SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. ______)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COMMUNITY FINANCIAL CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
COMMON STOCK, $0.01 PAR VALUE
2) Aggregate number of securities to which transaction applies:
2,147,470
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$15.14 CASH PER SHARE, WHICH IS THE MINIMUM AMOUNT OF PER
SHARE MERGER CONSIDERATION TO BE PAID IN THE TRANSACTION.
4) Proposed maximum aggregate value of transaction: $32,512,696
5) Total fee paid: $6,503
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $6,460
2) Form, Schedule or Registration Statement No.: PRELIMINARY SCHEDULE 14A
3) Filing Party: COMMUNITY FINANCIAL CORP.
4) Date Filed: AUGUST 9, 2001
COMMUNITY FINANCIAL CORP.
240 E. CHESTNUT STREET
OLNEY, ILLINOIS 62450-2295
(618) 395-8676
November 21, 2001
Dear Shareholder:
You are cordially invited to attend a Special Meeting of
Shareholders of Community Financial Corp. (the "Company") to be held at 501
East Main Street, Olney, Illinois 62450-2295, on Wednesday, December 19,
2001 at 2:00 p.m., local time, to consider and vote upon a proposal to
approve an Agreement of Affiliation and Merger, dated as of March 30, 2001,
as amended by that certain Amendment No. 1 to Agreement of Affiliation and
Merger, dated as of June 26, 2001, and that certain Amendment No. 2 to
Agreement of Affiliation and Merger, dated as of November 20, 2001 (the
"Agreement"), pursuant to which the Company will be acquired by First
Financial Corporation, an Indiana corporation registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended ("First
Financial"), by means of a merger of FFC Merger Corp, an Indiana corporation
and wholly owned subsidiary of First Financial, with and into the Company,
which will result in the Company becoming a wholly-owned subsidiary of First
Financial. Upon the closing of the merger (the "Closing"), (a) each share of
the Company's common stock issued and outstanding at the effective time of
the merger (other than shares as to which dissenters' rights of appraisal
are perfected under applicable law) will be converted into the right to
receive a cash payment of not less than $15.14 per share, subject to
possible upward adjustment based upon a formula contained in the Agreement
(the "Merger Consideration"); provided that First Financial may terminate
the Agreement if the formula results in a per share price of less than
$15.14, determined as of five business days prior to the Closing, and (b)
each option to acquire common stock with an exercise price less than the
Merger Consideration will be converted into the right to receive the
difference between the Merger Consideration and the exercise price of the
option multiplied by the number of shares covered by the option, under such
terms and conditions as are described in detail in the enclosed Proxy
Statement. As a result of the merger, you will no longer own any shares of
common stock of the Company or any successor to the Company. The Agreement
of Affiliation and Merger, Amendment No. 1 to Agreement of Affiliation and
Merger and Amendment No. 2 to Agreement of Affiliation and Merger are
attached as Annex A, Annex B and Annex C, respectively, to the enclosed
------- ------- -------
Proxy Statement.
THE BOARD OF DIRECTORS OF THE COMPANY CAREFULLY CONSIDERED AND
UNANIMOUSLY APPROVED THE AGREEMENT AS BEING IN THE BEST INTEREST OF THE
COMPANY AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS OF THE COMPANY
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL TO APPROVE THE
AGREEMENT. APPROVAL OF THE AGREEMENT BY THE HOLDERS OF AT LEAST TWO-THIRDS
OF THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK IS A CONDITION TO
THE CONSUMMATION OF THE PROPOSED MERGER. AN ABSTENTION OR FAILURE TO VOTE IS
-----------------------------------
THE EQUIVALENT OF VOTING AGAINST THE PROPOSED ACQUISITION.
- ---------------------------------------------------------
Your vote is important, regardless of the number of shares you own.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE, EVEN IF YOU CURRENTLY PLAN TO
ATTEND THE SPECIAL MEETING. This will NOT prevent you from voting in person,
but will assure that your vote is counted if you are unable to attend the
Special Meeting. If you later decide to attend the Special Meeting and vote
in person, or if you wish to revoke your proxy for any reason prior to the
vote at the Special Meeting, you may do so and your proxy will have no
further effect.
The investment banking firm Professional Bank Services, Inc. has
issued its written opinion, dated as of the date hereof, to the Board of
Directors regarding the fairness of the proposed merger from a financial
perspective. A copy of the opinion is attached as Annex D to the enclosed
-------
Proxy Statement.
Sincerely,
/s/ Wayne H. Benson
Wayne H. Benson
President
- -------------------------------------------------------------------------------
COMMUNITY FINANCIAL CORP.
240 E. CHESTNUT STREET
OLNEY, ILLINOIS 62450-2295
(618) 395-8676
- -------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 19, 2001
- -------------------------------------------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Special Meeting") of Community Financial Corp. (the "Company") will be held
at 501 East Main Street, Olney, Illinois 62450-2295, on Wednesday, December
19, 2001 at 2:00 p.m., local time, for the purpose of considering and acting
upon the following proposals:
1. The approval of an Agreement of Affiliation and Merger, dated as of
March 30, 2001, as amended by that certain Amendment No. 1 to
Agreement of Affiliation and Merger, dated as of June 26, 2001, and
that certain Amendment No. 2 to Agreement of Affiliation and Merger,
dated as of November 20, 2001 (the "Agreement"), by and among First
Financial Corporation, an Indiana corporation registered as a bank
holding company under the Bank Holding Company Act of 1956, as
amended ("First Financial"), FFC Merger Corp, an Indiana corporation
and wholly owned subsidiary of First Financial, and the Company,
pursuant to which: (a) the Company will be acquired by First Financial
by means of a merger of FFC Merger Corp with and into the Company
with the Company as the surviving corporation (the "Merger");
(b) each share of the Company's common stock, $0.01 par value per
share (the "Common Stock"), issued and outstanding at the effective
time of the Merger (other than shares with respect to which
dissenters' rights of appraisal are perfected under applicable
law) will be converted into the right to receive a cash payment
of not less than $15.14 per share, subject to possible upward
adjustment based upon a formula contained in the Agreement (the
"Merger Consideration"); provided that if the formula results in
a per share price of less than $15.14, determined as of five
business days prior to the closing of the Merger, then First
Financial may terminate the Agreement and the Merger would not
be completed; and (c) each option to acquire Common Stock with an
exercise price less than the Merger Consideration will be converted
into the right to receive the difference between the Merger
Consideration and the exercise price of the option multiplied by
the number of shares covered by the option, under such terms and
conditions as are described in detail in the enclosed Proxy
Statement. The Agreement of Affiliation and Merger, Amendment
No. 1 to Agreement of Affiliation and Merger and Amendment No. 2
to Agreement of Affiliation and Merger are attached as Annex A,
-------
Annex B and Annex C, respectively, to the enclosed Proxy Statement.
------- -------
2. The transaction of such other matters as may properly come before
the Special Meeting or any adjournment or postponement thereof.
Enclosed are the following items relating to the Special Meeting
and the Merger: (1) Proxy Statement; (2) proxy card; and (3) a pre-addressed
return envelope for the proxy card.
Any action may be taken on any of the foregoing proposals at the
Special Meeting on the date specified above or on any date or dates to
which, by original or later adjournment, the Special Meeting may be
adjourned. The Board of Directors has fixed the close of business on October
26, 2001 as the record date for determination of the shareholders entitled
to notice of and to vote at the Special Meeting or any adjournments thereof.
Pursuant to Sections 11.65 and 11.70 of the Illinois Business
Corporation Act of 1983, as amended, each holder of the Company's Common
Stock will have the right to dissent from the Merger and to demand a
determination of the fair value of such shareholder's shares in the event
the Agreement is approved and the Merger consummated. For a summary of such
dissenters' rights and the procedures required to perfect such dissenters'
rights, see "Terms of the Proposed Merger -- Dissenters' Rights" in the
enclosed Proxy Statement.
You are requested to complete and sign the enclosed proxy card
which is solicited by the Board of Directors and to mail it promptly in the
enclosed envelope. The proxy may be revoked at any time prior to the vote at
the Special Meeting by following the procedures set forth in the enclosed
Proxy Statement. Failure to return the enclosed proxy card or to vote at the
Special Meeting will have the same effect as a vote against the Merger.
By order of the Board of Directors
/s/ Wayne H. Benson
Wayne H. Benson
President
Olney, Illinois
November 21, 2001
COMMUNITY FINANCIAL CORP.
240 E. CHESTNUT STREET
OLNEY, ILLINOIS 62450-2295
(618) 395-8676
--------------------------
PROXY STATEMENT
--------------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 19, 2001
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Community Financial
Corp. (the "Company") to be used at a Special Meeting of Shareholders (the
"Special Meeting") to be held at 501 East Main Street, Olney, Illinois
62450-2295, on Wednesday, December 19, 2001 at 2:00 p.m., local time, and at
any adjournment or postponement thereof. At the Special Meeting,
shareholders will be asked to consider and vote upon a proposal to approve
an Agreement of Affiliation and Merger, dated as of March 30, 2001, as
amended by that certain Amendment No. 1 to Agreement of Affiliation and
Merger, dated as of June 26, 2001, and that certain Amendment No. 2 to
Agreement of Affiliation and Merger, dated as of November 20, 2001 (the
"Agreement"), pursuant to which the Company will be acquired by First
Financial Corporation, an Indiana corporation registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA") ("First Financial"), by
means of a merger of FFC Merger Corp, an Indiana corporation and wholly
owned subsidiary of First Financial ("Merger Corp"), with and into the
Company, with the Company as the surviving corporation (the "Merger"). The
Agreement of Affiliation and Merger, Amendment No. 1 to Agreement of
Affiliation and Merger and Amendment No. 2 to Agreement of Affiliation and
Merger are attached as Annex A, Annex B and Annex C, respectively, to the
------- ------- -------
enclosed Proxy Statement.
The Agreement provides that, at the effective time of the Merger
(the "Effective Time"), each share of the Company's common stock, $0.01 par
value per share (the "Common Stock"), outstanding immediately prior to the
Effective Time (other than shares the holders of which have perfected
dissenters' rights of appraisal ("Dissenting Shares")) will be cancelled and
converted into the right to receive a cash payment from First Financial of
not less than $15.14 per share, subject to possible upward adjustment based
upon a formula contained in the Agreement (the "Merger Consideration");
provided that if the formula results in a per share price of less than
$15.14, determined as of five business days prior to the closing of the
Merger (the "Closing"), then First Financial may terminate the Agreement and
the Merger would not be completed. There can be no assurance that the Merger
Consideration will be increased based on this formula. In addition, at the
Effective Time, all outstanding options of the Company which have an
exercise price less than the Merger Consideration as of the Effective Time
(the "Options") will be cancelled and converted into the right to receive
the difference between the Merger Consideration and the exercise price of
the Option multiplied by the number of shares of Common Stock covered by
such Option (the "Option Consideration"). Outstanding options of the Company
which have an exercise price greater than the Merger Consideration will be
terminated or will have expired on or prior to the Effective Time. As a
result of the Merger, shareholders of the Company will no longer hold any
shares of Common Stock of the Company or any successor to the Company.
Only shareholders of record as of the close of business on October
26, 2001 (the "Record Date") are entitled to notice of and to vote at the
Special Meeting. The accompanying Notice of Special Meeting and this Proxy
Statement, together with the enclosed proxy card, are being mailed to
shareholders of record on or about November 21, 2001.
The last sale price for the Common Stock as reported on the Nasdaq
National Market on March 29, 2001, the last business day prior to the
announcement of the signing of the Agreement, was $11.75 per share. The last
reported sale price of the Common Stock on November 19, 2001, the latest
practicable date prior to the mailing of this Proxy Statement, was $14.82
per share.
THE BOARD OF DIRECTORS BELIEVES THE MERGER IS IN THE BEST INTERESTS
OF THE COMPANY'S SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
AGREEMENT.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT WITH RESPECT TO
FIRST FINANCIAL AND ITS SUBSIDIARIES AND MERGER CORP HAS BEEN SUPPLIED BY
FIRST FINANCIAL, AND ALL INFORMATION WITH RESPECT TO THE COMPANY AND ITS
SUBSIDIARY HAS BEEN SUPPLIED BY THE COMPANY.
- -------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. AN ADDRESSED ENVELOPE
IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
- -------------------------------------------------------------------------------
** PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME **
SHAREHOLDERS WILL BE GIVEN DETAILED INSTRUCTIONS FOR
SURRENDERING THEIR STOCK CERTIFICATES AS SOON
AS PRACTICABLE AFTER THE MERGER BECOMES EFFECTIVE.
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers highlight the most important
aspects of the merger, but do not cover all of the information in this proxy
statement. You should read this entire proxy statement carefully.
Q: WHAT WILL HAPPEN IN THE MERGER?
A: A wholly owned subsidiary of First Financial will merge with and into
the company. The company will continue as the surviving corporation
and will be a wholly owned subsidiary of First Financial.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If you do not exercise your dissenters' rights, you will receive a
cash payment of not less than $15.14 from First Financial for each
share of common stock that you own immediately prior to the merger.
The cash payment may be more than $15.14 per share based upon a
formula contained in the merger agreement and determined as of five
business days prior to the closing date of the merger. There can be
no assurance that the cash payment will be increased based on this
formula. If the formula results in a per share price of less than
$15.14, determined as of five business days prior to the closing, then
First Financial may terminate the merger agreement and the merger would
not be completed. If the formula results in a per share price of less
than $15.14 and First Financial does not elect to terminate the merger
agreement, you will receive $15.14 per share of common stock you own
immediately prior to the merger. In addition, each option that you own
with an exercise price less than the per share merger consideration
will be cancelled and you will receive, for each option, the difference
between the per share merger consideration and the exercise price of
the option for each share of common stock covered by the option. As a
result of the merger, you will not own any shares of common stock or
options of the company or any successor to the company.
Q: WHY IS THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDING THAT I VOTE
TO APPROVE THE MERGER AGREEMENT?
A: The board of directors believes that the merger is in the best
interests of the company and its shareholders. To review the
background of and reasons for the merger in greater detail, see
"Terms of the Proposed Merger -- Background of the Merger" and
"Terms of the Proposed Merger -- Recommendation of the Board of
Directors; Reasons for the Merger."
Q: WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE MERGER TO ME?
A: You will receive an immediate cash payment for your shares of
common stock. That cash payment will be taxable to you. You will
not have the opportunity to participate in the company's future
earnings and growth, but you will not bear the risk of any decrease
in the company's stock price.
Q: IS THE MERGER CERTAIN TO OCCUR IF APPROVED BY THE SHAREHOLDERS OF THE
COMPANY?
A: In addition to obtaining shareholder approval and satisfying other
conditions set forth in the merger agreement, the Federal Reserve
System must approve the merger on terms and conditions satisfactory
to First Financial and First Financial shall have agreed to certain
conditions requested by the Federal Reserve System in connection with
the merger and its impact on First Financial's status as a financial
holding company. Furthermore, if the formula results in a per share
price of less than $15.14, determined as of five business days prior
to the closing, then First Financial may terminate the merger
agreement and the merger will not be completed. In addition, the
merger agreement may be terminated if First Financial becomes aware
3
of any information which could be expected to have a material adverse
effect on the company.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: The special meeting will be held on Wednesday, December 19, 2001 at
2:00 p.m., local time, at 501 East Main Street, Olney, Illinois
62450-2295.
Q: WHO CAN VOTE AT THE SPECIAL MEETING?
A: You may vote at the special meeting if you own shares of common stock
of the company at the close of business on October 26, 2001.
Q: HOW MANY VOTES ARE REQUIRED TO APPROVE THE MERGER AGREEMENT?
A: Approval of the merger agreement requires the affirmative vote of
the holders of at least two-thirds of the outstanding shares of
common stock.
Q: WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
A: Under Illinois law, you are entitled to dissenters' rights. If you
do not vote in favor of the merger and you properly elect to
exercise your dissenters' rights as described under "Terms of the
Proposed Merger -- Dissenters' Rights," you may receive the "fair
value" of your shares of common stock. The fair value could be
equal to, less than or more than the per share merger
consideration.
Q: WHAT DO I NEED TO DO NOW IF I WANT TO APPROVE THE MERGER?
A: Please complete and sign the enclosed proxy card and mail it in the
enclosed envelope as soon as possible so that your shares will be
represented at the special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later-dated, signed proxy card to the secretary of the
company before the special meeting or attend the special meeting in
person, revoke your proxy and vote your shares.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will mail you written
instructions explaining how to obtain the merger consideration and
the option consideration. Please do not send in your stock
certificates with your proxy.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the matters addressed in this proxy
statement or if you need additional copies of this proxy statement,
you should contact:
Community Financial Corp.
240 E. Chestnut Street
Olney, Illinois 62450-2295
Attention: Deborah Keller
Telephone: (618) 395-8676
4
TABLE OF CONTENTS
SUMMARY.................................................6
SELECTED CONSOLIDATED FINANCIAL DATA...................13
MEETING INFORMATION....................................15
Date, Time and Place.............................15
Voting Rights....................................15
Solicitation of Proxies..........................15
TERMS OF THE PROPOSED MERGER...........................16
General..........................................16
Background of the Merger.........................16
Description of the Merger........................17
Vote Required....................................18
Recommendation of the Board of Directors;
Reasons for the Merger.........................18
Opinion of Financial Advisor.....................19
ESOP Trustee.....................................24
ESOP Fairness Opinion............................24
Conditions to the Merger.........................24
Interests of Certain Persons in the Merger.......25
Effect on Employees and Certain Employee
Benefit Plans..................................27
Exchange of Stock Certificates and Settlement
of Options.....................................27
Dissenters' Rights...............................27
Effective Time...................................28
Material Federal Income Tax Consequences.........29
No Solicitation..................................30
Conduct of Business Pending the Merger...........30
Representations and Warranties...................32
Termination of the Agreement.....................33
Waiver and Amendment.............................34
Expenses.........................................34
Accounting Treatment.............................34
Regulatory Approvals.............................34
COMMUNITY FINANCIAL CORP...............................35
General..........................................35
Market Areas.....................................35
Competition......................................36
Employees........................................36
FIRST FINANCIAL CORPORATION............................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................37
General..........................................37
Forward-Looking Statements.......................37
Comparison of Financial Condition at
September 30, 2001 and December 31, 2000.......37
Comparison of Operating Results for the Three
Months and Nine Months Ended September 30,
2001 and 2000..................................38
Comparison of Financial Condition at
December 31, 2000 and 1999.....................40
Comparison of Operating Results for the Years
Ended December 31, 2000 and 1999...............41
Liquidity and Capital Resources..................43
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS...............................................44
SHAREHOLDER PROPOSALS..................................45
ANNEXES
Annex A - Agreement of Affiliation
and Merger.....................................A-1
Annex B - Amendment No. 1 to
Agreement of Affiliation and Merger............B-1
Annex C - Amendment No. 2 to
Agreement of Affiliation and Merger............C-1
Annex D - Opinion of Professional
Bank Services, Inc.............................D-1
Annex E - Opinion of Lakeshore Valuation
Group, L.L.C...................................E-1
Annex F - Dissenters' Rights Statute.............F-1
5
SUMMARY
The following is a brief summary of certain information regarding
the proposed Merger and related information contained elsewhere in this
Proxy Statement. This summary does not purport to be complete and is
qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement and in the annexes to this Proxy
Statement. Each shareholder is urged to read this Proxy Statement and the
annexes to this Proxy Statement in their entirety before casting his or her
vote.
DESCRIPTION OF THE MERGER
The Agreement provides for the acquisition of the Company by First
Financial by means of the Merger. Following the closing of the Merger,
shareholders of the Company will receive, for each share of Common Stock
that they owned immediately prior to the Merger, a cash payment from First
Financial of not less than $15.14 per share, subject to possible upward
adjustment based upon a formula contained in the Agreement and described
under "Terms of the Proposed Merger -- Description of the Merger." There can
be no assurance that the Merger Consideration will be increased based on
this formula. Furthermore, if the formula results in a per share price of
less than $15.14, determined as of five business days prior to the Closing,
then First Financial may terminate the Agreement and the Merger would not be
completed. In addition, each Option with an exercise price less than the
Merger Consideration as of the Effective Time will be cancelled and the
holders of the Options will receive, for each Option, the difference between
the Merger Consideration and the exercise price of the Option for each share
of Common Stock covered by such Option. Outstanding options of the Company
which have an exercise price greater than the Merger Consideration will be
terminated or will have expired on or prior to the Effective Time. Following
the Merger, shareholders of the Company will no longer own any shares of
Common Stock of the Company or any successor to the Company. As a result of
the Merger, the Company will become a wholly owned subsidiary of First
Financial. Community Bank and Trust, N.A. ("CB&T") will remain a wholly
owned subsidiary of the Company. The Agreement has been approved and adopted
by the Board of Directors of the Company, First Financial and Merger Corp.
See "Terms of the Proposed Merger -- Description of the Merger."
The Merger Consideration and Option Consideration were determined
in arms'-length negotiations between the Company and First Financial. For a
general discussion of these negotiations and the factors considered by the
Board of Directors of the Company in evaluating the Merger, see "Terms of
the Proposed Merger -- Background of the Merger" and "Terms of the Proposed
Merger -- Recommendation of the Board of Directors; Reasons for the Merger."
INFORMATION RELATING TO THE SPECIAL MEETING
The Special Meeting of Shareholders will be held on Wednesday,
December 19, 2001 at 2:00 p.m., local time, at 501 East Main Street, Olney,
Illinois 62450-2295. At the Special Meeting, shareholders will be asked to
consider and vote upon a proposal to approve the Agreement pursuant to which
the Company will be acquired by First Financial by means of the Merger. Only
shareholders of record as of the close of business on October 26, 2001 (the
"Record Date") are entitled to receive notice of and to vote at the Special
Meeting. See "Meeting Information."
VOTE REQUIRED
Approval of the Agreement requires the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Common Stock.
Each shareholder is entitled to one vote per share of Common Stock held as
of the Record Date. As of the Record Date, the Company had 2,147,470 shares
of Common Stock issued and outstanding held of record by approximately 481
shareholders.
6
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Board of Directors of the Company has unanimously approved the
Agreement and determined that the Merger is in the best interests of the
Company and its shareholders. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE AGREEMENT. In
determining that the Merger is in the best interests of the Company's
shareholders, the Board of Directors considered the following factors:
o The value being offered to the Company's shareholders by
First Financial in relation to the market value, book
value and earnings per share of the Common Stock during a
period prior to announcement of the Merger;
o The future business prospects for the Company;
o The financial terms of other recent comparable business
combinations;
o The solicitation and negotiation process preceding the
Agreement;
o The value of the consideration to be received by the
shareholders in relation to anticipated returns to
shareholders through continued operation as an independent
entity; and
o An opinion from the Company's financial advisor that the
terms of the Merger are fair to the Company's shareholders
from a financial point of view.
See "Terms of the Proposed Merger -- Recommendation of the Board of
Directors; Reasons for the Merger."
OPINION OF FINANCIAL ADVISOR
The Board of Directors retained Professional Bank Services, Inc.
("PBS") to render financial advisory services to the Company. The Board of
Directors requested that PBS render its opinion with respect to the
fairness, from a financial perspective, to the Company's shareholders of the
consideration to be received in the Merger. PBS rendered its oral opinion to
the Board of Directors on March 26, 2001. In its opinion, PBS concluded
that, from a financial perspective, the consideration to be offered in the
Merger was fair to the shareholders of the Company. A written opinion has
been delivered as of the date of this Proxy Statement. The written opinion
sets forth a description of the assumptions made and matters considered by
PBS and contains certain limitations and qualifications. A copy of the
written opinion is attached as Annex D to this Proxy Statement, and the
-------
description in this Proxy Statement is qualified in its entirety by
reference to the attached opinion. For additional information, see "Terms of
the Proposed Merger -- Opinion of Financial Advisor" and the opinion
attached hereto as Annex D.
-------
ESOP TRUSTEE
The Agreement requires the Company to appoint an independent
special trustee for the Employee Stock Ownership Plan of the Company (the
"ESOP") to act as a fiduciary on behalf of the participants in the ESOP.
Among other things, the Agreement provides that the independent special
trustee shall implement a procedure for soliciting instructions from
participants in the ESOP with respect to how to vote the shares of Common
Stock allocated to their ESOP accounts.
On June 21, 2001, the Company entered into a Trustee Agreement with
First Bankers Trust Company, N.A. ("First Bankers"), whereby First Bankers
became the independent special trustee of the ESOP. For its services to the
ESOP in connection with this transaction, First Bankers will receive a fee
of $35,000 plus additional service fees for solicitation of voting
instructions from participants in the ESOP, and will be
7
reimbursed for its reasonable out-of-pocket expenses, including the fees of
its legal counsel. The fees and expenses of First Bankers are payable by the
Company and are not contingent upon the closing of the Merger.
See "Terms of the Proposed Merger-- ESOP Trustee."
ESOP FAIRNESS OPINION
First Bankers has retained an independent financial advisor,
Lakeshore Valuation Group, L.L.C. ("Lakeshore"), to render an opinion as to
whether (a) the purchase price to be paid for the shares of the Common Stock
owned by the ESOP is at least equal to fair market value of such shares as
of the close of the transaction and (b) the terms and conditions of the
Merger are fair to the ESOP and the ESOP participants from a financial point
of view. Lakeshore will deliver its opinion to First Bankers on or prior to
the closing date of the Merger (the "Closing Date"). The written opinion
will set forth a description of the assumptions made and matters considered
by Lakeshore and will contain certain limitations and qualifications. A
draft of the written opinion is attached as Annex E to this Proxy Statement.
-------
For additional information, see "Terms of the Proposed Merger -- ESOP
Fairness Opinion" and the draft opinion attached hereto as Annex E.
-------
The opinions of Lakeshore are for the sole benefit of the special
trustee of the ESOP and should not be relied upon by the other shareholders
of the Company in determining whether the purchase price to be paid for
their shares of Common Stock is at least equal to the fair market value of
their shares as of the close of the transaction, whether the terms and
conditions of the Merger are fair to them from a financial point of view or
whether or not they should vote for the proposal to approve the Agreement.
CONDITIONS TO THE MERGER
The Agreement includes a number of conditions which must be
satisfied before the Merger may be consummated, including the approval of
the Agreement by the required vote of the Company's shareholders and the
receipt of all required regulatory approvals, including the approval of the
Board of Governors of the Federal Reserve System (the "Federal Reserve"),
upon terms and conditions satisfactory to First Financial. The required
applications regarding the Merger have been filed with the Federal Reserve.
There can be no assurance that the approval of the Federal Reserve will be
granted or as to the timing of such approval. In addition, First Financial
shall have received approval from the Federal Reserve with respect to the
Merger on terms and conditions satisfactory to First Financial and First
Financial shall have agreed to certain conditions requested by the Federal
Reserve System in connection with the Merger and its impact on First
Financial's status as a financial holding company under the BHCA.
If the shareholders do not approve the Agreement, the Merger cannot
be consummated. While no definitive plans have been formulated as to what
course of action would be pursued in the event shareholder or regulatory
approval is not obtained, the Board of Directors presently intends to
continue the operation of the Company as an independent entity.
The material conditions to the Merger are more fully described in
"Terms of the Proposed Merger -- Conditions to the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Company's Board of Directors and its
officers and employees have interests in the Merger in addition to their
interests as shareholders of the Company generally.
Wayne H. Benson, the President and Chief Executive Officer of the
Company, is a party to an employment agreement with CB&T and the Company
that provides for a severance payment upon the termination of his employment
following a change in control of CB&T or the Company. It is currently
anticipated that Mr. Benson will receive a severance payment under his
current employment agreement in the amount of $468,638.04.
8
As a result of the Merger, each holder of an Option will receive the
Option Consideration. Wayne H. Benson, Douglas W. Tompson, Brad A. Jones,
Michael F. Bauman and Roger A. Charleston are expected to receive an
aggregate of $77,903.72, $53,358.71, $20,010.02, $20,010.02 and $20,010.02,
respectively, in exchange for their Options.
Upon consummation of the Merger, a portion of the total purchase
price for the acquisition of the Company will be placed in the ESOP.
Thereafter, the assets of the ESOP will be distributed to participants in
the ESOP in accordance with the terms of the plan. Wayne H. Benson and
Douglas W. Tompson are expected to receive ESOP distributions of
approximately $192,913 and $202,022, respectively, in exchange for their
interests in the ESOP.
Following the Merger, First Financial will be liable for the
obligations of the Company and CB&T under certain Supplemental Executive
Retirement Agreements between CB&T and each of Douglas W. Tompson, Wayne H.
Benson and Shirley B. Kessler.
The Agreement also contains provisions for the maintenance of
directors' and officers' liability insurance.
See "Terms of the Proposed Merger -- Interests of Certain Persons
in the Merger."
EXCHANGE OF STOCK CERTIFICATES AND SETTLEMENT OF OPTIONS
It is currently anticipated that Terre Haute First National Bank
will serve as exchange agent (the "Exchange Agent") to receive stock
certificates of the Company and to send cash payments to the shareholders of
the Company. Promptly following the Closing Date, the Exchange Agent will
send a form of letter of transmittal ("Letter of Transmittal") to each
shareholder which will describe the procedures for surrendering stock
certificate(s) in exchange for the Merger Consideration. Upon receipt of the
certificate(s) and properly completed Letters of Transmittal, the Exchange
Agent will make the appropriate cash payment within 20 business days. The
Exchange Agent also will send a Letter of Transmittal to each holder of an
Option which will describe the procedures for obtaining the Option
Consideration for such Option. See "Terms of the Proposed Merger -- Exchange
of Stock Certificates and Settlement of Options."
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
DISSENTERS' RIGHTS
Under Illinois law, dissenters' rights of appraisal are available
to shareholders of the Company who comply with the statutory procedures for
requesting appraisal in connection with the Merger. AMONG OTHER
REQUIREMENTS, SHAREHOLDERS DESIRING TO EXERCISE THEIR RIGHTS OF APPRAISAL
MUST MAKE A WRITTEN DEMAND FOR APPRAISAL PRIOR TO THE SHAREHOLDER VOTE ON
THE AGREEMENT. A VOTE AGAINST THE MERGER WILL NOT CONSTITUTE A WRITTEN
DEMAND. SHAREHOLDERS WHO RETURN AN EXECUTED BLANK PROXY WILL BE DEEMED TO
HAVE VOTED IN FAVOR OF THE AGREEMENT AND TO HAVE WAIVED THEIR DISSENTERS'
RIGHTS OF APPRAISAL. See "Terms of the Proposed Merger -- Dissenters'
Rights."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
All shareholders should read carefully the discussion in "Terms of
the Proposed Merger -- Material Federal Income Tax Consequences" and other
sections of this Proxy Statement. Shareholders are urged to consult their
own tax advisors as to the specific consequences to them of the Merger under
applicable tax laws.
The receipt of cash by a shareholder of the Company in exchange for
shares of Common Stock pursuant to the Merger will be a taxable transaction
to such shareholder for federal income tax purposes. In general, a shareholder
who receives cash in the Merger in exchange for shares of Common Stock will
recognize gain or
9
loss equal to the difference, if any, between (a) the Merger Consideration
and (b) the shareholder's tax basis in such shares of Common Stock.
NO SOLICITATION
The Agreement contains provisions that may have the effect of
discouraging competing offers to acquire or merge with the Company. The
Agreement provides that the Company and CB&T will not permit any of their
respective officers, directors, employees, agents or representatives to hold
discussions with or provide any information to any person in connection with
any proposal for the acquisition of all or any substantial portion of the
business, assets, shares of Common Stock or other securities of the Company
or CB&T, or any merger of the Company or CB&T with any person. The Company
is obligated to promptly inform First Financial of its receipt of any such
proposal and the substance of such proposal. See "Terms of the Proposed
Merger -- No Solicitation."
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time before the Closing,
whether before or after approval by the shareholders of the Company, in a
number of circumstances, including the following (the term "Party" shall
mean the Company and CB&T, on the one hand, and First Financial and Merger
Corp, on the other hand, and the term "Parties" shall mean the Company,
CB&T, First Financial and Merger Corp):
o at the election of either Party if the Closing shall not
have occurred on or before January 31, 2002;
o by either Party if the shareholders of the Company do not
approve the Agreement;
o by the respective Boards of Directors of the Parties upon
mutual agreement;
o by the non-breaching Party if there is a breach of the
Agreement by the other Party which could reasonably be
expected to have a material adverse effect;
o by either Party upon a determination that the Merger has
become inadvisable as a result of a claim against the
other Party relating to the Merger or a claim which is
likely to have a material adverse effect;
o by First Financial in the event the calculation of the
merger consideration formula as set forth in the Agreement
results in a per share price of less than $15.14,
determined as of five business days prior to the Closing;
or
o by First Financial upon a determination that a material
adverse change with respect to the Company has occurred or
could be expected to occur.
For additional information, see "Terms of the Proposed Merger --
Termination of the Agreement."
ACCOUNTING TREATMENT
The Merger and the transactions contemplated thereby will be
accounted for under the purchase method of accounting as required by
Accounting Principles Board Opinion No. 16 Business Combinations. See
"Terms of the Proposed Merger -- Accounting Treatment."
10
BUSINESS OF COMMUNITY FINANCIAL CORP.
The Company is registered with the Federal Reserve as a bank
holding company under the BHCA. The Company has one wholly owned bank
subsidiary, CB&T, headquartered in Illinois. The Company's principal
business is overseeing the business of its wholly owned bank subsidiary and
investing its assets. At September 30, 2001, the Company had total assets of
$188.4 million, total deposits of $144.0 million and shareholders' equity of
$32.9 million.
On February 28, 2001, the Company completed the sale of two of its
banking subsidiaries: The Egyptian State Bank in Carrier Mills, Illinois
("Egyptian") and MidAmerica Bank of St. Clair County in O'Fallon, Illinois
("MidAmerica"). Egyptian was purchased by Midwest Community Bancshares, Inc.
of Marion, Illinois for $4.2 million and MidAmerica was purchased by First
National Bank of St. Louis for $3.7 million. On April 20, 2001, the Company
completed the sale of American Bank of Illinois in Highland ("American") to
First Mid-Illinois Bank & Trust, N.A. for $3.7 million.
The Company's executive offices are located at 240 E. Chestnut
Street, Olney, Illinois 62450-2295, and its main telephone number is (618)
395-8676.
CB&T conducts its business through its main office in Olney,
Illinois and its five branch offices in Olney, Lawrenceville, Fairfield,
Newton and Charleston, Illinois. CB&T's primary market area consists of
Richland, Jasper, Lawrence and Wayne Counties and the eastern two-thirds of
Coles County, Illinois, and each of CB&T's offices is located in the county
seat of those counties.
For additional information, see "Community Financial Corp."
