-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L0RnVu+V5cF6VZqdseemVsAwYXkiEg7Z+lEMRsAqlBgzAVT6nWlxwFush4I54Y53 OBD75TOl/ZORpnoQOUyWig== 0000941965-98-000023.txt : 19980227 0000941965-98-000023.hdr.sgml : 19980227 ACCESSION NUMBER: 0000941965-98-000023 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GERMAN AMERICAN BANCORP CENTRAL INDEX KEY: 0000714395 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351547518 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-46913 FILM NUMBER: 98549631 BUSINESS ADDRESS: STREET 1: 711 MAIN ST STREET 2: P O BOX 810 CITY: JASPER STATE: IN ZIP: 47546 BUSINESS PHONE: 8124821314 MAIL ADDRESS: STREET 1: 711 MAIN STREET CITY: JASPER STATE: IN ZIP: 47546 FORMER COMPANY: FORMER CONFORMED NAME: GAB BANCORP DATE OF NAME CHANGE: 19950510 S-4 1 REGISTRATION STATEMENT ON FORM S-4 File No. 333-_________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 GERMAN AMERICAN BANCORP (Exact name of Registrant as specified in its charter) INDIANA (State or other jurisdiction of incorporation or organization) 6711 (Primary Standard Industrial Classification Code Number) 35-1547518 (I.R.S. Employer Identification No.) 711 MAIN STREET, BOX 810 JASPER, INDIANA 47546-3042; (812) 482-1314 (Address, including Zip Code, and telephone number, including area code, of registrant's principal executive offices) GEORGE W. ASTRIKE, CHAIRMAN GERMAN AMERICAN BANCORP 711 MAIN STREET, BOX 810 JASPER, INDIANA 47546-3042; (812) 482-1314 Telecopier (812) 482-0745 (Name, address, including Zip Code, and telephone number, including area code, of agent for service) Copy to: Mark B. Barnes, Esq. Nicholas J. Chulos, Esq. Leagre Chandler & Millard Krieg, DeVault, Alexander 9100 Keystone Crossing & Capehart Suite 800 One Indiana Square Indianapolis, IN 46240-0609 Suite 2800 Indianapolis, IN 46204 Telephone (317) 843-1655 Telephone (317) 636-4341 Telecopier (317) 846-7900 Telecopier (317) 636-1507 -1- R.J. McConnell, Esq. Bose McKinney & Evans 2700 First Indiana Plaza 135 North Pennsylvania Street Indianapolis, Indiana 46204 Telephone (317) 684-5000 Telecopier (317) 684-5773 Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ]
Calculation of Registration Fee - -------------------------------------------------------------------------------------------------------------------- Proposed Proposed Title of each class of maximum maximum securities to be Amount to be offering price aggregate Amount of registered (1) registered (2) per unit (4) offering price (4) registration fee - --------------------------------------------------------------------------------------------------------------------- Common Shares, $10.00 Par Value, $1.00 Stated Value 1,137,504 shares (2) $ 8.01 $9,113,384 $2,689 Common Shares, $10.00 Par Value, $1.00 Stated Value 71,678 shares (3) $ 20.58 $1,475,487 $436
(1) This Registration Statement relates to securities of Registrant, issuable to holders of common stock of CSB Bancorp, Petersburg, Indiana ("CSB") and FSB Financial Corporation, Francisco, Indiana ("FSB"), in the proposed mergers of CSB and FSB into a wholly owned subsidiary of Registrant. (2) Represents the maximum number of shares to be offered to CSB shareholders. (3) Represents the estimated number of shares to be offered to FSB shareholders. (4) Estimated solely for the purposes of calculating the registration fee based, with respect to 1,137,504 shares, on the book value of the Common Stock of CSB as of September 30, 1997 and, with respect to 71,678 shares, the book value of the common stock of FSB as of December 31, 1997, in accordance with Rule 457(f)(2) of the General Rules and Regulations under the Securities Act of 1933. ------------------------------------------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ------------------------------------------------------------ -2- CSB BANCORP MAIN AND SEVENTH STREETS PETERSBURG, INDIANA 47567 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ______________, 1998 Notice is hereby given that a Special Meeting of Shareholders of CSB Bancorp ("CSB") will be held at the Southside branch of The Citizens State Bank of Petersburg located at Highway 61 and Illinois Street, Petersburg, Indiana, on ______________, 1998, at _____ [a.m./p.m.], Petersburg time (the "Special Meeting"), for the following purposes: 1. To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Reorganization dated December 8, 1997, among CSB; The Citizens State Bank of Petersburg, a wholly owned subsidiary of CSB ("Citizens"); German American Bancorp ("German American"); German American Holdings Corporation, a wholly owned subsidiary of German American ("GAHC"); and Community Trust Bank, a wholly owned subsidiary of GAHC (the "CSB Agreement"), and a Plan of Merger between CSB and GAHC, and joined in by German American in the form attached to the CSB Agreement as Appendix A, and to approve the transactions contemplated thereby, including the merger of CSB with and into GAHC (the CSB "Merger"). 2. To transact such other business as may properly come before the Special Meeting or any adjournment or adjournments thereof. Holders of CSB Common Stock of record at the close of business on ___________, 1998, are entitled to notice of and to vote at the Special Meeting or any adjournment or adjournments thereof. SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ALL SHAREHOLDERS, EVEN IF THEY PLAN TO ATTEND THE MEETING, ARE REQUESTED TO COMPLETE, SIGN, AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. By Order of the Board of Directors JERRY A. CHURCH, EXECUTIVE VICE PRESIDENT ___________, 1998 Petersburg, Indiana -3- FSB FINANCIAL CORPORATION 102 MAIN STREET FRANCISCO, INDIANA 47659 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ___________, 1998 Notice is hereby given that a Special Meeting of Shareholders of FSB Financial Corporation ("FSB") will be held at ________________________________________, Indiana _____, on ______, __________, 1998, at _______ [a.m./p.m.], Francisco time (the "Special Meeting"), for the following purposes: 1. To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Reorganization dated January ___, 1998, among FSB; FSB Bank, a wholly owned subsidiary of FSB ("FSB Bank"); German American Bancorp ("German American"); German American Holdings Corporation, a wholly owned subsidiary of German American ("GAHC"); and Community Trust Bank, a wholly owned subsidiary of GAHC (the "FSB Agreement"), and a Plan of Merger between FSB and GAHC, and joined in by German American in the form attached to the FSB Agreement as Appendix A, and to approve the transactions contemplated thereby, including the merger of FSB with and into GAHC (the "Merger"). 2. To transact such other business as may properly come before the Special Meeting or any adjournment or adjournments thereof. Holders of FSB Common Stock of record at the close of business on ___________, 1998, are entitled to notice of and to vote at the Special Meeting or any adjournment or adjournments thereof. SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ALL SHAREHOLDERS, EVEN IF THEY PLAN TO ATTEND THE MEETING, ARE REQUESTED TO COMPLETE, SIGN, AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. By Order of the Board of Directors GLENN YOUNG, PRESIDENT ______________, 1998 Francisco, Indiana -4- GERMAN AMERICAN BANCORP PROSPECTUS ------------------------ CSB BANCORP PROXY STATEMENT ------------------------ FSB FINANCIAL CORPORATION PROXY STATEMENT This Prospectus/Proxy Statement relates to the proposed merger of CSB Bancorp, Petersburg, Indiana ("CSB") into German American Holdings Corporation ("GAHC"), a wholly owned subsidiary of German American Bancorp, Jasper, Indiana ("German American") (the "CSB Merger"), pursuant to and in accordance with an Agreement and Plan of Reorganization, dated December 8, 1997 (the "CSB Agreement"), among CSB, German American, GAHC, The Citizens State Bank of Petersburg ("Citizens") and Community Trust Bank ("Community"). Simultaneously with and as an integral part of the CSB Merger, Community will merge with and into Citizens. This Prospectus/Proxy Statement also relates to the proposed merger of FSB Financial Corporation, Francisco, Indiana ("FSB"), into GAHC (the "FSB Merger"), pursuant to and in accordance with an Agreement and Plan of Reorganization, dated January ____, 1998 (the "FSB Agreement") among FSB, FSB Bank ("FSB Bank"), German American, GAHC and Community. Simultaneously with and as an integral part of the FSB Merger, FSB Bank will merge with and into Community or, if the CSB Merger is first effected, Citizens. The CSB Merger and the FSB Merger shall hereinafter be referred to collectively as the "Mergers". The CSB Agreement and the FSB Agreement are separate and distinct from each other, and neither the FSB Merger nor the CSB Merger is conditioned or dependent upon the consummation of the other. If the proposed CSB Merger is consummated, German American will issue not fewer than 5.8036 nor more than 7.1094 shares of German American Common Stock for each of the 160,000 issued and outstanding shares of CSB Common Stock, subject to adjustment in the event of any future stock dividends and the like. The exact number of shares to be issued by German American in the CSB Merger will be determined by the average closing bid/asked quotations for German American's Common Stock during a thirty day period ending on the second business day preceding the closing date (the "CSB Valuation Period"). On __________, 1998 (the latest date practicable prior to the printing of this Prospectus/Proxy Statement), the average of the closing bid/asked quotations for German American Common Stock was $_____ per share. Assuming that such average value remains not less than $_____ during the CSB Valuation Period (as to which there is no assurance), then the minimum number of shares specified by the CSB Agreement (5.8036 shares of German American for each CSB common share and an aggregate of 928,572 shares of German American Common Stock) will be issued in the CSB Merger. See "THE MERGERS -- The CSB Acquisition Agreements -- Terms of the Merger -- Conversion of CSB Common Stock." If the proposed FSB Merger Agreement is consummated, German American will issue that number of shares that have a market value equal to approximately 150% of FSB's shareholders equity plus or minus certain adjustments. See "THE MERGERS -- The FSB Acquisition Agreements -- Terms of the Merger--Conversion of FSB Common Stock" for a discussion of the exact factors that will be considered in determining the value of the German American Common Stock to be issued to FSB shareholders and the adjustments that will be considered to shareholders' equity. German American's best estimate is that it will issue between ___ and ___ shares for each FSB common share and that an aggregate from ___ to ___ shares of German American Common Stock will be issued in the FSB Merger. See "The MERGERS - - The FSB Acquisition Agreements - - Terms of the Merger - - Conversion of FSB Common Stock." -5- The Mergers are subject to the approval of the holders of a majority of the shares of the Common Stock of each company eligible to vote thereon and the satisfaction of certain other conditions, including obtaining regulatory approval. For a more complete description of the Mergers, see "THE MERGERS." The Special Meeting of the shareholders of CSB will be held at __________________, Indiana, at ___ [a.m./p.m.], Petersburg time, on __________________, ______________, 1998 to provided to (a) consider the CSB Merger proposal, and (b) transact such other business as may properly come before the meeting. The Special Meeting of the shareholders of FSB will be held at ____________________________, Indiana, at _____ [a.m./p.m.] on _______, __________, 1998, to (a) consider the FSB Merger proposal and (b) transact such other business as may properly come before the meeting. This Prospectus/Proxy Statement constitutes both a Prospectus of German American covering the German American Common Stock to be issued by it pursuant to the Mergers and a Proxy Statement in connection with the solicitation by the Boards of Directors of CSB and FSB of proxies to be voted at their respective Special Meetings. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus/Proxy Statement is ____________, 1998. -6- AVAILABLE INFORMATION German American is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Accordingly, German American files proxy statements, annual and quarterly reports, and other information with the Securities and Exchange Commission (the "Commission"). Those proxy statements, reports, and other information may be inspected and copied at prescribed rates, at the public reference facilities maintained by the Commission at the addresses set forth below. German American has filed with the Commission a Registration Statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the shares of German American Common Stock to be issued in connection with the Merger. This Proxy Statement also constitutes the Prospectus of German American filed as part of that Registration Statement. This Proxy Statement does not contain all of the information set forth in the Registration Statement. The Registration Statement and the exhibits thereto can be inspected and copied at prescribed rates at the Commission's public reference room, Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, as well as the Commission's regional offices located at: Seven World Trade Center, Suite 1300, New York, New York 10048; and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such materials may also be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants (including German American) that file electronically with the SEC. ------------------------------- SOURCES OF INFORMATION The information in the above-described Registration Statement, including this Prospectus/Proxy Statement, concerning German American and its affiliates, CSB and its affiliates, and FSB and its affiliates, has been supplied by management of the respective companies. ------------------------------- NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OR OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GERMAN AMERICAN OR CSB OR FSB. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF THE SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE OR IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF GERMAN AMERICAN, CSB OR FSB SINCE THE DATE HEREOF. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents are incorporated by reference into this Prospectus/Proxy Statement: 1. German American's Annual Report on Form 10-K for the year ended December 31, 1996, which was filed on March 31, 1997; 2. German American's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, which was filed on May 14, 1997; -7- 3. German American's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which was filed on August 13, 1997; 4. German American's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, which was filed November 14, 1997; 5. German American's Current Report on Form 8-K, which was filed on March 6, 1997, and amended on March 19, 1997; 6. German American's Current Report on Form 8-K, which was filed on November 12, 1997; 7. German American's Current Report on Form 8-K, which was filed on February ___, 1998; and 8. The description of the common stock of German American included under the heading "Description of German American Capital Stock" in the Prospectus/Proxy Statements contained in German American's Registration Statement on Form S-4 (File No. 333-____ filed __________, 1996, as amended Except as set forth in this Prospectus/Proxy Statement, there have been no material changes in the information set forth in such Reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus/Proxy Statement to the extent that a statement contained herein or in any other subsequently filed document which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Prospectus/Proxy Statement. All documents and reports filed by German American pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus/Proxy Statement and prior to the date(s) of the special meetings of shareholders shall be deemed to be incorporated by reference in this Prospectus/Proxy Statement and to be a part hereof from the dates of filing of such documents or reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus/Proxy Statement to the extent that a statement contained herein or in any other subsequently filed document which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus/Proxy Statement. THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO GERMAN AMERICAN WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (EXCLUDING UNINCORPORATED EXHIBITS) ARE AVAILABLE WITHOUT CHARGE TO EACH PERSON (INCLUDING ANY BENEFICIAL OWNER) TO WHOM THIS PROXY STATEMENT IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO JOHN M. GUTGSELL, GERMAN AMERICAN BANCORP, 711 MAIN STREET, BOX 810, JASPER, INDIANA 47546-3042 (812) 482-1314. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ______________, 1998. -8- TABLE OF CONTENTS AVAILABLE INFORMATION........................................................... SOURCES OF INFORMATION.......................................................... INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................. INTRODUCTION.................................................................... SUMMARY OF PROSPECTUS/PROXY STATEMENT........................................... THE SPECIAL MEETINGS....................................................... CSB .................................................................. FSB.................................................................... PARTIES TO THE MERGERS..................................................... GERMAN AMERICAN........................................................ GAHC .................................................................. CSB .................................................................. FSB.................................................................... THE MERGERS................................................................ GENERAL................................................................ THE CSB MERGER......................................................... MERGER CONSIDERATION.............................................. THE CITIZENS MERGER............................................... OPINION OF FINANCIAL ADVISOR...................................... THE FSB MERGER......................................................... GENERAL........................................................... MERGER CONSIDERATION.............................................. THE FSB BANK MERGER............................................... OPINION OF FINANCIAL ADVISOR...................................... PER SHARE MARKET VALUES AND EQUIVALENT PER SHARE MARKET VALUES......... SUMMARY SELECTED FINANCIAL INFORMATION................................. RIGHTS OF DISSENTING SHAREHOLDERS...................................... FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS......................... REGULATORY APPROVAL.................................................... VOTES REQUIRED FOR APPROVAL............................................ RECENT FINANCIAL INFORMATION.................................................... GERMAN AMERICAN............................................................ CSB ....................................................................... INFORMATION CONCERNING THE SPECIAL MEETINGS..................................... THE CSB SPECIAL MEETING.................................................... GENERAL................................................................ VOTES REQUIRED......................................................... THE FSB SPECIAL MEETING.................................................... GENERAL................................................................ VOTES REQUIRED......................................................... PROXIES.................................................................... SOLICITATION OF PROXIES.................................................... THE MERGERS..................................................................... -9- BACKGROUND AND REASONS FOR THE MERGERS..................................... CSB .................................................................. FSB.................................................................... GERMAN AMERICAN........................................................ THE CSB ACQUISITION AGREEMENTS............................................. EFFECT OF THE MERGER................................................... TERMS OF THE MERGER.................................................... CONVERSION OF CSB COMMON STOCK.................................... SURRENDER OF CERTIFICATES......................................... RIGHTS DETERMINED AT EFFECTIVE TIME............................... EXPENSES.......................................................... CONDITIONS............................................................. TERMINATION OF ACQUISITION AGREEMENTS.................................. THE FSB ACQUISITION AGREEMENTS............................................. EFFECT OF THE MERGER................................................... TERMS OF THE MERGER.................................................... CONVERSION OF FSB COMMON STOCK.................................... SURRENDER OF CERTIFICATES......................................... RIGHTS DETERMINED AT EFFECTIVE TIME............................... EXPENSES.......................................................... CONDITIONS............................................................. TERMINATION OF ACQUISITION AGREEMENTS.................................. ACCOUNTING TREATMENT....................................................... FEDERAL INCOME TAX CONSEQUENCES............................................ REGISTRATION STATEMENT..................................................... TRANSFER RESTRICTIONS...................................................... REGULATORY MATTERS......................................................... INTERESTS OF CERTAIN PERSONS IN THE MERGERS................................ RIGHTS OF DISSENTING SHAREHOLDERS.......................................... OPINION OF FINANCIAL ADVISOR TO CSB........................................ OPINION OF FINANCIAL ADVISOR TO FSB........................................ PRO FORMA FINANCIAL STATEMENTS OF GERMAN AMERICAN............................... INFORMATION ABOUT GERMAN AMERICAN............................................... INFORMATION ABOUT CSB........................................................... GENERAL.................................................................... COMPETITION................................................................ REGULATION AND SUPERVISION................................................. PROPERTIES................................................................. MARKET PRICE AND DIVIDEND INFORMATION...................................... STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS................... INFORMATION ABOUT FSB........................................................... GENERAL.................................................................... COMPETITION................................................................ REGULATION AND SUPERVISION................................................. PROPERTIES................................................................. MARKET PRICE AND DIVIDEND INFORMATION...................................... STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS................... CSB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................... -10- FSB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................... COMPARISON OF CSB COMMON STOCK AND GERMAN AMERICAN COMMON STOCK................. GENERAL.................................................................... NUMBER OF SHARES AUTHORIZED BUT UNISSUED................................... PREFERRED STOCK............................................................ DIVIDEND RIGHTS............................................................ VOTING RIGHTS.............................................................. LIQUIDATION RIGHTS......................................................... ABSENCE OF PREEMPTIVE RIGHTS............................................... ANTI-TAKEOVER PROVISIONS................................................... POSSIBLE ISSUANCE OF COMMON STOCK...................................... SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS COMBINATIONS...................................................... CLASSIFIED BOARD....................................................... REMOVAL OF DIRECTORS................................................... AMENDMENT, CHANGE, OR REPEAL OF CERTAIN ARTICLES....................... CONTROL SHARE RESTRICTIONS............................................. COMPARISON OF FSB COMMON STOCK AND GERMAN AMERICAN COMMON STOCK................. GENERAL.................................................................... NUMBER OF SHARES AUTHORIZED BUT UNISSUED................................... PREFERRED STOCK............................................................ DIVIDEND RIGHTS............................................................ VOTING RIGHTS.............................................................. LIQUIDATION RIGHTS......................................................... ABSENCE OF PREEMPTIVE RIGHTS............................................... ANTI-TAKEOVER PROVISIONS................................................... POSSIBLE ISSUANCE OF COMMON STOCK...................................... SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS COMBINATIONS...................................................... CLASSIFIED BOARD....................................................... REMOVAL OF DIRECTORS................................................... AMENDMENT, CHANGE, OR REPEAL OF CERTAIN ARTICLES....................... CONTROL SHARE RESTRICTIONS............................................. LEGAL MATTERS................................................................... EXPERTS......................................................................... OTHER MATTERS................................................................... INDEX TO CSB FINANCIAL STATEMENTS............................................... INDEX TO FSB FINANCIAL STATEMENTS............................................... -11- APPENDICES: APPENDIX A -- CSB Agreement and Plan of Reorganization APPENDIX B -- FSB Agreement and Plan or Reorganization APPENDIX C -- Provisions of Chapter 44 of the Indiana Business Corporation Law Governing Dissenters' Rights APPENDIX D -- Fairness Opinion of Olive Corporate Finance, LLC for CSB APPENDIX E -- Fairness Opinion of Olive Corporate Finance, LLC for FSB -12- MERGERS OF CSB BANCORP AND FSB FINANCIAL CORPORATION INTO GERMAN AMERICAN HOLDINGS CORPORATION, A SUBSIDIARY OF GERMAN AMERICAN BANCORP SPECIAL MEETINGS OF SHAREHOLDERS OF CSB BANCORP AND OF FSB FINANCIAL CORPORATION INTRODUCTION This Prospectus/Proxy Statement is being furnished to shareholders of CSB Bancorp ("CSB") and FSB Financial Corporation ("FSB") in connection with the separate solicitations of proxies by the Boards of Directors of CSB and of FSB to be voted at Special Meetings of their Shareholders. The purpose of each of the Special Meetings is to consider and vote upon separate proposals to merge CSB and FSB, respectively, into German American Holdings Corporation ("GAHC"), a wholly owned subsidiary of German American Bancorp ("German American") (which transactions are hereafter referred to collectively as the "Mergers" and individually as the "CSB Merger" and the "FSB Merger," respectively). The CSB Merger proposal is in accordance with the Agreement and Plan of Reorganization, dated December 8, 1997, among CSB, German American, GAHC, The Citizens State Bank of Petersburg ("Citizens"), and Community Trust Bank ("Community") (the "CSB Agreement"), and the Plan of Merger between CSB and GAHC, joined in by German American, in the form attached to the CSB Agreement as Exhibit A (collectively, the "CSB Acquisition Agreements"). The FSB Merger proposal is in accordance with the Agreement and Plan of Reorganization, dated January 30, 1998, among FSB, FSB Bank ("FSB Bank"), German American, GAHC and Community (the "FSB Agreement"), and the Plan of Merger between FSB and GAHC, joined in by German American, in the form attached to the FSB Agreement as Exhibit A (collectively the "FSB Acquisition Agreements"). If the enclosed proxy is executed and returned, it may nevertheless be revoked at any time insofar as it has not been exercised. The proxy may be revoked by (a) delivering to the Secretary of the corporation holding the meeting (CSB or FSB, as the case may be), (i) a written instrument revoking the proxy or (ii) a subsequently dated proxy, or (b) attending the Special Meeting and voting in person. Unless revoked, the proxy will be voted at the meeting in accordance with the instructions of the shareholder as indicated on the proxy. If no instructions are given, the shares will be voted FOR the applicable Merger, and on other matters that may come before the meeting as recommended by the Directors. Consummation of the CSB Merger is subject to approval by the vote of the holders of a majority of the outstanding shares of the common stock of CSB ("CSB Common Stock"). Consummation of the FSB Merger is subject to approval by the vote of the holders of a majority of the outstanding shares of the common stock of FSB ("FSB Common Stock"). THE BOARDS OF DIRECTORS OF CSB AND FSB EACH BELIEVE THAT THE TRANSACTIONS TO BE CONSIDERED AT THE RESPECTIVE SPECIAL MEETINGS ARE IN THE BEST INTEREST OF THE PARTIES THERETO AND THEIR RESPECTIVE SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSED TRANSACTIONS. For information concerning the reasons for these recommendations, see "THE MERGERS." -13- SUMMARY OF PROSPECTUS/PROXY STATEMENT The following is a brief summary of certain information contained in this Prospectus/Proxy Statement. This summary is not intended to be complete and is qualified in all respects by the more detailed information appearing elsewhere in this Prospectus/Proxy Statement. Shareholders are urged to review carefully the entire Prospectus/Proxy Statement, including the Appendices and other documents referred to herein. THE SPECIAL MEETINGS CSB The Special Meeting is scheduled to be held on __________, 1998, at the Southside branch of Citizens located at Highway 61 and Illinois Street, Petersburg, Indiana, at ____ [a.m./p.m.], to consider and vote upon adoption of the CSB Acquisition Agreements and the CSB Merger contemplated thereby. Only shareholders of record at the close of business on _________, 1998, will be entitled to vote at the Special Meeting. On such date, there were 160,000 shares of CSB Common Stock outstanding. Approval of the CSB Acquisition Agreements requires the affirmative vote of the holders of a majority of the outstanding shares of CSB Common Stock. See "INFORMATION CONCERNING THE SPECIAL MEETINGS -- The CSB Special Meeting." FSB The FSB Special Meeting is scheduled to be held on _______ __, 1998 at _________________________ Indiana at _____ [a.m./p.m.], to consider and vote upon the adoption of the FSB Acquisition Agreements and the FSB Merger contemplated thereby. Only shareholders of record at the close of business on _________, 1998, will be entitled to vote at the FSB Special Meeting. On such date, there were 48,916 shares of FSB Common Stock outstanding. Approval of the FSB Acquisition Agreements requires the affirmative vote of the holders of a majority of the outstanding shares of FSB Common Stock. See "INFORMATION CONCERNING THE SPECIAL MEETING -- The FSB Special Meeting." PARTIES TO THE MERGERS GERMAN AMERICAN German American is a multibank holding company incorporated under Indiana law in 1982 that owns all the outstanding capital stock of The German American Bank, Jasper, Indiana; First State Bank, Southwest Indiana, Tell City, Indiana; and GAHC and GAHC's subsidiaries, Community and The Peoples National Bank and Trust Company, Washington, Indiana ("Peoples"). The mailing address and telephone number of the principal executive offices of German American are 711 Main Street, Jasper, Indiana 47546-3042; 812/482-1314. See "INFORMATION ABOUT GERMAN AMERICAN." GAHC GAHC is an Indiana corporation and a wholly owned subsidiary of German American, which owns all of the outstanding capital stock of Community and Peoples. -14- CSB CSB is an Indiana corporation that owns all of the issued and outstanding shares of Citizens, an Indiana state banking corporation that was originally chartered in 1873. CSB was incorporated in 1983. CSB's principal executive offices are located at Main and Seventh Streets, Petersburg, Indiana 47567, and its telephone number is 812/354-8471. See "INFORMATION ABOUT CSB". FSB FSB is an Indiana corporation that owns all of the issued and outstanding shares of FSB Bank, a state banking corporation that was originally chartered in 1908. FSB was incorporated in 1994. FSB's principal executive offices are located at 102 Main Street, Francisco, Indiana 47659 and its telephone number is 812/782-3201. See "INFORMATION ABOUT FSB". THE MERGERS GENERAL The CSB and FSB Acquisition Agreements, each of which have been approved unanimously by the Boards of Directors of CSB or FSB, respectively, and German American, provide that CSB and FSB will be merged into GAHC, with GAHC being the surviving corporation in each of the Mergers. As a result of the Mergers, the separate corporate existences of CSB and FSB will cease. The CSB Acquisition Agreements also provide that simultaneously with the CSB Merger, Community will be merged into Citizens with Citizens surviving the merger. The FSB Acquisition Agreements also provide that simultaneously with the FSB Merger, FSB Bank will be merged into Community (or Citizens, in the event the CSB Merger is effected prior to the FSB Merger) with Community (or Citizens, as the case may be) surviving the merger. As a consequence of the Mergers, Citizens will become a direct, wholly owned banking subsidiary of GAHC and will in addition own and operate the properties and businesses now owned and operated by Community and FSB Bank. See "THE MERGERS -- The CSB Acquisition Agreements." The CSB Acquisition Agreements and the FSB Acquisition Agreements are hereby incorporated into this Prospectus/Proxy Statement by reference. THE CSB MERGER MERGER CONSIDERATION On the effective date of the CSB Merger (the "CSB Effective Time"), German American will issue not fewer than 5.8036 nor more than 7.1094 shares of German American Common Stock for each of the 160,000 issued and outstanding shares of CSB Common Stock (subject to adjustment in the event of any future stock dividends and the like). The exact number of shares to be issued by German American in the CSB Merger will be determined by the average closing bid/asked quotations for German American Common Stock during the 30 calendar day period ending on the second business day preceding the closing date (the "CSB Valuation Period"). On ________, 1998 (the latest practicable date prior to the printing of this Prospectus/Proxy Statement), the average of the closing bid/asked quotations for German American Common Stock was $_____ per share. Assuming that such average value remains not less than $_____ during the CSB Valuation Period (as to which there is no assurance), then the minimum number of shares specified by the CSB Agreement (5.8036 shares of German -15- American for each CSB common share and an aggregate of 928,572 shares of German American Common Stock) will be issued in the CSB Merger. See "THE MERGERS --The CSB Acquisition Agreements-- Terms of the Merger--Conversion of CSB Common Stock." THE CITIZENS MERGER Simultaneously with the CSB Merger, Community, a wholly owned banking subsidiary of German American and GAHC, will be merged into Citizens (the "Citizens Merger"). The bank surviving the Citizens Merger will retain the name "The Citizens State Bank of Petersburg" and will operate as a state chartered bank under the Articles of Incorporation and Bylaws of Citizens that were in effect immediately prior to the Citizens Merger. The main office of Community will become a branch of Citizens. As a consequence of the CSB Merger and the Citizens Merger, Citizens will become a wholly owned subsidiary of GAHC, which in turn is a wholly owned subsidiary of German American. OPINION OF FINANCIAL ADVISOR CSB has received an opinion of Olive Corporate Finance, LLC, that the exchange ratio in the CSB Merger is fair, from a financial point of view, to the holders of CSB Common Stock. See "THE MERGERS--Opinion of Financial Advisor to CSB" and the opinion of Olive Corporate Finance, LLC attached hereto as Appendix D. THE FSB MERGER MERGER CONSIDERATION On the effective date of the FSB Merger (the "FSB Effective Time"), German American will issue that number of shares of German American Common Stock for all of the 48,916 issued and outstanding shares of FSB Common Stock having a value (as valued at the average of the lowest closing asked prices and highest closing bid prices of German American Common Stock for each trading day within the period of ten trading days that ends on the second business day preceding the Closing Date (the "FSB Valuation Period") equal to 150% of the sum of the shareholders' equity of FSB as of the end of the month immediately preceding the FSB Closing Date, subject to certain adjustments described in greater detail in "THE MERGERS -- The FSB Acquisition Agreements -- Terms of the Merger -- Conversion of FSB Common Stock". German American's best estimate as of the date of this Prospectus is that 150% of FSB's shareholders' equity as of the month end prior to the FSB Closing Date (as adjusted in accordance with the FSB Acquisition Agreements) will be approximately $_____, assuming that the FSB Closing Date is on or before ________________, 1998. Purely for purposes of illustration, if that estimate of FSB's future adjusted shareholders' equity is accurate, and if the German American Common Stock has an average value as determined during the applicable valuation period in accordance with the FSB Acquisition Agreements of $___, $___ or $___, per share (representing the average of the closing bid/asked quotations for German American Common Stock on _____________, 1998 (the most recent practicable date prior to the date of this Prospectus/Proxy Statement) and such average varied by 10 percent), then under those alternative assumptions, German American would issue an aggregate of ___, ___ and ___ shares, respectively, to FSB shareholders, and each of the 48,916 FSB shares -16- that are expected to be issued and outstanding at the Effective Time will be converted into ___, ___ and ___ shares, respectively. See "THE MERGERS -- The FSB Acquisition Agreements--Terms of the Merger--Conversion of FSB Common Stock." THE FSB BANK MERGER Simultaneously with the FSB Merger, FSB Bank, a wholly owned banking subsidiary of FSB, will be merged into Community or, in the even that the Citizens Merger is first effected, Citizens (the "FSB Bank Merger"). Unless the Citizens Merger is effected first, the bank surviving the FSB Bank Merger will retain the name "Community Trust Bank" and will operate as a state chartered bank under the Articles of Incorporation and Bylaws of Community that were in effect immediately prior to the FSB Bank Merger until Community merges with and into Citizens. At that time, the surviving bank will retain the name "The Citizens State Bank of Petersburg" and will operate as a state charted bank under the Articles of Incorporation and Bylaws of Citizens that were in effect immediately prior to the Citizens Merger. The main office of FSB Bank will become a branch of Citizens. OPINION OF THE FINANCIAL ADVISOR FSB has received an opinion of Olive Corporate Finance, LLC that the exchange ratio in the FSB Merger is fair, from a financial point of view, to the holders of FSB Common Stock. See "THE MERGERS -- Opinion of Financial Advisor to FSB" and the opinion of Olive Corporate Finance, LLC attached hereto as Appendix E. PER SHARE MARKET VALUES AND EQUIVALENT PER SHARE MARKET VALUES The first table sets forth the market value of German American Common Stock (as determined by the average of the closing bid and asked quotations as reported by NASDAQ) and of CSB Common Stock (as determined by the price of the most recent trade known to CSB management) as of October 20, 1997, the date preceding the first public announcement of the CSB Merger, and the equivalent per share market value as of that date of the consideration to be received per CSB share in the CSB Merger calculated at the maximum, mid-point and minimum exchange ratios specified by the CSB Agreement. If the CSB Merger had closed on _________, 1998, the latest practicable date prior to the printing of this Prospectus/Proxy Statement, the exchange ratio would have been the minimum (5.8036), and (based on the average of the closing bid and asked prices of the German American Common Stock as of that date, which was $_____) the equivalent value as of that date per CSB Common Share at the minimum exchange ratio (calculated by multiplying $_____ by 5.8036) would have been $_____. The second table sets forth the market value of German American Common Stock (as determined by the average of the closing bid and asked quotations as reported by NASDAQ), and of FSB Common Stock (as determined by the price of the most recent trade known to FSB management) as of October 29, 1997, the date preceding the first public announcement of the FSB Merger, and the equivalent per share market value as of that date of the consideration to be received per FSB share in the Merger at three selected possible exchange ratios, representing the -17- estimated exchange ratio if the FSB Merger had closed on January 31, 1998, and such exchange ratio varied by ten percent. If the FSB Merger closes on or before __________, 1998, and if the average of the closing bid/asked quotations for German American Common Stock during the FSB Valuation Period is the same as the average of such quotations on ________, 1998, the latest practicable date prior to the printing of this Prospectus/Proxy Statement, German American estimates that the exchange ratio would have been __________, and (based on the average of the closing bid and asked prices of the German American Common Stock as of ________, 1998 which was $____) the equivalent value as of that date per FSB Common Share at the exchange ratio (calculated by multiplying $___ by ___) would have been $__________. The use of these assumed exchange ratios is for illustrative purposes only and is not intended to predict the actual number of shares to be issued in the Mergers. Equivalent Values as of Actual Market October 20, 1997 Per CSB Values as of Common Share at Selected October 20, 1997 Exchange Ratios Min. Midpoint Max. 5.8036 6.4565 7.1094 German American $27.96 N/A N/A N/A CSB $87.50 $162.27 $180.52 $198.78 Equivalent Values as of Actual Market October 29, 1997 Per FSB Values as of Common Share at Selected October 29, 1997 Exchange Ratios* ----- ----- ----- German American $28.02 N/A N/A N/A FSB $30.00 $_____ $_____ $_____ *There is no minimum or maximum exchange ratio in the FSB Merger. -18- SUMMARY SELECTED FINANCIAL INFORMATION The following tables set forth (a) pro forma consolidated selected financial data for CSB, FSB and German American combined as of and for the years ended December 31, 1996, 1995 and 1994, and for the nine months ended September 30, 1997, (b) historical, pro forma and equivalent pro forma net income, cash dividends and book value of CSB and FSB on a per share basis as of such dates and for such periods, and (c) selected consolidated financial data for CSB and FSB as of and for each of the five years ended December 31, 1996 and for the nine months ended September 30, 1997. This information is derived from and should be read in conjunction with the supplemental consolidated financial statements of German American and the historical financial statements of CSB and FSB that appear elsewhere in this Prospectus or in the documents and reports incorporated herein by reference, and with the pro forma condensed consolidated financial statements of German American, which give effect to the Mergers and which appear in this Prospectus under the caption "PRO FORMA FINANCIAL STATEMENTS OF GERMAN AMERICAN." The pro forma condensed consolidated financial information has been prepared based on the "pooling of interest" method of accounting and on the assumption that no CSB or FSB shareholder will exercise dissenters' rights. The supplemental consolidated financial information of German American and historical financial information of CSB and FSB has been combined for each period presented. The equivalent pro forma per share information for CSB has been determined by multiplying the German American pro forma per share information by assumed exchange ratios representing the maximum and minimum exchange ratios specified by the CSB Agreement, as well as a mid-point between the maximum and minimum exchange ratios. The maximum, mid-point and minimum assumed exchange ratios are 7.1094, 6.4565 and 5.8036, respectively. If the Merger had closed on January 31, 1998, the exchange ratio would have been the minimum (5.8036). The equivalent pro forma per share information for FSB has been illustrated at three selected possible exchange ratios, representing the estimated exchange ratio if the FSB Merger had closed on January 31, 1998 (1.4653) and such exchange ratio varied by 10 percent. There is no minimum or maximum exchange ratio specified by the FSB Acquisition Agreements. The use of these assumed exchange ratios is for illustrative purposes only and is not intended to predict the actual number of shares to be issued in either of the Mergers. -19- GERMAN AMERICAN BANCORP, FSB FINANCIAL CORPORATION, AND CSB BANCORP PRO FORMA CONSOLIDATED SELECTED FINANCIAL DATA (Dollar amounts in thousands, except share and per share data)
09/30/97 12/31/96 12/31/95 12/31/94 SUMMARY OF OPERATIONS (A) Interest income $33,186 $42,091 $39,914 $33,397 Interest expense 15,604 19,970 18,847 14,475 Net interest income 17,582 22,121 21,067 18,922 Provision for loan losses 47 434 109 724 Net interest income after provision f 17,535 21,687 20,958 18,198 Non-interest income 2,179 2,564 2,100 2,300 Non-interest expense 12,074 15,808 14,811 13,183 Income before income tax 7,640 8,443 8,247 7,315 Income tax 2,570 2,852 2,670 2,304 Income before change in accounting pr $5,070 $5,591 $5,577 $5,011 PERIOD END BALANCES (A) Total assets $581,344 $578,803 $538,825 $509,204 Total loans, net 379,682 360,205 332,943 317,964 Total deposits 507,202 500,553 465,053 435,195 Long-term debt 1,000 1,000 1,000 Total shareholders' equity 62,882 59,179 55,940 50,524 Cash dividends declared (B) 1,523 1,518 1,392 1,232 Common shares outstanding 6,346,269 6,339,287 6,331,394 6,332,525 PER SHARE DATA (A) Income before change in accounting pr $0.80 $0.88 $0.88 $0.79 Cash dividends declared (B) 0.29 0.28 0.26 0.23 Shareholders' equity, end of year 9.91 9.34 8.84 7.98 Weighted average shares outstanding 6,342,399 6,335,566 6,331,995 6,331,413 (A) Pro forma information includes German American Bancorp, FSB Financial Corporation and CSB Bancorp as if combined for all periods presented. Assumes issuance of 71,678 common shares of German American Bancorp in exchange for all shares of FSB Financial, and 928,572 common shares of German American Bancorp in exchange for all shares of CSB Bancorp (see Pro Forma Financial Statements regarding assumed shares issued). The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (B) Based upon GAB Bancorp cash dividends declared, without restatement for poolings, because management believes acquisitions will have no significant effect on GAB Bancorp dividend policy. -20-
GERMAN AMERICAN BANCORP AND CSB BANCORP HISTORICAL AND PRO FORMA PER SHARE DATA
GERMAN GERMAN AMERICAN CSB BANCORP AMERICAN BANCORP EQUIVALENT BANCORP PRO FORMA CSB BANCORP PRO FORMA (C) (A) (D) 09/30/97 Assuming 7.1094 Exchange Ratio (maximum) Net income $0.88 $0.77 $2.49 $5.47 Cash dividends declared (B) 0.29 0.29 1.00 2.06 Shareholders' equity, end of period 9.78 9.59 56.96 68.18 Assuming 6.4565 Exchange Ratio (mid-point) Net income 2.49 5.10 Cash dividends declared (B) 0.29 0.29 1.00 1.87 Shareholders' equity, end of period 9.78 9.75 56.96 62.95 Assuming 5.8036 Exchange Ratio (minimum) Net income 2.49 4.64 Cash dividends declared (B) 0.29 0.29 1.00 1.68 Shareholders' equity, end of period 9.78 9.91 56.96 57.51 12/31/96 Assuming 7.1094 Exchange Ratio (maximum) Net income 0.92 4.54 6.04 Cash dividends declared (B) 0.28 0.28 2.75 1.99 Assuming 6.4565 Exchange Ratio (mid-point) Net income 0.92 4.54 5.62 Cash dividends declared (B) 0.28 0.28 2.75 1.81 Assuming 5.8036 Exchange Ratio (minimum) Net income 0.92 4.54 5.11 Cash dividends declared (B) 0.28 0.28 2.75 1.63 12/31/95 Assuming 7.1094 Exchange Ratio (maximum) Net income 0.91 4.49 6.04 Cash dividends declared (B) 0.26 0.26 2.50 1.85 Assuming 6.4565 Exchange Ratio (mid-point) Net income 0.91 4.49 5.62 Cash dividends declared (B) 0.26 0.26 2.50 1.68 Assuming 5.8036 Exchange Ratio (minimum) Net income 0.91 4.49 5.11 Cash dividends declared (B) 0.26 0.26 2.50 1.51 12/31/94 Assuming 7.1094 Exchange Ratio (maximum) Net income 0.80 4.13 5.47 Cash dividends declared (B) 0.23 0.23 2.10 1.64 Assuming 6.4565 Exchange Ratio (mid-point) Net income 0.80 4.13 5.04 Cash dividends declared (B) 0.23 0.23 2.10 1.48 Assuming 5.8036 Exchange Ratio (minimum) Net income 0.80 4.13 4.58 Cash dividends declared (B) 0.23 0.23 2.10 1.33 (A) Pro forma information includes German American Bancorp, FSB Financial Corporation and CSB Bancorp as if combined for all periods presented. (B) Based upon German American Bancorp cash dividends declared, without restatement for poolings, because management believes acquisitions will have no significant effect on German American Bancorp dividend policy. (C) Retroactively restated for all stock splits and stock dividends through December 31, 1997. (D) Computed by multiplying German American Bancorp pro forma per share information by the indicated Exchange Ratio.
-21- GERMAN AMERICAN BANCORP AND FSB FINANCIAL CORPORATION HISTORICAL AND PRO FORMA PER SHARE DATA
FSB FINANCIAL GERMAN GERMAN AMERICAN CORPORATION AMERICAN BANCORP FSB FINANCIAL EQUIVALENT BANCORP PRO FORMA CORPORATION PRO FORMA (C) (A) (D) 09/30/97 Assuming 1.6118 Exchange Ratio (maximum) Net income $0.88 $0.80 ($0.47) $1.29 Cash dividends declared (B) 0.29 0.29 0.25 0.47 Shareholders' equity, end of period 9.78 9.90 30.28 15.96 Assuming 1.4653 Exchange Ratio (mid-point) Net income (0.47) 1.17 Cash dividends declared (B) 0.29 0.29 0.25 0.42 Shareholders' equity, end of period 9.78 9.91 30.28 14.52 Assuming 1.3188 Exchange Ratio (minimum) Net income (0.47) 1.06 Cash dividends declared (B) 0.29 0.29 0.25 0.38 Shareholders' equity, end of period 9.78 9.92 30.28 13.08 12/31/96 Assuming 1.6118 Exchange Ratio (maximum) Net income 0.92 (0.67) 1.42 Cash dividends declared (B) 0.28 0.28 0.00 0.45 Assuming 1.4653 Exchange Ratio (mid-point) Net income 0.92 (0.67) 1.29 Cash dividends declared (B) 0.28 0.28 0.00 0.41 Assuming 1.3188 Exchange Ratio (minimum) Net income 0.92 (0.67) 1.16 Cash dividends declared (B) 0.28 0.28 0.00 0.37 12/31/95 Assuming 1.6118 Exchange Ratio (maximum) Net income 0.91 0.22 1.42 Cash dividends declared (B) 0.26 0.26 0.25 0.42 Assuming 1.4653 Exchange Ratio (mid-point) Net income 0.91 0.22 1.29 Cash dividends declared (B) 0.26 0.26 0.25 0.38 Assuming 1.3188 Exchange Ratio (minimum) Net income 0.91 0.22 1.16 Cash dividends declared (B) 0.26 0.26 0.25 0.34 12/31/94 Assuming 1.6118 Exchange Ratio (maximum) Net income 0.80 1.76 1.27 Cash dividends declared (B) 0.23 0.23 0.25 0.37 Assuming 1.4653 Exchange Ratio (mid-point) Net income 0.80 1.76 1.16 Cash dividends declared (B) 0.23 0.23 0.25 0.34 Assuming 1.3188 Exchange Ratio (minimum) Net income 0.80 1.76 1.04 Cash dividends declared (B) 0.23 0.23 0.25 0.30 (A) Pro forma information includes German American Bancorp, FSB Financial Corporation and CSB Bancorp as if combined for all periods presented. (B) Based upon German American Bancorp cash dividends declared, without restatement for poolings, because management believes acquisitions will have no significant effect on German American Bancorp dividend policy. (C) Retroactively restated for all stock splits and stock dividends through December 31, 1997. (D) Computed by multiplying German American Bancorp pro forma per share information by the indicated Exchange Ratio. The FSB Acquisition Agreements do not specify a minimum or maximum exchange ratio. The mid-point exchange ratio is based on FSB September 30, 1997 shareholders' equity and the average bid and asked prices of German American stock for the last ten business days of January 1998 ($30.794). The maximum and minimum exchange ratios are 10% more and 10% less, respectively, than the mid-point exchange ratio.
-22- CSB Bancorp Selected Consolidated Financial Data (Dollar amounts in thousands, except share data) The following table presents selected financial information for CSB Bancorp:
Nine months ended September 30, Year ended December 31, 1997 1996 1996 1995 1994 1993 1992 -------------------------------------- ----------------------------- FOR THE PERIOD Interest Income $4,385 $4,205 $5,652 $5,222 $4,628 $4,526 $4,871 Interest Expense 2,189 2,074 2,799 2,499 2,116 2,035 2,282 Net Interest Income 2,196 2,131 2,853 2,723 2,512 2,491 2,589 Provision for loan losses 497 108 135 48 25 155 374 Non-interest income 217 169 250 270 302 206 186 Non-interest expense 1,335 1,341 1,898 1,889 1,824 1,722 1,673 Income before income taxes 581 851 1,070 1,056 965 820 728 Net Income 398 577 727 718 660 611 538 PER COMMON SHARE Net Income $2.49 $3.61 $4.54 $4.49 $4.12 $3.82 $3.39 Cash dividends 1.00 1.00 2.75 2.50 2.10 2.03 1.83 Weighted average shares (000) 160 160 160 160 160 160 159 AT PERIOD-END Total loans $49,054 $46,680 $43,245 $43,814 $42,531 $40,467 $38,865 Earning assets 69,630 67,901 68,221 63,353 52,796 59,421 56,899 Total assets 76,717 74,793 74,346 67,874 63,660 63,549 61,259 Average total assets 75,964 71,802 72,437 66,386 65,664 65,230 61,949 Deposits 66,731 65,018 64,347 58,776 55,030 55,251 53,352 Common shareholders' equity 9,113 8,996 8,867 8,596 8,210 7,938 7,603 Total shareholders' equity 9,113 8,996 8,867 8,596 8,210 7,938 7,603 Average shareholders' equity 9,156 8,851 8,848 8,537 8,140 7,852 7,569 PERFORMANCE RATIOS Return on average total assets 0.70 1.07 1.00 1.08 1.01 0.94 0.87 Return on average common equity 5.80 8.69 8.22 8.41 8.11 7.78 7.11 Efficiency 30.44 31.89 33.58 36.17 39.41 38.05 34.35 Net overhead expense to average assets 1.96 2.18 2.28 2.44 2.32 2.32 2.40 Net interest margin 4.32% 4.36% 4.36% 4.50% 4.25% 4.27% 3.81% CAPITAL RATIOS AT PERIOD-END Tangible equity to tangible assets 11.93% 11.83% 11.90% 12.58% 12.79% 12.36% 12.36% Tier 1 risk-adjusted capital 20.11 20.54 21.56 21.22 21.25 20.34 21.20 Total risk-adjusted capital 21.80 21.79 22.76 22.50 22.51 21.60 22.45 Dividend payout ratio 40.20 27.73 60.52 55.71 51.03 53.16 53.78 ASSET QUALITY DATA Nonperforming loans $465 $601 $699 $862 $415 $740 $1,208 Nonperforming assets 709 938 1,025 1,399 1,074 1,450 1,376 Allowance for loan losses 987 638 616 659 723 742 671 Nonperforming loans to period-end loans 0.95% 1.01% 1.62% 1.97% 0.98% 1.83% 3.11% Allowance for loan losses to nonperforming loans 212.26% 128.71% 88.13% 76.45% 174.22% 100.27% 55.55% Allowance for loan losses to period-end loans 2.01% 1.28% 1.42% 1.50% 1.70% 1.83% 1.73%
-23- FSB FINANCIAL CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (Dollar References In Thousands Except Per Share Data) The following selected data has been derived from the unaudited internal financial statements of FSB Financial Corporation and FSB Bank. The Corporation and Bank do not prepare internal financial statements on a fiscal year basis consistent with the audited September 30, 1997 consolidated financial statements. Accordingly, and to be consistent with the Selected Consolidated Financial Data of German American Bancorp and CSB Bancorp, this selected data has been presented on a calendar year basis. As the Corporation was formed in 1994, data prior to 1994 includes FSB Bank only. In the opinion of management, all normal recurring adjustments which are necessary to present fairly the selected consolidated financial date have been included.
