1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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FIRST FINANCIAL BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OhioOHIO 6711 31-1042001
(State or other jurisdiction of (Primary Standard Industrial(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS Employer
incorporation or organization) Classification Code Number) Identification No.EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
-------------------------
THIRD AND HIGH STREETS
HAMILTON, OHIO 45011
(513) 867-4700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
MichaelMICHAEL R. O'Dell
Senior Vice President, Chief Financial Officer and Secretary
First Financial Bancorp.
Third and High Streets
Hamilton, OhioO'DELL
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
FIRST FINANCIAL BANCORP.
THIRD AND HIGH STREETS
HAMILTON, OHIO 45011
(513) 867-4700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------
Copies to:
Neil Ganulin John A. Burgess
FrostNEIL GANULIN WALTER R. BYRNE, JR.
FROST & JacobsJACOBS LLP BarnesREBECCA B. STEPHENSON
2500 PNC CENTER STITES & Thornburg
2500 Pnc Center 600 1St Source Bank CenterHARBISON
201 East Fifth Street 100 North Michigan
Cincinnati, OhioEAST FIFTH STREET 250 WEST MAIN STREET, SUITE 2300
CINCINNATI, OHIO 45202 South Bend, Indiana 46601-1632LEXINGTON, KENTUCKY 40507-1758
(513) 651-6800 (219) 237-1156(606) 226-2300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
===================== ======================== ======================= ======================== ==============================================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED UNIT (1) PRICE (1) FEE
===================== ======================== ======================= ======================== =======================- -----------------------------------------------------------------------------------------------------------------------
Common Stock, no par value
5,115,000 $8.79765 $45,000,000 $12,510.00
===================== ======================== ======================= ======================== =======================1,222,650 N/A $11,800,000 $3,281
=======================================================================================================================
(1) Estimated in accordance with RuleESTIMATED IN ACCORDANCE WITH RULE 457(f)(1) solely for the purpose of
calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with SectionSOLELY FOR THE PURPOSE OF
CALCULATING THE REGISTRATION FEE.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) of
the Securities Act ofOF THE SECURITIES ACT OF 1933 or until the Registration shall become effective on
such date as the Commission, acting pursuant to said SectionOR UNTIL THE REGISTRATION SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), may
determine.
===============================================================================MAY DETERMINE.
================================================================================
2
FIRST FINANCIAL BANCORP. CROSS REFERENCE SHEET
FORM S-4 ITEM PROXY STATEMENT CAPTION
------------- -----------------------
1. Forepart of Registration Statement and Facing Page of Registration Statement; Cross Reference Sheet; Outside
Outside Front Cover Page of Prospectus Front Cover Page of Proxy Statement-Prospectus; Summary
2. Inside Front and Outside Back Cover Pages Table of Contents; Where You Can Find More Information
of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Questions And Answers About The Merger; Summary; Summary of Selected
Charges and Other Information Unaudited Consolidated Financial Data And Per Share Data; Risk
Factors; Comparative Market and Dividend Information; Principal
Charges and Other Information
Shareholders and Ownership By Management
4. Terms of the Transaction Summary; The Merger; The Merger Agreement; Comparison of Common
Stock and Shareholders' Rights
5. Pro FormaPro-forma Financial Information Pro FormaPro-forma Unaudited Consolidated Balance Sheet; Pro FormaPro-forma Unaudited
Consolidated Statements of Earnings
6. Material Contacts with the Company Being Summary; The Merger; The Merger Agreement
Acquired
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
Be Underwriters
8. Interests of Named Experts and Counsel Not Applicable
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
10. Information with Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information with Respect to S-2 or S-3 Information About First Financial; Comparative Market And Dividend
Registrants Information; Where You Can Find More Information
13. Incorporation of Certain Information by Where You Can Find More Information
Reference
14. Information with Respect to Registrants Not Applicable
Other Than S-3 or S-2 Registrants
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-2 or S-3 Not Applicable
Companies
17. Information with Respect to Companies Other Information About the Business of Sand Ridge Financial; Sand RidgeHebron Bancorp; Hebron Bancorp's
than Financial'sS-3 or S-2 Companies Consolidated Financial Statements; Management's
S-3 or S-2 Companies Discussion and
Analysis of Financial Condition and Results of Operations of Sand Ridge Financial;Hebron
Bancorp; Comparative Market and Dividend Information; Comparison of
Common Stock and Shareholders' Rights
18. Information if Proxies, Consents or Notice of Special Meeting of Shareholders; Summary; The Special
Authorizations are to be Solicited Meeting; The Merger; The Merger Agreement; Principal Shareholders
and Ownership By Management; Information About the Business of Sand
Ridge Financial;Hebron
Bancorp; Where You Can Find More Information
19. Information if Proxies, Consents or Not Applicable
Authorizations are not to be Solicited or
in an Exchange Offer
3
SAND RIDGE FINANCIAL CORPORATIONHEBRON BANCORP, INC.
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2611 Highway Avenue
Highland, Indiana 46322--------------------------------------------------------------------------------
2652 North Bend Road
Hebron, Kentucky 41048-0360
Phone:(219) 865-9500 (606) 689-4301
Fax: (219) 864-4204(606) 334-4289
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Sand Ridge Financial CorporationHebron Bancorp, Inc. has approved a merger agreement
which will result in Sand Ridge Financial CorporationHebron Bancorp merging into First Financial Bancorp. and
Sand RidgeHebron Deposit Bank becoming a wholly owned subsidiary of First Financial Bancorp.Financial.
Before we can complete this merger, the merger agreement must be approved by
Sand RidgeHebron Bancorp shareholders.
First Financial Bancorp. is a bank holding company and savings and loan holding company
owning community banks and savings and loans in various communities in Ohio,
Indiana and Michigan. At September 30,December 31, 1998, First Financial had total assets of
approximately $2.8$2.9 billion, deposits of approximately $2.2$2.3 billion and
shareholders' equity of approximately $302 million.
We expect that, for each share of Sand Ridge FinancialHebron Bancorp common stock which you own just
before the merger, you will be entitled to receive 85.2520.3775 shares of First
Financial common stock. This exchange ratio may change, however, under certain
circumstances as explained in the Summary in the accompanying Proxy
Statement-Prospectus. First Financial common stock trades on the NASDAQ National
Market (Symbol "FFBC"). Sand Ridge FinancialHebron Bancorp common stock does not trade on any stock
exchange or national market. You can obtain current stock prices for First
Financial from a newspaper, on the Internet or by calling your broker.
YOUR VOTE IS VERY IMPORTANT. Please take the time to vote, whether or not you
plan to attend the Sand Ridge Financial Special MeetingHebron Bancorp special meeting of Shareholders.shareholders. If you sign,
date and mail your proxy card without indicating how you want to vote, we will
vote your proxy in favor of the merger. If you do not return your card, or if
you do not instruct your broker how to vote any shares held for you in "street"street"
name," the effect will be a vote against the merger.
The Special Meetingspecial meeting of Shareholdersshareholders will be: April 22,May __, 1999, 9:00 a.m.____ _.m. local time,
at the main office of Sand RidgeHebron Deposit Bank, 2611 Highway Avenue, Highland,
Indiana.2652 North Bend Road, Hebron,
Kentucky.
This Proxy Statement-Prospectus provides you with detailed information about the
proposed merger. We encourage you to read it carefully.
We are very enthusiastic about the merger and the opportunity to become part of
First Financial Bancorp.Financial. The Board of Directors of Sand RidgeHebron Bancorp unanimously recommends
that you vote FOR the Merger Agreement.merger agreement.
Sincerely,
Bruce E. LeepMichael A. Conner
Chairman of the Board Presidentof Directors and
Chief Executive Officer
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT-PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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This Proxy Statement-Prospectus is dated March __,April ___, 1999 and was first mailed to
shareholders on or about MarchApril __, 1999.
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SAND RIDGE FINANCIAL CORPORATIONHEBRON BANCORP, INC.
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 22,MAY __, 1999
------------------
Sand Ridge Financial CorporationHebron Bancorp, Inc. will hold a Special Meetingspecial meeting of Shareholdersshareholders at the main
office of Sand RidgeHebron Deposit Bank, 2611 Highway Avenue, Highland, Indiana
46322,2652 North Bend Road, Hebron, Kentucky 41048, at
9:00 a.m.____ _.m. local time on April 22,May __, 1999 to vote on:
1. The Plan and Agreement of Merger dated December 16,31, 1998 by and between
First Financial Bancorp. and Sand Ridge Financial CorporationHebron Bancorp, Inc. providing for the
merger of Sand Ridge FinancialHebron Bancorp into First Financial Bancorp. with the result that
Sand RidgeHebron Deposit Bank, (aa wholly owned subsidiary of Sand
Ridge Financial Corporation)Hebron Bancorp, will
become a wholly owned subsidiary of First Financial.
2. A proposal to permit the Special Meetingspecial meeting to be adjourned or postponed,
in the discretion of the proxies, for the purpose, among others, of
allowing additional time for the solicitation of votes to approve the
merger agreement.
3. Any other matters that properly come before the Special Meetingspecial meeting or any
adjournment or postponement of the Special Meeting.
Sand Ridge Financialspecial meeting.
Hebron Bancorp stockholders at the close of business on March 8,April __, 1999 are
receiving notice of and may vote at the Special Meeting.special meeting. The approval of the
Plan and Agreement of Merger requires the affirmative vote of at least two-thirdsa
majority of the outstanding shares of Sand Ridge FinancialHebron Bancorp common stock. Shareholders
of Sand Ridge FinancialHebron Bancorp entitled to vote at the Special Meetingspecial meeting are or may be entitled
to assert dissenters' rights under Title 271B, Subtitle 13 of the Indiana Business
Corporation Law (I.C. 23-1-44),Kentucky
Revised Statutes, which is attached to this Proxy Statement-Prospectus as
Appendix C.
PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE PROMPTLY, whether or not you plan to attend the Special Meeting.special meeting. If you
attend the Special Meeting,special meeting, you may vote in person if you wish, even if you
previously returned your proxy card.
---------------------------------
Terry L. Saxsma, Vice President,
Secretary/Treasurer
March-------------------------------------------------
Stephen K. Dallas, Secretary
April ___, 1999
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF
THE PLAN AND AGREEMENT OF MERGER.
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PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. IF WE COMPLETE
THE MERGER, WE WILL SEND YOU INSTRUCTIONS ON HOW TO EXCHANGE YOUR STOCK
CERTIFICATES.
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5
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER...........................................................................1
SUMMARY
The Companies.........................................................................3Companies...........................................................................................4
The Merger............................................................................3Merger..............................................................................................4
SUMMARY OF SELECTED UNAUDITED CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA...................7DATA.....................................8
NOTES TO SELECTED UNAUDITED CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA.................... 9DATA......................................10
SUMMARY OF PRO FORMAPRO-FORMA UNAUDITED CONSOLIDATED FINANCIAL INFORMATION.............................10
PRO FORMAINFORMATION...............................................11
PRO-FORMA UNAUDITED CONSOLIDATED BALANCE SHEET................................................11
PRO FORMASHEET..................................................................12
PRO-FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS.......................................12EARNINGS.........................................................13
NOTES TO THE PRO FORMAPRO-FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS............................17STATEMENTS..............................................16
RISK FACTORS
Risks Relating To The Merger...........................................................................18
Post-Merger Risks......................................................................................19
THE SPECIAL MEETING
Time And Place; Purpose............................................................. 19Purpose................................................................................22
Voting And Revocation Of Proxies.....................................................19Proxies.......................................................................22
Solicitation Of Proxies..............................................................20Proxies................................................................................22
Record Date And Voting Rights........................................................20Rights..........................................................................23
THE MERGER
Background Of And Reasons For The Merger.............................................22Merger..................................................................24
Opinion Of Financial Advisor To Sand Ridge Financial.................................25Hebron Bancorp.........................................................26
Management Following The Merger......................................................30Merger........................................................................32
Interest Of Certain Persons In The Merger............................................31Merger..............................................................32
Dissenters' Rights...................................................................33Rights.....................................................................................34
Federal Income Tax Consequences Of The Merger .......................................36.........................................................38
Accounting Treatment.................................................................37Treatment...................................................................................39
Restrictions On Resale Of First Financial Common Stock...............................38Stock.................................................40
Regulatory Considerations ...........................................................39.............................................................................41
THE MERGER AGREEMENT
Structure Of The Merger .............................................................40...............................................................................42
Surrender Of Stock Certificates .....................................................40.......................................................................42
Effective Time Of The Merger.........................................................41Merger...........................................................................43
Fractional Interests ................................................................41..................................................................................43
Conditions To Consummation Of The Merger.............................................41Merger...............................................................43
Termination Of The Merger ...........................................................43.............................................................................45
First Financial Average Closing Price And Termination Of The Merger..................43Merger....................................46
INFORMATION ABOUT FIRST FINANCIAL
Recent Developments..................................................................46Developments....................................................................................48
General .............................................................................47...............................................................................................49
INFORMATION ABOUT THE BUSINESS OF SAND RIDGE FINANCIAL
General..............................................................................48
Competition..........................................................................48HEBRON BANCORP
General................................................................................................50
Competition............................................................................................50
Regulation ..........................................................................49............................................................................................51
Properties ..........................................................................49............................................................................................51
Legal Proceedings....................................................................49Proceedings......................................................................................51
Certain Transactions With Sand Ridge Financial.......................................49
Selected Financial Data..............................................................50
Analysis Of Net Interest Income......................................................51
Interest Income And Expense Rate/Volume Analysis.....................................52
Investment Securities................................................................53
Loan Portfolio.......................................................................54
Deposits.............................................................................57
Return On Equity And Assets..........................................................58
Short-Term Borrowings................................................................58Hebron Bancorp...............................................................51
PRINCIPAL SHAREHOLDERS AND OWNERSHIP BY MANAGEMENT............................................59MANAGEMENT..............................................................52
1i
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TABLE OF CONTENTS, CONTINUED
COMPARATIVE MARKET AND DIVIDEND INFORMATION
Nature of Trading Market.............................................................61
Dividends............................................................................62Market...............................................................................53
Dividends..............................................................................................54
COMPARISON OF COMMON STOCK AND SHAREHOLDERS' RIGHTS
Authorized But Unissued Shares.......................................................64Shares.........................................................................55
Dividend Rights......................................................................64
Directors............................................................................65Rights........................................................................................55
Directors..............................................................................................56
Quorum For Shareholders' Meetings....................................................66
Meeting Participation By Use of Communication Equipment..............................66Meetings......................................................................57
Voting Rights........................................................................66Rights..........................................................................................58
Special Meetings.....................................................................67Meetings.......................................................................................58
Notice Of Shareholder Meetings.......................................................67Meetings.........................................................................58
Preemptive Rights....................................................................67Rights......................................................................................58
Redemption And Assessment............................................................67
Two-ThirdsAssessment..............................................................................59
75% Majority Vote Required....................................................68Required.............................................................................59
Informal Action By Shareholders........................................................................60
Emergency By-Laws......................................................................................60
Amendments To Articles And Regulations/Code Of By-Laws...............................68By-Laws.........................................................60
Provisions Affecting Business Combinations And Changes In Control....................69Control......................................61
First Financial Shareholder Rights Plan..............................................71Plan................................................................63
Transfer Agent And Registrar.........................................................71Registrar...........................................................................63
ADJOURNMENT OF THE SPECIAL MEETING............................................................72
EXPERTS.......................................................................................73MEETING..............................................................................64
EXPERTS.........................................................................................................65
LEGAL MATTERS.................................................................................73MATTERS...................................................................................................65
WHERE YOU CAN FIND MORE INFORMATION...........................................................74
SAND RIDGEINFORMATION.............................................................................66
SELECTED FINANCIAL CORPORATION--MANAGEMENT'SDATA - HEBRON BANCORP, INC..................................................................F-1
HEBRON BANCORP, INC.--MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995................................................ F-1
SAND RIDGE FINANCIAL CORPORATIONOPERATIONS......................................................F-2
HEBRON BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report Of Independent Auditors.................................................... F-13Auditors....................................................................... F-18
Consolidated Balance Sheets - December 31, 1997 and 1996...........................F-14Sheets...........................................................................F-19
Consolidated Statements Of Income -
Years Ended December 31, 1997, 1996 and 1995.....................................F-15Income.....................................................................F-20
Consolidated Statements Of Changes In Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995.....................................F-16Comprehensive Income.......................................................F-21
Consolidated Statements Of Stockholders' Equity.......................................................F-22
Consolidated Statements Of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995.....................................F-17Flows.................................................................F-23
Notes To Consolidated Financial Statements.........................................F-19
SAND RIDGE FINANCIAL CORPORATION--MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997...............................................F-36
SAND RIDGE FINANCIAL CORPORATION UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet - September 30, 1998 (Unaudited)
and December 31, 1997.............................................................F-42
Consolidated Statements Of Income -
Nine Months Ended September 30, 1998 and 1997....................................F-43
Consolidated Statements of Comprehensive Income -
Nine Months Ended September 30, 1998 and 1997....................................F-44
Consolidated Statements Of Cash Flows -
Nine Months Ended September 30, 1998 and 1997....................................F-45
Notes To Consolidated Financial Statements.........................................F-47Statements............................................................F-25
APPENDICES
Plan and Agreement of Merger.................................................AppendixMerger....................................................................Appendix A
Fairness Opinion.............................................................AppendixOpinion................................................................................Appendix B
Indiana Code Chapter 44.Kentucky Revised Statutes - Subtitle 13. Dissenters' Rights.................................AppendixRights....................................Appendix C
ii
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY DO HEBRON BANCORP, INC. AND FIRST FINANCIAL BANCORP. WANT TO MERGE?
A: Hebron Bancorp believes shareholder value will increase and that its
customers will benefit through an affiliation with First Financial.
This will be First Financial's first association with a bank located in
Kentucky. The merger will expand First Financial's presence into a new
market with a bank it believes has excellent potential for profitable
growth.
Q. WHAT CHANGES WILL I SEE IN HEBRON DEPOSIT BANK?
A: Virtually none. Hebron Deposit Bank's name will not change and
customers will continue to be served by the same employees and
officers. The bank will continue to be guided by its present Board of
Directors.
Q. HOW WILL I BENEFIT?
A. Hebron Bancorp's Board of Directors believes you will benefit from the
financial terms of the merger and from the greater marketability and
liquidity of First Financial's stock. It is actively traded on the
Nasdaq National Market (common stock symbol: FFBC); Hebron Bancorp's
stock is not actively traded.
Q. WHAT WILL I RECEIVE FOR MY HEBRON BANCORP SHARES?
A. You will receive 20.3775 shares of First Financial common stock for
each share of Hebron Bancorp common stock which you own just before the
merger. First Financial will not issue fractional shares. Instead, you
will receive cash for any fractional shares, based on the average
closing price of First Financial common stock, as described in the
Merger Agreement. Based on the closing price of First Financial common
stock on April __, 1999, the value of 20.3775 shares of First Financial
common stock was $______. The number of shares of First Financial
common stock to be received by Hebron Bancorp shareholders may increase
if the market value of First Financial common stock decreases relative
to a peer group of other financial institution holding companies. See
the Plan and Agreement of Merger, incorporated as Appendix A in this
Proxy Statement-Prospectus, for more information.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We hope to complete the merger as soon as possible after the special
meeting, assuming the required shareholder approval is obtained. The
merger is also subject to required regulatory approvals and other
conditions which must be met or waived before the merger can occur.
Either Hebron Bancorp or First Financial may terminate the merger if it
does not occur on or before July 31, 1999.
1
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Q. WHAT DO I DO NOW?
A. After reviewing this document and the Merger Agreement, indicate on
your proxy card how you want to vote, sign it and return it to us as
soon as possible in the enclosed return envelope. You may attend the
special shareholders' meeting and vote your shares in person rather
than completing and returning your proxy card.
Q. HOW WILL MY SHARES BE VOTED IF I RETURN A BLANK PROXY CARD?
A. If you sign and return a proxy card and do not indicate how you wish to
vote, your proxy will be voted in favor of the merger.
Q. WHAT WILL HAPPEN IF I DON'T VOTE?
A. If you do not return the proxy card or vote in person at the special
meeting, it will have the same effect as if you voted "no." Please
remember that the required vote of shareholders is based on the total
number of outstanding shares and not the number of shares which are
actually voted. For this reason, we encourage you to complete and
return your proxy card.
Q. WHAT IF I RETURN MY PROXY AND THEN CHANGE MY MIND?
A. You may revoke your proxy at any time prior to its exercise by
submitting a written notice of revocation, properly completing a proxy
of later date, or by attending the special shareholders' meeting and
voting in person. See "THE SPECIAL MEETING - Voting And Revocation of
Proxies" for more information.
Q. IF MY SHARES ARE HELD IN "STREET" NAME BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A. Your broker will request instructions from you as to how you wish your
shares to be voted and will vote your shares according to your
instructions.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the merger is completed, you will receive written
instructions for exchanging your stock certificates.
Q. WHAT RIGHTS DO I HAVE IF I DISSENT FROM THE MERGER?
A. If you dissent from the merger and follow certain procedures described
in Title 271B, Subtitle 13 of the Kentucky Revised Statutes, you will
be entitled to receive the fair value of your Hebron Bancorp common
stock in cash. See "THE MERGER - Dissenters' Rights" for information on
dissenters' rights and how to exercise them. A copy of Subtitle 13 is
included in this Proxy Statement - Prospectus as Appendix C.
2
79
Q. WHAT ARE THE TAX CONSEQUENCES TO SHAREHOLDERS OF THE MERGER?
A. We expect the exchange of Hebron Bancorp common stock for First
Financial common stock to be tax free for federal income tax purposes.
Hebron Bancorp shareholders will recognize income or gain, however, on
cash received for fractional shares or for cash received as a result of
perfected dissenters' rights. See "THE MERGER - -------------------------------------------------------------------------------Federal Income Tax
Consequences Of The Merger" for more information concerning the tax
consequences of the merger.
Q. DO I NEED TO READ THE ENTIRE PROXY STATEMENT-PROSPECTUS, INCLUDING
APPENDICES?
A. Absolutely. Much of the Proxy Statement-Prospectus summarizes
information set forth in greater detail elsewhere in the document or in
the appendices to this document. Each summary is qualified in its
entirety by reference to the document being summarized. For example,
the summary of the Plan and Agreement of Merger contained in "THE
MERGER AGREEMENT" is qualified in its entirety by reference to the full
text of the Plan and Agreement of Merger, a copy of which is included
in this Proxy Statement-Prospectus as Appendix A. If there are any
differences, the information in the Plan and Agreement of Merger will
control over the information in the summary. As a result, to fully
understand the merger and your rights as a Hebron Bancorp shareholder,
you will need to read carefully this entire document including
appendices.
Q. WHO CAN I CONTACT IF I HAVE MORE QUESTIONS ABOUT THE MERGER?
A. If you have questions concerning the merger, please call Michael A.
Conner, Chairman of the Board of Directors and Chief Executive Officer
of Hebron Bancorp, at (606) 689-4301.
3
10
SUMMARY
This summary highlights selected information from this document. It does not
contain all the information that is important to you. You should read this
entire document carefully. For additional information, see "Where You Can Find
More Information" (page 74)66).
We call this document a Proxy Statement-Prospectus. It is a Proxy Statement sent
by Sand Ridge FinancialHebron Bancorp to you and the other shareholders of Sand Ridge
Financial.Hebron Bancorp. It also
is a Prospectus of First Financial Bancorp. covering the shares of First
Financial common stock whichthat you and the other shareholders of Sand Ridge FinancialHebron Bancorp
will receive if the merger is completed. These First Financial Bancorp. shares have been
registered with the Securities and Exchange Commission. Sand Ridge FinancialHebron Bancorp has
supplied the information in this document whichthat relates to it, and First
Financial Bancorp. has supplied the information whichthat relates to it.
THE COMPANIES (PAGES 4648 AND 48)50)
FIRST FINANCIAL BANCORP.
300 High Street
P.O. Box 476
Hamilton, Ohio 45012-0476
(513) 867-4700
First Financial is a bank holding company and savings and loan holding company
that, through its subsidiaries, provides a full range of banking services to its
customers located in selected communities in Ohio, Indiana and Michigan. First
Financial has 105 offices in those three states and at September 30,December 31, 1998 had
total assets of approximately $2.8$2.9 billion, deposits of approximately $2.2$2.3
billion and shareholders equity of approximately $302 million.
SAND RIDGE FINANCIAL CORPORATION
2611 Highway Avenue
Highland, Indiana 46322
(219) 838-9500
Sand Ridge FinancialHEBRON BANCORP, INC.
2652 North Bend Road
Hebron, Kentucky 41048-0360
(606) 689-4301
Hebron Bancorp is a one-bank holding company whose only subsidiary is an
Indianaa Kentucky
state chartered bank whichthat operates in Highland, Indiana, which is
approximately 20 miles southeast of Chicago. Sand RidgeHebron, Kentucky. Hebron Deposit Bank
offers a diversified selection of loan and investment products to its customers.
As of December 31, 1998, Hebron Bancorp had three offices located in Boone
County, Kentucky and assets of approximately $112 million, deposits of
approximately $96 million and shareholders' equity of approximately $11.8
million.
THE MERGER (PAGE 40)
GENERAL24)
We propose a merger as athat will result of which Sand Ridge Financial will bein Hebron Bancorp being acquired by and
merged into First Financial, and Sand Ridge Financial'sFinancial. Hebron Bancorp's wholly owned subsidiary, Sand RidgeHebron
Deposit Bank, will become a wholly owned subsidiary of First Financial. We hope
to complete the merger by the end of July 1999. The merger
agreementPlan and Agreement of Merger
(the "Merger Agreement") is the document that governs the merger. We have
attached this agreement as Appendix A to this Proxy Statement-Prospectus, and we
encourage you to read it.
WHAT YOU WILL RECEIVE IN THE MERGER
The merger agreementMerger Agreement provides that you will receive 85.2520.3775 shares of First
Financial common stock for each share of Sand Ridge FinancialHebron Bancorp common stock whichthat you
own just before the merger. If (i)Based on the valueclosing price per share of First
Financial common stock falls below a certain level, (ii)on the Nasdaq National Market on April __, 1999, the
value of the index of peer banking
companies falls below a certain level and (iii) First Financial agrees to issue
additional shares, the number of20.3775 shares of First Financial common stock set
forthwas $______.
In the event of a reorganization, recapitalization, reclassification, stock
dividend, stock split or other like changes in First Financial's capitalization,
the preceding sentence that you will receive as a resultnumber of the merger
will increase. If the conditions set forth in subclauses (i) and (ii) above are
satisfied and First Financial does not agreeshares you have the right to issue additional shares,receive will be
adjusted so as to give you the Sand Ridge Financial Boardproportional adjustment of Directors may cancel the merger as provided in the
merger agreement. The Sand Ridge Financial Board of Directors has not decided
yet whether it will cancel the merger in this event.such event or action.
You will receive only whole shares of First Financial stock and cash in payment
for any fractional share. First Financial's stock trades on the Nasdaq National
Market System under the symbol "FFBC". On MarchApril ____, 1999, the last reported sale of
First Financial common stock as reported on the Nasdaq National Market System was
$_________ per share.
The Sand Ridge Financial common stock is not traded on an established public
market. The last known trading price of Sand Ridge Financial was $1,100 per
share on December 8, 1998. Since there is not an established public trading
market for the shares of Sand Ridge Financial common stock, the stock is not
liquid and the price indicated above may not reflect the prices which would be
paid for such shares on an active market. You can obtain current stock price quotations for First
Financial common stock ("FFBC") from a newspaper, on the Internet or by calling
your broker.
The Hebron Bancorp common stock is not traded on an established public market.
Hebron Bancorp management is aware of only one sale of Hebron Bancorp common
stock since the holding company was formed in 1994, but does not know the price
at which the shares traded.
ADJUSTMENT TO MERGER CONSIDERATION IN THE EVENT OF A DECLINE IN FIRST FINANCIAL
STOCK PRICE
The Merger Agreement provides that Hebron Bancorp shareholders will receive
20.3775 shares of First Financial common stock for each share of Hebron Bancorp
common stock, unless First Financial's market price per share declines both
independently and relative to a peer group of financial institution holding
companies. If (a) the average closing price of First Financial common stock
falls below approximately $23.86 per share and (b) the HBI Ratio (the average
closing price divided by $28.0682) is less than the value of an index of
financial institution holding companies (the "Index Ratio"), Hebron Bancorp's
board of directors may elect to terminate the Merger Agreement. If Hebron
Bancorp's board elects to terminate the Merger Agreement and gives notice of its
termination of the Merger Agreement to First Financial as provided in the Merger
Agreement, First Financial will then have the option of increasing the number of
shares of First Financial common stock issued to Hebron Bancorp shareholders in
accordance with a formula set forth in the Merger Agreement. If First Financial
elects to increase the number of shares issued to Hebron Bancorp shareholders,
the Merger Agreement will not terminate and Hebron Bancorp shareholders will be
entitled to receive increased number of shares. If First Financial does not
agree to issue additional shares, the Merger Agreement will terminate
immediately. The Hebron Bancorp Board of Directors has not decided in advance
whether it would terminate the Merger Agreement if these declines occur.
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REASONS FOR THE MERGER (Page 22)(PAGE 24)
The Sand Ridge FinancialHebron Bancorp Board of Directors believes the merger will benefit both you
and Sand Ridge FinancialHebron Bancorp for a number of reasons, including:
1. First Financial's offer was valued at 310%The financial terms of book value by Hovde
Financial,the merger.
2. The opinion of Professional Bank Services, Inc., Sand Ridge Financial's investment advisor.
2. as to the fairness of
the merger consideration from a financial perspective.
3. First Financial's stock is actively traded on the Nasdaq National
Market
System; Sand Ridge Financial'sMarket; Hebron Bancorp's stock is not actively traded.
3.4. First Financial's offer does not have any current, adverseis tax-free to Hebron Bancorp shareholders for
federal income tax consequences
to Sand Ridge Financial shareholders,purposes, except for cash received for fractional
shares and cash paid dissenting shareholders who exercise dissenters'
rights.
4. Sand Ridge Financial shareholders will receive higher dividends after the
merger than Sand Ridge Financial is currently paying.
5. The banking philosophy of First Financial emphasizes community banking
and autonomy of its subsidiaries; Sand RidgeHebron Deposit Bank will continue to
operate as a separate subsidiary with minimal changes to employees.
The Board of Directors of Hebron Bancorp believes the reasons for the merger
must be viewed as a whole and did not assign any greater or lessor importance to
a specific reason.
THE SPECIAL MEETING OF SHAREHOLDERS (Page19)(PAGE 22)
We will hold a special meeting of Sand Ridge FinancialHebron Bancorp shareholders at the main office
of Sand RidgeHebron Deposit Bank, 2611 Highway Avenue, Highland, Indiana 46322,2652 North Bend Road, Hebron, Kentucky 41048, at 9:00
a.m.____
_.m. local time, on April 22,May __, 1999. At this meeting, we will ask you:
1. To approve the merger agreement;Merger Agreement;
2. To permit the Special Meetingspecial meeting to be adjourned or postponed for the
purpose of allowing additional time for the solicitation of votes to
approve the merger agreement,Merger Agreement, if necessary; and
3. To act on any other matters that properly may be presented for a vote.
Currently, we know of no other matters to be presented at the meeting.
OUR RECOMMENDATION (Page22)(PAGE 24)
The Board of Directors of Sand Ridge FinancialHebron Bancorp believes that the merger is fair to you
and in your best interests. The Board unanimously recommends that you vote "FOR"
approval of the merger agreementMerger Agreement
RECORD DATE; VOTING POWER (Page20)(PAGE 23)
You may vote at the Special Meetingspecial meeting if you owned Sand Ridge FinancialHebron Bancorp shares as of the
close of business on March 8,May __, 1999. You will have one vote for each share of
Sand Ridge FinancialHebron Bancorp common stock owned on that date.
VOTING REQUIRED AND VOTING AGREEMENT (Page20)(PAGE 23)
To approve the merger, Sand Ridge FinancialHebron Bancorp shareholders holding at least two-thirdsa majority
of the outstanding shares of Sand Ridge FinancialHebron Bancorp common stock must vote to approve
the merger agreement.Merger Agreement.
Together the directors and executive officers of Sand Ridge FinancialHebron Bancorp can vote 28.2%47.58%
of the shares entitled to vote at the Special Meeting.special meeting. Based upon the unanimous
recommendations of the Board, we expect Sand Ridge Financial'sHebron Bancorp's directors and officers
to vote all of their shares to approve the Merger Agreement.
Approval of the Plan and Agreement of Merger will also authorize the Hebron
Bancorp Board of Directors to exercise its discretion whether to proceed with
the merger agreement.in the event Hebron Bancorp has the right to terminate the Plan and
Agreement of Merger or, in the event of a substantial decline in the trading
price of First Financial common stock, agree to an adjustment to the terms of
the merger.
EXCHANGE OF CERTIFICATES (Page 40)(PAGE 42)
If the merger is completed and if you do not dissent to the merger, your shares
of Sand Ridge FinancialHebron Bancorp common stock will be converted into shares of First Financial
common stock, and you will need to exchange your Sand Ridge FinancialHebron Bancorp stock
certificates for First Financial stock certificates.
If we complete the merger, we will send you detailed instructions on how to
exchange your stock certificates. Please do not send us any stock certificates
until you receive these instructions.
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4--------------------------------------------------------------------------------
5
912
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WHAT WE NEED TO DO TO COMPLETE THE MERGER
(Page 41 )(PAGE 43)
The completion of the merger depends on a number of conditions being met. These
conditions are set forth in the merger agreement.Merger Agreement. Some of the conditions are:
1. Sand Ridge FinancialHebron Bancorp shareholders must approve the merger agreement.Merger Agreement.
2. Sand Ridge FinancialHebron Bancorp and First Financial must receive all required regulatory
approvals and certain waiting periods required by law must have passed;
3. There must be no governmental order blocking completion of the merger,
and no governmental proceeding trying to block the merger;
4. Sand Ridge FinancialHebron Bancorp and its shareholders and First Financial must receive
legal opinions confirming that the merger will be treated as a
reorganization for U.S.
federal income tax purposes;
and
5. Sand Ridge FinancialHebron Bancorp and First Financial must each receive a letter from its
independent accountants stating that the merger will qualify for
"pooling"pooling-of-interests" accounting treatment; and
6. First Financial must register its shares to be issued to shareholders
of interests" accounting treatment.Hebron Bancorp with the Securities and Exchange Commission and list
these shares on the Nasdaq National Market.
Unless prohibited by law, either First Financial or Sand Ridge Financialthe party entitled to assert the condition could waive
a condition to the merger that has not been satisfied and complete the merger
anyway.
We cannot be certain whether or when any of these conditions will be satisfied
or waived if permissible. We cannot be certain that we will complete the merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 43)45)
The two companies can agree at any time to terminate the merger agreementMerger Agreement
without completing the merger, even if the Sand Ridge FinancialHebron Bancorp shareholders have
already approved the merger. Either company also can terminate the merger
agreementMerger
Agreement for a number of reasons, including:
1. if any court or governmental body has issued a final order prohibiting
the merger;
2. if the merger is not completed by July 31, 1999;
3. if the Sand Ridge FinancialHebron Bancorp shareholders do not approve the merger; or
4. if the other company materially violates any of its representations,
warranties or obligations under the merger agreement.Merger Agreement.
First Financial can terminate the merger agreementMerger Agreement if the holderspercentage of 7.5% or
more of the outstandingHebron
Bancorp shares of Sand Ridge Financial common stock will be
entitled to receive cash in exchange for their Sand Ridge Financial shares
pursuant to perfectedowned by shareholders who perfect dissenters' rights under
Kentucky law exceeds the Indiana law.
Sand Ridgepercentage that would allow First Financial to account
for the merger as a pooling-of-interests.
Hebron Bancorp can terminate the merger agreementMerger Agreement if:
1. The average trading price of First Financial common stock drops below
$23.2671$23.857995 per share; and
2. The ratio obtained by dividing First Financial's average trading price
by $26.5909$28.0682 is less than the specified ratio for a group of peer
institutions; and
3. First Financial chooses not to issue additional shares of common stock
within the limits required by the merger agreement.Merger Agreement.
Either Hebron Bancorp or First Financial can terminate the Merger Agreement if
the average daily closing sales price of a First Financial share, as reported on
the Nasdaq National Market, for the 20 consecutive trading days (where at least
1,000 shares were traded) ending on the second trading day preceding the date of
consummation of the Merger is less than $20.00 per share.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 36)38)
We expect that neither of the two companies nor the shareholders of Sand Ridge
FinancialHebron
Bancorp will recognize any gain or loss for U.S. federal income tax purposes in the
merger, except in connection with any cash that Sand Ridge FinancialHebron Bancorp shareholders
receive instead of fractional shares. Sand Ridge Financialshares or cash paid dissenting shareholders who
exercise dissenters' rights. Hebron Bancorp and its shareholders and First
Financial will each receive a legal opinion that this is the case. However,If First
Financial and Hebron Bancorp choose to close with a tax opinion prepared by
legal counsel, however, these opinions do not bind the Internal Revenue Service,
which could take a different view. This tax treatment will not apply to any Sand Ridge
Financial shareholder who exercises dissenters' rights under Indiana law.
Determining the actual tax consequences of the merger to you as a taxpayer can
be complicated. The tax treatment will depend on your specific situation and on
many variables not within our control. You should consult your tax advisor for a
full understanding of the merger's tax consequences.
5- --------------------------------------------------------------------------------
6
1013
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ACCOUNTING TREATMENT (PAGE 37)39)
We expect the merger to qualify as a "pooling of interests,"pooling-of-interests," which means that,
for accounting and financial reporting purposes, First Financial will treat
Sand
Ridge FinancialHebron Bancorp as if it had always been a part of First Financial.
OPINION OF FINANCIAL ADVISOR (PAGE 25)26)
Among the other factors considered in deciding to approve the merger, Sand Ridge
Financial'sHebron
Bancorp's Board of Directors considered the opinion of its financial advisor,
Hovde Financial,Professional Bank Services, Inc., that the value of the First Financial sharesconsideration proposed to be received
for each shareby the shareholders of Sand Ridge Financial common stockHebron Bancorp under the terms of the Merger Agreement is
fair to the
holders of Sand Ridge Financial common stockand equitable from a financial point of view.perspective. We have attached this opinion
to this Proxy Statement-Prospectus as Appendix B.
You should read the opinion carefully to understand the procedures followed,
assumptions made, matters considered and limitations on the review undertaken by
Hovde Financial,Professional Bank Services, Inc., in rendering its opinion.
MANAGEMENT OF FIRST FINANCIAL AFTER THE MERGER
(PAGE 30)32)
The current directors and executive officers of First Financial will remain
unchanged after the merger except that First Financial will appoint Bruce E.
Leep, a member of the Board of Directors of Sand Ridge Bank, as a director of
First Financial promptly after the effective time of the merger.
INTERESTS OF SAND RIDGE FINANCIAL'SHEBRON BANCORP'S DIRECTORS AND EXECUTIVE OFFICERS
IN THE MERGER (PAGE 31)32)
Some directors and officers of Sand Ridge FinancialHebron Bancorp have interests in the merger that
are different from your interests. The merger agreementMerger Agreement contains certain
provisions regarding the continuation or modification of benefits available to
employees of Sand Ridge Financial.Hebron Bancorp. These modifications apply to all of Sand
Ridge Financial'sHebron
Bancorp's employees. The Board of Directors of Sand Ridge FinancialHebron Bancorp was aware of these
interests and took them into account in approving the merger
agreement.Merger Agreement.
DIFFERENCES IN RIGHTS OF SHAREHOLDERS (PAGE 64)55)
The Indiana Business Corporation LawKentucky Revised Statutes and Sand Ridge Financial's CertificateHebron Bancorp's Articles of Incorporation and
BylawsBy-Laws currently govern your rights as a shareholder of Sand
Ridge Financial.Hebron Bancorp. First
Financial is an Ohio corporation and, if the merger is completed, the Ohio
General Corporation Law and First Financial's Articles of Incorporation and
Regulations will govern your shareholder rights.
DISSENTERS' RIGHTS (PAGE 33)
Indiana34)
Kentucky law permits holders of Sand Ridge FinancialHebron Bancorp common stock to dissent from the
merger and, if the parties do not agree on the fair value of Hebron Bancorp
common stock, to have the fair value of their stock appraiseddetermined by a court and
paid to them in cash. To do this, holders of dissenting shares must follow
required procedures, including filing notices with us and either abstaining or
voting against the merger. If you dissent from the merger and follow the
required procedures, your shares of Sand Ridge FinancialHebron Bancorp common stock will not become
shares of First Financial common stock. Instead, your only right will be to
receive the appraisedfair value of your shares in cash. We have attached the applicable
provisions of IndianaKentucky law related to dissenters' rights to this Proxy
Statement-Prospectus as Appendix C.
REGULATORY APPROVALS (PAGE 39)41)
We cannot complete the merger until the proposed transaction receives the
approval of the Federal Reserve Board and 15 days expire after the receipt of
such approval. Such 15 day15-day period will become a 30 day30-day period, however, if the
United States Department of Justice issues an adverse comment relating to
competitive factors. In addition, the merger is also subject to approval by the
IndianaKentucky Department of Financial Institutions.
RECENT DEVELOPMENTS (PAGE 46)48)
First Financial signed a plan and agreement of merger with Hebron Bancorp, Inc.,
Hebron, KentuckySand Ridge Financial
Corporation ("Hebron Bancorp"Sand Ridge Financial") on December 31,16, 1998. Shareholders of Hebron
BancorpSand
Ridge Financial will receive 20.377585.25 shares of First Financial Common Stockcommon stock for
each share of Hebron BancorpSand Ridge Financial stock. After the merger, Hebron DepositSand Ridge Bank,
Hebron
Bancorp'sSand Ridge Financial's only subsidiary, will become a wholly owned subsidiary of
First Financial. Subject to numerous conditions, including shareholder and
regulatory approval, the completion of this merger is not certain.
First Financial's annual report for the year ended December 31, 1998 was not
available when this Proxy Statement-Prospectus was mailed to Sand Ridge
Financial's shareholders. Its earnings for 1998 were $44,106,000, or $1.21 per
share on a diluted basis. This compares with 1997 earnings of $40,308,000, or
$1.10 per diluted share.
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7
1114
SUMMARY OF SELECTED UNAUDITED CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------------ ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
SAND RIDGE FINANCIAL CORPORATION
(HISTORICAL)
Net earnings (A) $ 4,019 $ 3,5715,448 $ 4,993 $ 4,884 $ 4,158 $ 3,639
Total assets (period end) 527,256 428,343557,173 456,094 416,544 393,138 363,566
Long-term borrowings (period end) 13,89813,712 4,686 4,686 3,500 0 0
Net earnings per common share - basic (A)(1) 66.99 59.5190.80 83.21 81.39 69.30 60.66
Net earnings per common share - diluted (A)(1) 66.99 59.5190.80 83.21 81.39 69.30 60.66
(A) (1)
Dividends declared per share 0.00 0.0018.00 17.00 16.00 15.00 14.00
Book value per share (period end) (2) 746.13 645.39742.21 661.34 576.49 516.70 404.64
Average shares outstanding (B) 60,000 60,000 60,000 60,000 60,000
Shares outstanding (period end) (B) 60,000 60,000 60,000 60,000 60,000
HEBRON BANCORP, INC. (HISTORICAL)
Net earnings (A) $ 1,158 $ 1,204 $1,419 1,531 $ 1,263 $ 1,027 816
Total assets (period end) 105,568 96,851111,658 99,114 96,017 90,844 82,063
Long-term borrowings (period end) 1,874 1,1441,730 1,127 1,194 1,260 1,320
Net earnings per common share - basic (A)(1) 19.79 20.5824.24 26.17 21.59 17.56 13.95
Net earnings per common share - diluted (A)(1) 19.79 20.5824.24 26.17 21.59 17.56 13.95
(A) (1)
Dividends declared per share 0.00 0.005.50 5.00 4.00 2.50 2.20
Book value per share (period end) (2) 198.52 174.70196.65 176.36 152.21 134.24 120.50
Average shares outstanding (B)(4) 58,50058,533 58,500 58,500 58,500 58,500
Shares outstanding (period end) (B)(4) 58,50060,000 58,500 58,500 58,500 58,500
FIRST FINANCIAL (HISTORICAL)
Net earnings (A) $ 32,347 $ 29,65844,106 $ 40,308 $ 33,940 $ 31,789 $ 28,173
Total assets (period end) 2,809,717 2,421,0962,871,104 2,636,111 2,261,711 2,103,375 1,922,643
Long-term borrowings (period end) 101,216 12,133105,335 41,054 6,506 2,820
Net earnings per common share - basic (A)(1) 0.89 0.81 1.11 0.96 0.95
Net earnings per common share - diluted (A)(1) 0.88 0.81 1.10 0.96 0.95
Dividends declared per share (3) 0.41 0.39 0.52 0.46 0.41
Book value per share (period end) (2) 8.31 7.70 7.86 7.27 6.76
Average shares outstanding (B)(5) 36,418,481 36,395,752 36,402,415 35,359,522 33,243,500
Shares outstanding (period end) (B)(5) 36,396,062 36,427,457 36,424,937 35,578,513 34,641,729
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993
---- ----
(Dollars in thousands, except
per share data)
SAND RIDGE FINANCIAL (HISTORICAL)
Net earnings (A) $ 3,639 $ 3,628
Total assets (period end) 363,566 318,596
Long-term borrowings (period end) 0 0
Net earnings per common share - basic (A)(1) 60.66 60.471.21 1.11 0.96 0.95 0.87
Net earnings per common share - diluted 1.21 1.10 0.96 0.95 0.86
(A)(1) 60.66 60.47
Dividends declared per share 14.00 13.00(3) 0.57 0.52 0.46 0.41 0.37
Book value per share (period end) (2) 404.64 388.158.34 7.86 7.27 6.76 5.99
Average shares outstanding (B) 60,000 60,000(5) 36,375,686 36,402,415 35,359,522 33,243,500 32,505,024
Shares outstanding (period end) (B) 60,000 60,000
HEBRON BANCORP, INC. (HISTORICAL)
Net earnings (A) $ 816 $ 747
Total assets (period end) 82,063 79,549
Long-term borrowings (period end) 1,320 1,329
Net earnings per common share - basic (A)(1) 13.95 12.77
Net earnings per common share - diluted (A)(1) 13.95 12.77
Dividends declared per share 2.20 2.10
Book value per share (period end) (2) 120.50 109.04
Average shares outstanding (B) (4) 58,500 58,500
Shares outstanding (period end) (B)(4) 58,500 58,500
FIRST FINANCIAL (HISTORICAL)
Net earnings (A) $ 28,173 $ 25,194
Total assets (period end) 1,922,643 1,810,673
Long-term borrowings (period end) 0 3,983
Net earnings per common share - basic (A)(1) 0.87 0.78
Net earnings per common share - diluted (A)(1) 0.86 0.77
Dividends declared per share (3) 0.37 0.31
Book value per share (period end) (2) 5.99 5.87
Average shares outstanding (B)(5) 32,505,024 32,506,760
Shares outstanding (period end) (B)(5)36,201,700 36,424,937 35,578,513 34,641,729 32,488,579 30,877,596
7- --------------------
See Notes to Selected Unaudited Consolidated Financial Data and Per Share Data
on page 10.
8
12
15
SUMMARY OF SELECTED UNAUDITED CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA,
CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31,
--------------------------------- -----------------------------------
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
PRO FORMA
PRO-FORMA FIRST FINANCIAL, & SAND RIDGE
FINANCIAL CORPORATION & HEBRON BANCORP,
INC. (6)
Net earnings (A) $ 36,36650,973 $ 33,22946,832 $ 45,30140,087 $ 38,82436,974 $ 32,628
Net earnings per common share - basic (A)(1) 0.88 0.80 1.091.19 1.10 0.96 0.93 0.84
Net earnings per common share - diluted
(A)(1) 0.87 0.80 1.081.19 1.09 0.96 0.93 0.83
Dividends declared per share - First
Financial 0.41 0.390.57 0.52 0.46 0.41 0.37
Book value per share (period end) (2) 8.36 7.68 7.858.42 7.86 7.21 6.66 5.82
Average shares outstanding (B) 41,533,481 41,510,752 41,517,415 40,474,52242,713,336 42,740,065 41,697,172 39,581,150 38,842,674
Shares outstanding (period end) (B) 41,511,062 41,542,457 41,539,937 40,693,513
PRO FORMA SAND RIDGE FINANCIAL ONE SHARE
EQUIVALENT ASSUMING MERGER OF FIRST FINANCIAL
& SAND RIDGE FINANCIAL AND 85.25 EXCHANGE
RATIO (7)
Net earnings per common share - basic (A)(1) $ 75.02 $ 68.20 $ 92.92 $ 81.84
Net earnings per common share - diluted (A)(1) 74.17 68.20 92.07 81.84
Dividends declared per share 34.95 33.25 44.33 39.22
Book value per share (2) 712.69 654.72 669.21 614.65
PRO FORMA FIRST FINANCIAL, SAND RIDGE
FINANCIAL & HEBRON BANCORP, INC. (8)
Net earnings (A) $ 37,524 $ 34,433 $ 46,832 $ 40,087
Net earnings per common share - basic (A)(1) 0.88 0.81 1.10 0.96
Net earnings per common share - diluted (A)(1) 0.87 0.80 1.09 0.96
Dividends declared per share - First
Financial 0.41 0.39 0.52 0.46
Book value per share (period end) (2) 8.40 7.70 7.86 7.21
Average shares outstanding (B) 42,756,131 42,733,402 42,740,065 41,697,172
Shares outstanding (period end) (B) 42,733,712 42,765,10742,539,350 42,762,587 41,916,163 PRO FORMA SAND RIDGE FINANCIAL40,979,379 38,826,229
PRO-FORMA HEBRON BANCORP., INC. ONE SHARE
EQUIVALENT ASSUMING MERGER OF FIRST
FINANCIAL, SAND RIDGE FINANCIAL & HEBRON
BANCORP AND 85.2520.3775 EXCHANGE RATIO (7)
Net earnings per common share - basic (A)(1) $ 75.0224.25 $ 69.0522.42 $ 93.7819.56 $ 81.8418.95 $ 17.12
Net earnings per common share - diluted
(A)(1) 74.17 68.20 92.92 81.8424.25 22.21 19.56 18.95 16.91
Dividends declared per share 34.95 33.25 44.33 39.2211.62 10.60 9.37 8.35 7.54
Book value per share (2) 716.10 656.43 670.07 614.65
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993
---- ---- ----
(Dollars in thousands, except per share data)
PRO FORMA FIRST FINANCIAL & SAND RIDGE
FINANCIAL (6)
Net earnings (A) $ 35,947 $ 31,812 $ 28,822
Net earnings per common share - basic (A)(1) 0.94 0.85 0.77
Net earnings per common share - diluted (A)(1) 0.93 0.84 0.76
Dividends declared per share - First
Financial 0.41 0.37 0.31
Book value per share (period end) (2) 6.67 5.82 5.68
Average shares outstanding (B) 38,358,500 37,620,024 37,621,760
Shares outstanding (period end) (B) 39,756,729 37,603,579 35,992,596
PRO FORMA SAND RIDGE FINANCIAL ONE SHARE
EQUIVALENT ASSUMING MERGER OF FIRST FINANCIAL
& SAND RIDGE FINANCIAL AND 85.25 EXCHANGE
RATIO (7)
Net earnings per common share - basic (A)(1) $ 80.14 $ 72.46 $ 65.64
Net earnings per common share - diluted (A)(1) 79.28 71.61 64.79
Dividends declared per share 34.95 31.54 26.43
Book value per share (2) 568.62 496.16 484.22
PRO FORMA FIRST FINANCIAL, SAND RIDGE
FINANCIAL & HEBRON BANCORP, INC. (8)
Net earnings (A) $ 36,974 $ 32,628 $ 29,569
Net earnings per common share - basic (A)(1) 0.93 0.84 0.76
Net earnings per common share - diluted (A)(1) 0.93 0.83 0.76
Dividends declared per share - First
Financial 0.41 0.37 0.31
Book value per share (period end) (2) 6.66 5.82 5.67
Average shares outstanding (B) 39,581,150 38,842,674 38,844,410
Shares outstanding (period end) (B) 40,979,379 38,826,229 37,215,246
PRO FORMA SAND RIDGE FINANCIAL ONE SHARE
EQUIVALENT ASSUMING MERGER OF FIRST
FINANCIAL, SAND RIDGE FINANCIAL & HEBRON
BANCORP AND 85.25 EXCHANGE RATIO (7)
Net earnings per common share - basic (A)(1) $ 79.28 $ 71.61 $ 64.79
Net earnings per common share - diluted (A)(1) 79.28 70.76 64.79
Dividends declared per share 34.95 31.54 26.43
Book value per share (2) 567.77 496.16 483.37171.58 160.17 146.92 135.71 118.60
- --------------------------------------
(A) Before cumulative effect of changes in accounting principles.
(B) Average and period end shares outstanding are not rounded to the nearest
thousand.
8See Notes to Selected Unaudited Consolidated Financial Data and Per Share Data
on page 10.
9
1316
NOTES TO SELECTED UNAUDITED CONSOLIDATED FINANCIAL DATA AND PER SHARE DATA
- --------------------------------------------------------------------------
(1) EarningsNet earnings per common share - basic is calculated by dividing net
earnings for the period by the average number of common shares
outstanding for the period. EarningsNet earnings per common share - diluted for
First Financial includes the assumed exercise of outstanding stock
options. Sand Ridge Financial and Hebron Bancorp do not have any
potentially dilutive instruments outstanding.
(2) Book value per share is calculated by dividing total shareholders'
equity at the end of the period by the number of shares outstanding at
the end of the period.
(3) Dividend information on First Financial's subsidiaries, which have
merged with First Financial under the pooling-of-interests method after
January 1, 19931994, has not been recalculated or added to First
Financial's historical dividend information. First Financial has
adjusted historical information to reflect the issuance of stock splits
and dividends.
(4) At the dates indicated, Hebron Bancorp owned 97.5% of the outstanding stock of Hebron Deposit
Bank.Bank at December 31, 1997, 1996, 1995, and 1994. As of December 31,
1998, the minority shareholders of Hebron Deposit Bank had traded their
bank stock for shares of Hebron Bancorp, thereby increasing the total
outstanding stock of Hebron Bancorp to 60,000 shares and making Hebron
Deposit Bank a wholly owned subsidiary of Hebron Bancorp. The proformapro-forma
financial data assumes 60,000 shares of Hebron Bancorp were outstanding
at January 1, 1993.1994.
(5) The shares outstanding data for First Financial has been adjusted to
reflect treasury stock transactions.
(6) The PRO FORMA FIRST FINANCIAL & SAND RIDGE FINANCIAL reflects the
combined results of First Financial and Sand Ridge Financial after
giving effect to the pooling-of-interests method of accounting. For
illustrative purposes, the combined results assume the merger was
consummated on January 1, 1993.
The per share data, average shares outstanding and shares outstanding
(period end) were calculated assuming the issuance of 5,115,000 shares
of First Financial Common Stock for all outstanding shares of Sand
Ridge Financial.
(7) Upon consummation of the Merger, each Sand Ridge Financial shareholder
will be entitled to receive First Financial shares equal to the total
number of shares of Sand Ridge Financial Common Stock owned by such
shareholder multiplied by the Exchange Ratio. The Exchange Ratio will
be appropriately adjusted in the event of the subdivision or split of
the outstanding First Financial Common Stock, a capital reorganization,
or a reclassification or recapitalization affecting First Financial
Common Stock. Since the Exchange Ratio is not determinable at the
printing of this Proxy Statement-Prospectus, the one share equivalent
pro forma net earnings, dividends and book value per share for Sand
Ridge Financial was calculated assuming an Exchange Ratio of 85.25 and
are shown for illustrative purposes only.
(8) The PRO FORMAPRO-FORMA FIRST FINANCIAL, SAND RIDGE FINANCIAL CORPORATION &
HEBRON BANCORP, INC. reflects the combined results of First Financial,
Sand Ridge Financial and Hebron Bancorp, Inc. after giving effect to
the pooling-of-interests method of accounting. For illustrative
purposes, the combined results assume the merger was consummated on
January 1, 1993.1994.
The per share data, average shares outstanding and shares outstanding
(period end) were calculated assuming the issuance of 5,115,000 shares
of First Financial Common Stockcommon stock for all outstanding shares of Sand
Ridge Financial and the issuance of 1,222,650 shares of First Financial
Common Stockcommon stock for all outstanding shares of Hebron Bancorp, Inc.
9(7) Upon consummation of the Merger, each Hebron Bancorp shareholder will
be entitled to receive First Financial shares equal to the total number
of shares of Hebron Bancorp common stock owned by such shareholder
multiplied by the Exchange Ratio. The Exchange Ratio will be
appropriately adjusted in the event of the subdivision or split of the
outstanding First Financial common stock, a capital reorganization, or
a reclassification or recapitalization affecting First Financial common
stock.
Since the Exchange Ratio is not determinable at the printing of this
Proxy Statement-Prospectus, the one share equivalent pro-forma net
earnings, dividends and book value per share for Hebron Bancorp were
calculated assuming an Exchange Ratio of 20.3775 shares and are shown
for illustrative purposes only.
10
1417
SUMMARY OF PRO FORMAPRO-FORMA UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
The following pro formapro-forma unaudited consolidated balance sheet as of
September 30,December 31, 1998 and the pro formapro-forma unaudited consolidated statements of
earnings for the nine months ended September 30, 1998 and 1997 and the years ended December 31, 1998, 1997 1996 and 19951996 indicate the
pro formapro-forma effects of the mergers of Hebron Bancorp and Sand Ridge Financial and Hebron Bancorp, Inc. ("Hebron Bancorp") into
First Financial and the issuance of shares of First Financial Common Stockcommon stock in
exchange for all of the outstanding shares of Hebron Bancorp and Sand Ridge
Financial and Hebron
Bancorp common stock using the pooling-of-interests method of accounting. Each
share of Hebron Bancorp common stock and Sand Ridge Financial Common Stock and Hebron Bancorp Common Stockcommon stock will
be canceled and extinguished in consideration and exchange for a number of
shares of First Financial Common Stockcommon stock equal to their respective exchange
ratios. The pro formapro-forma information has been calculated assuming the issuance of
5,115,000 shares of First Financial Common Stockcommon stock for Sand Ridge Financial Common
Stockcommon
stock and the issuance of 1,222,650 shares of First Financial Common Stockcommon stock for
Hebron Bancorp Common Stock.common stock. These are the aggregate number of shares to be
issued according to the respective merger agreements.agreements, assuming no adjustments
are required.
The pro formapro-forma information for First Financial and Sand Ridge Financial
is based on their historical financial statements, giving effect to the
accounting method proposed and the assumptions and adjustments in the
accompanying notes to the pro formapro-forma financial statements. Hebron Bancorp uses a
June 30 fiscal year.year for audit purposes. For purposes of the pro formapro-forma unaudited
consolidated financial statements, theirthe statements of earnings have been adjusted
to reflect
the nine months ended September 30 and the years ended December 31. Even though Hebron Bancorp uses a June
30 fiscal year for reporting purposes, its internal books and records are
maintained on a calendar year basis. Hebron Bancorp's internal financial
statements were therefore used for the pro formapro-forma financial information on the
following pages.
These pro formapro-forma unaudited statements are presented for illustrative
purposes only and may not be indicative of the results that actually would have
occurred if the combination had been in effect on the dates indicated or which
may be obtained in the future. The pro formapro-forma unaudited financial statements
should be read in conjunction with the audited and unaudited financial
statements and related notes set forth or incorporated by reference in this
Proxy Statement-Prospectus.
1011
1518
PRO-FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1998
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 1998
First Sand Ridge Hebron Consolidated
Financial Financial Hebron Pro FormaBancorp Pro-forma
--------- ---------- ------ -------------------- ------- ---------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 123,398136,489 $ 22,72725,223 $ 2,9252,788 $ 149,050164,500
Interest-bearing
deposits with other
banks 2,6772,498 100 0 2,7772,598
Federal funds sold and
securities purchased
under agreements to
resell 4,8504,921 0 4,097 8,9473,733 8,654
Investment securities 371,415 202,824 27,699 601,938348,095 205,623 33,927 587,645
Loans, net of unearned
income and allowance
for loan losses 2,164,039 290,153 68,240 2,522,4322,237,189 313,614 68,543 2,619,346
Premises and equipment 48,602 5,750 1,154 55,50650,902 6,077 1,127 58,106
Accrued interest and
other assets 94,736 5,702 1,453 101,891
----------- ----------- ----------- -----------91,010 6,536 1,540 99,086
=========== =========== =========== ===========
TOTAL ASSETS $ 2,809,7172,871,104 $ 527,256557,173 $ 105,568111,658 $ 3,442,5413,539,935
=========== =========== =========== ===========
LIABILITIES
Deposits $ 2,248,6022,326,596 $ 437,587449,102 $ 89,56696,369 $ 2,775,7552,872,067
Short term borrowings 130,208 25,981 1,694 157,883109,363 44,419 1,282 155,064
Long term borrowings 101,216 13,898 1,874 116,988105,335 13,712 1,730 120,777
Accrued interest and
other liabilities 27,307 5,022 821 33,15027,877 5,407 478 33,762
----------- ----------- ----------- -----------
TOTAL LIABILITIES 2,507,333 482,488 93,955 3,083,7762,569,171 512,640 99,859 3,181,670
SHAREHOLDERS' EQUITY
Common stock 231,767298,285 600(B) 117(D) 239,892120(D) 306,709
Surplus 0 4,600(B) 2,808(D)3,104(D) 0
Retained earnings 69,422 36,062 8,452 113,9365,366 36,411 8,383 50,160
Accumulated comprehensive income 1,835 2,922 192 4,949
Restricted stock awards (408) 0 0 (408)
Treasury stock, at cost (1,068)(3,145) 0 0 (1,068)
Unrealized net gain
(losses) on securities
available-for-sale,
net of deferred income
taxes 2,707 3,506 236 6,449
Restricted stock awards (444) 0 0 (444)(3,145)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS
EQUITY 302,384 44,768 11,613 358,765
=========== =========== =========== ===========301,933 44,533 11,799 358,265
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,809,7172,871,104 $ 527,256557,173 $ 105,568111,658 $ 3,442,5413,539,935
=========== =========== =========== ===========
- --------------------
See Notes to the Pro FormaPro-forma Unaudited Consolidated Financial Statements on page
17.
