<PAGE>
[Community First Financial, Inc. Letterhead]
May 14, 1998
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Community First Financial, Inc. ("CFF") to be held at 11:00 a.m., local
time, on June 29, 1998 at the office of Community First Bank, National
Association, 102 West Second Street, Maysville, Kentucky. At the Special
Meeting you will be asked to consider and vote upon a proposal to approve an
Agreement and Plan of Merger (the "Merger Agreement") dated as of March 9,
1998, which provides for the merger (the "Merger") of CFF with and into
National City Bancshares, Inc. ("NCBE").
If the Merger is approved and consummated, all of the outstanding classes
of shares of common and preferred stock of CFF, other than shares held by
shareholders properly exercising dissenters' rights, will be converted into the
right to receive shares of NCBE common stock. The provisions for converting all
classes of shares of CFF into NCBE common stock are set forth in the Merger
Agreement and described in the accompanying Prospectus/Proxy Statement.
After careful review and consideration, your Board of Directors believes
that the proposed Merger is in the best interests of CFF and its shareholders.
ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN
FAVOR OF THE MERGER AGREEMENT.
Please read the accompanying Prospectus/Proxy Statement which describes the
Merger and related matters in more detail. Your participation in the Special
Meeting, in person or by proxy, is important. Therefore, please mark, sign and
date the enclosed proxy card and mail it as soon as possible in the enclosed
postage-paid envelope so that your shares will be represented at the Special
Meeting. If you attend the Special Meeting, you may revoke your proxy and vote
your shares in person if you wish, even if you have previously mailed in your
proxy card. In the event that proxies representing a sufficient number of votes
to approve the Merger are not obtained prior to the Special Meeting, a proposal
to adjourn the Special Meeting in order to solicit additional proxies will be
put to a vote at the Special Meeting.
Sincerely,
Robert D. Vance
Chairman of the Board
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
COMMUNITY FIRST FINANCIAL, INC.
To be held on June 29, 1998
TO THE SHAREHOLDERS OF COMMUNITY FIRST FINANCIAL, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Special Meeting") of Community First Financial, Inc., a Kentucky corporation
("CFF"), will be held on June 29, 1998, at 11:00 a.m., local time, at 102
West Second Street, Maysville, Kentucky, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger (the "Merger Agreement"), dated as of March 9, 1998, between
CFF and National City Bancshares, Inc., an Indiana corporation
("NCBE"), and the transactions contemplated thereby, pursuant to
which, among other things, CFF will be merged (the "Merger") with and
into NCBE, upon the terms and conditions set forth in the Merger
Agreement, as more fully described in the accompanying
Prospectus/Proxy Statement.
2. Such other matters as may properly come before the Special Meeting or
any adjournments or postponements thereof.
A copy of the Merger Agreement is attached as Appendix A to the
accompanying Prospectus/Proxy Statement and is incorporated by reference in this
Notice.
The Board of Directors of CFF has fixed the close of business on May 1,
1998, as the record date for determination of shareholders entitled to notice
of and to vote at the Special Meeting or at any adjournments or postponements
thereof. In the event that proxies representing a sufficient number of votes
to approve the Merger Agreement are not obtained prior to the Special
Meeting, a proposal to adjourn the Special Meeting in order to solicit
additional proxies will be put to a vote at the Special Meeting.
THE BOARD OF DIRECTORS OF CFF HAS APPROVED THE MERGER AGREEMENT AND
BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF THE CORPORATION, ITS
SHAREHOLDERS, ITS COMMUNITY AND ITS OTHER CONSTITUENTS. THE BOARD, THEREFORE,
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF CFF VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT.
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT DESCRIBES THE RIGHTS OF CFF
SHAREHOLDERS TO DISSENT FROM THE MERGER AND THE PROCEDURES WHICH MUST BE
FOLLOWED IN ORDER TO PERFECT SUCH RIGHTS.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
By Order of the Board of Directors,
Maysville, Kentucky
May 14, 1998 Clyde A. (Pete) Turner, Secretary
<PAGE>
Filed pursuant to Rule 424(b)(2)
Registration No. 333-51923
NATIONAL CITY BANCSHARES, INC.
PROSPECTUS
UP TO 1,441,862 SHARES OF COMMON STOCK
--------------------------
COMMUNITY FIRST FINANCIAL, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 29, 1998
This Prospectus/Proxy Statement relates to the proposed acquisition of
Community First Financial, Inc., a Kentucky corporation ("CFF"), by National
City Bancshares, Inc., an Indiana corporation ("NCBE"), by means of the merger
(the "Merger") of CFF with and into NCBE, pursuant to the terms of an Agreement
and Plan of Merger (the "Merger Agreement") dated as of March 9, 1998, between
CFF and NCBE. A copy of the Merger Agreement is attached hereto as Appendix A
and is incorporated by reference herein.
This Prospectus/Proxy Statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of CFF to be used at
the Special Meeting of Shareholders (the "Special Meeting") of CFF to be held
on June 29, 1998. At the Special Meeting, holders of shares of CFF's Common
Stock, no par value ("CFF Common"), CFF's Class A Preferred Stock, $225.00
par value per share ("CFF A Preferred") and CFF's Class B Preferred Stock,
$500.00 par value per share ("CFF B Preferred," and together with CFF Common
and CFF A Preferred, "CFF Stock"), will be asked to consider and vote upon
approval of the Merger Agreement and the transactions contemplated thereby.
In the event that proxies representing a sufficient number of votes to
approve the Merger Agreement are not obtained prior to the Special Meeting, a
proposal to adjourn the Special Meeting in order to solicit additional
proxies will be put to a vote at the Special Meeting. Any proxy given
pursuant to this solicitation may be revoked at any time prior to the voting
thereof at the Special Meeting. Shareholders of CFF are entitled to
dissenters' rights in connection with the Merger as described herein. See
"SPECIAL MEETING" and "THE MERGER -- Dissenters' Rights." This
Prospectus/Proxy Statement and the accompanying form of proxy are first being
mailed to shareholders of CFF on or about May 14, 1998.
Pursuant to the Merger Agreement and in connection with the Merger, each
issued and outstanding share of CFF Stock, other than shares held by
shareholders properly exercising dissenters' rights, will be converted into the
right to receive the following number of shares of common stock of NCBE ("NCBE
Common"): 32.0692 shares of NCBE Common for each share of CFF Common; 49.3545
shares of NCBE Common for each share of CFF A Preferred; and 39.0000 shares of
NCBE Common for each share of CFF B Preferred. See "THE MERGER -- Conversion of
CFF Stock." This Prospectus/Proxy Statement also constitutes the prospectus of
NCBE with respect to up to 1,441,862 shares of NCBE Common issuable in the
Merger.
The outstanding shares of NCBE Common are traded on the Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol, "NCBE." The last
reported sale price of NCBE Common on May 11, 1998, was $41.00.
SEE "RISK FACTORS RELATING TO NCBE COMMON" BEGINNING ON PAGE 12 FOR CERTAIN
INFORMATION RELEVANT TO AN INVESTMENT IN NCBE COMMON.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THE NCBE COMMON OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF NCBE COMMON OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR
SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND OR ANY OTHER GOVERNMENTAL AGENCY.
The date of this Prospectus/Proxy Statement is May 14, 1998
<PAGE>
ALL INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT WITH RESPECT
TO NCBE HAS BEEN SUPPLIED BY NCBE AND ALL INFORMATION WITH RESPECT TO CFF HAS
BEEN SUPPLIED BY CFF.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS RELATING TO NCBE
BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS (EXCLUDING UNINCORPORATED EXHIBITS) ARE AVAILABLE, WITHOUT CHARGE,
TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS/PROXY
STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST, TO STEPHEN C. BYELICK,
JR., SECRETARY, NATIONAL CITY BANCSHARES, INC., 227 MAIN STREET, P.O. BOX
868, EVANSVILLE, INDIANA 47705-0868 (TELEPHONE NUMBER (812) 464-9864). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BY JUNE 22, 1998.
--------------------------
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . . . . . . . . . 5
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Parties to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Special Meeting of CFF Shareholders . . . . . . . . . . . . . . . . . . . 6
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Summary Comparative Historical and Combined per Share Data. . . . . . . .10
Risk Factors Relating to NCBE Common. . . . . . . . . . . . . . . . . . .11
Stock Price Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Comparison of Shareholder Rights. . . . . . . . . . . . . . . . . . . . .11
RISK FACTORS RELATING TO NCBE COMMON . . . . . . . . . . . . . . . . . . . . .12
Status of NCBE as a Bank Holding Company. . . . . . . . . . . . . . . . .12
Risks Associated with Acquisitions. . . . . . . . . . . . . . . . . . . .12
Impact of Interest Rate Changes . . . . . . . . . . . . . . . . . . . . .13
Credit Risk and Loan Concentration. . . . . . . . . . . . . . . . . . . .13
Regulatory Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Exposure to Local Economic Conditions . . . . . . . . . . . . . . . . . .13
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Date, Time, Place and Purpose . . . . . . . . . . . . . . . . . . . . . .15
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Voting and Revocation of Proxies. . . . . . . . . . . . . . . . . . . . .15
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . .16
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . . . .16
2
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Reasons for the Merger. . . . . . . . . . . . . . . . . . . . . . . . . .17
Opinion of Financial Advisor to CFF . . . . . . . . . . . . . . . . . . .17
Recommendation of CFF's Board of Directors. . . . . . . . . . . . . . . .20
Closing and Effective Time. . . . . . . . . . . . . . . . . . . . . . . .21
Conversion of CFF Stock . . . . . . . . . . . . . . . . . . . . . . . . .21
Procedures for Exchange of Certificates . . . . . . . . . . . . . . . . .21
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . .22
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Representations and Warranties. . . . . . . . . . . . . . . . . . . . . .25
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Conditions to the Merger. . . . . . . . . . . . . . . . . . . . . . . . .26
Termination and Waiver. . . . . . . . . . . . . . . . . . . . . . . . . .27
No Solicitation; Fees and Expenses. . . . . . . . . . . . . . . . . . . .27
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . .27
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . .28
Resale of NCBE Common . . . . . . . . . . . . . . . . . . . . . . . . . .29
Interests of Certain Persons in the Merger. . . . . . . . . . . . . . . .29
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
COMPARATIVE STOCK PRICES AND DIVIDENDS . . . . . . . . . . . . . . . . . . . .33
INFORMATION CONCERNING NCBE. . . . . . . . . . . . . . . . . . . . . . . . . .34
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Security Ownership of Certain Beneficial Owners and Management. . . . . .36
INFORMATION CONCERNING CFF . . . . . . . . . . . . . . . . . . . . . . . . . .37
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Selected Financial Data of CFF. . . . . . . . . . . . . . . . . . . . . .37
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .38
DESCRIPTION OF NCBE CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . .47
Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Dividends, Voting, Liquidation and Other Rights . . . . . . . . . . . . .47
Certain Provisions of Articles of Incorporation and By-Laws . . . . . . .47
Certain Provisions of the Indiana Law . . . . . . . . . . . . . . . . . .48
Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
COMPARISON OF SHAREHOLDER RIGHTS . . . . . . . . . . . . . . . . . . . . . . .48
Classified Board of Directors . . . . . . . . . . . . . . . . . . . . . .48
Business Combinations Not Involving an Interested Shareholder . . . . . .48
Business Combinations Involving an Interested Shareholder . . . . . . . .49
Removal of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . .49
Amendments to Articles of Incorporation . . . . . . . . . . . . . . . . .50
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Rights of First Refusal or Transfer of Shares . . . . . . . . . . . . . .50
Special Meetings of Shareholders. . . . . . . . . . . . . . . . . . . . .51
Shareholder Action by Written Consent . . . . . . . . . . . . . . . . . .51
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Control Share Acquisitions. . . . . . . . . . . . . . . . . . . . . . . .51
3
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Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Limitation of Liability of Directors. . . . . . . . . . . . . . . . . . .52
Consideration of Non-Shareholder Interests. . . . . . . . . . . . . . . .53
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
INDEX TO CFF FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . F-1
APPENDIX A- Agreement and Plan of Merger dated as of March 9, 1998
betweenNational City Bancshares, Inc. and Community First
Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B- Fairness Opinion of Professional Bank Services, Inc.. . . . . B-1
APPENDIX C- Excerpts of the Kentucky Business Corporation Act
(Dissenters' Rights). . . . . . . . . . . . . . . . . . . . . C-1
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IN CONNECTION
WITH THE OFFERING DESCRIBED HEREIN AND ANY SUCH INFORMATION OR REPRESENTATION,
IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NCBE OR
CFF. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OR AN
OFFERING OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR IN ANY JURISDICTION TO ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT AT ANY TIME DOES NOT IMPLY THAT ANY INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
4
<PAGE>
AVAILABLE INFORMATION
NCBE is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Seven World Trade Center, New York, New York 10048, and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661, and copies of such
materials can be obtained from the public reference section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers who file
electronically with the Commission. The address of that site is
http://www.sec.gov. In addition, the NCBE Common is included in the Nasdaq
National Market and reports, proxy statements and other information concerning
NCBE are available for inspection at the office of the National Association of
Securities Dealers, Inc., at 1735 K Street, Washington, D.C. 20006.
NCBE has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
NCBE Common to be issued pursuant to the Merger. This Prospectus/Proxy
Statement does not contain all the information set forth in the Registration
Statement and the exhibits thereto. Such additional information may be obtained
from the Commission's principal office in Washington, D.C. Statements contained
in this Prospectus/Proxy Statement or in any document incorporated in this
Prospectus/Proxy Statement by reference as to the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance where reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement is qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by NCBE (File No.
0-13585) pursuant to the Exchange Act are incorporated by reference in this
Prospectus/Proxy Statement:
1. NCBE's Annual Report on Form 10-K for the year ended December 31,
1997, as amended by the Form 10-K/A filed March 26, 1998;
2. NCBE's Current Reports on Form 8-K dated March 11, 1998, and April 30,
1998;
3. NCBE's Proxy Statement dated April 22, 1998, relating to the 1998
annual meeting of shareholders; and
4. The description of the NCBE Common contained in the Registration
Statement on Form 8-A under the Exchange Act, filed with the
Commission on May 13, 1985, including any amendments or reports filed
for the purpose of updating such description.
All documents and reports filed by NCBE pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus/Proxy
Statement and prior to the date of the Special Meeting shall be deemed to be
incorporated by reference in this Prospectus/Proxy Statement and to be a part
hereof from the dates of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus/Proxy Statement to the extent that a statement contained herein or in
any other subsequently filed document which also is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus/Proxy Statement.
5
<PAGE>
SUMMARY
The following summary is not intended to be complete and is qualified in
all respects by the information appearing elsewhere herein or incorporated by
reference into this Prospectus/Proxy Statement, the Appendices hereto and the
documents referred to herein. All information contained in this
Prospectus/Proxy Statement relating to NCBE and its subsidiaries has been
supplied by NCBE and all information relating to CFF and its subsidiaries has
been supplied by CFF. Shareholders are urged to read this Prospectus/Proxy
Statement and the Appendices hereto in their entirety.
PARTIES TO THE MERGER
NCBE
National City Bancshares, Inc. is a bank holding company headquartered in
Evansville, Indiana. As of December 31, 1997, NCBE had total consolidated
assets of $1.3 billion, total loans of $916.4 million, total deposits of
$964.0 million, and total shareholders' equity of $146.8 million. As of
March 6, 1998, NCBE owned 13 financial institution subsidiaries serving
33 communities from 44 locations. NCBE's subsidiaries provide a wide range of
banking services in the tri-state area of Indiana, Kentucky and Illinois
surrounding Evansville, Indiana.
NCBE is an Indiana corporation. Its principal offices are located at
227 Main Street, Evansville, Indiana 47708 (telephone number (812) 464-9677).
CFF
Community First Financial, Inc. is a bank holding company headquartered in
Maysville, Kentucky. As of December 31, 1997, CFF had total consolidated assets
of $130.6 million, net loans of $101.9 million, total deposits of $113.2 million
and total shareholders equity of $14.1 million. CFF has two banking
subsidiaries, Community First Bank of Kentucky, a Kentucky banking corporation
with its principal office in Warsaw, Kentucky (the "State Bank") and Community
First Bank, National Association, Maysville, a national banking association with
its principal office in Maysville, Kentucky (the "National Bank" and, together
with the State Bank, the "Banks").
CFF is a Kentucky corporation. Its principal offices are located at One
West McDonald Parkway, Suite 3B, Maysville, Kentucky (telephone number (606)
564-4450).
SPECIAL MEETING OF CFF SHAREHOLDERS
DATE, TIME, PLACE AND PURPOSE
The Special Meeting of CFF shareholders will be held at the office of
the National Bank located at 102 West Second Street, Maysville, Kentucky on
June 29, 1998, at 11:00 a.m., local time to consider and vote to approve the
Merger Agreement and the transactions contemplated thereby, including the
Merger. A copy of the Merger Agreement is attached hereto as Appendix A.
RECORD DATE; VOTE REQUIRED
The record date (the "Record Date") for the Special Meeting is
May 1, 1998. On the Record Date there were 41,969 shares of CFF
Common, 1,605 shares of CFF A Preferred and 18 shares of CFF B Preferred
outstanding and entitled to vote.
The presence, in person or by proxy, of holders of a majority of the issued
and outstanding shares of each class of CFF Stock entitled to vote on the Record
Date is necessary to constitute a quorum at the Special Meeting. Pursuant to
the Kentucky Business Corporation Act, as amended (the "Kentucky Law"), the
affirmative vote of the holders of a majority of the issued and outstanding
shares of CFF Common, CFF A Preferred and CFF B Preferred, voting separately
6
<PAGE>
as classes, or 20,985 shares of CFF Common, 803 shares of CFF A Preferred and
10 shares of CFF B Preferred, is required to adopt the Merger Agreement and
the transactions contemplated thereby.
SECURITY OWNERSHIP OF CFF MANAGEMENT
As of the close of business on the Record Date, the directors and executive
officers of CFF and their affiliates owned 35,384 shares of CFF Common, or 84%
of such class, 905 shares of CFF A Preferred, or 56% of such class and 18 shares
of CFF B Preferred or 100% of such class. As of such date, no shares of CFF
Stock were beneficially owned by the directors and executive officers of NCBE or
their affiliates.
THE MERGER
The following summary is qualified in its entirety by reference to the full
text of the Merger Agreement, which is attached as Appendix A hereto and
incorporated by reference herein.
EFFECTIVE TIME OF THE MERGER
Subject to the terms and conditions of the Merger Agreement and in
accordance with the Kentucky Law and the Indiana Business Corporation Law, as
amended (the "Indiana Law"), the Merger will become effective at the hour and on
the date (the "Effective Time") specified in the Articles of Merger to be filed
pursuant to the Kentucky Law and the Indiana Law with the Secretaries of State
of Kentucky and Indiana following the closing (the "Closing") of the Merger. At
the Effective Time, CFF will merge with and into NCBE, and NCBE will be the
surviving corporation in the Merger and the separate corporate existence of CFF
will terminate. The parties expect that the Effective Time will occur during
the second or third quarter of 1998.
OPINION OF FINANCIAL ADVISOR
CFF engaged Professional Bank Services, Inc. ("PBS") to advise CFF's Board
of Directors as to the fairness of the consideration, from a financial
perspective, to be paid by NCBE in the Merger. PBS delivered a Fairness Opinion
to the Board of Directors on March 9, 1998. PBS has updated the Fairness
Opinion as of the date of this Prospectus/Proxy Statement. A copy of the PBS
Fairness Opinion is attached as Appendix B hereto. For a description of the
analysis performed by PBS in connection with the Fairness Opinion, see "THE
MERGER--Opinion of Financial Advisor to CFF."
REASONS FOR THE MERGER AND RECOMMENDATION OF BOARD OF DIRECTORS
The recommendation of CFF's Board of Directors is based upon a number of
factors, including, but not limited to: the similarities in operating
philosophies and cultures of NCBE and CFF, the loan quality history of NCBE, the
increased opportunities for employees of CFF offered by the affiliation with a
large company, the liquidity for shareholders offered by a publicly traded
company and the tax consequences of the proposed transaction to CFF
shareholders.
THE BOARD OF DIRECTORS OF CFF UNANIMOUSLY RECOMMENDS APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER.
For a discussion of the background of the Merger and the factors considered
by the Board of Directors of CFF in reaching its decision to approve the Merger
Agreement, see "THE MERGER -- Background of the Merger" and "-- Reasons for the
Merger; Recommendation of CFF's Board of Directors."
7
<PAGE>
CONVERSION OF CFF STOCK
As a result of the Merger, each share of CFF Stock issued and outstanding
immediately prior to the Effective Time, other than shares whose holders have
properly exercised their dissenters' rights under the Kentucky Law, will be
converted into the right to receive: 32.0692 shares of NCBE Common for each
share of CFF Common; 49.3545 shares of NCBE Common for each share of CFF A
Preferred; and 39.0000 shares of NCBE Common for each share of CFF B Preferred.
See "THE MERGER -- Conversion of CFF Stock".
No fractional shares of NCBE Common will be issued in the Merger and, in
lieu thereof and as part of the Merger Consideration, each holder of shares of
CFF Stock who would otherwise be entitled to a fractional interest of NCBE
Common (after taking into account all shares of CFF Stock held by such holder)
will be paid an amount in cash equal to the product of such fractional interest
and the average of the means between the highest and lowest per share trading
prices reported by the Nasdaq National Market for the ten trading days ended on
the third trading day prior to the Closing. 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."
For information on how shareholders of CFF will be able to exchange
certificates representing shares of CFF Stock for certificates representing
shares of NCBE Common after the Effective Time, see "THE MERGER -- Procedures
for Exchange of Certificates."
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The Merger Agreement contains various customary representations and
warranties of the parties and covenants that the parties will take or refrain
from taking certain actions prior to the Effective Date. See "THE MERGER --
Representations and Warranties" and "-- Covenants."
The obligations of both parties to consummate the Merger are subject to the
satisfaction or waiver of certain conditions including: (i) approval by CFF's
shareholders; (ii) approval by regulatory authorities having jurisdiction over
the parties or the Merger; (iii) no action taken by governmental authorities to
prevent consummation of the Merger; (iv) the registration statement containing
this Prospectus/Proxy Statement having been declared effective and no stop order
having been issued; (v) the receipt of an opinion of counsel to NCBE as to the
treatment of the Merger as a tax-free reorganization for federal income tax
purposes and (vi) the exchange of outstanding and unexercised options to acquire
CFF Common for options to acquire NCBE Common. The obligations of NCBE are
further conditioned upon, among other things, (i) the continued accuracy of
representations and warranties made by CFF and the absence of any material
adverse change prior to Closing in the business, assets, properties, financial
condition or results of operations of CFF and the Banks, taken as a whole;
(ii) the receipt of an opinion of counsel to CFF as to certain matters relating
to CFF and the Merger; and (iii) the determination by NCBE that the Merger may
be accounted for as a pooling of interests. The obligations of CFF are further
conditioned upon, among other things, (i) the continued accuracy of
representations and warranties made by NCBE; (ii) the receipt of an opinion of
counsel to NCBE as to certain matters relating to NCBE and the Merger; and
(iii) the receipt, as of the date of mailing this Prospectus/Proxy Statement, of
an opinion from PBS to the effect that the Merger is fair, from a financial
viewpoint to the CFF shareholders. See "THE MERGER -- Conditions."
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 CFF
shareholders: (i) by mutual consent of CFF and NCBE; (ii) by CFF, if any of the
conditions to its obligation to consummate the Merger have not been satisfied by
August 31, 1998; or (iii) by NCBE, if any of the conditions to its obligation to
consummate the Merger have not been satisfied by August 31, 1998. See "THE
MERGER -- Termination and Waiver."
8
<PAGE>
REGULATORY APPROVALS
The Merger is subject to approval by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), and by the Kentucky Department of
Financial Institutions (the "KDFI"). Regulatory approval is not anticipated
until after the Special Meeting. See "THE MERGER -- Regulatory Approvals."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. The qualification of the Merger for pooling
of interests accounting is a condition to NCBE's obligation to consummate the
Merger. If such condition is not met, the Merger will not be consummated unless
the condition is waived by NCBE. See "THE MERGER -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
If the Merger so qualifies, no gain or loss will be recognized by the holders of
shares of CFF Stock upon receipt of the Merger Consideration (except for cash
received in lieu of fractional interests of NCBE Common and by shareholders
properly exercising their dissenters' rights). Consummation of the Merger is
conditioned on there being delivered to the parties at the Closing an opinion of
counsel to NCBE to the effect that the Merger will qualify as a tax-free
reorganization.
EACH SHAREHOLDER OF CFF 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 FOREIGN LAWS AND THE POSSIBLE EFFECT OF
CHANGES IN FEDERAL AND OTHER TAX LAWS. SEE "THE MERGER -- CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
DISSENTERS' RIGHTS
The rights of dissenting shareholders of CFF are governed by the Kentucky
Law. Under Kentucky Law, the applicable portions of which are attached hereto
as Appendix B, a shareholder will be entitled to receive, in cash, the fair
value of shares of CFF Stock if such shareholder properly exercises dissenters'
rights. If holders of more than approximately 9% of the outstanding shares of
CFF Stock should properly exercise 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 Merger. See "THE MERGER --
Dissenters' Rights."