Nine Months Ended September 30, Year Ended December 31, 1997 1996 1996 1995 1994 1993 1992 SUMMARY OF OPERATIONS Interest and Fees on Loans $704 $627 $863 $528 $466 $425 $402 Interest on Investments 159 169 215 348 380 468 603 Total Interest Income 863 796 1,078 876 846 893 1,005 Interest on Deposits 413 351 479 400 339 411 575 Interest on Short-term Borrowings - 8 9 - - - - Interest on Long-term Debt - - - - - - - Total Interest Expense 413 359 488 400 339 411 575 Net Interest Income 450 437 590 476 507 482 430 Provision for Loan Losses 26 47 89 12 12 14 9 Net Interest Income after Provision for Loan Losses 424 390 501 464 495 468 421 Service Charges on Deposit Accounts 58 53 74 55 54 50 32 Other Income 12 7 12 11 10 10 15 Total Non-Interest Income 70 60 86 66 64 60 47 Salaries and Benefits 270 231 320 245 216 207 215 Other Expenses 247 228 302 259 233 246 210 Total Non-Interest Expense 517 459 622 504 449 453 425 Income Before Income Taxes (23) (9) (35) 26 110 75 43 Income Tax Expense - 8 (2) 15 24 16 1 Net Income (23) (17) (33) 11 86 59 42 PERIOD END BALANCES Total Assets 15,699 14,593 15,014 12,364 12,605 13,078 13,637 Total Loans, Net 10,417 10,289 10,822 7,332 5,175 4,336 3,574 Total Long-term Debt - - - - - - - Total Deposits 14,104 12,597 13,252 10,706 10,985 11,540 12,140 Total Shareholders' Equity 1,481 1,537 1,519 1,556 1,510 1,479 1,433 PER SHARE DATA Net Income (0.47) (0.35) (0.67) 0.22 1.76 1.20 0.86 Cash Dividends 0.25 - - 0.25 0.25 0.25 0.25 Shareholders' Equity, End of Period 30.28 31.37 31.00 31.76 30.82 30.18 29.24
-24- RIGHTS OF DISSENTING SHAREHOLDERS Subject to certain conditions, a shareholder of CSB or FSB who (a) before the time the vote is taken on the respective Merger at the Special Meeting, delivers to CSB or FSB, as the case may be, a written demand for payment of his or her shares of CSB or FSB Common Stock, and (b) does not vote in favor of the applicable Merger, will have the right to receive in cash the fair value of his or her shares of CSB or FSB Common Stock, as the case may be, as determined pursuant to Chapter 44 of the Indiana Business Corporation Law ("IBCL"). See "THE MERGERS -- Rights of Dissenting Shareholders" and Appendix C to this Prospectus/Proxy Statement. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The Mergers are each intended to constitute tax-free reorganizations to CSB, FSB, German American, and GAHC. Assuming each Merger qualifies as a tax-free reorganization, (a) shareholders will recognize no gain or loss upon the exchange of their shares for shares of German American Common Stock, (b) shareholders who receive cash in exchange for shares of either CSB or FSB Common Stock, either in lieu of fractional shares or because they have perfected dissenters' rights under the IBCL, will recognize gain or loss upon the receipt of cash for their shares, and (c) cash received by shareholders receiving cash in lieu of fractional share interests and cash received by shareholders perfecting dissenters' rights will be treated as a distribution in full payment of such fractional share interests, or shares surrendered in exercise of dissenters' rights, resulting in capital gain or loss or ordinary income or loss, as the case may be, depending upon each shareholder's particular situation. See "THE MERGERS--Federal Income Tax Consequences." Each CSB and FSB shareholder is urged to consult his or her own tax advisors regarding the specific tax consequences of the Mergers to him or her. REGULATORY APPROVAL The CSB Merger will not be made effective unless the Citizens Merger occurs simultaneously. Likewise, the FSB Merger will not be made effective unless the FSB Bank Merger occurs simultaneously. The Citizens Merger and the FSB Bank Merger are both subject to the approval of the Federal Insurance Deposit Corporation (the "FDIC") and the Indiana Department of Financial Institutions ("DFI"). Applications seeking approvals of the Citizens Merger and -25- the FSB Bank Merger were filed with the FDIC and the DFI on February ___, 1998 and are now pending. VOTES REQUIRED FOR APPROVAL The affirmative vote of the holders of a majority of the outstanding shares of Common Stock of each party to the Mergers (CSB, FSB and GAHC) is required to approve each of the Mergers. All of the Directors of CSB and FSB have agreed to vote the shares of Common Stock owned of record by them in favor of approval of the Mergers. At January 31, 1998, the 48,502 shares of CSB Common Stock owned of record by Directors of CSB represented approximately 30.31% of the shares entitled to vote at the CSB Special Meeting. The Directors and executive officers of CSB own beneficially (including not only shares owned of record but also shares owned by spouses, minor children and other close associates) an aggregate of 66,399 shares or approximately 41.5% of the shares entitled to vote at the CSB Special Meeting. At, the ____ shares of FSB Common Stock owned of record by Directors of FSB represented approximately ___ percent of the shares entitled to vote at the FSB Special Meeting. The Directors and executive officers of FSB own beneficially (including not only shares owned of record but also shares owned by spouses, minor children and other close associates) an aggregate of __ shares or approximately __% of the shares entitled to vote at the FSB Special Meeting. See "INFORMATION CONCERNING THE SPECIAL MEETINGS." German American, as the sole shareholder of GAHC, intends to vote all of GAHC's shares in favor of the Mergers; no vote of German American's shareholders is required to approve either of the Mergers. -26- RECENT FINANCIAL INFORMATION The following recent financial information as of December 31, 1997 has been reported by German American and CSB on an unaudited basis. Unaudited financial statements of FSB as of December 31, 1997 are included in the FSB financial statements included elsewhere herein. German American German American's net income for the fourth quarter of 1997 totaled $1,452,000 ($.27 per share) an increase of $297,000 (26%) as compared to $1,155,000 ($.22 per share) for the fourth quarter in 1996. Net income for 1997 was $6,139,000 ($1.15 per share), an increase of $1,245,000 (25%) as compared to 1996 net income of $4,894,000 ($.92 per share). All earnings per share amounts have been computed to give retroactive effect to all stock dividends and splits and excluding the dilutive effect of stock options. German American's year-end total assets as of December 31, 1997 were $498,831,000 compared to $488,928,000 at September 30, 1997 and $489,443,000 at December 31, 1996. Total shareholders' equity at December 31, 1997, was $53,332,000 compared to $52,288,000 at September 30, 1997 and $48,793,000 at December 31, 1996. CSB CSB reported net income for the fourth quarter of 1997 of $87,000 ($.54 per share), a decrease of $63,000 ($.39 per share) from net income of $145,000 ($.94 per share) for the fourth quarter of 1996. CSB's net income for 1997 was $484,000 ($3.03 per share) compared to $727,000 ($4.54 per share) for 1996. CSB's fourth quarter decrease in net income was due to the recording of expenses related to the pending merger. CSB reported total assets of $77,176,000 at December 31, 1997, compared to $________ at September 30, 1997 and $74,346,000 at December 31, 1996. Total stockholders' equity at December 31, 1997, was $8,900,000, compared to $9,091,000 at September 30, 1997 and $8,845,000 at December 31, 1996. INFORMATION CONCERNING THE SPECIAL MEETINGS THE CSB SPECIAL MEETING GENERAL Each copy of this Prospectus/Proxy Statement mailed to a CSB Shareholder is accompanied by a proxy, which is solicited by the Board of Directors of CSB for use at the Special Meeting that will be held at_________________________________________, Indiana, at ____ [a.m./p.m.], Petersburg time, on _________, __________, 1998, and at any adjournment or adjournments thereof. Shareholders of CSB who are the owners of CSB Common Stock of record at the close of business on _______ __, 1998, will be entitled to vote at the Special Meeting. On such date, there were 160,000 shares of CSB Common Stock outstanding and entitled to vote, with each such share entitled to one vote. VOTES REQUIRED -27- The presence at the Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of CSB Common Stock will constitute a quorum. Each share of CSB Common Stock is entitled to one vote on any matter to come before the Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of CSB Common Stock entitled to vote at the Special Meeting (at least 80,001 of the 160,000 shares of CSB Common Stock outstanding) is required for approval and adoption of the CSB Acquisition Agreements. Proxies marked as abstentions and shares held in street name that are designated by brokers on proxy cards as not voted will not be counted as votes cast and, as a result, will have the same effect as a vote against approval of the CSB Acquisition Agreements. Proxies marked as abstentions or as broker non-votes, however, will be treated as shares present for the purpose of determining whether a quorum is present. All of the members of the Board of Directors of CSB have agreed to vote all shares owned of record by them in favor of approval and adoption of the CSB Acquisition Agreements at the Special Meeting. At January 31, 1998 , the Directors of CSB owned of record shares or approximately 30.31 percent of the outstanding shares thereof, and owned beneficially (including not only shares owned by record but also shares owned by spouses, minor children, and other close associates) an aggregate of 66,399 shares, or approximately 41.5 percent. Accordingly, the vote of an additional 13,602 shares would be required to approve the merger in addition to the 66,399 shares beneficially owned by the Directors of CSB. -28- THE FSB SPECIAL MEETING GENERAL Each copy of this Prospectus/Proxy Statement mailed to a FSB Shareholder is accompanied by a proxy, which is solicited by the Board of Directors of FSB for use at the Special Meeting that will be held at_________________________________________, Indiana, at ____ [a.m./p.m.], Petersburg time, on _________, __________, 1998, and at any adjournment or adjournments thereof. Shareholders of FSB who are the owners of FSB Common Stock of record at the close of business on _______ __, 1998, will be entitled to vote at the Special Meeting. On such date, there were _______ shares of FSB Common Stock outstanding and entitled to vote, with each such share entitled to one vote. VOTES REQUIRED The presence at the Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of FSB Common Stock will constitute a quorum. Each share of FSB Common Stock is entitled to one vote on any matter to come before the Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of FSB Common Stock entitled to vote at the Special Meeting (at least 24,459 of the 48,916 shares of FSB Common Stock outstanding) is required for approval and adoption of the FSB Acquisition Agreements. Proxies marked as abstentions and shares held in street name that are designated by brokers on proxy cards as not voted will not be counted as votes cast and, as a result, will have the same effect as a vote against approval of the FSB Acquisition Agreements. Proxies marked as abstentions or as broker non-votes, however, will be treated as shares present for the purpose of determining whether a quorum is present. All of the members of the Board of Directors of FSB have agreed to vote all shares owned of record by them in favor of approval and adoption of the FSB Acquisition Agreements at the Special Meeting. At January 31, 1998 , the Directors of FSB owned of record _______ shares or approximately ____ percent of the outstanding shares thereof, and owned beneficially (including not only shares owned by record but also shares owned by spouses, minor children, and other close associates) an aggregate of ______ shares, or approximately __ percent. Accordingly, the vote of an additional _______ shares would be required to approve the Merger in addition to the ________ shares beneficially owned by the Directors of FSB. PROXIES If the enclosed proxy is executed and returned, it may nevertheless be revoked at any time insofar as it has not been exercised. The proxy may be revoked by (a) giving written notice of revocation to the Secretary of CSB or FSB (as the case may be) at the principal executive offices of such corporation set forth in the Summary, which written revocation notice is actually received by the Secretary prior to the proxy being exercised, (b) executing a subsequently dated proxy, or (c) attending the Special Meeting and voting in person. Unless revoked, the proxy will be voted at the meeting in accordance with the instructions of the shareholder as indicated on the proxy. If no instructions are given, the shares will be voted FOR the CSB Merger or the FSB Merger, respectively, and, on other matters that come before the meeting, as recommended by the Directors; -29- provided, that, in no event will a proxy that has been voted against the CSB Merger or the FSB Merger, respectively, be voted in favor of any motion to adjourn the respective CSB or FSB Special Meeting for the purpose of soliciting additional votes in favor of the CSB Merger or the FSB Merger. SOLICITATION OF PROXIES In addition to the use of the mails, Directors, officers, and certain employees of CSB, Citizens, FSB and FSB Bank may, without additional compensation therefor, solicit proxies in person or by telephone. CSB, FSB and German American will bear the cost of soliciting proxies from shareholders of CSB and FSB and the expense of preparing and printing this Prospectus/Proxy Statement. See "THE MERGERS --The CSB Acquisition Agreements--Terms of the Merger--Expenses" and "THE MERGERS -- The FSB Acquisition Agreements -- Terms of the Merger - Expenses." Brokers and other custodians, nominees, and fiduciaries are requested to forward proxies and proxy soliciting materials to the beneficial owners of shares held of record by such persons and will be reimbursed for their reasonable expenses in so doing. THE MERGERS BACKGROUND AND REASONS FOR THE MERGER CSB The Second Amendment and Restated Offer of Merger between the parties fixing the general terms of the transaction was entered into on October 6, 1997. German American and CSB, and their respective representatives, negotiated the financial and other terms of the Agreement on an Arms length basis. THE BOARD OF DIRECTORS OF CSB HAS UNANIMOUSLY APPROVED THE CSB ACQUISITION AGREEMENT AND UNANIMOUSLY RECOMMENDS TO THE SHAREHOLDERS OF CSB THAT THEY VOTE TO APPROVE SUCH AGREEMENTS AND THE CSB MERGER PROPOSAL CONTEMPLATED THEREBY. Pursuant to the CSB Acquisition Agreements, a representative of the present Board of Directors of CSB (not yet designated) will be added to the Board of Directors of German American as of the Effective Time of the CSB Merger. For information regarding certain agreements and understandings regarding the continuation of the tenure of, and the payment of benefits to, the members of the Board of Directors of CSB and Citizens, see "THE MERGERS -- Interests of Certain Persons in the Mergers." FSB In the fall of 1997, representatives of German American approached senior management of FSB suggesting the possibility of having FSB becoming affiliated with a larger financial institution. After preliminary negotiations and discussions with senior management and the Board of Directors of FSB, FSB and German American signed a letter of intent on October 9, 1997. After further negotiations and discussions, the Agreement and Plan of Reorganization was signed, effective as of -30- January 30, 1998. That Agreement provides for the consideration and other terms and conditions of the FSB Merger described herein. When considering whether to approve the FSB Merger, the Board of Directors of FSB assessed FSB Bank's future role in the changing banking environment in light of its managerial resources, financial condition and results of operations. It considered such things such as potential increased competition from bank and non-bank sources; prospects for future growth through mergers, acquisitions and branching in Southern Indiana; and its ability to develop new commercial loan products on a cost-effective basis. In addition, it considered (i) information concerning the relative financial condition, results of operations, dividend records and growth potential of FSB and German American, (ii) the relative strength and compatibility of the management of the two organizations, (iii) the market price data of German American Common Stock and FSB Common Stock, (iv) the anticipated tax-free nature of the FSB Merger to FSB shareholders who receive German American Common Stock in exchange for their FSB Common Stock, (v) financial terms of other recent business combinations in the banking industry, particularly in Indiana, and (vi) offers believed to be obtainable from other financial institutions. After reviewing these factors, the Board of Directors of FSB concluded that FSB's and FSB Bank's employees and customers will benefit from the opportunities offered by affiliation with a larger financial institution strategically located in an expanded market in Southern Indiana, and from a financial base which will permit more rapid development of new products and services. Shareholders of FSB receiving German American Common Stock may benefit from ownership of shares of a larger financial institution and from ownership of common stock which is traded in the NASDAQ National Market System. The FSB Merger will also provide FSB Bank with access to the expertise of a larger institution, improving its service capabilities. The Board of Directors of FSB believes that the FSB Mergers will better enable FSB and FSB Bank to meet the needs of the community which they serve, and will permit more aggressive competition with other financial institutions located in and around Gibson County, Indiana. For these reasons, the Board of Directors of FSB believes that the proposed FSB Mergers are in FSB's and FSB Bank's best interests and in the best interest of their shareholders, customers, employees and community. An Agreement between the parties fixing the general terms of the transaction was entered into on January 30, 1998. German American and FSB, and their respective representatives, negotiated the financial and other terms of the Agreement on an arms-length basis. THE BOARD OF DIRECTORS OF FSB HAS UNANIMOUSLY APPROVED THE FSB ACQUISITION AGREEMENT AND UNANIMOUSLY RECOMMENDS TO THE SHAREHOLDERS OF FSB THAT THEY VOTE TO APPROVE SUCH AGREEMENT AND THE FSB MERGER PROPOSAL CONTEMPLATED THEREBY. For information regarding the terms of certain severance payments proposed to be made to the President of FSB Bank, see "THE MERGERS -- Interests of Certain Persons in The Mergers." GERMAN AMERICAN -31- German American's Board of Directors considered a number of financial and non-financial factors in connection with its approval of the Mergers, including its respect for the ability and integrity of the Boards of Directors, management, and staff of CSB, FSB and their affiliates and its belief that expanding its Pike County operations and entering the Gibson County banking market through the Mergers offers important long range strategic benefits to German American. THE BOARD OF DIRECTORS OF GERMAN AMERICAN HAS UNANIMOUSLY APPROVED THE CSB AND FSB ACQUISITION AGREEMENTS AND UNANIMOUSLY RECOMMENDS TO THE SHAREHOLDERS OF GERMAN AMERICAN THAT THEY VOTE TO APPROVE SUCH AGREEMENTS AND THE ISSUANCE OF ADDITIONAL GERMAN AMERICAN COMMON STOCK CONTEMPLATED THEREBY. THE CSB ACQUISITION AGREEMENTS The following summary of the terms of the CSB Acquisition Agreements does not purport to be complete and is qualified in its entirety by reference to the CSB Acquisition Agreements, which are incorporated herein by reference and attached as Appendix A to this Prospectus/Proxy Statement. If approved by the shareholders of CSB, and if all other conditions to the consummation of the Merger specified by the CSB Acquisition Agreements are satisfied or waived, and unless the CSB Acquisition Agreements are terminated as provided therein, the CSB Merger will be consummated and become effective upon the filing of the CSB Articles of Merger with the Office of the Indiana Secretary of State (the "CSB Effective Time"). Although no assurances can be given, it is anticipated that the CSB Effective Time will occur on or before _________, 1998. Simultaneously with the CSB Merger, Community will be merged into Citizens. The resulting bank will continue operation under the name "The Citizens State Bank of Petersburg." EFFECT OF THE MERGER At the CSB Effective Time, the separate corporate existence of CSB will cease, and CSB will be merged into and become a part of GAHC, which will survive the CSB Merger. Following the CSB Merger, shareholders of CSB who did not perfect their dissenters' rights under Chapter 44 of the IBCL (see "THE MERGERS -- Rights of Dissenting Shareholders") will have the right, upon surrender of the certificates for their shares of CSB-Common Stock or other evidence of ownership of such shares acceptable to German American, to receive the CSB Merger Consideration as further discussed below. -32- TERMS OF THE MERGER CONVERSION OF CSB COMMON STOCK Pursuant to the CSB Merger, German American will acquire all 160,000 issued and outstanding shares of CSB Common Stock in exchange for shares of German American's Common Stock, $10 par value, $1 stated value, at an exchange ratio calculated as follows. German American Common Stock will be valued solely for purposes of computing the exchange ratio at the average of the lowest closing asked prices and highest closing bid prices of German American Common Stock as reported by the NASDAQ National Market System for each trading day within the period of the thirty calendar days that ends on the second business day preceding the closing date (the "CSB Valuation Period"). This valuation will be computed by averaging the asked prices separately from the bid prices over the thirty days of the CSB Valuation Period and then averaging the average bid price figure and the average asked price figure. Shareholders can obtain the daily closing bid/asked information as reported by NASDAQ for German American Common Stock by calling any member firm of the National Association of Securities Dealers ("NASD") or by accessing NASDAQ's home page on the Internet (http://www.nasdaq.com) and entering the NASDAQ quotation symbol for German American Common Stock ("GABC"). Shareholders can also obtain this information by calling the German American Investor Relations office at (812) 482-1314. The value of the German American Common Stock during the CSB Valuation Period (computed as indicated above) shall then be divided into the sum of $22,750,000 to establish (to the nearest whole share) the aggregate number of shares of German American Common Stock into which all of the then issued and outstanding shares of CSB Common Stock (which shall be not more than 160,000 shares) shall be converted at the Effective Time. This number of shares of German American Common Stock shall then be divided by 160,000, with the quotient therefrom (carried to the fourth figure past the decimal point) being the number of shares of German American Common Stock into which each share of CSB Common Stock, except for shares as to which dissenters rights under the IBCL have been perfected, shall be converted at the CSB Effective Time. Notwithstanding the above, in no event shall the total number of shares of German American Common Stock into which the 160,000 shares of CSB Common Stock shall be converted be more than 1,137,500 shares or fewer than 928,572 shares; and provided further, that in no event will the exchange ratio be more than 7.1094 or less than 5.8036 shares of German American Common Stock for each of the 160,000 shares of CSB Common Stock. The maximum and minimum exchange ratios, and the maximum and minimum numbers of shares, will be further adjusted in accordance with the anti-dilution provisions of the CSB Agreement in connection with any future stock dividends, stock splits and the like that German American might declare. Therefore, CSB's shareholders are assured that their interests under the CSB Agreement will not be diluted on account of any such future stock dividends, stock splits and the like. German American does not, however, anticipate that it will declare or effect any such future stock splits or dividends or the like prior to the Effective Time. At times herein the shares of German American Common Stock to be received in exchange for the shares of CSB Common Stock will be referred to as the "CSB Merger Consideration". On _________, 1998 (the latest practicable date prior to the printing of the Prospectus/Proxy Statement), the average of the closing bid/asked quotations ("Bid/Asked Value") for German American Common Stock was $_____ per share. Assuming that the Bid/Asked Value remains not less than $24.51 per share during the CSB Valuation Period (as to which there is no assurance), then -33- the minimum number of shares specified by the CSB Agreement (5.8036 shares of German American for each CSB common share and an aggregate of 928,572 shares of German American Common Stock) will be issued in the CSB Merger. If the Bid/Asked Value falls between $20.00 and $24.50 per share during the CSB Valuation Period, then CSB's shareholders will receive an aggregate number of shares of German American Common Stock that had an aggregate Bid/Asked Value as measured during the CSB Valuation Period of $22,750,000 (but not more than 1,137,500 shares in the aggregate or 7.1094 shares of German American Common Stock for each CSB common share). The CSB Acquisition Agreements may be terminated by CSB if the Bid/Asked Value of the German American Common Stock to be issued to the CSB shareholders, as calculated pursuant to the CSB Acquisition Agreements, would be less than $22,750,000. This termination right will become operative only if the average of the closing bid/asked quotations for German American Common Stock during the CSB Valuation Period is less than $20.00 per share, and the product obtained by multiplying the maximum number of shares to be issued in the CSB Merger (1,137,500 shares) by such average value therefore is less than $20.00. Although there can be no such assurance, the CSB Board of Directors presently anticipates that it would not waive any right that CSB may have to terminate the CSB Merger by reason of the Bid/Asked Value of the German American Common Stock dropping below $20.00 during the CSB Valuation Period unless it first submitted the Merger to the CSB's shareholders for reapproval and resolicited proxies. If CSB waives its right to terminate the CSB Merger (with or without shareholder reapproval) on account of the Bid/Asked Value dropping below $20.00 during the CSB Valuation Period, then CSB Shareholders would receive the maximum number of shares specified by the CSB Acquisition Agreements, which maximum number of shares would have a Bid/Asked Value as measured during the CSB Valuation Period of less than $22,750,000. The following table illustrates a range of possible values of the German American Common Stock to be received by the CSB shareholders in the CSB Merger:
Aggregate Per CSB Share Aggregate Bid/Asked Hypothetical Average Value During Average Bid/Asked The Bid/Asked Value During Shares CSB Valuation Value Aggregate The CSB Valuation To Be Period of During the Shares Period of Issued Per Shares To Be CSB Valuation To Be Shares To Be CSB Issued Per Period Issued* Issued Share* CSB Share - ------ ------- ------ ------ ---------- $35.00 928,572 $32,500,020 5.8036 $203.13 32.50 928,572 -- 5.8036 -- 30.00 928,572 -- 5.8036 -- 27.50 928,572 -- 5.8036 -- 25.00 928,572 -- 5.8036 -- 24.50 928,572 22,750,014 5.8036 142.19 22.50 1,011,111 22,750,000 6.3194 142.19 20.00 1,137,500 22,750,000 7.1094 142.19 *Subject to possible adjustment on account of future stock dividends, stock splits, or the like.
-34- No fractional shares of German American Common Stock will be issued and, in lieu thereof, holders of shares of CSB Common Stock who would otherwise be entitled to a fractional share interest (after taking into account all shares of CSB Common Stock held by such holder) shall be paid an amount in cash equal to the product of such fractional share interest and the average of the highest bid and the lowest asked price of a share of German American Common Stock as quoted on the NASDAQ National Market System on the last day of the CSB Valuation Period. Any CSB shareholders who perfect their dissenters' rights under the IBCL would receive cash for their shares of CSB Common Stock rather than shares of German American's Common Stock. SURRENDER OF CERTIFICATES As soon as reasonably practicable after the CSB Effective Time, German American or its designated exchange agent (the "Exchange Agent") shall mail to each record holder of CSB Common Stock a letter of transmittal (which shall specify that delivery shall be effected, and the risk of loss and title to the certificates of CSB Stock shall pass, only upon proper delivery of the certificates to the Exchange Agent and shall be in such form and have such other provisions as German American shall reasonably specify) (each such letter, the "CSB Merger Letter of Transmittal") and instructions for use in effecting the surrender of each CSB stock certificate (the "CSB Certificate") in exchange for the CSB Merger Consideration. As soon as reasonably practicable after surrender to the Exchange Agent of a CSB Certificate, together with a CSB Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such CSB Certificate the CSB Merger Consideration. No dividends that are otherwise payable on shares of German American Common Stock constituting the CSB Merger Consideration shall be paid to persons entitled to receive such shares of German American Common Stock until such persons surrender their CSB Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common Stock shall be issued any dividends which shall have become payable with respect to such shares of German American Common Stock (without interest and less the amount of taxes, if any, which may have been imposed thereon) between the CSB Effective Time and the time of such surrender. If the CSB Merger Consideration is to be issued to a person other than a person in whose name a surrendered CSB Certificate is registered, it shall be a condition of issuance that the surrendered CSB Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the CSB Shareholder in the event that such shareholder claims loss of a CSB Certificate for CSB Common Stock and requests that German American waive the requirement for surrender of such Certificate. -35- RIGHTS DETERMINED AT EFFECTIVE TIME CSB will provide to German American a certified list of the CSB shareholders from CSB stock records at the CSB Effective Time. Persons who are not identified as registered holders of CSB Common Stock on the records of CSB as of the CSB Effective Time but who have acquired beneficial interests in such shares of CSB Common Stock and desire to register the transfer of those rights after the CSB Effective Time will not be entitled to do so on the books of CSB. Instead, such persons must present to German American appropriate instruments of transfer signed by the registered holder of such shares as of the CSB Effective Time satisfactory to German American to obtain registration in their name of the CSB Merger Consideration issuable by German American. EXPENSES All costs and expenses incurred in connection with the transactions contemplated by the CSB Acquisition Agreements will be paid by the party incurring the expenses. However, if the CSB Acquisition Agreements are terminated because one party has knowingly materially breached any of that party's representations and warranties made in the CSB Acquisition Agreements and the breach is not cured within thirty (30) days of a written notice to cure the breach, then the non-breaching party may recover appropriate damages from the breaching party. In the event that the CSB Acquisition Agreements are terminated (i) as a result of the willful failure of CSB or Citizens to perform its obligations in violation of the CSB Acquisition Agreements or (ii) due to the failure of the CSB Merger to be approved by the shareholders of CSB as the result of the making by any other person or entity not a party to the CSB Acquisition Agreements of a proposal to CSB or Citizens contemplating a merger, consolidation, plan of stock exchange, sale of all or substantially all assets, or other business combination with CSB or Citizens and if CSB publicly announces within twelve months after the CSB Acquisition Agreements have been terminated that CSB has accepted a proposal for a business combination with any third party, then, in addition to whatever other legal rights or remedies to which German American may be entitled, CSB is obligated by Section 7.02 of the CSB Agreement, upon German American's demand and not later than 90 days after the making of such demand, (x) to pay to German American a termination fee of $455,000 and (y) to reimburse German American for all its out-of-pocket costs and expenses in connection with the CSB Merger incurred from and after October 1, 1997 (but not more than $100,000), including its legal, accounting, environmental and other consulting fees and expenses. If German American is entitled to collect the termination fee, CSB shall, in addition thereto, pay to German American all costs, charges, expenses (including without limitation the fees and expenses of counsel) and other amounts expended by German American in connection with or arising out of the obligations of CSB to pay all or a portion of the fee. German American is obligated by Section 7.05 of the CSB Agreement to pay CSB a termination fee of $455,000 within 90 days of the termination of the CSB Acquisition Agreements if the termination is solely a result of certain adverse regulatory determinations and to reimburse out-of-pocket costs and expenses. CONDITIONS Consummation of the CSB Merger is subject to the satisfaction, at or prior to the CSB Closing, of each of the following conditions precedent: -36- (a) The CSB Merger shall have been approved by a majority of the outstanding shares of CSB and by German American as the sole shareholder of GAHC; (b) All required regulatory approvals shall have been obtained for the CSB Merger and the Citizens Merger; (c) CSB shall have received from Olive Corporate Finance, LLC an opinion dated the date of the mailing of this Prospectus/Proxy Statement that the terms of the CSB Merger are fair to CSB stockholders from a financial point of view (the opinion is attached as Appendix D hereto); (d) German American shall have received a letter, dated as of the Effective Time, from its independent public accountants to the effect that, in their opinion, the CSB Merger qualifies for "pooling of interests" accounting treatment; (e) German American and CSB shall have received an opinion from Leagre Chandler & Millard, counsel for German American, concerning the expected federal income tax consequences of the CSB Merger; and (f) Other customary conditions and obligations of the parties set forth in the CSB Acquisition Agreements shall have been satisfied. Prior to the CSB Effective Time, the conditions to the consummation of the CSB Acquisition Agreements may, to the extent not prohibited by law, be waived in writing by the party entitled to the benefits thereof. TERMINATION OF ACQUISITION AGREEMENTS The CSB Acquisition Agreements may be terminated as follows: (a) By mutual agreement of all parties thereto; (b) By German American or CSB in the event of a material breach by the other party of any of its representations and warranties or covenants under the CSB Acquisitions Agreements and such breach is not cured within thirty (30) days after notice to cure such breach is given by the non-breaching party; (c) By German American or CSB, if the CSB Merger is not consummated by November 1, 1998; (d) By German American or CSB, if the conditions to its obligations set forth in the CSB Acquisition Agreements are not satisfied or waived on or prior to the CSB Closing Date; (e) By German American or CSB, if the CSB Acquisition Agreements and consummation of the CSB Merger are not approved by the affirmative vote of the holders of at least a majority of the outstanding shares of CSB Common Stock entitled to vote at the Special Meeting; and -37- (f) By CSB if the value of the German American Common Stock to be issued to the CSB Shareholders, as calculated during the CSB Valuation Period solely for purposes of calculating the exchange ratio pursuant to the CSB Acquisition Agreements, would be less than $22,750,000. See "THE MERGERS -- The CSB Acquisition Agreements." The CSB Acquisition Agreements also provide that either German American or CSB may terminate the CSB Acquisition Agreements if the environmental inspection reports on all real property owned or leased by CSB provided to German American by CSB pursuant to the CSB Agreement disclose any contamination or presence of hazardous wastes, the estimated remedial and corrective costs of which exceed $1,000,000, as reasonably estimated by an environmental expert retained for such purpose by German American and reasonably acceptable to CSB; provided, however, that German American or CSB must exercise such termination right within ten business days following receipt of such estimate. The environmental inspection reports have been ordered but have not yet been received. In addition, if any regulatory application filed in connection with the Merger is finally denied or disapproved by the respective regulatory authority, then either German American or CSB may terminate the CSB Acquisition Agreements. German American may also terminate the Merger in the event that any bank regulatory agency takes action against CSB or Citizens seeking to enforce banking laws or regulations. THE FSB ACQUISITION AGREEMENTS The following summary of the terms of the FSB Acquisition Agreements does not purport to be complete and is qualified in its entirety by reference to the FSB Acquisition Agreements, which are incorporated herein by reference and attached as Appendix B to this Prospectus/Proxy Statement. If approved by the shareholders of FSB, and if all other conditions to the consummation of the FSB Merger specified by the FSB Acquisition Agreements are satisfied or waived, and unless the FSB Acquisition Agreements are terminated as provided therein, the FSB Merger will be consummated and become effective upon the filing of the FSB Merger Agreement with the Office of the Indiana Secretary of State (the "FSB Effective Time"). Although no assurances can be given, it is anticipated that the FSB Effective Time will occur on or before _________, 1998. Simultaneously with the FSB Merger, FSB Bank will be merged into Community or, if the CSB Merger is completed first, Citizens. The resulting bank will continue operation under the name of the resulting entity, which will be "The Citizens State Bank of Petersburg," from and after the time of the CSB Merger. EFFECT OF THE MERGER At the FSB Effective Time of the Merger, the separate corporate existence of FSB will cease and FSB will be merged into and become a part of GAHC, which will survive the FSB Merger. Following the FSB Merger, shareholders of FSB who do not perfect their dissenters' rights under Chapter 44 of the IBCL (see "THE MERGERS--Rights of Dissenting Shareholders") will have the right, upon surrender of the certificates for their shares of FSB Common Stock or other evidence of ownership of such shares acceptable to German American, to receive the FSB Merger Consideration as further discussed below. -38- TERMS OF THE MERGER CONVERSION OF FSB COMMON STOCK Pursuant to the FSB Merger, German American will acquire all 48,916 issued and outstanding shares of FSB Common Stock in exchange for shares of German American's Common Stock, $10 par value, $1 stated value, at an exchange ratio calculated as follows. German American Common Stock will be valued at the average of the lowest closing asked prices and highest closing bid prices of German American Common Stock as reported by the NASDAQ National Market System for each trading day within the period of ten trading days that ends on the second business day preceding the closing date (such period being hereafter referred to as the "FSB Valuation Period" and the value being hereafter referred to as the "Closing Value"). Shareholders can obtain the daily closing bid/asked information as reported by NASDAQ for German American Common Stock by calling any member firm of the National Association of Securities Dealers (NASD) or by accessing NASDAQ's home page on the Internet (http://www.nasdaq.com) and entering the NASDAQ quotation symbol for German American Common Stock (GABC). Shareholders can also obtain this information by calling the German American Investor Relations office at (812)482-1314. The value of the German American Common Stock during the FSB Valuation Period (computed as indicated above) shall then be divided into the aggregate FSB Merger Consideration (as determined below) to establish (to the nearest whole share) the Exchange Ratio. FSB's shareholders of record at the time the FSB Merger shall become effective, for the shares of FSB Common then held by them, respectively, shall be allocated and entitled to receive (upon surrender of certificates representing said shares for cancellation) shares of German American Common Stock, which total number of shares of German American Common Stock shall have a value (as hereinafter determined) equal to 150% of the sum of (a) the shareholders' equity of FSB determined in accordance with generally accepted accounting principles consistently applied at June 30, 1997 plus (or minus) (b) the amount of net income (loss) retained after payment of dividends, if any, but before securities transactions gains of FSB (as determined in accordance with generally accepted accounting principles consistently applied to the satisfaction of German American) from June 30, 1997, to the end of the month immediately preceding the closing date, plus (c) if the Board of Directors of FSB or its subsidiary FSB Bank shall establish the executive bonus pool described in Section 4.01(a)(vi)(B) of the FSB Agreement (the "Bonus Pool"), and if FSB and FSB Bank shall thereby obtain a release from the Chief Executive Officer of all employment-related claims, the after-tax amount of any bonus payment (not exceeding $75,000, plus an allowance in lieu of vacation time not to exceed $4,060 pre-tax) that may be paid or payable to FSB Bank's present Chief Executive Officer thereunder. Fees and expenses incurred by FSB in connection with the transactions contemplated by this Agreement, regardless of whether such fees and expenses have been paid or accrued as of the end of the month preceding the Closing Date (but only to the extent that such fees and expenses exceed $15,000), and any amounts paid or payable before or after the FSB Effective Time pursuant to the Bonus Pool, shall be considered in determining the net income (loss) of FSB for purposes of computing the consideration payable to FSB shareholders hereunder ("FSB Merger Consideration"). This number of shares of German American Common Stock shall then be divided by 48,916, with the quotient therefrom (carried to the fourth figure past the decimal point) being the number of -39- shares of German American Common Stock into which each share of FSB Common Stock, except for shares as to which dissenters rights under the IBCL have been perfected, shall be converted at the Effective Time. If the Closing Date of the FSB Merger had been the date of this Prospectus/Proxy Statement, and assuming that a release had been obtained as of the date hereof from FSB Bank's Chief Executive Officer in exchange for a cash payment and the shareholders' equity of FSB would have therefore been appropriately adjusted on account of such payment in accordance with the terms of the FSB Acquisition Agreements, then German American estimates that FSB's adjusted shareholders' equity (as determined as of ____, 1998, the end of the month immediately preceding the hypothetical closing date) would have been approximately $_____ and that the market value of the consideration payable to FSB shareholders under the FSB Acquisition Agreements (calculated at 150 percent of such base amount) would have been approximately $___________. On _________, 1998 (the latest practicable date prior to the printing of the Prospectus/Proxy Statement), the average of the closing bid/asked quotations ("Bid/Asked Value") for German American Common Stock was $_____ per share. At that value, and under the preceding assumptions, German American estimates that it would have issued an aggregate of ___ shares of German American Common Stock to FSB shareholders (or ___ shares of German American Common Stock for each of the 48,916 shares outstanding of FSB Common) had the FSB Merger closed as of the date of this Prospectus/Proxy Statement. The following table illustrates a range of possible values of the German American Common Stock to be received by the FSB shareholders in the FSB Merger assuming that the aggregate value of the German American Common Stock to be issued in the FSB Merger is approximately $2,160,000:
Aggregate Per FSB Share Aggregate Bid/Asked Hypothetical Average Value During Average Bid/Asked The Bid/Asked Value During Shares FSB Valuation Value Aggregate The FSB Valuation To Be Period of During the Shares Period of Issued Per Shares To Be FSB Valuation To Be Shares To Be FSB Issued Per Period Issued* Issued Share* FSB Share - ------ ------- ------ ------ ---------- $35.00 61,714 1.26 32.50 66,461 1.35 30.00 72,000 1.60 27.50 86,400 1.76 25.00 96,000 1.96 22.50 108,000 2.20 20.00 *Subject to possible adjustment on account of future stock dividends, stock splits, or the like.
