674 11,339 2,347
---------- ---------- ---------- ----------
Total Other Income 110,248 96,675 460,427 366,598
OTHER EXPENSES
Salaries & Employee Benefits 562,033 493,293 2,253,858 1,953,563
Occupancy & Equipment Expenses 133,133 111,596 430,135 363,887
Equipment Service & Rentals 46,613 35,926 124,637 98,045
Postage & Supplies 63,521 31,207 170,413 210,074
FDIC and Other Insurance 3,007 5,181 14,348 978
Other Operating Expenses 110,727 83,418 335,218 269,417
---------- ---------- ---------- ----------
Total Other Expenses 919,034 760,621 3,328,609 2,895,964
---------- ---------- ---------- ----------
Net Income Before Income Taxes 251,423 346,970 1,247,324 1,251,697
INCOME TAXES
Federal Income Tax 68,416 98,130 345,825 244,805
State Income Tax 31,227 33,931 131,625 112,007
---------- ---------- ---------- ----------
NET INCOME $ 151,780 $ 214,909 $ 769,874 $ 894,885
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic Earnings per Share $ .38 $ .57 $ 2.00 $ 2.46
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 (AUDITED) AND THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON ESOP RETAINED
STOCK SURPLUS SHARES EARNINGS
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1996 $148,860 $2,940,486 $(1,035,735) $6,713,816
Comprehensive Income:
Net Income, 1996 894,885
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on AFS Inv.
Total Comprehensive Income
Dividends Declared, 1996 (129,843)
ESOP Shares Earned 114,763 318,787
Market Value Adjustment,
ESOP Shares
-------- ---------- ----------- ----------
BALANCE, December 31, 1996 148,860 3,055,249 (716,948) 7,478,858
Comprehensive Income:
Net Income 769,874
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on AFS Inv.
Total Comprehensive Income
Dividends Declared, 1997 (200,307)
ESOP Shares Earned 298,494 347,086
Market Value Adjustment,
ESOP Shares
-------- ---------- ----------- ----------
BALANCE, December 31, 1997 148,860 3,353,743 (369,862) 8,048,425
Comprehensive Income:
Net Income 151,780
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on AFS Inv.
Total Comprehensive Income
ESOP Shares Earned 64,472 75,000
Market Value Adjustment,
ESOP Shares
Rounding (2)
-------- ---------- ----------- ----------
BALANCE, March 31, 1998 $148,860 $3,418,215 $ (294,862) $8,200,203
-------- ---------- ----------- ----------
-------- ---------- ----------- ----------
<CAPTION>
ACCUM. OTHER COMMON STOCK
TREASURY COMPREHENSIVE OWNED COMPREHENSIVE
STOCK INCOME TOTAL BY ESOP INCOME
-------- ------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 $(291,675) $ 312,306 $ 8,788,058 $1,951,907
Comprehensive Income:
Net Income, 1996 894,885 $894,885
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on AFS Inv. (129,171) (129,171) (129,171)
--------
Total Comprehensive Income $765,714
--------
--------
Dividends Declared, 1996 (129,843)
ESOP Shares Earned 433,550 318,787
Market Value Adjustment,
ESOP Shares 289,080
-------- ------------- ----------- ----------
BALANCE, December 31, 1996 (291,675) 183,135 9,857,479 2,559,774
Comprehensive Income:
Net Income 769,874 769,874
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on AFS Inv. 67,479 67,479 67,479
--------
Total Comprehensive Income $837,353
--------
--------
Dividends Declared, 1997 (200,307)
ESOP Shares Earned 645,580 347,086
Market Value Adjustment,
ESOP Shares 1,204,018
-------- ------------- ----------- ----------
BALANCE, December 31, 1997 (291,675) 250,614 11,140,105 4,110,878
Comprehensive Income:
Net Income 151,780 151,780
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on AFS Inv. (20,733) (20,733) (20,733)
--------
Total Comprehensive Income $131,047
--------
--------
ESOP Shares Earned 139,472 75,000
Market Value Adjustment,
ESOP Shares
Rounding (2)
-------- ------------- ----------- ----------
BALANCE, March 31, 1998 $(291,675) $ 229,881 $11,410,622 $4,185,878
-------- ------------- ----------- ----------
-------- ------------- ----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
3-31-98 3-31-97 12-31-97 12-31-96
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 151,780 $ 214,909 $ 769,874 $ 894,885
Noncash Expenses Included in Net Income:
Depreciation and Amortization 60,000 60,000 218,391 194,518
Accretion of Discount on Securities
Including Mortgage-Backed Securities (788) (2,186) (9,889) (11,142)
Amortization of Premium on Securities 3,366 4,704 14,984 8,973
Deferred Income Taxes (6,884) (3,633) (12,754) (68,393)
Provision for Bad Debts 45,000 37,500 150,000 150,000
Gains on Sale of Securities (4,542) (5,674) (11,339) (2,347)
Net Change in Payables, Prepaids and
Accrued Items 405,193 443,437 (77,191) (22,144)
Market Value Adjustments Included in
Pension Costs 64,472 42,981 298,494 114,763
(Gain) Loss on Disposal of Fixed Assets (100) 0 (13,740) 607
----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities 717,497 792,038 1,326,830 1,259,720
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Loan Disbursements 781,860 (922,969) (6,814,432) (9,870,299)
Net Decrease (Increase) in Interest-Bearing
Deposits in Other Banks (257,480) 99,834 (207,036) (161,606)
Purchase of Federal Home Loan Bank Stock 0 0 (103,600) (404,000)
Purchase of Investment Securities
and Mortgage-Backed Securities-AFS (3,302,984) 0 (1,707,449) (5,137,642)
Proceeds from Maturities of Securities
and Principal Received on Mortgage-Backed
Securities-AFS 1,944,740 358,642 923,406 999,841
Proceeds from Sale of Securities &
Mortgage-Backed Securities-AFS 1,185,108 1,102,571 5,172,768 2,152,473
Proceeds from Sale of Fixed Assets 100 0 17,205 2,700
Proceeds from Sale of REO 0 0 0 37,000
Purchase of Fixed Assets (34,159) (88,693) (227,022) (98,604)
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities 317,185 549,385 (2,946,160) (12,480,137)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Demand Deposits,
MMDA, NOW and Savings Accounts (1,551,496) (4,555,782) (2,593,536) 2,384,526
Net Increase in Certificates of Deposit 2,407,268 81,652 1,772,785 1,771,732
Dividends Paid 0 0 (200,307) (129,843)
Repayment of FHLB Advances (500,000) 0 2,440,748 5,500,000
Repayment of Long-Term Debt (75,000) (50,000) (347,086) (318,787)
Principal Repayments from ESOP 75,000 50,000 347,086 318,787
Purchase of Federal Funds 0 500,000 0 0
----------- ----------- ----------- -----------
Net Cash Provided by Financing Activities 355,772 (3,974,130) 1,419,690 9,526,415
----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
3-31-98 3-31-97 12-31-97 12-31-96
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Cash
and Cash Equivalents 1,390,454 (2,632,707) (199,640) (1,694,002)
Cash & Cash Equivalents,
Beginning of Period 4,803,553 5,003,193 5,003,193 6,697,195
----------- ----------- ----------- -----------
Cash & Cash Equivalents,
End of Period $ 6,194,007 $ 2,370,486 $ 4,803,553 $ 5,003,193
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SCHEDULE OF NONCASH INVESTING AND
FINANCING TRANSACTIONS
Trade of Equipment $ 1,000
-----------
-----------
SUPPLEMENTARY INFORMATION
Interest Paid $ 1,128,620 $ 1,085,645 $ 4,243,728 $ 3,963,044
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income Taxes Paid $ 4,430 $ 27,308 $ 479,465 $ 401,910
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF OPERATIONS
HOOSIER HILLS FINANCIAL CORPORATION (the Company), through its
subsidiary, Ripley County Bank (the Bank), provides a full range of
banking services to individual and corporate customers in southern
Indiana. The Bank has three branch locations in the towns of
Osgood, Versailles and Milan, Indiana. The Company and the
subsidiary Bank are subject to the regulations of various federal
and state agencies and undergo periodic examination by regulators.
HOOSIER HILLS FINANCIAL CORPORATION is a bank holding company
formed in 1982 for the purpose of acquiring the outstanding stock
of the Ripley County Bank.
b. PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the
HOOSIER HILLS FINANCIAL CORPORATION and its wholly-owned
subsidiary, The Ripley County Bank. The combination is accounted
for as a pooling of interests. The parent company employs the
equity method in recognizing net income of and dividends paid by
the subsidiary. Intercompany transactions and balances have been
eliminated in the consolidation.
c. INVESTMENT SECURITIES
The Company adopted Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
(SFAS 115) as of January 1, 1994. This accounting policy expands
the use of fair value accounting for securities for which there is
not a positive intent and ability to hold to maturity. At
acquisition, SFAS 115 requires that securities be classified into
one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are purchased and held
principally with the intention of selling them in the near term.
The Company has no trading securities. Held-to-maturity securities
are those securities for which the Company has the ability and
intent to hold until maturity. All other debt securities are
classified as available-for-sale.
Securities available-for-sale are stated at fair value at December
31, 1997 and 1996. Fair value is based on market prices quoted in
financial publications and other independent sources. Net
unrealized gains or losses are excluded from earnings and reported,
net of deferred income taxes, as a separate component of
stockholders' equity until realized. The adjusted cost of the
specific security sold is used to compute any gain or loss upon
sale.
F-9
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. INVESTMENT SECURITIES (Continued)
Held-to-maturity securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income under the effective
interest method. Gain or loss is recorded when realized on a
specific identification basis or when, in the opinion of
management, an unrealized loss is other than temporary in nature.
d. BANK PREMISES AND EQUIPMENT
Bank Premises and Equipment is stated at cost less accumulated
depreciation. Depreciation is provided for principally using the
straight-line method applied over estimated useful lives.
Depreciation for income tax purposes has been computed under the
Accelerated Cost Recovery System and Modified Accelerated Cost
Recovery System as prescribed by the Internal Revenue Code.
e. LOANS AND RESERVE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by
unearned discount, net deferred loan fees and a Reserve for Loan
Losses. Unearned discount on installment loans is recognized as
income over the terms of the loans by either the rebate or simple
interest method. Interest on other loans is calculated by using
the simple interest method on daily balances of the principal
amount outstanding.
The Reserve for Loan Losses is established through a provision for
loan losses charged to expense. Loans are charged against the
Reserve for possible loan losses when management believes that the
collectibility of contractual principal and interest is unlikely.
The Reserve is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, credit
concentrations, review of specific impaired and nonperforming
loans, and current economic conditions and trends that may affect
the borrowers' ability to pay. Allowances for impaired loans are
generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced
by charge-offs, net of recoveries. Accrual of interest is
discontinued on loans when management believes, after considering
economic
F-10
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. LOANS AND RESERVE FOR LOAN LOSSES (Continued)
and business conditions and collection efforts, that the borrowers'
financial condition is such that collection is doubtful. A loan is
considered to be impaired when management believes that it is
probable that the Company will not collect the full principal and
interest as prescribed in the note.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires that impaired loans
be measured at the present value of expected cash flows discounted
at the loan's effective interest rate, the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent or foreclosure is probable. It amends previously issued
statements to clarify that the collectibility of both contractual
principal and interest should be evaluated when determining the
need for a loss accrual. The Statement provides that a loan is
impaired when it is probable that all amounts due under the loan
agreement will not be collected. It also specifies that a
delinquent loan is not impaired if the creditor expects to collect
all amounts due including interest accrued at the contractual rate
during the period of delinquency.
For impairment recognized in accordance with FASB Statement No.
114, the entire change in present value of expected cash flows is
reported as bad debt expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad
debt expense that otherwise would be reported.
Certain loan origination fees and direct costs of underwriting and
closing loans are deferred and the net deferred fees and costs are
recognized over the contractual life of the underlying loans as an
adjustment to interest income using the interest method.
Amortization of deferred loan fees is discontinued when a loan is
placed on nonaccrual status.
f. OTHER REAL ESTATE OWNED
Other Real Estate Owned consists of real estate acquired through
foreclosure or deed in lieu of foreclosure and is carried at the
lower of cost or fair market value less estimated selling expenses.
At the date of acquisition, estimated losses are charged to the
Reserve for Loan Losses.
F-11
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. INCOME TAXES
Income Taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for
differences between the basis of assets and liabilities for
financial statement and income tax purposes. The differences
relate primarily to depreciable assets (use of different
depreciation methods and lives for financial statement and income
tax purposes), allowance for loan losses (deductible for financial
statement purposes but not for income tax purposes), and accretion
of discount on debt securities (deferred for income tax purposes
but recognized for financial statement purposes). The deferred tax
assets and liabilities represent the future tax consequences of
those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled. Deferred taxes
are also recognized for operating losses and tax credits that are
available to offset future taxable income.
h. CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents, as presented in the Statements of Cash
Flows, includes cash on hand, demand deposits in other financial
institutions, and federal funds sold.
i. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of
fair value information about financial instruments, whether or not
recognized in the statement of financial condition. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments as
reflected in Note 12:
F-12
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those
assets' fair values.
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying amounts. The fair values for other loans are estimated
using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers
of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics.
Accrued Interest Receivable: The carrying amount of accrued
interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting
date. The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits.
Accrued Interest Payable: The carrying amount of accrued interest
payable approximates fair value.
Other borrowings and notes payable: The carrying amounts of other
borrowings and notes payable approximate their fair values.
Other liabilities: When applicable, commitments to extend credit
are evaluated and fair value is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness
of the counter-parties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of
interest rates and the committed rates.
F-13
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
A material estimate that is particularly susceptible to significant
change relates to the determination of the allowance for losses on
loans. A large portion of the Company's loan portfolio consists of
single-family residential loans in the Ripley County area. The
regional economy depends heavily on the agricultural industry.
Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio is susceptible to changes in local
market conditions.
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Company's
allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination. Because of these factors,
it is reasonably possible that the allowances for losses on loans
and foreclosed real estate may change materially in the near term.
k. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of March 31,
1998 and for the three-month periods ended March 31, 1998 and 1997
include the accounts of the Company and Bank after elimination of
material intercompany transactions and have been prepared by the
Company without audit. In the opinion of management all
adjustments necessary to fairly present these statements have been
made. Footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted for these statements. The
results of operations for the three months ended March 31, 1998 and
1997 are not necessarily indicative of the operating results for
the full year.
F-14
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 2. INVESTMENT SECURITIES
The amortized cost and fair value of securities available-for-sale
as of December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Agencies $ 1,500,000 $ 840 $ (470) $ 1,500,370
State & Municipal Oblig. 5,752,489 275,211 (6,329) 6,021,371
Mortgage-Backed Securities 4,408,120 95,270 (21,010) 4,482,380
Corporate Bonds 1,285,000 71,412 0 1,356,412
----------- -------- --------- -----------
Totals $12,945,609 $442,733 $ (27,809) $13,360,533
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
The Company carries restricted equity securities, comprised of
stock in the Federal Reserve Bank and Federal Home Loan Bank, at
cost (par) based upon management's belief that the par value is
ultimately recoverable. The stock is "restricted" due to
requirements for ownership as a condition of membership into the
respective federal banking organization.