1116.
12
16
PRO FORMA19
PRO-FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHSYEAR ENDED SEPTEMBER 30,DECEMBER 31, 1998
First Sand Ridge Hebron Consolidated
Financial Financial Hebron Pro FormaBancorp Pro-forma
--------- --------- ------------- ---------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees $143,294 $18,029 $4,787 $166,110$ 193,924 $ 24,295 $ 6,344 $ 224,563
Investment securities 19,230 8,152 938 28,32024,897 10,898 1,315 37,110
Other 583 83 170 836
-------- ------- ------ -------690 149 254 1,093
----------- ----------- ----------- -----------
Total interest income 163,107 26,264 5,895 195,266219,511 35,342 7,913 262,766
INTEREST EXPENSE:
Deposits 60,213 12,245 2,755 75,21380,282 16,556 3,752 100,590
Short-term borrowings 3,311 498 58 3,8674,204 597 76 4,877
Long-term borrowings 2,400 636 89 3,125
-------- ------- ------ -------3,961 898 108 4,967
----------- ----------- ----------- -----------
Total interest expense 65,924 13,379 2,902 82,205
-------- ------- ------ -------88,447 18,051 3,936 110,434
----------- ----------- ----------- -----------
Net interest income 97,183 12,885 2,993 113,061131,064 17,291 3,977 152,332
Provision for loan
losses 4,066 1,750 80 5,896
-------- ------- ------ -------Losses 6,077 2,050 120 8,247
----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses 93,117 11,135 2,913 107,165124,987 15,241 3,857 144,085
NONINTEREST INCOME 24,176 3,349 436 27,96134,341 4,533 545 39,419
NONINTEREST EXPENSES 68,348 9,200 1,744 79,292
-------- ------- ------ -------92,739 12,681 2,431 107,851
----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES 48,945 5,284 1,605 55,83466,589 7,093 1,971 75,653
Income tax expense 16,598 1,265 447 18,310
-------- ------- ------ -------22,483 1,645 552 24,680
----------- ----------- ----------- -----------
NET EARNINGS $ 32,34744,106 $ 4,019 $1,158 $37,524
======== ======= ====== =======5,448 $ 1,419 $ 50,973
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE
Basic $ 0.89 $66.99 $19.79 $0.88
======== ======= ====== =======1.21 $ 90.80 $24.24 $ 1.19
=========== =========== =========== ===========
Diluted $0.88 $66.99 $19.79 $0.87
======== ======= ====== =======$ 1.21 $ 90.80 $ 24.24 $ 1.19
=========== =========== =========== ===========
AVERAGE SHARES
OUTSTANDING 36,418,481 60,000 (A) 58,500 (C) 42,756,131
========== ====== ====== ==========36,375,686 60,000(A) 58,533(C) 42,713,336
=========== =========== =========== ===========
- --------------------
See Notes to the Pro FormaPro-forma Unaudited Consolidated Financial Statements on page
17.
12
17
PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
First Sand Ridge Consolidated
Financial Financial Hebron Pro Forma
--------- ----------- ------ ------------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees $ 122,298 $16,808 $4,753 $143,859
Investment securities 18,696 6,134 880 25,710
Other 560 721 126 1,407
---------- ------- ------ --------
Total interest income 141,554 23,663 5,759 170,976
INTEREST EXPENSE:
Deposits 51,810 11,553 2,407 65,770
Short-term borrowings 4,304 13 108 4,425
Long-term borrowings 489 396 61 946
---------- ------- ------ --------
Total interest expense 56,603 11,962 2,576 71,141
---------- ------- ------ --------
Net interest income 84,951 11,701 3,183 99,835
Provision for loan
losses 3,059 1,350 90 4,499
---------- ------- ------ --------
Net interest income
after provision for
loan losses 81,892 10,351 3,093 95,336
NONINTEREST INCOME 19,507 2,800 287 22,594
NONINTEREST EXPENSES 57,377 8,385 1,612 67,374
---------- ------- ------ --------
INCOME BEFORE INCOME
TAXES 44,022 4,766 1,768 50,556
Income tax expense 14,364 1,195 564 16,123
========== ======= ====== ========
NET EARNINGS $ 29,658 $ 3,571 $1,204 $ 34,433
========== ======= ====== =========
NET EARNINGS PER COMMONSHARE
Basic $ 0.82 $59.51 $20.58 $0.81
========== ======= ====== ========
Diluted $ 0.81 $59.51 $20.58 $0.80
========== ======= ====== ========
AVERAGE SHARES OUTSTANDING
36,395,752 60,000 (A) 58,500 (C) 42,733,402
=============== =============== =============== ==============
- --------------------
See Notes to the Pro Forma Unaudited Consolidated Financial Statements on page
17.16.
13
18
PRO FORMA20
PRO-FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
First Sand Ridge Hebron Consolidated
Financial Financial Hebron Pro FormaBancorp Pro-forma
--------- --------- ------------- ---------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees $ 166,336 $22,642 $6,443 $195,421$ 22,642 $ 6,443 $ 195,421
Investment securities 24,997 8,498 1,180 34,675
Other 852 982 146 1,980
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Total interest income 192,185 32,122 7,769 232,076
INTEREST EXPENSE:
Deposits 70,311 15,719 3,273 89,303
Short-term borrowings 5,518 69 133 5,720
Long-term borrowings 1,004 469 80 1,553
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Total interest expense 76,833 16,257 3,486 96,576
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Net interest income 115,352 15,865 4,283 135,500
Provision for loan
losses 4,736 1,800 120 6,656
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Net interest income
after provision for
loan losses 110,616 14,065 4,163 128,844
NONINTEREST INCOME 26,977 3,851 384 31,212
NONINTEREST EXPENSES 77,677 11,229 2,323 91,229
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES 59,916 6,687 2,224 68,827
Income tax expense 19,608 1,694 693 21,995
=============== =============== =============== ==============----------- ----------- ---------- ----------
NET EARNINGS $ 40,308 $ 4,993 $1,531$ 1,531 $ 46,832
=============== =============== =============== ======================== ========== ========== ==========
NET EARNINGS PER COMMON SHARE
Basic $1.11 $83.21 $26.17 $1.10
=============== =============== =============== ==============$ 1.11 $ 83.21 $ 26.17 $ 1.10
========== ========== ========== ==========
Diluted $1.10 $83.21 $26.17 $1.09
=============== =============== =============== ==============$ 1.10 $ 83.21 $ 26.17 $ 1.09
========== ========== ========== ==========
AVERAGE SHARES
OUTSTANDING 36,402,415 60,000 (A) 58,500 (C)60,000(A) 58,500(C) 42,740,065
=============== =============== =============== ======================== ========== ========== ==========
- --------------------
See Notes to the Pro FormaPro-forma Unaudited Consolidated Financial Statements on page
17.16.
14
19
PRO FORMA21
PRO-FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
First Sand Ridge Hebron Consolidated
Financial Financial Hebron Pro FormaBancorp Pro-forma
--------- --------- ------------- ---------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees $ 144,941 $21,149 $5,707 $171,797$ 21,149 $ 5,707 $ 171,797
Investment securities 25,377 7,448 1,474 34,299
Other 957 335 151 1,443
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Total interest income 171,275 28,932 7,332 207,539
INTEREST EXPENSE:
Deposits 65,907 14,052 3,419 83,378
Short-term borrowings 3,521 271 148 3,940
Long-term borrowings 279 149 81 509
--------------- ---------------
--------------- ------------------------ ---------- ---------- ----------
Total interest expense 69,707 14,472 3,648 87,827
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Net interest income 101,568 14,460 3,684 119,712
Provision for loan
losses 3,433 1,440 156 5,029
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
Net interest income
after provision for
loan losses 98,135 13,020 3,528 114,683
NONINTEREST INCOME 22,097 3,277 373 25,747
NONINTEREST EXPENSES 71,261 9,499 2,057 82,817
--------------- --------------- --------------- ------------------------ ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES 48,971 6,798 1,844 57,613
Income tax expense 15,031 1,914 581 17,526
=============== =============== =============== ==============---------- ---------- ----------- ---------
NET EARNINGS $ 33,940 $ 4,884 $1,263$ 1,263 $ 40,087
=============== =============== =============== ======================== ========== ========== ==========
NET EARNINGS PER COMMON SHARE
Basic $0.96 $81.39 $21.59 $0.96
=============== =============== =============== ==============$ 0.96 $ 81.39 $ 21.59 $ 0.96
========== ========== ========== ==========
Diluted $0.96 $81.39 $21.59 $0.96
=============== =============== =============== ==============$ 0.96 $ 81.39 $ 21.59 $ 0.96
========== ========== ========== ==========
AVERAGE SHARES OUTSTANDING
35,359,522 60,000 (A) 58,500 (C)60,000(A) 58,500(C) 41,697,172
=============== =============== =============== ======================== ========== ========== ==========
- --------------------
See Notes to the Pro FormaPro-forma Unaudited Consolidated Financial Statements on page
17.16.
15
20
PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
First Sand Ridge Consolidated
Financial Financial Hebron Pro Forma
--------- --------- ------ ---------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees $ 129,058 $20,072 $5,335 $154,465
Investment securities 24,024 6,577 1,208 31,809
Other 769 705 130 1,604
--------------- --------------- --------------- --------------
Total interest income 153,851 27,354 6,673 $187,878
INTEREST EXPENSE:
Deposits 59,413 12,994 3,040 75,447
Short-term borrowings 4,051 385 101 4,537
Long-term borrowings 52 679 87 818
--------------- --------------- --------------- --------------
Total interest expense 63,516 14,058 3,228 80,802
--------------- --------------- --------------- --------------
Net interest income 90,335 13,296 3,445 107,076
Provision for loan
losses 2,108 1,040 288 3,436
--------------- --------------- --------------- --------------
Net interest income
after provision for
loan losses 88,227 12,256 3,157 103,640
NONINTEREST INCOME 20,558 2,999 433 23,990
NONINTEREST EXPENSES 63,345 9,567 2,103 75,015
--------------- --------------- --------------- --------------
INCOME BEFORE INCOME
TAXES 45,440 5,688 1,487 52,615
Income tax expense 13,651 1,530 460 15,641
=============== =============== =============== ==============
NET EARNINGS $ 31,789 $ 4,158 $1,027 $ 36,974
=============== =============== =============== ==============
NET EARNINGS PER COMMON SHARE
Basic $0.95 $69.30 $17.56 $0.93
=============== =============== =============== ==============
Diluted $0.95 $69.30 $17.56 $0.93
=============== =============== =============== ==============
AVERAGE SHARES OUTSTANDING
33,243,500 60,000 (A) 58,500 (C) 39,581,150
=============== =============== =============== ==============
- --------------------
See Notes to the Pro Forma Unaudited Consolidated Financial Statements on page
17.
16
2122
NOTES TO THE PRO FORMAPRO-FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
GENERALGeneral
- -------
Reclassification of information has been made at times to provide
consistency in the presentation of financial information for the corporations
involved. These reclassifications are not material in nature and had no effect
on net earnings.
Listed below are certain costs that are directly attributable to the
Merger with Sand Ridge FinancialHebron Bancorp and some of these can reasonably be expected to be
included in the expenses of First Financial during the next 12 months. At September 30, 1998, Sand Ridge Financial hadMarch
31, 1999, approximately $46,000 of the costs listed below have already been paid
and expensed by Hebron Bancorp. Those costs not expensed any costs related to
the Merger. The following costspreviously paid were NOTnot
considered in the preparation of the Pro FormaPro-forma Unaudited Consolidated Financial
Statements.
Classification Amount
-------------- ------
(Dollars in thousands)
Legal $ 24580
Accounting 15550
Financial advisor 2,000283
Regulatory filing fees 256
Other 70
------22
--
Total $2,495
======$441
====
(A) First Financial is offering to exchange an aggregate total of 5,115,000
shares of First Financial Common Stockcommon stock for outstanding shares of Sand
Ridge Financial Common Stock.common stock. The exact number of First Financial
shares to be issued for each share of Sand Ridge Financial Common Stockcommon stock
will be calculated by dividing 5,115,000 by the aggregate number of
shares of Sand Ridge Financial Common Stockcommon stock issued and outstanding
immediately prior to the Effective Time.consummation date of the Merger. The Exchange
Ratio will be appropriately adjusted in the event of the subdivision or
split of the outstanding First Financial Common Stock,common stock, a capital
reorganization, or a reclassification or recapitalization affecting
First Financial Common
Stock.common stock.
If the Merger was consummated on __________April __, 1999, the Exchange Ratio
would be 85.25 shares of First Financial Common Stockcommon stock for each share of
Sand Ridge Financial Common Stock.common stock.
(B) First Financial Common Stockcommon stock and Sand Ridge Financial Common Stockcommon stock do
not have par values. Sand Ridge Financial Common Stock,common stock, however, has a
stated value of $10.00 per share, while First Financial Common Stockcommon stock
does not have a stated value. Since First Financial Common Stockcommon stock does
not have a stated value, its capital accounts do not include an
"additional paid-in capital" or "surplus" account. As a result, Sand
Ridge Financial's additional paid in capital was transferred to its
"common stock" account in the "consolidated pro forma"pro-forma" column, as shown
in the table below:
Sand Ridge Transfer Sand Ridge
Financial from Financial
Actual Surplus Pro FormaPro-forma
------ ------- ---------
(Dollars in thousands)
Common stock $ 600 $ 4,600 $ 5,200
Surplus 4,600 (4,600) 0
-------- ---------- --------------- ------- -------
Total common stock and surplus $ 5,200 $ 0 $ 5,200
======== ========== =============== ======= =======
1716
2223
The consolidated pro formapro-forma shareholders' equity per share was
calculated assuming the issuance of 5,115,000 shares of First Financial
Common Stock,common stock for Sand Ridge Financial common stock and the issuance of
1,222,650 shares of First Financial common stock for Hebron Bancorp
common stock, which isare the number of shares that would have been
issued if the Merger wasMergers were effective __________April __, 1999. The use of the
number of shares is for illustrative purposes only and does not attempt
to predict the actual number of shares that will be exchanged in the
Merger.
(C) First Financial is offering to exchange an aggregate total of 1,222,650
shares of First Financial Common Stockcommon stock for outstanding shares of Hebron
Bancorp Common Stock.common stock. The exact number of First Financial shares to be
issued for each share of Hebron Bancorp Common Stockcommon stock will be calculated
by dividing 1,222,650 by the aggregate number of shares of Hebron
Bancorp Common Stockcommon stock issued and outstanding immediately prior to the
Effective Time for this merger.consummation date of the Merger. The Exchange Ratio will be
appropriately adjusted in the event of the subdivision or split of the
outstanding First Financial Common Stock,common stock, a capital reorganization, or
a reclassification or recapitalization affecting First Financial Common
Stock.common
stock.
If the Merger was consummated on __________April __, 1999, the Exchange Ratio
would be 20.3775 shares of First Financial Common Stockcommon stock for each share
of Hebron Bancorp Common Stock.common stock.
(D) First Financial Common Stockcommon stock and Hebron Bancorp Common Stockcommon stock do not
have par values. Hebron Bancorp Common Stock,common stock, however, has a stated
value of $2.00 per share, while First Financial Common Stockcommon stock does not
have a stated value. Since First Financial Common Stockcommon stock does not have a
stated value, its capital accounts do not include an "additional
paid-in capital" or "surplus" account. As a result, Sand Ridge
Financial'sHebron Bancorp's
additional paid in capital was transferred to its "common stock"
account in the "consolidated pro forma"pro-forma" column, as shown in the table
below:
Hebron Transfer Hebron
Bancorp fromFrom Bancorp
Actual Surplus Pro FormaPro-forma
------ ------- ---------
(Dollars in thousands)
Common stock $ 117120 $ 2,8083,104 $ 2,9253,224
Surplus 2,808 (2,808)3,104 (3,104) 0
-------- ----------------- ------- --------
Total common stock and surplus $ 2,9253,224 $ 0 $ 2,9253,224
======= ======== ========== ===============
17
24
RISK FACTORS
In making your determination as to how to vote on the merger, you should
consider the following factors:
Risks Relating To The Merger
- ----------------------------
AFTER THE SPECIAL MEETING, HEBRON BANCORP'S BOARD OF DIRECTORS MAY TERMINATE THE
MERGER AGREEMENT, WITHOUT RESOLICITING THE APPROVAL OF HEBRON BANCORP'S
SHAREHOLDERS, IF A DECREASE IN THE MARKET VALUE OF FIRST FINANCIAL COMMON STOCK
MEETS CERTAIN CONDITIONS.
The precise value of the merger consideration to be paid to Hebron Bancorp's
shareholders will not be known at the time of the special meeting. The Merger
Agreement provides that Hebron Bancorp shareholders will receive 20.3775 shares
of First Financial common stock for each share of Hebron Bancorp common stock,
unless First Financial's market price per share declines both independently and
relative to a peer group of financial institution holding companies. If (a) the
average closing price of First Financial common stock falls below approximately
$23.86 per share, and (b) the HBI Ratio (the average closing price divided by
$28.0682) is less than the value of an index of financial institution holding
companies (the "Index Ratio"), Hebron Bancorp's board of directors may elect to
terminate the Merger Agreement. If Hebron Bancorp's board elects to terminate
the Merger Agreement and gives notice of its termination of the Merger Agreement
to First Financial as provided in the Merger Agreement, First Financial will
then have the option of increasing the number of shares of First Financial
common stock issued to Hebron Bancorp shareholders in accordance with a formula
set forth in the Merger Agreement. If First Financial elects to increase the
number of shares issued to Hebron Bancorp shareholders, the Merger Agreement
will not terminate and Hebron Bancorp shareholders will be entitled to receive
increased number of shares. If First Financial does not agree to issue
additional shares, the Merger Agreement will terminate immediately.
First Financial's average closing price, the HBI Ratio and Index Ratio will not
be computed any sooner than two days following the date of the special meeting
of shareholders. Therefore, Hebron Bancorp's Board of Directors will not be able
to determine if it has the right to terminate the Merger Agreement, and if it
has such right, whether it will exercise such right, until after the date of the
special meeting of shareholders. If the above conditions are satisfied, Hebron
Bancorp's Board of Directors may elect to terminate the Merger Agreement even
though it has been approved by a majority of the shareholders of Hebron Bancorp.
As of the date of this Proxy Statement-Prospectus, the average closing price of
First Financial common stock was $______, the HBI Ratio would be ______% and the
Index Ratio would be ______%. If the valuation date was the date of this Proxy
Statement-Prospectus, Hebron Bancorp's Board of directors [would/would not] have
the option of terminating the Merger Agreement. See "THE MERGER AGREEMENT -
First Financial Average Closing Price And Termination Of The Merger" for more
information.
18
23
THE SPECIAL MEETING25
HEBRON BANCORP'S SHAREHOLDERS WILL HAVE NO CONTROL OF FIRST FINANCIAL'S FUTURE
OPERATIONS.
Hebron Bancorp's shareholders own 100% of Hebron Bancorp and, in the aggregate,
have the power to approve or reject any matters requiring the approval of
shareholders under Kentucky law and Hebron Bancorp's Articles of Incorporation.
After Sand Ridge Financial Corporation and Hebron Bancorp merge with and into
First Financial, Hebron Bancorp's shareholders, in the aggregate, will own
approximately 2.87% of the outstanding shares of First Financial, based on First
Financial shares outstanding at December 31, 1998. Even if all former Hebron
Bancorp shareholders vote in concert on items which may be presented to First
Financial shareholders, they will not have a major impact on whether such items
are approved or rejected.
Post-Merger Risks
- -----------------
FIRST FINANCIAL'S ACQUISITION STRATEGY COULD POSE RISKS.
First Financial has grown through acquisitions during recent years and
anticipates that it will make additional acquisitions in the future. First
Financial may need to issue additional common stock to pay for future
acquisitions, which would further dilute the ownership interest of First
Financial shareholders, including former Hebron Bancorp shareholders. Future
acquisitions may also require First Financial to use substantial cash or other
liquid assets or to incur debt. If this occurs, First Financial may be more
susceptible to economic downturns and competitive pressures.
FIRST FINANCIAL NEEDS TO BE PREPARED FOR THE YEAR 2000.
Potential system disruptions that may occur because of the Year 2000 issue could
adversely affect First Financial's operations and profitability. Although First
Financial has devoted significant resources in both money and time to the
remediation of its systems in preparation for the Year 2000 and believes its
systems will be Year 2000 compliant, some factors are not within First
Financial's control and could disrupt its operations. Such factors could include
increased withdrawal demand as the year 2000 approaches and the affect on First
Financial's liquidity and the Year 2000 preparedness of First Financial's loan
customers and the risk for increased loan losses. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - YEAR 2000
ISSUES" in First Financial's 1998 Annual Report to its shareholders, which is
incorporated by reference, for a more thorough discussion of First Financial's
Year 2000 preparations.
19
26
THE FINANCIAL SERVICES INDUSTRY IS EXTREMELY COMPETITIVE.
First Financial's affiliates compete with other commercial banks, thrift
institutions and other financial service providers. Competitors now include
securities dealers, brokers, mortgage bankers, investment advisors, finance
companies and insurance companies. Many of the newer competitors offer one-stop
financial services to their customers that may include services that banks may
not have been able or legally permitted to offer their customers in the past.
The increasingly competitive environment is largely the result of changes in
regulation and technology and continuing consolidation of the banking and thrift
industry. First Financial's ability to increase shareholder value will depend,
in part, on its ability to offer financial services, products, and delivery
systems that meet the needs and demands of its customers.
ECONOMIC CHANGES COULD AFFECT FIRST FINANCIAL'S PROFITABILITY.
First Financial's income is heavily dependent on its net interest income - the
difference between earnings from interest-earning assets such as loans and
investments and the rates paid for interest-bearing liabilities such as deposits
and borrowings. These rates are highly sensitive to many factors beyond First
Financial's control, including general economic conditions, the policies of
various governmental and regulatory agencies, and general interest rate levels.
Fluctuations in these areas may adversely affect the profitability of First
Financial.
GOVERNMENTAL REGULATION AND LEGISLATION COULD LIMIT FIRST FINANCIAL'S FUTURE
GROWTH.
First Financial and its subsidiaries are subject to regulation and supervision
by various federal and state governmental agencies. Regulations issued by these
agencies may change in the future and could negatively influence First
Financial's ability to expand services and increase the value of its business.
The regulation of the national supply of bank credit in an Indianaeffort to prevent
recession and restrain inflation is an important function of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). Among the
procedures used to implement these objectives are open market operations in U.S.
government securities, changes in the discount rate on member bank borrowings
and changes in reserve requirements on member bank deposits. These procedures
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits and their use may also affect interest
rates charged on loans or paid for deposits. Such policies and procedures of the
Federal Reserve Board will likely have significant impact on the operating
results of the banking industry in general. The effect, if any, upon the future
business and earnings of First Financial cannot accurately be predicted.
20
27
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
This document, including information included or incorporated by reference
herein, contains or may contain forward-looking statements that involve risks
and uncertainties. This document contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of First Financial and
Hebron Bancorp, including statements preceded by, followed by or that include
the words "believes", "expects", "anticipates" or similar expressions. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, those risks discussed above.
21
28
THE SPECIAL MEETING
Hebron Bancorp, Inc., a Kentucky corporation, ("Sand Ridge
Financial"), is mailing this Proxy
Statement-Prospectus to holders of shares of its common stock ("Sand Ridge Financial Common Stock") on or about MarchApril
__, 1999, together with a notice of a Special Meetingspecial meeting of Shareholders (the "Special
Meeting")shareholders and a form
of proxy solicited by the Board of Directors of Sand Ridge
Financial (the "Sand Ridge Board")Hebron Bancorp for use at the
Special Meeting.
TIME AND PLACE; PURPOSEspecial meeting.
Time And Place; Purpose
- -----------------------
The Special Meetingspecial meeting will be at the main office of Sand RidgeHebron Deposit Bank,
2611
Highway Avenue, Highland, Indiana 46322,2652 North Bend Road, Hebron, Kentucky 41048, starting at 9:00 a.m._____ _.m., local
time, on April 22,May __, 1999. At the Special Meeting,special meeting, you will be asked to consider and
vote upon a proposal to approve a Plan and Agreement of Merger (the "Merger
Agreement") dated December 16,31, 1998 by and between First Financial, Bancorp., an Ohio
corporation, ("First Financial"), and Sand Ridge Financial.Hebron Bancorp. Pursuant to the Merger Agreement, Sand Ridge FinancialHebron
Bancorp will be merged into First Financial (the
"Merger") and Sand RidgeHebron Deposit Bank will become
a wholly owned subsidiary of First Financial.
VOTING AND REVOCATION OF PROXIESVoting And Revocation Of Proxies
- --------------------------------
You may use the accompanying proxy card if you are unable to attend the
Special Meetingspecial meeting in person or wish to have your shares voted by proxy even if you
do attend the Special Meeting.special meeting. You may revoke any proxy that you give at any
time before it is exercised, either by submitting a written notice of revocation
or a properly executed proxy of a later date, or by attending the Special
Meetingspecial
meeting and voting in person. You should address the written notice of
revocation and other communications with respect to the revocation of Sand Ridge
FinancialHebron
Bancorp proxies to Sand Ridge Financial Corporation, 2611 Highway Avenue,
Highland, Indiana 46322, Attention "Secretary."Hebron Bancorp, Inc., 2652 North Bend Road, Hebron, Kentucky
41048, Attention: Stephen K. Dallas, Secretary.
All shares of Sand Ridge Financial Common StockHebron Bancorp common stock represented by properly
executed proxies received prior to or at the Special Meetingspecial meeting and not revoked
before they are exercised will be voted in accordance with the instructions
indicated in such proxies. If you do not specify how your proxy is to be voted,
it will be voted "FOR" the Merger Agreement.
19
24
SOLICITATION OF PROXIES
Sand Ridge FinancialSolicitation Of Proxies
- -----------------------
Hebron Bancorp will pay the expenses of solicitation of proxies for the
Special Meeting.special meeting. In addition to solicitation by mail, proxies may be solicited
in person by directors, officers and employees of Sand RidgeHebron Bancorp without
additional compensation and by telephone, teletype, facsimile or similar method.
Sand RidgeHebron Bancorp will also make arrangements with brokerage houses and other
custodians, nominees and fiduciaries to send proxy material to beneficial owners
and to secure their voting instructions, if necessary. Sand Ridge FinancialHebron Bancorp will
reimburse these record holders for their reasonable expenses in forwarding such
materials.
RECORD DATE AND VOTING RIGHTS22
29
Record Date And Voting Rights
- -----------------------------
RECORD DATE. The Sand Ridge FinancialHebron Bancorp Board has fixed the close of business
on March 8,April __, 1999 as the record date for determining the Sand Ridge
FinancialHebron Bancorp
shareholders entitled to notice of and to vote at the Special Meetingspecial meeting (the
"Record Date"). You will be entitled to vote at the Special Meetingspecial meeting if you are a
shareholder of record on the close of business on the Record Date. As of the
Record Date, there were 60,000 shares of Sand Ridge Financial Common StockHebron Bancorp common stock outstanding
and entitled to vote.
VOTING RIGHTS. Each share of Sand Ridge Financial Common StockHebron Bancorp common stock entitles its
holder to one vote.
VOTE REQUIRED. As permitted by the Indiana Business Corporation LawKentucky Revised Statutes (the
"IBCL""KRS") and the Sand Ridge Financial CertificateHebron Bancorp Articles of Incorporation, the affirmative vote of
the holders of two-thirdsa majority of the shares of Sand Ridge
Financial Common StockHebron Bancorp common stock
outstanding on the Record Date is required to approve and adopt the Merger
Agreement.
As of the close of business on the Record Date, there were 60,000
shares of Sand Ridge Financial Common StockHebron Bancorp common stock outstanding and entitled to vote, and
there were 33792 holders of record of shares of Sand Ridge Financial Common
Stock.Hebron Bancorp common stock. On
such date, the directors and executive officers of Sand Ridge
FinancialHebron Bancorp as a group
beneficially owned 16,91827,300 shares of Sand Ridge Financial
Common Stock,Hebron Bancorp common stock, an amount equal
to 28.2%45.5% of the shares of Sand Ridge Financial
Common StockHebron Bancorp common stock issued and outstanding on
such date. The directors and executive officers have indicated their intentionunanimously approved the
merger and are expected to vote for the Merger.merger.
If less than two-thirdsa majority of the outstanding shares of Sand Ridge
Financial Common StockHebron Bancorp
common stock are present at the Special Meeting,special meeting, we expect that the Special Meetingspecial
meeting will be postponed or adjourned for the purpose of allowing additional
time for soliciting and obtaining additional proxies or votes. At any subsequent
reconvening of the Special Meeting,special meeting, we will vote all proxies in the same manner
as they would have been voted at the original convening of the Special Meeting,special meeting,
except for any proxies that have been revoked or withdrawn.
20
25
ABSTENTIONS AND BROKER NON-VOTES. A properly executed proxy marked
"Abstain" will not be voted on the Merger Agreement proposal. Also, brokers who
hold Sand Ridge Financial Common StockHebron Bancorp common stock in "street" name for customers can notcannot vote
these shares on the Merger Agreement proposal without specific instructions from
their customers.
SINCE APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF
AT LEAST TWO-THIRDSA MAJORITY OF THE OUTSTANDING SHARES OF SAND RIDGE FINANCIALHEBRON BANCORP COMMON STOCK,
YOUR FAILURE TO VOTE, YOUR ABSTENTION OR, IF YOUR SHARES ARE HELD IN "STREET"
NAME, YOUR FAILURE TO INSTRUCT YOUR BROKER ALL WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST THE MERGER. ACCORDINGLY, THE SAND RIDGE FINANCIALHEBRON BANCORP BOARD URGES YOU TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE.
2123
2630
THE MERGER
This section of the Proxy Statement-Prospectus describes certain of the
more important aspects of the Merger.merger. The following description does not purport
to be complete and is qualified in its entirety by reference to the Merger
Agreement, which is set forth in Appendix A to this Proxy Statement-Prospectus.
All shareholders are urged to read the Merger Agreement in its entirety.
BACKGROUND OF AND REASONS FOR THE MERGER
As partBackground Of And Reasons For The Merger
- ----------------------------------------
Changes in the financial service industry in recent years, coupled with
the passage of its continuing effortsthe Riegle Neal Interstate Bank and Branching Efficiency Act of
1994 that provides for nationwide interstate banking, have led to maximize shareholder value, Sand
Ridge Financial'san increased
consolidation of banks under large multi-bank companies through mergers and
acquisitions and an uncertain future for smaller independent financial
institutions. These large bank holding companies, along with other financial
institutions, have increased competition with smaller, independent banks and
bank holding companies and, ultimately, the ability of small banks and bank
holding companies to compete with large bank holding companies and other
financial institutions was closely reviewed.
In light of, and in response to, these trends in the financial services
industry, from time to time, the Board of Directors has considered various
strategic options
from timealternatives for Hebron Bancorp, which have included remaining independent or
selling to time, including the possibility of seeking a merger with anotherlarger financial institution. In recent years, there has been, and there continues to be, substantial
consolidation in the United States banking and financial services industry. This
trend is necessarily of concern to smaller institutions like Sand Ridge
Financial because larger entities that emerge from consolidations may acquire
substantial competitive advantages. Sand Ridge Financial has been dedicated to
the goal of providing superior banking services, and in analyzing strategic
alternatives has always sought to ensure that the alternatives being considered
can reasonably be expected to result in improved services as well as enhanced
shareholder value.
In Maysummer of 1998, the Sand Ridge Financial Board decidedof
Directors began to obtain
independent assistanceexplore the possible sale to or merger with a larger bank
holding company. In August 1998, the Board of Directors met with representatives
of Professional Bank Services, Inc. ("PBS") and Investment Bank Services, Inc.
("IBS"), a registered broker/dealer subsidiary of PBS, to review the changing
dynamics of community banking and, more specifically, the current market value
in Kentucky for banks. On August 26, 1998, Hebron Bancorp signed an agreement
with IBS, retaining IBS to serve as its investment banker in a strategicpossible sale of
Hebron Bancorp.
At a meeting held on September 15, 1998, representatives of PBS and IBS
met with the Board of Directors to review PBS' analysis of available options. The Sand
Ridge Financial Board retained outside financial advisors, Hovde Financial, Inc.
("Hovde"), to assist Sand Ridge Financial in reviewing market conditionsHebron Bancorp's
business and in
evaluating strategic alternatives. Prior to retaining Hovde, someestimated value. PBS also identified the most likely potential
acquirers of Hebron Bancorp and analyzed the ability of the directors of the Sand Ridge Financial Board interviewed members of an unrelated
client to whom Hovde had provided investment banking services. In making its
selection, the Sand Ridge Financial Board determined to its satisfaction that
Hovde had extensive experience in advising financial institutions regarding
strategic alternatives, had a sizeable staff with the desired qualifications and
provided a fee estimate that was fair and reasonable.
Hovde presented its strategic review materials to Sand Ridge
Financial's Board on June 4, 1998. After careful and thorough discussion of the
various alternatives, Sand Ridge Financial's Board determined to consider the
merger of Sand Ridge Financial.
In seeking potential acquirers
Sand Ridge Financial's Board had a
number of criteria for selecting a merger partner. The criteria included:
a. active and broad marketability of acquirer's stock;
b. a control premium that reflected Sand Ridge Financial's
financial condition;
c. attractive relative valuation of acquirer's stock with
prospects for price appreciation better than those for Sand
Ridge Financial's stock;
d.to consummate a transaction with little or no adverse tax consequences for
the shareholders;
e. possible higher dividends for shareholders;
22
27
f. a sizeable acquirer with a diversified product base and
revenue stream;
g. benefit plans which were comparable to Sand Ridge Financial's
plans;
h. minimal dislocation of employees;
i. a willingness to retain Sand Ridge Bank as a separate
subsidiary;
j. an acquirer which was a good corporate citizen;
k. an acquirer which would maintain a diverse and competitive
source of commercial bank products and services for Sand Ridge
Financial's customers; and
l. as few contingencies as possible to closing.Hebron Bancorp. The Board of Directors
authorized HovdePBS to contactprovide various potential acquirers believed to have a number of other bank holding
companies to assess theirhigh
interest in pursuing a strategic affiliationtransaction with Sand
Ridge Financial. Institutions contacted included companies which Sand Ridge
FinancialHebron Bancorp, with copies of a confidential
package prepared by PBS describing Hebron Bancorp and Hovde believed would have strategic interest in Sand Ridge
Financialits business.
In early November 1998, representatives of PBS met with the Board of
Directors and reported that six of the financial abilitypotential acquirers who were provided
with copies of PBS' confidential package had submitted offers to acquire Sand Ridge Financial.Hebron
Bancorp. After receiptanalyzing the terms of written preliminary indicationsthe six offers, including the ability of
interest from five companies,
subjectthe offerors to due diligence, three companies wereconsummate the transaction on such terms, the Board of Directors
directed PBS to continue discussions with representatives of two of the
potential acquirers, which potential acquirers offered the opportunityhighest merger
consideration to conduct a detailed business review of Sand Ridge Financial in order to formulate
a firm offer which would not be conditional upon the performance of a further
business review by the offeror. All three companies availed themselves of this
opportunity. In October, 1998, eachHebron Bancorp's shareholders. Each of the three conducted in-depth examinations
of the books, records and operations of Sand Ridge Financial and had discussions
with executive management andtwo potential
acquirers was invited to make presentations
24
31
to the Board of Directors. Upon conclusion of their examinations, each ofThese presentations occurred in mid-November 1998.
Based on these presentations and the companiesfact that had
conducted a business review submitted offers for stock.
After careful review ofFirst Financial offered the
highest merger consideration offered and ofat the merger
selection criteria, the Sand Ridge Financial Board determined on November 3,
1998, that the stock offer fromtime, First Financial was the most attractive offer.
The stock offer from First Financial was at a fixed Exchange Ratio, except in
certain limited circumstances,permitted to
conduct due diligence investigations of 85.25 sharesHebron Bancorp. Negotiation of First Financial common Stock
for each share of Sand Ridge Financial's Common Stock, producing a price of
approximately $2,266.00 per Sand Ridge Financial share, based on First
Financial's share price on October 29, 1998.
In addition to determining that the consideration offered by First
Financial was superior to other offers, the Sand Ridge Financial Board
determined that First Financial and First Financial's offer favorably satisfied
the merger criteria previously established by the Sand Ridge Financial Board.
Specifically, the Sand Ridge Financial Board found that, among favorable
criteria, First Financial's offer would:
a. afford a control premium to the shareholders of Sand Ridge
Financial because the offer was valued by Hovde at
approximately 310% of book value;
b. provide a marketable security to Sand Ridge Financial
shareholders because First Financial stock is actively traded
on the Nasdaq National Market System;
c. provide no current, adverse tax consequence to Sand Ridge
Financial shareholders, except for cash received for
fractional shares and cash paid to dissenting shareholders who
exercise dissenter's rights;
d. provide higher dividends for Sand Ridge Financial
shareholders;
23
28
e. provide for a merger with a bank holding company with $2.8
billion in assets and which operates five Ohio, one Michigan
and nine Indiana financial institution affiliates with a total
of 105 banking office locations;
f. provide benefit plans comparable to Sand Ridge Financial
plans;
g. maintain a diverse and competitive source of commercial bank
products and services for Sand Ridge Financial's customers;
h. retain Sand Ridge Bank as a separate subsidiary which would
allow autonomy in Sand Ridge Bank's operations thereby also
probably resulting in minimal dislocation of employees;
i. provide for only one business contingency, other than
contingencies that would be required in the normal course for
any merger transaction, that the transaction be treated as a
pooling-of-interests for accounting purposes; and
j. provide a price protection mechanism, permitting Sand Ridge
Financial to terminate the merger if there is a sustained
decline in First Financial's Common Stock value relative to a
peer group of comparable companies, unless First Financial
elects to adjust the Exchange Ratio to increase the number of
First Financial shares exchanged for each share of Sand Ridge
Financial Common Stock.
In addition, the banking philosophy of First Financial, emphasizing
community banking and the autonomy of its subsidiaries, was of major importance
to the Sand Ridge Financial Board.
In reviewing its initial merger criteria as well as the consideration
offered by each potential merger party, the Sand Ridge Financial Board
determined that the offer from First Financial was superior because it provided
a higher consideration and favorably met more of the criteria considered by the
Sand Ridge Financial Board.
After these deliberations, the Sand Ridge Financial Board, with the
assistance of Hovde and Barnes & Thornburg, general legal counsel, entered into
negotiations toward a
definitive agreement with First Financial commenced after completion of the due
diligence and Hebron Bancorp and First Financial continued to refine the
financial terms of the proposal resulting in the terms contained in the Merger
Agreement.
The final Merger Agreement was presented to the Board of Directors at a
special meeting held on December 31, 1998. At the meeting, representatives of
PBS presented an analysis of the financial terms of the proposed Merger
Agreement and delivered PBS' opinion that the Merger Agreement was fair to
Hebron Bancorp's shareholders from a financial point of view. Representatives of
Stites & Harbison, special counsel to Hebron Bancorp, presented an analysis of
the terms and conditions of the Merger Agreement. After further discussion and
questions, the Board of Directors unanimously approved the Merger Agreement.
Hebron Bancorp and First Financial issued press releases dated January 4, 1999
to announce the proposed merger between Hebron Bancorp and First Financial.
Following
negotiationThe terms of the Merger Agreement were the Sand Ridgeresult of arm's length
negotiations between Hebron Bancorp and First Financial and their respective
representatives. In reaching its decision to approve the Merger Agreement,
Hebron Bancorp's Board concludedof Directors consulted with PBS and Stites & Harbison and
considered a number of factors including, but not limited to, the following:
1) The financial terms of the merger consideration and the adequacy of
the merger consideration. A comparison of the financial terms of recent
bank acquisitions indicated that the financial terms of the Merger
wouldAgreement compared favorably with other recent transactions
2) The effect on shareholder value of Hebron Bancorp's remaining an
independent entity. The Board of Directors considered the increased
competition faced by community banks in general from large bank holding
companies and other financial institutions.
3) The opinion of PBS indicating that the consideration to be received
by Hebron Bancorp's shareholders under the Merger Agreement is fair
from a financial perspective.
4) First Financial's current intention to operate Hebron Deposit Bank
as a wholly owned subsidiary of First Financial.
5) The anticipated tax-free nature of the merger from federal income
taxes to the shareholders of Hebron Bancorp receiving solely First
Financial common stock in exchange for their shares of Hebron Bancorp
common stock.
6) An analysis of alternatives to Hebron Bancorp merging with First
Financial, including other potential acquirers.
25
32
7) The timeliness of a merger given the best intereststate of Sand Ridgethe economy and the
stock markets as well as anticipated trends in both.
8) The operating philosophy, competence, experience and integrity of
First Financial and its shareholders. On December 16, 1998,management.
9) The economic effect of the Sand Ridgemerger on Hebron Bancorp, Hebron Deposit
Bank, employees, customers, creditors and other elements of the
community.
10) The business and financial condition and earnings and prospects of
First Financial and its subsidiaries, including, but not limited to,
possible debt service and other existing or likely financial
obligations of First Financial and its subsidiaries and the possible
effect of such conditions on Hebron Bancorp and Hebron Deposit Bank and
other elements of the community in which Hebron Deposit Bank operates.
11) A review of the value to be provided to each of the shareholders of
Hebron Bancorp in the merger to determine if it is equal to or greater
than the value given by First Financial in any transaction during the
past twelve months.
Based on these factors without applying any greater weight to any
factor, and such other matters as members of the Board of Directors deemed
relevant, the Board of Directors has unanimously approved the Merger and the Merger Agreement. Based on its review, the Sand Ridge Financial
Board concluded the proposed Merger would beAgreement
as being in the best interests of Hebron Bancorp, its shareholders, employees,
customers and the shareholders of Sand Ridge Financialcommunity served by Hebron Bancorp, and its customers,other constituents
and also advisable for the general welfare and advantage of Hebron Bancorp.
Opinion of Financial Advisor to Hebron Bancorp, Inc.
- ----------------------------------------------------
Professional Bank Services, Inc. ("PBS") was engaged by Hebron Bancorp
to advise Hebron Bancorp's Board of Directors as to the fairness of the
communities
which Sand Ridgeconsideration, from a financial perspective, to be paid by First Financial serves. Accordingly,to
Hebron Bancorp's shareholders as set forth in the Sand Ridge FinancialMerger Agreement.
Professional Bank Services, Inc. is a bank consulting firm with offices
in Louisville, 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 Hebron Bancorp or First Financial. PBS was selected to
advise Hebron Bancorp's Board recommends that Sand Ridge Financial shareholders vote "FOR"of Directors based upon its familiarity with
Kentucky financial institutions and knowledge of the Merger.
24banking industry as a
whole.
26
29
OPINION OF FINANCIAL ADVISOR TO SAND RIDGE FINANCIAL
In addition33
PBS performed certain analyses described herein and presented the range
of values for Hebron Bancorp resulting from such analyses to the December 16, 1998 preliminaryBoard of
Directors of Hebron Bancorp in connection with its advice as to the fairness of
the consideration to be paid by First Financial.
A fairness opinion Hovde Financial, Inc. ("Hovde") hasof PBS was delivered to the Sand Ridge Financial Board itsof Directors of
Hebron Bancorp on December 31, 1998, at a special meeting of the Board of
Directors and has been updated fairness opinion, dated as of the date of this Prospectus/Proxy
Statement-Prospectus that, based upon and subject to the various considerations
set forth in such opinion, the Exchange Ratio is fair from a financial point of
view to the holders of Sand Ridge Financial Common Stock as of such date. In
requesting Hovde's advice and opinion, no limitations were imposed by Sand Ridge
Financial upon Hovde with respect to the investigations made or procedures
followed by it in rendering its opinion. The full textStatement. A copy of the updated fairness opinion, which includes a summary of Hovde, which describes the procedures followed,
assumptions made matters considered and limitations oninformation analyzed in deriving the review undertaken, and which does not
materially differ from the December 16, 1998 preliminary fairness opinion, is
attached hereto as Appendix B. Holders of Sand Ridge Financial Common StockB to this Proxy Statement-Prospectus and should be read this opinion in
its entirety.
Hovde is a nationally recognized investment banking firmIn arriving at its fairness opinion, PBS reviewed certain publicly
available business and as partfinancial information relating to Hebron Bancorp and
First Financial. PBS considered certain financial and stock market data of
its investment banking business, is continually engagedHebron Bancorp and First Financial, 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 valuationstates of Kentucky
and Indiana that have recently been effected. PBS also considered such other
information, financial institutions in connection with mergersstudies, analyses and acquisitions, private
placements and valuations for other purposes. As a specialist in securities of
financial institutions, Hovde has experience in, and knowledge of, banks,
thrifts and bank and thrift holding companies. Sand Ridge Financial's Board of
Directors selected Hovde to act as its financial advisor in connection with the
Merger on the basis of the firm's reputation and expertise in transactions such
as the Merger.
Hovde will receive a fee contingent upon the completion of the Merger
for services rendered in connection with advising Sand Ridge Financial regarding
the Merger, including the fairness opinioninvestigations and financial,
advisory services
provided to Sand Ridge Financial, plus reimbursement of out-of-pocket expenses.
As of the date of the preliminary fairness opinion, such fee would be
approximately $2.0 millioneconomic and Hovde has received approximately $400,000 of such
fee.
HOVDE'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, OF THE EXCHANGE RATIO, AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY HOLDER OF SAND RIDGE FINANCIAL COMMON STOCK AS TO HOW SUCH HOLDER SHOULD
VOTE AT THE SAND RIDGE FINANCIAL MEETING. THE SUMMARY OF THE OPINION OF HOVDE
SET FORTH IN THIS PROXY STATEMENT-PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The following is a brief summary of the analyses performed by Hovde inmarket criteria that it deemed relevant. In connection with its
fairness opinion:
Duringreview, PBS did not independently verify the course of its engagement, and as a basis for arriving at its
opinion, Hovde reviewed and analyzed material bearing upon the financial and
operating condition of Sand Ridge Financial and First Financial and material
prepared in connection with the Merger, including, among other things, the
following: (i) the Merger Agreement; (ii) certain historical publicly available
information concerning Sand Ridge Financial and First Financial; (iii) the
nature and terms of recent merger transactions; and (iv) financial and other
information provided to Hovde by
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the management of Sand Ridge Financial and First Financial. Hovde conducted
meetings and had discussions with members of senior management of Sand Ridge
Financial and First Financial for purposes of reviewing the future prospects of
Sand Ridge Financial and First Financial. Hovde also took into account its
experience in other transactions, as well as its knowledge of the commercial
banking and thrift industries and its general experience in securities
valuations.
In rendering its opinion, Hovde assumed, without independent
verification, the accuracy and completeness of the financial and otherforegoing information and relied upon the accuracy of the representations of the parties
containedon
such information as being complete and accurate in the Merger Agreement. Hovde hasall 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 made anymake
an independent evaluation or appraisal of any properties,the assets of Hebron Bancorp or liabilitiesFirst
Financial. PBS took into consideration the results of Sand Ridge Financial.
Hovde assumedPBS' wholly owned
subsidiary Investment Bank Services, Inc. ("IBS") solicitation of indications of
interest from other financial institutions concerning their interest in a
possible affiliation with Hebron Bancorp. PBS reviewed the correspondence and
relied upon the accuracy and completenessinformation received from interested financial institutions that were contacted.
PBS reviewed all offers received by Hebron Bancorp.
As part of preparing this fairness opinion, PBS performed a due
diligence review of First Financial on December 15, 1998. As part of the publicly
availabledue
diligence, PBS reviewed the following items: minutes of the Board of Directors
meetings of First Financial, from January 1997 through November 1998; reports of
independent auditors and management letters and response thereto, for the years
ending December 31, 1996 and 1997; the most recent analysis and calculation of
allowance for loan and lease losses for First Financial; internal loan review
reports; investment portfolio activity reports; asset/liability management
reports; asset quality reports; Uniform Holding Company Report for First
Financial as of June 30, 1998; June 30, 1998 and September 30, 1998 Consolidated
Reports of Condition and Income for First Financial; Security and Exchange
Commission ("SEC") filings made by First Financial for 1997 and year-to-date
1998; and discussions pertaining to any material pending litigation and other
potentially substantive issues with senior management of First Financial.
PBS performed a review and analysis of the historic performance of
Hebron Bancorp and its subsidiary, Hebron Deposit Bank, including: (i) September
30, 1998 internal financial reports of Hebron Deposit Bank; (ii) June 30, 1998
Consolidated Reports of Condition and Income filed by Hebron Deposit Bank with
the FDIC; (iii) June 30, 1998 and December 31, 1997 FRY-9 SP Parent Company Only
Financial Statements filed by Hebron Bancorp with the Federal Reserve; (iv) June
30, 1998, 1997 and 1996 audited balance sheets of Hebron Deposit Bank; (v) June
30,
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1998 Uniform Bank Performance Report of Hebron Deposit Bank; (vi) December 31,
1998 budget and projected financial data for Hebron Deposit Bank; and (vii)
various internal asset quality reports, loan loss allowance reports, securities
listings and deposit information for Hebron Deposit Bank. 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, provided to it, relied uponPBS took into account its assessment of general
market and financial conditions, its experience in other similar transactions
and its knowledge of the representations and warranties of Sand Ridge Financial and First Financial
made pursuant to the Merger Agreement, and did not independently attempt to
verify any of such information.banking industry generally.
In connection with rendering the fairness opinion and preparing its
opinion, Hovde performed various analyses with
respectwritten and oral presentation to Sand Ridge Financial. The following is a brief summaryHebron Bancorp's Board of such
analyses, certain of which were presented to the Sand Ridge Financial Board by
Hovde on December 16, 1998.
IMPLIED OFFER VALUE ANALYSIS BASED ON FIRST FINANCIAL HISTORICAL
TRADING VALUATION. Hovde reviewed the implied offer value per share to Sand
Ridge Financial Common Stock based on the price of First Financial Common Stock
at different intervals during the period commencing 90 trading days prior to
December 14, 1998, using the 5-day, 10-day, 15-day, 20-day, 30-day, 60-day and
90-day average closing price of First Financial Common Stock during such period.
Using such average closing prices, Hovde observed that the implied value per
share to Sand Ridge Financial Common Stock was between $2,250.47 and $2,595.33
during such period.
ANALYSIS OF SELECTED MERGERS. As part of its analysis, Hovde reviewed
comparable mergers involving banks headquartered in the Midwest announced since
January 1, 1997, in which the total assets of the seller were between $250
million and $1 billion and the tangible equity to assets ratio of the seller was
between 6.0% and 12.0% (15 transactions) (the "Midwest Merger Group"). For each
transaction in the Midwest Merger Group, Hovde calculated the multiple of the
Offer Value to the acquired company's earnings per share ("EPS") for the twelve
months preceding ("LTM") the announcement date of the transaction; the multiple
of the Offer Value to the acquired company's book value per share and tangible
book value per share; and the tangible book value premium to core deposits, each
as of the announcement date of the transaction.
The calculations for the Midwest Merger Group yielded a range of
multiples of offer value to LTM EPS of 15.5x to 30.2x, with an average of 20.7x
and a median of 21.0x; a range of multiples of offer value to book value of
1.39x to 3.78x, with an average of 2.53x and a median of 2.62x; a range of
multiples of offer value to tangible book value of 1.43x to 4.03x, with an
average of 2.68x and a median of 2.74x; and a range of tangible book value
premium to core deposits of 5.19% to 31.38%, with an average of 18.65% and a
median of 19.66%.
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Hovde compared these multiples with the corresponding multiples for the
Merger, valuing the shares of First Financial Common Stock that would be
received pursuant to the Merger Agreement at $2,514.88 per share of Sand Ridge
Financial Common Stock. In calculating the multiples for the Merger, Hovde used
Sand Ridge Financial's EPS for the 12 months ended September 30, 1998, and Sand
Ridge Financial's book value per share, tangible book value per share, and total
deposits as of September 30, 1998, and Hovde calculated that Sand Ridge
Financial's LTM EPS for such 12 month period, book value per share, tangible
book value per share and tangible book value premium to core deposits as of
September 30, 1998 were 25.5 times, 3.35 times, 3.35 times, and 26.38%,
respectively.
DISCOUNTED CASH FLOW ANALYSIS. HovdeDirectors, PBS
performed a discounted cash flow
analysis to determine a present value per sharevariety of Sand Ridge Financial Common
Stock assuming Sand Ridge Financial continued to operate as a stand-alone entity
and was acquired at a later date. This present value was determined by
projecting Sand Ridge Financial's after-tax net income for the five years ended
December 31, 1998 through 2002.financial analyses, including those summarized herein.
The "terminal value" per share (i.e., the
projected 2002 value per share) of Sand Ridge Financial Common Stock was
determined by applying a price to earnings multiple of 20.7 times against Sand
Ridge Financial's projected earnings at December 31, 2002. The present value of
the terminal value was then determined using an annual discount rate of 11.0%.
The above calculations resulted in a net present value per fully diluted share
of Sand Ridge Financial Common Stock of $1,926.44 per share.
CONTRIBUTION ANALYSIS. Hovde prepared a contribution analysis showing
percentages of assets, loans, deposits and common equity at September 30, 1998,
and estimated 1998 net income and estimated 1999 net income that would be
contributed to the combined company on a pro-forma basis by Sand Ridge Financial
and First Financial. This analysis showed, assuming an Exchange Ratio of 85.25,
that Sand Ridge Financial, as of September 30, 1998, would contribute 15.85% of
pro forma consolidated total assets, 11.71% of net loans, 16.36% of total
deposits, 12.96% of common equity, 11.90% of estimated 1998 net income and
12.00% of estimated 1999 net income. This analysis showed that holders of Sand
Ridge Financial Common Stock would own approximately 12.32% of the pro-forma
common shares outstanding of First Financial.
FINANCIAL IMPLICATIONS TO HOLDERS OF SAND RIDGE FINANCIAL COMMON STOCK.
Hovde prepared an analysis of the financial implications of the First Financial
offer to a holder of Sand Ridge Financial Stock. This analysis indicated that on
a pro forma equivalent basis, assuming the Exchange Ratio of 85.25 and excluding
any potential cost saving and revenue enhancement opportunities, a stockholder
of Sand Ridge Financial would achieve approximately 3.5% accretion in earnings
per share, an increase in dividends per share of approximately 170.0% and a
decrease in book value per share of approximately 5.4% in 1998 as a result of
the consummation of the Merger. Assuming that the projected earnings per share
and dividends per share do not materially change from historical growth rate
levels, the holders of Sand Ridge Financial Common Stock will experience an
increase of approximately 14.7% in earnings per share, an increase of
approximately 212.6% in dividends per share, and a decrease of approximately
14.5% in book value per share in 2002 as a result of the consummation of the
Merger.
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COMPARATIVE SHAREHOLDER RETURNS. Hovde presented an analysis of
comparative theoretical stockholder returns in several scenarios, including Sand
Ridge Financial remaining independent, Sand Ridge Financial being acquired in
2002, Sand Ridge Financial being acquired by First Financial through the Merger
and Sand Ridge Financial being acquired by First Financial through the Merger
with First Financial in turn being acquired in 2002. This analysis, which was
based on the net present value of projected dividend streams and projected
common stock valuations (using the current price-to-earnings multiples),
indicated total shareholder returns of 13.99% if Sand Ridge Financial remained
independent, 27.58% for a merger in 2002, 37.07% based on the acceptance of the
offer from First Financial at the Exchange Ratio of 85.25 First Financial shares
per Sand Ridge Financial share, and 43.65% based on the acceptance of the offer
from First Financial at the Exchange Ratio of 85.25 First Financial shares per
Sand Ridge Financial share and First Financial in turn being acquired in 2002.
Although the summary set forth above does not purport to be a complete description of the analyses
performed by Hovde, the most material aspects of the
analyses performed by HovdePBS in rendering its opinion have been summarized above.
However, thethis 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 necessarilyreadily susceptible to
partial analysis or summary description. HovdeAccordingly, notwithstanding the separate factors
summarized below, PBS believes that its analysis and
the summary set forth above must be considered as a whole
and that selecting portions of its analysis,analyses and of the factors considered by it,
without considering all analyses and factors, and analysis, wouldcould create an incomplete view of
the evaluation process underlying the analysis by which Hovde
reached its opinion. In addition, Hovde may have given various analyses more or
less weight than other analyses. Also, Hovde may have deemed various assumptions
more or less probable than other assumptions so that the ranges of valuations
resulting from any particular analysis described above should not be taken to be
Hovde's view of the actual value of Sand Ridge Financial or the combined
company.
In performing its analysis, Hovdeanalyses, PBS
made numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of Sand Ridge Financial andHebron Bancorp's
or First Financial.Financial's control. The analysisanalyses performed by Hovde isPBS are not necessarily
indicative of actual valuevalues or actual future results, which may be significantly more
or less favorable than suggested by such analysis. Such analysis was prepared
solely as part of Hovde's analysis of the fairness of the Exchange Ratio, from a
financial point of view,analyses. In addition, analyses
relating to the holdersvalues of Sand Ridge Financial Common Stock.
The analysis doesbusinesses do not purport to be an appraisalappraisals or to
reflect the prices atprocess by which a company mightbusinesses actually may be sold or the prices at which any securities may
trade at the present time or at any timesold.
Acquisition Comparison Analysis: In performing this analysis, PBS
reviewed all bank acquisition transactions in the future. Hovde usedStates of Kentucky and Indiana
(the "Regional Area") since 1992. There were 100 bank acquisition transactions
in itsthe Regional Area announced since 1992 for which detailed financial
information was available. The purpose of the analysis various projectionswas to obtain an
evaluation range based on these Regional Area bank acquisition transactions.
75th percentile multiples of future performance preparedearnings and book value implied by the managementcomparable
transactions were utilized in obtaining a range for the acquisition value of
Sand Ridge Financial. The projections are based on numerous variables and
assumptions,Hebron Bancorp. In addition to reviewing recent Regional Area bank transactions,
PBS performed separate comparable analyses for acquisitions of banks which, are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those assumedlike
Hebron Bancorp, were located in the projectionsstate of Kentucky, had an equity-to- asset
ratio between 9.00% - 12.00%, had total assets between $75.0 - $125.0 million,
had a return on average equity ("ROAE") between 14.00% - 17.00% and any related analysis.
Hovde's opinion does not addressbank
transactions effected in Regional Area since January 1, 1996. The 75th
percentile values for the relative merits100 Regional Area acquisitions expressed as multiples
of both book value and earning were 2.23X and 21.34X, respectively. The 75th
percentile multiples of book value and earnings for acquisitions of Regional
Area banks which, like Hebron Bancorp, were headquartered in the Merger as compared
to any other business combination instate of
Kentucky were 2.30X and 18.95X, respectively. 75th percentile multiples of book
value and earnings for acquisitions of Regional Area banks which Sand Ridge Financial might engage. In
addition, as described above, Hovde's opinion to the Sand Ridge Financial Board
was onehad an
equity-to-asset ratio between 9.00% and 12.00% were 2.24X and 21.28X,
respectively. For acquisitions of many factors taken into consideration by the Sand Ridge Financial
Board in making its determination to approve the Merger Agreement.Regional Area banks with
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Based upon35
assets between $75.0 - $125.0 million the foregoing analyses75th percentile multiples were 2.42X
and other investigations24.04X. For Regional Area acquisitions of banks with a ROAE between 14.00% -
17.00%, the 75th percentile multiples of book value and assumptions set forth in its opinion, without giving specific weightingsearnings were 2.62X and
17.99X, respectively. The 75th percentile multiples of book value and earnings
for acquisitions of Regional Area banks since January 1, 1996, were 2.80X and
25.44X, respectively. The following table summarizes the analysis:
ACQUISITION COMPARISON ANALYSIS
- --------------------------------------------------------------------------------------------------------------
Comparable Group 75 PERCENTILE
- --------------------------------------------------------------------------------------------------------------
Book Value Multiple Earnings Multiple
- --------------------------------------------------------------------------------------------------------------
All Regional transactions 2.23X 21.34X
- --------------------------------------------------------------------------------------------------------------
Kentucky Banks 2.30 18.95
- --------------------------------------------------------------------------------------------------------------
Equity/Assets between 9% and 12% 2.24 21.28
- --------------------------------------------------------------------------------------------------------------
Assets between $75 - $125 Million 2.42 24.04
- --------------------------------------------------------------------------------------------------------------
Return on Average Equity between 14%-17% 2.62 17.99
- --------------------------------------------------------------------------------------------------------------
Transactions since 1996 2.80 25.44
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
PROPOSED TRANSACTION 2.86 23.23
- --------------------------------------------------------------------------------------------------------------
In the proposed transaction, Hebron Bancorp shareholders will receive
an aggregate of 1,222,650 First Financial common shares for all 60,000 Hebron
Bancorp common shares outstanding or 20.3775 First Financial common shares per
Hebron Bancorp common share, subject to any
one factor or comparison, Hovde determined that the Exchange Ratio was fair from
a financial point of view to the holders of Sand Ridge Financial Common Stock.