9
<PAGE>
SUMMARY COMPARATIVE HISTORICAL AND COMBINED PER SHARE DATA
The following summary presents, for the periods indicated, selected
comparative historical, pro forma combined and pro forma equivalent unaudited
per share data for NCBE and CFF. The pro forma amounts assume that the Merger
had been effective during the periods presented and had been accounted for under
the pooling of interests method of accounting. For a description of the pooling
of interests method of accounting, see "THE MERGER -- Accounting Treatment."
The data presented is not necessarily indicative of the results of the future
operation of the combined organization or the actual results that would have
occurred if the Merger 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
Prospectus/Proxy Statement and with the unaudited pro forma financial statements
included elsewhere in this Prospectus/Proxy Statement. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE," "SELECTED FINANCIAL DATA," "INFORMATION
CONCERNING CFF" and "INDEX TO CFF FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income per common share:
Historical:
NCBE:
Basic $1.72 $1.52 $1.30
Diluted 1.69 1.52 1.30
CFF:
Basic 69.31 56.91 49.07
Diluted 65.42 53.54 46.49
Pro forma combined per share NCBE Common
Basic 1.76 1.54 1.32
Diluted 1.73 1.54 1.31
Equivalent pro forma per share CFF Common (1)
Basic 56.44 49.39 42.33
Diluted 55.48 49.39 42.01
Dividends per common share:
Historical:
NCBE 0.64 0.55 0.40
CFF 6.00 4.40 4.00
Equivalent pro forma per share CFF Common (1) 20.52 17.64 12.83
Book value per common share:
Historical:
NCBE 13.69 12.12 11.71
CFF 329.99 268.91 216.78
Pro forma combined per share NCBE Common 13.25 11.66 11.14
Equivalent pro forma per share CFF Common(1) 424.92 373.93 357.25
</TABLE>
____________
(1) Equivalent pro forma per common share data represents the pro forma per
share data for NCBE multiplied by 32.0692, the number of shares of NCBE
Common to be issued in the Merger for each share of CFF Common.
10
<PAGE>
RISK FACTORS RELATING TO NCBE COMMON
An investment in NCBE Common involves certain risks, including those
described in this Prospectus/Proxy Statement. See "RISK FACTORS RELATING TO
NCBE COMMON."
STOCK PRICE DATA
The following table sets forth as of March 9, 1998 (the last trading day
before the first public announcement of the terms of the proposed acquisition),
the last sale price per share for the NCBE Common and the pro forma equivalent
for a share of CFF Common, CFF A Preferred and CFF B Preferred. There is no
public trading market for any classes of the CFF Stock. See "COMPARATIVE STOCK
PRICES AND DIVIDENDS."
<TABLE>
<CAPTION>
Pro Forma Equivalent*
-----------------------
NCBE Common CFF Stock CFF Common CFF A Preferred CFF B Preferred
----------- --------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Price Per Share
(as of March 9, 1998) $39.00 N/A $1,250.70 $1,924.83 $1,521.00
</TABLE>
____________
*Assumes that each share of CFF Common is converted into 32.0692 shares of NCBE
Common, each share of CFF A Preferred is converted into 49.3545 shares of NCBE
Common, and each share of CFF B Preferred is converted into 39.0000 shares of
NCBE Common.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of the holders of CFF Stock and NCBE Common differ in certain
respects. The rights of the shareholders of CFF who receive shares of NCBE
Common in the Merger will be governed by the Indiana Law and by the Articles of
Incorporation and Bylaws of NCBE. The governing law and constituent documents
of NCBE differ, in several respects, from those which apply to CFF. As a
result, there are material differences between the rights of the holders of CFF
Stock and NCBE Common, including: shareholder votes required for approving
certain business combinations, removing directors, and amending Articles of
Incorporation; the circumstances under which a shareholder may dissent from
corporate action and receive fair value for his or her shares; and certain
Indiana statutory takeover provisions. See "COMPARISON OF SHAREHOLDER RIGHTS."
11
<PAGE>
RISK FACTORS RELATING TO NCBE COMMON
CFF SHAREHOLDERS SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER
INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS/PROXY
STATEMENT, THE FOLLOWING RISK FACTORS IN EVALUATING THE NCBE COMMON TO BE
ISSUED IN THE MERGER. CERTAIN STATEMENTS IN THIS PROSPECTUS/PROXY STATEMENT
AND IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN, INCLUDING, WITHOUT
LIMITATION, THIS SECTION AND "INFORMATION CONCERNING NCBE", CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF NCBE TO DIFFER
MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
SUCH FACTORS INCLUDE, AMONG OTHER THINGS, THE FOLLOWING: THE FACTORS
SET FORTH IN THIS SECTION; GENERAL AND LOCAL ECONOMIC CONDITIONS; RISKS
ASSOCIATED WITH ACQUISITIONS, LEGISLATIVE AND REGULATORY INITIATIVES;
MONETARY AND FISCAL POLICIES OF THE FEDERAL GOVERNMENT; DEPOSIT FLOWS; THE
COST OF FUNDS; GENERAL MARKET RATES OF INTEREST; INTEREST RATES ON COMPETING
INVESTMENTS; DEMAND FOR LOAN PRODUCTS; DEMAND FOR FINANCIAL SERVICES; CHANGES
IN ACCOUNTING POLICIES OR GUIDELINES; AND CHANGES IN THE QUALITY OR
COMPOSITION OF NCBE'S LOAN AND INVESTMENT PORTFOLIOS. NCBE DOES NOT
UNDERTAKE AND SPECIFICALLY DISCLAIMS ANY OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
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 latter's liquidation, reorganization or otherwise will be subject to
the claims of the subsidiaries' 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 that may be paid by
such subsidiaries without prior approval. During 1998, approximately
$3.3 million plus any 1998 net profits can be paid by the banking subsidiaries
to NCBE without prior regulatory approval.
The banking subsidiaries are also subject to legal restrictions which limit
the transfer of funds by any of the banking subsidiaries to NCBE and its
nonbanking subsidiaries, whether in the form of loans, extensions of credit,
investments, asset purchases or otherwise. Such transfers by any banking
subsidiary to NCBE or any of NCBE's nonbanking subsidiaries are limited in
amount to 10% of such subsidiary's capital and surplus and, with respect to NCBE
and all such nonbanking subsidiaries, to an aggregate of 20% of such banking
subsidiary capital and surplus. Furthermore, such loans and extensions of credit
are required to be secured in specified amounts.
RISKS ASSOCIATED WITH ACQUISITIONS
NCBE has experienced significant growth as a result of acquisitions. Since
January 1, 1995, NCBE has acquired ten financial institutions or branches of
financial institutions. As the banking industry continues to consolidate, NCBE
expects to pursue other acquisitions in the future. 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 the assimilation of the operations of the acquired company, a
diversion of management's attention from other business concerns, risks of
entering new geographic markets, the potential loss of key employees of the
acquired company and the 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 can be expected
to increase. NCBE competes with other banking companies for acquisition
opportunities and many of these competitors have greater financial resources and
12
<PAGE>
acquisition experience than NCBE. In addition, the "needs improvement"
rating from a banking regulatory agency received with respect to Year 2000
compliance efforts could adversely affect NCBE's plans to grow by
acquisition. See "INFORMATION CONCERNING NCBE - Recent Developments."
IMPACT OF INTEREST RATE CHANGES
NCBE's results of operations are derived from the operations of its
subsidiaries and are principally dependent on net interest income, calculated
as the difference between interest earned on loans and investments and the
interest expense paid on deposits and other borrowings. Like other banks and
financial institutions, NCBE's interest income and interest expense are
affected by general 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 be effective in avoiding undue interest rate risk.
CREDIT RISK AND LOAN CONCENTRATION
NCBE is exposed to the risk that customers to whom its subsidiaries have
made loans will be unable to repay those loans according to their terms and
that collateral securing such loans (if any) may not be sufficient in value
to assure repayment. Credit losses could have a material adverse effect on
NCBE's operating results.
A primary risk facing NCBE, and financial institutions in general, is
credit risk, that is, the risk of losing principal and interest due to a
borrower's failure to perform according to the terms of such borrower's loan
agreement. As of December 31, 1997, NCBE's total loan portfolio was
approximately $916.4 million or 70.6% of its total assets. The three largest
components of the loan portfolio are real estate loans, $501.9 million or
54.7% of total loans, commercial and industrial loans, $201.4 million or
22.0% of total loans, and consumer loans, $149.5 million or 16.3% 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 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.
REGULATORY RISKS
The banking industry is heavily regulated. These regulations are
primarily intended to protect depositors and the FDIC, not 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 is dependent to a certain
extent upon the general economic conditions of the 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 which
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
13
<PAGE>
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.
14
<PAGE>
SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
This Prospectus/Proxy Statement is being furnished to shareholders of
CFF in connection with the solicitation of proxies by the Board of Directors
of CFF for use at the Special Meeting to be held at the office of the
National Bank located at 102 West Second Street, Maysville, Kentucky, on June
29, 1998, at 11:00 a.m., local time, and at any adjournment or postponement
thereof.
At the Special Meeting, the shareholders of CFF will be asked to
consider and vote upon the approval of the Merger Agreement and the
transactions contemplated thereby, including the Merger of CFF with and into
NCBE.
This Prospectus/Proxy Statement, the attached Notice of Special Meeting
and a Proxy Card for the appropriate class of CFF Stock are first being sent
to shareholders of CFF on or about May 14, 1998.
RECORD DATE
The Board of Directors of CFF has fixed May 1, 1998, as the Record Date
for the determination of shareholders of CFF to receive notice of and to vote
at the Special Meeting. As of the close of business on the Record Date,
there were 41,969 shares of CFF Common, 1,605 shares of CFF A Preferred and
18 shares of CFF B Preferred issued and outstanding. Only holders of CFF
Stock 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 CFF Stock 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 each of the three outstanding classes of CFF
Stock entitled to vote on the Record Date is necessary to constitute a quorum
at the Special Meeting. Pursuant to the Kentucky Law, the affirmative vote
of the holders of a majority of the issued and outstanding shares of each
class, or 20,985 shares of CFF Common, 803 shares CFF A Preferred and 10
shares of CFF B Preferred, is required to approve the Merger Agreement and
the transactions contemplated thereby, including the Merger. Each holder of
CFF Stock is entitled to one vote per share held at the close of business on
the Record Date.
VOTING AND REVOCATION OF PROXIES
Proxies for use by holders of each class of CFF Stock at the Special
Meeting accompany this Prospectus/Proxy Statement. 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 represented by a proxy properly signed
and returned to CFF at, or prior to, 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 and the manner of voting
is not indicated on the proxy, any shares of CFF 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 prior to the voting thereof on the
matters to be considered at the Special Meeting by filing with the Secretary
of CFF 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 CFF proxies should be addressed to Community First Financial,
Inc., One West McDonald Parkway, Suite 3B, Maysville, Kentucky 41056,
Attention: Corporate Secretary. A holder of CFF Stock who previously signed
and returned a proxy and who elects to attend the Special Meeting and 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 CFF 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.
15
<PAGE>
CFF intends to count holders of shares of CFF Stock present in person at
the Special Meeting but not voting, and holders of shares of CFF Stock for
which CFF 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, if any, who hold shares in street name for customers who are the
beneficial owners of such shares are prohibited from giving a proxy to vote
shares held for such customers with respect to the approval of the Merger
Agreement and the transactions contemplated thereby, including the Merger,
without specific instructions from such customers. Since the affirmative
vote of the holders of a majority of the issued and outstanding shares of
each of the three outstanding classes of CFF Stock entitled to vote at the
close of business on the Record Date is required to approve the Merger
Agreement and the transactions contemplated thereby, including the Merger,
such non-voting shares and abstentions and the failure of such customers to
provide specific instructions with respect to their shares of CFF Stock will
have the effect of a vote against the approval of the Merger Agreement.
In the event that sufficient proxies are not obtained to approve 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 which 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 CFF Common
by use of the mail, proxies also may be solicited personally or by telephone
by directors, officers and employees of CFF, who will not be specifically
compensated for such services.
NCBE has agreed to bear the entire cost of printing this
Prospectus/Proxy Statement and all filing fees paid to the Commission and
other regulatory filing fees incurred in connection with the Merger.
THE MERGER
GENERAL
This section of the Prospectus/Proxy Statement 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
Prospectus/Proxy Statement, 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 herein and reference is made thereto for a complete
description of the terms of the Merger. Shareholders of CFF are urged to read
the Merger Agreement in its entirety.
BACKGROUND OF THE MERGER
On December 8, 1997, the directors of CFF met with Michael F. Elliott
and Robert A. Keil, the Chairman of the Board and President, respectively, of
NCBE, together with a representative of CFF's financial advisor, to explore
possible opportunities for combining NCBE and CFF. A second meeting among
these individuals was held at NCBE's corporate office in Evansville, Indiana
on December 29, 1997. No specific transaction terms were discussed at either
of these meetings. After considering NCBE's plan to retain the management,
bank name and Board of Directors of CFF, the CFF Board determined to explore
further a possible combination with NCBE.
Management of CFF also held preliminary discussions with two other
financial institutions regarding their interest in a possible combination
with CFF, one of which was substantially equivalent in market value to NCBE.
Management
16
<PAGE>
of CFF concluded that the operating philosophy and management style of NCBE
was more attractive than either of these other institutions, and no further
discussions were held.
On January 16, 1998, Robert D. Vance, Chairman of the Board of CFF, met
with Mr. Elliott to negotiate the terms of a possible transaction between
NCBE and CFF.
On January 29, 1998, Messrs. Elliott, Keil and Curtis D. Ritterling,
together with Norma J. Linville, visited all of the banking facilities of the
National Bank. On January 30, 1998, Messrs. Elliott, Keil and Ritterling,
together with Clyde A. (Pete) Turner, visited both banking facilities of the
State Bank.
On March 3, 1998, representatives of CFF's financial advisor performed a
due diligence review of NCBE's books and records at NCBE's corporate office
in Evansville.
On March 9, 1998, the CFF Board met to review the terms of the Merger
Agreement. Representatives of CFF's counsel were present at this meeting and
discussed the Merger Agreement in detail with the CFF Board. The CFF Board
also received the written opinion of PBS as to the fairness, from a financial
perspective, of the consideration to be received by the shareholders of CFF
pursuant to the Merger Agreement. The CFF Board then approved the Merger
Agreement.
On March 9, 1998, the Merger Agreement was executed and delivered on
behalf of NCBE and CFF.
REASONS FOR THE MERGER
Among the factors considered by the Board of Directors of CFF in
recommending to CFF shareholders the approval of the Merger Agreement and
Merger were: the similarities in operating philosophies and cultures of NCBE
and CFF, the loan quality history of NCBE, the increased opportunities for
employees of CFF offered by the affiliation with a larger company, the
liquidity for shareholders offered by the stock of a publicly traded company
and the expectation that the Merger will qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code. The Board of Directors of
CFF also considered information concerning the financial condition and
results of operations of NCBE, and the advice of, and financial analysis
prepared by, Professional Bank Services, Inc., including the opinion of
Professional Bank Services, Inc., to the effect that the consideration to be
received by the shareholders of CFF in the Merger is fair from a financial
perspective. The CFF Board of Directors did not assign any relative weights
to the foregoing factors.
OPINION OF FINANCIAL ADVISOR TO CFF
Professional Bank Services, Inc. ("PBS") was engaged by CFF to advise
CFF's Board of Directors as to the fairness of the consideration, from a
financial perspective, to be paid by NCBE to CFF shareholders as set forth in
the Merger Agreement.
Professional Bank Services, Inc. is a bank consulting firm with offices
in Louisville, Atlanta, Chicago, Nashville and Washington, D.C. 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 CFF or NCBE. PBS was
selected to advise CFF's Board of Directors based upon its familiarity with
Kentucky financial institutions and knowledge of the banking industry as a
whole.
PBS performed certain analyses described herein and presented the range
of values for CFF resulting from such analyses to the Board of Directors of
CFF in connection with its advice as to the fairness of the Merger
Consideration.
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A Fairness Opinion of PBS was delivered to the Board of Directors of CFF
on March 9, 1998, at a meeting of the Board of Directors and has been updated
as of the date of this Prospectus/Proxy Statement. A copy of the Fairness
Opinion, which includes a summary of the assumptions made and information
analyzed in deriving the Fairness Opinion, is attached as Appendix B to this
Prospectus/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 CFF and NCBE. PBS
considered certain financial and stock market data of CFF 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 in the states of Kentucky, Indiana, and Ohio that had recently
been effected. PBS also considered such other information, financial
studies, analyses, 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 CFF or NCBE. PBS took
into consideration the results of CFF's solicitation of indications of
interest from other financial institutions concerning their interest in a
possible affiliation with CFF.
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 meetings 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 and 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 as of December 31, 1996 and September
30, 1997; December 31, 1997 reports of Condition and Income and September 30,
1997 Uniform Bank or Thrift Performance Reports for each subsidiary bank;
discussion of pending litigation and other issues with senior management of
NCBE.
PBS reviewed and analyzed the historical performance of CFF and CFF's
wholly owned subsidiaries Community First Bank, of Kentucky, Warsaw, Kentucky
and Community First Bank, National Association, Maysville, Kentucky contained
in: audited Annual Reports and financial statements dated June 30, 1996 and
1997 of the Banks; June 30, 1997 and December 31, 1997 Consolidated Reports
of Condition and Income filed by the Banks with the Federal Reserve; December
31, 1997 consolidated unaudited financial statements of CFF; September 30,
1997 Uniform Bank Performance Report of the Banks; historical common stock
trading activity of CFF; and the premises and other fixed assets. PBS
reviewed and tabulated statistical data regarding the loan portfolio,
securities portfolio and other performance ratios and statistics. Financial
projections were prepared and analyzed as well as other financial studies,
analyses and investigations as deemed relevant for the purposes of this
opinion. In review of the aforementioned information, PBS took into account
its assessment of general market and financial conditions, its experience in
other similar transactions, and its knowledge of the banking industry
generally.
In connection with rendering the Fairness Opinion and preparing its
written and oral presentation to CFF's 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 determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the
separate factors summarized below, PBS believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion.
In performing its analyses, PBS made numerous assumptions with respect to
industry performance, business and economic conditions and other matters,
many of which are beyond CFF's 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
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favorable than suggested by such analyses. In addition, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
process by which businesses actually may be sold.
ACQUISITION COMPARISON ANALYSIS: In performing this analysis, PBS
reviewed all bank acquisition transactions in the states of Kentucky,
Indiana, and Ohio (the "Regional Area") since 1990. There were 151 bank
acquisition transactions in the Regional Area announced since 1990 for which
detailed financial information was available. The purpose of the analysis
was to obtain an evaluation range based on these Regional Area 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 CFF. In addition to reviewing recent Regional Area bank
transactions, PBS performed separate comparable analyses for acquisitions of
banks which, like CFF, had an equity-to-asset ratio between 10.00% and
12.00%, had total assets between $100.0 - $150.0 million, had a return on
average equity ("ROAE") greater than 15.00%, were located in the state of
Kentucky, and bank transactions effected in the Regional Area since January
1, 1996. In addition, median values for the 151 Regional Area acquisitions
expressed as multiples of both book value and earnings were 1.69 and 16.89,
respectively. The median multiples of book value and earnings for
acquisitions of Regional Area banks which, like CFF, had an equity-to-asset
ratio between 10.00% and 12.00% were 1.69 and 17.66, respectively. For
acquisitions of Regional Area banks with assets between $100.0 - $150.0
million the median multiples were 1.85 and 17.72. For Regional Area
acquisitions of banks with a ROAE greater than 15.00%, the median multiples
of book value and earnings were 1.82 and 10.45, respectively. The median
multiples of book value and earnings for acquisitions of banks located in the
state of Kentucky were 1.67 and 14.82, respectively. For bank acquisitions
in the Regional Area since January 1, 1996, the median multiples of book
value and earnings were 1.91 and 21.27, respectively.
In the proposed transaction, CFF shareholders will receive 32.0692
shares of NCBE Common per share of CFF Common. In addition, each of the
1,605 shares of CFF A Preferred will be exchanged for 49.3545 shares of NCBE
Common. Each of the 18 shares of CFF B Preferred will be exchanged at a
ratio of 39.0000 shares of NCBE Common per share of CFF B Preferred. Each of
CFF's 500 common stock options will be exchanged for a NCBE nonqualified
option to purchase 32.0692 shares of NCBE Common at an exercise price which
will be adjusted by dividing the current exercise price by 32.0692, as
further defined in the Merger Agreement. On March 2, 1998 the average of the
bid/ask price for NCBE Common on the National Association of Securities
Dealers Automated Quotation System was $39.75 per share. Using this average
price of $39.75 per share of NCBE Common, the proposed consideration to be
received by all classes of CFF's shares represents an aggregate value of
$57,209,300 or $1,274.75 per share of CFF Common, $1,961.84 per share of CFF
A Preferred and $1,550.25 per share of CFF B Preferred, which represents a
multiple of CFF's December 31, 1997 book value and a multiple of CFF's
December 31, 1997 earnings of 4.04 and 19.75 respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Regional Area comparable
group. Compared to all Regional Area bank transactions, the acquisition value
ranked in the 100th percentile as a multiple of book value and in the 70th
percentile as a multiple of earnings. Compared to Regional Area bank
transactions where the acquired institution had an equity-to-asset ratio
between 10.00% and 12.00%, the acquisition value ranked in the 100th
percentile as a multiple of book value and the 67th percentile as a multiple
of earnings. For Regional Area bank acquisitions where the acquired
institution had between $100.0 - $150.0 million in assets, the acquisition
value ranked in the 100th percentile as a multiple of book value and the 59th
percentile as a multiple of earnings. For Regional Area bank transactions
where the acquired institution had a ROAE greater than 15.00%, the
acquisition value ranked in the 100th percentile for both multiple of book
value and multiple of earnings. For bank transactions in the State of
Kentucky, the acquisition value ranked in the 100th percentile as a multiple
of book value and in the 87th percentile as a multiple of earnings. For
Regional Area transactions effected since January 1, 1996, the acquisition
value ranked in the 100th percentile as a multiple of book value and in the
41st percentile as a multiple of earnings.
ADJUSTED NET ASSET VALUE ANALYSIS: PBS reviewed CFF's balance sheet
data to determine the amount of material adjustments required to the
stockholders' equity of CFF based on differences between the market value of
CFF's assets and their value reflected on CFF's financial statements. PBS
determined that three adjustments were warranted. Equity
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was increased $102,000 to reflect the after tax appreciation in CFF's held to
maturity securities portfolio. Equity was reduced by $1,321,000 to reflect
goodwill on CFF's balance sheet. PBS also reflected a value of the
non-interest bearing demand deposits of approximately $4,651,000. The
aggregate adjusted net asset value of CFF was determined to be $17,675,000 or
$393.31 per Company common share.
DISCOUNTED EARNINGS ANALYSIS: A dividend discount analysis was
performed by PBS pursuant to which a range of values of CFF was determined by
adding (i) the present value of estimated future dividend streams that CFF
could generate over a five-year period and (ii) the present value of the
"terminal value" of CFF's earnings at the end of the fifth year. The
"terminal value" of CFF's earnings at the end of the five-year period was
determined by applying a multiple of 16.89 times the projected terminal
year's earnings. The 16.89 multiple represents the median price paid as a
multiple of earnings for all bank transactions in the Regional Area 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 CFF Common. The aggregate
value of CFF, determined by adding the present value of the total cash flows,
was $42,960,000 or $955.97 per share. In addition, using the five-year
projection as a base, a twenty-year projection was prepared assuming an
annual growth rate of 6.0%, and a return on assets of 2.30% would remain in
effect for the entire period beginning in year 2. Dividends were assumed to
increase from 35.0% of income in years one through five to 65% of income for
years six through twenty. This long-term projection resulted in a aggregate
value of $36,030,000 or $801.75 per share of CFF Common.
SPECIFIC ACQUISITION ANALYSIS: PBS valued CFF based on an acquisition
analysis assuming a "break-even" earnings scenario to an acquiror as to
price, current interest rates and amortization of the premium paid. Based on
this analysis, an acquiring institution would pay in aggregate $34,338,000,
or $764.10 per share, assuming they were willing to accept no impact to their
net income in the initial year. This analysis was based on a funding cost of
7.0% adjusted for taxes, amortization of the acquisition premium over 15
years and an adjusted December 31, 1997 earnings level of $2,902,000. This
analysis was repeated assuming a potential acquiror would attain non-interest
expense reductions of 10% in the transaction. Based on this analysis an
acquiring institution would pay in aggregate $36,493,000 or $812.06 per share
of CFF Common .
PBS analyzed the historical pro forma results of the proposed
transaction and considered the impact on CFF's historical earnings per share,
book value per share and dividends.