The amortized cost and fair value of securities available-for-sale
as of December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 1,000,917 $ 142 $ (2,674) $ 998,385
U.S. Agencies 1,500,000 2,935 (9,670) 1,493,265
State & Municipal Oblig. 7,629,085 318,860 (54,068) 7,893,877
Mortgage-Backed Securities 5,913,087 64,963 (37,992) 5,940,058
Corporate Bonds 1,285,000 36,000 0 1,321,000
----------- -------- --------- -----------
Totals $17,328,089 $422,900 $(104,404) $17,646,585
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
F-15
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities
available-for-sale at December 31, 1997, by contractual maturity,
are shown below:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AMORTIZED FAIR
DECEMBER 31, 1997 COST VALUE
---------------------------------------- ----------- -----------
<S> <C> <C>
Due in One Year or Less $ 7,013,678 $ 7,077,260
Due After One Year Through Five Years 3,263,598 3,464,882
Due After Five Years Through Ten Years 2,594,464 2,739,295
Due After Ten Years 73,869 79,096
----------- -----------
Totals $12,945,609 $13,360,533
----------- -----------
----------- -----------
</TABLE>
The amortized cost and estimated fair value of debt securities
available-for-sale at December 31, 1996, by contractual maturity,
are shown below:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AMORTIZED FAIR
DECEMBER 31, 1997 COST VALUE
---------------------------------------- ----------- -----------
<S> <C> <C>
Due in One Year or Less $ 7,481,199 $ 7,482,321
Due After One Year Through Five Years 6,399,729 6,635,062
Due After Five Years Through Ten Years 3,371,547 3,449,548
Due After Ten Years 75,614 79,654
----------- -----------
Totals $17,328,089 $17,646,585
----------- -----------
----------- -----------
</TABLE>
During 1997, the Company recognized gains of $19,263 and losses of
$7,924 on the sale of securities classified as available-for-sale.
The Company recognized gains of $7,299 and losses of $4,952 on the
sale of securities classified as available-for-sale in 1996.
As discussed in Note 14, certain investment securities are pledged
as collateral for Federal Home Loan Bank borrowings.
F-16
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 3. LOANS
Loans consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Mortgage Loans $62,476,023 $59,452,409
Commercial, Financial
& Agricultural Loans 10,998,850 9,655,485
Installment Loans
to Individuals 13,143,627 10,947,744
Credit Card Loans 566,214 513,309
Overdrafts 132,536 133,912
Less: Deferred Mortgage Fees (27,900) (55,800)
------------- -------------
Total Loans $87,289,350 $80,647,059
------------- -------------
------------- -------------
</TABLE>
Interest income of approximately $8,527 and $4,249 was not accrued
during 1997 and 1996, respectively, due to the delinquent status of
the related loans.
The following is a summary of nonperforming loans at December 31,
1997:
<TABLE>
<S> <C>
(a) Impaired Loans $147,038
(b) Nonaccrual Loans 49,991
(c) Loans Contractually Past Due 90
Days or More, Exclusive of (a) & (b) 129,821
----------
Total Nonperforming Loans $326,850
----------
----------
</TABLE>
The Company is not committed to lend additional funds to any debtor
whose loans are considered nonperforming at December 31, 1997.
At December 31, 1997 and 1996, the total recorded investment in
impaired loans, all of which had allowances determined in accordance
with SFAS No. 114 and No. 118, amounted to approximately $147,038 and
$292,440, respectively. The average recorded investment in impaired
loans amounted to approximately $202,000 and $140,000 for the years
ended December 31, 1997 and 1996. The allowance for loan losses
related to impaired loans amounted to approximately $11,000 and
$25,000 at December 31, 1997 and 1996. Interest income on impaired
loans of $19,300 was recognized for cash payments received in 1997 and
$4,500 for cash payments received in 1996.
F-17
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 4. RESERVE FOR LOAN LOSSES
The Reserve for Loan Losses for federal income tax purposes differs
from the actual reserve due to statutory limitations under federal tax
law. Activity in the tax and book Reserves for Loan Losses for 1997
and 1996 is summarized below:
<TABLE>
<CAPTION>
BOOK TAX PURPOSES
------------------------ ------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------- -------- --------- ---------
Balance, January 1 $905,096 $802,997 $289,607 $289,607
Recoveries 41,608 34,713 41,608 34,713
Charge-Offs (188,080) (82,614) (188,080) (82,614)
Provision for Loan Loss 150,000 150,000 146,472 47,901
-------- -------- --------- ---------
Balance, December 31 $908,624 $905,096 $289,607 $289,607
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
NOTE 5. PREMISES AND EQUIPMENT
Premises and Equipment is shown on the financial statements at cost
net of accumulated depreciation and consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Land, Building & Improvements $1,633,953 $1,614,649
Furniture, Fixtures & Equipment 1,398,012 1,216,291
---------- ------------
Total Cost of Fixed Assets 3,031,965 2,830,940
Less: Accumulated Depreciation (1,610,584) (1,415,725)
---------- ------------
Net Property and Equipment $1,421,381 $1,415,215
---------- ------------
---------- ------------
</TABLE>
NOTE 6. CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 or more amounted to
$6,313,475 and $5,912,886 at December 31, 1997 and 1996, respectively.
Aggregate individual balances by maturity (rounded to the nearest
$1,000) are as follows at December 31:
<TABLE>
<CAPTION>
MONTHS/YEARS UNTIL MATURITY 1997 1996
------------------------------------ ---------- ----------
<S> <C> <C>
Three Months or Less $2,215,000 $ 900,000
Over Three Months to Twelve Months 1,998,000 1,561,000
Over One Year Through Two Years 1,018,000 1,786,000
Over Two Years Through Three Years 1,082,000 611,000
Over Three Years Through Four Years 0 1,055,000
---------- ------------
Total $6,313,000 $5,913,000
---------- ------------
---------- ------------
</TABLE>
F-18
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
CERTIFICATES OF DEPOSIT (Continued)
Individual time certificates of deposit of less than $100,000 totalled
$44,831,365 and $43,459,168 at December 31, 1997 and 1996,
respectively. Those time deposits (rounded to the nearest $1,000)
mature as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Three Months or Less $ 6,808,000 $ 7,555,000
Over Three Months to Twelve Months 18,285,000 15,351,000
Over One Year through Two Years 13,981,000 7,804,000
Over Two Years through Three Years 4,751,000 8,378,000
Over Three Years through Four Years 654,000 844,000
Over Four Years through Five Years 352,000 3,527,000
----------- -----------
Total $44,831,000 $43,459,000
----------- -----------
----------- -----------
</TABLE>
NOTE 7. INCOME TAXES
HOOSIER HILLS FINANCIAL CORPORATION files a consolidated federal
income tax return with its subsidiary, The Ripley County Bank.
Substantial temporary differences exist between taxable income on the
Company's books and taxable income reported to the Internal Revenue
Service due to differences between IRS reporting requirements and
generally accepted accounting principles.
The Company is subject to a franchise tax imposed by the State of
Indiana. The tax affects all financial institutions which have offices
within Indiana. It is imposed at a rate of 8.5% and is applied against
federal taxable income after certain adjustments. This expense is
shown separately as state income tax on the Statements of Income and
is part of the following tax calculations
The components of income tax expense are as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Current Tax Expense $490,204 $425,205
Deferred Income Tax Expense (Benefit) (12,754) (68,393)
--------- ----------
Income Tax Expense $477,450 $356,812
--------- ----------
--------- ----------
</TABLE>
Income tax was calculated at the combined effective state and federal
statutory rate of 39.6% as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Income Tax at Statutory Rates $494,065 $495,672
Net Tax Effect of Exempt Income
& Expenses (16,615) (138,860)
-------- --------
Income Tax Expense $477,450 $356,812
-------- --------
-------- --------
</TABLE>
F-19
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 8. INCOME TAX DEFERRALS
The Company's net deferred federal and state tax assets at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred Federal Income Tax Assets $ 210,466 $ 209,267
Deferred Federal Income Tax Liabilities (161,828) (170,646)
------------ ------------
Total Net Deferred Federal Income
Tax Assets $ 48,638 $ 38,621
------------ ------------
------------ ------------
Deferred State Franchise Tax Assets $ 77,233 $ 76,933
Deferred State Franchise Tax Liabilities (37,041) (39,478)
------------ ------------
Total Net Deferred State Franchise Tax
Assets $ 40,192 $ 37,455
------------ ------------
------------ ------------
Deferred Federal Income Tax Asset
(Liability) - Unrealized (Gains) on
Securities Available-for-Sale $(129,041) $(108,289)
Deferred State Franchise Tax Asset
(Liability) - Unrealized (Gains) on
Securities Available-for-Sale (35,269) (27,072)
Total Deferred Tax Assets (Liabilities) ------------- ------------
SFAS 115 $(164,310) $(135,361)
------------ ------------
------------ ------------
</TABLE>
At December 31, 1997, the subsidiary bank was obligated to the holding
company for 1997 income taxes of approximately $176,000.
F-20
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 9. RELATED PARTY TRANSACTIONS
The subsidiary bank in its normal course of operations accepts
deposits from and makes loans to related parties, including officers,
directors and associated organizations. These transactions are made
on substantially the same terms as those involving unrelated parties.
The following balances existed at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Total Loans to Officers, Directors
and Their Associates $ 796,743 $1,094,977
---------- ----------
---------- ----------
Total Deposits of Officers, Directors
and Their Associates $1,402,092 $1,088,677
---------- ----------
---------- ----------
</TABLE>
During 1997, approximately $336,007 in new loans were extended to the
above noted persons and entities while $634,241 in repayments were
received.
NOTE 10. BENEFIT PLAN
The Company sponsors an employee stock ownership plan (ESOP) that
covers all employees. During 1994, HOOSIER HILLS FINANCIAL
CORPORATION borrowed $1,600,000 to loan to the ESOP for the purchase
of 32,000 (equal to 96,000 after stock split) shares of Company stock.
The Company makes annual contributions to the ESOP equal to total debt
service less dividends received by the ESOP. All dividends on
unallocated shares are used to pay debt service. The common stock of
Ripley County Bank is pledged as collateral for the debt and as the
debt is repaid, HOOSIER HILLS FINANCIAL CORPORATION common shares are
allocated to employees. The Company accounts for its ESOP in
accordance with Statement of Position 93-6. Accordingly, the shares
represented by outstanding debt are reported as unearned ESOP shares
in the statement of financial condition. As shares are earned, the
Company reports compensation expense equal to the current market price
of the shares, and the shares become outstanding for earnings per
share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest.
F-21
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
BENEFIT PLAN (Continued)
Contribution expense for the ESOP was $646,080 and $433,550 for the
years ended December 31, 1997 and 1996, respectively. Interest on the
debt is not considered compensation expense by the Company. The ESOP
shares were as follows as of December 31 (1996 has been restated to
give effect to the stock split described in Note 11):
<TABLE>
<CAPTION>
1997 1996
----- ----
<S> <C> <C>
Allocated Shares 101,523 82,395
Shares Released for Allocation 20,826 19,128
Unearned Shares 22,191 43,017
-------- --------
Total ESOP Shares 144,540 144,540
-------- --------
-------- --------
Fair Value of Unearned
Shares at December 31 $687,921 $975,052
-------- --------
-------- --------
</TABLE>
In the case of a distribution of ESOP shares which are not readily
tradeable on an established securities market, the plan provides the
participant with a put option that complies with the requirements of
Section 490(h) of the Internal Revenue Code. The Company has
classified outside of permanent equity the fair value of earned and
unearned ESOP shares (net of the debit balance representing unearned
ESOP shares) subject to the put option in accordance with the
Securities and Exchange Commission Accounting Series Release #268.
NOTE 11. EQUITY
At December 31, 1997 and 1996, there were 394,071 and 373,245 shares
of HOOSIER HILLS FINANCIAL CORPORATION common stock outstanding,
respectively. At December 31, 1997 and 1996, HOOSIER HILLS FINANCIAL
CORPORATION held 30,318 shares of treasury stock. The Ripley County
Bank had 150,000 shares of common stock outstanding at December 31,
1997 and 1996. Authorized shares for HOOSIER HILLS FINANCIAL
CORPORATION and Ripley County Bank were 750,000 and 150,000,
respectively, at December 31, 1997 and 1996.
At the April board meeting of HOOSIER HILLS FINANCIAL CORPORATION, the
Board approved a 3 to 1 stock split. The split was effective for
shareholders of record on July 1, 1997. To effect the split, the
Company's authorized shares were increased to 750,000.
The Ripley County Bank had net income of $1,336,496 for 1997 and
$1,259,918 for 1996. Earnings per share were $8.91 for 1997 and $8.40
for 1996 based on outstanding shares of 150,000. Earnings per share
for HOOSIER HILLS FINANCIAL CORPORATION was $2.00 for 1997 and $2.46
for 1996 based on weighted average shares outstanding of 383,658 and
363,681 for 1997 and 1996, respectively. Earnings per share for 1996
has been restated for the effect of the 1997 stock split. The Bank
paid dividends of $465,000 or $3.10 per share in 1997 and $400,000 or
$2.67 per share in 1996 to HOOSIER HILLS FINANCIAL CORPORATION.
Intercompany dividends have been eliminated in the accompanying
consolidated financial statements.
F-22
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
EQUITY (Continued)
Payment of dividends by the Bank is restricted by state and federal
banking regulations. Dividends may not be paid if such payment
results in an impairment of capital. The minimum capital requirements
for the subsidiary bank are reflected in Note 15. The Bank had
$2,196,414 available for the payment of dividends for 1997 in
accordance with state regulation.
NOTE 12. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company began originating mortgage loans for the secondary market
in June of 1997. Under provisions of the "correspondent agreement,"
the Company may be required to repurchase any loan for which all
federal and state lending regulations were not adhered to or if any
documents submitted to the lending bank by the Company are not genuine
and valid. The Company has not retained servicing rights on any of
these loans, therefore the outstanding balances of those loans subject
to possible repurchase is not known.
In order to effectively service its customers, the Company exposes
itself to risk beyond the amount recorded on the Balance Sheets
through issuance of loan commitments and letters of credit. The Bank
was exposed to additional credit loss to the extent of the notional
principal amount of commitments and letters of credit outstanding at
December 31, 1997 and 1996. The Bank evaluates the recipients of
commitments and letters of credit using the same policies and criteria
used to evaluate recipients of loans recorded on the Balance Sheets.
Loan commitments and outstanding lines and letters of credit at
December 31, 1997 and December 31, 1996 included a mix of unsecured
amounts as well as amounts secured by real estate, equipment,
inventory and accounts receivable.
FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS REPRESENT CREDIT RISK AT
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
----------------------------
(ROUNDED TO NEAREST 1,000)
1997 1996
---- ----
<S> <C> <C>
Commitments to Extend Credit:
Secured by Real Estate $1,819,000 $1,944,000
Unsecured 826,000 1,186,000
Undisbursed Lines of Credit:
Credit Card Lines-Unsecured 843,000 745,000
Letters of Credit-Unsecured 161,000 161,000
---------- ----------
Total $3,649,000 $4,036,000
---------- ----------
---------- ----------
</TABLE>
F-23
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
FINANCIAL INSTRUMENTS (Continued)
FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS REPRESENT CREDIT RISK AT
DECEMBER 31, 1997 (Continued)
Commitments to extend credit generally have fixed expiration dates and
many expire without being drawn upon, so the amounts reflected above
do not necessarily represent future cash requirements. The market or
interest rate risk associated with those instruments is, for all
practical purposes, the same as for loans reflected on the balance
sheets in that fluctuations in market rates will impact the value of
the instrument.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------ -------- ------
<S> <C> <C> <C> <C>
Financial Assets:
Cash & Cash Equivalents $ 4,803,553 $ 4,803,553 $ 5,003,193 $ 5,003,193
Interest-Bearing Deposits $ 368,641 $ 368,641 $ 161,606 $ 161,606
Investment and Mortgage-
Backed Securities $14,324,833 $14,324,833 $18,507,285 $18,507,285
Loans, Net of Allowance $86,380,726 $86,297,349 $79,741,963 $79,159,799
Accrued Interest Receivable $ 1,417,462 $ 1,417,462 $ 1,424,387 $ 1,424,387
Financial Liabilities:
Deposits $85,697,651 $85,920,591 $86,518,402 $86,999,472
FHLB Advances $10,940,748 $10,940,748 $ 8,500,000 $ 8,500,000
Notes Payable $ 369,862 $ 369,862 $ 716,948 $ 716,948
Accrued Interest Payable $ 658,901 $ 658,901 $ 676,733 $ 676,733
</TABLE>
NOTE 13. CONCENTRATIONS OF CREDIT RISK
The Ripley County Bank grants various types of loans to individuals
and businesses located, primarily, in Ripley and surrounding counties
of Indiana. Although the Bank's customers have a somewhat diversified
background, they are dependent, to a great extent, on the agricultural
sector of the local economy for the ability to repay their loans.