No fractional shares of German American Common Stock will be issued and, in lieu thereof, holders of shares of FSB Common Stock who would otherwise be entitled to a fractional share interest (after taking into account all shares of FSB Common Stock held by such holder) shall be paid an amount in cash equal to the product of such fractional share interest and the Closing Values. -40- Any FSB shareholders who perfect their dissenters' rights under the IBCL would receive cash for their shares of FSB Common Stock rather than shares of German American's Common Stock. SURRENDER OF CERTIFICATES As soon as reasonably practicable after the FSB Effective Time, German American or its designated exchange agent (the "Exchange Agent") shall mail to each record holder of FSB Common Stock a letter of transmittal (which shall specify that delivery shall be effected, and the risk of loss and title to the certificates of FSB Stock shall pass, only upon proper delivery of the certificates to the Exchange Agent and shall be in such form and have such other provisions as German American shall reasonably specify) (each such letter, the "FSB Merger Letter of Transmittal") and instructions for use in effecting the surrender of each FSB stock certificate (the "FSB Certificate") in exchange for the FSB Merger Consideration. As soon as reasonably practicable after surrender to the Exchange Agent of a FSB Certificate, together with a FSB Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such FSB Certificate the FSB Merger Consideration. No dividends that are otherwise payable on shares of German American Common Stock constituting the FSB Merger Consideration shall be paid to persons entitled to receive such shares of German American Common Stock until such persons surrender their FSB Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common Stock shall be issued any dividends which shall have become payable with respect to such shares of German American Common Stock (without interest and less the amount of taxes, if any, which may have been imposed thereon) between the Effective Time and the time of such surrender. If the FSB Merger Consideration is to be issued to a person other than a person in whose name a surrendered FSB Certificate is registered, it shall be a condition of issuance that the surrendered FSB Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the FSB Shareholder in the event that such shareholder claims loss of a FSB Certificate for FSB Common Stock and requests that German American waive the requirement for surrender of such Certificate. RIGHTS DETERMINED AT EFFECTIVE TIME FSB will provide to German American a certified list of the FSB shareholders from FSB stock records at the FSB Effective Time. Persons who are not identified as registered holders of FSB Common Stock on the records of FSB as of the FSB Effective Time but who have acquired beneficial interests in such shares of FSB Common Stock and desire to register the transfer of those rights after the FSB Effective Time will not be entitled to do so on the books of FSB. Instead, such persons must present to German American appropriate instruments of transfer signed by the registered holder of such shares as of the FSB Effective Time satisfactory to German American to obtain registration in their name of the FSB Merger Consideration issuable by German American. -41- EXPENSES All costs and expenses incurred in connection with the transactions contemplated by the FSB Acquisition Agreements will be paid by the party incurring the expenses, although the first $15,000 of expenses incurred by FSB will not be charged against FSB solely for purposes of determining the amount of the FSB Merger consideration. However, if the FSB Acquisition Agreements are terminated because one party has knowingly materially breached any of that party's representations and warranties made in the FSB Acquisition Agreements and the breach is not cured within thirty (30) days of a written notice to cure the breach, then the non-breaching party may recover appropriate damages from the breaching party. In the event that the FSB Acquisition Agreements are terminated due to failure of the FSB shareholders to approve the FSB Acquisition Agreements following the making by any other person or entity not a party to the FSB Acquisition Agreements of a proposal to FSB or FSB Bank contemplating a merger, consolidation, plan of stock exchange, sale of all or substantially all assets, or other business combination with FSB or FSB Bank, then, in addition to whatever other legal rights or remedies to which German American may be entitled, FSB is obligated by Section 7.02 of the FSB Agreement, upon German American's demand and within 90 days of such demand, (x) pay to German American a termination fee of $40,000 and (y) reimburse German American for all its out-of-pocket costs and expenses in connection with the FSB Merger incurred from and after October 1, 1997 (but not more than $100,000), including its legal, accounting, environmental and other consulting fees and expenses. If German American is entitled to collect the termination fee, FSB shall, in addition thereto, pay to German American all costs, charges, expense (including without limitation the fees and expenses of counsel) and other amounts expended by German American in connection with or arising out of the obligations of FSB to pay all or a portion of the fee. CONDITIONS Consummation of the FSB Merger is subject to the satisfaction, at or prior to the FSB Closing, of each of the following conditions precedent: (a) The FSB Merger shall have been approved by a majority of the outstanding shares of FSB and by German American as the sole shareholder of GAHC; (b) All required regulatory approvals shall have been obtained by the FSB Merger and the FSB Bank Merger; (c) German American shall have each received a letter, dated as of the Effective Time, from their independent public accountants to the effect that, in their opinion, the FSB Merger qualifies for "pooling of interests" accounting treatment; (d) German American and FSB shall have received an opinion from Leagre Chandler & Millard, counsel for German American, concerning the expected federal income tax consequences of the FSB Merger; and (e) Other customary conditions and obligations of the parties set forth in the FSB Acquisition Agreements shall have been satisfied. -42- Prior to the Effective Time, the conditions to the consummation of the FSB Acquisition Agreements may, to the extent not prohibited by law, be waived in writing by the party entitled to the benefits thereof. TERMINATION OF ACQUISITION AGREEMENTS The FSB Acquisition Agreements may be terminated as follows: (a) By mutual agreement of all parties thereto; (b) By German American or FSB in the event of a material breach by the other party of any of its representations and warranties or covenants under the FSB Acquisitions Agreements and such breach is not cured within thirty (30) days after notice to cure such breach is given by the non-breaching party; (c) By German American or FSB, if the FSB Merger is not consummated by June 30, 1998; (d) By German American or FSB, if the conditions to its obligations set forth in the FSB Acquisition Agreements are not satisfied or waived on or prior to the FSB Closing Date; and (e) By German American or FSB, if the FSB Acquisition Agreements and consummation of the FSB Merger are not approved by the affirmative vote of the holders of at least a majority of the outstanding shares of FSB Common Stock entitled to vote at the Special Meeting. The FSB Acquisition Agreements also provide that German American may terminate the FSB Acquisition Agreements if the environmental inspection reports on all real property owned or leased by FSB provided to German American by FSB pursuant to the Reorganization Agreement disclose any contamination or presence of hazardous wastes, the estimated remedial and corrective costs of which exceed $100,000, as reasonably estimated by an environmental expert retained for such purpose by German American and reasonably acceptable to FSB, or if the cost of such actions and measures cannot be so reasonably estimated by such expert with any reasonable degree of certainty, or if the costs of undertaking additional environmental investigations or procedures suggested by German American's expert in its first report exceed $10,000 and FSB does not agree to pay such excess; provided, however, that German American must exercise such termination right within 15 business days following receipt of such estimate or indication that the cost of such actions and measures cannot be so reasonably estimated. The environmental inspection reports have not disclosed any basis for terminating the FSB Acquisition Agreements pursuant to this environmental termination provision. In addition, if any regulatory application filed in connection with the FSB Merger is finally denied or disapproved by the respective regulatory authority, then either German American or FSB may terminate the FSB Acquisition Agreements. German American may also terminate the FSB Merger in the event that any bank regulatory agency takes action against FSB or FSB Bank seeking to enforce banking laws or regulations. -43- ACCOUNTING TREATMENT The Mergers are expected to qualify as a "pooling of interests" for accounting and financial reporting purposes. It is a condition of the Mergers that German American shall have received a letter from its independent accountant to the effect that, in its opinion, the respective Merger will qualify as a pooling of interests transaction under generally accepted accounting principles. Crowe, Chizek and Company, LLP, are the independent accountants for German American. FEDERAL INCOME TAX CONSEQUENCES The CSB and FSB Mergers are expected to qualify as a reorganizations under Section 368(a) of the Internal Revenue Code of 1986, as amended ("Code"). Except for cash received by any shareholders perfecting their dissenters' rights and cash received by shareholders in lieu of a fractional share interest in German American Common Stock, the holders of shares of CSB Common Stock and FSB Common Stock will recognize no gain or loss on the receipt of German American Common Stock in the Mergers, their aggregate basis in the shares of German American Common Stock received in the Mergers will be the same as their aggregate basis in their shares of CSB Common Stock or FSB Common Stock, as the case may be, converted in the Mergers, and, provided the shares surrendered are held as a capital asset, the holding period of the German American Common Stock received by them will include the holding period of their shares of CSB Common Stock or FSB Common Stock, as the case may be, converted in the Mergers. Cash received by shareholders in lieu of fractional share interests and cash received by shareholders exercising their dissenters' rights under Chapter 44 of the IBCL will be treated as a distribution in full payment of such fractional share interests, or shares surrendered in exercise of dissenters' rights, resulting in capital gain or loss or ordinary income or loss, as the case may be, depending upon each shareholder's particular situation. Leagre Chandler & Millard, attorneys for German American, has delivered opinions dated ________, 1998 to German American upon which German American has relied in preparing the above summary of the anticipated federal income tax consequences of the Mergers. The Leagre Chandler & Millard opinions, and Representation Certificates of German American, CSB and FSB upon which Leagre Chandler & Millard has relied as to certain factual matters in rendering its opinion, are filed as exhibits to the Registration Statement. Although the obligations of German American, CSB and FSB to consummate the Mergers are conditioned upon the receipt of the tax opinions of Leagre Chandler & Millard regarding the intended federal income tax consequences of each of the Mergers, those opinions are not binding upon the Internal Revenue Service and no ruling has been sought from the Internal Revenue Service regarding the tax-free nature of the Mergers. If the Mergers are consummated, and it is later determined that one or both of the Mergers did not qualify as a tax-free reorganization under the Code, CSB and/or FSB shareholders would recognize taxable gain or loss in the Mergers equal to the difference between the fair market value of the German American Common Stock such shareholder received and such shareholder's basis in his or her CSB Common Stock or FSB Common Stock, as the case may be. THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND DOES NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR CSB or FSB SHAREHOLDER'S SITUATION. EACH CSB AND FSB SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC LEGAL AND TAX CONSEQUENCES OF -44- THE MERGER TO HIM OR HER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS. REGISTRATION STATEMENT German American has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission registering under the 1933 Act the shares of German American Common Stock to be issued pursuant to the Mergers. German American intends to rely upon exemptions from the statutory registration requirements of the several states in which shareholders of CSB and FSB reside and has not taken any steps to register the German American Common Stock under those statutes. TRANSFER RESTRICTIONS The German American Common Stock received by CSB and FSB shareholders in the Mergers will be freely transferable, except that "affiliates" of CSB and FSB as of the date of their respective Special Meetings, as that term is defined in the rules and regulations under the Securities Act, may sell any German American Common Stock held by them during the two year period following the respective Merger (one year provided German American remains current in its reporting obligations under the Securities Exchange Act of 1934) only (a) in accordance with the provisions of Rule 145(d) under the Securities Act, (b) pursuant to an effective Registration Statement under the Securities Act, or (c) in transactions otherwise exempt from registration thereunder. In addition, affiliates of CSB and/or shareholders who may become "affiliates" of German American will be subject to similar sale restrictions for so long as they remain affiliates of German American. Affiliates of CSB and/or FSB also will be subject to prohibitions on sales until financial results covering at least 30 days of post-Merger combined operations have been published. Generally, persons who are not officers, Directors, or greater than ten percent shareholders of CSB and/or FSB will not be considered "affiliates" in the absence of other factors indicating a control relationship. REGULATORY MATTERS The CSB Merger will not be made effective unless the Citizens Merger occurs simultaneously. The FSB Merger will not be made effective unless the FSB Bank Merger occurs simultaneously. The Citizens Merger and the FSB Bank Merger are subject to the approval of the Federal Deposit Insurance Corporation (the "FDIC") and the Indiana Department of Financial Institutions ("DFI"). Applications for such approvals were filed with the FDIC and the DFI on _______________, 1998. -45- RIGHTS OF DISSENTING SHAREHOLDERS Pursuant to Chapter 44 of the IBCL, shareholders of CSB and FSB have dissenters' rights with respect to the Mergers. Chapter 44 of the IBCL provides that shareholders of CSB and FSB have the right to demand payment in cash for the fair value of his or her shares of CSB Common Stock and FSB Common Stock, as the case may be, immediately before the applicable Effective Time, excluding any appreciation or depreciation in value in anticipation of the Mergers unless a court determines that such exclusion would be inequitable. To claim this right the shareholder: (a) must, before the vote is taken, deliver to CSB or FSB, as the case may be, written notice of his intent to demand payment for his or her shares if the respective Merger is effectuated, and (b) must not vote in favor of the respective Merger in person or by proxy at the Special Meeting of the shareholders. If the respective Merger is approved by the shareholders, CSB or FSB, as the case may be, will send a notice of dissenters' rights to those shareholders satisfying the above conditions within ten days after the shareholder approval. The notice will state the procedures the dissenting shareholder thereafter must follow to exercise his or her dissenters' rights in accordance with Chapter 44 of the IBCL. A SHAREHOLDER WHO DOES NOT DELIVER WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT AND EITHER VOTES AGAINST THE RESPECTIVE MERGER OR REFRAINS FROM VOTING WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS UNDER CHAPTER 44 OF THE IBCL. Shareholders who execute and return the enclosed proxy but do not specify a choice on the Merger proposals will be deemed to have voted in favor of the respective Merger and accordingly to have waived their dissenters' rights, unless they revoke the proxy prior to its being voted. Upon consummation of the Mergers, CSB or FSB, as appropriate, will pay each dissenting shareholder who has complied with all requirements of Chapter 44 of the IBCL and of the respective notice CSB's or FSB's, as the case may be, estimate of the fair value of the shares as of the time immediately prior to the respective Merger, EXCLUDING ANY APPRECIATION IN VALUE IN ANTICIPATION OF THE MERGER. The determination of the estimate of "fair value" will be based on the financial condition of CSB or FSB, as the case may be, the trading history of CSB Common Stock or FSB Common Stock, as the case may be, and other factors normally used to determine the value of bank holding company stock, and will likely involve the engagement by CSB or FSB of a professional appraiser to advise it on these matters. Dissenters can object to the fair value by stating their estimate of the fair value and demanding payment of the additional amount claimed as fair value within 30 days after CSB or FSB, as the case may be, makes or offers payments for the dissenters' shares. CSB or FSB, as the case may be, can elect to agree to the dissenters' fair value demand or can commence an action in the Circuit or Superior Court of Pike County or of Gibson County, as the case may be, Indiana, within 60 days after receiving the demand for payment for a judicial determination of the fair value. The Court can appoint appraisers to determine the fair value. The costs of the proceeding, including compensation and expenses of the appraisers, counsel for the parties, and experts, will be assessed against all parties to the action in such amounts as the Court finds equitable. Each dissenter made -46- a party to the action will be entitled to receive the amount, if any, by which the Court finds the fair value of the dissenters' shares, plus interest, exceeds the amount paid by CSB or FSB, as the case may be. See the full text of Chapter 44 set forth in Appendix C to this Prospectus/Proxy Statement. TO PERFECT RIGHTS OF DISSENT, A SHAREHOLDER MUST NOT VOTE IN FAVOR OF THE RESPECTIVE MERGER AND MUST DELIVER A WRITTEN DEMAND FOR PAYMENT IN ACCORDANCE WITH THE REQUIREMENTS OF CHAPTER 44 OF THE IBCL. THIS SUMMARY OF THE DISSENTERS' RIGHTS OF CSB AND FSB SHAREHOLDERS DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE STATUTORY PROVISIONS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS APPENDIX C. ANY INDIVIDUAL CONSIDERING EXERCISING RIGHTS OF DISSENT SHOULD CAREFULLY READ AND CONSIDER THE INFORMATION DISCLOSED IN APPENDIX C AND CONSULT WITH AN INDEPENDENT INVESTMENT ADVISOR BEFORE EXERCISING RIGHTS OF DISSENT. INTERESTS OF CERTAIN PERSONS IN THE MERGERS Certain of the Directors and officers of CSB have interests in the CSB Merger other than their interests as shareholders of CSB, pursuant to certain agreements and understandings that are reflected in the CSB Acquisition Agreements. German American has agreed in the CSB Acquisition Agreements that it will cause a designated member of the present Board of Directors of CSB to be added to the German American Board of Directors as of the Effective Time of the CSB Merger. German American has also agreed that the present Directors of Citizens will have the exclusive right to designate the nominees for half of the seats on the Board of Directors of Citizens for three years following the Merger (thereby in effect giving the present Citizens Directors the right to continue to serve on the Board of Citizens during such period) subject to German American's reserved right to object to any such nominee in its discretion. Further, German American has agreed not to object to the payment by Citizens to its present Directors, during that three year period following the Merger, of up to $3,000 per year per Director in addition to customary Director fees payable to all Directors for their services, in order to compensate such Directors for the loss of certain health and life insurance benefits currently provided by Citizens to its present directors under programs which will be discontinued if the CSB Merger is consummated. German American has also agreed to certain super-majority voting requirements that will be applicable to removal of officers of Citizens during such three year period. Finally, CSB's Board of Directors in November 1997, in connection with the execution of the definitive CSB Acquisition Agreements, authorized the payment of fees to certain of its Directors who served on the special merger negotiating committee of the Board of Directors of Citizens for their services, aggregating $16,718.30. As a result of the FSB Merger, FSB's operations will be conducted at its present locations as branches of Community (or Citizens as the case may be). There was therefore no position available for Glenn Young, current President of FSB Bank, as a chief executive officer. In connection with the FSB Acquisition Agreements, German American agreed that up to $75,000 of payments that FSB may make to Mr. Young in connection with a bonus pool arrangement may be added back to the book value of FSB for purposes of computing the purchase price payable to FSB -47- shareholders, provided that Mr. Young executes and delivers to FSB and FSB Bank a release of any potential employment-related claim. Accordingly, FSB Bank intends to pay to Mr. Young the negotiated payment of $__________ (including $________ relating to accrued vacation pay) in exchange for his services in connection with the Merger and his release of claims. -48- OPINION OF FINANCIAL ADVISOR TO CSB Olive Corporate Finance, LLC has provided the following disclosures for inclusion in this Prospectus/Proxy Statement: Olive Corporate Finance LLC ("Olive") was engaged by CSB Bancorp, an Indiana corporation ("CSB"), to advise the CSB Board of Directors as to the fairness of the consideration, from a financial perspective, to be paid by German American Bancorp, an Indiana corporation ("German American"), to CSB shareholders as set forth in the Agreement and Plan of Reorganization dated December 8, 1997 ("Master Agreement"), among CSB, The Citizens State Bank of Petersburg, an Indiana banking corporation ("Citizens"), German American, German American Holdings Corporation, an Indiana corporation ("GAHC"), and Community Trust Bank, an Indiana banking corporation ("Community"); Plan of Merger dated ____________, 1998 between CSB and GAHC, and joined in by German American; and the Plan of Merger dated ___________, 1998 between Citizens and Community (the Agreement and Plan of Reorganization and the Plans of Mergers are referred to collectively herein as the "Agreements"). As part of its investment banking business, Olive 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, and other transactions. Neither Olive nor any of its affiliates has a material financial interest in CSB or German American. Olive was selected to advise the CSB Board of Directors based upon its familiarity with financial institutions and its knowledge of the banking industry as a whole. Except as described in this section, neither CSB nor German American have had any material or compensable relationship with Olive, its affiliates, and/or unaffiliated representatives during the past two years. Olive performed certain analyses described below and discussed the range of values for CSB resulting from such analyses with the Board of Directors of CSB in connection with its advice as to the fairness of the consideration to be paid by German American. A Fairness Opinion ("Opinion") rendered by Olive was delivered to the Board of Directors of CSB on ___________ at a special meeting of the Board of Directors. A copy of the Opinion, which includes a summary of the assumptions made and information analyzed in deriving the Opinion, is attached as Appendix ____ to this Proxy Statement/Prospectus and should be read in its entirety. In arriving at its Opinion, Olive reviewed certain publicly available business and financial information relating to CSB and German American. Olive considered certain financial and stock market data of CSB and German American and compared that data with similar data for certain other publicly-held bank holding companies which own Midwest financial institutions, and considered the financial terms of certain other comparable Midwest bank transactions that had recently been effected. Olive 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, -49- Olive 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 Olive were based on assumptions believed by Olive to be reasonable and to reflect currently available information. Olive did not make an independent evaluation or appraisal of the assets of CSB or German American. Olive reviewed the correspondence and information regarding the financial institutions that had expressed an interest in acquiring CSB. Olive reviewed all offers received by CSB. As part of preparing the Opinion, Olive performed a due diligence review of German American. As part of the due diligence review, Olive reviewed minutes of Board of Directors meetings beginning January 1, 1995 through December 31, 1997; Annual Reports on Form 10-K for each of the three years ended December 31, 1994, 1995, 1996; Quarterly Reports on Form 10-Q-for the periods ended March, June and September, 1997; Registration Statement on Form S-4 relating to this transaction; each filing on Form 8-K during the year ended December-31, 1997; report of independent auditors for the years ending December 31, 1994, 1995 and 1996; management letters from independent auditors for 1997 and management's responses thereto; Uniform Bank Performance Reports dated December 31, 1994 through September 30, 1997; investment security holdings; listing of pending litigation provided by independent counsel; analysis and calculation of the Allowance for Loan and Lease Losses as of December 31, 1997; and internally identified special assets and related reports. Olive reviewed and analyzed the historical performance of CSB contained in Annual Reports to shareholders of CSB for each of the five years ended December 31, 1992 through December 31, 1996; audited financial statements for the five years ended December 31, 1992 through December 31, 1996, and unaudited financial statements of CSB dated September 30, 1997; Consolidated Reports of Condition and Income filed with the Federal Deposit Insurance Corporation dated December 31, 1996, September 30, 1997 and December 31, 1997; Uniform Bank Performance Report dated December 31, 1992 through December 31, 1996, and September 30, 1997; and certain other assets. Olive reviewed and tabulated statistical data regarding the loan portfolio, securities portfolio and other performance ratios and statistics. In review of the aforementioned information, Olive 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 Opinion and preparing its written and oral presentations to CSB's Board of Directors, Olive performed a variety of financial analyses, including those summarized below. The summary set forth below does not purport to be a complete description of the analyses performed by Olive in this regard. The preparation of an 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, Olive 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, Olive made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond CSB's or German American's control. The analyses performed by Olive 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. -50- Acquisition Comparison Analysis: In performing this analysis, Olive reviewed 195 Midwest bank acquisition transactions announced since January 1, 1996. The purpose of the analysis was to obtain an evaluation range based on these Midwest acquisition transactions. Multiples of earnings and book values implied by the comparable transactions were utilized in obtaining a range for the acquisition value of CSB. In addition to reviewing recent Midwest bank transactions, Olive performed separate comparable analyses for acquisitions of Midwest banks which, like CSB, had a tangible equity-to-asset ratio between 11.5% and 13.5%; with assets between $70 and $90 million; with return on average equity between 7% and 10%; with return on average assets between .80% and 1.1%, and an efficiency ratio between 55% and 70%. Median values for the 195 Midwest bank acquisitions, expressed as multiples of both book value and earnings, were 1.79 and 17.20, respectively. The median multiples of book value and earnings for all stock acquisitions of Midwest banks with tangible equity-to-asset ratios between 11.5% and 13.5% were 1.64 and 18.00, respectively. Acquisitions of Midwest banks with assets between $70 and $90 million had median multiples of 2.15 and 18.27, respectively. Acquisitions of Midwest banks with return on average equity between 7% and 10% had median multiples of 1.64 and 20.15, respectively. Acquisitions of Midwest banks with return on average assets of between .80% and 1.10% had median multiples of 1.83 and 17.96, respectively. Acquisitions of Midwest banks with an efficiency ratio between 55% and 70% had median multiples of 1.82 and 17.26, respectively. Adjusted Net Asset Value Analysis: Olive reviewed CSB's balance sheet data to determine the amount of material adjustments required to the stockholder's equity of CSB based on differences between the market value of CSB's assets and their value reflected on CSB's financial statements. Olive determined that one adjustment was warranted. Olive reflected a value of the noninterest bearing deposits of approximately $6,799,000. The adjusted net asset value was determined to be $67.43 per share of CSB's common stock. Discounted Earnings Analysis: A dividend discount analysis was performed by Olive pursuant to which a range of stand-alone values of CSB was determined by adding (i) the present value of estimated future dividend streams that CSB could generate over a five-year period beginning in 1998 and ending in 2002, and (ii) the present value of the "terminal value" of CSB's common equity at the end of 2002. The "terminal value" of CSB's common equity at the end of the five-year period was determined by applying a multiple of 1.79 times the projected terminal year's book value. The 1.79 multiple represents the median price paid as a multiple of book value for all Midwest bank transactions since January 1, 1996. Dividend streams and terminal values were discounted to present values using a discount rate of 9%. This rate reflects assumptions regarding the required rate of return of holders or buyers of CSB's common stock. The value of CSB, determined by adding the present value of the total cash flows, was $93.01 per CSB's common share. In addition, using the five-year projection as a base, a twenty-year projection was prepared assuming that an annual growth rate of 5%, return on assets of 1.0% for years one through five, 1.1% for years six through ten, and 1.15% for years ten through twenty. Dividends also were assumed to be 50.0% of income for all years. This long-term projection resulted in a value of $83.83 per CSB's common share. Specific Acquisition Analysis: Olive valued CSB based on an acquisition analysis assuming a "break-even" earnings scenario to an acquirer as to price, current interest rates, and amortization -51- of the premium paid. Based on this analysis, an acquiring institution would pay $60.21 per share of CSB's common stock 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 8.0% adjusted for taxes, amortization of the acquisition premium over 15 years and earnings for the last twelve months at September 30, 1997 of $537,000. Pro Forma Merger Analysis: Olive compared the historical performance of CSB to that of German American and other regional bank holding companies. This included, among other things, a comparison of profitability, asset quality and capital adequacy measures. In addition, the contribution of each of CSB and German American to the income statement and balance sheet of the pro forma combined company was analyzed. The effect of the affiliation on the historical and pro forma financial data of CSB, as well as the projected financial data prepared by Olive, was analyzed. CSB's historical financial data was compared to pro forma combined historical and projected earnings and book value per share as well as other measures of profitability, capital adequacy and asset quality. The Opinion is directed only to the question of whether the consideration to be received by CSB's shareholders under the Agreements is fair and equitable from a financial perspective and does not constitute a recommendation to any CSB shareholder to vote in favor of the Merger. CSB or any of its affiliates imposed no limitations on Olive regarding the scope of its investigation or otherwise. Based on the results of the various analyses described above, Olive concluded that the consideration to be received by CSB shareholders under the Merger Agreement is fair and equitable from a financial perspective to the shareholders of CSB. Olive will receive a fee of $26,000 and reimbursement for all reasonable out-of-pocket expenses from CSB for its services. In addition, CSB has agreed to indemnify Olive and its directors, officers and employees from liability in connection with the Merger, and to hold Olive harmless from any losses, actions, claims, damages, expenses or liabilities related to any of Olive's acts or decisions made in good faith and in the best interest of CSB. -52- OPINION OF FINANCIAL ADVISOR TO FSB Olive Corporate Finance LLC ("Olive") was engaged by FSB Financial Corporation, an Indiana corporation ("FSB"), to advise the FSB Board of Directors as to the fairness of the consideration, from a financial perspective, to be paid by German American Bancorp, an Indiana corporation ("German American"), to FSB shareholders as set forth in the Agreement and Plan of Reorganization dated December 8, 1997 ("Master Agreement"), among FSB, FSB Bank an Indiana banking corporation ("FSB Bank"), German American, German American Holdings Corporation, an Indiana corporation ("GAHC"), and Community Trust Bank, an Indiana banking corporation ("Community"); Plan of Merger dated ____________, 1998 between FSB and GAHC, and joined in by German American; and the Plan of Merger dated ____________, 1998 between Citizens and Community (the Agreement and Plan of Reorganization and the Plans of Mergers are referred to collectively herein as the "Agreements"). As part of its investment banking business, Olive 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, and other transactions. Neither Olive nor any of its affiliates has a material financial interest in FSB or German American. Olive was selected to advise the FSB Board of Directors based upon its familiarity with financial institutions and its knowledge of the banking industry as a whole. Except as described in this section, neither FSB nor German American have had any material or compensable relationship with Olive, its affiliates, and/or unaffiliated representatives during the past two years. Olive performed certain analyses described below and discussed the range of values for FSB resulting from such analyses with the Board of Directors of FSB in connection with its advice as to the fairness of the consideration to be paid by German American. A Fairness Opinion ("Opinion") rendered by Olive has been delivered to the Board of Directors of FSB. A copy of the Opinion, which includes a summary of the assumptions made and information analyzed in deriving the Opinion, is attached as Appendix _ to this Proxy Statement/Prospectus and should be read in its entirety. In arriving at its Opinion, Olive reviewed certain publicly available business and financial information relating to FSB and German American. Olive considered certain financial and stock market data of FSB and German American and compared that data with similar data for certain other publicly-held bank holding companies which own Midwest financial institutions, and considered the financial terms of certain other comparable Midwest bank transactions that had recently been effected. Olive 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, Olive 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 Olive were based on assumptions believed by Olive to be reasonable and to reflect currently available information. Olive did not make an independent evaluation or appraisal of the assets of FSB or German American. Olive reviewed the correspondence and information regarding the financial institutions that had expressed an interest in acquiring FSB. Olive reviewed all offers received by FSB. -53- As part of preparing the Opinion, Olive performed a due diligence review of German American. As part of the due diligence review, Olive reviewed minutes of Board of Directors meetings beginning January 1, 1995 through December 31, 1997; Annual Reports on Form 10-K for each of the three years ended December 31, 1994, 1995, 1996; Quarterly Reports on Form 10-Q for the periods ended March, June and September, 1997; Registration Statement on Form S-4 relating to this transaction; each filing on Form 8-K during the year ended December 31, 1997; report of independent auditors for the years ending December 31, 1994, 1995 and 1996; management letters from independent auditors for 1997 and management's responses thereto; Uniform Bank Performance Reports dated December 31, 1994 through September 30, 1997; investment security holdings; listing of pending litigation provided by independent counsel; analysis and calculation of the Allowance for Loan and Lease Losses as of December 31, 1997; and internally identified special assets and related reports. Olive reviewed and analyzed the historical performance of FSB Bank contained in statements fo condition for the five years ended September 30, 1992 through September 30, 1996, and a draft of audited financial statements of FSB dated September 30, 1997; Consolidated Reports of Condition and Income filed with the Federal Deposit Insurance Corporation dated December 31, 1996, June 30, 1997, September 30, 1997 and December 31, 1997; Uniform Bank Performance Reports dated December 31, 1992 through December 31, 1996, and September 30, 1997; and certain other assets. Olive reviewed and tabulated statistical data regarding the loan portfolio, securities portfolio and other performance ratios and statistics. In review of the aforementioned information, Olive 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 Opinion and preparing its written and oral presentations to FSB's Board of Directors, Olive performed a variety of financial analyses, including those summarized below. The summary set forth below does not purport to be a complete description of the analyses performed by Olive in this regard. The preparation of an 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. Olive applied only certain methods of valuation, which were practical and pertained to the specific financial conditions of FSB. Accordingly, notwithstanding the separate factors summarized below, Olive 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, Olive made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond FSB's or German American's control. The analyses performed by Olive 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, Olive reviewed 195 Midwest bank acquisition transactions announced since January 1, 1996. The purpose of the analysis was to obtain an evaluation range based on these Midwest acquisition transactions. Multiples of book values implied by the comparable transactions were utilized in obtaining a range for the acquisition value of FSB. Multiples of earnings would normally be applied to FSB, however, considering FSB had earnings losses in years ended December 31, 1996 and December 31, 1997, -54- multiples of earnings obtained from the 195 Midwest bank acquisition transactions were not included in obtaining a valuation range for FSB. In addition to reviewing recent Midwest bank transactions, Olive performed separate comparable analyses for acquisitions of Midwest banks which, like FSB, had a tangible equity-to-asset ratio between 9.5% and 12.5%; with assets between $10 and $20 million; with return on average equity of less than 6%; with return on average assets of less than .70%, and an efficiency ratio between 75% and 95%. Median values for the 195 Midwest bank acquisitions, expressed as a multiple of book value, was 1.79. The median multiple of book value for acquisitions of Midwest banks with tangible equity-to-asset ratios between 9.5% and 12.5% was 1.81. Acquisitions of Midwest banks with assets between $10 and $20 million had a median multiple of 1.52. Acquisitions of Midwest banks with a return on average equity less than 6% had a median multiple of 1.48. Acquisitions of Midwest banks with a return on average assets less than .70% had a median multiple of 1.50. Acquisitions of Midwest banks with an efficiency ratio between 75% and 95% had a median multiple of 1.50. Adjusted Net Asset Value Analysis: Olive reviewed FSB's balance sheet data to determine the amount of material adjustments required to the stockholder's equity of FSB based on differences between the market value of FSB's assets and their value reflected on FSB's financial statements. Olive determined that one adjustment was warranted. Olive reflected a value of the noninterest bearing deposits of approximately $1,809,000. The adjusted net asset value was determined to be $36.86 per share of FSB's common stock. Discounted Earnings Analysis: A dividend discount analysis was performed by Olive pursuant to which a range of stand-alone values of FSB was determined by adding (i) the present value of estimated future dividend streams that CSB could generate over a five-year period beginning in 1998 and ending in 2002, and (ii) the present value of the "terminal value" of FSB's common equity at the end of 2002. The "terminal value" of FSB's common equity at the end of the five-year period was determined by applying a multiple of 1.79 times the projected terminal year's book value. The 1.79 multiple represents the median price paid as a multiple of book value for all Midwest bank transactions since January 1, 1996. Dividend streams and terminal values were discounted to present values using a discount rate of 7.5%. This rate reflects assumptions regarding the required rate of return of holders or buyers of FSB's common stock. The value of FSB, determined by adding the present value of the total cash flows, was $46.47 per FSB's common share. In addition, using the five-year projection as a base, a twenty-year projection was prepared assuming that an annual growth rate of 5%, return on assets of .50% for years one through ten, and .60% for years eleven through twenty. Dividends also were assumed to be 45.0% of income for all years. This long-term projection resulted in a value of $39.27 per FSB's common share. Pro Forma Merger Analysis: Olive compared the historical performance of FSB to that of German American and other regional bank holding companies. This included, among other things, a comparison of profitability, asset quality and capital adequacy measures. In addition, the contribution of each of FSB and German American to the income statement and balance sheet of the pro forma combined company was analyzed. The effect of the affiliation on the historical financial data of FSB, as well as the projected financial data prepared by Olive, was analyzed. FSB's historical financial data was compared to pro -55- forma combined historical and projected earnings and book value per share as well as other measures of profitability, capital adequacy and asset quality. The Opinion is directed only to the question of whether the consideration to be received by FSB's shareholders under the Agreement is fair and equitable from a financial perspective and does not constitute a recommendation to any FSB shareholder to vote in favor of the Merger. FSB or any of its affiliates imposed no limitations on Olive regarding the scope of its investigation or otherwise. Based on the results of the various analyses described above, Olive concluded that the consideration to be received by FSB shareholders under the Merger Agreement is fair and equitable from a financial perspective to the shareholders of FSB. Olive will receive a fee of $26,000 and reimbursement for all reasonable out-of-pocket expenses from FSB for its services. In addition, FSB has agreed to indemnify Olive and its directors, officers and employees from liability in connection with the Merger, and to hold Olive harmless from any losses, actions, claims, damages, expenses or liabilities related to any of Olive's acts or decisions made in good faith and in the best interest of FSB. -56- PRO FORMA FINANCIAL STATEMENTS OF GERMAN AMERICAN The following unaudited pro forma condensed consolidated balance sheet as of September 30, 1997, and the unaudited pro forma condensed consolidated statements of income for the period ended September 30, 1997 and for each of the years in the three-year period ended December 31, 1996, give effect to the Mergers based on the supplemental consolidated financial statements of German American and the historical consolidated financial statements of CSB and FSB under the assumptions and adjustments set forth below and in the accompanying notes to the pro forma financial statements. The Mergers are expected to be accounted for as poolings of interests and, therefore, are included in the pro forma condensed consolidated balance sheet as of September 30, 1997, as if the transaction had become effective on such date. The pro forma condensed consolidated statements of income for the period ended September 30, 1997 and for each of the years in the three-year period ended December 31, 1996 also include the historical statements of income of CSB and FSB as if the transactions had become effective at the beginning of the periods presented. If the proposed CSB Merger is consummated, German American will issue not fewer than 5.8036 shares of German American Common Stock for each of the 160,000 CSB Common Shares (an aggregate of 928,572 German American shares) or more than 7.1094 shares of German American Common Stock for each of the 160,000 CSB common shares (an aggregate of 1,137,500 German American shares). (All such numbers are subject to adjustment in the event of any future stock dividends and the like.) The exact number of shares to be issued in the Merger will be determined within the above range by the average of the closing bid/asked quotations for German American Common Stock during a thirty calendar day period ending on the second business day preceding the closing date of the CSB Merger. The pro forma financial statements have been prepared assuming the issuance of 928,572 shares of German American Common Stock, computed using the average bid/asked prices for January, 1998 (the latest practicable date, resulting in a price of $30.715 per share). The use of such number of shares is for illustrative purposes only and does not attempt to predict the actual number of shares to be issued in the CSB Merger. If the proposed FSB Merger Agreement is consummated, German American will issue that number of shares that have a market value equal to approximately 150% of FSB's shareholders equity plus or minus certain adjustments. See "THE MERGERS -- the FSB Acquisition Agreements -- Terms of the Merger -- Conversion of FSB Common Stock" for a discussion of the exact factors that will be considered in determining the value of the German American Common Stock to be issued to FSB shareholders and the adjustments that will be considered to shareholders' equity. The pro forma financial statements have been prepared assuming the issuance of 71,678 share of German American Common Stock, which is the number of shares computed using FSB September 30, 1997 shareholders' equity and the average bid/asked prices for German American Common Stock for the last ten business days of January, 1998 (the latest practicable date, resulting in a price of $30.794 per share). The use of such number of shares is for illustrative purposes only and does not attempt to predict the actual number of shares to be issued in the FSB Merger. The pro forma financial statements have been prepared by the management of German American based upon the supplemental consolidated financial statements of German American and the historical consolidated financial statements of CSB and FSB. These pro forma statements may not be indicative of the results that actually would have occurred if the Mergers had been in effect -57- on the dates indicated or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the supplemental and historical consolidated financial statements and notes thereto of German American, CSB and FSB presented elsewhere in this Prospectus/Proxy Statement or that accompany this Prospectus/Proxy Statement. German American, CSB and FSB expect to incur total legal, accounting, professional and regulatory costs of approximately $315,000 that are directly attributable to the Mergers, and most of these costs can reasonably be expected to be included in the consolidated expenses of German American during the next twelve months. No signficant amount of these costs had been paid and expensed or accrued and expensed by German American, CSB and FSB as of September 30, 1997. Those costs not previously paid or accrued were NOT considered in the preparation of the Pro Forma Financial Statements. -58- GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1997 (Dollar amounts in thousands) (Unaudited)
German American FSB Financial Pro Forma Pro Forma CSB Pro Forma Pro Forma ASSETS Bancorp Corporation Adjustments Consolidated Bancorp Adjustments Consolidated Cash and cash equivalents $30,273 $1,943 $ 32,216 $10,750 $42,966 Short-term investments 397 50 447 2,598 3,045 Investment in subsidiary - - $ 1,472 (A) - $ 9,113 (D) - (1,472)(B) (9,113)(B) Securities available for sale 93,539 300 93,839 1,230 95,069 Securities held to maturity 21,277 2,373 23,650 11,710 35,360 Loans 327,463 10,520 337,983 49,054 387,037 Allowance for loan losses (6,265) (103) (6,368) (987) (7,355) Premises and equipment 12,306 362 12,668 752 13,420 Intangibles 1,622 (C) - 1,622 - 1,622 Accrued interest receivable and other assets 8,316 254 8,570 1,610 10,180 Total assets $488,928 $15,699 $ - $504,627 $76,717 $ - $581,344 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits $426,367 $14,104 $440,471 $66,731 $507,202 Short-term borrowings 5,533 - 5,533 319 5,852 Long-term debt - - - - - Other liabilities 4,740 114 4,854 554 5,408 Total liabilities 436,640 14,218 450,858 67,604 518,462 SHAREHOLDERS' EQUITY Common stock 25,460 1 717 (A) 26,177 4,000 9,286 (D) 35,463 (1) (B) (4,000)(B) Additional paid-in capital 3,965 819 101 (A) 4,066 - (4,066)(D) - (819)(B) Retained earnings 22,144 663 663 (A) 22,807 5,104 3,884 (D) 26,691 (663)(B) (5,104)(B) Treasury stock - (2) 2 (B) - - - Net unrealized gain/(loss) on securities available for sale 719 - 719 9 9 (D) 728 (9)(B) Total shareholders' equity 52,288 1,481 - 53,769 9,113 - 62,882 Total liabilities and shareholders' equity $488,928 $15,699 $ - $504,627 $76,717 $ - $581,344
ADJUSTMENTS: (A) Assumed issuance of 71,678 common shares of German American Bancorp in exchange for all 48,916 shares of FSB Financial Corporation. The actual number of shares to be issued is not yet known. Assumed shares issued are based on FSB September 30, 1997 shareholders' equity, resulting in an approximate purchase price of $2,207, and a value of $30.794 per share of German American stock, which is the average of the bid and asked prices for the last ten business days of January 1998. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (B) To eliminate the investments in FSB Financial Corporation and CSB Bancorp. (C) Includes goodwill of $1,354 being amortized over 15 years and core deposit intangibles of $268 being being amortized over 10 years. (D) Assumed issuance of 928,572 common shares of German American Bancorp in exchange for all 160,000 shares of CSB Bancorp. The actual number of shares to be issued is not yet known. Assumed shares issued are based on CSB September 30, 1997 shareholders' equity, resulting in an approximate purchase price of $28,521, and a value of $30.715 per share of German American stock, which is the average of the bid and asked prices for January 1998. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (E) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. -59- GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the nine months ended September 30, 1997 (Dollar amounts in thousands except share and per share amounts) (Unaudited) 1997
German American FSB Financial Pro Forma Pro Forma CSB Pro Forma Bancorp Corporation Adjustments Consolidated Bancorp Consolidated INTEREST INCOME Interest and fees on loans $ 21,890 $ 704 $ 22,594 $ 3,316 $ 25,910 Interest on securities 5,689 128 5,817 473 6,290 Other interest income 359 31 390 596 986 Total interest income 27,938 863 28,801 4,385 33,186 INTEREST EXPENSE Interest on deposits 12,765 413 13,178 2,178 15,356 Other interest expense 237 - 237 11 248 Total interest expense 13,002 413 13,415 2,189 15,604 NET INTEREST INCOME 14,936 450 15,386 2,196 17,582 Provision for loan losses (476) 26 (450) 497 47 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,412 424 15,836 1,699 17,535 NON-INTEREST INCOME 1,892 70 1,962 217 2,179 NON-INTEREST EXPENSE 10,222 517 10,739 1,335 12,074 INCOME (LOSS) BEFORE INCOME TAXES 7,082 (23) 7,059 581 7,640 Income taxes 2,395 - $ (8) (B) 2,387 183 2,570 ----- --- ---- ----- --- ----- NET INCOME (LOSS) $4,687 $(23) $ 8 $4,672 $398 $ 5,070 ===== === ==== ===== === ===== EARNINGS PER SHARE Net income per share $ 0.88 (A) $ 0.86 (C) $ 0.80 (D) Weighted average number of shares outstanding 5,342,149 (A) 5,413,827 (C) 6,342,399 (D)
NOTES: (A) Retroactively restated for 2 for 1 stock split in November 1997, and a 5% stock dividend in December 1997. (B) To provide income tax (benefit) at full tax rate. (C) Assumes issuance of 71,678 common shares of German American Bancorp in exchange for all shares of FSB Financial Corporation at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (D) Assumes issuance of 928,572 common shares of German American Bancorp in exchange for all shares of CSB Bancorp at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (E) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. -60- GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 1996 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------------------1996--------------------------------------------------- German American FSB Financial Pro Forma Pro Forma CSB Pro Forma Bancorp Corporation Adjustments Consolidated Bancorp Consolidated INTEREST INCOME Interest and fees on loans $27,846 $863 $28,709 $4,434 $33,143 Interest on securities 6,737 204 6,941 714 7,655 Other interest income 778 11 789 504 1,293 Total interest income 35,361 1,078 36,439 5,652 42,091 INTEREST EXPENSE Interest on deposits 16,179 479 16,658 2,785 19,443 Other interest expense 504 9 513 14 527 Total interest expense 16,683 488 17,171 2,799 19,970 NET INTEREST INCOME 18,678 590 19,268 2,853 22,121 Provision for loan losses 210 89 299 135 434 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,468 501 18,969 2,718 21,687 NON-INTEREST INCOME 2,227 86 2,313 251 2,564 NON-INTEREST EXPENSE 13,288 622 13,910 1,898 15,808 INCOME (LOSS) BEFORE INCOME TAXES 7,407 (35) 7,372 1,071 8,443 Income taxes 2,513 (2) $ (3) (B) 2,508 344 2,852 NET INCOME (LOSS) $4,894 $(33) $ 3 $4,864 $727 $5,591 EARNINGS PER SHARE Net income per share $ 0.92 (A) $0.90 (C) $ 0.88 (D) Weighted average number of shares outstanding 5,335,316 (A) 5,406,994 (C) 6,335,566 (D)
NOTES: (A) Retroactively restated for 2 for 1 stock split in November 1997, and a 5% stock dividend in December 1997. (B) To provide income tax (benefit) at full tax rate. (C) Assumes issuance of 71,678 common shares of German American Bancorp in exchange for all shares of FSB Financial Corporation at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (D) Assumes issuance of 928,572 common shares of German American Bancorp in exchange for all shares of CSB Bancorp at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (E) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. -61- GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 1995 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------------------1995--------------------------------------------------- German American FSB Financial Pro Forma Pro Forma CSB Pro Forma Bancorp Corporation Adjustments Consolidated Bancorp Consolidated INTEREST INCOME Interest and fees on loans $26,197 $528 $26,725 $4,203 $30,928 Interest on securities 6,102 298 6,400 623 7,023 Other interest income 1,517 50 1,567 396 1,963 Total interest income 33,816 876 34,692 5,222 39,914 INTEREST EXPENSE Interest on deposits 15,150 400 15,550 2,499 18,049 Other interest expense 798 - 798 - 798 Total interest expense 15,948 400 16,348 2,499 18,847 NET INTEREST INCOME 17,868 476 18,344 2,723 21,067 Provision for loan losses 49 12 61 48 109 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,819 464 18,283 2,675 20,958 NON-INTEREST INCOME 1,764 66 1,830 270 2,100 NON-INTEREST EXPENSE 12,418 504 12,922 1,889 14,811 INCOME BEFORE INCOME TAXES 7,165 26 7,191 1,056 8,247 Income taxes 2,323 15 $ (6) (B) 2,332 338 2,670 NET INCOME $4,842 $11 $ 6 $4,859 $718 $5,577 EARNINGS PER SHARE Net income per share $0.91 (A) $0.90 (C) $0.88 (D) Weighted average number of shares outstanding 5,331,745 (A) 5,403,423 (C) 6,331,995 (D)
NOTES: (A) Retroactively restated for 2 for 1 stock split in November 1997, and a 5% stock dividend in December 1997. (B) To provide income tax (benefit) at full tax rate. (C) Assumes issuance of 71,678 common shares of German American Bancorp in exchange for all shares of FSB Financial Corporation at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (D) Assumes issuance of 928,572 common shares of German American Bancorp in exchange for all shares of CSB Bancorp at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (E) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. -62- GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 1994 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------------------1994--------------------------------------------------- German American FSB Financial Pro Forma Pro Forma CSB Pro Forma Bancorp Corporation Adjustments Consolidated Bancorp Consolidated INTEREST INCOME Interest and fees on loans $ 21,545 $ 466 $ 22,011 $ 3,606 $ 25,617 Interest on securities 5,632 352 5,984 637 6,621 Other interest income 746 28 774 385 1,159 Total interest income 27,923 846 28,769 4,628 33,397 INTEREST EXPENSE Interest on deposits 11,599 339 11,938 2,117 14,055 Other interest expense 420 -- 420 -- 420 Total interest expense 12,019 339 12,358 2,117 14,475 NET INTEREST INCOME 15,904 507 16,411 2,511 18,922 Provision for loan losses 687 12 699 25 724 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,217 495 15,712 2,486 18,198 NON-INTEREST INCOME 1,933 64 1,997 303 2,300 NON-INTEREST EXPENSE 10,910 449 11,359 1,824 13,183 INCOME BEFORE INCOME TAXES 6,240 110 6,350 965 7,315 Income taxes 1,958 24 $ 17 (B) 1,999 305 2,304 NET INCOME $ 4,282 $ 86 $ (17) $ 4,351 $ 660 $ 5,011 EARNINGS PER SHARE Net income per share $ 0.80 (A) $ 0.81 (C) $ 0.79 (D) Weighted average number of shares outstanding 5,331,163 (A) 5,402,841 (C) 6,331,413 (D) NOTES: (A) Retroactively restated for 2 for 1 stock split in November 1997, and a 5% stock dividend in December 1997. (B) To provide income tax (benefit) at full tax rate. (C) Assumes issuance of 71,678 common shares of German American Bancorp in exchange for all shares of FSB Financial Corporation at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (D) Assumes issuance of 928,572 common shares of German American Bancorp in exchange for all shares of CSB Bancorp at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (E) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16.