The Fairness Opinion is directed only to the question of whether the
Merger Consideration to be received by CFF's shareholders under the Agreement
is fair and equitable from a financial perspective and does not constitute a
recommendation to any CFF shareholder to vote in favor of the affiliation.
No limitations were imposed on PBS regarding the scope of its investigation
or otherwise by CFF.
Based on the results of the various analyses described above, PBS
concluded that the Merger Consideration to be received by CFF's shareholders
under the Merger Agreement is fair and equitable from a financial perspective
to the shareholders of CFF.
PBS will receive fees in the amount of $100,000 for all services
performed in connection with the sale of CFF and the rendering of the
Fairness Opinion. In addition, CFF has agreed to indemnify PBS and its
directors, officers and employees, from liability in connection with the
transaction, and to hold PBS harmless from any losses, actions, claims,
damages, expenses or liabilities related to any of PBS' acts or decisions
made in good faith and in the best interest of CFF.
RECOMMENDATION OF CFF'S BOARD OF DIRECTORS
For the foregoing reasons, the Board of Directors of CFF concluded that
the affiliation through the Merger of CFF with NCBE is in the best interest
of CFF, its shareholders, its community and its other constituents.
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THE CFF BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF CFF
STOCK VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
Certain members of the management and Board of Directors of CFF have
interests in the Merger that are in addition to the interests of shareholders
of CFF generally. 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 CFF 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 CFF
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 which are
required by the Merger Agreement to be filed with the Offices of the
Secretaries of State of the States of Kentucky and Indiana. It is presently
contemplated that the Effective Time will occur during the second or third
calendar quarter of 1998. The Merger Agreement may be terminated by either
party if, among other things, the Closing does not occur on or before August
31, 1998. See "--Termination and Waiver."
CONVERSION OF CFF STOCK
As a result of the Merger, each share of CFF Stock issued and
outstanding immediately prior to the Effective Time, other than shares whose
holders have properly exercised their dissenters' rights under the Kentucky
Law, will be converted into the right to receive the following number of
shares of NCBE Common: 32.0692 shares of NCBE Common for each share of CFF
Common; 49.3545 shares of NCBE Common for each share of CFF A Preferred; and
39.000 shares of NCBE Common for each share of CFF B Preferred.
Each option to purchase CFF Stock (a "CFF Option") outstanding and
unexercised immediately prior to the Effective Time shall be exchanged for a
substitute nonqualified stock option to be issued by NCBE. The substitute
option will permit the holder of a CFF Option to acquire such number of
shares (rounded down to the nearest whole number) of NCBE Common equal to the
product of number of shares of CFF Stock issuable pursuant to such option
multiplied by 32.0692 at an exercise price (rounded to the nearest whole
cent) equal to the per share exercise price applicable to the CFF Option
divided by 32.0692.
No fractional shares of NCBE Common will be issued in the Merger and, in
lieu thereof and as a part of the Merger Consideration, holders of shares of
CFF Stock who would otherwise be entitled to a fractional interest of a share
of NCBE Common (after taking into account all shares of CFF Stock held by
such holder) will be paid an amount in cash equal to the product of such
fractional interest and the average of the means between the highest and
lowest per share trading prices reported by the Nasdaq National Market for
the ten trading days ended on the third trading day prior to the Closing.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of CFF Stock into the right to receive the Merger
Consideration will occur by operation of law at the Effective Time. After
the Effective Time, certificates theretofore evidencing shares of CFF Stock
which may be exchanged for shares of NCBE Common 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.
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Within five (5) business days after the Effective Time, The National
City Bank of Evansville, the exchange agent in the Merger (the "Exchange
Agent"), will send a transmittal letter and instructions to each record
holder of certificates for CFF Stock 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 a fractional
interest of NCBE Common; and the procedures for surrendering such
certificates in exchange for a certificate for NCBE Common. The letter of
transmittal will also specify that delivery will be effected, and risk of
loss and title to the certificates for CFF Stock will pass, only upon proper
delivery of the certificates for CFF Stock to the Exchange Agent and 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 CFF Stock, together with a letter of
transmittal duly executed 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 CFF ARE
REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH LETTER
OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED. Unless and until the
certificates for CFF Stock are surrendered, together with a letter of
transmittal duly executed and any other required documents, dividends or
other distributions on the shares of NCBE Common issuable with respect to
such CFF Stock and cash payments in lieu of financial interests which would
otherwise be payable will not be delivered to the holders of such
certificates and, in such case, upon surrender of the certificates for CFF
Stock, together with a letter of transmittal duly executed and any other
required documents, there will be delivered any cash payment for fractional
interests and dividends or other distributions on such shares of NCBE Common
which became payable between the Effective Time and the time of such
surrender. No interest on any such cash payment or dividends will accrue or
be paid.
If a certificate for CFF Stock has been lost the Exchange Agent will
issue the Merger Consideration properly payable in accordance with the Merger
Agreement 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.
Following a recent examination, a rating of "needs improvement" was
received with respect to NCBE's Year 2000 compliance efforts. If the
examining agency does not issue a more satisfactory rating, Federal Reserve
Board approval will be delayed, perhaps substantially. While NCBE expects to
receive an improved rating in the near future, such improvement cannot be
assured.
The Merger may not be consummated until 30 days after 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
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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 Board regarding the competitive effects of the Merger.
The Merger is also subject to approval by the Kentucky Department of
Financial Institutions ("KDFI") under the following criteria: (i) the terms
of the acquisition are in accordance with the laws of the state; (ii) the
financial condition, or the competence, experience and integrity of the
acquiring company or its principals are such as will not jeopardize the
financial stability of the acquired bank or bank holding company; (iii) the
public convenience and advantage will be served by the acquisition; and (iv)
no federal regulatory authority whose approval is required has disapproved
the transaction because it would result in a monopoly or substantially lessen
competition. The commissioner of the KDFI will approve the Merger within 90
days of submission of a complete application if he finds the forgoing
criteria have been satisfied.
NCBE expects to file applications with the Federal Reserve Board and
KDFI for approval of the Merger as soon as NCBE believes it has addressed any
concerns such agencies may have with respect to NCBE's Year 2000 compliance
efforts. Approval is not anticipated until after the Special Meeting and
there can be no assurance thereof.
DISSENTERS' RIGHTS
The rights of CFF shareholders who choose to dissent from the Merger are
governed by the provisions of the Kentucky Law. A copy of the provisions of the
Kentucky Law governing dissenters' rights (KRS 271B.13-010 to 271B.13-280) is
attached hereto as Appendix C.
Any shareholder who wishes to assert dissenters' rights must deliver to
CFF a written notice indicating that shareholder's intent to demand payment
for his or her shares if the Merger is effectuated. This notice should be
addressed to Community First Financial, Inc., One West McDonald Parkway,
Suite 3B, Maysville, Kentucky 41056. The shareholder's notice must be
delivered to CFF 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
beneficially own. Shareholders who own shares beneficially but not of record
must, in addition to the other requirements described herein, submit to CFF
the consent of the record holder 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 Merger will not be entitled to
payment for his shares as a dissenting shareholder under the Kentucky Law.
If the Merger is approved at the special meeting, CFF will deliver a
written dissenters' notice to all shareholders who satisfied the requirements
set forth above. 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 certificated
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 occurred on March 10,
1998 with respect to the Merger, 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 CFF
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 Kentucky Law 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 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 under the dissenters' statute, but shall be entitled to receive the
Merger Consideration.
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If a dissenting shareholder was the beneficial owner of his shares on or
before the date of the first announcement to news media or to shareholders of
the terms of the proposed merger (a "Pre-announcement Shareholder"), which
occurred on March 10, 1998 with respect to the Merger, the Kentucky Law
requires CFF to pay such shareholder the amount CFF estimates to be the fair
value of his shares plus accrued interest. Payment shall be made as soon as
the Merger is consummated and must be accompanied by year-end and interim
financial statements of CFF, a statement of CFF's estimate of the fair value
of the shares, an explanation of how interest was calculated, a statement of
the dissenting shareholder's right to demand payment, and a copy of the
provisions of the Kentucky Law pertaining to dissenters' rights. If a
dissenting shareholder was not the beneficial owner of his shares prior to
the date of the first announcement to the news media or to shareholders of
the proposed Merger (a "Post-announcement Shareholder"), CFF may elect to
withhold payment of the fair value of the dissenting shareholder's shares.
To the extent such payment is withheld, CFF is required to estimate the fair
value of the dissenting shareholder's rights plus interest 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 CFF's estimate of value, an explanation of how interest was
calculated and a statement of the dissenting shareholder's right to demand
payment under the Kentucky Law.
The Kentucky Law provides that a dissenting shareholder may notify CFF
in writing of his estimate of the fair value of his shares and interest due
and demand payment of the amount of such estimate (less any payment already
made by CFF), or reject CFF'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, or if
the interest due is incorrectly calculated, (ii) CFF 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, CFF 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 CFF in
writing within 30 days after CFF made or offered payment for the dissenter's
shares.
If a demand for payment by a dissenting shareholder remains unsettled
within 60 days after CFF's receipt of the demand for payment, CFF must
commence a proceeding in the circuit court of Mason County, Kentucky and
petition the court to determine the fair value of the shares and accrued
interest. If such a proceeding is not commenced within the 60-day period,
CFF 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 CFF 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 CFF elected to
withhold payment in the case of a Post-announcement Shareholder. The court
in an appraisal proceeding will determine and assess the costs of the
proceeding, including the compensation and expenses of court-appointed
appraisers, against TBI, except the court may assess costs against dissenters
to the extent the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment. The court may also assess fees and expenses of
attorneys and experts for the parties against CFF if the court finds that CFF
did not substantially comply with the requirements of the Kentucky Law
regarding dissenters' rights, or against any party if the court finds that
such party acted arbitrarily, vexatiously or not in good faith. The Kentucky
Law 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 CFF.
If the holders of more than approximately 9% of the outstanding shares
of CFF Stock 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 KENTUCKY LAW RELATING TO THE RIGHTS OF DISSENTING
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SHAREHOLDERS OF CFF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
EXCERPTS FROM THE KENTUCKY LAW INCLUDED HEREIN AS APPENDIX C.
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) delivery 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; 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 CFF relate to, among other
things: (i) the organization, good standing and corporate power of CFF, the
capitalization of CFF, the organization and good standing of the Banks, and
the capitalization of the Banks; (ii) the authorization, execution and
delivery of the Merger Agreement and the Merger Agreement's noncontravention
of charter documents of CFF and the Banks; (iii) ownership and organization
of subsidiaries; (iv) delivery of audited financial statements of the Banks
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 $100,000 to which CFF or either of the Banks is a
party; (vii) ownership of real estate; (viii) the absence of any material
adverse change in the financial condition, properties, results of operations
or capitalization of CFF or either of the Banks; (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 CFF or either of the Banks and the absence of any
investigations, actions or other legal proceedings involving any director,
officer or employee of CFF or the Banks; (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;
(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; and (xviii) the absence of any untrue statements or
omissions of material fact on the part of CFF 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 and keep CFF informed of the status of such applications; (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) list the shares of
NCBE Common to be issued in the Merger on the Nasdaq National Market; (iv)
provide CFF with access during regular business hours to books and records
relating to NCBE's assets, properties, operations and liabilities; (v) elect
Robert D. Vance, the Chairman of the Board of CFF, as a director of NCBE; and
(vi) take certain actions with respect to the exchange of options to acquire
NCBE Common for unexercised options to acquire CFF Common. See "-- Interests
of Certain Persons in the Merger."
The covenants made by CFF include, among other things, agreements by CFF
to: (i) conduct its and the Banks' businesses 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
25
<PAGE>
may have a material adverse effect on the financial condition, operations,
business or assets of CFF and the Banks or would interfere with CFF'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 $2,000,000, make any capital expenditures except for
repairs, renewals or replacements in excess of $50,000 individually or
$250,000 in the aggregate, issue, sell or redeem any capital stock of CFF or
the Banks, pay cash dividends on the CFF Common in excess of $3.00 per share
payable semi-annually and cash dividends on the CFF A Preferred in excess of
$5.625 per share payable semi-annually (however, holders of CFF Stock may for
any given quarter only receive cash dividends attributable either to CFF or
NCBE, not both), amend the articles of incorporation or by-laws or similar
documents of CFF or the Banks, enter into or amend an employment agreement,
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 CFF's and the
Banks' assets, properties, operations and liabilities; (viii) provide NCBE
with copies of certain reports to the Boards of Directors of CFF or the Banks
and confer with NCBE on the general status of ongoing operations; (ix) notify
NCBE of any material change in the operations or certain complaints,
investigations or threatened litigation; (x) furnish NCBE with the
information in CFF'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 is
an officer, director or the owner of 5% or more of outstanding shares of each
class of CFF Stock, an agreement regarding transfers of NCBE Common following
the Merger; and (xii) cause a special meeting of CFF shareholders to be held
and recommend approval of the Merger Agreement and the Merger.
CONDITIONS TO THE MERGER
In addition to the approval of CFF 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; (v) the receipt of an opinion of Baker &
Daniels to the effect that the Merger will constitute a tax-free
reorganization for federal income tax purposes; and (vi) the exchange of
options to acquire NCBE Common for unexercised options to acquire CFF Common.
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 CFF in the Merger Agreement, the
performance or satisfaction in all material respects of all covenants to be
performed by CFF 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 CFF and the Banks, taken as a
whole; (ii) the receipt of or opinion of counsel to CFF as to certain matters
relating to CFF and the Merger; (iii) the determination by NCBE that the
Merger may be accounted for as a pooling of interests; and (iv) CFF's taking
of any actions requested by NCBE with respect to the resolution of certain
matters relating to CFF's employee benefit plans.
The obligation of CFF 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 condition or results of operations of NCBE and its subsidiaries,
taken as a whole; (ii) the receipt of an opinion of counsel to NCBE as to
certain matters relating to NCBE and the Merger; and (iii) the receipt, as of
the date of mailing this Proxy Statement/Prospectus, of an opinion from PBS
to the effect that the Merger is fair from a financial viewpoint, to the CFF
shareholders.
26
<PAGE>
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
CFF shareholders: (i) by mutual consent of CFF and NCBE; (ii) by CFF, if any
of the conditions to its obligation to consummate the Merger have not been
satisfied by August 31, 1998; or (iii) by NCBE, if any of the conditions to
its obligation to consummate the Merger have not been satisfied by August 31,
1998.
CFF 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 CFF shareholders, to the extent authorized by applicable law.
NO SOLICITATION; FEES AND EXPENSES
The Merger Agreement prohibits CFF, 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 CFF, the Bank, or all or substantially all of their assets,
unless CFF'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. CFF is
required to communicate to NCBE the terms of any such proposal.
Except as 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax ("federal income tax") consequences of the Merger to certain CFF
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 CFF
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 CFF 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 CFF Stock 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 CFF 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 CFF Stock are held
as capital assets (within the meaning of Section 1221 of 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) CFF shareholders will recognize no gain or loss as a result of
the exchange of their CFF Stock 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 CFF shareholder in the Merger (including only fractional
shares 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
CFF Stock surrendered.
27
<PAGE>
(iii) The holding period of the shares of NCBE Common received by
each CFF shareholder in the Merger (including only fractional shares of
NCBE Common deemed to be received, as described in paragraph (iv) below)
will include the holding period of the shares of CFF Stock exchanged
therefor.
(iv) A CFF 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 than 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 CFF 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, CFF and
certain shareholders of CFF. 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 opinion. Neither NCBE nor CFF 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 CFF
Stock 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 CFF WITHOUT REGARD TO THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S TAX SITUATION AND
STATUS. EACH SHAREHOLDER OF CFF 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 this method of
accounting, the assets and liabilities of NCBE and CFF 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 CFF for the entire fiscal year in which the Merger
occurs, the separately reported income of NCBE and CFF for prior periods will
be combined and restated as consolidated income of NCBE, and no goodwill will
be recognized.
The Merger Agreement provides that a condition to the obligation of NCBE
to consummate the Merger is that NCBE determine that the Merger will qualify
as a pooling of interests. In the event such condition is not met, the
Merger would not be consummated unless the condition was waived by NCBE. As
of the date of this Prospectus/Proxy Statement, NCBE and CFF are not aware of
any existing facts or circumstances which would preclude the Merger from
qualifying as a pooling of interests.
28
<PAGE>
The unaudited pro forma financial information contained in this
Prospectus/Proxy Statement 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 CFF
shareholder who may be deemed to be an "affiliate" of NCBE for purposes of
Rule 144 under the Securities Act or an "affiliate" of CFF for purposes of
Rule 145 under the Securities Act. Persons who may be deemed to be
affiliates of CFF or NCBE generally include individuals who, or entities
which, control, are controlled by or are under common control with CFF or
NCBE and will include directors and certain officers of CFF and NCBE and may
include principal shareholders of CFF 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 CFF 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.
The ability of affiliates to resell shares of NCBE Common received in
the Merger under Rule 144 or 145 under the Securities Act as summarized
herein 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 pursuant to an effective registration statement under the
Securities Act or another available exemption 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 CFF will obtain and deliver to NCBE
an agreement from each person who is an officer, director or the owner of 5%
or more of each outstanding class of CFF Stock providing that such person
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 CFF Stock 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 CFF after the Merger have been published.
This Prospectus/Proxy Statement does not cover resales of shares of NCBE
Common received by any person who may be deemed to be an affiliate of CFF or
NCBE.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the CFF Board of Directors have certain interests in
the transactions contemplated by the Merger Agreement that are in addition to
their interests as CFF shareholders, including those referred to below.
29
<PAGE>
In the Merger Agreement, NCBE has agreed to elect Robert D. Vance as a
director of NCBE after the Effective Time.
Clyde A. (Pete) Turner, a director of CFF, holds options to purchase an
aggregate of 400 shares of CFF Common. Two hundred options are expected to be
exercised prior to the Effective Time. See "THE MERGER -- Conversion of CFF
Stock."
30
<PAGE>
SELECTED FINANCIAL DATA
The following tables present selected unaudited consolidated historical
financial data for NCBE and pro forma combined amounts reflecting the Merger.
The pro forma amounts assume that the Merger had been effective during the
periods presented. The data presented is derived from the consolidated
financial statements of NCBE and CFF and should be read in conjunction with
the more detailed information and financial statements included herein or
incorporated by reference in this Prospectus/Proxy Statement and with the
unaudited pro forma financial statements included elsewhere in this
Prospectus/Proxy Statement. The pro forma amounts may not be indicative of
the results that actually would have occurred if the Merger had been in
effect on the dates indicated. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE," "INFORMATION CONCERNING CFF" AND "INDEX TO CFF FINANCIAL
STATEMENTS."
NCBE - HISTORICAL
(Dollar amounts other than per share data in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income $51,995 $48,606 $44,433 $39,933 $38,010
Provision for loan losses 1,891 2,704 399 78 736
-----------------------------------------------------------------
Net interest income after provision
for loan losses 50,104 45,902 44,034 39,855 37,274
Noninterest income 10,088 8,606 7,117 5,209 6,707
Noninterest expense 34,390 29,966 28,968 28,644 28,343
-----------------------------------------------------------------
Income before income taxes 25,802 24,542 22,183 16,420 15,638
Income taxes 7,451 8,046 7,784 5,668 4,861
------- ------- ------ ------- -------
Net income $18,351 $16,496 $14,399 $10,752 $10,777
------- ------- ------ ------- -------
------- ------- ------ ------- -------
PER SHARE DATA
Net income
Basic $1.72 $1.52 $1.30 $0.97 $0.97
Diluted 1.69 1.52 1.30 0.97 0.97
Book value 13.69 12.12 11.71 10.47 10.23
Cash dividends declared 0.64 0.55 0.40 0.40 0.38
SUMMARY OF FINANCIAL CONDITION
Total assets $1,298,260 $1,172,057 $1,081,921 $1,004,160 $993,468
Securities 279,328 282,894 258,895 268,103 269,098
Loans 916,356 800,622 736,997 645,235 579,556
Deposits 964,046 913,350 864,136 849,306 844,808
Shareholders' equity 146,803 129,694 130,606 114,750 113,975
SELECTED FINANCIAL RATIOS
Net income to average assets 1.47% 1.48% 1.40% 1.09% 1.09%
Net income to average equity 13.42 12.89 11.74 9.39 9.79
Cash dividend payout ratio 36.74 37.05 30.05 36.77 31.65
Average equity to average assets 10.98 11.48 11.93 11.59 11.14
Weighted average shares (basic) 10,679,448 10,843,295 11,095,116 11,040,906 11,146,280
Weighted average shares (diluted) 10,832,943 10,843,295 11,095,116 11,040,906 11,146,280
</TABLE>
31
<PAGE>
NCBE - CFF PRO FORMA
(Dollar amounts other than per share data in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1997 1996 1995
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income $58,868 $54,810 $50,127
Provision for loan losses 1,893 2,855 503
Net interest income after provision
for loan losses 56,975 51,955 49,624
Noninterest income 11,262 9,759 8,324
Noninterest expense 38,130 33,621 32,681
Income before income taxes 30,107 28,093 25,267
Income taxes 8,870 9,224 8,797
Net income 21,237 18,869 16,470
PER SHARE DATA
Net income
Basic 1.76 1.54 1.32
Diluted 1.73 1.54 1.31
Book value 13.25 11.66 11.14
Cash dividends declared
0.83 0.69 0.52
SUMMARY OF FINANCIAL CONDITION
Total assets 1,428,819 1,296,474 1,199,764
Securities 296,564 298,008 275,622
Loans, net 1,010,314 890,267 818,185
Deposits 1,077,283 1,020,686 964,971
Shareholders' equity 160,938 141,214 139,962
SELECTED FINANCIAL RATIOS
Net income to average assets 1.55% 1.53% 1.45%
Net income to average equity 14.18% 13.61% 12.61%
Dividend payout ratio 32.76% 33.31% 27.26%
Average equity to average assets 10.91% 11.23% 11.50%
Weighted average shares (basic) 12,087,900 12,254,321 12,523,209
Weighted average shares (diluted) 12,250,278 12,266,122 12,527,859
End of period shares outstanding-Proforma 12,144,898 12,113,550 12,563,150
NCBE only 10,727,247 10,702,198 11,152,316
NCBE dividend declared 0.64 0.55 0.40
CFF pro forma shares 1,417,651 1,411,352 1,410,834
CFF dividend on pro forma shares 0.19 0.14 0.12
</TABLE>
32
<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 CFF Common. The following table only sets forth information regarding
those transactions as to which management of CFF has knowledge of the prices
paid. Because of the lack of a public trading market for shares of CFF Common,
the prices indicated may not reflect the prices which would be paid for such
shares on such a market.
<TABLE>
<CAPTION>
NCBE Common CFF 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 --- --- ---
Second Quarter 25.17 26.76 0.14 1/2 --- --- $2.20
Third Quarter 25.17 26.42 0.14 1/2 --- --- ---
Fourth Quarter 25.40 28.57 0.15 --- --- 2.20
1997
First Quarter 27.86 32.26 0.15 1/4 --- --- ---
Second Quarter 30.24 40.24 0.15 1/4 --- --- 3.00
Third Quarter 38.57 41.67 0.15 1/4 $250 $300 ---
Fourth Quarter 40.00 51.19 0.18 --- --- 3.00
1998
First Quarter 38.50 45.50 0.18 --- --- ---
Second Quarter(2) 39.75 45.00 ---- --- --- ---
____________
</TABLE>
(1) Although there may have been private transactions involving CFF Common
during these periods that are not reflected in the table, neither CFF nor
any members of its management were parties to such transactions.
(2) Through May 11, 1998.
On March 9, 1998, the last trading day before the first public
announcement of the terms of the proposed acquisition, the closing sale price
of NCBE Common, was $39.00 per share. Based upon the per share price of NCBE
Common on such date, the equivalent per share price of CFF Common was
$1,250.70, of CFF A Preferred, $1,924.83, and of CFF B Preferred, $1,521.00.
The equivalent per share price for CFF 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 CFF Stock in the Merger, or
32.0692 for CFF Common, 49.3545 for CFF A Preferred, and 39.0000 for CFF B
Preferred.
On May 11, 1998, the closing sale price of NCBE Common was $41.00
per share. Based on the per share price of NCBE Common on such date, the
equivalent per share price of CFF Common was $1,314.84, of CFF A Preferred,
$2,023.53, and of CFF B Preferred, $1,599.00.
As of May 1, 1998, there were 2,505 holders of record of NCBE Common, 45
of CFF Common, 41 of CFF A Preferred and 9 of CFF B Preferred.
Both NCBE and CFF 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 CFF are advised to obtain current market quotations for
NCBE Common.
33
<PAGE>
INFORMATION CONCERNING NCBE
BUSINESS
NCBE was organized in 1985 as a bank holding company for The National
City Bank of Evansville ("NCB") which remains NCBE's principal banking
subsidiary. As of March 6, 1998, NCBE owned 12 commercial banks, including
NCB, one savings bank, a leasing subsidiary, and a property management
company. As of December 31, 1997, NCBE had total consolidated assets of $1.3
billion, total loans of $916.4 million, total deposits of $964.0 million, and
total shareholders' equity of $146.8 million. NCBE's 13 financial
institution subsidiaries serve 33 communities from 44 locations and provide a
wide range of banking services in the tri-state area of Indiana, Kentucky,
and Illinois surrounding Evansville, Indiana.