Hovde's fairness opinion does not take into account any adjustment, to the Merger
Consideration that may be provided foras further defined in the
Merger Agreement. THE SUMMARY OF THE PRESENTATION BY HOVDE TO THE SAND RIDGE FINANCIAL
BOARD AS SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
PRESENTATION. THE PREPARATION OF A FAIRNESS OPINION INVOLVES VARIOUS
DETERMINATIONS AS TO THE MOST APPROPRIATE AND RELEVANT METHODS OF FINANCIAL
ANALYSES AND THE APPLICATION OF THOSE METHODS TO THE PARTICULAR CIRCUMSTANCES,
AND, THEREFORE, SUCH AN OPINION IS NOT READILY SUSCEPTIBLE TO SUMMARY
DESCRIPTION. FURTHERMORE, IN ARRIVING AT ITS OPINION, HOVDE DID NOT ATTRIBUTE
ANY PARTICULAR WEIGHT TO ANY ANALYSIS OR FACTOR CONSIDERED BY IT, BUT RATHER
MADE QUALITATIVE JUDGMENTS AS TO THE SIGNIFICANCE AND RELEVANCE OF EACH ANALYSIS
AND FACTOR. ACCORDINGLY, HOVDE BELIEVES THAT ITS ANALYSES AND THE SUMMARY SET
FORTH ABOVE MUST BE CONSIDERED AS A WHOLE AND THAT SELECTING PORTIONS OF ITS
ANALYSES, WITHOUT CONSIDERING ALL FACTORS AND ANALYSES, COULD CREATE AN
INCOMPLETE VIEW OF THE PROCESS UNDERLYING THE ANALYSES SET FORTH IN ITS REPORT
TO THE SAND RIDGE FINANCIAL BOARD AND ITS FAIRNESS OPINION. IN PERFORMING ITS
ANALYSES, HOVDE MADE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE,
GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER MATTERS, MANY OF WHICH ARE
BEYOND THE CONTROL OF SAND RIDGE FINANCIAL OR FIRST FINANCIAL. THE ANALYSES
PERFORMED BY HOVDE ARE NOT NECESSARILY INDICATIVE OF ACTUAL VALUES OR ACTUAL
FUTURE PERFORMANCE.On December 28, 1998 the closing price for First Financial
common stock on the National Association of Securities Dealers Automated
Quotation System was $27.875 per common share. Utilizing this closing price of
$27.875 per First Financial common share, the proposed consideration to be
received represents an aggregate value of $34,081,369 or $568.02 per Hebron
Bancorp common share. The $568.02 per Hebron Bancorp common share represents a
multiple of Hebron Bancorp's September 30, 1998 book value and a multiple of
Hebron Bancorp's annualized adjusted September 30, 1998 nine month earning of
2.86X and 23.23X respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Regional Area comparable
transactions group. Compared to all Regional Area bank transactions, the
acquisition value ranks in the 91st percentile as a multiple of book value and
in the 80th percentile as a multiple of earnings. Compared to Regional Area bank
transactions where the acquired institution was headquartered in Kentucky, the
acquisition value ranks in the 89th percentile as a multiple of book value and
the 90th percentile as a multiple of earnings. Compared to Regional Area bank
transactions where the
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MANAGEMENT FOLLOWING THE MERGER36
acquired institution had an equity-to asset ratio between 9.00% and 12.00%, the
acquisition value ranks in the 93rd percentile as a multiple of book value and
the 82nd percentile as a multiple of earnings. For Regional Area bank
acquisitions where the acquired institution had between $75.0 - $125.0 million
in assets, the acquisition value ranks in the 89th percentile as a multiple of
book value and the 72nd percentile as a multiple of earnings. For Regional Area
bank transactions where the acquired institution had a ROAE between 14.00% and
17.00%, the acquisition value ranked in the 92nd percentile as a multiple of
book value and the 96th percentile as a multiple of earnings. For Regional Area
bank transactions effected since January 1, 1996, the acquisition value ranked
in the 78th percentile as a multiple of book value and in the 60th percentile as
a multiple of earnings. The following table summarizes the percentile ranking:
- --------------------------------------------------------------------------------------------------------
PERCENTILE RANKING
- --------------------------------------------------------------------------------------------------------
Book Value Multiple Earnings Multiple
------------------- -----------------
- --------------------------------------------------------------------------------------------------------
Comparable Group
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
All Regional transactions 91 80
- --------------------------------------------------------------------------------------------------------
Kentucky Banks 89 90
- --------------------------------------------------------------------------------------------------------
Equity/Assets between 9% - 12% 93 82
- --------------------------------------------------------------------------------------------------------
Assets between $75 - $125 million 89 72
- --------------------------------------------------------------------------------------------------------
Return on Average Equity between 14% - 17% 92 96
- --------------------------------------------------------------------------------------------------------
Transactions since 1996 78 60
- --------------------------------------------------------------------------------------------------------
Adjusted Net Asset Value Analysis: PBS reviewed Hebron Bancorp's
balance sheet data to determine the amount of material adjustments required to
the stockholders' equity of Hebron Bancorp based on differences between the
market value of Hebron Bancorp's assets and their value reflected on Hebron
Bancorp's financial statements. PBS determined that two adjustments were
warranted. Equity was increased $54,000 to reflect the after tax appreciation in
Hebron Bancorp's held to maturity securities portfolio. PBS also reflected a
value of the non-interest bearing demand deposits of approximately $2,670,000.
The aggregate adjusted net asset value of Hebron Bancorp was determined to be
$14,634,000 or $243.90 per Hebron Bancorp common share.
Discounted Earnings Analysis: A dividend discount analysis was
performed by PBS pursuant to which a range of values of Hebron Bancorp was
determined by adding (i) the present value of estimated future dividend streams
that Hebron Bancorp could generate over a five-year period and (ii) the present
value of the "terminal value" of Hebron Bancorp's earnings at the end of the
fifth year. The cash flow analysis was prepared by PBS with no consultation with
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37
management of Hebron Bancorp. The cash flow analysis was based on significantly
optimistic assumptions, and the data is not an accurate estimate of future
financial performance. The "terminal value" of Hebron Bancorp's earnings at the
end of the five-year period was determined by applying a multiple of 18.95 times
the projected terminal year's earnings. The 18.95 multiple represents the 75th
percentile price paid as a multiple of earnings for all Kentucky bank
transactions since 1992.
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 Hebron Bancorp's common stock.
The aggregate value of Hebron Bancorp, determined by adding the present value of
the total cash flows, was $25,116,000 or $418.60 per share. In addition, using
the five-year projection as a base, a twenty-year projection was prepared
assuming an annual growth rate of 6.00% and assuming return on assets of 1.50%
would remain in effect for the entire period beginning in year 2. Dividends were
assumed to increase from 25.0% of income in years one through five to 75.0% of
income for years six through twenty. This long-term projection resulted in an
aggregate value of $21,159,000 or $352.65 per Hebron Bancorp common share.
Specific Acquisition Analysis: PBS valued Hebron Bancorp based on an
acquisition analysis assuming a "break-even" earnings scenario to an acquirer as
to price, current interest rates and amortization of the premium paid. Based on
this analysis, an acquiring institution would pay in aggregate $21,277,000, or
354.62 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 6.0%
adjusted for taxes, amortization of the acquisition premium over 15 years and a
projected December 31, 1998 earnings level of $1,467,000. The analysis was
repeated assuming a potential acquirer would attain non-interest expense
reductions of 10% in the transaction. Based on this analysis an acquiring
institution would pay in aggregate $22,688,000 or $378.13 per Hebron Bancorp
share.
Pro-forma Merger Analysis: PBS compared the historical performance of
Hebron Bancorp to that of First Financial and other regional holding companies.
This analysis included, among other things, a comparison of profitability, asset
quality and capital measures. In addition, the contribution of Hebron Bancorp
and First Financial to the income statement and balance sheet of the pro-forma
combined company was analyzed.
The effect of the affiliation on the historical and pro-forma financial
data of Hebron Bancorp was prepared and analyzed. Hebron Bancorp's historical
financial data was compared to the pro-forma combined historical earning, book
value and dividends per share.
The fairness opinion is directed only to the question of whether the
consideration to be received by Hebron Bancorp's shareholders under the Merger
Agreement is fair and equitable from a financial perspective and does not
constitute a recommendation to any Hebron Bancorp shareholder to vote in favor
of the affiliation. No limitations were imposed on PBS regarding the scope of
its investigation or otherwise by Hebron Bancorp.
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38
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by Hebron Bancorp's shareholders
under the Merger Agreement is fair and equitable from a financial perspective to
the shareholders of Hebron Bancorp.
Based on a First Financial stock price of $27.875 PBS and IBS will
receive fees of approximately $283,000 for all services performed in connection
with the sale of Hebron Bancorp and the rendering of the fairness opinion. In
addition, Hebron Bancorp has agreed to indemnify PBS and IBS and its directors,
officers and employees, from liability in connection with the transaction, and
to hold PBS and IBS harmless from any losses, actions, claims, damages, expenses
or liabilities related to any of PBS' or IBS' acts or decisions made in good
faith and in the best interest of Hebron Bancorp.
Management Following The Merger
- -------------------------------
If the Mergermerger is consummated, Sand Ridge FinancialHebron Bancorp and First Financial will
merge into a single corporation and First Financial will be the surviving
corporation. The directors of First Financial aton the Effective Time ofdate upon which the Mergermerger
becomes effective (the "Effective Time") will be the directors of the surviving
corporation until their respective successors are duly elected and qualified.
The Merger Agreement with Sand Ridge Financial includes an agreement by First
Financial to appoint promptly after the Effective Timethat merger's effective time a mutually
agreeable member of Sand Ridge Bank's Board of Directors to First Financial's
Board of Directors. First Financial intends to appoint Mr. Bruce E. Leep, the
chairman of the board, president, and CEO of Sand Ridge Financial, and Mr. Leep
has agreed to accept the appointment. First Financial does not have a similar
agreement with Hebron Bancorp. Subject to the authority of the Board of
Directors as provided by law and the Regulationsregulations of the surviving corporation,
the officers of First Financial at the Effective Time will be the officers of
the Surviving Corporation.surviving corporation.
If the Mergermerger is consummated, Sand RidgeHebron Deposit Bank, Sand Ridge Financial'sHebron Bancorp's
only subsidiary, will become a wholly owned subsidiary of First Financial. The
directors of Sand RidgeHebron Deposit Bank at the Effective Time will continue to be
directors until their successors are duly elected and qualified by First
Financial as sole shareholder. Subject to the authority of the Board of
Directors of Sand RidgeHebron Deposit Bank as provided by its Code of By-Laws and as provided by
law, the officers of Sand RidgeHebron Deposit Bank at the Effective Time will continue to
be the officers of Sand
RidgeHebron Deposit Bank until their successors are duly elected
and qualified.
Effective January 18, 1999, Mr. James C. Hall was appointed
president-elect of Sand Ridge Bank. Prior to joining Sand Ridge Bank, Mr. Hall
was president and chief executive officer of Fidelity Federal Savings Bank
("Fidelity"), a wholly owned subsidiary of First Financial. Mr. Hall is still an
employee and a director of Fidelity. Upon completion of theInterest Of Certain Persons In The Merger
Mr. Leep,
who is currently chairman, president and chief executive officer of Sand Ridge
Bank, will retire from the office of president, but continue as chairman and
chief executive officer, and Sand Ridge Bank will elect Mr. Hall as a director
and president and chief operating officer of Sand Ridge Bank. At that time, Mr.
Hall will resign as a director of Fidelity. However, Mr. Hall will remain an
employee of Fidelity while serving as an officer of Sand Ridge Bank, until the
First Financial Bancorp. Thrift Plan is extended to eligible employees of Sand
Ridge Bank, pursuant to the terms of the Merger Agreement. It is anticipated
that this will take place on January 1, 2000. Until the Effective Time, First
Financial will reimburse Fidelity's expenses for employing Mr. Hall.
First Financial and Sand Ridge Bank have entered into the foregoing
arrangement in anticipation of the retirement of Mr. Leep. First Financial and
Sand Ridge Bank agree that, if the Merger is completed, Mr. Hall will be the
appropriate person to succeed Mr. Leep. In order to ensure a smooth transition
between Mr. Leep and Mr. Hall, it is the desire of both First Financial and Sand
Ridge Bank that Mr. Hall become acquainted with the operations, employees and
customers of Sand Ridge Bank as soon as possible. In order to maintain Mr.
Hall's employment should the Merger be terminated, and in order to preserve Mr.
Hall's benefits as an employee of First Financial, Mr. Hall will remain an
employee of Fidelity until the time specified above.
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INTEREST OF CERTAIN PERSONS IN THE MERGER- -----------------------------------------
The directors and officers of Sand Ridge FinancialHebron Bancorp and Sand RidgeHebron Deposit Bank
have certain interests in the Mergermerger in addition to their interests as
shareholders of Sand Ridge FinancialHebron Bancorp generally. The Board of Directors of Sand
Ridge FinancialHebron
Bancorp was aware of these interests and considered them, among others, in
approving the Merger Agreement.
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39
The Merger Agreement contains certain provisions regarding employee
benefits. As soon as practicable after the Effective DateTime of the Merger,merger, First
Financial will make available to eligible employees and officers of Sand RidgeHebron
Deposit Bank employee benefit plans comparable to the plans then made available
to similarly situated employees of other First Financial subsidiaries. Employee
benefit plans, fringe benefits and other employee practices and policies in
effect at Sand RidgeHebron Deposit Bank immediately prior to the Effective Time will
continue in effect until modified or terminated by First Financial.
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36
The First Financial Bancorp. Thrift Plan (the "Thrift Plan"), which is
a 401-K Plan, and the First Financial Bancorp. Employees' Pension Plan (the
"First Financial Pension Plan") cover the majority of the employees of First
Financial and its subsidiaries. All employees who are 21 years of age and have
completed one year of service are covered. The Thrift Plan is voluntary and
participants may contribute up to 12.0% of base salary to the plan. Subject to
the limitation described below, First Financial subsidiaries contribute $0.50
for each $1.00 a participant contributes. The matching contribution by First
Financial subsidiaries is limited to 3.00% of each participant's base salary and
all contributions become fully vested when made. Participants are 100% vested in
the First Financial Pension Plan after five years of credited service. For more
information about First Financial's Thrift Plan and Pension Plan, see First
Financial's Annual Report on Form 10-K for the fiscal year ended December 31,
1997,
previously1998 (the "First Financial Form 10-K"), incorporated herein by reference.
The Sand RidgeNeither Hebron Bancorp nor Hebron Deposit Bank has a retirement or
profit-sharing plan, except for the Hebron Deposit Bank Profit Sharing and 401(k)
Plan contains provisions
for a(the "Hebron 401(k) plan (the "Sand Ridge Bank 401(k) Plan") and a profit sharing plan
(the "Sand Ridge Bank Profit Sharing Plan"). The Sand Ridge BankHebron 401(k) Plan will continue in effect
until the first January 1 or July 1 coinciding with or next following the
Effective Time (the "Initial Entry Date"), at which time participants in the
Sand Ridge BankHebron 401(k) Plan will become fully vested in their plan accounts to the extent
required by Law.law. No contributions will be permittedmade to the Sand Ridge BankHebron 401(k) Plan with
respect to compensation paid after the Initial Entry Date. Contributions to the Sand Ridge Bank Profit
Sharing Plan will be made, but only with respect to operations before the
Initial Entry Date. On or after the
Initial Entry Date, the Sand Ridge BankHebron 401(k) Plan may be maintained as a frozen plan
for an indefinite period or merged into First Financial's Thrift Plan.Plan, at the
discretion of First Financial. As of the Initial Entry Date, Sand
RidgeHebron Deposit Bank
employees and officers may participate in First Financial's Thrift Plan. Service
with Sand RidgeHebron Deposit Bank prior to the Effective Time will be counted for
eligibility and vesting purposes under the Thrift Plan.
IfHebron Deposit Bank has entered into employment agreements with Michael
A. Conner, President and CEO; Robert C. Ruebel, Executive Vice President; Howard
L. Regenbogen, Vice President and Cashier; and Joseph Hojnacki, Vice President.
Among other items, these agreements provide for severance compensation if the
Mergeremployee is consummated, Sand Ridgeterminated by Hebron Deposit Bank employees will be
eligiblewithout cause. All contracts have
an expiration date of December 31, 2000, but are automatically renewable for
additional periods of one year each unless either party provides a 90-day notice
of intent not to participate in therenew. First Financial Pension Plan. The Sand Ridge Bank
Profit Sharing Plan will either continue as a frozen plan or will be terminated
and participants' accounts distributed in accordance withdoes not intend to terminate without
cause the termsemployment of the Sand
Ridge Bank Profit Sharing Plan, the Internal Revenue Code, and the Employee
Retirement Income Security Act of 1974 ("ERISA").
If any employee of Sand Ridge Financial or Sand Ridge Bank at the
Effective Time is terminated without cause within one year of the Effective
Time, Sand Ridge Bank, as a subsidiary of First Financial, will pay the
employee, upon receipt of a release of all claims in a form satisfactory to Sand
Ridge Bank and First Financial, a termination fee equal to the greater of four
weeks' salary or one week's salary multipliedindividuals covered by the number of full years of
service with Sand Ridge Bank.employment agreements.
33
40
The directors and executive officers of Sand Ridge FinancialHebron Bancorp have indicated their intentionunanimously
approved the merger and are expected to vote the shares of Sand Ridge Financial Common
StockHebron Bancorp common
stock held by them in favor of the Merger Agreement. On the Record Date, such
directors and executive officers as a group beneficially owned an aggregate of
16,91827,300 shares of Sand Ridge Financial Common Stock,Hebron Bancorp common stock, which represented 28.2%45.5% of the
shares issued and outstanding at that date.
32
37
DISSENTERS' RIGHTSDissenters' Rights
- ------------------
Under Indiana Code Chapter 23-1-44,Title 271B, Subtitle 13 of the Kentucky Revised Statutes (the
"KRS"), any holder of record of Sand Ridge
Financial Common StockHebron Bancorp common stock who does not vote in
favor of the Mergermerger may exercise dissenting shareholder rights and demand
payment in cash for the fair value of such holder's shares by complying with the
requirements of Chapter 23-1-44.Subtitle 13. For purposes of Chapter 23-1-44,Subtitle 13, the fair value of a
dissenting shareholder's shares is the value of the shares immediately before
the effectuation of the Merger,merger, excluding any appreciation or depreciation in
anticipation of the Mergermerger unless the exclusion would be inequitable.
Set forth below is a summary of the procedures relating to the exercise
of statutory dissenters' rights ("Dissenters' Rights"). THIS SUMMARY DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY EXPRESS REFERENCE TO
APPLICABLE INDIANAKENTUCKY LAW, INCLUDING INDIANA CODE CHAPTER 23-1-44,SUBTITLE 13, A COPY OF WHICH IS APPENDED AS
APPENDIX C TO THIS PROXY STATEMENTSTATEMENT-PROSPECTUS AND INCORPORATED HEREIN. ANY
SHAREHOLDER OF SAND RIDGE FINANCIALHEBRON BANCORP CONTEMPLATING EXERCISING DISSENTERS' RIGHTS WITH
RESPECT TO SAND RIDGE FINANCIALHEBRON BANCORP COMMON STOCK IS URGED TO REVIEW CAREFULLY SUCH
PROVISIONS AND TO CONSULT AN ATTORNEY, BECAUSE DISSENTERS' RIGHTS WILL BE LOST
IF THE PROCEDURAL REQUIREMENTS UNDER CHAPTER 23-1-44SUBTITLE 13 ARE NOT FULLY AND PRECISELY
SATISFIED. EACH STEP MUST BE TAKEN IN STRICT COMPLIANCE WITH THE APPLICABLE
PROVISIONS OF CHAPTER 23-1-44SUBTITLE 13 IN ORDER FOR HOLDERS TO PERFECT DISSENTERS' RIGHTS.
Under Chapter 23-1-44,Subtitle 13, a Sand Ridge FinancialHebron Bancorp shareholder of record for the
Special Meetingspecial meeting who desires to assert Dissenters' Rights must (i)must:
(a) deliver to Sand Ridge FinancialHebron Bancorp before the shareholder vote is taken
written notice of the shareholder's intent to demand payment
in cash for shares owned if the Mergermerger is effectuated, AND (ii)and
(b) not vote the shareholder's shares in favor of the Merger,merger,
either in person or by proxy.
Dissenting shareholders cannot dissent as to only some but not all of
the shares of Sand Ridge Financial Common StockHebron Bancorp common stock registered in their names, except in limited circumstances.names. Dissenting
shareholders may send their written notice to Terry L. Saxsma, Vice President,
Secretary/Treasurer, Sand Ridge Financial Corporation, 2611 Highway Avenue, P.O.
Box 1929, Highland, IN 46322.Stephen K. Dallas, Secretary,
Hebron Bancorp, Inc., 2652 North Bend Road, Hebron, Kentucky 41048-0360.
In the event the Mergermerger is approved by the Sand Ridge FinancialHebron Bancorp shareholders,
Sand Ridge Financial (hereinafter sometimes referred to for
purposes of this section as the "Corporation")Hebron Bancorp must mail or deliver a written notice of dissenters' rights (the
"Notice to Dissenters") to each dissenting shareholder satisfying the above
conditions within ten (10) days after shareholder approval has occurred, whichoccurred. This
Notice to Dissenters must:
34
41
(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;
33
38
(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 Merger,merger, which was December 16, 1998,January 4, 1999, and
requires that the dissenting shareholder certify whether or
not that shareholder acquired beneficial ownership of the
shares before that date;
(d) set a date by which the CorporationHebron Bancorp 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 to Dissenters
is delivered; and
(e) be accompanied by a copy of Indiana Code Chapter 23-1-44.Subtitle 13.
A Sand Ridge FinancialHebron Bancorp shareholder who is sent such a Notice to Dissenters
must then (i)then:
(a) demand payment for the shareholder's shares of Sand
Ridge Financial Common Stock, (ii)Hebron Bancorp
common stock;
(b) certify whether the shareholder acquired beneficial ownership
of the Sand Ridge Financial Common StockHebron Bancorp common stock before the date set forth
in the Notice to DissentersDissenters; and
(iii)(c) deposit the shareholder's certificates representing shares of
Sand Ridge Financial Common StockHebron Bancorp common stock in accordance with the terms of
the Notice to Dissenters.
IF THE SAND RIDGE
FINANCIALHEBRON BANCORP SHAREHOLDER FAILS TO TAKE THESETHE ABOVE STEPS, HE OR SHETHE
SHAREHOLDER WILL NOT BE ENTITLED TO PAYMENT FOR THE SHAREHOLDER'S SHARES THROUGH
THE DISSENTERS' RIGHTS PROCESS
AND WILL BE CONSIDERED TO HAVE VOTED HIS OR HER SHARES IN FAVOR OF THE MERGER.
A SAND RIDGE FINANCIAL SHAREHOLDER WHO DESIRES TO EXERCISE DISSENTERS'
RIGHTS CONCERNING THE MERGER BUT WHO DOES NOT COMPLY WITH THE PRELIMINARY
CONDITIONS DESCRIBED ABOVE WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS UNDER
INDIANA CODE CHAPTER 23-1-44.PROCESS.
SHAREHOLDERS WHO EXECUTE AND RETURN THE ENCLOSED PROXY BUT DO NOT
SPECIFY A CHOICE ON THE MERGER PROPOSAL WILL BE DEEMED TO HAVE VOTED IN FAVOR OF
THE MERGER AND ACCORDINGLY TO HAVE WAIVED THEIR DISSENTER'SDISSENTERS' RIGHTS, UNLESS THE
SHAREHOLDER REVOKES THE PROXY PRIOR TO ITS BEING VOTED AND SATISFIES THE OTHER
REQUIREMENTS OF INDIANA CODE CHAPTER 23-1-44.SUBTITLE 13.
35
42
Upon consummation of the Merger, the Corporationmerger, or upon receipt of a payment demand,
Hebron Bancorp will pay each dissenting shareholder who has complied with all
statutory requirements and the dissenter'sdissenters' notice, and who was the beneficial
owner of Sand Ridge Financial
Common StockHebron Bancorp common stock prior to December 16, 1998January 4, 1999 (the date the
Mergermerger proposal was first publicly announced), the Corporation'sHebron Bancorp's estimate of the
fair value of the shares as of the time immediately prior to the Merger,merger, plus
accrued interest but excluding any appreciation in value in anticipation of the
Merger.merger. For those dissenters who became beneficial owners of shares on or after
December 16, 1998, the CorporationJanuary 4, 1999, Hebron Bancorp will upon consummation of the Mergermerger provide
the Corporation'sHebron Bancorp's estimate of fair value, but may withhold payment of the fair
value of the shares until the dissenting shareholder agrees to accept the
estimated fair value amount in full satisfaction of the dissenting shareholder's
demand or until the CorporationHebron Bancorp is otherwise directed by a court of competent
jurisdiction.
34
39
If consummation of the merger does not occur within sixty (60) days
after the date set for demanding payment and depositing share certificates,
Hebron Bancorp will return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares of Hebron Bancorp common stock. If
consummation of the merger should take place after returning deposited
certificates and releasing transfer restrictions, Hebron Bancorp will mail or
deliver a new Notice to Dissenters and repeat the payment demand procedure.
A dissenting shareholder may notify Hebron Bancorp in writing of the
shareholder's own estimate of the fair value of his or her shares, and the
amount of accrued interest due, and demand payment of his or her estimate (less
the amount of any payment made by Hebron Bancorp for the shares to the
dissenting shareholder) if:
(a) the dissenting shareholder believes the amount paid or
estimated by the CorporationHebron Bancorp is less than the fair value for
his or her shares of Sand Ridge
Financial Common StockHebron Bancorp common stock; or
if the Corporation(b) Hebron Bancorp fails to make payment to the dissenting
shareholder within sixty (60) days after the date set for
demanding payment,payment; or
(c) the dissenting shareholder may notify the Corporation in writingconsummation of the shareholder's own estimate ofmerger has not occurred within sixty
(60) days after the fair value of hisdate set for demanding payment and
depositing share certificates, and Hebron Bancorp does not
return the deposited certificates or herrelease the transfer
restrictions imposed on uncertificated shares and demand
payment of his or her estimate (lesswithin sixty
(60) days after the amount of any payment made by the
Corporationdate set for the shares to the dissenting shareholder).demanding payment.
Such a demand for payment must be made in writing within thirty (30)
days after the CorporationHebron Bancorp has made payment for the dissenting shareholder's
shares or has offered to pay the Corporation'sHebron Bancorp's estimate of fair value for the
dissenting shareholder's shares. The Corporation will not give further notice to the dissenting
shareholder of this deadline. A dissenting shareholder who fails to make the
demand within this time waives the right to demand payment for the shareholder's
shares.
The Corporation36
43
Hebron Bancorp can elect to agree with the dissenting shareholder's
fair value demand or ifdemand. If a demand for payment remains unsettled, the Corporationhowever, Hebron
Bancorp must commence a proceeding in the circuit or superior court of LakeBoone County within
sixty (60) days after receiving the payment demand from the dissenting
shareholder and petition the court to determine the fair value of the shares. If
the CorporationHebron Bancorp fails to commence the proceeding within the sixty (60) day
period, it must pay each dissenting shareholder whose demand remains unsettled
the amount demanded. The CorporationHebron Bancorp must make all dissenting shareholders whose
demands remain unsettled parties to the proceeding and all parties must be
served 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. Each dissenting shareholder made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds the fair value of the
dissenting shareholder's shares, plus interest, exceeds the amount paid by
the
Corporation.Hebron Bancorp.
The court in an appraisal proceeding shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court, and shall assess these costs and the fees and expenses
of counsel and experts for the respective parties against the partiescorporation. The
court, however, may assess costs against all or some of the dissenters, in
amounts the court finds equitable.equitable, to the extent it finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under
Subtitle 13.
Every Sand Ridge FinancialHebron Bancorp shareholder who does not deliver a notice of
intent to demand payment for his or her shares as aforesaid,described above, or who votes
in favor of the Merger,merger, is bound by the vote of the assenting shareholders and
will have no right to dissent and to demand payment of the fair value of the
shareholder's shares of Sand Ridge Financial Common StockHebron Bancorp common stock as a result of the Merger.merger.
Such a shareholder will only be entitled to the same consideration described
herein to be offered to every other assenting Sand Ridge FinancialHebron Bancorp shareholder as a
result of the Merger.merger. Voting against the Mergermerger does not in itself constitute
the notice of intent to demand payment required by Indiana
Code Chapter 23-1-44.Subtitle 13.
The Board of Directors of Sand Ridge FinancialHebron Bancorp has determined that the Mergermerger
is advisable and in the best interest of Sand Ridge Financial'sHebron Bancorp's shareholders and has
unanimously recommended that the Sand Ridge FinancialHebron Bancorp shareholders vote in favor of
the Merger.
35merger.
37
40
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER44
Federal Income Tax Consequences Of The Merger
- ---------------------------------------------
Assuming that (i) the Mergermerger constitutes a reorganization within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code; (ii) after the
transaction, First Financial, as successor of Sand Ridge Financial,Hebron Bancorp, will hold
substantially all of Sand Ridge Financial'sHebron Bancorp's assets; and (iii) in the transaction, the
Sand Ridge FinancialHebron Bancorp shareholders will exchange an amount of stock constituting
control of Sand Ridge FinancialHebron Bancorp solely for First Financial Common Stock;common stock; the following
is a summary of the tax consequences which will result:
(1)(a) No gain or loss will be recognized by Sand Ridge FinancialHebron Bancorp
shareholders who exchange all of their Sand Ridge Financial
Common StockHebron Bancorp common
stock for First Financial Common Stockcommon stock pursuant to the Merger,merger,
except to the extent of any cash received in lieu of receipt
of a fractional share of First Financial Common Stock.
(2)common stock.
(b) The basis of the First Financial Common Stockcommon stock (including
fractional share interests) received by Sand Ridge FinancialHebron Bancorp
shareholders who exchange all of their Sand Ridge Financial
Common StockHebron Bancorp common
stock for First Financial Common Stockcommon stock will be the same as the
basis of the Sand Ridge Financial Common StockHebron Bancorp common stock surrendered in
exchange therefor.
(3)(c) The holding period of the First Financial Common Stockcommon stock
(including fractional share interests) received by Sand Ridge
FinancialHebron
Bancorp shareholders who exchange all of their Sand Ridge
Financial Common StockHebron Bancorp
common stock for First Financial Common Stockcommon stock will include the
period during which the Sand Ridge Financial
Common StockHebron Bancorp common stock was held,
provided the Sand Ridge Financial
Common StockHebron Bancorp common stock was held as a capital
asset on the date of the exchange.
(4)(d) Where a cash payment is received by a Sand Ridge FinancialHebron Bancorp
shareholder in lieu of fractional shares of First Financial
Common Stock,common stock, the cash payment will be treated as a
distribution in redemption of the fractional share interest by
First Financial.
(5)Financial, subject to the provisions and limitations of
Section 302 of the Internal Revenue Code. Where such exchange
qualifies under Section 302(a) of the Internal Revenue Code,
such shareholder will recognize a capital gain or loss
provided that the Hebron Bancorp common stock was held as a
capital asset on the date of the merger.
(e) Any Sand Ridge FinancialHebron Bancorp shareholder who perfects dissenters' rights
and receives solely cash in exchange for such shareholder's
Sand Ridge Financial Common StockHebron Bancorp common stock shall be treated as having
received such cash as a distribution in redemption of the
Sand Ridge Financial Common StockHebron Bancorp common stock subject to the provisions and
limitations of Section 302 of the Internal Revenue Code.
(6)(f) No gain or loss will be recognized by Sand Ridge FinancialHebron Bancorp or First
Financial in connection with the transaction.
3638
4145
Receipt of a favorable ruling from the Internal Revenue Service or an
opinion of tax counsel with respect to the above is a condition precedent to
consummation of the Merger.merger. Any such opinion will be subject to certain
representations of Sand Ridge Financial,Hebron Bancorp, First Financial and certain Sand Ridge
FinancialHebron Bancorp
shareholders. Further, any such opinion will be based on current law, which
could be amended, revoked or modified with or without retroactive effect in a
manner which would change such opinion. Such opinion will not be binding on the
IRS, nor will the IRS be precluded from taking a contrary position. If litigated
by the IRS, there can be no assurances that a court will agree with any such
opinion.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS BASED UPON THE
CODE, TREASURY REGULATIONS, CASE LAW AND INTERNAL REVENUE SERVICE RULINGS AS IN
EFFECT ON THE DATE HEREOF WITHOUT CONSIDERATION OF THE FACTS AND CIRCUMSTANCES
OF ANY PARTICULAR SITUATION OF ANY SAND RIDGE FINANCIALHEBRON BANCORP SHAREHOLDER. THIS DISCUSSION
ASSUMES THAT SAND RIDGE FINANCIALHEBRON BANCORP SHAREHOLDERS HOLD THEIR SAND RIDGE
FINANCIALHEBRON BANCORP COMMON STOCK
AS CAPITAL ASSETS WITHIN THE MEANING OF SECTION 1221 OF THE CODE. SPECIAL TAX
CONSIDERATIONS NOT DISCUSSED HEREIN MAY BE APPLICABLE TO PARTICULAR CLASSES OF
TAXPAYERS, SUCH AS BROKER-DEALERS, INSURANCE COMPANIES, TAX EXEMPT
ORGANIZATIONS, FINANCIAL INSTITUTIONS, FOREIGN CORPORATIONS, OR TO ANY
SHAREHOLDER WHO ACQUIRED SAND RIDGE FINANCIALHEBRON BANCORP COMMON STOCK THROUGH THE EXERCISE OF AN
EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION. EACH SHAREHOLDER SHOULD
CONSULT WITH HIS OR HER OWN TAX ADVISORADVISER WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT
OF EXISTING AND PROPOSED FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
ACCOUNTING TREATMENTAccounting Treatment
- --------------------
It is anticipated that the Mergermerger will be accounted for as a
pooling-of-interests. First Financial and Sand Ridge FinancialHebron Bancorp shall receive letters
at the Effective Time from Ernst & Young LLP and Crowe, Chizek and Company LLP
regarding the appropriateness of pooling-of-interests accounting for the Mergermerger
under Accounting Principles Board Opinion 16 if the Mergermerger is closed and
consummated in accordance with the terms of the Merger Agreement.
3739
42
RESTRICTIONS ON RESALE OF FIRST FINANCIAL COMMON STOCK46
Restrictions On Resale Of First Financial Common Stock
- ------------------------------------------------------
The issuance of the shares of First Financial Common Stockcommon stock in
connection with the Mergermerger has been registered under the Securities Act. Such
shares may be traded freely and without restriction under federal and state
securities laws by those shareholders not deemed to be "affiliates" of Sand
Ridge FinancialHebron
Bancorp as that term is defined in Rules 144 and 145 under the Securities Act.
"Affiliates" are generally defined as persons who control, are controlled by, or
are under common control with Sand Ridge FinancialHebron Bancorp at the time of the Sand Ridge Financial Special Meeting.Hebron Bancorp
special meeting. Accordingly, affiliates of Sand
Ridge FinancialHebron Bancorp will generally
include the directors and executive officers of Sand Ridge FinancialHebron Bancorp as well as Sand Ridge Financial'sHebron
Bancorp's largest shareholders. In general, shares of First Financial Common Stockcommon
stock received by affiliates of Sand
Ridge FinancialHebron Bancorp pursuant to the Mergermerger may not be
publicly resold without registration under the Securities Act except pursuant to
the volume and manner of sale limitations and other requirements provided in
Rules 144 and 145. This Proxy Statement-Prospectus does not cover any resales of
First Financial Common
Stockcommon stock received by affiliates of Sand Ridge Financial.Hebron Bancorp. Any owner
of Sand Ridge
Financial Common StockHebron Bancorp common stock who becomes an affiliate of First Financial will
be subject to similar restrictions under Rule 144.
Pursuant to the terms of the Merger Agreement, in order for the Mergermerger
to qualify for pooling-of-interests accounting treatment, none of the shares of
First Financial Common Stockcommon stock held by shareholders who are affiliates of First
Financial or Sand Ridge FinancialHebron Bancorp may be sold until such time as financial results
covering at least thirty days of post-Mergerpost-merger combined operations of First
Financial and Sand Ridge FinancialHebron Bancorp have been published (the "Publication Date"). As a
result, no shareholder who is an affiliate of First Financial or Sand Ridge FinancialHebron Bancorp
will be permitted to sell any shares of First Financial Common Stockcommon stock for the
period from the Effective Time to the Publication Date.
In addition, in order to preserve the proposed tax-free status of the
Mergermerger and in order to ensure that the continuity of shareholder interest
requirements related thereto, and set forth in Treasury Regulation Section
1.368-1, will be satisfied with respect to the Merger,merger, certain shareholders of
Sand Ridge FinancialHebron Bancorp participating in the Mergermerger and First Financial will be required
to execute letters indicating that such shareholders have no present plans or
intentions to sell or dispose of the First Financial common shares received by
such shareholders in connection with the merger to any person "related," as
defined in Treasury Regulation Section 1.368-1(e)(3), to First Financial and
that First Financial and any such "related" person has no intention to acquire
any shares of such First Financial Common Stock.common stock.
Except as provided above, there will be no restrictions on the transfer
of shares of First Financial Common Stockcommon stock issued by First Financial pursuant to
the Merger.
38merger.
40
43
REGULATORY CONSIDERATIONS47
Regulatory Considerations
- -------------------------
The proposed transaction requires the approval of the Board of
Governors of the Federal Reserve BoardSystem (the "Federal Reserve Board") under
section 3(a)(5) of the Bank Holding Company Act of 1956, as amended. The Bank
Holding Company Act provides that the Federal Reserve Board may not approve any
transaction which would result in a monopoly or which would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any part of the United States, or any transaction the
effect of which in any section of the United States may be substantially to
lessen competition or to tend to create a monopoly or which in any other manner
might restrain trade, unless the Federal Reserve Board determines that the
anti-competitive effects of the proposed merger are clearly outweighed in the
public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served.
The Mergermerger may generally not be consummated for fifteen days after the
receipt of Federal Reserve Board approval. Such fifteen day period will become
thirty days, however, if the United States Department of Justice issues an
adverse comment relating to competitive factors. During such fifteen or thirty
day period, the United States Department of Justice may commence legal action
challenging the Mergermerger under the Federal anti-trust Laws. If the Justice
Department does not commence a legal action during such period, the Mergermerger may
be consummated and the Justice Department may not thereafter challenge the
transaction except in an action commenced under Section 2 of the Sherman
Anti-Trust Act.
The Mergermerger is also subject to approval by the IndianaKentucky Department of
Financial Institutions under Chapter 28-2-16287 of the Indiana Code,Kentucky Revised Statutes, which
provides for foreign bank holding company acquisitions.
Applications requesting approval were submitted to the Federal Reserve
Board on February 1,March 4, 1999, and to the IndianaKentucky Department of Financial Institutions
on February 4,March 10, 1999. First Financial and Sand Ridge FinancialHebron Bancorp anticipate that the Mergermerger
will be approved by the Federal Reserve Board and the IndianaKentucky Department of
Financial Institutions and will not be challenged by the Justice Department
under the anti-trust laws. However, there can be no assurance that such
approvals will be given or whether conditions, if any, will be imposed on the
approvals or that the Justice Department will not challenge the Merger.merger.
The approvals of the Federal Reserve Board and the IndianaKentucky Department
of Financial Institutions are not to be interpreted as the opinion of the
regulatory authorities that the Mergermerger is favorable to Sand Ridge FinancialHebron Bancorp
shareholders, including from a financial point of view, or that these regulatory
authorities have considered the adequacy of the terms of the Merger.merger. The
approvals do not constitute an endorsement or a recommendation of the Mergermerger by
the regulatory authorities.
3941
4448
THE MERGER AGREEMENT
STRUCTURE OF THE MERGERStructure Of The Merger
- ----------------------
If the Mergermerger is approved by Sand Ridge FinancialHebron Bancorp shareholders at the Special Meetingspecial
meeting by at least a two-thirds (2/3rds) majority vote of the outstanding shares of Sand Ridge Financial Common StockHebron Bancorp
common stock and if necessary regulatory approvals are received and the other
conditions required for the consummation of the transactions contemplated by the
Merger Agreement are satisfied or waived, Sand Ridge FinancialHebron Bancorp will merge with and
into First Financial in a transaction in which the following will occur at the
Effective
Time:"Effective Time":
(a) Each of the then outstanding shares of Sand Ridge FinancialHebron Bancorp will be
canceled and extinguished in consideration and exchange for a
number of shares of First Financial Common
Stockcommon stock equal to the
Exchange Ratio (except for fractional shares and shares of
shareholders who exercise dissenters' rights, for which cash
shall be paid in exchange);
(b) Sand Ridge FinancialHebron Bancorp will merge with and into First Financial at the
Effective Time and First Financial will be the continuing,
surviving and resulting corporation in the Merger;merger; and
(c) Sand RidgeHebron Deposit Bank will become a wholly owned subsidiary of
First Financial.
SURRENDER OF STOCK CERTIFICATESSurrender Of Stock Certificates
- -------------------------------
The Merger Agreement provides for the surrender of Sand Ridge Financial
Common StockHebron Bancorp
common stock certificates by the holders thereof before such holders may receive
certificates evidencing First Financial Common Stock.common stock. The Registrar and Transfer
Company will act as the exchange agent (the "Exchange Agent").agent.
As soon as practicable after the Effective Time, First Financial will
cause the Exchange Agentexchange agent to prepare and mail to each holder of record of an
outstanding certificate or certificates representing shares of Sand Ridge
FinancialHebron Bancorp a
letter of transmittal containing instructions for the surrender of the
certificate or certificates. Upon surrender of the Sand Ridge FinancialHebron Bancorp certificate or
certificates in accordance with instructions set forth in the letter of
transmittal, such holder shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of First Financial into
which the shares represented by the certificate or certificates so surrendered
shall have been converted, without interest.
40interest, plus any cash payment for any
fractional shares.
42
4549
The Exchange Agentexchange agent shall not be obligated to deliver certificates for
First Financial Common Stockcommon stock to a former shareholder of Sand Ridge FinancialHebron Bancorp until
such former shareholder surrenders his or her certificate or certificates
representing shares of Sand Ridge FinancialHebron Bancorp or, in lieu thereof, an appropriate
affidavit of loss and an indemnity agreement or bond as may be required by First
Financial. Until so surrendered for exchange, each such stock certificate
formerly representing shares of Sand Ridge Financial Common StockHebron Bancorp common stock will be deemed for
all corporate purposes (except for the payment of dividends, which will be
subject to the exchange of stock certificates as above provided) to evidence the
ownership of the number of shares of common stock of the surviving corporation
that the holder thereof would be entitled to receive upon its surrender to First
Financial.
EFFECTIVE TIME OF THE MERGEREffective Time Of The Merger
- ----------------------------
The Effective Time is to be the later of the dates of filing of
articles of merger with the Secretaries of State of IndianaKentucky and Ohio and is
expected to be as soon as practicable after the approval of the Merger Agreement
by Sand Ridge FinancialHebron Bancorp shareholders, the satisfaction of all conditions set forth in
the Merger Agreement and the receipt of approvals from regulatory authorities,
or at such later date as may be agreed upon by Sand Ridge FinancialHebron Bancorp and First
Financial. See "THE MERGER--Regulatory Considerations".
No assurance can be provided that the necessary shareholder and
regulatory approvals will be obtained or that other conditions precedent to the
Mergermerger will be satisfied. In the event the Mergermerger is not consummated on or
before July 31, 1999, either party may terminate the Merger Agreement or the
parties may agree to extend the time for completion of the Merger.
FRACTIONAL INTERESTSmerger.
Fractional Interests
- --------------------
No fractional shares of First Financial Common Stockcommon stock will be issued as
a result of the Merger.merger. In lieu thereof, Sand Ridge FinancialHebron Bancorp shareholders having a
fractional interest will be paid in cash by First Financial for the fractional
interest. Such payment shall be equal to the fractional interest multiplied by
the Average Closing Price. The Merger Agreement defines the Average Closing
Price as definedthe average of the daily closing sales price of a share of First
Financial common stock, as reported on the Nasdaq National Market, for the 20
consecutive Nasdaq trading days in which at least 1,000 shares were traded
ending on the second day after the day that is the latest of (i) the day of
expiration of the last waiting period with respect to any of the required
regulatory approvals, (ii) the day on which the last of the required regulatory
approvals is obtained, and (iii) the day on which the required Hebron Bancorp
shareholder approval is obtained.
Conditions To Consummation Of The Merger
Agreement.
CONDITIONS TO CONSUMMATION OF THE MERGER- ----------------------------------------
Consummation of the Mergermerger is subject to a number of conditions, each
of which may be waived by the party entitled thereto to the extent permissible
by applicable law, including the following:
43
50
(a) The receipt of all required regulatory approvals for the
completion of the Mergermerger and the expiration of any applicable
waiting periods, with no such approval or authorization
containing any provision which would be materially adverse to
the merged businesses of Sand Ridge FinancialHebron Bancorp and First Financial;
41
46
(b) The validity or legality of the transactions contemplated by
the Merger Agreement shall not have been materially questioned
by any suit, action, investigation by any governmental body or
other legal or administrative proceedings;
(c) The receipt of all consents required for the consummation of
the Mergermerger or for the prevention of any default under any
contract, agreement or permit of First Financial or Sand Ridge
FinancialHebron
Bancorp which, if not obtained or made, is reasonably likely
to have, individually or in the aggregate, a material adverse
effect on the combined business affairs of First Financial and
Sand Ridge Financial;Hebron Bancorp;
(d) Compliance by First Financial and Sand Ridge FinancialHebron Bancorp with their
respective covenants and the truth of all representations and
warranties as of the Effective Time;
(e) The absence of any material adverse change in the financial
condition, operations, corporate status or business of First
Financial and its subsidiary banks or Sand Ridge Financial or
Sand Ridge Bank since December 31, 1997;1997 or
of Hebron Bancorp or Hebron Deposit Bank since June 30, 1998;
(f) The receipt of opinions from First Financial's special counsel
and from Sand Ridge Financial'sHebron Bancorp's special counsel with respect to
various corporate matters, due execution and delivery of the
Merger Agreement and various other Mergermerger related matters;
(g) The receipt of a favorable ruling from the Internal Revenue
Service or an opinion of counsel, in form and substance
satisfactory to First Financial and Sand Ridge Financial,Hebron Bancorp, to the
effect that, under the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"), no taxable gain or loss
will be recognized by Sand Ridge Financial,Hebron Bancorp, First Financial or their
respective shareholders as a result of the Merger,merger, except in
respect of fractional share interests or dissenters receiving
cash;
(h) The receipt of an opinion from Professional Bank Services,
Inc., dated as of the date of this Proxy Statement-Prospectus,
that the consideration to be received by Hebron Bancorp
shareholders is fair from a financial point of view, and this
opinion shall not have been withdrawn at the Effective Time;
(i) The receipt of letters from Ernst & Young LLP and Crowe,
Chizek and Company LLP regarding the appropriateness of
pooling-of-interests accounting for the Mergermerger under
Accounting Principles Board Opinion 16 if the Mergermerger is closed
and consummated in accordance with the terms of the Merger
Agreement;
(i)44
51
(j) The receipt by First Financial of a letter from Sand Ridge
FinancialHebron Bancorp
identifying all persons who are, at the date of the Special Meeting,special
meeting, "affiliates" of Sand Ridge FinancialHebron Bancorp for purposes of Rule
145 under the Securities Act of 1933 and for purposes of
qualifying the Mergermerger for pooling of interestspooling-of-interests accounting
treatment and the receipt on or prior to the Effective Time
from each person so identified of an agreement to restrict the
transfer of First Financial Common Stockcommon stock received; and
(j)(k) The approval of the Merger Agreement by Sand Ridge FinancialHebron Bancorp
shareholders at the Special Meetingspecial meeting by at least a two-thirds
(2/3rds) majority
vote of the outstanding Sand Ridge FinancialHebron Bancorp shares.
42
47
No assurance can be given that all of the conditions to the Mergermerger will
be satisfied or waived by any party permitted to do so.
TERMINATION OF THE MERGERTermination Of The Merger
- -------------------------
The merger may be terminated at any time prior to the Effective Time
under any one or more of the following circumstances:
(a) By the mutual consent of the Boards of Directors of Sand Ridge
FinancialHebron
Bancorp and First Financial;
(b) By First Financial if the holders of 7.50% or morepercentage of the outstanding shares
of Sand RidgeHebron Bancorp common stock owned by shareholders who
perfect their Dissenters' Rights under Subtitle 13 of the
Kentucky Revised Statutes exceeds the percentage that would
allow First Financial Common Stock will
be entitled to receive cash in exchangeaccount for their Sand Ridge
Financial shares pursuant to perfected dissenters' rights
under the Indiana Business Corporation Law;merger as a
pooling-of-interests;
(c) By Sand Ridge FinancialHebron Bancorp or First Financial if, prior to the
Effective Time, the conditions to such party's obligation to
consummate the Mergermerger are not met;
(d) By Hebron Bancorp or First Financial if the required receipt
of any or all regulatory approvals for the completion of the
merger is not obtained or if any approvals or authorizations
contain any provisions which would be materially adverse to
the merged businesses of Hebron Bancorp and First Financial;
(e) By Hebron Bancorp or First Financial in the event that any
action or proceeding before any court, governmental body or
agency is instituted or threatened to restrain or prohibit the
merger and such corporation deems it unadvisable to proceed
with the Merger;
(f) By either Sand Ridge FinancialHebron Bancorp or First Financial if the requisite
approval of the shareholders of Sand Ridge FinancialHebron Bancorp is not obtained
or if the Mergermerger is not consummated on or before July 31,
1999;
(g) By either Hebron Bancorp or (e)First Financial if the average of
the daily per share closing sales price of a share of First
Financial common stock for the 20 consecutive Nasdaq trading
days, in which at least 1,000 shares were traded, ending on
the second trading day preceding the Effective Time is less
than $20.00 per share; or
45
52
(h) By Sand Ridge FinancialHebron Bancorp if the Average Closing Price, as defined in
the Merger Agreement, of First Financial Common
Stockcommon stock is less
than $23.2671;$23.857995; the SRFCHBI Ratio is less than the Index Ratio,
as both terms are defined in the Merger Agreement; ANDand First
Financial decides not to increase the Exchange Ratio according
to the method described in the Merger Agreement.
FIRST FINANCIAL AVERAGE CLOSING PRICE AND TERMINATION OF THE MERGERFirst Financial Average Closing Price And Termination Of The Merger
- -------------------------------------------------------------------
The Merger Agreement contains a provision that permits Sand Ridge
FinancialHebron Bancorp
to terminate the Merger Agreement if there is a significant and prolonged
decline in the per share market price of First Financial Common Stockcommon stock that is
not coincidental with a decline in the stock prices of certain other financial
institution holding companies, unless First Financial electsis willing to increase the
Exchange Ratio.
The following discussion uses the terms defined below:
-o VALUATION DATE - the second trading day after the day that is the
latest of (i) the day of expiration of the last waiting period with
respect to any of the required regulatory approvals, (ii) the day on
which the last of the required regulatory approvals is obtained, and
(iii) the day on which the required Sand Ridge FinancialHebron Bancorp stockholder approval
is obtained.
43
48
- -o AVERAGE CLOSING PRICE - the average of the daily closing sales price of
First Financial Common Stock,common stock, as reported on the Nasdaq National Market
for the 20 consecutive trading days, in which at least 1,000 shares
were traded, ending on the Valuation Date.
- - SRFCo HBI RATIO - the number obtained by dividing First Financial's Average
Closing Price by $26.5909.
- -$28.0682.
o INDEX GROUP - 31 specified financial institution holding companies, 17
with headquarters in Ohio and 14 with headquarters in Indiana. All
specified companies are publicly traded and have not announced an
acquisition transaction at any time during the period beginning on the
date of the Merger Agreement and ending on the valuation date. If the
common stock of any of the specified companies ceases to be publicly
traded or if an acquisition transaction involving any of the specified
companies is announced, that company will be removed from the Index
Group.
- -o INDEX PRICE - the price obtained by dividing the sum of the December
15,31, 1998, closing sales price of each of the stocks in the Index Group
by the number of holding companies composing the Index Group. December
15,31, 1998 is the last trading day before the public announcement of the
Merger Agreement.
- -o AVERAGE INDEX PRICE - the price resulting from dividing (i) the sum of
the average of the daily closing sales price for the common stock of
each financial institution composing the Index Group during the 20
consecutive trading days ending on the Valuation Date by (ii) the
number of financial institutions composing the Index Group.
- -46
53
o INDEX RATIO - the number obtained by dividing the Average Index Price
by the Index Price and subtracting 0.1250.15 from the quotient.
Prior to making any decision to terminate, or allow the termination of,
the Merger Agreement, each of the Sand Ridge FinancialHebron Bancorp and the First Financial Boards
would consult with its respective financial and other advisors and would
consider all financial and other information it deemed relevant to its decision.
It is not possible to know whether the Price-Based Termination right will be
triggered until after the Valuation Date. The Sand Ridge FinancialHebron Bancorp Board has made no
decision as to whether it would exercise its right to terminate the Merger
Agreement if the termination right has been triggered. In consideringconsideration whether
to exercise its termination right in such situation, the Sand Ridge
FinancialHebron Bancorp Board
would, consistent with its fiduciary duties, take into account all relevant
facts and circumstances that exist at such time and would consult with its
financial advisors and legal counsel. Approval and adoption of the Merger
Agreement by the stockholders of Sand Ridge FinancialHebron Bancorp at the Special
Meetingspecial meeting will
confer on the Sand Ridge FinancialHebron Bancorp Board the power, consistent with its fiduciary
duties, to elect to consummate the Mergermerger in the event the termination right is
triggered, whether or not there is any increase in the Exchange Ratio and
without any further action by, or resolicitation of, the stockholders of Sand Ridge Financial.
44
49Hebron
Bancorp.
The Mergermerger may be terminated and abandoned upon a majority vote of
Sand
Ridge Financial'sHebron Bancorp's Board of Directors at any time during the ten-day period
commencing on the Valuation Date if both of the following conditions are
satisfied:
(a) the Average Closing Price is less than $23.2671,$23.857995, and
(b) the SRFCHBI Ratio is less than the Index Ratio.
Prompt written notice must be given to First Financial if Sand Ridge
Financial'sHebron
Bancorp's Board of Directors elects to exercise this termination right. This
notice may be withdrawn at any time during the ten-day period commencing on the
Valuation Date, provided that First Financial has not yet exercised its right,
as described below, to terminate the Merger Agreement. During the five days
commencing with the receipt of the written notice, First Financial will have the
option to avoid the termination of the Merger Agreement by electing to increase
the Exchange Ratio to the lesser of:
(a) the quotient obtained by dividing $1,983.52$486.1655 by the Average
Closing Price, or
(b) the quotient obtained by multiplying the Index Ratio and the
Exchange Ratio, as then in effect, and dividing the resulting
product by the SRFCHBI Ratio.
PromptIf First Financial decides to increase the Exchange Ratio, prompt
written notice of First Financial'sits decision will be provided Sand Ridge Financial.Hebron Bancorp. If First
Financial decides to increase the Exchange Ratio, the Merger Agreement will
remain in effect in accordance with its original terms, except for the
modification of the Exchange Ratio. If First Financial decides not to increase
the Exchange Ratio Sand Ridge Financial will have five
days after receipt of First Financial'sor does not provide prompt written notice to provide First
Financial with written notice of either its election to withdraw its termination
request or its election to haveduring the termination offive day
period, the Merger Agreement become
effective at the close of business on the second business day after First
Financial's receipt of the final notice.
45will terminate immediately.
47
5054
INFORMATION ABOUT FIRST FINANCIAL
Information about First Financial is included in the First Financial
Form 10-K, incorporated herein by reference, and in First Financial's Quarterly
Report on Form 10-Q for the quarters ended March 31, June 30, and September 30,
1998,previously incorporated herein by reference.
RECENT DEVELOPMENTSRecent Developments
- -------------------
PENDING MERGER WITH HEBRON BANCORP, INC.SAND RIDGE FINANCIAL CORPORATION. First Financial
signed a plan and agreement of merger with Hebron Bancorp, Inc., Hebron, KentuckySand Ridge Financial Corporation,
Highland, Indiana ("Hebron
Bancorp"Sand Ridge Financial") on December 31,16, 1998. The
consideration to be paid to Hebron BancorpSand Ridge Financial shareholders pursuant to the
merger agreement is fixed at 1,222,6505,115,000 shares of First Financial Common Stockcommon stock in
exchange for all outstanding shares of Hebron
BancorpSand Ridge Financial common stock. After
the merger, Hebron DepositSand Ridge Bank, Hebron Bancorp'sSand Ridge Financial's only subsidiary, will become
a wholly owned subsidiary of First Financial.
As of September 30,December 31, 1998, Hebron BancorpSand Ridge Financial had total assets of
approximately $106$557 million, loans outstanding of $69$318 million, total deposits of
$90$449 million and total shareholders' equity of $12$45 million. Its equity-to-assets
ratio at September 30,December 31, 1998 was 11.0%7.99%. Hebron BancorpSand Ridge Financial had net earnings for
the nine monthsyear ended September 30,December 31, 1998, of approximately $1,158,000$5,448,000 or $19.79$90.80 per
share. See "PRO FORMA"PRO-FORMA UNAUDITED CONSOLIDATED BALANCE SHEET" and "PRO FORMA"PRO-FORMA
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS."
The merger with Hebron BancorpSand Ridge Financial is subject to numerous conditions
including, among others, regulatory and shareholder approvals. First Financial
is unable to predict when or whether such conditions will be satisfied.
Accordingly, there can be no assurance that the proposed merger with Hebron
BancorpSand Ridge
Financial will be consummated. Provided all conditions are met and approvals
obtained, the proposed merger with Hebron Bancorp is anticipated to be completed during the second
quarter of 1999.
If the Merger had been effective December 31, 1998, former shareholders
of Sand Ridge Financial would have owned approximately 12.4% of the combined
company. But if the merger with Hebron Bancorp had occured on the same date, the
percentage ownership of former shareholders of Sand Ridge Financial would have
been reduced to 12.0% as the result of issuing 1,222,650 shares of First
Financial Common Stock in exchange for shares of Hebron common stock.
FIRST FINANCIAL'S 1998 EARNINGS. First Financial's net earnings for
1998 were $44,106,000, or $1.21 on a diluted per share basis. This represents a
9.42% increase over 1997 net earnings of $40,308,000. On a diluted per share
basis, 1998 net earnings were 10.0% greater than 1997 diluted earnings per share
of $1.10. The rise in earnings is largely attributable to growth in net interest
income of $15.7 million48
55
General
- up 13.6% over 1997. Loan growth of $290 million, or
14.7%, was primarily responsible for the increase in net interest income.
46
51
GENERAL-------
First Financial is a corporation organized under the laws of the State
of Ohio and is registered as a bank holding company as well as a savings and
loan holding company. Its principal executive offices are located in Hamilton,
Ohio. First Financial owns the following subsidiaries:
Bank subsidiaries:
First National Bank of Southwestern Ohio, Hamilton, Ohio
Community First Bank & Trust, , Celina, Ohio
Union Trust Bank, Union City, Indiana
Indiana Lawrence Bank, North Manchester, Indiana
Citizens First State Bank, Hartford City, Indiana
Union Bank & Trust Company, North Vernon, Indiana
The Clyde Savings Bank Company, Clyde, Ohio
Peoples Bank and Trust Company, Sunman, Indiana
Bright National Bank, Flora, Indiana
Farmers State Bank, Liberty, Indiana
National Bank of Hastings, Hastings, Michigan
Vevay Deposit Bank, Vevay, Indiana
Savings bank subsidiaries:
Fidelity Federal Savings Bank, Marion, Indiana
Home Federal Bank, a Federal Savings Bank, Hamilton, Ohio
Finance company subsidiary:
First Finance Mortgage Company of Southwestern Ohio, Inc.,
Hamilton, Ohio
At September 30, 1998,For further information about First Financial, had total assets of
approximately $2.8 billion, deposits of approximately $2.2 billion and
shareholders' equity of approximately $302 million. See Form 10-Q for the
quarter ended September 30, 1998 andsee "Item 1. Business"
in the First Financial Form 10-K, both of which havehas previously been incorporated herein
by reference.
4749
5256
INFORMATION ABOUT THE BUSINESS OF SAND RIDGE FINANCIAL
GENERAL
Sand Ridge Financial,HEBRON BANCORP
General
- -------
Hebron Bancorp, a bank holding company, was established in 19841994 and is
headquartered in Highland, Indiana, which is twenty miles southeast of
Chicago.Hebron, Kentucky. The holding company's wholly owned
subsidiary, Sand RidgeHebron Deposit Bank, was chartered by the State of IndianaKentucky as a
state bank in 1969. Sand Ridge's1920. Hebron Deposit Bank's primary market area includes the
cities of Highland, ScherervilleHebron, Burlington and Hammond, IndianaPetersburg, Kentucky and the contiguous areas
within LakeBoone County, Indiana.Kentucky. The economic base of Sand
RidgeHebron Deposit Bank's
primary market area is primarily retail,industrial and light manufacturing, but also
includes industrial companiesagricultural products and Great Lakes commercialretail. The Cincinnati-Northern Kentucky
International Airport is located in Boone County and service companies.is a major employer for the
area. In addition, the airport has significant economic influence on the
Kentucky, Ohio, Indiana tri-state area.
As of September 30,December 31, 1998, Sand Ridge FinancialHebron Bancorp had total assets of
approximately $527$112 million, total deposits of approximately $438$96 million and
shareholders' equity of approximately $45$11.8 million. It had 23337 employees at
September 30, 1998.
Sand Ridge Bank offers a diversified selection of loan and investment
products. At December 31, 1997,1998.
Hebron Deposit Bank has operated as a traditional community bank since
its founding. As with many community banks, its lending focus is strongly real
estate and consumer lending oriented. As of December 31, 1998, approximately
38.6% and 35.4%76.9% of its lending portfolio was comprised of commercial and real estate loans, respectively.loans. The balance
of its loan portfolio is comprised primarily of installmentfairly evenly divided between consumer and commercial
loans. Lendable funds are obtained primarily from deposits and loan principal
payments. Sand RidgeHebron Deposit Bank offers a full line of checking and NOW accounts,
savings, certificates of deposit and individual retirement accounts. In addition
to originating loans, Sand RidgeHebron Deposit Bank invests in U.S. treasury and governmentfederal
agency securities, mortgage-backed securities corporate notesand state and municipal
securities.
COMPETITION
Sand RidgeCompetition
- -----------
Hebron Deposit Bank competes for deposits and loans with other
commercial banks, savings associations, savings banks, and credit unions.
Competition from entities other than financial institutions has become
significant. Such deposit competitors include insurance companies and issuers of
commercial paper and other securities, such as shares in money market and stock
mutual funds. Loan competitors include consumer finance companies, leasing
companies, insurance companies and mortgage brokers. Major retail corporations
compete for loans by offering retail installment contracts.