-63- INFORMATION ABOUT GERMAN AMERICAN German American is a multi-bank holding company organized in Indiana in 1982. German American's principal subsidiaries are The German American Bank, Jasper, Indiana; First State Bank, Southwest Indiana, Tell City, Indiana; and German American Holdings Corporation, ("GAHC"), an Indiana corporation that owns all of the outstanding capital stock of Community Trust Bank, Otwell, Indiana ("Community"), and The Peoples National Bank and Trust Company, Washington, Indiana. German American's principal executive offices are located at 711 Main Street, Jasper, Indiana 47546, and its telephone number is (812) 482-1314. Information concerning German American is contained in the following documents, which are incorporated in this Prospectus/Proxy Statement by reference: German American's Annual Report on Form 10-K for the year ended December 31, 1996, as amended; German American's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997; German American's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997; German American's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997; German American's Current Report on Form 8-K which was filed on March 6, 1997, and amended March 19, 1997; German American's Current Report on Form 8-K which was filed on November 12, 1997; German American's Current Report on Form 8-K which was filed on February ___, 1998; and the description of German American's capital stock included in German American's Registration Statement on Form S-4 (File No. 333- ______) filed ___________, 1996. These documents are available without charge upon oral or written request to John M. Gutgsell, German American, 711 Main Street, Box 810, Jasper, Indiana 47546-3042 (812) 482-1314. In order to assure timely delivery of these documents, any requests should be made by _________, 1998. INFORMATION ABOUT CSB GENERAL CSB Bancorp, a bank holding company formed in 1983 ("CSB"), owns 100% of the capital stock of The Citizens State Bank of Petersburg ("Citizens"). CSB engages in the business of commercial banking and other permissible activities closely related to banking. CSB relies primarily upon funds from Citizens to pay the expenses of its operations and, to the extent applicable, any dividend on its outstanding shares of stock. Citizens has operated as a traditional community bank since its founding in 1873. The primary source of its income is generated by its lending activities. It offers a wide-range of personal and business financial and trust services to individuals, corporations, partnerships, municipalities and other public and governmental entities. Citizens' lending focus has been strongly single family residential and 1-4 family multi-family residential but a significant portion of its loan portfolio is also composed of other consumer, commercial and agricultural loans. Citizens offers a full line of deposit products. COMPETITION Citizens is the largest financial institution domiciled in Pike County, Indiana. The banking business in the area served by Citizens is highly competitive. The bank competes for deposits with -64- other commercial banks, savings associations, savings banks, and credit unions. For loan business, Citizens competes with other commercial banks, savings associations, savings banks, federal farm credit system, consumer finance companies, and credit unions. Competition in both areas is affected by interest rates, convenience of location, availability of lendable funds, and general and local economic conditions. REGULATION AND SUPERVISION CSB, as a bank holding company, is subject to supervision and regular examination by the Federal Reserve Board. Citizens has as its primary regulator the Federal Deposit Insurance Corporation. These regulations specify the types of activities in which bank holding companies and banks may engage and include regulations governing the extension of credit, the quality of loans and assets, maintenance of reserves against deposits, minimum capital requirements, and restrictions on dividends. PROPERTIES CSB operations require minimal space and it operates from Citizen's main office. Citizens operates from two locations, located in Pike County, Indiana. Its main office is located in downtown Petersburg, Indiana. An additional branch office is also located in Petersburg, Indiana. The branch is operated from a property owned by Citizens. MARKET PRICE AND DIVIDEND INFORMATION CSB Common Stock is not traded on any established market and information regarding transactions is not published. However, shares are traded directly between shareholders from time to time. Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. The range of reported prices is primarily based upon information provided by the parties to privately-negotiated transactions. The following table sets forth, for the periods indicated, the number of shares traded, the number of trades, and the high and low sales price per share of CSB as reported to CSB Management, and the per share dividends declared by CSB on its stock. All numbers are adjusted for splits. No. of Shares No. of Dividends Declared Traded Trades Prices (cents per share) High Low 1995 First Quarter Second Quarter 0.90 Third Quarter Fourth Quarter 1.60 1996 First Quarter Second Quarter 1.00 Third Quarter Fourth Quarter 1.75 1997 First Quarter -65- Second Quarter 1.00 Third Quarter Fourth Quarter 1.75 (Through ____, 1996) The most recent trade on or before October 20, 1997 (the last business day prior to the first public announcement of the CSB Merger on October ___, 1997) known to CSB management occurred during the second quarter of 1996 and involved 320 shares that were purchased and sold at an undisclosed price. The CSB Agreement provides that CSB may during 1998 declare a quarterly dividend of $0.6875 per share if the CSB Merger has not become effective as of the declaration date, and further stipulates that the declaration date for any CSB dividend with respect to the first quarter of 1998 shall not be earlier than May 15, 1998. If the CSB Merger becomes effective on ________ __, 1998, as anticipated, CSB's shareholders will not be entitled to any further dividends on their shares of CSB Common Stock but will be entitled to receive dividends from German American on their shares received in the CSB Merger that have a record date on or after __________, 1998. It is anticipated that the first such German American dividend will be considered by the Board of Directors of German American during April, 1998, and will have a record date not earlier than May __, 1998. Substantially all of CSB's cash income is derived from Citizens. As a state bank, Citizens is subject to certain restrictions imposed by its primary regulator, the FDIC, with respect to the payment of dividends to CSB. CSB must obtain the prior approval of the FDIC if the total of all dividends declared in any calendar year would exceed net income for the preceding two calendar years. STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth the number of shares and percentage of CSB Common Stock beneficially owned at January 31, 1998, by each person known to be the beneficial owner of more than five percent of the outstanding CSB Common Stock, each Director and officer of CSB, and all Directors and executive officers as a group. NAME NUMBER PERCENTAGE ---- ------ ---------- Jerry A. Church 762(1) * Robert D. Harris (2) 9,850(3) 6.2% Marion R. Klipsch (4) 32,000(5) 20.0% Robert C. Klipsch 800(6) * Lester Nixon 5,066 3.2% W. Wyatt Rauch (7) 15,330(8) 9.6% Michael J. Voyles 1,868(9) 1.2% Gregory K. Willis 723(10) * -66- Directors and Officers 66,399 41.5% as a Group (8 Individuals) (1) Jerry Church beneficially owns 130 shares directly, and 632 shares are beneficially owned by Jerry Church and Alycia Church, the wife of Mr. Church. (2) The address of this shareholder is 702 Walnut Street, Petersburg, Indiana 47567. (3) Robert Harris beneficially owns 40 shares directly, and 3,715 shares are beneficially owned by the Robert D. Harris Primary Trust, over which Mr. Harris has sole voting and investment power. An additional 4,855 shares beneficially owned by the Sondra S. Harris Primary Trust, over which Sondra Harris, the spouse of Mr. Harris, has sole voting and investment power, and an additional 1,280 shares are beneficially owned by Gretchen A. Harris, the daughter of Mr. Harris. (4) The address of this shareholder is P.O. Box 38, Eastwood Drive, Petersburg, Indiana 47567. (5) Marion Klipsch beneficially owns 13,600 directly and 4,000 shares are jointly owned by Marion Klipsch and Martha Klipsch, the spouse of Mr. Klipsch. An additional 8,000 shares are beneficially owned by Martha Klipsch. Additionally, 3,200 shares are beneficially owned by Marion R. Klipsch and/or Mr. David Klipsch, the son of Marion Klipsch, and 3,200 shares are beneficially owned by Marion R. Klipsch or Marcia Nordham, the daughter of Mr. Klipsch. (6) Robert Klipsch beneficially owns 40 shares directly and 760 shares are beneficially owned by Robert Klipsch and Karen J. Klipsch, the wife of Robert Klipsch. Robert Klipsch is the cousin of Marion R. Klipsch, who owns more than 5% of the CSB Common Stock. (7) The address of this shareholder is 801 Goodlet Street, Petersburg, Indiana 47567. (8) Wyatt Rauch beneficially owns 11,920 shares directly. Additionally, Betty J. Rauch, the wife of Mr. Rauch, beneficially owns 2,110 shares directly, and Deiadre L. Rauch, the daughter of Mr. Rauch, beneficially owns 1,300 shares directly. Mr. Rauch disclaims any beneficial interest in the 2,110 shares owned by his wife and the 1,300 shares owned by his daughter. (9) Michael Voyles beneficially owns 1,176 shares directly, and 300 shares are beneficially owned by Mr. Voyles and Margaret A. Voyles, the wife of Mr. Voyles. An additional 196 shares are beneficially owned by Jennifer A. Voyles, the daughter of Mr. Voyles, and 196 shares are beneficially owned by John M. Voyles, the son of Mr. Voyles. (10) Gregory Willis beneficially owns 270 shares directly, and 60 shares are beneficially owned by Gregory Willis and Carla D. Willis, the wife of Mr. Willis. An additional 393 shares are beneficially owned by Gregory K. Willis and/or Norma L. Willis, the mother of Mr. Willis. -67- INFORMATION ABOUT FSB General FSB Financial Corporation is a state-chartered institution organized in 1994, which operates FSB Bank. FSB Bank was organized as an Indiana state banking association on June 20, 1908. The principal executive offices of FSB Bank are located at 102 Main Street, Francisco, Gibson County, Indiana 47659. FSB Bank engages in a range of commercial and personal banking activities, including accepting demand, time and savings account deposits; making loans to corporations, individuals, and others, and offering safekeeping services. FSB Bank's lending services include commercial, real estate, and installment loans. The primary risk consideration associated with the lending activities conducted by FSB Bank involves its concentration in various types of consumer lending. These risks are mitigated by lending procedures, which include collateralization. 36% of FSB Bank's loan portfolio is secured by 1 - 4 family housing and a significant portion of the installment portion of the portfolio is also collateralized. In addition, the balance of FSB Bank's non-performing loans and historical loss percentage indicates acceptable credit risk in the portfolio. Employees At September 30, 1997 FSB Bank employed 13 full-time employees. FSB Bank is not a party to any collective bargaining agreement, and employee relations are considered to be good. Competition The banking business is highly competitive. FSB Bank's market area principally consists of eastern Gibson County. At September 30, 1997 FSB Bank was the sole commercial bank headquartered in Gibson County, and had total assets of $15,699,000 and total deposits of $14,104,000. Regulation and Supervision FSB Bank is supervised and regulated by the FDIC and DFI, and is examined regularly by representatives of those agencies. Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors rather than shareholders. Properties FSB Bank conducts its operations from its main office facility located at 102 Main Street in Francisco, Indiana 47659. The building which houses FSB Bank's main office, which was completed in 1926, is owned by FSB Bank and is a two-story brick facility containing approximately 2,700 square feet, all of which is occupied by FSB Bank. The facility also houses a drive-up banking facility, as well as a drive-up ATM. FSB Bank also conducts operations from a branch office facility located at 231 W. Broadway in Princeton, Indiana. The building which houses this branch facility was completed in 1967, was purchased by FSB Bank in 1997, and is a two-story brick facility containing approximately 5,100 -68- square feet, all of which is occupied by FSB Bank. The facility also houses a drive-up banking facility, as well as a drive-up ATM. Description of FSB Capital Stock General FSB's authorized capital stock consists of: (a) 2,000,000 shares of no par value FSB Preferred Stock, of which no shares are issued or outstanding; and, (b) 3,000,000 shares of FSB Common Stock ($0.01 stated value), 49,000 shares of which are issued and 48,916 shares outstanding, with 84 shares held by the Company as Treasury Stock, at cost. FSB Common Stock was held by approximately 146 shareholders of record at January 31, 1998. Market Price FSB Common Stock is not traded on any established market, and there are no regularly published bid and asked quotations. To the best of the knowledge of FSB management, there were 23 sale transactions in 1996 involving 15,685 shares of FSB Common Stock, 3 sale transactions in 1997 involving 698 shares, and no sales transactions in 1998 prior to the date of this Prospectus/Proxy Statement. Included in the 1997 transactions was a re-purchase of 84 shares by FSB at $30.00 per share, which was designated as Treasury Stock. Management of FSB has limited knowledge as to the prices at which such sales transactions occurred, but believes that most of such sales transactions occurred at the book value of FSB's Common Stock. The book value of a share of FSB Common Stock was $31.41 at September 30, 1995 (unaudited); $31.37 at September 30, 1996 (unaudited); $30.28 at September 30, 1997. Dividends FSB historically has declared dividends on an annual basis in November. In December 1995 and January 1997, FSB paid cash dividends in the amount of $0.25 per share. FSB has agreed in the Reorganization Agreement not to declare or pay any other dividends without the prior written consent of GAB. -69- Stock Ownership of, and Effect of Merger on, Management and Principal Shareholders The following table sets forth the number of shares and percentage of FSB Common Stock beneficially owned at December 31, 1997 by, and the effect of the Merger on such ownership amounts and percentages of, (a) each person known to be the beneficial owner of more than five percent of the outstanding FSB Common Stock; (b) each Director of FSB; and, (c) all Directors and executive officers of FSB as a group. DIRECTORS AND OFFICERS OF FSB FINANCIAL CORPORATION
NAME & RESIDENCE ADDRESS POSITION HC OCCUPATION NUMBER SHARES & % Michael B. McConnell Director Farmer 808; 2.0% R.R. 1, Box 127 Francisco, IN 47649 Glenn A. Young President/ Employee of Bank 615; 1.2% R.R. 2 CEO/Director Princeton, IN 47670 Bobby J. Hill Secretary/ Ret. Potter 331; R.R. 1 Box 131 Director & Brumfield Francisco, IN 47649 John W. Wells Director Funeral Director 3,331; 7.0% R.R. 3 Box 223C Princeton, IN 47670 R.J. McConnell Chairman of Attorney-Bose 5,249; 10.7% R.R. 3 Box 104 the Board McKinney & Evans Franklin, IN 46131 Wynn W. Hopkins Director Spencer Plastics 35;* R.R. 1 Engineering Gentryville, IN 47537 Beverly A. Singleton Vice President Employee of Bank 3;* R.R. 2 Box 77 Asst. Secretary Fort Branch, IN 47648 G. Gregory Foster Vice President Employee of Bank 0 Box 254 Poseyville, IN 47633
-70- CSB BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction This financial analysis should be read in conjunction with the consolidated financial statements and accompanying notes. The information in this financial analysis explains certain significant financial matters over the past several years. The financial information included frequently compares current amounts to historical amounts. Financial information is presented on a consolidated basis including the subsidiary, Citizens State Bank of Petersburg (the "Bank"), and the parent company, CSB Bancorp ("CSB"). This analysis should be read in conjunction with the separate historical financial statements of CSB and notes thereto included elsewhere in the Prospectus/Proxy Statement. All per share information has been restated to reflect the 2 for 1 stock split in 1993. Business of CSB CSB is a one-bank holding company which conducts no direct business activities. All business activities are performed by the Bank. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. It maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles and personal expenditures, and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit vehicles, including checking, savings, individual retirement accounts and certificates of deposit. The principal source of revenue for CSB and the Bank is interest and fees on loans. The Bank's results of operations depend primarily on the level of its net interest income and other operating income and operating expenses. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, and actions of regulatory authorities. On a consolidated basis, interest and fees on loans accounted for 75.11% of CSB's total income (comprised of interest income and other income) in 1996, 76.52% in 1995, and 73.14% in 1994. The principal markets for the Bank's financial services are the Petersburg community and the surrounding communities of Pike County. CSB and the Bank serve these markets through two offices located in Petersburg. CSB and the Bank employ approximately 25 persons on a full-time equivalent basis. FINANCIAL CONDITION Comparison of September 30, 1997 to December 31, 1996 Total assets increased to $76,717,000 as of September 30, 1997 from $74,346,000 as of December 31, 1996, an increase of $2,371,000, or 3.19%. Shareholders' equity increased approximately $246,000, or 2.77%, from $8,867,000 at December 31, 1996 to $9,113,000 at September 30, 1997. The increase in shareholders' equity was the result of earnings, less the impact of cash dividends paid on common shares. Loans increased $5,809,000, or 13.43%, from $43,245,000 at December 31, 1996 to $49,054,000 at September 30, 1997. Real estate loans for single family houses increased by $1,055,000 and commercial loans increase $2,414,000, primarily due to customer demand. Consumer loans increased $2,340,000 primarily due to increased financing needs relating to vehicle sales. -71- Total deposits increased $2,384,000, or 3.70%, from $64,347,000 at December 31, 1996 to $66,731,000 at September 30, 1997. The increase in deposits was primarily the result of an increase in time deposits. Management attributes growth in time deposits to customer preferences for higher yielding instruments of deposit as opposed to the liquidity afforded lower yielding transactional accounts. The Bank's pricing of time deposits is consistent with that of its competitors. RESULTS OF OPERATIONS Comparison of Nine Months Ended September 30, 1997 to September 30, 1996 General. CSB reported net income of $398,000 for the nine months ended September 30, 1997, a decrease of $179,000, or 31.02%, over the net income for the first nine months of 1996 of $577,000. Return on average shareholders' equity for the nine months ended September 30, 1997 was 5.80% compared to 8.69% for the same period in 1996. For the nine months ended September 30, 1997, return on average assets was 0.70% compared to 1.07% for the same period in 1996. Net Interest Income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Changes in the mix and volume of assets and liabilities, and the yields and rates earned or paid, have a major impact on earnings. Table 1 shows average balances and rates. The level of net interest income achieved is also influenced by market rates of interest, the financial strength of loan customers and the federal government's monetary policies. Interest income represented 95.28% of total income for the nine months ended September 30, 1997 and 96.14% for the same period in 1996. For the nine months ended September 30, 1997, total interest income was $4,385,000, an increase of $180,000 from $4,205,000 for the nine months ended September 30, 1996. Total interest expense increased $115,000 from $2,074,000 for the nine months ended September 30, 1996 to $2,189,000 for the same period in 1997. As a result, net interest income increased $65,000 from $2,131,000 for the nine months ended September 30, 1996 to $2,196,000 for the nine months ended September 30, 1997, as shown in Table 1. Interest Income. On a fully taxable-equivalent basis (whereby tax-exempt income is adjusted to be comparable to income from taxable investments), as shown in Table 1, total interest income increased by $198,000, or 4.65%, for the nine months ended September 30, 1997 compared to the same period for 1996. The increase is primarily due to a $3,200,000, or 4.79%, increase in average outstanding interest-earning assets ( $70,075,000 for the nine months ended September 30, 1997 and $66,875,000 for the nine months ended September 30, 1996). This increase is partially offset by a 0.04% decrease in average interest rates from 8.38% in the first nine months of 1996 to 8.34% in the first nine months of 1997. The average interest rate for loans decreased from 9.83% in the first nine months of 1996 to 9.51% in the first nine months of 1997. The decrease in the average interest rate for loans is a direct result of market rate competition; the majority of the Bank's loan portfolio rates are tied to the prime rate. This rate decrease was offset by average loan growth of $1,521,000, or 3.38%, which primarily consisted of growth in the single family residential, nonfarm nonresidential and multi-family real estate and consumer loan portions of the portfolio. Average interest rates for securities increased from 6.60% in the first nine months of 1996 to 7.00% in the first nine months of 1997, largely due to the purchase of higher-rate securities as lower rate securities matured and were replaced. The effect of this rate increase was supplemented by the effect of increased average outstanding balances resulting in an increase in interest income on securities of 29.57% from the first nine months of 1996 to the first nine months of 1997. The average balance outstanding for federal funds sold decreased by 13.16% from $9,817,000 in the first nine months of 1996 to $8,525,000 in the first nine months of 1997. The average interest rate increased from 4.78% in the first nine months of 1996 to 5.88% in the first nine months of 1997 as a result of the increase in rates paid for federal funds sold in the first nine months of 1997 over the first nine months of 1996. Interest Expense. As shown in Table 1, increases in total interest expense are primarily attributable to the increases in the average outstanding balances of interest-bearing liabilities and by the marginally higher average interest rates. Interest expense on deposits increased as a result of changes in deposit mix and greater reliance on higher priced time deposits to fund loan growth. The average outstanding balance of time certificates of deposits increased $3,068,000, or 7.27%, from September 30, 1996 to September 30, 1997. Additionally, the rates paid on these deposits decreased -72- slightly from 5.65% in the first nine months of 1996 to 5.63% in the same period of 1997. Interest rates paid on interest-bearing demand deposits and savings accounts decreased from 2.65% in the first nine months of 1996 to 2.58% in the same period of 1997. Interest expense on securities sold under agreements to repurchase increased slightly. The increase in rates paid, from 3.17% in the first nine months of 1996 to 5.29% for the same period in 1997, was offset by a 25.00% decrease in the average balance from $336,000 for the nine months ended September 30, 1996 to $252,000 for the nine months ended September 30, 1997. The Bank is unable to predict the impact on future earnings of interest rates changes due to uncertainties regarding economic conditions in 1998 and beyond. The Bank expects rates on deposits to remain stable or fall due to market interest rate changes. As discussed in the Asset/Liability Management section of this financial review, the Bank attempts to manage the structure (i.e., categories and maturities) of the balance sheet to minimize the effects of interest rate fluctuations. The Bank's net interest margin (net interest income divided by total earning assets) decreased from 4.36% in the first nine months of 1996 to 4.32% in the same period for 1997, and the interest spread (average rate earned minus average rate paid) also decreased from 3.61% to 3.57% in the same period. While it is difficult to predict 1998 interest rates, it is anticipated that rates will remain stable through most of the year. Provision and Allowance or Loan Losses. The provision for loan losses reflects management's judgment of the cost associated with the credit risk inherent in the loan portfolio. The provision is determined through management's assessment of the quality of the loan portfolio, current as well as future economic factors, and the volume of loans outstanding. Provision amounts from year-to-year are also affected by the level of net charge-offs and management's perception of the adequacy of the allowance for loan losses. The activity in the allowance for loan losses is shown in Table 8. The provision for loan losses for the nine months ended September 30, 1997 was $497,000 an increase of $389,000 over the $108,000 provision for same period in 1996. Net charge-offs decreased slightly for the nine months ended September 30, 1997 to $126,000 from $129,000 for the same period in 1996. The lack of a significant change in net charge-offs is a result of the seasoning of the Bank's portfolio. However, due to the substantial loan growth in 1997, future charge-off activity could increase. At September 30,1997, the allowance for loan losses amounted to $987,000, or 2.01%, of total loans outstanding, compared to $638,000, or 1.28%, of total loans at September 30, 1996. The allowance is maintained in consideration of the perceived credit risk in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based upon a continuing review of the loan portfolio which includes past loan loss experience, current economic conditions, loan volume, composition of the loan portfolio and additional factors. The $349,000 increase in the allowance for loan losses from September 30, 1996 to September 30, 1997 is primarily attributable to an additional $350,000 provision made to reflect a more conservative management methodology in determining the amount of the allowance for loan losses. Non-performing loans decreased by $136,000, or 22.63%, from $601,000 at September 30, 1996 to $465,000 at September 30, 1997, as shown in Table 7. Generally, the accrual of interest income on a loan is suspended when the loan becomes 90 days past due, unless the loan is fully secured and is in the process of collection. A restructured loan is generally one that is accruing interest, but on which concessions in terms have been granted as a result of deterioration in the financial condition of the borrower. Management believes that the allowance for loan losses is adequate at September 30, 1997 based upon its analysis of loss potential. The Bank's policy is to maintain an allowance sufficient to cover expected losses based on its analysis of the loan portfolio and at a reasonable level considering historical net charge-offs for the Bank. However, the Bank does expect the level of net charge-offs to increase in the future as a result of planned loan growth and changes in the loan mix within the portfolio. At September 30, 1997 the Bank had one concentration greater than 10% of the total loans outstanding. Outstanding loans to agricultural enterprises totaled $8,037,000, or 16.39%, of total loans. Noninterest Income. Noninterest income primarily consists of fees for services and products. Income related to service charges on deposit accounts consists of fees for demand deposit accounts, overdraft and non-sufficient fund charges, and other transaction fees. Total income from service charges on deposit accounts was $113,000 for the nine months ended -73- September 30, 1997 compared to $103,000 for the same period in 1996. The increase is primarily due to an increase in the Bank's per item overdraft fee. The remaining category of noninterest income is derived from services that include fees for safe deposit box rentals, travelers check sales and other miscellaneous categories. Other income was $104,000 for the nine months ended September 30, 1997, a $38,000, or a 57.58%, increase from the same period in 1996 of $66,000. The increase was primarily due to income derived from Internet fees and coop comfort servicing. Due to the variety of income sources included in noninterest income, fluctuations in the level of income occur from year to year. No other individual component of this category is significant during the nine month periods ended September 30, 1997 or 1996. Noninterest Expense. Noninterest expense decreased $6,000, or 0.45%, from $1,341,000 in the first nine months of 1996 to $1,335,000 for the same period in 1997. No change in any individual component of this category was significant. Income Taxes. The effective income tax rate for the first nine months of 1997 was 31.57% which is comparable to the 32.20% effective rate for the same period in 1996. This change is due to increased tax-exempt interest and other factors. The $90,000 decrease in income taxes for the nine months ended September 30, 1996 compared to the nine months ended September 30, 1997 is primarily attributable to decreased pre-tax earnings. FINANCIAL CONDITION Comparison of December 31, 1996 to 1995 Total assets increased to $74,346,000 as of December 31, 1996 from $67,874,000 as of December 31, 1995, an increase of $6,472,000, or 9.54%. Shareholders' equity increased approximately $271,000, or 3.15%, to $8,867,000 at December 31, 1996 from $8,596,000 at December 31, 1995. The increase in shareholders' equity was the result of earnings, less the impact of cash dividends paid on common shares. Loans decreased $569,000, or 1.30%, from $43,814,000 at December 31, 1995 to $43,245,000 at December 31, 1996. Real estate loans decreased by $828,000 and commercial loans increased $55,000, primarily due to customer demand. Consumer loans increased $204,000 primarily due to increased financing needs relating to vehicle sales. Total deposits increased $5,571,000, or 9.48%, from $58,776,000 at December 31, 1995 to $64,347,000 at December 31, 1996. The increase in deposits was primarily the result of an increase in time deposits. Management attributes growth in time deposits to customer preferences for higher yielding instruments of deposit as opposed to the liquidity afforded lower yielding transactional accounts. The Bank's pricing of time deposits is consistent with that of its competitors. RESULTS OF OPERATIONS Comparison of 1996 to 1995 General. CSB reported net income of $727,000 in 1996, an increase of $9,000, or 1.25%, from 1995 net income of $718,000. Return on average shareholders' equity for 1996 was 8.22% compared to 8.41% for 1995. The 1996 return on average assets was 1.00% compared to 1.08% for 1995. Net Interest Income. For the year ended December 31, 1996, total interest income was $5,652,000, an increase of $430,000, or 8.23%, from $5,222,000 for 1995. Total interest expense increased $300,000 from $2,499,000 in 1995 to $2,799,000 in 1996. As a result, net interest income increased $130,000 from $2,723,000 in 1995 to $2,853,000 in 1996, as shown in Table 1a. -74- Interest Income. On a fully taxable-equivalent basis, total interest income increased by $432,000 from 1996 to 1995. This increase was due to a $5,059,000 increase in average outstanding earning assets ($67,365,000 for 1996 and $62,306,000 for 1995) and an increase in average interest rates (8.39% for 1996 and 8.38% for 1995), as depicted in Table 1a and Table 2. Average interest rates for securities decreased from 6.68% in 1995 to 6.55% in 1996, largely due to the maturity of higher-rate securities. The effect of this rate change was offset by the effect of reduced average outstanding balances, resulting in a nominal decrease in interest income on securities. The average balance outstanding for short-term investments increased by 97.74% from $5,313,000 in 1995 to $10,506,000 in 1996. The average interest rate for short-term investments decreased from 4.99% in 1995 to 4.66% in 1996 as a result of the decrease in rates paid for federal funds sold in 1996 over 1995. Interest Expense. Table 1a depicts average balances and rates, and Table 2 shows the dollar effect of volume and rate changes. Interest on deposits increased as a result of changes in deposit mix and greater reliance on higher priced time deposits to fund loan growth. The average outstanding balance of time certificates of deposits increased $3,941,000, or 10.17%. Additionally, the rates paid on these deposits increased as well from 5.50% in 1995 to 5.63% in 1996. Interest rates paid on interest-bearing demand deposits and savings accounts also increased from 2.68% in 1995 to 2.74% in 1996. Consistent with other institutions, the Bank was forced to increase the rates offered on deposit products as increased yields on other investment vehicles drew customer funds away from the Bank. Provision and Allowance for Loan Losses. The provision for loan losses for 1996 was $135,000, an increase of $87,000 over the 1995 provision of $48,000. As depicted in Table 8, the Bank experienced net charge-offs of $178,000 in 1996 and net charge-offs of $112,000 in 1995, a change of $66,000. At December 31, 1996, the allowance for loan losses amounted to $616,000, or 1.42%, of total loans outstanding as compared to $659,000, or 1.50%, of total loans at December 31, 1995. Since the level of non-accrual, past due and restructured loans decreased from the prior year, the allowance for loan losses was decreased in 1996 considering historical net charge-offs for the Bank and the industry as a whole. Noninterest Income. Total income from service charges on deposit accounts was $149,000 for 1996 compared to $146,000 for 1995, changing only slightly. Other income was $102,000 for 1996, a $22,000, or 17.74%, decrease from the 1995 level of $124,000. The decrease was primarily due to a decline in trust fees from 1995. No other individual component of this category was significant during 1996 or 1995. Noninterest Expense. Salaries and employee benefits, totaling $932,000 for 1996, remained consistent with the 1995 amount of $936,000, changing only slightly due to employee changes at different salary levels. The FDIC assessment decreased $64,000 during 1996 to $2,000 compared to $66,000 in 1995. This is due primarily to the Bank Insurance Fund ("BIF") of the FDIC meeting the legally mandated reserve level. Income Taxes. The effective income tax rate for 1996 was 32.12% which is compared to 32.05% effective rate for 1995, changing only slightly. FINANCIAL CONDITION Comparison of December 31, 1995 to 1994 Total assets increased to $67,874,000 as of December 31, 1995 from $63,660,000 as of December 31, 1994, an increase of $4,214,000, or 6.62%. Shareholders' equity increased approximately $386,000, or 4.70%, to $8,596,000 at December 31, 1995 from $8,210,000 at December 31, 1994. The increase in shareholders' equity was the result of earnings, less the impact of cash dividends paid on common shares. Loans increased $1,283,000, or 3.02%, from $42,531,000 at December 31, 1994 to $43,814,000 at December 31, 1995. This increase was primarily due to consumer loan customer demand. -75- Total deposits increased $3,746,000, or 6.81%, from $55,030,000 at December 31, 1994 to $58,776,000 at December 31, 1995. The increase in deposits was primarily the result of an increase in time deposits. Management attributes growth in time deposits to customer preferences for higher yielding instruments of deposit as opposed to the liquidity afforded lower yielding transactional accounts. The Bank's pricing of time deposits is consistent with that of its competitors. RESULTS OF OPERATIONS Comparison of 1995 to 1994 General. CSB reported net income of $718,000 in 1995, an increase of $58,000, or 8.79%, over 1994 net income of $660,000. Return on average shareholders' equity for 1995 was 8.41% compared to 8.11% for 1994. The 1995 return on average assets was 1.08% compared to 1.01% for 1994. Net Interest Income. As shown in Table 1a, for the year ended December 31, 1995 total interest income was $5,222,000 an increase of $594,000, or 12.83%, from $4,628,000 for 1994. Total interest expense increased $383,000 from $2,116,000 in 1994 to $2,499,000. As a result, net interest income increased $211,000 from $2,512,000 in 1994 to $2,723,000 in 1995. Interest Income. On a fully taxable-equivalent basis, total interest income increased by $589,000 from 1995 to 1994. This increase was due to a $1,172,000 increase in average outstanding earning assets ($62,306,000 for 1995 and $61,134,000 for 1994) and an increase in average interest rates (8.38% for 1995 and 7.57% for 1994), as depicted in Table 1a and Table 2. This rate increase was supplemented by total average loan growth of approximately $2,475,000, or 5.92%, which primarily consisted of growth in the real estate and consumer portions of the portfolio. Average interest rates for securities increased from 6.29% in 1994 to 6.68% in 1995, largely due to the purchase of higher-rate investments as lower rate investments matured and were replaced. The effect of this rate increase was more than offset by the effect of reduced average outstanding balances, resulting in a 7.03% decrease in interest income on securities. The average balance outstanding for short-term investments increased by 8.85% from $4,881,000 in 1994 to $5,313,000 in 1995. The average interest rate for short-term investments also increased from 4.65% in 1994 to 4.99% in 1995 as a result of the increase in rates paid for federal funds sold in 1995 over 1994. Interest Expense. Table 1a depicts average balances and rates, and Table 2 shows the dollar effect of volume and rate changes. Interest on deposits increased as a result of changes in deposit mix and greater reliance on higher priced time deposits to fund loan growth. The average outstanding balance of time certificates of deposits increased $2,200,000, or 6.02%. Additionally, the rates paid on these deposits increased as well from 4.66% in 1994 to 5.50% in 1995. Interest rates paid on interest-bearing demand deposits and savings accounts decreased slightly from 2.69% in 1994 to 2.68% in 1995. Consistent with other institutions, the Bank was forced to increase certain rates offered on deposit products as increased yields on other investment vehicles drew customer funds away from the Bank. Provision and Allowance for Loan Losses. The provision for loan losses for 1995 was $48,000, an increase of $23,000 over the 1994 provision of $25,000. The Bank experienced net charge-offs of $112,000 in 1995 and net charge-offs of $44,000 in 1994, as depicted in Table 8, a change of $68,000. The change in net charge-off loans is a result of increased personal bankruptcies. At December 31, 1995, the allowance for loan losses amounted to $659,000, or 1.50%, of total loans outstanding as compared to $723,000, or 1.70%, of total loans at December 31, 1994. While the level of non-accrual, past due and restructured loans increased from the prior year, the allowance for loan losses was decreased in 1995 to a level considering historical net charge-offs for the Bank and the industry as a whole. Noninterest Income. Total income from service charges on deposit accounts was $146,000 for 1995 compared to 136,000 for 1994. The increase from 1994 is primarily due to the increase of the Bank's per item overdraft fee. Other income was $124,000 for 1995, a $43,000, or 25.75%, decrease from the 1994 level of $167,000. The decrease was primarily due to a decrease in trust fees. No other individual component of this category was significant during 1995 or 1994. -76- Noninterest Expense. Salaries and employee benefits, totaling $936,000 for 1995, remained consistent with the 1994 amount of $921,000, changing only slightly due to employee changes at different salary levels. The FDIC assessment decreased $61,000 during 1995 to $66,000 compared to $127,000 in 1994. The decrease was due to the BIF of the FDIC meeting the legally mandated reserve level in the second quarter of 1995 and the resultant decrease in deposit premiums from $.23 to $.04 per $100 of deposits effective June 1, 1995. Income Taxes. The effective income tax rate for 1995 was 32.05% which is comparable to the 31.61% effective 1994. This change is due to decreased tax-exempt interest and other factors. The $33,000 increase in income taxes for 1995 is attributable to increased pre-tax earnings. ASSET/LIABILITY MANAGEMENT Asset/Liability management involves developing, implementing and monitoring strategies to maintain sufficient liquidity, maximize net interest income and minimize the impact significant fluctuations in market interest rates have on earnings. The Asset/Liability Committee of the Bank is responsible for managing this process. Much of this committee's efforts are focused on minimizing the Bank's sensitivity to changes in interest rates. One method of gauging sensitivity is by a static gap analysis. As seen in Table 12, the Bank had a cumulative liability gap position of $10,923,000 within the one-year time frame. This position suggests that if market interest rates decline in the next 12 months, the Bank has the potential to earn more net interest income. A limitation of the traditional static gap analysis, however, is that it does not consider the timing or magnitude of noncontractual repricing. In addition, the static gap analysis treats demand and savings accounts as repriceable within 30 days, while experience suggests that these categories of deposits are actually comparatively resistant to rate sensitivity. Although the static gap sensitivity varies from time frame to time frame, management has the ability to adjust rates on deposit accounts in an effort to achieve a neutral interest sensitivity position within the intermediate term. LIQUIDITY Liquidity is generally defined as the ability to meet cash flow requirements. CSB manages liquidity at two levels, the parent company and its subsidiary, the Bank. CSB's primary cash requirement is to pay dividends to CSB's shareholders. Its primary source of funds is dividends received from the Bank. The Bank's primary liquidity consideration is to meet the cash flow needs of its customers, such as borrowings and deposit withdrawals. To meet cash flow requirements, sufficient sources of liquid funds must be available. These sources include short-term investments; repayments and maturities of loans and securities; sales of assets; growth in deposits and other liabilities; and bank profits. At September 30, 1997, the Bank had approximately $5,675,000 in federal funds sold. In addition, approximately $1,591,000 of securities were scheduled to mature within one year. Principal reductions received on loans also provide a continual stream of cash flows. Another source of liquid funds is net cash provided from operating activities, which provided $905,000 of cash in 1996. Finally, as a member of the Federal Home Loan Bank of Indianapolis, the Bank can access advances under a borrowing agreement. At September 30, 1997, the Bank had no borrowings with the FHLB. Also, as a member of the Federal Reserve Bank of St. Louis, the Bank can borrow from the federal discount window, as provided. CAPITAL RESOURCES Management believes a strong capital position is paramount to its continued profitability and continued depositor and investor confidence. It also enables the Bank flexibility to take advantage of expansion opportunities and to accommodate larger commercial loan customers. Regulators have established "risk based" capital guidelines for banks and bank holding companies. Under the guidelines, minimum capital levels are based on the perceived risk in asset categories and certain off-balance-sheet items, such as loan commitments and standby letters of credit. Management -77- monitors its capital levels to comply with regulatory requirements. The Bank's capital ratios were well in excess of regulatory standards for classification as "well capitalized" and approximated the capital ratios of CSB as depicted in Table 11. Being considered "well capitalized" is one condition for assessing the federal deposit insurance premium at the lowest available rate. IMPACT OF INFLATION The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of CSB's operations. Nearly all the assets and liabilities of CSB are financial, unlike most industrial companies. As a result, performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. CSB's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on it's performance. Changes in interest rates do not necessarily move to the same extent as do changes in the prices of goods and services. -78- CSB Bancorp Rate Volume Analysis Table 1 (Dollars in thousands)
Nine months ended September 30, ------------------------------------------------------------- 1997 1996 Average Average Average Average ASSETS Balance Interest Rate Balance Interest Rate ------------------------------------------------------------- Interest-earning assets: Interest-earning deposits $ 1,932 $ 79 5.45% $ 1,332 $ 62 6.21% Federal funds sold 8,525 376 5.88% 9,817 352 4.78% Investment securities (taxable) 8,454 468 7.38% 7,217 363 6.71% Investment securities (tax-exempt) 4,641 145 4.17% 3,507 111 4.22% Loans (net of unearned income) (1) 46,523 3,317 9.51% 45,002 3,317 9.83% ---------------- ---------------- Total interest earning assets $70,075 $4,385 8.34% $66,875 $4,205 8.38% ================ ================ Non-earning assets: Cash and due from banks $ 4,286 $ 3,328 Other non-earning assets 2,200 2,230 Allowance for loan losses (597) (631) ------- ------- Total Assets $75,964 $71,802 ======= ======= LIABILITIES Interest-bearing liabilities: Transaction accounts $ 9,677 $ 185 2.55% $ 9,611 $ 188 2.61% Savings deposits 4,255 85 2.66% 4,500 92 2.73% Time deposits 45,245 1,909 5.63% 42,177 1,786 5.65% Repurchase agreements 252 10 5.29% 336 8 3.17% ---------------- ---------------- Total interest-bearing liabilities $59,429 $2,189 4.91% $56,624 $2,074 4.88% ================ ================ Non-interest bearing liabilities: Demand deposits $ 6,824 $ 5,867 Other liabilities 555 460 Stockholders' equity 9,156 8,851 ------- ------- Total Liabilities and Stockholders' equity $75,964 $71,802 ======= ======= Net interest income $2,196 $2,131 ====== ====== Net interest spread 3.43% 3.50% ===== ===== Net interest margin 4.18% 4.25% ===== ===== Tax equivalent data: (2) Tax equivalent adjustment 75 57 ====== ====== Adjusted net interest income $2,271 $2,188 ====== ====== Net interest spread 3.57% 3.61% ===== ===== Net interest margin 4.32% 4.36% ===== =====
(1) Average total loans include non-accrual loans and loan income includes loan fee income on loans held in the portfolio. (2) Tax-equivalent adjustment is computed using 34% statutory tax rate for all periods presented. -79- CSB Bancorp Rate Volume Analysis - Table 1a (Dollars in thousands)
Years ended December 31, --------------------------------------------------------------------------------------- 1996 1995 1994 Average Average Average Average Average Average ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------- ------------------------- ------------------------- Interest-earning assets: Interest-earning deposits $ 1,299 $ 80 6.16% $ 1,399 $ 79 5.65% $ 1,524 $ 69 4.53% Federal funds sold 10,506 490 4.66% 5,313 265 4.99% 4,881 227 4.65% Investment securities (taxable) 7,351 481 6.54% 8,127 521 6.41% 9,610 564 5.87% Investment securities (tax-exempt) 3,646 158 4.33% 3,157 154 4.88% 3,284 163 4.96% Loans (net of unearned income) (1) 44,563 4,443 9.97% 44,310 4,203 9.49% 41,835 3,605 8.62% ------------------------- ------------------------- ------------------------- Total interest earning assets $67,365 $5,652 8.39% $62,306 $5,222 8.38% $61,134 $4,628 7.57% ================ ================ Non-earning assets: Cash and due from banks $ 3,457 $ 2,482 $ 3,078 Other non-earning assets 2,243 2,290 2,173 Allowance for loan losses (628) (692) (721) ------- ------- ------- Total Assets $72,437 $66,386 $65,664 ======= ======= ======= LIABILITIES Interest-bearing liabilities: Transaction accounts $ 9,490 $ 260 2.74% $ 9,361 $ 246 2.63% $10,211 $ 268 2.62% Savings deposits 4,431 121 2.73% 4,389 123 2.80% 5,119 144 2.81% Time deposits 42,695 2,404 5.63% 38,754 2,130 5.50% 36,554 1,704 4.66% Repurchase agreements 392 14 3.57% - - - ------------------------- ------------------------- ------------------------- Total interest-bearing liabilities $57,008 $2,799 4.91% $52,504 $2,499 4.76% $51,884 $2,116 4.08% ================ Non-interest bearing liabilities: Demand deposits $ 6,090 $ 4,939 $ 5,296 Other liabilities 491 406 344 Stockholders' equity 8,848 8,537 8,140 ------- ------- ------- Total Liabilities and Stockholders' equity $72,437 $66,386 $65,664 ======= ======= ======= Net interest income $2,853 $2,723 $2,512 ====== ====== ====== Net interest spread 3.48% 3.62% 3.49% ===== ===== ===== Net interest margin 4.24% 4.37% 4.11% ===== ===== ===== Tax equivalent data: (2) Tax equivalent adjustment 81 79 84 ====== ====== ====== Adjusted net interest income $2,934 $2,802 $2,596 ====== ====== ====== Net interest spread 3.60% 3.75% 3.63% ===== ===== ===== Net interest margin 4.36% 4.50% 4.25% ===== ===== =====
(1) Average total loans include non-accrual loans and loan income includes loan fee income on loans held in the portfolio (2) Tax-equivalent adjustment is computed using 34% statutory tax rate for all periods presented. -80- CSB Bancorp Rate Volume Analysis Table 2 The effect on CSB Bancorp's interest income (on a fully-taxable equivalent basis) and interest expense due to the changes in volume and average rates for the periods indicated are shown below (in thousands): 1996-1995 ---------------------- Change Change Total Due To Due To Change Volume Rate ---------------------- ASSETS Interest-earning assets: Interest-earning deposits $ 1 ($6) $ 7 Federal Funds Sold 225 259 (34) Investment Securities (taxable) (40) (50) 10 Investment Securities (tax-exempt) 6 36 (30) Loans (net of unearned income) 240 24 216 ---------------------- Total interest-earning assets $432 $264 $168 ====================== LIABILITIES Interest Bearing Liabilities: Transaction accounts $ 14 $ 3 $ 11 Savings deposits (2) 1 (3) Time deposits 274 217 57 ---------------------- Repurchase agreements 14 0 14 ---------------------- Total interest-bearing liabilities $300 $221 $ 79 ====================== Net interest income $132 $ 43 $ 89 ====================== 1995-1994 ---------------------- Change Change Total Due To Due To Change Volume Rate ---------------------- ASSETS Interest-earning assets: Interest-earning deposits $ 10 ($6) $ 16 Federal Funds Sold 38 20 18 Investment Securities (taxable) (43) (87) 44 Investment Securities (tax-exempt) (14) (10) (4) Loans (net of unearned income) 598 213 385 ---------------------- Total interest-earning assets $589 $131 $458 ====================== Interest Bearing Liabilities: Transaction accounts ($22) ($22) $ 0 Savings deposits (21) (21) (0) Time deposits 426 103 323 Repurchase agreements 0 0 0 ---------------------- Total interest-bearing liabilities $383 $ 60 $323 ====================== Net interest income $206 $ 71 $135 ====================== For purposes of this table, changes in interest due to volume and average rate were determined as follows: Volume Variance - change in volume multiplied by previous average rate. Rate Variance - change in average rate multiplied by previous volume. Rate/Volume Variance - change in volume multiplied by change in average rate. The rate/volume variances have been allocated to the rate change variance. -81- CSB Bancorp INVESTMENT PORTFOLIO (Dollars in thousands) Book Value - Table 3 September 30, December 31, ------------------------------------ 1997 1996 1995 1994 1993 1992 U.S. Treasury and agencies $ 7,695 $7,215 $7,257 $8,213 $6,922 $8,588 State and political subdivisions 4,687 4,064 3,512 3,456 3,018 3,086 Other securities 558 539 731 831 831 236 ----------------------------------------------- Total Investments $12,940 $11,818 $11,500 $12,500 $10,771 $11,910 =============================================== Excluding those holdings in the investment security portfolio of U.S. Treasury and U.S. Government agency and corporation securities and various projects notes fully-guaranteed by the U.S. Government, there were no investments in securities of any one issuer which exceeded 10% of shareholders' equity at September 30, 1997. Maturities - Table 4 Table 4 sets forth the schedule of maturities and weighted average interest rates of securities as of September 30, 1997(in thousands): September 30, 1997 ------------------------------------------ 1 Year 1-5 5-10 After or less Years Years 10 Years Total ------------------------------------------ U.S. Treasury and agencies $ 499 $3,290 $3,096 $ 810 $ 7,695 State and political subdivisions(1) 892 1,190 1,169 1,436 4,687 Other securities 200 0 0 358 558 ------------------------------------------ Total Investments $1,591 $4,480 $4,265 $2,604 $12,940 ========================================== Weighted average yield 7.63% 6.74% 7.17% 7.14% ========================================== (1) The yields on tax-exempt obligations have computed on a fully-taxable equivalent basis using a marginal federal tax rate of 34%. -82- CSB Bancorp Loan Portfolio Summary Table 5 (Dollars in thousands) December 31, September 30, -------------------------------- 1997 % 1996 % 1995 % ------------------------------------------------- Commercial loans $14,579 29.72% $12,165 28.13% $12,110 27.64% Real estate loans 21,244 43.31% 20,189 46.69% 21,017 47.97% Installment loans 13,231 26.97% 10,891 25.18% 10,687 24.39% ------------------------------------------------- Total Loans $49,054 100.00% $43,245 100.00% $43,814 100.00% ================================================= December 31, ------------------------------------------------- 1994 % 1993 % 1992 % ------------------------------------------------- Commercial loans $12,277 28.87% $12,069 29.82% $12,285 31.61% Real estate loans 20,802 48.91% 20,079 49.62% 19,355 49.80% Installment loans 9,452 22.22% 8,319 20.56% 7,225 18.59% ------------------------------------------------- Total Loans $42,531 100.00% $40,467 100.00% $38,865 100.00% ================================================= As of September 30, 1997, the Bank had one concentration of credit greater than 10% of the total loans outstanding: Agricultural enterprises outstanding loans totaled $8.037 million or 16.39% of total loans. Maturities and Sensitivities of Loans to Changes in Interest Rates Table 6 (Dollars in thousands) December 31, 1996 --------------------------------- 1 Year 1-5 After or less Years 5 Years Total --------------------------------- Fixed rate loans $ 8,418 $10,071 $2,683 $21,172 Adjustable rate loans 20,934 1,139 0 22,073 --------------------------------- $29,352 $11,210 $2,683 $43,245 ================================= -83- CSB Bancorp Non-Performing Loans Table 7 (Dollars in thousands) Nonperforming loans include loans on which interest is not being accrued and accruing loans contractually past due ninety days or more as to interest or principal payments.
December 31, September 30, ---------------------------------------------- 1997 1996 1995 1994 1993 1992 --------------------------------------------------------- Non-accrual loans $ 418 $ 633 $ 798 $ 390 $ 706 $ 1,201 Accruing loans contractually past due 90 or more 47 66 64 25 34 7 --------------------------------------------------------- Total non-performing loans $ 465 $ 699 $ 862 $ 415 $ 740 $ 1,208 ========================================================= Non-performing loans as a percent of total loans 0.95% 1.62% 1.97% 0.98% 1.83% 3.11% Non-performing loans as a percent of total assets 0.61% 0.94% 1.27% 0.65% 1.16% 1.97% Total Loans $49,054 $43,245 $43,814 $42,531 $40,467 $38,865 Total Assets $76,717 $74,346 $67,874 $63,660 $63,549 $61,259
Loans are placed on non-accrual status when, in the opinion of management, the collectibility of principal and interest is considered doubtful or when the payment of interest and principal is 90 days past due, unless the loans are both well secured and in the process of collection. Additional interest that would have been earned in 1997 had the loans classified as non-accrual remained at original terms is immaterial. As of September 30, 1997, there are no loans which are not included in the above nonperforming loan total for which management had serious doubt as to the ability of the borrowers to comply with the present repayment terms. -84- CSB Bancorp Allowance for Loan Losses Table 8 (Dollars in thousands) A provision is credited monthly to an allowance for loan losses which is maintained at a level considered by management to be adequate to absorb possible future loan losses inherent in the current portfolio. During each quarter, management determines the level of provision necessary for an adequate allowance. Factors considered in assessing the adequacy of the allowance for loan losses include changes in the volume of the loan portfolio, past loan loss experience, existing and anticipated economic conditions, and other factors which may deserve current recognition in estimating possible future loan losses.
Nine Months ended December 31, ----------- ----------------------------------------------- 09/30/97 1996 1995 1994 1993 1992 ----------------------------------------------------------- Beginning Balance $ 616 $ 659 $ 723 $ 742 $ 671 $ 552 Loans charged off: Commercial loans 71 108 55 48 31 207 Real estate loans - 26 - 12 35 32 Installment loans 130 64 127 110 65 66 --------------------------------------------------------- Total Charge Offs 201 198 182 170 131 305 --------------------------------------------------------- Recoveries of charged-off loans: Commercial loans 14 7 5 103 22 30 Real estate loans 41 - 22 9 1 1 Installment loans 20 13 43 14 24 19 ------- ------- ------- ------- ------- ------- Total Recoveries 75 20 70 126 47 50 ------- ------- ------- ------- ------- ------- Net Charge offs (recoveries) 126 178 112 44 84 255 Provision charged to operations 497 135 48 25 155 374 ------- ------- ------- ------- ------- ------- Ending Balance $ 987 $ 616 $ 659 $ 723 $ 742 $ 671 ======= ======= ======= ======= ======= ======= Allowance as a percent of total loans 2.01% 1.42% 1.50% 1.70% 1.83% 1.73% Net charged-off loans to average loans 0.27% 0.40% 0.25% 0.11% 0.21% 0.66% Allowance as a percent of non-performing loans 212.26% 88.13% 76.45% 174.22% 100.27% 55.55% Total loans $49,054 $43,245 $43,814 $42,531 $40,467 $38,865 Total non-performing loans $ 465 $ 699 $ 862 $ 415 $740 $ 1,208
-85- CSB Bancorp Allocation of the Allowance for Loan Losses Table 9 (Dollars in thousands) The following schedule sets forth managements's allocation of the allowance for loan losses by loan type. This allowance allocation is neccessarily judgmental and is based upon current economic conditions (in general and with respect to certain customers or industries), past loss experience, the volume of each loan category and its respective past due history and other factors. Since these factors are subject to change, the following allocation is not necessarily indicative of the breakdown of future loan losses. The amounts indicated for each loan type include amounts allocated for specific loans as well as a general allocation.
September 30, December 31, ------------- --------------------------------------------------------------------------------- 1997 % 1996 % 1995 % 1994 % 1993 % 1992 % ------------- --------------------------------------------------------------------------------- Commercial loans $298 30.19% $178 28.90% $184 27.92% $204 28.22% $212 28.57% $189 28.17% Real estate loans 111 11.25% 66 10.71% 83 12.59% 86 11.89% 85 11.46% 87 12.97% Installment loans 578 58.56% 372 60.39% 392 59.48% 433 59.89% 445 59.97% 395 58.87% ------------- --------------------------------------------------------------------------------- Total ALL $987 100.00% $616 100.00% $659 100.00% $723 100.00% $742 100.00% $671 100.00% ============= =================================================================================
-86- CSB Bancorp Deposit Summary Table 10 (Dollars in thousands)
September 30,1997 December 31, 1996 ---------------------------- ----------------------------- Avg bal Avg rate % Deposits Avg bal Avg rate % Deposits -------------------------------------------------------------- Non-interest bearing demand deposits $ 6,824 10.34% $ 6,090 9.71% Interest bearing demand deposits 9,677 2.55% 14.66% 9,490 2.74% 15.13% Savings deposits 4,255 2.66% 6.45% 4,431 2.73% 7.07% Time deposits 45,245 5.63% 68.55% 42,695 5.63% 68.09% ------- ------ ------- ------ Average total deposits $66,001 100.00% $62,706 100.00% ============================================================ December 31, 1995 December 31, 1994 ---------------------------- ----------------------------- Avg bal Avg rate % Deposits Avg bal Avg rate % Deposits -------------------------------------------------------------- Non-interest bearing demand deposits $ 4,939 8.60% $ 5,296 9.26% Interest bearing demand deposits 9,361 2.63% 16.30% 10,211 2.62% 17.86% Savings deposits 4,389 2.80% 7.64% 5,119 2.81% 8.95% Time deposits 38,754 5.50% 67.47% 36,554 4.66% 63.93% ------------------------------------------------------------ Average total deposits $57,443 100.00% $57,180 100.00% ============================================================ December 31, 1993 December 31,1992 ---------------------------- ----------------------------- Avg bal Avg rate % Deposits Avg bal Avg rate % Deposits -------------------------------------------------------------- Non-interest bearing demand deposits $ 6,780 11.88% $ 4,772 9.04% Interest bearing demand deposits 10,260 2.89% 17.98% 10,666 3.66% 20.20% Savings deposits 5,105 2.94% 8.95% 4,153 3.68% 7.87% Time deposits 34,923 4.55% 61.20% 33,203 5.24% 62.89% ------------------------------------------------------------ Average total deposits $57,068 100.00% $52,794 100.00% ============================================================
Time Certificates of Deposit of $100,000 or more 09/30/97 -------- 1.) Time deposits >= $100,000 $11,193 2.) 3 months or less maturity 1,823 4-6 months maturity 3,078 7-12 months maturity 1,726 over 12 months 4,566 -------- 11,193 ======== -87- CSB Bancorp Regulatory Capital Table 11 (Dollars in thousands) September 30, December 31, 1997 1996 1995 -------------------------------------- Total Assets $76,717 $74,346 $67,874 Risk-based Assets 45,310 41,125 40,501 Tier I Capital 9,113 8,867 8,596 Total Capital 9,876 9,359 9,114 Leverage Ratio 12.87 12.59 13.43 Tier I Risk-based Capital Ratio 20.11 21.56 21.22 Total Risk-based Capital Ratio 21.80 22.76 22.50 -88- CSB Bancorp GAP Position Table 12 The schedule that follows illustrates CSB Bancorp's asset/liability (gap) position as of September 30, 1997 (in thousands): Up to 3 4 to 12 1 to 2 After Total Months Months Years 2 Years --------------------------------------------- ASSETS - ------ Loans $49,054 $ 8,033 $19,201 $ 1,702 $20,118 Securities 15,540 676 1,903 3,263 9,698 Federal funds sold 5,675 5,675 - Other assets 6,448 6,448 ---------------------------------------------- Total assets $76,717 $14,384 $21,104 $ 4,965 $36,264 ============================================== LIABILITIES - ----------- Interest-bearing deposits $59,944 $27,769 $18,323 $11,026 $ 2,826 Securities sold under agreements to repurchase 319 319 Other liabilities and equity 16,454 - - - 16,454 ---------------------------------------------- Total liabilities and equity $76,717 $28,088 $18,323 $11,026 $19,280 ============================================== Gap ($13,704) $ 2,781 ($6,061) $16,984 Cumulative gap ($13,704) ($10,923) ($16,984) $ - Cumulative rate sensitive ratio 0.51 0.99 0.70 1.00 ============================================== -89- CSB Bancorp Return on Equity and Assets Table 13 The following table sets forth, for the periods indicated, return on assets, return on equity, dividend payout and average equity to average asset ratio:
September 30, December 31, 1997 1996 1995 1994 1993 1992 ------------- -------------------------------------- Return on assets 0.70% 1.00% 1.08% 1.01% 0.94% 0.87% Return on equity 5.80% 8.22% 8.41% 8.11% 7.78% 7.11% Dividend payout ratio 40.20% 60.52% 55.71% 50.91% 53.16% 53.94% Average equity to average assets 12.05% 12.21% 12.86% 12.40% 12.04% 12.22%
-90- CSB Bancorp Selected Consolidated Financial Data (Dollar amounts in thousands, except share data) The following table presents selected financial information for CSB Bancorp:
Nine months ended Sepember 30, Year ended December 31, -------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------------------------------------------------------------------- FOR THE PERIOD Interest Income $4,385 $4,205 $5,652 $5,222 $4,628 $4,526 $4,871 Interest Expense 2,189 2,074 2,799 2,499 2,116 2,035 2,282 Net Interest Income 2,196 2,131 2,853 2,723 2,512 2,491 2,589 Provision for loan losses 497 108 135 48 25 155 374 Non-interest income 217 169 250 270 302 206 186 Non-interest expense 1,335 1,341 1,898 1,889 1,824 1,722 1,673 Income before income taxes 581 851 1,070 1,056 965 820 728 Net Income 398 577 727 718 660 611 538 PER COMMON SHARE Net Income $2.49 $3.61 $4.54 $4.49 $4.12 $3.82 $3.39 Cash dividends 1.00 1.00 2.75 2.50 2.10 2.03 1.83 Weighted average shares (000) 160 160 160 160 160 160 159 AT PERIOD-END Total loans $49,054 $46,680 $43,245 $43,814 $42,531 $40,467 $38,865 Earning assets 69,630 67,901 68,221 63,353 52,796 59,421 56,899 Total assets 76,717 74,793 74,346 67,874 63,660 63,549 61,259 Average total assets 75,964 71,802 72,437 66,386 65,664 65,230 61,949 Deposits 66,731 65,018 64,347 58,776 55,030 55,251 53,352 Common shareholders' equity 9,113 8,996 8,867 8,596 8,210 7,938 7,603 Total shareholders' equity 9,113 8,996 8,867 8,596 8,210 7,938 7,603 Average shareholders' equity 9,156 8,851 8,848 8,537 8,140 7,852 7,569 PERFORMANCE RATIOS Return on average total assets 0.70 1.07 1.00 1.08 1.01 0.94 0.87 Return on average common equity 5.80 8.69 8.22 8.41 8.11 7.78 7.11 Efficiency 30.44 31.89 33.58 36.17 39.41 38.05 34.35 Net overhead expense to average assets 1.96 2.18 2.28 2.44 2.32 2.32 2.40 Net interest margin 4.32% 4.36% 4.36% 4.50% 4.25% 4.27% 3.81% CAPITAL RATIOS AT PERIOD-END Tangible equity to tangible assets 11.93% 11.83% 11.90% 12.58% 12.79% 12.36% 12.36% Tier 1 risk-adjusted capital 20.11 20.54 21.56 21.22 21.25 20.34 21.20 Total risk-adjusted capital 21.80 21.79 22.76 22.50 22.51 21.60 22.45 Dividend payout ratio 40.20 27.73 60.52 55.71 51.03 53.16 53.78 ASSET QUALITY DATA Nonperforming loans $465 $601 $699 $862 $415 $740 $1,208 Nonperforming assets 709 938 1,025 1,399 1,074 1,450 1,376 Allowance for loan losses 987 638 616 659 723 742 671 Nonperforming loans to period-end loans 0.95% 1.01 1.62% 1.97% 0.98% 1.83% 3.11% Allowance for loan losses to nonperforming loans 212.26% 128.71% 88.13% 76.45% 174.22% 100.27% 55.55% Allowance for loan losses to period-end loans 2.01% 1.28% 1.42% 1.50% 1.70% 1.83% 1.73%
-91- FSB FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION FSB Financial Corporation is a state-chartered institution organized in 1994, which operates the FSB Bank (collectively referred to in this section as "FSB"). FSB operates a main office located in Francisco, Indiana and a branch office located in Princeton, Indiana. FSB offers a range of banking and financial services to individuals and businesses in Gibson County in Southwestern Indiana. The following management's discussion and analysis is presented to provide information concerning FSB's financial condition and results of operations as of and for the fiscal years ended September 30, 1997 and 1996. This discussion and analysis should be read in conjunction with FSB's financial statements and related footnotes, which are presented in this document. Note that 1996 results are unaudited. RESULTS OF OPERATIONS COMPARISON OF 1997 TO 1996 NET LOSS FSB incurred a $41,000 net loss for 1997, which represented a $25,000 or 60% decline from the $16,000 net loss incurred for 1996. The increased net loss in 1997 as compared to 1996 was primarily attributable to a $100,000 increase in non-interest expenses, which was somewhat offset by an increase of $62,000 in net interest income. $10,000 of the increase in expenses was attributable to merger related costs. The table below presents the change in net income by major income statement components for 1997, on a taxable equivalent basis (dollars in thousands): Net Interest Income $ 62 Provision for Loan Losses (10) Non-interest Income 16 Non-interest Expenses (100) Income Taxes 7 ------ Change in Net Income $ ( 25) == NET INTEREST INCOME Net interest income is the difference between interest and fees earned on loans and investments, and interest paid on interest bearing liabilities. It is the bank's principal source of income. In this discussion, net interest income is presented on a taxable equivalent basis -- that is, tax-exempt income earned on securities of state and political subdivisions has been increased to an amount that would have been earned on a taxable basis. This places taxable and non-taxable income on a more comparable basis and makes their comparison more meaningful. -92- Change from Prior Period Year Ended September 30, (dollars in thousands) Change 1997 1996 $ % ---- ---- - - Interest Income (taxable equivalent) $1,163 $1,021 $142 13.9% Interest Expense 540 460 80 17.4 ----- ----- --- Net Interest Income $ 623 $ 561 $ 62 11.0% ===== ===== === In 1997, taxable equivalent net interest income of $623,000 increased by $62,000 or 11.0% from 1996. Net interest income, on a taxable equivalent basis, as a percentage of average earning assets was 4.41% for 1997. Management reviews the bank's Asset/Liability position on a regular basis in order to minimize inherent balance sheet interest rate risk. See management's discussion in the section entitled Liquidity, Interest Rate Risk Management and Inflation. PROVISION FOR LOAN LOSSES The provision for loan losses is a charge against income, to provide an allowance against which future losses will be charged as those losses are identified. FSB's management makes a quarterly evaluation of estimated losses and the adequacy of the allowance for loan losses. Management considers the allowance to be adequate to absorb estimated losses in the loan portfolio. The provision for loan losses was $68,000 in 1997 versus $58,000 in 1996. The increase in the provision was the result of management's determination that a higher allowance for loan losses was prudent. There were no significant write-offs in 1997 or 1996. NON-INTEREST INCOME Non-interest income increased by $16,000 to $96,000 in 1997, over the 1996 total of $80,000. Non-interest income as a percentage of taxable equivalent net interest income also increased, to 15.4% in 1997 compared to 14.2% in 1996. The primary source of non-interest income is service charges on deposit accounts, which increased by $9,000 to $78,000 in 1997, from $69,000 in 1996. The remaining increase in non-interest income of $7,000 was due to increases in commissions, ATM fees and dividends on FHLB stock. Non-interest income also includes exchange fees, safe deposit rental, and other miscellaneous charges. Securities gains were minimal in both years. FSB does not offer fiduciary services. NON-INTEREST EXPENSES The principal components of non-interest expense are salaries and employee benefits, occupancy and equipment, and data processing. The remaining components of non-interest expense are classified as other operating expenses and consist of supplies and telephone, directors' and professional fees, and other miscellaneous expenses. Non-interest expenses were $683,000 in 1997, compared to $583,000 in 1996, an increase of $100,000. Salaries and Employee Benefits accounted for $61,000 of this increase, and professional fees increased $10,000 from 1996. Merger related expenses were $10,000 in 1997. -93- FSB's efficiency ratio, consisting of non-interest expenses as a percentage of the total of taxable equivalent net interest income and non-interest income (net operating income), was 95% in 1997 and 91% in 1996. The following tables provide an analysis of the components of non-interest expense for 1997 and 1996: Non-interest Expenses (dollars in thousands) % to $ to 1997 Total 1996 Total Change ---- ----- ---- ----- ------- Salaries and Employee Benefits $359 52% $298 51% $61 20% Occupancy and Equipment 93 14 87 15 6 6 Data Processing 57 8 58 10 (1) (2) Other Operating 174 26 140 24 34 25 --- -- --- --- -- -- Non-Interest Expense $683 100% $583 100% $100 17% === === === === === == Non-interest Expenses Stated as a % of Taxable Equivalent Net Operating Income (dollars in thousands) 1997 1996 ---- ---- Salaries and Employee Benefits 50% 46% Occupancy and Equipment 13 14 Data Processing 8 9 Other Operating 24 22 -- -- Non-Interest Expense 95% 91% == == INCOME TAX The income tax benefit for 1997 was $10,000 compared to a $3,000 benefit for 1996. Income tax benefit as a percentage of net loss before taxes was 19% in 1997 and 18% in 1996. FINANCIAL CONDITION Comparison of September 30, 1997 to 1996 As of September 30, 1997 FSB's total assets increased $1,097,000 to $15,699,000 compared to $14,603,000 at September 30, 1996. The increase was primarily due to an increase in Federal Funds Sold and Premises and Equipment, offset by a decline in the investment portfolio. Loans totaled $10,520,000 at September 30, 1997. This represents an increase of $126,000 over the September 30, 1996 balance of $10,394,000. -94- Total deposits at September 30, 1997 of $14,104,000 increased 12%, or $1,506,000 over the total of $12,598,000 at September 30, 1996. $810,000 of this increase occurred in certificates of deposits in denominations of $100,000 or more. At September 30, 1997 FSB had no outstanding balance in Federal Funds Purchased, a decrease of $375,000 from the previous year-end. Shareholders' Equity totaled $1,481,000 or 9.4% of total assets at September 30, 1997. This represents a decrease of $56,000 from the September 30, 1996 balance of $1,537,000 which was 10.5% of total assets. This decrease is the result of:(a) a net loss for 1997 of $41,000; (b)payment of cash dividends of approximately $12,000; and, (c)repurchase of common stock of approximately $3,000. USES OF FUNDS MONEY MARKET INVESTMENTS FSB's money market investments for the periods presented were comprised of federal funds sold and interest bearing deposits in other banks, and are used by FSB to meet lending requirements and normal liquidity needs. The balance of money market investments was $1,325,000 at September 30, 1997. This increase of $1,200,000 from the balance of $125,000 at September 30, 1996 was funded by a net increase of $1,131,000 in total deposits and federal funds purchased. INVESTMENT SECURITIES The investment securities portfolio is used as a means of investing funds over and above those needed for lending and liquidity requirements. Investment securities are primarily purchased with the intent and ability to hold until maturity. Approximately $300,000 in U.S. Treasury securities was held as available-for-sale at September 30, 1997 and 1996. Investment securities held-to-maturity declined $643,000 during 1997, to $2,325,000 at September 30, 1997. This decline from the September 30, 1996 balance of $2,967,000 was primarily the result of scheduled maturities and calls prior to maturity of U.S. Government Agency and Mortgage-backed securities. $48,000 of these funds were re-invested in Federal Home Loan Bank stock. Approximately $600,000 of FSB's U.S. Government Agency securities are scheduled to mature in the fiscal year ending September 30, 1998. The following tables present an analysis of investments and their maturity schedule as of September 30, 1997:
Total Investments As of September 30, 1997 (dollars in thousands) % to % to 1997 Total 1996 Total ---- ----- ---- ----- MONEY MARKET INVESTMENTS Federal Funds Sold $1,275 32% $ 75 2% Interest Bearing Deposits 50 2 50 2 ----- ------ ----- 1,325 34 125 4 ----- -- ------ ----- INVESTMENT SECURITIES U.S. Treasuries 300 7 300 9 U.S. Government Agencies 900 23 1,250 37 -95- State and political sub-divisions 585 15 581 17 Mortgage-backed securities 840 21 1,136 33 ----- ----- ----- -- 2,625 66 3,267 96 ===== ===== ===== ===== TOTAL INVESTMENTS Investment Maturity Schedule As of September 30, 1997 (dollars in thousands) Within 1 - 5 > 5 1 Year Years Years Total ------ ----- ----- ----- Money Market Investments $1,325 $ -- $ -- $1,325 Investment Securities 880 460 1,285 2,625 ------- ---- ----- ----- TOTAL INVESTMENTS $2,205 $460 $1,285 $3,950 ===== === ===== =====
LOANS Total loans of $10,520,000 at September 30, 1997 represented an increase of $126,000 compared to September 30, 1996 balances of $10,394,000. This net increase resulted from an increase in real estate loans of $332,000 (8%), a decline in commercial loans of $122,000 (7%), and a decline in consumer loans of $86,000 (2%). At September 30, 1997 the loan portfolio was comprised of real estate loans (43%), consumer loans (41%), and commercial loans (16%). Deferred loan costs were negligible. These relative percentages did not change significantly from September 30, 1996 balances. The percentage of loans to total assets and loans to deposits at September 30, 1997 declined from the prior year-end, due to an increase in cash equivalents and total deposits.