RECENT DEVELOPMENTS
The following is a brief description of the two 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.
VERNOIS BANCSHARES, INC. On March 6, 1998, NCBE acquired Vernois
Bancshares, Inc. ("VBI"), 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 VBI. 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.
The following is a brief description of the terms of two other pending
acquisitions:
ILLINOIS ONE BANK, NATIONAL ASSOCIATION. NCBE is a party to an
Agreement and Plan of Merger dated December 15, 1997 with 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. The agreement relates
to the acquisition of IOBI in a merger transaction in which up to 577,417
shares of NCBE Common would be issued. As of December 31, 1997, IOB had
total assets of $88.1 million, net loans of $48.4 million, total deposits of
$76.4 million and total shareholders' equity of $10.9 million. The
acquisition is subject to the approval of the shareholders of IOBI and the
Federal Reserve. The acquisition is expected to qualify for the pooling of
interests method of accounting. The parties expect to close the merger in
the second quarter of 1998.
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 CFF in a merger transaction in which up to
736,278 shares of the NCBE Common would be issued. As of December 31, 1997,
TCFB had total assets of $96.4 million, net loans of $52.1 million, total
deposits of $72.5 million and total shareholders equity of $8.5 million. The
acquisition of CFF is subject to the approval of the shareholders of TBI, the
Federal Reserve and the KDFI. The acquisition is expected to qualify for the
pooling of interests method of accounting. The parties expect to close the
merger in the second or third quarter of 1998.
THE RIPLEY COUNTY BANK. NCBE is a party to an Agreement and Plan of
Merger dated April 21, 1998, with Hoosier Hills Financial Corporation
("HHFC"), the holding company for The Ripley County Bank ("RCB"), an Indiana
banking corporation, which has offices in Milan, Osgood, and Versailles,
Indiana. The agreement relates to the acquisition of HHFC in a merger
transaction in which up to 775,625 shares of NCBE Common (subject to increase
34
<PAGE>
under certain circumstances, at NCBE's election) would be issued. As of
December 31, 1997, RCB had total assets of $108.9 million, net loans of $86.6
million, total deposits of $85.7 million and total shareholders' equity of
$11.3 million. The acquisition is subject to the approval of the
shareholders of HHFC and the Federal Reserve. 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.
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 preferred trust securities. The Trust used the proceeds of
the public offering and funds from NCBE to purchase $35.6 principal amount of
subordinated debentures issued by NCBE. NCBE used the net proceeds it
received from the sale of its subordinated debentures to repay indebtedness
incurred in the acquisition of VBI discussed above.
YEAR 2000 ISSUE
The year 2000 has posed a unique set of challenges to those 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.
In 1996, NCBE started the process of identifying the hardware and
software issues required to be addressed to assure year 2000 compliance.
NCBE began by assessing the issues related to the year 2000 and the potential
for those issues to adversely affect NCBE's own operations and those of its
subsidiaries. Since that time, NCBE has established a Year 2000 Compliance
Team (the "Team") composed of representatives from key areas throughout the
organization. It is the mission of this Team to identify areas subject to
complications related to the year 2000 and to initiate remedial measures
designed to eliminate any adverse effects on NCBE's operations. The Team has
identified all mission-critical software and hardware that may be adversely
affected by the year 2000 and has required vendors to represent that the
systems and products provided are or will be year 2000 compliant. Management
of NCBE expects that all mission critical software will be upgraded to
achieve year 2000 compliance and tested by December 31, 1998. In addition,
the Team is developing contingency plans to address systems which do not
become year 2000 compliant by December 31, 1998.
NCBE is committed to a plan for achieving compliance, focusing not only
on its own data processing systems, but also on its customers. The Team has
taken steps to educate and assist its customers with identifying their year
2000 compliance problems. In addition, the Team has proposed policy and
procedure changes to help identify potential risks to NCBE and to gain an
understanding of how customers are managing the risks associated with the
year 2000.
Management of NCBE 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. Following a recent examination, a rating of "needs
improvement" was received with regard to NCBE's Year 2000 compliance efforts.
If the examining agency does not issue a more satisfactory rating, NCBE will
not qualify for expedited processing of regulatory applications seeking
approval of future acquisitions or such approvals may only be given subject
to additional conditions. While management expects to devote sufficient
corporate resources to address regulatory concerns in this area, there can be
no assurance that Year 2000 compliance issues will not delay the consummation
of this acquisition,
35
<PAGE>
any other pending acquisitions (other than the acquisition of Illinois One
Bank, N.A., which was approved by the Federal Reserve on March 12, 1998) or
future acquisitions or otherwise adversely affect NCBE's ability to continue
to grow through acquisition.
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 1,441,862
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 60,678 (1) * 60,678 *
Michael F. Elliott 340,829 (2) 3.2% 340,829 2.8%
Susanne R. Emge 24,479 (3) * 24,479 *
Donald G. Harris 12,042 * 12,042 *
H. Ray Hoops 848 * 848 *
Robert A. Keil 57,177 (4) * 57,177 *
John D. Lippert 71,797 (5) * 71,797 *
Ronald G. Reherman 9,065 (6) * 9,065 *
Curtis D. Ritterling 151 (7) * 151 *
Laurence R. Steenberg 29,402 (8) * 29,402 *
Richard F. Welp 3,686 (9) * 3,686 *
All directors and executive
officers as a group
(12 persons) 610,154 (10) 5.6% 610,154 4.9%
</TABLE>
____________
* Less than 1%.
(1) Includes 56,268 shares with shared voting and investment power with spouse
and 4,410 shares that may be purchased pursuant to options exercisable
within 60 days.
(2) Includes 252,784 shares with sole voting and investment power;
18,318 shares with shared voting and investment power with spouse;
20,726 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 2,020 shares with sole voting and investment power; 14,829 shares
with shared voting and investment power with spouse; and 7,630 shares with
sole voting and investment power by spouse.
(4) Includes 11,424 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 3,386 shares with sole voting and investment power; and
5,679 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 1,492 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.
36
<PAGE>
INFORMATION CONCERNING CFF
BUSINESS
CFF was incorporated under the laws of the Commonwealth of Kentucky on
February 20, 1980 to act as a bank holding company. On August 31, 1994,
Community Independent Bancorp, Inc. and Community First Financial, Inc.
merged with and into CFF. The State Bank is a Kentucky banking corporation
that commenced business in 1922. The National Bank is a national banking
association that commenced business in 1847. The business of CFF consists
solely of the ownership, supervision and control of the Banks. The State
Bank has two banking offices located in Warsaw and Dry Ridge, Kentucky. The
National Bank has six banking offices located in Maysville (2), May's Lick
and Mount Olivet, Kentucky, and Ripley and Aberdeen, Ohio. As of December
31, 1997, CFF had, on a consolidated basis, total assets of $130.6 million,
net loans of $101.9 million, total deposits of $113.2 million, and total
shareholders' equity of $14.1 million.
SELECTED FINANCIAL DATA OF CFF
The selected consolidated data presented below under the captions "Selected
Statement of Income Data" and "Selected Balance Sheet Data" for and as of the
two years ended June 30, 1997 and 1996 have been derived from the
consolidated financial statements of CFF, which consolidated financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The selected consolidated data presented below for the
six-month periods ended December 31, 1997 and 1996 are derived from the
unaudited consolidated financial statements of CFF included elsewhere in this
Prospectus/Proxy Statement. This data should be read in conjunction with
CFF's Consolidated Financial Statements and the Notes thereto and "--
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Six Month Period Year Ended
Ended December 31, June 30,
------------------ -----------
(unaudited)
(Dollar amounts other than
per share data in thousands) 1997 1996 1997 1996
----- ---- ---- -----
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA
Net interest income $3,504 $3,200 $6,597 $6,009
Provision for loan losses (9) 66 77 173
Noninterest income 555 558 1,148 1,261
Noninterest expense 1,878 1,884 3,746 3,599
Income before income taxes 2,190 1,808 3,922 3,498
Income taxes 711 600 1,307 1,197
Net income $1,479 $1,208 $2,615 $2,301
Net income -- Basic $35.57 $28.96 $62.71 $54.93
-- Diluted 33.54 27.23 59.17 51.84
Book value 329.99 268.91 299.47 242.03
Cash dividends declared 3.00 2.20 5.20 4.20
SELECTED BALANCE SHEET DATA
Loans $103,172 $98,085 $104,773 $92,884
Allowance for loan losses 1,245 1,252 1,288 1,220
Securities 17,236 15,021 11,923 12,565
Total assets 130,559 125,190 126,183 117,107
Deposits 113,237 108,109 108,713 100,001
Long-term debt 1,515 3,738 2,431 4,786
Stockholders' equity 14,135 11,520 12,783 10,408
SELECTED FINANCIAL RATIOS
Net income to average assets 2.3% 2.0% 2.1% 2.0%
Net income to average equity 21.6 21.3 22.1 24.1
Cash dividend payout 8.5 7.6 8.3 7.6
Average equity to average assets 10.6 9.2 9.6 8.2
Tangible equity to tangible assets 9.9 8.1 4.1 7.7
Total capital to risk weighted assets 14.7 12.2 13.1 10.9
OTHER DATA
Weighted average shares -- Basic 41,323 41,396 41,398 41,540
-- Diluted 44,093 44,361 44,195 44,384
</TABLE>
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this discussion is to provide an analysis of the consolidated
financial condition and results of operations of CFF and subsidiaries. This
discussion should be read in conjunction with CFF's consolidated financial
statements and accompanying notes appearing elsewhere in this
Prospectus/Proxy Statement.
YEARS ENDED JUNE 30, 1997 AND 1996
RESULTS OF OPERATIONS
Net income was $2,615 or $59.17 per share (diluted) for the years ended
June 30, 1997, compared to $2,301 or $51.84 (diluted) for 1996, an increase
of 14.1% in diluted income per share. The increase in income was primarily
attributable to increased net interest income of $573,000 (taxable equivalent
basis), offset primarily by increased non-interest expenses of $147,000.
The following paragraphs provide a more detailed analysis of the
significant factors affecting operating results.
NET INTEREST INCOME
Net interest income was $6.7 million and $6.1 million for 1997 and 1996
(taxable equivalent basis), respectively, an increase of 9.4%. This increase
resulted from an increase in average earning assets and net interest spread.
Average earning assets increased $6.6 million (6.1%) to $114.4 million. Net
interest spread and margin were 5.10% and 5.85%, respectively in 1997 and
4.96% and 5.68%, in 1996.
The following table sets forth the changes in net interest income due to
changes in rates (computed on a taxable equivalent basis) and changes in volume
for 1997 and 1996. Taxable equivalent rates are based on a 34% tax rate. The
change in interest due to both rate and volume has been allocated to the change
due to volume and change due to rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
Taxable Equivalent Rate/Volume Analysis
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997/1996 1996/1995
--------- ---------
Increase (decrease) due to Increase (decrease) due to
Net change Rate Volume Net change Rate Volume
---------- ---- ------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $876 (140) 1,016 2,039 (10) 2,049
Securities:
Taxable (181) (132) (49) 55 43 12
Tax exempt (44) 3 (47) 4 (25) 29
Federal funds sold (33) 86 (119) 92 (19) 111
Interest bearing deposits (23) (3) (20) 11 (8) 19
---------- ---- ------ ------ ----- ------
Total interest income 595 (186) 781 2,201 (19) 2,220
---------- ---- ------ ------ ----- ------
Deposits: demand (29) (5) (24) (3) (69) 66
savings (12) (14) 2 19 (16) 35
time 237 (123) 360 943 212 731
Federal funds purchased
and securities sold under
agreements to repurchase (7) (8) 1 3 6 (3)
FHLB advances 14 8 6 51 8 43
Notes payable (181) (7) (174) 19 5 14
---------- ---- ------ ------ ----- ------
Total interest expense 22 (149) 171 1,032 146 886
---------- ---- ------ ------ ----- ------
Net interest income $573 (37) 610 1,169 (165) 1,334
---------- ---- ------ ------ ----- -------
---------- ---- ------ ------ ----- -------
</TABLE>
38
<PAGE>
PROVISION FOR LOAN LOSSES
Management considers the overall quality of the loan portfolio, previous
loss experience, the size and composition of the loan portfolio and an
assessment of current economic conditions on borrowers in determining the
provision for loan losses. CFF's loan quality is good and charge-off history
has been nominal. The provisions for loan losses of $77,000 and $173,000 for
the years ended June 30, 1997 and 1996, respectively, resulted in ratios of
the allowance to total loans of 1.23% and 1.31% at June 30, 1997 and 1996,
respectively, and were considered sufficient, in management's opinion, to
maintain the allowance at an adequate level.
NON-INTEREST INCOME AND EXPENSES
Non-interest income decreased $113,000 from 1996 to 1997. The
significant reasons for the decrease were due to 1996 gains on the sale of a
branch and sales of premises and equipment, amounting to $112,000 and
$68,000, respectively, offset partially by a loss on disposition of other
real estate amounting to $45,000 during 1996. The largest component of
non-interest income is service charges on deposits, which increased 3% in
1997 compared to 1996.
Non-interest expenses increased $147,000 (4.1%) in 1997 compared to
1996. The increase was primarily attributable to increases in salaries and
employee benefits of $197,000, or 10.4% This increase was attributable to
normal salary increases, bonuses and staff additions. There were no
individually significant increases in the other categories of non-interest
expenses. CFF's efficiency ratios were 47.8% and 48.8%, respectively.
INCOME TAXES
CFF's effective income tax rates were 33.3% and 34.2%, respectively, for
1997 and 1996, compared to the statutory federal income rate of 34%.
FINANCIAL CONDITION
Consolidated total assets increased from $117.1 million at June 30, 1996
to $126.2 million at June 30, 1997, an increase of $9.1 million or 7.8%.
Average assets increased 6.0%, or $7.0 million, to $123.8 million.
The growth in average assets was primarily in loans and deposits.
Average loans increased $10.2 million (11.6%) during 1997. Average deposits
increased $6.6 million (6.7%). The majority of the increase in average
deposits was an $6.8 million (12.9%) increase in time deposits. These
increases were significantly attributable to increased market share due to
establishing a branch office in Maysville and aggressive marketing efforts.
CFF's loan to deposit ratios were 96.4% and 92.9% at June 30, 1997 and
1996, and averaged 92.5% and 87.3% for the years ended June 30, 1997 and
1996. The increase in those amounts and ratios are due primarily to
aggressive marketing efforts.
39
<PAGE>
Average Balances and Rates - Taxable Equivalent Basis
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- -------------------------------- --------------------------------
Average Average Average Average Average Average Average
Balances Interest Rate Balances Interest Rate Balances Rate Balances
Earning assets --------- --------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ 98,421 $ 9,781 9.94% $ 88,220 $ 8,905 10.09% $ 67,917 $ 6,866 10.11%
Securities:
Taxable 9,669 577 5.97 11,271 758 6.73 11,077 703 6.35
Tax exempt 2,928 274 9.36 3,426 318 9.28 3,119 314 10.07
Federal funds sold 3,143 223 7.10 4,318 256 5.93 2,469 164 6.64
Interest bearing deposits 206 13 6.31 532 36 6.77 276 25 9.06
-------- ------ ------ ------- ------ ----- -------- ------- -----
Total earning assets 114,367 10,868 9.50 107,767 10,273 9.53 84,858 8,072 9.51
------ ---- ------- ----- -------- ----
Non-earning assets, less
allowance for loan losses 9,401 8,994 7,671
-------- ------- --------
Total assets $ 123,768 $ 116,761 $ 92,529
--------- --------- ---------
--------- --------- ---------
Interest bearing liabilities
Deposits: demand $ 21,854 524 2.40 $ 22,864 553 2.42 $ 20,311 556 2.74
savings 9,048 224 2.48 8,977 236 2.63 7,672 217 2.83
time 59,669 3,127 5.24 52,875 2,890 5.47 39,220 1,947 4.96
Federal funds purchased and
securities sold under
agreements to repurchase 780 31 3.97 751 38 5.06 873 35 4.01
FHLB advances 2,234 160 7.16 2,151 146 6.79 1,511 95 6.29
Notes payable 1,297 112 8.64 3,316 293 8.84 3,158 274 8.68
-------- ------ ------ ------- ------ ----- -------- ------- -----
Total interest
bearing liabilities 94,882 4,178 4.40 90,934 4,156 4.57 72,745 3,124 4.29
------ ----- ------ ----- ------- -----
Non-interest bearing
liabilities
Demand deposits 15,856 15,079 11,941
Other 1,195 1,184 732
------- ------- --------
Total liabilities 111,933 107,197 85,418
Stockholders' equity 11,835 9,564 7,111
------- -------- -------
Total liabilities and
stockholders' equity $ 123,768 $ 116,761 $ 92,529
---------- ----------- ---------
---------- ----------- ---------
Net interest income $ 6,690 $ 6,117 $ 4,948
-------- --------- ----------
-------- --------- ----------
Net interest spread 5.10% 4.96% 5.22%
------ ----- -----
------ ----- -----
Net interest margin 5.85% 5.68% 5.83%
------ ----- -----
------ ----- -----
</TABLE>
SECURITIES
The carrying value of securities is summarized as follows:
(In thousands)
<TABLE>
<CAPTION>
June 30,
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
U.S. Treasury and government
agencies $ 8,644 8,812 12,851
Mortgage-backed securities 121 153 235
Obligations of states and political
subdivisions 2,657 3,125 3,676
Equity securities 501 465 368
Corporate obligations - 10 10
--------- -------- ---------
$ 11,923 12,565 17,140
--------- -------- ---------
--------- -------- ---------
</TABLE>
40
<PAGE>
The maturity distribution and weighted average rates of securities at June 30,
1997 follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
----------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- ------- ------ -------- ------- -------- -------
U.S. Treasury and $ -
government agencies $ 6,099 5.71% $ 2,470 5.99% - -- % $ 75 9.00%
Obligations of states
and political subdivisions 268 8.34 1,282 8.77 658 8.90% 449 10.40
Mortgage-backed
securities -- -- -- -- -- -- 121 7.51
--------- ------ ---------- ----- --------- ------- ---------- ------
$ 6,367 5.82% $ 3,752 6.94% $ 658 8.90% $ 645 8.65%
--------- ------ ---------- ----- --------- ------- ---------- ------
--------- ------ ---------- ----- --------- ------- ---------- ------
</TABLE>
LOAN PORTFOLIO
CFF's primary source of income is interest on loans. The following
table sets fort the composition of the loan portfolio at June 30 of each of the
last five years:
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- ------ -------- ------- --------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 21,552 20.6% $ 20,641 22.2% $ 15,401 18.5% $ 12,412 20.9% $ 10,745 19.5%
Real Estate - 9,719 9.3 4,204 4.5 3,785 4.6 2,588 4.4 2,055 3.7
Construction
Real Estate - Commercial 35,310 33.7 34,193 36.8 35,414 42.6 25,382 42.8 24,208 44.1
Real Estate - Residential 32,591 31.1 28,414 30.6 22,498 27.1 15,589 26.3 14,500 26.4
Consumer 5,601 5.3 5,432 5.9 5,946 7.2 3,331 5.6 3,437 6.3
--------- ------ -------- ----- --------- ------ ------- ----- -------- ------
$104,773 100.0% $ 92,884 100.0% $ 83,044 100.0% $ 59,302 100.0% $ 54,945 100.0%
--------- ------ -------- ----- --------- ------ ------- ----- -------- ------
--------- ------ -------- ----- --------- ------ ------- ----- -------- ------
</TABLE>
The following tables present the amount of commercial, financial and
agricultural loans, and construction and development loans, at June 30, 1997,
maturing in the periods indicated. Also shown are the amounts due after one
year classified according to sensitivity to changes in interest rates.
(In thousands)
<TABLE>
<CAPTION>
Over One Rate Structure for Loans
One Year Year Through Over Five Maturing Over One Year
or Less Five Years Years Total Predetermined Adjustable
--------- ----------- --------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 7,921 7,187 6,444 21,552 $ 4,506 9,125
Real Estate-Construction 4,670 2,896 2,153 9,719 1,735 3,314
--------- ------- ------ ------- -------- -------
$ 12,591 10,083 8,597 31,271 $ 6,241 12,449
--------- ------- ------ ------- -------- -------
--------- ------- ------ ------- -------- -------
</TABLE>
41
<PAGE>
NONPERFORMING LOANS AND ASSETS
Nonperforming loans, which include nonaccrual and restructured loans and
loans 90 days or more past due, but still accruing interest, were approximately
$1.1 million at both June 30, 1997 and 1996, and represented 1.0% and 1.2%,
respectively, of total loans.
Nonperforming assets include nonperforming loans and other real estate.
There was no other real estate at either June 30, 1997 or 1996. CFF's ratios of
nonperforming assets to total assets were 0.84% and 0.96%, respectively.
In addition to the nonperforming loans discussed above, there were loans
for which payments were current or less than 90 days past due where the
borrowers were experiencing significant financial difficulties, which amounted
to $666,000 at June 30, 1997. These loans are monitored by management and
considered in determining the level of the allowance for loan losses.
The following schedule summarizes nonaccrual loans past due 90 days or more
and still accruing, restructured loans, and other real estate owned at
December 31, 1997 and at June 30 of each of the last five years:
(In thousands)
<TABLE>
<CAPTION>
June 30,
December 31, -------------------------------------------------------------
1997 1997 1996 1995 1994 1993
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $1,664 620 766 1,009 1,100 509
Loans contractually past due
90 days or more and still
accruing 309 264 192 168 527 140
Restructured loans 166 170 163 167 29 32
-------- ------ ------ ------ ------- -----
Total nonperforming loans 2,139 1,054 1,121 1,344 1,656 681
Other real estate --- --- --- 580 --- 90
-------- ------ ------ ------ ------- -----
Total nonperforming assets $2,139 1,054 1,121 1,924 1,656 771
-------- ------ ------ ------ ------- -----
-------- ------ ------ ------ ------- -----
</TABLE>
42
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance established to
provide for loans which may not be paid in their entirety. The allowance is
increased by provisions charged to expense and decreased by loan charge offs,
net of recoveries of previously charged off loans. Loans are charged off by
management when deemed uncollectible. The allowance for loan losses was 1.2x and
1.1x of nonperforming loans at June 30, 1997 and 1996, respectively.
The following table summarizes CFF's loan loss experience for the six
months ended December 31, 1997 and the last five years ended June 30:
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30,
December 31, --------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------ ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period $102,503 98,421 88,220 67,917 55,433 53,677
--------- ------- ------ ------- ------- -------
--------- ------- ------ ------- ------- -------
Allowance for loan losses:
Balance at beginning of period $1,288 1,220 1,097 914 890 908
Charge-offs:
Commercial, financial & agricultural 8 55 49 58 5 81
Real estate - construction --- --- --- --- --- ---
Real estate - mortgage 38 36 12 23 --- ---
Consumer --- 3 27 4 1 1
--------- ------- ------ ------- ------- -------
Total 46 94 88 85 6 82
--------- ------- ------ ------- ------- -------
Recoveries:
Commercial, financial & agricultural 9 28 16 10 25 49
Real estate - construction --- --- --- --- --- ---
Real estate - mortgage --- 39 14 2 2 ---
Consumer 3 18 8 4 3 7
--------- ------- ------ ------- ------- -------
Total 12 85 38 16 30 56
--------- ------- ------ ------- ------- -------
Net charge-offs (recoveries) 34 9 50 69 (24) 26
Provision charged to operations (9) 77 173 31 --- ---
Additions due to acquisitions --- --- --- 221 --- 8
--------- ------- ------ ------- ------- -------
Balance at end of period $1,245 1,288 1,220 1,097 914 890
--------- ------- ------ ------- ------- -------
--------- ------- ------ ------- ------- -------
Net charge-offs to average loans
outstanding during period 0.03% 0.01% 0.06% 0.10% (0.04)% 0.05%
--------- ------- ------ ------- ------- -------
--------- ------- ------ ------- ------- -------
</TABLE>
43
<PAGE>
The following table sets forth the allocation of the allowance for loan
losses and the percent of loans in each category to total loans as of June 30
of each of the last five years:
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------- ------ ------- ------ ------ ------ ------ ------- -------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $374 20.6% $365 22.2% $284 18.5% $256 20.9% $174 19.5
Real Estate -- Construction 180 9.3 110 4.5 99 4.6 73 4.4 33 3.7
Real Estate -- Commercial 515 33.7 525 36.8 516 42.6 430 42.8 392 44.1
Real Estate -- Residential 129 31.1 122 30.6 99 27.1 82 26.3 235 26.4
Consumer 90 5.3 98 5.9 99 7.2 73 5.6 56 6.3
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
$1,288 100.0% $1,220 100.0% $1,097 100.0% $914 100.0% $890 100.0%
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
</TABLE>
DEPOSITS
Maturities of time deposits over $100,000 at June 30, 1997, were as
follows:
(In thousands)
Three months or less $ 3,424
Over three through six months 4,602
Over six months through twelve months 4,321
Over twelve months 1,408
-----
$ 13,755
------
LIQUIDITY ------
The role of liquidity is to ensure funds are available to meet depositors'
withdrawal and borrowers' credit demands while at the same time maximizing
profitability. This is accomplished by balancing changes in demand for funds
with changes in the supply of those funds. Liquidity to meet the demand is
provided by maturing assets, short-term liquid assets that can be converted to
cash and the ability to attract funds from external sources, principally
depositors.