F-24
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 14. NOTES PAYABLE
HOOSIER HILLS FINANCIAL CORPORATION issued a long-term note on April
1, 1994, the proceeds of which were then loaned to the Company's
employee stock ownership plan on identical terms for the acquisition
of company stock. The note is secured by the pledge of the
outstanding stock of Ripley County Bank and contains various financial
covenants pertaining to levels of net worth, dividend payments,
indebtedness and fixed asset acquisitions. The Company was in
compliance with all such covenants at December 31, 1997.
Interest on the note is payable quarterly at the lender's prime rate
plus .75% which may be adjusted daily. Principal payments of $50,000
are due on the first day of each January, April, July and October with
full repayment scheduled to occur on April 1, 2002. The Company may
prepay all or any part of the principal of the note at any time
without penalty or premium. Principal prepayments are applied to the
required quarterly installments in the inverse order of their
respective maturities. As reflected in the following table, the
Company has prepaid a significant portion of the principal due on the
note. The required annual principal payments under the note are
summarized as follows:
<TABLE>
<S> <C>
1998 $200,000
1999 169,862
--------
Total Amount Due $369,862
--------
--------
</TABLE>
At December 31, 1997 and 1996, the Company's subsidiary bank was
indebted to the Federal Home Loan Bank of Indianapolis (FHLB) in the
amount of $10,940,748 and $8,500,000, respectively, under an
"Advances, Pledge and Security Agreement" dated August 19, 1994. The
Agreement provides for the pledge of "eligible blanket collateral"
consisting of certain 1 to 4 family mortgage loans with a total
carrying value of $40,521,726 and U.S. government and agency
investment securities and mortgage-backed securities with a total
carrying value of $5,831,748 at December 31, 1997, to secure the
debt. The amounts of each advance and the annual rate of interest
thereon are summarized, by maturity, as follows:
F-25
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTES PAYABLE (Continued)
<TABLE>
<CAPTION>
Interest Contractual
Amount Rate Maturity
------ ----- --------
<S> <C> <C>
$ 500,000 5.79% January 12, 1998
$ 1,000,000 5.80% March 23, 1998
$ 1,000,000 6.17% August 21, 1998
$ 1,000,000 5.94% September 9, 1998
$ 1,000,000 5.79% November 16, 1998
$ 1,000,000 6.41% June 7, 1999
$ 1,500,000 5.85% May 17, 2000
$ 1,000,000 6.45% June 7, 2000
$ 500,000 6.13% October 27, 2000
$ 940,748 6.78% September 17, 2001
$ 500,000 6.32% October 16, 2002
$ 1,000,000 6.21% November 15, 2002
-----------
$10,940,748
-----------
-----------
</TABLE>
Under the blanket collateral agreement, the subsidiary bank must
maintain eligible collateral of 170% of total advances. Based upon
that requirement, approximately $16,000,000 was available to the Bank
at December 31, 1997. Management has been authorized by the board of
directors to borrow, if necessary, a total of $12,000,000 under this
agreement.
NOTE 15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital to risk-weighted
assets, and of Tier I capital to average assets (as defined in the
regulations). Management believes, as of December 31, 1997 and
December 31, 1996, that the Bank met all capital adequacy requirements
to which it is subject.
F-26
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
REGULATORY MATTERS (Continued)
As of December 31, 1997 and December 31, 1996, the Bank would be
categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the
Bank must maintain total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that date that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
following tables as of:
DECEMBER 31, 1997 (ROUNDED TO NEAREST 000):
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
___________________________ _______________________ __________________________
Amount Ratio Amount Ratio Amount Ratio
_____________ _______ __________ ________ ____________ ________
<S> <C> <C> <C> <C> <C> <C>
Total Capital $11,970,000 16.4% $5,811,840* 8.0%* $7,264,800* 10.0%*
(to risk
weighted assets)
Tier I Capital $11,062,000 15.2% $2,905,920* 4.0%* $4,358,880* 6.0%*
(to risk
weighted assets)
Tier I Capital $11,062,000 10.2% $4,315,720* 4.0%* $5,394,650* 5.0%*
(to average
assets)
* - is greater than or equal to
</TABLE>
DECEMBER 31, 1996 (ROUNDED TO NEAREST 000):
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
___________________________ _______________________ __________________________
Amount Ratio Amount Ratio Amount Ratio
_____________ _______ __________ ________ ____________ ________
<S> <C> <C> <C> <C> <C> <C>
Total Capital $11,043,000 16.2% $7,604,400* 8.0%* $9,505,500* 10.0%*
(to risk
weighted assets)
Tier I Capital $10,191,000 15.0% $3,802,200* 4.0%* $5,703,300* 6.0%*
(to risk
weighted assets)
Tier I Capital $10,191,000 9.84% $5,239,160* 4.0%* $4,752,750* 5.0%*
(to average
assets)
* - is greater than or equal to
</TABLE>
F-27
<PAGE>
HOOSIER HILLS FINANCIAL CORPORATION
AND SUBSIDIARY
OSGOOD, INDIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 16. CONTINGENT LIABILITIES
The Ripley County Bank terminated, during 1997, a data processing
service contract that contained an option to renew and provided the
servicing agent with a right of first refusal. Based upon those
provisions, the servicing agent has claimed that the Bank breached the
agreement. Anticipated damages totalling $144,000 have been claimed
by the servicing agent, but no legal action has been initiated to
date. Management adamantly denies any breach of contract and, based
upon the advice of legal counsel, intends to vigorously defend any
action to collect these damages.
F-28
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of
the 21st day of April, 1998, by and between National City Bancshares, Inc., an
Indiana corporation ("NCBE"), and Hoosier Hills Financial Corporation, an
Indiana corporation ("HHFC").
W I T N E S S E T H:
WHEREAS, HHFC owns all of the outstanding capital stock of The Ripley
County Bank, an Indiana banking corporation located in Osgood, Indiana (the
"Bank"); and
WHEREAS, the parties desire that HHFC merge with and into NCBE (the
"Merger") in a transaction to be accounted for as a pooling-of-interests upon
the terms and conditions contained herein; and
WHEREAS, the Board of Directors of HHFC deems the Merger advisable and in
the best interests of HHFC and its shareholders and has adopted a resolution
approving this Agreement and directing that this Agreement be submitted for
consideration at a meeting of HHFC's shareholders; and
WHEREAS, the Board of Directors of NCBE has adopted a resolution approving
the Merger and this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
representations, warranties and covenants herein contained and for the purpose
of prescribing the terms and conditions of the Merger, the mode of carrying the
Merger into effect, the manner of converting the capital stock of HHFC, and such
other provisions as are deemed desirable in connection with the Merger, the
parties, intending to be bound, hereby agree as follows:
1. THE MERGER.
(a) MERGER. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Indiana Business Corporation Law (the
"IBCL"), at the Effective Time (as hereafter defined), HHFC will be merged with
and into NCBE. HHFC shall be the merging corporation under the Merger and its
separate corporate existence shall cease as of the Effective Time. NCBE shall
be the surviving corporation under the Merger (the "Surviving Corporation") and
shall succeed to and assume all rights and obligations of HHFC in accordance
with the IBCL.
(b) REGULATORY APPROVALS. The parties acknowledge that certain approvals
must be received from or notices must be given to federal and state banking
regulatory agencies including: (i) the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"); (ii) the Indiana Department of
Financial Institutions; and (iii) any other banking regulatory authorities
having jurisdiction over the parties or the Merger (the governmental agencies
referred to in items (i)-(iii) above are collectively referred to herein as the
"Applicable Governmental Authorities").
(c) CLOSING; EFFECTIVE TIME. The delivery of the certificates and
opinions called for by this Agreement shall take place at the offices of NCBE,
227 Main Street, Evansville, Indiana, at a closing (the "Closing") fixed by
agreement of NCBE and HHFC as promptly as practicable (but in any event at least
five (5) business days prior to the Closing) following the latest of (i)
approval by all the Applicable Governmental Authorities; (ii) the expiration of
any waiting period imposed by law; and (iii) satisfaction or waiver (to the
extent legally permissible) of the conditions set forth in Sections 11, 12 and
13 of this Agreement. The parties shall execute and file on or prior to the
Closing, articles of merger in the form required by the IBCL (the "Articles of
Merger") relating to the Merger with the Indiana Secretary of State. The time
at which the Merger becomes effective shall be specified in the Articles of
Merger and is hereafter referred to as the "Effective Time" and shall be no
later than NCBE's close of business on the day of Closing.
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2. EFFECTS OF THE MERGER.
(a) EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the IBCL.
(b) ARTICLES OF INCORPORATION AND BY-LAWS. The Articles of Incorporation
and the By-Laws of NCBE as in effect at the Effective Time shall be the Articles
of Incorporation and By-Laws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
(c) DIRECTORS. The directors of NCBE serving at the Effective Time shall
be the directors of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
(d) OFFICERS. The officers of NCBE serving at the Effective Time shall be
the officers of the Surviving Corporation until the earlier of their resignation
or removal or until their respective successors are duly elected and qualified,
as the case may be.
3. CONVERSION OF HHFC COMMON. Without any action on the part of any
holders of any of HHFC's shares of Common Stock, without par value ("HHFC
Common"), or shares of capital stock of NCBE, the Merger shall have the
following effects with regard to the HHFC Common:
(a) CONVERSION OF HHFC COMMON. As of the Effective Time, each issued and
outstanding share of HHFC Common other than Dissenting Shares (as hereafter
defined) shall be converted into the right to receive the number of shares of
NCBE's Common Stock, without par value ("NCBE Common") computed as follows:
(i) If the Average NCBE Value (as hereafter defined) is greater
than or equal to $34.00, but less than or equal to $47.00, then each
share of HHFC Common shall be converted into 1.7537 shares of NCBE
Common;
(ii) If the Average NCBE Value is greater than $47.00, then each
share of HHFC Common shall be converted into that number of shares of
NCBE Common valued at the Average NCBE Value having an aggregate value
equal to $82.42;
(iii) If (A) the Average NCBE Value is less than $34.00, but
greater than or equal to $32.00, or (B) the Average NCBE Value is less
than $32.00 and HHFC elects not to exercise its termination rights
under Section 16(e), then each share of HHFC Common shall be converted
into the lesser of: (x) that number of shares of NCBE Common valued at
the Average NCBE Value having an aggregate value equal to $59.63 and
(y) 1.8633 shares of NCBE Common;
(iv) If (A) the Average NCBE Value is less than $32.00, (B) HHFC
elects to exercise its termination rights under Section 16(e), and
(C) NCBE elects to negate HHFC's termination as permitted by
Section 16(e), then each share of HHFC Common shall be converted into
that number of shares of NCBE Common valued at the Average NCBE Value
having an aggregate value equal to $59.63; and
(v) "Average NCBE Value" shall mean the average of the means
between the highest and lowest per share trading prices reported by
the Nasdaq National Market for the ten (10) trading days ended on or
prior to the fifth business day prior to the Closing. A "trading day"
shall mean a day on which at least 100 shares of NCBE Common are
traded on the Nasdaq National Market.
(vi) All fractional interests of NCBE Common shall be rounded to
the nearest ten-thousandth (.0001).
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(b) SHARE ADJUSTMENT. If between the date hereof and prior to the
Effective Time, the number of outstanding shares of NCBE Common should be
changed as the result of any stock dividend, stock split or reclassification (a
"Share Adjustment"), the number of shares of NCBE Common to be received by
holders of HHFC Common pursuant to Section 3(a) shall be appropriately adjusted
to reflect the Share Adjustment.
(c) NO FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of NCBE Common shall be issued upon the surrender for exchange
of certificates evidencing HHFC Common. Each holder of HHFC Common who would
otherwise have been entitled to receive a fractional interest in a share of NCBE
Common shall have the right to receive cash (without interest) in an amount
equal to such fractional interest of a share of NCBE Common multiplied by the
Average NCBE Value. Such cash, together with the shares of NCBE Common to be
issued pursuant to Section 3(a), is referred to as the "Merger Consideration."
(d) CANCELLATION OF TREASURY STOCK. As of the Effective Time, each share
of HHFC Common that is owned by HHFC in its treasury shall automatically be
canceled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor. The foregoing shall not apply to any issued and
outstanding shares held by HHFC in a fiduciary or similar capacity.
(e) DISSENTING SHARES. "Dissenting Shares" shall mean shares of HHFC
Common held by any person who properly exercises and perfects rights under the
IBCL as a dissenting shareholder. The holder of any Dissenting Shares shall
only have the rights accorded a dissenting shareholder under the IBCL and shall
not receive any part of the Merger Consideration.
4. EFFECT ON NCBE COMMON. The Merger shall have no effect on the shares
of NCBE Common issued and outstanding immediately prior to the Effective Time.
5. EXCHANGE OF CERTIFICATES.
(a) SURRENDER OF CERTIFICATES. Within five (5) business days after the
Effective Time, the exchange agent appointed by NCBE (the "Exchange Agent"),
shall send to each record holder of HHFC Common (except for holders of
Dissenting Shares), a letter of transmittal, in form reasonably acceptable to
HHFC, for use in effecting the surrender of certificates formerly evidencing
HHFC Common in exchange for the Merger Consideration. The letter of transmittal
shall specify how surrender of the certificates formerly evidencing shares of
HHFC Common shall be effected. Upon surrender of a certificate formerly
evidencing HHFC Common to the Exchange Agent together with such letter of
transmittal and such other documentation that reasonably may be required by NCBE
or the Exchange Agent, the Merger Consideration shall be issued, and the
certificate so surrendered shall be canceled. No interest shall accrue or be
paid with respect to the Merger Consideration. There shall be no obligation to
deliver the Merger Consideration in respect of any shares of HHFC Common until
(and then only to the extent that) the holder thereof validly surrenders the
certificates formerly representing the shares of HHFC Common for exchange as
provided in this Section 5, or, in lieu thereof, delivers to the Exchange Agent
an appropriate affidavit of loss and an indemnity agreement as may be required
in any such case by NCBE in its reasonable discretion. If any payment for
shares of HHFC Common is to be made in a name other than the registered holder
of a surrendered certificate, it shall be a condition to the payment that the
certificate shall be properly endorsed or otherwise in proper form for transfer,
that all signatures shall be guaranteed by a bank, broker or other institutional
member of the Medallion Signature Guarantee Program, and that the person
requesting the payment shall either (i) pay to the Exchange Agent any transfer
or other taxes required by reason of the payment to a person other than the
registered holder of a surrendered certificate or (ii) establish to the
satisfaction of the Exchange Agent that such taxes have been paid or are not
payable.
(b) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to NCBE Common with a record date after the
Effective Time shall be delivered to the holder of any unsurrendered certificate
evidencing shares of HHFC Common with respect to the shares of NCBE Common
evidenced thereby until the surrender of such certificate in accordance with
this Section 5.
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(c) ESCHEAT. Notwithstanding anything in this Section 5 or elsewhere
in this Agreement to the contrary, neither the Exchange Agent nor any party
hereto shall be liable to a former holder of HHFC Common for any property
delivered to a public official pursuant to applicable escheat or abandoned
property laws.