Sand RidgeHebron Deposit Bank competes for loan originations primarily through
interest rates and loan fee charges and through the efficiency and quality of
services it provides to borrowers. The primary factors in competing for deposits
are interest rates, quality of service and convenience of office location.locations.
50
57
Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors whichthat are not readily predictable.
48
53
REGULATION
Sand Ridge Financial,Regulation
- ----------
Hebron Bancorp, as a bank holding company, is subject to supervision
and/or regular examination by the Federal Reserve Board. Sand RidgeHebron Deposit Bank, as
a state bank and a nonmember of the Federal Reserve, is subject to supervision
and regular examination by the IndianaKentucky Department of Financial Institutions and
by the Federal Deposit Insurance Corporation.
PROPERTIES
Sand RidgeProperties
- ----------
Hebron Deposit Bank conducts its business through its main office in
Hebron, Kentucky and two
stand-alone branch offices two supermarket branches and a network of 18 ATMs.
The Main Office and a stand-alone branch are located in HighlandBurlington and another
stand-alone branch is located in Schererville, Indiana. The supermarket branches
are located in Van Til's supermarket in Hammond and Strack and Van Til's
supermarket in Schererville. The ATMs are located within Lake County. An
operations center is located in Schererville.
The mainPetersburg,
Kentucky. All office stand-alone branch offices and operations centerfacilities are owned by Sand RidgeHebron Deposit Bank.
The two supermarket branches are leased. In addition,
Sand Ridge Bank owns a parcel of vacant land located in St. John, Indiana, which
is considered a possible future branch location, and two buildings adjacent to
its Highland branch facility. The two Highland buildings are currently leased to
others. Sand Ridge FinancialHebron Bancorp does not directly own any real property.
LEGAL PROCEEDINGSLegal Proceedings
- -----------------
Neither Sand Ridge FinancialHebron Bancorp nor Sand RidgeHebron Deposit Bank is presently involved in
any legal proceedings of a material nature. From time to time, Sand RidgeHebron Deposit
Bank is a party to legal proceedings incidental to its business to enforce its
security interests in collateral pledged to secure loans made by Sand Ridge
Bank.
CERTAIN TRANSACTIONS WITH SAND RIDGE FINANCIALit has made.
Certain Transactions With Hebron Bancorp
- ----------------------------------------
At September 30,December 31, 1998, certain directors and executive officers of
Sand
Ridge FinancialHebron Bancorp and members of their immediate families were indebted to Sand
RidgeHebron
Deposit Bank in the aggregate amount of approximately $2,459,000.$1,281,000. Such
indebtedness was incurred in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons. All such loans were
current at December 31, 1997 and September 30, 1998 and are not considered to involve more than the
normal risk of collectibility or to present other unfavorable features.
49
54
SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the
financial condition, earnings and other data regarding Sand Ridge Financial at
the dates and for the periods indicated:
At September 30, At December 31,
---------------------- --------------------------------------------------------
Financial condition and other data: 1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Total amount of:
Assets $527,256 $428,343 $456,094 $416,544 $393,138 $363,566 $318,596
Investment securities:
Held-to-maturity 0 0 0 0 0 17,948 0
Available-for-sale 202,824 137,977 154,483 124,205 124,588 85,623 0
Held-for-sale 0 0 0 0 0 0 12,611
Investment 0 0 0 0 0 0 84,404
Loans receivable, net of
unearned income, deferred 290,153 263,214 268,729 256,115 242,999 233,696 194,355
loan fees and allowance
for loan losses
Deposits 437,587 381,283 378,676 361,280 336,022 307,903 273,900
Long-term FHLB advances 13,898 4,686 4,686 3,500 0 0 0
Shareholders' equity 44,768 38,723 39,681 34,589 31,002 24,279 23,289
Nine Months Ended
September 30, Year Ended December 31,
---------------------- --------------------------------------------------------
Earnings and other data: 1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Interest income $ 26,264 $ 23,663 $ 32,122 $ 28,932 $ 27,354 $ 23,248 $ 20,760
Interest expense 13,379 11,962 16,257 14,472 14,058 10,933 8,753
-------- -------- -------- -------- -------- -------- --------
Net interest income 12,885 11,701 15,865 14,460 13,296 12,315 12,007
Provision for loan losses 1,750 1,350 1,800 1,440 1.040 840 840
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 11,135 10,351 14,065 13,020 12,256 11,475 11,167
Other income 3,349 2,800 3,851 3,277 2,999 2,723 2,355
Other expenses 9,200 8,385 11,229 9,499 9,567 9,276 8,608
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes 5,284 4,766 6,687 6,798 5,688 4,922 4,914
Income taxes 1,265 1,195 1,694 1,914 1,530 1,283 1,286
-------- -------- -------- -------- -------- -------- --------
Net earnings $ 4,019 $ 3,571 $ 4,993 $ 4,884 $ 4,158 $ 3,639 $ 3,628
======== ======== ======== ======== ======== ======== ========
Net earnings per share $ 66.99 $ 59.51 $ 83.21 $ 81.39 $ 69.30 $ 60.66 $ 60.47
======== ======== ======== ======== ======== ======== ========
Dividends per share $ 0.00 $ 0.00 $ 17.00 $ 16.00 $ 15.00 $ 14.00 $ 13.00
======== ======== ======== ======== ======== ======== ========
Return on equity (net earnings
divided by average equity) 13.04%(1) 13.47%(1) 13.74% 15.06% 15.24% 15.30% 16.59%
Return on assets (net earnings
divided by average total assets) 1.09%(1) 1.09%(1) 1.13% 1.20% 1.09% 1.07% 1.21%
Dividend payout ratio (dividends
declared per share divided by net 0.00% 0.00% 20.43% 19.66% 21.65% 23.08% 21.50%
earnings per share)
Book value per common share $ 746.13 $ 645.39 $ 661.34 $ 576.49 $ 516.70 $ 404.64 $ 388.15
Average shareholders' equity to average 8.38% 8.12% 8.23% 7.99% 7.17% 6.97% 7.28%
total assets
- --------
(1) Annualized
50
55
ANALYSIS OF NET INTEREST INCOME
The following table sets forth for the years ended December 31, 1997,
1996 and 1995 the average balances of major categories of interest-earning
assets and interest-bearing liabilities, interest income earned and interest
expense paid during such periods and the related weighted average rates for Sand
Ridge Financial.
Year ended December 31,
--------------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in thousands)
Interest-earning assets:
Loans (1) $267,162 $22,642 8.48% $255,482 $21,149 8.28%
Securities available for sale (2) 136,684 8,498 6.22 124,115 7,448 6.00
Federal funds sold 17,247 973 5.64 5,925 316 5.33
Interest-bearing balances with financial
institutions 100 9 9.00 239 19 7.95
-------- ------- -------- -------
Total interest-earning assets 421,193 32,122 7.63 385,761 28,932 7.50
Noninterest-earning assets:
Allowance for loan losses (2,940) (3,664)
Cash and due from financial institutions 11,799 12,030
SFAS No. 115 adjustment 2,149 1,678
Other assets 9,413 10,211
-------- --------
Total assets $441,614 $406,016
======== ========
Interest-bearing liabilities:
Savings, NOW and money market $174,340 5,703 3.27 $176,346 5,800 3.29
Other time deposits 176,428 10,016 5.68 146,484 8,252 5.63
Federal funds purchased 342 18 5.26 3,233 178 5.51
Securities sold under agreements to
repurchase 899 51 5.67 1,574 93 5.91
Federal funds purchased 7,847 469 5.98 2,642 149 5.64
-------- ------- -------- -------
Total interest-bearing liabilities 359,856 16,257 4.52 330,279 14,472 4.38
------- -------
Noninterest-bearing liabilities
Demand deposits 41,427 38,977
Other liabilities 3,983 4,334
-------- --------
Total liabilities 405,266 373,590
Shareholders' equity 36,348 32,426
-------- --------
Total liabilities and shareholders' equity $441,614 $406,016
======== ========
Net interest income, interest rate spread $15,865 3.11% $14,460 3.12%
======= ===== ======= =====
Net interest margin (net interest income
as a percent of average interest-earning
assets) 3.77% 3.75%
===== =====
Average interest-earning assets to average
interest-bearing liabilities 117.04% 116.80%
======= =======
Year ended December 31,
--------------------------------------
1995
----------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in thousands)
Interest-earning assets:
Loans (1) $240,044 $20,072 8.36%
Securities available for sale (2) 109,125 6,577 6.03
Federal funds sold 11,235 667 5.94
Interest-bearing balances with financial
institutions 481 38 7.90
-------- -------
Total interest-earning assets 360,885 27,354 7.58
Noninterest-earning assets:
Allowance for loan losses (3,040)
Cash and due from financial institutions 11,659
SFAS No. 115 adjustment (703)
Other assets 11,585
--------
Total assets $380,386
========
Interest-bearing liabilities:
Savings, NOW and money market $176,780 6,070 3.43
Other time deposits 120,421 6,924 5.75
Federal funds purchased 2,255 151 6.70
Securities sold under agreements to
repurchase 3,808 234 6.15
Federal funds purchased 11,101 679 6.12
-------- -------
Total interest-bearing liabilities 314,365 14,058 4.47
-------
Noninterest-bearing liabilities
Demand deposits 35,034
Other liabilities 3,710
--------
Total liabilities 353,109
Shareholders' equity 27,277
--------
Total liabilities and shareholders' equity $380,386
========
Net interest income, interest rate spread $13,296 3.11%
======= =====
Net interest margin (net interest income
as a percent of average interest-earning
assets) 3.68%
=====
Average interest-earning assets to average
interest-bearing liabilities 114.80%
=======
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in
the average loan balances outstanding and loan fees are included in
interest on loans receivable. The inclusion of nonaccrual loans and
fees does not have a material effect on either the average balance or
the average yield.
(2) Interest income on tax-exempt securities has not been adjusted to a
taxable equivalent basis.
51
56
INTEREST INCOME AND EXPENSE RATE/VOLUME ANALYSIS
The table below describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Sand Ridge Financial's interest income and expense
during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii) total
changes in rate and volume. The combined effects of changes in both volume and
rate, which cannot be separately identified, have been allocated proportionately
to the change due to volume and the change due to rate.
Year ended December 31,
-------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------- ------------------------ --------
Increase (decrease) due to Increase (decrease) due to
------------------------ ------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest income attributable to:
Loans $ 977 $ 516 $1,493 $1,310 $ (233) $1,077
Securities available for sale (1) 774 276 1,050 900 (29) 871
Federal funds sold 638 19 657 (289) (62) (351)
Interest-bearing balances with financial
institutions (12) 2 (10) (19) 0 (19)
------ ------ ------ ------ ------ ------
Total interest income 2,377 813 3,190 1,902 (324) 1,578
Interest expense attributable to:
Savings, NOW and money market (66) (31) (97) (15) (255) (270)
Other time deposits 1,699 65 1,764 1,471 (143) 1,328
Federal funds purchased (152) (8) (160) 57 (30) 27
Securities sold under agreements to repurchase (38) (4) (42) (132) (9) (141)
Advances from FHLB 311 9 320 (481) (49) (530)
------ ------ ------ ------ ------ ------
Total interest expense 1,754 31 1,785 900 (486) 414
------ ------ ------ ------ ------ ------
Increase (decrease) in net interest income $ 623 $ 782 $1,405 $1,002 $ 162 $ 1,164
====== ====== ====== ====== ====== =======
- --------------------
(1) Interest income on tax-exempt securities has not been adjusted to a tax
equivalent basis.
52
57
INVESTMENT SECURITIES
The following table sets forth the carrying amount of securities
classified as available for sale at December 31, 1997, 1996 and 1995. Sand Ridge
Financial did not have any securities classified as held to maturity at these
three dates. Investment securities classified as available for sale are recorded
at fair value.
Available For Sale
December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
U.S. treasury and government agencies $ 19,364 $ 16,709 $ 19,830
Obligations of states and political subdivisions 69,431 59,198 48,800
Other corporate securities 2,678 414 427
Mortgage-backed securities 61,629 46,509 54,173
Marketable equity securities 1,381 1,375 1,358
-------- -------- --------
Total $154,483 $124,205 $124,588
======== ======== ========
The following table presents the contractual maturities or terms to
repricing of debt securities available for sale and the weighted average yield
at December 31, 1997.
After one but After five but
within within
Within One Year Five Years Ten Years
--------------- ----------- ----------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. treasury and government $ 0 0.00% $12,638 5.91% $ 6,726 6.60%
agencies
Obligations of states and
political subdivisions 1,666 5.22 11,006 6.25 22,010 5.58
Other corporate securities 2,471 6.03 207 10.26 0 0.00
Mortgage-backed securities 0 0.00 0 0.00 0 0.00
------ ---- ------- ----- ------- -----
$4,137 5.70% $23,851 6.11% $28,736 5.82%
====== ===== ======= ===== ======= =====
After Ten Years Totals
---------------- -----------------
Amount Yield Amount Yield
------ ----- ------ -----
U.S. treasury and government
agencies $ 0 0.00% $ 19,364 6.15%
Obligations of states and
political subdivisions 34,749 5.52 69,431 5.65
Other corporate securities 0 0.00 2,678 6.35
Mortgage-backed securities 61,629 6.98 61,629 6.98
------- ----- -------- -----
$96,378 6.45% $153,102 6.26%
======= ===== ======== =====
--------------------
(1) Yields on tax-exempt investments have not been computed on a tax
equivalent basis.
At December 31, 1997 there were no holdings of securities of any one
issuer, other than the U.S. government and its agencies and corporations, in an
amount greater than 10% of shareholders' equity.
53
58
LOAN PORTFOLIO
LOAN PORTFOLIO COMPOSITION. Sand Ridge Financial's primary lending
areas are the cities of Highland, Schererville and Hammond, Indiana and the
contiguous areas in Lake County, Indiana.
The following table presents certain information regarding the
composition of Sand Ridge Financial's loan portfolio at the dates indicated:
At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
Commercial $105,181 $102,464 $ 92,767 $ 78,810 $ 66,028
Real estate-mortgage 94,362 85,202 86,872 93,843 89,644
Real estate-construction 2,160 3,600 2,869 589 274
Installment 68,159 65,845 63,448 63,922 41,785
Credit card 2,686 2,010 1,241 0 0
-------- -------- -------- -------- --------
Total loans 272,548 259,121 247,197 237,164 197,731
Deferred loan fees (567) (639) (826) (893) (990)
Allowance for loan losses (3,252) (2,367) (3,372) (2,575) (2,386)
-------- -------- -------- -------- --------
Net loans $268,729 $256,115 $242,999 $233,696 $194,355
========= ======== ======== ======== ========
At December 31, 1997, Sand Ridge Financial did not have any
concentrations of loans exceeding 10.0% of total loans not otherwise disclosed
in the loan categories in the table above.
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1997 regarding commercial and real
estate-construction loans maturing or repricing, based on the earlier of
contractual terms to maturity or the next scheduled repricing date for variable
rate loans:
After one After five
Within but within but within After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -----
(In thousands)
Commercial $ 56,456 $ 30,533 $ 8,975 $ 9,217 $105,181
Real estate-construction 2,160 0 0 0 2,160
-------- -------- -------- -------- --------
Totals $ 58,616 $ 30,533 $ 8,975 $ 9,217 $107,341
========= ========= ========= ========= ========
The following table sets forth the dollar amount of all
commercial and real estate-construction loans due after one year that have
predetermined interest rates and have floating or adjustable interest rates:
Predetermined Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Commercial $33,152 $15,573
Real estate-construction 0 0
------- -------
Totals $33,152 $15,573
======= =======
54
59
DELINQUENT LOANS AND NONPERFORMING ASSETS. All loans are reviewed on a
regular basis and are placed on non-accrual status when, in the opinion of
management, the collection of interest is doubtful. Loans are classified as
restructured when management, to protect its investment, grants concessions that
would not otherwise be considered to a debtor. Other real estate owned ("OREO")
represents real estate acquired by Sand Ridge Financial as a result of loan
defaults by customers. The following table summarizes Sand Ridge Financial's
nonaccrual loans, restructured loans, OREO and past due loans:
At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Nonaccrual loans $ 2,643 $ 5,834 $ 873 $ 657 $ 772
Restructured loans 0 0 0 0 0
Other real estate owned 200 0 0 0 196
------- ------- ------- ------- -------
Total nonperforming assets $ 2,843 $ 5,834 $ 873 $ 657 $ 968
======= ======= ======= ======= =======
Accruing loans past due
90 days or more $ 188 $ 203 $ 146 $ 170 $ 100
======= ======= ======= ======= =======
Nonperforming assets as a
percent of total loans
plus OREO 1.04% 2.25% 0.35% 0.28% 0.49%
===== ===== ===== ===== =====
Interest income which would have been recorded under the original terms
of nonaccrual loans and the interest income actually recognized are summarized
below:
Year ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Interest income which would
have been recorded $ 388 $ 510 $ 83 $ 40 $ 53
Interest income recognized 61 103 120 35 67
------- ------- ------- ----- -------
Interest income foregone $ 327 $ 407 $ (37) $ 5 $ (14)
======= ======= ======= ====== =======
At December 31, 1997 Sand Ridge Financial had approximately $3.8
million in loans not currently classified as nonaccrual or 90 days past due and
accruing where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of such borrowers to
comply with the present loan repayment terms and which may result in future
disclosure of such loans. These loans are subject to constant monitoring by
management and are considered in determining the adequacy of Sand Ridge
Financial's allowance for loan losses.
55
60
ALLOWANCE FOR LOAN LOSSES. Sand Ridge Financial maintains an allowance
to absorb anticipated losses on loans. Additions to the allowance for loan
losses are charged to the provision for loan losses on the statement of income.
Management reviews on a quarterly basis the allowance for loan losses as it
relates to a number of relevant factors, including, but not limited to, trends
in the level of nonperforming assets, current and anticipated economic
conditions in the primary lending area, past loss experience, loan
concentrations, composition of the loan portfolio and possible losses arising
from specific problem loans. While management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in evaluating the adequacy of the allowance for loan losses.
The following table sets forth an analysis of Sand Ridge Financial's
allowance for loan losses for the periods indicated:
Year ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Balance at beginning of period $ 2,367 $ 3,372 $ 2,575 $ 2,386 $ 1,768
Charge-offs:
Commercial 979 2,299 134 510 186
Real estate-mortgage 10 14 0 97 150
Real estate-construction 0 0 0 0 0
Installment and credit card 522 480 411 178 59
-------- -------- -------- -------- --------
Total charge-offs 1,511 2,793 545 785 395
Recoveries:
Commercial 430 186 168 60 92
Real estate-mortgage 16 4 0 24 48
Real estate-construction 0 0 0 0 0
Installment and credit card 150 158 134 50 33
-------- -------- -------- -------- --------
Total recoveries 596 348 302 134 173
-------- -------- -------- -------- --------
Net charge-offs (recoveries) 915 2,445 243 651 222
Provision for loan losses 1,800 1,440 1,040 840 840
-------- -------- -------- -------- --------
Balance at end of period $ 3,252 $ 2,367 $ 3,372 $ 2,575 $ 2,386
======== ======== ======== ======== ========
Loans outstanding at end of period $272,548 $259,121 $247,196 $237,164 $197,731
======== ======== ======== ======== ========
Average loans outstanding
during period $267,162 $255,482 $240,044 $219,928 $180,131
======== ======== ======== ======== ========
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding during
the period 0.34% 0.96% 0.10% 0.30% 0.12%
===== ===== ===== ===== =====
The following table provides an allocation of Sand Ridge Financial's
allowance for loan losses by category for the periods indicated. The allowance
can be allocated by category only on an approximate basis. The allocation of
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other
category.
56
61
Allowance for Loan Losses
At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Commercial $ 1,421 $ 1,134 $ 683 $ 825 $ 793
Real estate-mortgage 131 118 255 522 320
Real estate-construction 0 0 0 0 0
Installment and credit card 499 419 105 95 112
Unallocated 1,201 696 2,329 1,133 1,161
-------- -------- -------- -------- --------
Total $ 3,252 $ 2,367 $ 3,372 $ 2,575 $ 2,386
======== ======== ======== ======== ========
Percentage of Loans to Total Loans
At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial 38.59% 39.54% 37.53% 33.23% 33.39%
Real estate-mortgage 34.63 32.88 35.14 39.57 45.34
Real estate-construction 0.79 1.39 1.16 0.25 0.14
Installment and credit card 25.99 26.19 26.17 26.95 21.13
Unallocated N/A N/A N/A N/A N/A
-------- -------- -------- -------- --------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
DEPOSITS
Deposits have traditionally been the primary source of Sand Ridge
Financial's funds for use in lending and other investment activities. Deposits
are attracted principally within the area of Lake County, Indiana through the
offering of a broad selection of deposit instruments, including checking and NOW
accounts, money market deposit accounts, regular savings accounts, term
certificate accounts and retirement savings plans. Sand Ridge Financial has not
and does not presently use brokers to attract deposits.
The average balance of and the average rate paid on various deposit
categories for 1997, 1996 and 1995 is disclosed elsewhere herein in the table
showing "Analysis Of Net Interest Income."
The following table presents the amount of Sand Ridge Financial's time
deposits of $100,000 or more by the time remaining until maturity as of December
31, 1997:
Maturity December 31, 1997
--------- -----------------
(In thousands)
Three months or less $ 12,795
Over three through six months 3,348
Over six through twelve months 6,321
Over twelve months 3,316
--------
Total $ 25,780
========
57
62
RETURN ON EQUITY AND ASSETS
The following table sets forth certain performance ratios of Sand Ridge
Financial for the periods indicated:
Year ended December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
Return on assets (net income
divided by average total assets) 1.13% 1.20% 1.09%
Return on equity (net income
divided by average equity) 13.74% 15.06% 15.24%
Dividend payout ratio (dividends
declared per share divided by
net income per share) 20.43% 19.66% 21.65%
Equity to assets ratio (average
equity divided by average assets) 8.23% 7.99% 7.17%
SHORT-TERM BORROWINGS
This information is not required as there were no categories of
short-term borrowings for which the average balance outstanding during the
period was 30% or more of shareholders' equity at the end of the period.
58
63
PRINCIPAL SHAREHOLDERS AND OWNERSHIP BY MANAGEMENT
For information regarding the principal shareholders of First Financial
and ownership of First Financial Common Stockcommon stock by First Financial's directors and
executive officers, see "Item 12. Security Ownership of Certain Beneficial
Owners and Management" in the First Financial Form 10-K, which is incorporated
herein by reference.
The following table sets forth certain information with respect to the
only persons known to Sand Ridge Financial to own beneficially more than 5% of
the outstanding common stock of Sand Ridge Financial as of the Record Date:
Number of Percent of Shares
Shares Outstanding
------ -----------
Name And Address
----------------
Bruce E. Leep 7,544 12.57%
Sand Ridge Financial Corporation
2611 Highway Avenue
Highland, Indiana 46322
E. Kenneth Leep 6,559 10.93%
Sand Ridge Financial Corporation
2611 Highway Avenue
Highland, Indiana 46322
Van Der Molen Sand Ridge LLC 5,786 9.64%
Richard L. Van Der Molen, Trustee
1 North 335 Indian Knoll Road
West Chicago, Illinois 60185
59
64
The following table sets forth certain information regarding the number
of shares of common stock of Sand Ridge FinancialHebron Bancorp beneficially owned by each director
of Sand Ridge FinancialHebron Bancorp and by all directors and executive officers of Sand Ridge FinancialHebron Bancorp
as a group as of the Record Date:
Number of Percent of Shares
Name Shares Outstanding
---- ------ -----------
BruceWilma C. Scheben 9,750 (1) 16.25%
Michael A. Conner 7,150 (2) 11.92%
Wilma C. Scheben & Michael A. Conner 250 0.42%
Joseph B. Aylor 1,500 (3) 2.50%
Stephen K. Dallas 400 (4) 0.67%
Ronald E. Leep 7,544 (1) 12.57%
E. Kenneth Leep 6,559 (2) 10.93%
Richard E. Olszewski 50 (3) 0.08%
RhettGarnett 5,150 (5) 8.58%
William L. Tauber 50 (4) 0.08%
Gerald Van Prooyen 1,571 (5) 2.62%
Samuel Van Til 102 (6) 0.17%
Carl Wolak 260 (7) 0.43%Goodridge 2,500 4.17%
Charles T. Moore 150 0.25%
Robert C. Ruebel 400 0.67%
All executive officers and
directors as a group
(9 persons) 16,918 28.20%27,300 45.50%
--------------------
(1) Of these, 3,034150 shares are owned jointly with other individuals.
(2) Of these, 1,300 shares are owned by Mr. Bruce E. Leep'sConner's wife, for
which Mr. LeepConner disclaims beneficial ownership, and 387
shares are owned by the Sand Ridge Financial Employee Profit
Sharing Trust, of which Mr. Leep is a committee member.
(2) Of these, 2,336 shares are owned by Mr. E. Kenneth Leep's wife
and 380 shares are owned by their children, for which Mr. Leep
disclaims beneficial ownership.
(3) All of Mr. Olszewski's2,850
shares are owned jointly with his wife.
(4)(3) All of Mr. Tauber's shares are owned jointly with his wife.
(5) Of these, 24Aylor's shares are owned by a revocable trust,Aylor Holdings, LLC, of
which Mr. Van ProoyenAylor is the trustee, and 624sole unit owner.
(4) Of these, 250 shares are owned by Mathis, Dallas & Frohlich,
of which Mr. Dallas is a partner. Mr. Dallas disclaims
beneficial ownership of those shares.
(5) Of these, 100 shares are owned by Mr. Van Prooyen's wife is the trustee. Mr. Van Prooyen
disclaims beneficial ownership of the shares owned by the
trust and his wife.
(6) All of Mr. Van Til's shares are owned jointly with his wife.
(7) Of these, 10 shares are owned by Mr. Wolak'sGarnett's wife, for
which Mr. WolakGarnett disclaims beneficial ownership, and 150 sharesownership.
No individuals other than the members of Hebron Bancorp's Board of Directors
listed above are owned jointly with his wife.
60known to beneficially own 5.00% or more of the outstanding
common stock of Hebron Bancorp as of the Record Date.
52
6559
COMPARATIVE MARKET AND DIVIDEND INFORMATION
NATURE OF TRADING MARKETNature Of Trading Market
- ------------------------
The First Financial Common Stockcommon stock is quoted on the Nasdaq National
Market System under the symbol "FFBC". On MarchApril __, 1999, the last reported sale price
of First Financial Common Stockcommon stock as reported on the Nasdaq National Market System was
$_____ per share.
The Sand Ridge Financial Common StockHebron Bancorp common stock is not traded on an established public
market. The last known tradingHebron Bancorp management is aware of only one sale of Hebron Bancorp
common stock since the holding company was formed in 1994, but does not know the
price of Sand Ridge Financial Common Stock
was $1,100 per share on December 8, 1998 for two shares. As there is not an
established public trading market forat which the shares of Sand Ridge Financial Common
Stock, the stock is not liquid and the price indicated above may not reflect the
prices which would be paid for such shares on an active market. This information
should not necessarily be relied upon when determining the value of a
shareholder's investment.traded.
The following table sets forth, for the periods indicated, the high and
low sales prices per share of First Financial Common Stockcommon stock as reported on the
Nasdaq National Market System.Market. All prices have been adjusted to give retroactive effect
to stock dividends and stock splits.
FIRST FINANCIAL FIRST FINANCIAL
HIGH BID LOW BID
-------- -------
19951996
----
First Quarter $13.05 $12.2113.34 12.58
Second Quarter 12.96 12.4013.15 11.84
Third Quarter 13.33 12.4013.15 12.02
Fourth Quarter 13.24 12.40
199613.43 12.49
1997
----
First Quarter 13.34 12.5815.19 12.60
Second Quarter 13.15 11.8417.15 13.95
Third Quarter 13.15 12.0223.07 16.12
Fourth Quarter 13.43 12.49
199722.95 21.14
1998
----
First Quarter 15.19 12.6026.70 21.82
Second Quarter 17.15 13.9528.98 23.41
Third Quarter 23.07 16.1226.70 22.73
Fourth Quarter 22.95 21.14
199831.00 25.00
1999
----
First Quarter 26.70 21.82
Second Quarter 28.98 23.41
Third Quarter 26.70 22.73
Fourth Quarter 31.00 25.00_____ _____
61
66
The following information reflects actual trade transactions in Sand
Ridge Financial Common Stock made during 1996 through 1998, for which management
is aware of both the number of shares traded and the selling price. The
information should not necessarily be relied upon when determining the value of
a shareholder's investment.
Sand Ridge Financial Trades In
----------------------------------------------------
1996 1997 1998(1)
---- ---- ----
Number of trades 11 12 11
Number of shares traded 10,667 1,892 583
Selling price $439.89-$569.67 $569.67-$700.00 $925.00-$1,100.00
----------
(1) Through September 30, 1998
As of March __, 1999, there were approximately _______ holders of
record of First Financial Common Stock.common stock. As of MarchApril 1, 1999, Sand Ridge
FinancialHebron Bancorp had
33793 shareholders of record.
DIVIDENDS53
60
Dividends
- ---------
The following table sets forth the per share cash dividends declared on
First Financial and Sand Ridge Financial Common Stock,Hebron Bancorp common stock, respectively, for each quarter
since January 1, 1995.1996. First Financial dividends have been adjusted to give
retroactive effect to all stock dividends and stock splits.
FIRST SAND RIDGEHEBRON
FINANCIAL FINANCIALBANCORP
--------- ----------------
1995
----
First Quarter $ .10
Second Quarter .10
Third Quarter .10
Fourth Quarter .11 $15.00
1996
----
First Quarter .11
Second Quarter .11
Third Quarter .11
Fourth Quarter .12 16.004.00
1997
----
First Quarter .12
Second Quarter .12
Third Quarter .14
Fourth Quarter .14 17.005.00
1998
----
First Quarter .14
Second Quarter .14
Third Quarter .14
Fourth Quarter .15 18.005.50
1999
----
First Quarter ___ ____
62
67
In the Merger Agreement, First Financial and Sand Ridge FinancialHebron Bancorp agreed that
if the Effective Time is after First Financial's record date for its first
quarter, 1999 regular dividend, Sand Ridge Financialwhich date is April 1, 1999, Hebron Bancorp
shareholders will receive a quarterly dividend of $4.75$1.50 per share. Hebron
Bancorp shareholders will receive an additional dividend of $1.50 per share on Aprilif
the Effective Time is after First Financial's record date for its second
quarter, 1999 regular dividend, which date is July 1, 1999.
The future dividend policy of First Financial is subject to the
discretion of First Financial's Board of Directors, cash needs, general business
conditions and dividends from subsidiaries.
For certain restrictions on the payment of dividends by First Financial
and Sand Ridge FinancialHebron Bancorp, see "COMPARISON OF COMMON STOCK AND SHAREHOLDERS'
RIGHTS--Dividend Rights."
6354
6861
COMPARISON OF COMMON STOCK AND SHAREHOLDERS' RIGHTS
The following summary comparison of the terms of the common stock of
Sand Ridge FinancialHebron Bancorp and First Financial, and the rights of holders thereof, does not
purport to be complete and is qualified in its entirety by reference to First
Financial's Articles of Incorporation, Sand Ridge Financial'sHebron Bancorp's Articles of
Incorporation, First Financial's Regulations and Sand Ridge Financial's Code ofHebron Bancorp's By-Laws.
Various features of the Articles of Incorporation and Regulations of First
Financial differ from Sand Ridge Financial'sHebron Bancorp's Articles of Incorporation and
Code of By-Laws.
The following discussion summarizes the differences that are deemed to be
material by First Financial.
AUTHORIZED BUT UNISSUED SHARESAuthorized But Unissued Shares
- ------------------------------
First Financial's Articles of Incorporation authorize the issuance of
60,000,000 shares, without par value, of First Financial Common Stock,common stock, of which
36,320,338 shares were issued and outstanding at December 31, 1998. At its
upcoming annual meeting of shareholders, First Financial is proposing to
increase its authorized common shares to 160,000,000 shares. The remaining
authorized but unissued shares of First Financial Common Stockcommon stock may be issued
upon authorization of the Board of Directors without prior shareholder approval.
Sand Ridge Financial'sHebron Bancorp's Articles of Incorporation authorize the issuance of
200,000120,000 shares, without par value, of Hebron Bancorp common stock, of which
60,000 shares were issued and outstanding at December 31, 1998.
DIVIDEND RIGHTSDividend Rights
- ---------------
The holders of Sand Ridge FinancialHebron Bancorp and First Financial Common Stockcommon stock are
entitled to dividends and other distributions when, as and if declared by their
respective Boards of Directors out of funds legally available therefor. Subject
to certain regulatory restrictions, dividends may be paid in cash, property or
shares of common stock, unless the entity is insolvent or the dividend payment
would render it insolvent.
The amount of dividends, if any, that might be declared by First
Financial following the purchasemerger will necessarily depend upon many factors,
including, without limitation, future earnings, capital requirements, business
conditions of subsidiaries (since First Financial will be dependent upon
dividends paid to it by its subsidiaries) and the discretion of First
Financial's Board of Directors. Dividends paid to First Financial by its
subsidiary financial institutions are subject to the regulations of various
regulatory authorities. A Federal Reserve Board Policy Statement provides that
cash dividends paid by a bank holding company should meet the following two
guidelines: (1) the organization's net income available to common shareholders
over the past year should be sufficient to fully fund the dividends and (2) the
prospective rate of earnings retention by the organization appears consistent
with capital needs, asset quality, and overall financial condition. First
Financial has complied with the first guideline since its organization in 1983
and believes it has also complied with the second guideline.
6455
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DIRECTORS62
Directors
- ---------
After the Merger, Sand Ridge Financial'smerger, Hebron Bancorp's Board of Directors will cease to
exist and First Financial's Board of Directors will be the Board of Directors
for the Surviving Corporation, except that Bruce E. Leep, a member of Sand Ridge
Bank's Board of Directors, will be appointed to First Financial's Board promptly
after the Effective Time.effective time for the merger with Sand Ridge Financial. First
Financial does NOT have a similar agreement with Hebron Bancorp, Inc.
The number of directors of First Financial can be no less than nine and
no more than 25. First Financial currently has 15 directors, not including the
Sand Ridge Bank director who will be appointed to First Financial's Board
promptly after the Effective Time,Mr.
Leep, divided into three classes of directors. The size of the Board can be
increased or decreased at any time by:
a. the affirmative vote of two-thirds (2/3rds) of the whole
authorized number of directors, or
b. the affirmative vote of the holders of at least two-thirds
(2/3rds) of the outstanding voting power of First Financial at
a meeting of shareholders, at which a quorum is present,
called for the purpose of electing directors.
First Financial's Board of Directors may not, under provisions of First
Financial's Regulations, increase the authorized number of directors by more
than three positions during any period between annual meetings.
First Financial directors are elected to three-year terms, with the
term of office of one class expiring each year. Shareholders of First Financial
annually elect only one of the three classes. This method of election could be
considered an impediment for a takeover of control of First Financial by third
parties.
Sand Ridge Financial's CodeHebron Bancorp's Articles of By-Laws providesIncorporation provide for a Board of
Directors of seven persons. Allno less than five and no more than fifteen persons, the exact
number to be determined by resolution adopted by a majority of the full Board of
Directors. Hebron Bancorp currently has eight directors on its Board. The
Articles of Incorporation provide that the terms of the Board members may be
staggered in accordance with Kentucky law, if approved by a resolution of the
Board of Directors. Hebron Bancorp's Board has not adopted such a resolution,
and all directors are elected by the shareholders to one-year terms at each
annual meeting, except that the Board of Directors may
fill vacancies occurring on the Board of Directors, including vacancies
resulting from an increase in the number of directors on the Board.meeting.
56
63
Nominations for the election of First Financial directors may be made
by the Board of Directors, a committee appointed by the Board of Directors or by
any shareholder entitled to vote in the election of directors. Shareholders
intending to nominate director candidates for election must deliver written
notice thereof to the Secretary of First Financial no later than (i) 90 days
prior to the date one year from the date of the immediately preceding annual
meeting of shareholders with respect to an election to be held at an annual
meeting of shareholders, or (ii) the close of business on the tenth day
following the date on which a meeting notice is first given to shareholders with
respect to an election to be held at a special meeting of shareholders. The
written notice must set forth certain information, as described in the
Regulations, concerning the shareholder and the person being nominated. Any
person not nominated in compliance with the prescribed procedures will not be
eligible for election as a director. Sand Ridge Financial's Code ofHebron Bancorp's By-Laws doesdo not describe
the method for making nominations for the election of directors.
65
70
A majority of First Financial's directors in office at any time, though
less than a majority of the whole authorized number of directors, may, by a vote
of a majority of their number, fill any director's office that is created by an
increase in the number of directors or by a vacancy. Any directors so chosen
will hold office for the remaining length of the term; a vote by First Financial
shareholders is not required. AThe affirmative vote of a majority of Sand Ridge Financial'sHebron
Bancorp's directors then in office is required to fill any vacancies in Sand Ridge Financial'sHebron
Bancorp's Board or fill any newly created director positions. Any directors so chosenA director
appointed to fill a vacancy shall serve the remainder of the predecessor's
unexpired term, which will be until the next election since board members are
elected to one year terms. A person appointed to fill a newly created director
position may hold office only until the next annual or special meetingelection of directors by the
shareholders.
Any director or the entire Board of Sand Ridge FinancialDirectors of Hebron Bancorp may be
removed, with or without cause, by the affirmative vote of at least two-thirds (2/3rds) of the
outstanding shares of Sand Ridge Financial Common Stock at a meeting of shareholders called expressly
for that purpose.purpose, by the unanimous vote of the holders of the shares then
entitled to vote at an election of directors. A First Financial director may be
removed only if a court of law finds such director guilty of a felony or if the
director has breached his or her fiduciary duty under the laws of Ohio.
First Financial's Regulations have an age limitation preventing
election or re-election of directors who have reached the age of 70 years or
older. Sand Ridge Financial'sHebron Bancorp's Articles of Incorporation and Code of By-Laws do not contain
such an age limitation, but as a matter of policy all directors in
fact resign at age 70.
QUORUM FOR SHAREHOLDERS' MEETINGSlimitation.
Quorum For Shareholders' Meetings
- ---------------------------------
Except as provided by law, the holders of record of a majority of
outstanding shares, in person or by proxy, are required for a quorum at all
First Financial and Sand Ridge FinancialHebron Bancorp shareholders' meetings.
MEETING PARTICIPATION BY USE OF COMMUNICATION EQUIPMENT
Sand Ridge Financial's Code of By-Laws allows any or all directors to
participate in a Board of Directors meeting or a committee meeting by using a
conference telephone or similar communication equipment by means of which all
persons participating in the meeting can communicate with each other. First
Financial's Articles of Incorporation and Regulations make no provision for
meeting participation using communication equipment, but Ohio statutes allow
directors to participate in a directors' meeting using such equipment.
VOTING RIGHTS57
64
Voting Rights
- -------------
The holders of Sand Ridge Financial Common StockHebron Bancorp common stock and First Financial Common Stockcommon
stock are entitled to one vote per share on all matters presented for
shareholder vote. Shareholders of First Financial or Sand Ridge Financial do notHebron Bancorp have cumulative voting rights
in the election of directors.
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71
SPECIAL MEETINGSdirectors, while shareholders of First Financial do not have
cumulative voting rights. Under cumulative voting, a shareholder may cast a
number of votes equal to the number of directors to be elected multiplied by the
number of shares owned by the shareholder. The shareholder may cast the whole
number of votes for one candidate or distribute the votes among two or more
candidates. Since First Financial does not have cumulative voting, a shareholder
may only vote for or against or abstain from voting for each candidate.
Special Meetings
- ----------------
Special meetings of the shareholders of First Financial may be called
for any purpose by the Chairman of the Board of Directors; by the President; by
the Vice President authorized to exercise the authority of the President upon
his absence, death or disability; by resolution of the directors; or by holders
of not less than 50% percent of the outstanding voting power of First Financial.
Special Meetingsmeetings of the shareholders of Sand Ridge FinancialHebron Bancorp may be called by
the President,Chief Executive Officer, by a majority of the Board of Directors, or by
shareholders holding of record not less than one-fourthone-fifth (1/4th)5th) of all shares of
Sand Ridge Financial
Common StockHebron Bancorp common stock outstanding and entitled to vote on the business
proposed to be transacted at the meeting.
The President shall also call a special meeting upon
the written request of a majority of the members of the Board of Directors or
shareholders holding of record a majority of all shares of common stock
outstanding and entitled to vote on the business for which the meeting is being
called. Any request for a special meeting shall state the purpose or purposes of
the proposed meeting.
NOTICE OF SHAREHOLDER MEETINGSNotice Of Shareholder Meetings
- ------------------------------
First Financial and Sand Ridge FinancialHebron Bancorp have similar notification
requirements. Notice of shareholder meetings shall be mailed, postage prepaid,
to every shareholder of record at the address appearing on the respective
company's books at least ten days prior to the date of the meeting. PREEMPTIVE RIGHTSNotices for
Hebron Bancorp shareholder meetings cannot be mailed more than fifty days before
the date of the meeting.
Preemptive Rights
- -----------------
As permitted by law, neither First Financial's nor Sand Ridge
Financial'sHebron Bancorp's
Articles of Incorporation provide for preemptive rights.
REDEMPTION AND ASSESSMENT58
65
Redemption And Assessment
- -------------------------
Shares of First Financial and Sand Ridge Financial Common StockHebron Bancorp common stock are not
subject to further call or assessment. A bank holding company may redeem or
purchase shares of its Common Stock with funds legally available therefor,
provided it gives prior notice to the Federal Reserve Board if the consideration
to be paid for the purchase or redemption, when aggregated with the
consideration paid for all purchases or redemptions for the preceding twelve
months, equals or exceeds 10% of its consolidated net worth. This prior
notification is not required if the bank holding company (a) exceeds the
thresholds established for a "well-capitalized" institution both before and
after the redemption, (b) received a composite "1" or "2" rating at its most
recent regulatory inspection, and (c) is not the subject of any unresolved
supervisory issues. First Financial currently meets these three requirements and
is not required to notify the Federal Reserve Board before purchasing shares of
its common stock. Redemptions may not be made when First Financial is insolvent
or, as a result of the redemption, would be rendered insolvent. Redemptions or
repurchases of Sand Ridge Financial Common StockHebron Bancorp common stock are also subject to regulatorythese
limitations.
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72
TWO-THIRDS MAJORITY VOTE REQUIRED75% Majority Vote Required
- --------------------------
The Articles of Incorporation for Sand Ridge FinancialHebron Bancorp require a two-thirds
(2/3rds)75% majority
vote of the outstanding shares of Sand Ridge Financial Common
Stock for:
a. Removal ofHebron Bancorp common stock for any or all members of the
Boardtransactions listed below, unless such action is approved and recommended to the
shareholders by at least 80% of Directors;
b. Approval of any merger or consolidation of Sand Ridge
Financial or any of its subsidiaries, except for a merger or
consolidation of one or more subsidiaries with each other or
with the holding company;
c.directors:
a. The liquidation or dissolution of Sand Ridge Financial;
d. Any sale, exchange, lease, transfer or other disposition of (but not any bona
fide security interest in or mortgage, pledge or other
encumbrance on)
all or substantially all of the assets of Sand
Ridge Financial;Hebron Bancorp;
b. The purchase, exchange, lease or other acquisition by Hebron
Bancorp or any of its subsidiaries of all or substantially all
of the assets or business of another company or person;
c. The merger or consolidation of Hebron Bancorp or any of its
subsidiaries with or into another organization, irrespective
of which organization is the surviving entity of the
transaction;
d. Any reclassification, recapitalization or other transaction
that has the effect of decreasing or increasing the number of
outstanding shares of Hebron Bancorp or its subsidiaries by
more than 25%; and
e. Any amendment or repeal of the two-thirds (2/3rds) voting
requirement forabove four items or the
adoption of any provision that is inconsistent with the above
four items.
See "Directors"The Board is required to look at other constituents other than the
adequacy of the consideration in a merger proposal and "Amendments to Articlesthe Board did review each
of the other constituencies.
59
66
The Board of Directors of Hebron Bancorp has unanimously approved and
Regulations/Coderecommended the Merger Agreement. The affirmative vote of By-Laws" of this section for discussions of those actions requiring a two-thirds
(2/3rds) affirmative votemajority of
outstanding shares of Hebron Bancorp common stock is therefore needed for
approval of the Merger Agreement.
Informal Action By Shareholders
- -------------------------------
Under Hebron Bancorp's By-Laws, any action required to be taken, or
which may be taken, at a meeting of shareholders may be taken without a meeting
if a written consent, setting forth the action to be taken, is signed by all the
shareholders entitled to vote with respect to such action. First Financial Common Stock.
AMENDMENTS TO ARTICLES AND REGULATIONS/CODE OF BY-LAWSFinancial's
Articles of Incorporation or By-Laws do not contain a similar provision. Ohio
statutes, however, allow shareholders to take action without a meeting upon
satisfaction of similar requirements.
Emergency By-Laws
- -----------------
Hebron Bancorp's By-Laws contain a set of emergency by-laws that will
take effect upon the occurrence of a natural or man-made disaster or a similar
emergency condition and, as a result of such disaster or emergency, a quorum of
the Board of Directors cannot readily be convened. Under the emergency by-laws,
any officer or director of Hebron Bancorp may call a meeting of the Board of
Directors, providing notice of the meeting to as many directors as it may be
feasible to reach using any available means of communication. The director or
directors in attendance at that meeting shall constitute a quorum. Other
emergency powers include modifying lines of succession if any or all officers of
Hebron Bancorp are rendered incapable of discharging their duties as a result of
the disaster or emergency and relocating the main office to another location.
Each of First Financial's subsidiaries have a "Business Resumption
Plan," but emergency provisions are not included in its Articles of
Incorporation or Regulations.
Amendments To Articles And Regulations/By-Laws
- ----------------------------------------------
Any provision of First Financial's Articles of Incorporation may be
amended, altered, changed or repealed by following the procedures prescribed by
the then current laws of the State of Ohio.
Any section of Sand Ridge Financial'sHebron Bancorp's Articles of Incorporation may be
amended or repealed by following the procedures prescribed by the then current
laws of the StateCommonwealth of Indiana,Kentucky, except for repeal or amendment of the
section of the Articles requiring a two-thirds (2/3rds)75% majority vote of outstanding shares of
Sand Ridge Financial Common StockHebron Bancorp common stock entitled to vote, as described in "TWO-THIRDS MAJORITY VOTE REQUIRED."75% Majority Vote
Required."
Sand Ridge Financial's Code ofHebron Bancorp's By-Laws may be amended, altered, amendedrepealed or repealedreplaced
by a majoritythe unanimous vote of the numberentire Board of authorized membersDirectors or by the shareholders of
Hebron Bancorp by following the procedures prescribed by the then current laws
of the BoardCommonwealth of Directors. Since Sand Ridge Financial's Code of By-Laws currently authorizes a
Board of seven members, the affirmative vote of four members is necessary to
alter, amend, or repeal provisions of the Code of By-Laws.
68Kentucky .
60
7367
First Financial's Regulations may be amended, altered, repealed or
replaced by the affirmative vote of at least two-thirds (2/3rds) of shares
outstanding at a meeting of shareholders called for such purpose, unless the
change or changes is recommended by the affirmative vote of two-thirds (2/3rds)
of the whole authorized number of directors. If recommended by the affirmative
vote of two-thirds (2/3rds) of the whole authorized number of directors, the
affirmative vote of a majority of the outstanding shares will be required for
approval.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROLProvisions Affecting Business Combinations And Changes In Control
- -----------------------------------------------------------------
Ohio law governs the rights of shareholders of First Financial. Chapter
1704 of the Ohio Revised Code (the "ORC") may be viewed as having an
anti-takeover effect. This statute, in general, prohibits an "issuing public
corporation," the definition of which includes First Financial, from entering
into a "Chapter 1704 Transaction" with the beneficial owner, or affiliates of
such beneficial owner, of 10.0% or more of the outstanding shares of the
corporation (an "interested shareholder") for at least three years following the
date on which the interested shareholder attains such 10.0% ownership, unless
the board of directors of the corporation approves, prior to such person
becoming an interested shareholder, either the transaction or the acquisition of
shares resulting in a 10.0% ownership position. A "Chapter 1704 Transaction" is
broadly defined to include, among other things, a merger or consolidation with;
a sale of substantial assets to; or the receipt of a loan, guaranty or other
financial benefit, which is not proportionately received by all shareholders,
from the interested shareholder. Following the expiration of such three-year
period, a Chapter 1704 Transaction with the interested shareholder is permitted
only if either (i) the transaction is approved by the holders of at least
two-thirds of the voting power of the corporation or such different proportion
as is set forth in the corporation's articles of incorporation, including a
majority of the outstanding shares excluding those owned by the interested
shareholder, or (ii) the business combination results in the shareholders other
than the interested shareholder receiving a prescribed "fair price" for their
shares. One significant effect of Chapter 1704 is to encourage a person to
negotiate with the board of directors of a corporation prior to becoming an
interested shareholder.
In addition, Section 1707.043 of the ORC requires a person or entity
that makes a proposal to acquire the control of a corporation to repay to that
corporation any profits made from trades in the corporation's stock within
eighteen months after making the control proposal.
Section 1701.831 of the ORC (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person, including any individual, partnership, corporation,
limited liability company, society, association or two or more persons who have
a joint or common interest, of shares of a corporation that, when added to all
other shares of the corporation that may be voted, directly or indirectly, by
the acquiring person, would entitle such person to exercise or direct the
exercise of 20.0% or more, but less than 33-1/3%, of the voting power of the
corporation in the election of directors or 33-1/3% or more, but less than a
majority, of such voting power or a majority or more of such voting power. Under
the
61
68
Control Share Acquisition Statute, the control share acquisition must be
approved in advance by the holders of a majority of the outstanding voting
shares represented at a meeting at which a quorum is
69
74 present and by the holders
of a majority of the portion of the outstanding voting shares represented at
such a meeting excluding the voting shares owned by the acquiring shareholder
and certain "interested shares," including shares owned by officers elected or
appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.
The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant to the shareholders of First Financial the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of First Financial were
before them and, most importantly, that the interests of all shareholders will
be taken into account in connection with such vote and the probability will be
increased that they will be treated equally regarding the price to be offered
for their common shares if the implementation of the proposal is approved.
The Control Share Acquisition Statute applies not only to traditional
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that the transaction must
be authorized at a special meeting of shareholders, at which a quorum is
present, by the affirmative vote of the majority of the voting power represented
and by a majority of the portion of such voting power excluding interested
shares. Any corporate defense against persons seeking to acquire control may
have the effect of discouraging or preventing offers which some shareholders
might find financially attractive. On the other hand, the need on the part of
the acquiring person to convince the shareholders of First Financial of the
value and validity of the offer may cause such offer to be more financially
attractive in order to gain shareholder approval.
In addition, Section 1701.59 of the ORC provides that, in determining
what such director reasonably believes to be in the best interests of the
corporation, the director may consider, in addition to the interests of the
corporation's shareholders, any of the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the State of Ohio and the
United States, community and societal considerations and the long-term as well
as the short-term interests of the corporation and its shareholders, including
the possibility that these interests may be best served by the continued
independence of the corporation.
Although First Financial believes that these provisions are in its best
interests, you should be aware that such provisions could be disadvantageous to
you because the overall effect of these statutes may be to render more difficult
or discourage the removal of incumbent management or the assumption of effective
controls by other persons.
7062
75
FIRST FINANCIAL SHAREHOLDER RIGHTS PLAN69
First Financial Shareholder Rights Plan
- ---------------------------------------
On November 26, 1993, First Financial adopted a shareholder rights plan
(the "Plan") and declared a dividend of one right on each outstanding share of
First Financial Common Stockcommon stock ("Right") to shareholders of record as of December
6, 1993. Each share of First Financial Common Stockcommon stock issued after December 6,
1993 will include one Right. Under the Plan, the Rights will actually be
distributed only if one or more of certain designated actions involving First
Financial Common Stockcommon stock occur. See Note 18 of First Financial's 19971998 Financial
Statements for more information on the Plan.
TRANSFER AGENT AND REGISTRARTransfer Agent and Registrar
- ----------------------------
The registrar and transfer agent for First Financial Common Stockcommon stock is
The Registrar and Transfer Company, Cranford, New Jersey.
7163
7670
ADJOURNMENT OF THE SPECIAL MEETING
The shareholders of Sand Ridge FinancialHebron Bancorp are being asked to approve a
proposal to permit the adjournment of the Special Meeting,special meeting, if necessary, to
solicit additional proxies with respect to the approval of the Merger Agreement.
The Merger Agreement must be approved by the affirmative vote of at least two-thirdsa
majority of the outstanding shares of Sand Ridge Financial Common Stock.Hebron Bancorp common stock. If such
matter does not receive the requisite number of proxy votes at the Special
Meetingspecial
meeting and does not receive a sufficient number of negative proxy votes to
assure the failure of the matter, the Board of Directors may decide to adjourn
the Special Meetingspecial meeting to solicit additional proxies. If the Board of Directors
decides to adjourn the Special Meetingspecial meeting with respect to the Merger Agreement, the
Chairman of the Special Meetingspecial meeting will request a motion that the Special Meetingspecial meeting
be adjourned for up to 30 days. An adjournment of up to 30 days would not
require either the setting of a new meeting date or the giving of notice of the
adjourned meeting.
Each proxy given in connection with the Special Meetingspecial meeting will be voted
on a motion for adjournment in accordance with the instructions contained
therein. If no contrary instructions are given, each proxy will be voted in
favor of any motion to adjourn the Special Meeting.special meeting. The holders of the majority
of the shares of Sand Ridge FinancialHebron Bancorp represented in person or by proxy at the Special Meetingspecial
meeting will be required to approve a motion to adjourn the Special
Meeting.special meeting.
If a motion to adjourn the Special Meetingspecial meeting is approved, no vote will be
taken on the Merger Agreement at the Special Meetingspecial meeting on April 22,May __, 1999 but the
Merger Agreement will be voted upon at the adjourned meeting. Unless revoked
prior to its use, any proxy solicited for the Special Meetingspecial meeting will continue to
be valid and will be voted in accordance with the instructions contained therein
at the adjourned meeting.
Since the Board of Directors recommends that the shareholders vote for
the Merger Agreement, the Board of Directors similarly recommends that the
shareholders vote FOR the proposal to adjourn the Special Meeting,special meeting, which will
facilitate the approval of the Merger Agreement. Such an adjournment would be
disadvantageous to shareholders who oppose the Merger Agreement because the
adjournment will give Sand Ridge FinancialHebron Bancorp additional time to solicit votes in favor
of the Merger Agreement, thereby increasing the chances of passing the Merger
Agreement proposal. Sand Ridge FinancialHebron Bancorp has no reason to believe that an adjournment
of the Special Meetingspecial meeting will be required.
If a quorum is not present at the Special Meeting,special meeting, none of the
proposals will be acted upon, and the Board of Directors will adjourn the
Special Meetingspecial meeting to a later date in order to solicit additional proxies to assure
the presence of a quorum. The proposal to approve a motion to adjourn the
Special Meetingspecial meeting does not apply to an adjournment relating to the absence of a
quorum.
7264
7771
EXPERTS
The consolidated financial statements of First Financial incorporated
by reference in First Financial's Annual Report on Form 10-K for the year ended
December 31, 1997,1998, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Sand Ridge FinancialHebron Bancorp at December 31, 1997 and 1996June 30,
1998 and for the yearsyear ending December 31, 1997, 1996 and
1995June 30, 1998 appearing in this Proxy
Statement-Prospectus have been audited by Crowe, Chizek and Company LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the shares of First Financial Common Stockcommon stock to be issued
in the Mergermerger described herein and certain additional legal matters will be
passed upon by Frost & Jacobs LLP, 2500 PNC Center, 201 East Fifth Street,
Cincinnati, Ohio 45202. BarnesFrost & Thornburg, 600 1st Source Bank Center, 100 North Michigan,
South Bend, Indiana 46601-1632Jacobs LLP will also issue the tax opinion.
Stites & Harbison, 250 West Main Street, Suite 2300, Lexington,
Kentucky 40507 will pass upon certain legal matters in connection with the
Mergermerger for Sand Ridge Financial and issue the tax opinion.
73Hebron Bancorp.
65
7872
WHERE YOU CAN FIND MORE INFORMATION
First Financial files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
document we file at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them which means that we can disclose important information to you by
referring you to other documents. The information incorporated by reference is
considered to be part of this prospectus and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. First Financial's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "First Financial Form
10-K");1998;
2. First Financial's Quarterly Report on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 1998;
3. The following information set forth in the 1997"Management's
Discussion and Analysis of Financial Condition and Results of
Operations" section of the 1998 Annual Report of First
Financial to its shareholders:
a. The information in the table set forth on page 5028
under the caption " Quarterly"Quarterly Financial And Common
Stock Data."
b. The information in the table set forth on page 242
under the caption "Table 1 - Financial Summary."
c. The information set forth on pages 231 through 319 under
the caption "Management's Discussion And Analysis Of
Financial Condition And Results of Operations."
4. First Financial's report on Form 8-K filed March 26, 1998,
discussing issues concerning First Financial's Year 2000
preparations.
5. First Financial's report on Form 8-K filed August 31, 1998,
regarding the announcement of two stock repurchase programs.
74
79
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Secretary
First Financial Bancorp.
Third and High Streets
Hamilton, Ohio 45011
(513) 867-4700
You should rely only on the information incorporated by reference or
provided in this Proxy Statement-Prospectus. First Financial has not authorized
anyone else to provide you with different information. First Financial is not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this Proxy
Statement-Prospectus is accurate as of any date other than the date on the front
of this document.
7566
80
SAND RIDGE73
SELECTED FINANCIAL CORPORATIONDATA
HEBRON BANCORP, INC.
For the Six Months Ended For the Year Ended
December 31, June 30,
------------ --------
(DOLLAR AMOUNTS OTHER THAN PER SHARE DATA IN 1998 1997 1998 1997 1996
THOUSANDS) ---- ---- ---- ---- ----
Summary of Operations
- ---------------------
Interest income $ 4,002 $ 4,005 $ 7,916 $ 7,511 $ 7,064
Tax equivalent adjustment (1) 89 63 139 68 70
-------- -------- -------- -------- --------
Interest income-tax equivalent 4,091 4,068 8,055 7,579 7,134
Interest expense 2,071 1,803 3,668 3,521 3,573
-------- -------- -------- -------- --------
NET INTEREST INCOME-TAX EQUIVALENT $ 2,020 $ 2,265 $ 4,387 $ 4,058 $ 3,561
======== ======== ======== ======== ========
Interest income $ 4,002 $ 4,005 $ 7,916 $ 7,511 $ 7,064
Interest expense 2,071 1,803 3,668 3,521 3,573
-------- -------- -------- -------- --------
Net interest income $ 1,931 $ 2,202 $ 4,248 $ 3,990 $ 3,491
Provision for loan losses 60 60 120 156 288
Noninterest income 273 212 484 392 408
Noninterest expenses 1,283 1,251 2,361 2,073 2,005
-------- -------- -------- -------- --------
Income before income taxes $ 861 $ 1,103 $ 2,251 $ 2,153 $ 1,606
Income tax expense 230 319 642 692 454
-------- -------- -------- -------- --------
Earnings before minority interest $ 631 $ 784 $ 1,609 $ 1,461 $ 1,152
Minority interest in earnings 17 20 40 37 29
-------- -------- -------- -------- --------
NET EARNINGS $ 614 $ 764 $ 1,569 $ 1,424 $ 1,123
======== ======== ======== ======== ========
PER SHARE DATA
Net earnings - basic $ 10.48 $ 13.06 $ 26.83 $ 24.34 $ 19.20
Net earnings - diluted $ 10.48 $ 13.06 $ 26.83 $ 24.34 $ 19.20
Cash dividends declared $ 5.50 $ 5.00 $ 5.00 $ 4.00 $ 2.50
Average common shares outstanding
(in thousands) 59 59 59 59 59
Selected Period-End Balances
- ----------------------------
Total assets $111,658 $ 99,067 $104,070 $ 97,021 $ 95,293
Earnings assets 107,709 97,960 100,470 93,125 91,410
Investment securities held to maturity 2,862 4,164 3,346 4,849 5,928
Investment securities available for sale 31,065 16,349 22,884 14,906 20,410
Loans, net of unearned income 69,518 73,942 69,824 68,855 64,075
Deposits 96,369 83,832 88,365 82,154 83,065
Noninterest bearing demand deposits 10,179 9,824 9,560 8,145 7,065
Short-term borrowings 1,283 1,933 1,772 3,063 2,050
Long-term borrowings 1,730 1,127 2,057 1,162 1,226
Shareholders' equity 11,799 10,323 11,078 9,721 8,108
Selected Ratios
- ---------------
Loans to deposits 72.14% 88.20% 79.02% 83.81% 77.14%
Net charge offs to loans .06% .00% .00% .02% .23%
Shareholders' equity to
Total assets 10.57% 10.42% 10.64% 10.02% 8.51%
Deposits 12.24% 12.31% 12.54% 11.83% 9.76%
Return on average assets (2) 1.15% 1.57% 1.58% 1.49% 1.24%
Return on average equity (2) 10.72% 15.03% 15.11% 15.55% 14.07%
(1) Tax equivalent adjustment was calculated using a 34.0% tax rate in all
periods presented.
(2) Interim periods annualized
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended
December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------
The following discussion and analysis provides information aboutis presented to facilitate the
consolidatedunderstanding of the financial conditionposition and results of the operations of Sand Ridge
Financial Corporation (the "Corporation")Hebron
Bancorp, Inc. (HBI) and its wholly-owned subsidiary, Sand
RidgeHebron Deposit Bank (the "Bank")Bank). It
identifies trends and material changes that occurred during the reportingreported periods and
should be read in conjunction with the consolidated financial statements and
accompanying notes.
EARNINGS SUMMARY
ConsolidatedBUSINESS OF HEBRON BANCORP, INC.
HBI is a one-bank holding company which conducts no direct business activities.