BUSINESS OF FIRST FINANCIAL CORPORATION
First Financial became a multi-bank holding company in 1984. It
serves as the holding company of Terre Haute First National Bank; The Morris
Plan Company of Terre Haute, Inc.; First State Bank; First Citizens State
Bank; First Farmers State Bank; First Parke State Bank; First Ridge Farm
State Bank; First National Bank of Marshall; First Crawford State Bank;
First Financial Reinsurance Company, Ltd.; and Forrest Sherer, Inc. At
September 30, 2001, on a consolidated basis, First Financial reported total
assets of $2.0 billion, total deposits of $1.3 billion and shareholders'
equity of $219.5 million.
First Financial, which is headquartered in Terre Haute, Indiana,
offers a wide variety of financial services, including commercial and
consumer lending, lease financing, trust account services and depositor
services, through its subsidiaries. Terre Haute First National Bank is the
largest bank in Vigo County, Indiana. It operates twelve full service
banking branches within the county. It also has a main office in downtown
Terre Haute and an operations center in southern Terre Haute.
First Financial operates 37 branches in west-central Indiana and
east-central Illinois. First Financial's primary source of revenue is
derived from loans to customers, primarily middle-income individuals, and
investment activities.
The executive offices of First Financial are located at One First
Financial Plaza, Terre Haute, Indiana 47807, and its main telephone number
is (812) 238-6000.
For additional information, see "First Financial Corporation."
BUSINESS OF MERGER CORP
Merger Corp is an Indiana corporation and a wholly owned subsidiary
of First Financial. Merger Corp has conducted no business operations and was
formed solely to consummate the Merger.
11
The executive offices of Merger Corp are located at One First
Financial Plaza, Terre Haute, Indiana 47807, and its main telephone number
is (812) 238-6000.
12
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial
information for the Company at the dates and for the periods indicated. The
balance sheet data and income statement data as of and for the five years
ended December 31, 2000 are taken from the audited consolidated financial
statements of the Company. The balance sheet data and income statement data
as of and for the nine months ended September 30, 2001 and 2000 are taken
from the unaudited consolidated financial statements of the Company. This
data includes all adjustments which are, in the opinion of management,
necessary for a fair presentation and of a normal recurring nature. Results
for the nine months ended September 30, 2001 do not necessarily indicate
results for the entire year. You should read this financial data in
conjunction with the consolidated financial statements of the Company, and
the related notes, filed with the Securities and Exchange Commission.
The following table also presents certain selected unaudited pro
forma combined consolidated financial information for the Company giving
effect to the sales of Egyptian and MidAmerica which occurred on February
28, 2001 and the sale of American which occurred on April 20, 2001. The
balance sheet data gives effect to the sales of Egyptian, MidAmerica and
American as if each occurred on December 31, 2000. The income statement data
gives effect to the sales of Egyptian, MidAmerica and American as if each
occurred on January 1, 2000. You should read this financial data in
conjunction with the consolidated financial statements of the Company, and
the related notes, filed with the Securities and Exchange Commission. The
unaudited pro forma combined consolidated financial information may not be
indicative of the results of operations that actually would have occurred if
the sales of Egyptian, MidAmerica and American had occurred on the dates
assumed above or the results of operations that may be achieved in the
future.
13
FOR THE NINE MONTHS ENDED AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------------- -----------------------------------------------
2001(1) 2000 2000 1999 1998
---- ---- ---- ---- ----
ACTUAL PRO FORMA (DOLLARS IN THOUSANDS)
------ ---------
FINANCIAL CONDITION DATA (END OF PERIOD):
Assets .................................. $188,356 $206,575 $277,697 $185,766 $309,919 $309,840
Loans receivable, net.................... 109,877 119,198 171,542 113,316 179,467 157,207
Cash and cash equivalents................ 41,405 16,876 20,443 17,949 15,655 22,902
Investments securities:
Securities available for sale......... 22,080 31,703 57,073 35,394 43,771 52,102
Securities held to maturity........... 859 1,209 909 909 16,921
Mortgage-backed securities:
Securities available for sale......... 7,959 30,062 10,909 10,612 34,341 42,797
Securities held to maturity........... -- -- -- -- 338 442
Deposits................................. 143,950 149,946 232,785 142,236 225,170 223,933
Total shareholders' equity............... 32,880 32,443 34,890 33,181 33,826 35,266
OPERATING DATA:
Interest income.......................... $ 9,588 $ 11,363 $ 21,855 $ 15,010 $ 21,689 $ 22,231
Interest expense......................... 5,399 6,734 12,536 8,941 12,296 12,815
Net interest income...................... 4,189 4,629 9,319 6,069 9,393 9,416
Provision for loan losses................ 1,845 2,174 3,438 2,706 707 441
Net interest income after provision for
loan losses........................... 2,344 2,455 5,881 3,363 8,686 8,975
Other income............................. 922 1,234 1,966 1,312 2,289 1,681
Other expense............................ 4,185 4,485 9,852 6,364 9,322 8,880
Income (loss) before income taxes........ (919) (796) (2,005) (1,689) 1,653 1,758
Income tax provision (benefit)........... (298) (224) (529) (496) 523 521
Net income (loss)........................ (2,417)(2) (538)(3) (1,476) (1,193) 1,130 1,237
PERFORMANCE RATIOS:
Return on average assets................ -1.40%(4,5) -0.33%(4,5) -0.49% -0.57%(4) 0.36% 0.40%
Return on average equity................ -8.01(5) -2.18(5) -4.11 -3.49(6) 3.26 3.43
Interest rate spread.................... 2.42(6) 2.46(6) 2.54 2.36(6) 2.88 2.79
Net yield on interest-earning assets.... 3.15(6) 3.23(6) 3.25 3.23(6) 3.19 3.18
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 117.71(4) 117.45(4) 116.26 120.08(4) 107.38 109.02
ASSET QUALITY RATIOS:
Nonperforming assets to total assets.... 1.70% 0.72% 0.69% 0.82% 0.34% 0.53%
Nonperforming loans to total loans...... 2.75 0.94 0.84 1.00 0.44 0.75
Allowance for loan losses to total
loans................................ 1.31 1.17 1.44 1.38 0.87 1.24
Allowance for loan losses to
nonperforming loans.................. 47.84 125.00 171.16 137.72 198.49 164.78
Provision for loan losses to total
loans................................ 1.66 1.80 1.98 2.36 0.39 0.28
Net charge-offs to average loans........ 1.72 1.40 1.40 1.79 0.65 0.25
CAPITAL RATIOS:
Stockholders' equity to total assets.... 17.46% 15.71% 12.56% 17.86% 10.91% 11.38%
Average stockholders' equity to average
assets............................... 17.42(4) 15.19(4) 11.36 15.47(4) 11.09 11.54
PER SHARE DATA:
Basic earnings (loss) per share......... $ (1.13) $ (0.25) $ (0.67) $ (0.54) $ 0.53 $ 0.57
Dividends per share..................... 0.00 0.00 0.00 0.00 0.25 0.25
Book value per share.................... 15.31 15.28 16.25 15.45 15.28 15.73
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
FINANCIAL CONDITION DATA (END OF PERIOD):
Assets .................................. $304,265 $185,799
Loans receivable, net.................... 162,318 122,307
Cash and cash equivalents................ 26,724 12,618
Investments securities:
Securities available for sale......... 57,283 13,990
Securities held to maturity........... 18,318 3,362
Mortgage-backed securities:
Securities available for sale......... 23,895 28,319
Securities held to maturity........... 891 --
Deposits................................. 218,915 139,100
Total shareholders' equity............... 35,727 34,082
OPERATING DATA:
Interest income.......................... $ 17,008 $ 13,875
Interest expense......................... 8,670 6,728
Net interest income...................... 8,338 7,147
Provision for loan losses................ 236 10
Net interest income after provision for
loan losses........................... 8,102 7,137
Other income............................. 1,129 777
Other expense............................ 7,152 6,798
Income (loss) before income taxes........ 2,077 1,116
Income tax provision (benefit)........... 675 343
Net income (loss)........................ 1,402 773
PERFORMANCE RATIOS:
Return on average assets................ 0.62% 0.42%
Return on average equity................ 4.02 2.15
Interest rate spread.................... 3.05 3.17
Net yield on interest-earning assets.... 3.80 4.03
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 119.04 122.58
ASSET QUALITY RATIOS:
Nonperforming assets to total assets.... 0.81% 0.27%
Nonperforming loans to total loans...... 1.29 0.36
Allowance for loan losses to total
loans................................ 1.18 1.23
Allowance for loan losses to
nonperforming loans.................. 0.91 339.29
Provision for loan losses to total
loans................................ 0.15 0.01
Net charge-offs to average loans........ 0.19 --
CAPITAL RATIOS:
Stockholders' equity to total assets.... 11.74% 18.34%
Average stockholders' equity to average
assets............................... 15.33 19.19
PER SHARE DATA:
Basic earnings (loss) per share......... $ 0.62 $ 0.33
Dividends per share..................... 0.25 0.25
Book value per share.................... 15.13 14.28
<FN>
- ---------------------------
(1) Includes the results of the sale of Egyptian and MidAmerica on February
28, 2001 and American on April 20, 2001.
(2) Adjusted to reflect loss on sale of affiliated banks of approximately
$1,644,000 and operating losses of these banks which was approximately
$152,000.
(3) Adjusted to reflect operating income of sold affiliated banks of
approximately $34,000.
(4) Average assets include the sales proceeds as being received at the start
of the reporting period.
(5) Return data has been annualized.
(6) Yields on proceeds received from sale have been calculated as if the
proceeds were available at the start of the reporting period applying the
federal funds rate.
14
MEETING INFORMATION
DATE, TIME AND PLACE
The Special Meeting will be held on Wednesday, December 19, 2001 at
2:00 p.m., local time, at 501 East Main Street, Olney, Illinois.
VOTING RIGHTS
The securities entitled to vote at the Special Meeting consist of
the Common Stock. Shareholders of record as of the close of business on the
Record Date are entitled to one vote for each share of Common Stock then
held. As of the Record Date, the Company had 2,147,470 shares of Common
Stock issued and outstanding. At that date, such shares were held of record
by approximately 481 shareholders.
The presence, either in person or by proxy, of a majority of the
outstanding Common Stock is required for a quorum. For purposes of
determining whether a quorum is present at the meeting, shares of Common
Stock for which the Company has received properly executed proxies,
including proxies which direct that the shares be voted to abstain, will be
treated as present and entitled to vote. Broker non-votes, which occur when
a nominee holding shares for a beneficial owner does not vote because the
nominee does not have discretionary voting power and has not received
instructions from the beneficial owner, will not be treated as present for
purposes of determining whether a quorum exists. UNDER ILLINOIS LAW,
APPROVAL OF THE AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS
OF AT LEAST TWO-THIRDS OF THE OUTSTANDING SHARES OF COMMON STOCK. Thus,
abstentions and broker non-votes will have the same effect as votes against
approval of the Agreement.
SHARES OF THE COMMON STOCK REPRESENTED BY PROPERLY EXECUTED PROXIES
WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS INDICATED ON THE PROXIES
OR, IF NO INSTRUCTIONS ARE INDICATED, WILL BE VOTED "FOR" THE PROPOSAL TO
APPROVE THE AGREEMENT. The proxy confers discretionary authority on the
persons named therein to vote with respect to matters incident to the
conduct of the Special Meeting. If any other business is presented at the
Special Meeting or any adjournment or postponement thereof, properly
executed proxies will be voted by those named therein in accordance with
their best judgment. In the event there are insufficient votes represented,
in person or by proxy, at the Special Meeting to approve the Agreement, the
persons named as proxies may vote for one or more adjournments of the
Special Meeting to permit solicitation of additional proxies; provided,
however, that no proxy which is voted against the Agreement will be voted in
favor of such adjournment.
Shareholders who execute proxies will retain the right to revoke
their proxies at any time before the Special Meeting. A shareholder may
revoke a proxy by filing a written notice of revocation with, or delivering
a duly executed proxy bearing a later date to, the Secretary of the Company
at the Company's main office address at any time before the Special Meeting.
Shareholders also may revoke proxies by delivering a duly executed proxy
bearing a later date to an Inspector of Election at the Special Meeting or
by attending the Special Meeting and casting a contrary vote. The presence
of a shareholder at the Special Meeting alone will not automatically revoke
the shareholder's proxy.
SOLICITATION OF PROXIES
The Company will bear the cost of the solicitation of proxies.
Proxies will be solicited by mail. In addition to solicitations by mail,
proxies also may be solicited by officers and regular employees of the
Company and CB&T personally or by telephone, but such persons will not be
specifically compensated for such services. Brokerage houses, custodians,
nominees and fiduciaries will be requested to forward the soliciting
material to the beneficial owners of stock held of record by such persons
and will be reimbursed for their reasonable expenses incurred in connection
therewith.
15
TERMS OF THE PROPOSED MERGER
THE FOLLOWING IS A DESCRIPTION OF THE MATERIAL TERMS OF THE
AGREEMENT. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT OF AFFILIATION AND MERGER,
AMENDMENT NO. 1 TO AGREEMENT OF AFFILIATION AND MERGER AND AMENDMENT NO. 2
TO AGREEMENT OF AFFILIATION AND MERGER WHICH ARE ATTACHED HERETO AS ANNEX A,
-------
ANNEX B AND ANNEX C, RESPECTIVELY.
- ------- -------
GENERAL
On March 30, 2001, the Company, First Financial and Merger Corp
entered into the Agreement of Affiliation and Merger. On June 26, 2001, the
Company, First Financial and Merger Corp entered into Amendment No. 1 to
Agreement of Affiliation and Merger for purposes of restructuring the
transaction to provide certain tax benefits to the shareholders of the
Company. As of November 20, 2001, the Company, First Financial and Merger
Corp. entered into Amendment No. 2 to Agreement of Affiliation and Merger
for purposes of amending and clarifying certain portions of the Agreement.
Pursuant to the Agreement, subject to the satisfaction or waiver of certain
conditions precedent, including receipt of all required regulatory
approvals, the approval by the shareholders and the satisfaction or waiver
of a number of other conditions, each outstanding share of the Company's
Common Stock (other than Dissenting Shares) will be converted into the right
to receive a cash payment of not less than $15.14 per share, subject to
possible upward adjustment based upon a formula contained in the Agreement.
There can be no assurance that the Merger Consideration will be increased
based on this formula. Furthermore, if the formula results in a per share
price of less than $15.14, determined as of five business days prior to the
Closing, then First Financial may terminate the Agreement. In addition, each
outstanding Option with an exercise price less than the Merger Consideration
as of the Effective Time will be cancelled and the holders of the Options
will receive, for each Option, the difference between the Merger
Consideration and the exercise price of the Option, multiplied by the number
of shares covered by such Option. Outstanding options of the Company which
have an exercise price greater than the Merger Consideration will be
terminated or will have expired on or prior to the Effective Time.
See "-- Description of the Merger."
The aggregate purchase price to be paid by First Financial in the
Merger, which includes the expected $32.5 million to be paid to the
shareholders of the Company, is approximately $33.1 million. First Financial
has represented that it will have the financial capability at the Effective
Time of the Merger to pay for the shares of Common Stock and the Options
pursuant to the Agreement.
APPROVAL OF THE AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE
HOLDERS OF AT LEAST TWO-THIRDS OF ALL VOTES ENTITLED TO BE CAST BY THE
HOLDERS OF THE COMMON STOCK.
BACKGROUND OF THE MERGER
In October 1999, the Company contracted with PBS to evaluate
strategic alternatives to enhance shareholder value. As a result, PBS and
the Company's management prepared a detailed Strategic Plan to maximize the
value of the Company. As a result of the Company losing a contested vote for
the election of directors and the determination that the current objectives
of the Strategic Plan were no longer attainable, in May 2000, the Company
engaged Investment Bank Services, Inc. ("IBS"), a wholly owned subsidiary of
PBS, to explore the possible sale of the Company. In May and June of 2000,
IBS contacted a total of thirty financial institutions, as well as certain
individuals, which IBS believed might have an interest in acquiring the
Company. Thirteen financial institutions, including First Financial, and two
individuals were sent a Confidential Financial Information Package
concerning the Company and were requested to submit preliminary indications
of interest regarding a potential combination with the Company by late June
of 2000. Two indications of interest regarding a potential acquisition of
the entire Company were submitted to IBS. One preliminary indication of
interest, from an individual, was for a price which IBS and the Board of
Directors of the Company determined was in the best interests of the Company
and its shareholders to continue to pursue. This individual was invited to
do due
16
diligence by the Company in July of 2000. Upon the completion of a short due
diligence, this indication of interest was withdrawn.
Several of the institutions contacted by IBS expressed informal
interest in pursuing an acquisition of one or more of the Company's
subsidiaries but not the entire company. First Financial and one other
financial institution submitted indications of interest regarding the
acquisition of the Company's subsidiary, CB&T. Of these two indications of
interest received, First Financial's was the highest and First Financial was
also the only institution which indicated a willingness to pursue an
acquisition of the shares of the entire Company conditioned upon the sale of
the Company's three smaller subsidiary banks. Due to this and other
strategic considerations, the Company's Board of Directors and IBS
determined it was in the best interest of the Company and its shareholders
to pursue the sale of the Company's other subsidiary banks. Seventeen
preliminary indications of interest regarding the acquisition of one or more
of the Company's smaller subsidiaries were solicited from interested
financial institutions contacted by IBS. On February 28, 2001, the Company
completed the sale of two subsidiary banks: Egyptian and Mid-America. In
addition, on April 20, 2001, the Company completed the sale of American.
From May 2000 through March 2001, the Company and First Financial
had several discussions concerning the possible purchase price for the
Company's Common Stock. It was ultimately agreed that First Financial would
acquire the Common Stock for a purchase price based upon the formula
contained in the Agreement.
At a regular meeting of the Board of Directors on March 26, 2001,
an oral fairness opinion of PBS with respect to the consideration to be
received by the Company's shareholders was delivered to the Board of
Directors. In its opinion, PBS concluded that the consideration to be
received by the Company's shareholders was fair and equitable from a
financial perspective. A written opinion has been delivered as of the date
of this Proxy Statement. A copy of the written fairness opinion, which
includes a summary of the assumptions made and information analyzed in
deriving the fairness opinion, is attached hereto as Annex D.
-------
On March 30, 2001, the Company and First Financial executed the
Agreement of Affiliation and Merger which was subsequently amended by
Amendment No. 1 to Agreement of Affiliation and Merger, dated as of June 26,
2001, and Amendment No. 2 to Agreement of Affiliation and Merger, dated as
of November 20, 2001.
DESCRIPTION OF THE MERGER
Subject to the terms of the Agreement, First Financial will acquire
the Company through the Merger in accordance with the Agreement and
applicable provisions of Illinois law. Merger Corp shall merge with and into
the Company, with the Company as the surviving corporation. As a result of
the Merger, the Company will be a wholly owned subsidiary of First
Financial. CB&T will remain a wholly owned subsidiary of the Company. The
Merger will become effective and the separate corporate existence of Merger
Corp shall cease at the Effective Time. Each share of Common Stock
outstanding immediately prior to the Effective Time (other than Dissenting
Shares) shall, by virtue of the Merger and without any further action by the
holder thereof, be cancelled and converted into and represent the right to
receive the Merger Consideration.
The Merger Consideration will be not less than $15.14 per share and
may increase based upon the following formula set forth in the Agreement:
(a) the Aggregate Purchase Price (defined in the Agreement as (i)
$19,500,000 (subject to adjustment to reflect any recovery on certain loans
of CB&T), plus (ii) the proceeds from the sale of American, MidAmerica and
Egyptian, plus (iii) the amount of cash held by the Company, plus (iv)
proceeds which are receivable from certain requested income tax refunds,
plus (v) the principal balance of certain loans, plus (vi) the fair market
value of securities held by the Company, minus (vii) any liabilities of the
Company), minus (b) the aggregate amount to be paid to holders of Options,
minus (c) the aggregate amount to be paid to the Company's ESOP, divided by
(d) 2,147,470, which is the number of shares of Common Stock
17
which will be outstanding at the Effective Time (the "Formula"). THE MINIMUM
MERGER CONSIDERATION OF $15.14 PER SHARE REPRESENTS THE MINIMUM CASH PER
SHARE OF COMMON STOCK TO BE RECEIVED IN THE MERGER. THE ACTUAL AMOUNT OF
CASH PAYABLE PER SHARE OF THE COMPANY'S COMMON STOCK MAY BE MORE THAN THIS
MINIMUM AMOUNT. THE ACTUAL AMOUNT PAYABLE PER SHARE OF THE COMPANY'S COMMON
STOCK WILL BE BASED SOLELY ON THE ABOVE-MENTIONED FORMULA DETERMINED AS OF
FIVE BUSINESS DAYS PRIOR TO THE CLOSING DATE.
IN THE EVENT THAT THE FORMULA RESULTS IN A PER SHARE PRICE OF LESS
THAN $15.14, DETERMINED AS OF FIVE BUSINESS DAYS PRIOR TO THE CLOSING,
FIRST FINANCIAL MAY TERMINATE THE AGREEMENT AND THE MERGER WILL NOT BE
CONSUMMATED. IF THE FORMULA RESULTS IN A PER SHARE PRICE OF LESS THAN $15.14
AND FIRST FINANCIAL DOES NOT ELECT TO TERMINATE THE AGREEMENT, THE MERGER
CONSIDERATION PAYABLE TO SHAREHOLDERS OF COMMUNITY WILL BE $15.14 PER SHARE
OF COMMON STOCK.
In addition, at the Effective Time, each Option will be cancelled,
and each holder thereof will receive, for each Option, the difference
between the Merger Consideration and the exercise price of such Option. At
the Effective Time, there will be 154,340 Options outstanding. The Company
has agreed, as a condition to the closing of the Merger, that all
outstanding options of the Company which have an exercise price greater than
the Merger Consideration will be terminated or will have expired on or prior
to the Effective Time.
In addition, upon consummation of the Merger, a portion of the
total purchase price for the acquisition of the Company will be placed in
the ESOP. The amount to be placed in the ESOP will be (a)(i) an amount equal
to 64,059 (which is the number of shares of Common Stock which would have
been outstanding and held by the ESOP if the ESOP had not been terminated in
December 2000), multiplied by (ii) the Merger Consideration less $10.3437
(which is the total amount of debt retired by the ESOP of $662,605.48
divided by 64,059), plus (b) 64,059, multiplied by (i) the amount of taxes
relating to the ESOP required to be paid by the Company, divided by (ii)
2,365,869 (which is the total of outstanding shares of Common Stock plus
154,340 shares subject to Options plus 64,059 shares which would have been
held by the ESOP). Pursuant to the Agreement, on or prior to the Effective
Time, the Company is required to pay all fees and taxes relating to the
termination of the ESOP in December 2000.
VOTE REQUIRED
Under Illinois law, approval of the Agreement requires the
affirmative vote of the holders of at least two-thirds of the outstanding
shares of Common Stock of the Company. As of the Record Date, the Company
had 2,147,470 shares of Common Stock issued and outstanding. At that date,
such shares were held of record by approximately 481 shareholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
THE BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
IS IN THE BEST INTEREST OF THE COMPANY AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE AGREEMENT. In
determining that the Merger is in the best interest of the Company's
shareholders, the Board of Directors, in consultation with its legal and
financial advisors, considered numerous factors, including, but not limited
to, the following:
o THE VALUE BEING OFFERED TO THE COMPANY'S SHAREHOLDERS BY
FIRST FINANCIAL IN RELATION TO THE MARKET VALUE, BOOK
VALUE AND EARNINGS PER SHARE OF THE COMMON STOCK DURING A
PERIOD PRIOR TO ANNOUNCEMENT OF THE MERGER. The Board of
Directors believes that the Merger Consideration to be
received by shareholders will provide the Company's
shareholders with an immediate premium for their shares.
o THE FUTURE BUSINESS PROSPECTS FOR THE COMPANY. Based on
the competitive environment for financial institutions
generally and for bank holding companies whose principal
origin was a
18
savings and loan association, the Board of Directors
believes that the future business prospects for the Company
as an independent bank holding company are unfavorable.
o THE FINANCIAL TERMS OF OTHER RECENT COMPARABLE BUSINESS
COMBINATIONS. The Board of Directors believes that the
financial terms of the Merger, adjusted for performance
levels of the Company, are comparable to the financial
terms of other recent business combinations in the
financial services industry for comparably situated
institutions.
o THE SOLICITATION AND NEGOTIATION PROCESS PRECEDING THE
AGREEMENT. The terms of the Merger reflect extensive
arms'-length negotiations between the parties after a
thorough canvass of the market. The Board of Directors
believes that the financial institutions most likely to
bid on the Company were identified and given an
opportunity to express their interest in an affiliation.
o THE VALUE OF THE MERGER CONSIDERATION IN RELATION TO
ANTICIPATED RETURNS TO SHAREHOLDERS THROUGH CONTINUED
OPERATION AS AN INDEPENDENT ENTITY.
o THE OPINION OF THE COMPANY'S FINANCIAL ADVISOR THAT THE
CONSIDERATION TO BE RECEIVED BY THE COMPANY'S SHAREHOLDERS
IS FAIR AND EQUITABLE TO SUCH SHAREHOLDERS FROM A
FINANCIAL PERSPECTIVE. In determining whether to enter
into the Agreement, the Board of Directors received an
oral opinion prior to its vote from its financial advisor
that the Merger Consideration was fair and equitable to
shareholders from a financial perspective. A written
opinion has been delivered as of the date of this Proxy
Statement. A copy of the written fairness opinion is
attached hereto as Annex D.
-------
In its deliberations, the Board of Directors discussed a variety of
other matters related to the Merger but believes that the foregoing factors
represent the material factors considered in the Board's collective
determination that the Merger is in the best interest of the Company's
shareholders. The Board of Directors did not quantify or otherwise attempt
to assign relative weights to the factors considered in making its
determination and does not believe that any single factor discussed above
was given greater weight than any other factor. Having considered all of the
foregoing, however, the Board of Directors determined that the Merger is in
the best interest of shareholders and unanimously recommends that
shareholders vote for the proposal to approve the Agreement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
OF THE COMPANY VOTE "FOR" THE PROPOSAL TO APPROVE THE AGREEMENT.
OPINION OF FINANCIAL ADVISOR
PBS was engaged by the Company to advise the Company's Board of
Directors as to the fairness of the consideration, from a financial
perspective, to be paid by First Financial to the Company's shareholders as
set forth in the Agreement.
PBS is a bank consulting firm with offices in Louisville,
Nashville, Orlando, 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 the Company or First Financial. PBS was selected to
advise the Company's Board of Directors based upon its familiarity with
Illinois financial institutions and knowledge of the banking industry as a
whole.
19
PBS performed certain analyses described herein and presented the
range of values for the Company resulting from such analyses to the Board of
Directors of the Company in connection with its advice as to the fairness of
the consideration to be paid by First Financial.
An oral fairness opinion of PBS was delivered to the Board of
Directors of the Company on March 26, 2001 at a regular meeting of the Board
of Directors. In addition, a written fairness opinion has been delivered as
of the date of this Proxy Statement. A copy of the fairness opinion, which
includes a summary of the assumptions made and information analyzed in
deriving the fairness opinion, is attached as Annex D to this Proxy
-------
Statement and should be read in its entirety.
In arriving at its fairness opinion, PBS reviewed certain publicly
available business and financial information relating to the Company and
First Financial. PBS considered certain financial data of the Company and
First Financial, compared that data with similar data for certain other
publicly traded banks, thrifts and bank holding companies and considered the
financial terms of certain other comparable financial institution
transactions in the States of Illinois, Indiana, Iowa, Kansas, Kentucky,
Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota
and Wisconsin (the "Midwest Region") that have recently been effected. PBS
also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant. In connection with its review, PBS did not independently verify
the foregoing information and relied on such information as being complete
and accurate in all material respects. Financial forecasts prepared by PBS
were based on assumptions believed by PBS to be reasonable and to reflect
currently available information. PBS did not make an independent evaluation
or appraisal of the assets of the Company or First Financial.
As part of preparing this fairness opinion, PBS took into
consideration the results of contacts made with other financial institutions
and individuals by IBS, a wholly owned subsidiary of PBS, which was engaged
by the Company in May of 2000 to explore the possible sale of the Company.
In May and June of 2000, IBS contacted a total of thirty financial
institutions, as well as certain individuals, which IBS believed might have
an interest in acquiring the Company. Thirteen financial institutions and
two individuals were sent a Confidential Financial Information Package
concerning the Company and were requested to submit preliminary indications
of interest regarding a potential combination with the Company by late June
of 2000. Two indications of interest regarding a potential acquisition of
the entire Company were submitted to IBS. One preliminary indication of
interest, from an individual, was for a price which IBS and the Board of
Directors of the Company determined was in the best interests of the Company
and its shareholders to continue to pursue. This individual was invited to
do due diligence by the Company in July of 2000. Upon the completion of a
short due diligence, this indication was withdrawn.
Several of the institutions contacted by IBS expressed informal
interest in pursuing an acquisition of one or more of the Company's
subsidiaries but not the entire Company. First Financial and one other
financial institution submitted indications of interest regarding the
acquisition of CB&T. Of these two indications received, First Financial's
was the highest and First Financial was also the only institution which
indicated a willingness to pursue an acquisition of the shares of the entire
Company conditioned upon the sale of the Company's three smaller subsidiary
banks. At this time, the Company's Board of Directors and IBS determined it
was in the best interest of the Company and its shareholders to pursue the
sale of the Company's other subsidiary banks. Seventeen preliminary
indications of interest regarding the acquisition of one or more of the
Company's smaller subsidiaries were solicited from interested financial
institutions contacted by IBS. On February 28, 2001, the Company completed
the sale of two subsidiary banks: Egyptian and Mid-America. In addition, on
April 20, 2001, the Company completed the sale of American.
For purposes of this fairness opinion, PBS performed a review and
analysis of the historic performance of the Company and CB&T, including: (i)
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999,
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000,
December 31, 2000, March 31,
20
2001, June 30, 2001 and September 30, 2001 Forms 10-Q and 10-K filed with
the Securities and Exchange Commission by the Company; (ii) December 31,
1999 and 2000 Uniform Bank Performance Report of the Company and CB&T; (iii)
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999,
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000,
December 31, 2000, March 31, 2001, June 30, 2001 and September 30 , 2001
Consolidated Reports of Condition and Income filed by CB&T; (iv) quarter end
and year end classified and problem loan listings; and (v) quarter end and
year end loan loss reserve analysis. PBS has 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 the opinion. In the review of the
aforementioned information, PBS took into account its assessment of general
market and financial conditions, its experience in other transactions and
its knowledge of the banking industry generally.
In connection with rendering the fairness opinion and preparing its
written and oral presentation to the Company's Board of Directors, PBS
performed a variety of financial analyses, including those summarized
herein. The summary does not purport to be a complete description of the
analyses performed by PBS in this regard. The preparation of a fairness
opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. Accordingly, notwithstanding the
separate factors summarized below, PBS believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying its
opinion. In performing its analyses, PBS made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the Company's or First Financial's
control. The analyses performed by PBS are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
process by which businesses actually may be sold.
Acquisition Comparison Analysis: In performing this analysis, PBS
-------------------------------
reviewed all bank and thrift acquisition transactions in the Midwest Region
since 1995 where the consideration paid was cash. There were 316 financial
institution cash acquisition transactions in the Midwest Region announced
since 1995 for which detailed financial information was available. The
purpose of the analysis was to obtain an evaluation range based on these
Midwest Region cash acquisition transactions. Median multiples of earnings
and book value implied by the comparable transactions were utilized in
obtaining a range for the acquisition value of the Company. In addition to
reviewing recent Midwest Region financial institution transactions, PBS
performed separate comparable analyses for acquisitions of institutions
which, like the Company, had an equity-to-asset ratio between 11.00% and
12.00%; had a return on average equity ("ROAE") below 6.00%; had total
assets between $100.0 million - $200.0 million; were headquartered in the
State of Illinois; and were cash transactions which were effected in the
Midwest Region that have been announced since January 1, 2000.
The median values for the 316 Midwest Region cash acquisitions
expressed as multiples of both book value and earnings were 1.60X and
16.89X, respectively. The median multiples of book value and earnings for
cash acquisitions of Midwest Region institutions which, like the Company,
had an equity-to-asset ratio between 11.00% and 12.00% were 1.49X and
15.52X, respectively. For Midwest Region cash acquisitions of institutions
with a ROAE below 6.00%, the median multiples of book value and earnings
were 1.33X and 30.43X, respectively. For cash acquisitions of Midwest Region
institutions with assets between $100.0 million - $200.0 million, the median
multiples were 1.57X and 14.78X, respectively. The median multiples of book
value and earnings for cash acquisitions of Midwest Region institutions
headquartered in the state of Illinois were 1.54X and 17.03X, respectively.
The median multiples of book value and earnings for cash acquisitions of
Midwest Region institutions since January 1, 2000 were 1.47X and 17.36X,
respectively.
21
In the proposed acquisition, Company shareholders will receive cash
equal to $19.5 million for CB&T as well as additional cash consideration
equal to the net value of all other assets held by the Company, on a parent
company only basis, at the Effective Time. Based on this formula, total cash
consideration is expected to equal at least $33.1 million for all of the
Company's common shares and Options outstanding, or approximately $15.14 per
common share subject to upward adjustment as further defined in the
Agreement. The $15.14 per Company common share represents a multiple of the
Company's June 30, 2001 adjusted book value and a multiple of the Company's
2001 adjusted earnings of 1.02X and 32.50X, respectively.
Utilizing the valuation multiples of the proposed transaction, PBS
calculated the proposed transaction's percentile rankings with respect to
the above Midwest Region comparable transactions group. Compared to all
Midwest Region institution transactions where the consideration paid was
cash, the proposed acquisition value ranks in the 2nd percentile as a
multiple of book value and in the 89th percentile as a multiple of earnings.
Compared to Midwest Region cash transactions where the acquired institution
had an equity-to-asset ratio between 11.00% and 12.00%, the acquisition
value ranks in the 0th percentile as a multiple of book value and in the
100th percentile as a multiple of earnings. For Midwest Region cash
transactions where the acquired institution had a ROAE below 6.00%, the
acquisition value ranks in the 7th percentile as a multiple of book value
and in the 59th percentile as a multiple of earnings. For Midwest Region
cash acquisitions where the acquired institution had between $100.0 million
- - $200.0 million in assets, the acquisition value ranks in the 3rd
percentile as a multiple of book value and in the 100th percentile as a
multiple of earnings. For Midwest Region cash transactions where the seller
was headquartered in the state of Illinois, the acquisition value ranks in
the 6th percentile as a multiple of book value and in the 91st percentile as
a multiple of earnings. For Midwest Region cash transactions effected since
January 1, 2000, the acquisition value ranks in the 6th percentile as a
multiple of book value and in the 90th percentile as a multiple of earnings.