Total Loans As of September 30, (dollars in thousands) % to % to 1997 Total 1996 Total ---- ----- ---- ----- Commercial $ 1,662 16 $ 1,784 17 Real Estate 4,554 43 4,222 41 Consumer 4,281 41 4,366 42 ------ --- ----- -- 10,497 100 10,372 100 Deferred Loan Costs 23 - 22 - ------- -- -- TOTAL LOANS $ 10,520 100 $10,394 100 ====== === ====== === LOANS TO TOTAL ASSETS 67% 71% === === LOANS TO TOTAL DEPOSITS 75% 82% === ===
-96- Approximately $3,800,000 of real estate loans were secured by 1-4 family housing at September 30, 1997 and approximately $985,000 of outstanding commercial loans were for agricultural purposes or secured by farmland. The majority of consumer loans were collateralized at year-end. Unfunded lines of credit were not significant. SOURCES OF FUNDS Comparison of September 30, 1997 to 1996 DEPOSITS FSB's core deposits include demand deposits, regular savings accounts and certificates of deposit of less than $100,000. FSB relies on core deposits as the major source of funding for earning assets. Core deposits increased 6%, or $696,000 to $11,616,000 at September 30, 1997 compared to $10,920,000 at September 30, 1996. Non-interest bearing demand deposits, a component of core deposits, increased 2% or $24,000 for the year ended September 30, 1997. Certificates of deposits of $100,000 or more totaled $2,487,000 and $1,678,000 at September 30, 1997 and 1996, respectively; an increase of $810,000. Deposits in this category are generally considered more subject to periodic withdrawals than core deposits, and as such are generally not used as a permanent source of funding for loans. OTHER FUNDING SOURCES FSB's remaining funding source consists of federal funds purchased from other financial institutions, generally on an overnight basis. These borrowings represent an important source of temporary short-term liquidity for FSB. FSB had no borrowings at September 30, 1997. CAPITAL RESOURCES Shareholders' Equity at September 30, 1997 declined $56,000 from the previous year-end, to $1,481,000. This decline resulted primarily from a net loss in 1997 of $41,000 following a net loss in 1996 of $16,000. Shareholders' Equity as a percentage of total assets declined to 9.4% at September 30, 1997 from 10.5% at September 30, 1996. FSB paid cash dividends of approximately $12,000 in both 1997 and 1996. Due to FSB's recent net losses and certain Indiana state banking regulations, FSB is required to obtain prior regulatory approval before payment of future dividends. Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide a definition of core capital (Tier 1 capital) and assign a measure of risk to various categories of assets (risk-weighted assets). These guidelines require minimum levels of capital to be maintained in proportion to total risk-weighted assets and off-balance sheet exposures such as unfunded loan commitments. The bank's Tier 1 capital consists solely of shareholders' equity. Tier 2 capital is defined as the allowance for loan losses up to 1.25% of gross risk-weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 requires federal regulatory agencies to define capital tiers. These tiers are: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. To be considered well-capitalized, an institution must achieve a Tier 2 Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0%, a -97- leverage ratio of at least 5.0%, and not be under a capital directive order. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. FSB's Tier 1, Total Capital and leverage ratios at September 30, 1997 were 15.5%, 14.4% and 9.3%, respectively. All ratios exceeded minimum regulatory ratios for the definition of a well-capitalized institution. At September 30, 1997 management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material impact on the Company's liquidity, capital resources or operations. RISK MANAGEMENT LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with FSB's CEO and Vice President. These officers have the authority to extend credit based on guidelines approved by FSB's Board of Directors. In the opinion of the Board, these officers possess the knowledge, judgement and experience necessary to administer lending activities of FSB. FSB's Board of Directors holds regular meetings and special meetings, as needed, to review and approve lending activities and to review credit applications which, according to FSB's loan policy, require Board approval. The Board reviews underperforming assets and watch list loans at quarterly intervals in order to monitor credit quality. The Board approves all charge-offs to the allowance for loan losses. Loans are charged-off when, in management's opinion, they are deemed uncollectible. Underperforming assets consist of: a) non-accrual loans; b) accruing loans past due greater than 90 days; and c) restructured loans, which have been renegotiated to provide a reduction or deferral in interest and/or principal due to the impaired financial condition of the borrower. FSB's underperforming assets totaled $117,000 and $54,000 or 1.11% and 0.51% of total loans, at September 30, 1997 and 1996, respectively. The Board of Directors formally evaluates the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is based upon reviews of specific loans, loan categories, and historical loss experience, as well as current and projected conditions. FSB's provision to the Allowance for Loan Losses was $68,000 in 1997 and $58,000 in 1996. Net charge-offs reduced the Allowance for Loan Losses by $48,000 in 1997 and $18,000 in 1996. The balance of the Allowance for Loan Losses totaled $103,000 and $83,000 or 0.98% and 0.80% of total loans, at September 30, 1997 and 1996, respectively. LIQUIDITY, INTEREST RATE RISK MANAGEMENT AND INFLATION Management monitors the bank's liquidity requirements on a daily basis. Liquidity needs arise from loan demand and deposit withdrawals. The objective of liquidity management is to match available funds with anticipated funding needs. The investment portfolio is managed to help meet FSB's liquidity needs, as well as mitigate interest rate risk in FSB's loan and deposit portfolios. Interest rate risk management seeks to minimize the risks to net interest income associated with the effect of potential changes in interest rates. These risks are mitigated by the appropriate positioning of interest-earning assets to interest-bearing liabilities, based on the periods in which they mature or reprice. In general, a position wherein interest sensitive assets are greater than interest sensitive liabilities in a given period is appropriate during periods of rising interest rates. In general, the inverse is true during periods of declining interest rates. -98- Since virtually all of FSB's assets and liabilities are monetary in nature, changes in interest rates may have a significant impact on the bank's performance. However, interest rates do not necessarily move in concert with, or in the same magnitude as, the general inflation rate or prices of other goods and services. Management and the Board of Directors monitor FSB's interest rate risk position on a quarterly basis. An analysis of the bank's interest rate sensitivity position at September 30, 1997 is provided in the table below:
INTEREST RATE SENSITIVITY As of September 30, 1997 (dollars in thousands) Under 1 - 5 Beyond 1 Year Years 5 Yrs Total ------ ------ ------ ------ INTEREST EARNING ASSETS: Federal Funds Sold $ 1,275 -- $ -- $ 1,275 Interest Bearing Deposits 50 -- -- 50 Investment Securities 1,489 409 727 2,625 Loans (net of unearned) 2,071 5,710 2,739 10,520 ----- ----- ----- ------ RATE SENSITIVE ASSETS (RSA) $ 4,885$ 6,119 $ 3,466 $ 14,470 ----- ----- ----- ------ INTEREST BEARING LIABILITIES: Interest Bearing Demand $ 1,149 -- $ -- $ 1,149 Savings and MMDA 200 1,961 -- 2,161 Time Deposits 4,732 4,276 -- 9,008 ----- ----- ----- ------ RATE SENSITIVE LIABILITIES (RSL) $ 6,081$ 6,237 $ -- $ 12,318 ----- ----- --- ------ INTEREST SENSITIVITY GAP: Current $(1,196) $(118) $3,466 $ 2,152 ===== ==== ===== ===== Cumulative $(1,196) $(1,314) $2,152 ===== ===== ===== Cumulative RSA / RSL 80% 90% 117% === === ====
-99- INTRODUCTION The following management's discussion and analysis is presented to provide information concerning FSB's financial condition and results of operations as of December 31, 1997 and September 30, 1997 as well as for the three months ended December 31, 1997 and 1996. The three months ended December 31, 1997 and 1996 represent the first fiscal quarter of the 1998 and 1997 fiscal years, respectively. This discussion and analysis should be read in conjunction with FSB's financial statements and related footnotes, which are presented in this document. Note that all results are unaudited. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996 NET LOSS FSB incurred a $5,000 net loss for the three months ended December 31, 1997 which represented an improvement of $12,000 from the $17,000 net loss incurred for the same period in 1996. This improvement was primarily attributable to a $38,000 decrease in the provision for loan loss, which was principally offset by an increase in interest expense of $21,000. In addition, no income tax benefit associated with the pre-tax loss was recorded in the first fiscal quarter of 1998. A tax benefit of $9,000 was recorded in the first fiscal quarter of 1997. There were no merger-related expenses in the first fiscal quarter of 1998. The table below presents the change in net income by major income statement components for the three months ended December 31, 1997 in comparison to the three months ended December 31, 1996 on a taxable equivalent basis (dollars in thousands): Net Interest Income $ (13) Provision for Loan Losses 38 Non-interest Income 1 Non-interest Expenses (5) Income Taxes (9) ------- Change in Net Income $ 12 ======= NET INTEREST INCOME Net interest income is the difference between interest and fees earned on loans and investments, and interest paid on interest bearing liabilities. It is the bank's principal source of income. In this discussion, net interest income is presented on a taxable equivalent basis -- that is, tax-exempt income earned on securities of state and political subdivisions has been increased to an amount that would have been earned on a taxable basis. This places taxable and non-taxable income on a more comparable basis and makes their comparison more meaningful. -100-
Change from Prior Period Three Months Ended December 31, (dollars in thousands) % of Average Change Earning Assets 1997 1996 $ % 1997 1996 ---- ---- - - ---- ---- Interest Income (taxable equivalent) $ 296 $288 $ 8 3 8.21 8.35 Interest Expense 149 128 21 16 4.13 3.71 --- ---- ---- ---- Net Interest Income $ 147 $160 $(13) 8 4.08 4.64 ==== === === ==== ====
For the first fiscal quarter of 1998, taxable equivalent net interest income of $147,000 decreased by $13,000 or 8% from the first fiscal quarter of 1997. Net interest income, on a taxable equivalent basis, as a percentage of average earning assets (net interest margin) was 4.08% for the three months ended December 31, 1997 compared to 4.64% for the same period in the prior year. The reduction in net interest income and net interest margin was primarily due to an increase in interest expense. This increase was due to higher average deposit outstandings and average rate paid on deposits from period to period. Management reviews FSB's Asset/Liability position on a regular basis in order to minimize inherent balance sheet interest rate risk. See management's discussion in the section entitled Liquidity, Interest Rate Risk Management and Inflation. PROVISION FOR LOAN LOSSES The provision for loan losses is a charge against income, to provide an allowance against which future losses will be charged as those losses are identified. FSB's management makes a quarterly evaluation of estimated losses and the adequacy of the allowance for loan losses. Management considers the allowance to be adequate to absorb estimated losses in the loan portfolio. The provision for loan losses was $4,000 in the first fiscal quarter of 1998, compared to $42,000 in the same period for 1997. The decrease in the provision from period to period was the result of management's determination that there were no significant loan losses forecast for the first fiscal quarter of 1998, and that $25,000 of the provision in the comparable period for 1997 was made as a direct contribution to cover some year-end 1997 loan losses. There were no significant write-offs in the first fiscal quarter of 1998 or 1997. NON-INTEREST INCOME The primary source of non-interest income is service charges on deposit accounts. Non-interest income also includes commissions, ATM fees, dividends on FHLB stock, exchange fees, safe deposit rental, and other miscellaneous charges. Non-interest income increased by $1,000 to $26,000 in the first fiscal quarter of 1998, over the 1997 amount of $25,000. NON-INTEREST EXPENSES The principal components of non-interest expense are salaries and employee benefits, occupancy and equipment, and data processing. The remaining components of non-interest expense are classified as other operating expenses and consist of supplies and telephone, directors' and professional fees, and other miscellaneous expenses. -101- Non-interest expenses were $170,000 in the first fiscal quarter of 1998, compared to $165,000 for the same period in 1997, an increase of $5,000. Occupancy and Equipment expenses increased $13,000 due to the amortized cost of two new ATMs, associated site preparation, and the subsequent purchase of maintenance agreements to cover said machines. Data Processing and Other Operating Expenses decreased $4,000 and $5,000 respectively. There were no merger-related expenses in the first fiscal quarter of 1998. FSB's efficiency ratio, consisting of non-interest expenses as a percentage of the total of taxable equivalent net interest income and non-interest income (net operating income), was 98% in the first fiscal quarter of 1998 compared to 89% in 1997. The following tables provide an analysis of the components of non-interest expense for the three months ended December 31, 1997 and 1996:
Non-interest Expenses (dollars in thousands) 1st Qtr % to 1st Qtr % to 1998 Total 1997 Total Change ----- ---- ----- ------ Salaries and Employee Benefits $ 90 53% $ 89 54% $ 1 1% Occupancy and Equipment 28 16 15 9 13 87 Data Processing 14 8 18 11 (4)(22) Other Operating 38 22 43 26 (5) 12 -- --- -- --- --- Non-Interest Expense $170 100% $165 100% 5 3% === === === ===
Non-interest Expenses Stated as a % of Taxable Equivalent Net Operating Income (dollars in thousands) 1st Qtr 1st Qtr 1998 1997 Salaries and Employee Benefits 52% 48% Occupancy and Equipment 16 8 Data Processing 8 9 Other Operating 22 24 -- -- Non-Interest Expense 98% 89% == ==
The increase in the efficiency ratio is primarily due to lower net interest income in the first fiscal quarter of 1998 compared to same period in the prior year. INCOME TAX No income tax benefit was recorded for the first fiscal quarter of 1998. A $9,000 tax benefit was recorded for the same period in the prior year. -102- FINANCIAL CONDITION Comparison of December 31, 1997 to September 30, 1997 As of December 31, 1997 FSB's total assets increased $63,000 to $15,762,000 compared to $15,699,000 at September 30, 1997. This net increase was primarily the result of a $23,000 decrease in the Allowance for Loan Loss and a $35,000 increase in Other Assets. In addition, a $465,000 decline in investment securities and a $441,000 decline in loans were reinvested in Federal Funds Sold, funding the majority of the $967,000 increase in Cash and Cash Equivalents. Total deposits at December 31, 1997 of $14,172,000 were $68,000 over the total of $14,104,000 at September 30, 1997. Non-interest bearing deposits declined $73,000 while interest-bearing deposits increased by $141,000 during this period. Shareholders' Equity totaled $1,475,000 or 9.4% of total assets at December 31, 1997. This represents a decrease of $5,000 from the September 30, 1997 and no change in the equity to assets ratio. This decline resulted from the net loss for the three months ended December 31, 1997. USES OF FUNDS MONEY MARKET INVESTMENTS FSB's money market investments for the periods presented were comprised of federal funds sold and interest bearing deposits in other banks, and are used by FSB to meet lending requirements and normal liquidity needs. The balance of money market investments increased $890,000 in the first fiscal quarter of 1998, to a total of $2,215,000. This increase from the total of $1,325,000 at September 30, 1997 was funded by a decline in investment securities and loans. Management's intent is to provide liquidity for seasonal loan growth and expected maturities of time deposits; and, to reinvest excess liquidity in the investment portfolio when sufficient yields can be obtained. INVESTMENT SECURITIES The investment securities portfolio is used as a means of investing funds over and above those needed for lending and liquidity requirements. Investment securities are primarily purchased with the intent and ability to hold until maturity. Investment securities declined $465,000 from September 30, 1997 to $2,160,000 at December 31, 1997. This decline was primarily the result of scheduled maturities of U.S. Treasury, U.S. Government Agency and Mortgage-backed securities. An additional $500,000 of the bank's U.S. Government Agency securities are scheduled to mature in the fiscal year ending September 30, 1998. The following tables present an analysis of money market investments and investment securities as of December 31, 1997 and September 30, 1996 and their maturity schedules as of December 31, 1997: -103-
Money Market Investments and Investment Securities As of: (dollars in thousands) Dec 31, % to Sep 30, % to 1997 Total 1997 Total ---- ----- ---- ----- MONEY MARKET INVESTMENTS Federal Funds Sold $2,215 51% $1,275 32% Interest Bearing Deposits -- -- 50 2 -- 2,215 51 1,325 34 ------ --- ----- -- INVESTMENT SECURITIES U.S. Treasuries -- -- 300 7 U.S. Government Agencies 800 18 900 23 State and political sub-divisions 585 13 585 15 Mortgage-backed securities 775 18 840 21 ------- --- --- 2,160 49 2,625 66 ------ --- ----- --- TOTAL INVESTMENTS $ 4,375 100% $3,950 100% ===== === ===== ===
Money Market Investments and Investment Securities Maturity Schedule As of December 31, 1997 (dollars in thousands) Within 1 - 5 > 5 1 Year Years Years Total ------ ------ ------ ------ Money Market Investments $2,215 $-- $ -- $2,215 Investment Securities 1,284 312 564 2,160 ----- ------- ----- TOTAL INVESTMENTS $3,499 $ 312 564 $4,375 ===== ===== =====
LOANS Total loans of $10,079,000 at December 31, 1997 represented a decline of $441,000 compared to the September 30, 1997 balance of $10,520,000. This net decline principally resulted from seasonal repayments of agricultural loans. At December 31, 1997 the loan portfolio was comprised of real estate loans (45%), consumer loans (42%), and commercial loans (13%). Deferred loan costs were negligible. These relative percentages did not change significantly from September 30, 1997 balances. The decline in commercial loans, percentage of loans to total assets and loans to deposits at December 31, 1997 from the fiscal year-end was due to seasonal repayments in the agricultural loan portfolio. -104-
Total Loans as of: (dollars in thousands) Dec 31, % to Sep 30, % to 1997 Total 1997 Total ---- ----- ---- ----- Commercial $ 1,296 13% $ 1,662 16% Real Estate 4,490 45 4,554 43 Consumer 4,271 42 4,281 41 ------ --- ----- --- 10,057 100 10,497 100 Deferred Loan Costs 23 - 23 - -- -- -- -- TOTAL LOANS $10,080 100% $ 10,520 100% ====== === ====== === LOANS TO TOTAL ASSETS 64% 67% === === LOANS TO TOTAL DEPOSITS 71% 75% === ===
Approximately $3,800,000 of real estate loans were secured by 1-4 family housing at December 31, 1997 and approximately $533,000 of outstanding commercial loans were for agricultural purposes or secured by farmland. The majority of consumer loans were collateralized at December 31, 1997. Unfunded lines of credit were not significant. SOURCES OF FUNDS Comparison of December 31, 1997 to September 30, 1997 DEPOSITS FSB's core deposits include demand deposits, regular savings accounts and certificates of deposit of less than $100,000. FSB relies on core deposits as the major source of funding for earning assets. Core deposits increased 3%, or $370,000 to $11,986,000 at December 31, 1997 compared to $11,616,000 at September 30, 1997. Non-interest bearing demand deposits, a component of core deposits, decreased 4% or $72,000 for the three months ended December 31, 1997. Certificates of deposits of $100,000 or more at December 31, 1997 and September 30, 1997 totaled $2,187,000 and $2,487,000 respectively; a decrease of $300,000. Deposits in this category are generally considered more subject to periodic withdrawals than core deposits, and as such are generally not used as a permanent source of funding for loans. OTHER FUNDING SOURCES FSB's remaining funding source consists of federal funds purchased from other financial institutions, generally on an overnight basis. These borrowings represent an important source of temporary short-term liquidity for FSB. FSB had no borrowings at December 31, 1997. CAPITAL RESOURCES Shareholders' Equity at December 31, 1997 declined $5,000 from year-end, to $1,475,000. This decline resulted from a net loss in first fiscal quarter of 1998. The percentage of Shareholders' Equity to total assets was 9.4% at December 31, 1997 and September 30, 1997. -105- Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide a definition of core capital (Tier 1 capital) and assign a measure of risk to various categories of assets (risk-weighted assets). These guidelines require minimum levels of capital to be maintained in proportion to total risk-weighted assets and off-balance sheet exposures such as unfunded loan commitments. The bank's Tier 1 capital consists solely of shareholders' equity. Tier 2 capital is defined as the allowance for loan losses up to 1.25% of gross risk-weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 requires federal regulatory agencies to define capital tiers. These tiers are: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. To be considered well-capitalized, an institution must achieve a Tier 2 Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0%, a leverage ratio of at least 5.0%, and not be under a capital directive order. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. FSB's Tier 1, Total Capital and leverage ratios at December 31, 1997 were 15.8%, 15.0% and 9.2%, respectively. All ratios exceeded minimum regulatory ratios for the definition of a well-capitalized institution. At December 31, 1997 management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material impact on the Company's liquidity, capital resources or operations. RISK MANAGEMENT LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with FSB's CEO and Vice President. These officers have the authority to extend credit based on guidelines approved by FSB's Board of Directors. In the opinion of the Board, these officers possess the knowledge, judgement and experience necessary to administer lending activities of FSB. FSB's Board of Directors holds regular meetings and special meetings, as needed, to review and approve lending activities and to review credit applications which, according to FSB's loan policy, require Board approval. The Board reviews underperforming assets and watch list loans at quarterly intervals in order to monitor credit quality. The Board approves all charge-offs to the allowance for loan losses. Loans are charged-off when, in management's opinion, they are deemed uncollectible. Underperforming assets consist of: a) non-accrual loans; b) accruing loans past due greater than 90 days; and c) restructured loans, which have been renegotiated to provide a reduction or deferral in interest and/or principal due to the impaired financial condition of the borrower. FSB's underperforming assets totaled $127,000 and $117,000 or 1.26% and 1.11% of total loans, at December 31, 1997 and September 30, 1997, respectively. The Board of Directors formally evaluates the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is based upon reviews of specific loans, loan categories, and historical loss experience, as well as current and projected conditions. FSB's provision to the Allowance for Loan Losses was $4,000 in the first fiscal quarter of 1998. During this period, FSB recorded net charge-offs against the Allowance for Loan Losses totaling $32,000. The Allowance for Loan Losses totaled $80,000 and $103,000 or 0.80% and 0.98% of total loans, at December 31, 1997 and September 30, 1997 respectively. -106- LIQUIDITY, INTEREST RATE RISK MANAGEMENT AND INFLATION Management monitors the bank's liquidity requirements on a daily basis. Liquidity needs arise from loan demand and deposit withdrawals. The objective of liquidity management is to match available funds with anticipated funding needs. The investment portfolio is managed to help meet FSB's liquidity needs, as well as mitigate interest rate risk in FSB's loan and deposit portfolios. Interest rate risk management seeks to minimize the risks to net interest income associated with the effect of potential changes in interest rates. These risks are mitigated by the appropriate positioning of interest-earning assets to interest-bearing liabilities, based on the periods in which they mature or reprice. In general, a position wherein interest sensitive assets are greater than interest sensitive liabilities in a given period is appropriate during periods of rising interest rates. In general, the inverse is true during periods of declining interest rates. Since virtually all of FSB's assets and liabilities are monetary in nature, changes in interest rates may have a significant impact on the bank's performance. However, interest rates do not necessarily move in concert with, or in the same magnitude as, the general inflation rate or prices of other goods and services. Management and the Board of Directors monitor FSB's interest rate risk position on a quarterly basis. An analysis of the bank's interest rate sensitivity position at December 31, 1997 is provided in the table below:
INTEREST RATE SENSITIVITY As of December 31, 1997 (dollars in thousands) Under 1 - 5 Beyond 1 Year Years 5 Yrs Total ------ ------ ------ ------ INTEREST EARNING ASSETS: Federal Funds Sold $ 2,215 $ -- $ -- $ 2,215 Investment Securities 1,284 312 564 2,160 Loans (net of unearned) 1,898 6,269 1,913 10,080 ----- ----- ----- ------ RATE SENSITIVE ASSETS (RSA) $ 5,397 $6,581 $ 2,477 $14,455 ----- ----- ----- ------ INTEREST BEARING LIABILITIES: Interest Bearing Demand 1,961 $ -- $ -- $ 1,961 Savings and MMDA 253 1,932 -- 2,185 Time Deposits 4,807 3,505 -- 8,312 ----- ----- ----- ------- RATE SENSITIVE LIABILITIES (RSL) $ 7,021 $ 5,437 $ -- $12,458 ----- ----- --- ------ INTEREST SENSITIVITY GAP: Current $(1,624) $ 1,144 $ 2,477 $ 1,997 ===== ===== ===== ======= Cumulative $(1,624) $( 480) $ 1,997 ===== === ===== Cumulative RSA / RSL 77% 96% 116% === === ====
-107- At September 30, 1997 the loan portfolio was comprised of real estate loans (43%), consumer loans (41%), and commercial loans (16%). Deferred loan costs were negligible. These relative percentages did not change significantly from September 30, 1996 balances. The percentage of loans to total assets and loans to deposits at September 30, 1997 declined from the prior year-end, due to an increase in cash equivalents and total deposits. Total Loans As of September 30, (dollars in thousands) % to % to 1997 Total 1996 Total ---- ----- ---- ----- Commercia $1,662 16% $1,784 17% Real Estate 4,55 43 4,222 41 Consumer 4,28 41 4,366 42 ------- -- ----- -- 10,497 100 10,372 100 Deferred Loan Costs 23 -- 22 -- -- -- -- ---- TOTAL LOANS $10,520 100% $10,394 100% ====== === ====== === LOANS TO TOTAL ASSETS 67% 71% === === LOANS TO TOTAL DEPOSITS 75% 82% === Approximately $3,800,000 of real estate loans were secured by 1-4 family housing at September 30, 1997 and approximately $985,000 of outstanding commercial loans were for agricultural purposes or secured by farmland. The majority of consumer loans were collateralized at year-end. Unfunded lines of credit were not significant. SOURCES OF FUNDS Comparison of September 30, 1997 to 1996 DEPOSITS FSB's core deposits include demand deposits, regular savings accounts and certificates of deposit of less than $100,000. FSB relies on core deposits as the major source of funding for earning assets. Core deposits increased 6%, or $696,000 to $11,616,000 at September 30, 1997 compared to $10,920,000 at September 30, 1996. Non-interest bearing demand deposits, a component of core deposits, increased 2% or $24,000 for the year ended September 30, 1997. -108- Certificates of deposits of $100,000 or more totaled $2,487,000 and $1,678,000 at September 30, 1997 and 1996, respectively; an increase of $810,000. Deposits in this category are generally considered more subject to periodic withdrawals than core deposits, and as such are generally not used as a permanent source of funding for loans. OTHER FUNDING SOURCES FSB's remaining funding source consists of federal funds purchased from other financial institutions, generally on an overnight basis. These borrowings represent an important source of temporary short-term liquidity for FSB. FSB had no borrowings at September 30, 1997. CAPITAL RESOURCES Shareholders' Equity at September 30, 1997 declined $56,000 from the previous year-end, to $1,481,000. This decline resulted primarily from a net loss in 1997 of $41,000 following a net loss in 1996 of $16,000. Shareholders' Equity as a percentage of total assets declined to 9.4% at September 30, 1997 from 10.5% at September 30, 1996. FSB paid cash dividends of approximately $12,000 in both 1997 and 1996. Due to FSB's recent net losses and certain Indiana state banking regulations, FSB is required to obtain prior regulatory approval before payment of future dividends. Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide a definition of core capital (Tier 1 capital) and assign a measure of risk to various categories of assets (risk-weighted assets). These guidelines require minimum levels of capital to be maintained in proportion to total risk-weighted assets and off-balance sheet exposures such as unfunded loan commitments. The bank's Tier 1 capital consists solely of shareholders' equity. Tier 2 capital is defined as the allowance for loan losses up to 1.25% of gross risk-weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. -109- In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 requires federal regulatory agencies to define capital tiers. These tiers are: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. To be considered well-capitalized, an institution must achieve a Tier 2 Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0%, a leverage ratio of at least 5.0%, and not be under a capital directive order. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. FSB's Tier 1, Total Capital and leverage ratios at September 30, 1997 were 15.5%, 14.4% and 9.3%, respectively. All ratios exceeded minimum regulatory ratios for the definition of a well-capitalized institution. At September 30, 1997 management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material impact on the Company's liquidity, capital resources or operations. RISK MANAGEMENT LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with FSB's CEO and Vice President. These officers have the authority to extend credit based on guidelines approved by FSB's Board of Directors. In the opinion of the Board, these officers possess the knowledge, judgement and experience necessary to administer lending activities of FSB. FSB's Board of Directors holds regular meetings and special meetings, as needed, to review and approve lending activities and to review credit applications which, according to the bank's loan policy, require Board approval. The Board reviews underperforming assets and watch list loans at quarterly intervals in order to monitor credit quality. The Board approves all charge-offs to the allowance for loan losses. Loans are charged-off when, in management's opinion, they are deemed uncollectible. -110- Underperforming assets consist of: a) non-accrual loans; b) accruing loans past due greater than 90 days; and c) restructured loans, which have been renegotiated to provide a reduction or deferral in interest and/or principal due to the impaired financial condition of the borrower. FSB's underperforming assets totaled $117,000 and $54,000 or 1.11% and 0.51% of total loans, at September 30, 1997 and 1996, respectively. The Board of Directors formally evaluates the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is based upon reviews of specific loans, loan categories, and historical loss experience, as well as current and projected conditions. FSB's provision to the Allowance for Loan Losses was $68,000 in 1997 and $58,000 in 1996. Net charge-offs reduced the Allowance for Loan Losses by $48,000 in 1997 and $18,000 in 1996. The balance of the Allowance for Loan Losses totaled $103,000 and $83,000 or 0.98% and 0.80% of total loans, at September 30, 1997 and 1996, respectively. LIQUIDITY, INTEREST RATE RISK MANAGEMENT AND INFLATION Management monitors the bank's liquidity requirements on a daily basis. Liquidity needs arise from loan demand and deposit withdrawals. The objective of liquidity management is to match available funds with anticipated funding needs. The investment portfolio is managed to help meet FSB's liquidity needs, as well as mitigate interest rate risk in FSB's loan and deposit portfolios. Interest rate risk management seeks to minimize the risks to net interest income associated with the effect of potential changes in interest rates. These risks are mitigated by the appropriate positioning of interest-earning assets to interest-bearing liabilities, based on the periods in which they mature or reprice. In general, a position wherein interest sensitive assets are greater than interest sensitive liabilities in a given period is appropriate during periods of rising interest rates. In general, the inverse is true during periods of declining interest rates. Since virtually all of FSB's assets and liabilities are monetary in nature, changes in interest rates may have a significant impact on the bank's performance. However, interest rates do not necessarily move in concert with, or in the same magnitude as, the general inflation rate or prices of other goods and services. -111- Management and the Board of Directors monitor FSB's interest rate risk position on a quarterly basis. An analysis of the bank's interest rate sensitivity position at September 30, 1997 is provided in the table below:
INTEREST RATE SENSITIVITY As of September 30, 1997 (dollars in thousands) Under 1 - 5 Beyond 1 Year Years 5 Yrs Total ------ ------ ------ ------ INTEREST EARNING ASSETS: Federal Funds Sold $1,275 $ -- $ -- $ 1,275 Interest Bearing Deposits 50 -- -- 50 Investment Securities 1,489 409 727 2,625 Loans (net of unearned) 2,071 5,710 2,739 10,520 ----- ----- ----- ------ RATE SENSITIVE ASSETS (RSA) $4,885 $ 6,119 $ 3,466 $14,470 ----- ----- ----- ------ INTEREST BEARING LIABILITIES: Interest Bearing Demand $1,149 $ -- $ -- $ 1,149 Savings and MMDA 200 1,961 -- 2,161 Time Deposits 4,732 4,276 -- 9,008 ----- ----- ----- ------ RATE SENSITIVE LIABILITIES (RSL) $6,081 $ 6,237 $ -- $12,318 ----- ----- ------ INTEREST SENSITIVITY GAP: Current $(1,196) $ (118) $ 3,466 $ 2,152 ===== ==== ===== ====== Cumulative $(1,196) $(1,314) $ 2,152 ===== ===== ===== Cumulative RSA / RSL 80% 90% 117% === === ====
-112- COMPARISON OF FSB COMMON STOCK AND GERMAN AMERICAN COMMON STOCK GENERAL The FSB Common Stock is similar in many respects to the German American Common Stock to be issued pursuant to the Merger. Certain differences exist, however, because the Articles of Incorporation of FSB differ from the Articles of Incorporation of German American. The following is a comparison of FSB Common Stock with German American Common Stock and a description of certain material differences between them. NUMBER OF SHARES AUTHORIZED BUT UNISSUED The Articles of Incorporation of FSB authorize the issuance of 3,000,000 shares of FSB Common Stock, without par value. As of the date hereof, 48,916 of which are issued and outstanding. The Articles of Incorporation of German American authorize the issuance of 20,000,000 shares of Common Stock, $10.00 par value, $1 stated value, of which, upon consummation of the FSB Merger, _________ shares of German American Common Stock are expected to be issued and outstanding (assuming no shareholders of FSB exercise dissenters' rights and the minimum number of shares specified by the FSB Agreement is issued in the FSB Merger). The remaining shares of German American Common Stock will remain authorized but unissued and may be issued by the Board of Directors of German American without further shareholder approval for any proper corporate purpose, including possible issuance in connection with future mergers and acquisitions. Such shares could be issued either to existing shareholders of German American or to persons who are not then shareholders of German American. The Board of Directors has no present plans to issue the shares of German American Common Stock that will be authorized but unissued after the FSB Merger, other than pursuant to the Company's established annual stock dividend program. PREFERRED STOCK The Articles of Incorporation of FSB and the Articles of Incorporation of German American both provide for the issuance of preferred stock. The Articles of Incorporation of FSB authorize the Board of Directors to issue 2,000,000 shares of Preferred Stock, without par value. The Articles of Incorporation of German American authorize the Board of Directors to issue 500,000 shares of Preferred Stock, $10.00 par value. The Articles of Incorporation of FSB and the Articles of Incorporation of German American give the respective Boards of Directors the authority to establish the relative rights, preferences, restrictions and limitations of rights of the Preferred Stock. The German American Board of Directors presently has no plans to issue any of the authorized shares of Preferred Stock. DIVIDEND RIGHTS Holders of FSB Common Stock and German American Common Stock each have the right to receive, pro rata, such dividends as are declared by the Board of Directors out of funds legally available. FSB's and German American's ability to pay dividends is dependent upon their receipt of dividends from their respective bank subsidiaries. Legal and regulatory restrictions limit the amount of dividends that may be paid by banks to their shareholders in order to assure that banks maintain adequate capital. FSB's and German American's ability to -113- pay dividends is also restricted by the IBCL, to which FSB and German American are subject. The IBCL prohibits the payment of dividends if, after giving effect to the payment, the corporation would not be able to pay its debts as they come due in the usual course of business or the corporation's total assets would be less than the sum of its liabilities plus preferential rights of shareholders payable upon dissolution. VOTING RIGHTS Each holder of FSB Common Stock and German American Common Stock is entitled to one vote per share on most matters submitted to a vote of shareholders. The shareholders of German American and FSB do not have cumulative voting rights on the election of Directors, which means that the Directors standing for election at a particular meeting can be elected by a simple plurality of the votes cast. The affirmative vote of the holders of a majority of the shares entitled to vote is sufficient to approve most matters submitted to a shareholder vote of either corporation. Under the IBCL, a merger, consolidation, or sale of substantially all of a corporation's assets must be approved by the holders of a majority of the outstanding shares of FSB Common Stock. The Articles of Incorporation of German American and FSB in addition contain certain anti-takeover provisions which require a supermajority vote of shareholders in certain circumstances. LIQUIDATION RIGHTS In the event of liquidation German American, the holders of common stock will be entitled to receive, pro rata, all of the assets remaining for distribution to shareholders. ABSENCE OF PREEMPTIVE RIGHTS Both the holders of FSB Common Stock and German American Common Stock have no preemptive rights to purchase their proportionate share of any future offering of common stock. ANTI-TAKEOVER PROVISIONS The Articles of Incorporation of German American contain provisions that might deter the takeover or change-in-control of German American. See "DESCRIPTION OF GERMAN AMERICAN CAPITAL STOCK--Anti-Takeover Provisions" for a description of the anti-takeover provisions in German American's Articles of Incorporation. LEGAL MATTERS The due authorization and valid issuance of the shares of German American Common Stock pursuant to the Mergers, and the intended federal income tax consequences of the Mergers, will be passed upon by Leagre Chandler & Millard. EXPERTS The consolidated balance sheets of CSB as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994 have been audited by Gaither Rutherford & Co., LLP, independent certified public accountants, -114- and their reports thereon, which appear elsewhere herein, have been included therein and herein in reliance upon their reports given upon their authority as experts in accounting and auditing. The consolidated balance sheets of FSB as of September 30, 1997 and the related consolidated statements of income, changes in shareholders equity and cash flows for the year then ended, have been audited by Crowe, Chizek and Company LLP, independent certified public accountants, and their report thereon, which appears elsewhere herein has been included herein in reliance upon their report given upon their authority as experts in accounting and auditing. The historical and supplemental consolidated balance sheets of German American as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1996, 1995, and 1994 have been audited by Crowe, Chizek and Company LLP, independent certified public accountants, and their reports thereon, which appear in the documents and reports incorporated by reference herein, have been incorporated by reference herein in reliance upon their reports given upon their authority as experts in accounting and auditing. The opinions of Olive Corporate Finance, LLC, ("Olive"), and the information provided by Olive under "THE MERGERS -- Opinion of Financial Adviser to CSB," and "THE MERGERS -- Opinion of Financial Advisor to FSB" have been included herein in reliance upon its authority as experts in valuation of financial institutions and their securities in connection with mergers and acquisitions. OTHER MATTERS The Boards of Directors of CSB and FSB do not know of any other matters that may come before the Special Meetings of Shareholders. -115- INDEX TO CSB FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS: Page No. Independent Auditors' Report 117 Consolidated Balance Sheets as of December 31, 1996 and 1995 118 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 119 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 120 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 121 Summary of Significant Accounting Policies 123 Notes to Consolidated Financial Statements 126 UNAUDITED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 138 Consolidated Statements of Income for the Nine Months Ended September 30, 1997 and 1996 139 Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 1997 and 1996 140 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 141 Notes to Consolidated Financial Statements 142 -116- Independent Auditors' Report Board of Directors CSB Bancorp We have audited the accompanying consolidated balance sheets of CSB Bancorp and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSB Bancorp and Subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 14 to the financial statements, on January 1, 1995, the Corporation changed its method of accounting for benefits for retired employees to conform to the requirements of Statement of Financial Accounting Standards No. 106, "Employers Accounting for Post-retirement Benefits Other Than Pensions." /s/ GAITHER RUTHERFORD & CO., LLP GAITHER RUTHERFORD & CO., LLP Evansville, Indiana February 7, 1997 -117-
CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED BALANCE SHEETS December 31, 1996 1995 ----------------------- --------------------- Assets Cash and Cash Equivalents Cash and due from banks (Note 1) $ 3 842 531 2 027 160 Federal funds sold 12 575 000 7 200 000 ---------------------- --------------------- Total Cash and Cash Equivalents 16 417 531 9 227 160 Interest-Bearing Deposits 1 199 000 1 539 000 Securities Available for Sale (Note 2) 603 781 1 143 781 Securities Held to Maturity (Note 2) 11 214 277 10 356 338 Net Loans, net of allowance for loan losses of $616,081 in 1996 and $659,186 in 1995 (Notes 3 and 4) 42 629 439 43 154 421 Premises and Equipment - Net (Note 5) 735 135 665 181 Accrued Interest Receivable 917 759 983 496 Other Assets 629 424 804 850 ----------------------- --------------------- $ 74 346 346 67 874 227 ======================= ===================== Liabilities and Stockholders' Equity Deposits (Note 6) Noninterest-bearing $ 6 748 637 4 820 142 Interest-bearing 57 598 502 53 956 158 ----------------------- --------------------- Total Deposits 64 347 139 58 776 300 Securities Sold under Agreements to Repurchase (Note 7) 560 414 -- Accrued Interest and Other Liabilities 572 041 502 138 ----------------------- --------------------- Total Liabilities 65 479 594 59 278 438 ----------------------- --------------------- Commitments, Contingencies and Credit Risk (Note 11) Stockholders' Equity Common stock, without par value (stated value $25.00 per share) authorized 160,000; issued 160,000 4 000 000 4 000 000 Retained earnings (Note 12) 4 866 533 4 579 587 Securities valuation 219 16 202 ----------------------- --------------------- Total Stockholders' Equity 8 866 752 8 595 789 $ 74 346 346 67 874 227 ======================= ===================== See accompanying summary of accounting policies and notes to consolidated financial statements.
-118-
CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1996 1995 1994 ------------------ ------------------ ------------------ Interest Income Interest and fees on loans $ 4 433 907 4 202 612 3 606 013 Interest on investment securities: U.S. Treasury and agencies 522 052 437 827 441 532 State and municipal 192 368 185 284 195 715 Interest on federal funds sold and interest-bearing deposits 504 110 395 865 384 504 ----------------- ------------------ ------------------ 5 652 437 5 221 588 4 627 764 ----------------- ------------------ ------------------ Interest Expense Interest on deposits 2 785 328 2 498 937 2 116 401 Interest on borrowings 13 814 -- -- ------------------ ------------------ ------------------ 2 799 142 2 498 937 2 116 401 ------------------ ------------------ ------------------ Net Interest Income 2 853 295 2 722 651 2 511 363 Provision for Loan Losses (Note 4) 135 000 48 000 25 000 ------------------ ------------------ ------------------ Net interest income after provision for loan losses 2 718 295 2 674 651 2 486 363 ------------------ ------------------ ------------------ Noninterest Income Service fees 148 510 146 237 136 115 Other operating income 101 985 124 041 166 543 ------------------ ------------------ ------------------ 250 495 270 278 302 658 ------------------ ------------------ ------------------ Noninterest Expenses Salaries and employee benefits 931 681 935 824 920 924 Occupancy expense 248 148 243 281 250 899 Other operating expenses 718 015 709 542 652 597 ------------------ ------------------ ------------------ 1 897 844 1 888 647 1 824 420 ------------------ ------------------ ------------------ Income Before Taxes on Income 1 070 946 1 056 282 964 601 Taxes on Income (Note 9) 344 000 338 500 305 000 ------------------ ------------------ ------------------ Net Income $ 726 946 $ 717 782 $ 659 601 ------------------ ------------------ ------------------ Earnings Per Common Share (Note 10) $ 4.54 $ 4.49 $ 4.12 ------------------ ------------------ ------------------ See accompanying summary of accounting policies and notes to consolidated financial statements.