The Banks have a number of sources of funds to meet liquidity needs on a
daily basis. An increase in loans affects liquidity as the repayment of
principal and interest are a daily source of funds. The deposit base,
consisting of consumer and commercial deposits and large dollar denomination
($100,000 and over) certificates of deposit, is another source of funds. The
majority of these deposits are from long-term customers and are a stable source
of funds. The Banks have no brokered deposits. Federal funds purchased also
provide an available source of liquidity, although this source is seldom needed.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase. Also, the Banks are members of the
Federal Home Loan Bank of Cincinnati (FHLB), and therefore have access to credit
products of the FHLB.
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<PAGE>
CFF's liquidity depends primarily on the dividends paid to it as the
sole shareholder of the Banks. As discussed in note 17 to the consolidated
financial statements, as of July 1, 1997, the Banks may pay up to $1.1
million in dividends to CFF without regulatory approval.
CAPITAL
CFF's total stockholders' equity was $12.8 million at June 30, 1997, an
increase of $2.4 million from June 30, 1996. The increase was due to
retained net income. Cash dividends declared on CFF's common stock were
$5.20 and $4.20 per share for the years ended June 30, 1997 and 1996,
respectively.
Bank holding companies and their subsidiary banks are required to meet
certain risk based capital ratios by their regulators. These risk based
ratios measure the relationship of capital to risk weighted assets, which are
the sum of on and off balance sheet amounts for various assets and
commitments, adjusted by various risk weightings prescribed by the
regulators.
At June 30, 1997, CFF's tier 1 and total risk based capital ratios were
11.9% and 13.1%, respectively. These ratios exceed the minimum 4.0% and 8.0%
ratios prescribed by the regulators. A minimum leverage ratio, based upon
tier 1 capital and average total assets, supplements the risk based capital
ratios. The minimum leverage ratio is 3.0%, however, most bank holding
companies are required to maintain a minimum in excess of that amount. CFF's
leverage ratio was 9.0% at June 30, 1997. Further details regarding
regulatory capital requirements and the capital ratios of the Banks are
contained in Note 17 to the consolidated financial statements. CFF and the
Banks exceed all regulatory capital ratios required to be categorized as
well-capitalized. The ratios show an increasing trend due to the growth
rate of CFF's capital exceeding the growth rate of its assets.
RETURN ON EQUITY AND ASSETS
The following table presents various key financial ratios for the years
ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Return on average assets 2.1% 2.0% 1.8%
Return on average stockholders' equity 22.1 24.1 23.1
Dividend payout ratio 8.3 7.6 10.0
Average equity to average assets ratio 9.6 8.2 7.7
</TABLE>
YEAR 2000
CFF has undertaken efforts to evaluate the effects Year 2000 will have
on its information systems and other important aspects of its business. In
connection with a capacity upgrade during 1997, Maysville's existing computer
system was brought into Year 2000 compliance. Testing is scheduled for May,
1998. Warsaw will require a similar system upgrade to become Year 2000
compliant, the cost of which will approximate $40,000. Additionally, CFF is
in the process of contacting all commercial customers with balances of
$100,000 or more regarding the Year 2000 issue to mitigate the potential
adverse effects of this issue on their ability to service their debt with CFF.
ACCOUNTING STANDARDS EFFECTIVE IN 1998
During 1997, the Financial Accounting Standards Board issued FASB
Statement No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement is effective for interim and annual periods beginning in 1998.
45
<PAGE>
Also, during 1997, the Financial Accounting Standards Board issued FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement requires reporting of certain information about
operating segments in complete sets of financial statements and in condensed
financial statements of interim periods issued to shareholders. This
statement is effective in 1998. In the initial year of application, this
statement is not required to be applied to interim periods.
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
RESULTS OF OPERATIONS
Net income was $1,479 or $33.54 per share (diluted) for the six months
ended December 31, 1997, compared to $1,208 or $27.23 (diluted) per share for
1996, an increase of 23.2% in diluted income per share.
Net interest income was $3.5 million and $3.2 million for the six months
ended December 31, 1997 and 1996, respectively, an increase of 9.5%. Net
interest income for the six months ended December 31, 1997 included $113,000
of cash basis income resulting from the payout of a nonaccrual loan.
The provisions for loan losses were ($9,000) and $66,000, respectively,
and resulted in a ratio of the allowance to total loans of 1.21% as of
December 31, 1997.
Non-interest income and expenses were each essentially flat in total.
The most significant increase was a $54,000 increase in credit life
commissions, due to various incentives being emphasized for sales of credit
life insurance, which was offset by decrease in service charge income and
other non-interest income. CFF's efficiency ratios were 45.8% and 49.5%,
respectively, resulting primarily from the increase in total revenues.
FINANCIAL CONDITION
Consolidated total assets increased $4.4 million (3.5%) from June 30,
1997 to $130.6 million as a result of an increase in deposits amounting to
$4.5 million. Total loans decreased $1.6 million to $103.2 million, which is
a seasonal decrease associated with CFF's agricultural loan portfolio. As a
result, CFF's loan to deposit ratio decreased from 96.4% at June 30, 1997 to
91.1% at December 31, 1997. The excess funds generated by these changes were
used to reduce debt and invested in securities. Stockholders' equity
increased $1.3 million to $14.1 million. CFF's risk based capital ratios
were as follows at December 31, 1997: 13.5% (tier 1 risk based), 14.7%
(total risk based) and 10.0% (leverage), and increased due to the growth rate
of CFF's capital exceeding the growth rate of its assets, with much of the
asset increase being invested in U.S. Treasury securities.
NONPERFORMING LOANS AND ASSETS
Nonperforming loans were $2.1 million at December 31, 1997, compared to
$1.1 million at June 30, 1997, an increase of $1.0 million. The increase is
primarily due to the addition of new credits amounting to $1.6 million, less
a reduction of $440,000 due to repayments. One of the additions, amounting
to $852,000, was repaid with no loss of principal or interest to CFF
subsequent to December 31, 1997. The other additions relate to credits which
are fully secured by real estate collateral, and in management's opinion, are
carried at realizable values. After adjusting for the repayment discussed
above, nonperforming loans represent 1.2% of total loans compared to 1.0% at
December 31, 1997.
In addition to the nonperforming loans discussed above, there were loans
for which payments were current or less that 90 days past due where the
borrowers were experiencing significant financial difficulties, which
amounted to $749,000.
46
<PAGE>
DESCRIPTION OF NCBE CAPITAL STOCK
AUTHORIZED SHARES
NCBE's Articles of Incorporation presently authorize the issuance of
20,000,000 shares of common stock, without par value. As of May 1, 1998,
there were 10,759,219 shares of NCBE Common issued and outstanding.
DIVIDENDS, VOTING, LIQUIDATION AND OTHER RIGHTS
Holders of NCBE's Common are entitled to receive dividends when, as and
if declared by NCBE's Board of Directors out of funds legally available
therefor. The ability of the financial institution subsidiaries of NCBE to
pay cash dividends, which are expected to be NCBE's principal source of
income, is restricted by applicable banking laws and regulations. Such
dividends have previously been NCBE's principal source of income.
Holders of NCBE Common are entitled to one vote per share on all matters
to be voted upon by the shareholders other than the election of directors.
NCBE shareholders are entitled to cumulative voting on election of directors.
Cumulative voting permits a shareholder to cast a number of votes equal to
the number of shares owned multiplied by the number of directors to be
elected. Such votes may be cast for one nominee or spread among designated
nominees.
In the event of liquidation, dissolution or winding up of NCBE, whether
voluntary or involuntary, the holders of NCBE Common would be entitled to
share ratably in any of its assets or funds that are available for
distribution to its shareholders after the satisfaction of its liabilities
(or after adequate provision is made therefor).
Holders of shares of NCBE Common do not have the preemptive right to
subscribe on a pro-rata basis for any presently or subsequently authorized
shares of NCBE Common.
The shares of NCBE Common presently outstanding are, and the shares of
NCBE Common to be issued pursuant to the Merger will be, when issued and
delivered pursuant to the Merger Agreement and as described herein, duly
authorized, validly issued, fully paid and non-assessable.
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 (see "COMPARISON OF SHAREHOLDER RIGHTS --Classified
Board of Directors"); (ii) the requirements that any business combination be
approved by the holders of 80% of the shares entitled to vote thereon; and
(iii) requirements for advance notice for making nominations at shareholders'
meetings.
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 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.
47
<PAGE>
CERTAIN PROVISIONS OF THE INDIANA LAW
The Indiana Law applies to NCBE as an Indiana corporation. Certain
provisions of the Indiana Law 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 National City Bank of Evansville, Evansville, Indiana is the
transfer agent for shares of NCBE Common.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of holders of shares of NCBE Common are governed by the
Indiana Law and by NCBE's Articles of Incorporation and By-laws. The rights
of holders of shares of CFF Stock are governed by the Kentucky Law and by
CFF's Articles of Incorporation and By-laws. The rights of holders of shares
of CFF Stock 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 CFF is set forth below.
At NCBE's 1998 annual meeting of shareholders, which is to be held May
20, 1998, holders of NCBE Common will be asked to consider changes to NCBE's
Articles of Incorporation. Such changes are described in NCBE's Proxy
Statement dated April 22, 1998, which is incorporated by reference herein.
The following summary does not reflect any of the changes to NCBE's Articles
of Incorporation that may be approved on May 20, 1998.
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.
Directors are elected by a plurality of votes cast by shares entitled to
vote. 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.
CFF. CFF's Articles of Incorporation do not contain any provisions for
a classified Board of Directors.
BUSINESS COMBINATIONS NOT INVOLVING AN INTERESTED SHAREHOLDER
NCBE. Under the Indiana Law, 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 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 pursuant to the merger), will not exceed by more than 20% the
total number of voting shares of the surviving corporation
48
<PAGE>
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. The articles of
incorporation of any corporation may supersede the majority vote requirement
by specifying a greater vote requirement. NCBE's Articles of Incorporation
require the affirmative vote of 80% of the shares entitled to vote on any
merger, consolidation or other business combination transaction with another
corporation that is not approved by a majority of the members of NCBE's Board
of Directors.
CFF. The Kentucky Law is substantially the same as the Indiana Law.
CFF's Articles of Incorporation do not contain any provisions that would
affect the vote required under the Kentucky Law to approve a business
combination.
BUSINESS COMBINATIONS INVOLVING AN INTERESTED SHAREHOLDER
NCBE. The Indiana Law 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.
CFF. The Kentucky Law imposes a greater minimum share voting
requirement for a "business combination" which is defined as merger, sale of
assets or sale of shares to an "interested shareholder." However these
provisions would not apply to the Merger because CFF does not have 500 or
more beneficial owners of any class of CFF Stock.
REMOVAL OF DIRECTORS
NCBE. Under the Indiana Law, directors may be removed in any manner
provided in the corporation's articles of incorporation. In addition, unless
the articles of incorporation provide otherwise, the shareholders or
directors may remove one or more directors with or without cause. A director
may be removed by the shareholders, if they are otherwise authorized to do
so, only at a meeting called for that purpose, and such purpose must be
stated in the notice of the meeting. A director elected by a voting group of
shareholders may be removed only by that voting group. NCBE's Articles of
Incorporation do not contain any provisions changing the statutory provisions
relating to the removal of directors.
CFF. The Kentucky Law is substantially the same as the Indiana Law.
CFF's Articles of Incorporation do not contain any provisions changing the
statutory provisions relating to the removal of directors.
49
<PAGE>
AMENDMENTS TO ARTICLES OF INCORPORATION
NCBE. The Indiana Law provides that, unless a greater vote is required
under a specific provision of the Indiana Law 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 vote of the holders of a
majority of the outstanding shares is required. Certain amendments, unless
provided otherwise in a corporation's articles of incorporation, do not
require shareholder approval. Under the Indiana Law, 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 Indiana Law.
NCBE's Articles of Incorporation provide that amendments must be approved by
the holders of a majority of the outstanding voting shares; except that any
amendment to the provisions concerning business combinations must be approved
by the holders of eighty percent (80%) of the outstanding voting shares.
CFF. The Kentucky Law is substantially the same as the Indiana Law.
CFF's Articles of Incorporation do not contain any provisions changing the
statutory provisions relating to amendments of its Articles of Incorporation.
VOTING RIGHTS
NCBE. On all matters other than the election of directors, NCBE
shareholders are entitled to cast one vote per share of NCBE Common. NCBE
shareholders are entitled to cumulative voting on election of directors.
Cumulative voting permits a shareholder to cast a number of votes equal to
the number of shares owned multiplied by the number of directors to be
elected. Such votes may be cast for one nominee or spread among designated
nominees.
CFF. On all matters other than the election of directors, holders of
shares of CFF Common are entitled to one vote per share of CFF Common. CFF
shareholders are entitled to cumulative voting on election of directors.
Cumulative voting permits a shareholder to cast a number of votes equal to
the number of shares owned multiplied by the number of directors to be
elected. Such votes may be cast for one nominee or spread among designated
nominees.
Except with respect to the occurrence of a "Voting Triggering Event"
(described below) or except where otherwise provided by law, holders of
shares of CFF A Preferred have no right to vote on any matter for any
purpose. In the event of a Voting Triggering Event which has not been cured,
holders of CFF A Preferred have the right to call a special meeting of CFF's
shareholders for the purpose of electing directors of CFF and may vote for
the election of two persons to CFF's board of directors, with the remaining
members to be elected by holders of CFF Common. A "Voting Triggering Event"
means the failure of CFF to pay in four instances (which need not be
consecutive) the semi-annual dividend on the CFF A Preferred as provided in
the articles of incorporation of CFF, as amended. A Voting Triggering Event
shall be deemed cured as soon as all dividends on the CFF A Preferred have
been paid in full without interest. Generally, holders of shares of CFF B
Preferred do not have the right to vote on any matter. However, holders of
CFF A Preferred and CFF B Preferred are entitled to vote as separate voting
groups on matters that, among other things, effect an exchange or
reclassification of all or part of the shares of the class into shares of
another class, change the designation, rights preferences, or limitations of
all or part of the shares of the class. Holders of each class of CFF Stock
shall be entitled to vote on the Merger.
RIGHTS OF FIRST REFUSAL OR TRANSFER OF SHARES.
NCBE. Under the Indiana Law, a corporation's articles of incorporation
or by-laws, or an agreement among shareholders or an agreement between
shareholders and the corporation may impose restrictions on the transfer or
registration of transfer of shares. There are no such restrictions
applicable to shares of NCBE Common.
CFF. The Kentucky Law is substantially the same as the Indiana Law.
50
<PAGE>
SPECIAL MEETINGS OF SHAREHOLDERS
NCBE. The Indiana Law provides that a corporation with more than 50
shareholders shall hold a special meeting of shareholders on call of its
board of directors or the persons authorized to do so in the corporation's
articles of incorporation or by-laws. NCBE's By-laws provide that a special
meeting of shareholders must be held upon the request of the Chairman of the
Board, the President, a majority of the Board of Directors or the holders of
25% or more of the outstanding shares of voting stock.
CFF. The Kentucky Law provides that a corporation must hold a special
meeting of shareholders on the call of its board of directors or the persons
authorized to do so in the corporation's articles of incorporation or by-laws
or at the request of the holders of at least 33 1/3% (or such higher or lower
percentage specified in the articles of incorporation) of the votes entitled
to be cast at a special meeting. CFF's By-Laws provide that a special
meeting of shareholders may be called by the chief executive officer, a
majority of the Board of Directors or the holders of 1/5th or more of the
outstanding shares.
SHAREHOLDER ACTION BY WRITTEN CONSENT
NCBE. Under the Indiana Law, any action required or permitted to be
taken at a meeting of shareholders may be taken without a meeting if a
written consent to such action is signed by all shareholders entitled to vote
thereon.
CFF. The Kentucky Law is substantially the same as the Indiana Law.
DISSENTERS' RIGHTS
NCBE. Under the Indiana Law, a shareholder of a corporation is entitled
(subject to certain exceptions) to receive payment for the fair value of his
shares if, among other things, such shareholder dissents from a plan of share
exchange, sale or exchange of all or substantially all of the property of the
corporation, or a merger or control share acquisition to which such
corporation is a party. NCBE's shareholders are not required to vote on the
Merger nor are they entitled to exercise dissenters' rights in connection
with the Merger.
CFF. The Kentucky Law is substantially the same as the Indiana Law.
Shareholders of CFF are entitled to exercise such rights in connection with
the Merger. See "THE MERGER -- Dissenters' Rights."
CONTROL SHARE ACQUISITIONS
NCBE. Pursuant to the Indiana Law, 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 entitle
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, has its principal office or
substantial assets within Indiana and either (i) more than 10% of its
shareholders resident in
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<PAGE>
Indiana, (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.
CFF. There is no similar provision under the Kentucky Law.
INDEMNIFICATION
NCBE. Pursuant to the Indiana Law, 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 Indiana Law
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 Indiana Law also applies to
individuals who are serving at such corporation's request as directors,
officers, employees and agents of such corporation's subsidiaries. The
Indiana Law 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 Indiana
Law 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 Indiana Law 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 Indiana Law 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 Indiana Law 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 generally provide for the
indemnification of NCBE's directors, officers, employees and agents to the
extent permitted by the Indiana Law.
CFF. The Kentucky Law is substantially similar to the Indiana Law.
CFF's Articles of Incorporation and By-Laws contain provisions requiring
indemnification of directors and officers generally in accordance with the
Kentucky Law.
LIMITATION OF LIABILITY OF DIRECTORS
NCBE. The Indiana Law 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 Indiana Law 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
Indiana Law 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.
CFF. Kentucky law provides that a corporation may set forth in its
articles of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of his duties as a director, provided that such provision
shall not eliminate or limit the liability of a director: (i) for any
transaction in which the director's personal financial interest is in
conflict with the financial interests of the corporation
52
<PAGE>
or its shareholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or are known to the director to be a violation
of law; (iii) for any vote for or assent to an unlawful distribution to
shareholders as prohibited under Kentucky law; or (iv) for any transaction
from which the director derived an improper personal benefit. CFF has
adopted such a provision in its articles of incorporation, as amended.
CONSIDERATION OF NON-SHAREHOLDER INTERESTS
NCBE. The Indiana Law specifically authorizes directors, in considering
the best interests of a corporation, to consider the short-term and long-term
interests of the corporation as well as the effects of any action on
shareholders, employees, suppliers and customers of the corporation and
communities in which offices or other facilities of the corporation are
located, and any other factors the directors consider pertinent. Under the
Indiana Law, directors are not required to approve a proposed corporate
action if the directors determine in good faith after considering and
weighing as they deem appropriate the effect of such action on the
corporation's constituents that such approval is not in the best interest of
the corporation. In addition, the Indiana Law states that directors are not
required to redeem any rights under or render inapplicable a shareholder
rights plan or to take or decline to take any other action solely because of
the effect such action might have on a proposed acquisition of control of a
corporation or the amounts to be paid to shareholders under such an
acquisition. The Indiana Law explicitly provides that the different or
higher degree of scrutiny imposed under the Delaware General Corporation Law
with respect to Delaware corporations and certain other jurisdictions upon
director actions taken in response to potential changes in control will not
apply. Any determination made with respect to the foregoing by a majority of
the disinterested directors will conclusively be presumed to be valid unless
it can be demonstrated that such determination was not made in good faith.
CFF. There is similar provision under the Kentucky Law.
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 legal matters on behalf of CFF in connection
with the Merger will be passed upon by Stites & Harbison, Lexington, Kentucky.
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 CFF as of June 30, 1997 and
1996, and for the two years ended June 30, 1997 and 1996, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
53
<PAGE>
INDEX TO CFF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 (Unaudited)
and June 30, 1997 and 1996 F-3
Consolidated Statements of Income for the Six Months Ended
December 31, 1997 and 1996 (Unaudited) and the Years Ended
June 30, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Six
Months Ended December 31, 1997 and 1996 (Unaudited) and the Years
Ended June 30, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1997 and 1996 (Unaudited) and the Years Ended
June 30, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Community First Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Community First
Financial, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' 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 consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Community First Financial, Inc.