Adjusted Net Asset Value Analysis: PBS reviewed the Company's
---------------------------------
balance sheet data to determine the amount of material adjustments required
to the stockholders' equity of the Company based on differences between the
market value of the Company's assets and their value reflected on the
Company's financial statements. A review of CB&T's financial statements
indicates no goodwill. In addition, due to the consummation of the sale of
the Company's three small subsidiaries, the Company no longer has goodwill
on its financial statements. PBS determined that three adjustments were
warranted. Equity was decreased by $1.99 million to reflect the after tax
impact of loans on non-accrual, less total loan loss reserves, which are
expected to result in material losses. Equity was increased by $10,000 to
reflect the after tax depreciation in CB&T's held to maturity securities
portfolio. PBS also reflected a value of the non-interest bearing demand
deposits of approximately $1,627,000. The aggregate adjusted net asset value
of the Company was determined to be $34,933,000 or $14.77 per adjusted
Company common share.
Discounted Earnings Analysis: A dividend discount analysis was
----------------------------
performed by PBS pursuant to which a range of values of the Company was
determined by adding (i) the present value of estimated future dividend
streams that the Company could generate over a five-year period and (ii) the
present value of the "terminal value" of the Company's earnings at the end
of the fifth year. The "terminal value" of the Company's earnings at the end
of the five-year period was determined by applying a multiple of 17.36 times
the projected terminal year's ending net income. The 17.36 multiple
represents the median price paid as a multiple of earnings for all Midwest
financial institution cash transactions since January 1, 2000.
Dividend streams and terminal values were discounted to present
values using a discount rate of 13%. This rate reflects assumptions
regarding the required rate of return of holders or buyers of financial
institution common stock. The aggregate value of the Company, determined by
adding the present value of the total cash flows, was $23,092,000 or $9.76
per adjusted common share. In addition, using the five-year projection as a
base, a twenty-year projection was prepared assuming an annual asset growth
rate of 4.0%, and assuming return on assets increase to 1.00%, by year 6.
Dividends were assumed to equal 40% of income in years 1 through 5
22
and then increase to 90.0% of net income per year for the remainder of the
analysis. This long-term projection resulted in an aggregate value of
$17,987,000 or $7.60 per adjusted Company common share.
Specific Acquisition Analysis: PBS valued the Company based on an
-----------------------------
acquisition analysis assuming a "break-even" earnings scenario to an
acquiror as to price, current interest rates and amortization of the core
deposit intangible. Based on this analysis, an acquiring institution would
pay in aggregate $26,083,000, or $11.02 per adjusted 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 6.50% adjusted for taxes,
amortization of the core deposit intangible over 10 years and adjusted 2001
earnings of $1,102,000. The analysis was repeated assuming a potential
acquiror would attain non-interest expense reductions of 10% in the
transaction. Based on this analysis, an acquiring institution would pay in
aggregate $33,775,000 or $14.28 per adjusted Company common share.
Due to the sensitivity to earnings dilution of most active
acquirors, PBS weighted the overall earnings derived methods more heavily in
its analysis in determining the fairness of the proposed transaction, from a
financial perspective. PBS also weighted the liquidation value more heavily
in its opinion due to the likelihood of a liquidation of the Company or an
extremely lengthy and costly turnaround process in the event the Agreement
was not executed. The average aggregate and adjusted per share values of the
Company excluding the Market Comparison Method derived Book Value Methods
equal to $23.9 million and $10.11, respectively. The median aggregate and
adjusted per share values of the Company excluding the Market Comparison
Method derived Book Value Methods equal to $21.1 million and $8.93,
respectively. In addition, PBS also took into consideration the following
factors in its determination of the fairness of the proposed transaction
from a financial perspective:
o The Company and CB&T had stated losses of $1,476,000 and
$531,000, respectively, for the year ending December 31, 2000.
o The Company's asset quality is suspect and the Company has
continued to raise regulatory concerns.
o The per share consideration to be received by Company
shareholders represents a premium of 29% over the
Company's March 29, 2001 closing market price of $11.75,
as quoted on NASDAQ.
o On a status quo stand-alone basis the Company's and CB&T's
performance has continued to deteriorate since year-end
1997.
The fairness opinion is directed only to the question of whether
the consideration to be received by the Company's shareholders under the
Agreement is fair and equitable from a financial perspective and does not
constitute a recommendation to any Company shareholder to vote in favor of
the affiliation. No limitations were imposed on PBS regarding the scope of
its investigation or otherwise by the Company.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by the Company's
shareholders under the Agreement is fair and equitable from a financial
perspective to the shareholders of CB&T.
PBS and IBS will receive total fees equal to approximately $320,000
for all services performed in connection with the sale of the Company and
the rendering of the fairness opinion. In addition, the Company 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
23
liabilities related to any of PBS' or IBS' acts or decisions made in good
faith and in the best interest of the Company.
ESOP TRUSTEE
The Agreement requires the Company to appoint an independent
special trustee for the ESOP to act as a fiduciary on behalf of the
participants in the ESOP. Among other things, the Agreement provides that
the independent special trustee shall implement a procedure for soliciting
instructions from participants in the ESOP with respect to how to vote the
shares of Common Stock allocated to their ESOP accounts.
On June 21, 2001, the Company entered into a Trustee Agreement with
First Bankers, whereby First Bankers became the independent special trustee
of the ESOP. For its services to the ESOP in connection with this
transaction, First Bankers will receive a fee of $35,000 plus additional
service fees for solicitation of voting instructions from participants in
the ESOP, and will be reimbursed for its reasonable out-of-pocket expenses,
including the fees of its legal counsel. The fees and expenses of First
Bankers are payable by the Company and are not contingent upon the closing
of the Merger.
ESOP FAIRNESS OPINION
First Bankers retained Lakeshore to render an opinion as to whether
the purchase price to be paid for the shares of the Common Stock owned by
the ESOP is at least equal to fair market value as of the close of the
transaction and whether the terms and conditions of the Merger are fair to
the ESOP and the ESOP participants from a financial point of view.
In arriving at its fairness opinion, Lakeshore will review, among
other things, (i) the Agreement, (ii) certain of the Company's public
reports filed with the Securities and Exchange Commission, (iii) the
Company's and CB&T's financial statements and (iv) certain other financial
and operating information with respect to the Company and CB&T. In addition,
Lakeshore will have discussions with the management of the Company and
undertake such other studies, analyses and investigations as it deems
appropriate.
For its services related to this transaction, the Company has
agreed to pay Lakeshore a fee in the amount of $15,000 and will reimburse
Lakeshore for its reasonable out-of-pocket expenses. The fee payable to
Lakeshore is not contingent upon the consummation of the Merger.
Lakeshore will deliver its opinion to First Bankers on or prior to
the Closing Date. A draft of the fairness opinion, which includes a summary
of the assumptions that will be made and the information that will be
analyzed in deriving the fairness opinion, is attached as Annex E to this
-------
Proxy Statement.
The opinions of Lakeshore are for the sole benefit of the special
trustee of the ESOP and should not be relied upon by the other shareholders
of the Company in determining whether the purchase price to be paid for
their shares of the Common Stock is at least equal to the fair market value
of their shares as of the close of the transaction, whether the terms and
conditions of the Merger are fair to them from a financial point of view or
whether or not they should vote for the proposal to approve the Agreement.
CONDITIONS TO THE MERGER
The obligations of the Company, First Financial and Merger Corp to
consummate the Merger are subject to the satisfaction of a number of
conditions, upon terms and conditions satisfactory to First Financial, on or
before Closing, including the following:
o the Company's shareholders shall have approved the Agreement;
24
o the parties shall have received all requisite regulatory
approvals, consents, orders and clearances required by law
for the Merger, including approval of the Merger by the
Federal Reserve on terms and conditions satisfactory to
First Financial, and First Financial shall have agreed to
certain conditions requested by the Federal Reserve in
connection with the Merger and its impact on First
Financial's status as a financial holding company under
the BHCA;
o the representations and warranties of each Party as set
forth in the Agreement shall be true, accurate and
complete and each Party shall have in all material
respects fulfilled or complied with each of its covenants
under the Agreement; and
o each party shall have received each of the closing
documents required to be received from the other Party
pursuant to the Agreement.
The obligations of First Financial also are contingent upon the
following:
o except for the Options, the termination or expiration of
all options, warrants, commitments, calls, puts,
agreements, understandings, arrangements or other rights
relating to the Common Stock shall have expired or been
terminated;
o receipt by the trustee of the Company's ESOP of a fairness
opinion from an independent financial advisor dated not
later than the mailing date of the mailing of this proxy
and updated as of the Effective Time;
o First Financial shall have agreed to the amount of the
Company's potential tax liabilities in connection with the
Company's receipt of (a) proceeds from the sale of
American, MidAmerica and Egyptian and (b) proceeds from
certain income tax refunds;
o First Financial shall have received waivers from each of
the Company's and CB&T's directors of each director's
right to seek reimbursement for any indemnification
claims; and
o First Financial shall be satisfied with the terms and
conditions of all requisite regulatory approvals,
consents, orders and clearances required for the Merger.
Pursuant to the Agreement, any Party to the Agreement may in writing
waive the obligations to it of any other Party to the Agreement. Additionally,
the Agreement may be amended in writing by all the parties to the Agreement.
See "--Waiver and Agreement."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Boards of Directors and management of the
Company and CB&T may be deemed to have certain interests in the Merger in
addition to their interests as shareholders of the Company generally. The
Board of Directors of the Company was aware of these interests and
considered them, among other matters, in unanimously approving the Agreement
and the transactions contemplated thereby.
CHANGE IN CONTROL PAYMENT. Wayne H. Benson is party to an
employment agreement with CB&T and the Company that provides for a severance
payment upon the termination of his employment following a change in control
of CB&T or the Company. Such payment will equal the difference between (i)
2.99 times Mr. Benson's "base amount," as defined in Section 280G(b)(3) of
the Internal Revenue Code and (ii) the sum of any other parachute payments,
as defined in Section 280G(b)(2) of the Internal Revenue Code, that he
received on
25
account of the change in control. It is currently anticipated that Mr.
Benson will be entitled to a severance payment under his current employment
agreement in the amount of $468,638.04.
STOCK OPTIONS. Pursuant to the Agreement, at the Effective Time,
each holder of an Option will receive, in consideration for his or her
agreement to surrender such Option, the Option Consideration. The following
directors and executive officers of the Company are expected to receive the
following amounts in exchange for the cancellation of their Options
outstanding as of the Record Date:
NUMBER OF SHARES NET REALIZABLE
UNDERLYING VALUE OF ISSUED
NAME POSITION OPTIONS OPTIONS
---- -------- ---------------- ---------------
Wayne H. Benson President and Chief Executive Officer 38,617 $77,903.72
Douglas W. Tompson Chief Financial Officer 26,450 $53,358.71
Brad A. Jones Director 9,919 $20,010.02
Michael F. Bauman Director 9,919 $20,010.02
Roger A. Charleston Director 9,919 $20,010.02
EMPLOYEE STOCK OWNERSHIP PLAN. Upon consummation of the Merger, a
portion of the total purchase price for the acquisition of the Company will
be placed in the ESOP. Thereafter, the assets of the ESOP will be
distributed to participants in the ESOP in accordance with the terms of the
plan. Wayne H. Benson and Douglas W. Tompson are expected to receive ESOP
distributions of approximately $192,913 and $202,022, respectively, in
exchange for their interests in the ESOP.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENTS. Following the Merger,
First Financial will be liable for the obligations of the Company and CB&T
under certain Supplemental Executive Retirement Agreements ("SERAs") between
CB&T and each of Douglas W. Tompson, Wayne H. Benson and Shirley B. Kessler
(collectively, the "Executives"). Pursuant to the terms of the SERAs, each
year CB&T credits an account for each Executive with the amount, if any, by
which (a) the sum of any annual additions allocated to the Executive's
account under the ESOP and any other tax-qualified, defined contribution
plan maintained by CB&T or the Company exceeds (b) the limit imposed on
annual additions by Internal Revenue Code Section 415 and any regulations
thereunder. In addition, if the limitation imposed by Section 415 of the
Internal Revenue Code reduces the benefit that the Executive accrues under
any defined benefit pension plan maintained by CB&T, CB&T, as soon as
practicable after the close of the plan year in which said reduction occurs,
contributes to the Executive's account an amount equal to the present value
of such reduction.
In accordance with the terms of the SERAs, upon an Executive's
termination of employment with the Company or CB&T for reasons other than
death or removal for "just cause," CB&T is required to pay the balance of
the Executive's account to the Executive in 10 substantially equal annual
installments. In the event that the Executive dies before all benefit
payments have been made to him or her, CB&T will pay the Executive's
beneficiary (or estate, if he or she has no beneficiary) a lump sum payment
within 60 days following the Executive's death in an amount equal to the
balance of the Executive's account. In the event of a change in control (as
defined in the SERAs), the balance in the Executive's account becomes due
and payable to the Executive in one lump sum payment within 10 days
following such change in control.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Agreement also
contains provisions for the maintenance of directors' and officers'
liability insurance. Under the terms of the Agreement, First Financial will
allow the Company and/or CB&T to extend the Company's current directors' and
officers' liability insurance coverage for three years from the Effective
Time with respect to certain matters occurring prior to the Effective Time.
26
EFFECT ON EMPLOYEES AND CERTAIN EMPLOYEE BENEFIT PLANS
Each employee of the Company who becomes an employee of First
Financial or its subsidiaries after the Effective Time ("Continuing
Employees") will be eligible to participate in employee benefit plans of
First Financial which are substantially similar in coverage and benefits to
those available to similarly situated employees of First Financial if such
employees meet the eligibility requirements for such plans. Continuing
Employees will be given service credit for all of their service with the
Company for purposes of (a) eligibility under First Financial's employee
welfare benefit plans and (b) eligibility and vesting, but not for purposes
of benefit accrual or contributions, under First Financial's pension plan,
stock ownership plan and 401(k) plan. Continuing Employees and/or covered
dependents will not be subject to pre-existing conditions exclusions to the
extent permitted by such plans. Until such time as the Continuing Employees
become participants of First Financial's employee benefit plans as provided
under the Agreement, those employees will remain covered by the Company's
welfare benefit plans.
Following the Closing of the Merger, the Company's 401(k) plan will
be merged with First Financial's 401(k) plan, subject to the receipt of a
determination letter from the Internal Revenue Service that such merger will
not affect the tax-qualified status of either plan.
EXCHANGE OF STOCK CERTIFICATES AND SETTLEMENT OF OPTIONS
It is currently anticipated that Terre Haute First National Bank
will act as Exchange Agent to make payment of the Merger Consideration and
the Option Consideration. In order to receive payment of the Merger
Consideration and/or Option Consideration, each holder must surrender the
certificate for such shares of Common Stock or the certificate for the
Option, as the case may be, together with a duly executed letter of
transmittal (which the Exchange Agent will mail promptly after the Effective
Time to each holder of record of a certificate or certificates which,
immediately prior to the Effective Time, represented issued and outstanding
shares of Common Stock or Options). On or before the Effective Time, First
Financial shall cause to be deposited with the Exchange Agent an amount of
immediately available funds equal to the aggregate Merger Consideration and
the aggregate Option Consideration. The Exchange Agent shall distribute the
Merger Consideration and Option Consideration to former shareholders and
optionholders of the Company within 20 business days following receipt of a
properly executed letter of transmittal and the required certificate or
certificates. The Exchange Agent will not deliver the Merger Consideration
or Option Consideration until the holder surrenders his or her certificates
representing such shares or Options or an appropriate affidavit of loss and
indemnity agreement and/or bond, as First Financial may require. If a
shareholder requests payment for shares of Common Stock in a name other than
that on the certificate for such shares is registered, then the certificate
must be properly endorsed in proper form for transfer and that the person
requesting such payment shall (a) pay the Exchange Agent any transfer or
other taxes required by reason of the payment to a person other than the
registered holder of the certificate or (b) establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not payable. After the
Effective Time, there shall be no transfers on the stock transfer books of
the Company of the shares of Common Stock outstanding immediately prior to
the Effective Time and any such shares presented for transfer after the
Effective Time shall be cancelled and exchanged for the Merger
Consideration. No interest shall accrue on the Merger Consideration or the
Option Consideration after the Effective Time.
DISSENTERS' RIGHTS
Each holder of the Company's Common Stock has the right to dissent
from the Merger and receive the fair value of such shares of the Company's
Common Stock in cash if the shareholder follows the procedures set forth in
the Illinois Business Corporation Act of 1983, as amended (the "IBCA"),
included as Annex F hereto and the material provisions of which are
-------
summarized below. Pursuant to the IBCA, if a holder of the
27
Company's Common Stock dissents the Company, as the surviving corporation,
will pay to such shareholder the fair value of such shareholder's shares of
the Company's Common Stock, exclusive of any appreciation or depreciation in
anticipation of the Merger, as of immediately before the consummation of the
Merger. However, a dissenting shareholder must (a) file with the Company
prior to the vote being taken a written demand for payment for his or her
shares if the Merger is consummated and (b) not vote in favor of the Merger.
The Exchange Agent will include notice of the Closing Date in its letter to
all shareholders of the Company notifying them of the procedures to exchange
their shares for the cash payment due to such shareholders pursuant to the
Agreement. Such letter shall be sent promptly following the Closing Date.
Within 10 days after the shareholders' vote is effective or 30 days after
the shareholder delivers to the Company the written demand for payment,
whichever is later, the Company shall send each shareholder who has
delivered a written demand for payment a statement setting forth the opinion
of the Company as to the estimated fair value of the shares, the Company's
latest balance sheet as of the end of a fiscal year ended not earlier than
16 months before the delivery of the statement, together with the statement
of income for that year and the latest available interim financial
statements, and a commitment to pay for the shares of the dissenting
shareholder at the estimated fair value thereof upon transmittal to the
Company of the certificate or certificates, or other evidence of ownership,
with respect to the shares. A VOTE AGAINST THE MERGER, WHETHER BY PROXY OR
IN PERSON, WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN DEMAND FOR PAYMENT
FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS.
Upon consummation of the Merger, the Company shall pay to each
dissenter who transmits to the Exchange Agent the certificate or other
evidence of ownership of the shares the amount the Company estimates to be
the fair value of the shares, plus accrued interest, accompanied by a
written explanation of how the interest was calculated. Upon payment of the
agreed value, the dissenting shareholder shall cease to have any interest in
such shares or in the Company.
If the dissenting shareholder does not agree with the opinion of
the Company as to the estimated fair value of the shares or the amount of
interest due, the dissenting shareholder must, within 30 days from the
delivery of the Company's statement of value, notify the Company in writing
of the shareholder's estimated fair value and interest due and demand
payment for the difference between the shareholder's estimate of fair value
and interest due and the amount of the payment by the Company. If, within 60
days from delivery to the Company of the shareholder notification of
estimate of fair value of shares and interest due, the Company and the
dissenting shareholder have not agreed in writing upon the fair value of the
shares and interest due, the Company shall either pay the difference in
value demanded by the shareholder, with interest, or file a petition in the
circuit court of the county in which either the registered office or the
principal office of the Company is located, requesting the court to
determine the fair value of the shares and interest due. The "fair value"
determined by the court may be more or less than the amount offered to the
Company's shareholders under the Agreement. The judgment shall be payable
only upon, and simultaneously with, the surrender to the Company of the
certificate or certificates representing said shares of the Company Common
Stock. Upon the payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares or in the Company.
THE FOREGOING SUMMARY OF THE PROVISIONS REGARDING DISSENTERS'
RIGHTS UNDER THE IBCA IS QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF
THE IBCA WHICH IS ATTACHED HERETO AS ANNEX F.
-------
Shareholders who are interested in perfecting dissenters' rights
pursuant to the IBCA in connection with the Merger should consult with their
counsel for advice as to the procedures required to be followed.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
EFFECTIVE TIME
The Effective Time shall be upon the issuance of a Certificate of
Merger by the Secretary of State of the State of Illinois and the Secretary
of State of the State of Indiana, which the parties will use their best
efforts to
28
cause to occur on the Closing Date. Assuming that the Agreement is approved
by the Company's shareholders, the Merger will remain subject to a number of
conditions, including the receipt of required regulatory approvals. See
"-- Regulatory Approvals."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material United States
federal income tax consequences to a shareholder of the Company
participating in the Merger. The discussion does not purport to be a
complete analysis of all potential tax considerations or consequences that
may be relevant to particular shareholders of the Company (including foreign
persons and persons who are not citizens or residents of the United States,
insurance companies, tax-exempt entities, financial institutions or broker
dealers, retirement plans, dealers in securities, persons who acquired their
shares of Common Stock pursuant to the exercise of employee stock options or
otherwise as compensation, and persons who hold their shares of Common Stock
as part of a "straddle," "hedge" or "conversion transaction subject to
special treatment under federal income tax laws.") The following discussion
assumes that all Company shares are held as capital assets in the hands of
Company shareholders.
The statements in this discussion are based on current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing,
temporary, and currently proposed Treasury Regulations promulgated under the
Code, the legislative history of the Code, existing administrative rulings
and practices of the Internal Revenue Service (the "Service") and judicial
decisions. No assurance can be given that future legislative, judicial or
administrative actions or decisions, which may be retroactive in effect,
will not affect the accuracy of any statements in this Registration
Statement with respect to the transactions contemplated prior to the
effective date of such changes.
EACH SHAREHOLDER OF THE COMPANY SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE MERGER,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
SUCH MERGER, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
For federal income tax purposes, the receipt of cash by a
shareholder of the Company in exchange for shares of the Common Stock
pursuant to the Merger will constitute a taxable transaction to such
shareholder. In general, a shareholder who receives cash in the Merger in
exchange for such shareholder's shares of Common Stock will recognize gain
or loss equal to the difference, if any, between (a) the sum of the cash
payment of approximately $15.14 per share received from First Financial in
exchange for the shares of the Common Stock and (b) the shareholder's tax
basis in such Common Stock. Gain or loss will be calculated separately for
each block of Company shares purchased by First Financial. Such capital gain
or loss will be treated as long-term capital gain or loss if the tendering
Company shareholder has held such shares for more than 12 months at the time
of such purchase. Long-term capital gain realized by a non-corporate
taxpayer is taxed at a maximum federal rate of 20 percent. Capital losses
not offset by capital gains may be deducted against a non-corporate
taxpayer's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward indefinitely by non-corporate
taxpayers. All net capital gain of a corporate taxpayer is subject to tax at
ordinary corporate rates. A corporate taxpayer can deduct capital losses
only to the extent of capital gains, with unused losses being carried back
three years and forward five years.
INFORMATION REPORTING AND BACKUP WITHHOLDING. First Financial will
report to tendering Company shareholders and to the Service the amount paid
for the Company shares.
The cash payments due to the holders of the Common Stock upon the
exchange thereof pursuant to the Merger (other than certain exempt entities
and persons, such as corporations) will be subject to a backup withholding
tax at the rate of 31% unless certain requirements are met. Generally, the
Exchange Agent will be required to deduct and withhold the tax in the
following circumstances: (a) the shareholder fails to furnish a
29
taxpayer identification number ("TIN") to the Exchange Agent or fails to
certify under penalty of perjury that such TIN is correct; (b) the Service
notifies the Exchange Agent that the TIN furnished by the shareholder is
incorrect; (c) the Service notifies the Exchange Agent that the shareholder
has failed to report interest, dividends or original issue discount in the
past; or (d) there has been a failure by the shareholder to certify under
penalty of perjury that such shareholder is not subject to the backup
withholding tax. Any amounts withheld by the Exchange Agent in collection of
the backup withholding tax will reduce the federal income tax liability of
the shareholders from whom such tax was withheld.
NO SOLICITATION
The Agreement contains certain provisions that may have the effect
of discouraging competing offers to acquire or merge with the Company. The
Agreement provides that the Company and its subsidiary will not permit any
of their respective officers, directors, employees or agents to hold
discussions with or provide any information to any person in connection with
any proposal for the acquisition of all or any substantial portion of the
business, assets, shares of Common Stock or other securities of the Company
or CB&T, or any merger of the Company or CB&T with any person. The Company
is obligated to promptly inform First Financial of its receipt of any such
proposal and the substance of such proposal.
CONDUCT OF BUSINESS PENDING THE MERGER
The Company has agreed that it will conduct its business in the
ordinary course and preserve its business intact. Among other things, the
Agreement provides that the Company will not, without the prior written
consent of First Financial,
o (a) make any changes in, authorize the issuance of,
encumber, make any shareholder distributions with respect
to, redeem or grant a security interest in or right to
acquire its capital stock; or (b) merge or sell
substantially all of the assets of the Company or CB&T, or
enter into any agreement or commitment relative to the
foregoing;
o purchase, sell or combine any assets, real estate or
securities or assume any liabilities of another bank
holding company, bank, corporation or other entity, except
in the ordinary course of business necessary to manage its
investment portfolio;
o make any loan or commitment to lend money, issue any
letter of credit or accept any deposit or subject any of
the Company's properties or assets to any encumbrance,
except in the ordinary course of business in accordance
with its existing banking practices;
o change any Company officer's or employee's compensation or
terms of employment; renew, change or create any employee
benefit plan, employment agreement, stock option plan or
bonus agreements, or change the level of benefits or
payments under any of the foregoing, or increase or
decrease any severance or termination of pay benefits, or
any other fringe or employee benefits, other than as
required by law;
o hire or employ any new or additional employees of the
Company or CB&T, except those which are reasonably
necessary for the proper operation of its business;
o amend, modify or restate Community's or CB&T's Articles
of Incorporation or By-Laws from those in effect on the
date of this Agreement;
30
o fail to maintain, in accordance with past practices, the
Company's or CB&T's reserve for loan and lease losses in
accordance with safe, sound and prudent banking practices;
o fail to accrue, pay, discharge and satisfy all debts,
liabilities, obligations and expenses as such may
come due;
o open, close, move or, in any material respect, expand,
diminish, renovate, alter or change any of the
Company's or CB&T's offices or branches;
o pay or commit to pay any management or consulting or other
similar type of fees; or
o enter into any agreement requiring payments in excess of
$10,000.
Under the Agreement, the Company also agreed that it will:
o maintain current levels of insurance;
o permit First Financial access to its properties, facilities,
operations, books and records as necessary to become familiar
with the Company;
o deliver to First Financial monthly unaudited consolidated
balance sheets and profit and loss statements, CB&T's call
reports for each quarterly period before the Effective
Time and all other financial reports or statements
submitted by the Company or CB&T;
o cooperate with First Financial to terminate the Company's
tax-qualified employee benefit plans;
o appoint an independent fiduciary to act solely on behalf
of the Company's ESOP and 401(k) Plans (together, the
"Plans") and the participants and beneficiaries thereunder
to:
(a) implement a voting procedure so that the
participants under the Plans and their
beneficiaries may vote the shares of
Common Stock allocated to their accounts
with respect to the Merger; and
(b) provide (1) written notice regarding the
existence of and provisions for such
voting procedures and (2) a copy of this
Proxy Statement;
o obtain a written opinion from an independent financial
advisor to the Special Trustee of the ESOP stating that
(a) the consideration given to the ESOP in the Merger in
exchange for the shares of Common Stock will constitute no
less than "adequate consideration" as defined in Section 3(18)
of Employee Retirement Income Security Act of 1974 ("ERISA")
and (b) that the terms and conditions of the Merger are fair
to the ESOP and its participants from a financial point of
view. In addition, prior to the distribution of any ESOP
accounts in connection with the termination of the ESOP,
the Company shall obtain a determination letter from the
Internal Revenue Service that the termination will not
affect the tax-qualified status of the ESOP;
o except as required by law, not issue any press release or
make any public announcements regarding the Merger and the
transactions contemplated thereby; and
o pay all legal, accounting and investment banking fees of
the Company relating to the Merger and the transfer, in
December 2000, of Common Stock by the Company ESOP to the
Company.
31
Prior to the Effective Time, the Company also has agreed to:
(a) pay to the Special Trustee of the Company's ESOP an
amount equal to the amount to be placed in the
ESOP pursuant to the Agreement; and
(b) file certain federal tax returns related to the
Company's employee benefit plans and pay all
taxes for calendar years 2000 and 2001.
The Company also has agreed that it will cause CB&T to:
o accrue for and pay all salary termination expenses associated
with the termination of CB&T's and the Company's employment
agreements; and
o prior to the Effective Time, make an additional provision
to CB&T's allowance for loan loss reserve in an amount as
requested by First Financial.
Under the Agreement, among other things, First Financial agreed to:
o be primarily responsible for the preparation of and costs
associated with filing CB&T regulatory applications required
for the Merger; and
o offer the same employee benefits available to First
Financial's employees to the Continuing Employees after
the Effective Time (See "Effect on Employees and Certain
Employee Benefit Plans" for a more detailed discussion).
In addition, First Financial and Merger Corp agreed to assume and
be jointly and severally liable for each of the Company's and CB&T's rights
and obligations under certain supplemental retirement agreements between
CB&T and each of Douglas W. Tompson, Wayne H. Benson and Shirley B. Kessler.
REPRESENTATIONS AND WARRANTIES
The Agreement contains extensive representations and warranties by
the Company and First Financial. These include the usual representations and
warranties made in connection with business combinations of nonaffiliated
entities. See the "Representations and Warranties of Community" and
"Representation and Warranties of First Financial" sections in the
Agreement. However, the Company made additional representations and
warranties to First Financial which included, among other things,
representations and warranties as to the following:
32
o the absence of material adverse changes
and the conduct of the Company and
CB&T since December 31, 2000;
o the absence of shareholder rights and
other anti-takeover mechanisms not
already disclosed to First Financial;
o obligations to brokers and finders;
o the documents, including financial
statements and other reports, filed by
the Company and CB&T with the
applicable regulatory authorities
including the Federal Reserve, Federal
Deposit Insurance Corporation
("FDIC"), state regulatory agencies,
self-regulatory organizations and the
Securities Exchange Commission;
o FDIC deposit insurance;
o the accuracy of the information
supplied by the Company in its
disclosure to First Financial;
o the Company's capital structure;
o the absence of liabilities not disclosed
with respect to the Company's sale of
MidAmerica, Egyptian and American;
o the absence of the right of third parties
to acquire the capital stock or assets of
the Company of CB&T;
o the Company's Board of Directors
having been informed by a financial
adviser that the terms of the Merger
are fair to the Company's
shareholders; and
o agreements with regulatory agencies.
TERMINATION OF THE AGREEMENT
The Agreement provides that either Party may terminate the
Agreement upon written notice to the other Party if:
o the Merger has not been consummated by January 31, 2001;
o the Company's shareholders do not approve the Agreement
and the Merger by the requisite vote;
o the respective Boards of Directors of the Company and First
Financial mutually agree to terminate the Agreement;
o a Party misrepresents information or breaches a warranty
or a covenant of the Agreement which may have a material
adverse effect on such Party's business, assets,
capitalization, financial condition or results of
operations; or
o a Party determines that the Merger has become inadvisable
or impracticable due to the commencement or threat of any
claim, litigation or proceeding against it, the other
Party, or any director or officer of either Party (a)
relating to the Agreement or the Merger or (b) which is
likely to have a material adverse effect on such the other
Party's business, assets, capitalization, financial
condition or results of operations.
First Financial may also terminate the Agreement prior to the
Effective Time if:
o First Financial determines that any item, event or
information provided by the Company under the Agreement,
or that First Financial becomes aware of, has had or could
be expected to have a material adverse effect on the
Company's business, assets, capitalization, financial
condition or results of operations;
33
o the Company misrepresents the number of issued and
outstanding shares of Common Stock or options to purchase
shares of capital stock of the Company or CB&T, regardless
of the materiality of any such inaccuracy;
o the Company fails to comply with any covenant in the
Agreement which could reasonably be expected to have a
material adverse effect on the economic value of the
Merger to First Financial;
o there has been a material adverse change in the Company's
business, assets, capitalization, financial condition or
results of operations since December 31, 2000, other than
as allowed by the Agreement or resulting primarily by
reason of changes in banking laws, the general level of
interest rates or changes in economic, financial or market
conditions affecting the banking industry generally in the
Company's market area;
o the Company's Board of Directors withdraws or modifies its
approval and recommendation of the Agreement in any manner
adverse to First Financial; or
o based on the Formula, Community's per share price is less
than $15.14, determined as of five business days prior to
the Closing.
WAIVER AND AMENDMENT
The conditions of the Agreement which may be waived may only be
waived by notice to the other Party waiving such condition. The Agreement
may be amended or modified by the Parties only by a written agreement signed
by the Parties.
EXPENSES
The Agreement provides that each Party shall bear and pay all
expenses incurred by it in connection with the transactions contemplated by
the Agreement. However, First Financial will bear the cost of obtaining the
necessary banking regulatory approvals and the Company will bear the cost of
sending out this Proxy Statement.
ACCOUNTING TREATMENT
The Merger and the transactions contemplated thereby will be
accounted for under the purchase method of accounting as required by
Accounting Principles Board Opinion No. 16 Business Combinations.
REGULATORY APPROVALS
Consummation of the Merger is subject to the receipt of all
regulatory approvals required for the completion of the Merger, including
the approval of the Federal Reserve of the Merger on terms and conditions
satisfactory to First Financial, and First Financial shall have agreed to
certain conditions requested by the Federal Reserve in connection with the
Merger and its impact on First Financial's status as a financial holding
company under the BHCA. The required applications regarding the Merger have
been filed with the Federal Reserve. There can be no assurance that the
approval of the Federal Reserve will be granted or as to the timing of such
approval.
34
COMMUNITY FINANCIAL CORP.
GENERAL
COMMUNITY FINANCIAL CORP. The Company is registered with the
Federal Reserve as a bank holding company under the BHCA. The Company wholly
owns one bank subsidiary, CB&T, headquartered in Illinois.
The Company's principal business is overseeing the business of its
wholly owned bank subsidiary and investing its assets. The Company's
subsidiary accepts deposits from the general public and invests those funds
in loans in their market areas and in investment securities and
mortgage-backed securities. At September 30, 2001, the Company had total
assets of $188.4 million, total deposits of $144.0 million and shareholders'
equity of $32.9 million.
On February 28, 2001, the Company completed the sale of two of its
subsidiaries: Egyptian and MidAmerica. Egyptian was purchased by Midwest
Community Bancshares, Inc. of Marion, Illinois for $4.2 million and
MidAmerica was purchased by First National Bank of St. Louis for $3.7
million. On April 20, 2001, the Company completed the sale of American to
First Mid-Illinois Bank & Trust, N.A. for $3.7 million.
The Company's executive offices are located at 240 E. Chestnut
Street, Olney, Illinois 62450-2295, and its main telephone number is (618)
395-8676.
COMMUNITY BANK AND TRUST, N.A. CB&T is a national bank operating
through six offices serving Richland, Coles, Jasper, Lawrence and Wayne and
contiguous counties in Southeastern Illinois. CB&T was chartered in 1883 as
Olney Building and Loan Association. In 1961, CB&T changed its name to Olney
Savings and Loan Association. CB&T expanded its branch office network
through a series of acquisitions of other financial institutions, acquiring
its Lawrenceville and Fairfield offices in 1983, its Charleston office in
1989 and its Newton office in 1990. CB&T became an Illinois state savings
bank in July 1992, at which time it adopted the title Community Bank &
Trust, sb, and converted to a federally chartered mutual savings bank under
the name Community Bank & Trust, fsb in February 1995. In June 1995, CB&T
became a national bank and adopted its present name. At September 30, 2001,
CB&T had total assets of $174.3 million and total deposits of $144.0
million.