(d) NO FURTHER OWNERSHIP RIGHTS IN HHFC COMMON. The Merger
Consideration paid upon the surrender of a certificate evidencing shares of
HHFC Common in accordance with the terms of this Section 5 shall be deemed to
have been paid in full satisfaction of all rights pertaining to the shares of
HHFC Common theretofore represented by such certificate, and there shall be
no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of HHFC Common which were outstanding
immediately prior to the Effective Time.
(e) WITHHOLDING RIGHTS. NCBE shall be entitled to deduct and withhold
from any dividends payable to former holders of HHFC Common such amounts as
NCBE is required to deduct and withhold with respect to the making of such
payment under the Internal Revenue Code of 1986, as amended (the "Code").
Such withheld amounts shall be treated as having been paid by any such former
holder of shares of HHFC Common.
6. REPRESENTATIONS AND WARRANTIES OF NCBE. NCBE represents and
warrants to HHFC as follows:
(a) ORGANIZATION, AUTHORIZATION AND NO VIOLATION. NCBE is a
corporation duly organized and validly existing under the laws of the State
of Indiana. NCBE has all necessary corporate power to own its properties and
assets and to carry on its business as now conducted. Subject to receipt of
approvals from the Applicable Governmental Authorities, the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby by NCBE have been duly authorized by all necessary
corporate action on the part of NCBE, and this Agreement constitutes the
legal, valid and binding obligation of NCBE, enforceable against NCBE in
accordance with its terms, except as limited by (i) bankruptcy, insolvency,
moratorium, reorganization, fraudulent conveyance laws and other similar laws
affecting creditors' rights generally, and (ii) general principles of equity,
regardless of whether asserted in a proceeding in equity or law. The
execution and delivery of this Agreement by NCBE and the consummation of the
transactions contemplated by this Agreement, will not violate the provisions
of, or constitute a breach or default under, the articles of incorporation or
by-laws of NCBE or any material agreement to which NCBE is a party or is
bound, or any other material license, law, order, rule, regulation or
judgment to which NCBE is a party. NCBE is duly registered with the Federal
Reserve Board as a bank holding company under the Bank Holding Company Act of
1956, as amended.
(b) NO SHAREHOLDER VOTE. No vote by the shareholders of NCBE is
required to approve the Merger under IBCL, the articles of incorporation or
by-laws of NCBE or any rules of the National Association of Securities
Dealers, Inc. which apply to Nasdaq National Market issuers.
(c) CAPITAL STOCK. The authorized capital stock of NCBE consists of
20,000,000 shares of NCBE Common, of which 10,758,939 shares were issued and
outstanding as of April 17, 1998. All of the issued and outstanding shares
of NCBE Common are duly and validly issued and outstanding and are fully paid
and non-assessable. None of the shares of NCBE Common have been issued in
violation of any preemptive rights. As of the date hereof, there are no
outstanding options, warrants, rights to subscribe for, calls, or commitments
of any character whatsoever relating to, or securities or rights convertible
into or exchangeable for, such shares or contracts, commitments,
understandings or arrangements by which NCBE is or may be obligated to issue
additional shares of capital stock or other equity securities of NCBE, other
than (i) options to purchase shares of NCBE Common which have been granted
pursuant to NCBE's Incentive Stock Option Plan, and (ii) commitments to issue
shares of NCBE Common in connection with the pending acquisitions of Illinois
One Bancorp, Inc., Trigg Bancorp, Inc., and Community First Financial, Inc.
(d) SEC DOCUMENTS. NCBE has provided HHFC with copies of the following
reports (the "SEC Documents") filed by NCBE with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"): (i) the annual report on Form 10-K
for the year ended December 31, 1997, as amended and (ii) the definitive
proxy materials for the 1998 annual meeting of NCBE shareholders. As of
their
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respective dates, the SEC Documents complied, and any filings NCBE makes with
the SEC on or after the date hereof will comply, in all material respects
with the requirements of the Exchange Act and the rules and regulations of
the Commission promulgated thereunder and did not or will not, as the case
may be, contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements contained therein not
misleading.
(e) FINANCIAL INFORMATION. NCBE has delivered to HHFC the consolidated
balance sheets of NCBE and its subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the three (3) years ended December 31, 1997,
together with the notes thereto, that are included in the SEC Documents.
Such financial statements have been audited by McGladrey & Pullen, LLP,
independent auditors, whose report thereon is included with such financial
statements. Such financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent
basis (except for changes, if any, required by GAAP and disclosed therein)
and fairly present in all material respects the consolidated financial
position and the consolidated results of operations, changes in shareholders'
equity and cash flows of NCBE and its consolidated subsidiaries as of the
dates and for the periods indicated. At December 31, 1997, there were no
material liabilities of NCBE and its subsidiaries (actual, contingent or
accrued) which, in accordance with GAAP applied on a consistent basis, should
have been shown or reflected in such financial statements or the notes
thereto, but which are not so reflected.
(f) ABSENCE OF CHANGES. Except as disclosed in the SEC Documents,
since December 31, 1997, NCBE has not incurred any obligation or liability
(absolute or contingent), except normal trade or business obligations or
liabilities incurred in the ordinary course of business, and there has not
been any material adverse change in the financial condition, results of
operations or business of NCBE and its subsidiaries taken as whole, nor have
there been any events or transactions having such a material adverse effect
which should be disclosed in order to make the financial statements described
in subsection (e) not misleading.
(g) LITIGATION. There is no litigation, claim, investigation or other
proceeding pending or, to the knowledge of NCBE, threatened, against or
adversely affecting NCBE or any of its subsidiaries, or of which the property
of NCBE or any of its subsidiaries is or would be subject and which would
have a material adverse effect on the financial condition, results of
operations or business of NCBE and its subsidiaries, taken as a whole. To
the knowledge of NCBE management, there is no litigation, claim,
investigation or other proceeding to which any director, officer, employee or
agent of NCBE or any of its subsidiaries in their respective capacities as
directors, officers, employees or agents, is a party, pending or threatened
against any such director, officer, employee or agent. There is no
outstanding order, writ, injunction or decree of any court, government or
governmental agency against or, affecting NCBE or any of its subsidiaries, or
the assets or business of NCBE or any of its subsidiaries, which could
reasonably be expected to have a material adverse effect on the financial
condition, results of operations or business of NCBE and its subsidiaries,
taken as a whole, or which challenges the validity of the transactions
contemplated by this Agreement.
(h) SHARES TO BE ISSUED IN THE MERGER. The shares of NCBE Common to be
issued in the Merger are duly authorized and, when issued in accordance with
this Agreement, will be validly issued, fully paid and nonassessable.
(i) POOLING-OF-INTERESTS; TAX REORGANIZATION; REGULATORY APPROVAL. As
of the date of this Agreement, NCBE has no reason to believe that the Merger
will not (i) qualify for the pooling-of-interests method of accounting under
Accounting Principles Board No. 16 ("APB 16"); (ii) qualify as a
"reorganization" within the meaning of section 368(a) of the Code; or (iii)
receive the approvals from the Applicable Governmental Authorities other than
the fact that NCBE has received a "needs improvement" rating with regard to
its "Year 2000" compliance efforts.
(j) TRUE AND COMPLETE INFORMATION. No representation or warranty made
by NCBE contained in this Agreement and no statement of NCBE contained in any
certificate, list, exhibit or other instrument specified in this Agreement,
whether heretofore furnished to HHFC or hereinafter required to be furnished
to HHFC including the Registration Statement (as hereafter defined), contains
or will contain any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained therein
not misleading.
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7. REPRESENTATIONS AND WARRANTIES OF HHFC. HHFC represents and
warrants to NCBE, except as disclosed in the writing delivered to NCBE
concurrently with the execution of this Agreement (the "Disclosure
Schedule"), as follows:
(a)(i) ORGANIZATION AND GOOD STANDING OF HHFC. HHFC is a corporation
duly organized and validly existing under the laws of the State of Indiana
and has all necessary corporate power to own its properties and assets and
to carry on its business as now conducted. HHFC is duly qualified to
conduct its business and is in good standing in each jurisdiction in which
the nature of the business transacted by HHFC requires such qualification.
HHFC is duly registered with the Federal Reserve Board as a bank holding
company under the Bank Holding Company Act of 1956, as amended.
(ii) CAPITAL STOCK. On the date hereof, HHFC has 750,000 shares of
HHFC Common authorized, of which 416,262 shares are issued and outstanding
and 33,738 shares are held in the treasury. All of the issued and
outstanding shares of HHFC Common are duly and validly authorized and
issued, fully paid and nonassessable. None of the issued and outstanding
shares of HHFC Common have been issued in violation of any preemptive
rights. There are no shares of any class of capital stock or equity
securities of HHFC outstanding other than the HHFC Common and there are no
outstanding, options, warrants, rights to subscribe for, calls, or
commitments of any character whatsoever relating to, or securities
convertible into or exchangeable for, such shares or contracts,
commitments, understandings or arrangements by which HHFC is or may be
obligated to issue additional shares of any class of capital stock or other
equity securities of HHFC.
(iii) ORGANIZATION OF THE BANK. The Bank is a banking corporation
duly organized and validly existing under the laws of the State of Indiana.
The deposits of the Bank are insured by the Bank Insurance Fund
administered by the FDIC up to applicable limits.
(iv) CAPITAL STOCK OF THE BANK. On the date hereof, the Bank has
150,000 shares of Common Stock, $10.00 par value per share ("Bank Stock")
of which 150,000 shares are issued and outstanding. HHFC is the record and
beneficial owner of all of the issued and outstanding shares of Bank Stock.
All of the issued and outstanding shares of Bank Stock are duly and validly
authorized and issued, fully paid and non-assessable. None of the issued
and outstanding shares of Bank Stock have been issued in violation of any
preemptive rights. There are no shares of any class of capital stock or
equity securities of the Bank outstanding other than Bank Stock and there
are no outstanding options, warrants, rights to subscribe for, calls, or
commitments of any character whatsoever relating to, or securities
convertible into or exchangeable for, such shares or contracts,
commitments, understandings or arrangements by which the Bank is or may be
obligated to issue additional shares of any class of capital stock or other
equity securities of the Bank.
(b) AUTHORIZATION AND NO VIOLATION. Subject to receipt of approvals
from the Applicable Governmental Authorities and approval by the shareholders
of HHFC, the execution and delivery of this Agreement by HHFC and the
consummation of the transactions contemplated by this Agreement have been
duly and validly authorized by all necessary corporate action on the part of
HHFC and this Agreement constitutes the legal, valid and binding obligation
of HHFC, enforceable against HHFC in accordance with its terms, except as
limited by (x) bankruptcy, insolvency, moratorium, reorganization, fraudulent
conveyance laws and other similar laws affecting creditors' rights generally,
and (y) general principles of equity, regardless of whether asserted in a
proceeding in equity or at law. The execution of this Agreement by HHFC and
the consummation of the transactions contemplated by this Agreement will not
violate the provisions of, or constitute a breach or default under (i) the
articles of incorporation or by-laws of HHFC or the articles of incorporation
and by-laws of the Bank, (ii) any Material Contract (as defined in Section
7(f)) of HHFC or the Bank or (iii) any other material license, law, order,
rule, regulation or judgment to which HHFC or the Bank is a party, is bound
or by which any of their respective properties or assets is subject. The
minute books of HHFC and the Bank accurately reflect in all material respects
all corporate actions held or taken by its shareholders and Board of
Directors (including committees of the Board of Directors).
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(c) SUBSIDIARIES. The only entity (including, without limitation,
corporations, partnerships, limited liability companies and joint ventures)
in which HHFC has a direct or indirect equity or ownership interest is the
Bank.
(d) FINANCIAL STATEMENTS. HHFC has delivered to NCBE the consolidated
statements of financial condition of HHFC as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the years then ended. Such financial statements
have been audited by Sherman, Barber & Mullikin, certified public
accountants, whose report thereon is included with such financial statements.
Such financial statements have been prepared in conformity with GAAP applied
on a consistent basis (except for changes, if any, required by GAAP and
disclosed therein), the statements of condition present fairly the
consolidated financial condition of HHFC as of their respective dates and the
statements of income present fairly the results of operations for the periods
covered. At December 31, 1997, there were no material liabilities of HHFC
(actual, contingent or accrued) which, in accordance with GAAP applied on a
consistent basis, should have been shown or reflected in such financial
statements or the notes thereto, but which are not so shown or reflected.
(e) TAXES AND TAX RETURNS.
(i) To the knowledge of HHFC management, each of HHFC and the Bank
has duly filed all federal and state tax information and tax returns (the
"Returns") required to be filed by it (all such returns being accurate and
complete in all material respects) and has duly paid or made provision for
the payment of all material taxes and other governmental charges which have
been incurred and are shown to be due on said Returns or are otherwise due
or claimed to be due from it or imposed on it or its respective properties,
assets, income, franchises, licenses, sales or use, by any federal, state
or local taxing authorities (collectively, the "Taxes") on or prior to the
date hereof other than Taxes which are being contested in good faith and by
appropriate proceedings and as to which HHFC and the Bank either singly or
in the aggregate have set aside adequate reserves. To the knowledge of
HHFC management, the amounts recorded as reserves for Taxes on the
consolidated financial statements of HHFC as of December 31, 1997, are
sufficient in the aggregate for the payment of all unpaid Taxes (including
any interest or penalties thereon) whether or not disputed or accrued, for
the period ended December 31, 1997 or for any year or period prior thereto.
The federal and state Returns of HHFC and the Bank either have been
examined by the Internal Revenue Service ("IRS") or other appropriate tax
authority or the tax years have been closed without audit and any liability
with respect thereto has been satisfied for all years to and including the
year ended December 31, 1993 and, if required, the appropriate tax
authorities have been apprised of such liabilities and the satisfaction
thereof. There are no material disputes pending, or claims asserted, for
Taxes upon HHFC or the Bank. Neither HHFC nor the Bank has been required
to give any currently effective waivers extending the statutory period of
limitation applicable to any federal, state or local Return for any period.
Neither HHFC nor the Bank has in effect any power of attorney or
authorization to anyone to represent it with respect to any Taxes. HHFC
has not filed any consolidated federal income tax return with an
"affiliated group" (within the meaning of Section 1504 of the Code), where
HHFC was not the common parent of the group. Neither HHFC nor the Bank is,
or has been, a party to any tax allocation agreement or arrangement
pursuant to which it has any contingent or outstanding liability to anyone
other than HHFC or the Bank. Neither HHFC nor the Bank has filed a consent
under Section 341(f) of the Code. HHFC has made available to NCBE or its
representatives complete and correct copies of its federal and state income
tax returns filed on or prior to April 15, 1998, and all examination
reports, if any, relating to the audit of such returns by the IRS or other
tax authority for each taxable year beginning on or after January 1, 1995.
(ii) All monies required to be withheld from employees of HHFC and the
Bank for income taxes, social security and unemployment insurance taxes or
collected from customers or others as sales, use or other taxes have been
withheld or collected and paid, when due, to the appropriate governmental
authority, or if such payment is not yet due, a reserve, which in the
opinion of HHFC management is adequate, has been established.
(f) MATERIAL CONTRACTS. The Disclosure Schedule contains a list of all
executory contracts, indentures, commitments, and other agreements (other than
agreements or commitments for loans made in the ordinary course of business by
the Bank) in excess of $50,000 to which HHFC or the Bank is a party or to which
HHFC or the Bank or
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any of their properties are subject (collectively, the "Material Contracts"
and each a "Material Contract"). All Material Contracts were entered into in
the ordinary course of business. Each of HHFC and the Bank has duly
performed all its obligations thereunder to the extent that such obligations
to perform have accrued, and no material breach or default thereunder by HHFC
or the Bank or, to the knowledge of HHFC management, any other party thereto
has occurred which will impair the ability of HHFC or the Bank to enforce any
material rights thereunder.