and Subsidiaries as of June 30, 1997 and 1996 and results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
Louisville, Kentucky /s/ KPMG Peat Marwick LLP
April 21, 1998
F-2
<PAGE>
COMMUNITY FIRST FINANCIAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
ASSETS 1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 4,688 5,219 4,599
Interest bearing deposits with banks 84 105 433
Federal funds sold 1,522 520 2,667
Securities:
Available for sale (amortized cost of $4,451 at December 31, 1997,
$3,401 at June 30, 1997 and $4,714 at June 30, 1996) 4,452 3,404 4,711
Held to maturity (fair value of $12,933 at December 31, 1997,
$8,627 at June 30, 1997 and $7,918 at June 30, 1996) 12,784 8,519 7,854
Loans 103,172 104,773 92,884
Less allowance for loan losses 1,245 1,288 1,220
------- ------- -------
Net loans 101,927 103,485 91,664
------- ------- -------
Premises and equipment 2,347 2,183 2,273
Accrued interest receivable and other assets 1,434 1,361 1,386
Goodwill, less accumulated amortization of $968 at December 31, 1997,
$902 at June 30, 1997 and $769 at June 30, 1996 1,321 1,387 1,520
------- ------- -------
Total assets $130,559 126,183 117,107
------- ------- -------
------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $ 17,620 16,956 14,064
Interest bearing demand 23,044 20,926 21,728
Savings 8,373 9,268 9,332
Time deposits 64,200 61,563 54,877
------- ------- -------
Total deposits 113,237 108,713 100,001
Federal funds purchased and securities sold under
agreements to repurchase 324 833 734
Advances from the Federal Home Loan Bank 1,515 2,181 2,286
Accrued interest payable and other liabilities 1,348 1,423 1,178
Note payable - 250 2,500
------- ------- -------
Total liabilities 116,424 113,400 106,699
------- ------- -------
Stockholders' Equity:
Class A nonvoting preferred stock. $225 par value. Authorized 2,000
shares. Issued and outstanding: 1,605, 1,639 and 1,690 shares at
December 31, 1997 and June 30, 1997 and 1996, respectively. 361 368 380
Class B nonvoting preferred stock. $500 par value. Authorized 100
shares. Issued and outstanding: 18 shares. 9 9 9
Common stock, no par value. Authorized 250,000 shares. Issued
and outstanding: 41,714, 41,426 and 41,396 shares at
December 31, 1997 and June 30, 1997 and 1996, respectively. 1,327 1,222 1,218
Surplus 510 514 516
Retained earnings 11,928 10,668 8,287
Net unrealized gains (losses) on securities available for sale - 2 (2)
------- ------- -------
Total stockholders' equity 14,135 12,783 10,408
Commitments and contingent liabilities
------- ------- -------
Total liabilities and stockholders' equity $130,559 126,183 117,107
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMMUNITY FIRST FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Years ended
December 31, June 30,
----------- -------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $5,178 4,782 9,781 8,905
Securities:
Taxable 330 299 577 758
Tax-exempt 76 94 181 210
Federal funds sold 102 119 223 256
Interest bearing deposits with banks 4 11 13 36
----- ----- ------ ------
Total interest income 5,690 5,305 10,775 10,165
----- ----- ------ ------
Interest expense:
Deposits 2,098 1,928 3,875 3,679
Borrowings 88 177 303 477
----- ----- ------ ------
Total interest expense 2,186 2,105 4,178 4,156
----- ----- ------ ------
Net interest income before provision for loan losses 3,504 3,200 6,597 6,009
Provision for loan losses (9) 66 77 173
----- ----- ------ ------
Net interest income after provision for loan losses 3,513 3,134 6,520 5,836
----- ----- ------ ------
Non-interest income:
Service charges on deposit accounts 406 427 835 810
Securities gains 1 - 1 5
Gain on sale of branch - - - 112
Credit life insurance commissions 89 35 113 102
Other 59 96 199 232
----- ----- ------ ------
Total non-interest income 555 558 1,148 1,261
----- ----- ------ ------
Non-interest expenses:
Salaries and employee benefits 1,040 1,046 2,088 1,891
Net occupancy expense 115 116 214 249
Equipment expense 177 170 343 349
Directors fees 60 60 119 130
Supplies 62 54 98 102
Goodwill amortization 66 66 133 133
Other 358 372 751 745
----- ----- ------ ------
Total non-interest expenses 1,878 1,884 3,746 3,599
----- ----- ------ ------
Income before taxes 2,190 1,808 3,922 3,498
Income tax expense 711 600 1,307 1,197
----- ----- ------ ------
Net income $1,479 1,208 2,615 2,301
----- ----- ------ ------
----- ----- ------ ------
Net income per common share:
Basic $35.57 28.96 62.71 54.93
Diluted 33.54 27.23 59.17 51.84
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMMUNITY FIRST FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997 and 1996
and six months ended December 31, 1997 (unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Class A Preferred Stock Class B Preferred Stock Common Stock
----------------------- ----------------------- ------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount Surplus
--------- ------ --------- ------ --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 1,747 $393 18 $9 41,831 $1,225 589
Issuance of common stock 50 7
Repurchase of common stock (485) (14) (72)
Repurchase of preferred stock (57) (13) (1)
Net income
Change in net unrealized gains (losses)
on securities available for sale
Cash dividends declared:
Common, $4.20 per share
Preferred $11.25 per share
----- ----- ------ ------ ------- ------ ---
Balance, June 30, 1996 1,690 380 18 9 41,396 1,218 516
Issuance of common stock 30 4
Repurchase of preferred stock (51) (12) (2)
Net income
Change in net unrealized gains (losses)
on securities available for sale
Cash dividends declared:
Common, $5.20 per share
Preferred $11.25 per share
----- ----- ------ ------ ------- ------ ---
Balance, June 30, 1997 1,639 368 18 9 41,426 1,222 514
Issuance of common stock 595 115
Repurchase of common stock (307) (10) (4)
Repurchase of preferred stock (34) (7)
Net income
Change in net unrealized gains (losses)
on securities available for sale
Cash dividends declared:
Common, $3.00 per share
Preferred $5.63 per share
----- ----- ------ ------ ------- ------ ---
Balance, December 31, 1997 (unaudited) 1,605 $361 18 $9 41,714 $1,327 510
----- ----- ------ ------ ------- ------ ---
----- ----- ------ ------ ------- ------ ---
<CAPTION>
Net Unrealized
Gains (Losses) Total
Retained on Securities Stockholders'
Earnings Available for Sale Equity
-------- ------------------ ------
<S> <C> <C> <C>
Balance, June 30, 1995 6,179 12 8,407
Issuance of common stock 7
Repurchase of common stock (86)
Repurchase of preferred stock (14)
Net income 2,301 2,301
Change in net unrealized gains (losses)
on securities available for sale (14) (14)
Cash dividends declared:
Common, $4.20 per share (174) (174)
Preferred $11.25 per share (19) (19)
------ --- ------
Balance, June 30, 1996 8,287 (2) 10,408
Issuance of common stock 4
Repurchase of preferred stock (14)
Net income 2,615 2,615
Change in net unrealized gains (losses)
on securities available for sale 4 4
Cash dividends declared:
Common, $5.20 per share (215) (215)
Preferred $11.25 per share (19) (19)
------ --- ------
Balance, June 30, 1997 10,668 2 12,783
Issuance of common stock 115
Repurchase of common stock (77) (91)
Repurchase of preferred stock (8) (15)
Net income 1,479 1,479
Change in net unrealized gains (losses)
on securities available for sale (2) (2)
Cash dividends declared:
Common, $3.00 per share (125) (125)
Preferred $5.63 per share (9) (9)
------ --- ------
Balance, December 31, 1997 (unaudited) 11,928 - 14,135
------ --- ------
------ --- ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMMUNITY FIRST FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six months ended Years ended
December 31, June 30,
----------- -------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,479 1,208 2,615 2,301
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses (9) 66 77 173
Depreciation, amortization and accretion, net 193 188 388 450
Deferred income taxes (8) (16) (16) (5)
Securities gains (1) - (1) (5)
Loss on disposition of other real estate owned - - - 45
Gain on sale of branch - - - (112)
Gain on sale of premises and equipment - - - (68)
(Increase) decrease in accrued interest receivable and
other assets (80) 121 10 49
Increase (decrease) in accrued interest payable and other
liabilities (66) 61 259 100
------ ------ ------ ------
Net cash provided by operating activities 1,508 1,628 3,332 2,928
------ ------ ------ ------
Cash flows from investing activities:
Net (increase) decrease interest bearing deposits with banks 21 265 328 545
Net (increase) decrease in federal funds sold (1,002) (1,159) 2,147 (992)
Proceeds from maturities of securities available for sale 451 1,510 7,653 1,095
Purchases of securities available for sale (1,492) (1,574) (6,319) (2,048)
Proceeds from maturities and calls of securities held to maturity 3,656 3,657 3,810 11,836
Purchases of securities held to maturity (7,907) (6,024) (4,483) (6,359)
Net (increase) decrease in loans 1,567 (5,273) (11,898) (10,003)
Purchases of premises and equipment (307) 19 (162) (247)
Proceeds from sale of premises and equipment - - - 122
Proceeds from sale of other real estate owned - - - 537
Cash paid upon purchase and assumption transaction - - - (1,705)
------ ------ ------ ------
Net cash used in investing activities (5,013) (8,579) (8,924) (7,219)
------ ------ ------ ------
Cash flows from financing activities:
Net increase in deposits 4,524 8,108 8,712 7,982
Net increase (decrease) in federal funds purchased and securities
sold under agreement to repurchase (509) (142) 99 (1,719)
Advances from Federal Home Loan Bank 116 - - 746
Repayment of notes payable (250) (1,000) (2,250) (1,524)
Repayment of advances from Federal Home Loan Bank (782) (48) (105) (83)
Proceeds from issuance of common stock 115 - 4 7
Repurchase of common stock (91) - - (86)
Repurchase of preferred stock (15) (1) (14) (14)
Dividends paid (134) (100) (234) (193)
------ ------ ------ ------
Net cash provided by financing activities 2,974 6,817 6,212 5,116
------ ------ ------ ------
Net increase (decrease) in cash and cash equivalents (531) (134) 620 825
Cash and due from banks, beginning of period 5,219 4,599 4,599 3,774
------ ------ ------ ------
Cash and due from banks, end of period $4,688 4,465 5,219 4,599
------ ------ ------ ------
------ ------ ------ ------
Supplemental disclosure of cash flow information:
Cash paid for interest $2,126 2,054 4,117 4,103
Cash paid for income taxes 909 685 1,190 1,160
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 (unaudited), June 30, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Community First Financial, Inc. (the Company) and its wholly-owned
subsidiaries, Community First Bank, N.A. (Maysville) and Community
First Bank of Kentucky (Warsaw) (the Banks). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The Banks provide a full range of banking services to individual
and corporate customers in the Mason, Robertson, Gallatin and Grant
areas of Kentucky and Ripley and Aberdeen areas of Ohio. The Banks
are subject to competition from other financial institutions. The
Banks are also subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory
agencies.
The consolidated financial statements as of December 31, 1997 and
for the six months ended December 31, 1997 and 1996, are unaudited,
but in the opinion of management reflect all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of financial condition at December 31, 1997, and
results of operations for the six months ended December 31, 1997
and 1996.
In preparing the financial statements, management is required 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 balance sheet and revenues and
expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for loan losses.
(b) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and due from banks.
(Continued)
F-7
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) SECURITIES
Securities classified as held to maturity are those debt securities
the Banks have both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost
adjusted for amortization of premium and accretion of discount,
computed by methods approximating the interest method over their
contractual lives.
Securities classified as available for sale are those debt securities
that the Banks intend to hold for an indefinite period of time, but
not necessarily to maturity. Securities available for sale are
carried at fair value, with unrealized gains or losses presented as a
component of stockholders' equity on a net of tax basis. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in income.
(d) LOANS
Loans are stated at unpaid principal. Interest income on loans is
recorded on the accrual basis except for those loans in a nonaccrual
income status. Loans are placed in a nonaccrual income status when
the prospects for recovering both principal and accrued interest are
considered doubtful or when a default of principal or interest has
existed for 90 days or more unless such loan is well secured and in
the process of collection. Loan fees are not significant.
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, at
the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. Smaller balance,
homogenous loans, including consumer and residential mortgages, are
collectively evaluated for impairment.
(Continued)
F-8
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for loan losses inherent in the
loan portfolio. Management determines the adequacy of the allowance
based upon reviews of individual credits, recent loss experience,
current economic conditions, the risk characteristics of the various
categories of loans and such other factors, which in management's
judgment deserve current recognition in estimating loan losses. The
allowance for loan losses is increased by the provision for loan
losses and reduced by net loan charge-offs.
(f) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation. The provision for depreciation is computed principally
by the straight-line method over the estimated useful lives of the
assets.
(g) OTHER ASSETS
Included in other assets is real estate acquired in settlement of
loans. Other real estate owned is carried at the lower of cost or
fair value minus estimated selling costs. Any write-downs to the fair
value at the date of acquisition are charged to the allowance for loan
losses. Expenses incurred in maintaining assets, write-downs to
reflect subsequent declines in value and realized gains or losses are
reflected in income.
(h) GOODWILL
The excess of cost, including acquisition costs, over fair value of
net assets acquired in purchase business combinations (goodwill) is
amortized over 15-20 years on the straight-line basis. The carrying
values and useful lives of goodwill are reviewed for possible
impairment when events or changed circumstances may affect the
underlying basis of the asset.
(Continued)
F-9
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) INCOME TAXES
Income tax expense is computed using the asset and liability method of
accounting. Accordingly, deferred tax assets and liabilities are
established for temporary differences between the financial reporting
and the tax bases of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(j) NET INCOME PER COMMON SHARE
Basic net income per common share is determined by dividing net income
less preferred dividends by the weighted average number of shares of
common stock outstanding. Diluted net income per common share is
determined by dividing net income by the weighted average shares of
common stock outstanding plus the weighted average number of shares
that would be issued upon the conversion of preferred stock and upon
the exercise of dilutive stock options assuming the proceeds were used
to repurchase shares pursuant to the treasury stock method.
(2) BRANCH SALE
In October 1995, Warsaw closed on a branch sale pursuant to an Asset
Purchase and Deposit Assumption Agreement with Grant County Deposit Bank
(Grant), whereby Grant purchased certain loans and premises and equipment
with an aggregate book value of $156,000 and assumed deposit liabilities
amounting to $1,973,000 of one of Warsaw's branch offices. The total cash
paid in connection with the sale was $1,705,000.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
Bank regulatory authorities require the Banks to maintain certain cash and
due from bank reserve balances daily relating to customer deposits. At
December 31, 1997, June 30, 1997 and 1996, the balances maintained under
such requirements were approximately $631,000 (unaudited), $495,000 and
$434,000, respectively.
(Continued)
F-10
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) SECURITIES
The amortized cost, gross unrealized gains and losses, and approximate fair
value of securities available for sale at December 31, 1997 and June 30,
1997 and 1996 follows:
<TABLE>
<CAPTION>
December 31, 1997 (unaudited)
------------------------------------------------
Unrealized
Amortized ------------------ Fair
(In Thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 3,931 3 2 3,932
Equity securities 520 - - 520
------- ------- ------- -------
$ 4,451 3 2 4,452
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
June 30, 1997
------------------------------------------------
Unrealized
Amortized ------------------ Fair
(In Thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 2,900 3 - 2,903
Equity securities 501 - - 501
------- ------- ------- -------
$ 3,401 3 - 3,404
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
June 30, 1996
------------------------------------------------
Unrealized
Amortized ------------------ Fair
(In Thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 4,249 8 11 4,246
Equity securities 465 - - 465
------- ------- ------- -------
$ 4,714 8 11 4,711
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(Continued)
F-11
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) SECURITIES (CONTINUED)
The amortized cost, gross unrealized gains and losses, and approximate fair
value of securities held to maturity at December 31, 1997 and June 30, 1997
and 1996 follows:
<TABLE>
<CAPTION>
December 31, 1997 (unaudited)
------------------------------------------------
Unrealized
Amortized ------------------ Fair
(In Thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 10,087 13 8 10,092
Mortgage-backed
securities 104 6 - 110
Obligations of states and
political subdivisions 2,593 142 4 2,731
------- ------- ------- -------
$ 12,784 161 12 12,933
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
June 30, 1997
------------------------------------------------
Unrealized
Amortized ------------------ Fair
(In Thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 5,741 19 4 5,756
Mortgage-backed
securities 121 1 - 122
Obligations of states and
political subdivisions 2,657 106 14 2,749
------- ------- ------- -------
$ 8,519 126 18 8,627
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(Continued)
F-12
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------
Unrealized
Amortized ------------------ Fair
(In Thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 4,566 13 24 4,555
Mortgage-backed
securities 153 2 - 155
Obligations of states and
political subdivisions 3,125 107 34 3,198
Corporate obligations 10 - - 10
------- ------- ------- -------
$ 7,854 122 58 7,918
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The amortized cost and approximate fair values of debt securities at
December 31, 1997 and June 30, 1997, by contractual maturity, is shown
below. Actual maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997 (unaudited)
------------------------------------------------
Securities Securities
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due within one year $ 3,832 3,832 9,069 9,067
Due after one year
through five years 99 100 2,795 2,848
Due after five years
through ten years - - 547 605
Due after ten years - - 269 303
Mortgage-backed
securities - - 104 110
------- ------- ------- -------
$ 3,931 3,932 12,784 12,933
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(Continued)
F-13
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Securities Securities
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due within one year $ 2,050 2,051 4,316 4,319
Due after one year
through five years 850 852 2,900 2,934
Due after five years
through ten years - - 658 691
Due after ten years - - 524 561
Mortgage-backed
securities - - 121 122
------- ------- ------- -------
Total $ 2,900 2,903 8,519 8,627
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Securities with a par value of approximately $12,893,000 (unaudited),
$9,237,000 and $8,693,000 at December 31, 1997, June 30, 1997 and 1996,
respectively, were pledged as collateral on public deposits and for other
purposes as required by law.
(5) LOANS
The composition of loans follows:
<TABLE>
<CAPTION>
(In Thousands) December 31, June 30,
------------ -----------------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Commercial, financial and
agricultural $ 20,425 21,552 20,641
Real estate construction 10,871 9,719 4,204
Commercial real estate 35,845 35,310 34,193
Residential real estate 29,636 32,591 28,414
Consumer 6,395 5,601 5,432
------- ------- -------
$ 103,172 104,773 92,884
------- ------- -------
------- ------- -------
</TABLE>
(Continued)
F-14
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) LOANS (CONTINUED)
Loans to officers, directors and entities in which these individuals are
principal owners were approximately $1,314,000, $1,446,000 and $1,973,000,
respectively, at December 31, 1997 (unaudited) and June 30, 1997 and 1996.
During the years ended June 30, 1997, new loans of $905,000 were made to
officers, directors and affiliated companies; repayments amounted to
$1,432,000.
Impaired loans amounted to $1,884,000 , $791,000 and $929,000 at December
31, 1997 (unaudited) and June 30, 1997 and 1996, respectively. The average
recorded investment in impaired loans for the six months ended December 31,
1997 (unaudited) was $1,550,000 and for the years ended June 30, 1997 and
1996 were $959,000 and $946,000, respectively. The allowance for loan
losses related to these loans was $22,000, $17,000 and $185,000,
respectively, at December 31, 1997 (unaudited) and June 30, 1997 and 1996.
Interest income on impaired loans of $134,000, $21,000 and $28,700 was
recognized for cash payments received for the six months ended December 31,
1997 (unaudited) and the years ended June 30, 1997 and 1996.
(6) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Six months ended Years ended
(In Thousands) December 31, June 30,
------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,288 1,220 1,220 1,097
Provision for loan losses (9) 66 77 173
Loans charged off (46) (65) (94) (88)
Recoveries of loans previously
charged off 12 31 85 38
Net loan charge offs (34) (34) (9) (50)
------- ------- ------- -------
Balance at end of period $ 1,245 1,252 1,288 1,220
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(Continued)
F-15
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
(In Thousands) December 31, June 30,
---------------------- --------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Land $ 368 368 368
Bank premises 2,275 2,058 2,104
Furniture and equipment 1,960 1,816 2,035
Construction in progress - 60 -
------- ------- -------
4,603 4,302 4,507
Less accumulated depreciation 2,256 2,119 2,234
------- ------- -------
$ 2,347 2,183 2,273
------- ------- -------
------- ------- -------
</TABLE>
(8) DEPOSITS
Maturities of time deposits are as follows:
<TABLE>
<S> <C>
December 31, 1997 (unaudited):
1998 $ 50,211
1999 and thereafter 13,989
-------
$ 64,200
-------
-------
June 30, 1997:
1998 $ 53,198
1999 and thereafter 8,365
-------
$ 61,563
-------
-------
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $15,296,000, $13,755,000 and $10,900,000 at December 31, 1997
(unaudited) and June 30, 1997 and 1996, respectively.
(Continued)
F-16
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Banks enter into sales of securities under agreements to repurchase
which are treated as financings. The obligation to repurchase the
securities sold is reflected as a liability and the assets underlying the
agreements remain in the respective securities accounts. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, June 30,
------------ -----------------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Average balance during the period $ 323 501 715
Average interest rate during the period 5.61% 4.85% 5.27%
Maximum month-end balance during
the period $ 324 757 1,069
----- ----- -----
----- ----- -----
</TABLE>
(10) FEDERAL HOME LOAN BANK ADVANCES
The Banks are members of the Federal Home Loan Bank of Cincinnati (FHLB)
and, accordingly, are eligible to borrow from the FHLB. The Banks pledge
certain first mortgage loans as collateral for these advances. The
aggregate balance of these mortgages must equal 150% of the outstanding
advances. Certain information with respect to the advances from the FHLB
is summarized below:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
-------------------------- --------------------------
Weighted Average Weighted Average
(Dollars in Thousands) Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Year of maturity
2000 - 2004 $ 900 6.47% 921 6.47%
2005 and thereafter 615 7.62% 1,260 6.75%
------ ------
$ 1,515 2,181
------ ------
------ ------
</TABLE>
Scheduled principal repayments on advances from FHLB at June 30, 1997 were
approximately $112,000, $116,000, $121,000, $460,000, $110,000 for 1998
through 2002, respectively, and $1,262,000 thereafter.
(Continued)
F-17
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
(In Thousands) December 31, June 30,
------------ ----------------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Term note payable to Fifth Third Bank,
due 12/31/97. Interest payable
semi-annually at the prime rate
(8.5% at June 30, 1997). $ - 250 2,500
------- ------ ------
------- ------ ------
</TABLE>
(12) Income Taxes
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Six months ended Years ended
(In Thousands) December 31, June 30,
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Current $ 719 616 1,323 1,202
Deferred (8) (16) (16) (5)
------ ------ ------ ------
Total for operations 711 600 1,307 1,197
Charged (credited) to stockholders'
equity for net unrealized gains
(losses) on securities available
for sale (1) 3 2 (7)
------ ------ ------ ------
$ 710 603 1,309 1,190
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The effective income tax rates were 32.5% and 33.2%, respectively, for the
six months ended December 31, 1997 and 1996 (unaudited), and 33.3% and
34.2%, respectively, for the years ended June 30, 1997 and 1996. The
effective rates are less than that computed by applying the federal
statutory rate of 34% due primarily to tax exempt income on securities and
non-deductible amortization of goodwill.
(Continued)
F-18
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) INCOME TAXES (CONTINUED)
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
(In Thousands) December 31, June 30,
------------ ----------------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Deferred tax assets -
Allowance for loan losses $ 218 216 205
----- ----- -----
Deferred tax liabilities -
Accumulated depreciation 46 54 48
Cash basis accounting 21 32 42
Purchase accounting adjustments 79 81 88
Other 42 28 20
----- ----- -----
188 195 198
----- ----- -----
Net deferred tax asset $ 30 21 7
----- ----- -----
----- ----- -----
</TABLE>
No valuation allowance for deferred tax assets has been recorded because
management believes it is more likely than not that the reversal of future
taxable amounts and results of future operations will generate sufficient
taxable income to realize the tax benefit of the deductible temporary
differences.
(13) EMPLOYEE BENEFITS
The Company has a defined benefit pension plan which covers all employees
of Maysville who have met certain requirements as to age and length of
service. The plan's benefit formula generally bases payments to retired
employees upon their length of service and a percentage of their highest
consecutive five-year average annual compensation. The Company contributes
annually the minimum required contribution.
(Continued)
F-19
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the Plan's funded status and the components
of net pension expense:
<TABLE>
<CAPTION>
June 30,
------------------
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $331 and $256, respectively $ 350 268
------ ------
------ ------
Plan assets at fair value $ 514 420
Projected benefit obligation for service rendered to date 583 489
------ ------
Funded status (69) (69)
Unrecognized net loss from past experience different
from that assumed (85) (18)
Unrecognized net asset value being recognized over 12 years 25 27
------ ------
Accrued pension plan cost $ (129) (60)
------ ------
------ ------
<CAPTION>
Years
ended June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Net pension plan expense includes the following components:
Service cost-benefits earned during the period $ 60 55
Interest cost on projected benefit obligation 38 32
Actual (return) loss on plan assets (104) (25)
Net amortization and deferral 75 (2)
------ ------
Net pension plan expense $ 69 60
------ ------
------ ------
</TABLE>
(Continued)
F-20
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the actuarial assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted average discount rate 7.75% 7.75%
Rate of increase in future compensation levels 7.50 7.50
Long-term rate of return on assets 5.00 5.00
</TABLE>
Warsaw has a profit-sharing plan that covers substantially all employees.
Contributions to the plan are based on a formula and are contingent upon
the attainment of certain levels of earnings as defined in the agreement.
During the six months ended December 31, 1997 and 1996 (unaudited), the
expenses of the plan were approximately $3,000 and $500, respectively.
During the years ended June 30, 1997 and 1996, expenses of the plan were
approximately $7,000 and $14,000, respectively.
The Company sponsors a defined contribution 401(k) plan that covers
substantially all employees. Contributions to the plan are made to match
50% of employee contributions up to 6% of the employee's salary. Expenses
of the plan were approximately $18,000 and $19,000 for the six months ended
December 31, 1997 and 1996 (unaudited), respectively. Expenses of the plan
were approximately $38,000 and $18,000 for the years ended June 30, 1997
and 1996, respectively. Employer matching contributions vest over a six
year period.
(Continued)
F-21
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) STOCK OPTIONS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. A summary of the status of the Company's
stock options and the changes therein is presented below:
<TABLE>
<CAPTION>
Six months
ended December 31 Years ended June 30
1997 1997 1996
------------------ ---------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,150 $164.59 1,180 $172.01 1,230 $163.32
Granted 200 299.47 - - - -
Exercised (595) 193.61 (30) 145.00 (50) 145.00
----- ----- -----
Outstanding at end of year 755 189.82 1,150 164.59 1,180 172.01
----- ----- -----
----- ----- -----
Options exercisable at
period-end 55 450 395
----- ----- -----
----- ----- -----
</TABLE>
At June 30, 1997, 1,150 stock options were outstanding at a weighted
average exercise price of $164.59 (exercise prices ranged from $145-187 per
share). The weighted average remaining contractual life was less than one
year. The 450 options exercisable at June 30, 1997 were at a weighted
average exercise price of $172.04.
(Continued)
F-22
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) PREFERRED STOCK
The Class A preferred stock is entitled to receive 5% nonparticipating,
noncumulative dividends annually, except that no dividends may be paid on
common stock until any unpaid dividends, if any, on the Class A preferred
have been paid. The Class A preferred is convertible into common stock at
a rate of 1.539 shares of common stock for each share of Class A preferred
stock held. Additionally, the Company must offer to redeem any or all of
the outstanding Class A preferred stock for a cash price of at least 105%
of its par value before redeeming any common stock. In the event of the
Company's liquidation, holders of the Class A preferred stock are entitled
to receive the par value per share plus any unpaid dividends before any
distribution to holders of the Company's Class B or common stock.
The Class B preferred stock receives no dividends. In the event of the
Company's liquidation, holders of the Class A preferred stock are entitled
to receive the par value per share before any distribution is made to the
holders of the Company's Class B preferred stock or common stock.
(Continued)
F-23
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) NET INCOME PER SHARE
The following table reflects the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computation:
<TABLE>
<CAPTION>
Six months ended Years ended
(In thousands, except share data) December 31, June 30,
-------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Net income $1,479 1,208 2,615 2,301
Less preferred stock dividends 9 9 19 19
------ ------ ------ ------
Net income available to common
stockholders $1,470 1,199 2,596 2,282
------ ------ ------ ------
------ ------ ------ ------
Average shares outstanding 41,323 41,396 41,398 41,540
Effect of dilutive securities:
Stock options 300 373 275 243
Convertible preferred stock 2,470 2,592 2,522 2,601
------ ------ ------ ------
Average shares outstanding
including dilutive securities 44,093 44,361 44,195 44,384
------ ------ ------ ------
------ ------ ------ ------
Net income per share:
Basic $35.57 28.96 62.71 54.93
Diluted 33.54 27.23 59.17 51.84
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(17) REGULATORY MATTERS
The Company's principal source of funds is dividends received from the
Banks. Under applicable banking laws, bank regulatory authorities must
approve the declaration of dividends in any year if such dividends are in
an amount in excess of the sum of net income of that year and retained
earnings of the preceding two years. At January 1, 1998 (unaudited) and
July 1, 1997 the Banks could declare, without regulatory approval,
dividends of approximately $1,727,000 and $1,126,000, respectively.