CB&T's deposits are insured by the Savings Association Insurance
Fund ("SAIF") of the FDIC up to the applicable limits for each depositor.
CB&T is subject to comprehensive examination, supervision and regulation by
the Office of the Comptroller of the Currency ("OCC"). This regulation is
intended primarily for the protection of depositors.
MARKET AREAS
CB&T conducts its business through its main office in Olney,
Illinois and its five branch offices in Olney, Lawrenceville, Fairfield,
Newton and Charleston, Illinois. CB&T's primary market area consists of
Richland, Jasper, Lawrence and Wayne Counties and the eastern two-thirds of
Coles County, Illinois, and each of CB&T's offices is located in the county
seat of those counties. CB&T also has loan and deposit customers in Clay,
Crawford, Cumberland, Edwards, Effingham, White and Wabash Counties,
Illinois, which are contiguous to its primary market area. A significant
percentage of CB&T's lending activities are conducted in its primary market
area.
CB&T's market area is largely rural, with the exception of
Charleston which is home to a university. The main industry in CB&T's market
area is agriculture, with most of the farms being relatively small and
family owned. The local economy also is dependent on light industry. Major
employers in the area include Prairie Farms, Golden Rule Insurance, Ruckers
Wholesale, Trim Masters Inc., Airtex, Grain Systems, Inc.,
35
Trailmobile, Wal-Mart Stores and Distribution Center, and Eastern Illinois
University. Oil production has been present in CB&T's market area since the
1920s, but production has been significantly reduced. However, related
businesses still exist in the area.
COMPETITION
The Company faces strong competition both in originating real
estate, agriculture, automobile, consumer and other loans and in attracting
deposits. The Company competes for real estate and other loans principally
on the basis of interest rates, the types of loans it originates and the
quality of services it provides to borrowers. Its competition in originating
real estate loans comes primarily from savings institutions, commercial
banks and mortgage bankers making loans secured by real estate located in
the Company's market area. Commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending. Competition may
increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
CB&T attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located.
Consequently, competition for deposits is principally from other savings
institutions, commercial banks, credit unions and brokers in these
communities. CB&T competes for deposits and loans by offering a variety of
deposit accounts at competitive rates, a wide array of loan products,
convenient business hours and branch locations, a commitment to outstanding
customer service and a well-trained staff. In addition, CB&T has developed
strong relationships with local businesses, realtors and the public in
general.
EMPLOYEES
As of September 30, 2001, the Company and its subsidiary had 71
full-time equivalent employees, none of whom were represented by a
collective bargaining agreement, and management considers relationships with
employees to be good.
FIRST FINANCIAL CORPORATION
First Financial became a multi-bank holding company in 1984. It
serves as the holding company of Terre Haute First National Bank; The Morris
Plan Company of Terre Haute, Inc.; First State Bank; First Citizens State
Bank; First Farmers State Bank; First Parke State Bank; First Ridge Farm
State Bank; First National Bank of Marshall; First Crawford State Bank;
First Financial Reinsurance Company, Ltd.; and Forrest Sherer, Inc. At
September 30, 2001, on a consolidated basis, First Financial reported total
assets of $2.0 billion, total deposits of $1.3 billion and shareholders'
equity of $219.5 million.
First Financial, which is headquartered in Terre Haute, Indiana,
offers a wide variety of financial services, including commercial and
consumer lending, lease financing, trust account services and depositor
services. Terre Haute First National Bank is the largest bank in Vigo
County, Indiana. It operates twelve full service banking branches within the
county. It also has a main office in downtown Terre Haute and an operations
center in southern Terre Haute.
First Financial operates 37 branches in west-central Indiana and
east-central Illinois. First Financial's primary source of revenue is
derived from loans to customers, primarily middle-income individuals, and
investment activities.
The executive offices of First Financial are located at One First
Financial Plaza, Terre Haute, Indiana 47807, and its main telephone number
is (812) 238-6000.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's net income is dependent primarily on its net interest
income. Net interest income is determined by (a) the difference between
yields earned on interest-earning assets (loans, mortgage-backed and related
securities portfolio) and rates paid on interest-bearing liabilities
("interest rate spread") and (b) the relative amounts of interest-earning
assets and interest-bearing liabilities. The Company's interest rate spread
is affected by regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. To a lesser extent, the
Company's net income also is affected by the level of general and
administrative expenses and the level of other income, which primarily
consists of service charges and other fees.
The operations of the Company are significantly affected by
prevailing economic conditions, competition and the monetary, fiscal and
regulatory policies of governmental agencies. Lending activities are
influenced by the demand for and supply of housing, competition among
lenders, the level of interest rates and the availability of funds. Deposit
flows and costs of funds are influenced by prevailing market rates of
interest, primarily on competing investments, account maturities and the
levels of personal income and savings in the Company's market area.
FORWARD-LOOKING STATEMENTS
When used in this proxy, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "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 certain risks and uncertainties including
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Shareholders should not place undue reliance on
any such forward-looking statements, which speak only as of the date made.
The factors listed above could affect the Company's financial performance
and could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
The Company's financial condition decreased during the period as
reflected by a decrease in total assets of $89.3 million, or 32.2% from
$277.7 million at December 31, 2000 to $188.4 million at September 30, 2001.
The decrease was primarily due to the sales of Egyptian, which reduced
assets by $39.1 million, and Mid-America, which reduced assets by $30.0
million, both of which were completed on February 28, 2001, and by the sale
of American on April 20, 2001, which reduced assets by $33.9 million. After
restating the December 31, 2000 financial statements to remove the effects
of the sale of the subsidiaries, the Company's financial position remained
unchanged as total assets increased, net of sale proceeds of $11.6 million,
by $2.1 million, or 1.1% from $186.3 million at December 31, 2000 (restated)
to $188.4 million at September 30, 2001.
37
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
NET INCOME. Net income increased $483,000, or 49.2% from a loss of
$981,000 for the three months ended September 30, 2000 to a loss of $498,000
for the three months ended September 30, 2001. The increase is primarily due
to a reduction of $439,000, or 23.9% in provision for loan losses from $1.8
million for the three months ended September 30, 2000 to $1.4 million for
the three months ended September 30, 2001.
The Company reported a net loss of $2.4 million for the nine months
ended September 30, 2001. This represents a decrease of $1.9 million, which
was primarily due to the loss on the sale of the subsidiaries of $1.8
million and associated expenses.
NET INTEREST INCOME. Net interest income decreased $11,000, or 0.7%
from $1.5 million for the three months ended September 30, 2000 to $1.5
million for the three months ended September 30, 2001.
Net interest income decreased $440,000, or 9.5% from $4.6 million
for the nine months ended September 30, 2000 to $4.2 million for the nine
months ended September 30, 2001.
Interest Income. Interest income decreased by $595,000, or 15.8%
from $3.8 million for the three months ended September 30, 2000 to $3.2
million for the three months ended September 30, 2001. Interest income on
loans decreased by $334,000, or 12.4% from $2.7 million for the three months
ended September 30, 2000 to $2.4 million for the three months ended
September 30, 2001. The decrease is primarily due to a volume decrease as
the average balance of loans decreased $11.4 million, or 9.2% from $123.5
million for the quarter ended September 30, 2000 (restated) to $112.1
million for the quarter ended September 30, 2001. The decrease in interest
income on investment securities and interest bearing deposits of $261,000,
or 24.2% was primarily due to a volume decrease. The average balance of
securities and interest bearing deposits decreased $12.7 million, or 16.5%
from $77.1 million for the quarter ended September 30, 2000 (restated) to
$64.4 million for the quarter ended September 30. 2001.
Interest income decreased $1.8 million, or 15.8% from $11.4 million
for the nine months ended September 30, 2000 to $9.6 million for the nine
months ended September 30, 2001. Of the decrease, $979,000 was primarily due
to the loan portfolio reflecting a volume decrease of $11.6 million, or 9.2%
from $125.8 million for the nine months ended September 30, 2000 (restated)
to $114.2 million for the nine months ended September 30, 2001. The decrease
in interest income on securities and interest bearing deposits of $796,000,
or 24.2% was due to a volume decrease on the average balance of securities
and interest bearing deposits of $19.2 million, or 24.3%. The average
balance of securities and interest bearing deposits was $79.1 million for
the nine months ended September 30, 2000 (restated) compared to $59.9
million for the nine months ended September 30, 2001. In addition, the yield
on the investment portfolio has decreased 78 basis points, from 6.2% for the
nine months ended September 30, 2000 to 5.4% for the nine months ended
September 30, 2001.
INTEREST EXPENSE. Interest expense decreased by $584,000, or 25.5%
from $2.3 million for the three months ended September 30, 2000 to $1.7
million for the three months ended September 30, 2001. Interest expense on
deposits decreased by $306,000, or 16.1% from $1.9 million for the three
months ended September 30, 2000 to $1.6 million for the three months ended
September 30, 2001. The decrease was primarily due to a volume decrease on
average deposits of $6.6 million, or 4.5% from $145.4 million for the three
months ended September 30, 2000 (restated) to $138.8 million for the three
months ended September 30, 2001. Interest expense on borrowings decreased by
$278,000, or 70.2% from $396,000 for the three months ended September 30,
2000 to $118,000 for the three months ended September 30, 2001. The primary
reason for the decrease was due to the reduction in the average balance of
borrowings of $14.1 million, or 56.9% from $24.8 million for the three
months ended September 30, 2000 (restated) to $10.7 million for the three
months ended September 30, 2001.
38
Interest expense decreased by $1.3 million, or 19.4% from $6.7
million for the nine months ended September 30, 2000 to $5.4 million for the
nine months ended September 30, 2001. The decrease was due to interest
expense on borrowings having a volume decrease on the average balance of
borrowings of $24.1 million, or 72.8% from $33.1 million for the nine months
ended September 30, 2000 (restated) to $9.0 million for the nine months
ended September 30, 2001.
Provision for Loan Losses. The Company established provisions for
loan losses of $1.4 million and $1.9 million for the three months ended
September 30, 2001 and 2000, respectively. Of the $1.4 million, $1.2 million
was due to a partial charge off of a commercial loan that is undergoing a
reorganization plan. Of the $1.9 million, $1.5 million was for a secured
commercial loan charge off which involved a customer who was indicted by the
United States for alleged involvement in a Ponzi scheme. The security which
the U.S. Department of Justice seized included commercial real estate,
vehicles and inventory that were pledged. The Company and its attorneys are
working with the federal prosecutor in locating, securing and liquidating
the assets used to secure the loans. The projected recovery of any part of
the charged off loan is undeterminable at this time. The increase in the
provision for loan losses was based on the quarterly analysis of the
allowance for loan and lease loss reserves indicating that additional
reserves were needed. The review process applies different risk ratings to
the concentrations of credit within the total loan portfolio. In addition,
the process takes into consideration the effect that changing economic
conditions has had on individual credits in the past, present and future.
The increase in the provision for loan losses was the result of identifying
a need to add to the reserves.
The Company established provisions for loan losses of $1.8 million
and $2.2 million for the nine months ended September 30, 2001 and 2000,
respectively. Of the $1.8 million, $1.2 million was due to a partial charge
off of a commercial loan that is undergoing a reorganization plan. Of the
$2.2 million, $1.5 million was for a secured commercial loan charge off
which involved a customer who was indicted by the United States for his
alleged involvement in a Ponzi scheme. The security which the U.S.
Department of Justice seized included commercial real estate, vehicles and
inventory that were pledged as security for a commercial loan. The Company
and its attorneys are working with the federal prosecutor in locating,
securing and liquidating the assets used to secure the loan. The projected
recovery of any part of the charged off loan is undeterminable at this time.
In addition, analysis of the allowance for loan and lease loss reserves
indicated that additional reserves were needed. The review process applies
different risk ratings to the concentrations of credit within the total loan
portfolio. In addition, the process takes into consideration the effect that
changing economic conditions has had on individual credits in the past,
present and future. The increase in the provision for loan losses was the
result of identifying a need to add to the reserves.
Noninterest Income. Noninterest income decreased by $112,000, or
27.3% from $411,000 for the three months ended September 30, 2000 to
$299,000 for the three months ended September 30, 2001. The decrease was
primarily a result of a decrease of $38,000, or 41.3% in the commissions
generated from annuity and brokerage sales, as a result of the volatility of
the stock market, from $92,000 for the three months ended September 30, 2000
to $54,000 for the three months ended September 30, 2001.
Noninterest income decreased by $312,000, or 25.3% from $1.2
million for the nine months ended September 30, 2000 to $922,000 for the
nine months ended September 30, 2001. The decrease was primarily the result
of a decrease of $147,000, or 16.6% in service fees from $887,000 for the
nine months ended September 30, 2000 to $740,000 for the nine months ended
September 30, 2001. This decrease reflects the decrease in loan fees as the
result of the decreasing loan portfolio. In addition, commissions generated
from annuity and brokerage sales decreased $106,000, or 40.2% from $264,000
for the nine months ended September 30, 2000 to $158,000 for the nine months
ended September 30, 2001.
Noninterest Expense. Noninterest expense decreased by $150,000, or
10.1% from $1.5 million for the three months ended September 30, 2000 to
$1.3 million for the three months ended September 30, 2001. Of the
39
decrease, salaries and employee benefits decreased $105,000, or 15.7% from
$667,000 for the three months ended September 30, 2000 to $562,000 for the
three months ended September 30, 2001 primarily as the result of the
Employee Stock Ownership Plan ("ESOP") being terminated after December, 2000
and the final Management Recognition Plan ("MRP") allocation being made in
2000.
Noninterest expense decreased by $300,000, or 6.7% from $4.5
million for the nine months ended September 30, 2000 to $4.2 million for the
nine months ended September 30, 2001. Of the decrease, salaries and employee
benefits decreased $457,000, or 21.4% from $2.1 million for the nine months
ended September 30, 2000 to $1.7 million for the nine months ended September
30, 2001 primarily as the result of the ESOP being terminated after
December, 2000 and the final MRP allocation being made in 2000.
INCOME TAX EXPENSE (BENEFIT). The Company's income tax expense
(benefit) was estimated at ($321,000) and ($431,000) for the three months
ended September 30, 2001 and 2000, respectively. For the nine months ended
September 30, 2001 and 2000, income taxes were estimated to be a benefit of
($298,000) and ($224,000), respectively. The losses from the sale of the
subsidiary banks are considered capital losses and do not reduce income from
operations for income tax purposes.
DISPOSAL OF BUSINESS SEGMENTS. For the nine months ended September
30, 2001, the Company has sold three of its business segments which has
resulted in a loss of $1.6 million. The equity in the earnings for the nine
months ended September 30, 2001 was reduced by $152,000.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND 1999
The Company's financial condition decreased during the 2000 period
as reflected by a decrease in total assets of $32.2 million from $309.9
million at December 31, 1999 to $277.7 million at December 31, 2000. The
Company's strategic plan was to reduce the $36.0 million of short term
borrowing that was reported at December 31, 1999, due to the rising cost to
carry this type of liability. To achieve this goal, the Company reduced the
short term borrowings by applying the proceeds from the principle reduction
of the investment portfolio, tightened its lending requirements and actively
seeking deposit growth.
The Company's cash and cash equivalents increased $4.7 million, or
29.9% from $15.7 million at December 31, 1999 to $20.4 million at December
31, 2000. The increase is primarily the result of securities sold late in
December 2000 with a portion of the proceeds applied to eliminate the
balance of short term borrowings and the remainder was invested in the first
quarter of 2001.
The Company's investment securities decreased by $4.2 million, or
6.8% from $62.2 million at December 31, 1999 to $58.0 million at December
31, 2000 as a result of securities being called or maturing. The decrease
was used primarily to fund the reduction in short term borrowing. The
Company's mortgage-backed and related securities decreased by $23.8 million,
or 68.6% from $34.7 million at December 31, 1999 to $10.9 million at
December 31, 2000. The decrease is the result of principal payback, sales
and maturities. The decrease was used primarily to fund the reduction in
short term borrowing. Securities held to maturity and mortgage-backed and
related securities held to maturity reflect a decrease as a result of the
Company's affiliates, Egyptian and Saline County Bank, being merged in May
2000 into one bank charter with Egyptian being the survivor. As a result of
this merger, the securities held to maturity portfolio totaling $16.1
million and the mortgage-backed and related securities held to maturity
portfolio totaling $319,000 at May 2000 were reclassified as securities
available for sale and mortgage-backed and related securities available for
sale. At December 31, 2000, the Company's portfolio of investment securities
and mortgage-backed and related securities classified as available for sale
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
decreased capital by $303,000 (net of taxes) as a result of a decrease in
the market value.
40
The Company's net loans receivable decreased $8.0 million, or 4.5%
from $179.5 million at December 31, 1999 to $171.5 million at December 31,
2000. The decrease was primarily due to automobile loans decreasing $8.3
million, or 24.1% from $34.4 million at December 31, 1999 to $26.1 million
at December 31, 2000. The Company relaxed the aggressive approach used in
prior years based on the increased competition for automobile loans and
redirected the proceeds to retire outstanding borrowings. Real estate loans
decreased by $3.0 million, or 2.4% from $123.4 million at December 31, 1999
to $120.4 million at December 31, 2000 as competition for real estate loans
increased. Agriculture loans increased $2.0 million, or 22.2% from $9.0
million at December 31, 1999 to $11.0 million at December 31, 2000 and
commercial loans increased $2.6 million, or 45.6% from $5.7 million at
December 31, 1999 to $8.3 million at December 31, 2000. The reduction and
restructuring of the loan portfolio increased the weighted average interest
rate on loans by 5 basis points from 8.57% at December 31, 1999 to 8.62% at
December 31, 2000. The allowance for loan and lease losses increased
$900,000, or 56.2% from $1.6 million at December 31, 1999 to $2.5 million at
December 31, 2000. The increase in the allowance for loan and lease loss
reserves was based on the quarterly analysis that additional reserves were
needed. The review process applies different risk ratings to the
concentrations of credit within the total loan portfolio. In addition, the
process takes into consideration the effect that changing economic
conditions has had on individual credits in the past, present and future.
The increase in the allowance for loan and lease loss reserve was the result
of identifying a need to add to the reserves.
Deposits increased by $7.6 million, or 3.4% from $225.2 million at
December 31, 1999 to $232.8 million at December 31, 2000. The increase was
due to non-interest demand deposits increasing $3.4 million, or 23.6% from
$14.4 million at December 31, 1999 to $17.8 million at December 31, 2000,
money market deposits increasing $3.6 million, or 17.6% from $20.5 million
at December 31, 1999 to $24.1 million at December 31, 2000 and time deposits
increased by $4.1 million, or 3.0% from $136.3 million at December 31, 1999
to $140.4 million at December 31, 2000 while interest bearing demand
deposits decreased $1.2 million, or 4.3% from $27.7 million at December 31,
1999 to $26.5 million at December 31, 2000 and passbook savings decreased by
$2.3 million, or 8.8% from $26.2 million at December 31, 1999 to $23.9
million at December 31, 2000. The weighted average cost of deposits
increased by 72 basis points from 4.21% for the year ended December 31, 1999
to 4.93% for the year ended December 31, 2000.
The Company's repurchase agreements decreased by $4.1 million, or
59.4% from $6.9 million at December 31, 1999 to $2.8 million at December 31,
2000. The repurchase program was introduced in 1996 to attract large
depositors. The FDIC does not insure these liabilities. The Company's
Federal Home Loan Bank ("FHLB") advances decreased $36.0 million, or 85.7%
from $42.0 million at December 31, 1999 to $6.0 million at December 31,
2000.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NET INCOME. The Company reported a net loss of $1.5 million for the
year ended December 31, 2000, as compared to net income of $1.1 million for
the year ended December 31, 1999. This represents a decrease of $2.6
million, or 236.4%. The decrease in net income was primarily due to (on a
pre-tax basis) the provision for loan losses increasing $2.7 million, or
385.7% from $707,000 for the year ended December 31, 1999 to $3.4 million
for the year ended December 31, 2000. The increase in the provision for loan
losses was primarily due to a commercial loan write-off of $1.7 million. The
U.S. Department of Justice has attempted to seize certain assets of a
customer which secured a loan, due to the customer's admitted involvement in
a Ponzi scheme. In addition, the results of the quarterly review of the
allowance for loan and lease losses identified the need to add $900,000 to
the reserves due to changing economic conditions and the impact higher
interest rates have had on certain credits to bring the allowance for loan
and lease losses into compliance with the Company's policies.
NET INTEREST INCOME. Net interest income decreased by $74,000, or
0.8% from $9.4 million for the year ended December 31, 1999 to $9.3 million
for the year ended December 31, 2000. The decrease in net interest
41
income reflects an increase in interest income of $166,000, or 0.8% from
$21.7 million for the year ended December 31, 1999 to $21.9 million for the
year ended December 31, 2000. The increase was primarily due to the average
yield on interest earning assets increasing 27 basis points from 7.36% for
the year ended December 31, 1999 to 7.63% for the year ended December 31,
2000. The cost of interest-bearing liabilities increased by $240,000, or
2.0% from $12.3 million for the year ended December 31, 1999 to $12.5
million for the year ended December 31, 2000. The increase was due to an
increase in the average cost of liabilities of 61 basis points, from
4.48% for the year ended December 31, 1999 to 5.09% for the year ended
December 31, 2000.
INTEREST INCOME. Interest income was $21.9 million for the year
ended December 31, 2000, as compared to $21.7 million for the year ended
December 31, 1999, representing an increase of $166,000, or 0.8%. The
increase was primarily due to an increase of 27 basis points in rates on
average earning assets from 7.36% for the year ended December 31, 1999 to
7.63% for the year ended December 31, 2000 in connection with a volume
decrease of $8.2 million, or 2.8% from $294.6 million for the year ended
December 31, 1999 to $286.4 million for the year ended December 31, 2000.
Interest on loans increased by $870,000, or 5.9% from $14.6 million for the
year ended December 31, 1999 to $15.5 million for the year ended December
31, 2000. This is due primarily to a volume increase of $9.1 million, or
5.3% in the average balance of (net) loans receivable from $171.0 million at
December 31, 1999 to $180.1 million at December 31, 2000. Interest income on
mortgage-backed and related securities decreased $538,000, or 20.6% from
$2.6 million for the year ended December 31,1999 to $2.1 million for the
year ended December 31, 2000, primarily due to a volume decrease in the
average balance of $8.9 million, or 22.1% from $40.3 million for the year
ended December 31, 1999 to $31.4 million for the year ended December 31,
2000. Interest on investments and interest-bearing deposits decreased by
$166,000, or 3.7% from $4.4 million for the year ended December 31, 1999 to
$4.3 million for the year ended December 31, 2000. The decrease was
primarily the result of a volume decrease in the average balance of
investment securities decreasing $5.7 million, or 8.5% from $66.8 million
for the year ended December 31, 1999 to $61.1 million for the year ended
December 31, 2000. In addition, the average balance of cash and cash
equivalents experienced a volume decrease of $2.3 million, or 14.2% from
$16.2 million for the year ended December 31, 1999 to $13.9 million for the
year ended December 31, 2000.
INTEREST EXPENSE. Interest expense, which consists primarily of
interest on deposits, increased by $240,000, or 2.0% from $12.3 million for
the year ended December 31, 1999 to $12.5 million for the year ended
December 31, 2000. Interest on deposits increased by $1.2 million, or 12.8%
from $9.4 million for the year ended December 31, 1999 to $10.6 million for
the year ended December 31, 2000. The increase is primarily due to a rate
increase of 72 basis points, from 4.21% for the year ended December 31, 1999
to 4.93% for the year ended December 31, 2000. In addition, interest on
other borrowed funds decreased $900,000, or 31.3% from $2.9 million for the
year ended December 31, 1999 to $2.0 million for the year ended December 31,
2000.
PROVISION FOR LOAN LOSSES. The Company established provisions for
loan losses of $3.4 million and $707,000 for the year ended December 31,
2000 and 1999, respectively. Of the $3.4 million, $1.7 million was for a
commercial loan charge off which involved a customer who was indicted by the
United States for his admitted involvement in a Ponzi scheme. The assets
seized by the U.S. Department of Justice included commercial real estate,
vehicles and inventory that were pledged as security for a commercial loan.
The Company and its attorneys are working with the federal prosecutor in
locating, securing and liquidating the assets used to secure the loan. The
projected recovery of any part of the charged off loan is indeterminable at
this time. In addition, the quarterly analysis of the allowance for loan and
lease loss reserves indicated that additional reserves were needed. The
review process applies different risk ratings to the concentrations of
credit within the total loan portfolio. In addition, the process takes into
consideration the effect that changing economic conditions has had on
individual credits in the past, present and future. The increase in the
provision for loan losses was the result of identifying a need to add to the
reserves. Net charge offs to average loans was 1.40% and 0.65% for the
periods ending December 31, 2000 and 1999, respectively. Provisions for loan
losses to total loans was 1.98% and 0.39% for the periods ending December
31, 2000 and 1999, respectively.
42
NON-INTEREST INCOME. Non-interest income decreased by $323,000, or
14.1% from $2.3 million for the year ended December 31, 1999 to $2.0 million
for the year ended December 31, 2000. The decrease is primarily due to an
increase in the net loss realized on the sale of securities and
mortgage-backed securities of $301,000, or 1584.2% from a loss of $19,000
for the year ended December 31, 1999 to a loss of $320,000 for the year
ended December 31, 2000.
NON-INTEREST EXPENSE. Non-interest expense increased by $530,000,
or 5.7% from $9.3 million for the year ended December 31, 1999 to $9.9
million for the year ended December 31, 2000. The increase was due primarily
to professional fees increasing $559,000, or 168.4% from $332,000 for the
year ended December 31, 1999 to $891,000 for the year ended December 31,
2000. The change in professional fees consisted of legal fees increasing
$275,000, or 277.8% from $99,000 for the year ended December 31, 1999 to
$374,000 for the year ended December 31, 2000 due to additional costs
involved in a proxy contest and the negotiations to sell one or more of the
Company's affiliates. Accounting and auditing costs increased $129,000, or
97.7% from $132,000 for the year ended December 31, 1999 to $261,000 for the
year ended December 31, 2000 due to the additional accounting requirements
requested by potential acquirers. Other professional fees increased
$155,000, or 153.5% from $101,000 for the year ended December 31, 1999 to
$256,000 for the year ended December 31, 2000 as a result of increased
charges due to the proxy contest and additional costs involved in the
potential sale of one or more of the Company's affiliates.
INCOME TAX EXPENSE. The Company's income tax expense (benefit) was
($529,000) and $523,000 for the years ended December 31, 2000 and 1999,
respectively, which resulted in an effective income tax rate of 26.38% and
31.64%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and proceeds
from maturing mortgage-backed and related securities, principal and interest
payments on loans, and mortgage-backed and related securities. While
maturities and scheduled amortization of mortgage-backed and related
securities and loans are a predictable source of funds, deposit flows and
mortgage payments are greatly influenced by general interest rates, economic
conditions, competition and other factors.
The primary investing activity of the Company is the purchase of
investment securities. Other investing activities include origination of
loans and purchases of mortgage-backed and related securities. The primary
financing activity of the Company is accepting savings deposits and
obtaining short-term borrowings through FHLB advances.
The Company has other sources of liquidity if there is a need for
funds. The Company has a portfolio of unpledged investment securities and
mortgage-backed and related securities with an aggregate market value of
$5.4 million at September 30, 2001 classified as available for sale. Another
source of liquidity is the ability of CB&T to obtain advances from the
Federal Home Loan Bank of Chicago. In addition, the Company maintains a
significant portion of its investments in interest-bearing deposits at other
financial institutions that would be available if needed.
The Company anticipates that it will have sufficient funds
available to meet commitments outstanding and to meet loan demand. As of
September 30, 2001, the Company's ratios of Tier I capital to adjusted total
assets was 17.4%, as compared to the required level of 3.0%. The risk-based
capital ratio at that date was 32.1%, as compared to the requirement of 8.0%.
43
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the shares of
Common Stock beneficially owned as of October 26, 2001 by each of the
Company's directors and executive officers, all of the directors and
executive officers as a group and each person known to own five percent or
more of the Common Stock.
SHARES OF COMMON STOCK PERCENT
BENEFICIALLY OWNED (1) OF CLASS (2)
---------------------- ------------
Joseph Stilwell 200,000 (3) 9.3%
26 Broadway, 23rd Floor
New York, New York 10004
First Financial Fund, Inc. 155,500 (4) 7.2
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, New Jersey 07102-7503
Wellington Management Company, LLP 155,500 (5) 7.2
75 State Street
Boston, Massachusetts 02109
Loeb Partners Corporation
Loeb Arbitrage Fund 117,700 (6) 5.5
61 Broadway
New York, New York 10006
Community Financial Corp. Employee
Stock Ownership Plan ("ESOP") 99,022 (7) 4.6
240 E. Chestnut Street
Olney, Illinois 62450-2295
Michael F. Bauman 19,925 (8) *
Wayne H. Benson 76,640 (9) 3.5
Roger A. Charleston 36,284(10) 1.7
James W. Foley 100 *
Roger L. Haberer 8,606(11) *
Brad A. Jones 23,785 1.1
Michael B. Nadler 9,100 *
Barrett R. Rochman 90,890(12) 4.2
Douglas W. Tompson 53,191(13) 2.4
All directors and executive officers as a group (9 persons) 318,485 14.2%
<FN>
- --------------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock if he has voting or investment power with
respect to such Common Stock or has a right to acquire beneficial
ownership of such Common Stock at any time within sixty days of October
26, 2001. As used herein, "voting power" is the power to vote or direct
the voting of shares, and "investment power" is the power to dispose or
direct the disposition of shares. Except as otherwise noted, ownership
is direct, and the named individuals and group exercise sole voting and
investment power over the shares of the Common Stock. Amounts shown
include 9,919, 38,617, 9,919, 5,290, 9,919, 26,450 and 100,114 shares
which may be acquired by Mr. Bauman, Mr. Benson, Mr. Charleston, Mr.
Haberer, Mr. Jones, Mr. Tompson and by all directors and executive
officers of the Company as a group, respectively, upon the exercise of
options exercisable within sixty days of October 26, 2001.
(2) The percentage calculations are based upon 2,147,470 shares of Common
Stock issued and outstanding on October 26, 2001.
44
(3) The information provided herein is based upon an Amendment No. 3 to
Schedule 13D, dated April 16, 2001, filed jointly by Joseph Stilwell,
Stilwell Value Partners III, L.P., Stilwell Associates, L.P. and
Stilwell Value LLC (collectively, the "Group"). The Schedule 13D
reported that each member of the Group shared voting and investment
power with respect to all 200,000 shares reported as beneficially
owned.
(4) The information provided herein is based upon an Amendment No. 10 to
Schedule 13G, dated February 12, 2001. The Schedule 13G/A reported sole
voting power and shared dispositive power with respect to all 155,500
shares reported as beneficially owned.
(5) The information provided herein is based upon an amendment to Schedule
13G, dated February 13, 2001. The Schedule 13G/A reported shared
dispositive power with respect to all 155,500 shares reported as
beneficially owned.
(6) The information provided herein is based upon a Schedule 13D, dated
August 29, 2001, filed jointly by Loeb Partners Corporation and Loeb
Arbitrage Fund. In the Schedule 13D, Loeb Partners Corporation reported
sole voting and investment power with respect to 6,748 shares and
shared voting and investment power with respect to 5,860 shares. Loeb
Arbitrage Fund reported sole voting and investment power with respect
to 105,092 shares.
(7) All allocated shares in the ESOP are voted in accordance with the
instructions of the participating employees. Allocated shares for which
no instructions have been received are voted by the trustee in the
manner directed by the Company's Board of Directors, and in the absence
of such direction from the Company's Board of Directors, the ESOP
trustee would have sole discretion as to the voting of such shares. As
of October 26, 2001, there were 99,022 allocated shares and no
unallocated shares held by the ESOP.
(8) Includes 290 shares owned by Mr. Bauman's spouse.
(9) Includes 3,350 shares owned by Mr. Benson's spouse, 10,574 shares
allocated to Mr. Benson's account under the ESOP and 2,222 shares held
in the Company's 401(k) Thrift Plan.
(10) Includes 3,492 shares owned by Mr. Charleston's spouse.
(11) Includes 500 shares owned by Mr. Haberer's spouse.
(12) Includes 6,340 shares owned by Mr. Rochman's spouse, 4,350 shares owned
by The Boo Rochman Charitable Corp and 1,500 shares owned by the
Rochman Family Investment.
(13) Includes 11,073 shares allocated to Mr. Tompson's account under the
ESOP and 978 shares held in the Company's 401(k) Thrift Plan.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, the Company plans to hold its
2002 Annual Meeting of Shareholders on May 2, 2002. If the Merger is not
consummated before such date, any shareholder who wishes to present a
proposal for inclusion in the proxy materials for the Company's 2002 Annual
Meeting of Shareholders must have submitted such proposal to the Company at
240 E. Chestnut Street, Olney, Illinois 62450-2295 by not later than January
1, 2002. Any such proposals are subject to the requirements of the proxy
rules adopted under the Securities Exchange Act of 1934, as amended.
Under the Company's Articles of Incorporation, a shareholder
proposal which does not appear in the proxy materials may be considered at a
meeting of shareholders only if notice of the proposal is submitted in
writing to the Secretary of the Company at the address stated in the above
paragraph no less than 30 days nor more than 60 days prior to the date of
such meeting; provided, however, that if less than forty days' notice of the
meeting is given to shareholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Company not later than the
close of business on the tenth day following the day on which notice of the
45
meeting was mailed to shareholders. If the Merger is not consummated, in
order to be considered at the Annual Meeting, a shareholder proposal must
have been delivered or mailed to the Company's Secretary no later than April
1, 2002.
46
ANNEX A
-------
AGREEMENT OF AFFILIATION AND MERGER
THIS AGREEMENT OF AFFILIATION AND MERGER ("Agreement") is made and
entered into effective as of the 30th day of March, 2001, by and between
FIRST FINANCIAL CORPORATION ("FIRST FINANCIAL"), FFC MERGER CORP ("MERGER
CORP"), and COMMUNITY FINANCIAL CORP. ("COMMUNITY").