(g) REAL ESTATE. HHFC or the Bank has good title to all of the assets
reflected as owned in the financial statements described in subsection (d),
and in the case of real property, transferable and insurable title in fee
simple, and in all cases free and clear of any material liens or other
encumbrances. The real properties, structures, buildings, equipment, and the
tangible personal property owned, operated or leased by HHFC or the Bank are
(i) in good repair, order and condition, except for depletion, depreciation
and ordinary wear and tear, and (ii) free from any material known structural
defects. As of the date hereof, there are no laws, conditions of record or
other impediments which materially interfere with the intended uses by HHFC
or the Bank of the real property or tangible personal property owned or
leased by either of them.
(h) NO MATERIAL ADVERSE CHANGE. Except as set forth on the Disclosure
Schedule, since December 31, 1997, there has been no material adverse change
in the business, financial condition, properties, results of operation, or
capitalization of HHFC and the Bank, taken as a whole.
(i) LITIGATION. There is no litigation, claim, investigation or other
proceeding pending or, to the knowledge of HHFC management, threatened,
against or adversely affecting HHFC or the Bank, or of which the property of
HHFC or the Bank is or would be subject and which would have a material
adverse effect on the financial condition, results of operations or business
of HHFC and the Bank, taken as a whole. To the knowledge of HHFC management,
there is no litigation, claim, investigation or other proceeding to which any
director, officer, employee or agent of HHFC or the Bank in their respective
capacities as directors, officers, employees or agents, is a party, pending
or threatened against any such director, officer, employee or agent. There
is no outstanding order, writ, injunction or decree of any court, government
or governmental agency against or, affecting HHFC or the Bank, or the assets
or business of HHFC or the Bank, which could reasonably be expected to have a
material adverse effect on the financial condition, results of operations or
business of HHFC and the Bank, taken as a whole, or which challenges the
validity of the transactions contemplated by this Agreement.
(j) INSURANCE. Each of HHFC and the Bank has in effect insurance
coverage with reputable insurers, which in respect to amounts, types and
risks insured, is adequate in the opinion of HHFC management for the business
in which HHFC and the Bank are engaged. All policies of insurance owned or
held by HHFC or the Bank are in full force and effect, all material premiums
with respect thereto covering all periods up to and including the date hereof
is paid (other than retrospective premiums which may be payable with respect
to worker's compensation insurance policies), and no notice of cancellation
or termination has been received with respect to any such policy.
(k) COMPLIANCE WITH LAWS. Each of HHFC and the Bank has conducted its
business in substantial compliance with all applicable federal, state and
local laws, regulations and orders including, without limitation, disclosure,
usury, equal credit opportunity, equal employment, fair credit reporting,
lender liability, and other laws, regulations and orders, and the forms,
procedures and practices used by HHFC and the Bank, to the knowledge of HHFC,
are in compliance with such laws, regulations and orders except to the extent
that non-compliance with any such law, regulation or order would not have a
material adverse effect on HHFC and the Bank, taken as a whole.
(l) BROKER'S AND FINDER'S FEES. Except for fees payable to Investment
Bank Services, Inc. as disclosed on the Disclosure Schedule, neither HHFC nor
the Bank has incurred any obligation or liability, contingent or otherwise,
for any brokers or finders in respect of the matters provided for in this
Agreement.
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(m) EMPLOYEE BENEFIT PLANS.
(i) Except for HHFC and the Bank, there are no other trades or
businesses, whether or not incorporated, which, together with HHFC or the
Bank, would be deemed to be a "single employer" within the meaning of
Section 414(b), (c) or (m) of the Code.
(ii) The Disclosure Schedule sets forth a true and a complete list of
(A) each employee benefit plan, as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") that HHFC or
the Bank currently maintains or has maintained within the three year period
preceding the date hereof (the "ERISA Plans"), and (B) each other plan,
arrangement, program and agreement providing employee benefits, including,
but not limited to, deferred compensation, bonuses, severance pay or fringe
benefits, and consulting or employment agreements, that are presently
maintained for the benefit of any current or former employees of HHFC or
the Bank (the ERISA Plans and such other plans are collectively referred to
as the "Plans"). HHFC has made available to NCBE copies of all Plans and
any related documents or instruments establishing the Plans or any related
trusts or funding arrangements; the most recent determination letter, or
any outstanding request for a determination letter, from the IRS with
respect to each ERISA Plan intended to satisfy the requirements of Section
401(a) of the Code and a copy of the application on which the determination
letter or request for determination letter is based; fidelity bonds;
actuarial valuations, if applicable, for the most recent three plan years
for which such valuations are available; current summary plan descriptions;
annual returns/reports on Form 5500 and summary annual report for the three
most recent plan years; Form 5310 and any related filings with the IRS, the
Department of Labor ("DOL") or the Pension Benefit Guaranty Corporation
("PBGC") within the last year preceding the date of this Agreement; and any
material correspondence to or from the IRS, DOL or PBGC within the last
three years preceding the date hereof in connection with any Plan.
(iii) Neither HHFC nor the Bank currently maintains or contributes
to, or has ever maintained or contributed to, a "multi-employer plan" as
defined in Section 3(37) of ERISA.
(iv) No Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or
former employees for any period extending beyond their retirement or other
termination of service other than (A) continuation group health coverage
pursuant to Section 4980B of the Code or applicable state law;
(B) benefits, the full cost of which is borne by the current or former
employee (or his or her beneficiary); or (C) benefits which in the
aggregate are not material.
(v) Each ERISA Plan intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the IRS that
the Plan is qualified and satisfies all legal requirements, including the
requirements of the Tax Reform Act of 1986. To the knowledge of HHFC
management, nothing has occurred since the dates of the respective IRS
favorable determination letters that could adversely affect the
qualification of the Plans and their related trusts.
(vi) All of the Plans, and any related trust agreement, group annuity
contract, insurance policy or other funding arrangement are in substantial
compliance with all applicable laws, rules and regulations, including
without limitation, the rules and regulations promulgated by the DOL, PBGC
or IRS pursuant to the provisions of ERISA and the Code, and each of such
Plans has been administered in substantial compliance with such
requirements and its own terms.
(vii) Neither HHFC nor the Bank currently maintains or contributes to,
or has ever maintained or contributed to, a Plan that is subject to
Title IV of ERISA or the minimum funding requirements of Section 412 of the
Code.
(viii) To the knowledge of HHFC's management, none of HHFC, the Bank,
any of the Plans, any trust created thereunder, or any trustee or
administrator thereof has engaged in a transaction in connection with which
HHFC or the Bank, any of the Plans, any such trust, or any trustee or
administrator thereof, or any party dealing with the
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Plans or related trusts could be subject to either a civil penalty
assessed pursuant to Sections 409 or 502 of ERISA or a tax imposed
pursuant to Sections 4975 or 4976 of the Code. To the knowledge of HHFC
management, neither HHFC nor the Bank is, or, as a result of any
actions, omissions, occurrences or state of facts existing prior to or
at the Effective Time, may become liable for any tax imposed under
Sections 4978 or 4978(B) of the Code.
(ix) There are no (A) actions, suits, arbitrations or claims (other
than routine claims for benefits), (B) legal, administrative or other
proceedings or governmental investigations or audits, or (C) complaints to
or by any governmental entity, which are pending, anticipated or
threatened, against any Plan or its assets, or against any Plan fiduciary
or administrator, or against HHFC or the Bank or their officers or
employees with respect to any Plan.
(x) Each ERISA Plan may be terminated directly or indirectly by the
Surviving Corporation, in its discretion, at any time after the Effective
Time, in accordance with its terms, without any liability on the part of
the Surviving Corporation, NCBE, HHFC or the Bank, to any person, entity or
government agency for any conduct, practice or omission of HHFC or the Bank
which occurred prior to the Effective Time, except for liabilities to and
the rights of the employees thereunder accrued prior to the Effective Time,
or if later, the time of termination; provided, that such Plans are amended
to comply with any applicable laws that require amendment prior to their
termination.
(xi) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (A) result in any
material payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director
or any employee of HHFC or the Bank from HHFC or the Bank under any Plan or
otherwise; (B) materially increase any benefits otherwise payable under any
Plan; or (C) result in any acceleration of the time of payment or vesting
of any such benefits to any material extent other than the accelerated
vesting required at termination of a Plan.
(xii) The termination of HHFC's employee stock ownership plan (the
"ESOP") and the related actions to be taken with respect to the ESOP as
provided in Section 10(f) will not violate the provisions of the ESOP or
any applicable laws, rules and regulations, including without limitation,
the rules and regulations promulgated by the DOL or IRS pursuant to the
provisions of ERISA and the Code; provided, that such Plans are amended to
comply with any applicable laws that require amendment prior to their
termination.
(n) LABOR MATTERS. Neither HHFC nor the Bank is a party to any organized
labor contract or collective bargaining agreement.
(o) ENVIRONMENTAL MATTERS.
(i) As used herein, the term "Environmental Laws" shall mean all
local, state and federal environmental, health and safety laws and
regulations and common law standards in all jurisdictions in which HHFC and
the Bank have done business or owned, leased or operated property,
including, without limitation, the Federal Resource Conservation and
Recovery Act, the Federal Comprehensive Environmental Response,
Compensation and Liability Act, the Federal Clean Water Act, the Federal
Clean Air Act, and the Federal Occupational Safety and Health Act.
(ii) To the knowledge of HHFC management, neither the conduct nor
operation of HHFC or the Bank nor any condition of any property presently
or previously owned, leased or operated by any of them violates or violated
Environmental Laws or has in any respect that would have a material adverse
effect on the financial condition, results of operations or business of
HHFC and the Bank, taken as a whole, and no condition has existed or event
has occurred with respect to either of them or any such property that, with
notice or the passage of time, or both, would constitute a violation of
Environmental Laws or obligate (or potentially obligate) HHFC, NCBE or the
Bank to remedy, stabilize, neutralize or otherwise alter the environmental
condition of any such property where the aggregate cost of such actions
would have a material adverse effect on the financial condition, results of
operations or business of HHFC and the Bank, taken as a whole. Neither
HHFC nor the Bank has received any notice from
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any person or entity that HHFC or the Bank or the operation or condition
of any property ever owned, leased or operated by any of them are or
were in violation of any Environmental Laws or that either of them are
responsible for the cleanup or other remediation of any pollutants,
contaminants, or hazardous or toxic wastes, substances or materials at,
on or beneath any such property.
(p) REGULATORY COMPLIANCE. Neither HHFC nor the Bank is a party to any
enforcement action instituted by any memorandum of understanding, agreement,
consent agreement or cease and desist order with the Indiana Department of
Financial Institutions, the Federal Reserve Board, the FDIC or any federal or
state regulatory agency, and neither HHFC nor the Bank has been advised by
any federal or state regulatory agency that it is considering taking such
action. There is no material unresolved violation, criticism or exception
cited by any such federal or state regulatory agency with respect to any
examination of HHFC or the Bank.
(q) POOLING-OF-INTERESTS; TAX REORGANIZATION; REGULATORY APPROVAL. As
of the date of this Agreement, HHFC has no reason to believe that the Merger
will not (i) qualify for the pooling-of-interests method of accounting under
APB 16; (ii) qualify as a "reorganization" within the meaning of section
368(a) of the Code; or (iii) receive the approvals from the Applicable
Governmental Authorities other than the fact that NCBE has received a "needs
improvement" rating with regard to its "Year 2000" compliance efforts.
(r) TRUE AND COMPLETE INFORMATION. No representation or warranty made
by HHFC contained in this Agreement and no statement of HHFC contained in
the Disclosure Schedule or any certificate, list, exhibit or other instrument
specified in this Agreement, whether heretofore furnished to NCBE or
hereinafter required to be furnished to NCBE, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained therein not misleading.
8. COVENANTS OF NCBE. NCBE agrees with HHFC as follows:
(a) REGULATORY APPROVALS. NCBE shall, at its sole expense, be
responsible for the preparation and filing of all regulatory applications or
notices to the Applicable Governmental Authorities. NCBE shall use
reasonable efforts to obtain the approvals of the Applicable Governmental
Authorities for the transactions contemplated by this Agreement; however,
NCBE's obligation to use its reasonable efforts to obtain the approvals of
the Applicable Governmental Authorities shall not be construed as including
an obligation to accept any unreasonable terms of or conditions to an
approval of any Applicable Governmental Authority, to change the business
practices of NCBE or any NCBE subsidiary in any material respect or to
institute any litigation in connection with such approvals. Notwithstanding
the foregoing, NCBE shall use its best efforts to remedy any "Year 2000"
compliance issues raised by any Applicable Governmental Authorities so that
all regulatory approvals of the Merger are received as promptly as
practicable. NCBE shall keep HHFC informed as to the status of such
applications and provide to HHFC at least one business day in advance of
filing, copies of such applications and any supplementally filed materials.
(b) REGISTRATION STATEMENT. NCBE shall file with the Commission a
Registration Statement on Form S-4 (the "Registration Statement") relating to
the shares of NCBE Common to be issued pursuant to the Merger, and shall use
its best efforts to cause the Registration Statement to become effective. At
the time the Registration Statement becomes effective, the Registration
Statement, including the Proxy Statement/Prospectus included therein (the
"Proxy Statement/Prospectus"), as amended or supplemented, shall comply in
all material respects with the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, and the information in the Proxy Statement/Prospectus furnished
by NCBE for inclusion therein shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not false or misleading.
(c) LISTING. NCBE shall use its best efforts to list the shares of
NCBE Common to be issued in the Merger on the Nasdaq National Market.
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(d) ACCESS TO INFORMATION. NCBE shall permit HHFC reasonable access
during regular business hours to its properties. NCBE shall disclose and
make available to HHFC and shall use its best efforts to cause its agents and
authorized representatives to disclose and make available to HHFC, all books,
papers and records relating to its assets, properties, operations,
obligations and liabilities, including, but not limited to, all books of
account, tax records, minute books of directors' and shareholders' meetings,
organizational documents, material contracts and agreements, loan files,
filings with any regulatory authority, accountants' workpapers (if available
and subject to the respective independent accountants' consent), litigation
files (but only to the extent that such review would not result in a material
waiver of the attorney-client or attorney work product privileges under the
rules of evidence), plans affecting employees, and any other business
activities or prospects in which HHFC may have a reasonable and legitimate
interest in furtherance of the transactions contemplated by this Agreement.
(e) POOLING; TAX REORGANIZATION; REGULATORY APPROVAL. NCBE shall not
knowingly take any action that would adversely affect the ability of the
Merger to (i) be accounted for using the pooling-of-interest method of
accounting under APB 16, (ii) qualify as a "reorganization" under Section
368(a) of the Code, or (iii) be approved by any Applicable Governmental
Authority with respect to consummation of the Merger.
(f) NOTICE. NCBE will promptly notify HHFC of any event which
hereafter becomes known to NCBE management which may reasonably have a
material adverse effect on the financial condition, operations, business or
assets of NCBE and its subsidiaries, taken as a whole, or if NCBE determines
that it may be unable to fulfill the conditions set forth in Sections 11 or
13 hereof.
9. AGREEMENTS WITH RESPECT TO CONDUCT OF HHFC AND THE BANK PRIOR TO
THE CLOSING. HHFC agrees with NCBE as follows:
(a) ORDINARY COURSE, INSURANCE AND PRESERVATION OF BUSINESS. Each of
HHFC and the Bank will, except as otherwise agreed to in writing by NCBE:
(i) carry on its respective business in the ordinary course and
consistent with its respective policies, procedures and practices as
heretofore conducted;
(ii) except as terminated in accordance with their terms or in
accordance with the terms of this Agreement, keep in full force and
effect, and not cause a default of any of its obligations under, any
Material Contracts;
(iii) keep in full force and effect the insurance coverage in effect
on the date hereof;
(iv) maintain, renew, keep in full force and effect and preserve its
business organization, material rights, franchises, permits and
licenses, retain its present employee force, maintain its existing, or
substantially equivalent, credit arrangements with banks and other
financial institutions and use its best efforts to continue its general
customer relationships; and
(v) duly comply in all material respects with all laws applicable to
it and to the conduct of its business.