All business activities are performed by the Bank. The Bank operates banking
locations and conducts its operations in Hebron, Boone County, Kentucky and
adjacent counties in Kentucky. HBI's consolidated results of operations are
dependent upon net interest income, which is the difference between the interest
income on interest earning assets and the interest expense on interest bearing
liabilities. Principal interest earning assets are securities and commercial,
agricultural, real estate mortgage and consumer loans. Interest bearing
liabilities consist of interest bearing deposit accounts and short-term and
long-term borrowings. Other sources of income include fees charged to customers
for a variety of loan and deposit services. Operating expenses consist primarily
of employee salaries and benefits and occupancy and equipment expenses. HBI's
results of operations are significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies.
As of December 31, 1998, HBI had total assets of approximately $111.7 million,
total deposits of approximately $96.4 million, and shareholders' equity of
approximately $11.8 million. HBI and the Bank employed 33 persons on a full-time
equivalent basis at December 31, 1998.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998 TO
DECEMBER 31, 1997
Net income decreased $150,000 to $614,000 for the six months ended December 31,
1998 as compared to net income of $764,000 recorded in the Corporationsame period in 1997.
The decrease was primarily the result of a $271,000 (12.3%) decrease in net
interest income and a $32,000 (2.6%) increase in non-interest expenses partially
offset by a $61,000 (28.8%) increase in non-interest income and a $89,000
(27.9%) decrease in income tax expense. Returns on average assets and average
equity were 1.15% and 10.72%, respectively, in 1998 as compared to 1.57% and
15.03% in 1997. Earnings per share decreased to $10.48 in 1998 from $13.06 in
1997.
F-2
75
Net interest income decreased from $2.2 million for the yearsix months ended
December 31, 1997 to $1.9 million for the same period in 1998. The decrease was
$4,993,000 or $83.21 per share. This represented anthe result of a $3,000 decrease in total interest income combined with a
$268,000 increase in total interest expense. Non-interest income increased from
$212,000 in 1997 to $273,000 in 1998 primarily due to a $43,000 increase in
gains on the sale of 2.23% or
$109,000 over 1996 earnings.securities.
Non-interest expenses increased from $1,251,000 in 1997 to $1,283,000 in 1998
representing a 2.6% increase. The provision for income taxes decreased $89,000
from $319,000 in 1997 to $230,000 in 1998 due to a $242,000 decrease in income
before taxes and a $74,000 increase in tax-exempt interest. The effective income
tax rate for the six months ended December 31, 1998 and 1997 was 26.7% and
$29.0%, respectively.
FINANCIAL CONDITION
COMPARISON OF JUNE 30, 1998 TO DECEMBER 31, 1998
Total assets increased 7.3% to $111.7 million as of December 31, 1998 from
$104.1 at June 30, 1998. Cash and cash equivalents increased slightly from $6.4
million to $6.5 million and securities increased from $26.2 million to $33.9
million while net loans decreased marginally from $69.8 million to $69.5
million. Deposits increased from $88.4 million to $96.4 million. While the mix
of borrowed funds varies from period to period depending on the volume of
securities sold under agreements to repurchase, total borrowings other than
deposits decreased to $3.0 million from $3.8 million primarily due to a $500,000
decrease in securities sold under agreements to repurchase with the remaining
being scheduled maturities of advances from the Federal Home Loan Bank.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED JUNE 30, 1998 TO JUNE 30, 1997
GENERAL. Net income for 1996 was $4,884,000 ($81.39 per
share) reflectingincreased 10.2% or $145,000 over 1997 to $1,569,000 in 1998.
The increase is primarily the result of a 17.46%$258,000 or $726,000 increase over 1995 earnings of $4,158,000
($69.30 per share). The6.5% increase in net
interest income during 1996 was impactedand a $92,000 increase in non-interest income partially offset
by growth in interest-earning assets but more significantly from a reduction$288,000 increase in noninterest expense compared to 1995.
Two often cited ratios for analysis of financial institutions areexpenses. Comparing the same periods,
return on average assets (ROA) andincreased to 1.58% from 1.49% while return on average
equity (ROE)decreased to 15.11% from 15.55%. ROA was 1.13%, 1.20%
and 1.09% for the years ended December 31, 1997, 1996 and 1995 respectively. ROE
for 1997 was 13.74%, 1996 was 15.06% and 1995 was 15.24%.
RESULTS OF OPERATIONS (1997 comparedEarnings per share increased to 1996)
Net$26.83
from $24.34.
F-3
76
NET INTEREST INCOME. HBI's primary source of revenue is its net interest income,
the Corporation's principal source of earnings,which is the excess ofdifference between the interest received fromon its earning assets overand
the interest paid on interest-bearing liabilities. The Corporation's netthe funds acquired to support those assets. Loans made to
businesses and individuals are the primary interest income for the
years 1995 through 1997 is shownearning assets, followed by
investment securities and federal funds sold in the table "Analysis of Net Interest Income"
that is incorporated in this document.inter-bank market. Deposits
are the primary interest bearing liabilities used to support the interest
earning assets. The amountlevel of net interest income is determinedaffected by both the
balances and mix of interest earning assets and interest bearing liabilities,
the changes in their corresponding yields and costs, by the volume of interest
earning assets funded by noninterest bearing deposits, and mixthe level of capital.
HBI's long term objective is to manage this income to provide the largest
possible amount of income while balancing interest rate, credit and liquidity
risks.
Net interest income on a tax-equivalent basis increased 8.1% or $329,000 to $4.4
million in 1998 as compared to $4.1 million in 1997. The increase is attributed
primarily to the 4.2% or $3.9 million overall growth in average interest earning
assets which generally earn at a higher rate than the rate paid on the
corresponding growth in interest bearing liabilities. Average loans increased
$5.2 million due primarily to continued residential real estate loan demand and
was funded primarily by an increase of $4.2 million in average deposits and a
$1.2 million increase in average stockholders' equity. HBI's emphasis on
attracting new loans rather than investing in securities also positively
impacted net interest income because of the higher yield earned on loans over
that earned on investment securities.
The net interest spread increased one basis point from 3.73% in 1997 to 3.74% in
1998, while the net interest margin increased 17 basis points from 4.41% to
4.58%. The increase in the net interest margin is primarily due to the $3.2
million increase in funding of earning assets with non-interest bearing deposits
and capital.
The following table sets forth for the rates earned on suchyears ended June 30, 1998 and 1997 the
average balances of major categories of interest earning assets and interest
bearing liabilities, interest income earned and interest expense paid during
such periods and the volume, mix andrelated weighted average rates paid for the deposits and borrowed money that support the earning assets.HBI.
F-4
77
AVERAGE BALANCE SHEETS AND AVERAGE INTEREST RATES
TABLE 1
(Dollars in Thousands)
--------------------1998----------------- --------------------1997---------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Earnings assets:
Investment securities
Taxable $ 13,581 $ 816 6.01% $ 19,250 $ 1,215 6.31%
Tax-exempt (1) 7,934 520 6.55 4,192 253 6.04
Federal funds sold 2,686 150 5.58 2,090 114 5.45
Loans (2,3) 71,680 6,569 9.16 66,452 5,997 9.02
----------- --------- ------- ----------- --------- -------
Total earning assets $ 95,881 $ 8,055 8.40% $ 91,984 $ 7,579 8.24%
=========== ========= ======= =========== ========= =======
Allowance for loan losses (897) (755)
Non-earning assets:
Cash and due from banks $ 2,314 $ 2,261
Premises and equipment 1,143 1,167
Other assets 649 621
----------- -----------
Total assets $ 99,090 $ 95,278
=========== ===========
Interest bearing liabilities
Transaction accounts $ 15,754 $ 416 2.64% $ 16,081 $ 357 2.22%
Savings accounts 8,270 185 2.24 9,062 203 2.24
Time deposits 51,402 2,890 5.62 48,071 2,678 5.57
Repurchase agreements and other
borrowed funds 3,294 177 5.37 4,914 283 5.76
----------- --------- ------- ----------- --------- -------
Total interest bearing liabilities $ 78,720 $ 3,668 4.66% $ 78,128 $ 3,521 4.51%
=========== ========= ======= =========== ========= =======
Non-interest bearing liabilities
Demand deposits $ 9,578 $ 7,583
Other liabilities 406 411
Stockholders' equity 10,386 9,156
----------- -----------
Total liabilities and stockholders'
equity $ 99,090 $ 95,278
=========== ===========
Net interest income $ 4,387 $ 4,058
========= =========
Net interest spread 3.74% 3.73%
======= =======
Net interest margin 4.58% 4.41%
======= =======
(1) Income computed on a tax equivalent basis assuming a 34% federal income tax
rate.
(2) Includes loans on non-accrual status.
(3) Also includes fee income.
F-5
78
The table "Interest Income and Expense Rate/Volume Analysis" that is incorporated in
this documentbelow describes the extent to which changes in interest rates and
changes in the volume of interest earning assets and interest-bearinginterest bearing
liabilities have affected the Corporation's netHBI's interest income and expense during the yearsperiods
indicated. For each category of interest earning assets and interest bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effecteffects of changes in both volume and rate, haswhich
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
RATE/VOLUME VARIANCE ANALYSIS - TABLE 2
(Dollars in Thousands)
1998 vs. 1997
Increase (decrease)
due to change in
Net Change Volume Rate
---------- ------ ----
Interest income:
Investment securities
Taxable $(399) $(358) $ (41)
Tax exempt 267 226 41
Federal funds sold 36 33 3
Loans 572 472 100
----- ----- -----
Total interest income $ 476 $ 373 $ 103
===== ===== =====
Interest expense:
Transaction accounts $ 59 $ (7) $ 66
Savings accounts (18) (18) --
Time deposits 212 186 26
Repurchase agreements and
other borrowed funds (106) (88) (18)
----- ----- -----
Total interest expense 147 73 74
----- ----- -----
Net interest income $ 329 $ 300 $ 29
===== ===== =====
NONINTEREST INCOME. Noninterest income was $32,122,000increased $92,000 in 1997, an increase of $3,190,000 or
11.03% over 1996. This change was a result of an increase in both the average
interest-earning assets and the yield on earning assets. Average outstanding
loan, securities available for sale and federal funds sold increased
$11,680,000, $12,569,000 and $11,322,000 compared to 1996. The yield on loans,
securities available for sale and federal funds sold increased 0.20%, 0.22% and
0.31% compared to 1996.
F-1
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Total interest expense was $16,257,000 in 1997, an increase of $1,785,000 or
12.33% over 1996. This change was predominately due to an increase of
$29,577,000 in average interest-bearing liabilities,1998 from an average of
$330,279,000 during 1996 to an average of $359,856,000 during 1997. The increase
in average interest-bearing liabilities was primarily due to the $29,944,000
increase in other time deposits from $146,484,000 in 1996 to $176,428,000 in
1997.
Net interest income, the difference between total interest income and total
interest expense, increased $1,405,000 during 1997 due to increases in both
volume and rate as described above. The increased interest income was greater
than the increased interest expense, thereby causing net interest income to
increase.
The interest rate spread and the net interest margin are two ratios frequently
used to measure differences in interest income and interest expense. The
interest rate spread (the average rate on interest-earning assets minus the
average rate on interest-bearing liabilities) was 3.11% for 1997 and 3.12% for
1996, a difference of one basis point. The net interest margin (net interest
income divided by average interest-earning assets) increased two basis points to
3.77% during 1997 from 3.75% during 1996.
The Corporation records a provision for loan losses in the Consolidated
Statement of Income to provide for expected credit losses. Actual losses on
loans are charged against the allowance for loan losses, which is an allowance
accumulated on the Consolidated Balance Sheet. The recorded values of
uncollectable loans are removed from the Consolidated Balance Sheet and referred
to as charge-offs and, after netting out recoveries on previously charged off
assets, become net charge-offs. The Corporation's policy is to charge off loans
when, in management's opinion, collection of principal is in doubt. All loans
charged off are subject to continuous review and concerted efforts are made to
maximize recovery.
Management records the provision for loan losses in amounts sufficient to result
in an allowance that will cover future risks believed to be inherent in the loan
portfolio. Management's evaluation in establishing the provision includes such
factors as historical loss and recovery experience, estimated future loss for
loans, known deterioration in loans and prevailing economic conditions that
might have an impact on the portfolio. The evaluation is inherently subjective
as it requires material estimates, including the amounts and timing of future
cash flows expected to be received on impaired loans, that may be susceptible to
significant change. The evaluation of the factors is completed by an internal
loan review analyst and reviewed by a group of senior officers from the
financial and lending departments.
The provision for loan losses increased $360,000 from $1,440,000 in 1996 to
$1,800,000$392,000
in 1997. The primary source of other income is service charge income on deposit
products which decreased from $302,000 in 1997 to $295,000 in 1998. The overall
increase during 1997 was duein noninterest income is attributable to the increase in total
loans, net of deferred fees, of 5.22% and also provided for a 28 basis point
increase in the allowance to total loans ratio. The allowance at December 31,
1997, was $3,252,000 or 1.19% of total loans which compares to $2,367,000 or
0.91% of total loans at December 31, 1996. The increase in both the provision
and the allowance for loan losses during 1997 was primarily due to the growth in
the loan portfolio, a need to replenish the allowance for loan losses for
$915,000 in net charge-offs recorded during 1997 and increasing the allowance
for risks related to a $600,000 increase in total impaired loans, excluding
impaired Bennett Funding loans (see discussion of Bennett Funding loans later
herein), from $1.3 million at December 31, 1996 to $1.9 million at December 31,
1997. The allowance allocated to these impaired loans increased $157,000 from
$282,000 at December 31, 1996 to $439,000 at December 31, 1997.
F-2
82
Impaired loans totaled $2.8 million at December 31, 1997, including $862,000
related to Bennett Funding, compared to $5.8 million at December 31, 1996,
including $4.5 million related to Bennett Funding. The decline in the balance of
impaired Bennett Funding loans from December 31, 1996 to December 31, 1997 was
due to significant payments received during 1997 under a settlement agreement
with the Bennett Funding bankruptcy trustee. No portion of the allowance for
loan losses was allocated for the Bennett Funding loans at December 31, 1997 or
1996 as full paymentgains on the
remaining balance, after recording a $1.7 million
charge-offsale of investment securities which increased from $3,000 in 1996, was expected based on the agreement with the bankruptcy
trustee.
The level of nonaccrual loans is an important element1997 to $94,000 in
assessing asset
quality. Loans are classified as nonaccrual when, in the opinion of management,
collection of interest is doubtful. Nonaccrual loans decreased $3.2 million1998.
NONINTEREST EXPENSE. Noninterest expenses increased from $5.8 million at December 31, 1996 to $2.6 million at December 31, 1997. The
decrease in nonaccrual loans during 1997 occurred primarily as a result of $3.6$2.1 million in settlement payments received on the Bennett Funding loans during
1997.
Noninterest income increased $574,000 or 17.52% in 1997 as compared to
1996. Net
realized gain (loss) on sales of securities available for sale increased
$113,000 from a loss of $28,000 during 1996 to a gain of $85,000 during 1997.
During 1997, the Corporation received $17.2$2.4 million in proceeds from sales of
securities available for sale. Service charges on deposit accounts increased
$451,000 or 26.63% over 1996 and represented the majority of the increase in
noninterest income. This increase was achieved as the result of implementing a
free checking account product and replacing the lost monthly service charge
income with higher services charges for overdraft and non-sufficient fund
transactions.
Noninterest expense increased $1.7 million or 18.21% in 1997 as compared to
1996.1998. The largestprimary component of noninterest expense is salaries
and employee benefits expense which increased $770,000 or 15.93%$38,000 (3.3%) in 1998 to $1.2
million. The remainder of the increase is attributable to increased costs of
occupancy and equipment, miscellaneous taxes, data processing, professional
services, and various other expenses.
INCOME TAXES. The provision for income taxes decreased $51,000 in 1998 from
$693,000 in 1997 as compared to 1996$642,000 in 1998. The decrease is primarily due to additional employees neededa
$195,000 increase in interest income on tax-exempt securities reported in 1998.
The effective tax rates for 1998 and 1997 were 28.5% and 32.2%, respectively.
F-6
79
FINANCIAL CONDITION
COMPARISON OF JUNE 30, 1998 TO JUNE 30, 1997
GENERAL. Total assets increased $7.1 million, (7.3%) from $97.0 million at June
30, 1997 to service a 9.49%$104.1 million at June 30, 1998. Investment securities increased
$6.5 million and net loans increased $1.0 million. The growth in total assets
normal annual wage and salary increases and related increases in
employee benefits. Furniture and equipment depreciation expense increased
$146,000 or 16.58% in 1997 as compared to 1996. Marketing expense increased
$148,000 or 42.67% primarily due to increased promotional efforts to generate
home equity line of credit loans and deposits. Other expenses also increased
$457,000 or 24.39% in 1997 as compared to 1996 primarily due to increases in ATM
interchange fees, credit card processing fees, telephone expense and postage.
Income tax expense decreased $220,000 in 1997 as compared to 1996. This decrease
was primarily due to anfunded by a $6.2 million increase in total deposits.
LOANS. Loans represent HBI's largest earning asset and as of $622,000 in tax exempt interest income that
resulted in a $211,000 reductionJune 30, 1998
represented approximately 66% of income tax expense in 1997 as compared to
1996.
Nettotal assets. During the year ended June 30,
1998, the average balance of net loans increased $12.67.9% to $71.7 million or 4.93%from
$66.5 million during 1997. The majority of the increase was from growth in real estate-mortgage loans which increased $9.2
million or 10.75%. This increase was achieved as the Corporation took advantage
of continued mortgage loan demand for both new and loan refinancing taking place
during 1997 due to the low interest rate environment during 1997 as compared to
historical interest rates.
Securities available for sale increased $30.3 million or 24.38% during 1997. All
securities are classified as available for sale at December 31, 1997 and are
available for liquidity and asset-liability management purposes. The Corporation
follows a conservative investment policy, investing primarily for interest rate
risk management and liquidity management purposes and to also provide additional
interest income. U.S. Treasury securities, generally considered to have the
least credit risk and the highest liquidity, composed 5.23% of the Corporation's
investment portfolio at December 31, 1997.
F-3
83
Another 7.30% of the securities portfolio balance at December 31, 1997 was
composed of securities issued by U.S. government agencies and corporations,
primarily the Federal Home Loan Bank (FHLB), Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National Mortgage Association (FNMA). Due to the
government guarantees, either expressed or implied, U.S. government agency and
corporate obligations are considered to have low credit risk and high liquidity.
Mortgage-backed securities (MBSs), including collateralized mortgage obligations
(CMO's), composed 39.89% of the securities portfolio at December 31, 1997. MBSs
represent participations in pools of mortgage loans, the principal and interest
payments of which are passed to the security investors. MBSs are subject to
prepayment risk, especially during periods of decreasing interest rates.
Prepayments of the underlying mortgage loans may shorten the lives of the
securities, thereby affecting yields to maturity and market values. The
Corporation invests primarily in MBSs issued by U.S. government agencies, such
as FHLMC, FNMA and Government National Mortgage Association (GNMA). Such
securities, because of government agency guarantees, are considered to have low
credit risk and high liquidity.
State, county and municipal securities composed 44.94% of the Corporation's
security portfolio at December 31, 1997. The securities are highly diversified
as to states and issuing authorities within states, thereby decreasing portfolio
risk.
The Corporation solicits deposits by offering a wide variety of savings and
transaction accounts, including checking accounts, regular savings accounts,
money market accounts and other time deposits of various maturities and rates.
Total deposits increased $17.4 million or 4.82% during 1997. The growth in
deposits was used to finance the growth in the loan and securities portfolios.
Federal funds purchased and securities sold under agreements to repurchase
increased $8.2 million and $8.0 million during 1997. These funds were also used
to help finance the growth in the loan and securities portfolios.
RESULTS OF OPERATIONS (1996 compared to 1995)
Total interest income was $28,932,000 in 1996, an increase of $1,578,000 or
5.77% over 1995. This change was a result of an increase of $24,876,000 in
average interest-earning assets offset by an 8 basis point decrease in the yield
for average interest-earning assets. Average outstanding loans and securities
available for sale increased $15,438,000 and $14,990,000 as compared to 1995.
Total interest expense was $14,472,000 in 1996, an increase of $414,000 or 2.94%
over 1995. This change was predominately due to an increase of $15,914,000 in
average interest-bearing liabilities, from an average of $314,365,000 during
1995 to an average of $330,279,000 during 1996. The increase in average
interest-bearing liabilities was primarily due to the $26,063,000 increase in
other time deposits from $120,421,000 in 1995 to $146,484,000 in 1996, offset by
a decrease in advances from FHLB of $8,459,000 from $11,101,000 in 1995 to
$2,642,000 in 1996. The increase of average interest-bearing liabilities were
partially offset by a nine basis point decrease in the cost of average
interest-bearing liabilities compared to 1995.
Net interest income, the difference between total interest income and total
interest expense, increased $1,164,000 during 1996 primarily due to increases in
the volume of net interest-earning assets as described above. The increased
interest income was greater than the increased interest expense, thereby causing
net interest income to increase.
F-4
84
The interest rate spread and the net interest margin are two ratios frequently
used to measure differences in interest income and interest expense. The
interest rate spread (the average rate on interest-earning assets minus the
average rate on interest-bearing liabilities) was 3.12% for 1996 and 3.11% for
1995, a difference of one basis point. The net interest margin (net interest
income divided by average interest-earning assets) increased seven basis points
to 3.75% during 1996 from 3.68% during 1995.
The provision for loan losses increased from $1,040,000 in 1995 to $1,440,000 in
1996. The provision recorded during 1996 was $400,000 greater than 1995's
provision. The increase during 1996 was due to the increase
in total loans of
4.82% and to replenish the allowance forresidential real estate loan losses for $2.4 million in net
loan charge-offs during 1996. Of these net charge-offs, $1.7 million resulted
from the Bennett Funding loan relationship. The allowance for loan losses atportfolio.
At December 31, 1996, was $2,367,000 or 0.91%1998, the Bank had no concentrations of loans to borrowers of
similar activities that exceeded 10% of total loans which compares to
$3,372,000 or 1.36% or total loans at December 31, 1995. The reduction in the
allowance for loan losses during 1996 was a result of the net charge-offs
related to the Bennett Funding loan relationship.
Of the $5.8 million balance of impaired and nonaccrual loans as of December 31,
1996, approximately $4.5 million related to the Bennett Funding loan
relationship and reflected a reduction of $1.7 million which was charged-off
during 1996. The reason for the impairment classification is that Bennett
Funding had filed for Chapter 11 bankruptcy during 1996. The Corporation had
purchased pools of numerous leases secured by small business equipment such as
copy and facsimile machines from Bennett Funding. Bending Funding acts as
servicing agent to collect lease payments for the Corporation. The Corporation
negotiated a settlement with the bankruptcy trustee and anticipates full
recovery of the loan balances remaining after recording the $1.7 million
charge-off and, therefore, no portion of the allowance for loans losses balance
at December 31, 1996 was allocated for the Bennett Funding loan relationship.
Noninterest income increased $278,000 or 9.27% in 1996. Net realized gain (loss)
on sales of securities available for sale decreased $183,000 from a gain of
$155,000 during 1995 to a loss of $28,000 during 1996. The Corporation received
$29.0 million in proceeds on sales of securities available for sale during 1996.
Service charges on deposit accounts increased $107,000 or 6.72% over 1995
primarily due to an increase in average deposits during 1996. Other income
increased $266,000 or 48.45% from $549,000 in 1995 to $815,000 in 1996. This
increase was primarily due to a $45,000 increase in credit life commission
income, a $41,000 increased credit card merchant discount fees, and $142,000 in
gains on sales of fixed assets during 1996.
Noninterest expense decreased $68,000 or .71% in 1996. The largest component of
noninterest expense is salaries and employee benefits, which increased $125,000
or 2.66% over 1995 primarily due to normal annual wage and salary increases.
FDIC insurance decreased from $355,000 in 1995 to $12,000 in 1996 and was the
primary factor for the decrease in total noninterest expense. The decrease in
FDIC insurance was a result of the FDIC restructuring the bank and thrift
insurance programs resulting in lower premiums for well capitalized banks.
Income tax expense increased $385,000 for 1996 compared to 1995. This increase
was primarily due to an increase of $1,110,000 in income before income taxes
from 1995 to 1996.
F-5
85
LIQUIDITY
The Corporation manages its liquidity position through the Bank. The purpose of
liquidity management is to fund loan demand, meet the withdrawal needs of
customers and provide for operating expenses. Sources of liquidity are cash and
funds due from financial institutions, interest-bearing balances with financial
institutions, federal funds sold, sale and/or maturity of securities classified
as available for sale and principal repayments on loans. The Corporation also
has a borrowing relationship with the Federal Home Loan Bank of Indianapolis.
This relationship allows the Corporation to borrow funds using the Bank's real
estate mortgage loans, held in portfolio, as collateral. This ability to borrow
funds allows for another source of liquidity.
Management believes its current liquidity level is sufficient to meet
anticipated growth.
The consolidated statements of cash flows indicates the concerted level of
emphasis management has placed upon maximizing interest income from earning
assets. While cash and due from financial institutions have fluctuated from a
low of $13,326,000 at the beginning of 1995 to a high of $26,076,000 at year end
1996, to $23,010,000 at December 31, 1997, management has structured its balance
sheet to increase the overall net interest margin on average interest-earning
assets by using funds obtained from deposits and borrowings to invest in the
origination of loans and the purchase of securities. Cash and due from financial
institutions at reporting periods may fluctuate due to various operational
activities; however, the average balance of cash and due from financial
institutions has been $11,659,000 during 1995, $12,030,000 during 1996 and
$11,799,000 during 1997, demonstrating that management of liquidity and
noninterest-earning funds has been consistent.
Liquid assets include cash and due from financial institutions, securities
available for sale, federal funds sold and interest-bearing balances with
financial institutions. Core deposits are defined as customer account balances
that are loyal to a particular financial institution. Core deposits exclude
public funds and brokered deposits or "hot money."
December 31,
1997 1996
---- ----
Liquid Assets (in millions) $ 177.6 $ 150.4
Core Deposits (in millions) $ 216.5 $ 210.4
INTEREST RATE SENSITIVITY
The following schedule details the maturities and yields of interest-bearing
financial instruments at December 31, 1997, for the next five years and
thereafter. The values represent the contractual maturity of each instrument.
For loan instruments without contractual maturities, such as credit card loans,
management has allocated principal payments based upon historical trends of
payment activity. Where there is no set maturity, as in the case of some
interest-bearing liabilities, management has allocated the amounts based upon
its expectation of cash flows, incorporating internal core deposit studies and
current expectations of customer behavior. For loans, securities, and
liabilities with contractual maturities, the table presents principal cash flows
and related weighted-average interest rates by contractual maturities. The dataother than those categories
already listed in the table was aggregated by type of financial instrument - fixed and variable
rate loans, fixed and variable rate securities available for sale, fixed and
variable rate deposits, and fixed rate borrowings. The Corporation has no
interest rate swaps, interest rate caps, or interest rate floors. Therefore,
data concerning these instruments is not included in the table.
F-6
86
The primary source of market risk for the financial instruments presented is
interest rate risk. That is, the risk that an adverse change in market rates
will adversely affect the market value of the instruments. Generally, the longer
the maturity, the higher the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the
Corporation's net interest margin to swings in interest rates, to assuring
sufficient capital and liquidity to support future balance sheet growth. The
Corporation manages interest rate risk through the Asset/Liability Committee.
The Asset/Liability Committee is comprised of bank officers from various
disciplines. The Committee establishes policies and rates which lead to the
prudent investment of resources, the effective management of risks associated
with changing interest rates, the maintenance of adequate liquidity, and the
earning of an adequate return on shareholders' equity.
MARKET RISK DISCLOSURE OF SCHEDULED MATURITIES AT DECEMBER 31, 1997below.
LOAN PORTFOLIO- TABLE 3
(Dollars in Thousands)
December 31, June 30, June 30,
1998 1999 2000 2001 2002 Thereafter Total
RATE-SENSITIVE ASSETS% 1998 % 1997 %
---- - ---- - ---- -
Commercial and agricultural $ 7,983 11.5% $ 7,972 11.4% $ 8,711 12.6%
Real estate 53,431 76.9 54,733 78.4 52,587 76.4
Consumer and installment 8,104 11.6 7,118 10.2 7,557 11.0
------- ----- ------- ----- ------- -----
Total loans $69,518 100.0% $69,823 100.0% $68,855 100.0%
======= ===== ======= ===== ======= =====
The table below illustrates HBI's rate sensitivities and repricing frequency for
the commercial and agricultural loans as follows:
SELECTED LOAN DISTRIBUTION - TABLE 4
(Dollars in Thousands)
--------Six Months Ended December 31, 1998----------
(in thousands)
1 Year or Less 1 - 5 Years After 5 years Total
-------------- ----------- ------------- -----
Variable interest
Fixed rate maturities $1,864 $1,417 $ 81 $3,362
Adjustable rate repricing
frequency 4,621 -- -- 4,621
------ ------ ------ ------
$6,485 $1,417 $ 81 $7,983
====== ====== ====== ======
F-7
80
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The allowance for loan losses is
regularly evaluated by management and maintained at a level believed to be
adequate to absorb future loan losses in HBI's portfolios. Periodic provisions
to the allowance are made as needed. The amount of the provision for loan losses
necessary to maintain an adequate allowance is based upon an assessment of
current economic conditions, analysis of periodic loan reviews, delinquency
trends and ratios, changes in the mixture and levels of the various categories
of loans, historical charge-offs, recoveries, and other information. Management
believes that the allowance for loan losses is adequate. Although management
believes it uses the best information available to make allowance provisions,
future adjustments which could be material may be necessary if management's
assumptions differ from the loan portfolio's actual future performance.
The allowance for loan losses increased $121,000 during 1998 to $956,000 at June
30, 1998. The increase is primarily attributable to the $120,000 increase in
non-performing loans from June 30, 1997 to June 30, 1998. Net charge-offs for
1998 and 1997 were nominal compared to the loan portfolio and allowance for loan
losses.
SUMMARY OF LOAN LOSS EXPERIENCE - TABLE 5
(Dollars in Thousands)
Six Months
Ended
December 31, Period Ended June 30,
1998 1998 1997
---- ---- ----
Allowance for loan losses at
beginning of year $ 956 $ 835 $ 696
Charge-offs:
Commercial and agricultural 37 2 4
Real estate -- -- 6
Consumer and installment 8 12 29
----- ----- -----
Total 45 14 39
Recoveries:
Commercial and agricultural 1 11 9
Real estate -- -- --
Installment 3 4 13
----- ----- -----
Total 4 15 22
Net (charge-offs) recoveries (41) 1 (17)
----- ----- -----
Provision for loan losses 60 120 156
----- ----- -----
Allowance for loan losses end of period $ 975 $ 956 $ 835
===== ===== =====
Ratio of allowance to total net loans at the
end of the period 1.40% 1.37% 1.21%
F-8
81
The following table is management's allocation of the allowance for loan losses
by loan type. The level of the allowance and allocation is based on management's
assessment of economic conditions, past loss experience, loan volume, past due
history and other factors. Since these factors are subject to change, the
allocation is not necessarily predictive of future portfolio performance.
The allocation for the allowance for loan losses is an estimate of the portion
of the allowance that will be used to cover future charge-offs in each major
loan category, but it does not preclude any portion of the allowance allocated
to one type of loan being used to absorb losses of another loan type.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AND PERCENT
OF LOANS BY CATEGORY TO TOTAL LOANS - TABLE 6
(Dollars in Thousands)
December 31, June 30, June 30,
1998 % 1998 % 1997 %
---- - ---- - ---- -
Commercial and agricultural $590 11.5% $610 11.4% $590 12.6%
Real estate 178 76.9 148 78.4 136 76.4
Consumer and installment 207 11.6 198 10.2 109 11.0
---- ----- ---- ----- ---- -----
Total $975 100.0% $956 100.0% $835 100.0%
==== ===== ==== ===== ==== =====
ASSET QUALITY. Loans are placed on non-accrual when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that the collection of interest is
doubtful. When loans are placed on non-accrual status, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received. These loans remain on non-accrual status
until the borrower demonstrates the ability to remain current or the loan is
deemed uncollectible and is charged-off. The following table provides
information on non-performing assets.
F-9
82
NON-PERFORMING ASSETS - TABLE 7
(Dollars in Thousands)
December 31, ---June 30,---
1998 1998 1997
---- ---- ----
Loans on non-accrual status (1) $ 52,1690 $ 14,9246 $ 18,3891
Loans past due 90 days or more 170 183 68
---- ---- ----
Total non-performing loans 170 189 69
Other real estate owned -- -- --
---- ---- ----
Total non-performing assets $170 $189 $ 5,203 $ 5,972 $ 18,802 $ 115,459
Average interest rate 8.85% 8.28% 7.71% 7.80% 7.71% 7.52% 8.27%
Fixed interest rate69
==== ==== ====
Percentage of non-performing assets to
total loans 75,829 31,531 19,607 8,909 5,231 15,982 157,089
Average interest rate 9.40% 8.77% 8.81% 8.31% 7.91% 8.33% 8.98%
Variable interest rate0.24% 0.27% 0.10%
Percentage of non-performing assets to
total assets 0.15% 0.18% 0.07%
(1)The interest income that would have been earned and received on non-accrual
loans was not material.
HBI defines impaired loans to be those commercial and agricultural loans that
management believes is probable that all principal and interest amounts will not
be collected according to the loan contract. Impaired loans totaled $189,000 and
$69,000 at June 30, 1998 and 1997. The allowance related to these loans was
$88,000 and $29,000, respectively.
INVESTMENT SECURITIES. The securities portfolio consists of debt and equity
securities which provide HBI with a relatively stable source of income.
Additionally, the investment portfolio provides a balance to interest rate and
credit risks in other categories of the balance sheet. The securities portfolio
is also used as a secondary source of liquidity. HBI has classified certain
securities as held to maturity based on management's positive intent and ability
to hold such securities to maturity. All other securities have been classified
as available for sale. HBI's municipal securities provide tax-free income and
are within management's guidelines with respect to credit risk and market risk.
The municipal securities have been issued principally by Kentucky
municipalities. The U. S. Treasury and Federal Agency securities and
asset-backed securities provide a source of stable income and can be used as
collateral to secure municipal deposits and repurchase agreements.
Excluding those holdings in the investment security portfolio of U.S. Treasury
and U.S. agency securities, there were no investments in securities of any one
issuer which exceeded 10% of stockholders' equity at December 31, 1998.
F-10
83
The following tables present the carrying values and maturity distribution of
investment securities.
INVESTMENT PORTFOLIO - TABLE 8
(Dollars in Thousands)
December 31, ------June 30,-----
1997 1998 1997
---- ---- ----
U. S. Treasury and Federal Agencies:
Available for sale 51,347$ 5,045 $ 4,499 $ 4,075
Held to maturity -- -- 3,833
State and municipal obligations:
Available for sale 13,696 10,623 5,142
Held to maturity 70 75 83
Asset-backed securities:
Available for sale 12,324 7,762 5,689
Held to maturity 2,792 3,271 933
Total securities:
Available for sale 31,065 22,884 14,906
Held to maturity 2,862 3,346 4,849
------- ------- -------
Total $33,927 $26,230 $19,755
======= ======= =======
F-11
84
MATURITY DISTRIBUTION OF SECURITIES - TABLE 9
(Dollars in Thousands)
------------------As of December 31, 1998-----------------
One Five
Year Through Through Over
or Five Ten Ten
Less Years Years Years Total
---- ----- ----- ----- -----
U. S. Treasury and Federal Agencies:
Available for sale $ 2,520 $ 2,525 $ -- $ -- $ 5,045
Held to maturity -- -- -- -- --
51,347
Average interest rate 6.84%State and municipal obligations:
Available for sale 1,938 5,323 4,451 1,984 13,696
Held to maturity -- -- 70 -- -- -- 6.84%
Fixed interest rate securities
available70
Asset-backed securities:
Available for sale 3,945 9,132 9,954 3,702 3,882 72,521 103,136
Average interest rate 5.81% 6.31% 6.36% 6.00% 5.70% 5.94% 6.00%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing demand deposits 32,957 -- 14,125 -- -- -- 47,082
Average interest rate -- -- -- -- -- -- --
Savings, NOW and money market deposits 69,943 34,971 34,971 29,570 -- -- 169,455
Average interest rate 3.23% 3.23% 3.23% 3.16% -- -- 3.22%
Variable interest rate other time deposits 7,151 -- -- -- -- -- 7,151
Average interest rate 5.36% -- -- -- -- -- 5.36%
Fixed interest rate other time deposits 118,759 22,295 6,597 2,514 3,148 1,675 154,988
Average interest rate 5.65% 5.92% 5.85% 5.85% 5.85% 7.45% 5.72%
Fixed interest rate securities sold under
agreements0 1,510 724 10,090 12,324
Held to repurchase 8,000 -- -- -- -- -- 8,000
Average interest ratematurity 95 1,124 672 901 2,792
------- ------- ------- ------- -------
Total securities:
Available for sale 4,458 9,358 5,175 12,074 31,065
Held to maturity 95 1,124 742 901 2,862
------- ------- ------- ------- -------
Total $ 4,553 $10,482 $ 5,917 $12,975 $33,927
======= ======= ======= ======= =======
Weighted average 5.63% -- -- -- -- --5.83% 5.23% 5.63% Fixed interest rate borrowings 21,232 543 530 2,445 736 -- 25,486
Average interest rate 5.69% 6.05% 6.12% 5.87% 6.71% -- 5.75%5.63%
F-7DEPOSITS. Managing the mix and repricing of deposit liabilities is an important
factor affecting HBI's ability to maximize its net interest margin. The
strategies used to manage interest bearing deposit liabilities are designed to
adjust as the interest rate environment changes. In this regard, management
regularly assesses its funding needs, deposit pricing, and interest rate
outlook.
Deposits increased $6.2 million or 7.6% from $82.2 million at June 30, 1997 to
$88.4 at June 30, 1998. The increase was primarily due to growth in time
deposits. Total deposits averaged $85.0 million in 1998 as compared to $80.8
million in 1997. Non-interest bearing deposits to total deposits averaged 11.3%
in 1998 as compared to 9.4% in 1997.
F-12
87
\
CAPITAL MANAGEMENT
Total shareholders' equity was $39,681,00085
The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 1998:
CERTIFICATES OF DEPOSIT OF $100,000 OR MORE - TABLE 10
(Dollars in Thousands)
December 31,
1998
----
Maturing 3 months or less $ 2,469
Maturing over 3 through 6 months 5,565
Maturing over 6 through 12 months 3,710
Maturing over 12 months 1,449
-------
Total $13,193
=======
SHORT TERM BORROWINGS. HBI's short term borrowings consist of securities sold
under agreements to repurchase. Short term borrowings decreased $1.3 million
during 1998 to $1.8 million at June 30, 1998. Amounts outstanding under these
agreements can fluctuate greatly depending on the cash needs of the Bank's
customers. See Note 7 to the Consolidated Financial Statements for additional
information on securities sold under agreements to repurchase.
OTHER BORROWED FUNDS. Other borrowed funds consist of advances from the Federal
Home Loan Bank (FHLB). FHLB advances increased $895,000 during 1998 to $2.1
million at June 30, 1998. Substantially all of these advances require monthly
principal and interest payments. Levels of other borrowed funds are routinely
evaluated by management with consideration given to growth in the loan
portfolio, liquidity needs, cost of retail deposits, market conditions, and
other factors.
ASSET/LIABILITY MANAGEMENT.
Asset/liability management involves developing, implementing and monitoring
strategies to maintain sufficient liquidity, maximize net interest income and
minimize the impact significant fluctuations in market interest rates have on
earnings. The Asset/Liability Committee of the Bank is responsible for managing
this process. Much of this committee's efforts are focused on minimizing the
Bank's sensitivity to changes in interest rates. One method of gauging
sensitivity is by a static gap analysis.
As seen in the following table as of December 31, 1997.1998, HBI had a cumulative
negative gap position of $5.0 million within the one year time frame. This
represents an increase overposition suggests that if market interest rates decrease in the prior yearnext 12 months,
HBI has the potential to earn more net interest income. A limitation of the
traditional static gap analysis, however, is that it does not consider the
timing or magnitude of noncontractual repricing. Although the static gap
sensitivity varies from time frame to time frame, management has the ability to
adjust rates on deposit accounts to achieve a neutral interest sensitivity
position within the intermediate term.
F-13
86
GAP POSITION - TABLE 11
(Dollars in Thousands)
Up to 4 to 12 1 to 5 After Non-
3 months Months Years 5 years Sensitive Total
-------- ------ ----- ------- --------- -----
ASSETS
Cash and due from banks $ 70 $ $ $ $ 2,718 $ 2,788
Federal funds sold 3,733 3,733
Investment securities 2,076 4,412 9,423 18,547 34,458
Loans 21,346 21,834 24,235 2,103 (975) 68,543
Other assets 2,136 2,136
-------- -------- -------- -------- -------- --------
Total assets $ 27,225 $ 26,246 $ 33,658 $ 20,650 $ 3,879 $111,658
======== ======== ======== ======== ======== ========
LIABILITIES
Noninterest bearing deposits $ $ $ $ $ 10,179 $ 10,179
Interest bearing deposits 25,215 31,622 29,353 86,190
Repurchase agreements 1,282 1,282
FHLB advances 70 204 875 581 1,730
Other liabilities and equity 12,277 12,277
-------- -------- -------- -------- -------- --------
Total liabilities and equity $ 26,567 $ 31,826 $ 30,228 $ 581 $ 22,456 $111,658
======== ======== ======== ======== ======== ========
GAP 658 (5,580) 3,430 20,069 (18,577)
Cumulative GAP 658 (4,922) (1,492) 18,577
Cumulative as a percent of earning
assets .61% (4.57%) (1.39%) 17.25%
F-14
87
LIQUIDITY.
Liquidity is generally defined as the ability to meet cash flow requirements.
HBI manages liquidity at two levels, the parent company and its subsidiary,
Hebron Deposit Bank. HBI's primary cash requirement is to pay dividends to its
shareholders and its primary source of funds is dividends received from the
Bank.
The Bank's primary liquidity consideration is to meet the cash flow needs of its
customers, such as borrowings and deposit withdrawals. To meet cash flow
requirements, sufficient sources of liquid funds must be available. These
sources include short-term investments, repayments and maturities of loans and
securities, growth in deposits and other liabilities, and profits. At December
31, 19961998, the Bank had $6.5 million in cash and due from banks and federal funds
sold. Also, as shown in Table 9, approximately $4.6 million of 14.72%investment
securities were scheduled to mature within one year. Principal reductions
received on loans also provide a continual stream of cash flows. Another source
of liquid funds is net cash provided from operating activities, which provided
$1.5 million in the year ended June 30, 1998. Also, the Bank has established
federal funds lines of credit with its correspondent banks which allow the Bank
to borrow up to $2.5 million. Finally, the Bank is a member of the Federal Home
Loan Bank of Cincinnati (FHLB). This
was accomplished while increasingBased on the cash dividend from $16.00 per share during
1996Bank's December 31, 1998 stock
ownership, an additional $8.7 million borrowing capacity is available with the
FHLB.
CAPITAL RESOURCES.
Management believes that a strong capital position is paramount to $17.00 per share during 1997.its continued
profitability and continued depositor and shareholder confidence. It also
provides HBI with flexibility to take advantage of growth opportunities and to
accommodate larger commercial loan customers. Regulators have established "risk
based" capital guidelines for banks and bank holding companies. Under the
guidelines, minimum capital levels are based on the perceived risk in asset
categories and certain off-balance-sheet items, such as loan commitments and
standby letters of credit. Management monitors its capital levels to comply with
regulatory requirements. In order to be considered "well capitalized" by the
FDIC, financial institutions must maintain a leverage ratio in excess of 5% and
a total risk based capital ratio in excess of 10%. As depicted in Note 14 to the
consolidated financial statements, HBI and the Bank's capital ratios are in
excess of regulatory standards for classification as "well capitalized". Being
considered "well capitalized" is one condition for assessing the federal deposit
insurance premiums at the lowest available rate.
IMPACT OF INFLATION.
The primary componentconsolidated financial statements and notes have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in shareholders' equity is the net income for the year. Secondarily, the yearrelative purchasing power of 1997 benefited from a positive net unrealized gain on securities classified as
available for sale of $1,119,000.
Restrictions existmoney over time due
to regulatory guidelines imposed uponinflation. The impact of inflation is reflected in the increased cost of HBI
operations. Nearly all financial
institutions regarding the Bank'sassets and liabilities of HBI are financial. As a
result, performance is directly impacted by changes in interest rates, which are
indirectly influenced by inflationary expectations. HBI's ability to transfer fundsmatch the
interest sensitivity of its financial assets to the Corporationinterest sensitivity of its
financial liabilities in its asset/liability management may tend to minimize the
effect of changes in interest rates on performance. Changes in interest rates do
not necessarily move to the same extent as do changes in the formprices of cash dividends, loans or advances. These restrictions have had no
significant impact ongoods and
services.
F-15
88
YEAR 2000.
Management has assessed the Corporation's dividend policy or operations.
The Corporation's subsidiary Bank remains aboveoperational and financial implications of its Year
2000 needs and developed a plan to ensure that data processing systems can
properly handle the minimum capital levels
required by regulatory agencies to meet the definition ofchange. Management has determined that if a well capitalized
Bank. The banking regulators may alter minimum capital requirementsbusiness
interruption as a result of revising their internal policies and their rating of the Corporation's
subsidiary Bank. As of December 31, 1997, management is not aware of any current
recommendations by banking authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on the
Corporation's liquidity, capital resources or operations.
Under risk-based capital guidelines issued by the Federal Reserve Board, the
Corporation and its subsidiary Bank are required to maintain a minimum
risk-based total capital ratio of 8% and a minimum Tier 1 capital ratio of 4% as
of December 31, 1997. While risk-based total capital and risk-based Tier 1
capital guidelines consider on-balance-sheet and off-balance-sheet risk, the
minimum Tier 1 capital ratio measures capital in relation to total
on-balance-sheet assets. The components of risk-based total capital are Tier 1
capital and Tier 2 capital. The definition of capital, used in the Tier 1
capital ratio, is identical to Tier 1 capital under risk-based capital
guidelines. Tier 1 capital is total shareholders' equity less intangible assets.
Tier 2 capital includes total allowance for loan losses up to a maximum of 1.25%
of risk-weighted assets. The net unrealized gain (loss) on securities available
for sale, net of tax, is not considered for meeting regulatory capital
requirements. The following table provides the minimum regulatory capital
requirements and the Corporation's and the Bank's actual capital ratios at
December 31, 1997.
Minimum Regulatory Corporation's Bank's
Capital Requirements Actual Capital Ratio Actual Capital Ratio
Type Of Capital Ratio At December 31, 1997 At December 31, 1997 At December 31, 1997
--------------------- -------------------- --------------------- --------------------
Ratio of total capital to
risk-weighted assets 8% 14.8% 14.7%
Ratio of Tier 1 capital to
risk-weighted assets 4% 13.6% 13.5%
Tier 1 capital ratio 4% 8.0% 8.0%
F-8
88
IMPACT OF THE YEAR 2000
The Corporation is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The issue is whether
computer systems will properly recognize the date sensitive information as the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Corporation is
heavily dependent on computer processing in its business activities and the year
2000 issue creates risk for the Corporation from unforeseen problems in the
Corporation's computer system and from third parties whom the Corporation uses
to process information. Such failures of the Corporation's computer system
and/or third parties computer systems could have a material impact on the
Corporation's ability to conduct its business.
A major third party vendor provides the Corporation's primary data processing.
This provider has advised the Corporation that it has completed the renovation
and testing of its system to be Year 2000 ready. Users of the system have been
given the opportunity to participate in proxy testing of the system and the
Corporation has taken advantage of this opportunity.
The Corporation has performed an assessment of its computer hardware and
software, and has determined those systems that require upgrade to be Year 2000
ready. Such upgrades have been substantially completed. In addition, the
Corporation has reviewed other external third party vendors that provide
services to the Corporation (i.e. utility companies, electronic fund transfer
providers, and alarm companies), and has requested or already received
certification letters from these vendors that their systems will be Year 2000
ready on a timely basis. Testing will be performed with these service providers,
where possible, to determine their Year 2000 readiness.
The Corporation could incur losses if loan payments are delayed due to Year 2000
problems affecting significant borrowers. The Corporation is communicating with
such parties to assess their progress in evaluating and implementing any
corrective measures required by them to be Year 2000 ready. To date, the
Corporation has not been advised by such parties that they do not have plans in
place to address and correct the issues associated with the Year 2000 problem;
however, noissue occurred, such an interruption
could be material. The primary effort required to prevent a potential business
interruption is the installation of the most current software release of the
Bank's core system as provided by the Bank's third party processor. The third
party processor has stated that Year 2000 remediation and testing efforts have
been successfully completed. In further assurance canof this, the Bank has
completed seven testing dates in July and August 1998, the results of which were
warranted by the third party processor and the results were signed off and
acknowledged by the Bank's employees and a third party advisor. Non-compliant
hardware is being replaced through routine hardware upgrades. Non-compliant
software is in the remediation stage and will be given asscheduled for re-testing before
March 31, 1999. Should mission critical system readiness not be achieved by
March 31, 1999, the Bank intends to the adequacy of such plans orseek alternative solutions from other
vendors. Non-mission critical systems, including systems other than data
processing with embedded technology, has been evaluated and is included in a
remediation schedule according to the
timeliness of their implementation.
Based on the Corporation's review of its computer systems, management believespriority. Management projects the cost of the remediation effort to make its systems Year
2000 readyreadiness will be approximately $49,000. In addition, it is estimated that 1,881 man-hoursin the range of $25,000 to $50,000 which will be incurred by Corporation personnel related toexpensed
as incurred. Year 2000 issues at an approximate
cost of $56,000. Such costs will be chargedexpenses are subject to expense as incurred. Computer
equipment totaling about $200,000 is to be replaced in many areas ofchange and could vary from
current estimates if the Corporation during 1998 and 1999. Much of this equipment was replaced sooner
than it otherwise would have beenfinal requirements for Year 2000 compliance purposes; however, it
was not replaced purely for this reason.
The Corporation has developed a Year 2000 contingency plan that addresses, among
other issues, critical operations and potential failures thereof, and strategies
for business continuation.
Although management believes the Corporation's computer systems and service
providers will be Year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Corporation's systems rely,
will be fully functional in the Year 2000. Such failure could have a significant
adverse impact on the financial condition and results of operations of the
Corporation.
F-9readiness exceed
management's expectations.
F-16
89
THE IMPACT OF INFLATION AND CHANGING PRICES
For a financial institution, the effects of price changesHEBRON BANCORP, INC. and inflation can vary
substantially. Inflation affects the growth of total assets, but it is difficult
to assess its impact since neither the timing nor the magnitude of the changes
in the consumer price index (CPI) coincides with changes in interest rates. The
price of one or more of the important components of the CPI may fluctuate
considerably and thereby influence the overall CPI without having a
corresponding affect on interest rates or upon the cost of those goods and
services normally purchased by the Corporation. In years of high inflation and
high interest rates, intermediate and long-term fixed interest rates tend to
increase, thereby adversely impacting the market values of investment
securities, mortgage loans and other long-term fixed rate loans. In addition,
higher short-term interest rates caused by inflation tend to increase the cost
of funds. In years of low inflation and low interest rates, the reverse
situation may occur.
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings involving the Corporation with
the Securities and Exchange Commission, in the Corporation's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Corporation's market area, and competition, all or
some of which could cause actual results to differ materially from historical
earnings and those presently anticipated or projected.
The Corporation wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Corporation's financial performance and could cause
the Corporation's actual results for future periods to differ materially from
those anticipated or projected.
The Corporation does not undertake, and specifically disclaims any obligation,
to update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
F-10Subsidiary
Hebron, Kentucky
- --------------------------------------------------------------------------------
F-17
90
SAND RIDGE FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
F-11
91
SAND RIDGE FINANCIAL CORPORATION
Highland, Indiana
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS
............................................ F-13
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS .......................................... F-14
CONSOLIDATED STATEMENTS OF INCOME .................................... F-15
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY ............................................... F-16
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................ F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... F-19
F-12
92
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Sand Ridge Financial Corporation
Highland, IndianaHebron Bancorp, Inc.
Hebron, Kentucky
We have audited the accompanying consolidated balance sheetssheet of Sand Ridge
Financial CorporationHebron Bancorp, Inc. and
Subsidiary, Hebron, Kentucky as of December 31, 1997 and 1996June 30, 1998 and the related consolidated
statements of income, comprehensive income, changes in shareholders'stockholders' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995.year then ended. These consolidated financial statements are the
responsibility of the Corporation'sCompany's management. Our responsibility is to express an
opinion on these financial statements based on our audits.audit.