-119-
CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Retained Securities Shares Amount Earnings Valuation --------------- ------------------ ------------------ -------------- Balance, January 1, 1994 160 000 4 000 000 3 938 204 -- Net income for the year -- -- 659 601 -- Dividends - $2.10 per share -- -- (336 000) -- --------------- ------------------ ------------------ -------------- Balance, December 31, 1994 160 000 4 000 000 4 261 805 -- Net income for the year -- -- 717 782 -- Dividends - $2.50 per share -- -- (400 000) -- Net unrealized gains -- -- -- 16 202 --------------- ------------------ ------------------ -------------- Balance, December 31, 1995 160 000 4 000 000 4 579 587 16 202 Net income for the year -- -- 726 946 -- Dividends - $2.75 per share -- -- (440 000) -- Net unrealized losses -- -- -- (15 983) --------------- ------------------ ------------------ -------------- Balance, December 31, 1996 160 000 4 000 000 4 866 533 219 =============== ================== ================== ============== See accompanying summary of accounting policies and notes to consolidated financial statements
-120-
CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996 1995 1994 ----------------- ----------------- ----------------- Cash Flows From Operating Activities Net income $ 726 946 $ 717 782 $ 659 601 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 135 000 48 000 25 000 Depreciation and amortization 99 360 89 500 97 161 Deferred income tax (21 109) (15 900) (7 500) Amortization and accretion of security premiums and discounts 2 786 3 486 5 419 Write-down of foreclosed property -- -- 986 (Gain) loss on sale of assets -- (2 135) (48 494) Decrease (increase) in: Accrued interest receivable 65 737 (71 281) (94 317) Other assets (174 117) 7 168 19 615 Increase (decrease) in accrued interest payable and other liabilities 69 903 132 007 10 309 ----------------- ----------------- ----------------- Net Cash Provided by Operating Activities 904 506 908 627 667 780 ----------------- ----------------- ----------------- Cash Flows From Investing Activities Proceeds from calls and maturities of investment securities 7 924 594 3 224 477 6 507 852 Purchase of investment securities (8 025 742) (2 212 363) (8 242 141) Proceeds from sales and maturities of interest-bearing deposits 580 000 999 000 -- Purchase of interest-bearing deposits (240 000) (899 000) (499 000) Net decrease (increase) in loans 524 982 (1 207 080) (2 221 718) Purchases of premises and equipment (169 222) (48 099) (122 083) Other assets -- 3 975 51 766 ----------------- ----------------- ----------------- Net Cash Provided (Absorbed) by Investing Activities 594 612 (139 090) (4 525 324) ----------------- ----------------- ----------------- Cash Flows From Financing Activities Net increase in deposits 5 570 839 3 708 194 (182 914) Securities sold under agreements to repurchase 560 414 -- -- Cash dividends paid (440 000) (400 000) (336 000) ----------------- ----------------- ----------------- Net Cash Provided(Absorbed) by Financing Activities 5 691 253 3 308 194 (518 914) ----------------- ----------------- ----------------- Net Increase (Decrease) in Cash and Cash Equivalents 7 190 371 4 077 731 (4 376 458) Cash and Cash Equivalents, at beginning of year 9 227 160 5 149 429 9 525 887 ----------------- ----------------- ----------------- Cash and Cash Equivalents, at end of year $ 16 417 531 9 227 160 5 149 429 ================= ================= ================= See accompanying summary of accounting policies -121- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG and notes to consolidated financial statements.
-122- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG SUMMARY OF ACCOUNTING POLICIES Nature of Operations and Customer Concentration The Corporation is a one-bank holding company which conducts no direct business activities. All business activities are performed by its wholly-owned subsidiary, Citizens State Bank of Petersburg. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and industries located in its service area. It maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles and personal expenditures, and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit vehicles, including checking, savings, individual retirement accounts and certificates of deposit. The principal markets for the Bank's financial services are the Indiana community in which the Bank is located and the areas immediately surrounding these communities. The Bank serves these markets through two offices located in Petersburg. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiary. All significant intercompany accounts and transactions are eliminated. Cash and Cash Equivalents Cash and cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Cash payments of interest amounted to $2,819,750, $2,447,875 and $2,106,092 for the years ended December 31, 1996, 1995 and 1994, respectively. Income tax payments of $344,800, $326,212 and $295,433 were made in 1996, 1995 and 1994, respectively. Securities Held to Maturity Securities for which management has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities Available for Sale Available for sale securities consist of securities not classified as held to maturity securities. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific identification method. -123- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG SUMMARY OF ACCOUNTING POLICIES Premises, Equipment and Depreciation Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to operating expense over the useful lives of the assets, principally by the straight-line method. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Foreclosed Properties Real estate properties acquired as a result of foreclosure are to be sold and are initially recorded at fair value at the date of the foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. Interest Income on Loans Interest on loans is accrued and credited to income based on the principal amount outstanding. For impaired loans that are on non-accrual status, cash payments received are generally applied to reduce the outstanding principal balance. However, all or a portion of a cash payment received on a non-accrual loan may be recognized as interest income to the extent allowed by the loan contract, assuming management expects to fully collect the remaining principal balance of the loan. Advertising Costs Advertising costs are expensed as incurred. Advertising costs amounted to $47,610, $45,568 and $44,805, respectively, for the years ended December 31, 1996, 1995 and 1994. Allowance for Loan Losses The allowance for loan losses is provided to absorb future loan losses, net of recoveries. The allowance for loan losses is based on estimated losses. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Additions to the allowance are based upon past loan loss experience, the character of the loan portfolio, current economic conditions and other factors which, in management's judgment, should be considered in estimating possible loan losses. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting for Creditors for Impairment of a Loan - Income Recognition and Disclosures (collectively referred to as "SFAS No. 114"). Under SFAS No. 114, a loan is considered to be impaired when it is probable that the Corporation will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. The allowance for loan losses related to loans identified as impaired is primarily based on the excess of the loan's current outstanding principal balance over the estimated fair market value of the related collateral. For impaired loans that are not collateral dependent, the allowance for loan losses is recorded at the amount by which the outstanding recorded principal balance exceeds the current best estimate of the future cash flows on the loan, discounted at the loan's effective interest rate. Prior to 1996, the allowance for loan losses for loans which would have qualified as impaired under SFAS No. 114 was primarily based upon the estimated fair market value of the related collateral. The effect of adopting SFAS No. 114 was immaterial to the 1995 operating results of the Corporation. Prior financial statements have not been restated to apply the provisions of SFAS No. 114. -124- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG SUMMARY OF ACCOUNTING POLICIES Income Taxes Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." -125- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Restrictions on Cash and Due From Banks The Subsidiary Bank is required to maintain an average reserve balance on hand and with the Federal Reserve Bank. The amount of the required reserve balance at December 31, 1996, is approximately $363,000. 2. Debt and Equity Securities Debt and equity securities have been classified in the consolidated balance sheet according to management's intent. The carrying amount of securities and their approximate fair values at December 31 were as follows:
1996 Securities available for sale Securities held to maturity ------------------------------------------- -------------------------------------- U.S. State and Equity Treasury Municipal Other Securities and Agency Securities Securities Securities ---------------- ---------------- ---------------- ---------------- Amortized cost $ 403 427 200 135 4 064 422 7 149 855 Gross unrealized gains -- 521 52 861 15 232 Gross unrealized losses -- 302 -- 4 451 ---------------- ---------------- ---------------- ---------------- Fair value $ 403 427 200 354 4 117 283 7 160 636 ================ ================ ================ ================ 1995 Securities available for sale Securities held to maturity ------------------------------------------- -------------------------------------- U.S. State and Equity Treasury Municipal Other Securities and Agency Securities Securities Securities ---------------- ---------------- ---------------- ---------------- Amortized cost $ 331 000 796 579 3 512 042 6 844 296 Gross unrealized gains -- 16 636 55 551 9 495 Gross unrealized losses -- 434 2 893 114 ---------------- ---------------- ---------------- ---------------- Fair value $ 331 000 812 781 3 564 700 6 853 677 ================ ================ ================ ================ Equity securities consist of a restricted security, Federal Home Loan Bank stock.
-126- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The scheduled maturities of debt securities held to maturity and debt securities available for sale at December 31, 1996, was as follows:
1996 Securities available for sale Securities held to maturity ------------------------------------------- -------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------------- ---------------- ---------------- ---------------- Due in one year or less $ -- $ -- $ 1 327 148 1 331 595 Due from one year to five years 200 135 200 354 6 006 799 6 041 383 Due from five to ten years -- -- 1 693 518 1 639 984 Due after ten years -- -- 2 186 812 2 264 957 ---------------- ---------------- ---------------- ---------------- $ 200 135 200 354 11 214 277 11 277 919 ================ ================ ================ ================
Securities, carried at approximately $200,000 at December 31, 1996 and 1995, were pledged to secure public deposits and for other purposes required or permitted by law. 3. Loans Loans consisted of the following at December 31:
1996 1995 ------------------- -------------------- Real estate $ 20 189 200 21 016 875 Commercial 12 131 751 12 109 586 Installment 11 734 484 11 554 953 Unearned interest income (809 915) (867 807) --------------------- -------------------- 43 245 520 43 813 607 Less allowance for loan losses (616 081) (659 186) --------------------- -------------------- Total $ 42 629$439 43 154 421 ===================== ====================
4. Allowance for Loan Losses The allowance for loan losses is based on estimated losses. In the opinion of management, the allowance for loan losses at December 31, 1996, was adequate to absorb anticipated loan losses that may be incurred in the collection of the present loan portfolio. It is at least reasonably possible that ultimate losses in the near term may vary materially from these estimates. -127- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity in the allowance for loan losses account was as follows for the years ended December 31:
1996 1995 ----------------- ----------------- Balance, at January 1 $ 659 186 723 407 Addition - provision charged to operations 135 000 48 000 ----------------- ----------------- 794 186 771 407 ----------------- ----------------- Deduction Charge-offs charged to allowance 198 546 181 668 Less recoveries 20 441 69 447 ----------------- ----------------- Net charge-offs 178 105 112 221 ----------------- ----------------- Balance, at December 31 $ 616 081 659 186 ================= ================= 5. Premises and Equipment Premises and equipment consisted of the following at December 31: 1996 1995 -------------------- ----------------- Land $ 137 992 137 992 Buildings and improvements 888 180 885 415 Furniture and equipment 961 522 795 065 -------------------- ----------------- 1 987 694 1 818 472 Less accumulated depreciation (1 252 559) (1 153 291) -------------------- ----------------- Net premises and equipment $ 735 135 665 181 ==================== ================= 6. Deposits Deposits consisted of the following at December 31: 1996 1995 -------------------- ------------------- -128- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Demand $ 6 748 637 4 820 142 NOW accounts 9 126 112 9 008 456 Savings accounts 4 261 907 4 307 811 Certificates of deposit - $100,000 and over 10 243 477 7 976 043 Other certificates of deposit 33 967 006 32 663 848 -------------------- ------------------- Total deposits $ 64 347 139 58 776 300 ==================== ===================
7. Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase generally mature within one to ten days from the transaction date. 8. Profit-Sharing Plan The Subsidiary Bank has a trusteed retirement profit-sharing plan that was established in 1995 covering substantially all employees. Contributions are based upon a percentage of salaries. Contributions to the plan for 1996 and 1995 were approximately $21,500 and $17,300, respectively. 9. Taxes on Income Significant components of the provision for income taxes in the consolidated statements of income are as follows:
1996 1995 1994 -------------- -------------- -------------- Current Federal $ 264 209 $ 255 500 $ 224 500 State 100 900 98 900 88 000 -------------- -------------- -------------- 365 109 354 400 312 500 Deferred Federal (21 109) (15 900) (7 500) -------------- -------------- -------------- Total taxes on income $ 344 000 $ 338 500 $ 305 000 ============== ============== ============== Significant components of deferred tax liabilities and assets consisted of the following at December 31: ============== ============== ============== 1996 1995 1994 -------------- -------------- -------------- Deferred tax liabilities: Depreciation $ 117 500 $ 120 600 $ 129 250 Investment security accretion 6 700 7 600 4 000 -------------- -------------- -------------- -129- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------- -------------- -------------- Total deferred tax liabilities 124 200 128 200 133 250 -------------- -------------- -------------- Deferred tax assets: Allowance for loan losses (137 100) (148 350) (170 500) Employee benefit plans (82 050) (55 000) (22 250) Other (1 309) -- -- -------------- -------------- -------------- Total deferrtax assets (220 459) (203 350) (192 750) -------------- -------------- -------------- Net deferred tax asset $ (96 259) (75 150) (59 500) ============== ============== ==============
The reconciliation of income tax computed at the federal statutory rate (34 percent) to income tax expense is as follows:
1996 Amount Percent -------------------- -------------------- Income tax at statutory rate $ 364 000 34.0 Increase (decrease) resulting from: Tax exempt interest income (94 000) (8.8) State taxes, net of federal income tax benefit 66 600 6.2 Other - net 7 400 .7 -------------------- -------------------- Total taxes on income $ 344 000 32.1 ==================== ==================== 1995 Amount Percent -------------------- -------------------- Income tax at statutory rate $ 359 000 34.0 Increase (decrease) resulting from: Tax exempt interest income (52 000) (4.6) State taxes, net of federal income tax benefit 65 000 5.7 Other - net (33 500) (3.0) -------------------- -------------------- Total taxes on income $ 338 500 32.1 ==================== ==================== 1994 Amount Percent -------------------- -------------------- Income tax at statutory rate $ 328 000 34.0
-130- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Increase (decrease) resulting from: Tax exempt interest income (55 000) (5.7) State taxes, net of federal income tax benefit 58 000 6.0 Other - net (26 000) (2.7) -------------------- -------------------- Total taxes on income $ 305 000 31.6 ==================== ====================
10. Earnings per Common Share Earnings per common share was computed by dividing net income by the weighted average number of common shares outstanding during the year (160,000 in all three years). 11. Commitments, Contingencies and Credit Risk In the normal course of business, the Subsidiary Bank has outstanding commitments and contingent liabilities, such as pending legal actions and commitments to extend credit, which are not reflected in the financial statements. Management does not expect any material losses to result from these transactions. Loan commitments and outstanding letters of credit aggregated approximately $2,038,000 at December 31, 1996. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Subsidiary Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Subsidiary Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. 12. Restrictions on Transfer From Subsidiary The Corporation's subsidiary, Citizens State Bank of Petersburg, is subject to the provisions of the Indiana Financial Institutions Act. The Act provides that the Subsidiary Bank, generally, may not pay cash dividends to the Corporation in excess of its undivided profits, as defined. 13. Related Party Transactions The Subsidiary Bank has had, and expects to have in the future, transactions in the ordinary course of business with directors, officers, employees and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others, and not involving more than the normal risk of collectibility or presenting other unfavorable features. At December 31, 1996 and 1995, certain employees, officers, directors and affiliates were indebted to the Subsidiary Bank in the aggregate amount of approximately $1,530,000 and $1,639,000, respectively. 14. Employee Benefit Plans -131- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Subsidiary Bank maintains a qualified defined benefit pension plan covering substantially all salaried and hourly employees. Benefits are based on years of service and employee compensation during employment. The Subsidiary Bank's funding policy is to contribute annually the amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the plan's funded status at December 31, 1996, 1995 and 1994:
1996 1995 1994 -------------- ------------ -------------- Actuarial Present Value of Benefit Obligations Accumulated benefit obligations Vested $ 84 144 $ 396 750 $ 365 468 Nonvested 1 079 1 213 3 256 -------------- ------------ -------------- Accumulated benefit obligation $ 485 223 $ 397 963 $ 368 724 ============== ============ ============== Projected benefit obligation $ 598 185 $ 519 146 $ 457 991 Plan assets at fair value (primarily listed stock, bonds and U.S. Government obligations) 432 656 387 570 422 735 -------------- ------------ -------------- Projected benefit obligation over plan assets 165 529 131 576 35 256 Unrecognized net asset 31 674 34 166 36 658 Unrecognized service cost (3 319) (3 533) (3 747) Unrecognized net gain (loss) (93 665) (92 925) (18 126) -------------- ------------ -------------- Accrued pension cost included in other liabilities $ 100 219 $ 69 284 $ 50 041 ============== ============ ==============
Net periodic pension cost includes the following components: -132- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995 1994 -------------- -------------- -------------- Service costs $ 22 878 $ 24 695 $ 23 004 Interest cost 40 627 37 750 33 559 Expected return on plan assets (34 612) (31 387) (34 828) Net amortization and deferral (854) (2 492) (2 492) -------------- -------------- -------------- Net periodic pension cost $ 28 039 $ 28 566 $ 19 243 ============== ============== ==============
The weighted average discount rate of 6.0 percent for 1996, 7.5 percent for 1995 and 8 percent for 1994, and a rate of increase in future compensation levels of 6.0 percent for 1996, 1995 and 1994 were used in determining the actuarial present value of the projected benefit obligation. The expected long-term rate of return on assets was 8.0 percent for 1996, 8.5 percent for 1995 and 8.5 percent for 1994. The Subsidiary Bank also provides certain medical, dental, life insurance and Medicare Part B reimbursement benefits for retired employees. Substantially all the Subsidiary Bank's employees hired prior to January 1, 1992, may become eligible for those benefits if they reach normal retirement age while working for the Subsidiary Bank. In 1995, the Corporation adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The effect of adopting the new rules increased 1995 net periodic post-retirement benefit cost for the above defined benefit plans by $80,700 and decreased 1995 net income by $53,200 ($.33 per share). The following table shows the plan's combined funded status reconciled with the amounts recognized in the Corporation's consolidated balance sheet:
1996 1995 -------------- -------------- Accumulated post-retirement benefit obligation: Retirees $ 449 647 $ 429 078 Fully eligible active plan participants 175 829 167 786 Other active plan participants 268 443 256 162 -------------- -------------- 893 919 853 026 Plan assets at fair value -- -- -------------- -------------- Accumulated Post-retirement benefit obligations in excess of plan assets 893 919 853 026 Unrecognized transition obligation 731 677 772 326 -------------- -------------- Accrued Post-retirement benefit cost $ 162 242 $ 80 700 ============== ==============
-133- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic post-retirement benefit cost included the following components: 1996 1995 -------------- -------------- Service cost $ 17 800 $ 17 309 Interest cost 59 675 60 867 Amortization of transition obligation over 20 years 40 649 40 649 -------------- -------------- Net periodic Post-retirement benefit cost $ 118 124 $ 118 825 ============== ==============
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., the health care cost trend rate) for the medical plan is 9.0 percent in both years and is assumed to decrease gradually to 4.5 percent in 2006 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated Post-retirement benefit obligation for the medical plan as of December 31, 1996 by $133,194 and the aggregate of the service and interest cost components of net periodic Post-retirement benefit cost for 1996 by $15,648. The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7.5 percent at December 31, 1996. 15. Regulatory Matters The Subsidiary Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Subsidiary Bank must meet specific capital guidelines that involve quantitative measures of the Subsidiary Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Subsidiary Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Subsidiary Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Subsidiary Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized the Subsidiary Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Subsidiary Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Subsidiary Bank's actual capital amounts and ratios are also presented in the table. -134- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ---------------------------------------------------------------------------------------- As of December 31, 1996 Amount % Amount % Amount % ------------- ----------- --------------- ----------- -------------- --------- Total Capital (to Risk-Weighted Assets) $ 9 359 500 22.75 $ 3 290 000 8.0 $ 4 112 500 10.0 Tier I Capital (to Risk-Weighted Assets) 8 844 200 21.50 1 645 000 4.0 2 467 500 6.0 Tier I Capital (to Average Assets) 8 844 200 12.0 2 957 000 4.0 3 695 800 5.0 As of December 31, 1995 Total Capital (to Risk-Weighted Assets) $ 9 154 000 22.91 $3 196 000 8.0 3 995 000 10.0 Tier I Capital (to Risk-Weighted Assets) 8 595 000 21.51 1 598 000 4.0 2 397 000 6.0 Tier I Capital (to Average Assets) 8 595 000 12.37 2 778 700 4.0 3 473 400 5.0
-135- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. CSB Bancorp (Parent Company Only) Financial Statements
Balance Sheets December 31, 1996 1995 --------------- ---------------- Assets Cash and equivalents $ 11 551 $ 43 170 Investment in Citizens State Bank of Petersburg 8 855 201 8 552 619 --------------- ---------------- Total Assets $ 8 866 752 8 595 789 =============== ================ Stockholders' Equity Common stock $ 4 000 000 4 000 000 Retained earnings 4 866 533 4 579 587 Securities valuation 219 16 202 --------------- ---------------- Total Stockholders' Equity 8 866 752 8 595 789 --------------- ---------------- Total Liabilities and Stockholders' Equity $ 8 866 752 8 595 789 =============== ================
Statements of Income Years ended December 31, 1996 1995 1994 -------------- ------------ ------------- Income Dividends from Citizens State Bank of Petersburg $ 440 000 $ 400 000 $ 336 000 Interest income -- 2 237 1 000 Expenses Other expenses 31 619 11 286 -- -------------- ------------ ------------- Income before equity in undistributed net income of Citizens State Bank of Petersburg 408 381 390 951 337 000 Equity in undistributed net income of Citizens State Bank of Petersburg 318 565 326 831 322 601 -------------- ------------ ------------- Net Income $ 726 946 $ 717 782 $ 659 601 ============== ============ =============
-136- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows Years ended December 31, 1996 1995 1994 -------------- ------------ ------------- Cash Flows From Operating Activities Cash dividends received $ 440 000 $ 400 000 $ 336 000 Cash paid to suppliers and employees (31 619) (11 286) -- Interest paid -- 2 237 1 000 -------------- ------------ ------------- Net Cash Provided by Operating Activities 408 381 390 951 337 000 -------------- ------------ ------------- Cash Flows From Financing Activities Cash dividends paid (440 000) (400 000) (336 000) -------------- ------------ ------------- Net Cash Absorbed by Financing Activities (440 000) (400 000) (336 000) -------------- ------------ ------------- Net Decrease in Cash and Cash Equivalents (31 619) (9 049) 1 000 Cash and Cash Equivalents, at beginning of year 43 170 52 219 11 219 -------------- ------------ ------------- Cash and Cash Equivalents, at end of year $ 11 551 $ 43 170 $ 12 219 ============== ============ ============= Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $ 726 946 $ 717 782 $ 659 601 -------------- ------------ ------------- Decrease (increase) in: Investment in Citizens State Bank of Petersburg (318 565) (326 831) (322 601) -------------- ------------ ------------- Net Cash Provided by Operating Activities $ 408 381 $ 390 951 $ 337 000 ============== ============ =============
-137- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED BALANCE SHEETS
September 30, 1997 December 31, (Unaudited) 1996 --------------------- --------------------- Assets Cash and Cash Equivalents Cash and due from banks $ 5 074 555 $ 3 842 531 Federal funds sold 5 675 000 12 575 000 --------------------- --------------------- Total Cash and Cash Equivalents 10 749 555 16 417 531 Interest-Bearing Deposits 2 598 000 1 199 000 Securities Available for Sale 1 229 653 603 781 Securities Held to Maturity 11 710 594 11 214 277 Net Loans, net of allowance for loan losses of $987,000 in 1997 and $616,081 in 1996 48 067 466 42 629 439 Premises and Equipment - Net 751 958 735 135 Accrued Interest Receivable 938 020 917 759 Other Assets 671 713 629 424 ------------------------------------------------ $ 76 716 959 $ 74 346 346 ===================== ===================== Liabilities and Stockholders' Equity Deposits Noninterest-bearing $ 6 787 121 $ 6 748 637 Interest-bearing 59 944 036 57 598 502 --------------------- --------------------- Total Deposits 66 731 157 64 347 139 Securities Sold Under Agreements to Repurchase 319 222 560 414 Accrued Interest and Other Liabilities 553 196 572 041 --------------------- --------------------- Total Liabilities 67 603 575 65 479 594 --------------------- --------------------- Commitments, Contingencies and Credit Risk Stockholders' Equity Common stock, without par value (stated value $25 per share) authorized 160,000; issued 160,000 4 000 000 4 000 000 Retained earnings 5 104 453 4 866 533 Securities valuation 8 931 219 --------------------- --------------------- Total Stockholders' Equity 9 113 384 8 866 752 --------------------- --------------------- $ 76 716 59 74 346 346 ===================== ===================== See accompanying notes to consolidated financial statements.
-138- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine months ended September 30, 1997 1996 ----------------- ---------------- Interest Income Interest and fees on loans $ 3 316 043 3 316 135 Interest on investment securities: U.S. treasury and agencies 281 233 199 689 State and municipal 191 468 138 249 Interest on federal funds sold and interest-bearing deposits 595 883 550 762 ----------------- ---------------- 4 384 627 4 204 835 ----------------- ---------------- Interest Expense Interest on deposits 2 178 373 2 065 791 Interest on borrowings 10 459 7 934 ----------------- ---------------- 2 188 832 2 073 725 ----------------- ---------------- Net Interest Income 2 195 795 2 131 110 Provision for Loan Losses 497 000 108 000 ----------------- ---------------- Net interest income after provision for loan losses 1 698 795 2 023 110 ----------------- ---------------- Noninterest Income Service fees 113 385 103 108 Other operating income 104 044 65 866 ----------------- ---------------- 217 429 168 974 ----------------- ---------------- Noninterest Expenses Salaries and employee benefits 645 544 671 398 Occupancy expense 74 044 66 685 Other operating expenses 615 179 602 704 ----------------- ---------------- 1 334 767 1 340 787 ----------------- ---------------- Income Before Taxes on Income 581 457 851 297 Taxes on Income 183 537 274 040 ---------------- ---------------- Net Income $ 397 920 $ 577 257 ================= ================ See accompanying notes to consolidated financial statements.
-139- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Retained Securities Stock Earnings Valuation --------------- -------------- ---------------- Balance, January 1, 1996, $ 4 000 000 $ 4 579 587 $ 16 202 Net income for the period -- 577 257 -- Dividends - $1.00 per share -- (160 000) -- Net unrealized losses -- -- (17 434) --------------- -------------- --------------- Balance, September 30, 1996 $ 4 000 000 $ 4 996 844 (1 232) =============== ============== =============== Balance, January 1, 1997 $ 4 000 000 $ 4 866 533 $ 219 Net income for the period -- 397 920 Dividends - $1.00 per share -- (160 000) -- Net unrealized gains -- -- 8 712 --------------- ------------- ---------------- Balance, September 30, 1997 $ 4 000 000 $ 5 104 453 8 931 =============== ============== ================ See accompanying notes to consolidated financial statements.
-140- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CSB BANCORP CITIZENS STATE BANK OF PETERSBURG CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 1997 1996 ----------------- ----------------- Cash Flows From Operating Activities Net income $ 397 920 $ 577 257 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 497 000 108 000 Depreciation and amortization 79 305 67 860 Deferred income tax (108 438) (8 335) Amortization and accretion of security premiums and discounts 3 173 1 292 (Gain) loss on sale of investment securities (8 065) -- Decrease (increase) in: Accrued interest receivable (20 261) 93 498 Other assets 66 149 176 916 Increase (decrease) in accrued interest payable and other liabilities (18 845) (4 741) ----------------- ----------------- Net cash provided by operating activities 887 938 1 011 747 ----------------- ----------------- Cash Flows From Investing Activities Proceeds from calls and maturities of investment securities 3 979 698 4 886 278 Purchase of investment securities (5 088 283) (5 415 316) Proceeds from sales and maturities of interest-bearing deposits 300 000 440 000 Purchase of interest-bearing deposits (1 699 000) (100 000) Excess of loan proceeds disbursed over principal payments received (5 935 027) (2 995 973) Purchases of premises and equipment (96 128) (147 640) ----------------- ----------------- Net cash absorbed by investing activities (8 538 740) (3 332 651) ----------------- ----------------- Cash Flows From Financing Activities Net increase in deposits 2 384 018 6 241 753 Securities sold under agreements to repurchase (241 192) 281 583 Cash dividends paid (160 000) (160 000) ----------------- ----------------- Net cash provided by financing activities 1 982 826 6 363 336 ----------------- ----------------- Net Increase (Decrease) in Cash and Cash Equivalents (5 667 976) 4 042 432 Cash and Cash Equivalents, at January 1 16 417 531 9 227 160 ----------------- ----------------- Cash and Cash Equivalents, at September 30 $10 749 555 $13 269 592 ================= ================= See accompanying notes to consolidated financial statements.
-141- CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CSB BANCORP CITIZENS STATE BANK OF PETERSBURG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the most recent audited financial statements, has been omitted. The accompanying unaudited consolidated financial statements should be read in conjunction with the Summary of Accounting Policies and Notes to Consolidated Financial Statements contained in the December 31, 1996 Consolidated Financial Statements. In the opinion of management of the Corporation, the unaudited consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of the Corporation as of September 30, 1997, and the consolidated results of operations and cash flows for the nine months ended September 30, 1997 and 1996. The results of operations for the nine months ended September 30, 1997, are not necessarily indicative of the result to be expected for the full year. -142- INDEX TO FSB FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS: Page No. Independent Auditors' Report 144 Consolidated Balance Sheets as of September 30, 1997 and 1996 (unaudited) 145 Consolidated Statements of Operations for the Years Ended September 30, 1997 and 1996 (unaudited) 146 Consolidated Statements of Cash Flows for the Years Ended September 30, 1997 and 1996 (unaudited) 147 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended September 30, 1997 and 1996 (unaudited) 148 Notes to Consolidated Financial Statements 149 UNAUDITED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1997 and September 30, 1997 159 Consolidated Statements of Income for the Three Months Ended December 31, 1997 and 1996 160 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1997 and 1996 161 Note to Consolidated Financial Statements 162 -143- REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders FSB Financial Corporation Francisco, Indiana We have audited the accompanying consolidated balance sheet of FSB Financial Corporation as of September 30, 1997, and the related consolidated statements of operations, cash flows, and changes in shareholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FSB Financial Corporation as of September 30, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Indianapolis, Indiana January 13, 1998, except for Note 12, as to which the date is January 30, 1998 -144- FSB FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30, 1997 and 1996 - --------------------------------------------------------------------------------
(Unaudited) 1997 1996 ASSETS Cash and due from banks $ 667,753 $ 519,618 Federal funds sold 1,275,000 75,000 ------------ ------------ Cash and cash equivalents 1,942,753 594,618 Interest bearing balances with financial institutions 50,000 50,000 Securities available for sale, at fair value 300,179 300,328 Securities held to maturity, at cost (fair value $2,317,744 and $2,937,661 at September 30, 1997 and 1996) 2,324,673 2,967,494 Federal Home Loan Bank stock, at cost 48,000 -- Loans 10,519,754 10,394,275 Allowance for loan losses (102,962) (83,029) ------------ ------------ Net loans 10,416,792 10,311,246 Premises and equipment, net 362,276 157,939 Accrued interest receivable and other assets 254,766 221,062 $ 15,699,439 $ 14,602,687 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non-interest bearing deposits $ 1,786,268 $ 1,762,532 Interest bearing deposits 12,317,711 10,835,300 ------------ ------------ Total deposits 14,103,979 12,597,832 Federal funds purchased -- 375,000 Accrued interest payable and other liabilities 114,356 92,836 ------------ ------------ Total liabilities 14,218,335 13,065,668 ------------ ------------ Shareholders' equity Preferred stock, no par value; 2,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, $.01 stated value: 3,000,000 shares authorized, 49,000 shares issued, 48,916 and 49,000 shares outstanding in 1997 and 1996 490 490 Additional paid-in capital 819,510 819,510 Retained earnings 663,436 716,644 Unrealized gain on securities available for sale 188 375 Treasury stock, at cost: 84 shares in 1997 (2,520) -- ------------ ------------ Total shareholders' equity 1,481,104 1,537,019 ------------ ------------ $ 15,699,439 $ 14,602,687 ============ ============ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-145- FSB FINANCIAL COROPRATION CONSOLIDATED STATEMENTS OF OPERATIONS Years ended September 30, 1997 and 1996
(Unaudited) 1997 1996 Interest income Interest and fees on loans $ 939,283 $ 763,717 Interest on investment securities Taxable 136,754 189,324 Non-taxable 35,821 35,615 Interest on federal funds sold 30,652 11,677 Interest on balances with financial institutions 2,156 2,601 ---------------- --------------- Total interest income 1,144,666 1,002,934 Interest expense Interest on deposits 539,118 453,075 Interest on federal funds purchased 1,290 7,529 ---------------- --------------- Total interest expense 540,408 460,604 ---------------- --------------- Net interest income 604,258 542,330 Provision for loan losses 67,988 58,130 ---------------- --------------- Net interest income after provision for loan losses 536,270 484,200 Non-interest income Service charges on deposit accounts 78,276 68,807 Securities gains 520 125 Other income 17,465 10,860 ---------------- --------------- Total non-interest income 96,261 79,792 Non-interest expenses Salaries and employee benefits 359,186 297,838 Occupancy and equipment expense 92,508 87,259 Data processing expense 57,170 58,388 Other operating expenses 174,219 139,630 ---------------- --------------- Total non-interest expense 683,083 583,115 ---------------- --------------- Loss before income taxes (50,552) (19,123) Provision for income taxes (9,594) (3,423) ---------------- --------------- Net loss $ (40,958) $ (15,700) =============== ================ Net loss per share $ (.84) $ (.32) =============== =============== Weighted average common shares outstanding 48,984 49,000 ================ ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -146- FSB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, 1997 and 1996
(Unaudited) 1997 1996 Cash flows from operating activities: Net loss $ (40,958) $ (15,700) Adjustments to reconcile net loss to net cash from operating activities: Depreciation 35,340 21,285 Provision for loan losses 67,988 58,130 Securities gains (520) (125) Net amortization/(accretion) on securities (3,666) (6,856) Amortization of organization costs 6,072 6,070 Change in accrued interest receivable and other assets (39,776) (17,802) Change in accrued interest payable and other liabilities 21,520 (565) ---------------- --------------- Net cash from operating activities 46,000 44,437 Cash flows from investing activities: Property and equipment expenditures (239,677) (80,528) Loans made to customers and principal collections thereon (173,534) (4,456,206) Proceeds from maturities of securities available for sale - 500,000 Proceeds from maturities and principal paydowns of securities held to maturity 671,969 1,102,574 Purchases of securities held to maturity (25,000) (25,000) Purchase of Federal Home Loan Bank stock (48,000) - ---------------- --------------- Net cash from investing activities 185,758 (2,959,160) Cash flows from financing activities: Net change in deposit accounts 1,506,147 2,392,428 Net change in federal funds purchased (375,000) 375,000 Dividends paid (12,250) (12,250) Purchase treasury stock (2,520) - ---------------- --------------- Net cash from financing activities 1,116,377 2,755,178 ---------------- --------------- Net change in cash and cash equivalents 1,348,135 (159,545) Cash and cash equivalents at beginning of year 594,618 754,163 ---------------- --------------- Cash and cash equivalents at end of year $ 1,942,753 $ 594,618 ================ =============== Cash paid during the period for: Interest $ 527,995 $ 454,985 Income taxes paid (refunded) - (3,423)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -147- FSB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended September 30, 1997 and 1996
Unrealized Gain Additional on Securities Total Common Paid-in Retained Treasury Available Shareholders' Stock Capital Earnings Stock for Sale Equity Balances at October 1, 1995 (unaudited) $ 490 $ 819,510 $ 744,594 $ - $ 324 $ 1,564,918 Net loss (15,700) (15,700) Cash dividends ($.25 per share) (12,250) (12,250) Change in unrealized gain on securities 51 51 ----------- ------------- ----------- ------- -------- ----------- Balances at September 30, 1996 (unaudited) 490 819,510 716,644 - 375 1,537,019 Net loss (40,958) (40,958) Cash dividends ($.25 per share) (12,250) (12,250) Purchase treasury shares (84 shares) (2,520) (2,520) Change in unrealized gain on securities (187) (187) ----------- ------------- ----------- ------- -------- ----------- Balance at September 30, 1997 $ 490 $ 819,510 $ 663,436 $(2,520) 188 $ 1,481,104 =========== ============ =========== ======== ========= ==========
-148- FSB FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 and 1996 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of FSB Financial Corporation (Company) and its wholly-owned subsidiary, FSB Bank (Bank). All significant intercompany transactions have been eliminated in consolidation. Description of Business: FSB Financial Corporation generates consumer, mortgage, and commercial loans and receives deposits from customers located primarily in Gibson county and surrounding Indiana counties. The majority of the Company's loans are secured by specific items of collateral including consumer assets, real property and business assets. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses and fair values of certain securities. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. The Company reports net cash flows for customer loan transactions, deposit transactions, and deposits made with other institutions. Securities: Securities are classified by management at date of purchase as available for sale or held to maturity. Securities classified as available for sale are securities that might be sold in response to changes in interest rates, changes in prepayment risk, or other similar factors, and which are carried at fair value. The unrealized gain/(loss) on securities available for sale is reflected as a separate component of shareholders= equity, net of tax. Securities classified as held to maturity are securities that the Company has both the ability and positive intent to hold to maturity and are carried at amortized cost (cost adjusted for amortization of premium or accretion of discounts). Interest income on securities is recognized using the level yield basis. Gains and losses on sales of securities are computed on a specific identification basis. Loans: Loans are reported at the principal balance outstanding, net of deferred loan fees and costs, the allowance for loan losses, and charge-offs. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Interest received on such loans is recognized on the cash basis or reported as principal reductions. -149- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses: The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management=s judgment, should be charged-off. Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan=s existing rate. Loans are evaluated for impairment when payments are delayed, typically 90 days or more. Premises and Equipment: Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to operating expense over the useful lives of assets and is computed primarily on the straight-line method. Maintenance and repairs are charged to operations as incurred. Improvements are capitalized and disposals are recorded in the year sold or abandoned. Income Taxes: Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future amounts that will result from differences in the financial statement and tax basis of assets and liabilities. Recognition of deferred tax assets is limited by the establishment of a valuation reserve unless management concludes that the assets will more likely than not result in future tax benefits to the Company. Income tax expense is the amount paid for the current year income tax liability plus or minus the change in deferred taxes. Earnings Per Share: Earnings per share is based on the weighted average common shares outstanding. -150- NOTE 2 - SECURITIES The amortized cost and fair values of securities available for sale are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities: September 30, 1997 $ 299,991 $ 188 $ - $ 300,179 =============== =============== ================ =============== September 30, 1996 (unaudited) $ 299,953 $ 375 $ - $ 300,328 =============== =============== ================ ===============
The amortized cost and fair values of securities held to maturity are as follows at September 30:
1997 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government agency $ 899,962 $ - $ (11,031) $ 888,931 State and political subdivisions 584,888 - - 584,888 Mortgage-backed securities 839,822 12,147 (8,045) 843,924 --------------- --------------- ----------------- --------------- Totals $ 2,324,673 $ 12,147 $ (19,076) $ 2,317,744 =============== =============== ================= ===============
(Unaudited) 1996 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government agency $ 1,249,882 $ 125 $ (28,802) $ 1,221,205 State and political subdivisions 581,487 - - 581,487 Mortgage-backed securities 1,136,125 15,443 (16,599) 1,134,969 --------------- --------------- ----------------- --------------- Totals $ 2,967,494 $ 15,568 $ (45,401) $ 2,937,661 =============== =============== ================= ===============
-151- NOTE 2 - SECURITIES (Continued) The amortized cost and fair value of securities at September 30, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are not due at a specific date and are shown separately.
Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 299,991 $ 300,179 $ 580,043 $ 575,483 Due after one year through five years - - 459,800 453,329 Due after five years through ten years - - 238,966 238,966 Due after ten years - - 206,042 206,042 ---------------- ---------------- --------------- --------------- Total fixed maturity debt securities 299,991 300,179 1,484,851 1,473,820 Mortgage-backed securities - - 839,822 843,924 ---------------- ---------------- --------------- --------------- $ 299,991 $ 300,179 $ 2,324,673 $ 2,317,744 ================ ================ =============== ===============
Securities gains in 1997 and 1996 (unaudited) were entirely attributable to call premiums on called securities. At September 30, 1997 and 1996 (unaudited), securities carried at $450,000 were pledged to secure public deposits and for other purposes. U.S. government agency securities include structured notes with a carrying value of $799,962 and $1,149,882 (unaudited) at September 30, 1997 and 1996. Seventy-five percent of the September 30, 1997 structured notes outstanding mature in the year ended September 30, 1998. -152- NOTE 3 - LOANS Loans are comprised of the following classifications:
(Unaudited) 1997 1996 Commercial $ 1,662,309 $ 1,784,089 Real estate 4,553,992 4,221,551 Consumer 4,281,019 4,366,490 Deferred loan costs 22,434 22,145 ----------------- ----------------- $ 10,519,754 $ 10,394,275 ================= =================
There were no impaired loans during the years ended September 30, 1997 or 1996 (unaudited). Nonperforming loans were as follows at September 30:
(Unaudited) 1997 1996 Non-accrual loans $ 87,794 $ 48,792 Accruing loans past due greater than 90 days 29,390 4,731 Restructured loans - - ----------------- ----------------- $ 117,184 $ 53,523 ================= =================
NOTE 4 - ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses follows:
(Unaudited) 1997 1996 Beginning balance $ 83,029 $ 43,021 Provision for loan losses 67,988 58,130 Losses charged to the allowance (59,754) (19,549) Recoveries credited to the allowance 11,699 1,427 ---------------- --------------- Ending balance $ 102,962 $ 83,029 ================ ===============
-153- NOTE 5 - PREMISES AND EQUIPMENT A summary of premises and equipment at September 30 follows:
(Unaudited) 1997 1996 Bank premises $ 428,647 $ 267,504 Equipment and furniture 316,516 237,982 ------------------ ------------------ Total 745,163 505,486 Less accumulated depreciation (382,887) (347,547) ------------------ ------------------ Total premises and equipment, net $ 362,276 $ 157,939 ================== ==================
NOTE 6 - DEPOSITS Certificates of deposit in denominations of $100,000 or more as of September 30, 1997 and 1996 were $2,487,445 and $1,677,688 (unaudited), respectively. At year-end 1997, interest bearing deposits include time deposits with stated maturities as follows: 1998 $ 4,732,022 1999 1,645,771 2000 656,717 2001 1,602,470 2002 371,267 ------------------ $ 9,008,247 NOTE 7 - BENEFIT PLANS The Bank maintains a simplified employee pension plan for all active employees. Employees are eligible for participation in the plan after six months of service. Contributions are made annually by the Bank at a minimum of 8% of annual compensation. Contributions provided for the plan and charged to operations totaled $20,266 and $18,003 (unaudited) in 1997 and 1996. -154- NOTE 8 - INCOME TAXES An analysis of the components of income taxes follows:
(Unaudited) 1997 1996 Current income taxes $ (9,594) $ (3,701) Deferred income taxes - 278 ---------------- --------------- Total income taxes (benefit) $ (9,594) $ (3,423) ================ ===============
The difference between the financial statement tax provision and amounts computed by applying the federal income tax rate of 34% to pretax income is reconciled as follows:
(Unaudited) 1997 1996 Computed expected provision $ (17,188) $ (6,502) Tax effect of: Tax-exempt interest income (12,179) (12,109) Non-deductible interest expense 1,395 1,243 State income tax, net - 1,609 Effect of graduated rates and other items 18,378 12,336 ---------------- --------------- Applicable income tax $ (9,594) $ (3,423) ================ ===============
The net deferred tax asset is comprised of the following components:
(Unaudited) 1997 1996 Deferred tax assets: Allowance for loan losses $ 14,304 $ 9,874 Accrued expenses 18,750 13,982 Other 570 483 ---------------- --------------- 33,624 24,339 Deferred tax liabilities: Accrued income and prepaid expenses (47,460) (38,733) Deferred loan costs (4,986) (4,922) Other (992) (498) ---------------- --------------- (53,438) (44,153) Valuation allowance - - ---------------- --------------- Net deferred tax liability $ (19,814) $ (19,814) ================ ===============
The Company files tax returns on a calendar year basis. As a result of tax returns filed through December 31, 1996, the Company had $46,064 of state tax net operating loss carryforwards expiring in the year 2011. -155- NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company, in the ordinary course of business, has loans, commitments and contingent liabilities, such as guarantees, commitments to extend credit, etc., which are not reflected in the accompanying consolidated balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial guarantees is represented by the contractual amounts of those instruments. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items. The contractual amount of these financial instruments are summarized as follows: (Unaudited) 1997 1996 Commitments to extend credit $ 410,728 $ 238,979 The commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established under the contract. Generally, such commitments are for no more than one year, and most are variable rate contracts. These commitments are primarily overdraft protection, and commercial lines of credit. Since many commitments expire without being used, the amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. NOTE 10 - RELATED PARTY TRANSACTIONS Certain directors, officers and principal shareholders of the Company were also customers of the Bank. The aggregate amount of loans to these persons totaled $462,976 and $409,259 (unaudited) at September 30, 1997 and 1996. Related party deposits totaled $255,427 and $186,734 (unaudited) at year-end 1997 and 1996. -156- NOTE 11 - REGULATORY MATTERS The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At year end 1997, actual Bank capital levels (in thousands) and minimum required levels were:
Minimum Required Minimum Required To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) $ 1,544 15.5% $ 798 8.0% $ 998 10.0% Tier I Capital (to Risk Weighted Assets) $ 1,441 14.4% $ 399 4.0% $ 599 6.0% Tier 1 Capital (to Average Assets) $ 1,441 9.3% $ 619 4.0% $ 774 5.0%
At year-end 1997 the Bank was categorized as well capitalized. The Company=s primary source of funds with which to pay dividends is the subsidiary bank. The Bank=s ability to pay dividends is limited by Indiana state banking regulations. Among other restrictions, the Bank may not pay dividends in excess of the retained net income of the current and previous two calendar years without prior regulatory approval. As of September 30, 1997, the Bank was required to obtain prior regulatory approval before payment of dividends. -157- FSB FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 and 1996 NOTE 12 -- SUBSEQUENT EVENT The Board of Directors of the Company signed a definitive agreement with German American Bancorp effective January 30, 1998 under which German American would acquire all of the outstanding stock of the Company. German American Bancorp is a $489 million multi-bank holding company located in Jasper, Indiana. Under terms of the agreement, all outstanding common shares of FSB Financial Corporation will be exchanged for German American common shares valued at approximately 1.5 times the book value of the Company plus or minus certain adjustments. The proposed transaction requires approval by regulatory authorities and shareholders of both companies. The proposed transaction is expected to be consummated in early 1998 and is expected to be accounted for as a pooling-of-interests. -158- CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, 1997 and September 30, 1997
December 31, September 30, 1997 1997 ASSETS Cash and due from banks $ 695,159 $ 667,753 Federal funds sold 2,215,000 1,275,000 ----------------- ----------------- Cash and cash equivalents 2,910,159 1,942,753 Interest bearing balances with financial institutions - 50,000 Securities available for sale, at fair value - 300,179 Securities held to maturity, at cost 2,160,427 2,324,673 Federal Home Loan Bank stock, at cost 48,000 48,000 Loans 10,079,461 10,519,754 Allowance for loan losses (79,742) (102,962) ----------------- ----------------- Net loans 9,999,719 10,416,792 Premises and equipment, net 353,807 362,276 Accrued interest receivable and other assets 290,149 254,766 ---------------- ----------------- 15,762,261 $ 15,699,439 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non-interest bearing deposits $ 1,713,973 $ 1,786,268 Interest bearing deposits 12,458,561 12,317,711 ----------------- ----------------- Total deposits 14,172,534 14,103,979 Accrued interest payable and other liabilities 114,240 114,356 Total liabilities 14,286,774 14,218,335 ----------------- ----------------- Shareholders' equity Preferred stock, no par value; 2,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.01 stated value: 3,000,000 shares authorized, 49,000 shares issued, 48,916 shares outstanding 490 490 Additional paid-in capital 819,510 819,510 Retained earnings 658,007 663,436 Unrealized gain on securities available for sale - 188 Treasury stock, at cost: 84 shares (2,520) (2,520) ----------------- ----------------- Total shareholders' equity 1,475,487 1,481,104 ----------------- ----------------- 15,762,261 $ 15,699,439 ================= =================
-159- FSB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended December 31, 1997 and 1996
1997 1996 ---- ---- Interest income Interest and fees on loans $ 229,608 $ 235,503 Interest on investment securities Taxable 28,217 36,537 Non-taxable 8,775 8,794 Interest on federal funds sold 24,324 1,654 Interest on balances with financial institutions 530 550 ---------------- --------------- Total interest income 291,454 283,038 Interest expense Interest on deposits 148,718 126,586 Interest on federal funds purchased - 971 ---------------- --------------- Total interest expense 148,718 127,557 ---------------- --------------- Net interest income 142,736 155,481 Provision for loan losses 4,263 42,342 ---------------- --------------- Net interest income after provision for loan losses 138,473 113,139 Non-interest income Service charges on deposit accounts 18,418 20,750 Securities losses (20) - Other income 7,506 4,665 ---------------- --------------- Total non-interest income 25,904 25,415 Non-interest expenses Salaries and employee benefits 90,427 89,045 Occupancy and equipment expense 27,994 15,183 Data processing expense 13,799 17,413 Other operating expenses 37,586 43,375 ---------------- --------------- Total non-interest expense 169,806 165,016 ---------------- --------------- Loss before income taxes (5,429) (26,462) Provision for income taxes - (9,594) ---------------- --------------- Net income (loss) $ (5,429) $ (16,868) ================ =============== Net income (loss) per share $ (.11) $ (.34) =============== =============== Weighted average common shares outstanding 48,916 49,000 ================ ===============
-160- FSB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended December 31, 1997 and 1996
1997 1996 ---- ---- Cash flows from operating activities: Net gain/(loss) $ (5,429) $ (16,868) Adjustments to reconcile net income to net cash from operating activities: Depreciation 9,532 9,110 Provision for loan losses 4,263 42,342 Securities (gains)/losses 20 - Net amortization/(accretion) on securities (871) (1,199) Amortization of organization costs 1,518 1,518 Change in accrued interest receivable and other assets (36,901) (52,383) Change in accrued interest payable and other liabilities (116) 10,260 ---------------- --------------- Net cash from operating activities (27,984) (7,220) Cash flows from investing activities: Proceeds from maturities of interest bearing balances 50,000 - Proceeds from maturities of securities available for sale 299,971 - Proceeds from maturities and principal paydowns of securities held to maturity 165,117 315,980 Loans made to customers and principal collections thereon 412,810 (579,021) Property and equipment expenditures (1,063) (153,005) ---------------- --------------- Net cash from investing activities 926,835 (416,046) Cash flows from financing activities: Net change in deposit accounts 68,555 654,372 Net change in federal funds purchased - (225,000) ---------------- --------------- Net cash from financing activities 68,555 429,372 ---------------- --------------- Net change in cash and cash equivalents 967,406 6,106 Cash and cash equivalents at beginning of period 1,942,753 594,618 ---------------- --------------- Cash and cash equivalents at end of period $ 2,910,159 $ 600,724 ================ =============== Cash paid during the period for: Interest $ 146,710 $ 134,441 Income taxes paid (refunded) - -
-161- FSB FINANCIAL CORPORATION NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) December 31, 1997 NOTE 1 -- BASIS OF PRESENTATION Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles have been condensed or omitted. All adjustments made by management to these unaudited statements were of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the FSB Financial Corporation September 30, 1997 Financial Statements. -162- APPENDIX A ====================================================================== AGREEMENT AND PLAN OF REORGANIZATION by and among CSB BANCORP an Indiana corporation, THE CITIZENS STATE BANK OF PETERSBURG an Indiana banking corporation, GERMAN AMERICAN BANCORP, an Indiana corporation, GERMAN AMERICAN HOLDINGS CORPORATION, an Indiana corporation, and COMMUNITY TRUST BANK an Indiana banking corporation. ====================================================================== Dated: December 8, 1997 -A 1- AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made December ___, 1997, by and among CSB BANCORP, an Indiana corporation ("CSB"), THE CITIZENS STATE BANK OF PETERSBURG an Indiana banking corporation ("Citizens"), GERMAN AMERICAN BANCORP, an Indiana corporation ("German American"), GERMAN AMERICAN HOLDINGS CORPORATION, an Indiana corporation ("GAHC"), and COMMUNITY TRUST BANK, an Indiana banking corporation ("Community"). Recitals A. CSB is a corporation duly organized and existing under the Indiana Business Corporation Law ("IBCL") that is duly registered with the Board of Governors of the Federal Reserve System ("FRB") as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHC Act"). CSB owns all of the outstanding capital stock of Citizens. The principal place of business of CSB is Petersburg, Pike County, Indiana. B. Citizens is a banking corporation duly organized and existing under the Indiana Financial Institutions Act ("IFIA"), chartered by the Indiana Department of Financial Institutions ("DFI"), and a member of the Federal Reserve System with both of its banking offices located in Petersburg, Pike County, Indiana. C. German American is a corporation duly organized and existing under the IBCL and is duly registered as a bank holding company under the BHC Act. German American owns all of the outstanding capital stock of GAHC. The principal place of business of German American is Jasper, Dubois County, Indiana. D. GAHC is a corporation duly organized and existing under the IBCL and is duly registered as a bank holding company under the BHC Act with its principal place of business in Jasper, Dubois County, Indiana. GAHC owns all of the outstanding common stock of Community. E. Community is a banking corporation duly organized and existing under the IFIA, chartered by the DFI, which is not a member of the Federal Reserve System with its principal banking office in Otwell, Pike County, Indiana. F. The parties desire to effect a transaction whereby Community will be merged with and into Citizens and simultaneously CSB will be merged with and into GAHC in consideration of the issuance of German American Common Stock. Agreements In consideration of the premises and the mutual terms and provisions set forth in this Agreement, the parties agree as follows. ARTICLE ONE TERMS OF THE MERGERS AND CLOSING Section 1.01. The Holding Company Merger. Pursuant to the terms and provisions of this Agreement, the IBCL and the Plan of Merger attached hereto as Appendix A and incorporated herein by reference (the "Holding Company Plan of Merger"), CSB shall merge with and into GAHC (the "Holding Company Merger") simultaneously with the Bank Merger (as defined below). CSB shall be the "Merging Holding Company" in the -A 1- Holding Company Merger and its corporate identity and existence, separate and apart from GAHC, shall cease on consummation of the Holding Company Merger. GAHC shall be the "Surviving Holding Company" in the Holding Company Merger, and its name shall not be changed pursuant to the Holding Company Merger. Section 1.02. Effect of the Holding Company Merger. The Holding Company Merger shall have all the effects provided by the IBCL. Section 1.03. The Holding Company Merger - Conversion of Shares. (a) At the time of filing with the Indiana Secretary of State of appropriate Articles of Merger with respect to the Holding Company Merger or at such later time as shall be specified by such Articles of Merger (the "Effective Time"): (i) Each of the not more than 160,000 shares of common stock, no par value, of CSB ("CSB Common") that are issued and outstanding immediately prior to the Effective Time shall thereupon and without further action be converted into shares of common stock, $10 par value, of German American ("German American Common") at the Exchange Ratio which shall be calculated as set forth in this Section 1.03(a)(i). CSB's shareholders of record at the Effective Time, for the shares of CSB Common then held by them, respectively, shall be allocated and entitled to receive (upon surrender of certificates representing said shares for cancellation) shares of German American Common, which total number of shares of German American Common shall have a value (as hereinafter determined) of at least $22,750,000 subject, however, to (A) the provisions of this Section 1.03(a) with respect to the minimum and maximum number of shares to be exchanged, (B) the provisions of Section 1.03(f) of this Agreement, and (C) the provisions of this Section 1.03(b) with respect to fractional shares. The consideration payable to CSB shareholders hereunder is sometimes hereafter referred to as the "Merger Consideration." For purposes of establishing the number of shares of German American Common into which each share of CSB Common shall be converted at the Effective Time (the "Exchange Ratio"), each share of German American Common shall be valued at the average of the lowest closing asked prices and highest closing bid prices of German American Common as reported by the NASDAQ National Market System for each trading day within the period of thirty consecutive calendar days that ends on the second business day preceding the Closing Date (as defined by Section 1.09 hereof) (the "Valuation Period"). Such value shall then be divided into the sum of $22,750,000 to establish (to the nearest whole share) the aggregate number of shares of German American Common into which all of the then issued and outstanding shares of CSB Common shall be converted at the Effective Time; provided, however, that in no event shall the total number of shares of German American Common into which the shares of CSB Common shall be converted be more than 1,137,500 shares or fewer than 928,572 shares. Such number of shares of German American Common shall then be divided by the number of shares of CSB Common that are issued and outstanding as of the Effective Time, with the quotient therefrom (carried to the fourth figure past the decimal point) being the Exchange Ratio. The maximum and minimum number of shares of German American Common for which the shares of CSB Common shall be exchanged shall be subject to adjustment in accordance with the provisions of Section 1.03(f) of this Agreement. (ii) The shares of GAHC issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding shares of GAHC. (b) No fractional shares of German American Common shall be issued and, in lieu thereof, holders of shares of CSB Common who would otherwise be entitled to a fractional share interest (after taking into account all -A 2- shares of CSB Common held by such holder) shall be paid an amount in cash equal to the product of such fractional share and the average of the highest bid and the lowest asked price of a share of German American Common as quoted on the NASDAQ National Market System on the last day of the Valuation Period. (c) At the Effective Time, all of the outstanding shares of CSB Common, by virtue of the Holding Company Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of any certificate or certificates which immediately prior to the Effective Time represented outstanding shares of CSB Common (the "Certificates") shall thereafter cease to have any rights with respect to such shares, except the right of such holders to receive, without interest, the Merger Consideration upon the surrender of such Certificate or Certificates in accordance with Section 1.08. (d) At the Effective Time, each share of CSB Common, if any, held in the treasury of CSB or by any direct or indirect subsidiary of CSB (other than shares held in trust accounts for the benefit of others or in other fiduciary, nominee or similar capacities) immediately prior to the Effective Time shall be cancelled. (e) At the Effective Time, the shares of common stock of Citizens outstanding immediately prior to the Effective Time shall be unchanged by the Holding Company Merger and shall be deemed owned by the Surviving Holding Company. (f) If (i) German American shall hereafter declare a stock dividend or other distribution of property or securities (other than a cash dividend and other than the five percent stock dividend declared October 29, 1997, and issuable on December 20, 1997, to shareholders of record on November 28, 1997) upon its shares of common stock or shall subdivide, split up, reclassify or combine its shares of common stock, and (ii) the record date for such transaction is prior to the date on which the Effective Time occurs, appropriate adjustment or adjustments will be made in the maximum and minimum total number of shares of German American Common for which the shares of CSB Common are to be exchanged. (g) If any holders of CSB Common dissent from the Holding Company Merger and demand dissenters' rights under the IBCL, any issued and outstanding shares of CSB Common held by such dissenting holders shall not be converted as described in this Section 1.03 but shall from and after the Effective Time represent only the right to receive such consideration as may be determined to be due to such dissenting holders pursuant to the IBCL; provided, however, that each share of CSB Common outstanding immediately prior to the Effective Time and held by a dissenting holder who shall, after the Effective Time, withdraw his demand for dissenters' rights or lose his right to exercise dissenters' rights shall have only such rights as provided under the IBCL. Section 1.04. The Bank Merger. Pursuant to the terms and provisions of this Agreement, the IFIA, and the Plan of Merger attached hereto as Appendix B and incorporated herein by reference (the "Bank Plan of Merger"), and simultaneously with the Holding Company Merger, Community shall merge with and into Citizens (the "Bank Merger"). Community shall be the "Merging Bank" in the Bank Merger and its corporate identity and existence, separate and apart from Citizens, shall cease on consummation of the Bank Merger. Citizens shall be the "Surviving Bank" and shall continue its corporate existence under its charter under the provisions of the IFIA and the Bank Merger shall effect no change in the corporate name of Citizens. The Board of Directors of the Surviving Bank immediately after the Effective Time shall consist of the Board of Directors of Citizens (as it is constituted immediately prior to the Effective Time), six representatives of the Board of Directors of Community (as it is constituted immediately prior to the Effective Time but provided that no officers of Community will become members of the Board of Directors of the Surviving Bank), and two representatives of German American (such two representatives are hereinafter referred to as the "German American Representatives"). -A 3- Section 1.05. Effect of the Bank Merger. The Bank Merger shall have all of the effects provided by the IFIA. Without limitation of the foregoing, following the Bank Merger, Citizens shall be entitled under the IFIA to all of the rights and benefits, and shall assume under the IFIA all the duties and burdens, of Community under the agreement that is contemplated to be executed between Community and FSB Bank, Francisco, Gibson County, Indiana ("FSB") providing for the merger of FSB with and into Community; provided, however, that the merger consideration to be paid by German American as the ultimate parent of Community in connection with the acquisition of FSB and its parent corporation shall be entirely borne by German American. Section 1.06. The Bank Merger - No Conversion of Shares. At the Effective Time, the shares of Citizens that were issued and outstanding immediately prior to the Bank Merger shall continue to be issued and outstanding, and the shares of Community shall be canceled. Section 1.07. The Closing. The closing of the Mergers (the "Closing") shall take place at the offices of Leagre Chandler & Millard (or at such other place as the parties may agree) at 9:00 A.M. Eastern Standard Time on the Closing Date described in Section 1.09 of this Agreement. Section 1.08. Exchange Procedures; Surrender of Certificates. (a) Fifth Third Bank, Cincinnati, Ohio, shall act as Exchange Agent in the Holding Company Merger (the "Exchange Agent"). (b) As soon as reasonably practicable but in no event more than five working days after the Effective Time, the Exchange Agent shall mail to each record holder of any Certificate or Certificates whose shares were converted into the right to receive the Merger Consideration, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as German American may reasonably specify) (each such letter the "Merger Letter of Transmittal") and instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. As soon as reasonably practical but in no event more than fifteen days after surrender to the Exchange Agent of a Certificate, together with a Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such Certificate the Merger Consideration. No interest on the Merger Consideration issuable upon the surrender of the Certificates shall be paid or accrued for the benefit of holders of Certificates. If the Merger Consideration is to be issued to a person other than a person in whose name a surrendered Certificate is registered, it shall be a condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the CSB shareholder in the event that such shareholder claims loss of a Certificate and requests that German American waive the requirement for surrender of such Certificate. (c) No dividends that are otherwise payable on shares of German American Common constituting the Merger Consideration shall be paid to persons entitled to receive such shares of German American Common until such persons surrender their Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common shall be issued any dividends which shall have become payable with respect to such shares of German American Common (without interest and less the amount of taxes, if any, which may have been imposed thereon), between the Effective Time and the time of such surrender. -A 4- Section 1.09. The Closing Date. The Closing shall take place on the last business day of the month during which each of the conditions in Sections 6.01(d) and 6.02(d) is satisfied or waived by the appropriate party, or on such later or earlier date as CSB and German American may agree (the "Closing Date"). The parties shall use their best efforts to cause the Effective Time of both Mergers to be as of the first day of the calendar month that follows the month in which the Closing occurs. Section 1.10. Actions At Closing. (a) At the Closing, CSB shall deliver to German American: (i) a certified copy of the Articles of Incorporation and Bylaws of CSB, as amended, and a certified copy of the Articles of Incorporation and Bylaws of Citizens, as amended; (ii) a certificate or certificates signed by the chief executive officer of CSB and Citizens stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article Two hereof is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing, and (B) CSB and Citizens have performed and complied in all material respects, unless waived by German American, with all of their obligations and agreements required to be performed hereunder prior to the Closing Date; (iii) certified copies of the resolutions of CSB's Board of Directors and shareholders, approving and authorizing the execution of this Agreement and the Plan of Merger and authorizing the consummation of the Holding Company Merger; (iv) a certified copy of the resolutions of Citizens' Board of Directors and shareholder, as required for valid approval of the execution of this Agreement and the consummation of the Bank Merger; (v) a certificate of the Indiana Secretary of State, dated a recent date, stating that CSB is duly organized and exists under the IBCL; (vi) a certificate of the Indiana Secretary of State, dated a recent date, stating that Citizens is duly organized and exists under the IFIA; and (vii) the legal opinion of Krieg DeVault, Alexander & Capehart, counsel for CSB to the effect set forth as Exhibit 1.10(a)(vii). (b) At the Closing, German American shall deliver to CSB: (i) a certificate signed by the Chief Executive Officer of German American stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article Three is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing and (B) German American and Community have performed and complied in all material respects, unless waived by CSB with all of its obligations and agreements required to be performed hereunder prior to the Closing Date; (ii) certified copies of the resolutions of German American's and GAHC's Boards of Directors and of German American's (if required by the NASDAQ NMS listing standards) and GAHC's shareholders -A 5- authorizing the execution of this Agreement and the Holding Company Plan of Merger and the consummation of the Holding Company Merger; (iii) a certified copy of the resolutions of Community's Board of Directors and shareholder, as required for valid approval of the execution of this Agreement and the Bank Plan of Merger and the consummation of the Bank Merger; (iv) the legal opinion of Leagre Chandler & Millard, counsel for German American, in the form attached hereto as Exhibit 1.10(b)(iv); and (v) certificates of the Indiana Secretary of State, dated a recent date, stating that German American is duly organized and exists under the IBCL and that Community is duly organized and exists under the IFIA. (c) At the Closing, the parties shall insert the Exchange Ratio determined in accordance with Section 1.03 of this Agreement into the Holding Company Plan of Merger, and shall execute and/or deliver to one another such Plan of Merger and such other documents and instruments and take such other actions as shall be necessary or appropriate to consummate the Mergers. ARTICLE TWO REPRESENTATIONS AND WARRANTIES OF CSB AND CITIZENS CSB and Citizens hereby severally make the following representations and warranties, as applicable to each of them: Section 2.01. Organization and Capital Stock. (a) CSB is a corporation duly organized and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (b) Citizens is a banking corporation duly incorporated and validly existing under the IFIA and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (c) CSB has authorized capital stock of 160,000 shares of CSB Common, all of which shares are duly and validly issued and outstanding, fully paid and non-assessable. None of the outstanding shares of CSB Common has been issued in violation of any preemptive rights of the current or past shareholders of CSB or in violation of any applicable federal or state securities laws or regulations. (d) Citizens has authorized capital stock of 40,000 shares of common stock, $25 par value, all of which shares are issued and outstanding ("Citizens Common"). All of such shares of Citizens Common are duly and validly issued and outstanding and are fully paid and nonassessable. None of the outstanding shares of Citizens Common has been issued in violation of any preemptive rights of the current or past shareholders of Citizens or in violation of any applicable federal or state securities laws or regulations. (e) There are no shares of capital stock or other equity securities of CSB or Citizens authorized, issued or outstanding (except as set forth in this Section 2.01) and no outstanding options, warrants, rights to subscribe for, calls, puts, or commitments of any character whatsoever relating to, or securities or rights convertible into or -A 6- exchangeable for, shares of the capital stock of CSB or Citizens, or contracts, commitments, understandings or arrangements by which CSB or Citizens are or may be obligated to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock. Section 2.02. Authorization; No Defaults. The Boards of Directors of CSB and Citizens have each, by all appropriate action, approved this Agreement, the applicable Plan of Merger and the Merger contemplated thereby and have authorized the execution of this Agreement and the applicable Plan of Merger on their behalf by their duly authorized officers and the performance by CSB and Citizens of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of CSB, as amended, or the Articles of Incorporation or Bylaws of Citizens, as amended, or in any material agreement or instrument, or any decree, proceeding, law or regulation (except as specifically referred to in or contemplated by this Agreement) by or to which CSB or Citizens is bound or subject, would prohibit CSB or Citizens from consummating, or would be violated or breached by CSB's or Citizens' consummation of, this Agreement and the Mergers and other transactions contemplated herein on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by CSB and Citizens and constitutes a legal, valid and binding obligation of CSB and Citizens, enforceable against CSB and Citizens in accordance with its terms. Neither CSB nor Citizens is, nor will be by reason of the consummation of the transactions contemplated herein, in material default under or in material violation of any provision of, nor will the consummation of the transactions contemplated herein afford any party a right to accelerate any indebtedness under, CSB's or Citizens' articles of incorporation or bylaws, any material promissory note, indenture or other evidence of indebtedness or security therefor, or any material lease, contract, or other commitment or agreement to which either CSB or Citizens is a party or by which it or its property is bound. Section 2.03. Subsidiaries. Except as otherwise disclosed in a confidential writing delivered by CSB and Citizens to German American and executed by all the parties concurrently with the execution of this Agreement (the "Disclosure Schedule") and except for the ownership by CSB of all the capital stock of Citizens, neither CSB nor Citizens has (or has had at any time in the last ten years) any direct or indirect ownership interest in any corporation, partnership, limited liability company, joint venture or other business. Section 2.04. Financial Information. (a) CSB has furnished to German American the consolidated balance sheets of CSB as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. Such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be reflected in the notes thereto), and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of CSB in all material respects as of the date and for the period indicated. (b) Citizens has furnished to German American its Consolidated Reports of Condition and Income as filed with the FFIEC for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 (the "Call Reports"). The Call Reports were prepared in accordance with the applicable regulatory instructions on a consistent basis with previous such reports, and fairly present the financial position and results of operations of Citizens in all material respects as of the dates and for the periods indicated, subject, however, to normal recurring year-end adjustments, none of which will be material. (c) Except as set forth in the Disclosure Schedule, neither CSB nor Citizens has any material liability, fixed or contingent, except to the extent set forth in the financial statements and the Call Reports described in subsections (a) and (b) of this Section 2.04 (collectively, the "CSB Financial Statements") or incurred in the ordinary -A 7- course of business since the date of the most recent balance sheet of CSB or Citizens included in the CSB Financial Statements. (d) CSB does not engage in the lending business (except by and through Citizens) or any other business or activity other than that which is incident to its ownership of all the capital stock of Citizens, and does not own any investment securities (except the capital stock of Citizens). Section 2.05. Absence of Changes. Since December 31, 1996, and except to the extent reflected in the Call Reports, and except for CSB's or Citizens' costs and expenses related to the Holding Company Merger and the Bank Merger, any increases in Citizens' allowance for loan losses (up to $350,000) effected pursuant to Section 4.05 or other discretionary changes to any accruals or balance sheet items of CSB or Citizens requested by German American and agreed to by Citizens, there has not been any material adverse change in the financial condition, the results of operations or the business of CSB or Citizens, taken as a whole. Section 2.06. Absence of Agreements with Banking Authorities. Neither CSB nor Citizens is subject to any order (other than orders applicable to bank holding companies or banks generally) and neither is a party to any agreement or memorandum of understanding with any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation, the Federal Deposit Insurance Corporation (the "FDIC"), the FRB, and the DFI. Section 2.07. Tax Matters. CSB and Citizens have filed all federal, state and local tax returns due in respect of any of their respective business, income and properties in a timely fashion and has paid or made provision for all amounts shown due on such returns. All such returns fairly reflect the information required to be presented therein in all material respects. All provisions for accrued but unpaid taxes contained in the CSB Financial Statements were made in accordance with generally accepted accounting principles. Section 2.08. Absence of Litigation. Except as set forth in the Disclosure Schedule, there is no material litigation, claim or other proceeding pending or, to the knowledge of CSB, threatened, before any judicial, administrative or regulatory agency or tribunal, to which CSB or Citizens is a party or to which any of their properties are subject. Section 2.09. Employment Matters. (a) Except as set forth in the Disclosure Schedule, neither CSB nor Citizens is a party to or bound by any material contract arrangement or understanding (written or otherwise) for the employment, retention or engagement of any past or present officer, employee, agent, consultant or other person or entity which, by its terms, is not terminable by CSB or Citizens, respectively, on thirty (30) days' written notice or less without the payment of any amount by reason of such termination. (b) CSB and Citizens are and have been in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, any such laws respecting employment discrimination and occupational safety and health requirements, and (i) neither CSB nor Citizens is engaged in any unfair labor practice; (ii) there is no unfair labor practice complaint against CSB or Citizens pending or, to the knowledge of CSB, threatened before the National Labor Relations Board; (iii) there is no labor dispute, strike, slowdown or stoppage actually pending or, to the knowledge of CSB, threatened against or directly affecting CSB or Citizens; and (iv) neither CSB nor Citizens has experienced any material work stoppage or other material labor difficulty during the past five years. -A 8- (c) Except as set forth in the Disclosure Schedule, neither the execution nor the delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby, will (i) result in any payment (including without limitation severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of CSB or Citizens from either of such entities, (ii) increase any benefit otherwise payable under any of their employee plans or (iii) result in the acceleration of the time of payment of any such benefit. No amounts paid or payable by CSB or Citizens to or with respect to any employee or former employee of CSB of Citizens will fail to be deductible for federal income tax purposes by reason of Section 280G of the Internal Revenue Code of 1986, as amended ("Code") or otherwise. Section 2.10. Reports. Since January 1, 1994 CSB and Citizens have filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, if any, that they were required to file with (i) the Securities and Exchange Commission ("SEC"), (ii) the FRB, (iii) the FDIC, (iv) the DFI and (v) any other governmental authority with jurisdiction over CSB or Citizens. As of their respective dates, each of such reports and documents, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. Section 2.11. Investment Portfolio. All United States Treasury securities, obligations of other United States Government agencies and corporations, obligations of States and political subdivisions of the United States and other investment securities held by Citizens, as reflected in the Call Reports, are carried on the books of Citizens in accordance with generally accepted accounting principles, consistently applied. Citizens does not engage in activities that would require that it establish a trading account under applicable regulatory guidelines and interpretations. Section 2.12. Loan Portfolio. To the knowledge of CSB, all loans and discounts shown in the Call Reports, or which were entered into after September 30, 1997, but before the Closing Date, were and will be made in all material respects for good, valuable and adequate consideration in the ordinary course of the business of Citizens, in accordance in all material respects with Citizens' lending policies and practices unless otherwise approved by Citizens' Board of Directors, and are not subject to any material defenses, set offs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. To the knowledge of CSB, the notes or other evidences of indebtedness evidencing such loans and all forms of pledges, mortgages and other collateral documents and security agreements are and will be, in all material respects, enforceable, valid, true and genuine and what they purport to be. To the knowledge of CSB, Citizens has complied and will through the Closing Date continue to comply with all laws and regulations relating to such loans, or to the extent there has not been such compliance, such failure to comply will not materially interfere with the collection of any such loan. Except as set forth in the Disclosure Schedule, Citizens has not sold, purchased or entered into any loan participation arrangement except where such participation is on a pro rata basis according to the respective contributions of the participants to such loan amount. Except as set forth in the Disclosure Schedule, CSB has no knowledge that any condition of property in which Citizens has an interest as collateral to secure a loan or that is held as an asset of any trust violates the Environmental Laws (defined in Section 2.15) in any material respect or obligates CSB, or Citizens, or the owner or operator of such property to remedy, stabilize, neutralize or otherwise alter the environmental condition of such property. Section 2.13. ERISA. (a) Except as disclosed in the Disclosure Schedule, no person participates in any "employee welfare benefit plan" or "employee pension benefit plan" (as those terms are respectively defined in Sections 3(1) and 3(2) -A 9- of the Employee Retirement Income Security Act of 1974 ("ERISA")), nor may any person reasonably expect to participate in any such plan, in either case, on account of his or her past or present employment with CSB or Citizens. CSB and Citizens do not maintain any retirement or deferred compensation plan, savings, incentive, stock option or stock purchase plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements (referred to collectively hereinafter as "fringe benefit arrangements") for any past or present employee, consultant or agent of CSB or Citizens, whether pursuant to contract, arrangement, custom or informal understanding, which does not constitute an "employee benefit plan" (as defined in Section 3(3) of ERISA), except as listed in the Disclosure Schedule. (b) During the past sixty months, CSB has not maintained any employee welfare benefit plans or employee pension benefit plans except for plans listed on the Disclosure Schedule. There have been no amendments to any of the employee pension benefit plans, employee welfare benefit plans or fringe benefit arrangements listed on the Disclosure Schedule since December 31, 1994, except as set forth in the Disclosure Schedule. (c) To the knowledge of CSB, all employee pension benefit plans, employee welfare benefit plans and fringe benefit arrangements listed on the Disclosure Schedule comply in form and in operation in all material respects with all applicable requirements of law and regulation. To the knowledge of CSB, all employee pension benefit plans maintained by CSB and Citizens comply in form and in operation with all applicable requirements of Sections 401(a) and 401(k) of the Code. To the knowledge of CSB, except as disclosed in the Disclosure Schedule, neither CSB nor Citizens has (i) incurred any liability for tax under Section 4971 of the Code on account of any accumulated funding deficiency and no plan or arrangement listed in the Disclosure Schedule has incurred any accumulated funding deficiency within the meaning of Section 412 or 418(B) of the Code; (ii) applied for or obtained a waiver by the IRS of any minimum funding requirement under Section 412 of the Code; (iii) become subject to any disallowance of deductions under Sections 419 or 419(A) of the Code; (iv) incurred any liability for excise tax under Sections 4972, 4975, or 4976 of the Code or any liability under Section 406 of ERISA; (v) incurred any liability to the Pension Benefit Guaranty Corporation; (vi) had a reportable event (within the meaning of Section 4043 of ERISA); or (vii) breached any of the duties or failed to perform any of the obligations imposed upon the fiduciaries or plan administrators under Title I or ERISA. (d) A true and correct copy of each of the plans and arrangements listed on the Disclosure Schedule as in effect on the date hereof and each trust agreement relating to each such plan and arrangement, has been supplied to German American. A true and correct copy of the annual report (as described in Section 103 of ERISA) most recently filed for each plan listed in the Disclosure Schedule has been supplied to German American, and there have been no material changes in the financial condition in the respective plans from that stated in the annual reports supplied. In the case of any plan or arrangement which is not in written form, the Disclosure Schedule includes an accurate description of such plan or arrangement. CSB and Citizens have provided to German American a description of any liability or contingent liability which may be incurred by CSB or Citizens if any plan or arrangement listed on the Disclosure Schedule (including without limitation the payment by Citizens of premiums for health care coverage for active employees or retirees) were terminated or if CSB or Citizens was to cease its participation therein. To the best of the knowledge of the present non-employee members of the Board of Directors of CSB and of Citizens (without any independent review of the books and records of CSB and Citizens or the making of any other independent inquiry), and to the best of the knowledge of the President of Citizens (after review of the books and records of Citizens but without the obligation to make any further independent inquiry), neither CSB nor Citizens nor any of their affiliates or persons acting on their behalf have made any written or oral promises or statements to employees or retirees who are now living which might reasonably have been construed by them as promising "lifetime" or other vested rights to benefits under any plan or arrangement (other than any employee pension plan disclosed in the Disclosure Schedule) that cannot be unilaterally terminated or modified by Citizens or CSB at their discretion at any time without further obligation. -A 10- (e) Except as disclosed in the Disclosure Schedule, in the case of each plan or arrangement listed in the Disclosure Schedule which is a defined benefit plan (within the meaning of Section 3(35) of ERISA), the net fair market value of the assets held to fund such plan or arrangement equals or exceeds the present value of all accrued benefits thereunder, both vested and nonvested, on a plan continuation basis and as determined in accordance with an actuarial costs method acceptable under section 3(31) of ERISA. (f) On a timely basis, CSB and Citizens have made all contributions or payments to or under each plan or arrangement listed in the Disclosure Schedule as required pursuant to each such plan or arrangement, any collective bargaining agreements or other provision for reserves to meet contributions and payments under such plans or arrangements which have not been made because they are not yet due. (g) None of the plans or arrangements listed in the Disclosure Schedule owns (or has owned within the past 60 months) any CSB Common or other securities of CSB, Citizens or a related entity. Section 2.14. Title to Properties; Insurance. CSB and Citizens have marketable title, insurable at standard rates, free and clear of all liens, charges and encumbrances (except taxes which are a lien but not yet payable and liens, charges or encumbrances reflected in the CSB Financial Statements and easements, rights-of-way, and other restrictions which are not material and, in the case of Other Real Estate Owned, as such real estate is internally classified on the books of Citizens, rights of redemption under applicable law) to all real properties reflected on the CSB Financial Statements as being owned by CSB or Citizens, respectively. All material leasehold interests used by CSB and Citizens in their respective operations are held pursuant to lease agreements which are valid and enforceable in accordance with their terms. Except as set forth in the Disclosure Schedule, all such properties comply in all material respects with all applicable private agreements, zoning requirements and other governmental laws and regulations relating thereto and there are no condemnation proceedings pending or, to the knowledge of CSB, threatened with respect to such properties. CSB and Citizens have valid title or other ownership or use rights under licenses to all material intangible personal or intellectual property used by CSB and Citizens in their respective business free and clear of any claim, defense or right of any other person or entity which is material to such property, subject only to rights of the licensor pursuant to applicable license agreements, which rights do not materially adversely interfere with the use or enjoyment of such property. All insurable properties owned or held by CSB or Citizens are insured in such amounts, and against fire and other risks insured against by extended coverage and public liability insurance, as is customary with companies of the same size and in the same business. Section 2.15. Environmental Matters. (a) As used in this Agreement, "Environmental Laws" means all local, state and federal environmental, health and safety laws and regulations in all jurisdictions in which CSB or Citizens has done business or owned property, including, without limitation, the Federal Resource Conservation and Recovery Act, the Federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Clean Water Act, the Federal Clean Air Act, and the Federal Occupational Safety and Health Act. (b) Except as set forth in the Disclosure Schedule, to the knowledge of CSB and Citizens, neither (i) the conduct by CSB and Citizens of operations at any property, nor (ii) any condition of any property owned by CSB or Citizens within the past ten (10) years and used in its business operations, nor (iii) the condition of any property owned by them within the past ten (10) years but not used in their business operations, nor (iv) the condition of any property held by them as a trust asset within the past ten (10) years, violates or violated Environmental Laws in any material respect, and to the knowledge of CSB and Citizens, no condition or event has occurred with respect to any such property that, with notice or the passage of time, or both, would constitute a material violation of Environmental Laws or obligate (or potentially obligate) CSB or Citizens to remedy, stabilize, neutralize or -A 11- otherwise alter the environmental condition of any such property. Neither CSB nor Citizens has received any notice from any person or entity that CSB or Citizens or the operation of any facilities or any property owned by either of them, or held as a trust asset, are or were in violation of any Environmental Laws or that either of them is responsible (or potentially responsible) for the cleanup of any pollutants, contaminants, or hazardous or toxic wastes, substances or materials at, on or beneath any such property. Section 2.16. Compliance with Law. CSB and Citizens each have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable it to conduct their respective businesses as presently conducted and to their knowledge, are in compliance in all material respects with all applicable laws and regulations, the violation of which would be material. Section 2.17. Brokerage. Except as set forth in the Disclosure Schedule, there are no claims, agreements, arrangements, or understandings (written or otherwise) for brokerage commissions, finders' fees or similar compensation in connection with the Mergers payable by CSB or Citizens. Section 2.18. Material Contracts. Except as set forth in the Disclosure Schedule, neither CSB nor Citizens is a party to or bound by any oral or written (i) material agreement, contract or indenture under which it has borrowed or will borrow money (not including federal funds and money deposited, including without limitation, checking and savings accounts, certificates of deposit, money market accounts and other deposit accounts and borrowings from the FHLB and the FRB); (ii) material guaranty of any obligation for the borrowing of money or otherwise, excluding endorsements made for collection and guarantees made in the ordinary course of business and letters of credit issued in the ordinary course of business; (iii) contract, arrangement or understanding with any present or former officer, director or shareholder (except for deposit or loan agreements entered into in the ordinary course of business); (iv) material license, whether as licensor or licensee; (v) contract or commitment for the purchase of materials, supplies or other real or personal property in an individual amount in excess of $10,000 or for the performance of services over a period of more than thirty days and involving an individual amount in excess of $25,000; (vi) joint venture or partnership agreement or arrangement; (vii) contract arrangement or understanding with any present or former consultant, advisor, investment banker, broker, attorney or accountant; or (viii) contract, agreement or other commitment not made in the ordinary course of business. Section 2.19. Compliance with Americans with Disabilities Act. (a) To the best of CSB's knowledge, CSB and Citizens and their respective properties (including those held by either of them in a fiduciary capacity) are in material compliance with all applicable provisions of the Americans with Disabilities Act (the "ADA"), and (b) no action under the ADA against CSB, Citizens or any of its properties has been initiated nor, to the best of CSB's knowledge, has been threatened or contemplated. Section 2.20. Statements True and Correct. None of the information supplied or to be supplied by CSB or Citizens for inclusion in any documents to be filed with the FRB, the SEC, the DFI, the FDIC, or any other regulatory authority in connection with the Mergers will, to the best of the knowledge of CSB or Citizens at the respective times such documents are filed, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading. Section 2.21. CSB's Knowledge. With respect to representations and warranties herein that are made or qualified as being made "to the knowledge of CSB" or words of similar import, it is understood and agreed that matters within the knowledge of the directors and the Executive Vice President of CSB and the President of Citizens shall be considered to be within the knowledge of CSB. -A 12- ARTICLE THREE REPRESENTATIONS AND WARRANTIES OF GERMAN AMERICAN, GAHC AND COMMUNITY German American, GAHC and Community hereby severally make the following representations and warranties: Section 3.01. Organization and Capital Stock. (a) German American is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (b) GAHC is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. All of the capital stock of GAHC is owned by German American. (c) Community is a banking corporation duly incorporated and validly existing under the IFIA and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. All of the capital stock of Community is owned by GAHC. (d) German American has authorized capital stock of (i) 20,000,000 shares of German American Common, of which, as of the date of this Agreement, 5,096,209 shares are issued and outstanding (not including an additional approximately 254,810 shares that will be issued and delivered on December 20, 1997, pursuant to German American's annual five percent stock dividend), and (ii) 500,000 shares of preferred stock, $10.00 par value per share, of which no shares are issued and outstanding. All of the issued and outstanding shares of German American Common are duly and validly issued and outstanding, fully paid and non-assessable. (e) GAHC has authorized capital stock of 200,000 shares of common stock, $1 par value, (the "GAHC Common") and 12,000 shares of preferred stock, $1 par value. As of the date of this Agreement 9,999 of the issued and outstanding shares of GAHC Common are duly and validly issued and outstanding, fully paid and non-assessable, and none of the shares of GAHC preferred stock is issued or outstanding. (f) Community has authorized capital stock of 4,000 shares of common stock, $25.00 par value per share (the "Community Common"). As of the date of this Agreement, all of the shares of Community Common are duly and validly issued and outstanding, fully paid, and owned by German American. (g) The shares of German American Common that are to be issued to the shareholders of CSB pursuant to the Holding Company Merger have been duly authorized and, when issued in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and non-assessable. Section 3.02. Authorization. The Boards of Directors of German American, GAHC and Community have each, by all appropriate action, approved this Agreement, the applicable Plan of Merger and the Mergers and authorized the execution hereof on their behalf by their duly authorized officers and the performance by each such -A 13- entity of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of German American, GAHC or Community, as amended, or any other agreement, instrument, decree, proceeding, law or regulation (except for the possible need for approval of the issuance of additional shares pursuant to the Holding Company Merger by the shareholders of German American under the National Market System listing standards of NASDAQ, and except as specifically referred to in or contemplated by this Agreement) by or to which either of them or any of their subsidiaries is bound or subject would prohibit German American, GAHC or Community from entering into and consummating this Agreement and the Mergers on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by German American, GAHC and Community and constitutes a legal, valid and binding obligation of German American, GAHC and Community enforceable against German American, GAHC and Community in accordance with its terms and no other corporate acts or proceedings are required by law to be taken by German American, GAHC or Community to authorize the execution, delivery and performance of this Agreement. Except for any requisite approvals of the FRB, FDIC and DFI, and the SEC's order declaring effective German American's registration statement under the Securities Act of 1933, as amended ("Securities Act") with respect to the Holding Company Merger, no notice to, filing with, authorization by, or consent or approval of, any federal or state regulatory authority is necessary for the execution and delivery of this Agreement or the consummation of the Mergers by German American, GAHC or Community. German American, GAHC and Community are not, nor will any of them by reason of the consummation of the transactions contemplated herein be, in material default under or material violation of any provision of, nor will the consummation the transactions contemplated herein afford any party a right to accelerate any indebtedness under, any of their respective articles of incorporation or bylaws, any material promissory note, indenture or other evidence of indebtedness of security thereof, or any material lease, contract or other commitment or agreement to which any of them is a party or other commitment or agreement to which any of them is a party or by which any of them or their respective property is bound. Section 3.03. Subsidiaries. Each of German American's subsidiaries is duly organized and validly existing under the laws of the jurisdiction of its incorporation and has the corporate power to own its respective properties and assets, to incur its respective liabilities and to carry on its respective business as now being conducted. Section 3.04. Financial Information. The consolidated balance sheet of German American and its subsidiaries as of December 31, 1996 and related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended together with the notes thereto, included in German American's most recent Annual Report on Form 10-K, as filed with the SEC (the "10-K"), and the unaudited consolidated balance sheets of German American and its subsidiaries as of March 31 and June 30, 1997 and the related unaudited consolidated statements of income, changes in shareholders' equity and cash flows for the periods then ended included in German American's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1997 as filed with the SEC (the "10-Q Reports") (collectively the financial statements and notes thereto included in the 10-Q Reports and the 10-K are sometimes referred to as the "German American Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as disclosed therein) and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of German American and its consolidated subsidiaries as of the dates and for the periods indicated (subject, in the case of interim financial statements, to normal recurring year-end adjustments, none of which will be material). Section 3.05. Absence of Changes. Since December 31, 1996 (and except to the extent reflected in the 10-Q Reports), there has not been any material adverse change in the consolidated financial condition or the consolidated results of operations or the business of German American and its subsidiaries, taken as a whole. -A 14- Section 3.06. Reports. Since January 1, 1994 (or, in the case of subsidiaries of German American, the date of acquisition thereof by German American, if later), German American and each of its subsidiaries have filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, that it was required to file with (i) the SEC, (ii) the FRB, (iii) the FDIC, (iv) the DFI, (v) any applicable state securities or banking authorities, and (vi) any other governmental authority with jurisdiction over German American or any of its subsidiaries. As of their respective dates, each of such reports and documents, as amended, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. None of the information included in such reports or documents was, at their respective dates of filing, false or misleading with respect to any material fact, or omitted to state any material fact necessary in order to make the statements therein not misleading, on a consolidated basis, taking into account the circumstances under which such reports or documents were filed and considering the total mix of information that was at the time publicly available concerning German American and its subsidiaries. Section 3.07. Absence of Litigation. There is no material litigation, claim or other proceeding pending or, to the knowledge of German American, threatened, before any judicial, administrative or regulatory agency or tribunal against German American or any of its subsidiaries, or to which the property of German American or any of its subsidiaries is subject, which is required to be disclosed in SEC reports under Item 103 of Regulation S-K, and which has not been so disclosed. Section 3.08. Absence of Agreements with Banking Authorities. Neither German American nor any of its subsidiaries is subject to any order (other than orders applicable to bank holding companies or banks generally) or is a party to any agreement or memorandum of understanding with any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation the FDIC, the DFI and the FRB. Section 3.09. Compliance with Law. German American and its subsidiaries have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable them to conduct their respective businesses as presently conducted and are, and all times while this Agreement is in effect shall be, in compliance in all material respects with all applicable laws and regulations, including, without limitation, all rules, regulations and requirements of the SEC, the violation of which would be material. ARTICLE FOUR COVENANTS OF CSB AND CITIZENS The parties hereto agree that the covenants contained in this Article Four shall be effective from the date hereof through the earlier of the Effective Time or the termination of this Agreement. Section 4.01. Conduct of Business. (a) CSB and Citizens shall continue to carry on their respective businesses, and shall discharge or incur obligations and liabilities, only in the ordinary course of business as heretofore conducted and, by way of amplification and not limitation with respect to such obligation, neither CSB nor Citizens will, without the prior written consent of German American: (i) declare or pay any dividend or make any other distribution to shareholders, whether in cash, stock or other property, except as provided in Section 4.09 of this Agreement; or -A 15- (ii) issue (or agree to issue) any common or other capital stock or any options, warrants or other rights to subscribe for or purchase common or any other capital stock or any securities convertible into or exchangeable for any capital stock; or (iii) directly or indirectly redeem, purchase or otherwise acquire (or agree to redeem, purchase or acquire) (except for shares acquired in satisfaction of a debt previously contracted) any of their own common or any other capital stock; or (iv) effect a split, reverse split, reclassification, or other similar change in, or of, any common or other capital stock or otherwise reorganize or recapitalize; or (v) change the Articles of Incorporation or Bylaws of CSB or the Articles of Incorporation or Bylaws of Citizens; or (vi) pay or agree to pay, conditionally or otherwise, any bonus (other than bonuses for calendar year 1997 that, when aggregated with other bonuses paid or payable with respect to 1997, would not exceed the aggregate amount of bonuses paid for calendar year 1996), additional compensation (other than ordinary and normal salary increases consistent with past practices) or severance benefit or otherwise make any changes out of the ordinary course of business with respect to the fees or compensation payable or to become payable to consultants, advisors, investment bankers, brokers, attorneys, accountants, directors, officers or employees or, except as required by law, adopt or make any change in any Employee Plan or other arrangement or payment made to, for or with any of such consultants, advisors, investment bankers, brokers, attorneys, accountants, directors, officers or employees; provided, however, that CSB and Citizens may pay the fees, expenses and other compensation of consultants, advisors, investment bankers, brokers, attorneys and accountants disclosed on the Disclosure Schedule when, if, and as earned by them; (vii) borrow or agree to borrow any material amount of funds except in the ordinary course of business, or directly or indirectly guarantee or agree to guarantee any material obligations of others except in the ordinary course of business or pursuant to outstanding letters of credit; or (viii) make or commit to make (or renew or commit to renew) any new loan, or issue or commit to issue (or renew or commit to renew) any new letter of credit or line of credit, or make (or commit to make) any additional discretionary advance (not including any advance for the purposes and in the amount already committed) under any existing letter of credit or line of credit, or purchase or agree to purchase any interest in a loan participation, in aggregate principal amounts (A) in excess of $250,000 to any one borrower (or group of affiliated borrowers) or (B) that would cause Citizens' credit extensions or commitments to any one borrower (or group of affiliated borrowers) to exceed $500,000 (German American's consent to credit extensions in the ordinary course of business will not be unreasonably withheld); or (ix) other than U.S. Treasury obligations or asset-backed securities issued or guaranteed by United States governmental agencies or financial institution certificates of deposit insured by the FDIC, in either case having an average remaining life of five years or less (except that maturities may extend to seven years on variable-rate securities), purchase or otherwise acquire any investment security for their own accounts, or sell any investment security owned by either of them which is designated as held-to-maturity, or engage in any activity that would require the establishment of a trading account for investment securities; or -A 16- (x) increase or decrease the rate of interest paid on time deposits, or on certificates of deposit, except in a manner and pursuant to policies consistent with past practices; or (xi) enter into or amend any agreement, contract or commitment out of the ordinary course of business; or (xii) except in the ordinary course of business, place on any of their assets or properties any mortgage, pledge, lien, charge, or other encumbrance; or (xiii) except in the ordinary course of business, cancel, release, compromise or accelerate any material indebtedness owing to CSB or Citizens, or any claims which either of them may possess, or voluntarily waive any material rights with respect thereto; or (xiv) sell or otherwise dispose of any real property or any material amount of any personal property other than properties acquired in foreclosure or otherwise in the ordinary course of collection of indebtedness to CSB or Citizens; or (xv) foreclose upon or otherwise take title to or possession or control of any real property without first obtaining a phase one environmental report thereon, prepared by a reliable and qualified person or firm reasonably acceptable to German American, which indicates that the property is free of pollutants, contaminants or hazardous or toxic waste materials; provided, however, that neither CSB nor Citizens shall be required to obtain such a report with respect to single family, non-agricultural residential property of one acre or less to be foreclosed upon unless it has reason to believe that such property might contain such materials or otherwise might be contaminated; or (xvi) commit any act or fail to do any act which will cause a material breach of any material agreement, contract or commitment; or (xvii) violate any law, statute, rule, governmental regulation or order, which violation might have a material adverse effect on its business, financial condition, or earnings; or (xviii) purchase any real or personal property or make any other capital expenditure where the amount paid or committed therefor is in excess of $50,000 other than purchases of property made in the ordinary course of business or in connection with loan collection activities or foreclosure sales in connection with any of CSB's or Citizens' loans; (xix) issue certificate(s) for shares of CSB