W I T N E S S E T H:
-------------------
WHEREAS, First Financial is an Indiana corporation registered as a
bank holding company under the federal Bank Holding Company Act of 1956, as
amended ("BHC Act"), with its principal office located in Terre Haute, Vigo
County, Indiana; and
WHEREAS, Merger Corp is an Indiana corporation with its principal
office located in Terre Haute, Vigo County, Indiana and is a wholly-owned
subsidiary of First Financial; and
WHEREAS, Community is an Illinois corporation registered as a bank
holding company under the BHC Act, with its principal office located in
Olney, Richland County, Illinois, and is the sole shareholder of Community
Bank and Trust, N.A., a national banking association ("Bank"), and American
Bank of Illinois in Highland, an Illinois state banking institution
organized and existing under the laws of the State of Illinois; and
WHEREAS, it is the desire of First Financial and Community to
affiliate through a corporate reorganization whereby Community will be
merged with and into Merger Corp; and
WHEREAS, a majority of the entire Board of Directors of each of
First Financial, Merger Corp and Community have approved this Agreement,
authorized its execution and designated this Agreement a plan of
reorganization and a plan of merger.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties, covenants and agreements herein contained and
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, First Financial, Merger Corp and Community hereby
make this Agreement and prescribe the terms and conditions of the
affiliation of First Financial and Community and the mode of carrying such
merger into effect as follows:
SECTION 1
THE MERGER
----------
1.01. General Description. Upon the terms and subject to the
-------------------
conditions of this Agreement, at the Effective Time (as defined in Section 10
----------
hereof), Community shall be merged with and into and under the Articles
of Incorporation of Merger Corp ("Merger"). Merger Corp shall survive the
Merger ("Surviving Corporation") and shall continue its corporate existence
under the laws of the State of Indiana pursuant to the provisions of and
with the effect provided in the Indiana Business Corporation Law, as
amended. Upon consummation of the Merger, Bank shall become a wholly-owned
subsidiary of Merger Corp.
1.02. Name, Officers and Management. The name of the Surviving
-----------------------------
Corporation shall be "FFC Merger Corp." Its principal office shall be
located at One First Financial Plaza, Terre Haute, Indiana 47807. The
officers of Merger Corp serving at the Effective Time shall continue to
serve as the officers of the Surviving Corporation, until such time as their
successors shall have been duly elected and have been qualified. The
A-1
directors of Community shall cease to be directors of Community as of the
Effective Time and shall not become directors of Merger Corp or First
Financial after the Effective Time. The directors of Merger Corp as of the
Effective Time shall remain the directors of the Surviving Corporation,
until such time as their successors have been duly elected and have been
qualified.
1.03. Capital Structure. The capital of the Surviving Corporation
-----------------
shall be not less than the capital of Merger Corp immediately prior to the
Effective Time.
1.04. Articles of Incorporation and By-Laws. The Articles of
-------------------------------------
Incorporation and By-Laws of Merger Corp in existence at the Effective Time
shall remain the Articles of Incorporation and By-Laws of the Surviving
Corporation following the Effective Time, until such Articles of
Incorporation and By-Laws shall be further amended as provided by applicable
law.
1.05. Assets and Liabilities. At the Effective Time, the title to
----------------------
all assets, real estate and other property owned by Community shall vest in
Merger Corp without reversion or impairment. At the Effective Time, all
liabilities of Community shall be assumed by Merger Corp.
1.06. Additional Actions. If at any time after the Effective Time,
------------------
Merger Corp or First Financial shall consider or be advised that any further
deeds, assignments or assurances in law or any other acts are necessary or
desirable (a) to vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title or interest in, to or under any of
the rights, properties or assets of Community or the Bank, or (b) otherwise
carry out the purposes of this Agreement, Community and the Bank and their
respective officers and directors shall be deemed to have granted to the
Surviving Corporation an irrevocable power of attorney to execute and
deliver all such deeds, assignments or assurances in law and to do all acts
necessary or proper to vest, perfect or confirm title to and possession of
such rights, properties or assets in the Surviving Corporation and otherwise
to carry on the purposes of this Agreement, and the officers and directors
of the Surviving Corporation are authorized in the name of Community or the
Bank or otherwise to take any and all such action.
SECTION 2
MERGER CONSIDERATION
--------------------
2.01. Conversion of Shares. Each share of Community's common stock
--------------------
issued and outstanding immediately prior to the Effective Time, other than
shares held by shareholders who have exercised their dissenter's rights as
set forth in Section 3 ("Dissenting Shares"), shall, by virtue of the Merger
---------
and without any action on the part of the holder thereof, be converted into
and represent the right to receive the consideration payable as set forth
below to the holder of record thereof, without any interest thereon, upon
surrender of the certificate representing such common stock.
2.02. Consideration. (a) As consideration for the Merger,
-------------
shareholders of Community, other than those shareholders who have exercised
their dissenter's rights as set forth in Section 3, will be entitled to
---------
receive in cash for each share of Community common stock they own an amount
equal to:
(i) the Aggregate Purchase Price (as defined in
Section 2.02(b), and as may be amended or modified by
---------------
Section 2.02(c)) minus (A) the aggregate amount to be paid to
---------------
the Community ESOP pursuant to Section 2.02(e), and (B) minus
---------------
the aggregate amount to be paid to the holders of record as of
the Effective Time of the outstanding "in the money" options
of Community (as defined in Section 2.02(f)) pursuant to
---------------
Section 2.02(f),
---------------
A-2
(ii) divided by 2,147,470 (which is the number of shares
of Community common stock which will be outstanding as of
the Effective Time).
(b) First Financial shall pay an aggregate purchase price (the
"Aggregate Purchase Price") equal to the sum of the following, less an
amount equal to the fees and expenses incurred by Community pursuant to
Section 6.13(b), which amount shall not exceed $25,000 (if the actual amount
- ---------------
incurred by Community pursuant to Section 6.13(b) exceeds $25,000, the
---------------
amount in excess of $25,000 shall be borne by the Bank), and less any
liabilities of Community (computed on a parent company only basis):
(i) $19,500,000;
(ii) the proceeds realized by Community on an after-tax
basis (in an amount agreed to by First Financial,
Community, and the independent auditors of First
Financial) from the sale of American Bank of Illinois in
Highland, MidAmerica Bank of St. Clair County and The
Egyptian State Bank; (iii) the amount of cash held by
Community on a parent company only basis (other than
amounts included pursuant to some other section of this
Section 2.02(b));
---------------
(iv) the amounts receivable by Community pursuant to
requests for refunds of income taxes paid (in an amount
agreed to by First Financial, Community, and the
independent auditors of First Financial);
(v) an amount equal to the principal balance of the loans
identified on Schedules 2.02(b)(v)(1) and (2) of the
-------------------------------
Disclosure Schedule (as identified in Section 4 hereof)
---------
which has been placed on the parent company only financial
statements of Community and for which the Bank, as of the
Effective Time, will have a $300,000 reserve allocated
within its general loan loss reserve for the credits set
forth on Schedule 2.02(b)(v)(1) of the Disclosure
----------------------
Schedule; and
(vi) an amount equal to the fair market value of
securities held by Community on a parent company only
basis.
(c) If at the Effective Time the Bank has realized on its financial
records a recovery (in an amount agreed to by First Financial, Community,
and the independent auditors of First Financial) on those loans identified
in Schedule 2.02(c) of the Disclosure Schedule, then the amount set forth in
----------------
Section 2.02(b)(i) shall be increased by the amount of the recovery,
- ------------------
determined in accordance with this section of the Agreement; provided,
however, that in no event shall such increase in the amount set forth in
Section 2.02(b)(i) exceed $500,000.
- ------------------
(d) For purposes of Section 2.02(e) and Section 2.02(f), the Per
--------------- ---------------
Share Merger Consideration shall be determined by dividing:
(i) the sum of (A) the Aggregate Purchase Price, (B)
the amount of proceeds which would be realized by
Community if the "in the money" options to
purchase shares of Community common stock" were
exercised, and (C) the amount of the retired ESOP
debt of $662,605.48, by
(ii) 2,365,869.
A-3
The number in Section 2.02(d)(ii) is the sum of 2,147,470 (which is the
-------------------
number of shares of Community common stock outstanding), 154,340 (which is
the number of "in the money" Community options to purchase shares of
Community common stock outstanding) and 64,059 (which is the number of
shares of Community common stock held by Community as treasury stock which
would have been outstanding if the Community ESOP had not been terminated).
(e) Of the total Aggregate Purchase Price to be received by
Community, an amount equal to:
(i) (A) 64,059, multiplied by (B) the Per Share Merger
Consideration less $10.3437, plus
(ii) (A) 64,059, multiplied by (B) the quotient of (1) the
taxes (and any applicable interest or penalties) required
to be paid by Community in accordance with the provisions
of Section 6.12(b), and (2) 2,365,869,
---------------
will be placed in the Employee Stock Ownership Plan of Community.
The amount of $10.3437 which is subtracted from the Per Share Merger
Consideration in Section 2.02(e)(i)(B) for this purpose is the quotient of
---------------------
the amount of the retired ESOP debt divided by the number of shares of
Community common stock held by Community as treasury stock which would have
been outstanding if the Community ESOP had not been terminated, or
$662,605.48 divided by 64,059.
The number in Section 2.02(e)(ii)(B)(2) is the sum of 2,147,470 (which is
-------------------------
the number of shares of Community common stock outstanding), 154,340 (which
is the number of "in the money" Community options to purchase shares of
Community common stock outstanding) and 64,059 (which is the number of
shares of Community common stock held by Community as treasury stock which
would have been outstanding if the Community ESOP had not been terminated).
(f) Each outstanding "in the money option" of Community shall be
canceled and exchanged for an amount of the total Aggregate Purchase Price
to be received by Community equal to the Per Share Merger Consideration less
the exercise price of such option. For purposes of this Agreement, an
outstanding "in the money" option of Community shall be defined as an option
with an exercise price less than the Per Share Merger Consideration. As of
the date of this Agreement there are, and as of the Effective Time there
will be, 154,340 outstanding "in the money" options of Community.
2.03. Distribution of Cash. (a) Promptly following the Effective
--------------------
Time, First Financial shall mail to each Community shareholder a letter of
transmittal providing instructions as to the transmittal to First Financial
of certificates formerly representing shares of Community common stock and
the payment of cash in exchange therefor pursuant to the terms of this
Agreement.
(b) Following the Effective Time, First Financial shall distribute
cash payments, without interest, for shares of Community (other than
Dissenting Shares) to each shareholder of Community at the Effective Time
within twenty (20) business days following receipt by First Financial of the
shareholder's certificate(s) formerly representing such shareholder's shares
of Community common stock together with a properly completed and executed
letter of transmittal, all in form and substance reasonably satisfactory to
the Surviving Corporation and First Financial.
(c) Following the Effective Time, stock certificates formerly
representing Community common stock (other than Dissenting Shares) held by
shareholders of Community shall be deemed to evidence only the right to
receive cash, without interest thereon, pursuant to Section 2.01 and
------------
Section 2.02 hereof.
- ------------
A-4
(d) At or after the Effective Time, there shall be no transfers on
the stock transfer books of Community of any shares of the common stock of
Community. First Financial shall be entitled to rely upon the stock transfer
books of Community to establish the persons entitled to receive any cash
payment pursuant to this Agreement, which books shall be conclusive with
respect to the ownership of shares of Community common stock.
(e) With respect to any certificate for shares of Community common
stock which has been lost, stolen or destroyed, First Financial shall be
authorized to pay cash pursuant to Section 2.01 and Section 2.02 hereof to
------------ ------------
the registered owner of such certificate upon First Financial's (i) receipt
of an agreement to indemnify First Financial against loss from such lost,
stolen or destroyed certificate, an affidavit of lost, stolen or destroyed
stock certificate and a bond, all in form and substance reasonably
satisfactory to First Financial, and upon compliance by the shareholder of
Community with all other reasonable requirements of First Financial in
connection with such lost, stolen or destroyed stock certificates.
SECTION 3
DISSENTING SHARES
-----------------
Shareholders of Community who properly exercise and perfect
statutory dissenters' rights shall have the rights accorded to dissenting
shareholders under Article 11 of the Illinois Business Corporations Act of
1983, as amended.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF COMMUNITY
-------------------------------------------
Community hereby represents and warrants to First Financial and
Merger Corp with respect to itself and Bank, as its wholly-owned subsidiary,
as follows:
4.01. Organization and Authority. Community is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of the State
of Illinois. Bank is a national banking association duly organized, validly
existing and in good standing under the laws of the United States of
America. Community and Bank have full power and authority (corporate and
otherwise) to own and lease their properties as presently owned and leased
and to conduct their respective business in the manner and by the means
utilized as of the date hereof. Except as set forth in the Disclosure
Schedule (for purposes of this Agreement, "Disclosure Schedule" shall mean
the schedules referencing the applicable provisions of this Agreement which
are attached hereto and made a part of this Agreement), Community's only
subsidiaries are the Bank and American Bank of Illinois in Highland (located
in Highland and Pocahontas, Illinois), and it has no other subsidiaries and
owns no voting stock or equity securities of any corporation, partnership,
association or other entity, except for stock held by the Bank in the
Federal Home Loan Bank of Chicago and the Federal Reserve Bank of St. Louis.
Bank has no subsidiaries. Bank is subject to primary regulatory supervision
and examination by the Office of the Comptroller of the Currency. Community
has one class of stock registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended ("1934 Act"), and is subject to the
reporting requirements of the 1934 Act. Community has entered into a binding
agreement to sell the stock which it owns of American Bank of Illinois in
Highland.
4.02. Authorization. (a) Community has the requisite corporate
-------------
power and authority to enter into this Agreement and to perform its
obligations hereunder, subject to the fulfillment of the conditions
precedent set forth in Section 8.02(e) and (f) hereof. This Agreement and
-----------------------
its execution and delivery by Community have been duly authorized and
approved by the Board of Directors of Community and, assuming due execution
and delivery by First Financial, constitutes a valid and binding obligation
of Community, subject to the fulfillment of
A-5
the conditions precedent set forth in Section 8.02 hereof, and is
------------
enforceable in accordance with its terms, except to the extent limited by
general principles of equity and public policy and by bankruptcy,
insolvency, fraudulent transfer, reorganization, liquidation, moratorium,
readjustment of debt or other laws of general application relating to or
affecting the enforcement of creditors' rights.
(b) Neither the execution of this Agreement nor consummation of the
Merger contemplated hereby: (i) conflicts with or violates Community's
Certificate of Incorporation or By-Laws; (ii) conflicts with or violates any
local, state, federal or foreign law, statute, ordinance, rule or regulation
(provided that the approvals of or filings with applicable government
regulatory agencies or authorities required for consummation of the Merger
are obtained) or any court or administrative judgment, order, injunction,
writ or decree; (iii) conflicts with, results in a breach of or constitutes
a default under any note, bond, indenture, mortgage, deed of trust, license,
lease, contract, agreement, arrangement, commitment or other instrument to
which Community or Bank is a party or by which Community or Bank is subject
or bound; (iv) results in the creation of or gives any person, corporation
or entity the right to create any lien, charge, claim, encumbrance or
security interest, or results in the creation of any other rights or claims
of any other party (other than First Financial) or any other adverse
interest, upon any right, property or asset of Community or Bank; or (v)
terminates or gives any person, corporation or entity the right to
terminate, accelerate, amend, modify or refuse to perform under any note,
bond, indenture, mortgage, agreement, contract, lease, license, arrangement,
deed of trust, commitment or other instrument to which Community or Bank is
bound or with respect to which Community or Bank is to perform any duties or
obligations or receive any rights or benefits.
(c) Other than in connection or in compliance with the provisions
of the applicable federal and state banking, securities, and corporation
statutes, all as amended, and the rules and regulations promulgated
thereunder, no notice to, filing with, exemption by or consent,
authorization or approval of any governmental agency or body is necessary
for consummation of the Merger by Community or Bank.
4.03. Capitalization. (a) The authorized capital stock of Community
--------------
as of the date hereof consists, and at the Effective Time will consist, of
1,000,000 shares of preferred stock, $0.01 par value per share, none of
which is issued or outstanding, and 7,000,000 shares of common stock, $0.01
par value per share. As of the date hereof, and at the Effective Time,
2,147,470 shares of the common stock of Community are and will be issued and
outstanding (such issued and outstanding shares are referred to herein as
"Community Common Stock"). Such issued and outstanding shares of Community
Common Stock have been duly and validly authorized by all necessary
corporate action of Community, are validly issued, fully paid and
nonassessable and have not been issued in violation of any pre-emptive
rights of any present or former Community shareholder. Community has no
common stock authorized, issued or outstanding other than as described in
this Section 4.03(a) and has no intention or obligation to authorize or
---------------
issue any other capital stock or any additional shares of Community Common
Stock. On a consolidated basis as of December 31, 2000, Community had total
capital of approximately $34,890,653, which consisted of common stock of
$26,450, capital surplus of $19,378,177 and undivided profits of
$15,486,026, including unrealized gains or losses on available-for-sale
securities. Each share of Community Common Stock is entitled to one vote per
share. A description of the Community Common Stock is contained in the
Certificate of Incorporation of Community, as amended, as set forth in the
Disclosure Schedule pursuant to Section 4.04 hereof.
------------
(b) The authorized capital stock of Bank as of the date hereof
consists, and at the Effective Time will consist, of 1,000,000 shares of
common stock, $4.00 par value per share, all of which shares are issued and
outstanding (such issued and outstanding shares are referred to herein as
"Bank Common Stock"). Such issued and outstanding shares of Bank Common
Stock have been duly and validly authorized by all necessary corporate
action of Bank, are validly issued, fully paid and nonassessable, and have
not been issued in violation of any pre-emptive rights of any present or
former Bank shareholder. All of the issued and outstanding shares of common
stock of Bank are owned by Community free and clear of all liens, pledges,
charges, claims, encumbrances, restrictions, security interests, options and
pre-emptive rights and of all other rights or claims of
A-6
any other person, corporation or entity with respect thereto. Bank has no
capital stock authorized, issued or outstanding other than as described in
this Section 4.03(b) and has no intention or obligation to authorize or
---------------
issue any other capital stock or any additional shares of Bank Common Stock.
On a consolidated basis as of December 31, 2000, Bank had total capital of
approximately $19,454,534, which consisted of common stock of $4,000,000,
capital surplus of $8,691,900 and undivided profits of $6,762,634, including
unrealized gains or losses on available-for-sale securities. Each share of
Bank Common Stock is entitled to one vote per share. A description of the
Bank Common Stock is contained in the Articles of Incorporation of Bank, as
amended, as set forth in the Disclosure Schedule pursuant to Section 4.04
------------
hereof.
(c) Except as set forth in Schedule 4.03(c) of the Disclosure
----------------
Schedule, there are no options, warrants, commitments, calls, puts,
agreements, understandings, arrangements or subscription rights relating to
any shares of Community Common Stock, or any securities convertible into or
representing the right to purchase or otherwise acquire any common stock or
debt securities of Community, by which Community is or may become bound.
Community does not have any outstanding contractual or other obligation to
repurchase, redeem or otherwise acquire any of the issued and outstanding
shares of Community Common Stock.
(d) There are no options, warrants, commitments, calls, puts,
agreements, understandings, arrangements or subscription rights relating to
any shares of Bank Common Stock, or any securities convertible into or
representing the right to purchase or otherwise acquire any common stock or
debt securities of Bank, by which Bank is or may become bound. Bank does not
have any outstanding contractual or other obligation to repurchase, redeem
or otherwise acquire any of the issued and outstanding shares of Bank Common
Stock.
(e) Except as set forth in the Disclosure Schedule, Community has
no knowledge of any person or entity which beneficially owns 5% or more of
its outstanding shares of common stock.
4.04. Organizational Documents. The respective Articles of
------------------------
Incorporation and By-Laws of Community, and the Articles of Association and
By-Laws of Bank, representing true, accurate and complete copies of such
corporate documents in effect as of the date of this Agreement, have been
delivered to First Financial and are included in the Disclosure Schedule.
4.05. Compliance with Law. (a) Except as set forth in Schedule 4.05
------------------- -------------
of the Disclosure Schedule, none of Community, Bank, nor the fiduciaries of
any Community Plans (as defined in Section 4.14(a)), have engaged in any
activity nor taken or omitted to take any action which has resulted or could
result in the violation of any local, state, federal or foreign law,
statute, regulation, rule, ordinance, order, restriction or requirement, nor
are they in violation of any order, injunction, judgment, writ or decree of
any court or government agency or body. Community and Bank possess and hold
all licenses, franchises, permits, certificates and other authorizations
necessary for the continued conduct of their business without interference
or interruption, and such licenses, franchises, permits, certificates and
authorizations are transferable (to the extent required) to First Financial
or Merger Corp at the Effective Time without any restrictions or limitations
thereon or the need to obtain any consents of government agencies or other
third parties other than as set forth in this Agreement. The Bank has
received no inquiries from any regulatory agency or government authority
relating to its compliance with the Bank Secrecy Act, the Truth-in-Lending
Act or the Community Reinvestment Act or any laws with respect to the
protection of the environment or the rules and regulations promulgated
thereunder.
(b) All agreements, understandings and commitments with, and all
orders and directives of, all government regulatory agencies or authorities
with respect to the financial condition, results of operations, business,
assets or capital of Community or Bank which presently are binding upon or
require action by, or at any time during the last five (5) years have been
binding upon or have required action by, Community or Bank are set forth in
the Disclosure Schedule, and all correspondence, communications and
commitments related thereto have been made available to First Financial.
Except as set forth in Schedule 4.05 of the Disclosure Schedule, there are
-------------
no uncured violations, or violations with respect to which refunds or
restitutions may be
A-7
required, cited in any examination report of Community or Bank as a result
of an examination by any regulatory agency or body, or set forth in any
accountant's or auditor's report to Community or Bank.
(c) All of the existing offices and branches of Community and Bank
have been legally authorized and established in accordance with all
applicable federal, state and local laws, statutes, regulations, rules,
ordinances, orders, restrictions and requirements. Bank has no approved but
unopened offices or branches.
4.06. Accuracy of Statements Made and Materials Provided to First
-----------------------------------------------------------
Financial. Except as set forth in Schedule 4.06 of the Disclosure Schedule;
- --------- -------------
(a) No representation, warranty or other statement made, or any
information provided, by or on behalf of Community or Bank in this Agreement
or the Disclosure Schedule (and any update thereto), and no written report,
statement, list, certificate, materials or other information furnished or to
be furnished by or on behalf of Community or Bank to First Financial through
and including the Effective Time in connection with this Agreement, the
Merger contemplated hereby, or First Financial's due diligence investigation
or confidential review of Community and the Bank or otherwise (including,
without limitation, any written information which has been or shall be
supplied by Community or Bank with respect to its financial condition,
results of operations, business, assets, capital or directors and officers
for inclusion in the proxy statement relating to the Merger), contains or
shall contain (in the case of information relating to the proxy statement at
the time it is mailed to Community's shareholders) any untrue statement of
material fact or omits or shall omit to state a material fact necessary to
make the statements contained herein or therein, in light of the
circumstances in which they are made, not false or misleading.
(b) No materials or information provided by or on behalf of
Community or Bank to First Financial for use by First Financial or Merger
Corp in any filing with any state or federal regulatory agency or authority
shall (i) contain any untrue or misleading statement of material fact, or
(ii) omit to state a material fact necessary to make the statements
contained therein, in light of the circumstances in which they are made, not
false or misleading.
4.07. Litigation and Pending Proceedings. (a) Except as set forth
----------------------------------
in the Disclosure Schedule, there are no claims, actions, suits,
proceedings, arbitrations or investigations pending or, to the best
knowledge of Community and Bank after due inquiry, threatened in any court
or before any government agency or authority, arbitration panel or otherwise
(nor does Community or Bank have any knowledge of a basis for any claim,
action, suit, proceeding, litigation, arbitration or investigation) against,
by or affecting Community or Bank.
(b) Except as set forth in the Disclosure Schedule, neither
Community nor Bank is: (i) subject to any outstanding judgment, order, writ,
injunction or decree of any court, arbitration panel or governmental agency
or authority; (ii) presently charged with or, to the best knowledge of
Community or Bank after due inquiry, under governmental investigation with
respect to any actual or alleged violations of any law, statute, rule,
regulation or ordinance; or (iii) the subject of any pending or, to the best
knowledge of Community and Bank after due inquiry, threatened proceeding by
any government regulatory agency or authority having jurisdiction over its
respective business, assets, capital, properties or operations.
4.08. Financial Statements and Reports. Community has delivered to
--------------------------------
First Financial copies of the following financial statements and reports of
Community and Bank, including the notes thereto (collectively, the
"Community Financial Statements"):
(a) Consolidated Balance Sheets and the related Consolidated
Statements of Income and Consolidated Statements of Changes in Shareholders'
Equity of Community as of and for the years ended December 31, 2000, 1999
and 1998;
A-8
(b) Consolidated Statements of Cash Flows of Community for the
years ended December 31, 2000, 1999, and 1998;
(c) Consolidated Statements of Changes in Financial Position of
Community for the years ended December 31, 2000 and 1999;
(d) Reports of Condition and Income ("Call Reports") for Bank as
of the close of business on December 31, 2000, 1999, 1998; and
(e) Financial Statements of Community on Form FRY-9LP and Form
FRY-9C filed with the Board of Governors of the Federal Reserve System at
the close of business on December 31, 2000 and 1999.
Except as set forth in Schedule 4.08 of the Disclosure Schedule,
-------------
the Community Financial Statements are true, accurate and complete in all
material respects and present fairly the consolidated financial position of
Community and Bank as of and at the dates shown and the consolidated results
of operations for the periods covered thereby. The Community Financial
Statements described in clauses (a), (b) and (c) above for completed fiscal
years are audited financial statements and have been prepared in conformance
with generally accepted accounting principles applied on a consistent basis,
except as may otherwise be indicated in any accountants' notes or reports
with respect to such financial statements. The Community Financial
Statements do not include any assets, liabilities or obligations or omit to
state any assets, liabilities or obligations, (whether absolute, accrued,
contingent or otherwise), or any other facts which inclusion or omission
would render any of the Community Financial Statements false, misleading or
inaccurate in any material respect.
4.09. Properties, Contracts, Employees and Other Agreements.
-----------------------------------------------------
(a) Set forth in the Disclosure Schedule is a true, accurate and complete
copy of the following:
(i) A brief description and the location of all real property
owned by Community or Bank and the principal buildings and
structures located thereon, together with a legal
description of such real property and a title insurance
policy or abstract opinion insuring the same, and each
lease of real property to which Community or Bank is a
party, identifying the parties thereto, the annual rental
payable, the expiration date of the lease and a brief
description of the property covered;
(ii) All conditional sales contracts or other title retention
agreements relating to Community or Bank and agreements for
the purchase of federal funds;
(iii) All agreements, contracts, leases, licenses, lines of
credit, understandings, commitments or obligations of
Community or Bank which individually or in the aggregate:
(A) involve payment or receipt by Community or Bank
(other than as disbursements of loan proceeds to
customers, loan payments by customers or customer
deposits) of more than $10,000;
(B) involve payments based on profits of Community or Bank;
(C) relate to the purchase of goods, products, supplies
or services in excess of $10,000;
(D) were not made in the ordinary course of business; or
(E) may not be terminated without penalty within one
(1) year from the date of this Agreement;
A-9
(iv) The name and current annual salary of each director,
officer and employee of Community or Bank whose current
annual salary is in excess of $50,000, and the profit
sharing, bonus or other form of compensation (other than
basic salary) paid or payable by Community or Bank to or
for the benefit of each such person for the year ended
December 31, 2000 and 1999, and any employment, severance
or deferred compensation agreement or arrangement with
respect to each such person; and
(v) A brief description (with reference to any applicable
contractual provisions) of any obligations or liabilities
(whether absolute, accrued, contingent or otherwise) of
Community or Bank related to American Bank of Illinois in
Highland, MidAmerica Bank of St. Clair County, or The
Egyptian State Bank which will continue or arise at or
exist subsequent to consummation of the sale by Community
of the stock which it now owns or owned in the past of
American Bank of Illinois in Highland, MidAmerica Bank of
St. Clair County, or The Egyptian State Bank
(b) Community and Bank have, prior to the date of this Agreement,
provided or given access to First Financial to the files and documentation
of all borrowers of Bank, or persons or entities that are or may become
obligated to Bank under an existing letter of credit, line of credit, loan
transaction, loan agreement, promissory note or other commitment of Bank, in
excess of $10,000 individually or in the aggregate, whether in principal,
interest or otherwise, and including all guarantors of such indebtedness.
(c) Each of the agreements, contracts, commitments, leases,
instruments and documents set forth in the Disclosure Schedule relating to
this Section 4.09 is valid and enforceable in accordance with its terms,
------------
except to the extent limited by general principles of equity and public
policy or by bankruptcy, insolvency, fraudulent transfer, readjustment of
debt or other laws of general application relative to or affecting the
enforcement of creditor's rights. Community and Bank are, and to their
respective best knowledge after due inquiry, all other parties thereto are,
in material compliance with the provisions thereof, and Community and Bank
are not, and to their respective best knowledge after due inquiry, no other
party thereto is, in default in the performance, observance or fulfillment
of any material obligation, covenant or provision contained therein. None of
the foregoing requires the consent of any party to its assignment in
connection with the Merger contemplated by this Agreement. Other than as
disclosed pursuant to this Section 4.09, to the best knowledge of Community
------------
and Bank after due inquiry, no circumstances exist resulting from
transactions effected or to be effected, from events which have occurred or
may occur or from any action taken or omitted to be taken which could
reasonably be expected to result in the creation of any agreement, contract,
obligation, commitment, arrangement, lease or document described in or
contemplated by this Section 4.09.
------------
(d) Neither Community nor Bank is, to the best knowledge of
Community and Bank after due inquiry, in default under or in breach of, or
alleged to be in default under or in breach of, any loan or credit
agreement, conditional sales contract or other title retention agreement,
security agreement, bond, indenture, mortgage, license, contract, lease,
commitment or any other instrument, agreement or obligation.
4.10. Absence of Undisclosed Liabilities. Except as provided in the
----------------------------------
Community Financial Statements and in the Disclosure Schedule, except for
unfunded loan commitments and obligations on letters of credit to customers
of Bank, except for trade payables incurred in the ordinary course of
Community's and Bank's business (for purposes of this Section 4, all
---------
references to ordinary course of business shall be deemed to be Community's
and Bank's ordinary course of business), and except for the Merger
contemplated by this Agreement, neither Community nor Bank has, nor will
have at the Effective Time, any obligation, agreement, contract, commitment,
liability, lease or license which exceeds $10,000 individually, or any
obligation, agreement, contract, commitment, liability, lease or license
made outside of the ordinary course of business, nor does there exist any
circumstances resulting from transactions effected or events occurring on or
prior to the date of this Agreement or from any action omitted to be taken
during such period which could reasonably be expected to result in any such
obligation, agreement, contract, commitment, liability, lease or license.
A-10
4.11. Title to Assets. Except as described in this Section 4.11:
--------------- ------------
(a) Community and Bank have good and marketable title in fee simple absolute
to all real property (including, without limitation, all real property used
as bank premises and all other real estate owned) which is reflected in the
Community Financial Statements as of December 31, 2000; good and marketable
title to all personal property reflected in the Community Financial
Statements as of December 31, 2000, other than personal property disposed of
in the ordinary course of business since December 31, 2000; good and
marketable title to or right to use by valid and enforceable lease or
contract all other properties and assets (whether real or personal, tangible
or intangible) which Community and Bank purport to own or which Community or
Bank uses in its business; good and marketable title to, or right to use by
terms of a valid and enforceable lease or contract, all other property used
in their respective businesses; and good and marketable title to all
property and assets acquired and not disposed of or leased since December
31, 2000. All of such properties and assets are owned by Community or Bank
free and clear of all land or conditional sales contracts, mortgages, liens,
pledges, restrictions, security interests, charges, claims, rights of third
parties or encumbrances of any nature except: (i) as set forth in the
Disclosure Schedule; (ii) as specifically noted in reasonable detail in the
Community Financial Statements; (iii) statutory liens for taxes not yet
delinquent or being contested in good faith by appropriate proceedings; (iv)
pledges or liens required to be granted in connection with the acceptance of
government deposits or granted in connection with repurchase or reverse
repurchase agreements; and (v) easements, encumbrances and liens of record,
imperfections of title and other limitations which are not material in
amounts to Community on a consolidated basis and which do not materially
detract from the value or materially interfere with the present or
contemplated use of any of the properties subject thereto or otherwise
materially impair the use thereof for the purposes for which they are held
or used. All real property owned or leased by Community or Bank is in
compliance with all applicable zoning and land use laws.
(b) Community, Bank, and all current or former direct or indirect
subsidiaries of Community or Bank have conducted their respective business
in compliance with all federal, state, county and municipal laws, statutes,
regulations, rules, ordinances, orders, directives, restrictions and
requirements relating to, without limitation, responsible property transfer,
underground storage tanks, petroleum products, air pollutants, water
pollutants or storm water or process waste water or otherwise relating to
the environment or toxic or hazardous substances or to the manufacturing,
recycling, handling, processing, distribution, use, generation, treatment,
storage, disposal or transport of any hazardous or toxic substances or
petroleum products (including polychlorinated biphenyls, whether contained
or uncontained, and asbestos-containing materials, whether friable or not),
including, without limitation, the Federal Solid Waste Disposal Act, the
Hazardous and Solid Waste Amendments, the Federal Clean Air Act, the Federal
Clean Water Act, the Occupational Health and Safety Act, the Federal
Resource Conservation and Recovery Act, the Toxic Substances Control Act,
the Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 and the Superfund Amendments and Reauthorization Act of 1986,
all as amended, and regulations of the Environmental Protection Agency, the
Nuclear Regulatory Agency, the Army Corp of Engineers, the Department of
Interior, the United States Fish and Wildlife Service and any state
department of natural resources or state environmental protection agency now
or at any time thereafter in effect (collectively, "Environmental Laws").
There are no pending or, to the best knowledge of Community and Bank after
due inquiry, threatened claims, actions or proceedings by any local
municipality, sewage district or other governmental entity against
Community, Bank, or any current or former direct or indirect subsidiaries of
Community or Bank with respect to the Environmental Laws, and there is no
reasonable basis or grounds for any such claim, action or proceeding. No
environmental clearances or other governmental approvals relating to
environmental matters are required for the conduct of the business of
Community or Bank or the consummation of the Merger contemplated hereby.
Neither Community, Bank, nor any current or former direct or indirect
subsidiaries of Community or Bank is the owner, and has not been in the
chain of title or the operator or lessee, of any property on which any
substances have been used, stored, deposited, treated, recycled or disposed
of, which substances if known to be present on, at or under such property
would require clean-up, removal or any other remedial action under any
Environmental Law. Community and Bank owns, operates, leases and controls,
and has owned, operated, leased and controlled, all
A-11
real property in compliance with the Environmental Laws. Neither Community,
Bank, nor any current or former direct or indirect subsidiaries of Community
or Bank has any liability for any clean-up or remediation under any of the
Environmental Laws with respect to any real property.
4.12. Loans and Investments. Except as set forth in Schedule 4.12
--------------------- -------------
of the Disclosure Schedule:
(a) There is no loan by Community or Bank in excess of $10,000 that
has been classified by bank regulatory examiners or management as "Other
Loans Specially Mentioned," "Substandard," "Doubtful" or "Loss" or in excess
of $10,000 that has been identified by accountants or auditors (internal or
external) as having a significant risk of uncollectability. The most recent
loan watch list of Bank and a list of all loans in excess of $10,000 which
Bank has determined to be thirty (30) days or more past due with respect to
principal or interest payments or has placed on nonaccrual status are set
forth in the Disclosure Schedule.