(b) NOTICE. HHFC will promptly notify NCBE of any event which
hereafter becomes known to HHFC management which may reasonably have a
material adverse effect on the financial condition, operations, business or
assets of HHFC and the Bank, taken as a whole, or if HHFC determines that it
may be unable to fulfill the conditions set forth in Section 11 or 12 hereof.
(c) PROHIBITED ACTION WITHOUT APPROVAL. Neither HHFC nor the Bank
will, except as disclosed in the Disclosure Schedule or with the prior
written consent of NCBE, do any of the following:
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(i) incur or agree to incur any obligation or liability (absolute or
contingent) other than the taking of deposits and other liabilities
incurred in the ordinary course of business and consistent with prior
practice, and liabilities arising out of, incurred in connection with, or
related to the consummation of this Agreement; make or permit any amendment
or termination of any Material Contract; acquire (by merger, consolidation,
or acquisition of stock or assets) any corporation, partnership, limited
liability company or other business organization or division or substantial
part thereof; sell or otherwise dispose of any substantial part of its
assets; enter into, dispose or divest itself of any joint venture or
partnership or cause any business entity to become a subsidiary or
affiliate; sell or otherwise dispose of any real property owned or operated
by HHFC or the Bank; enhance, expand, modify, replace or alter any computer
or data processing system owned, leased or licensed by HHFC or the Bank
(including any software associated with any such computer or system); make,
originate or otherwise acquire one or more loans, or one or more loan
commitments for one or more loans, or one or more lines of credit, in an
aggregate amount in excess of $1,000,000 to any person other than renewals
or restructurings of loans in existence on the date hereof; or enter into
any contract, agreement, commitment or arrangement with respect to any of
the foregoing; or
(ii) make any capital expenditure, except for ordinary repairs,
renewals and replacements in excess of $50,000 individually or $100,000 in
the aggregate; or
(iii) issue, sell, redeem or acquire for value, or agree to do so,
any shares of the capital stock or other equity securities, options or
other ownership interests of HHFC or debt securities, or declare, issue or
pay any dividend or other distribution of assets, whether consisting of
money, other personal property, real property or other things of value, to
its shareholders other than (A) cash dividends on the HHFC Common in an
amount not to exceed $0.27 per share, payable semi-annually in accordance
with past practices; provided, however, that HHFC and NCBE shall cooperate
with each other to coordinate the record and payment dates of their
respective dividends for the quarter in which the Effective Time occurs,
such that HHFC shareholders shall receive a quarterly dividend from either
HHFC or NCBE but not both during or with respect to such quarter, (B) cash
dividends payable by the Bank, (C) sinking fund or other mandatory payments
required under the terms of any indenture or loan agreement or repurchases
of any outstanding debt securities to be applied against any such sinking
fund payments in amounts which do not exceed, with respect to any series or
class of debt securities, the sinking fund payments required within the
next twelve-month period, (D) the payment of any debt security upon the
maturity thereof, and (E) obligations or liabilities permitted to be
incurred pursuant to Section 9(c)(i) hereof; or
(iv) sell, pledge or redeem any of the Bank Stock; amend its
articles of incorporation or by-laws or permit the Bank to amend its
articles of association or by-laws; split, combine or reclassify any
shares of capital stock; or enter into any agreement, commitment or
arrangement with respect to any of the foregoing; or
(v) enter into any new or amend any existing employment agreements,
pay any extraordinary bonus or establish any general increase in salaries;
or
(vi) compromise or otherwise settle or adjust any assertion or claim
of a deficiency in taxes (or interest thereon or penalties in connection
therewith) or file any appeal from an asserted deficiency, except in a form
previously approved by NCBE, or file any federal or state tax return
before furnishing a copy to NCBE and affording NCBE an opportunity to
consult with the filing entity; or
(vii) open any new office or close any current office of the Bank at
which business is conducted; or
(viii) knowingly take any actions that would adversely affect the
ability of the Merger to be accounted for using the pooling-of-interests
method of accounting under APB 16.
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<PAGE>
(d) NO SOLICITATION.
(i) Neither HHFC nor any officer, director or any representative
thereof shall solicit or authorize the solicitation of, or, unless HHFC's
Board of Directors has reasonably determined in good faith based upon the
written advice of counsel that the failure to do so would cause the Board
of Directors to breach its fiduciary duties under applicable law, enter
into or authorize any discussions with any third party concerning, or
furnish or authorize the furnishing of any confidential information
relating to HHFC or the Bank to any third party for the purpose of
studying, considering, soliciting or inducing any offer or possible offer
by any such third party or any other third party to acquire HHFC or any or
all of the capital stock, other equity securities or other ownership
interests, or all or substantially all of the assets, of HHFC or the Bank.
HHFC will promptly communicate to NCBE the terms of any proposal or
contract it may receive with respect to any such transactions.
(ii) Upon the execution of this Agreement, HHFC shall immediately
terminate all discussions then existing with any third parties regarding
any possible offer to acquire HHFC or the Bank.
(e) INSIDER LENDING. The Bank shall not change or modify any of its
current practices relating to the lending of money, secured or unsecured, to its
affiliated persons, including but not limited to its directors, officers and
employees.
(f) NO VIOLATION. Neither HHFC nor the Bank will take any action which
knowingly violates any statute, code, ordinance, rule, regulation or judgment,
order, writ, arbitral award, injunction or decree of any court, governmental
agency or body or arbitrator, domestic or foreign, having jurisdiction over its
properties.
(g) ACCOUNTING. Each of HHFC and the Bank will maintain its books,
accounts and records in accordance with GAAP. Neither HHFC nor the Bank shall
make any change in any method of accounting or accounting practice, or any
change in the method used in allocating income, charging costs or accounting for
income, except as may be required by law, regulation or GAAP. Neither HHFC nor
the Bank shall change any practice or policy with respect to the charging off or
loans or the maintenance of its reserve for possible loan losses, except as
required by law, regulation or GAAP.
10. ADDITIONAL AGREEMENTS.
(a) CONTINUING ACCESS TO INFORMATION. Through the Effective Time, HHFC
shall permit NCBE and its authorized representatives reasonable access during
regular business hours to HHFC's properties and those of the Bank. HHFC shall
make its and the Bank's directors, management and other employees and agents and
authorized representatives (including counsel and independent public
accountants) available to confer with NCBE and its authorized representatives at
reasonable times and upon reasonable request, and HHFC shall, and shall cause
the Bank to, disclose and make available to NCBE, and shall use its best efforts
to cause its agents and authorized representatives to disclose and make
available to NCBE, all books, papers and records relating to the assets,
properties, operations, obligations and liabilities of HHFC and the Bank,
including, but not limited to, all books of account, tax records, minute books
of directors' and shareholders' meetings, organizational documents, material
contracts and agreements, loan files, filings with any regulatory authority,
accountants' workpapers (if available and subject to the respective independent
accountants' consent), litigation files (but only to the extent that such review
would not result in a material waiver of the attorney-client or attorney work
product privileges under the rules of evidence), plans affecting employees, and
any other business activities or prospects in which NCBE may have a reasonable
and legitimate interest in furtherance of the transactions contemplated by this
Agreement.
(b) MANAGEMENT REPORTS. HHFC shall promptly provide to NCBE copies of any
reports to the Board of Directors of HHFC or the Bank or any committee thereof
and minutes of all meetings of the Board of Directors of HHFC and the Bank and
each committee thereof. Throughout the period prior to the Effective Time, HHFC
and the Bank will cause one or more designated representatives to confer with
representatives of NCBE on the ongoing operations of HHFC and the Bank.
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(c) INFORMATION FOR REGULATORY FILINGS. Upon request by NCBE, HHFC shall
promptly furnish NCBE with any information within its possession which relates
to HHFC or the Bank and which is required under any applicable law or regulation
for inclusion in any filing that NCBE is required to make with any Applicable
Governmental Authority. HHFC agrees that all information so furnished shall be
true and correct in all material respects without omission of any material fact
required to be stated therein or necessary to make the information stated
therein not misleading.
(d) RESTRICTION ON RESALES. HHFC shall obtain and deliver to NCBE, at
least thirty-one (31) days prior to the Closing, the signed agreement, in the
form of Exhibit A hereto, of each of its officers and directors and shall use
its best efforts to obtain similar agreements from each other person who owns 5%
or more of the outstanding shares of HHFC Common and any other persons who may
reasonably be deemed by NCBE to be an "affiliate" of HHFC within the meaning of
such term as used in Rule 145 under the Securities Act.
(e) SHAREHOLDER APPROVAL. HHFC shall cause to be duly called and held a
special meeting of the holders of HHFC Common for submission of this Agreement
and the Merger for approval of such shareholders as required by the IBCL. In
connection with such shareholders' meeting, (i) HHFC shall cooperate and assist
NCBE in preparing and filing the Registration Statement, and any amendments or
supplements thereto, including the Proxy Statement/Prospectus with the SEC and
applicable state securities authorities, and HHFC shall mail the Proxy
Statement/Prospectus to its shareholders; (ii) HHFC shall furnish NCBE all
information within its possession concerning itself that NCBE may reasonably
request in connection with the Proxy Statement/Prospectus; (iii) the Board of
Directors of HHFC (subject to compliance with its fiduciary duties as advised in
writing by counsel) shall recommend to its shareholders the approval of this
Agreement and the Merger contemplated hereby and use its best efforts to obtain
such approval; and (iv) HHFC agrees that the information furnished to NCBE for
inclusion in the Proxy Statement/Prospectus shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not false or
misleading.
(f) TERMINATION OF ESOP. HHFC shall take such actions in connection with
the ESOP as may be necessary to: (i) terminate the ESOP effective no earlier
than December 31, 1998; (ii) cause the trustee of the ESOP to surrender to the
Exchange Agent the certificates representing all shares of HHFC Common owned by
the ESOP in exchange for the Merger Consideration in accordance with this
Agreement; (iii) prior to December 31, 1998, cause the repayment, by the trustee
of the ESOP, of the outstanding loan used to acquire the HHFC Common and the
release of the assets held as collateral in the ESOP suspense account; (iv)
allow the allocation of unallocated assets held by the ESOP, after repayment of
the loan, to the ESOP participants to the fullest extent permitted by applicable
law; (v) as soon as practicable after December 31, 1998, obtain an IRS
determination that the termination of the ESOP will not affect the qualified
status of the ESOP under the Code; and (vi) as soon as practicable after
December 31, 1998, provide for the distribution to participants of their
interest in the ESOP.
(g) OTHER EMPLOYEE BENEFIT PLANS.
(i) As of January 1, 1999, employees of the Bank shall be entitled to
participate in the NCBE Employees' Savings and Profit sharing Plan and the
NCBE Employee Cash Bonus Plan (the "NCBE Plans") to the extent such
employees are eligible to participate under the terms of the NCBE Plans,
counting past service with HHFC and the Bank for then-active employees for
purposes of, eligibility vesting and benefit contributions based on
service, if any.
(ii) Except as provided in Section 10(f) with respect to the ESOP, the
Plans currently maintained by the Bank that are listed on the Disclosure
Schedule shall remain in effect, subject to the terms of such Plans as in
effect on the date hereof, after the Effective Time through such date as
NCBE may determine as the date on which employees of the Bank shall become
covered by the NCBE employee benefit plans available to similarly-situated
NCBE employees on a non-discriminatory basis. NCBE will take all actions
necessary to assure that (A) health and life insurance coverage is
maintained for employees of the Bank during the transition to the NCBE
employee benefit
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plans and (B) there are no pre-existing condition limitations as to benefit
payments or eligibility to participate in NCBE's group health plan.
(iii) Notwithstanding the foregoing provisions of this Section
10(g), this Agreement shall not confer upon any such employee of Bank any
rights or remedies hereunder and shall not constitute a contract of
employment or create any right to be retained in the employment of NCBE.
(h) INDEMNIFICATION.
(i) After the Effective Time, NCBE shall indemnify, defend and hold
harmless the present and former directors, officers, employees, and agents of
HHFC and the Bank (each, an "Indemnified Party") (including any person who
becomes a director, officer, employee, or agent prior to the Effective Time)
against all liabilities (including reasonable attorneys' fees, and expenses,
judgments, fines and amounts paid in settlement) arising out of actions or
omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under IBCL, HHFC's or the Bank's Articles of Incorporation or Bylaws as in
effect on the date hereof , including provisions relating to advances of
expenses incurred in the defense of any litigation. Without limiting the
foregoing, in any case in which approval by NCBE is required to effectuate any
indemnification, NCBE shall direct, at the election of the Indemnified Party,
that the determination of any such approval shall be made by independent counsel
mutually agreed upon between NCBE and Indemnified Party.
(ii) Any Indemnified Party wishing to claim indemnification under
Subsection (i) of this Section 10(h), upon learning of any such liability or
litigation, shall promptly notify NCBE thereof, provided that the failure to so
notify shall not affect the obligations of NCBE under this Section 10(h) unless
and to the extent such failure materially increases NCBE's Liability under this
Section 10(h). In the event of any such litigation (whether arising before or
after the Effective Time), (A) NCBE shall have the right to assume the defense
thereof and NCBE shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if NCBE
elects not to assume such defense or counsel for the Indemnified Parties advises
that there are substantive issues which raise conflicts of interest between NCBE
and the Indemnified Parties or between the Indemnified Parties, the Indemnified
Parties may retain counsel satisfactory to them, and NCBE shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, that NCBE shall be
obligated pursuant to this Subsection (ii) to pay for only two firms of counsel
for all Indemnified Parties in any jurisdiction, (B) the Indemnified Parties
will cooperate in the defense of any such litigation, and (C) NCBE shall not be
liable for any settlement effected without its prior written consent or have any
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall determine, and such determination shall have become final,
that the indemnification of such Indemnified Party in the manner contemplated
hereby is prohibited by applicable law.
(iii) If NCBE or any of its respective successors or assigns shall
consolidate with or merge into any other person and shall not be the continuing
or surviving person of such consolidation or merger or shall transfer all or
substantially all of its assets to any person, then and in each case, proper
provision shall be made so that the successors and assigns of NCBE shall assume
the obligations set forth in this Section 10(h).
(iv) NCBE shall pay all reasonable costs, including attorneys' fees,
that may be incurred by any Indemnified Party in enforcing the indemnity and
other obligations provided for in this Section 10(h).
(v) The provisions of this Section 10(h) are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
(i) CURRENT PUBLIC INFORMATION. For not less than the one (1) year period
following the Effective Time, NCBE shall make available adequate current public
information about itself within the meaning of Rule 144(c) under the Securities
Act.
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11. CONDITIONS TO OBLIGATIONS OF BOTH PARTIES. The respective obligations
of each party to effect the Merger are subject to the satisfaction or waiver on
or prior to the Closing of the following conditions:
(a) SHAREHOLDER APPROVAL. The Merger shall have been approved by the
holders of a majority of the outstanding shares of HHFC Common.
(b) REGULATORY APPROVAL. The transactions contemplated by this Agreement
shall have been approved by all Applicable Governmental Authorities and all
applicable waiting periods shall have expired.
(c) NO ACTION TO PREVENT CONSUMMATION.
(i) No action or proceeding shall have been instituted before a court
or other governmental body, agency or authority or other person which is
reasonably expected to (A) result in an order enjoining the Merger,
(B) result in a determination that a party has failed to comply with
applicable legal requirements in connection with the Merger; or (C) have a
material adverse effect on the future conduct of the business of a party;
(ii) No governmental agency shall have notified either party in
writing to the effect that consummation of the transactions contemplated by
this Agreement would constitute a violation of any statute, rule,
regulation or policy and that it intends to commence proceedings to
restrain consummation of the Merger; and
(iii) No statute, rule, regulation or policy shall have been
promulgated or enacted by any governmental or regulatory agency of
competent jurisdiction which shall prevent or declare the Merger illegal.