(Continued)
F-24
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) REGULATORY MATTERS (CONTINUED)
The Company is subject to various regulatory capital requirements
administered by 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classifications 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 Company to maintain minimum amounts and ratios of Total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier I capital (as defined) to average assets (as defined).
Management believes as of December 31, 1997 and June 30, 1997, that the
Company meets all capital adequacy requirements to which it is subject.
(Continued)
F-25
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) REGULATORY MATTERS (CONTINUED)
As of December 31, 1997, the most recent regulatory notifications
categorized the Banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Company must maintain a minimum total risk-based capital ratio of at least
10%, a Tier 1 risk-based ratio of at least 6% and a Tier 1 leverage ratio
of at least 5%. There are no conditions or events since the notification
that management believes have changed the Company's category. A summary of
the Company's and the individual banks' capital ratios follows:
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------------
1997 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Total risk - based capital (1)
Consolidated 14.7% 13.1% 10.9%
Community First Bank, N.A. 13.7 13.0 12.0
Community First Bank of Kentucky 13.8 12.9 13.3
Tier 1 risk based capital (1)
Consolidated 13.5% 11.9% 9.9%
Community First Bank, N.A. 12.4 11.8 10.8
Community First Bank of Kentucky 12.6 11.7 12.1
Tier 1 leverage (2)
Consolidated 10.0% 9.0% 8.0%
Community First Bank, N.A. 9.5 9.3 8.9
Community First Bank of Kentucky 9.5 8.7 9.2
</TABLE>
(1) Ratio is computed in relation to risk-weighted assets.
(2) Ratio is computed in relation to average assets.
(Continued)
F-26
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) COMMITMENTS AND CONTINGENCIES
The Company's financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business to meet
the financing needs of customers. These include commitments to extend
credit and letters of credit. These instruments involve, to varying
degrees, elements of credit, interest rate and liquidity risk in excess of
the amount recognized in the balance sheet. The extent of the Banks
involvement in various commitments and contingent liabilities is expressed
by the contract amount of such instruments.
Commitments to extend credit, which amounted to approximately $6,645,000,
$6,864,000 and $6,317,000 at December 31, 1997 (unaudited) and June 30,
1997 and 1996, respectively, are agreements to lend to a customer as long
as there is not a violation of any condition established in the contract.
Commitments have exposure to some credit loss in the event of
nonperformance of the customer. The Banks credit policies and procedures
for credit commitments and financial guarantees are the same as those for
extensions of credit that are recorded on the balance sheet. The Banks
experience has been that most loan commitments are drawn upon by customers.
The Banks evaluate each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Banks upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Banks
guaranteeing the performance of a customer to a third party. Those
guarantees primarily consist of performance assurances made on behalf of
the customers who have contractual commitments to produce or deliver goods
or services. Most guarantees are for one year or less. The risk to the
Banks arises from its obligation to make payment in the event of the
customer's contractual default. The amount of collateral obtained if
deemed necessary by the Banks is based upon management's credit evaluation
of the customer. Collateral held varies. At December 31, 1997 (unaudited)
and June 30, 1997 and 1996, the Banks had approximately $547,000,
$1,706,000 and $1,167,000, respectively, in standby letters of credit
outstanding.
(Continued)
F-27
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is a party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation and
claims will not be material to the Company's consolidated financial
position or results of operations.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
(In Thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 5,844 5,844 7,699 7,699
Securities 11,923 12,031 12,565 12,629
Loans, net 103,485 103,589 91,664 91,503
Financial liabilities:
Deposits $108,713 108,777 100,001 100,061
Federal funds purchased
and securities sold under
agreements to repurchase 833 833 734 734
Advances from FHLB 2,181 2,156 2,286 2,141
Note payable 250 250 2,500 2,500
Off balance sheet financial
instruments:
Commitments - - - -
Letters of credit - - - -
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value.
The fair value for cash and short-term investments is the financial
statement carrying amount.
(Continued)
F-28
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value for securities equals quoted market price, if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities or dealer
quotes.
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
The fair value of advances from FHLB are based upon rates currently
available to the Company for debt with similar terms and remaining
maturities.
The fair value of commitments to extend credit are estimated using
fees currently charged to enter into similar agreements and the
creditworthiness of the customers. The fair value of standby letters
of credit are based on fees currently charged for similar agreements
or the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial
instruments. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and
other factors. These estimates are subject to judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
(Continued)
F-29
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial data (unaudited) for Community First Financial, Inc.
(parent company only) follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets
(In Thousands) June 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiaries $ 579 898
Investment in subsidiaries 12,653 12,039
Other assets 184 175
------- -------
Total assets $13,416 13,112
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 250 2,500
Other liabilities 383 204
Stockholders' equity 12,783 10,408
------- -------
Total liabilities and stockholders'
equity $13,416 13,112
------- -------
------- -------
</TABLE>
(Continued)
F-30
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Condensed Statements of Income Years ended
(In Thousands) June 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Income:
Dividends from subsidiaries $2,250 2,140
Other income 13 8
------ ------
Total income 2,263 2,148
------ ------
Expenses:
Interest expense 112 293
Other expenses 282 256
------ ------
Total expenses 394 549
------ ------
Income before income tax benefit
and equity in undistributed
earnings of subsidiaries 1,869 1,599
Income tax benefit (131) (144)
------ ------
Income before equity in
undistributed earnings of subsidiaries 2,000 1,743
Equity in undistributed earnings
of subsidiaries 615 558
------ ------
Net income $2,615 2,301
------ ------
------ ------
</TABLE>
(Continued)
F-31
<PAGE>
COMMUNITY FIRST FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Years ended
(In Thousands) June 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,615 2,301
Adjustments to reconcile net
income to cash provided
by operating activities:
Amortization 22 21
Equity in undistributed
earnings of subsidiaries (615) (558)
Increase in other assets (26) 480
Increase in other liabilities 179 55
------ ------
Net cash provided by operating
activities 2,175 2,299
------ ------
Cash flows from financing activities:
Repayment of notes payable (2,250) (1,524)
Proceeds from issuance of
common stock 4 7
Repurchase of common stock - (86)
Repurchase of preferred stock (14) (14)
Dividends paid (234) (193)
------ ------
Net cash used in financing
activities (2,494) (1,810)
------ ------
Net increase (decrease) in cash
and cash equivalents (319) 489
Cash and cash equivalents at
beginning of period 898 409
------ ------
Cash and cash equivalents at
end of period $ 579 898
------ ------
------ ------
</TABLE>
F-32
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of
the 9th day of March, 1998, by and between National City Bancshares, Inc., an
Indiana corporation ("NCBE"), and Community First Financial, Inc., a Kentucky
corporation ("CFF").
W I T N E S S E T H:
WHEREAS, CFF owns all of the outstanding capital stock of Community First
Bank of Kentucky, a Kentucky banking corporation with its principal place of
business located in Warsaw, Kentucky (the "State Bank"), and Community First
Bank, National Association, Maysville, a national banking association with its
principal place of business in Maysville, Kentucky (the "National Bank" and,
together with the State Bank, the "Banks"); and
WHEREAS, the parties desire that CFF 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 CFF deems the Merger advisable and in
the best interests of CFF and its shareholders and has adopted a resolution
approving this Agreement and directing that this Agreement be submitted for
consideration at a meeting of CFF's shareholders; and
WHEREAS, the Board of Directors of NCBE has adopted a resolution approving
the Merger and this Agreement.
NOW, THEREFORE, for and 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
CFF, 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") and the Kentucky Business Corporation Act (the "KBCA" and, together with
the IBCL, the "Statutes"), at the Effective Time (as hereafter defined), CFF
will be merged with and into NCBE. CFF 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 CFF
in accordance with the Statutes.
(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 Kentucky 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 CFF as promptly as practicable 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
A-1
<PAGE>
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 Statutes (the "Articles
of Merger") relating to the Merger with the Indiana Secretary of State and the
Kentucky 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".
(d) TAX TREATMENT; POOLING OF INTERESTS. The parties intend for the
Merger to qualify as a tax-free reorganization within the meaning of Section
368(a)(1)(A) and related provisions of the Internal Revenue Code of 1986, as
amended (the "Code") and as a "pooling of interests" for accounting purposes.
Each of the parties agree to cooperate and take such actions as may be
reasonably necessary to assure such qualification.
2. EFFECTS OF THE MERGER.
(a) EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the Statutes.
(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 CFF STOCK. The Merger shall have the following effects
with regard to shares of the authorized classes of capital stock of CFF ("CFF
Stock"):
(a) CONVERSION OF CFF COMMON. As of the Effective Time, each issued and
outstanding share of CFF Stock other than Dissenting Shares (as hereafter
defined) shall be converted into the right to receive from NCBE the following
number of shares of Common Stock, without par value ("NCBE Common"): (i) each
outstanding share of CFF Common Stock, no par value ("CFF Common"), shall be
converted into the right to receive 32.0692 shares of NCBE Common; (ii) each
outstanding share of CFF Class A Preferred Stock, $225.00 par value per share
("CFF A Preferred"), shall be converted into the right to receive 49.3545 shares
of NCBE Common; and (iii) each outstanding share of CFF Class B Preferred Stock,
$500.00 par value per share ("CFF B Preferred"), shall be converted into the
right to receive 39.0000 shares of NCBE Common. If between the date hereof and
prior to the Closing, the shares of NCBE Common should be changed as the result
of a stock dividend, stock split or reclassification (a "Share Adjustment"), the
number of shares of NCBE Common to be received by holders of each class of CFF
Stock shall be appropriately adjusted to reflect the Share Adjustment.
(b) NO FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of NCBE Common shall be issued upon the surrender for exchange
of certificates evidencing CFF Stock. Each holder of CFF Stock exchanged
pursuant to the Merger 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 Value of the NCBE Common. Such
cash, together with the shares of NCBE Common to be issued pursuant to Section
3(a) is referred to as the "Merger Consideration." The Average Value of a share
of NCBE Common shall be equal to the average of the means between the highest
and lowest per share trading prices reported by the Nasdaq National Market
System for the ten (10) trading days ended on the third trading day prior to the
Closing.
A-2
<PAGE>
(c) CANCELLATION OF TREASURY STOCK. As of the Effective Time, each share
of CFF Stock that is owned by CFF 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 CFF in a fiduciary or similar capacity.
(d) DISSENTING SHARES. "Dissenting Shares" shall mean shares of any class
of CFF Stock held by any person who properly exercises and perfects rights under
the KBCA as a dissenting shareholder. The holder of any Dissenting Shares shall
only have the rights accorded a dissenting shareholder under the KBCA and shall
not receive any part of the Merger Consideration.
(e) EXCHANGE OF CFF OPTIONS. Each option to purchase CFF Stock (a "CFF
Option") outstanding and unexercised immediately prior to the Effective Time
shall be exchanged for a substitute Nonqualified Stock Option under NCBE's 1998
Stock Option and Incentive Plan (the "NCBE Option Plan"). The substitute option
shall permit the holder of a CFF Option to acquire such number of shares
(rounded down to the nearest whole number) of NCBE Common equal to the product
of number of shares of CFF Stock issuable pursuant to such option multiplied by
32.0692 at an exercise price (rounded to the nearest whole cent) equal to the
per share exercise price applicable to the CFF Option divided by 32.0692.
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 National City Bank of Evansville (the "Exchange Agent"),
shall send to each record holder of each class of CFF Stock (except for holders
of Dissenting Shares), a letter of transmittal for use in effecting the
surrender of certificates formerly evidencing CFF Stock in exchange for the
Merger Consideration. The letter of transmittal shall specify how surrender of
the certificates formerly evidencing shares of CFF Stock shall be effected.
Upon surrender of a certificate formerly evidencing CFF Stock 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 appropriate 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 CFF Stock until (and then only to the extent that)
the holder thereof validly surrenders the certificates formerly representing the
shares of CFF Stock 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 the Merger Consideration for any shares of CFF Stock
is to be issued 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 member of the Medallion Signature Guarantee
Program that is either a member firm of any national securities exchange in the
United States or the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States, 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 a certificate evidencing
shares of CFF Stock, until the surrender of such certificate. Upon surrender of
any such certificate there shall be paid, without interest, the amount of
accrued and unpaid dividends or other distributions payable with respect to the
whole shares of NCBE Common included in the Merger Consideration issuable to the
holder of such certificate.
A-3
<PAGE>
(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 CFF Stock for any property delivered to a
public official pursuant to applicable escheat or abandoned property laws.
(d) NO FURTHER OWNERSHIP RIGHTS IN CFF STOCK. The Merger Consideration
paid upon the surrender of a certificate evidencing shares of CFF Stock 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 CFF Stock
theretofore represented by such certificate(s), subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by CFF on such shares of CFF Stock in accordance with the terms
of this Agreement or prior to the date of this Agreement and which remain unpaid
at the Effective Time and have not been paid prior to such surrender, and there
shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of CFF Stock which were outstanding
immediately prior to the Effective Time.
(e) WITHHOLDING RIGHTS. NCBE shall be entitled to deduct and withhold
from the Merger Consideration or any dividends payable to former holders of CFF
Stock such amounts as NCBE is required to deduct and withhold with respect to
the making of such payment under the Code. Such withheld amounts shall be
treated as having been paid by any such former holder of shares of CFF Stock.
6. REPRESENTATIONS AND WARRANTIES OF NCBE. NCBE represents and warrants
to CFF 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
under the IBCL, the articles of incorporation or by-laws of NCBE or the rules of
the National Association of Securities Dealers, Inc. which apply to Nasdaq
National Market issuers in order to approve the Merger.
(c) CAPITAL STOCK. The authorized capital stock of NCBE consists of
20,000,000 shares of NCBE Common, of which 10,727,247 shares were issued and
outstanding as of December 31, 1997. 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 of this Agreement, 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) outstanding
options to purchase shares of NCBE Common pursuant to NCBE's Incentive Stock
Option Plan and (ii) commitments to issue shares of NCBE Common in connection
with the proposed acquisitions of Illinois One Bancorp, Inc. and Trigg Bancorp,
Inc.
A-4
<PAGE>
(d) SEC DOCUMENTS. NCBE has provided CFF with copies of the following
reports 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) NCBE's annual report on Form 10-K for the year ended
December 31, 1996; and (ii) NCBE's quarterly reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1997 (collectively, the "SEC
Documents"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder and did not 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. Included in the SEC Documents are the
consolidated balance sheets of NCBE and its subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the three (3) years ended December 31,
1996, together with the notes thereto, and the unaudited consolidated balance
sheet of NCBE and its subsidiaries as of September 30, 1997 and the related
unaudited statements of income, changes in shareholders' equity and cash flow
for the nine months then ended. Such financial statements (other than for
interim periods) 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 (subject, in the case of interim financial statements, to
normal recurring year-end adjustments). At December 31, 1996, 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, 1996, 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 best of NCBE's
knowledge, 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 of 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. As of the date of this Agreement, NCBE has no
reason to believe that the Merger will not qualify as a pooling-of-interests for
accounting purposes.
(j) TRUE AND COMPLETE INFORMATION. No representation or warranty made by
NCBE contained in this Agreement and no statement contained in any certificate,
list, exhibit or other instrument specified in this Agreement,
A-5
<PAGE>
whether heretofore furnished to CFF or hereinafter required to be furnished to
CFF, 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.
7. REPRESENTATIONS AND WARRANTIES OF CFF. CFF 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 CFF. CFF is a corporation
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Kentucky and has all necessary corporate power to own its
properties and assets and to carry on its business as now conducted. CFF
is duly qualified to conduct its business and is in good standing in each
jurisdiction in which the nature of the business transacted by CFF requires
such qualification. CFF 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, CFF has 250,000 shares of CFF
Common authorized, of which 41,969 shares are issued and outstanding and no
shares are held in the treasury, 2,000 shares of CFF A Preferred
authorized, of which 1,605 shares are issued and outstanding and no shares
are held in the treasury, and 100 shares of CFF B Preferred authorized, of
which 18 shares are issued and outstanding and no shares are held in the
treasury. All of the issued and outstanding shares of CFF Stock are duly
and validly authorized and issued, fully paid and nonassessable. None of
the issued and outstanding shares of CFF Stock have been issued in
violation of any preemptive rights. There are no other classes of capital
stock or equity securities of CFF other than CFF Stock. Except as set
forth on the Disclosure Schedule, 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,
shares of any class of CFF Stock or any contracts, commitments,
understandings or arrangements by which CFF is or may be obligated to issue
additional shares of any class of CFF Stock.
(iii) ORGANIZATION OF THE BANKS. The State Bank is a banking
corporation duly organized, validly existing and in good standing under the
laws of the Commonwealth of Kentucky. The National Bank is a national
banking association duly organized, validly existing and in good standing
under the laws of the United States. The deposits of the Banks are insured
by the Bank Insurance Fund administered by the FDIC up to applicable
limits.
(iv) CAPITAL STOCK OF THE BANKS. On the date hereof, the State Bank
has 5,000 shares of common stock, $50.00 par value per share ("State Bank
Stock"), authorized, of which 3,333 shares are issued and outstanding and
no shares are held in the treasury and the National Bank has 6,400 shares
of common stock, $100.00 par value per share ("National Bank Stock" and
together with State Bank Stock, "Bank Stock"), authorized, of which 6,400
shares are issued and outstanding and no shares are held in the treasury.
CFF is the record and beneficial owner of all of the issued and outstanding
shares of the 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 other
classes of capital stock or equity securities of the Banks other than Bank
Stock. 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, shares of Bank Stock or
any contracts, commitments, understandings or arrangements by which either
of the Banks is or may be obligated to issue additional shares of Bank
Stock.
(b) AUTHORIZATION AND NO VIOLATION. Subject to receipt of approvals from
the Applicable Governmental Authorities and approval by the shareholders of CFF,
the execution and delivery of this Agreement by CFF 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 CFF and this
Agreement constitutes the legal, valid and binding obligation of
A-6
<PAGE>
CFF, enforceable against CFF 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 CFF 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 CFF or the articles of incorporation or articles of
association, as the case may be, and by-laws of the Banks, (ii) any Material
Contract (as defined in subsection (f)) of CFF or the Banks or (iii) any other
material license, law, order, rule, regulation or judgment to which CFF or
either of the Banks is a party, is bound or by which any of their respective
properties or assets is subject. The minute books of CFF 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).
(c) SUBSIDIARIES. The Banks are the only entities (including, without
limitation, corporations, partnerships, limited liability companies and joint
ventures) in which CFF, directly or indirectly through the Banks, has any equity
or other ownership interest.
(d) FINANCIAL STATEMENTS. CFF has delivered to NCBE the balance sheets of
the Banks as of June 30, 1997 and 1996 and the related consolidated statements
of income, stockholder's equity and cash flows for the two years ended June 30,
1997. Such financial statements have been audited by KPMG Peat Marwick, LLP,
independent auditors, whose reports thereon are 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 balance sheets present fairly the financial
conditions of the Banks as of their respective dates and the statements of
income present fairly the results of operations of the Banks for the respective
periods covered. At June 30, 1997, there were no material liabilities (actual,
contingent or accrued) of the Banks 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) CFF and each of the Banks 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 CFF and each of the Banks either singly or in the aggregate
have set aside adequate reserves. The amounts recorded as reserves for
Taxes on the financial statements of the Banks as of June 30, 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 June 30, 1997 or for any year or period prior thereto.
The federal and state Returns of CFF and the Banks have not been examined
by the Internal Revenue Service ("IRS") or other appropriate tax authority.
There are no material disputes pending, or claims asserted, for Taxes upon
CFF or either of the Banks. None of CFF or the Banks 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.
None of CFF or the Banks has in effect any power of attorney or
authorization to anyone to represent it with respect to any Taxes. CFF has
not filed any consolidated federal income tax return with an "affiliated
group" (within the meaning of Section 1504 of the Code), where CFF was not
the common parent of the group. None of CFF or the Banks 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 CFF and
the Banks. None of CFF or the Banks has filed a consent under Section
341(f) of the Code. CFF 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 December 31, 1997, 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.
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(ii) All monies required to be withheld from employees of CFF and the
Banks 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 CFF management is adequate, has been established.
(f) MATERIAL CONTRACTS. All executory contracts, indentures, commitments,
and other agreements in excess of $100,000 to which CFF or either of the Banks
is a party or to which CFF or either of the Banks or any of their properties are
subject (collectively, the "Material Contracts" and each a "Material Contract")
were entered into in the ordinary course of business. CFF and each of the Banks
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 CFF or either of the Banks or, to the best knowledge of CFF
management, any other party thereto has occurred which will impair the ability
of CFF or the Banks to enforce any material rights thereunder.
(g) REAL ESTATE. CFF has good title to all of the assets reflected as
owned in the financial statements described in subsection (e), 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. As of the
date hereof, the real properties, structures, buildings, equipment, and the
tangible personal property owned, operated or leased by CFF or the Banks are (i)
to the best knowledge of CFF management, in good repair, order and condition,
except for depletion, depreciation and ordinary wear and tear, and (ii) to the
best of CFF's knowledge, free from any 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 CFF or the Banks of the real
property or tangible personal property owned or leased by any of them.
(h) NO MATERIAL ADVERSE CHANGE. Since June 30, 1997, there has been no
material adverse change in the business, financial condition, properties,
results of operations, or capitalization of CFF or either of the Banks.
(i) LITIGATION. Except as set forth on the Disclosure Schedule, there is
no litigation, claim, investigation or other proceeding pending or, to the
knowledge of CFF, threatened, against or adversely affecting CFF or either of
the Banks, or of which the property of CFF or either of the Banks is or would be
subject and which would have a material adverse effect on the financial
condition, results of operations or business of CFF and the Banks, taken as a
whole. To the best of CFF's knowledge, there is no litigation, claim,
investigation or other proceeding to which any director, officer, employee or
agent of CFF or either of the Banks 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 CFF or either of the Banks, or the assets or business of CFF or either
of the Banks, which could reasonably be expected to have a material adverse
effect on the financial condition, results of operations or business of CFF and
the Banks, taken as a whole, or which challenges the validity of the
transactions contemplated by this Agreement.
(j) INSURANCE. Except as set forth on the Disclosure Schedule, CFF and
each of the Banks has in effect insurance coverage with reputable insurers,
which in respect to amounts, types and risks insured, is adequate in the opinion
of CFF for the businesses in which CFF and the Banks are engaged. All policies
of insurance owned or held by CFF or either of the Banks 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. CFF and each of the Banks 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 CFF and the Banks, to the best knowledge of CFF management,
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 CFF and the Banks, taken as a whole.
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(l) BROKER'S AND FINDER'S FEES. None of CFF or the Banks has incurred any
obligation or liability, contingent or otherwise, for any brokers or finders in
respect of the matters provided for in this Agreement.
(m) EMPLOYEE BENEFIT PLANS.
(i) Except for the businesses conducted by CFF and the Banks, there
are no other trades or businesses, whether or not incorporated, which,
together with CFF or either of the Banks, 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 CFF or
either of the Banks or their predecessors by merger 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 by CFF or either of
the Banks for the benefit of any current or former employees of CFF, the
Banks or their predecessors by merger (the ERISA Plans and such other plans
are collectively referred to as the "Plans"). Except as otherwise set
forth on the Disclosure Schedule, CFF has made available to NCBE copies of
all Plans and related trusts or funding arrangements for such Plans; the
most recent determination letter for each Plan as to which a determination
letter has been issued, 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 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 ERISA Plan. CFF has also made available to NCBE for any Plan,
copies of any 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.
(iii) No Plan provides benefits, including without limitation death
or medical benefits (whether or not insured), with respect to current or
former employees of CFF, the Banks or their predecessors by merger 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) except as otherwise set forth on the Disclosure Schedule, benefits
which in the aggregate are not material.
(iv) Except as set forth on the Disclosure Schedule, 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. To
the best of CFF's knowledge, nothing has occurred since the dates of the
respective IRS favorable determination letters that would adversely affect
the qualification of the Plans and their related trusts.
(v) Except as set forth on the Disclosure Schedule, to the best of
CFF's knowledge, all of the Plans, and any related trust agreement, group
annuity contract, insurance policy or other funding arrangement are in
compliance in all material respects 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 compliance with
such requirements and its own terms in all material respects.
(vi) To the best of CFF's knowledge, none of CFF, the Banks or their
predecessors by merger currently maintains or contributes to, or has ever
maintained or contributed to, a Plan that is subject to Title IV
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<PAGE>
of ERISA or the minimum funding requirements of Section 412 of the Code,
other than the Community First Defined Benefit Plan.
(vii) None of CFF, the Banks, their predecessors by merger, any of the
Plans or any trust created thereunder, or, to the best of CFF's knowledge,
any trustee or administrator thereof has engaged in a transaction in
connection with which CFF or the Bank, any of the Plans or any such trust,
would 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. None of CFF or the Banks is, or, as a result of any actions,
omissions, occurrences or state of facts existing prior to or at the
Effective Time, will become liable for any tax imposed under Section 4978
of the Code.