(b) All loans reflected in the Community Financial Statements as of
December 31, 2000 and which have been made, extended, renewed, restructured,
approved, amended or acquired since December 31, 2000: (i) have been made
for good, valuable and adequate consideration in the ordinary course of
business; (ii) constitute the legal, valid and binding obligation of the
obligor and any guarantor named therein, except to the extent limited by
general principles of equity and public policy or by bankruptcy, insolvency,
fraudulent transfer, reorganization, liquidation, moratorium, readjustment
of debt or other laws of general application relative to or affecting the
enforcement of creditors' rights; (iii) are evidenced by notes, instruments
or other evidences of indebtedness which are true, genuine and what they
purport to be; and (iv) are secured, to the extent that Community or Bank
has a security interest in collateral or a mortgage securing such loans, by
perfected security interests or recorded mortgages naming Bank as the
secured party or mortgagee (unless by written agreement to the contrary).
(c) The reserves, the allowance for possible loan and lease losses
and the carrying value for real estate owned which are shown on the
Community Financial Statements are adequate in all material respects under
the requirements of generally accepted accounting principles applied on a
consistent basis to provide for possible losses on items for which reserves
were made, on loans and leases outstanding and real estate owned as of the
respective dates.
(d) None of the investments reflected in the Community Financial
Statements as of and for the period ended December 31, 2000 and none of the
investments made by Community or Bank since December 31, 2000 are subject to
any restriction, whether contractual or statutory, which materially impairs
the ability of Community or Bank to dispose freely of such investment at any
time. Neither Community nor Bank is a party to any repurchase agreements
with respect to securities.
(e) Set forth in the Disclosure Schedule is a true, accurate and
complete list of all loans in which Bank has any participation interest or
which have been made with or through another financial institution on a
recourse basis against Bank.
(f) Except as set forth in the Disclosure Schedule, and except for
customer deposits and ordinary trade payables, neither Community nor Bank
has, nor will they have at the Effective Time, any indebtedness for borrowed
money.
4.13. Shareholder Rights Plan and Anti-takeover Mechanisms. Except
----------------------------------------------------
as otherwise provided in the Disclosure Schedule, Community has no
shareholder rights plan or any other plan, program or agreement involving,
restricting, prohibiting or discouraging a change in control or merger of
Community or which may be considered an anti-takeover mechanism.
A-12
4.14. Employee Benefit Plans. Except as set forth in Schedule
----------------------
4.14(a) - (g) of the Disclosure Schedule:
(a) With respect to the employee benefit plans, as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), sponsored or otherwise maintained by Community or Bank,
whether written or oral; in which Community or Bank participates as a
participating employer; to which Community or Bank contributes; with respect
to which Community or Bank acts as administrator, custodian, trustee or
fiduciary; and including any such plans which have been terminated, merged
into another plan, frozen or discontinued; with respect to which Community
or Bank may have any liability (whether absolute, accrued, contingent or
otherwise), (collectively, "Community Plans"): (i) all such Community Plans
have, on a continuous basis since their adoption, been, in all material
respects, maintained in compliance with the requirements prescribed by all
applicable statutes, orders and governmental rules or regulations,
including, without limitation, ERISA, the Internal Revenue Code (the
"Code"), and the Department of Labor ("Department") and Treasury Regulations
promulgated thereunder; (ii) all Community Plans intended to constitute
tax-qualified plans under Section 401(a) of the Code have complied since
their adoption or have been timely amended to comply in all material
respects with all applicable requirements of the Code and the Treasury
Regulations promulgated thereunder, and favorable determination letters have
been timely received from the Internal Revenue Service ("Service") (or the
remedial amendment period has not expired) with respect to each such
Community Plan stating that each, in its current form (or at the time of its
disposition if it has been terminated, merged, frozen or discontinued), is
qualified under and satisfies all applicable provisions of the Code and
Treasury Regulations; (iii) no Community Plan (or its related trust) holds
any stock or other securities of Community or any related or affiliated
person or entity; (iv) neither Community nor Bank has any liability to the
Department or the Service with respect to any Community Plan; (v) Community
has not engaged in any transaction that may subject Community or the Bank,
or any Community Plan, to a civil penalty imposed by Section 502 of ERISA;
(vi) no non-exempt prohibited transaction (as defined in Section 406 of
ERISA or as defined in Section 4975(c) of the Code) has occurred with
respect to any Community Plan; (vii) each Community Plan subject to ERISA or
intended to be qualified under Section 401(a) of the Code has been and, if
applicable, is being operated in all material respects in accordance with
the applicable provisions of ERISA and the Code and the Department and
Treasury Regulations promulgated thereunder; (viii) no participant or
beneficiary or non-participating employee has been denied any benefit due or
to become due under any Community Plan or has been misled as to his or her
rights under any Community Plan; (ix) all obligations required to be
performed by Community or Bank under any provision of any Community Plan
have been performed by them in all material respects and they are not in
default under or in violation of, in any material respect, any provision of
any Community Plan; (x) no event has occurred which would constitute grounds
for an enforcement action by any party under Part 5 of Title I of ERISA
under any Community Plan; (xi) there are no actions, suits, proceedings or
claims pending (other than routine claims for benefits) or, to the best
knowledge of Community and Bank after due inquiry, threatened, against
Community, Bank, any Community Plan or the assets of any Community Plan; and
(xii) with respect to any Community Plan sponsored, participated in or
contributed to by Community or Bank, or with respect to which Community or
Bank is responsible for complying with the reporting and disclosure
requirements of ERISA or the Code, there has been no violation of the
reporting and disclosure requirements imposed either under ERISA or the Code
for which a penalty has been or may be imposed.
(b) With regard to any Community Plan intended to be qualified
under Section 401(a) of the Code, no director, officer, employee or agent of
Community or Bank has engaged in any action or failed to act in such a
manner that, as a result of such action or failure to act, the Service could
revoke or deny that plan's qualification under Section 401(a) of the Code,
the exemption under Section 501(a) of the Code for any trust related to such
plan, or the status of such plan as an "employee stock ownership plan"
described in Section 4975(e)(7) of the Code.
A-13
(c) Community has provided to First Financial true, accurate and
complete copies and, in the case of any plan or program which has not been
reduced to writing, a summary of all of the following (including all plans
and programs which have been terminated): (i) pension, retirement,
profit-sharing, savings, stock purchase, stock bonus, stock ownership, stock
option and stock appreciation right plans and all amendments thereto and all
summary plan descriptions thereof (including any modifications thereto);
(ii) all employment, deferred compensation (whether funded or unfunded),
salary continuation, consulting, bonus, severance and collective bargaining
agreements, arrangements or understandings; (iii) all executive and other
incentive compensation plans, programs and agreements; (iv) all group
insurance and health insurance contracts, policies or plans; (v) all other
incentive, welfare or employee benefit plans, understandings, arrangements
or agreements, maintained or sponsored, participated in, or contributed to
by Community or Bank for its current or former directors, officers or
employees; and (vi) all reports to any government department or agency filed
within the preceding three years by Community or Bank with respect to any
Community Plan.
(d) No current or former director, officer or employee of Community
or Bank is entitled to or may become entitled to any benefit under any
welfare benefit plans (as defined in Section 3(1) of ERISA) after
termination of employment with Community or Bank, except that such
individuals may be entitled to continue their group health care coverage
pursuant to Section 4980B of the Code if they pay the cost of such coverage
pursuant to the applicable requirements of the Code with respect thereto.
(e) No Community Plan is, and neither Community nor the Bank has
any liability with respect to any plan that is (i) a defined benefit pension
plan subject to Title IV of ERISA, (ii) a pension plan subject to Section
302 of ERISA or Section 412 of the Code, or (iii) a multi-employer pension
plan (as that term is defined in Sections 4001(a)(3) and 3(37) of ERISA).
(f) With respect to any group health plan (as defined in Section
607(1) of ERISA) sponsored or maintained by Community or Bank, in which
Community or Bank participates as a participating employer or to which
Community or Bank contributes, no director, officer, employee or agent of
Community or Bank has engaged in any action or failed to act in such a
manner that, as a result of such action or failure to act, would cause a tax
to be imposed on Community or Bank under Code Section 4980B(a). With respect
to all such plans, all applicable provisions of Section 4980B of the Code
and Section 601 of ERISA have been complied with in all material respects by
Community and Bank.
(g) There are no collective bargaining, employment, management,
consulting, deferred compensation, reimbursement, indemnity, retirement,
early retirement, severance or similar plans or agreements, commitments or
understandings, or any employee benefit or retirement plan or agreement,
binding upon Community or Bank and no such agreement, commitment,
understanding or plan is under discussion or negotiation by management with
any employee or group of employees, any member of management or any other
person.
4.15. Obligations to Employees. All obligations and liabilities of
------------------------
and all payments by Community and Bank, and all Community Plans, whether
arising by operation of law, by contract or by past custom, for payments to
trusts or other funds, to any government agency or authority or to any
present or former director, officer, employee or agent (or his or her heirs,
legatees or legal representatives) have been and are being paid to the
extent required by applicable law or by the plan, trust, contract or past
custom or practice, and adequate actuarial accruals and reserves for such
payments have been and are being made by Community and Bank in accordance
with generally accepted accounting principles and applicable law applied on
a consistent basis and actuarial methods with respect to the following: (a)
withholding taxes, unemployment compensation or social security benefits;
(b) all pension, profit-sharing, savings, stock purchase, stock bonus, stock
ownership, stock option and stock appreciation rights plans and agreements;
(c) all employment, deferred compensation (whether funded or unfunded),
salary continuation, consulting, retirement, early retirement, severance,
reimbursement, bonus or collective bargaining plans and agreements; (d) all
executive and other incentive compensation plans,
A-14
programs, or agreements; (e) all group insurance and health contracts,
policies and plans; and (f) all other incentive, welfare, retirement or
employee benefit plans or agreements maintained or sponsored, participated
in, or contributed to by Community or Bank for its current or former
directors, officers, employees and agents, including, without limitation,
all liabilities and obligations to the Community Plans (as defined in
Section 4.14(a) hereof). All obligations and liabilities of Community and
Bank, whether arising by operation of law, by contract or by past custom or
practice, for all other forms of compensation which are or may be payable to
their current or former directors, officers, employees or agents or to any
Community Plan have been and are being paid to the extent required by
applicable law or by the plan or contract, and adequate actuarial accruals
and reserves for payment therefor have been and are being made by Community
and Bank in accordance with generally accepted accounting and actuarial
principles applied on a consistent basis. All accruals and reserves referred
to in this Section 4.15 are correctly and accurately reflected and accounted
------------
for in all material respects in the Community Financial Statements and the
books, statements and records of Community and Bank.
4.16. Taxes, Returns and Reports. Except as set forth in the
--------------------------
Disclosure Schedule, Community has since January 1, 1995 (a) duly and timely
filed all federal, state, local and foreign tax returns of every type and
kind required to be filed, and each such return is true, accurate and
complete in all material respects; (b) paid or otherwise adequately reserved
in accordance with generally accepted accounting principles for all taxes,
assessments and other governmental charges due or claimed to be due upon it
and Bank or any of their income, properties or assets; and (c) not requested
an extension of time for any such payments (which extension is still in
force). Community has established, and shall establish in the Subsequent
Community Financial Statements, in accordance with generally accepted
accounting principles, a reserve for taxes in the Community Financial
Statements adequate to cover all of Community's and Bank's tax liabilities
(including, without limitation, income taxes, payroll taxes and withholding,
and franchise fees) for the periods then ending. Neither Community nor Bank
has, nor will either of them have, any liability for taxes of any nature for
or with respect to the operation of their respective businesses, including
the business of any subsidiary, or ownership of their assets, including the
assets of any subsidiary, from the date hereof up to and including the
Effective Time, except to the extent set forth in the Subsequent Community
Financial Statements (as hereinafter defined) or as accrued or reserved for
on the books and records of Community. Neither Community nor Bank is
currently under audit by any state or federal taxing authority. No federal,
state or local tax returns of Community have been audited by any taxing
authority during the past five (5) years.
4.17. Deposit Insurance. The deposits of Bank are insured by the
-----------------
FDIC in accordance with the Federal Deposit Insurance Act, as amended, to
the fullest extent provided by applicable law and Community and Bank have
paid or properly reserved or accrued for all current premiums and
assessments with respect to such deposit insurance.
4.18. Insurance. Set forth in the Disclosure Schedule is a list and
---------
brief description of all policies of insurance (including, without
limitation, bankers' blanket bond, directors' and officers' liability
insurance, property and casualty insurance, group health or hospitalization
insurance and insurance providing benefits for employees) owned or held by
Community or Bank on the date hereof or with respect to which Community or
Bank pays any premiums. Each such policy is in full force and effect and all
premiums due thereon have been paid when due, and a true, accurate and
complete copy thereof has been made available to First Financial prior to
the date hereof.
4.19. Books and Records. The books and records of Community and
-----------------
Bank are complete and correct and accurately reflect the basis for the
financial condition, results of operations, business, assets and capital of
Community and Bank set forth in the Community Financial Statements.
4.20. Broker's, Finder's or Other Fees. Except as set forth in the
--------------------------------
Disclosure Schedule and except for reasonable fees of Community's attorneys
and accountants, all of which shall be paid by Community prior to the
Effective Time, no agent, broker or other person acting on behalf of
Community or Bank or under any authority
A-15
of Community or Bank is or shall be entitled to any commission, broker's or
finder's fee or any other form of compensation or payment from any of the
parties hereto relating to this Agreement and the Merger contemplated
hereby.
4.21. Disclosure Schedule and Documents. All written data,
---------------------------------
documents, materials and information referred to in this Agreement and
delivered by Community or Bank pursuant to or in connection with the
Disclosure Schedule are true, accurate and complete in all material respects
as of the date hereof and with respect to such items delivered subsequent to
the date hereof or with any update to the Disclosure Schedule, will be true,
accurate and complete in all material respects on the date of delivery
thereof.
4.22. Interim Events. Except as set forth in Schedule 4.22 of the
-------------- -------------
Disclosure Schedule and except as otherwise required or permitted hereunder,
since December 31, 2000, neither Community nor Bank has, other than in the
ordinary course of business:
(a) Suffered any changes having an adverse impact on the financial
condition, results of operations, business, assets or capital of Community
or Bank in excess of $10,000 individually or in the aggregate;
(b) Suffered any damage, destruction or loss to any of its
properties, not fully paid by insurance proceeds, in excess of $5,000
individually or in the aggregate;
(c) Declared, distributed or paid any dividend or other
distribution to its shareholders;
(d) Repurchased, redeemed or otherwise acquired shares of its
common stock, issued any shares of its common stock or stock appreciation
rights or sold or agreed to issue or sell any shares of its common stock or
any right to purchase or acquire any such stock or any security convertible
into such stock or taken any action to reclassify, recapitalize or split its
stock;
(e) Granted or agreed to grant any increase in benefits payable or
to become payable under any pension, retirement, profit sharing, health,
bonus, insurance or other welfare benefit plan or agreement to employees,
officers or directors of Community or Bank except pursuant to the express
terms thereof;
(f) Increased the salary of any director, officer or employee or
entered into any employment contract, indemnity agreement or understanding
with any officer or employee or installed any employee welfare, pension,
retirement, stock option, stock appreciation, stock dividend, profit sharing
or other similar plan or arrangement;
(g) Leased, sold or otherwise disposed of any of its assets except
as contemplated by Section 2.02(c) or in the ordinary course of business or
---------------
leased, purchased or otherwise acquired from third parties any assets except
in the ordinary course of business;
(h) Except for the Merger contemplated by this Agreement, merged,
consolidated or sold shares of its common stock, agreed to merge or
consolidate with or into any third party, agreed to sell any shares of its
common stock or acquired or agreed to acquire any stock, equity interest,
assets or business of any third party;
(i) Incurred, assumed or guaranteed any obligation or liability
(whether absolute, accrued, contingent or otherwise) other than obligations
and liabilities incurred in the ordinary course of business;
(j) Mortgaged, pledged or subjected to a lien, security interest,
option or other encumbrance any of its assets except for tax and other liens
which arise by operation of law and with respect to which payment is not
past due and except for pledges or liens: (i) required to be granted in
connection with acceptance by Community or Bank of government deposits; or
(ii) granted in connection with repurchase or reverse repurchase agreements;
A-16
(k) Except as set forth in the Disclosure Schedule, canceled,
released or compromised any loan, debt, obligation, claim or receivable
other than in the ordinary course of business;
(l) Entered into any transaction, contract or commitment other
than in the ordinary course of business;
(m) Agreed to enter into any transaction for the borrowing or
loaning of monies, other than in the ordinary course of its lending business;
or
(n) Conducted its business in any manner other than substantially
as it was being conducted through December 31, 2000.
4.23. Regulatory Filings. Community has filed and will continue to
------------------
file in a timely manner all required filings with the Securities and
Exchange Commission ("SEC"), as required by applicable law, including, but
not limited to, all reports on Form 8-K, Form 10-K and Form 10-Q and proxy
statements, and with all federal and state regulatory agencies and
authorities as required by applicable law. All such filings with the SEC and
with all other federal and state regulatory agencies by Community, Bank, and
all current or former direct or indirect subsidiaries of Community or Bank
were and will be true, accurate and complete as of the dates of the filings
and have been complied or will comply in all respects as to form with the
applicable requirements and prepared in conformity with generally accepted
regulatory accounting principles applied on a consistent basis, and no such
filing contained or will contain any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements,
at the time and in light of the circumstances under which they were made,
not false or misleading.
4.24. Contracts. Neither Community nor Bank is in default under or
---------
in breach of or, to the best knowledge of Community and Bank after due
inquiry, alleged to be in default under or in breach of, any loan or credit
agreement, conditional sales contract or other title retention agreement,
security agreement, bond, indenture, mortgage, license, contract, lease,
commitment or any other instrument or obligation.
4.25. No Third Party Options. There are no agreements, options,
----------------------
commitments or rights with, of or to any third party to acquire any shares of
capital stock or assets of Community or Bank.
4.26. Indemnification Agreements. Except as set forth in
--------------------------
Schedule 4.26 of the Disclosure Schedule:
- -------------
(a) Neither Community nor Bank is a party to any indemnification,
indemnity or reimbursement agreement, contract, commitment or understanding
to indemnify any present or former director, officer, employee, fiduciary of
any Community Plan, shareholder or agent against liability or hold the same
harmless from liability.
(b) No claims have been made against or filed with Community or
Bank nor have, to the best knowledge of Community and Bank after due
inquiry, any claims been threatened against Community or Bank, nor is
Community or Bank aware after due inquiry of any facts or circumstances
which may create the basis for a claim, for indemnification against
liability or for reimbursement of any costs or expenses incurred in
connection with any legal or regulatory proceeding by any present or former
director, officer, shareholder, employee or agent of Community or Bank.
4.27. Shareholder Approval. The affirmative vote of the holders of
--------------------
two-thirds of the Community Common Stock (which are issued and outstanding
on the record date relating to the meeting of shareholders) is required for
shareholder approval of this Agreement and the Merger.
A-17
4.28. Trust Administration. The Bank has properly administered all
--------------------
accounts for which it acts as a fiduciary (under ERISA or otherwise) or
agent, custodian, personal representative, guardian, conservator or
investment adviser or investment manager in accordance with the terms of the
governing documents and applicable state and federal law. Neither Community,
the Bank nor any director, officer or employee of Community or the Bank
acting on behalf of the Bank has committed any breach of trust or other
violation of applicable law or regulation with regard to any such fiduciary
or agency account, and the accountings for each such fiduciary or agency
account are true and correct in all material respects and accurately reflect
the assets of such fiduciary or agency account.
4.29. Absence of Changes. Except as set forth in Schedule 4.29 of
------------------ -------------
the Disclosure Schedule, since December 31, 2000 there has not been any
change in the financial condition, the results of operations or the business
of Community or the Bank which would have a material adverse effect on
Community or the Bank.
4.30. Sale of Subsidiary Banks. Except as set forth in Schedule 4.30
------------------------ -------------
of the Disclosure Schedule, upon consummation of the sale by Community
of the stock it holds of American Bank of Illinois in Highland, MidAmerica
Bank of St. Clair County, and The Egyptian State Bank (the "Sold Banks"),
Community shall have no liability or obligation (whether absolute, accrued,
contingent or otherwise) to any individual or entity, with respect to the
sale of the stock of the Sold Banks or with respect in any way to the Sold
Banks. After due inquiry, Community is not aware of any set of facts which
could be expected to give rise to such liabilities or obligations.
4.31. Opinion of Financial Advisor. The Board of Directors of
----------------------------
Community, at a duly constituted and held meeting at which a quorum was
present throughout, has been informed orally by a reputable financial
advisor experienced in transactions such as the Merger that the terms of the
Merger are fair to the shareholders of Community from a financial point of
view.
4.32. Regulatory Matters. Neither Community nor the Bank has taken
------------------
or agreed to take any action or has any knowledge of any fact or
circumstance that would materially impede or delay receipt of any regulatory
approval required for consummation of the transactions contemplated by this
Agreement.
4.33. Representations and Warranties at the Effective Time. All
----------------------------------------------------
representations and warranties of Community and Bank contained herein shall
be true, accurate and complete in all material respects on and as of the
Effective Time as though made or given at such time.
4.34. Nonsurvival of Representations and Warranties. The
---------------------------------------------
representations and warranties of Community and Bank contained in this
Agreement shall expire at the Effective Time, and thereafter Community and
Bank, and all directors, officers and employees of Community and Bank shall
have no further liability with respect thereto, except for fraud or except
as otherwise provided by law, whether statutory, common law or otherwise.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF FIRST FINANCIAL
-------------------------------------------------
First Financial represents and warrants to Community as follows:
5.01. Organization and Authority. First Financial is a corporation
--------------------------
duly organized and validly existing under the laws of the State of Indiana
and has full power and authority (corporate and otherwise) to own and lease
its properties as presently owned and leased and to conduct its business in
the manner and by the means utilized as of the date hereof.
A-18
5.02. Authorization. First Financial has the requisite corporate
-------------
power and authority to enter into this Agreement and to carry out its
obligations hereunder, subject to the fulfillment of the conditions
precedent set forth in Section 8.01 hereof. This Agreement and its execution
------------
and delivery by First Financial have been duly authorized by the Board of
Directors of First Financial. This Agreement constitutes a valid and binding
obligation of First Financial, subject to the conditions precedent set forth
in Section 8.01 hereof, and is enforceable in accordance with its terms,
------------
except to the extent limited by general principles of equity and public
policy and by bankruptcy, insolvency, reorganization, liquidation,
moratorium, readjustment of debt or other laws of general application
relating to or affecting the enforcement of creditors' rights.
(b) Neither the execution of this Agreement nor consummation of the
Merger contemplated hereby: (i) conflicts with or violates First Financial's
Articles of Incorporation or By-Laws; (ii) conflicts with or violates in any
material respect any local, state, federal or foreign law, statute,
ordinance, rule or regulation (provided that the approvals of or filings
with applicable government regulatory agencies or authorities required for
consummation of the Merger are obtained) or any court or administrative
judgment, order, injunction, writ or decree; or (iii) conflicts with,
results in a breach of or constitutes a material default under any note,
bond, indenture, mortgage, deed of trust, license, contract, lease,
agreement, arrangement, commitment or other instrument to which First
Financial is subject or bound and which is material to First Financial on a
consolidated basis.
(c) Other than in connection or in compliance with applicable
federal and state banking, securities and corporation statutes, all as
amended, and the rules and regulations promulgated thereunder, no notice to,
filing with, exemption by or consent, authorization or approval of any
governmental agency or body is necessary for the consummation by First
Financial of the Merger contemplated by this Agreement.
5.03. Litigation and Pending Proceedings. There are no claims,
----------------------------------
actions, suits, proceedings, investigations or arbitrations pending or, to
the best knowledge of First Financial after due inquiry by the officers of
First Financial, threatened in any court or before any government agency or
authority, arbitration panel or otherwise (nor does First Financial have any
knowledge of a basis for any claim, action, suit, proceeding, litigation,
investigation or arbitration) against, by or affecting First Financial which
would reasonably be expected to prevent the performance of this Agreement,
declare the same unlawful or cause the rescission hereof.
5.04. Accuracy of Statements Made to Community. No representation,
----------------------------------------
warranty or other statement made, or any information provided, by First
Financial in this Agreement, and no written report, statement, list,
certificate, materials or other information furnished or to be furnished by
First Financial to Community through and including the Effective Time in
connection with this Agreement or the Merger contemplated hereby, contains
or shall contain (in the case of information relating to the proxy statement
at the time it is mailed to Community's shareholders) any untrue or
misleading statement of material fact or omits or shall omit to state a
material fact necessary to make the statements contained herein or therein,
in light of the circumstances in which they are made, not false or
misleading.
5.05. Representations and Warranties at the Effective Date. All
----------------------------------------------------
representations and warranties of First Financial contained herein shall be
true, accurate and complete in all material respects on and as of the
Effective Time as though made or given at such time.
5.06. Nonsurvival of Representations and Warranties. The
---------------------------------------------
representations and warranties of First Financial contained in this
Agreement shall expire at the Effective Time and, thereafter, neither First
Financial nor its directors, officers and employees shall have any further
liability with respect thereto, except for fraud or except as otherwise
provided by law, whether statutory, common law or otherwise.
A-19
5.07. Shareholder Approval. Approval by First Financial's
--------------------
shareholders of the Merger or any other actions contemplated by this Agreement
is not required.
SECTION 6
COVENANTS OF COMMUNITY
----------------------
Community covenants and agrees with First Financial and Merger Corp
as follows:
6.01. Shareholder Approval. Community will submit this Agreement to
--------------------
its shareholders for approval at a meeting to be called and held in
accordance with applicable law and the Articles of Incorporation of
Community at the earliest practicable date. The Board of Directors of
Community will recommend to Community's shareholders that such shareholders
approve this Agreement and the Merger contemplated hereby and will solicit
proxies voting in favor of this Agreement from Community's shareholders.
6.02. Other Approvals. (a) Community will proceed expeditiously,
---------------
cooperate fully and use its best efforts to assist First Financial in
procuring upon reasonable terms and conditions all consents, authorizations,
approvals, registrations and certificates, in completing all filings and
applications and in satisfying all other requirements prescribed by law
which are necessary for consummation of the Merger on the terms and
conditions provided in this Agreement at the earliest possible reasonable
date.
(b) Community will use commercially reasonable efforts to obtain
any required third party consents to agreements, contracts, commitments,
leases, instruments and documents described in the Disclosure Schedule
pursuant to Section 4.
---------
(c) Community will cooperate with First Financial in and shall take
all necessary action to effectuate the disposition of the Community Plans,
as provided in Section 6.13 hereof. Community shall pay all costs and
------------
expenses associated with such dispositions.
6.03. Conduct of Business. (a) Except as set forth in the
-------------------
Disclosure Schedule, on and after the date of this Agreement and until the
Effective Time or until this Agreement will be terminated as herein
provided, Community will not, without the prior written consent of First
Financial:
(i) make any changes in its capital stock accounts
(including, without limitation, any stock split,
stock dividend, recapitalization or reclassification);
(ii) authorize a class of stock or issue, or authorize
the issuance of, securities other than or in
addition to the issued and outstanding common
stock as set forth in Section 4.03 hereof;
------------
(iii) distribute or pay any dividends on its shares of
common stock, or authorize a stock split, or make
any other distribution to its shareholders;
(iv) redeem any of its outstanding shares of common stock;
(v) merge, combine or consolidate or effect a share
exchange with or sell its assets or any of its
securities to any other person, corporation or
entity or enter into any other similar
transaction not in the ordinary course of
business;
A-20
(vi) purchase any assets or securities or assume any
liabilities of another bank holding company,
bank, corporation or other entity, except in the
ordinary course of business necessary to manage
its investment portfolio;
(vii) make any loan or commitment to lend money, issue
any letter of credit or accept any deposit,
except in the ordinary course of business in
accordance with its existing banking practices;
(viii) except for the disposition in the ordinary course
of business of other real estate owned and except
for the sale by Community of the stock it holds
of American Bank of Illinois in Highland,
MidAmerica Bank of St. Clair County, and The
Egyptian State Bank, acquire or dispose of any
real or personal property or fixed asset
constituting a capital investment in excess of
$10,000 individually or $25,000 in the aggregate;
(ix) subject any of its properties or assets to a
mortgage, lien, claim, charge, option,
restriction, security interest or encumbrance,
except for tax and other liens which arise by
operation of law and with respect to which
payment is not past due and except for pledges or
liens: (i) required to be granted in connection
with acceptance by Community of government
deposits; or (ii) granted in connection with
repurchase or reverse repurchase agreements;
(x) promote to a new position or increase the rate of
compensation or enter into any agreement to
promote to a new position or increase the rate of
compensation, of any director, officer or
employee of Community or Bank;
(xi) execute, create, institute, modify, amend, terminate
(except with respect to any amendments to the
Community Plans required by law, rule or regulation)
or engage in any transaction with any pension,
retirement, savings, stock purchase, stock bonus,
stock ownership, stock option, stock appreciation
or depreciation right or profit sharing plans; any
employment, deferred compensation, consulting, bonus
or collective bargaining agreement; any group
insurance or health contract or policy; or any other
incentive, retirement, welfare or employee welfare
benefit plan, agreement or understanding for current
or former directors, officers or employees of
Community or Bank; or change the level of benefits
or payments under any of the foregoing or increase or
decrease any severance or termination of pay benefits
or any other fringe or employee benefits other than
as required by law or regulatory authorities or the
terms of any of the foregoing;
(xii) modify, amend or institute new employment
policies or practices, or enter into, renew or
extend any employment, indemnity, reimbursement,
consulting, compensation or severance agreements
with respect to any present or former directors,
officers or employees of Community or Bank;
(xiii) hire or employ any new or additional employees of
Community or Bank, except those which are
reasonably necessary for the proper operation of
its business;
(xiv) elect or appoint any officers or directors of
Community or Bank who are not presently serving in
such capacities;
A-21
(xv) amend, modify or restate Community's or Bank's
Articles of Incorporation or By-Laws from those
in effect on the date of this Agreement and as
delivered to First Financial hereunder;
(xvi) give, dispose of, sell, convey or transfer;
assign, hypothecate, pledge or encumber; or grant
a security interest in or option to or right to
acquire any shares of common stock or
substantially all of the assets of Community or
Bank, or enter into any agreement or commitment
relative to the foregoing;
(xvii) fail to continue to make additions to in
accordance with past practices and to otherwise
maintain in all respects Community's or Bank's
reserve for loan and lease losses, or any other
reserve account, in accordance with safe, sound,
and prudent banking practices and in accordance
with generally accepted accounting principles
applied on a consistent basis;
(xviii) fail to accrue, pay, discharge and satisfy all
debts, liabilities, obligations and expenses,
including, but not limited to, trade payables,
incurred in the regular and ordinary course of
business as such debts, liabilities, obligations
and expenses become due;
(xix) issue, or authorize the issuance of, any securities
convertible into or exchangeable for any shares of
the capital stock of Community or Bank;
(xx) except for obligations disclosed within this
Agreement, FHLB daily advances utilized for the
purpose of Community's and the Bank's cash management,
or in Schedule 6.03(a)(xx) of the Disclosure
--------------------
Statement, trade payables and similar liabilities and
obligations incurred in the ordinary course of
business and the payment, discharge or satisfaction
in the ordinary course of business of liabilities
reflected in the Community Financial Statements or
the Subsequent Community Financial Statements,
borrow any money or incur any indebtedness including,
without limitation, through the issuance of
debentures, or incur any liability or obligation
(whether absolute, accrued, contingent or otherwise),
in an aggregate amount exceeding $10,000;
(xxi) open, close, move or, in any material respect, expand,
diminish, renovate, alter or change any of its offices
or branches;
(xxii) pay or commit to pay any management or consulting or
other similar type of fees; or
(xxiii) enter into any contract, agreement, lease,
commitment, understanding, arrangement or
transaction or incur any liability or obligation
(other than as contemplated by Section 6.03(a)(vii)
--------------------
hereof and legal, accounting and fees related to the
Merger) requiring payments by Community which exceed
$10,000, whether individually or in the aggregate,
or that is not a trade payable or incurred in the
ordinary course of business.
(b) Community will maintain, or cause to be maintained, in full
force and effect, insurance on its and the Bank's assets, properties and
operations, fidelity coverage and directors' and officers' liability
insurance in such amounts and with regard to such liabilities and hazards as
are currently insured by Community and/or the Bank as of the date of this
Agreement.
6.04. Preservation of Business. On and after the date of this
------------------------
Agreement and until the Effective Time or until this Agreement is terminated
as herein provided, Community will: (a) carry on its business diligently,
substantially in the manner as is presently being conducted and in the
ordinary course of business; (b) use
A-22
commercially reasonable efforts to preserve its business organization intact
(except for the sale by Community of the stock it holds of American Bank of
Illinois in Highland, MidAmerica Bank of St. Clair County, and The Egyptian
State Bank), keep available the services of the present officers and
employees and preserve its present relationships with customers and persons
having business dealings with it; (c) maintain all of the properties and
assets that it owns or utilizes in the operation of its business as
currently conducted in good operating condition and repair, reasonable wear
and tear excepted, and maintain insurance upon such properties and assets in
amounts and kinds comparable to that in effect on the date of this
Agreement; (d) maintain its books, records and accounts in the usual,
regular and ordinary manner, on a basis consistent with prior years and in
compliance with all material respects with all statutes, laws, rules and
regulations applicable to them and to the conduct of its business; and (e)
not knowingly do or fail to do anything which will cause a breach of, or
default in, any contract, agreement, commitment, obligation, understanding,
arrangement, lease or license to which it is a party or by which it is or
may be subject or bound which would reasonably be expected to have a
material adverse effect on the financial condition, results of operations,
business, assets, or capital of Community.
6.05. Press Releases. Except as required by law, Community will not
--------------
issue any press or news releases or make any other public announcements or
disclosures relating to the Merger without the prior consent of First
Financial following delivery to First Financial of a final copy of such
press or news release, which consent shall not be unreasonably withheld.
6.06. Disclosure Schedule Update. Community will promptly
--------------------------
supplement, amend and update, upon the occurrence of any change prior to the
Effective Time, and as of the Effective Time, the Disclosure Schedule with
respect to any matters or events hereafter arising which, if in existence or
having occurred as of the date of this Agreement, would have been required
to be set forth or described in the Disclosure Schedule or this Agreement
and including, without limitation, any fact which, if existing or known as
of the date hereof, would have made any of the representations or warranties
of Community or Bank contained herein materially incorrect, untrue or
misleading.