(d) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and shall not be subject of any stop order or
proceeding seeking a stop order.
(e) FEDERAL TAX OPINION. The parties shall have received an opinion of
Baker & Daniels in form and substance reasonably satisfactory to the parties to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code and such opinion shall not have been withdrawn or
modified in any material respect prior to the Effective Time.
12. CONDITIONS TO OBLIGATIONS OF NCBE. The obligation of NCBE to effect
the Merger is subject to the satisfaction or waiver on or prior to the Closing
of the following conditions:
(a) STATUS AS OF CLOSING. All representations and warranties of HHFC
contained in this Agreement shall be true as though made at and as of the
Closing except for such untruths or inaccuracies which individually or in the
aggregate would not have a material adverse effect on HHFC and the Bank, taken
as a whole; HHFC shall have performed and satisfied or otherwise complied with
all covenants made by it in this Agreement which are to be performed on or prior
to the Closing; there shall not have occurred any material adverse change in the
business, assets, properties, financial condition or results of operations of
HHFC and the Bank, taken as a whole; and there shall be delivered to NCBE a
certificate (dated the Closing and signed by the chief executive officer of
HHFC) stating that to the best of his knowledge such conditions have been
satisfied.
(b) ATTORNEYS' OPINION. NCBE shall have received an opinion, dated the
Closing, of Brown, Todd & Heyburn PLLC, counsel for HHFC, in substantially the
form of Exhibit B attached hereto, subject to customary and appropriate
assumptions and qualifications.
(c) POOLING-OF-INTERESTS. In the reasonable opinion of NCBE, after
consultation with its independent auditors, the Merger shall qualify for the
pooling-of-interests method of accounting under APB 16 if consummated in
accordance with this Agreement.
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13. CONDITIONS TO OBLIGATIONS OF HHFC. The obligation of HHFC to effect
the Merger is subject to the satisfaction or waiver on or prior to the Closing
of the following conditions:
(a) STATUS OF CLOSING. All representations and warranties of NCBE
contained in this Agreement shall be true as though made at and as of the
Closing except for such truths or inaccuracies which individually or in the
aggregate would not have a material adverse effect on NCBE and its subsidiaries,
taken as a whole; NCBE shall have performed and satisfied all covenants made by
it in this Agreement which are to be performed on or prior to the Closing; there
shall not have occurred any material adverse change in the business, assets,
properties, financial condition or results of operations of NCBE and its
subsidiaries, taken as a whole; and there shall be delivered to HHFC a
certificate (dated the Closing and signed by the President of NCBE) stating that
to the best of his knowledge such conditions have been satisfied.
(b) ATTORNEYS' OPINION. HHFC shall have received an opinion, dated the
Closing, of Baker & Daniels, counsel for NCBE, in substantially the form of
Exhibit C attached hereto, subject to customary and appropriate assumptions and
qualifications.
(c) NCBE COMMON LISTING. The shares of NCBE Common to be issued in the
Merger shall have been listed on the Nasdaq National Market.
(d) FAIRNESS OPINION. The opinion from Professional Bank Services, Inc.
received by HHFC prior to the execution of this Agreement, to the effect that
the Merger is fair to HHFC's shareholders (including the ESOP) from a financial
point of view shall be confirmed and not withdrawn as of the date of the Proxy
Statement/Prospectus mailed to HHFC's shareholders in connection with the
meeting held to approve this Agreement.
14. INFORMATION. The parties acknowledge the confidential and proprietary
nature of the "Information" (as hereafter defined) which has heretofore been
exchanged and which will be received from each other hereunder and agree to hold
and keep the same confidential. Such Information shall include any and all
financial, technical, commercial, marketing, customer or other information
concerning the business, operations and affairs of a party that may be provided
to the other, irrespective of the form of the communication, by such party's
employees or authorized representatives. Such Information shall not include
information which is or becomes generally available to the public other than as
a result of a disclosure by a party or its authorized representatives in
violation of this Agreement. The parties agree that the Information will be
used solely for the purposes contemplated by this Agreement and that such
Information will not be disclosed to any person other than employees and
authorized representatives of a party who are directly involved in evaluating
the Merger. The Information shall not be used in any way detrimental to a
party, including use directly or indirectly in the conduct of the other party's
business or any business or enterprise in which such party may have an interest,
now or in the future, and whether or not now in competition with such other
party. Upon termination of this Agreement without the Merger becoming
effective, each party shall: (a) deliver to the other originals and all copies
of all Information made available to such party; (b) not retain any copies,
extracts or other reproductions in whole or in part of such Information; and
(c) destroy all memoranda, notes and other writings prepared by any party or its
authorized representatives based on the Information.
15. PAYMENT OF EXPENSES.
(a) EXPENSES GENERALLY. Except as otherwise provided in subsection (b)
below, each party hereto shall pay its own fees and expenses incident to
preparing for, entering into, and carrying out this Agreement and the
transactions contemplated hereby.
(b) REIMBURSEMENT OF NCBE. Upon the occurrence of a Triggering Event
(as hereafter defined), HHFC shall reimburse NCBE for all of its
out-of-pocket expenses and costs, including fees of accountants and
attorneys, incurred in connection with the transactions contemplated by this
Agreement up to a maximum of $150,000. As used herein, the term "Triggering
Event" shall mean both (i) the termination of this Agreement for any reason
other than a failure
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of any of the conditions set forth in Sections 11(b), 11(c), 11(d), 11(e),
13(a), or 13(b) or pursuant to Section 16(a) or 16(e) hereof and (ii) the
occurrence of any of the following within one (1) year of the date of
termination: (A) HHFC enters into any agreement with respect to a Competing
Transaction; (B) the Board of Directors of HHFC recommends a Competing
Transaction to HHFC's shareholders; or (C) following the announcement of a
Competing Transaction, the Board of Directors of HHFC withdraws or modifies
its recommendation of the Merger or this Agreement. The term "Competing
Transaction" means any of the following: (x) an offer by any person or group
of persons (other than NCBE) to acquire ownership of twenty-five percent
(25%) or more of the HHFC Common or the Bank Stock; or (y) a proposal for a
merger, consolidation, share exchange, business combination, or similar
transaction involving HHFC or the Bank; or (z) a proposal for a sale, lease,
exchange, transfer or other disposition of twenty-five percent (25%) or more
of the assets of HHFC shall occur. The terms "person" and "group of persons"
shall have the meanings conferred thereon by Sections 3(a)(9) and 13(d)(3) of
the Exchange Act and the regulations promulgated thereunder.
16. TERMINATION OF AGREEMENT. Notwithstanding the fact that the
shareholders of HHFC have approved this Agreement, this Agreement may be
terminated at any time on or prior to the Effective Time:
(a) MUTUAL CONSENT. By mutual consent of HHFC and NCBE;
(b) COMPETING TRANSACTION. By HHFC, if HHFC or its Board of Directors
accepts or approves a Competing Transaction or recommends a Competing
Transaction to its shareholders; provided that HHFC has simultaneously delivered
to NCBE the amounts payable pursuant to Section 15(b);
(c) CONDITIONS TO NCBE'S OBLIGATIONS NOT MET. By NCBE, upon written
notice to HHFC, if by December 31, 1998 any of the conditions set forth in
Sections 11 or 12 shall have not been satisfied;
(d) CONDITIONS TO HHFC'S OBLIGATIONS NOT MET. By HHFC, upon written
notice to NCBE, if by December 31, 1998 any of the conditions set forth in
Sections 11 or 13 shall not have been satisfied; or
(e) TERMINATION BY HHFC DEPENDENT UPON AVERAGE NCBE VALUE. By HHFC,
within three business days prior to the Closing, if the Average NCBE Value is
less than $32.00; provided, however, NCBE may elect to negate HHFC's termination
by so notifying HHFC within two (2) business days after receipt of NCBE's notice
of termination. If NCBE shall negate the termination of this Agreement as
permitted in this subsection (e), the parties shall proceed to complete the
Merger on the terms and conditions set forth in this Agreement, including
Section 3(a)(iv).
(f) EFFECT OF TERMINATION. Upon termination of this Agreement pursuant to
this Section 16, there shall be no liability by reason of this Agreement or the
termination thereof on the part of NCBE or HHFC or the respective directors,
officers, employees, agents or stockholders of either of them, except for any
liability under Section 15(b) or unless such termination results from a party's
intentional or reckless misrepresentation or intentional or reckless breach of
any covenant contained herein.
17. PUBLICITY AND REPORTS. NCBE and HHFC shall coordinate all publicity
relating to the transactions contemplated by this Agreement and, except as
otherwise required by law, neither party shall issue any press release,
publicity statement or other public notice relating to this Agreement or any of
the transactions contemplated hereby without obtaining the prior written consent
of the other, which consent shall not be unreasonably withheld.
18. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Except as set
forth in the following sentence, none of the representations, warranties or
covenants of the parties shall survive the Effective Time or the earlier
termination of this Agreement. The covenants contained in Sections 2, 3, 4, 5,
10(f), 10(g), 10(h), 10(i) and 14 shall survive the Effective Time or, in the
case of Section 14 only, the earlier termination of this Agreement.
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19. NOTICES. Any notice of communication required or permitted hereunder
shall be sufficiently given if in writing and (a) delivered in person; (b) sent
by facsimile transmission (with confirmation of receipt by the recipient) or
express delivery service; or (c) mailed by certified or registered mail, postage
prepaid, as follows:
If to NCBE, addressed to:
National City Bancshares, Inc.
227 Main Street
P. O. Box 868
Evansville, Indiana 47705-0868
Attn: Robert A. Keil
Fax No. (812) 464-9825
With a copy addressed to:
Baker & Daniels
300 North Meridian Street, Suite 2700
Indianapolis, Indiana 46204-1782
Attn: David C. Worrell
Fax No. (317) 237-1000
If to HHFC, addressed to:
Hoosier Hills Financial Corporation
P.O. Box 176
(420 South Buckeye)
Osgood, Indiana 47037-0176
Attn: Fred R. Crum
Fax No. (812) 689-3413
With a copy addressed to:
Brown, Todd & Heyburn PLLC
400 West Market Street, 32nd Floor
Louisville, Kentucky 40202-3363
Attn: R. James Straus
David L. Beckman, Jr.
Fax No. (502) 581-1087
20. MISCELLANEOUS.
(a) ASSIGNMENT. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by either party, in whole or in part,
without the consent of the other party and any attempted assignment in violation
of this prohibition shall be null and void.
(b) LAW GOVERNING. This Agreement will be governed in all respects,
including validity, interpretation and effect, by the internal laws of the State
of Indiana.
(c) COUNTERPARTS. This Agreement may be executed in several counterparts
and one or more separate documents, all of which together shall constitute one
and the same instrument with the same force and effect as though all of the
parties had executed the same documents.
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<PAGE>
(d) AMENDMENT AND WAIVER. Any of the terms or conditions of this
Agreement may be waived, amended or modified in whole or in part at any time
before or after the approval of this Agreement by the shareholders of HHFC, to
the extent authorized by applicable law, by a writing signed by HHFC and NCBE.
(e) ENTIRE AGREEMENT. All exhibits and the Disclosure Schedule referred
to in this Agreement are integral parts hereof, and this Agreement, such
exhibits and Disclosure Schedule, constitute the entire agreement among the
parties hereto with respect to the matters contained herein and therein, and
supersede all prior agreements and understandings between the parties with
respect thereto.
(f) REMEDIES. Subject to the terms hereof, in the event of any willful
breach of this Agreement in any material respect by any of the parties hereto,
any other party hereto damaged shall have all the rights, remedies and causes of
action available at law or in equity.
(g) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
NATIONAL CITY BANCSHARES, INC.
By: /s/ Robert A. Keil
--------------------------
Robert A. Keil, President
ATTEST:
/s/ Curtis Ritterling
- -------------------------------------------
Curtis Ritterling, Executive Vice President
and Assistant Secretary
HOOSIER HILLS FINANCIAL CORPORATION
By: /s/ Fred R. Crum
------------------------------
Fred R. Crum, President and
Chief Executive Officer
ATTEST:
/s/ Shirley Franklin
- -----------------------------
Shirley Franklin, Director
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<PAGE>
EXHIBIT A
FORM OF AFFILIATE LETTER
Gentlemen:
In connection with the merger (the "Merger") of Hoosier Hills Financial
Corporation, ("HHFC"), with and into National City Bancshares, Inc. ("NCBE"),
pursuant to the Agreement and Plan of Merger dated as of April __, 1998 (the
"Agreement"), I have been advised that I may be deemed to be an "affiliate"
within the meaning of Rule 145 promulgated by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "1933
Act"), for the purposes of any resales of shares of the common stock, without
par value, of NCBE to be issued to me in the Merger (the "Shares"). I have also
been advised that I may be deemed an "affiliate" of HHFC for purposes of
qualifying the Merger for pooling of interests accounting treatment under
Opinion 16 of the Accounting Principles Board. Based on such advice and in
order to induce NCBE and HHFC to cause the Merger to be consummated, I hereby
represent and warrant to, and agree with NCBE and HHFC as follows:
A. I hereby consent to the placing of a legend on the certificate or
certificates evidencing the Shares referring to the issuance thereof in a
transaction to which Rule 145 under the 1933 Act is applicable and to the
giving of stop transfer instructions to the transfer agent for the Shares
with respect to such certificate or certificates. The legend will state in
substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 under the Securities Act of 1933 applies
and may be sold or otherwise transferred only in compliance with the
terms of such Rule."
B. I understand that NCBE is under no obligation to take any action
to facilitate the sale, transfer, or other disposition by me or on my
behalf of any of the Shares.
C. In the event of any sale or transfer of any of the Shares in a
transaction not involving a sale within the limits and in accordance with
the applicable provisions of Rule 145 or a sale in a registered public
offering, I will obtain from each transferee of the Shares in such
transaction a letter agreement substantially similar hereto, or a letter
containing such other information reasonably required by NCBE to evidence
an exception from the applicable registration requirements of federal or
state securities laws, which is binding and enforceable by NCBE against the
transferee.
It is understood and agreed that the legend set forth in Paragraph A above
shall be removed, and the related stock transfer restrictions shall be lifted
forthwith (i) if the sale or other transfer by me or on my behalf of my Shares
shall have been registered under the 1933 Act, (ii) if the sale or other
transfer by me or on my behalf of my Shares is not so registered, such sale is
exempt from the registration requirements of the 1933 Act, or (iii) upon the
expiration of the period specified in Rule 145(d)(3) under the 1933 Act, as it
may be amended from time to time.
I further represent to and covenant with NCBE that I have not, within
the preceding 30 days, sold, transferred or otherwise disposed of any shares
of HHFC Common Stock held by me and that I will not sell, transfer or
otherwise dispose of any of the Shares received by me in the Merger until
after such time as results covering at least 30 days of combined operations
of HHFC and NCBE have been published by NCBE, in the form of a quarterly
earnings report, an effective registration statement filed with the SEC, a
report to the SEC on Form 10-K, 10-Q or 8-K, or any other public filing or
announcement which includes such combined results of operations.
Very truly yours,
---------------------------
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EXHIBIT B
FORM OF OPINION OF COUNSEL FOR HHFC
Capitalized terms used and not otherwise defined herein have the meanings
given them in the Plan and Agreement of Merger (the "Agreement").
1. HHFC is a corporation duly organized and validly existing under the
laws of the State of Indiana and is registered as a bank holding company with
the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended. The Bank is a banking corporation duly organized and validly existing
under the laws of the State of Indiana.
2. HHFC and the Bank each have the requisite corporate power and
authority necessary to carry out their respective businesses as currently
conducted.