We conducted our auditsaudit 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 provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Sand Ridge Financial
CorporationHebron Bancorp, Inc. and
Subsidiary as of December 31, 1997 and 1996,June 30, 1998, and the results of itstheir operations and itstheir
cash flows for the yearsyear then ended, December 31, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 15,Lexington, Kentucky
December 31, 1998
F-13- --------------------------------------------------------------------------------
F-18
93
SAND RIDGE FINANCIAL CORPORATION91
HEBRON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
December 31 -----------------June 30------------
1998 1998 1997 1996
---- ---- ----
(unaudited) (unaudited)
ASSETS
Cash and due from financial institutionsbanks $ 23,009,7062,788,285 $ 26,075,959
Interest-bearing balances with financial
institutions 100,000 100,000
Securities available2,432,522 $ 3,070,017
Federal funds sold 3,733,000 3,922,000 3,676,000
------------- ------------- -------------
Total cash and cash equivalents 6,521,285 6,354,522 6,746,017
Investment securities
Available for sale 154,483,307 124,204,55431,065,080 22,884,170 14,905,541
Held to maturity (fair value $2,945,397,
$3,426,437 and $4,922,968, respectively) 2,862,359 3,345,796 4,848,944
Loans receivable, net of allowance70,193,609 70,570,676 69,677,165
Unearned income (675,885) (746,884) (822,106)
Allowance for loan losses of $3,252,361 in 1997 and $2,367,288 in 1996 268,729,148 256,115,131
Premises(974,563) (956,185) (835,330)
------------- ------------- -------------
Net loans 68,543,161 68,867,607 68,019,729
Bank premises and equipment, - net 5,958,084 6,107,718
Interest1,127,091 1,162,659 1,140,349
Accrued interest receivable and other700,857 670,825 623,435
Federal Home Loan Bank stock 530,500 493,500 459,400
Other assets 3,813,879 3,941,052
------------ ------------
Total assets $456,094,124 $416,544,414
============ ============307,937 291,212 277,193
------------- ------------- -------------
TOTAL ASSETS $ 111,658,270 $ 104,070,291 $ 97,020,608
============= ============= =============
LIABILITIES AND SHAREHOLDERS'STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing demandDeposits
Noninterest bearing $ 10,178,569 $ 9,560,475 $ 8,145,406
Time deposits, $ 47,081,633 $ 41,690,247
Savings, NOW$100,000 and money market 169,455,230 168,726,981over 13,192,828 13,801,107 12,933,937
Other time deposits 162,139,170 150,863,222
------------ ------------interest bearing 72,998,015 65,003,377 61,074,716
------------- ------------- -------------
Total deposits 378,676,033 361,280,450
Federal funds purchased 13,800,000 5,600,00096,369,412 88,364,959 82,154,059
Securities sold under agreements to repurchase 8,000,000 -1,281,615 1,772,476 3,063,128
Advances from Federal Home Loan Bank (FHLB) 11,686,285 11,000,000
Interest1,730,014 2,056,853 1,161,520
Accrued interest payable and other404,379 427,984 467,069
Other liabilities 4,251,128 4,074,715
------------ ------------73,919 85,778 204,598
------------- ------------- -------------
Total liabilities 416,413,446 381,955,165
Shareholders' equity
Preferred99,859,339 92,708,050 87,050,374
Minority interest -- 283,927 249,092
STOCKHOLDERS' EQUITY
Capital stock, 100,000120,000 shares authorized, 60,000,
58,500 and -0- shares outstanding - -
Common stock, $10 stated value: 200,000 shares
authorized and 60,000 shares58,500 issued and outstanding 600,000 600,000
Additional paid-in capital 4,600,000 4,600,000120,000 117,000 117,000
Surplus 3,104,451 2,808,000 2,808,000
Retained earnings 32,042,978 28,070,2628,382,771 8,099,137 6,822,361
Net unrealized gain (loss) on investment
securities, available for sale, net of tax of $1,598,894 in 1997 and $865,130 in 1996 2,437,700 1,318,987
------------ ------------191,709 54,177 (26,219)
------------- ------------- -------------
Total shareholders'stockholders' equity 39,680,678 34,589,249
------------ ------------
Total liabilities and shareholders' equity $456,094,124 $416,544,414
============ ============11,798,931 11,078,314 9,721,142
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,658,270 $ 104,070,291 $ 97,020,608
============= ============= =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-14- --------------------------------------------------------------------------------
F-19
94
SAND RIDGE FINANCIAL CORPORATION92
HEBRON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Six Months Ended Year Ended
--------December 31---------- --------------------June 30--------------------
1998 1997 1998 1997 1996 1995
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income $3,108,543 $3,334,010 $6,568,935 $5,996,580 $5,562,084
Loans, including fees
$ 22,642,057 $ 21,148,663 $ 20,071,674
Deposits with financial institutions 9,133 19,071 37,721Investment securities -
Taxable 504,469 424,915 780,905 1,183,604 1,144,814
Tax-exempt 245,427 171,396 380,876 185,453 191,319
Federal funds sold 973,281 316,246 667,410
Securities:
Taxable 5,106,986 4,689,273 3,986,487
Non-taxable 3,390,166 2,758,563 2,590,637
------------ ------------ ------------
32,121,623 28,931,816 27,353,929112,721 56,881 149,938 114,500 155,515
Other interest income 30,423 17,470 35,285 31,241 10,626
---------- ---------- ---------- ---------- ----------
Total interest income 4,001,583 4,004,672 7,915,939 7,511,378 7,064,358
Interest expense
Deposits 15,718,890 14,052,419 12,993,928
Federal funds purchased 18,216 178,043 151,458
Securities sold under agreements to repurchase 50,548 92,767 233,705
Advances from FHLB 469,187 149,157 679,381
------------ ------------ ------------
16,256,841 14,472,386 14,058,472
------------ ------------ ------------
NET INTEREST INCOME 15,864,782 14,459,430 13,295,4571,970,924 1,709,658 3,491,002 3,238,337 3,386,527
Other borrowings 100,019 93,548 177,388 283,045 186,426
---------- ---------- ---------- ---------- ----------
Total interest expense 2,070,943 1,803,206 3,668,390 3,521,382 3,572,953
Net interest income 1,930,640 2,201,466 4,247,549 3,989,996 3,491,405
Provision for loan losses 1,800,000 1,440,000 1,040,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,064,782 13,019,430 12,255,457
Noninterest60,000 60,000 120,000 156,474 288,492
---------- ---------- ---------- ---------- ----------
Net interest income Netafter provision
for loan losses 1,870,640 2,141,466 4,127,549 3,833,522 3,202,913
Non-interest income
Service charges 161,003 149,957 294,750 302,167 345,901
Investment securities gains (losses) 85,417 (27,729) 155,329
Service charges on deposit accounts 2,145,418 1,694,261 1,587,587
ATM fees 412,697 323,778 295,746
Investment commissions 353,112 366,235 293,689
Trust revenues 144,960 105,730 117,128, net 57,341 14,517 94,445 2,546 8,252
Other income 709,519 814,751 549,475
------------ ------------ ------------
3,851,123 3,277,026 2,998,954
Noninterest55,010 47,597 94,694 87,516 54,421
---------- ---------- ---------- ---------- ----------
273,354 212,071 483,889 392,229 408,574
Non-interest expenses
Salaries and employee benefits 5,601,839 4,832,160 4,706,833577,913 589,057 1,187,856 1,149,865 1,070,423
Occupancy 700,494 614,385 646,637
Furniture and equipment 1,028,016 881,848 900,324
FDIC insurance 46,958 12,457 355,279expenses 145,915 126,548 219,751 217,189 229,735
Data processing 582,320 552,378 466,126expense 109,345 107,013 219,011 195,886 158,870
Marketing 496,356 347,896 291,208
Supplies 441,032 383,009 431,688expense 16,894 10,074 35,255 29,919 28,312
Other expenses 2,331,952 1,874,650 1,768,660
------------ ------------ ------------
11,228,967 9,498,783 9,566,755
------------ ------------ ------------433,004 417,665 698,439 479,840 517,987
---------- ---------- ---------- ---------- ----------
1,283,071 1,250,357 2,360,312 2,072,699 2,005,327
Income before income taxes 6,686,938 6,797,673 5,687,656860,923 1,103,180 2,251,126 2,153,052 1,606,160
Provision for income taxes 230,210 319,399 641,575 692,548 454,272
---------- ---------- ---------- ---------- ----------
Income tax expense 1,694,222 1,914,131 1,529,407
------------ ------------ ------------before minority interest 630,713 783,781 1,609,551 1,460,504 1,151,888
Minority interest in income 17,079 19,624 40,275 36,554 28,873
---------- ---------- ---------- ---------- ----------
NET INCOME $ 4,992,716613,634 $ 4,883,542 $ 4,158,249
============ ============ ============
Basic earnings764,157 $1,569,276 $1,423,950 $1,123,015
========== ========== ========== ========== ==========
Earnings per common share - basic $ 83.2110.48 $ 81.3913.06 $ 69.30
============ ============ ============26.83 $ 24.34 $ 19.20
Earnings per common share - diluted $ 10.48 $ 13.06 $ 26.83 $ 24.34 $ 19.20
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-15- --------------------------------------------------------------------------------
F-20
95
SAND RIDGE FINANCIAL CORPORATION93
HEBRON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Six Months Ended Year Ended
----------December 31-------- -------------------June 30-------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Net income $ 613,634 $ 764,157 $ 1,569,276 $ 1,423,950 $ 1,123,015
Other comprehensive income (loss) net of tax:
Unrealized gains (losses) on securities
arising during the period 175,384 139,767 142,730 416,793 (438,604)
Reclassification of realized amount (37,852) (9,581) (62,334) (1,680) (5,446)
----------- ----------- ----------- ----------- -----------
Net change in unrealized gain (loss)
on securities 137,532 130,186 80,396 415,113 (444,050)
----------- ----------- ----------- ----------- -----------
Comprehensive income $ 751,166 $ 894,343 $ 1,649,672 $ 1,839,063 $ 678,965
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-21
94
HEBRON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Net
Unrealized
Gain (Loss)
on Securities
AdditionalCommon Retained Available
Total
Common Paid-In Retained ForStock Surplus Earnings for Sale Shareholders'
Stock Capital Earnings Net of Tax EquityTotal
----- ------- -------- ---------- -------------- -----
Balance-JanuaryBalances, July 1, 1995 (unaudited) $ 600,000117,000 $ 4,600,0002,808,000 $ 20,888,4714,655,646 $ (1,809,825)2,718 $ 24,278,646
Net income - - 4,158,249 - 4,158,249
Cash dividends ($15.00
per share) - - (900,000) - (900,000)7,583,364
Net change in unrealized gain (loss)losses on
securities available for sale net
of tax of $2,272,636 - - - 3,464,895 3,464,895
------------- -------------- --------------- ------------- ----------------
Balance-December 31, 1995 600,000 4,600,000 24,146,720 1,655,070 31,001,790(unaudited) -- -- -- (444,050) (444,050)
Net income - - 4,883,542 - 4,883,542
Cash dividends(unaudited) -- -- 1,123,015 -- 1,123,015
Dividends paid ($16.002.50 per share)
- - (960,000) - (960,000)(unaudited) -- -- (146,250) -- (146,250)
------------ ------------ ------------ ------------ ------------
Balances, June 30, 1996 (unaudited) 117,000 2,808,000 5,632,411 (441,332) 8,116,079
Net change in unrealized gain (loss)losses on
securities available for sale net
of tax of ($220,436) - - - (336,083) (336,083)
------------- -------------- --------------- ------------- ----------------
Balance-December 31, 1996 600,000 4,600,000 28,070,262 1,318,987 34,589,249(unaudited) -- -- -- 415,113 415,113
Net income - - 4,992,716 - 4,992,716
Cash dividends(unaudited) -- -- 1,423,950 -- 1,423,950
Dividends paid ($17.004.00 per share)
- - (1,020,000) - (1,020,000)(unaudited) -- -- (234,000) -- (234,000)
------------ ------------ ------------ ------------ ------------
Balances, June 30, 1997 (unaudited) 117,000 2,808,000 6,822,361 (26,219) 9,721,142
Net change in unrealized gain (loss)gains on
securities available for sale net-- -- -- 80,396 80,396
Net income -- -- 1,569,276 -- 1,569,276
Dividends paid ($5.00 per share) -- -- (292,500) -- (292,500)
------------ ------------ ------------ ------------ ------------
Balances, June 30, 1998 117,000 2,808,000 8,099,137 54,177 11,078,314
Net change in unrealized gains on
securities available for sale (unaudited) -- -- -- 137,532 137,532
Issuance of tax of $733,764 - - - 1,118,713 1,118,713
------------- -------------- --------------- ------------- ----------------
Balance-Decembercommon stock in exchange for
minority interest shares 3,000 296,451 -- -- 299,451
Net income (unaudited) -- -- 613,634 -- 613,634
Dividends paid ($5.50 per share) -- -- (330,000) -- (330,000)
------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 19971998
(UNAUDITED) $ 600,000120,000 $ 4,600,0003,104,451 $ 32,042,9788,382,771 $ 2,437,700191,709 $ 39,680,678
============= ============== =============== ============= ================11,798,931
============ ============ ============ ============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-16F-22
96
SAND RIDGE FINANCIAL CORPORATION95
HEBRON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,- --------------------------------------------------------------------------------
Six Months Ended Year Ended
--------December 31------ --------------------June 30--------------------
1998 1997 1998 1997 1996 and 1995
- -------------------------------------------------------------------------------
1997 1996 1995
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,992,716613,634 $ 4,883,542764,157 $ 4,158,2491,569,276 $ 1,423,950 $ 1,123,015
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 901,591 855,747 785,44261,425 56,765 91,118 88,387 85,493
Minority interests in net income of
consolidated subsidiaries 17,079 19,624 40,275 36,554 28,873
Amortization, net 72,170 49,606 92,577 35,705 93,437
Provision for loan losses 1,800,000 1,440,000 1,040,000
Net amortization and accretion of60,000 60,000 120,000 156,474 288,492
Deferred income taxes (128) (23,331) (44,358) (36,947) (42,094)
FHLB stock dividends (37,000) (26,800) (34,100) (30,500) (27,400)
Investment securities (125,810) 122,891 300,805
Net securities (gains) losses (85,417) 27,729 (155,329)
Net (gain) loss on sales of premises
and equipment (6,325) (142,191) 581
Net changegains, net (57,351) (14,517) (94,445) (2,546) (8,252)
Changes in:
Interest receivable (30,032) (26,180) (47,390) 114,854 (209,851)
Other assets (606,591) (604,671) 154,78011,519 3,411 (12,139) 17,675 (21,290)
Interest payable (23,605) (13,716) (39,085) (59,496) 120,327
Other liabilities 116,413 (329,627) 782,996
-------------9,252 (53,817) (79,745) 47,645 7,945
Income taxes refundable/payable (119,361) (67,281) (39,075) 49,496 26,981
------------ ------------ Total adjustments 1,993,861 1,369,878 2,909,275
------------- ------------ ------------ Net cash from operating activities 6,986,577 6,253,420 7,067,524------------
NET CASH FROM OPERATING ACTIVITIES 577,602 727,921 1,522,909 1,841,251 1,465,676
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing balances with
financial institutions - 289,583 98,963
Net change in loans receivable (15,010,345) (14,904,487) (10,644,679)
Purchase of:
Securities available for sale (96,824,613) (45,358,515) (36,984,597)
Securities held to maturity - - (373,920)
Premises and equipment (760,516) (544,255) (575,300)
Proceeds from:
SalesPurchases of securities available for sale 17,228,831 28,998,352 2,802,775
Maturities(13,100,019) (5,603,397) (20,262,929) (5,461,946) (14,890,975)
Proceeds from sales of securities available
for sale 2,880,467 2,689,220 5,431,598 8,585,799 855,512
Proceeds from maturities and calls of
securities available for sale 41,740,880 5,030,031 9,080,629
Maturities1,275,000 1,075,000 3,985,000 1,365,000 2,310,000
Principal payments from securities
available for sale 974,885 603,700 3,073,091 1,697,238 1,520,168
Principal payments from securities held
to maturity 463,486 643,879 1,424,561 1,010,158 932,777
Purchases of investment securities held
to maturity -- -- -- -- (1,020,000)
Proceeds from maturities and calls of
securities held to maturity - - 1,346,403
Principal payments on securities
available for-- -- -- -- 2,180,000
Purchases of FHLB stock -- -- -- -- (13,600)
Proceeds from sale 9,639,853 11,006,152 8,704,842
Recoveries onof real estate acquired
through foreclosure -- -- -- 49,000 --
Net change in loans charged-off 596,328 348,279 301,733
Sales264,446 (5,084,356) (967,878) (4,846,645) (3,289,174)
Purchases of premises and equipment 14,884 819,049 16,229
-------------(25,857) (36,403) (113,428) (41,245) (40,670)
------------ ------------ Net cash from investing activities (43,374,698) (14,315,811) (26,226,922)------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (7,267,592) (5,712,357) (7,429,985) 2,357,359 (11,455,962)
(continued)
- -------------------------------------------------------------------------------
(Continued)
F-17--------------------------------------------------------------------------------
F-23
97
SAND RIDGE FINANCIAL CORPORATION96
HEBRON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Six Months Ended Year Ended
--------December 31------ ------------------------June 30----------------------
1998 1997 1998 1997 1996 1995
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 17,395,583 $ 25,258,420 $ 28,119,0678,004,453 1,677,855 6,210,900 (911,129) 8,966,447
Advances from Federal Home Loan Bank -- -- 973,000 -- --
Repayment of Federal Home Loan Bank
advances (326,839) (35,001) (77,667) (64,763) (69,050)
Repayment of debt -- -- -- -- (12,000)
Net change in agreements to repurchase
securities (490,861) (1,130,225) (1,290,652) 2,313,328 (1,272,149)
Net change in federal funds purchased 8,200,000 (2,400,000) 200,000
Proceeds from securities sold under
agreements-- 1,044,000 -- (1,300,000) 1,300,000
Dividends paid (330,000) (292,500) (292,500) (234,000) (146,250)
Dividends paid to repurchase 8,000,000 1,818,860 3,723,970
Repayment of securities sold under agreements
to repurchase - (5,588,580) (3,420,161)
Proceeds from advances from FHLB 8,250,000 11,000,000 10,000,000
Repayment of advances from FHLB (7,563,715) (10,000,000) (17,000,000)
Cash dividends paid (960,000) (900,000) (840,000)
------------ ------------ ------------
Net cash from financing activities 33,321,868 19,188,700 20,782,876
------------ ------------ ------------minority interests -- (7,500) (7,500) (6,000) (3,750)
----------- ----------- ----------- ----------- -----------
NET CASH FROM FINANCING ACTIVITIES 6,856,753 1,256,629 5,515,581 (202,564) 8,763,248
Net change in cash and cash equivalents (3,066,253) 11,126,309 1,623,478166,763 (3,727,807) (391,495) 3,996,046 (1,227,038)
Cash and cash equivalents at beginning
of year 26,075,959 14,949,650 13,326,172
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEARperiod 6,354,522 6,746,017 6,746,017 2,749,971 3,977,009
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 23,009,7066,521,285 $ 26,075,9593,018,210 $ 14,949,650
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION6,354,522 $ 6,746,017 $ 2,749,971
Supplemental disclosures of cash flow
information
Cash paid during the yearperiod for
Interest $ 15,992,3132,094,548 $ 14,429,3401,816,922 $ 13,217,2213,707,475 $ 3,580,878 $ 3,452,626
Income taxes 1,667,000 2,899,754 1,010,862
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Transfer353,000 410,000 725,000 680,000 470,000
Supplemental schedule of non-cash
investing activities
Non-cash transfer from Securitiessecurities
held to maturity to securities
available for sale $ - $ - $ 16,989,356-- -- -- -- 6,739,223
Change in unrealized gain (loss)
on securities available for sale, net 137,532 130,186 80,396 415,113 (444,050)
Loans transferred to real estate
acquired through foreclosure -- -- -- -- 49,000
Common stock issued for minority
Interest shares 299,451 -- -- -- --
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-18- --------------------------------------------------------------------------------
F-24
98
SAND RIDGE FINANCIAL CORPORATION97
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:Basis of Presentation: The accompanying consolidated financial statements include the
accounts of Sand Ridge Financial CorporationHebron Bancorp, Inc. (the Company) and its wholly-ownedmajority-owned
subsidiary, Sand RidgeHebron Deposit Bank, ("the Bank") (together referred to as "the
Corporation")Hebron, Kentucky (the Bank). Sand Ridge Financial Corporation is a bank holding company,
organized under Indiana law, that owns all of the outstanding stock of Sand
Ridge Bank. All significant inter-companymaterial
intercompany transactions and balances and transactions have been eliminated in consolidation.
NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK:eliminated.
Nature of Business: The Corporation accepts
depositsBank operates under a state bank charter, and grants commercial, real estate, installmentprovides
full banking services. As a state bank, the Bank is subject to regulation by the
Kentucky Department of Financial Institutions and personal loansthe Federal Deposit Insurance
Corporation. The Company is subject to customers mainlyregulation by the Federal Reserve Bank.
Estimates in the northwestern Indiana region. Substantially all loans are
collateralized by specific items including business assets, consumer assets, and
residences. Commercial loans make up approximately 38% of the loan portfolio and
include loans secured by business assets. Commercial loans are expected to be
repaid from cash flow from operations of businesses. Real estate loans make up
approximately 35% of the loan portfolio and are collateralized by both
commercial and residential real estate.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS:Financial Statements: The preparation of
consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets liabilities and disclosure of contingent
assets and
liabilities at the date of the financial statements and the reported amounts of
revenuerevenues and expenses during the reporting period, as well as the
disclosures provided. Areas involving the use of estimates and assumptions in
the accompanying consolidated financial statements include the allowance for
loan losses, fair values of securities and other financial instruments,
determination and carrying value of impaired loans, the realization of deferred
tax assets, and the determination of depreciation of premises and equipment.period. Actual results could differ
from those estimates. The collectibility of loans
and estimates associated with the allowance for loan losses and the fair values of securities and other financial
instruments are particularly susceptiblesubject to significant change in the near term.
CASH FLOW REPORTING:change.
Cash and Cash Equivalents: For purposes of the statement ofreporting cash flows, cash and cash
equivalents is defined to include the Corporation's cash on hand, demand
deposits in other financial institutionsamounts due from banks and its federal funds sold.
Generally, federal funds are sold with afor one-day periods.
Investment Securities: The Bank classifies its investment securities into three
categories: trading, available for sale and held to maturity. The Bank has
classified certain municipal securities and asset-backed agency securities as
held to maturity based on management's positive intent and ability to hold such
securities to maturity. All remaining investment securities are classified as
available for sale. The Company has no investments classified as trading.
Investment securities available for sale are carried at fair value. Adjustments
from amortized cost to fair value are recorded in stockholders' equity, net of
90 days or less.related income tax, under unrealized gain (loss) on investment securities. The
Corporation reports net cash flowsadjustment is computed on the difference between fair value and cost adjusted
for customer
loanamortization of premiums and deposit transactions, interest-bearing balances with financial
institutions,accretion of discounts which are recorded as
adjustments to interest income using the constant yield method.
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and short-term borrowings with maturitiesaccretion of 90 days or less.discounts which are recorded as
adjustments to interest income using the constant yield method.
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(Continued)
F-19F-25
99
SAND RIDGE FINANCIAL CORPORATION98
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SECURITIES: The Corporation has the ability to classify investment securities
and mortgage-backed and related securities into held to maturity and available
for sale categoriesLoans: Loans are stated at the timeamount of purchase. Held to maturity securities are
those which the Corporation has the positive intentunpaid principal, reduced by unearned
interest and ability to hold to
maturity, and are reported at amortized cost. Availablean allowance for sale securities are
those the Corporation may decide to sell if needed for liquidity,
asset-liability management or other reasons. Available for sale securities are
reported at fair value, with unrealized gains and losses includedloan losses. Unearned interest is recognized as
a separate
component of shareholders' equity, net of tax. Currently, the Corporation has
classified all securities as available for sale.
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income adjusted by
amortization of purchase premium or discount, is included in earnings. Premiums
and discounts on securities are recognized using the level yield method over the estimated life of the security.
INTEREST INCOME ON LOANS: Interest on loans is accrued over the termterms of the loans basedby a method which approximates the constant
yield method. Interest income on other loans is recognized on the principal balance outstanding. When serious doubt exists as
to collectibilityaccrual basis
except for those loans on a nonaccrual of a loan, theincome status. The accrual of interest
is discontinued. Under
Statement of Financial Accounting Standards ("SFAS") No. 114, as amended by SFAS
No. 118, the carrying values ofon impaired loans are periodically adjusted to
reflect cash payments, revised estimatesis discontinued when management believes, after consideration
of future cash flows,economic and increases inbusiness conditions and collection efforts, that the present valueborrowers'
financial condition is such that collection of expected cash flows due to passage of time. Cash payments
representinginterest is doubtful. When
interest accrual is discontinued, interest income are reported as such. Otheris subsequently recognized
only to the extent cash payments are reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
reported as a component of the provision for loan losses.
LOAN FEES AND COSTS: Loan fees, net of direct loan origination costs, are
deferred. The net amount deferred is reported in the consolidated balance sheets
as part of loans and is recognized into interest income over the term of the
loan using the level yield method.
ALLOWANCE FOR LOAN LOSSES:received.
The allowance for loan losses is established because
some loans may not be paid in full. Increases to the allowance are recorded bythrough a provision for loan losses
charged to expense. Estimating the risk of loss and
the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses thatLoans are currently anticipated. This is based on past loss experience,
general economic conditions, information about specific borrowers' situations,
including their financial position and collateral values, and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions ofcharged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, current economic conditions that may affect the
borrowers' ability to pay, overall portfolio quality and review of specific
problem loans. Loans are charged against the allowance for loan situations,losses when
management believes that the wholecollectibility of the principal is unlikely.
The allowance for loan losses on impaired loans is available for anydetermined using the present
value of estimated future cash flows of the loan charge-offs that
occur.discounted at the loan's
interest rate, or the fair value of the underlying collateral. A loan is
charged-off by management asconsidered to be impaired when it is probable that all principal and interest
amounts will not be collected according to the loan contract.
Bank Premises and Equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is recorded on the straight-line and
declining-balance methods.
Securities Sold Under Agreements to Repurchase: Securities sold under agreements
to repurchase generally mature within one to four days from the transaction
date. The securities underlying the agreements are maintained in a loss when deemed uncollectible,
although collection efforts continuethird-party
custodian's account under a written custodial agreement which explicitly
recognizes the Company's interest in the securities.
Income Taxes: Deferred income taxes are reported for temporary differences
between items of income or expense reported for financial statement purposes and
those reported for income tax purposes using the liability method. Under the
liability method, deferred income taxes are based on the change from the
beginning of the year in the deferred tax liability or asset established for the
expected future recoveries may occur.tax consequences of differences in the financial reporting and
tax bases of assets and liabilities. The differences relate principally to
unrealized gains and losses on investment securities, FHLB stock and the
allowance for loan losses.
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(Continued)
F-20F-26
100
SAND RIDGE FINANCIAL CORPORATION99
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LoansPer Share Information: During the year ended June 30, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", under which basic and diluted earnings per share are considered impaired if full principal or interest paymentscomputed. Basic and
diluted earnings per share are not
anticipatedbased on net income divided by the weighted
average number of shares outstanding (58,500 shares) during the period. There
were no dilutive items outstanding during the period. All prior earnings per
share are reported under SFAS No. 128.
Effect of New Accounting Standards: In 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income", which requires that all items that are
components of comprehensive income (defined as "the change in accordance withequity (net of
assets) of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners"), be reported in the contractual loan terms. Impaired loans are
carriedfinancial statements. The new
guidance is effective for fiscal years beginning after December 15, 1997 and
requires reclassification of prior periods presented. All information for all
periods has been presented under this new standard.
Recent Accounting Pronouncements: In 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This new
standard requires companies to record all derivatives at fair value. Depending
on the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair valueuse of the collateral ifderivative and whether it qualifies for hedge accounting,
gains or losses resulting from changes in the loan is collateral dependent. A portionvalues of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed tothose derivatives would
either be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require an increase, such increase is reportedrecorded as a component of the provision
for loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, manufactured homes,
home equity and second mortgage loans. Commercial loans and mortgage loans
secured by other properties are evaluated individually for impairment. When
analysis of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet its
debt service requirements, the loan is evaluated for impairment. Often this is
associated with a delaynet income or shortfall in payments of 90 days or more. Nonaccrual
loans are often also considered impaired. Impaired loans, or portions thereof,
are charged off when deemed uncollectible.
FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for as a loan losschange in stockholders'
equity. The Company is required to adopt this new standard July 1, 1999.
Management has not yet determined the impact of this standard.
Unaudited Financial Statements: Financial information at June 30, 1997 and
charged against the allowance for loan losses. After
acquisition, a valuation allowance is recorded through a charge to incomeDecember 31, 1998, and for the amount of estimated selling costs. Valuations are periodically performed by
management,six months ended December 31, 1998 and valuation allowances are adjusted through a charge to income1997, and
for changes in fair value or estimated costs to sell. The dollar amount of
properties held as other real estate owned at December 31,the years ended June 30, 1997 and 1996 was
$200,000 and $-0-.
INCOME TAXES: Income tax expense is unaudited. In the sumopinion of
management of the currentCompany, all adjustments necessary for a fair presentation of
such financial information have been included. All such adjustments are of a
normal recurring nature. The statements of income, cash flows and stockholders'
equity for the six months ended December 31, 1998 are not necessarily indicative
of the results which may be expected for the year income taxending June 30, 1999.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or refundable andmaintained in vault cash in accordance
with average balance requirements specified by the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequencesFederal Reserve Board of
temporary
differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
PREMISESGovernors. The average balance requirement was $386,000 at June 30, 1998.
- --------------------------------------------------------------------------------
(Continued)
F-27
100
HEBRON BANCORP, INC. AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. All depreciation is computed on a straight-line basis
with useful lives as follows:
Buildings and improvements 15 - 40 years
Furniture, equipment and land improvements 3 - 15 years
- -------------------------------------------------------------------------------
(Continued)
F-21
101
SAND RIDGE FINANCIAL CORPORATIONSUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)INVESTMENT SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE: Substantially all securities
sold under agreements to repurchase represent amounts advanced by various
customers that are not covered by federal deposit insuranceAmortized cost and are secured by
securities owned.
DIVIDEND RESTRICTION: The Corporation and the Bank are subject to banking
regulations which require the maintenance of certain capital levels which limit
the amount of dividends which may be paid. For regulatory capital requirements,
see Note 14.
PROFIT SHARING PLAN: The Corporation maintains a 401(k) profit sharing plan
covering substantially all employees. The plan provides for discretionary
contributions by the Corporation as determined by the Board of Directors and
voluntary employee contributions. The Corporation's contribution to the plan is
charged to expense annually. The Corporation's expense for 1997, 1996 and 1995
was approximately $305,000, $347,000 and $280,000, respectively.
EARNINGS PER COMMON SHARE: Basic earnings per common share is based on the
weighted average common shares outstanding. The weighted average number of
common shares outstanding was 60,000 for 1997, 1996 and 1995. Diluted earnings
per common share further assumes issue of any dilutive potential common shares.
The Corporation has no dilutive potential common shares, therefore no diluted
earnings per common share is reported for 1997, 1996 or 1995. The adoption of
SFAS No. 128, "Earnings Per Share", on December 31, 1997, did not impact the
computation of earnings per common share for 1997 and did not result in the
restatement of any prior period earnings per share data.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Corporation, in the
normal course of business, makes commitments to extend credit which are not
reflected in the consolidated financial statements. A summary of these
commitments is disclosed in Note 10.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance-sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
RECLASSIFICATIONS: Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997 presentation.
- -------------------------------------------------------------------------------
(Continued)
F-22
102
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - CASH AND DUE FROM FINANCIAL INSTITUTIONS
The Corporation is requiredinvestment securities, by the Federal Reserve to maintain cash reserves
consisting of cash on hand and noninterest-bearing balances on deposit with the
Federal Reserve Bank. The required cash reserve and clearing balancescategory, at December 31, 1997 and 1996 was approximately $6,815,000 and $5,666,000,
respectively.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Year end securities available for sale wereJune 30,
1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1997
- ----
U.S.Available for sale
U. S. Treasury securities $ 8,055,1414,504,577 $ 34,709299 $ (2,352)(6,126) $ 8,087,498
U.S. Government and
federal agencies 11,222,621 54,297 (92) 11,276,826
States4,498,750
Obligations of states and political
subdivisions 66,532,154 2,990,588 (91,960) 69,430,782
Mortgage-backed pass-
through10,495,460 134,913 (6,842) 10,623,531
Asset-backed securities 18,583,374 704,089 (105) 19,287,358
Collateralized
mortgage obligations 42,000,894 496,917 (156,305) 42,341,506
Corporate and other
debt securities 2,671,229 8,880 (2,072) 2,678,037
Marketable equity
securities 1,381,300 - - 1,381,300
------------- ------------- ------------- -------------7,799,942 4,878 (42,931) 7,761,889
----------- ----------- ----------- -----------
Total available for sale $22,799,979 $ 150,446,713140,090 $ 4,289,480 $ (252,886) $ 154,483,307
============= ============= ============= =============
1996
- ----
U.S. Treasury $ 7,018,173 $ 1,639 $ (22,001) $ 6,997,811
U.S. Government and
federal agencies 9,752,289 26,227 (67,713) 9,710,803
States(55,899) $22,884,170
=========== =========== =========== ===========
Held to maturity
Obligations of states and political
subdivisions 57,698,461 1,653,306 (154,112) 59,197,655
Mortgage-backed pass-
through$ 74,879 $ -- $ -- $ 74,879
Asset-backed securities 29,420,090 741,461 (45,870) 30,115,681
Collateralized
mortgage obligations 16,358,440 94,804 (59,940) 16,393,304
Corporate3,270,917 86,129 (5,488) 3,351,558
----------- ----------- ----------- -----------
Total held to maturity $ 3,345,796 $ 86,129 $ (5,488) $ 3,426,437
=========== =========== =========== ===========
Amortized cost and fair value of investment securities, by category, at June 30,
1997 are as follows (unaudited):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
U. S. Treasury securities $ 2,496,886 $ 735 $ (746) $ 2,496,875
Obligations of states and other
debtpolitical
subdivisions 5,047,762 96,577 (2,260) 5,142,079
Asset-backed securities 397,684 16,316 - 414,000
Marketable equity7,401,636 13,115 (148,164) 7,266,587
----------- ----------- ----------- -----------
Total available for sale $14,946,284 $ 110,427 $ (151,170) $14,905,541
=========== =========== =========== ===========
Held to maturity
Obligations of states and political
subdivisions $ 83,351 $ -- $ -- $ 83,351
Asset-backed securities 1,375,300 - - 1,375,300
------------- ------------- ------------- -------------4,765,593 105,669 (31,645) 4,839,617
----------- ----------- ----------- -----------
Total held to maturity $ 122,020,4374,848,944 $ 2,533,753105,669 $ (349,636)(31,645) $ 124,204,554
============= ============= ============= =============4,922,968
=========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(Continued)
F-23F-28
103
SAND RIDGE FINANCIAL CORPORATION101
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
The amortized cost and fair valuevalues of investment securities available for sale,at June 30, 1998, by
contractual maturity are shown below. Expected maturities maywill differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities not due at
a single maturity date or with no maturity date are shown separately.
Securities Available for Sale
December 31, 1997
-----------------
Amortized Fair
Cost Value
---- -----
Available for sale
Due in one year or less $ 4,120,6581,616,166 $ 4,137,4451,619,291
Due after one year through five years 23,369,562 23,851,3486,377,395 6,395,563
Due after five years through ten years 27,612,348 28,735,7184,904,663 4,967,198
Due after ten years 33,378,577 34,748,632
Mortgage-backed pass-through2,101,813 2,140,229
Asset-backed securities and collateralized mortgage obligations 60,584,268 61,628,864
Marketable equity7,799,942 7,761,889
----------- -----------
Total available for sale $22,799,979 $22,884,170
=========== ===========
Held to maturity
Due after ten years $ 74,879 $ 74,879
Asset-backed securities 1,381,300 1,381,300
------------- -------------3,270,917 3,351,558
----------- -----------
Total held to maturity $ 150,446,7133,345,796 $ 154,483,307
============= =============3,426,437
=========== ===========
Proceeds grossfrom sales of investment securities during the years ended June
30, 1998, 1997 and 1996 were $5,431,598, $8,585,799 and $855,512,
respectively. Gross gains of $94,883, $10,833 and $8,252 and gross losses
of $438, $8,287 and $0 were realized on those sales. Proceeds from
salesmaturities and calls of investment securities available for sale forduring the years ended December 31,June
30, 1998, 1997 and 1996 were $3,985,000, $1,365,000 and 1995 are as
follows:
1997 1996 1995
---- ---- ----
Proceeds from sales of$4,490,000,
respectively. There were no gains or losses realized on those calls and
maturities.
Investment securities
available for sale $ 17,228,831 $ 28,998,352 $ 2,802,775
============ ============= =============
Gross gains from sales of securities
available for sale $ 191,283 $ 108,910 $ 45,321
Gross losses from sales of securities
available for sale (105,866) (136,639) -
Net gains from calls of securities available
for sale and securities held to maturity - - 110,008
------------ ------------- -------------
Net securities gains (losses) $ 85,417 $ (27,729) $ 155,329
============ ============= =============
Securities with a carrying valuean amortized cost of approximately $1,102,000, $1,102,000 and
$5,163,000$5,185,000 at June
30, 1998 were pledged to secure public deposits and short-term borrowings for
the years ended December 31, 1997, 1996 and 1995. See Note 7 for discussion of
securities pledged for securities sold under agreements to repurchase.
The applicable income tax effects of net securities gains (losses) weredeposits.
NOTE 4 - LOANS
Loans at June 30 are summarized as follows:
1998 1997
---- ----
(unaudited)
Commercial and agricultural $ 7,972,342 $ 8,711,123
Real estate 54,732,921 52,587,147
Consumer and installment 7,865,413 8,378,895
----------- -----------
$70,570,676 $69,677,165
=========== ===========
- tax expense of $34,000; 1996 - tax benefit of $11,000; and 1995
- - tax expense of $62,000.
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(Continued)
F-24F-29
104
SAND RIDGE FINANCIAL CORPORATION102
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE(Continued)
Loans to directors, executive officers, principal stockholders and their related
interests were approximately $1,188,000 at June 30, 1998. Such loans were made
in the ordinary course of business at the Bank's normal credit terms and
interest rates, and, in management's opinion, do not represent more than a
normal risk of collection. An analysis of the activity for the year ended June
30, 1998 with respect to these loans is as follows:
Balance, June 30, 1997 $ 1,264,000
Additions, including loans now meeting
disclosure requirements 145,000
Amounts collected, including loans no longer
meeting disclosure requirements (221,000)
-----------
Balance, June 30, 1998 $ 1,188,000
===========
Changes in the allowance for loan losses were as follows:
------------Years Ended June 30----------
1998 1997 1996
---- ---- ----
(unaudited) (unaudited)
Balance, beginning of year $ 835,330 $ 696,000 $ 556,095
Loans charged off (14,656) (39,000) (163,000)
Recoveries 15,511 21,856 14,413
Provision for loan losses 120,000 156,474 288,492
--------- --------- ---------
Balance, end of year $ 956,185 $ 835,330 $ 696,000
========= ========= =========
The Company's recorded investment in impaired loans was approximately $189,000
and $69,000 at June 30, 1998 and 1997, respectively, as measured using the value
of the underlying collateral. The total allowance for credit losses related to
those loans was approximately $88,000 and $29,000. The average recorded
investment of impaired loans was approximately $108,000, $46,000 and $139,000
for the years ended June 30, 1998, 1997 and 1996. Interest income recognized on
impaired loans totaled approximately $11,000, $0 and $0 for the years ended June
30, 1998, 1997 and 1996, respectively, which represented actual cash payments
received on impaired loans.
- NET
Loans receivable, net--------------------------------------------------------------------------------
(Continued)
F-30
103
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information except at December 31,June 30, 1998 and the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at June 30 are summarized as follows:
1998 1997
---- ----
(unaudited)
Land and bank building $1,481,217 $1,480,862
Furniture and equipment 726,402 644,560
Bank vehicles 38,085 20,896
---------- ----------
2,245,704 2,146,318
Less: Accumulated depreciation 1,083,045 1,005,969
---------- ----------
$1,162,659 $1,140,349
========== ==========
Depreciation expense was $91,118, $88,387 and $85,493 for the years ended June
30, 1998, 1997 and 1996, respectively.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes are as follows:
------------Years Ended June 30-----------
1998 1997 1996
---- ---- ----
(unaudited) (unaudited)
Currently payable $ 685,933 $ 729,495 $ 496,366
Deferred (44,358) (36,947) (42,094)
--------- --------- ---------
$ 641,575 $ 692,548 $ 454,272
========= ========= =========
The Bank's deferred tax assets and liabilities at June 30 are shown below. No
valuation allowance for the realization of deferred tax assets is considered
necessary.
1998 1997
---- ----
Commercial $ 105,181,077 $ 102,463,938
Real estate - mortgage 94,362,314 85,202,395
Real estate - construction 2,160,338 3,599,845
Installment 68,158,869 65,845,095
Credit card 2,685,823 2,009,705
------------- -------------
272,548,421 259,120,978
Deferred loan fees (566,912) (638,559)tax assets
Allowance for loan losses (3,252,361) (2,367,288)
------------- -------------
$ 268,729,148 $ 256,115,131
============= =============
Activity in the allowance for loan losses is
summarized as follows for the years ended December 31:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 2,367,288 $ 3,372,317 $ 2,575,265
Provision for loan losses 1,800,000 1,440,000 1,040,000
Charge-offs (1,511,255) (2,793,308) (544,681)
Recoveries 596,328 348,279 301,733
----------- ------------- -------------
Balance at end of year $ 3,252,361 $ 2,367,288 $ 3,372,317
=========== ============= =============
Information regarding impaired loans is as follows for the years ending December
31:
1997 1996 1995
---- ---- ----
Year end loans with no allowance for loan
losses allocated $ 881,110 $ 5,029,291 $ 196,697
Year end loans with allowance for loan
losses allocated 1,900,537 734,502 1,208,483
Amount of allowance allocated 439,000 282,000 330,000
Average of impaired loans during the year 4,817,197 6,034,919 971,985
Interest income recognized during
impairment 60,853 102,524 119,662
Cash-basis interest income recognized - 102,524 92,277$280,677 $239,586
Unrealized loss on investment securities -- 13,507
Other 18,261 2,964
-------- --------
Total deferred tax assets 298,938 256,057
-------- --------
Deferred tax liabilities
Federal Home Loan Bank dividends 49,300 36,924
Unrealized gain on investment securities 28,625 --
-------- --------
Total deferred tax liabilities 77,925 36,924
-------- --------
Net deferred tax asset $221,013 $219,133
======== ========
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
(Continued)
F-25F-31
105
SAND RIDGE FINANCIAL CORPORATION104
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 56 - PREMISES AND EQUIPMENT - NET
PremisesINCOME TAXES (Continued)
An analysis of the differences between the effective tax rates and equipment at December 31 are summarizedthe statutory
U. S. federal income tax rate is as follows:
---------------------------Years Ended June 30,--------------------------
1998 1997 1996
---- ---- ----
(unaudited) (unaudited)
Land
U. S. federal income tax rate $ 954,191765,383 34.0% $ 844,101
Buildings and improvements 4,975,611 4,877,021
Furniture and equipment 5,797,089 5,278,698
Land improvements 746,039 740,114
------------ ------------
12,472,930 11,739,934
Accumulated depreciation (6,514,846) (5,632,216)
------------ ------------732,038 34.0% $ 5,958,084546,094 34.0%
Changes from the statutory rate:
Tax-exempt investment income (132,898) (5.8) (68,834) (3.2) (72,192) (4.5)
Non-deductible interest expense related
to carrying tax-exempt investments 20,720 0.9 10,089 0.5 10,248 0.7
Other (11,630) (0.6) 19,255 0.9 (29,878) (1.9)
--------- ---- --------- ---- --------- ----
$ 6,107,718
============ ============641,575 28.5% $ 692,548 32.2% $ 454,272 28.3%
========= ==== ========= ==== ========= ====
NOTE 6 - TIME DEPOSITS
At December 31, 1997, the scheduled maturities of other time deposits are as
follows for the years ended December 31:
1998 $ 122,116,849
1999 23,863,142
2000 7,258,348
2001 3,076,283
2002 3,678,606
Thereafter 2,145,942
-------------
$ 162,139,170
=============
The Corporation had approximately $25,780,000 and $26,219,000 in time
certificates of deposit in denominations of $100,000 or more as of December 31,
1997 and 1996, respectively. Interest expense on certificates of deposit in
denominations of $100,000 or more was approximately $2,171,000, $1,719,000 and
$1,083,000 in 1997, 1996 and 1995, respectively.
- -------------------------------------------------------------------------------
(Continued)
F-26
106
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations ofgenerally mature within one to
ninety days from the Corporation to other parties. These arrangements are for terms of one year or
less and are secured by investment securities. Such collateral is held by
safekeeping agents of the Corporation.transaction date. Information concerning securitiesmaturities sold
under agreements to repurchase as of December 31, 1997, 1996 and 1995at June 30 is summarized as follows:
1998 1997
1996 1995
---- ---- ----(unaudited)
Balance at end of year $ 8,000,000 $ - $ 3,769,720Year-end balance $1,772,476 $3,063,128
Average daily balance during the year $ 898,630 $ 1,574,003 $ 3,808,016$2,026,603 3,559,941
Average interest rate during the year 5.625% 5.894% 6.137%4.42% 5.39%
Maximum month endmonth-end balance during the year $ 8,000,000 $ 3,665,470 $ 4,830,120$2,324,609 $4,100,000
SecuritiesU. S. Treasury and agency securities underlying thesethe agreements at year end wereare as follows:
1998 1997
1996 1995
---- ---- ----(unaudited)
Carrying value of securities $ 8,039,000 $ - $ 4,135,000
Fair$2,706,000 $3,100,000
Estimated fair value $ 8,039,000 $ - $ 4,135,000$2,683,000 $3,085,000
- --------------------------------------------------------------------------------
(Continued)
F-32
105
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information except at June 30, 1998 and the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
AdvancesBorrowings from the Federal Home Loan Bank at year end were:
1997 1996
---- ----
5.68% FHLB advance, due June 1997 $ - $ 7,500,000
6.15% FHLB advance, due January 1998 7,000,000 -
5.43% FHLB advance, due February 2001 1,936,285 2,000,000
6.36% FHLB advance, due January 2002 1,500,000 1,500,000
6.71% FHLB advance, due May 2002 1,250,000 -
--------------- ----------------
$ 11,686,285 $ 11,000,000
=============== ================
At December 31,June 30, 1998 and 1997 totaled
$2,056,853 and 1996, the Corporation had book value$1,161,520, respectively, and consist of approximately
$15,522,000 and $15,682,000, respectively, of mortgage loans which were pledgedadvances with interest
rates ranging from 5.85% to the Federal Home Loan Bank to secure advances outstanding in addition to
$1,381,000 in 1997 and $1,375,000 in 1996 of FHLB stock.
- --------------------------------------------------------------------------------
(Continued)
F-27
107
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
Income tax expense consists of:
1997 1996 1995
---- ---- ----
Current federal $ 2,041,504 $ 836,424 $ 2,573,125
Deferred federal (950,564) 471,956 (1,556,919)
Current state 853,263 510,116 1,104,872
Deferred state (249,981) 95,635 (591,671)
-------------- -------------- --------------
$ 1,694,222 $ 1,914,131 $ 1,529,407
============== ============== ==============
The difference between the income tax expense shown7.40% maturing at various dates in the statements of incomeyears 2007
through 2013. Scheduled principal repayments at June 30, 1998 and amounts computed by applying the statutory federal income tax rate to income
before income taxes, is as follows:
1997 1996 1995
---- ---- ----
Income tax calculated at statutory rate of 34% $ 2,273,559 $ 2,311,209 $ 1,933,803
Increase (decrease) due to tax effect of
Tax-exempt interest income (1,135,799) (924,348) (862,789)
Non-deductible interest expense 147,304 120,822 114,502
State income tax, net of federal income
tax benefit 398,166 399,796 338,713
Other items, net 10,992 6,652 5,178
-------------- -------------- --------------
$ 1,694,222 $ 1,914,131 $ 1,529,407
============== ============== ==============
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of December 31 are as
follows:
1998 1997
1996
---- ----
Deferred tax assets(unaudited)
Provision for loan losses $1,040,310July 1, 1998 - June 30, 1999 $ 682,499
Mark to market adjustment 1,651,502 755,934
Deferred loan fees 121,347 185,267
Other 193,202 100,038
----------- -----------316,873 $ 3,006,36177,352
July 1, 1999 - June 30, 2000 266,701 76,580
July 1, 2000 - June 30, 2001 223,836 81,909
July 1, 2001 - June 30, 2002 201,921 87,608
July 1, 2002 - June 30, 2003 182,389 93,706
Thereafter 865,133 744,365
------------ --------------
$ 1,723,738
Deferred tax liabilities
State tax2,056,853 $ (217,248) $ (128,316)
Accretion (153,472) (160,326)
Net unrealized gain
on securities available for sale (1,598,894) (865,130)
----------- -----------
(1,969,614) (1,153,772)
Valuation allowance -- --
----------- -----------
$ 1,036,747 $ 569,966
=========== ===========1,161,520
The advances are collateralized by Federal Home Loan Bank stock and first
mortgage loans amounting to at least 150% of outstanding borrowings at June 30,
1998.
NOTE 9 - --------------------------------------------------------------------------------
(Continued)
F-28
108
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------LIMITATION ON BANK DIVIDENDS
Banking regulations limit the amount of bank dividends that may be paid without
regulatory approval. Under these regulations, the amount of dividends that may
be paid in any calendar year is limited to the current year's net profits, as
defined, combined with the retained net profits of the preceding two years. As
of June 30, 1998, approximately $3,230,000 of the Bank's retained earnings were
free of such restrictions.
NOTE 10 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEETOFF-BALANCE SHEET RISK
As of December 31, 1997, the Corporation leased branch offices as well as
various equipment. Rent expense was approximately $29,000, $23,000 and $36,000
in 1997, 1996 and 1995, respectively. In accordance with the terms of the
leases, the Corporation pays insurance and maintenance costs.
Rental commitments under noncancelable operating leases are as follows for the
year ended December 31:
1998 $ 16,000
1999 11,000
2000 11,000
2001 925
------------
$ 38,925
============
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these mattersThe Bank is not expecteda party to have a material
effect on the Corporation's consolidated financial condition or results of
operations.
Some financial instruments are usedwith off-balance sheet risk in the
normal course of business to meet the financing needs of customers and to reduce exposure to interest rate changes.its customers. These
financial instruments include commitments to extend credit, unused credit
on credit card arrangements and standby letters of credit. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount reported
in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of credit and financial guarantees written.commitments to
extend credit in the form of unused lines of credit. The Bank uses the same
credit policies are used forin making commitments and conditional obligations as are usedit does for
loans.on-balance sheet instruments.
At June 30, 1998 and 1997, the Bank had the following financial instruments
whose contract amounts represent credit risk:
1998 1997
(unaudited)
Standby letters of credit $ -- $ 8,000
Commitments to extend credit $2,933,000 $5,773,000
- --------------------------------------------------------------------------------
(Continued)
F-33
106
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information except at June 30, 1998 and the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
Standby letters of credit represent conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing these letters of credit is essentially the same as the risk
involved in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being used,drawn upon, the total commitmentscommitment amounts do not necessarily
represent future cash requirements. Standby lettersThe Bank evaluates each customer's
creditworthiness on a case-by-case basis. Collateral held varies but includes
primarily real estate, equipment, and time deposits.
NOTE 11 - CONCENTRATION OF CREDIT RISK
The majority of creditthe Bank's business activity is with customers located within
Boone County, Kentucky and financial guarantees
writtenadjoining counties. Manufacturing and service
industries are conditional commitmentsprominent in the area. Although the Bank has a diverse loan
portfolio, a substantial portion of its debtors' ability to guaranteeperform on their
contracts is somewhat dependent on the local economy.
NOTE 12 - PROFIT SHARING PLAN AND 401(k) PLAN
The Bank has a customer's performanceprofit sharing plan covering all eligible employees.
Contributions to the plan are discretionary, determined each year by the Board
of Directors. During 1998, the Bank contributed 3% of each eligible employee's
compensation to the plan. Profit sharing expense recorded during the years ended
June 30, 1998, 1997 and 1996 amounted to $27,732, $30,600 and $20,305,
respectively.
The Bank also has a third party.401(k) plan covering all eligible employees. Employer
matching contributions are discretionary, determined each year by the Board of
Directors. Matching contributions, based on 50% of employee contributions on the
first 6% contributed, totaled $20,868, $19,316 and $0 for the years ended June
30, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(Continued)
F-29F-34
109
SAND RIDGE FINANCIAL CORPORATION107
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
A summary of the
notional or contractual amounts of financial instruments with
off-balance-sheet risk at year end follows:
1997 1996
---- ----
Commitments to extend credit
(primarily variable rate) $21,290,000 41,396,000
Unused credit on credit card arrangements
(primarily fixed rate) 9,314,000 8,490,000
Standby letters of credit
(primarily variable rate) 1,167,000 1,677,000
----------- -----------
$31,771,000 $51,563,000
=========== ===========
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation, including
associates of such persons, are loan customers. A summary of the related party
loan activity, for loans aggregating $60,000 or more to any one related party,
follows for the years December 31, 1997 and 1996:
1997 1996
---- ----
Balance, January 1 $ 2,725,056 $ 2,516,722
New loans 678,331 1,736,529
Repayments (303,368) (1,528,195)
----------- -----------
Balance, December 31 $ 3,100,019 $ 2,725,056
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
F-30
110
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Sand Ridge Financial Corporation at December
31:
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
---- ----
ASSETS
Cash and due from financial institutions $ 283,557 $ 180,610
Securities available for sale 74,766 36,188
Investment in subsidiary bank 39,454,070 34,377,649
Dividends receivable 840,000 960,000
Interest receivable and other assets 83,974 44,541
--------------- ----------------
Total assets $ 40,736,367 $ 35,598,988
=============== ================
LIABILITIES
Dividends payable $ 1,020,000 $ 960,000
Interest payable and other liabilities 35,689 49,739
--------------- ----------------
Total liabilities 1,055,689 1,009,739
SHAREHOLDERS' EQUITY 39,680,678 34,589,249
--------------- ----------------
Total liabilities and shareholders' equity $ 40,736,367 $ 35,598,988
=============== ================
CONDENSED STATEMENTS OF INCOME
Yearsthen ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Dividends from bank - cash $ 1,035,000 $ 960,000 $ 900,000
Interest income on deposits
with financial institutions - 1,250 -
Interest income on securities 183 169 15,944
Other income - - 2,764
Other expenses - (60) (15)
--------------- --------------- ----------------
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY
IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY BANK 1,035,183 961,359 918,693
Income tax expense 174 677 6,412
--------------- --------------- ----------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY BANK 1,035,009 960,682 912,281
Equity in undistributed earnings of subsidiary
bank 3,957,707 3,922,860 3,245,968
--------------- --------------- ----------------
Net income $ 4,992,716 $ 4,883,542 $ 4,158,249
=============== =============== ================
- --------------------------------------------------------------------------------
(Continued)
F-31
111
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,992,716 $ 4,883,542 $ 4,158,249
Adjustment to reconcile net income to
net cash from operating activities
Equity in undistributed earnings
of subsidiary bank (3,957,707) (3,922,860) (3,245,968)
Net accretion of securities (183) (169) -
Change in dividends receivable 120,000 (60,000) (60,000)
Change in interest receivable and
other assets (39,433) (12,123) 123,120
Change in interest payable and
other liabilities (14,051) 48,673 1,066
--------------- --------------- ----------------
Net cash from operating activities 1,101,342 937,063 976,467
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (38,395) - (176)
--------------- --------------- ----------------
Net cash from investing activities (38,395) - (176)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (960,000) (900,000) (840,000)
--------------- --------------- ----------------
Net cash from financing activities (960,000) (900,000) (840,000)
Net change in cash and cash equivalents 102,947 37,063 136,291
Cash and cash equivalents at beginning of year 180,610 143,547 7,256
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 283,557 $ 180,610 $ 143,547
=============== =============== ================
- --------------------------------------------------------------------------------
(Continued)
F-32
112
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995is unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated year end fair valuesDEPOSITS
At June 30, 1998, the scheduled maturities of financial instruments were:time deposits are as follows:
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash1998 $ 15,837,092
1999 19,568,261
2000 10,768,667
2001 6,097,459
2002 and due from financial
institutionsthereafter 437,597
-------------
$ 23,009,706 $ 23,010,000 $ 26,075,959 $ 26,076,000
Interest-bearing balances with
financial institutions 100,000 100,000 100,000 100,000
Securities available for sale 154,483,307 154,483,000 124,204,554 124,205,000
Loans receivable, net of allowance for
loan losses 268,729,148 271,021,000 256,115,131 257,236,000
Financial liabilities
Non-interest bearing demand deposits (47,081,633) (47,082,000) (41,690,247) (41,690,000)
Savings, NOW and money market (169,455,230) (169,455,000) (168,726,981) (168,727,000)
Other time deposits (162,139,170) (162,386,000) (150,863,222) (151,147,000)
Short-term borrowings (21,800,000) (21,800,000) (5,600,000) (5,600,000)
Advances from FHLB (11,686,285) (11,697,000) (11,000,000) (10,918,000)52,709,076
=============
For purposesDirectors, executive directors and businesses in which they have a substantial
interest had deposits of the above disclosures of estimated fair values, the following
assumptions were used as of December 31, 1997 and 1996. The estimated fair value
for cash and due from financial institutions is considered to approximate cost.
The estimated fair value for interest-bearing balances with financial
institutions and securities available for sale is based on quoted market values
for the individual deposits or securities or for equivalent deposits or
securities. The estimated fair value for commercial loans is based on estimates
of the difference in interest rates the Corporation would charge the borrowers
for similar such loans with similar maturities madeapproximately $3,186,000 at December 31, 1997 and
1996, applied for an estimated time period until the loan is assumed to reprice
or be paid. The estimated fair value for other loans is based on estimates of
the rate the Corporation would charge for similar such loans at December 31,
1997 and 1996, applied for the time period until estimated repayment. The
estimated fair value for demand, savings, NOW and money market deposits is based
on their carrying value. The estimated fair values for other time deposits,
short-term borrowings and advances from FHLB are based on estimates of the rate
the Corporation would pay on such deposits or borrowings at December 31, 1997
and 1996, applied for the time period until maturity. The estimated fair values
for other financial instruments and off-balance-sheet loan commitments are
considered to approximate cost at December 31, 1997 and 1996, and are not
considered significant to this presentation.
- --------------------------------------------------------------------------------
(Continued)
F-33
113
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------June 30, 1998.
NOTE 14 - REGULATORY MATTERS
The Corporation and Bank areis subject to various regulatory capital requirements administered by
the federal banking agencies. CapitalFailure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, regulationsthe Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. CapitalThe Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors,factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
regulators can lower classificationsfollowing table) of Total and Tier I capital (as defined in certain cases. Failurethe regulations) to
meet variousrisk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of June 30, 1998, that the Bank meets all
capital adequacy requirements can initiateto which it is subject.
As of June 30, 1998, the most recent notification with the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory action that could
have a direct material effect on the consolidated financial statements.
Theframework for prompt corrective action regulations provide five classifications, includingaction. To be categorized as well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized,the Bank must maintain minimum Total risk-based, Tier I risk-based,
and critically undercapitalized, although these termsTier I leverage ratios as set forth in the following table. There are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end, consolidated and bank only actual capital levels and minimum
required levels were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
1997
- ----
Total capital (to risk weighted assets)
Consolidated $ 40,495 14.8% $ 21,893 8.0% $27,367 10.0%
Bank $ 40,269 14.7% $ 21,870 8.0% $27,337 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 37,243 13.6% $ 10,947 4.0% $16,420 6.0%
Bank $ 37,016 13.5% $ 10,935 4.0% $16,402 6.0%
Tier 1 capital (to average assets)
Consolidated $ 37,243 8.0% $ 18,580 4.0% $23,225 5.0%
Bank $ 37,016 8.0% $ 18,563 4.0% $23,204 5.0%
no
conditions or events since that notification that management believes have
changed the institution's category.
- --------------------------------------------------------------------------------
(Continued)
F-34F-35
114
SAND RIDGE FINANCIAL CORPORATION108
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996(All information except at June 30, 1998 and 1995the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY MATTERS (Continued)
Minimum Required
To Be Well
Minimum Required Capitalized
Under Prompt
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
1996
- ----As of June 30, 1998:
Total capitalCapital (to risk weighted assets)
Consolidated $35,637 13.9% $20,485 8.0% $25,607 10.0%
Bank $35,426 13.8% $20,468 8.0% $25,585 10.0%Risk-Weighted Assets) $ 12,083,000 19.34% $ 4,999,000 8.00% $6,249,000 10.00%
Tier 1 capitalI Capital (to risk weighted assets)
Consolidated $33,270 13.0% $10,243 4.0% $15,364 6.0%
Bank $33,059 12.9% $10,234 4.0% $15,351 6.0%Risk-Weighted Assets) 11,302,000 18.09 2,499,000 4.00 3,749,000 6.00
Tier 1 capitalI Capital (to average assets)
Consolidated $33,270 8.2% $16,258 4.0% $20,323 5.0%
Bank $33,059 8.1% $16,249 4.0% $20,312 5.0%Average Assets) 11,302,000 11.28 4,008,000 4.00 5,009,000 5.00
As of June 30, 1997 (unaudited):
Total Capital (to Risk-Weighted Assets) $ 10,825,916 18.04% $ 4,799,690 8.00% $5,999,613 10.00%
Tier I Capital (to Risk-Weighted Assets) 9,990,585 16.65 2,399,845 4.00 3,599,768 6.00
Tier I Capital (to Average Assets) 9,990,585 10.55 3,788,840 4.00 4,435,600 5.00
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1998, the Company's total assets exceeded $100 million and therefore
is required to disclose the fair value of its financial instruments. The
Corporationfollowing methods and Bankassumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents: For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Investment Securities: Fair values are based on quoted market prices or dealer
quotes.
Loans: Fair value is estimated by discounting the future cash flows using the
current rates at year end 1997which similar loans would be made to borrowers with similar
credit ratings and 1996 were categorized as well
capitalized.for the same remaining maturities.
Deposit Liabilities: 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-rate certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for deposits
of similar remaining maturities.
Other Borrowed Funds: The fair value of fixed-rate borrowings is estimated by
discounting the future cash flows using a rate which approximates market
borrowings of a similar maturity. The carrying value of variable-rate borrowed
funds is a reasonable estimate of fair value.
- --------------------------------------------------------------------------------
(Continued)
F-35
115
SAND RIDGE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------------------
The following discussion and analysis provides information about material
changes in the consolidated financial condition and results of operations of
Sand Ridge Financial Corporation (the "Corporation") and its wholly-owned
subsidiary, Sand Ridge Bank (the "Bank"). It identifies trends and material
changes that occurred during the reporting periods and should be read in
conjunction with the consolidated financial statements and accompanying notes
appearing elsewhere herein.
MATERIAL CHANGES IN FINANCIAL CONDITION
Total assets increased by $71,162,000, or 15.60%, from $456,094,000 at December
31, 1997, to $527,256,000 at September 30, 1998. This represents a 20.80%
annualized rate of growth. This increase can primarily be attributed to the
growth in securities available for sale and loans receivable. Securities
available for sale increased $48,341,000 or 31.29%, from $154,483,000 at
December 31, 1997, to $202,824,000 at September 30, 1998. This was an annualized
rate of growth of 41.72% and was primarily due to the purchase of more fixed
rate government agencies and state and political subdivision securities than
were sold, called or matured during the period. The growth in net loans
represents an increase of $21,424,000, or 7.97%, from $268,729,000 at December
31, 1997, to $290,153,000 at September 30, 1998. This is an annualized growth
rate of 10.63%. The loan growth primarily occurred in the Bank's real estate
loan portfolio.
The growth in securities and loans were funded primarily from increases in total
deposits and Federal Home Loan Bank (FHLB) borrowings. Total deposits increased
by $58,911,000, or 15.56%, from $378,676,000 at December 31, 1997, to
$437,587,000 at September 30, 1998. This represents a 20.74% annualized rate of
growth. Interest-bearing deposit accounts increased $46,180,000 and
noninterest-bearing accounts increased $12,731,000. FHLB borrowings increased
$12,704,000, or 108.71%, from $11,686,000 at December 31, 1997, to $24,390,000
at September 30, 1998.
F-36
116
MATERIAL CHANGES IN RESULTS OF OPERATIONS
For the nine months ended September 30, 1998, the Bank recorded net income of
$4,019,000 compared to net income of $3,571,000 for the same period in 1997,
resulting in an increase of $448,000 or 12.55%. Interest income increased
$2,601,000, or 10.99%, primarily due to the increase in the average balance of
interest-earning assets. To offset the increase to interest income, interest
expense increased $1,416,000 or 11.84%. This increase was primarily due to the
increase in the average balance of interest-bearing liabilities. The combined
effect of the increase in interest income and interest expense resulted in a
$1,185,000 or 10.12% increase in net interest income for the nine months ended
September 30, 1998 as compared to the same period in 1997.
The provision for loan losses increased $400,000 or 29.63% from $1,350,000 for
the nine months ended September 30, 1997 to $1,750,000 for the same period for
1998. This increase in this provision was used to replenish the allowance for
loan losses from $1,179,000 in net loan charge-offs during the nine months ended
September109
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information except at June 30, 1998 and the
year then ended is unaudited)
- --------------------------------------------------------------------------------
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Commitments to provide an increaseExtend Credit and Standby Letters of 17.57% inCredit: Commitments to
extend credit and standby letters of credit represent agreements to lend to a
customer at the allowance for
loan losses related tomarket rate when the loan growth during those nine months.
The increase in net interest income after provision for loan lossesis extended, thus the commitments and
letters of $785,000
for the nine months ended September 30, 1998, compared to the same period for
1997, was the primary reason for the $448,000 increase in net income.
Noninterest income, noninterest expense and income tax expense all increased
incrementally as a result of the general growth that occurred during the nine
months ended September 30, 1998 as compared to the same period for 1997.
LIQUIDITY
The Corporation manages its liquidity position through the Bank. The purpose of
liquidity management is to fund loan demand, meet the withdrawal needs of
customers and provide for operating expenses. Sources of liquiditycredit are cash and
funds due from financial institutions, interest-bearing balances with financial
institutions, federal funds sold, sale and/or maturity of securities classified
as available for sale and principal repayments on loans. The Corporation also
has a borrowing relationship with the Federal Home Loan Bank of Indianapolis.
This relationship allows the Corporation to borrow funds using the Bank's real
estate mortgage loans, under a general blanket agreement, as collateral. This
ability to borrow funds allows for another source of liquidity. Management
believes its current liquidity level is sufficient to meet anticipated growth.
INTEREST RATE SENSITIVITY AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
The primary source of market risk for the financial instruments held by the
Corporation is interest rate risk. That is, the risk that an adverse change in
market rates will adversely affect the market value of the instruments.
Generally, the longer the maturity, the higher the interest rate risk exposure.
While maturity information does not necessarily present all aspects of exposure,
it may provide an indication of where risks are prevalent.
F-37
117
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the
Corporation's net interest margin to swings in interest rates, to assuring
sufficient capital and liquidity to support future balance sheet growth. The
Corporation manages interest rate risk through its Asset/Liability Committee.
The Asset/Liability Committee is comprised of bank officers from various
disciplines. The Committee establishes policies and rates which lead to the
prudent investment of resources, the effective management of risks associated
with changing interest rates, the maintenance of adequate liquidity, and the
earning of an adequate return on shareholders' equity.
Management believes that there has been no significant change to the interest
rate sensitivity since the presentation in the December 31, 1997 Management
Discussion and Analysis appearing elsewhere herein.
CAPITAL MANAGEMENT
Total shareholders' equity was $44,768,000 as of September 30, 1998. This
represents an increase of $5,087,000, or 12.82%, over the prior year end of
December 31, 1997. The primary component of the change in shareholders' equity
is the $4,019,000 in net income for the nine months ended September 30, 1998.
Secondarily, the period ended September 30, 1998 benefited from a positive
change in net unrealized gains on securities available for sale, net of tax, of
$1,068,000.
Restrictions exist due to regulatory guidelines imposed upon all financial
institutions regarding the Bank's ability to transfer funds to the Corporation
in the form of cash dividends, loans or advances. These restrictions have had no
significant impact on the Corporation's dividend policy or operations.
The Corporation's subsidiary Bank remains above the minimum capital levels
required by regulatory agencies to meet the definition of a well capitalized
Bank. The banking regulators may alter minimum capital requirements as a result
of revising their internal policies and their rating of the Corporation's
subsidiary bank. As of September 30, 1998, management is not aware of any
current recommendations by banking authorities which, if they were to be
implemented, would have, or are reasonably likelyconsidered to have a material adverse
effect onfair value.
The estimated fair values of the Corporation's liquidity, capital resources or operations.
Under risk-based capital guidelines issued by the Federal Reserve Board, the
Corporation and its subsidiary BankCompany's financial instruments at June 30,
1998 are required to maintain a minimum
risk-based total capital ratio of 8% and a minimum Tier 1 capital ratio of 4% as of September 30, 1998. While risk-based total capital and risk-based Tier 1
capital guidelines consider on-balance-sheet and off-balance-sheet risk, the
minimum Tier 1 capital ratio measures capital in relation to total
on-balance-sheet assets. The components of risk-based total capital are Tier 1
capital and Tier 2 capital. Tier 1 capital is total shareholders' equity less
intangible assets. Tier 2 capital includes total allowance for loan losses up to
a maximum of 1.25% of risk-weighted assets. The net unrealized gain (loss) on
securities available for sale, net of tax, is not considered for meeting
regulatory capital requirements. The following table provides the minimum
regulatory capital requirements and the Corporation's and Bank's actual capital
ratios at September 30, 1998.
F-38
118follows:
Minimum Regulatory Corporation's Bank's
Capital Requirements Actual Capital Ratio Actual Capital Ratio
Type of Capital Ratio at September 30, 1998 at September 30, 1998 at September 30, 1998
--------------------- --------------------- --------------------- ---------------------Carrying Fair
Amount Value
------ -----
RatioFinancial assets
Cash and cash equivalents $ 6,354,522 $ 6,354,522
Investment securities 26,229,966 26,310,607
Federal Home Loan Bank stock 493,500 493,500
Loans, net of total capital to
risk-weighted assets 8% 15.0% 14.9%
Ratio of Tier 1 capital to
risk-weighted assets 4% 13.7% 13.7%
Tier 1 capital ratio 4% 8.0% 8.0%allowance 68,867,607 68,686,738
------------ ------------
$101,945,595 $101,845,367
============ ============
Financial liabilities
Deposits $ 88,364,959 $ 88,863,097
Other borrowed funds 3,829,329 3,845,051
------------ ------------
$ 92,194,288 $ 92,708,148
============ ============
IMPACT OF THE YEAR 2000
The Corporation is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The issue is whether
computer systems will properly recognize the date sensitive- --------------------------------------------------------------------------------
(Continued)
F-37
110
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information as the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Corporation is
heavily dependent on computer processing in its business activitiesexcept at June 30, 1998 and the
year 2000 issue creates risk for the Corporation from unforeseen problems in the
Corporation's computer system and from third parties whom the Corporation uses
to process information. Such failures of the Corporation's computer system
and/or third parties' computer systems could have a material impact on the
Corporation's ability to conduct its business.