6.07. Information, Access Thereto, Confidentiality. First Financial
--------------------------------------------
and its representatives and agents will, at all times during normal business
hours prior to the Effective Time, have full and continuing access to the
properties, facilities, operations, books and records of Community. First
Financial and its representatives and agents may, prior to the Effective
Time, make or cause to be made such reasonable investigation of the
operations, books, records and properties of Community and Bank and of their
respective financial and legal condition as deemed necessary or advisable to
familiarize themselves with such operations, books, records, properties and
other matters; provided, however, that such access or investigation shall
not interfere unnecessarily with the normal business operations of
Community. Upon request, Community will furnish First Financial or its
representatives or agents, their attorneys' responses to external auditors
requests for information, management letters received from their external
auditors and such financial, loan and operating data and other information
reasonably requested by First Financial which has been or is developed by
Community, its auditors, accountants or attorneys (provided with respect to
attorneys, such disclosure would not result in the waiver by Community of
any claim of attorney-client privilege), and will permit First Financial or
its representatives or agents to discuss such information directly with any
individual or firm performing auditing or accounting functions for
Community, and such auditors and accountants will be directed to furnish
copies of any reports or financial information as developed to First
Financial or its representatives or agents. No investigation by First
Financial will affect the representations and warranties made by Community
or Bank herein. Any confidential information or trade secrets received by
First Financial or its representatives or agents in the course of such
examination will be treated confidentially, and any correspondence,
memoranda, records, copies, documents and electronic or other media of any
kind containing such confidential information or trade secrets or both shall
be destroyed by First Financial or, at Community's request, returned to
Community in the event this Agreement is terminated as provided in Section 9
---------
hereof. This Section 6.07 will not require the disclosure of any information
------------
to First Financial which would be prohibited by law.
A-23
6.08. Subsequent Community Financial Statements. As soon as
-----------------------------------------
reasonably available after the date of this Agreement, Community will
deliver to First Financial the monthly unaudited consolidated balance sheets
and profit and loss statements of Community prepared for its internal use,
Bank's Call Reports for each quarterly period completed prior to the
Effective Time, and all other financial reports or statements submitted by
Community or Bank to regulatory authorities after the date hereof, to the
extent permitted by law (collectively, "Subsequent Community Financial
Statements"). The Subsequent Community Financial Statements will be prepared
on a basis consistent with past accounting practices and generally accepted
accounting principles applied on a consistent basis to the extent applicable
and shall present fairly the financial condition and results of operations
as of the dates and for the periods presented. The Subsequent Community
Financial Statements, including the notes thereto, will not include any
assets, liabilities or obligations or omit to state any assets, liabilities
or obligations (whether absolute, accrued, contingent or otherwise) or any
other facts, which inclusion or omission would render such financial
statements inaccurate, incomplete or misleading in any material respect.
6.09. Employee Benefits. Neither the terms of this Agreement nor the
-----------------
provision of any employee benefits by First Financial to employees of
Community or the Bank will: (a) create any employment contract, agreement or
understanding with or employment rights for, or constitute a commitment or
obligation of employment to, any of the officers or employees of Community
or the Bank; or (b) prohibit or restrict First Financial or its
subsidiaries, whether before or after the Effective Time, from changing,
amending or terminating any employee benefit plans or programs provided to
its employees from time to time.
6.10. Environmental Reports. If requested by First Financial,
---------------------
Community and Bank will cooperate with an environmental consulting firm
designated by First Financial in connection with the conduct by such firm of
a phase one environmental investigation on all real property owned or leased
by Community as of the date of this Agreement, and any real property
acquired or leased by Community after the date of this Agreement.
6.11. Other Negotiations. On and after the date of this Agreement
------------------
and until the Effective Time or until this Agreement is terminated as herein
provided, except with the prior written approval of First Financial, neither
Community nor Bank shall, and neither Community nor Bank shall permit or
authorize its directors, officers, employees, agents or representatives to,
directly or indirectly, initiate, solicit, encourage or engage in
discussions or negotiations with, or provide information to, any
corporation, association, partnership, person or other entity or group
concerning any merger, consolidation, share exchange, combination, purchase
or sale of substantial assets, sale of shares of common stock (or securities
convertible or exchangeable into or otherwise evidencing, or any agreement
or instrument evidencing the right to acquire, capital stock) or similar
transaction relating to Community or Bank or to which Community or Bank may
become a party (all such transactions are hereinafter referred to as
"Acquisition Transactions"). Community or Bank shall promptly communicate to
First Financial the terms of any proposal or offer which either of them may
receive with respect to an Acquisition Transaction and any request by or
indication of interest on the part of any third party with respect to the
initiation of any Acquisition Transaction or discussions with respect
thereto.
6.12. Payment of Certain Expenses and Taxes. On or prior to the
-------------------------------------
Effective Time, Community shall pay all legal, accounting, and investment
banking fees of Community relating to the Merger and the transfer, in
December 2000, of Community stock by the Community Employee Stock Ownership
Plan ("ESOP") to Community. Prior to the Effective Time, Community shall
also take the following actions:
(a) Special Payment to Community ESOP. Pay to the Special
---------------------------------
Trustee of the Community ESOP an amount equal to the
amount to be placed in the ESOP pursuant to Section 2.02(e)
---------------
of this Agreement.
(b) Payment of Taxes. File with the Internal Revenue Service
----------------
Form 5330, Return of Excise Taxes Related to Employee
Benefit Plans, for 2000 and 2001 and cause to be paid all
taxes (and, to the extent applicable, any interest and
penalties associated with such taxes) on the basis that
the
A-24
amount produced by the calculation required in Section 6.12(a)
is subject to the tax imposed by Section 4975(a) of the Code
for calendar years 2000 and 2001.
6.13. Disposition of Community Tax-Qualified Plans. Community shall
--------------------------------------------
take all necessary corporate action to effectuate the disposition of the
tax-qualified plans sponsored by them (collectively, "Community
Tax-Qualified Plans") as provided in this Section 6.13 and Section 7.03
------------ ------------
hereof. Such action shall be taken at the expense of Community, in a manner
which satisfies all requirements of applicable law, and is satisfactory to
counsel for FFC.
(a) Participation in Merger Transaction and Merger of Community
-----------------------------------------------------------
401(k) Plan.
- -----------
(i) In connection with the Merger, Community shall
appoint an independent fiduciary, acceptable to
First Financial and its counsel, which may be the
same entity as the Special Trustee provided for
in subsection 6.13(b), and shall be also take all
actions necessary to cause the fiduciaries of the
Community 401(k) Plan to take all of the
following actions:
(A) Implement a written confidential pass
through voting procedure pursuant to
which the participants under the
Community 401(k) Plan and their
beneficiaries may direct the appointed
independent fiduciary regarding the
manner in which the shares of Community
common stock allocated to their
Community 401(k) accounts are to be
voted with respect to the Merger; and
(B) Provide the Community 401(k) Plan
participants and their beneficiaries
with a written notice regarding the
existence of and provisions for such
confidential pass through voting
procedures, as well as the same written
materials to be provided to the
shareholders of Community in connection
with the Merger.
(ii) As soon as administratively feasible after the
Effective Time ("Disposition Date"), the Community
Financial Corp. 401(k) Plan ("Community 401(k) Plan")
shall be merged with and into the First Financial
Corporation Employees' 401(k) Savings Plan ("FFC
401(k) Plan"); provided, however, that such merger
shall be subject to receipt of a determination letter
from the Internal Revenue Service ("Service") to the
effect that the merger of the Community 401(k) Plan
into the FFC 401(k) Plan will not adversely affect
the tax-qualified status of either plan. First
Financial shall be responsible for obtaining such
determination letter. All account balances maintained
under the Community 401(k) Plan shall become fully
vested on the day on which the Effective Time
occurs. From the date of this Agreement through the
Disposition Date, Community may continue to make
contributions to the Community 401(k) Plan so long
as such contributions are comparable in amount to any
past contributions to such plan.
(b) Participation in Merger Transaction and Termination of
------------------------------------------------------
Community ESOP. In connection with the Merger, Community shall appoint an
- --------------
independent, institutional "Special Trustee" experienced in acting as an
independent employee stock ownership plan trustee and which is acceptable to
First Financial and its counsel, to act as an independent fiduciary solely
on behalf of the Community ESOP and the participants and beneficiaries
thereunder and shall also take all actions necessary to cause the
fiduciaries of the Community ESOP, including the "Special Trustee"
thereunder, to take all of the following actions:
(i) Implement a written confidential pass through
voting procedure pursuant to which the
participants under the Community ESOP and their
beneficiaries may direct the Special Trustee
regarding the manner in which the shares of
Community common stock
A-25
allocated to their Community ESOP accounts are to be
voted with respect to the Merger;
(ii) Provide the Community ESOP participants and their
beneficiaries with a written notice regarding the
existence of and provisions for such confidential
pass through voting procedures, as well as the
same written materials to be provided to the
shareholders of Community in connection with the
Merger;
(iii) Obtain a written opinion from an independent financial
advisor, which is experienced in acting as a financial
advisor to independent employee stock ownership plan
trustees and which is acceptable to First Financial
and its counsel, to the Special Trustee of the
Community ESOP to the effect that the consideration
to be received by the Community ESOP in the Merger
in exchange for the shares of Community common stock,
will (i) constitute no less than "adequate
consideration" as defined in Section 3(18) of ERISA,
and (ii) that the terms and conditions of the Merger,
as they apply to the Community ESOP, including the
disposition of shares of Community common stock prior
to the Merger (taking into account the actions
required to be taken in connection therewith by
Section 6.12) and the disposition of the Community
------------
ESOP in connection therewith, are fair to the
Community ESOP and its participants from a financial
point of view. The contents of the written opinion
referred to in the preceding sentence must be
acceptable in form and content to First Financial
and its counsel;
(iv) Take any and all additional actions necessary to
satisfy the requirements of ERISA applicable to the
Community ESOP fiduciaries in connection with the
Merger;
(v) Prior to the distribution of any ESOP accounts in
connection with the termination of the Community
ESOP, Community shall have obtained a
determination letter from the Service to the
effect that the termination will not affect the
tax-qualified status of the Community ESOP.
(c) First Financial and its counsel shall either draft or review
and shall be supplied with copies of all documents, filings, resolutions,
amendments or other writings prepared by or on behalf of Community in
connection with carrying out any of the provisions of this Section 6.13.
------------
6.14. SEC and Other Reports. Promptly upon its becoming available,
---------------------
furnish to First Financial one (1) copy of each financial statement, report,
notice, or proxy statement sent by Community to its shareholders generally
and of each regular or periodic report, registration statement or prospectus
filed by Community with Nasdaq or the SEC or any successor agency, and of
any order issued by any Governmental Authority in any proceeding to which
Community is a party. For purposes of this provision, "Governmental
Authority" shall mean any government (or any political subdivision or
jurisdiction thereof), court, bureau, agency or other governmental entity
having or asserting jurisdiction over Community or any of its business,
operations or properties.
6.15. Adverse Actions. Community shall not knowingly take any
---------------
action that is intended or is reasonably likely to result in (i) any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any respect at any time at or prior to the Effective Time, (ii)
any of the conditions to the Merger set forth in Section 8 not being
---------
satisfied, (iii) a material violation of any provision of this Agreement or
(iv) a delay in the consummation of the Merger except, in each case, as may
be required by applicable law or regulation.
A-26
6.16. Termination Expenses. At or prior to the Effective Time the
--------------------
Bank shall accrue for and pay all salary termination expenses associated
with the termination of the Bank's and Community's employment agreements.
6.17. Addition to Loan Loss Reserve. Prior to the Effective Time
-----------------------------
the Bank shall make an additional provision to its allowance for loan loss
reserve in an amount as shall be requested by First Financial.
SECTION 7
COVENANTS OF FIRST FINANCIAL
----------------------------
First Financial covenants and agrees with Community as follows:
7.01. Approvals. (a) First Financial shall have primary
---------
responsibility for the preparation, filing and costs of all bank holding
company and bank regulatory applications required for consummation of the
Merger. First Financial shall provide to Community's counsel copies of all
applications filed and copies of all material written communications with
all state and federal bank regulatory agencies relating to such
applications. First Financial shall proceed expeditiously, cooperate fully
and use its best efforts to procure, upon terms and conditions reasonably
acceptable to First Financial, all consents, authorizations, approvals,
registrations and certificates, to complete all filings and applications and
to satisfy all other requirements prescribed by law which are necessary for
consummation of the Merger on the terms and conditions provided in this
Agreement at the earliest possible reasonable date.
7.02. Press Releases. Except as required by law, First Financial
--------------
shall not issue any press releases or make any other public announcements or
disclosures relating primarily to Community with respect to the Merger
without the prior consent of Community, which consent shall not be
unreasonably withheld.
7.03. Employee Benefit Plans. (a) At such time as First Financial
----------------------
shall determine, in its sole discretion, but in no event later than December
31, 2001, First Financial will make available to the employees of Community
who continue as employees of any subsidiary of First Financial after the
Effective Time and, further, subject to Subsections 7.03(b), (c) and (d)
--------------------------------
hereof, substantially the same employee benefits on substantially the same
terms and conditions that First Financial may offer to similarly situated
officers and employees of its banking subsidiaries from time to time. Until
such time as the employees of Community become covered by the First
Financial welfare benefit plans, the employees of Community shall remain
covered by their respective welfare benefit plans, subject to the terms of
such plans.
(b) Subject to the provisions of subsection (c) hereof, years of
service (as defined in the applicable First Financial plan) of an officer or
employee of Community prior to the Effective Time shall be credited,
effective as of the date on which such employees become covered by a
particular First Financial plan, to each such officer or employee eligible
for coverage under Section 7.03(a) hereof for purposes of: (i) eligibility
---------------
under First Financial's employee welfare benefit plans; and (ii) eligibility
and vesting, but not for purposes of benefit accrual or contributions, under
the First Financial Corporation Employees' Pension Plan ("FFC Pension Plan")
under the First Financial Corporation Employee Stock Ownership Plan ("FFC
ESOP") or under the FFC 401(k) Plan. Subject to the provisions of
Section 6.13 hereof, those officers and employees of Community who otherwise
- ------------
meet the eligibility requirements of the FFC Pension Plan or FFC ESOP, based
upon their age and years of Community service, shall become participants
thereunder on the first plan entry date under the FFC Pension Plan or FFC
ESOP, as the case may be, which coincides with or next follows the Effective
Time. Those officers or employees who do not meet the eligibility
requirements of the FFC Pension Plan, First Financial Corporation 401(k)
Plan or FFC ESOP on such date shall become participants thereunder on the
first plan entry date under the FFC Pension Plan or FFC ESOP, as the case
may be, which coincides with or next follows the date on which such
eligibility requirements are satisfied. Subject to the provisions of
Section 6.13
A-27
hereof, those officers and employees of Community who otherwise meet the
eligibility requirements of the FFC 401(k) Plan, based upon their age and
years of Community service shall become participants thereunder on the day
immediately following the Disposition Date of such plan. Those officers or
employees who do not meet the eligibility requirements of the FFC 401(k)
Plan on such date shall become participants thereunder on the first plan
entry date under the FFC 401(k) Plan which coincides with or next follows
the date on which such eligibility requirements are satisfied.
(c) No employee of Community serving as of the Effective Time
shall be subject to any pre-existing condition limitation under any of First
Financial's welfare benefit plans if such officer, employee or individual
was not subject to any pre-existing condition limitation under the
corresponding Community welfare benefit plan on the day immediately
preceding the day he becomes a participant in the First Financial welfare
benefit plans pursuant to Section 7.03(a) hereof. If in the sole discretion
---------------
of First Financial it is administratively feasible without unreasonable
efforts or expense, expenses incurred by a Community employee or a Community
employee's covered dependent or spouse under a Community welfare benefit
plan shall be taken into account for purposes of satisfying any applicable
deductible, coinsurance or maximum out-of-pocket provisions under the
corresponding First Financial welfare benefit plan in the year in which such
individuals become participants in the First Financial plan.
(d) Neither the terms of this Agreement nor the provision of any
employee benefits by First Financial or any of its subsidiaries to employees
of Community or Bank shall: (i) create any employment contract, agreement or
understanding with or employment rights for, or constitute a commitment or
obligation of employment to, any of the officers or employees of Community
or Bank; or (ii) prohibit or restrict First Financial or its subsidiaries,
whether before or after the Effective Time, from changing, amending or
terminating any employee benefits provided to its employees from time to
time.
(e) First Financial shall take any and all actions necessary
to effectuate the disposition of the Community Plans provided by this
Section 7.03 and by Section 6.13 hereof.
- ------------ ------------
7.04. Adverse Actions. First Financial shall not knowingly take any
---------------
action that is intended or is reasonably likely to result in (i) any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any respect at any time at or prior to the Effective Time, (ii)
any of the conditions to the Merger set forth in Section 8 not being
---------
satisfied, (iii) a material violation of any provision of this Agreement or
(iv) a delay in the consummation of the Merger except, in each case, as may
be required by applicable law or regulation.
7.05. Directors' and Officers' Liability Insurance. First Financial
--------------------------------------------
agrees that either Community or the Bank (as determined by Community), prior
to the Effective Time, may pay the premium necessary to extend for three
years from the Effective Time, Community's current directors' and officers'
liability insurance policy with respect to matters occurring prior to the
Effective Time; provided, however, that the amount of such premium shall not
exceed an amount in the aggregate greater than three times the cost of the
most recent policy of one year.
7.06. Assumption of Supplemental Executive Retirement Agreements.
----------------------------------------------------------
Notwithstanding any other provision herein to the contrary, at the Effective
Time, First Financial and Merger Corp hereby expressly assume and agree to
be jointly and severally liable for the rights and obligations of, among
other things, Community and Bank under those three (3) certain Supplemental
Executive Retirement Agreements identified in this Section 7.06 below and
------------
briefly described on Schedule 4.09(a)(iv) of the Disclosure Schedule to this
--------------------
Agreement:
(i) That certain Supplemental Executive Retirement Agreement by
and between Community Bank & Trust N.A., f/k/a Community Bank & Trust, fsb
and Douglas W. Tompson dated as of June 22, 1995;
A-28
(ii) That certain Supplemental Executive Retirement Agreement by
and between Community Bank & Trust N.A., f/k/a Community Bank & Trust, fsb
and Wayne H. Benson dated as of June 22, 1995; and
(iii) That certain Supplemental Executive Retirement Agreement
by and between Community Bank & Trust N.A., f/k/a Community Bank & Trust,
fsb and Shirley B. Kessler dated as of June 22, 1995.
SECTION 8
CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
8.01. First Financial. The obligation of First Financial to
---------------
consummate the Merger is subject to the satisfaction and fulfillment of each
of the following conditions on or prior to the Effective Time, unless waived
in writing by First Financial:
(a) Representations and Warranties at Effective Time. Each of the
------------------------------------------------
representations and warranties of Community contained in this Agreement will
be true, accurate and correct in all material respects at and as of the
Effective Time as though such representations and warranties had been made
or given on and as of the Effective Time.
(b) Covenants. Each of the covenants and agreements of Community
---------
will have been fulfilled or complied with in all material respects from the
date of this Agreement through and as of the Effective Time.
(c) Deliveries at Closing. First Financial will have received from
---------------------
Community at the Closing (as hereinafter defined) the items and documents,
in form and content reasonably satisfactory to First Financial, set forth in
Section 11.02(b) hereof.
- ----------------
(d) Regulatory Approvals. The appropriate banking regulators will
--------------------
have authorized and approved the Merger on terms and conditions satisfactory
to First Financial. In addition, all appropriate orders, consents, approvals
and clearances from all other regulatory agencies and governmental
authorities whose orders, consents, approvals or clearances are required by
law for consummation of the Merger contemplated by this Agreement will have
been obtained on terms and conditions satisfactory to First Financial.
(e) Shareholder Approval. The shareholders of Community will have
--------------------
approved and adopted this Agreement as required by applicable law and its
Articles of Incorporation.
(f) Officers' Certificate. Community will have delivered to First
---------------------
Financial a certificate signed by its President and its Secretary, dated as
of the Effective Time, certifying that: (i) all the representations and
warranties of Community are true, accurate and correct in all material
respects on and as of the Effective Time; (ii) all the covenants of
Community have been complied with in all material respects from the date of
this Agreement through and as of the Effective Time; and (iii) Community has
satisfied and fully complied with all conditions necessary to make this
Agreement effective as to them.
(g) Stock Options. Except for the 154,340 outstanding "in the
-------------
money" Community options to purchase shares of Community common stock
referenced in Section 2 of this Agreement, all options, warrants,
---------
commitments, calls, puts, agreements, understandings, arrangements or
subscription rights relating to any shares of Community Common Stock, or any
securities convertible into or representing the right to purchase or
otherwise acquire any common stock or debt securities of Community, by which
Community is or may become bound, will have been terminated or expired.
A-29
(h) Adequate Consideration and Fairness Opinion. A written opinion
-------------------------------------------
shall have been delivered to the Special Trustee of the Community ESOP by
its independent financial advisor to the effect specified in Section
-------
6.13(b)(iii). Such opinion shall (i) be in form and substance satisfactory
- ------------
to First Financial and its counsel, (ii) be dated as of a date not later
than the mailing date of the proxy statement-prospectus relating to the
Merger to be mailed to Community's shareholders, and (iii) updated or
confirmed in writing as of the Effective Time.
(i) Amount of Liabilities and Assets. First Financial shall have
--------------------------------
agreed to the amount of the potential tax liabilities of Community and the
amounts contemplated by Sections 2.02(b)(ii) and (iv) for purposes of
-----------------------------
determining the Aggregate Purchase Price in Section 2.02(b), and any amount
---------------
contemplated by Section 2.02(c).
---------------
(j) Director Waivers. First Financial shall have received from each
----------------
of the Directors of Community and the Bank waivers, in form and substance
satisfactory to it, of such individual's rights to seek reimbursement of or
make a claim for the expenses incurred or which may be incurred in
connection with the matters set forth in Schedule 4.26(b) of the Disclosure
----------------
Schedule.
8.02. Community. The obligation of Community to consummate the Merger
---------
is subject to the satisfaction and fulfillment of each of the following
conditions on or prior to the Effective Time, unless waived in writing
by Community:
(a) Representations and Warranties at Effective Time. Each of the
------------------------------------------------
representations and warranties of First Financial contained in this
Agreement will be true, accurate and correct in all material respects on and
as of the Effective Time as though the representations and warranties had
been made or given at and as of the Effective Time.
(b) Covenants. Each of the covenants and agreements of First
---------
Financial will have been fulfilled or complied with in all material respects
from the date of this Agreement through and as of the Effective Time.
(c) Deliveries at Closing. Community will have received from First
---------------------
Financial at the Closing the items and documents, in form and content
reasonably satisfactory to Community, listed in Section 11.02(a) hereof.
----------------
(d) Regulatory Approvals. The appropriate banking regulators will
--------------------
have authorized and approved the Merger. In addition, all appropriate
orders, consents, approvals and clearances from all other regulatory
agencies and governmental authorities whose orders, consents, approvals or
clearances are required by law for consummation of the Merger contemplated
by this Agreement will have been obtained.
(e) Shareholder Approval. The shareholders of Community will have
--------------------
approved and adopted this Agreement as required by applicable law and
Community's Articles of Incorporation.
(f) Officers' Certificate. First Financial will have delivered to
---------------------
Community a certificate signed by its Chairman or President and its
Secretary, dated as of the Effective Time, certifying that: (i) all the
representations and warranties of First Financial are true, accurate and
correct in all material respects on and as of the Effective Time; (ii) all
the covenants of First Financial have been complied with in all material
respects from the date of this Agreement through and as of the Effective
Time; and (iii) First Financial has satisfied and fully complied with all
conditions necessary to make this Agreement effective as to it.
A-30
SECTION 9
TERMINATION OF MERGER
---------------------
9.01. Manner of Termination. This Agreement and the Merger may be
---------------------
terminated at any time prior to the Effective Time by written notice
delivered by First Financial to Community, or by Community to First
Financial, as follows:
(a) By First Financial or Community, if:
(i) the Merger contemplated by this Agreement has not
been consummated by September 30, 2001; or
(ii) the Agreement and the Merger are not approved by the
requisite vote of the shareholders of Community at
the Special Meeting of Shareholders of Community; or
(iii) the respective Boards of Directors of First
Financial and Community mutually agree to
terminate this Agreement.
(b) By First Financial if:
(i) First Financial determines in its sole discretion
that any item, event or information set forth in any
supplement, amendment or update to the Disclosure
Schedule, or the results of any environmental report
pursuant to Section 6.10, has had or could be expected
------------
to have a material adverse effect on the business,
assets, capitalization, financial condition or
results of operations of Community; or First Financial
otherwise becomes aware of any item, event or
information which it determines in its sole discretion
has had or could be expected to have a material
adverse effect on the business, assets, capitalization,
financial condition or results of operations of
Community (it being understood and acknowledged by
Community that the due diligence review of Community
by First Financial was not complete as of the date
of this Agreement); or
(ii) there has been a misrepresentation or a breach of any
warranty by or on the part of Community in its
representations and warranties set forth in this
Agreement which has had or would be expected to have
a material adverse effect on the business, assets,
capitalization, financial condition or results of
operations of Community; provided, however, that in
the event of any inaccuracy in the representations
and warranties contained in Section 4.03 hereof
------------
relative to the number of issued and outstanding
shares of capital stock or options to purchase
shares of capital stock of Community or Bank, First
Financial will have the absolute right to terminate
this Agreement without regard to the materiality
of any such inaccuracy; or
(iii) there has been a breach of or failure to comply
with any covenant set forth in this Agreement by
or on the part of Community which could
reasonably be expected to have a material adverse
effect on the economic value of the Merger to
First Financial; or
(iv) First Financial shall reasonably determine that
the Merger contemplated by this Agreement has
become inadvisable or impracticable by reason of
commencement or threat of any claim, litigation
or proceeding against First Financial, Community,
or any director or officer of any of such
entities (A) relating to this Agreement or the
Merger,
A-31
or (B) which is likely to have a material adverse
effect on the business, assets, capitalization,
financial condition or results of operations of
Community; or
(v) there has been a material adverse change in the
business, assets, capitalization, financial condition
or results of operations of Community as of the
Effective Time as compared to that in existence as
of December 31, 2000 other than (A) any change
resulting from the action taken by Community
pursuant to Section 6.12 or Section 6.17, (B) any
------------ ------------
change set forth on the Disclosure Schedule as of
and delivered as of the date of this Agreement, or
(C) resulting primarily by reason of changes in
banking laws or regulations (or interpretations
thereof), changes in the general level of interest
rates or changes in economic, financial or market
conditions affecting the banking industry generally
in Community's market area; or
(vi) Community's Board of Directors has failed to
approve and recommend this Agreement or the
Merger, or has withdrawn or modified in any
manner adverse to First Financial its approval or
recommendation of this Agreement or the Merger or
will have resolved or publicly announced an
intention to do either of the foregoing; or
(vii) the sale by Community for cash of all of the
shares of American Bank of Illinois in Highland,
MidAmerica Bank of St. Clair County, and The
Egyptian State Bank has not consummated by May
30, 2001.
(c) By Community, if:
(i) there has been a misrepresentation or a breach of
any warranty by or on the part of First Financial
in its representations and warranties set forth
in this Agreement which has had or would be
expected to have a material adverse effect on the
business, assets, capitalization of First
Financial; or
(ii) there has been a breach of or failure to comply
with any covenant set forth in this Agreement by
or on the part of First Financial or First
Financial which has had or would be expected to
have a material adverse effect on the business,
assets, capitalization, financial condition or
results of operations of First Financial; or
(iii) it shall reasonably determine that the Merger
contemplated by this Agreement has become
inadvisable or impracticable by reason of
commencement or threat of any material claim,
litigation or proceeding against First Financial
(A) relating to this Agreement or the Merger, or
(B) which is likely to have a material adverse
effect on the business, assets, capitalization of
First Financial.
9.02. Effect of Termination. Upon termination by written notice,
---------------------
this Agreement shall be of no further force or effect, and there shall be no
further obligations or restrictions on future activities on the part of
First Financial, Community and their respective directors, officers,
employees, agents and shareholders, except as provided in compliance with
the confidentiality provisions of this Agreement set forth in Section 6.07
------------
and the payment of expenses set forth in Section 12.10 hereof. Termination
-------------
will not in any way release a breaching party from liability for any willful
breach of this Agreement giving rise to such termination.
A-32
SECTION 10
EFFECTIVE TIME OF THE MERGER
----------------------------
Upon the terms and subject to the conditions specified in this
Agreement, the Merger will become effective at the close of business on the
day and at the time specified in the Articles of Merger of Community with
and into Merger Corp as filed with the Indiana and Illinois Secretaries of
State ("Effective Time"). Unless otherwise mutually agreed to by the parties
hereto, the Effective Time will occur on the last business day of the month
following (a) the fulfillment of all conditions precedent to the Merger set
forth in Section 8 of this Agreement and (b) the expiration of all waiting
---------
periods in connection with the bank regulatory applications filed for the
approval of the Merger.
SECTION 11
CLOSING
-------
11.01. Closing Date and Place. So long as all conditions precedent
----------------------
set forth in Section 8 hereof have been satisfied and fulfilled, the closing
---------
of the Merger ("Closing") will take place on the Effective Time at a
location to be reasonably determined by First Financial.
11.02. Deliveries. (a) At the Closing, First Financial will deliver
----------
to Community the following:
(i) the officers' certificate contemplated by
Section 8.02(g) hereof;
---------------
(ii) copies of all approvals by government regulatory
agencies necessary to consummate the Merger;
(iii) copies of the resolutions of the Board of
Directors of First Financial and Merger Corp
certified by the Secretary of First Financial and
Merger Corp, respectively, relative to the
approval of this Agreement and the Merger; and
(iv) such other documents as Community or its legal
counsel may reasonably request.
(b) At the Closing, Community will deliver to First Financial the
following:
(i) an opinion of its legal counsel in the form attached
hereto as Exhibit A and dated as of the Effective
Time;
(ii) the officers' certificate contemplated by
Section 8.01(f) hereof;
---------------
(iii) a list of Community's shareholders as of the
Effective Time certified by the President
and Secretary of Community;
(iv) copies of the resolutions adopted by the Board of
Directors and shareholders of Community certified
by the Secretary of Community relative to the
approval of this Agreement and the Merger;
(v) such other documents as First Financial or its legal
counsel may reasonably request; and
(vi) the Fairness Opinion required by Sections 8.01(h)
----------------
and 8.02(h) hereof; and
-------
A-33
SECTION 12
MISCELLANEOUS
-------------
12.01. Effective Agreement. This Agreement will be binding upon and
-------------------
inure to the benefit of the respective parties hereto and their respective
successors and assigns; provided, however, that this Agreement may not be
assigned by any party hereto without the prior written consent of the other
parties hereto; provided, however, that no such extension, waiver or
amendment agreed to after authorization of this Agreement by the
shareholders of Community will affect the rights of such shareholders in any
manner which is materially adverse to such shareholders. The
representations, warranties, covenants and agreements contained in this
Agreement are for the sole benefit of the parties hereto and their
successors and assigns, and they will not be construed as conferring any
rights on any other persons.
12.02. Waiver; Amendment. (a) The parties hereto may by an
-----------------
instrument in writing: (i) extend the time for the performance of or
otherwise amend any of the covenants, conditions or agreements of the other
parties under this Agreement; (ii) waive any inaccuracies in the
representations or warranties of the other parties contained in this
Agreement or in any document delivered pursuant hereto or thereto; (iii)
waive the performance by the other parties of any of the covenants or
agreements to be performed by it or them under this Agreement; or (iv) waive
the satisfaction or fulfillment of any condition, the nonsatisfaction or
nonfulfillment of which is a condition to the right of the party so waiving
to consummate the Merger. The waiver by any party hereto of a breach of or
noncompliance with any provision of this Agreement will not operate or be
construed as a continuing waiver or a waiver of any other or subsequent
breach or noncompliance hereunder.
(b) This Agreement may be amended, modified or supplemented only
by a written agreement executed by the parties hereto.
12.03. Notices. All notices, requests and other communications
-------
hereunder will be in writing (which will include telecopier communication)
and will be deemed to have been duly given if delivered by hand and
receipted for, sent by certified United States Mail, return receipt
requested, first class postage pre-paid, delivered by overnight express
receipted delivery service or telecopied if confirmed immediately thereafter
by also mailing a copy of such notice, request or other communication by
certified United States Mail, return receipt requested, with first class
postage pre-paid as follows:
If to First Financial: with a copy to (which will not
constitute notice):
First Financial Corporation Krieg DeVault Alexander & Capehart
One First Financial Plaza One Indiana Square, Suite 2800
PO Box 540 Indianapolis, Indiana 46204-2017
Terre Haute, Indiana 447807 ATTN: John W. Tanselle, Esq.
ATTN: Michael A. Carty, CFO and Secretary Telephone: (317) 238-6216
Telephone: (812) 238-6264 Telecopier: (317) 636-1507
Telecopier: (812) 238-6140
A-34
If to Community: with a copy to (which will not
constitute notice):
Community Financial Corp. Thompson Coburn LLP
240 E. Chestnut Street One Firstar Plaza
Olney, Illinois 62450-2295 St. Louis, Missouri 63101
ATTN: Wayne H. Benson, President ATTN: Gerard K. Sandweg, Jr.
Telephone: (618) 395-8676 Telephone: (314) 552-6104
Telecopier: (618) 392-4619 Telecopier: (314) 552-7104
or such substituted address or person as any of them have given to the other
in writing. All such notices, requests or other communications will be
effective: (a) if delivered by hand, when delivered; (b) if mailed in the
manner provided herein, five (5) business days after deposit with the United
States Postal Service; (c) if delivered by overnight express delivery
service, on the next business day after deposit with such service; and (d)
if by telecopier, on the next business day if also confirmed by mail in the
manner provided herein.
12.04. Headings. The headings in this Agreement have been inserted
--------
solely for ease of reference and should not be considered in the
interpretation or construction of this Agreement.
12.05. Severability. In case any one or more of the provisions
------------
contained herein will, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability will not affect any other provision of this Agreement, but
this Agreement will be construed as if such invalid, illegal or
unenforceable provision or provisions had never been contained herein.
12.06. Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which will be an original, but such counterparts
will together constitute one and the same instrument.
12.07. Governing Law. This Agreement will be governed by and
-------------
construed in accordance with the laws of the State of Indiana and applicable
federal laws, without regard to principles of conflicts of law.
12.08. Entire Agreement. This Agreement and the Exhibits hereto
----------------
supersede all other prior or contemporaneous understandings, commitments,
representations, negotiations or agreements, whether oral or written, among
the parties hereto relating to the Merger or matters contemplated herein and
constitute the entire agreement between the parties hereto, except as
otherwise provided herein. Upon the execution of this Agreement by all the
parties hereto, any and all other prior writings of either party relating to
the Merger will terminate and will be rendered of no further force or
effect. The parties hereto agree that each party and its counsel reviewed
and revised this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party
will not be employed in the interpretation of this Agreement or any
amendments or exhibits hereto.