3. The authorized capital stock of HHFC consists of 750,000 shares of
HHFC Common. Based solely on a review of HHFC's stock records, there are
416,262 shares of HHFC Common issued and outstanding and 33,738 shares in the
treasury. The authorized capital stock of the Bank consists of 150,000 shares
of Bank Stock. Based solely on a review of the Bank's stock records, there are
150,000 shares of Bank Stock issued and outstanding, all of which are owned of
record by HHFC. All of the outstanding shares of HHFC Common and Bank Stock
have been duly authorized and validly issued and are fully paid and
non-assessable and, to the best of our knowledge, were not issued in violation
of any preemptive rights.
4. The Agreement has been duly executed and delivered by HHFC and
constitutes a valid and binding obligation of HHFC, enforceable against HHFC in
accordance with its terms, except to the extent limited by general principles of
equity and by bankruptcy, insolvency, reorganization, liquidation, fraudulent
conveyance, moratorium, readjustment of debt or other laws of general
application relating to or affecting the enforcement of creditors' rights.
5. All consents or approvals from Applicable Governmental Authorities
that are required to be obtained by HHFC in connection with the Merger have been
obtained.
6. The execution and delivery by HHFC of, and the performance by HHFC of
its agreements in, the Agreement do not: (a) violate the articles of
incorporation or by-laws of HHFC or the articles of incorporation or by-laws of
the Bank, or (b), to our knowledge, except as set forth in the Disclosure
Schedule, violate, result in a breach of or constitute a default under any
Material Contract to which HHFC or the Bank is a party or by which their
properties are bound.
7. The meeting of shareholders of HHFC held on ________ __, 1998, was
duly held in accordance with all applicable requirements of the IBCL and the
articles of incorporation and bylaws of HHFC. The Agreement was duly adopted
by the affirmative vote of the holders of a majority of the outstanding shares
of HHFC Common, which is the only action required on the part of the holders of
HHFC Common to approve the Merger.
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EXHIBIT C
FORM OF OPINION OF COUNSEL FOR NCBE
Capitalized terms used and not otherwise defined herein have the meanings
given them in the Plan and Agreement of Merger (the "Agreement").
1. NCBE is a corporation duly organized and validly existing under the
laws of Indiana and is registered as a bank holding company with the Federal
Reserve Board under the Bank Holding Company Act of 1956, as amended.
2. NCBE has all requisite corporate power and authority necessary to
carry out its business as currently conducted.
3. The authorized capital stock of NCBE consists of 20,000,000 shares of
common stock, without par value. All shares of NCBE Common to be issued to
shareholders of HHFC pursuant to the Merger have been duly authorized and, when
issued in accordance with the Agreement, will be fully paid and non-assessable.
4. The Agreement has been duly executed and delivered by NCBE and
constitutes a valid and binding obligation of NCBE, enforceable against NCBE in
accordance with its terms, except to the extent limited by general principles of
equity and by bankruptcy, insolvency, reorganization, liquidation, fraudulent
conveyance, moratorium, readjustment of debt or other laws of general
application relating to or affecting the enforcement of creditors' rights.
5. All consents or approvals of any Applicable Governmental Authorities
required to be obtained by NCBE in connection with the Merger have been
obtained.
6. No vote by the shareholders of NCBE is required to approve the Merger
under IBCL, the articles of incorporation or by-laws of NCBE or rules of the
National Association of Securities Dealers, Inc. which apply to Nasdaq National
Market issuers.
7. The execution and delivery by NCBE of, and the performance by NCBE of
its agreements in, the Agreement do not: (a) violate its articles of
incorporation or by-laws; or (b) to our knowledge, violate, result in a breach
or constitute a default under any material contract, agreement or other
instrument to which NCBE is a party or by which its respective properties are
bound.
8. Upon the filing and acceptance of the Articles of Merger by the
Indiana Secretary of State, the Merger will become effective under the IBCL at
the time specified in the Articles of Merger.
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APPENDIX B
[Professional Bank Services, Inc. Letterhead]
August 14, 1998
Board of Directors
Hoosier Hills Financial Corporation
420 S. Buckeye Street
Osgood, Indiana 47037-1308
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial perspective, to the common shareholders of Hoosier Hills
Financial Corporation, Osgood, Indiana (the "Company") of the proposed merger
of the Company with National City Bancshares, Inc., Evansville, Indiana
("NCBE"). In the proposed merger, Company shareholders will receive an
aggregate of 730,000 NCBE common shares for all 416,262 Company common shares
outstanding as further defined in the Agreement and Plan of Merger between
NCBE and the Company (the "Agreement"). On August 6, 1998, the proposed
consideration to be received represents an aggregate value of $27,192,500 or
$65.32 per Company common share based on the average of the bid / ask price
for NCBE common stock of $37.25 as quoted on the National Association of
Securities Dealers Automated Quotation System.
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as
part of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of the Company and its wholly owned subsidiary, Ripley
County Bank (the "Bank") contained in: (i) December 31, 1997, March 31, 1998
and June 30, 1998 Consolidated Reports of Condition and Income filed by the
Bank with the FDIC; (ii) December 31, 1997 and 1996 audited annual reports of
the Company; and (iii) December 31, 1997 and March 31, 1998 Uniform Bank
Performance Report of the Bank. We have reviewed and tabulated statistical
data regarding the loan portfolio, securities portfolio and other performance
ratios and statistics. Financial projections were prepared and analyzed as
well as other financial studies, analyses and investigations as deemed
relevant for the purposes of this opinion. In review of the aforementioned
information, we have taken into account our assessment of general market and
financial conditions, our experience in other transactions, and our knowledge
of the banking industry generally. We have also taken into consideration
other offers received by the Company.
We have not compiled, reviewed or audited the financial statements of the
Company or NCBE nor have we independently verified any of the information
reviewed; we have relied upon such information as being complete and accurate in
all material respects. We have not made independent evaluation of the assets of
the Company or NCBE.
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Based on the foregoing and all other factors deemed relevant, it is our
opinion as investment bankers, that, as of the date hereof, the consideration
proposed to be received by the shareholders of the Company under the Agreement
is fair and equitable from a financial perspective.
Very truly yours,
Professional Bank Services, Inc.
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APPENDIX C
EXCERPTS OF THE INDIANA BUSINESS CORPORATION LAW
(DISSENTERS' RIGHTS)
23-1-44-1 "CORPORATION" DEFINED
Sec. 1. As used in this chapter, "corporation" means the issuer of
the shares held by a dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that issuer.
23-1-44-2 "DISSENTER" DEFINED
Sec. 2. As used in this chapter, "dissenter" means a shareholder who
is entitled to dissent from corporate action under section 8 of this chapter and
who exercises that right when and in the manner required by sections 10
through 18 of this chapter.
23-1-44-3 "FAIR VALUE" DEFINED
Sec. 3. As used in this chapter, "fair value", with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which the dissenter objects, excluding
any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
23-1-44-4 "INTEREST" DEFINED
Sec. 4. As used in this chapter, "interest" means interest from the
effective date of the corporate action until the date of payment, at the average
rate currently paid by the corporation on its principal bank loans or, if none,
at a rate that is fair and equitable under all the circumstances.
23-1-44-5 "RECORD SHAREHOLDER" DEFINED
Sec. 5. As used in this chapter, "record shareholder" means the
person in whose name shares are registered in the records of a corporation or
the beneficial owner of shares to the extent that treatment as a record
shareholder is provided under a recognition procedure or a disclosure procedure
established under IC 23-1-30-4.
23-1-44-6 "BENEFICIAL SHAREHOLDER" DEFINED
Sec. 6. As used in this chapter, "beneficial shareholder" means the
person who is a beneficial owner of shares held by a nominee as the record
shareholder.
23-1-44-7 "SHAREHOLDER" DEFINED
Sec. 7. As used in this chapter, "shareholder" means the record
shareholder or the beneficial shareholder.
23-1-44-8 RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Sec. 8. (a) A shareholder is entitled to dissent from, and obtain
payment of the fair value of the shareholder's shares in the event of, any of
the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is
a party if:
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(A) shareholder approval is required for the merger by
IC 23-1-40-3 or the articles of incorporation; and
(B) the shareholder is entitled to vote on the merger.
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to vote on
the sale or exchange, including a sale in dissolution, but not
including a sale pursuant to court order or a sale for cash pursuant
to a plan by which all or substantially all of the net proceeds of the
sale will be distributed to the shareholders within one (1) year after
the date of sale.
(4) The approval of a control share acquisition under
IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of
the board of directors provides that voting or nonvoting shareholders
are entitled to dissent and obtain payment for their shares.
(b) This section does not apply to the holders of shares of any class
or series if, on the date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting of shareholders at which the merger,
plan of share exchange, or sale or exchange of property is to be acted on, the
shares of that class or series were:
(1) registered on a United States securities exchange registered
under the Exchange Act (as defined in IC 23-1-43-9); or
(2) traded on the National Association of Securities Dealers,
Inc. Automated Quotations System Over-the-Counter Markets -- National
Market Issues or a similar market.
(c) A shareholder:
(1) who is entitled to dissent and obtain payment for the
shareholder's shares under this chapter; or
(2) who would be so entitled to dissent and obtain payment but
for the provisions of subsection (b);
may not challenge the corporate action creating (or that, but for the provisions
of subsection (b), would have created) the shareholder's entitlement.
23-1-44-9 DISSENTERS' RIGHTS OF BENEFICIAL SHAREHOLDER
Sec. 9. (a) A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in the shareholder's name only if the
shareholder dissents with respect to all shares beneficially owned by any one
(1) person and notifies the corporation in writing of the name and address of
each person on whose behalf the shareholder asserts dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if the
shares as to which the shareholder dissents and the shareholder's other shares
were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to
shares held on the shareholder's behalf only if:
(1) the beneficial shareholder submits to the corporation the
record shareholder's written consent to the dissent not later than the
time the beneficial shareholder asserts dissenters' rights; and
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(2) the beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the
beneficial shareholder has power to direct the vote.
23-1-44-10 PROPOSED ACTION CREATING DISSENTERS' RIGHTS; NOTICE
Sec. 10. (a) If proposed corporate action creating dissenters' rights
under section 8 of this chapter is submitted to a vote at a shareholders'
meeting, the meeting notice must state that shareholders are or may be entitled
to assert dissenters' rights under this chapter.
(b) If corporate action creating dissenters' rights under section 8
of this chapter is taken without a vote of shareholders, the corporation shall
notify in writing all shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in
section 12 of this chapter.
23-1-44-11 PROPOSED ACTION CREATING DISSENTERS' RIGHTS; ASSERTION OF
DISSENTERS' RIGHTS
Sec. 11. (a) If proposed corporate action creating dissenters' rights
under section 8 of this chapter is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters' rights:
(1) must deliver to the corporation before the vote is taken
written notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated; and
(2) must not vote the shareholder's shares in favor of the
proposed action.
(b) A shareholder who does not satisfy the requirements of
subsection (a) is not entitled to payment for the shareholder's shares under
this chapter.
23-1-44-12 DISSENTERS' NOTICE; CONTENTS
Sec. 12. (a) If proposed corporate action creating dissenters' rights
under section 8 of this chapter is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of section 11 of this chapter.
(b) The dissenters' notice must be sent no later than ten (10) days
after approval by the shareholders, or if corporate action is taken without
approval by the shareholders, then ten (10) days after the corporate action was
taken. The dissenters' notice must:
(1) state where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
(3) supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the person
asserting dissenters' rights certify whether or not the person
acquired beneficial ownership of the shares before that date;
(4) set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than
sixty (60) days after the date the subsection (a) notice is delivered;
and
(5) be accompanied by a copy of this chapter.
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23-1-44-13 DEMAND FOR PAYMENT AND DEPOSIT OF SHARES BY SHAREHOLDER
Sec. 13. (a) A shareholder sent a dissenters' notice described in
IC 23-1-42-11 or in section 12 of this chapter must demand payment, certify
whether the shareholder acquired beneficial ownership of the shares before the
date required to be set forth in the dissenter's notice under section 12(b)(3)
of this chapter, and deposit the shareholder's certificates in accordance with
the terms of the notice.
(b) The shareholder who demands payment and deposits the
shareholder's shares under subsection (a) retains all other rights of a
shareholder until these rights are cancelled or modified by the taking of the
proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter and is considered, for purposes of this article, to have
voted the shareholder's shares in favor of the proposed corporate action.
23-1-44-14 UNCERTIFICATED SHARES; RESTRICTION ON TRANSFER; DISSENTERS'
RIGHTS
Sec. 14. (a) The corporation may restrict the transfer of
uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released under
section 16 of this chapter.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
23-1-44-15 PAYMENT TO DISSENTER
Sec. 15. (a) Except as provided in section 17 of this chapter, as
soon as the proposed corporate action is taken, or, if the transaction did not
need shareholder approval and has been completed, upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with section 13 of
this chapter the amount the corporation estimates to be the fair value of the
dissenter's shares.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen (16) months before the date of
payment, an income statement for that year, a statement of changes in
shareholders' equity for that year, and the latest available interim
financial statements, if any;
(2) a statement of the corporation's estimate of the fair value
of the shares; and
(3) a statement of the dissenter's right to demand payment under
section 18 of this chapter.
23-1-44-16 FAILURE TO TAKE ACTION; RETURN OF CERTIFICATES; NEW ACTION BY
CORPORATION
Sec. 16. (a) If the corporation does not take the proposed action
within sixty (60) days after the date set for demanding payment and depositing
share certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 12 of this chapter and repeat the payment
demand procedure.
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23-1-44-17 WITHHOLDING PAYMENT BY CORPORATION; CORPORATION'S ESTIMATE OF
FAIR VALUE; AFTER-ACQUIRED SHARES
Sec. 17. (a) A corporation may elect to withhold payment required by
section 15 of this chapter from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 of this chapter.
23-1-44-18 DISSENTERS' ESTIMATE OF FAIR VALUE; DEMAND FOR PAYMENT; WAIVER
Sec. 18. (a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and demand
payment of the dissenter's estimate (less any payment under section 15 of this
chapter), or reject the corporation's offer under section 17 of this chapter and
demand payment of the fair value of the dissenter's shares, if:
(1) the dissenter believes that the amount paid under section 15
of this chapter or offered under section 17 of this chapter is less
than the fair value of the dissenter's shares;
(2) the corporation fails to make payment under section 15 of
this chapter within sixty (60) days after the date set for demanding
payment; or
(3) the corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty (60) days
after the date set for demanding payment.
(b) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (a) within thirty (30) days after the corporation made
or offered payment for the dissenter's shares.
23-1-44-19 COURT PROCEEDING TO DETERMINE FAIR VALUE; JUDICIAL APPRAISAL
Sec. 19. (a) If a demand for payment under IC 23-1-42-11 or under
section 18 of this chapter remains unsettled, the corporation shall commence a
proceeding within sixty (60) days after receiving the payment demand and
petition the court to determine the fair value of the shares. If the
corporation does not commence the proceeding within the sixty (60) day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or
superior court of the county where a corporation's principal office (or, if none
in Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation
was located.
(c) The corporation shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is
commenced under subsection (b) is plenary and exclusive. The court may appoint
one (1) or more persons as appraisers to receive evidence and recommend decision
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on the question of fair value. The appraisers have the powers described in the
order appointing them or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) for the amount, if any, by which the court finds the fair
value of the dissenter's shares, plus interest, exceeds the amount
paid by the corporation; or
(2) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to
withhold payment under section 17 of this chapter.
23-1-44-20 COSTS; FEES; ATTORNEY FEES
Sec. 20. (a) The court in an appraisal proceeding commenced under
section 19 of this chapter shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against such parties and in such
amounts as the court finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of sections 10 through 18 of this
chapter; or
(2) against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly
situated and that the fees for those services should not be assessed
against the corporation, the court may award to these counsel
reasonable fees to be paid out of the amounts awarded the dissenters
who were benefitted.
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