A major third party vendor provides the Corporation's primary data processing.
This provider has advised the Corporation that it has completed the renovation
and testing of its system to be Year 2000 ready. Users of the system have been
given the opportunity to participate in proxy testing of the system and the
Corporation has taken advantage of this opportunity.
The Corporation has performed an assessment of its computer hardware and
software, and has determined those systems that require upgrade to be Year 2000
ready. Such upgrades have been substantially completed. In addition, the
Corporation has reviewed other external third party vendors that provide
services to the Corporation (i.e. utility companies, electronic fund transfer
providers, and alarm companies), and has requested or already received
certification letters from these vendors that their systems will be Year 2000
ready on a timely basis. Testing will be performed with these service providers,
where possible, to determine their Year 2000 readiness.
The Corporation could incur losses if loan payments are delayed due to Year 2000
problems affecting significant borrowers. The Corporationthen ended is communicating with
such parties to assess their progress in evaluating and implementing any
corrective measures required by them to be Year 2000 ready. To date, the
Corporation has not been advised by such parties that they do not have plans in
place to address and correct the issues associated with the Year 2000 problem;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation.
F-39
119
Based on the Corporation's review of its computer systems, management believes
the cost of the remediation effort to make its systems Year 2000 ready will be
approximately $49,000. In addition, it is estimated that 1,881 man-hours will be
incurred by Corporation personnel related to Year 2000 issues at an approximate
cost of $56,000. Such costs will be charged to expense as incurred. Computer
equipment with an aggregate total of about $200,000 has been replaced in 1998
and is to be replaced in many areas of the Corporation in 1999. Much of this
equipment was replaced sooner than it otherwise would have been for Year 2000
compliance purposes; however, it was not replaced purely for this reason.
The Corporation has developed a Year 2000 contingency plan that addresses, among
other issues, critical operations and potential failures thereof, and strategies
for business continuation.
Although management believes the Corporation's computer systems and service
providers will be Year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Corporation's systems rely,
will be fully functional in the Year 2000. Such failure could have a significant
adverse impact on the financial condition and results of operations of the
Corporation.
F-40
120
SAND RIDGE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATEDunaudited)
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
As of September 30, 1998 and for the Nine Months Ended
September 30, 1998 and 1997
F-41
121
SAND RIDGE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (Unaudited) and December 31, 1997
- ------------------------------------------------------------------------------Condensed Balance Sheet
-----------June 30---------
1998 1997
---- ----
(unaudited)
ASSETS
Cash and due from financial institutions $ 22,726,9832,352 $ 23,009,706
Interest-bearing balances with financial
institutions 100,000 100,000
Securities available for sale 202,824,166 154,483,307
Loans receivable, net of allowance for loan
losses of $3,823,640830
Investment in 1998 and $3,252,361 in 1997 290,152,964 268,729,148
Premises and equipment - net 5,750,350 5,958,084
Interest receivable and othersubsidiaries 11,073,179 9,714,603
Other assets 5,702,011 3,813,879
------------ ------------2,783 5,709
----------- -----------
Total assets $527,256,474 $456,094,124
============ ============$11,078,314 $ 9,721,142
=========== ===========
LIABILITIES AND SHAREHOLDERS'STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing demand deposits $ 59,812,896 $ 47,081,633
Savings, NOW and money market 181,338,022 169,455,230
Other time deposits 196,436,200 162,139,170
------------ ------------
Total deposits 437,587,118 378,676,033
Federal funds purchased 9,300,000 13,800,000
Securities sold under agreements to repurchase 5,219,000 8,000,000
U.S Treasury demand note 970,186 --
Advances from Federal Home Loan Bank (FHLB) 24,389,845 11,686,285
Interest payable and other liabilities 5,022,433 4,251,128
------------ ------------
Total liabilities 482,488,582 416,413,446
Shareholders'Stockholders' equity
Preferred stock, 100,000 shares authorized and
-0- shares outstanding -- --
Common stock, $10 stated value: 200,000no par value; 120,000 shares
authorized and 60,000authorized; 58,500 shares issued and outstanding 600,000 600,000
Additional paid-in capital 4,600,000 4,600,000$ 117,000 $ 117,000
Surplus 2,808,000 2,808,000
Retained earnings 36,062,367 32,042,9788,099,137 6,822,361
Net unrealized gainslosses on securities available for sale net54,177 (26,219)
----------- -----------
Total stockholders' equity $11,078,314 $ 9,721,142
=========== ===========
Condensed Statement of Income
-------------------Years Ended June 30-------------------
1998 1997 1996
(unaudited) (unaudited)
Income
Dividends from subsidiary bank $ 292,500 $ 234,000 $ 159,705
Expenses
Other expenses 2,128 2,513 4,620
----------- ----------- -----------
Income before income taxes and equity
in undistributed income of subsidiary 290,372 231,487 155,085
Income tax expense (benefit) (724) (839) (1,570)
----------- ----------- -----------
Income before equity in undistributed
income of $2,299,285subsidiary 291,096 232,326 156,655
Equity in 1998 and $1,598,894 in 1997 3,505,525 2,437,700
------------ ------------
Total shareholders' equity 44,767,892 39,680,678
------------ ------------
Total liabilities and shareholders' equity $527,256,474 $456,094,124
============ ============undistributed income of subsidiary 1,278,180 1,191,624 966,360
----------- ----------- -----------
NET INCOME $ 1,569,276 $ 1,423,950 $ 1,123,015
=========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
F-42- --------------------------------------------------------------------------------
(Continued)
F-38
122
SAND RIDGE111
HEBRON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME
Nine months ended September(All information except at June 30, 1998 and 1997
(Unaudited)the
year then ended is unaudited)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statement of Cash Flows
-------------Years Ended June 30-------------
1998 1997 ---- ----1996
(unaudited) (unaudited)
Interest income
Loans, including fees $ 18,028,800 $ 16,808,607
Deposits with financial institutions 6,831 6,832
Federal funds sold 76,560 713,954
Securities:
Taxable 5,169,882 3,644,444
Non-taxable 2,982,051 2,489,510
--------------- ----------------
26,264,124 23,663,347
Interest expense
Deposits 12,244,943 11,553,197
Federal funds purchased 191,496 12,930
Securities sold under agreements to repurchase 272,578 -
Advances from FHLB 636,373 396,461
Other 33,386 -
--------------- ----------------
13,378,776 11,962,588
--------------- ----------------
NET INTEREST INCOME 12,885,348 11,700,759
Provision for loan losses 1,750,000 1,350,000
--------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,135,348 10,350,759
Noninterest income
Net securities gains 91,035 31,937
Service charges on deposit accounts 1,745,997 1,585,554
ATM fees 363,838 344,454
Investment commissions 413,612 256,296
Trust revenues 125,912 111,087
Other income 608,960 471,047
--------------- ----------------
3,349,354 2,800,375
Noninterest expenses
Salaries and employee benefits 4,779,387 4,127,671
Occupancy 497,968 550,088
Furniture and equipment 888,780 795,971
FDIC insurance 35,876 35,224
Data processing 458,894 436,563
Marketing 346,821 375,660
Supplies 316,030 324,884
Other expenses 1,876,691 1,739,439
--------------- ----------------
9,200,447 8,385,500
--------------- ----------------
INCOME BEFORE INCOME TAXES 5,284,255 4,765,634
Income tax expense 1,264,866 1,194,866
--------------- ----------------
NET INCOME $ 4,019,389 $ 3,570,768
=============== ================
Basic earnings per common share $ 66.99 $ 59.51
=============== ================
See accompanying notes to unaudited consolidated financial statements.
F-43
123
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 1998 and 1997
(Unaudited)
- ------------------------------------------------------------------------------
1998 1997
---- ----
NET INCOME $ 4,019,389 $ 3,570,768
Other comprehensive income
Net change in unrealized gains on securities available for sale
Unrealized gains arising during the period 1,859,251 964,888
Reclassification adjustments for
gains included in net income (91,035) (31,937)
--------------- ----------------
Net change in unrealized gains on securities
available for sale 1,768,216 932,951
Tax effects (700,391) (369,542)
--------------- ----------------
Total other comprehensive income 1,067,825 563,409
--------------- ----------------
COMPREHENSIVE INCOME $ 5,087,214 $ 4,134,177
=============== ================
See accompanying notes to unaudited consolidated financial statements.
F-44
124
SAND RIDGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1997
(Unaudited)
- ------------------------------------------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,019,3891,569,276 $ 3,570,7681,423,950 $ 1,123,015
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 801,748 732,907
Provision for loan losses 1,750,000 1,350,000
Net amortization and accretionEquity in undistributed income of
securities 89,635 19,735
Net securities gains (91,035) (31,937)
Net change in:
Othersubsidiary (1,278,180) (1,191,624) (966,360)
Change in other assets (2,588,522) 669,249
Other2,926 2,411 744
Change in other liabilities 1,791,305 166,255
-------------- -- (12,000)
----------- Total adjustments 1,753,131 2,906,209
------------ ----------- Net cash from operating activities 5,772,520 6,476,977-----------
NET CASH FLOWS FROM INVESTINGOPERATING ACTIVITIES Net change in loans receivable (23,400,935) (8,628,528)
Purchase of:
Securities available for sale (121,072,034) (46,166,572)
Premises and equipment (594,014) (476,964)
Proceeds from:
Sales of securities available for sale 12,239,325 14,740,066
Maturities and calls of securities available for sale 48,741,879 9,559,731
Principal payments on securities available for sale 13,519,586 7,039,187
Recoveries on loans charged-off 227,119 179,762
------------ -----------
Net cash from investing activities (70,339,074) (23,753,318)
(Continued)
F-45
125
SAND RIDGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1997
(Unaudited)
- ------------------------------------------------------------------------------
1998 1997
---- ----
294,022 234,737 145,399
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 58,911,085 $ 20,002,564
Net change in federal funds purchased (4,500,000) (5,600,000)
Proceeds from securities sold under
agreements to repurchase 2,414,450 --
Repayment of securities sold under agreements
to repurchase (5,195,450) --
Net change in U.S. Treasury demand note 970,186 --
Proceeds from advances from FHLB 30,000,000 1,250,000
Repayment of advances from FHLB (17,296,440) (7,563,715)
Cash dividendsDividends paid (1,020,000) (960,000)
------------ ------------
Net cash from financing activities 64,283,831 7,128,849
------------ ------------(292,500) (234,000) (146,250)
----------- ----------- -----------
Net change in cash and cash equivalents (282,723) (10,147,492)1,522 737 (851)
Cash and cash equivalents at beginning of year 23,009,706 26,075,959
------------ ------------830 93 944
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,726,9832,352 $ 15,928,467
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest830 $ 13,173,342 $ 12,004,574
Income taxes 3,084,215 640,00093
=========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
F-46F-39
126
SAND RIDGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
- -----------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Article 10-01 of Regulation S-X. Accordingly, footnote
disclosures, which would substantially duplicate the disclosures contained in
the most recent audited financial statements, have been omitted. In the opinion
of management of the Corporation, all adjustments necessary for a fair
presentation of such financial information have been included. All such
adjustments are of a normal recurring nature. The results of operations and cash
flows for the nine months ended September 30, 1998 may not be indicative of the
results for the entire year. The accompanying unaudited consolidated financial
statements should be read in conjunction with the notes to consolidated
financial statements contained in the December 31, 1997 consolidated financial
statements.
NOTE 1 - EARNINGS PER COMMON SHARE
Earnings per common share are calculated on the basis of the weighted average
number of shares outstanding. The Corporation has no dilutive potential common
shares. Earnings per common share are based on 60,000 shares for the nine months
ended September 30, 1998 and 1997, respectively.
NOTE 2 - ACCOUNTING STANDARDS IMPLEMENTED IN 1998
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires comprehensive income to be reported for all periods.
Comprehensive income includes both net income and other comprehensive income.
Other comprehensive income includes the change in net unrealized gains and
losses on securities available for sale, net of tax.
NOTE 3 - MERGER AGREEMENT
In December of 1998, the Corporation announced that it had signed a definitive
agreement to be acquired by First Financial Bancorp., parent company of First
National Bank of Southwestern Ohio. The transaction will be structured as a
tax-free exchange and will be accounted for under the pooling-of-interests
method. Transaction related expenses are anticipated to total approximately
$2,400,000, if the transaction is consummated. The expenses are primarily for
investment banker fees which are variable based upon the value of the
consideration to be paid by First Financial Bancorp. These expenses have not
been included in the September 30, 1998 Statement of Income.
F-47
127112
APPENDIX A
PLAN AND AGREEMENT OF MERGER
BETWEEN
FIRST FINANCIAL BANCORP.
AND
SAND RIDGE FINANCIAL CORPORATIONHEBRON BANCORP, INC.
128113
TABLE OF CONTENTS
PAGE
----
1. Recitals.....................................................................................................1Recitals.................................................................................................1
2. The Merger...................................................................................................1Merger; Tax Effect...................................................................................2
3. Closing......................................................................................................2Closing..................................................................................................2
4. Effective Time...............................................................................................2Time...........................................................................................2
5. Governing Law; Articles of Incorporation.....................................................................2Incorporation.................................................................2
6. Regulations..................................................................................................2
7. DirectorsRegulations..............................................................................................2
7.Directors and Officers.......................................................................................2Officers..........................................................................................2
8. Conversion of Shares in the Merger...........................................................................3Merger.......................................................................3
8.1. FFB's Common Shares.............................................................................3
8.2. SRFC'sHBI's Common Shares............................................................................3Shares.............................................................................3
8.3. Consideration; Exchange Ratio...................................................................3
8.4. Surrender of SRFC Certificates..................................................................3HBI Certificates...................................................................4
8.5. Fractional Interests............................................................................4
9. Effect of the Merger.........................................................................................4Merger.....................................................................................4
10. Approval of Shareholders.....................................................................................5Shareholders.................................................................................5
11. SRFC'sHBI's Representations and Warranties........................................................................5Warranties.....................................................................5
11.1. Organization....................................................................................5
11.2. Corporate Authority.............................................................................5
11.3. Capitalization..................................................................................5
11.4. List of Information.............................................................................5Information.............................................................................6
11.5. Subsidiaries....................................................................................5Subsidiaries....................................................................................6
11.6. Financial Statements............................................................................6
11.7. Intellectual Property...........................................................................6
11.8. Good and Marketable Title.......................................................................7
i
129114
11.9. Taxes...........................................................................................7
11.10. Absence of Certain Changes or Events............................................................7Events............................................................8
11.11. Contracts and Agreements........................................................................8
11.12. Insurance.......................................................................................8
11.13. Litigation and Proceedings......................................................................8
11.14. Material Contracts; No Conflict with Other Instruments..........................................8
11.15. Governmental Authorizations and Filings.........................................................9
11.16. Consents and Approvals..........................................................................9
11.17. Brokers.........................................................................................9
11.18. Environmental Matters...........................................................................9
11.19. Validity of Contemplated Transactions..........................................................10
11.20. Year 2000 Compliance...........................................................................10
11.21. Employee Benefit Plans.........................................................................11
12. FFB's Representations and Warranties........................................................................12Warranties....................................................................12
12.1. Organization...................................................................................12
12.2. Corporate Authority............................................................................12
12.3. Subsidiaries...................................................................................12
12.4. Capitalization.................................................................................12
12.5. Shares to be Issued............................................................................12Issued............................................................................13
12.6. Financial Statements...........................................................................13
12.7 Environmental Matters..........................................................................13
12.8 Absence of Certain Changes or Events...........................................................14
12.9.Events...........................................................13
12.8. Litigation and Proceedings.....................................................................14
12.10.Proceedings.....................................................................13
12.9. Consents and Approvals.........................................................................14Approvals.........................................................................13
12.10. Brokers........................................................................................14
12.11. Brokers........................................................................................15
12.12. Validity of Contemplated Transactions..........................................................15
12.13Transactions..........................................................14
12.12 Year 2000 Compliance...........................................................................15Compliance...........................................................................14
12.13 Intellectual Property..........................................................................14
12.14 Intellectual Property..........................................................................15
12.15 Good and Marketable Title......................................................................16Title......................................................................15
12.15 Taxes..........................................................................................15
12.16 Taxes..........................................................................................16Environmental Matters..........................................................................16
12.17 Material Contracts; No Conflict with Other Instruments.........................................16
13. Conduct of Business Pending the Merger......................................................................17Merger..................................................................17
13.1. Negative Covenants of SRFC.....................................................................17
13.2.HBI......................................................................17
13.2 Dividends......................................................................................17
13.3. SRFC Efforts...................................................................................17
13.4. PURCHASE OF "TAIL COVERAGE"....................................................................17HBI Efforts....................................................................................17
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14. Additional Agreements.......................................................................................17Agreements...................................................................................17
14.1. Access and Information.........................................................................17
14.2. Confidentiality................................................................................18
14.3. Registration Statement.........................................................................18
14.4. Employee Benefits..............................................................................18
14.5. Expenses.......................................................................................19
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14.6. Further Assurances.............................................................................19
14.7. Pooling........................................................................................20Pooling........................................................................................19
14.8. Audited Financial Statements...................................................................20Statements...................................................................19
14.9. Press Releases.................................................................................20
14.10. Seller Affiliates..............................................................................20
14.11. Board Representation...........................................................................21Acquisition Transactions.......................................................................20
15. Conditions Precedent; Terminations..........................................................................21Terminations......................................................................21
15.1. Conditions Precedent to Obligations of the Parties.............................................21
15.2. Conditions Precedent to FFB's Obligations......................................................21Obligations......................................................22
15.3. Conditions Precedent to SRFC's Obligation......................................................23HBI's Obligation.......................................................23
15.4. Termination and Abandonment....................................................................24
15.5. Effect of Termination..........................................................................27
15.6.15.7. Expenses.......................................................................................27
15.7. Survival of Representations....................................................................27
16. General Provisions..........................................................................................27Provisions......................................................................................27
16.1. Definitions....................................................................................27
16.2. Amendments.....................................................................................27
16.3. Purchase of "Tail Coverage" for Directors' and Officers' Insurance.............................27
16.4. No Survival....................................................................................27
16.5. Notices........................................................................................28
16.4.16.6. Binding Nature of Agreement....................................................................28
16.5.16.7. Entire Agreement...............................................................................28
16.8. Remedies.......................................................................................28
16.9. Headings.......................................................................................29
16.10. Assignment.....................................................................................29
16.6.16.11. Governing Law..................................................................................29
16.7.16.12. Counterparts...................................................................................29
16.13. Knowledge of HBI...............................................................................29
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131116
PLAN AND AGREEMENT OF MERGER
BETWEEN
FIRST FINANCIAL BANCORP.
AND
SAND RIDGE FINANCIAL CORPORATIONHEBRON BANCORP, INC.
THIS PLAN AND AGREEMENT OF MERGER (the "Agreement") is made and entered
into this 16th31st day of December, 1998 by and between FIRST FINANCIAL BANCORP.BANCORP
("FFB"), an Ohio corporation and registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHCA"), and a savings and loan
holding company under the Savings and Loan Holding Company Act, and SAND RIDGE FINANCIAL CORPORATIONHEBRON
BANCORP, INC. ("SRFC"HBI"), an Indianaa Kentucky corporation and registered as a bank holding
company under Bank Holding Company Act of 1956.the BHCA.
1. RECITALS.
1.1 FFB is a corporation duly organized and existing under the laws of
the State of Ohio, having been incorporated on August 8, 1982. SRFCHBI is a
corporation duly organized and existing under the laws of the StateCommonwealth of
Indiana,Kentucky, having been incorporated on May 24, 1984.January 25, 1994.
1.2 The Boards of Directors of FFB and SRFCHBI deem it advisable for the
general welfare and advantage of FFB and SRFCHBI and their respective shareholders
and other constituencies that SRFCHBI merge with and into FFB pursuant to this
Agreement and pursuant to the applicable provisions of the laws of the StatesState of
Ohio and Indiana and the
United StatesCommonwealth of America,Kentucky, subject to the approval of various federal
and state regulatory authorities. The parties intend that the transaction shall
constitute a tax-free reorganization for federal income tax purposes.
1.3 As of November 6, 1998 the authorized capital stock of FFB
consisted of 60,000,000 common shares, without par value ("FFB Common Shares"),
of which 32,921,329 shares were outstanding.
1.4 As of November 1, 1998, theThe authorized capital stock of SRFC
consistedHBI consists solely of 200,000120,000
shares of common stock, without par value ("SRFCHBI Common Shares"), of which 60,000
shares were issued and outstanding, and 100,000outstanding.
1.5 Hebron Deposit Bank ("Bank") is the only subsidiary of HBI. The
authorized capital stock of Bank consists of 1,200 shares of preferredcommon stock, $100 par
value $100 per share ("Bank Common Shares"), of which no1,200 shares were issued
and outstanding.outstanding and 1,200 Bank Common Shares were owned by HBI.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual agreements herein contained, the parties hereby agree as follows:
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2. THE MERGER.MERGER; TAX EFFECT. Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time (as defined in Section 4), in
accordance with the applicable statutory provisions of the StatesState of Ohio and
Indiana,Commonwealth of Kentucky, the United States of America, and any regulatory
approvals, SRFCHBI will be merged with and into FFB and the separate corporate
existence of 132
SRFCHBI shall thereupon cease (the "Merger"). FFB will be the surviving
corporation in the Merger (said corporation hereafter being sometimes called the
"Surviving Corporation"), and the separate corporate existence of FFB with all
of its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger. Sand RidgeThe Bank, (the "Bank"), a wholly owned100%-owned subsidiary of SRFC,HBI, will
continue as a wholly owned subsidiary of the Surviving Corporation. 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").
3. CLOSING. The closingdelivery of the Merger (the "Closing")certificates and opinions called for by
this Agreement shall take place onat the earlieroffice of the following dateFrost & Jacobs, 2500 PNC
Center, 201 East Fifth Street, Cincinnati, Ohio 45201, at a closing (the
"Closing") fixed by agreement of FFB and HBI (the "Closing Date"): July 31, 1999; 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; (iii) satisfaction or (ii) if
allwaiver (to the extent legally permissible) of the
conditions precedent to the consummation of this Agreement as set forth in Section 15 hereof have been satisfied on or before the fifteenth day15.1, 15.2 and 15.3 of any
given month, the parties will consummate this Agreement asAgreement; and (iv)
expiration of the end of the
same month; provided, however, that if the conditions precedent to the
consummation of this Agreement are satisfied on or10-day period commencing after the sixteenth day of
any month through the last day of such month, as of the end of the month
immediately following such month; or (iii) on such other date as the parties
mutually agree.Valuation Date (as defined
in Section 15.4.7).
4. EFFECTIVE TIME. As soon as practicable following the Closing, FFB will
cause (i) the ArticlesCertificate of Merger in the form attached hereto as Exhibit A
(the "Ohio Articles of Merger") to be filed with the office of the Secretary of
State of the State of Ohio (the "Ohio Secretary of State") and (ii) Articles of
Merger in the form attached hereto as Exhibit B (the "Indiana"Kentucky Articles of
Merger") to be filed with the office of the Secretary of State of the
StateCommonwealth of IndianaKentucky (the "Indiana"Kentucky Secretary of State"). The Merger will
become effective (the "Effective Time") on the date on which the latest of the
following actions will have been completed: (i) at the time when the Ohio
Articles of Merger are accepted for filing by the Ohio Secretary of State, (ii)
at the time when the IndianaKentucky Articles of Merger are accepted for filing by the
IndianaKentucky Secretary of State or (iii) such later time agreed to by FFB and SRFCHBI
and established under the Ohio and IndianaKentucky Articles of Merger but not later
than 30 days after the Closing Date.
5. GOVERNING LAW; ARTICLES OF INCORPORATION. The laws which are to govern
the Surviving Corporation are the laws of the State of Ohio. The Articles of
Incorporation of FFB, at the Effective Time, will be the Articles of
Incorporation of the Surviving Corporation until the same will be further
amended or altered in accordance with the provisions thereof.
6. REGULATIONS. The Regulations of FFB at the Effective Time will be the
Regulations of the Surviving Corporation until the same will be altered or
amended in accordance with the provisions thereof.
7. DIRECTORS AND OFFICERS. The directors of FFB at the Effective Time will
be the directors of the Surviving Corporation until their respective successors
are duly elected and qualified. Subject to the authority of the Board of
Directors as provided by law and the Regulations of the Surviving Corporation,
the officers of FFB at the Effective Time will be the officers of the
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118
Surviving Corporation. The directors of Bank at the Effective Time will be the
directors of Bank until their respective successors are duly elected and
qualified. Subject to the authority of the board of directors of Bank as
provided by law and the By-Laws of Bank, the officers of Bank at the Effective
Time will continue to serve as officers of Bank after the Effective Time.
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133
8. CONVERSION OF SHARES IN THE MERGER. The mode of carrying into effect
the Merger provided in this Agreement and the manner and basis of converting the
shares of the constituent corporation into shares of the Surviving Corporation
are as follows:
8.1 FFB'S COMMON SHARES. None of the FFB Common Shares issued at the
Effective Time will be converted as a result of the Merger, but all such shares
(including shares held in the treasury) will remain issued shares of FFB.
8.2 SRFC'SHBI'S COMMON SHARES. At the Effective Time, each SRFCHBI Common Share
outstanding immediately prior to the Effective Time (except as otherwise
provided in Section 8.5)8.5 and except for shares held by shareholders who have
perfected their right to dissent under Title 271B, Chapter 13 of the Kentucky
Revised Statutes ("KRS")) will by virtue of the Merger be converted into FFB
Common Shares as determined pursuant to Section 8.3 below, and each SRFCHBI Common
Share held in treasury immediately prior to the Effective Time will be
cancelled.
8.3 CONSIDERATION; EXCHANGE RATIO.
8.3.1 Each SRFCHBI Common Share issued and outstanding immediately
prior to the Effective Time shall subject to Section 15.4.7, be converted into, and become exchangeable
for, a number (the "Exchange Ratio") of FFB Common Shares (the "Merger
Consideration"), the numerator of which shall be 5,115,0001,222,650 (which number is
adjusted for the 10% stock dividend declared by FFB on November 24, 1998) and
the denominator of which shall be the number of SRFCHBI Common Shares outstanding,
on a fully diluted basis, immediately prior to the Effective Time; provided,
however that dissenting shareholders of SRFCHBI who perfect their rights under the
laws of the StateCommonwealth of IndianaKentucky will instead receive cash in such amount per SRFCHBI
Common Share which they own as determined in accordance with Indiana
Business Corporation Law I.C. ss. 23-1-44.KRS Sections
271B.13-010 through 271B.13-310. In the event that prior to the Effective Time
the outstanding FFB Common Shares shall have been increased, decreased or
changed into or exchanged for a different number or kind of shares or securities
by reorganization, recapitalization, reclassification, stock dividend, stock
split or other like changes in FFB's capitalization, all without FFB receiving
consideration therefor, then an appropriate and proportionate adjustment shall
be made in the Exchange Ratio. As of the date of this Agreement, the Exchange
Ratio is 85.25.20.3775.
8.3.2 At the Effective Time, each of the then issued and
outstanding SRFCHBI Common Shares will be cancelled and extinguished and, in
consideration and in exchange therefor, the holders thereof will be entitled,
upon compliance with Section 8.4, to receive from FFB the number of FFB Common
Shares as determined pursuant to Section 8.3.1.8.3.1, and the holders that perfect
their right to dissent will receive fair value for their shares pursuant to KRS
271B.13.
8.3.3 After determining the Exchange Ratio, each holder of
outstanding SRFCHBI Common Shares after the Effective Time, upon surrender to FFB,
will be entitled to receive one
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119
or more stock certificates of FFB into which the SRFCHBI Common Shares so
surrendered will have been converted as aforesaid. No dividends that may have
been declared by FFB after the Effective Time and prior to the surrender of SRFCHBI
Common Shares will be paid until such shares have been presented for exchange to
FFB.
8.4 SURRENDER OF SRFCHBI CERTIFICATES. As soon as practicable after the
Effective Time, the stock certificates representing SRFCHBI Common Shares issued and
outstanding at the Effective Time will be surrendered for exchange to FFB. As
promptly as practicable after the Effective 3
134
Time, FFB will cause the Registrar
and Transfer Company (the( the "Exchange Agent") to prepare and mail to each holder
of record of an outstanding certificate or certificates prior thereto
representing SRFCHBI Common Shares a letter of transmittal containing instructions
for the surrender of the certificate or certificates of SRFCHBI held by such holder.
Upon surrender of the certificate or certificates that prior thereto represented
SRFCHBI Common Shares in accordance with instructions set forth in the letter of
transmittal, such holder will be entitled to receive in exchange therefor,
certificates representing the number of whole shares of FFB into which the
shares represented by the certificate or certificates so surrendered will have
been converted, without interest.interest and the payment for any fractional interest as
set forth in Section 8.5 below. The Exchange Agent will not be obligated to
deliver certificates for FFB Common Shares to a former stockholder of SRFCHBI until
such former stockholder surrenders his or her certificate or certificates
representing shares of SRFCHBI or, in default thereof, an appropriate affidavit of
loss and indemnity agreement or bond as may be required by FFB. Until so
surrendered for exchange, each such stock certificate formerly representing SRFCHBI
Common Shares will be deemed for all corporate purposes (except for the payment
of dividends, which will be subject to the exchange of stock certificates as
above provided) to evidence the ownership of the number of common shares of the
Surviving Corporation that the holder thereof would be entitled to receive upon
its surrender to FFB.
8.5 FRACTIONAL INTERESTS. No fractional FFB Common Shares or
certificate or scrip representing the same will be issued. In lieu thereof, each
holder of SRFC'sHBI's Common Shares having a fractional interest arising upon such
conversion will be paid in cash by the Exchange Agent on behalf of FFB for the
additional fractional interest. Such payment will be equal to the fractional
interest times the Average Closing Price as defined in Section 15.4.7. This
amount will not be paid to any holder of SRFC'sHBI's Common Shares who will not have
surrendered his or her certificates for exchange pursuant to Section 8.4 hereof,
and FFB will retain such amount until such time as such certificates have been
surrendered.
9. EFFECT OF THE MERGER. At the Effective Time, the Surviving Corporation
will succeed to, without other transfer, and will possess and enjoy, all the
rights, privileges, immunities, powers and franchises both of a public and a
private nature, and be subject to all the restrictions, disabilities and duties
of each of FFB and SRFC,HBI, and all the rights, privileges, immunities, powers and
franchises of each of FFB and SRFCHBI and all property, real, personal and mixed,
and all debts due to either of said constituent corporations on whatever
account, for stock subscriptions as well as for all other things in action or
belonging to each of said corporations, will be vested in the Surviving
Corporation; and all property, rights, privileges, immunities, powers and
franchises, and all and every other interest will be thereafter as effectually
the property of the Surviving Corporation as they were of FFB and SRFC,HBI,
respectively, and the title to any real estate vested by deed or otherwise in
either of FFB and SRFCHBI will not revert or be in any way impaired by reason
4
120
of the Merger; provided, however, that all rights of creditors and all liens
upon any property of either of FFB or SRFCHBI will be preserved unimpaired, limited
in lien to the property affected by such liens at the Effective Time, and all
debts, liabilities and duties of said constituent corporations, respectively,
will thenceforth attach to the Surviving Corporation and may be enforced against
it to the same extent as if said debts, liabilities and duties had been incurred
or contracted by the Surviving Corporation.
4
135
10. APPROVAL OF SHAREHOLDERS. This Agreement will be submitted to the
shareholders of SRFCHBI for adoption and approval on or before June 30, 1999 or such
later date as the Boards of Directors of FFB and SRFCHBI mutually approve.
11. SRFC'SHBI'S REPRESENTATIONS AND WARRANTIES. SRFCExcept as disclosed in writing
delivered to FFB concurrently with the execution of this Agreement (the
"Disclosure Schedule"), HBI represents and warrants to FFB as of the date hereof
and as of the Closing Date as follows:
11.1 ORGANIZATION. SRFCHBI is a corporation duly organized and validly
existing under the laws of the StateCommonwealth of IndianaKentucky and is registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended. SRFCBHCA. HBI has the corporate power to carry on its
businesses as they are now being conducted and is qualified to do business in
each jurisdiction in which the character and location of the assets owned by it,
or the nature of the business transacted by it, requires qualification.
11.2 CORPORATE AUTHORITY. SRFCHBI has all requisite corporate power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement and to consummate,
subject only to the approval of the Merger by the holders of at least two-thirdsa majority
of the outstanding SRFCHBI Common Shares entitled to vote on the matter, the Merger.
This Agreement is a valid and binding agreement of SRFCHBI enforceable against the
Company in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles (the "Bankruptcy and Equity Exception").
The Board of Directors of SRFCHBI (i) has unanimously adopted the plan of
merger set forth herein and approved this Agreement and the other transactions
contemplated hereby, (ii) has declared that the Merger and this Agreement and
the other transactions contemplated hereby are advisable and (iii) has received
the opinion of its financial advisor, Hovde Financial,Professional Bank Services, Inc. ("PBS"),
to the effect that as of the date hereof, the Exchange Ratio to be received by
the holders of the SRFCHBI Common Shares in the Merger is fair to such holders from
a financial point of view.
11.3 CAPITALIZATION. SRFC'sHBI's capitalization consists solely of 200,000120,000
authorized SRFCHBI Common Shares, of which, as of the date hereof, 60,000 shares
were issued and outstanding, and 100,000 preferred shares, $100 par value, of
which no shares are issued and outstanding. Each SRFCHBI Common Share was validly issued, fully
paid and non-assessable, and each outstanding SFRCHBI Common Share is entitled to
one vote. There are no outstanding subscriptions, options, warrants, calls or
rights of any kind relating to or providing for the issuance, sale, delivery or
transfer of any class of securities of SRFC.HBI.
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11.4 LIST OF INFORMATION. For the due diligence examination in
November, 1998, SRFCHBI delivered to FFB certain information. Suchinformation concerning HBI dated as
of the date furnished. To the best knowledge of HBI, such information and the
copies of documents furnished to FFB are accurate in all material respects as of
the date furnished.
11.5 SUBSIDIARIES. SRFCHBI has one wholly owned100%-owned Subsidiary, the Bank. SRFCThe
authorized capital stock of Bank consists of 1,200 shares of common stock, par
value $100 per share ("Bank Common Shares"), of which 1,200 shares were issued
and outstanding and 1,200 Bank Common Shares were owned by HBI. HBI has no other
Subsidiaries. Bank is a state bank duly organized and validly existing under the
laws of the StateCommonwealth of Indiana.Kentucky. Bank has the corporate power to carry on
its businesses as they are now being conducted and is qualified to do business
in each jurisdiction in which the character and location
5
136 of the assets owned by
it, or the nature of the business transacted by it, requires qualification. All
of the outstanding shares of the stock of Bank are validly issued, fully paid
and non-assessable, except as provided under federal banking law, and all such
shares are owned by SRFCHBI free and clear of all liens, claims, charges or
encumbrances. There are no outstanding preferred shares, subscriptions, options,
warrants, calls or rights of any kind relating to or providing for the issuance,
sale, delivery or transfer of any class of securities of Bank.
11.6 FINANCIAL STATEMENTS. SRFCHBI has delivered to FFB copies of its
consolidatedthe
Bank's balance sheets as of December 31, 1997, 1996,June 30, 1998 and 1995 and the
related consolidated statements of earnings, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997, in each case including the
notes thereto, all certified by Crowe, Chizek and Company LLP, independent
public accountants, or one of said accountant's predecessor firms.
All of such financial statements present fairly the financial positions
as of and at the dates shown and the results of operations for the periods
covered thereby.shown. They have been prepared in accordance with
generally accepted accounting principles consistently followed throughout the
periods indicated, except as otherwise indicated in the notes thereto. Each of
the balance sheets presents a true and complete statement in all material
respects as of its date of SRFC'sthe Bank's financial condition. All material
liabilities of SRFCthe Bank (including any contingent liabilities), as of the date
of each balance sheet, were properly accrued in such balance sheet or disclosed
in the related footnotes, in accordance with generally accepted accounting
principles.
HBI has delivered to FFB copies of its June 30, 1998 and December 31,
1997 Form FRY-9SP as filed with the Board of Governors of the Federal Reserve
System. All financial statements and data included in such Forms present fairly
the financial positions as of and at the dates shown.
11.7 INTELLECTUAL PROPERTY. Except as disclosed in the Disclosure
Schedule, SRFCHBI and Bank do not have knowledge of any
valid grounds for any bona fide claims (i) to the effect that their licensing or
use of any product as now used, sold or licensed or proposed for use, sale or
license by SRFCHBI or Bank infringes on any copyright, patent, trademark, trade
name, service mark or trade secret; (ii) against the use by SFRCHBI and Bank of any
copyrights, patents, trademarks, trade names, service marks, trade secrets,
technology, know-how or computer software programs and applications used in the
business of SRFCHBI and Bank as currently conducted or as proposed to be conducted;
(iii) challenging the
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122
ownership, validity or effectiveness of any of SRFC'sHBI's and Bank's Intellectual
Property Rights or other trade secret material of SRFCHBI and Bank; or (iv)
challenging the license or legally enforceable right to use Third-Party
Intellectual Rights by SRFCHBI and Bank.
As used in this Agreement, the term (x) "Intellectual Property" means all
patents, trademarks, trade names, service marks, copyrights and any applications
therefor, technology, know-how, computer software programs or applications, and
tangible or intangible proprietary information or materials; (y) "Third-Party
Intellectual Property Rights" means any third-party patents, trademarks, trade
names, service marks and copyrights; and (z) "SRFC's"HBI's and Bank's Intellectual
Property Rights" means the patents, registered and material unregistered
trademarks, trade names and service marks, registered copyrights and any
applications therefor owned by SRFCHBI or Bank.
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11.8 GOOD AND MARKETABLE TITLE. SRFCHBI and Bank have and on the Closing
Date will have good and marketable title in fee simple to all lands and
buildings shown as assets in their records and books of account, free and clear
of all liens, encumbrances and charges except as reflected in the aforesaid
financial statements and except for current taxes and assessments not delinquent
or being contested in good faith and liens, encumbrances and charges shown in
their records and books of account which are not substantial in character or
amount and do not materially detract from the value or interfere with the use of
the properties subject thereto or affected thereby. SRFCHBI and Bank have and on the
Closing Date will have valid leases under which they are entitled to occupy and
use in their business all real property of which they are lessees, and SRFCHBI and
Bank have no knowledge of any material default under any such lease. As of the
date hereof, neither SRFCHBI nor Bank has title to any real property or buildings as
a result of foreclosure or by otherwise realizing on collateral held by either
of them. Neither SRFCHBI nor Bank will take action to foreclose or otherwise realize
on any real property collateral held by either of them prior to the Closing Date
without the prior consent of FFB, which consent will not be unreasonably
withheld.
SRFCHBI and Bank have and on the Closing Date will have good and marketable
title to the machinery, equipment, merchandise, materials, supplies and other
property of every kind, tangible or intangible, contained in their offices and
other facilities or shown as assets in their records and books of account,
except for properties held in trust or other fiduciary capacity or personal
property of SFRCHBI employees or Bank employees contained in their offices, free and
clear of all liens, encumbrances and charges except as reflected in the
aforesaid financial statements and except for liens, encumbrances and charges,
if any, which do not materially detract from the value of or interfere with the
use of the properties subject thereto or affected thereby. SRFCHBI and Bank have and
will have immediately prior to the Closing Date valid leases under which they
are entitled to use in their business all personal property of which they are
lessees, and neither SRFCHBI nor Bank has any knowledge of any material default
under any such leases.
11.9 TAXES. SRFCHBI and Bank have paid all taxes imposed by the United
States or by any state, municipality, subdivision or instrumentality of the
United States or by any other taxing authority, which are due or payable by
either SRFCHBI or Bank, that the failure to pay would have a material and adverse
effect on SRFCHBI and/or Bank, and all claims asserted against each of them have
been paid in full or are adequately accrued in the records and books of accounts
of each of
SRFC7
123
HBI and Bank and will be so paid or provided for on the Closing Date. All income
tax returns for each of SRFCHBI and Bank have been filed with the taxing authorities
having jurisdiction thereof through December 31, 1997, and no extension of time
for the assessment of deficiencies for any such years is in effect. Neither SRFCHBI
nor Bank has knowledge of any unassessed tax deficiency proposed or threatened
against it.
11.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
disclosure schedule attached hereto (the "Disclosure Schedule), from December
31, 1997From June 30, 1998 to the
date hereof, there has not been:
11.10.1 any material change in the corporate status, business,
operations or financial condition of SRFCHBI and Bank, other than changes in the
ordinary course of business;
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11.10.2 any declaration, setting aside or payment of any
dividend or other distribution, with respect to SRFC'sHBI's Common Shares except for
the payment in January 1998 to the SRFC shareholders of a regular annual dividend in
the amount of $17.00$5.50 per share paid in respect of the fiscal year ended 1997;December 1998; and
11.10.3 any other event or condition of any character which
has materially and adversely affected the corporate status, business, operations
or financial condition of SRFCHBI and Bank taken as a whole.
11.11 CONTRACTS AND AGREEMENTS. Except for agreements described in the
Disclosure Schedule, neither SRFCNeither HBI nor Bank is a party to: (a) any sales agency
agreement not subject to termination without liability on notice of 60 days or
less; (b) any contract for the purchase or sale of any materials, products or
supplies which contains any escalator, renegotiation or redetermination clause
or which commits it for a fixed term greater than 36 months or which provides
for annual payments greater than $50,000; (c)
any contract of employment with any officer or employee not terminable at will
without liability; (d)(b) any pension, retirement or profit sharing plan or
agreement not cancelable within 60 days without liability; (e)(c) any management or consultationroyalty
agreement, not
terminable at will without liability; (f) any lease, license, royalty, union agreement or loan agreement except those entered into in the
ordinary course of business and which are terminable without liability on notice
of 60 days or less
or which has an annual contract price less than $50,000; (g)less; (d) any contract, accepted orderagreement or commitment for the purchase or sale of materials, products or
supplies having a total annual
contract price in excess of $50,000;$20,000 which is not terminable without liability or
(h)on notice of 60 days or less; or (e) any other agreement which materially affects the business, properties, assets or
condition (financial or otherwise) of SRFC, or which was entered into
other than in the ordinary and usual course of business.
11.12 INSURANCE. SRFCHBI is adequately insured with respect to risks
normally insured against by companies similarly situated. SRFC has previously
delivered copies,The Disclosure
Schedule contains a list of all existing insurance policies of SRFCHBI and Bank,
including but not limited to group insurance and pension plans. All such
policies are in full force and effect. The Disclosure Schedule also contains a
list of all claims for insured losses in excess of $10,000 filed by SRFCHBI and Bank during the
three-year period immediately preceding the date of this Agreement, including
but not limited to worker's compensation, automobile and general liability.
11.13 LITIGATION AND PROCEEDINGS. Except as set forth in the Disclosure
Schedule, thereThere is no suit, action or legal or
administrative proceeding pending or, to the knowledge of SRFC,HBI, threatened,
against it or Bank, which, if adversely determined, might materially and
adversely affect the financial condition, on a consolidated basis, of SRFCHBI and
Bank or the conduct of their businesses, nor is there any decree, injunction or
order of any court, governmental department or agency outstanding against SRFCHBI or
Bank having any such effect.
11.14 MATERIAL CONTRACTS; NO CONFLICT WITH OTHER INSTRUMENTS. Neither
SRFCHBI nor Bank is in default under the terms of any outstanding contract,
agreement, lease or other
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commitment which default would have a material and adverse effect, on a
consolidated basis, on SRFCHBI and Bank, and on the Closing Date, the consummation
of the transactions contemplated by this Agreement will not result in the breach
of any term or provision of or constitute a default under any indenture,
mortgage, deed of trust or other agreement or instrument to which SRFCHBI or
8
139 Bank is
a party, which default or breach would have a material and adverse effect, on a
consolidated basis, on SRFCHBI and Bank.
11.15 GOVERNMENTAL AUTHORIZATIONS AND FILINGS. Each of SRFCHBI and Bank has
all valid and sufficient licenses, franchises, permits and other governmental
authorizations for all businesses presently carried on by SRFCHBI and Bank,
respectively, and has filed with the Board of Governors of the Federal Reserve
BoardSystem (the "Federal Reserve Board") all reports necessary to the conduct of its
business as a bank holding company and is current in all respect as to such
filings.
SRFC has previously delivered to FFB
its Annual Reports on Forms FRY-6 and FRY-9 for 1993, 1994, 1995, 1996 and 1997,
proxy materials for its Annual Meetings in such years and will provide proxy
materials for its Annual Meeting in 1999. Bank has previously delivered to FFB
its Year-End Call Reports for 1994, 1995, 1996 and 1997 and will deliver 1998,
when available, as filed with the Federal Deposit Insurance Corporation.
11.16 CONSENTS AND APPROVALS. The only consent and approval required to
be obtained by or on behalf of SRFCHBI or Bank on or prior to the Closing Date is
the approval of the SRFCHBI shareholders in the form required by the Financial
Institutions Law of the State of Indiana.Kentucky
Business Corporation Act. Other consents and approvals required to be obtained
prior to the Effective Time are set forth in Section 12.1212.9 below.
11.17 BROKERS. Neither SRFC,HBI, Bank nor any of their officers, directors
or employees have employed any broker or finder or incurred any liability for
any financial advisory fees, brokerage fees, commissions or finders' fees in
connection with this Agreement or with the transactions contemplated hereby
except that SRFCHBI has retained Hovde Financial, Inc. ("Hovde")PBS to perform various brokerage services in
connection with this transaction. SFRCHBI is liable for and will pay all amounts due
Hovde.PBS.
11.18 ENVIRONMENTAL MATTERS. For purposes hereof, "environmental laws"
means all applicable federal, state or local statutes, laws, ordinances, codes,
rules, regulations and guidelines (including consent decrees and administrative
orders) relating to public health and safety and protection of the environment
and natural resources.
11.18.1 Except as set forth in the Disclosure Schedule, toTo the best knowledge of SRFCHBI and Bank, to the extent
required, SRFCHBI and Bank have filed all notices, permit applications and other
required governmental submissions and have obtained all permits, licenses and
other authorizations which are required and which are material in connection
with the conduct of their respective businesses under all applicable
environmental laws, including approvals relating to emissions, discharges,
releases or threatened releases, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals, new or used petroleum products,
industrial, toxic or hazardous substances or solid wastes into the environment
(including, without limitation, ambient air, surface water, groundwater, land or
sewers).
11.18.2 Except as set forth in the Disclosure Schedule, toTo the extent required, each of SRFCHBI and Bank is in
compliance, in all material respects, in the conduct of its business with all
terms and conditions of the necessary permits, licenses and authorizations, and
to the best of their knowledge is also in compliance in all material respects
with all other applicable 9
140
limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
such
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125
environmental laws or contained in any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered, promulgated or
approved under such environmental laws.
11.18.3 Except as set forth in the Disclosure Schedule, neither
SRFCNeither HBI nor Bank is aware of, nor has either of
SRFCHBI or Bank received notice of, any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans which may
materially interfere with or prevent compliance or continued compliance in the
conduct of its business with such environmental laws or any regulation, code,
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved under such environmental laws, or which may
give rise to any common law or legal liability, or otherwise form the basis of
any claim, action, demand, suit, proceeding, hearing, study or investigation,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment (including,
without limitation, ambient air, surface water, groundwater, land or sewers), of
any pollutant, contaminant, chemical, or industrial, toxic or hazardous
substance or waste or new or used petroleum products.
11.18.4 Except as set forth in the Disclosure Schedule, neither
SRFCNeither HBI nor Bank is aware of, nor has either of
SRFCHBI or Bank received notice of, any material civil, criminal or administrative
action, suit, demand, claim, hearing, notice or demand letter, notice of
violation, investigation, or proceeding pending or threatened against either SRFCHBI
or Bank relating in any way to the environmental laws or any regulation, code,
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved under such environmental laws.
11.18.5 Except as set forth in the Disclosure Schedule, toTo the best knowledge of each of SRFCHBI and Bank, there
is no asbestos containing material on the properties of SRFCHBI or Bank that
violates any environmental law or is in need of removal or repair.
11.19 VALIDITY OF CONTEMPLATED TRANSACTIONS. Except as set forth in the
Disclosure Schedule, theThe execution, delivery
and performance of this Agreement will not: (i) violate, or conflict with, or
require any consent under, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in the creation of any lien
upon any of the assets of either of SRFCHBI or Bank, under any of the terms,
conditions or provisions of the Articles of Incorporation or By-Laws of SRFCHBI and
the Articles of AssociationIncorporation or By-Laws of Bank, or of any note, bond,
mortgage, indenture, deed of trust, material license, lease, agreement or other
instrument or obligation to which either of SRFCHBI or Bank is a party or by which
either of SRFCHBI or Bank or any of their assets may be bound or affected or (ii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to SRFC,HBI, Bank or any of their assets.
11.20 YEAR 2000 COMPLIANCE. Except as set forth in the Disclosure
Schedule and a preliminary Millennium Management Report dated December 1998 on
SRFC Year 2000 Preparedness, theThe software and hardware operated by SRFCHBI
and Bank are capable of providing or are being adapted or replaced to provide
uninterrupted millennium functionality to record,
10
141 store, process and present
calendar dates falling on or after January 1, 2000 and date-dependent data in
substantially the same manner and with the same functionality as such software
records, stores, processes and presents such calendar dates and date-dependent
data as of the date hereof, except for the failure to have such capability which
would not, individually or in the aggregate, be reasonably likely to cause a
material adverse effect upon the
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126
business, financial condition and operations of SRFCHBI and Bank. SRFCHBI and Bank have
complied in all material respects with any and all programs, guidelines and
statements relating to Year 2000 issued by the Federal Financial Institutions
Examination Council.
11.21 EMPLOYEE BENEFIT PLANS. For purposes hereof, "ERISA" means the
Employee Retirement Income Security Act as amended.
11.21.1 The Disclosure Schedule lists each employee benefit
plan, arrangement, practice, contract or agreement, whether formal or informal,
written or unwritten, and whether applicable to one or more persons, now or ever
maintained or contributed to by SRFCHBI or Bank at any time during the five year
period preceding the date of this Agreement, including but not limited to
employee welfare benefit plans and employee pension benefit plans as defined in
Sections 3(1) and 3(2) of the Employee Retirement Income Security Act ("ERISA"),
nonqualified deferred compensation plans, medical plans, disability plans, life
insurance plans, severance pay plans, educational assistance plans, cafeteria
plans, flexible spending accounts, stock option plans or stock purchase plans
("Benefit Plans"). Except as disclosed in the Disclosure Schedule, neither SRFCHBI
nor Bank ever maintained or contributed to any defined benefit plan (as defined
in Section 3(35) of ERISA), multiemployer plan (as defined in Section 3(37) of
ERISA), medical plan providing benefits after termination of employment (except
for continuation coverage required by the federal law known as COBRA), or
severance pay plan or arrangement. Except for SRFC and Bank, there isThere has at no time been any trade or
business, whether or not incorporated, which, together with SRFC and/HBI or Bank, is or
was treated as a single employer under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code.
11.21.2 For each Benefit Plan, SRFC andHBI or Bank havehas made available
to FFB, to the extent such documents exist, a copy of the plan and any relevant
trust agreements, the summary plan description, and, to the extent applicable,
the latest determination letters issued by the Internal Revenue Service, the
latest annual report, the latest report of any trustee or insurance company
providing benefits under the Benefit Plan, and the latest actuarial valuation or
statement of individual accounts.
11.21.3 Except as disclosed inTo the Disclosure Schedule,best knowledge of HBI or Bank, each Benefit
Plan at all times has been maintained and operated in substantial compliance
with all applicable laws and regulations, including but not limited to laws and
regulations concerning eligibility for favorable tax treatment and those
requiring the filing of reports. Except as disclosed on the Disclosure Schedule,
there are no claims, no audits or investigations by any federal or state agency
and no litigation pending or threatened with respect to any Benefit Plan. Except
for routine payments due on insurance contracts, and routine deposits to any 401(k)
plan of SRFCHBI or Bank neither SRFC norand annual employer profit sharing contributions to any
profit sharing plan, HBI and Bank has anydo not have unsatisfied liability to any
person (including but not limited to governmental agencies) with respect to any
Benefit Plan, and except to the extent disclosed on the Disclosure Schedule
there are no facts known to SRFCHBI or Bank which could give rise to such liability.
Each Benefit Plan may be terminated on notice of 60 days or less by SRFCHBI or Bank, as applicable,
without liability to SRFC orHBI and Bank except for liability (i) for benefits accrued
in the normal operation of the plan prior to the date of termination.termination or (ii)
with respect to any profit sharing and/or 401(k) plan of HBI or Bank, to the
extent required by applicable law upon termination of such plan.
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142127
12. FFB'S REPRESENTATIONS AND WARRANTIES. FFB represents and warrants to
SRFCHBI as of the date hereof and as of the Closing Date as follows:
12.1 ORGANIZATION. FFB is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio and is
registered as a bank holding company under Bank Holding Company Act of 1956, as
amended,the BHCA, and a savings and loan
holding company under the Savings and Loan Holding Company Act. FFB has the
corporate power to carry on its businesses as they are now being conducted and
is qualified to do business in each jurisdiction in which the character and
location of the assets owned by it, or the nature of the business transacted by
it, requires qualification. FFB has authority to enter into this Agreement and
this Agreement is legally binding.
12.2 CORPORATE AUTHORITY. FFB has all requisite corporate power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement and to consummate the
Merger. This Agreement is a valid and binding agreement of FFB enforceable
against FFB in accordance with its terms, subject to the Bankruptcy and Equity
Exception.
The FFB Board of Directors has (i) unanimously adopted the plan of merger set forth
herein and approved this Agreement and the other transactions contemplated
hereby, and (ii) has declared that the Merger and this Agreement and the other
transactions contemplated hereby are advisable. No vote by the shareholders of
FFB is required to approve the Merger under Ohio law, the Articles of
Incorporation or Regulations of FFB or the rules of the National Association of
Securities Dealers, Inc. which apply to Nasdaq National Market issues.
12.3 SUBSIDIARIES. Each indirect and direct subsidiary of FFB which, as
of the effective time of the Merger would be deemed to be a "significant
subsidiary," as such term is defined in Rule 405 of the rules and regulations
promulgated in the Securities Act of 1933, as amended (the "1933 Act"), is
either a national bank or federal savings association duly organized, validly
existing, and in good standing under a charter granted by the Office of the
Comptroller of the Currency or the Office of Thrift Supervision, or is a
corporation or state bank duly organized, validly existing and in good standing
under the laws of the state of its incorporation, and in either case, is duly
qualified to do business and is in good standing in all jurisdictions where its
ownership or leasing of property or the conduct of its business requires it to
be so qualified and where failure to so qualify would have a material and
adverse effect on the consolidated business, financial condition or results of
operations of FFB.
12.4 CAPITALIZATION. FFB's capitalization consists of 60,000,000
authorized Common Shares, of which, as of November 6, 1998, 32,921,329 shares
were issued and outstanding. Adjusted for a 10% stock dividend declared on
November 24, 1998 and payable on January 4, 1999, FFB's equivalent shares
outstanding as of November 6, 1998 would be 36,213,462. Each issued share is
validly issued, fully paid and non-assessable, and each outstanding share is
entitled to one vote.
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128
12.5 SHARES TO BE ISSUED. All FFB Common Shares into which the SRFCHBI
Common Shares will be converted will be, immediately after the Effective Time
and when issued upon such conversion, duly and validly authorized and issued,
fully paid and non-assessable, and no shareholder of FFB will have any
pre-emptive right of subscription or purchase in respect 12
143
thereof. FFB will take
such steps as may be necessary for such shares to be listed on NASDAQ
immediately after the Effective Time.
12.6 FINANCIAL STATEMENTS. FFB has delivered to SRFCHBI copies of its
consolidated balance sheets as of December 31, 1997, 1996 and 1995, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997, in each case including the notes thereto, all certified by Ernst & Young
LLP, independent public accountants, or one of said accountants' predecessor
firms.
All of such financial statements present fairly the financial positions
as of and at the dates shown and the results of operations for the periods
covered thereby. They have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods indicated,
except as otherwise indicated in the notes thereto. Each of such balance sheets
presents a true and complete statement in all material respects as of its date
of FFB's financial condition. All material liabilities of FFB (including any
contingent liabilities), as of the date of each balance sheet, were properly
accrued in such balance sheet or disclosed in the related footnotes, in
accordance with generally accepted accounting principles.
12.7 ENVIRONMENTAL MATTERS. For purposes hereof, "environmental laws"
means all applicable federal, state or local statutes, laws, ordinances, codes,
rules, regulations and guidelines (including consent decrees and administrative
orders) relating to public health and safety and protection of the environment
and natural resources.
12.7.1 Except as set forth in a writing delivered to SRFC, to the
best knowledge of FFB, to the extent required, FFB has filed all notices, permit
applications and other required governmental submissions and has obtained all
permits, licenses and other authorizations which are required and which are
material in connection with the conduct of their respective businesses under all
applicable environmental laws, including approvals relating to emissions,
discharges, releases or threatened releases, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals, new or used
petroleum products, industrial, toxic or hazardous substances or solid wastes
into the environment (including, without limitation, ambient air, surface water,
groundwater, land or sewers).
12.7.2 Except as set forth in a writing delivered to SRFC, to the
extent required, FFB is in compliance, in all material respects, in the conduct
of its business with all terms and conditions of the necessary permits, licenses
and authorizations, and to the best of its knowledge is also in compliance in
all material respects with all other applicable limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in such environmental laws or contained in any regulation,
code, plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved under such environmental laws.
12.7.3 Except as set forth in a writing delivered to SRFC, FFB is
not aware of, nor has FFB received notice of, any past or present events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may materially interfere with or prevent compliance or continued
compliance in the conduct of its business with such environmental laws or any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued,
13
144
entered, promulgated or approved under such environmental laws, or which may
give rise to any common law or legal liability, or otherwise form the basis of
any claim, action, demand, suit, proceeding, hearing, study or investigation,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment (including,
without limitation, ambient air, surface water, groundwater, land or sewers), of
any pollutant, contaminant, chemical, or industrial, toxic or hazardous
substance or waste or new or used petroleum products.
12.7.4 Except as set forth in a writing delivered to SRFC, FFB is
not aware of, nor has FFB received notice of, any material civil, criminal or
administrative action, suit, demand, claim, hearing, notice or demand letter,
notice of violation, investigation, or proceeding pending or threatened against
FFB relating in any way to the environmental laws or any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved under such environmental laws.
12.7.5 Except as set forth in a writing delivered to SRFC, to the
best knowledge of FFB, there is no asbestos containing material on the
properties of FFB that violates any environmental law or is in need of removal
or repair.
12.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. From September 30, 1998 to
the date hereof, there has not been:
12.8.112.7.1 any change in the corporate status, business,
operations or financial condition of FFB and its consolidated Subsidiaries,
other than changes in the ordinary course of business, and those changes
described in any FFB filings with the Securities and Exchange Commission, none
of which are, in the aggregate, materially adverse to FFB; or
12.8.212.7.2 any other event or condition of any character which has
materially and adversely affected the corporate status, business, operations or
financial condition of FFB and its consolidated Subsidiaries taken as a whole.
12.912.8 LITIGATION AND PROCEEDINGS. There is no suit, action or legal or
administrative proceeding pending, or to the knowledge of FFB threatened,
against it or any of FFB's consolidated Subsidiaries, which, if adversely
determined, might materially and adversely affect the financial condition, on a
consolidated basis, of FFB and FFB's consolidated Subsidiaries or the conduct of
their businesses, nor is there any decree, injunction or order of any court,
governmental department or agency outstanding against FFB or any of FFB's
consolidated Subsidiaries having any such effect.
12.1012.9 CONSENTS AND APPROVALS. The consents and approvals required to be
obtained by FFB on or prior to the Closing Date are set forth below:
12.10.112.9.1 approval and effectiveness of the Registration
Statement referred to in Section 14.3 or of any post effective amendment
thereto;
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145
12.10.2129
12.9.2 approval of FRBthe Federal Reserve Board under Bank Holding Company Act;
12.10.3the BHCA;
12.9.3 approval of the Department of Financial Institutions of
the StateCommonwealth of Indiana;Kentucky; and
12.10.412.9.4 any other required consents for the completion of the
Merger.
12.1112.10 BROKERS. Neither FFB nor any of its officers, directors or
employees have employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finders' fees in
connection with this Agreement or with the transactions contemplated thereby.
12.1212.11 VALIDITY OF CONTEMPLATED TRANSACTIONS. The execution, delivery
and performance of this Agreement will not: (i) violate, or conflict with, or
require any consent under, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in the creation of any lien
upon any of the assets of FFB, under any of the terms, conditions or provisions
of the Articles of Incorporation or Regulations of FFB, or of any note, bond,
mortgage, indenture, deed of trust, material license, lease, agreement or other
instrument or obligation to which FFB is a party or by which FFB or any of its
assets may be bound or affected or (ii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to FFB or any of its assets.
12.1312.12 YEAR 2000 COMPLIANCE. Except as set forth in the Disclosure
Schedule, the software and hardware operated by FFB and its Subsidiaries are
capable of providing or are being adapted or replaced to provide uninterrupted
millennium functionality to record, store, process and present calendar dates
falling on or after January 1, 2000 and date-dependent data in substantially the
same manner and with the same functionality as such software records, stores,
processes and presents such calendar dates and date-dependent data as of the
date hereof, except for the failure to have such capability which would not,
individually or in the aggregate, be reasonably likely to cause a material
adverse effect upon the business, financial condition and operations of FFB and
its Subsidiaries. FFB and its Subsidiaries have complied in all material
respects with any and all programs, guidelines and statements relating to Year
2000 issued by the Federal Financial Institutions Examination Council.
12.1412.13 INTELLECTUAL PROPERTY. Except as disclosed in a writing delivered
to SRFC,HBI, FFB does not have knowledge of any valid grounds for any bona fide
claims (i) to the effect that its licensing or use of any product as now used,
sold or licensed or proposed for use, sale or license by FFB infringes on any
copyright, patent, trademark, trade name, service mark or trade secret; (ii)
against the use by FFB of any copyrights, patents, trademarks, trade names,
service marks, trade secrets, technology, know-how or computer software programs
and applications used in the business of FFB as currently conducted or as
proposed to be conducted; (iii) challenging the ownership, validity or
effectiveness of any of FFB's Intellectual Property Rights or other trade secret
material of FFB; or (iv) challenging the license or legally enforceable right to
use Third-Party Intellectual Rights by FFB.