12.09. Survival of Representations, Warranties or Covenants. Except
----------------------------------------------------
as set forth in the following sentence, none of the representations,
warranties or covenants of the parties will survive the Effective Time or
the earlier termination of this Agreement, and thereafter First Financial,
Merger Corp, Community, and all the respective directors, officers and
employees of First Financial, Merger Corp and Community will have no further
liability with respect thereto, except for fraud or except as otherwise
provided by law, whether statutory, common law or otherwise. The covenants
contained in Sections 6.07 (regarding confidentiality), 9.02, 12.08, 12.09
-------------------------------------------------------------
and 12.10 shall survive termination of this Agreement. The covenants
- ---------
contained in Sections 6.07 (regarding confidentiality), 12.08, 12.09 and
-----------------------------------------------------------
12.10 shall survive the Effective Time.
- -----
12.10. Expenses. Each party to this Agreement shall pay its own
--------
expenses incidental to the Merger contemplated hereby.
A-35
12.11. Certain References. Whenever in this Agreement a singular
------------------
word is used, it also will include the plural wherever required by the
context and vice-versa. Except expressly stated otherwise, all references in
this Agreement to periods of days shall be construed to refer to calendar,
not business, days. The term "business day" will mean any day except
Saturday and Sunday when Terre Haute First National Bank in Terre Haute,
Indiana, the lead bank of First Financial, is open for the transaction of
business.
12.12. Disclosure Schedule. The Disclosure Schedule attached hereto
-------------------
is intended to be and hereby is specifically made a part of this Agreement.
A-36
IN WITNESS WHEREOF, First Financial, Merger Corp and Community have
made and entered into this Agreement as of the day and year first above
written and have caused this Agreement to be executed, attested in
counterparts and delivered by their duly authorized officers.
FIRST FINANCIAL CORPORATION
By: /s/ Donald E. Smith
--------------------------------------
Donald E. Smith, Chairman of the Board
and President
/s/ Michael A. Carty
- ------------------------------
Michael A. Carty, Secretary
FFC MERGER CORP
By: /s/ Donald E. Smith
--------------------------------------
Donald E. Smith, Chairman of the Board
and President
/s/ Michael A. Carty
- ------------------------------
Michael A. Carty, Secretary
COMMUNITY FINANCIAL CORP.
By: /s/ Wayne H. Benson
--------------------------------------
Wayne H. Benson, President
/s/ Steve Walser
- ------------------------------
Steve Walser, Secretary
A-37
ANNEX B
-------
AMENDMENT NO. 1 TO AGREEMENT OF AFFILIATION AND MERGER
------------------------------------------------------
THIS AMENDMENT NO. 1 ("Amendment") to the Agreement of Affiliation
and Merger ("Agreement") dated and effective as of the 30th day of March,
2001, by and between First Financial Corporation ("First Financial"), FFC
Merger Corp ("Merger Corp"), and Community Financial Corp. ("Community") is
made and entered into this 26th day of June, 2001 by and among First
Financial, Merger Corp and Community.
RECITALS
--------
1. The Agreement provides that Community will merge with and into
Merger Corp and that Merger Corp will survive the Merger.
2. First Financial, Merger Corp and Community desire to amend the
Agreement to provide that Merger Corp will be merged with and into Community
and that Community will survive the Merger.
3. The Agreement provides in Section 12.02(b) that it may only be
amended, modified or supplemented by the written agreement of First
Financial, Merger Corp and Community.
4. First Financial, Merger Corp and Community wish to amend, modify,
and supplement the Agreement as provided herein.
NOW, THEREFORE, the Agreement is hereby amended, as of the date
written above, as follows:
1. The Preamble of the Agreement is hereby amended to read as follows:
W I T N E S S E T H:
-------------------
WHEREAS, First Financial is an Indiana corporation registered as a
bank holding company under the federal Bank Holding Company Act of 1956, as
amended ("BHC Act"), with its principal office located in Terre Haute, Vigo
County, Indiana; and
WHEREAS, Merger Corp is an Indiana corporation with its principal
office located in Terre Haute, Vigo County, Indiana and is a wholly-owned
subsidiary of First Financial; and
WHEREAS, Community is an Illinois corporation registered as a bank
holding company under the BHC Act, with its principal office located in
Olney, Richland County, Illinois, and is the sole shareholder of Community
Bank and Trust, N.A., a national banking association ("Bank"); and
WHEREAS, it is the desire of First Financial and Community to
affiliate through a corporate reorganization whereby Merger Corp will be
merged with and into Community; and
WHEREAS, a majority of the entire Board of Directors of each of
First Financial, Merger Corp and Community have approved this Agreement,
authorized its execution and designated this Agreement a plan of
reorganization and a plan of merger.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties, covenants and agreements herein contained and
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, First Financial, Merger Corp and Community hereby
make this
B-1
Agreement and prescribe the terms and conditions of the affiliation of First
Financial and Community and the mode of carrying such merger into effect as
follows:
2. Section 1 is hereby amended to read as follows:
SECTION 1
THE MERGER
----------
1.01. General Description. Upon the terms and subject to
-------------------
the conditions of this Agreement, at the Effective Time (as defined
in Section 10 hereof), Merger Corp shall be merged with and into
----------
Community ("Merger"). Community shall survive the Merger
("Surviving Corporation") and shall continue its corporate
existence under the laws of the State of Illinois pursuant to the
provisions of and with the effect provided in the Illinois Business
Corporations Act of 1983, as amended, as a wholly-owned subsidiary
of First Financial.
1.02. Name, Officers and Management. The name of the
-----------------------------
Surviving Corporation shall be "FFC Merger Corp." The officers of
Merger Corp serving at the Effective Time shall become and serve as
the officers of the Surviving Corporation, until such time as their
successors shall have been duly elected and have been qualified.
The directors of Merger Corp as of the Effective Time shall become
and serve as the directors of the Surviving Corporation, until such
time as their successors have been duly elected and have been
qualified. The directors and officers of Community shall cease to
be directors and officers of Community as of the Effective Time and
shall not become directors or officers of the Surviving Corporation
or First Financial after the Effective Time.
1.03. Capital Structure. The capital of the Surviving
-----------------
Corporation shall be not less than the capital of Community
immediately prior to the Effective Time.
1.04. Articles of Incorporation and By-Laws. In connection
-------------------------------------
with the Merger, the Articles of Incorporation of Community shall
be amended and restated in the form attached as Exhibit A. The
Articles of Incorporation attached hereto as Exhibit A and the
By-Laws of Merger Corp in existence at the Effective Time shall
become the Articles of Incorporation and By-Laws of the Surviving
Corporation following the Effective Time, until such Articles of
Incorporation and By-Laws shall be further amended as provided by
applicable law.
1.05. Assets and Liabilities. At the Effective Time, the
----------------------
title to all assets, real estate and other property owned by Merger
Corp shall vest in Community without reversion or impairment. At
the Effective Time, all liabilities of Merger Corp shall be assumed
by Community.
1.06. Additional Actions. If at any time after the
------------------
Effective Time, Merger Corp or First Financial shall consider or be
advised that any further deeds, assignments or assurances in law or
any other acts are necessary or desirable (a) to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation its
right, title or interest in, to or under any of the rights,
properties or assets of Community or the Bank, or (b) otherwise
carry out the purposes of this Agreement, Community and the Bank
and their respective officers and directors shall be deemed to have
granted to the Surviving Corporation an irrevocable power of
attorney to execute and deliver all such deeds, assignments or
assurances in law and to do all acts necessary or proper to vest,
perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to
carry on the purposes of this Agreement, and the officers and
directors of the Surviving Corporation are authorized in the name
of Community or the Bank or otherwise to take any and all such
action.
B-2
3. Capitalized terms not otherwise defined in this Amendment shall have
the meanings ascribed to them in the Agreement.
4. Except as amended hereby, the Agreement shall continue in full force
and effect in accordance with its terms.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
B-3
IN WITNESS WHEREOF, First Financial, Merger Corp and Community have
made and entered into this Amendment as of the day and year first above
written and have caused this Amendment to be executed in counterparts by
their duly authorized officers.
FIRST FINANCIAL CORPORATION
By: /s/ Donald E. Smith
--------------------------------------
Donald E. Smith, Chairman of the Board
and President
/s/ Michael A. Carty
- -------------------------------
Michael A. Carty, Secretary
FFC MERGER CORP
By: /s/ Donald E. Smith
--------------------------------------
Donald E. Smith, Chairman of the Board
and President
/s/ Michael A. Carty
- -------------------------------
Michael A. Carty, Secretary
COMMUNITY FINANCIAL CORP.
By: /s/ Wayne H. Benson
--------------------------------------
Wayne H. Benson, President
/s/ Steve Walser
- -------------------------------
Steve Walser, Secretary
B-4
ANNEX C
-------
AMENDMENT NO. 2 TO AGREEMENT OF AFFILIATION AND MERGER
------------------------------------------------------
THIS AMENDMENT NO. 2 ("Amendment No. 2") to the Agreement of
Affiliation and Merger, as amended June 26, 2001 ("Agreement"), dated and
effective as of the 30th day of March, 2001, by and between First Financial
Corporation ("First Financial"), FFC Merger Corp ("Merger Corp"), and
Community Financial Corp. ("Community") is made and entered into as of the
20th day of November, 2001 by and among First Financial, Merger Corp and
Community. Except as otherwise amended by this Amendment No. 2, all
capitalized terms not herein defined shall have the meanings set forth in
the Agreement.
RECITALS
--------
A. First Financial, Merger Corp and Community desire to amend
certain provisions of the Agreement relating to (1) the Aggregate Purchase
Price, (2) the date by which First Financial will make its employee benefit
plans available to Community employees, (3) the nature of the "Agreement
Under the Bank Holding Company Act" proposed to First Financial by the Board
of Governors of the Federal Reserve System in connection with the Merger,
(4) the right of First Financial to terminate the Merger and (5) the date on
which the Agreement may be terminated if the Merger is not completed and in
certain other regards as herein stated.
B. Section 12.02(b) of the Agreement provides that the Agreement
may only be amended, modified or supplemented by the written agreement of First
Financial, Merger Corp and Community.
C. First Financial, Merger Corp and Community wish to amend, modify
and supplement the Agreement as provided herein.
NOW, THEREFORE, the Agreement is hereby amended, as of the date
written above, as follows:
1. Section 2.02(a) of the Agreement is hereby amended and replaced
in its entirety to read as follows:
(a) As consideration for the Merger, shareholders of Community,
other than those shareholders who have exercised their dissenter's
rights as set forth in Section 3, will be entitled to receive in
---------
cash for each share of Community common stock they own an amount
equal to:
(i) the Aggregate Purchase Price (as defined in Section
-------
2.02(b), and as may be amended or modified by Section
------- -------
2.02(c)) minus (A) the aggregate amount to be paid to the
-------
Community ESOP pursuant to Section 2.02(e), and (B) minus
---------------
the aggregate amount to be paid to the holders of record
as of the Effective Time of the outstanding "in the money"
options of Community (as defined in Section 2.02(f))
---------------
pursuant to Section 2.02(f),
---------------
(ii) divided by 2,147,470 (which is the number of shares of
Community common stock which will be outstanding as of the
Effective Time);
provided, however, in no event shall such shareholders receive an amount
less than $15.14 for each share of Community common stock.
2. The initial clause of Section 2.02(b) of the Agreement is
hereby amended and replaced in its entirety to read as follows:
C-1
(b) First Financial shall pay an aggregate purchase price (the
"Aggregate Purchase Price"), determined as of five business days
prior to the Closing, equal to the sum of the following less any
liabilities of Community (computed on a parent company only basis):
3. The fourth sentence of Section 4.01 of the Agreement is hereby
amended and replaced in its entirety to read as follows:
Except as set forth in the Disclosure Schedule (for
purposes of this Agreement, "Disclosure Schedule" shall mean the
schedules referencing the applicable provisions of this Agreement
which are attached hereto and made a part of this Agreement, as
such schedules may be amended from time to time), Community's only
subsidiary is the Bank, and it has no other subsidiaries and owns
no voting stock or equity securities of any corporation,
partnership, association or other entity, except for stock held by
the Bank in the Federal Home Loan Bank of Chicago and the Federal
Reserve Bank of St. Louis.
4. Section 4.22(f) of the Agreement is hereby amended and replaced
in its entirety to read as follows:
(f) Except as disclosed in writing to First Financial, increased
the salary of any director, officer or employee or entered into any
employment contract, indemnity agreement or understanding with any
officer or employee or installed any employee welfare, pension,
retirement, stock option, stock appreciation, stock dividend,
profit sharing or other similar plan or arrangement;
5. Section 7.03(a) of the Agreement is hereby amended and replaced
in its entirety to read as follows:
(a) At such time as First Financial shall determine, in its sole
discretion, but in no event later than June 30, 2002, First
Financial will make available to the employees of Community who
continue as employees of any subsidiary of First Financial after
the Effective Time and, further, subject to Subsections 7.03(b),
--------------------
(c) and (d) hereof, substantially the same employee benefits on
-----------
substantially the same terms and conditions that First Financial
may offer to similarly situated officers and employees of its
banking subsidiaries from time to time. Until such time as the
employees of Community become covered by the First Financial
welfare benefit plans, the employees of Community shall remain
covered by their respective welfare benefit plans, subject to the
terms of such plans.
6. Section 8.01(d) of the Agreement is hereby amended and replaced
in its entirety to read as follows:
(d) Regulatory Approvals. The appropriate banking regulators will
--------------------
have authorized and approved the Merger and agreed to an "Agreement
Under The Bank Holding Company Act" regarding First Financial's
status as a financial holding company (after considering the
preliminary results of the most recent regulatory examination of
Community Bank) on terms and conditions satisfactory to First
Financial. In addition, all appropriate orders, consents, approvals
and clearances from all other regulatory agencies and governmental
authorities whose orders, consents, approvals or clearances are
required by law for consummation of the Merger contemplated by this
Agreement will have been obtained on terms and conditions
satisfactory to First Financial.
C-2
7. Section 9.01(a)(i) of the Agreement is hereby amended and
replaced in its entirety to read as follows:
(i) the Merger contemplated by this Agreement has not been
consummated by January 31, 2002; or
8. Section 9.01(b)(viii) is hereby added to the Agreement to read
as follows:
(viii) the amount to be received by the shareholders of
Community, other than those shareholders who have exercised their
dissenter's rights as set forth in Section 3, for each of their
---------
shares of common stock pursuant to Section 2.02(a) is less than
$15.14.
9. An amendment to Schedule 4.09(a)(iv) to the Disclosure
Schedule is attached hereto as Annex A.
-------
10. Except as amended hereby, the Agreement shall continue in
full force and effect in accordance with its terms.
C-3
IN WITNESS WHEREOF, First Financial, Merger Corp and
Community have made and entered into this Amendment No. 2 as of the day and
year first above written and have caused this Amendment No. 2 to be executed
in counterparts by their duly authorized officers.
FIRST FINANCIAL CORPORATION
By /s/ Donald E. Smith
-----------------------------------
Donald E. Smith,
Chairman of the Board and President
/s/ Michael A. Carty
- --------------------------------
Michael A. Carty, Secretary
FFC MERGER CORP
By /s/ Donald E. Smith
-----------------------------------
Donald E. Smith,
Chairman of the Board and President
/s/ Michael A. Carty
- --------------------------------
Michael A. Carty, Secretary
COMMUNITY FINANCIAL CORP.
By /s/ Wayne H. Benson
-----------------------------------
Wayne H. Benson, President
/s/ Steve Walser
- --------------------------------
Steve Walser, Secretary
C-4
ANNEX D
-------
Professional Bank Services, The 1000 Building
Incorporated 6200 Dutchman's Lane, Suite 305
Louisville, Kentucky 40205
Atlanta, Chicago,
Louisville, Nashville, 502 451-6633
Ocala 502 451-6755 (FAX)
800-523-4778 (WATS)
Consultants to the www.probank.com
Financial Industry pbs@probank.com
[ProfessionalBankService logo]
November 21, 2001
Board of Directors
Community Financial Corp
240 East Chestnut Street
Olney, Illinois 62450
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial perspective, to the common shareholders of Community
Financial Corp, Olney, Illinois (the "Company") of the proposed acquisition
of the Company by First Financial Corporation, Terre Haute, Indiana
("THFF"). In the proposed acquisition, Company shareholders will receive
cash equal to $19.5 million for Community Bank and Trust, National
Association (the "Bank") as well as additional cash consideration equal to
the net value all other assets held by the Company, on a parent company only
basis, at the effective time. Based on this formula, the minimum total cash
consideration to be received will equal approximately $33.1 million for all
of the Company's common shares and options outstanding or $15.14 per common
share subject to upward adjustment as further defined in the Agreement of
Affiliation and Merger between THFF, FFC Merger Corp and the Company, as
amended (the "Agreement").
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 Company including: (i) December 31, 1998, March 31,
1999, June 30, 1999, September 30, 1999, December 31, 1999, March 31, 2000,
June 30, 2000, September 30, 2000, December 31, 2000, March 31, 2001, June
30, 2001 and September 30, 2001 forms 10Q and 10K filed with the SEC by the
Company; (ii) December 31, 1999 and 2000 Uniform Bank Performance Report of
the Company and the Bank; (iii) quarter end and year end classified and
problem loan listings; and (iv) quarter end and year end loan loss reserve
analysis. We have reviewed and tabulated statistical data regarding the loan
portfolio, securities portfolio and other performance ratios and
D-1
statistics. Financial projections were prepared and analyzed as well as
other financial studies, analyses and investigations as deemed relevant for
the purposes of this opinion. In review of the aforementioned information,
we have taken into account our assessment of general market and financial
conditions, our experience in other transactions, and our knowledge of the
banking industry generally. We have also taken into consideration other
indications of interest received by the Company.
We have not compiled, reviewed or audited the financial statements of the
Company or THFF, 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 THFF.
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,
/s/ Professional Bank Services, Inc.
Professional Bank Services, Inc.
D-2
ANNEX E
-------
DRAFT OPINION
October 30, 2001
First Bankers Trust Company as
Trustee of the Community Financial Corp.
Employee Stock Ownership Plan
c/o Mr. Norman Rosson
First Bankers Trust Company
225 West Washington Street
Suite 2200
Chicago, IL 60606
Dear Ladies & Gentlemen:
Lakeshore Valuation Group, L.L.C. ("Lakeshore") was retained by First
Bankers Trust Company, as Trustee of the Community Financial Corp. Employee
Stock Ownership Plan (the "Trustee"), to determine, among other things,
whether the transaction described below is fair to the ESOP from a financial
point of view.
Specifically, you have asked us to determine 1) whether the purchase price
to be paid for the shares of Community Financial Corp. (the "Company") stock
owned by the Community Financial Corp. Employee Stock Ownership Plan (the
"Plan") is at least equal to fair market value as of the close of the
transaction for the purposes of the definition of "adequate consideration"
as set forth in Section 3 (18) of ERISA, and 2) that the terms and
conditions of the proposed merger of FFC Merger Corp with and into the
Company (the "Proposed Merger"), as they apply to the Plan, including the
disposition of shares of Company stock, prior to the Proposed Merger (taking
into account the actions required to be taken in connection therewith by
Section 6.12 of the Merger Agreement) and the disposition of Company stock
in connection therewith, are fair to the Plan and Plan participants from a
financial point of view.
In arriving at our opinion, we reviewed and analyzed the Agreement of
Affiliation and Merger entered into on the 30th day in March 2001, amended
the 26th day of June 2001, by and between First Financial Corporation
("First Financial"), FFC Merger Corp and the Company. We understand the
terms of the consideration or Aggregate Purchase Price to be as follows:
o $19,500,000;
o The proceeds received by the Company on an after tax basis from the
sale of American Bank of Illinois in Highland, MidAmerica Bank of
St. Clair County and the Egyptian State Bank;
o The amount of cash held by the Company on a parent company only
basis;
o The amounts receivable by the Company pursuant to requests for
refunds of income taxes paid;
o An amount equal to the principal balances on the loans identified
on the Disclosure Schedule which have been placed on the parent
Company only financial statements and for which Community Bank and
Trust ("CBT") will have a $300,000 reserve allocated;
o An amount equal to the fair market value of the securities held by
the Company on a parent company only basis;
E-1
o Less the fees and expenses incurred by the Company pursuant to
Section 6.13(b) which shall not exceed $25,000;
o And less any liabilities of the Company on a parent company only
basis.
In conjunction with this Opinion, we have made such reviews, analyses, and
inquiries, as we deemed necessary and appropriate under the circumstances.
Among other things we have reviewed the following:
o The Company 10KSB filed with the Securities and Exchange Commission
("SEC") on April 2, 2001;
o The Company 10KSB/A filed with the SEC on April 30, 2001;
o The Company 10QSB filed with the SEC on August 14, 2001;
o The Company 8K filed with the SEC on August 14, 2001;
o The CBT internally prepared consolidating Income Statements and
Balance Sheets for the quarters ending March 31, 1997 through
September 30, 2001;
o The Uniform Bank Performance Report for CBT for the period ending
December 31, 2000;
o The CBT Statement of Financial Condition for the five month period
ending May 31, 2001;
o The CBT Asset/Liability Committee Reports for the periods ending
December 31, 1999, December 31, 2000 and May 31, 2001;
o The Consolidated Reports of Condition and Income for CBT filed with
the Federal Reserve for the twelve month fiscal periods ending
December 31, 1999, December 31, 2000 and for the nine month fiscal
period ending September 30, 2001;
o The CBT Interest Earning Asset Summary by Branch Location as of
June 30, 2001;
o The CBT Budget for 2001;
o The CBT Monthly Statement of Cash Flow from September 30, 1999
through June 30, 2001;
o The securities portfolio listing as of June 30, 2001; and
o Market pricing through October 26, 2001.
We have also reviewed and analyzed the financial and operating information
with respect to the business, operations and prospects of the Company
furnished to us by the Company. In addition, we have had discussions with
the management of the Company concerning the business, operations, assets,
financial conditions and prospects of the Company, and we have undertaken
such other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information,
including information provided by the Company, its advisors, and other
external sources of market,
E-2
industry, and Company data. We have, however, exercised independent judgment
and have not relied upon information that we consider inaccurate or
unreliable. We have further relied upon the assurances of management of the
Company that they are not aware of any facts that would make such
information inaccurate or misleading. We have also placed reliance on the
material provided by management and outside parties, and have made
assumptions regarding certain important matters, including Title, Contingent
Liabilities, Information, Financial Condition, Regulations and Licenses.
These assumptions and limiting conditions are detailed on attachments
hereto, and are hereby incorporated in this opinion.
We have assumed that the financial projections of the Company have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company. In arriving at our
opinion, we have conducted a limited physical inspection of the properties
and facilities of the Company but we have not made or obtained any
evaluations or appraisals of the assets or liabilities of the Company.
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the purchase price to be paid for the shares of Company
stock owned by the Plan is at least equal to fair market value as of the
close of the transaction for the purposes of the definition of "adequate
consideration" as set forth in Section 3 (18) of ERISA, and that the terms
and conditions of the Proposed Merger, as they apply to the Plan, including
the disposition of shares of Company stock, prior to the Proposed Merger
(taking into account the actions required to be taken in connection
therewith by Section 6.12 of the Merger Agreement) and the disposition of
Company stock in connection therewith, are fair to the Plan and Plan
participants from a financial point of view.
This opinion is solely for the use and benefit of the Trustee. This opinion
may not be summarized, excerpted from, or otherwise publicly referred to
without prior explicit written consent, which will not unreasonably be
withheld. However, this opinion may be included in any filing required to be
made by the Company with the SEC in connection with the Proposed Merger and
in materials delivered to the Company's stockholders that are a part of such
filings, provided that any such description or inclusion shall be subject to
our prior review and approval, which approval shall not be unreasonably
withheld.
Lakeshore and its employees have no present or prospective interest in the
property that is the subject of this Opinion, and also have no personal
interest or bias with respect to the parties involved. Further, Lakeshore's
compensation is not contingent on an action or event resulting from the
analyses, opinions, or conclusions in, or the use of, this Opinion.
Regards,
Lakeshore Valuation Group, L.L.C.
By
-------------------------------------------
Its
------------------------------------------
Attachments
E-3
ANNEX F
-------
Following is the text of the dissenters' rights provisions set
forth at Sections 11.65 and 11.70, respectively, of the Illinois Business
Corporation Act of 1983, as amended:
SECTION 11.65. RIGHT TO DISSENT. (a) A shareholder of a corporation is
entitled to dissent from, and obtain payment for his or her shares in the
event of any of the following corporate actions: (1) consummation of a plan
of merger or consolidation or a plan of share exchange to which the
corporation is a party if (i) shareholder authorization is required for the
merger or consolidation or the share exchange by Section 11.20 or the
articles of incorporation or (ii) the corporation is a subsidiary that is
merged with its parent or another subsidiary under Section 11.30; (2)
consummation of sale, lease or exchange of all, or substantially all, of the
property and assets of the corporation other than in the usual and regular
course of business; (3) an amendment of the articles of incorporation that
materially and adversely affects rights in respect of a dissenter's shares
because it: (i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
such shares; (iii) in the case of a corporation incorporated prior to
January 1, 1982, limits or eliminates cumulative voting rights with respect
to such shares; or (4) any other corporate action taken pursuant to a
shareholder vote if the articles of incorporation, by-laws, or a resolution
of the board of directors provide that shareholders are entitled to dissent
and obtain payment for their shares in accordance with the procedures set
forth in Section 11.70 or as may be otherwise provided in the articles,
by-laws or resolution.
(b) A shareholder entitled to dissent and obtain payment for his or
her shares under this Section may not challenge the corporate action
creating his or her entitlement unless the action is fraudulent with respect
to the shareholder or the corporation or constitutes a breach of a fiduciary
duty owed to the shareholder.
(c) A record owner of shares may assert dissenters' rights as to
fewer than all the shares recorded in such person's name only if such person
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person
on whose behalf the record owner asserts dissenters' rights. The rights of a
partial dissenter are determined as if the shares as to which dissent is
made and the other shares were recorded in the names of different
shareholders. A beneficial owner of shares who is not the record owner may
assert dissenters' rights as to shares held on such person's behalf only if
the beneficial owner submits to the corporation the record owner's written
consent to the dissent before or at the same time the beneficial owner
asserts dissenters' rights.
SECTION 11.70. PROCEDURE TO DISSENT. (a) If the corporate action
giving rise to the right to dissent is to be approved at a meeting of
shareholders, the notice of meeting shall inform the shareholders of their
right to dissent and the procedure to dissent. If, prior to the meeting, the
corporation furnishes to the shareholders material information with respect
to the transaction that will objectively enable a shareholder to vote on the
transaction and to determine whether or not to exercise dissenters' rights,
a shareholder may assert dissenters' rights only if the shareholder delivers
to the corporation before the vote is taken a written demand for payment for
his or her shares if the proposed action is consummated, and the shareholder
does not vote in favor of the proposed action.
(b) If the corporate action giving rise to the right to dissent is
not to be approved at a meeting of shareholders, the notice to shareholders
describing the action taken under Section 11.30 or Section 7.10 shall inform
the shareholders of their right to dissent and the procedure to dissent. If,
prior to or concurrently with the notice, the corporation furnishes to the
shareholders material information with respect to the transaction that will
objectively enable a shareholder to determine whether or not to exercise
dissenters' rights, a shareholder may assert dissenter's rights only if he
or she delivers to the corporation within 30 days from the date of mailing
the notice a written demand for payment for his or her shares.
F-1
(c) Within 10 days after the date on which the corporate action
giving rise to the right to dissent is effective or 30 days after the
shareholder delivers to the corporation the written demand for payment,
whichever is later, the corporation shall send each shareholder who has
delivered a written demand for payment a statement setting forth the opinion
of the corporation as to the estimated fair value of the shares, the
corporation's latest balance sheet as of the end of a fiscal year ending not
earlier than 16 months before the delivery of the statement, together with
the statement of income for that year and the latest available interim
financial statements, and either a commitment to pay for the shares of the
dissenting shareholder at the estimated fair value thereof upon transmittal
to the corporation of the certificate or certificates, or other evidence of
ownership, with respect to the shares, or instructions to the dissenting
shareholder to sell his or her shares within 10 days after delivery of the
corporation's statement to the shareholder. The corporation may instruct the
shareholder to sell only if there is a public market for the shares at which
the shares may be readily sold. If the shareholder does not sell within that
10 day period after being so instructed by the corporation, for purposes of
this Section the shareholder shall be deemed to have sold his or her shares
at the average closing price of the shares, if listed on a national
exchange, or the average of the bid and asked price with respect to the
shares quoted by a principal market maker, if not listed on a national
exchange, during that 10 day period.
(d) A shareholder who makes written demand for payment under this
Section retains all other rights of a shareholder until those rights are
cancelled or modified by the consummation of the proposed corporate action.
Upon consummation of that action, the corporation shall pay to each
dissenter who transmits to the corporation the certificate or other evidence
of ownership of the shares the amount the corporation estimates to be the
fair value of the shares, plus accrued interest, accompanied by a written
explanation of how the interest was calculated.
(e) If the shareholder does not agree with the opinion of the
corporation as to the estimated fair value of the shares or the amount of
interest due, the shareholder, within 30 days from the delivery of the
corporation's statement of value, shall notify the corporation in writing of
the shareholder's estimated fair value and amount of interest due and demand
payment for the difference between the shareholder's estimate of fair value
and interest due and the amount of the payment by the corporation or the
proceeds of sale by the shareholder, whichever is applicable because of the
procedure for which the corporation opted pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the
shareholder notification of estimate of fair value of the shares and
interest due, the corporation and the dissenting shareholder have not agreed
in writing upon the fair value of the shares and interest due, the
corporation shall either pay the difference in value demanded by the
shareholder, with interest, or file a petition in the circuit court of the
county in which either the registered office or the principal office of the
corporation is located, requesting the court to determine the fair value of
the shares and interest due. The corporation shall make all dissenters,
whether or not residents of this State, whose demands remain unsettled
parties to the proceeding as an action against their shares and all parties
shall be served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law. Failure
of the corporation to commence an action pursuant to this Section shall not
limit or affect the right of the dissenting shareholders to otherwise
commence an action as permitted by law.
(g) The jurisdiction of the court in which the proceeding is
commenced under subsection (f) by a corporation is plenary and exclusive.
The court may appoint one or more persons as appraisers to receive evidence
and recommend decision on the question of fair value. The appraisers have
the power described in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds that the fair
value of his or her shares, plus interest, exceeds the amount paid by the
corporation or the proceeds of sale by the shareholder, whichever amount is
applicable.
F-2
(i) The court, in a proceeding commenced under subsection (f),
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of the appraisers, if any, appointed by the court
under subsection (g), but shall exclude the fees and expenses of counsel and
experts for the respective parties. If the fair value of the shares as
determined by the court materially exceeds the amount which the corporation
estimated to be the fair value of the shares or if no estimate was made in
accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter
estimated to be the fair value of the shares materially exceeds the fair
value of the shares as determined by the court, then all or any part of the
costs may be assessed against that dissenter. The court may also assess the
fees and expenses of counsel and experts for the respective parties, in
amounts the court finds equitable, as follows:
(1) Against the corporation and in favor of any or all
dissenters if the court finds that the corporation did not
substantially comply with the requirements of subsections (a), (b),
(c), (d), or (f).
(2) Against either the corporation or a dissenter and in
favor of any other party if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to the rights
provided by this Section.
If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated and that
the fees for those services should not be assessed against the corporation,
the court may award to that counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who are benefited. Except as otherwise
provided in this Section, the practice, procedure, judgment and costs shall
be governed by the Code of Civil Procedure.
(j) As used in this Section:
(1) "Fair value," with respect to a dissenter's shares,
means the value of the shares immediately before the consummation
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.
(2) "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.
F-3
COMMUNITY FINANCIAL CORP.
240 E. CHESTNUT STREET
OLNEY, ILLINOIS 62450-2295
For the Special Meeting of Shareholders to be held December 19, 2001
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned shareholder(s) of COMMUNITY FINANCIAL CORP. (the
"Company") does hereby nominate, constitute and appoint Douglas Tompson and
Deborah Keller, and each of them (with full power to act alone), true and
lawful proxies and attorneys-in-fact, with full power of substitution, for
the undersigned and in the name, place and stead of the undersigned to vote
all of the shares of common stock, $0.01 par value (the "Common Stock"), of
the Company standing in the name of the undersigned on its books at the
close of business on October 26, 2001 at the Special Meeting of Shareholders
to be held at 501 East Main Street, Olney, Illinois 62450-2295, on December
19, 2001, at 2:00 p.m., local time, and at any adjournments or postponements
thereof, with all of the powers the undersigned would possess if personally
present, as follows:
1. To consider and vote upon the approval of the Agreement of Affiliation
and Merger, dated as of March 30, 2001, as amended by that certain
Amendment No. 1 to Agreement of Affiliation and Merger, dated as of
June 26, 2001, and that certain Amendment No. 2 to Agreement of
Affiliation and Merger, dated as of November 20, 2001 (the
"Agreement"), pursuant to which the Company will be acquired by First
Financial Corporation ("First Financial") by means of a merger of FFC
Merger Corp, a wholly owned subsidiary of First Financial, with and
into the Company with the Company as the surviving corporation. Upon
consummation of the merger, each share of Common Stock owned
immediately prior to the merger will be converted into the right to
receive a cash payment of not less than $15.14 per share, subject to
upward adjustment based upon a formula set forth in the Agreement (the
"Merger Consideration"); provided that First Financial may terminate
the Agreement if the formula results in a per share price of less than
$15.14, determined as of five business days prior to the closing date
of the merger. In addition, each holder of an option to acquire Common
Stock with an exercise price less than the Merger Consideration will be
entitled to receive, for each option, the difference between the Merger
Consideration and the exercise price of the option multiplied by the
number of shares covered by the option, as set forth in detail in the
accompanying Proxy Statement.
/ / FOR / / AGAINST / / ABSTAIN
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THE AGREEMENT.
The undersigned hereby revokes any other proxies to vote at such
meeting and hereby ratifies and confirms all that the proxies and
attorneys-in-fact, or each of them, appointed hereunder may lawfully do by
virtue hereof. Said proxies and attorneys-in-fact, without limiting their
general authority, are specifically authorized to vote in accordance with
their best judgment with respect to all matters incident to the conduct of
the Special Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN
HEREIN, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL LISTED ABOVE.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY.
RETURN USING THE ENVELOPE PROVIDED.
Check appropriate box Address Change? / /
Indicate changes below: Name Change? / /
-----------------------------------
- ------------------------------------------ -----------------------------------
Name of Shareholder (Please print clearly) Signature(s) In Box
- ------------------------------------------
Number of Shares
Please sign this proxy card exactly as your shares are registered. When
signing as attorney, executor, administrator, trustee or guardian, please
give your full title. If more than one person holds the power to vote the
same shares, any one of them may sign this proxy card. If the shareholder is
a corporation, this proxy card must be signed by a duly authorized officer
or attorney of the shareholder.
By signing this proxy card, you acknowledge receipt of the Notice of Special
Meeting and the Proxy Statement, dated November 21, 2001, relating to the
special meeting.