(viii) 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) to the best of
CFF's knowledge, complaints to or by any governmental entity, which are
pending, anticipated or threatened, against any Plan or its assets, or, to
the best of CFF's knowledge, against any Plan fiduciary or administrator,
or against CFF or either of the Banks or their officers or employees with
respect to any Plan.
(ix) To the best of CFF's knowledge and except as set forth on the
Disclosure Schedule, 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, CFF or either of
the Banks, to any person, entity or government agency for any conduct,
practice or omission 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.
(x) 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, golden
parachute or otherwise) becoming due to any director or any employee of CFF
or either of the Banks from CFF or either of the Banks under any Plan; (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.
(n) LABOR MATTERS. None of CFF or the Banks is a party to or has in
effect 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 CFF,
the Banks or their predecessors by merger 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 best of CFF's knowledge, neither the conduct nor operation
of any of CFF, the Banks or their predecessors by merger nor any condition
of any property presently or previously owned, leased or operated by any of
them violates or has violated Environmental Laws in any respect that would
have a material adverse effect on the financial condition, results of
operations or business of CFF and the Banks, taken as a whole, and no
condition has existed or event has occurred with respect to any 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) CFF or either of the Banks 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 CFF and the
Banks, taken as a whole. None of CFF or the Banks has received any notice
from any person or entity that any of CFF, the
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Banks or their predecessors by merger 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 any 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. None of CFF or the Banks is a party to any
enforcement action instituted by any memorandum of understanding, agreement,
consent agreement or cease and desist order with the Kentucky Department of
Financial Institutions, the Federal Reserve Board, the FDIC or any federal or
state regulatory agency, and none of CFF or the Banks 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 CFF
or either of the Banks.
(q) POOLING-OF-INTERESTS. As of the date of this Agreement, CFF has no
reason to believe that the Merger will not qualify as a pooling-of-interests for
accounting purposes.
(r) TRUE AND COMPLETE INFORMATION. No representation or warranty made by
CFF contained in this Agreement and no statement 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 CFF 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
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. NCBE shall keep CFF reasonably informed as to the status
of such applications and shall provide to CFF 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.
(d) ACCESS TO INFORMATION. NCBE shall permit CFF reasonable access during
regular business hours to its properties. NCBE shall disclose and make
available to CFF and shall use its best efforts to cause its agents and
authorized representatives to disclose and make available to CFF, 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
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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 CFF may have a reasonable
and legitimate interest in furtherance of the transactions contemplated by this
Agreement.
(e) ELECTION OF ADDITIONAL NCBE DIRECTOR. After the Effective Time, NCBE
agrees to use its best efforts to expand its Board of Directors by one member
and elect Robert D. Vance to fill the vacancy created by such action.
(f) NCBE OPTION PLAN. NCBE agrees to use its best efforts to cause the
NCBE Option Plan to be approved by the holders of NCBE Common at the 1998 annual
meeting of shareholders and to issue the substitute Nonqualified Stock Options
under the NCBE Option Plan pursuant to Section 3(e) hereof. NCBE shall also use
its best efforts to file a registration statement under the Securities Act with
respect to the shares of NCBE Common issuable pursuant to the NCBE Option Plan.
9. AGREEMENTS WITH RESPECT TO CONDUCT OF CFF AND THE BANKS PRIOR TO THE
CLOSING. CFF agrees with NCBE as follows:
(a) ORDINARY COURSE, INSURANCE AND PRESERVATION OF BUSINESS. CFF and each
of the Banks 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. CFF will promptly notify NCBE of any event of which hereafter
becomes known to CFF management which may reasonably have a material adverse
effect on the financial condition, operations, business or assets of CFF and the
Banks, taken as a whole, or if CFF determines that it may be unable to fulfill
the conditions set forth in Section 11 or 12 hereof.
(c) PROHIBITED ACTION WITHOUT APPROVAL. None of CFF or the Banks will,
except with the prior written consent of NCBE, do any of the following:
(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
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become a subsidiary or affiliate; sell or otherwise dispose of any real
property owned or operated by CFF or either of the Banks; enhance, expand,
modify, replace or alter any computer or data processing system owned,
leased or licensed by CFF or either of the Banks (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
$2,000,000 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 $250,000 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 CFF 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 CFF Common in an
amount equal to $3.00 per share payable semi-annually on July 1 and
January 1, and (B) cash dividends on the CFF A Preferred in an amount equal
to $5.625 per share, payable semi-annually on March 30 and September 30;
provided, however, that CFF shall coordinate with NCBE the record and
payment dates of dividends payable pursuant to clauses (A) and (B) for the
quarter in which the Effective Time occurs, such that CFF shareholders
shall receive dividends from either CFF or NCBE, but not both, with respect
to such quarter, (C) cash dividends payable by the Banks, (D) 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, (E) the payment
of any debt security upon the maturity thereof, and (F) obligations or
liabilities permitted to be incurred pursuant to Section 9(c)(i) hereof; or
(iv) sell, pledge or redeem any Bank Stock; amend its articles of
incorporation or articles of association, as the case may be, 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 or amend any employment agreement; 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 Banks; 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.
(d) NO SOLICITATION.
(i) None of CFF or the Banks nor any officer, director or any
representative thereof shall solicit or authorize the solicitation of, or,
unless CFF'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, (A) enter into or authorize any discussions with any third
party concerning, or (B) furnish or authorize the furnishing of any
confidential information relating to CFF or the Banks 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 CFF or any or all of the capital stock, other
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<PAGE>
equity securities or other ownership interests, or all or substantially all
of the assets, of CFF or the Banks. CFF 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, CFF shall immediately
terminate all discussions then existing with any third parties regarding
any possible offer to acquire CFF or the Banks.
(e) INSIDER LENDING. The Banks shall not change or modify any of their
current practices relating to the lending of money, secured or unsecured, to its
affiliated persons, including but not limited to their directors, officers and
employees.
(f) NO VIOLATION. None of CFF or the Banks 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. CFF and each of the Banks will maintain its books,
accounts and records in accordance with GAAP. None of CFF or the Banks 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. None of CFF or
the Banks shall change any practice or policy with respect to the charging off
or loans or the maintenance of their reserve for possible loan losses, except as
required by law, regulation or GAAP.
10. ADDITIONAL AGREEMENTS. CFF agrees as follows:
(a) CONTINUING ACCESS TO INFORMATION. Through the Effective Time, CFF
shall permit NCBE and its authorized representatives reasonable access during
regular business hours to CFF's properties and those of the Banks. CFF shall
make its and the Banks' 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 CFF shall, and shall cause the
Banks 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 CFF and the Banks, 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. CFF shall promptly provide to NCBE copies of any
reports to the Board of Directors of CFF or either of the Banks or any committee
thereof and minutes of all meetings of the Board of Directors of CFF and the
Banks and each committee thereof. Throughout the period prior to the Effective
Time, CFF and the Banks will cause one or more designated representatives to
confer with representatives of NCBE on the ongoing operations of CFF and the
Banks.
(c) NOTIFICATION OF CHANGE. CFF shall promptly notify NCBE of any
material change in the ordinary course of business or in the operation of the
properties of CFF or either of the Banks and of any governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), or the institution or the threat of litigation involving CFF or
either of the Banks which is material to, or which might have a material adverse
effect on CFF and the Banks, taken as a whole, or of any breach by CFF of any
representation, warranty, covenant or agreement set forth in this Agreement, and
will keep NCBE promptly and fully informed of such events.
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<PAGE>
(d) INFORMATION FOR REGULATORY FILINGS. Upon request by NCBE, CFF shall
promptly furnish NCBE with any information within its possession which relates
to CFF or either of the Banks 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. CFF 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.
(e) RESTRICTION ON RESALES. CFF 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 each class of CFF Stock and any other
persons who may reasonably be deemed by NCBE to be an "affiliate" of CFF within
the meaning of such term as used in Rule 145 under the Securities Act.
(f) SHAREHOLDER APPROVAL. CFF shall cause to be duly called and held a
special meeting of the holders of CFF Stock for submission of this Agreement and
the Merger for approval of such shareholders as required by the KBCA. In
connection with such meeting, (i) CFF 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
Commission and applicable state securities authorities, and CFF shall mail the
Proxy Statement/Prospectus to its shareholders; (ii) CFF 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 CFF (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) CFF 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.
11. CONDITIONS TO OBLIGATIONS OF BOTH PARTIES. The respective obligations
of each party to effect the Merger is 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 each of the classes of CFF Stock, voting as separate
voting groups.
(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 (i) result in an order enjoining the Merger, (ii)
result in a determination that a party has failed to comply with applicable
legal requirements in connection with the Merger; or (iii) 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 law 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.
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<PAGE>
(e) FEDERAL TAX OPINION. The parties shall have received an opinion of
Baker & Daniels, in form and substance satisfactory to the parties, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code and such opinion shall not have been withdrawn
or modified in any material respect prior to the Effective Time.
(f) EXCHANGE OF CFF OPTIONS. Each outstanding and unexercised CFF Option
shall have been exchanged for a substitute Nonqualified Stock Option under the
NCBE Option Plan or other arrangements satisfactory to the holders of such CFF
Options shall have been made.
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 CFF
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 CFF and the Banks, taken
as a whole; CFF 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
CFF and the Banks, taken as a whole; and there shall be delivered to NCBE a
certificate (dated the Closing and signed by the chief executive officer of CFF)
stating that to the best of his knowledge such conditions have been satisfied.
(b) ATTORNEY'S OPINION. NCBE shall have received an opinion, dated the
Closing, of Stites & Harbison, counsel for CFF, in substantially the form of
Exhibit B attached hereto.
(c) POOLING-OF- INTERESTS. In the opinion of NCBE, after consultation
with its independent auditors, the Merger shall qualify for the
pooling-of-interests method under Accounting Principles Board No. 16 if
consummated in accordance with this Agreement.
(d) EMPLOYEE BENEFIT PLANS. CFF shall have taken such actions as NCBE may
reasonably request to resolve or initiate the resolution of matters identified
on the Disclosure Schedule with respect to the Plans of CFF and the Banks.
13. CONDITIONS TO OBLIGATIONS OF CFF. The obligation of CFF 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 CFF 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) ATTORNEY'S OPINION. CFF shall have received an opinion, dated the
Closing, of Baker & Daniels, counsel for NCBE, in substantially the form of
Exhibit C attached hereto.
(c) FAIRNESS OPINION. CFF shall have received, as of the date of mailing
the Proxy Statement/Prospectus contained in the Registration Statement, an
up-date of the opinion delivered to the Board of Directors of CFF prior to the
date of this Agreement, to the effect that the Merger Consideration is fair,
from a financial viewpoint, to the holders of all classes of CFF stock.
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<PAGE>
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. 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.
16. TERMINATION OF AGREEMENT. Notwithstanding any provision to the
contrary herein, and notwithstanding the fact that the shareholders of CFF have
approved this Agreement, this Agreement may be terminated at any time on or
prior to the Closing:
(a) MUTUAL CONSENT. By mutual written consent of a majority of the
members of each of the Boards of Directors of CFF and NCBE, or
(b) OTHERWISE. (i) By the Board of Directors of CFF, upon written notice
to NCBE, if by August 31, 1998, any of the conditions set forth in Sections 11
or 13 shall not have been satisfied or are no longer capable of being satisfied;
or (ii) by the Board of Directors of NCBE, upon written notice to CFF, if by
August 31, 1998, any of the conditions set forth in Sections 11 or 13 shall not
have been satisfied or are no longer capable of being satisfied.
(c) EFFECT OF TERMINATION. Upon termination of this Agreement by either
NCBE or CFF 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 CFF or the
respective directors, officers, employees, agents or stockholders of either of
them 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 CFF 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 1(d), 5,
8(e) and 14 shall survive the Effective Time or the earlier termination of this
Agreement.
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:
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<PAGE>
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 CFF, addressed to:
Community First Financial, Inc.
One West McDonald Parkway, Suite 3B
Maysville, Kentucky 41056
Attn: Robert D. Vance
Fax No. (606) 564-5757
With a copy addressed to:
Stites & Harbison
Suite 2300
250 W. Main Street
Lexington, Kentucky 40507
Attn: Walter R. Byrne, Jr.
Fax No. (606) 253-9144
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 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.
(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 CFF, to
the extent authorized by applicable law, by a writing signed by CFF and NCBE.
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<PAGE>
(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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<PAGE>
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/ STEPHEN C. BYELICK, JR.
- ----------------------------------
Stephen C. Byelick, Jr., Secretary
COMMUNITY FIRST FINANCIAL, INC.
By: /s/ ROBERT D. VANCE
-----------------------------------------
Robert D. Vance, Chairman of the Board
ATTEST:
/s/ CLYDE A. (PETE) TURNER
- ----------------------------------
Clyde A. (Pete) Turner, Secretary
A-20
<PAGE>
EXHIBIT A
FORM OF AFFILIATE LETTER
Gentlemen:
In connection with the merger (the "Merger") of Community First Financial,
Inc., a Kentucky corporation ("CFF"), with and into National City Bancshares,
Inc., an Indiana corporation ("NCBE"), pursuant to the Agreement and Plan of
Merger dated as of ________ __, 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 ($1.00 stated value per share), 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 CFF 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 CFF to
cause the Merger to be consummated, I hereby represent and warrant to, and agree
with NCBE and CFF 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 CFF
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 CFF 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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<PAGE>
EXHIBIT B
FORM OF OPINION OF COUNSEL FOR CFF
Capitalized terms used and not otherwise defined herein have the meanings
given them in the Plan and Agreement of Merger (the "Agreement").
1. CFF is a corporation validly existing and in good standing under the
laws of the Commonwealth of Kentucky and is registered as a bank holding company
with the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended. The State Bank is a banking corporation validly existing and in good
standing under the laws of the Commonwealth of Kentucky. The National Bank is a
national banking association validly existing and in good standing under the
laws of the United States.
2. CFF and each of the Banks have the requisite corporate power and
authority necessary to carry out their respective businesses as currently
conducted.
3. The authorized capital stock of CFF consists of 250,000 shares of CFF
Common, 2,000 shares of CFF A Preferred and 100 shares of CFF B Preferred.
Based solely on a review of CFF's stock records, there are 41,969 shares of CFF
Common issued and outstanding and no shares in the treasury, 1,605 shares of CFF
A Preferred issued and outstanding and no shares in the treasury and 18 shares
of CFF B Preferred issued and outstanding and no shares in the treasury. The
authorized capital stock of the State Bank consists of 5,000 shares of State
Bank Stock. Based solely on a review of the State Bank's stock records, there
are 3,333 shares of State Bank Stock issued and outstanding, all of which are
owned of record by CFF. The authorized capital stock of the National Bank
consists of 6,400 shares of National Bank Stock. Based solely on a review of
the National Bank's stock transfer records, there are 6,400 shares of National
Bank Stock issued and outstanding, all of which are owned of record by CFF. To
the best of our knowledge, all the outstanding shares of CFF Stock and Bank
Stock have been duly authorized and validly issued and are fully paid and non-
assessable and were not issued in violation of any preemptive rights.
4. The Agreement has been duly executed and delivered by CFF and
constitutes a valid and binding obligation of CFF, enforceable against CFF 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 CFF in connection with the Merger have been
obtained.
6. The execution and delivery by CFF of, and the performance by CFF of
its agreements in, the Agreement do not: (a) violate its articles of
incorporation or by-laws or the articles of incorporation or articles of
association, as the case may be, or by-laws of the Banks, or (b) to the best of
our knowledge after due inquiry, violate, result in a breach of or constitute a
default under any Material Contract to which CFF is a party or by which its
properties are bound.
7. Upon the filing and acceptance of the Articles of Merger by the
Kentucky Secretary of State and assuming the Merger is effective under the laws
of the State of Indiana, the Merger will become effective under the KBCA upon
the issuance of a Certificate of Merger by the Kentucy Secretary of State.
8. The meeting of shareholders of CFF held on ________ __, 1998, was duly
held in accordance with all applicable requirements of the KBCA and the articles
of incorporation and bylaws of CFF. The Agreement was duly adopted by the
affirmative vote of the holders of a majority of each of the classes of CFF
Stock, voting as separate voting groups. No other action on the part of the
holders of any class of CFF capital stock is required to approve the Merger.
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<PAGE>
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 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 (stated value $1.00 per share). All shares of
NCBE Common to be issued to shareholders of CFF 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 holders of any of the capital stock of NCBE to approve
the Merger is required under Indiana law, 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 the best of our knowledge, after due
inquiry, 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 and assuming the Merger is effective under the laws
of the Commonwealth of Kentucky, the Merger will become effective under the IBCL
at the time specified in the Articles of Merger.
9. The Registration Statement has become effective under the Securities
Act and, to our knowledge, is not the subject of any stop order or proceedings
seeking a stop order.
A-23
<PAGE>
APPENDIX B
[PBS Fairness Opinion]
May 14, 1998
Board of Directors
Community First Financial, Inc.
1 McDonald Parkway, Suite 3B
Maysville, Kentucky 41056
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial perspective, to the common and preferred shareholders of
Community First Financial, Inc., Maysville, Kentucky (the "Company") of the
proposed merger of the Company with National City Bancshares, Inc., Evansville,
Indiana ("NCBE"). In the proposed merger, Company common shareholders will
receive 32.0692 NCBE common shares per Company common share or an aggregate of
1,345,912 NCBE common shares for all 41,969 Company common shares outstanding.
In addition, each of the Company's 1,605 Class A preferred shares will be
exchanged for 49.3545 for a total of 79,214 NCBE common shares. The Company's 18
Class B preferred shares will be exchanged at a ratio of 39 NCBE common shares
per Company Class B preferred share or an aggregate of 702 NCBE common shares.
Each of the Company's 500 common stock options will be exchanged for a NCBE
non-qualified option to purchase 32.0692 NCBE common shares at a exercise price
which will be adjusted by dividing the current exercise price by 32.0692, as
further defined in the Agreement and Plan of Merger between NCBE and the Company
(the "Agreement"). On May 11, 1998, the proposed consideration to be received,
by all classes of Company shares, represents an aggregate value of $58,110,465
or $1,294.79 per Company common share, $1,992.69 per Class A preferred share and
$1,574.63 per Class B preferred share, based on the average of the bid/ask price
for NCBE common stock of $40.375 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 subsidiaries
Community First Bank of Kentucky, Warsaw, Kentucky and Community First Bank,
National Association, Maysville, Kentucky (the "Banks") contained in: (i)
March 31, 1998, December 31, 1997 and June 30, 1997 Consolidated Reports of
Condition and Income filed by the Banks with the Federal Reserve; (ii) June
30, 1996 and 1997 audited annual reports of the Banks; (iii) December 31,
1997 consolidated unaudited financial statements of the Company; and (iv)
December 31, 1997 Uniform Bank Performance Reports of the Banks. 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.
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 meetings from January 17,
1996 through January 21, 1998; reports filed with the Securities and Exchange
Commission by NCBE on
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<PAGE>
Forms 10-K, 8-K and 10-Q for the years ending December 31, 1995, 1996 and
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 as of December 31, 1996, September 30, 1997 and December 31, 1997;
March 31, 1998 and December 31, 1997 reports of Condition and Income and
December 31, 1997 and September 30, 1997 Uniform Bank or Thrift Performance
Reports for each subsidiary bank; discussion of pending litigation and other
issues with senior management of NCBE.
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.
Based on the foregoing and all other factors deemed relevant, it is our
opinion as investment bankers, that, as of the date hereof, the merger
consideration proposed to be received the holders of all classes of stock 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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<PAGE>
APPENDIX C
Excerpts of the Kentucky Business Corporation Act
(Dissenters' Rights)
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010 DEFINITIONS. - As used in this subtitle:
(1) "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.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under KRS 271B.13-020 and who exercises that right when and in
the manner required by KRS 271B.13-200 to 271B.13-280.
(3) "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. In
any transaction subject to the requirements of KRS 271B.12-210 or exempted by
KRS 271B.12-220(2), "fair value" shall be at least an amount required to be paid
under KRS 271B.12-220(2) in order to be exempt from the requirements of KRS
271B.12-210.
(4) "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.
(5) "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 of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
271B.13-020 RIGHT TO DISSENT - (1) A shareholder shall be entitled to
dissent from, and obtain payment of the fair value of his shares in the event
of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party:
1. If shareholder approval is required for the merger by KRS 271B.11-040
or the articles of incorporation and the shareholder is entitled to vote on the
merger; or
2. If the corporation is a subsidiary that is merged with its parent
under KRS 271B.11-040;
(b) 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;
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the ususal 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;
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(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
1. Alters or abolishes a preferential right of the shares to a
distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
3. Excludes or limits the right of the shares to vote on any matter other
than a limitation by dilution through issuance of shares or other securities
with similar voting rights; or
4. Reduces the number of shares owned by the shareholder to a fraction of
a share if the fractional share so created is to be acquired for cash under KRS
271B.6-040;
(e) Any transaction subject to the requirements of KRS 271B.12-210 or
exempted by KRS 271B.12-220(2); or
(f) 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.
(2) A shareholder entitled to dissent and obtain payment for his shares
under this chapter shall not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
271B.13-030 DISSENT BY NOMINEE AND BENEFICIAL OWNERS - (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he shall dissent with respect to all shares
beneficially owned by any one (2) person and notify the corporation in writing
of the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection shall be
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) He 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
(b) He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271B.13-200 NOTICE OF DISSENTERS' RIGHTS - (1) If proposed corporate action
creating dissenters' rights under KRS 271B.13-020 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 subtitle and the
corporation shall undertake to provide a copy of this subtitle to any
shareholder entitled to vote at the shareholders' meeting upon request of that
shareholder.
(2) If corporate action creating dissenters' rights under KRS 271B.13-020
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 KRS 271B.13-220.
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271B.13-210 NOTICE OF INTENT TO DEMAND PAYMENT - (1) If proposed corporate
action creating dissenters' rights under KRS 271B.13-020 is submitted to a vote
at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights:
(a) Shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated; and
(b) Shall not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section shall not be entitled to payment for his shares under this
chapter.
271B.13-220 DISSENTERS' NOTICE - (1) If proposed corporate action creating
dissenters' rights under KRS 271B.13-020 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten (10) days after
the date the proposed corporate action was authorized by the shareholders or, if
no shareholder authorization was obtained, by the board of directors, and shall:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) 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 he acquired beneficial ownership of the shares before
that date;
(d) 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 notice provided in subsection (1) of this section is
delivered; and
(e) Be accompanied by a copy of this subtitle.
271B.13-230 DUTY TO DEMAND PAYMENT - (1) A shareholder who is sent a
dissenters' notice described in KRS 271B.13-220 shall demand payment, certify
whether he acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to subsection (2)(c) of KRS
271B.13-220, and deposit his certificates in accordance with the terms of the
notice.
(2) The shareholder who demands payment and deposits his share
certificates under subsection (1) of this section shall retain all other rights
of a shareholder until these rights are cancelled or modified by the taking of
the proposed corporate action.
(3) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice,
shall not be entitled to payment for his shares under this subtitle.
271B.13-240 SHARE RESTRICTIONS - (1) 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 KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares shall retain all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
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271B.13-250 PAYMENT - (1) Except as provided in KRS 271B.13-270, as soon as
the proposed corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with KRS 271B.13-230 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(2) The payment shall be accompanied by:
(a) 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;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenters' right to demand payment under KRS
271B.13-280.
271B.13-260 FAILURE TO TAKE ACTION - (1) 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.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under KRS 271B.13-220 and repeat the payment demand
procedure.
271B.13-270 AFTER-ACQUIRED SHARES - (1) A corporation may elect to withhold
payment required by KRS 271B.13-250 from a dissenter unless he 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.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenters' right to demand payment under KRS
271B.13-280.
271B.13-280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER -(1)
A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate (less any payment under KRS 271B.13-250), or reject the corporation's
offer under KRS 271B.13-270 and demand payment of the fair value of his shares
and interest due, if:
(a) The dissenter believes that the amount paid under KRS 271B.13-250 or
offered under KRS 271B.13-270 is less than the fair value of his shares or that
the interest due is incorrectly calculated;
(b) The corporation fails to make payment under KRS 271B.13-250 within
sixty (60) days after the date set for demanding payment; or
(c) 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 afer the date set for demanding
payment.
(2) A dissenter waives his right to demand payment under this section
unless he shall notify the corporation of his demand in writing under subsection
(1) of this section within thirty (30) days after the corporation made or
offered payment for his shares.
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JUDICIAL APPRAISAL OF SHARES
271B.13-300 COURT ACTION - (1) If a demand for payment under KRS 271B.13-280
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 and accrued interest. 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.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office (or, if none in this state,
its registered office) is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) 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 shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section shall be plenary and exclusive. The court
may appoint one (1) or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it. The
dissenters shall be entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding shall be entitled to
judgment:
(a) For the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under
KRS 271B.13-270.
271B.13-310 COURT COSTS AND COUNSEL FEES - (1) The court in an appraisal
proceeding commenced under KRS 271B.13-300 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 the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) 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 KRS 271B.13-200 to 271B.13-280; or
(b) 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 subtitle.
(3) 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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