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146130
As used in this Agreement, the term (x) "Intellectual Property" means
all patents, trademarks, trade names, service marks, copyrights and any
applications therefor, technology, know-how, computer software programs or
applications, and tangible or intangible proprietary information or materials;
(y) "Third-Party Intellectual Property Rights" means any third-party patents,
trademarks, trade names, service marks and copyrights; and (z) "FFB's
Intellectual Property Rights" means the patents, registered and material
unregistered trademarks, trade names and service marks, registered copyrights
and any applications therefor owned by FFB.
12.1512.14 GOOD AND MARKETABLE TITLE. FFB has and on the Closing Date will
have good and marketable title in fee simple to all lands and buildings shown as
assets in its records and books of account, except for properties held in trust
or other fiduciary capacity, free and clear of all liens, encumbrances and
charges except as reflected in the aforesaid financial statements and except for
current taxes and assessments not delinquent or being contested in good faith
and liens, encumbrances and charges shown in their records and books of account
which are not substantial in character or amount and do not materially detract
from the value or interfere with the use of the properties subject thereto or
affected thereby. FFB has and on the Closing Date will have valid leases under
which it is entitled to occupy and use in its business all real property of
which it is lessee, and FFB has no knowledge of any material default under any
such lease.
FFB has and on the Closing Date will have good and marketable title to
the machinery, equipment, merchandise, materials, supplies and other property of
every kind, tangible or intangible, contained in its offices and other
facilities or shown as assets in its records and books of account, except for
properties held in trust or other fiduciary capacity or personal property of FFB
employees contained in their offices, free and clear of all liens, encumbrances
and charges except as reflected in the aforesaid financial statements and except
for liens, encumbrances and charges, if any, which do not materially detract
from the value of or interfere with the use of the properties subject thereto or
affected thereby. FFB has and will have immediately prior to the Closing Date
valid leases under which it is entitled to use in its business all personal
property of which it is lessee, and FFB has no knowledge of any material default
under any such lease.
12.1612.15 TAXES. All taxes imposed by the United States or by any state,
municipality, subdivision or instrumentality of the United States or by any
other taxing authority, which are due or payable by FFB, and all claims asserted
against it have been paid in full or are adequately accrued in the records and
books of accounts of FFB and will be so paid or provided for on the Closing
Date. All income tax returns for FFB have been filed with the taxing authorities
having jurisdiction thereof through 1994, and no extension of time for the
assessment of deficiencies for any such years1997. The Internal Revenue Service is in effect.the
process of completing a routine examination of FFB for federal tax years 1995
and 1996. A final report is expected to be issued by the Internal Revenue
Service in January 1999. FFB management has reviewed the IRS's proposed
adjustments and determined that such adjustments will not have any material
effect on the financial statements of FFB.
12.16 ENVIRONMENTAL MATTERS. For purposes hereof, "environmental laws"
means all applicable federal, state or local statutes, laws, ordinances, codes,
rules, regulations and guidelines (including consent decrees and administrative
orders) relating to public health and safety and protection of the environment
and natural resources.
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131
12.16.1 Except as set forth in a writing delivered to HBI, to
the best knowledge of FFB, to the extent required, FFB has nofiled all notices,
permit applications and other required governmental submissions and has obtained
all permits, licenses and other authorizations which are required and which are
material in connection with the conduct of their respective businesses under all
applicable environmental laws, including approvals relating to emissions,
discharges, releases or threatened releases, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals, new or used
petroleum products, industrial, toxic or hazardous substances or solid wastes
into the environment (including, without limitation, ambient air, surface water,
groundwater, land or sewers).
12.16.2 Except as set forth in a writing delivered to HBI, to
the extent required, FFB is in compliance, in all material respects, in the
conduct of its business with all terms and conditions of the necessary permits,
licenses and authorizations, and to the best of its knowledge is also in
compliance in all material respects with all other applicable limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in such environmental laws or contained in
any regulation, code, plan, order, decree, judgment, injunction, notice or
demand letter issued, entered, promulgated or approved under such environmental
laws.
12.16.3 Except as set forth in a writing delivered to HBI, FFB
is not aware of, nor has FFB received notice of, any unassessed tax deficiency proposedpast or present events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may materially interfere with or prevent compliance or continued
compliance in the conduct of its business with such environmental laws or any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved under such environmental laws,
or which may give rise to any common law or legal liability, or otherwise form
the basis of any claim, action, demand, suit, proceeding, hearing, study or
investigation, based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment (including,
without limitation, ambient air, surface water, groundwater, land or sewers), of
any pollutant, contaminant, chemical, or industrial, toxic or hazardous
substance or waste or new or used petroleum products.
12.16.4 Except as set forth in a writing delivered to HBI, FFB
is not aware of, nor has FFB received notice of, any material civil, criminal or
administrative action, suit, demand, claim, hearing, notice or demand letter,
notice of violation, investigation, or proceeding pending or threatened against
it.FFB relating in any way to the environmental laws or any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved under such environmental laws.
12.16.5 Except as set forth in a writing delivered to HBI, to
the best knowledge of FFB, there is no asbestos containing material on the
properties of FFB that violates any environmental law or is in need of removal
or repair.
12.17 MATERIAL CONTRACTS; NO CONFLICT WITH OTHER INSTRUMENTS. Neither
FFB nor any of its consolidated Subsidiaries is in default under the terms of
any material outstanding contract, agreement, lease or other commitment which
default would have a material and adverse effect, on a consolidated basis, on
FFB and FFB's consolidated Subsidiaries, and on the Closing
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Date, the consummation of the transactions contemplated by this Agreement will
not result in the breach of any term or provision of or constitute a default
under any material indenture, mortgage, deed or trust or other material
agreement or instrument to which FFB or any of its consolidated 16
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Subsidiaries is
a party, which default or breach would have a material and adverse effect, on a
consolidated basis, on FFB and FFB's consolidated Subsidiaries.
13. CONDUCT OF BUSINESS PENDING THE MERGER.
13.1 NEGATIVE COVENANTS OF SRFC.HBI. From and after the date of this
Agreement and prior to the Effective Time, without the prior written consent of
FFB, neither SRFCHBI nor Bank will:
13.1.1 amend its respective Articles of Incorporation Articles
of Association, Regulations or
By-Laws;
13.1.2 engage in any material activity or transaction or incur
any material obligation (by contract or otherwise) except in the ordinary course
of business;
13.1.3 issue rights or options to purchase or subscribe to any
shares of its capital stock or subdivide or otherwise change any such shares; or
13.1.4 issue or sell any shares of its capital stock.
13.2 DIVIDENDS. The parties agree that in January 1999December 1998 the
shareholders of SRFCHBI shall receive a regular annual dividend anticipated to be in the amount
of eighteen dollars ($18.00)$5.50 per share.
In addition, in the event that the Effective Time is after FFB's first quarter
1999 record date, on April 1, 1999, SRFC'sand in the event that the Effective Time is
after FFB's second quarter 1999 record date on July 1, 1999, HBI's shareholders
shall receive a quarterly dividend in the amount of $4.75$1.50 per share.
13.3 SRFCHBI EFFORTS. From and after the date of this Agreement and prior
to the Effective Time, SRFCHBI and Bank will use their respective best efforts to
preserve their business organizations intact; to keep available the services of
their present officers and employees and to preserve the goodwill of their
suppliers, customers and others having business relations with it. During the
same period, SRFCHBI and Bank will not put into effect any material increase in the
compensation or other benefits applicable to officers or other key personnel in
excess of compensation increases paid by SRFCHBI or Bank to similarly situated
employees in accordance with past practices.
13.4 PURCHASE OF "TAIL COVERAGE". SFRC may purchase "tail coverage" on
its Directors' and Officers' insurance for a period of six years and for a sum
not exceeding $115,000 in the aggregate. From and after the Effective Time,
every director, officer, employee and agent of SRFC and Bank shall be entitled
to indemnification from FFB on the same basis and to the same extent as the
other directors, officers, employees and agents of FFB.
14. ADDITIONAL AGREEMENTS.
14.1 ACCESS AND INFORMATION. FFB and SRFCHBI hereby agree that each will
give to the other and to the other's accountants, counsel and other
representatives full access during normal business hours throughout the period
prior to the Merger to all of its properties, books, contracts, commitments and
records, and that each will furnish the other during such period with all such
information concerning its affairs as such other party may reasonably request.
In the event of the 17
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termination of this Agreement, each party will, upon the
request of the other, destroy or deliver to the other all documents, work papers
and other material obtained from the other relating to the transactions
contemplated hereby, whether so obtained before or after the execution hereof,
and
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will use its best efforts to have any information so obtained and not heretofore
made public kept confidential.
14.2 CONFIDENTIALITY. From and after the date of this Agreement, the
parties and their respective Subsidiaries will, and they will cause their
respective directors, officers, employees and advisors ("Affiliates") to, treat
all information received from or on behalf of another party hereto or its
Affiliates concerning the business, assets, operations and financial condition
of such other party or its Subsidiaries as confidential, unless and to the
extent that the party receiving such information can demonstrate that such
information was in the public domain, and the party receiving such information
and its Subsidiaries will, and will cause their respective Affiliates to, not
use any such confidential information for any purpose except in furtherance of
the transactions contemplated by this Agreement. In the event this Agreement is
terminated pursuant to Section 15.4 hereof, each party and its Subsidiaries,
upon the request of the other, will promptly return to the other party or
destroy all documents and work papers and all copies thereof, containing any
such confidential information received from or on behalf of another party hereto
in connection with the transactions contemplated by this Agreement. The
covenants contained in this Section are of the essence and will survive any
termination of this Agreement and the closing of the transactions contemplated
by this Agreement.
14.3 REGISTRATION STATEMENT. FFB will prepare and file a Registration
Statement on Form S-4 under the 1933 Act to be filed with the Securities and
Exchange Commission (the "Registration Statement") to register a sufficient
number of FFB Common Shares which the shareholders of SRFCHBI will receive pursuant
to Section 8 at the Effective Time. FFB will use its best efforts to cause such
Registration Statement to become effective. SRFCHBI and Bank agree that none of the
information supplied or to be supplied by each of them for inclusion or
incorporation by reference in (i) the Registration Statement, including the
joint proxy statement and prospectus (the "Joint Proxy
Statement-Prospectus""Proxy Statement/Prospectus") constituting a
part thereof, will, at the time the Registration Statement becomes effective
under the Securities Act or (ii) the Joint Proxy Statement-ProspectusStatement/Prospectus and any
amendment or supplement thereto will, at the date of mailing to shareholders and
at the times of the meeting of shareholders of SRFCHBI to be held in connection with
the Merger, in either case contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
Other than information supplied by SRFC and Bank for inclusion or
incorporation by reference in the Registration Statement and the Joint Proxy
Statement-Prospectus, FFB agrees that neither the Registration Statement at the
time the Registration Statement becomes effective under the Securities Act nor
the Joint Proxy Statement-Prospectus at the date of mailing to shareholders and
at the time of the meeting of shareholders of SRFC in either case, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
14.4 EMPLOYEE BENEFITS.
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14.4.1 As soon as practicable after the Effective Time, FFB
shall make available to eligible employees of HBI and Bank employee benefit
plans comparable to the employee benefit plans then made available to similarly
situated employees of other FFB subsidiaries. Employee benefit plans, fringe
benefits and other employee practices and policies in effect at HBI and Bank
immediately prior to the effective dateEffective Time of the Merger shall continue in effect
until modified or terminated by FFB.
14.4.2 The SRFCHBI Profit Sharing 401(k) Plan ("SRFCHBI 401(k) Plan")
shall continue in effect until the first January 1 or July 1 coinciding with or
next following the Effective Time (the "Initial Entry Date"). No contributions
shall be made to the SRFCHBI 401(k) Plan with respect to compensation paid after the
Initial Entry Date. On or after the Initial Entry Date, the SRFCHBI 401(k)
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Plan may be maintained as a frozen plan for an indefinite period or merged into
the FFB Thrift Plan.Plan, as determined by FFB in its discretion. Participants in the
SRFCHBI 401(k) Plan shall become fully vested in their accounts under that plan as
of the Initial Entry Date to the extent required by law. As of the Initial Entry
Date, the FFB Thrift Plan shall be extended to eligible employees of HBI and
Bank. All years of service as of the Effective Time credited to SRFC andHBI or Bank
employees will be recognized for purposes of computing eligibility and vesting
for the FFB Thrift Plan.
14.4.2 If any person who is an SRFC employee as of the Effective
Time is terminated without cause within one year after the Effective Time, Bank,
as a subsidiary of FFB, shall pay such employee a termination payment equal to
one week's salary for each full year of completed service with Bank, upon
receipt from the employee of a release of all claims in form satisfactory to
Bank and FFB; provided, however, that any such terminated employee with less
than four full years of completed services with Bank shall receive a termination
payment equal to four weeks' salary in the aggregate.
14.4.3 Nothing contained in this Section shall be deemed to
constitute an agreement to employ or continue to employ any employee of Bank or
restrict the right of FFB to modify or terminate any employee benefit plan,
policy or practice applicable to employees of Bank.
14.5 EXPENSES. Upon a termination of this Agreement as provided in
Section 15.4, each party will pay all costs and expenses of its performance of
and compliance with all agreements and conditions contained herein on its part
to be performed or complied with, including fees, expenses and disbursements of
its accountants and counsel.
14.6 FURTHER ASSURANCES. If at any time the Surviving Corporation will
consider or be advised that any further assignment or assurance in law or other
action is necessary or desirable to vest, perfect, or confirm, of record or
otherwise, in the Surviving Corporation, the title to any property or rights of
SRFCHBI acquired or to be acquired by or as a result of the Merger, the proper
officers and directors of SRFCHBI and the Surviving Corporation, respectively, will
be and they hereby are severally and fully authorized to execute and deliver
such proper deeds, assignments and assurances in law and take such other action
as may be necessary or proper in the name of SRFCHBI or the Surviving Corporation to
vest, perfect or confirm title to such property or rights in the Surviving
Corporation and otherwise carry out the purposes of this Agreement.
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14.7 POOLING. Neither SRFC,HBI, Bank, FFB nor any of its consolidated
Subsidiaries has taken or agreed to take or will take any action that would
prevent SRFCHBI and FFB from accounting for the business combination to be effected
by the Merger as a "pooling of interests." SRFCHBI has received from its independent
accountants, Crowe, Chizek and Company LLP, a letter stating that, based upon
Crowe, Chizek and Company LLP's review of such relevant documents and
information which Crowe, Chizek and Company LLP deemed relevant, such firm is
currently unaware of any reason why the business combination to be effected by
the Merger cannot be accounted for as a "pooling of interests" in regard to SRFCHBI
and Bank. FFB has received from its independent accountants, Ernst & Young LLP,
a letter stating that, based upon Ernst & Young's review of such relevant
documents and information which Ernst & Young LLP deemed relevant, such firm is
currently unaware of any reason why the business combination to be effected by
the Merger cannot be accounted for as a "pooling of interests" in regard to FFB
and its consolidated Subsidiaries.
14.8 AUDITED FINANCIAL STATEMENTS. As soon as reasonably practicable,
SRFCHBI will deliver to FFB the information required by Item 17 of the instructions
to Registration Statement Form S-4, including but not limited to a copy of its
consolidated balance sheet as of December 31,June 30, 1998 (if available),and 1997 and 1996 and related consolidated
statements of income, changes in shareholders' equity and cash flows for the
fiscal years ended December 31,June 30, 1998, (if available),
1997 1996 and 1995,1996, and such financial statements
for the most recently ended fiscal year will be in the format required by the
Securities
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and Exchange Commission and will include a Management's Discussion and Analysis
of Financial Condition and Results of Operations section. Upon request by FFB,
SRFCHBI will deliver to FFB a copy of its balance sheet (unaudited) and related
statements of income and cash flows (unaudited) for the ninesix months period ending
September
30,December 31, 1998, including the notes thereto. All of such financial statements
will present fairly the financial positions as of and at the dates shown and the
results of operations for the periods covered thereby. They will have been
prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods indicated, except as otherwise
indicated in the notes thereto. All liabilities of SRFCHBI (including any contingent
liabilities), as of the date of each balance sheet, will be properly accrued in
such balance sheet or disclosed in the related footnotes in accordance with
generally accepted accounting principles. Each of such consolidated statements
of earnings of SRFCHBI will be fairly presented in accordance with generally
accepted accounting principles for the periods indicated.
14.9 PRESS RELEASES. The parties will consult with each other as to the
form and substance of any press release, written communication with their
shareholders, or other public disclosure of matters related to this Agreement,
and a party will not issue any such press release, written communication, or
public disclosure without the prior consent of the other party, which consent
will not be unreasonably withheld or delayed; provided, however, that nothing
contained herein will prohibit any party, following notification to the other
party, from making any disclosures which its counsel deems necessary to conform
with requirements of law or the rules of NASDAQ.
14.10 SRFCHBI AFFILIATES. SRFCHBI shall deliver to FFB a letter ("Affiliate
Letter") identifying all persons who are, at the date of the SRFCHBI shareholders
meeting to approve the Merger contemplated by this Agreement, "affiliates" of
SRFCHBI for purposes of Rule 145 under
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145 Affiliates") and for purposes of qualifying the Merger for pooling of
interests accounting treatment. SRFCHBI shall use its best efforts to cause each
person who is identified as a "Seller's Rule 145 Affiliate" in such letter to
deliver to FFB on or prior to the Closing Date a written agreement substantially
in athe form agreed to by the
parties.attached hereto as Exhibit C. FFB shall be entitled to place legends
on any certificates of FFB Common Shares issued to such Seller's Rule 145
Affiliates to restrict transfer of such shares as set forth above; provided,
however, such legends shall be removed at the request of a Seller's Rule 145
Affiliate not earlier than one year after the Closing Date.
14.11 BOARD REPRESENTATION. FFB agreesACQUISITION TRANSACTIONS. HBI will not, directly or indirectly,
and will instruct and otherwise use its diligent efforts to cause its and Bank's
officers, directors, employees, agents and advisors not to, directly or
indirectly, solicit or initiate any proposals or offers from any person or
entity, or discuss or negotiate with any such person or entity, relating to any
acquisition or purchase of all or a material amount of the assets of, or any
equity securities of, or any merger or business combination with, HBI or Bank
(such transactions are referred to herein as "Acquisition Transactions");
provided, however, that promptly afternothing contained in this Section will prohibit (i) HBI
or Bank from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited proposal of an
Acquisition Transaction if and to the Effective Time, FFB will appoint a member ofextent that (a) the Board of Directors of
HBI or Bank, as a
directorafter consultation with and based upon the written advice of FFB (such selected candidatelegal
counsel, determines in good faith that such action
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is required for the directors of HBI or Bank to be mutually agreeablefulfill their fiduciary duties
and obligations to the HBI or Bank shareholders and other constituencies under
Kentucky law and (b) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, HBI or Bank provide
immediate written notice to FFB andto the effect that they are furnishing
information to, or entering into discussions or negotiations with, such person
or entity, or (ii) the Board of Directors of Bank).
14.12 DISCLOSURE SCHEDULE. SRFC shall have deliveredHBI or Bank from failing to make,
withdrawing or modifying its recommendation to shareholders regarding the Merger
with FFB following receipt of a Disclosure
Scheduleproposal for an Acquisition Transaction if the
Board of Directors of HBI or Bank, after consultation with and based upon the
written advice of legal counsel, determines in final formgood faith that such action is
required for the directors of HBI or Bank to FFB by December 21, 1998,fulfill their fiduciary duties and
obligations to the HBI or Bank shareholders and other constituencies under
Kentucky law. FFB shall havebe notified in writing within 24 hours of any breach of
this Section 14.11 or any determination by HBI or Bank, as the case may be, that
it has determined, whetherin good faith, that it has a fiduciary responsibility to
consider an Acquisition Transaction. Such written notification shall describe in
reasonable detail any such Disclosure Schedule is satisfactoryoccurrence and identify the person or person
involved.
In the event that, prior to the termination of this Agreement, HBI or
Bank (x) determines that it must, in good faith, consider an Acquisition
Transaction and, within 48 hours of the notice described in the preceding
paragraph above, has not notified FFB that it has ceased all cooperation and
consideration of such Acquisition Transaction or (y) breaches the provisions of
this Section 14.11, HBI shall be obligated to pay FFB the sum of $50,000 plus
all reasonable out-of-pocket costs and expenses incurred by December 24,
1998.FFB in connection
with or in furtherance of this Agreement and the transactions contemplated
hereby, including, without limitation, all legal, travel, accounting, advisory
and environmental costs and expenses, such cost and expenses not to exceed
$100,000.
15. CONDITIONS PRECEDENT; TERMINATIONS.
15.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES. The
obligations of each of the parties hereto to effect the Merger is subject to the
fulfillment on or prior to the Effective Time of the following conditions
precedent:
15.1.1 The Merger will have been approved by the FRBFederal
Reserve Board or the delegate, and by any other governmental authority having
jurisdiction and any applicable waiting period will have expired, with no such
approval or authorization containing any provision which would be materially
adverse to the merged businesses of SRFCHBI and FFB as contemplated by this
Agreement.
15.1.2 No suit, action, investigation by any governmental
body, or other legal or administrative proceedings will have been brought or
threatened which materially questions the validity or legality of the
transactions contemplated herein. For the purposes hereof, inquiries which could
give rise to any such suit, investigation or proceeding given by any
governmental agency may, at the option of either party, be deemed such a threat.
15.1.3 The parties hereto will have obtained any and all
consents required for the consummation of the Merger or for the preventing of
any default under any contract, agreement or permit of the parties hereto,
which, if not obtained or made, is reasonably likely to have,
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individually or in the aggregate, a material adverse effect on the combined
business affairs of SRFCHBI and FFB.
15.2 CONDITIONS PRECEDENT TO FFB'S OBLIGATIONS. The obligation of FFB
to effect the Merger will be subject to the fulfillment on or prior to the
Effective Date of the following conditions precedent (which may be waived in
writing by FFB):
15.2.1 The representations and warranties of SRFCHBI herein
contained will be true in all material respects as of and at the Closing Date
with the same effect as though made at such time; SRFCHBI will have
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obligations and complied with all covenants required by this Agreement to be
performed or complied with by it prior to the Closing Date; and SRFCHBI will have
delivered to FFB a certificate, dated the Closing Date and signed by its
president or one of its vice presidents and its secretary or one of its
assistant secretaries, to both such effects.
15.2.2 No material change in the corporate status, businesses,
operations or condition (financial or otherwise) of either of SRFCHBI or Bank will
have occurred since December 31, 1997,June 30, 1998, (whether or not covered by insurance), none
of which has been materially adverse in relation to SRFC,HBI, taken as a whole, and
no other event or condition of any character will have occurred or arisen since
that date which will have materially and adversely affected the corporate
status, businesses, operations or financial condition of SRFC.HBI.
15.2.3 FFB will have received from BarnesStites & Thornburg,Harbison, counsel
for SRFC,HBI, a favorable opinion, dated as of the Closing Date, in form and
substance satisfactory to FFB's counsel. In rendering this opinion, such counsel
may rely on certificates of public officials and of corporate officers, opinions
of recognized local counsel in jurisdictions where such counsel is not qualified
to practice, and such other evidence as he may deem appropriate. The provisions
of the preceding sentence are applicable to all other opinions of counsel to be
delivered hereunder.
15.2.4 The Registration Statement will have become effective
relating to the shares of FFB which the shareholders of SRFCHBI will receive at the
Effective Time.
15.2.5 FFB will have received a favorable ruling from the
Internal Revenue Service, or opinion of counsel, in form and substance
satisfactory to FFB and its counsel, to the effect that, under the IRC, and
particularly Section 368(a)(1)(A), no gain or loss will be recognized to FFB or
its shareholders or to SRFCHBI or its shareholders as a result of the Merger except
for gain (but not loss) on cash received by the shareholders of SRFC.HBI.
15.2.6 FFB will have received such written consents and confirmations
(or opinions of counsel to the effect that such consents or confirmations are
not required), as they may reasonably request to the effect that the Surviving
Corporation will succeed upon consummation of the Merger to all of SRFC's right,
title and interest in and to its material contracts, agreements, leases and
other commitments and that the Surviving Corporation will possess and enjoy all
material licenses, permits and other governmental authorizations possessed by
SRFC at the date hereof. FFB will have received those approvals and consents
described in Section 12.1012.9 hereof.
15.2.7 At the date of signing this Agreement and immediately
prior to the Closing Date, FFB will have received from FFB's independent
accountants letters to the effect that they are not aware of any reason that FFB
is not in compliance with the pooling of interests criteria as specified under
APB No. 16, and that, accordingly, the Merger can be accounted for as a pooling
of interests from FFB's perspective.
15.2.8 SRFC will have performed, at FFB's expense, a Phase I
Environmental Survey by December 31, 1998 and FFB will have reviewed the results
of such Phase I Environmental Survey on its owned banking facilities by January
15, 1999 and determined whether it is satisfied with the results thereof and
that no further testing is required and no
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remedial action is necessary, or if such Phase I is not satisfactory in form and
substance to it, FFB and SRFC will have reached agreement by January 31, 1999 as
to the remedial actions necessary to correct any unsatisfactory conditions and
the payment for such remedial actions.
15.2.9138
15.2.8 FFB will have received the Affiliate Letter and the
written agreements signed by each Seller's Rule 145 Affiliate described in
Section 14.10 hereof.
15.3 CONDITIONS PRECEDENT TO SRFC'SHBI'S OBLIGATION. The obligation of SRFCHBI to
effect the Merger will be subject to the fulfillment on or prior to the
Effective Time of the following conditions precedent (which may be waived in
writing by SRFC)HBI):
15.3.1 The representations and warranties of FFB herein
contained will be true in all material respects as of and at the Closing Date
with the same effect as though made at such time; FFB will have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by it prior to the Closing Date; and FFB will have
delivered to SRFCHBI a certificate, dated the Closing Date and signed by its
president or one of its vice presidents and its secretary or one of its
assistant secretaries, to both such effects.
15.3.2 No material change in the corporate status, businesses,
operations or condition (financial or otherwise) of FFB and its consolidated
Subsidiaries will have occurred since December 31, 1997 (whether or not covered
by insurance), which has been materially adverse in relation to FFB and its
consolidated Subsidiaries, taken as a whole, and no other event or condition of
any character will have occurred or arisen since that date which will have
materially and adversely affected the corporate status, businesses, operations
or financial condition of FFB and its consolidated Subsidiaries, taken as a
whole.
15.3.3 SRFCHBI will have received from Frost & Jacobs LLP, counsel
for FFB, a favorable opinion, dated immediately prior to the Closing Date, in
form and substance satisfactory to SRFC'sHBI's counsel. In rendering this opinion,
such counsel may rely on certificates of public officials and of corporate
officers, opinions of recognized local counsel in jurisdictions where such
counsel is not qualified to practice, and such other evidence as it may deem
appropriate. The provisions of the preceding sentence are applicable to all
other opinions of counsel to be delivered hereunder.
15.3.4 The Registration Statement will have become effective
relating to the shares of FFB common stock which the shareholders of SRFCHBI will
receive at the Effective Time.
15.3.5 SRFCHBI and its shareholders will have received a favorable
ruling from the Internal Revenue Service, or opinion of counsel, in form and
substance satisfactory to SRFC,HBI, to the effect that, under the Internal Revenue
Code of 1986, as amended (i) no gain or loss will be recognized to SRFCHBI as a
result of the Merger, and (ii) no gain or loss (except in respect of fractional
share interests sold or dissenter's receiving cash) will be recognized to SRFC'sHBI's
shareholders as a result of their exchange of common stock of SRFCHBI for common
shares of FFB, and covering such other matters as are typically covered by such
opinion.
15.3.6 At the date of signing this Agreement and immediately
prior to the Closing Date, SRFCHBI will have received from SRFC'sHBI's independent
accountants letters to the
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154 effect that they are not aware of any reason that SRFCHBI
is not in compliance with the pooling of interests criteria as specified under
APB No. 16, and that, accordingly, the Merger can be accounted for as a pooling
of interests from SRFC'sHBI's perspective.
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15.3.7 The SRFCHBI Board of Directors shall have received an
opinion from Hovde,PBS, dated as of the date of the Joint Proxy Statement-Prospectus,Statement/Prospectus, to the
effect that the consideration to be received by SRFCHBI shareholders in the merger
is fair from a financial point of view, and such opinion shall not have been
withdrawn at the time of Closing.
15.4 TERMINATION AND ABANDONMENT. Anything herein or elsewhere to the
contrary notwithstanding, this Agreement may be terminated and abandoned at any
time before the Effective Time, whether before or after adoption or approval of
this Agreement by the shareholders of SRFC,HBI, under any one or more of the
following circumstances:
15.4.1 By the mutual consent of the Boards of Directors of FFB
and SRFC;HBI;
15.4.2 By FFB if the holders of 7.5% or morepercentage of the outstanding shares of
common stock of SRFC will be entitled to receive cash in exchange forHBI owned by shareholders who perfect their SRFC shares pursuant to perfected dissenters' rights
under the Indiana
Business Corporation Act;KRS exceeds the percentage that would allow FFB to account for the
Merger as a pooling of interests;
15.4.3 By FFB if, prior to the Effective Time, the conditions
set forth in Sections 15.2.1 through 15.2.9,15.2.8, inclusive, will not have been met;
15.4.4 By SRFCHBI if, prior to the Effective Time, the conditions
set forth in Sections 15.3.1 through 15.3.7, inclusive, will not have been met;
15.4.5 By either FFB or SRFCHBI if prior to the Effective Time,
the conditions set forth in Sections 15.1.1 through 15.1.3, inclusive, will not
have been met, or any action or proceeding before any court or other
governmental body or agency will have been instituted or threatened to restrain
or prohibit the Merger and such constituent corporation deems it unadvisable to
proceed with the Merger;
15.4.6 By either FFB or SRFCHBI if the requisite approval of the
shareholders of SRFCHBI will not have been obtained or if the Effective Time, will
not have occurred on or before July 31, 1999; or
15.4.7 By SRFC, in accordance with the procedures set forth in
this Section 15.4.7,HBI, if the SRFCHBI Board so determines by a vote of a
majority of its members, at any time during the ten-day period commencing on the
second
trading day (the "Valuation Date") after the day that is the latest of (i) the
day of expiration of the last waiting period with respect to any of the required
regulatory approvals, (ii) the day on which the last of the required regulatory
approvals is obtained, and (iii) the day on which the required SRFCHBI stockholder
approval is obtained, if both of the following conditions are satisfied (a
"Termination Event"):
(a) the Average Closing Price is less than $23.2671, AND$23.857995,
and
(b) the SRFCHBI Ratio is less than the Index Ratio.
24
155
If SRFCHBI elects to exercise this termination right, it will give prompt written
notice to FFB (which notice may be withdrawn at any time). Duringtime within the
aforementioned ten-day period so long as FFB has not exercised its right to
terminate this Agreement as set forth below) and, during the five days
commencing with its receipt of such notice, FFB will have the option to avoid
the termination of
this Agreement by electing to increaseincreasing the Exchange Ratio to equal the lesser of (i) the result of dividing
$1,983.52$486.1655 by the Average Closing
24
140
Price, and (ii) the quotient obtained by dividing the product of the Index Ratio
and the Exchange Ratio (as then in effect) by the SRFCHBI Ratio. If FFB makes an
election contemplated by the preceding sentence (the "Election") within such five-day period, it
will give prompt written notice to SRFCHBI of the Electionsuch election and the revised Exchange
Ratio, whereupon (x) no termination will have occurred as a result of the
Termination Event and SRFC'sHBI's exercise of its right of termination, (y) this
Agreement will remain in effect in accordance with its terms (except as the
Exchange Ratio will have been so modified), and (z) any references in the
Agreement to "Exchange Ratio" will thereafter be deemed to refer to the Exchange
Ratio as so adjusted). If FFB failsdoes not elect to makeincrease the Election, FFB will give prompt
written notice to SRFC of its decision not to make the Election and, within five
days of its receipt of such notice, SRFC must give written notice (the "Final
Notice") to FFB of either: (A) its election to withdraw the exercise of its
termination right, in which case (i) no termination will have occurredExchange Ratio as
a
result of the Termination Event and SRFC's exercise of its right of termination,
(ii)set forth above, this Agreement will remain in effect in accordance with its terms, and
(iii) any references in the Agreement to "Exchange Ratio" will continue as
defined herein and without any modification or adjustment; or (B) its election
to have the termination of this Agreement become effective, in which case such
termination will occur at the close of business on the second business day after
FFB's receipt of the Final Notice.terminate immediately.
For purposes of this Section 15.4.7, the following terms have the definitions
set forth below:
*o Average Closing Price means the average of the daily closing sales price
of a FFB common share, as reported on the Nasdaq National Market for the 20
consecutive Nasdaq trading days (in which at least 1,000 shares were traded)
ending on the Valuation Date.
*o Index Group"Group means the 31 financial institution holding companies (17 with
headquarters in Ohio and 14 with headquarters in Indiana) listed below, the
common stock of all of which shall be publicly traded and as to which there
shall not have been an Acquisition Transaction (as defined in the Merger
Agreement) involving such company publicly announced at any time during the
period beginning on the date of the Merger Agreement and ending on the Valuation
Date. In the event that the common stock of any such company ceases to be
publicly traded or a proposal regarding a change in control involving, or a
material acquisition by, any such company is announced at any time during the
period beginning on the date of the Merger Agreement and ending on the Valuation
Date, such company will be removed from the Index Group. The 31 financial
institution holding companies are as follow:
Ohio Banks
----------
BFOH BancFirst Ohio Corp
BLMT Belmont Bancorp.
FITB Fifth Third Bancorp
FMER FirstMerit Corporation
25
156
HMAN
BFOH BancFirst Ohio Corp
BLMT Belmont Bancorp
FITB Fifth Third Bancorp
FMER FirstMerit Corporation
HBAN Huntington Bancshares Incorporated
KEY KeyCorp
MGNB Mahoning National Bancorp, Incorporated
NCC National City Corporation
OAKF Oak Hill Financial, Inc.
OVBC Ohio Valley Banc Corp.
PRK Park National Corporation
PEBO Peoples Bancorp Inc.
PFGI Provident Financial Group Inc.
SECD Second Bancorp, Incorporated
SKYF Sky Financial Group Inc.
UBCP United Bancorp, Inc.
WNNB Wayne Bancorp, Inc.
25
141
Indiana Banks
-------------
SRCE 1st Source Corporation
ANBC ANB Corporation
BNK CNB Bancshares, Inc.
CBIN Community Bank Shares of Indiana, Inc.
THFF First Financial Corporation
FRME First Merchants Corporation
GABC German American Bancorp
IUBC Indiana United Bancorp
IRWN Irwin Financial Corporation
LKFN Lakeland Financial Corporation
METB MetroBanCorp
NCBE National City Bancshares, Inc.
OLDB Old National Bancorp
PPLS Peoples Bank Corporation of Indianapolis
If FFB or any company belonging to the Index Group declares or effects
a stock dividend, reclassification, recapitalization, split-up, combination,
exchange or shares or similar transaction between the date of the Merger
Agreement and the Valuation Date, the prices for the common stock of such
company will be appropriately adjusted for purposes of determining whether a
Termination Event has occurred.
*o Index Price means, with respect to the Index Group, the price resulting
from dividing (i) the sum of the closing sales price on the Starting Date of a
share of common stock of each member of the Index Group by (ii) the number of
financial institutions that comprise the Index Group.
*o Average Index Price, with respect to the Index Group, means the price
resulting from dividing (i) the sum of the average of the daily closing sales
price of a share of common stock of each financial institution comprising the
Index Group, as reported on the consolidated transaction reporting system for
the market or exchange on which such common stock is principally traded, 26
157
during
the period of 20 consecutive trading days ending on the Valuation Date by (ii)
the number of financial institutions that comprise the Index Group.
* SFRCo HBI Ratio means the number obtained by dividing the Average Closing Price
by $26.5909.
*$28.0682.
o Index Ratio means the number obtained by dividing the Average Index Price
by the Index Price and subtracting 0.1250.15 from the quotient.
*o Starting Date means the day immediately prior to the parties' public
announcement of the signing of this Agreement.
26
142
An example of the determination regarding whether a Termination Event
has occurred and the resulting number of FFB common shares that could possibly
be issued is attached as Schedule 15.4.7; or15.4.7.
15.4.8 By either FFB or HBI, upon written notice to the other
party, if it determines that the disclosure Schedule
delivered pursuant to Section 14.12Closing Date Price is not satisfactory.less than $20.00 per share. "Closing Date
Price" means the average of the daily closing sales price of a FFB common share,
as reported on the Nasdaq National Market for the 20 consecutive Nasdaq trading
days (in which at least 1,000 shares were traded) ending on the second trading
day preceding the Closing Date.
15.5 EFFECT OF TERMINATION. Upon any such termination and abandonment,
neither party will have any liability or obligation hereunder to the other,
except for the return of all documents exchanged and the preservation of the
confidentiality by each party of the information exchanged, and except for a
termination pursuant to Section 15.4.3 (resulting from a failure to satisfy
Section 15.2.1) or pursuant to Section 15.4.4 (resulting from a failure to
satisfy Section 15.3.1), in which case, a termination shall not relieve the
breaching party from liability for a breach of a representation or covenant
giving rise to the termination.
15.6 EXPENSES. Upon a termination of this Agreement as provided in
Section 15.4, each party will pay all costs and expenses of its performance of
and compliance with all agreements and conditions contained herein on its part
to be performed or complied with, including fees, expenses and disbursements of
its accountants and counsel.
15.7 SURVIVAL OF REPRESENTATIONS. The representations and warranties of
the parties contained in this Agreement survive until the Effective Time and do
not survive after such Effective Time.
16. GENERAL PROVISIONS.
16.1 DEFINITIONS. "Subsidiaries" as used herein means any corporation
50% or more of whose outstanding voting securities are owned directly or
indirectly by FFB or SRFC,HBI, as the context may require, whether consolidated or
unconsolidated. The headings in this Agreement will not affect in any way its
meaning or interpretation.
16.2 AMENDMENTS. Any of the terms or conditions of this Agreement may
be modified or waived at any time before the Effective Time by the party which
is, or the shareholders of which are, entitled to the benefit thereof upon the
authority of the Board of Directors of such party, provided that any such
modification or waiver will in the judgment of the party making it 27
158
not affect
substantially or materially and adversely the benefits to such party or its
shareholders intended under this Agreement.
16.3 PURCHASE OF "TAIL COVERAGE" FOR DIRECTORS' AND OFFICERS'
INSURANCE. HBI shall purchase "tail coverage" on its Directors' and Officers'
insurance for a period of at least two years from the Closing Date and for a sum
not exceeding $10,000 in the aggregate.
16.4 NO SURVIVAL. Except as set forth in the following sentence, none
of the representations, warranties or covenants made in this Agreement shall
survive the Effective Time or earlier termination of this Agreement. The
covenants set forth in Sections 8.4, 14.2, 14.11, 15.6 and 16.3 shall survive
the Effective Time or earlier termination of this Agreement.
27
143
16.5 NOTICES. All notices, demands, requests, consents or approvals
required hereunder will be in writing and will be given (and will be deemed to
have been duly given upon receipt) by delivery in person or by certified or
registered mail, return receipt requested, postage prepaid, addressed to such
party at the address set forth below or to such other address as any party may
give to the other by like notice:
IF TO FFB: First Financial Bancorp.Bancorp
300 High Street
P.O. Box 476
Hamilton, Ohio 45012-0476
ATTENTION: Stanley N. Pontius, President
and Chief Executive Officer
With copies to: Frost & Jacobs
2500 PNC Center
201 East Fifth Street
P.O. Box 5715
Cincinnati, Ohio 45201-5715
ATTENTION: Neil Ganulin
If to SRFC: Sand Ridge Financial Corporation
2611 Highway Avenue
P. O.HBI: Hebron Bancorp, Inc.
2652 N. Bend Road
P.O. Box 1929
Highland, Indiana 46322360
Hebron, KY 41048
ATTENTION: Bruce E. Leep,Michael Conner, President
With copies to: BarnesStites & Thornburg
600 1st Source Bank Center
100 North Michigan
South Bend, Indiana 46601-1632Harbison
250 W. Main Street, Suite 2300
Lexington, KY 40507-1758
ATTENTION: John A. Burgess, Esq.
Hovde Financial, Inc.
1629 Colonial Parkway
Inverness, Illinois 60067
ATTENTION: Steve Nelson
16.4Walter R. Byrne, Jr.
16.6 BINDING NATURE OF AGREEMENT. This Agreement will be binding upon
and inure to the benefit of FFB and SRFCHBI and their respective successors and
permitted assigns.
16.7 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.
16.8 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.
28
159
16.5144
16.9 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.
16.10 ASSIGNMENT. Neither this Agreement nor any obligation or right
hereunder may be assigned by any party hereto, whether directly or indirectly,
without the prior written consent of the other party.
16.616.11 GOVERNING LAW. This Agreement will in all respects be governed
and construed in accordance with the laws of the State of Ohio, except to the
extent superseded by the federal banking laws of the United States.
16.7 COUNTERPARTS.16.12 COUNTERPARTS.. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same instrument.
16.13 KNOWLEDGE OF HBI. Where any representation or warranty contained
in this Agreement is expressly qualified by reference to the best knowledge of
HBI, "best knowledge" means that none of Michael A. Conner (Chief Executive
Officer), Joseph Hojnacki (Vice President), Howard Regenbogen (Vice President
and Cashier) and Robert C. Ruebel (Executive Vice President) of HBI has any
actual knowledge as to such matter and nothing has come to their attention which
would lead any of them to believe that any representation or warranty is not
true.
IN WITNESS WHEREOF, pursuant to authority duly given by its Board of
Directors, each of FFB, and SRFCHBI has caused this Agreement to be executed and
attested by its authorized officers as of the date and year first above written.
FIRST FINANCIAL BANCORP.BANCORP
By:
-------------------------------------
Stanley N. PontiusMichael R. O'Dell
Senior Vice President, Chief
Financial Officer and CEO
SAND RIDGE FINANCIAL CORPORATIONSecretary
HEBRON BANCORP, INC.
By:
-------------------------------------
Bruce E. Leep
Chairman andMichael A. Conner
President
29
160145
SCHEDULE 15.4.7
The following example illustrates whether a Termination Event could
occur and the resulting number of FFB shares that could possibly be issued:
Average Closing Price $22.75 $22.75$23.50 $23.50
Average Index Price/Index Price .97 1.01
SRFCHBI Ratio .8556 .8556.8372 .8372
Index Ratio .8450 .8850.8200 .8600
Does Termination Event Occur? No Yes
New Exchange Ratio (lower of Ii or ii):
(i) 87.187720.6879
(ii) 88.179320.9325
FFBC Shares Issued 5,115,000 5,231,2621,222,650 1,241,274
30
161146
APPENDIX B
TO BE UPDATED ASFAIRNESS OPINION OF THE DATE OF THE PROXY MAILING
-------------------------------------------------PROFESSIONAL BANK SERVICES, INC.
December 16,31, 1998
Board of Directors
Sand Ridge Financial Corporation
2611 Highway Avenue
Highland, IN 46322Hebron Bancorp, Inc.
2652 North Bend Road
Hebron, Kentucky 41048
Dear Members of the Board:
Sand Ridge Financial Corporation ("Sand Ridge")You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of Hebron Bancorp, Inc.,
an Indiana
corporation, andHebron, Kentucky (the "Company") of the proposed merger of the Company with
First Financial Bancorp, Hamilton, Ohio ("First Financial"FFBC"), (the "Merger"). In the
proposed Merger, Company shareholders will receive 20.3775 FFBC common shares
per Company common share or an Ohio
corporation, have entered into aaggregate of 1,222,650 FFBC common shares for all
60,000 Company common shares outstanding, subject to adjustment, as further
defined in the Plan and Agreement of Merger ("Planbetween FFBC and the Company (the
"Agreement"). On December 28, 1998, the proposed consideration to be received
represents an aggregate value of Merger"$34,081,369 or $568.02 per Company common share
based on the closing price, on December 28, 1998, for FFBC common stock of
$27.875 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 subsidiary Hebron Deposit Bank,
Hebron, Kentucky (the "Bank") including: (i) September 30, 1998 internal
financial reports of the Bank; (ii) June 30, 1998 Consolidated Reports of
Condition and Income filed by the Bank with the FDIC; (iii) June 30, 1998 and
December 31, 1997 FRY-9 SP Parent Company Only Financial Statements filed by the
Company with the Federal Reserve; (iv) June 30, 1998, 1997 and 1996 audited
balance sheets of the Bank; (v) June 30, 1998 Uniform Bank Performance Report of
the Bank; (vi) December 31, 1998 budget and projected financial data for the
Bank; (vii) and various internal asset quality reports, loan loss allowance
reports, securities listings and deposit information. We have reviewed and
tabulated statistical data regarding the loan profile, 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.
B-1
147
We have taken into consideration all other offers and associated correspondence
received by the Company regarding a possible combination.
We have not compiled, reviewed or audited the financial statements of the
Company or FFBC, 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 FFBC.
As part of preparing this Fairness Opinion, PBS performed a due diligence review
of FFBC on December 15, 1998. As part of the Due diligence, PBS reviewed the
following items: minutes of the Board of Directors meetings of FFBC, from
January 1997 through November 1998; reports of independent auditors and
management letters and response thereto, for the years ending December 31, 1996
and 1997; the most recent analysis and calculation of allowance for loan and
lease losses of FFBC; internal loan review reports; investment portfolio
activity reports; asset/liability management reports; asset quality reports;
Uniform Holding Company Report for FFBC as of June 30, 1998; June 30, 1998 and
September 30, 1998 Consolidated Reports of Condition and Income for FFBC;
Security and Exchange Commission ("SEC") filings made by FFBC for 1997 and
year-to-date 1998; and discussions pertaining to any material pending litigation
and other potentially substantive issues with senior management of FFBC.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by the shareholders of the Company under the Agreement is fair
and equitable from a financial perspective.
Very truly yours,
Professional Bank Services, Inc.
B-2
148
April ____, 1999
Board of Directors
Hebron Bancorp, Inc.
2652 North Bend Road
Hebron, Kentucky 41048
Dear Members of the Board:
To our knowledge, nothing of a material nature has occurred since the issuance
of our Fairness Opinion (the "Opinion") to the common shareholders of Hebron
Bancorp, Inc., Hebron, Kentucky (the "Company") dated December 16,31, 1998, pursuantthat
would cause us to which Sand Ridge will be merged with and
into First Financial (the "Merger"). Asalter or rescind the Opinion. The Opinion is set forth in Section 8.3 of the Plan
of Merger, at the effective time of the Merger each of the outstanding shares of
Sand Ridge common stock ("Sand Ridge Common Stock") will be converted into and
have the right to receive 85.25 shares (the "Exchange Ratio") of First Financial
common stock ("First Financial Common Stock"), subject to certain adjustments as
set forth in Section 15.4 of the Plan of Merger. In connection therewith, you
have requested our opinion asrelated to the
fairness from a financial point of view, to the common shareholders of the
Exchange Ratio to the shareholders of Sand Ridge.
Hovde Financial, Inc. ("Hovde") specializes in providing investment
banking and financial advisory services to commercial bank and thrift
institutions. Our principals are experienced in the independent valuation of
securities in connection with negotiated underwritings, subscription and
community offerings, private placements, merger and acquisition transactions and
recapitalizations. We are familiar with Sand Ridge, having acted as its
financial advisor in connection with, and having participated in the
negotiations leading to, the Plan of Merger.
We were retained by Sand Ridge to act as its exclusive financial
advisor with respect to a review of Sand Ridge's strategic alternatives and the
possible sale, merger, consolidation, or other business combination, in one or a
series of transactions, involving all or a substantial amount of the business,
securities or assets of Sand Ridge. We will receive compensation from Sand Ridge
in connection with our services, a significant portion of which is contingent
upon the consummation of the Merger. At your direction, we solicited the
interest of third partiesCompany, regarding a possible business combination with Sand
Ridge. The Plan of Merger is the result of this solicitation.
B-1
162
Board of Directors
Sand Ridge Financial Corporation
December 16, 1998
Page Two
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Sand Ridge and First
Financial and material prepared in connection with the proposed transaction including the following:outlined in the Plan and Agreement
of Merger; certain historical publicly
available information concerning Sand Ridge and First Financial; the terms of
recent merger and acquisition transactions involving thrifts and thrift holding
companies that we considered relevant; historical market prices and trading
volumes forMerger Between First Financial Common Stock;Bancorp. and financial and other information
provided to us by the managements of Sand Ridge and First Financial.
In addition, we have conducted meetings with members of the senior
management of Sand Ridge and First Financial for the purpose of reviewing the
future prospects of Sand Ridge and First Financial. We also evaluated the pro
forma ownership of First Financial Common Stock by Sand Ridge's shareholders
relative to the pro forma contribution of Sand Ridge's assets, liabilities,
equity and earnings to the pro forma company, and conducted such other studies,
analyses and examinations as we deemed appropriate. We also took into account
our assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our knowledge of the banking
industry and our general experience in securities valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us by
Sand Ridge and First Financial and in the discussions with Sand Ridge and First
Financial management. We did not independently verify and have relied on and
assumed that the aggregate allowances for loan losses set forth in the balance
sheets of each of Sand Ridge and First Financial at September 30, 1998 were
adequate to cover such losses and complied fully with applicable law, regulatory
policy and sound banking practices as of the date of such financial statements.
We were not retained to and did not conduct a physical inspection of any of the
properties or facilities of Sand Ridge or First Financial, nor did we make any
independent evaluation or appraisal of the assets, liabilities or prospects of
Sand Ridge or First Financial, nor were we furnished with any such evaluation or
appraisal, and we were not retained to and did not review any individual credit
files.
B-2
163
Board of Directors
Sand Ridge Financial Corporation
December 16, 1998
Page Three
We have assumed that the Merger is, and will be, in compliance with all
laws and regulations that are applicable to Sand Ridge and First Financial. In
rendering this opinion, we have been advised by Sand Ridge and First Financial
and we have assumed that there are no factors that would impede any necessary
regulatory or governmental approval for the Merger and we have further assumed
that in the course of obtaining the necessary regulatory and governmental
approvals, no restriction will be imposed on First Financial or the surviving
corporation that would have a material adverse effect on First Financial or the
contemplated benefits of the Merger. We have also assumed that there would not
occur any change in the applicable law or regulation that would cause a material
adverse change in the prospects or operations of First Financial or the
surviving corporation after the Merger.
Our opinion is based solely upon the information available to us and
the economic, market and other circumstances as they exist as of the date
hereof. Events occurring and information that becomes available after the date
hereof could materially affect the assumptions and analyses used in preparing
this opinion. We have not undertaken to reaffirm or revise this opinion or
otherwise comment upon any events occurring or information that becomes
available after the date hereof.
We are not expressing any opinion herein as to the prices at which
shares of First Financial Common Stock issued in the Merger may trade if and
when they are issued or at any future time, nor does our opinion constitute a
recommendation to any holder of Sand Ridge Common Stock as to how such holder
should vote with respect to the Plan of Merger at any meeting of holders of Sand
Ridge Common Stock.
This letter is solely for the information of the Board of Directors of
Sand Ridge and is not to be used, circulated, quoted or otherwise referred to
for any other purpose, nor is it to be filed with, included in or referred to in
whole or in part in any registration statement, proxy statement or any other
document, except in each case in accordance with our prior written consent which
shall not be unreasonably withheld; provided, however, that we hereby consent to
the inclusion and reference to this letter in any registration statement, proxy
statement, information statement or tender offer document to be delivered to the
holders of Sand Ridge Common Stock in connection with the Merger if and only if
this letter is quoted in full or attached as an exhibit to such document and
this letter has not been withdrawn prior to the date of such document.Hebron Bancorp, Inc.
Very truly yours,
Professional Bank Services, Inc.
B-3
164
Board of Directors
Sand Ridge Financial Corporation
December 16, 1998
Page Four
Subject to the foregoing and based on our experience as investment
bankers, our activities and assumptions as described above, and other factors we
have deemed relevant, we are of the opinion as of the date hereof that the
Exchange Ratio is fair, from a financial point of view, to the shareholders of
Sand Ridge.
Sincerely,
HOVDE FINANCIAL, INC.
B-4
165
APPENDIX C
INDIANA CODE
CHAPTER 44149
KENTUCKY REVISED STATUTES
SUBTITLE 13. DISSENTERS' RIGHTS
Section.
23-1-44-1. "Corporation" defined.
23-1-44-2. "Dissenter" defined.
23-1-44-3. "Fair value" defined.
23-1-44-4. "Interest" defined.
23-1-44-5. "Record shareholder" defined.
23-1-44-6. "Beneficial shareholder" defined.
23-1-44-7. "Shareholder" defined.
23-1-44-8. Shareholder dissent.
23-1-44-9. Beneficial shareholder dissent.
23-1-44-10.RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010 Definitions
271B.13-020 Right to dissent
271B.13-030 Dissent by nominees and beneficial owners
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271B.13-200 Notice of dissenters' rights
preceding shareholder vote.
23-1-44-11.271B.13-210 Notice of intent to dissent.
23-1-44-12. Notice of dissenter's rights followingdemand payment
271B.13-220 Dissenters' notice
271B.13-230 Duty to demand payment
271B.13-240 Share restrictions
271B.13-250 Payment
271B.13-260 Failure to take action
creating rights.
23-1-44-13. Demand for271B.13-270 After-acquired shares
271B.13-280 Procedure if shareholder dissatisfied with payment by dissenter.
23-1-44-14. Transfer of shares restricted after demand for payment.
23-1-44-15. Payment to dissenter.
23-1-44-16. Return of sharesor offer
JUDICIAL APPRAISAL OF SHARES
271B.13-300 Court action
271B.13-310 Court costs and release of restrictions.
23-1-44-17. Offer of fair value for shares obtained after first
announcement.
23-1-44-18. Dissenter demand for fair value under certain conditions.
23-1-44-19. Effect of failure to pay demand - Commencement of judicial
appraisal proceeding.
23-1-44-20. Judicial determination and assessment of costs.
23-1-44-1. "CORPORATION" DEFINED. -counsel fees
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010 DEFINITIONS
As used in this chapter, "corporation"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.[P.L.149-1986, ss. 28.]
23-1-44-2. "DISSENTER" DEFINED. - As used in this chapter, "dissenter"
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 8 [IC
23-1-44-8] of this chapterKRS 271B.13-020 and who exercises that right
when and in the manner required by sections 10 through 18 [IC 23-1-44-10 through IC 23-1-44-18] of this
chapter. [P.L.149-1986, ss. 28.]
23-1-44-3. "FAIR VALUE" DEFINED.- As used in this chapter, "fairKRS 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. [P.L. 149-1986, ss. 28.]
23-1-44-4. "INTEREST" DEFINED. - As usedIn 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
this chapter, "interest"order to be exempt from the requirements of KRS 271B.12-210.
C-1
150
(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.
[P.L. 149-1986, ss. 28.]
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23-1-44-5. "RECORD SHAREHOLDER" DEFINED. - As used in this chapter, "record(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 that treatment
asof the rights granted by a record shareholder is provided undernominee certificate on
file with a recognition procedure or a
disclosure procedure established under IC 23-1-30-4. [P.L.149-1986, ss. 28.]
23-1-44-6. "BENEFICIAL SHAREHOLDER" DEFINED. - As used in this chapter,
"beneficialcorporation.
(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.
[P.L. 149-1986, ss. 28.]
23-1-44-7. "SHAREHOLDER" DEFINED. - As used in this chapter, "shareholder"(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
[P.L.149-1986,ss.28.]
23-1-44-8. SHAREHOLDER DISSENT. - (a)271B.13-020 RIGHT TO DISSENT
(1) A shareholder isshall be entitled to dissent from, and obtain payment of
the fair value of the shareholder'shis shares in the event of, any of the following
corporate actions:
(1)(a) Consummation of a plan of merger to which the corporation is a
party if:
(A) Shareholderparty:
1. If shareholder approval is required for the merger by
IC 23-1-40-3KRS 271B.11-030 or the articles of incorporation;incorporation and
(B) Thethe shareholder is entitled to vote on the merger.
(2)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.
(3)plan;
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the
usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order
or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be
distributed to the shareholders within one (1) year after the
date of sale.
(4) The approvalsale:
(d) An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a controldissenter'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 acquisitionif the fractional share so
created is to be acquired for cash under IC
23-1-42.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
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(f) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws,By-Laws, or a
resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain
payment for their shares.
(b) This section does not apply to the holders of shares of any class
or series if, on the date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting of shareholders at which the merger,
plan of share exchange, or sale or exchange of property is to be acted on, the
shares of that class or series were:
(1) Registered on a United States securities exchange
registered under the Exchange Act (as defined in IC
23-1-43-9); or
(2) Traded on the National Association of Securities
Dealers, Inc. Automated Quotations System
Over-the-Counter Markets - National Market Issues or
a similar market.
(c) A shareholder:
(1) Who isshareholder entitled to dissent and obtain payment for the
shareholder'shis shares
under this chapter; or
(2) Who would be so entitled to dissent and obtain
payment but for the provisions of subsection (b); maychapter shall not challenge the corporate action creating
(or that,
but forhis entitlement unless the provisions of subsection (b), would have
created)action is unlawful or fraudulent with
respect to the shareholder's entitlement.
[P.L.149-1986, ss. 28; P.L.107-1987, ss. 19.]
23-1-44-9.shareholder or the corporation.
271B.13-030 DISSENT BY NOMINEES AND BENEFICIAL SHAREHOLDER DISSENT. - (a)OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the
shareholder'shis name only if the shareholder dissentshe shall dissent with respect
to all shares beneficially owned by any one (1) person and notifiesnotify the
corporation in writing of the name and address of each person on whose
behalf the shareholderhe asserts dissenters'dissenter's rights. The rights of a partial dissenter
under this subsection areshall be determined as if the shares as to which
the shareholderhe dissents and the
shareholder'shis other shares were registered in the names of
different shareholders.
(b)(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder'shis behalf only if:
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1) The beneficial shareholder(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
(2) The beneficial shareholder(b) He does so with respect to all the beneficial shareholder's shares or those
shares overof which he is the
beneficial shareholder or over which he has power to direct
the vote.
[P.L.149-1986, ss. 28.]
23-1-44-10.PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271B.13-200 NOTICE OF DISSENTERS' RIGHTS
PRECEDING SHAREHOLDER VOTE. - (a)(1) If proposed corporate action creating dissenters' rights under section 8 [IC
23-1-44-8] of this chapterKRS
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 chapter.
(b)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 section 8 of
this chapterKRS 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 Notice to Dissentersdissenters' notice described in
section
12 [IC 23-1-44-12] of this chapter. [P.L.149-1986, ss. 28; P.L.107-1987, ss.
20.]
23-1-44-11.KRS 271B.13-220.
271B.13-210 NOTICE OF INTENT TO DISSENT. - (a)DEMAND PAYMENT
(1) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapterKRS
271B.13-020 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(1) Must(a) Shall deliver to the corporation before the vote is taken
written notice of the shareholder'shis intent to demand payment for the shareholder'shis shares
if the proposed action is effectuated; and
(2) Must(b) Shall not vote the shareholder'shis shares in favor of the proposed action.
(b)(2) A shareholder who does not satisfy the requirements of subsection (a) is(1)
of this section shall not be entitled to payment for the shareholder'shis shares under
this chapter.
[P.L.149-1986, ss. 28.]
23-1-44-12.C-3
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271B.13-220 DISSENTERS' NOTICE
OF DISSENTERS' RIGHTS FOLLOWING ACTION CREATING RIGHTS. - (a)(1) If proposed corporate action creating dissenters' rights under section 8 [IC
23-1-44-8] of this chapterKRS
271b.13-020 is authorized at a shareholders' meeting, the corporation
shall deliver a written Notice to Dissentersdissenters' notice to all shareholders who
satisfied the requirements of section 11 [IC 23-1-44-11] of this chapter.
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(b)KRS 271B.13-210.
(2) The Notice to Dissenters mustdissenters' notice shall be sent no later than ten (10) days after
approvalthe date the proposed corporate action was authorized by the
shareholders, or, if corporate action is taken without
approvalno shareholder authorization was obtained, by the
shareholders, then ten (10) days after the corporate action was
taken. The Notice to Dissenters must:
(1)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;
(2)(b) Inform holders of uncertificateduncertified shares to what extent transfer
of the shares will be restricted after the payment demand is
received;
(3)(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 the personhe
acquired beneficial ownership of the shares before that date;
(4)(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 (a) notice(1) of this section is delivered; and
(5)(e) Be accompanied by a copy of this chapter.
[P.L.149-1986, ss. 28.]
23-1-44-13.subtitle.
271B.13-230 DUTY TO DEMAND FOR PAYMENT
BY DISSENTER. - (a)(1) A shareholdershare holder who is sent a Notice
to Dissentersdissenters' notice described in IC 23-1-42-11 or in section 12 [IC 23-1-44-12] of
this chapter mustKRS
271B.13-220 shall demand payment, certify whether the shareholderhe acquired
beneficial ownership of the shares before the date required to be set
forth in the dissenter'sdissenters' notice under section 12(b)(3) [IC 23-1-44-12(b)(3)]pursuant to subsection (2) (c) of this
chapter,KRS
271B.13-220, and deposit the shareholder'shis certificates in accordance with the terms
of the notice.
(b)(2) The shareholder who demands payment and deposits the shareholder's
shareshis share certificates
under subsection (a) retains(1) of this section shall retain all other rights of a
shareholder until these rights are canceledcancelled or modified by the taking
of the proposed corporate action.
(c)(3) A shareholder who does not demand payment or deposit the
shareholder'shis share
certificates where required, each by the date set in the Notice to Dissenters, isdissenters'
notice, shall not be entitled to payment for the shareholder'shis shares under this
chapter and is considered, for purposes of this article, to have
voted the shareholder's shares in favor of the proposed corporate action.
[P.L.149-1986, ss. 28.]
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