Common to any CSB shareholder in replacement of certificate(s) claimed to have been lost or destroyed without first obtaining from such shareholder(s), at the expense of such shareholder(s), a surety bond from a recognized insurance company in an amount that would indemnify CSB (and its successors) against lost certificate(s) but not less than $150 per share of CSB Common, and obtaining a usual and customary affidavit of loss and indemnity agreement from such shareholder(s); provided, however, that CSB may waive the surety bond requirement in connection with the issuance of replacement certificates to any shareholder if the number of shares of CSB Common so reissued (together with the number of shares previously reissued since October 1, 1997 to such shareholder and all other shareholders who are affiliated or associated with such shareholder) does not exceed an aggregate of 100 shares; or -A 17- (xx) hold a special, regular or annual meeting (or take action by consent in lieu thereof) of the Board of Directors or the sole shareholder of Citizens for the purpose of appointing or electing any new member to the Board of Directors of Citizens (whether to fill a vacancy or otherwise) unless such new member is approved in advance in writing by German American. (b) Neither CSB nor Citizens shall, without the prior written consent of German American, engage in any transaction or take any other action that would render untrue in any material respect any of the representations and warranties of CSB or Citizens contained in Article Two hereof if such representations and warranties were given as of the date of such transaction or action. (c) CSB shall promptly notify German American in writing of the occurrence of any matter or event known to CSB or Citizens that is, or is likely to become, materially adverse to the business, operations, properties, assets or condition (financial or otherwise) of CSB or Citizens taken as a whole. (d) Neither CSB nor Citizens shall (a) directly or indirectly solicit or encourage (nor shall they permit any of their respective officers, directors, employees or agents directly or indirectly to solicit or encourage), including by way of furnishing information other than the terms of this Agreement, any inquiries or proposals from third parties for a merger, consolidation, share exchange or similar transaction involving CSB or Citizens or for the acquisition of the stock or substantially all of the assets or business of CSB or Citizens, or (b) subject to the fiduciary duties of the Directors of CSB as advised by counsel in a written opinion, discuss with or enter into conversations with any person concerning any such merger, consolidation, share exchange, acquisition or other transaction. CSB shall promptly notify German American orally (to be confirmed in writing as soon as practicable thereafter) of all of the relevant details concerning any inquiries or proposals that it may receive relating to any such matters, including actions it intends to take with respect to such matters. Section 4.02. Breaches. CSB shall, in the event it has knowledge of the occurrence of any event or condition which would cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known prior to the date of this Agreement) of any of its or Citizens' representations or agreements contained or referred to in this Agreement, give prompt notice thereof to German American and use its best efforts to prevent or promptly remedy the same. Section 4.03. Submission to Shareholders. CSB shall cause to be duly called and held, on a date mutually selected by German American and CSB, a special meeting of its shareholders (the "CSB Shareholders' Meeting") for submission of this Agreement and the Holding Company Merger for approval of CSB shareholders as required by the IBCL. In connection with the CSB Shareholders' Meeting, (i) CSB shall cooperate with and assist German American in preparing and filing a registration statement containing a Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") with the SEC in accordance with SEC requirements and CSB shall mail it to its shareholders, (ii) CSB shall furnish German American all information concerning itself that German American may reasonably request in connection with such Proxy Statement/Prospectus, and (iii) the Board of Directors of CSB shall (unless in the written opinion of counsel for CSB the fiduciary duties of the Board of Directors advises against such a recommendation, in which event the individual members of the Board of Directors shall nevertheless remain personally obligated to support the Agreement and the Holding Company Merger pursuant to their personal undertakings on the signature page of this Agreement) unanimously recommend to CSB's shareholders the approval of this Agreement and the Holding Company Merger contemplated hereby. Section 4.04. Consummation of Agreement. CSB shall use its best efforts to perform and fulfill all conditions and obligations on its part to be performed or fulfilled under this Agreement and to effect the Mergers in accordance with the terms and provisions hereof. CSB shall furnish to German American in a timely manner all -A 18- information, data and documents in the possession of CSB or Citizens requested by German American as may be required to obtain any necessary regulatory or other approvals of the Mergers or to file with the SEC a registration statement on Form S-4 (the "Registration Statement") relating to the shares of German American Common to be issued to the shareholders of CSB pursuant to the Holding Company Merger and this Agreement, and shall otherwise cooperate fully with German American to carry out the purpose and intent of this Agreement. Section 4.05. Financial Information. CSB will, at its expense, commence preparation of financial statements, Guide 3 statistical data, selected financial data, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Items 301, 302, and 303 of SEC Regulation S-K) ("MD&A") in compliance with SEC requirements for inclusion in the Registration Statement, including unaudited financial statements and related Guide 3 and MD&A as of and for the appropriate quarterly and year-to-date periods ending September 30, 1997, and CSB shall use its best efforts to provide such financial statements and data and MD&A to German American in EDGAR format as soon as practicable but in no event later than January 8, 1998. CSB shall allow German American's independent public accountants, Crowe, Chizek and Company LLP, to make a special review of the assets of the Bank prior to December 19, 1997 with a view to determining the consistency of the procedures and standards employed by Citizens in determining its allowance for possible loan losses with the procedures and standards employed by German American's present bank subsidiaries. CSB shall make additional provisions as of September 30, 1997, to its allowance for loan losses in order to increase such allowance as reflected in the consolidated financial statements of CSB as of that date to be included in the Registration Statement by up to $350,000 (or by such greater amount as Citizens and German American may mutually agree based upon the results of such review) compared to the amount of Citizens' allowance for loan losses at September 30, 1997, in the Call Reports, if and to the extent that Crowe, Chizek and Company, LLP recommends that such an increase in the allowance be made in order to make the Citizens allowance equal to the amount that would result from the consistent application of procedures and standards utilized by German American's other bank subsidiaries. Any such additional provision and additional allowance (up to $350,000) that Citizens may make pursuant to this Section 4.05 shall not (a) be construed as evidence that the Call Reports or other CSB Financial Statements were not as represented and warranted pursuant to Section 2.04 hereof or as evidence of a material adverse change in Citizens' financial condition or results of operations under Section 2.05 of this Agreement, (b) be deducted from Citizens' income or otherwise considered when determining the amount of donations that Citizens may make pursuant to Section 5.13 hereof, and (c) give German American, GAHC or Community any right to refuse to consummate the Mergers pursuant to Section 6.01 hereof or to terminate this Agreement or the Mergers pursuant to Article Seven hereof. Section 4.06. Environmental Reports. (a) Except as German American shall otherwise consent with respect to any residential real estate (which consent will not be unreasonably withheld by German American), CSB shall, at German American's expense, cooperate with an environmental consulting firm designated by German American in connection with the conduct by such firm of a phase one environmental investigation on all real property owned or leased by CSB or its subsidiaries as of the date of this Agreement, and any real property acquired or leased by CSB or its subsidiaries after the date of this Agreement, except as otherwise provided in Section 4.01(a)(xv). (b) If further investigation procedures are required as to any property by the report of the phase one investigation in German American's reasonable opinion, CSB shall as soon as practicable, at CSB's expense, commission the taking by German American's expert of such further procedures and provide a report of the results of such further procedures ("Phase Two Report") to German American. German American shall have ten (10) business days from German American's receipt of any Phase Two Report to notify CSB in writing of German American's determination (the "Determination Notice") that remedial and corrective actions and measures identified -A 19- in such report ("Remedial Actions") are (i) required by applicable law, or (ii) prudent in light of the recommendations or suggestions in the Phase Two Report findings. The Determination Notice shall also contain the German American's expert's reasonable estimated cost, in the aggregate, of taking Remedial Actions (the "German American Estimate"). (c) If CSB disputes that any Remedial Actions are required by law or prudent in light of the recommendations or suggestions in the Phase Two Report findings, or disputes the amount of the German American Estimate, CSB shall notify German American in writing in reasonable detail of the basis for its dispute (the "Dispute Notice") within ten (10) business days of its receipt of the Determination Notice. The Dispute Notice shall also designate CSB's own environmental expert, which shall be hired by CSB at CSB's expense. German American and CSB shall each use their best efforts to cause their respective experts to consult with one another and select, within five (5) business days of German American's receipt of the Dispute Notice, a third environmental expert (the "Neutral Expert") for the purpose of reviewing the Phase Two report and resolving the dispute. The Neutral Expert shall perform all services pursuant to a contract, subject to the reasonable approval of German American and CSB, that requires the Neutral Expert to meet the deadlines specified in this Agreement. Within a period of ten (10) business days from the date the Neutral Expert is selected, the Neutral Expert, after consultation with CSB's and German American's experts and review of the Phase Two Report findings, shall determine the scope of Remedial Actions that are prudent in light of the findings or required by law, and the estimated costs thereof, which determination shall be final (the "Final Estimate"). CSB and German American shall split the fees and expenses of the Neutral Expert, but the fees and expenses of CSB's expert shall be borne solely by CSB. CSB's expert and the Neutral Expert shall provide consulting services only and shall not perform any additional site tests or examinations without the prior written consent of both German American and CSB. (d) If (i) CSB fails to provide German American with the Dispute Notice within the specified time period or (ii) the Neutral Expert fails to make the Final Estimate within the specified time period, and such failure is not caused by German American or its expert, the German American Estimate shall be the Final Estimate for the purposes of this Agreement. (e) If the Final Estimate exceeds the sum of $100,000, subject to Section 4.06(f) hereof, then German American shall have the right to reduce the aggregate number of shares of German American Common to be issued to CSB's shareholders under Section 1.03(a)(i) hereof (even if such reduction causes the number of shares to be issued to be fewer than the minimum number that would otherwise be specified by such provision) by that number of shares of German American Common, the value of which (as determined by the average of the highest closing bid price, and the lowest closing asked price, quoted at the close of trading on the NASDAQ National Market System on the date prior to the effective date of the notice of such reduction contemplated below) is equal to the after-tax effect of the sum of the excess of the Final Estimate over $100,000, multiplied by 2.436. If German American desires to exercise its right under this Section 4.06(e), German American shall, within ten (10) business days of the date as of which the Final Estimate becomes determinable, provide CSB with written notice of its determination to reduce the number of shares to be issued to CSB's shareholders under Section 1.03(a)(i) hereof, including the manner and basis by which such reduction has been determined. (f) If the Final Estimate equals or exceeds the sum of $1,000,000, then either CSB or German American shall have the right pursuant to Section 7.03 hereof, for a period of 10 business days following the date as of which the Final Estimate is determinable, to terminate this Agreement without further obligation to the other party, which shall be the terminating party's sole remedy in such event. -A 20- (g) If the Final Estimate is less than or equal to the sum of $100,000, in the aggregate, then CSB, if requested by German American, shall promptly direct the German American expert to commence the Remedial Actions, and no adjustment to the Merger Consideration and no right to terminate this Agreement shall occur. Section 4.07. Restriction on Resales. CSB shall obtain and deliver to German American, at least thirty (30) days prior to the Closing Date, signed representations, in form reasonably acceptable to German American, of each shareholder who may reasonably be deemed an "affiliate" of CSB as of the date of the CSB Shareholders' Meeting within the meaning of such term as used in Rule 145 under the Securities Act regarding their prospective compliance with the provisions of such Rule 145. CSB shall also obtain and deliver to German American at least 30 days prior to the Closing Date, the signed agreements of each shareholder who may reasonably be deemed an "affiliate" (as such term is described in the preceding sentence) of CSB as of the date of the Shareholders' Meeting agreeing not to sell any shares of German American Common or otherwise reduce his or her risk relative to such shares, until such time as financial results covering at least thirty (30) days of post-Merger combined operations have been filed by German American with the SEC in a quarterly report on Form 10-Q or in an annual report on Form 10-K. Section 4.08. Access to Information. CSB shall permit German American reasonable access, in a manner which will avoid undue disruption or interference with CSB's normal operations, to its and Citizens' properties and shall disclose and make available to German American all books, documents, papers and records relating to its and Citizens' assets, stock ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including general ledgers), tax records, minute books of directors' and shareholders' meetings, organizational documents, material contracts and agreements, loan files, filings with any regulatory authority, accountants' workpapers, litigation files, plans affecting employees, and any other business activities or prospects in which German American may have an interest in light of the transactions contemplated by this Agreement. During the period from the date of this Agreement to the Effective Time, CSB will cause one or more of it or Citizens' designated representatives to confer on a regular basis with the President of German American, or any other person designated in a written notice given to CSB by German American pursuant to this Agreement, to report the general status of the ongoing operations of CSB and Citizens. CSB will promptly notify German American of any material change in the normal course of the operation of its business or properties and of any regulatory complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of litigation involving CSB or Citizens, and will keep German American fully informed of such events. German American, GAHC and Community hereby understand and agree that all books, documents, papers and records relating to CSB's and Citizens' assets, stock ownership, properties, operations, obligations and liabilities which they obtain, receive, review or have access to pursuant to this Section 4.08 shall be subject to the Confidentiality Agreement between CSB and German American ("Confidentiality Agreement"). Section 4.09. Dividends. Notwithstanding Section 4.01(a) of this Agreement, but subject to the restrictions of the second paragraph of this Section 4.09, CSB may (in the absence of any material adverse change in its consolidated financial condition, results of operations, or business other than the increase to Citizens' allowance for loan losses (up to $350,000) contemplated by Section 4.05 hereof and other than the adverse change that is expected to result from the expenses associated with the Mergers), declare and pay in arrears quarterly cash dividends to CSB shareholders, not to exceed the following amounts: $1.75 per share of CSB Common (representing $0.50 per quarter and an additional $0.75 special dividend) for the period of two quarters ended December 31,1997, and $0.6875 per share of CSB Common for each calendar quarterly period in 1998. German American typically considers the declaration of cash dividends on German American Common for each quarterly period at meetings of its Board of Directors held the last week of the first month of the next -A 21- calendar quarter (January, April, July, and October), and typically declares any such dividends to be payable to holders of record of German American Common as of a subsequent date that is within the calendar month that follows the month of declaration (February, May, August and November). In order to assure that CSB shareholders will be entitled to receive, for each quarterly period commencing January 1, 1998, dividends with respect to his or her CSB Common, or dividends with respect to the German American Common to be exchanged therefor pursuant to the Holding Company Merger, but not both, CSB may (in each case if the Effective Time has for any reason not then occurred and at the maximum quarterly rates specified by this Section 4.09) declare, not earlier than May 15, 1998, a dividend with respect to CSB's first calendar quarter; and, not earlier than August 15, 1998, a dividend with respect to CSB's second quarter; and, not earlier than November 15, 1998, a dividend with respect to CSB's third quarter. Section 4.10. Modification or Termination of Retiree Health Care Program. In accordance with the studies of the various alternative proposals for such modification and termination that have been conducted by advisers to CSB and Citizens, CSB and Citizens shall terminate any potential obligations to provide post-retirement health insurance coverage to all active employees, directors, consultants and other persons, and shall terminate or modify any potential obligations to continue to provide health insurance coverage to all present retirees, under the post-retirement health care insurance program of Citizens and CSB in accordance with this Section 4.10. CSB and Citizens shall give written notice of such termination and modification to all employees and retirees potentially affected thereby as soon as practicable but in no event later than December 31, 1997. The manner and amount of such modification and termination shall be within the discretion of the Board of Directors of CSB and Citizens, provided that (i) the aggregate accrued post-retirement benefit cost recorded on CSB's books and previously expensed in the CSB Financial Statements as of September 30, 1997, shall not be less than the projected total post-retirement benefit obligation of CSB and Citizens to all of its retirees and active employees after September 30, 1997 under the terms of the program so modified, amended or terminated, as determined as of September 30, 1997 by the program's actuary and (ii) any partial termination of retiree benefits and any modification of the terms of the post-retirement health care insurance program as applicable to retirees shall be made in such a manner as to clearly communicate to the beneficiary that the right of Citizens and CSB to terminate or make further modifications of such program without further obligation or notice has been reserved by Citizens and CSB. ARTICLE FIVE COVENANTS OF GERMAN AMERICAN, GAHC AND COMMUNITY Section 5.01. Regulatory Approvals and Registration Statement. (a) German American shall file (and cause Community to file and cooperate with CSB and Citizens in filing) all regulatory applications required in order to consummate the Mergers, including all necessary applications for the prior approvals of the FRB under the Bank Holding Company Act and the Bank Merger Act (or of the FDIC under the Bank Merger Act if German American shall request Citizens to withdraw its membership in the Federal Reserve System as part of the Bank Merger as contemplated by Section 7.05), and the DFI. German American shall use its best efforts to cause such banking agency regulatory applications to be filed on or before December 22, 1997. German American shall keep CSB reasonably informed as to the status of such applications and promptly send or deliver copies of such applications, and of any supplementally filed materials, to counsel for CSB. (b) German American shall file with the SEC the Registration Statement relating to the shares of German American Common to be issued to the shareholders of CSB pursuant to this Agreement, and shall use its best efforts to file such Registration Statement by January 22, 1998 and shall use its best efforts to cause the -A 22- Registration Statement to become effective as soon as practicable. At the time the Registration Statement becomes effective, the form of the Registration Statement shall comply in all material respects with the provisions of the Securities Act and the published rules and regulations thereunder, and shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not false or misleading. At the time of the mailing thereof to the shareholders and at the time of any Shareholders' Meeting, the Proxy Statement/Prospectus included as part of the Registration Statement, as amended or supplemented by any amendment or supplement, shall not contain any untrue statement of a material fact or omit to state any material fact regarding German American, GAHC or the Holding Company Merger necessary to make the statements therein not false or misleading. German American shall timely file all documents required to obtain all necessary Blue Sky permits and approvals, if any, required to carry out the Merger, shall pay all expenses incident thereto and shall use its best efforts to obtain such permits and approvals on a timely basis. German American shall promptly and properly prepare and file any other filings required under the Securities Exchange Act of 1934 (the "Exchange Act") relating to the Mergers, or otherwise required of it under the Exchange Act prior to the Effective Time, and shall deliver copies thereof to CSB's counsel promptly upon the filing thereof with the SEC. Section 5.02. Breaches. German American shall, in the event it has knowledge of the occurrence of any event or condition which would cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known prior to the date of this Agreement) of any of its representations or agreements contained or referred to in this Agreement, give prompt notice thereof to CSB and use its best efforts to prevent or promptly remedy the same. Section 5.03. Consummation of Agreement. German American shall use its best efforts to perform and fulfill all conditions and obligations to be performed or fulfilled under this Agreement and to effect the Mergers in accordance with the terms and conditions of this Agreement, and use its best efforts to cause the Closing to occur on March 31, 1998 or as soon thereafter as practicable. Section 5.04. Directors' and Officers' Indemnification. (a) Following the Effective Time, German American will provide the directors and officers of CSB and Citizens from time to time with the same directors' and officers' liability insurance coverage that German American provides to directors and officers of its other banking subsidiaries. German American will use its best efforts to cause such coverage with respect to the CSB and Citizens directors and officers to specify an unlimited retroactive date in order that all present and former directors and officers of CSB and Citizens would be entitled to coverage thereunder in accordance with the policy terms with respect to acts or omissions whether before or after the Effective Time. In the event that German American is unsuccessful in obtaining such full retroactive insurance coverage, German American will not object to the purchase by CSB and Citizens of tail coverage with respect to prior acts or omissions of present and prior directors and officers of CSB and Citizens. (b) For six (6) years after the Effective Time, German American shall (and shall cause the Surviving Bank to) indemnify, defend and hold harmless the officers and directors of CSB and Citizens who are serving at the Effective Time or who have served prior to the Effective Time (each, an "Indemnified Party") against all losses, expenses, claims, damages and liabilities arising out of actions or omissions (arising from their present or former status as officers or directors) occurring on or prior to the Effective Time to the full extent then permitted under the applicable provisions of the IBCL and the IFIA and under the respective articles of incorporation and bylaws of CSB and Citizens. -A 23- (c) If during the six (6) year period after the Effective Time German American or the Surviving Bank or any of its or their successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case, proper provision shall be made so that the successors and assigns of German American and/or the Surviving Bank shall assume the obligations set forth in this Section 5.04. Section 5.05. Board of Directors of German American and Citizens. (a) German American shall cause a mutually acceptable representative of the Board of CSB (as it is constituted immediately prior to the Effective Time) to be appointed to the Board of Directors of German American as of the Effective Time. While German American cannot commit to any future course of conduct by its Board of Directors as to the election of directors because nominations of Board nominees are subject to their fiduciary duties and because there can be no assurance that the present members of the Board of Directors of German American will remain members (in whole or in part) of the Board of Directors as of any future time, German American represents that it is the general present practice and intent of its present Board of Directors to nominate incumbent members of the Board for re-election at the expiration of their respective terms, subject to the Board's retirement age and other policies in effect from time to time. (b) For a period of three years following the Closing Date (the "Transition Period"), German American or GAHC shall cause the Board of Directors of Citizens to be not larger than 16 members and shall grant the directors of Citizens who were directors of Citizens immediately prior to the Effective Time ("Continuing Directors") the exclusive right to nominate individuals to German American (as future sole shareholder) to fill any vacancies among the group of Continuing Directors that may arise during the Transition Period; provided, however, that German American retains the right to vote against any such nominee should it find such nominee objectionable. During the Transition Period, and subject to standard practices protecting Citizens as it relates to bonding and regulatory issues, German American shall not remove any Continuing Director from his position as a director of Citizens unless such removal is approved by three fourths of the members of the Board of Directors of Citizens then in office. During the Transition Period, German American shall use its best efforts to assure that the Continuing Directors always represent 50 percent of the total number of members of the Board of Directors of Citizens. (c) For each year during the Transition Period, German American shall direct the German American Representatives serving on the Board of Citizens not to oppose any advance payment that may be authorized by the Citizens Board of Directors of up to $3000 per year to each Continuing Director then on the Board of Directors in addition to customary director fees, in lieu of certain health and life insurance benefits currently provided by Citizens to its present directors. Section 5.06. Officers of Citizens. During the Transition Period, Jerry A. Church shall not be removed as the President and Chief Executive Officer of Citizens, unless such removal is approved by three fourths of the members of the Board of Directors of Citizens then in office. In addition, neither (a) Jerry A. Church, during the Transition Period, (b) nor any other officers of Citizens, for a period of at least six months from the Effective Time, shall be terminated (other than for willful misconduct) unless such termination is approved by three fourths of the members of the Board of Directors of Citizens then in office. Section 5.07. Construction of Banking Facility. Immediately following the date of this Agreement, German American shall initiate detailed design work, and as soon as practicable after the Effective Time shall commence the construction, of a modern banking facility for Citizens incorporating the existing one square block -A 24- former Moose property located between Third and Fourth Streets on Main Street in Petersburg, Indiana. The building shall comprise approximately 15,000 to 18,000 square feet and is anticipated to have an approximate budget of $1.5 to 2.0 million. Disposition and interim or permanent utilization of Citizens' existing office facility and of Community's Petersburg branch shall be as determined by the Citizens Board with a view to the best interests of the Petersburg community and of Citizens. Section 5.08. Preservation of Business. German American shall: (a) conduct its business substantially in the manner as is presently being conducted and in the ordinary course of business and not amend its articles of incorporation in any manner that requires the approval of shareholders of German American under the IBCL; (b) file, and cause its subsidiaries to file, all required reports with applicable regulatory authorities; (c) comply with all laws, statutes, ordinances, rules or regulations applicable to it and to the conduct of its business, the noncompliance with which results or could result in a material adverse effect on the financial condition, results of operations, business, assets or capitalization of German American on a consolidated basis; and (d) comply in all material respects with each contract, agreement, commitment, obligation, understanding, arrangement, lease or license to which it is a party by which it is or may be subject or bound, the breach of which could result in a material adverse effect on the financial condition, results of operations, business, assets or capitalization of German American on a consolidated basis. Section 5.09. Securities and Exchange Commission Filings. German American will provide CSB with copies of all filings made by German American with the SEC under the Exchange Act; and the Securities Act and the respective rules and regulations of the SEC thereunder as soon as practicable after such filings are made at any time prior to the Effective Time. Section 5.10. Rule 144(c) Information. Following the Effective Time, German American shall make available adequate current public information about itself as that terminology is used in and as required by Rule 144(c) of the SEC under the Securities Act. Section 5.11. Authorization of Common Stock. At the Effective Time and on such subsequent dates when the former shareholders of CSB surrender their CSB share certificates for cancellation, the shares of German American Common to be exchanged with former shareholders of CSB shall have been duly authorized and validly issued by German American and shall be fully paid and non-assessable and subject to no pre-emptive rights and listed for trading on the NASDAQ NMS. Section 5.12. Past Service Credit. All employees of Citizens will be eligible to participate in all German American's employee benefit plans (in accordance with the terms of the German American plans) as soon as practicable following the Effective Time. Following the Effective Time and until Citizens employees become eligible to participate in German American's employee benefit plans, German American shall continue the coverage of such employees under the Citizens plans such that no gap in coverage shall occur. As has been its past practice, German American shall give employees of Citizens full vesting, entry eligibility, benefit eligibility and pre-existing condition service credit under all of German American's employee benefit programs for their years and, if applicable, months of service with Citizens, and German American shall use its best efforts to cause these results to occur; provided, however, terms of employee participation in any insured program are subject to the agreement of German American's insurers with respect to pre-existing conditions. Copayments and deductibles paid by a Citizens employee under any Citizens welfare benefit plan shall be treated as if paid under the applicable German American welfare benefit plan, subject to the agreement of German American's insurers. Section 5.13. Charitable Giving; Community Foundation. -A 25- (a) During the Transition Period, German American shall direct its German American Representatives serving on the Board of Citizens not to oppose any donations of Citizens in support of the charitable, fraternal, social, educational, recreational and other needs of the communities served by Citizens in an aggregate annual minimum amount not exceeding two percent of Citizens' net income for the previous year (although German American may, of course, support larger donations in its discretion). Following the Transition Period, the donations by Citizens or its successors in support of such charitable, fraternal, social, educational, recreational and other needs shall be based upon the Citizens Board's annual independent determination of the level of donations required to meet the needs of worthy projects within the communities served by Citizens, after consideration of all relevant factors. In determining the net income of Citizens, the following shall not be deducted or otherwise taken into account: (i) all costs and expenses associated with the Mergers, and (ii) all accounting and financial statement adjustments relating to the Mergers. (b) If Citizens determines, in its discretion, following the Effective Time to form a non-profit foundation, managed by its Board of Directors for the benefit of the communities served by Citizens, German American will support the funding by Citizens of such foundation at levels not less than Citizens' past charitable contributions practices prior to the Merger; provided that any donations approved by the Citizens Board of Directors pursuant to Section 5.13(a) shall be credited against the annual funding of the foundation. ARTICLE SIX CONDITIONS PRECEDENT TO THE MERGERS Section 6.01. Conditions of German American's Obligations. The obligations of German American, GAHC and Community to effect the Mergers shall be subject to the satisfaction (or waiver by German American, GAHC and Community) prior to or on the Closing Date of the following conditions: (a) The representations and warranties made by CSB and Citizens in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date. (b) CSB and Citizens shall have performed and complied in all material respects with all of their respective obligations and agreements required to be performed on or prior to the Closing Date under this Agreement. (c) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers shall be in effect, nor shall any proceeding by any bank regulatory authority or governmental agency seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Mergers which makes the consummation of the Mergers illegal. (d) All necessary regulatory approvals, consents, authorizations and other approvals required by law or stock market requirements for consummation of the Mergers, including any approval of the Mergers by the shareholders of German American in order to comply with the NASDAQ NMS listing standards, shall have been obtained and all waiting periods required by law shall have expired. (e) German American shall have received the environmental reports required by Sections 4.06 and 4.01(a)(xv) hereof and shall not have elected, pursuant to Section 4.06 hereof, to terminate and cancel this Agreement. -A 26- (f) German American shall have received all documents required to be received from CSB or Citizens on or prior to the Closing Date, all in form and substance reasonably satisfactory to German American. (g) German American shall have received a letter, dated as of the Effective Time, from Crowe, Chizek and Company, LLP, its independent public accountants, to the effect that the Holding Company Merger will qualify for pooling of interests accounting treatment under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with this Agreement. (h) The Registration Statement shall be effective under the Securities Act and no stop orders suspending the effectiveness of the Registration Statement shall be in effect or proceedings for such purpose pending before or threatened by the SEC. (i) German American shall have received from its counsel, Leagre Chandler & Millard, an opinion to the effect that if the Mergers are consummated in accordance with the terms set forth in this Agreement, (i) the Holding Company Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by the holders of shares of CSB Common upon receipt of the Merger consideration (except for cash received in lieu of fractional shares); (iii) the basis of shares of German American Common received by the shareholders of CSB will be the same as the basis of shares of CSB Common exchanged therefor; and (iv) the holding period of the shares of German American Common received by the shareholders of CSB will include the holding period of the shares of CSB Common exchanged therefor, provided such shares were held as capital assets as of the Effective Time. Section 6.02. Conditions of CSB's and Citizens' Obligations. CSB's and Citizens' obligations to effect the Mergers shall be subject to the satisfaction (or waiver by CSB and Citizens) prior to or on the Closing Date of the following conditions: (a) The representations and warranties made by German American, GAHC and Community in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on the Closing Date. (b) German American, GAHC and Community shall each have performed and complied in all material respects with all of its obligations and agreements required to be performed prior to the Closing Date under this Agreement. (c) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers shall be in effect, nor shall any proceeding by any bank regulatory authority or other governmental agency seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, enforced or deemed applicable to the Mergers which makes the consummation of the Mergers illegal. (d) All necessary regulatory approvals, consents, authorizations and other approvals required by law for consummation of the Mergers, including the requisite approval of the Mergers by the shareholders of CSB, shall have been obtained and all waiting periods required by law shall have expired. (e) CSB shall have received all documents required to be received from German American, GAHC and Community on or prior to the Closing Date, all in form and substance reasonably satisfactory to CSB. -A 27- (f) The Registration Statement shall be effective under the Securities Act and no stop orders suspending the effectiveness of the Registration Statement shall be in effect or proceedings for such purpose pending before or threatened by the SEC, and German American shall have received all state securities or "Blue Sky" approvals, authorizations, exemptions or permits required to issue the shares of German American Common as the Merger Consideration to the shareholders of CSB. (g) CSB shall have received from counsel for German American, Leagre Chandler & Millard, an opinion reasonably satisfactory to CSB to the effect that if the Mergers are consummated in accordance with the terms set forth in this Agreement, (i) the Holding Company Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by the holders of shares of CSB Common upon receipt of the Merger Consideration (except for cash received in lieu of fractional shares); (iii) the basis of German American Common received by the shareholders of CSB will be the same as the basis of CSB Common exchanged therefor; and (iv) the holding period of the shares of German American Common received by the shareholders of CSB will include the holding period of the shares of CSB Common exchanged therefor, provided such shares were held as capital assets as of the Effective Time. (h) The German American Common to be exchanged for the CSB Common pursuant to the Holding Company Merger shall have an aggregate value (as measured by the per share average value of the German American Common during the Valuation Period that is utilized to determine the Exchange Ratio pursuant to Section 1.03(a)) of at least $22,750,000. (i) CSB shall have received from Olive Corporate Finance, LLC or another reputable financial advisor a written fairness opinion stating that the terms of the Holding Company Merger are fair to the shareholders of CSB from a financial point of view. Such written fairness opinion shall (i) be in form and substance reasonably satisfactory to CSB, (ii) be dated as of the date not later than the mailing date of the proxy statement - prospectus relating to the Mergers to be mailed to the shareholders of CSB, and (iii) be included as an exhibit to such proxy statement - prospectus. ARTICLE SEVEN TERMINATION OR ABANDONMENT Section 7.01. Mutual Agreement. This Agreement may be terminated by the mutual written agreement of the parties approved by their respective Boards of Directors at any time prior to the Effective Time, regardless of whether shareholder approval of this Agreement and the Mergers by the shareholders of CSB or German American shall have been previously obtained. Section 7.02. Breach of Representations, Warranties or Covenants. (a) In the event that there is a material breach in any of the representations and warranties or covenants of the parties, which breach is not cured within thirty (30) days after notice to cure such breach is given by the non-breaching party, then the Board of Directors of the non-breaching party, regardless of whether approval by the shareholders of this Agreement and the Mergers shall have been previously obtained, and in addition to any other remedies to which the non-breaching party may be entitled, may terminate and cancel this Agreement effective immediately by providing written notice thereof to the other party hereto. (b) In the event that this Agreement is terminated -A 28- (i) as a result of the wilful failure of CSB or Citizens to perform its obligations in violation of this Agreement or (ii) due to the failure of the Holding Company Merger to be approved by the requisite vote of shareholders of CSB following the making by any other person or entity not a party to this Agreement of a proposal to CSB or Citizens contemplating a merger, consolidation, plan of stock exchange, sale of all or substantially all assets, or other business combination with CSB or Citizens, and if, but only if, CSB shall publicly announce within twelve months following a termination described by this clause (ii) that CSB has accepted a proposal for a business combination with any third party, then, in lieu of specific performance but in addition to whatever other legal rights or remedies to which German American may be entitled against any third party, CSB shall, upon German American's demand and not later than 90 days after the making of such demand, (x) pay to German American a termination fee of $455,000 and (y) reimburse German American for all its out-of-pocket costs and expenses in connection with the Mergers incurred from and after October 1, 1997 (but not more than $100,000), including its legal, accounting, environmental and other consulting fees and expenses. If CSB should fail or refuse to pay any amount demanded by German American pursuant to the preceding sentence and German American recovers such disputed amount pursuant to a legal proceeding, CSB shall, in addition thereto, pay to German American all reasonable costs, charges, expenses (including without limitation the reasonable fees and expenses of counsel) and other amounts expended by German American in connection with or arising out of such legal proceeding. The parties agree that the actual damages and loss that would be caused to German American by reason of any such termination cannot be determined with certainty due to German American's "opportunity cost" in proceeding with the Mergers compared to proceeding with other opportunities that are available to German American and other factors. The parties therefore agree that the amounts payable pursuant to this Section 7.02 represent a reasonable estimate of German American's opportunity cost and other damages and loss that may be awarded as either a termination fee or as liquidated damages to German American if it chooses not to seek specific performance of this Agreement, and that such amounts represent the sole damages from CSB and Citizens to which German American would be entitled. Section 7.03. Adverse Environmental Reports. German American or CSB as specifically provided by Section 4.06(f) may terminate this Agreement by giving written notice thereof to the nonterminating party. Section 7.04. Failure of Conditions. In the event any of the conditions to the obligations of either party are not satisfied or waived on or prior to the Closing Date, and if any applicable cure period provided in Section 7.02 (a) hereof has lapsed, then the Board of Directors of such party may, regardless of whether approval by its shareholders of this Agreement and the Mergers shall have been previously obtained, terminate and cancel this Agreement on the Closing Date by delivery of written notice thereof to the other party on such date. Section 7.05. Termination Upon Adverse Regulatory Determination. In connection with the filings that the German American, Community, CSB and/or Citizens may be required to make in connection with the Mergers with banking, securities, and antitrust regulatory agencies ("Agencies"), each party shall use their best efforts to obtain all necessary approvals of, or clearances from, the Agencies, and shall cause their respective agents and advisors to cooperate and use their best efforts in connection therewith. CSB consents to the representation by its counsel, Krieg DeVault Alexander & Capehart, of German American as German American's special antitrust counsel with respect to the Mergers in connection with preparing the necessary economic briefs addressing the potential anti-competitive consequences of the Mergers and acting as advocate before the Agencies in connection with such matters (provided that German American shall be solely responsible for all of such firm's fees and expenses in connection with such briefing and such advocacy). Citizens -A 29- shall, if requested by German American, withdraw from the Federal Reserve System in time for the required application for approval of the Bank Merger under the Bank Merger Act to be properly submitted for approval of the FDIC rather than the FRB so that the regulatory requirements (if any) that might be imposed upon Citizens in connection with approval of the Bank Merger Act application will be consistent with the FDIC standards that are imposed upon German American's other state bank subsidiaries. German American (or its subsidiaries) shall be responsible for making the required Merger filings (except to the limited extent that the applicable law, regulations, or forms specify that CSB (or Citizens) is the appropriate filing party) with, and for paying all filing fees to, the Agencies, and for discussing such filings with the Agencies and responding to comments thereon. If any required filing is disapproved by any of the Agencies, or any determination is made by any of the Agencies that either of the Mergers cannot be consummated except on terms and conditions that are materially adverse from a financial point of view to German American, or the U.S. Department of Justice shall have sought and obtained an order from a court of appropriate jurisdiction temporarily or permanently restraining or enjoining consummation of the Mergers (an "Adverse Determination"), then German American shall promptly advise CSB of such Adverse Determination and German American's intended course of action with respect thereto. In the event that German American in its sole discretion determines to seek a judicial or regulatory appeal or review (formal or informal) of the Adverse Determination, CSB and Citizens (and their agents and advisors) shall continue to cooperate with such appeal and review procedure and use their best efforts to assist in connection with obtaining reversal or modification of such Adverse Determination. In the event that (a) German American in its sole discretion elects not to seek an appeal or review of the Adverse Determination or elects in its sole discretion at any time after seeking such an appeal or review to discontinue that effort, or (b) German American seeks such an appeal or review but all avenues for such appeal or review are exhausted without the Adverse Determination having been vacated or overruled or modified in such a manner that the Adverse Determination is no longer materially adverse ("Relief Determination"), then either German American or CSB may terminate this Agreement without obligation to the other on account of the Adverse Determination; provided, however, that German American shall (a) pay CSB a termination fee of $455,000 within 90 days of any such termination (which is agreed to be a reasonable estimate of CSB's opportunity cost in proceeding with the Mergers compared to proceeding with other opportunities available to CSB) and (b) reimburse CSB and Citizens for all their out-of-pocket costs and expenses in connection with the Mergers incurred from October 1, 1997, (but not more than $100,000) including its legal, accounting, environmental and other consulting fees and expenses, if (x) the Agreement is terminated in accordance with this sentence solely as a result of an Adverse Determination relating to the potential effect of the Mergers upon competition, and (y) CSB and Citizens and their respective agents and advisors have abided by their obligations of cooperation and best efforts expressed in this Section 7.05. If German American should fail or refuse to pay any amount demanded by CSB pursuant to the preceding sentence and CSB should recover such disputed amount pursuant to a legal proceeding, German American shall, in addition thereto, pay to CSB all reasonable costs, charges, expenses (including without limitation the reasonable fees and expenses of counsel) and other amounts reasonably expended by CSB in connection with or arising out of such legal proceeding. Section 7.06. Shareholder Approval Denial. If this Agreement and consummation of the Holding Company Merger is not approved by the shareholders of CSB, or if the issuance of the additional German American Common is required to be approved by the shareholders of German American pursuant to the NASDAQ NMS listing standards and is not so approved at the meeting of German American's shareholders called to consider such issuance, then either party may terminate this Agreement by giving written notice thereof to the other party, subject to Section 7.02(b). Section 7.07. Regulatory Enforcement Matters. In the event that CSB or Citizens shall become a party or subject to any memorandum of understanding, cease and desist order, or civil money penalties imposed by any federal or state agency charged with the supervision or regulation of banks or bank holding companies after the -A 30- date of this Agreement, then German American may terminate this Agreement by giving written notice thereof to CSB. Section 7.08. Lapse of Time. If the Closing Date does not occur on or prior to November 1, 1998 (regardless of whether an Adverse Determination occurs), then this Agreement may be terminated by the Board of Directors of either CSB or German American by giving written notice thereof to the other party. ARTICLE EIGHT GENERAL PROVISIONS Section 8.01. Liabilities. In the event that this Agreement is terminated or the Mergers are abandoned pursuant to the provisions of Article Seven hereof, no party hereto shall have any liability to any other party for costs, expenses, damages, termination fees, or otherwise except to the extent specifically set forth in Section 7.02(b) and in Section 7.05. Directors, officers and employees of each party hereto shall have no personal liability under this Agreement with respect to the representations and warranties of their respective parties except for fraud or for their personal intentional and knowing participation in the making of false or misleading statements in such representation and warranties. Section 8.02. Notices. Any notice or other communication hereunder shall be in writing and shall be deemed to have been given or made (a) on the date of delivery, in the case of hand delivery, or (b) three (3) business days after deposit in the United States Registered or Certified Mail, with mailing receipt postmarked by the Postal Service to show date of mailing, postage prepaid, or (c) upon actual receipt if transmitted during business hours by facsimile (but only if receipt of a legible copy of such transmission is confirmed by the recipient); addressed (in any case) as follows: (a) If to German American, GAHC or Community: German American Bancorp 711 Main Street Box 810 Jasper, Indiana 47546 Attn: George W. Astrike, Chairman of the Board with a copy to: Leagre Chandler & Millard 9100 Keystone Crossing Suite 800 P. O. Box 40609 Indianapolis, Indiana 46240-0609 Attn: Mark B. Barnes and (b) If to CSB or Citizens: CSB Bancorp Main and 7th Streets P.O. Box 98 Petersburg, IN 47567 Attn: Jerry A. Church, Chief Executive Officer -A 31- with a copy to: Krieg DeVault Alexander & Capehart One Indiana Square Suite 2800 Indianapolis, Indiana 46204-2017 Attn: Nicholas J. Chulos or to such other address as any party may from time to time designate by notice to the other. Section 8.03. Non-survival of Representations and Agreements. No representation, warranty or covenant contained in this Agreement shall survive (and no claims for the breach or nonperformance thereof may be brought after) the Effective Time except the covenants of German American in Sections 5.04, 5.05, 5.06, 5.07, 5.10, 5.11, 5.12 and 5.13 which shall survive the Effective Time. No representation, warranty or covenant contained in this Agreement shall survive (and, except for any intentional breach or nonperformance, no claims for the breach or nonperformance, thereof may be brought after) the termination of this Agreement pursuant to Article Seven hereof. The reliability and binding effect of any representation or warranty made by any party in this Agreement shall not be diminished or limited in any way by any review, or by the opportunity to conduct any review, by or on behalf of the intended beneficiary of the subject matter of the representation or warranty, whether before or after the date of this Agreement, unless and to the extent that the reviewing party and the other party expressly agree otherwise in writing. Section 8.04. Entire Agreement. This Agreement and the Confidentiality Agreement constitute the entire agreement between the parties and supersede and cancel any and all prior discussions, negotiations, undertakings and agreements between the parties relating to the subject matter hereof, including, without limitation, the Second Amended and Restated Offer of Merger dated October 6, 1997 of German American accepted by CSB. Section 8.05. Headings and Captions. The captions of Articles and Sections hereof are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. Section 8.06. Waiver, Amendment or Modification. The conditions of this Agreement which may be waived may only be waived by written notice specifically waiving such condition addressed to the party claiming the benefit of the waiver. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. This Agreement may not be amended or modified except by a written document duly executed by the parties hereto. Section 8.07. Rules of Construction. Unless the context otherwise requires (a) a term used herein has the meaning assigned to it, and (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles. Section 8.08. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall be deemed one and the same instrument. Section 8.09. Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors. There shall be no third party beneficiaries hereof. -A 32- Section 8.10. Governing Law; Assignment. This Agreement shall be governed by the laws of the State of Indiana. This Agreement may not be assigned by any of the parties hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written, with the unanimous approval of their respective Boards of Directors. GERMAN AMERICAN BANCORP By____________________________ George W. Astrike Chairman of the Board and Chief Executive Officer GERMAN AMERICAN HOLDINGS CORPORATION By____________________________ George W. Astrike Chief Executive Officer COMMUNITY TRUST BANK By____________________________ Its___________________________ -A 33- CSB BANCORP By____________________________ Its____________________________ THE CITIZENS STATE BANK OF PETERSBURG By____________________________ Its___________________________ APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF CSB BANCORP: The undersigned Directors of CSB Bancorp hereby (a) agree in their capacities as Directors of CSB to recommend to CSB's shareholders the approval of this Agreement and the Holding Company Merger in accordance with 4.03 hereof, and (b) agree to vote their shares of CSB Common that are registered in their personal names (and agree to use their best efforts to cause all additional shares of CSB Common over which they have voting influence or control to be voted) in favor of the Holding Company Merger at the CSB Shareholders Meeting. Notwithstanding the foregoing, the execution of the Agreement by the undersigned Directors of CSB or anything herein to the contrary, German American, GAHC and Community hereby understand and agree, as evidenced by their execution of this Agreement above, that none of the undersigned Directors of CSB and Citizens will have any obligation or liability under this Agreement or otherwise to German American, GAHC, Community or any other person or entity, except as provided in the foregoing sentence and in Section 8.01 hereof. - ----------------------------------- ---------------------------------- Lester Nixon Marion R. Klipsch - ----------------------------------- ---------------------------------- Jerry A. Church Michael J. Voyles - ----------------------------------- ---------------------------------- Robert C. Klipsch W. Wyatt Rauch - ----------------------------------- ---------------------------------- Robert D. Harris Gregory K. Willis -A 34- APPENDIX B ====================================================================== AGREEMENT AND PLAN OF REORGANIZATION by and among FSB FINANCIAL CORPORATION an Indiana corporation, FSB BANK an Indiana banking corporation, GERMAN AMERICAN BANCORP, an Indiana corporation, GERMAN AMERICAN HOLDINGS CORPORATION, an Indiana corporation, and COMMUNITY TRUST BANK an Indiana banking corporation. ====================================================================== January __, 1998 -B 1- AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made January ___, 1998, by and among FSB FINANCIAL CORPORATION, an Indiana corporation ("FSB"), FSB BANK, an Indiana banking corporation ("FSB Bank"), GERMAN AMERICAN BANCORP, an Indiana corporation ("German American"), GERMAN AMERICAN HOLDINGS CORPORATION, an Indiana corporation ("GAHC"), and COMMUNITY TRUST BANK, an Indiana banking corporation ("Community"). Recitals A. FSB is a corporation duly organized and existing under the Indiana Business Corporation Law ("IBCL") that is duly registered with the Board of Governors of the Federal Reserve System ("FRB") as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHC Act"). FSB owns all of the outstanding capital stock of FSB Bank. The principal place of business of FSB is Francisco, Gibson County, Indiana. B. FSB Bank is a banking corporation duly organized and existing under the Indiana Financial Institutions Act ("IFIA"), chartered by the Indiana Department of Financial Institutions ("DFI"), which is not a member of the Federal Reserve System, with its principal banking offices located in Francisco, Gibson County, Indiana, and a branch located in Princeton, Gibson County, Indiana. C. German American is a corporation duly organized and existing under the IBCL that is duly registered as a bank holding company under the BHC Act. German American owns all of the outstanding capital stock of GAHC. The principal place of business of German American is Jasper, Dubois County, Indiana. D. GAHC is a corporation duly organized and existing under the IBCL that is duly registered as a bank holding company under the BHC Act with its principal place of business in Jasper, Dubois County, Indiana. GAHC owns all of the outstanding common stock of Community. E. Community is a banking corporation duly organized and existing under the IFIA, chartered by the DFI, which is not a member of the Federal Reserve System, with its principal banking office in Otwell, Pike County, Indiana. F. German American is also party to an agreement providing for the merger of Community with and into the Citizens State Bank of Petersburg, Petersburg, Pike County, Indiana ("Citizens"). G. The parties desire to effect a transaction whereby FSB Bank will be merged with and into Community (or into Citizens if the planned merger of Community into Citizens has first occurred) and simultaneously FSB will be merged with and into GAHC in consideration of the issuance of German American Common Stock. Agreements In consideration of the premises and the mutual terms and provisions set forth in this Agreement, the parties agree as follows. -B 2- ARTICLE ONE TERMS OF THE MERGERS & CLOSING Section 1.01. The Holding Company Merger. Pursuant to the terms and provisions of this Agreement, the IBCL and the Plan of Merger attached hereto as Appendix A and incorporated herein by reference (the "Holding Company Plan of Merger"), FSB shall merge with and into GAHC (the "Holding Company Merger") simultaneously with the Bank Merger (as defined below). FSB shall be the "Merging Holding Company" in the Holding Company Merger and its corporate identity and existence, separate and apart from GAHC, shall cease on consummation of the Holding Company Merger. GAHC shall be the "Surviving Holding Company" in the Holding Company Merger, and its name shall not be changed pursuant to the Holding Company Merger. Section 1.02. Effect of the Holding Company Merger. The Holding Company Merger shall have all the effects provided by the IBCL. Section 1.03. The Holding Company Merger - Conversion of Shares. (a) At the time of filing with the Indiana Secretary of State of appropriate Articles of Merger with respect to the Holding Company Merger or at such later time as shall be specified by such Articles of Merger (the "Effective Time"): (i) Each of the not more than 48,916 shares of common stock, no par value, of FSB ("FSB Common") that are issued and outstanding immediately prior to the Effective Time shall thereupon and without further action be converted into shares of common stock, $10 par value, $1 stated value, of German American ("German American Common") at the Exchange Ratio which shall be calculated as set forth in this Section 1.03(a)(i). FSB's shareholders of record at the time the Merger shall become effective, for the shares of FSB Common then held by them, respectively, shall be allocated and entitled to receive (upon surrender of certificates representing said shares for cancellation) shares of German American Common, which total number of shares of German American Common shall have a value (as hereinafter determined) equal to 150% of the sum of (A) the shareholders' equity of FSB determined in accordance with generally accepted accounting principles consistently applied at June 30,1997 plus (or minus) (B) the amount of net income (loss) retained after payment of dividends, if any, but before securities transactions gains of FSB (as determined in accordance with generally accepted accounting principles consistently applied to the satisfaction of German American) from June 30, 1997, to the end of the month immediately preceding the Closing Date (as that term is defined in Section 1.09), plus (C) if the Board of Directors of FSB or its subsidiary FSB Bank shall establish the executive bonus pool described in Section 4.01(a)(vi)(B) of this Agreement (the "Bonus Pool"), and if FSB and FSB Bank shall thereby obtain a release from the Chief Executive Officer of all employment-related claims, the after-tax amount of any bonus payment (not exceeding $75,000, plus an allowance in lieu of vacation time not to exceed $4,060 pre-tax) that may be paid or payable to FSB Bank's present Chief Executive Officer thereunder. Fees and expenses incurred by FSB in connection with the transactions contemplated by this Agreement, regardless of whether such fees and expenses have been paid or accrued as of the end of the month preceding the Closing Date (but only to the extent that such fees and expenses exceed $15,000), and any amounts paid or payable before or after the Effective Time pursuant -B 3- to the Bonus Pool, shall be considered in determining the net income (loss) of FSB for purposes of computing the consideration payable to FSB shareholders hereunder ("Merger Consideration"). For purposes of establishing the number of shares of German American Common into which each share of FSB Common shall be converted at the Effective Time (the "Exchange Ratio"), each share of German American Common shall be valued at the average of the lowest closing asked prices and highest closing bid prices of German American Common as reported by the NASDAQ National Market System for each trading day within the period of ten trading days that ends on the second business day preceding the Closing Date (as defined by Section 1.09 hereof) (such period being hereafter referred to as the "Valuation Period" and the value being hereafter referred to as the "Closing Value"). Such value shall then be divided into the aggregate Merger Consideration to establish (to the nearest whole share) the Exchange Ratio. (ii) The shares of GAHC issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding shares of GAHC. (b) No fractional shares of German American Common shall be issued and, in lieu thereof, holders of shares of FSB Common who would otherwise be entitled to a fractional share interest (after taking into account all shares of FSB Common held by such holder) shall be paid an amount in cash equal to the product of such fractional share and the Closing Value. (c) At the Effective Time, all of the outstanding shares of FSB Common, by virtue of the Holding Company Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of any certificate or certificates which immediately prior to the Effective Time represented outstanding shares of FSB Common (the "Certificates") shall thereafter cease to have any rights with respect to such shares, except the right of such holders to receive, without interest, the Merger Consideration upon the surrender of such Certificate or Certificates in accordance with Section 1.08. (d) At the Effective Time, each share of FSB Common, if any, held in the treasury of FSB or by any direct or indirect subsidiary of FSB (other than shares held in trust accounts for the benefit of others or in other fiduciary, nominee or similar capacities) immediately prior to the Effective Time shall be canceled. (e) At the Effective Time, the shares of common stock of Community outstanding immediately prior to the Effective Time shall be unchanged by the Holding Company Merger and shall be deemed owned by the Surviving Holding Company. (f) If any holders of FSB Common dissent from the Holding Company Merger and demand dissenters' rights under the IBCL, any issued and outstanding shares of FSB Common held by such dissenting holders shall not be converted as described in this Section 1.03 but shall from and after the Effective Time represent only the right to receive such consideration as may be determined to be due to such dissenting holders pursuant to the IBCL; provided, however, that each share of FSB Common outstanding immediately prior to the Effective Time and held by a dissenting holder who shall, after the Effective Time, withdraw his demand for dissenters' rights or lose his right to exercise dissenters' rights shall have only such rights as provided under the IBCL. -B 4- Section 1.04. The Bank Merger. Pursuant to the terms and provisions of this Agreement, the IFIA, and the Plan of Merger attached hereto as Appendix B and incorporated herein by reference (the "Bank Plan of Merger"), and simultaneously with the Holding Company Merger, FSB Bank shall merge with and into Community (or, if the merger of Community into Citizens has first occurred, into Citizens) (the "Bank Merger"). FSB Bank shall be the "Merging Bank" in the Bank Merger and its corporate identity and existence, separate and apart from Community (or Citizens, as the case may be), shall cease on consummation of the Bank Merger. Community (or Citizens as the case may be) shall be the "Surviving Bank" and shall continue its corporate existence under its charter under the provisions of the IFIA and the Bank Merger shall effect no change in the corporate name of Community. Section 1.05. Effect of the Bank Merger. The Bank Merger shall have all of the effects provided by the IFIA. Section 1.06. The Bank Merger - No Conversion of Shares. At the Effective Time, the shares of Community (or Citizens as the case may be) that were issued and outstanding immediately prior to the Bank Merger shall continue to be issued and outstanding, and the shares of FSB Bank shall be canceled. Section 1.07. The Closing. The closing of the Mergers (the "Closing") shall take place at the offices of Leagre Chandler & Millard (or at such other place as the parties may agree) at 9:00 A.M. Eastern Standard Time on the Closing Date described in Section 1.09 of this Agreement. Section 1.08. Exchange Procedures; Surrender of Certificates. (a) Fifth Third Bank, Cincinnati, Ohio, shall act as Exchange Agent in the Holding Company Merger (the "Exchange Agent"). (b) As soon as reasonably practicable but in no event more than five working days after the Effective Time, the Exchange Agent shall mail to each record holder of any Certificate or Certificates whose shares were converted into the right to receive a pro rata portion of the Merger Consideration, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as German American may reasonably specify) (each such letter the "Merger Letter of Transmittal") and instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consolidation. As soon as reasonably practical but in no event more than fifteen days after surrender to the Exchange Agent of a Certificate, together with a Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such Certificate certificate(s) representing shares of German American Common in an aggregate amount computed at the Exchange Ratio plus a check representing any cash payable in lieu of issuance of a fractional share. No interest on the Merger Consideration issuable upon the surrender of the Certificates shall be paid or accrued for the benefit of holders of Certificates. If the Merger Consideration is to be issued to a person other than a person in whose name a surrendered Certificate is registered, it shall be a condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of -B 5- the FSB shareholder in the event that such shareholder claims loss of a Certificate and requests that German American waive the requirement for surrender of such Certificate. (c) No dividends that are otherwise payable on shares of German American Common constituting the Merger Consideration shall be paid to persons entitled to receive such shares of German American Common until such persons surrender their Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common shall be issued any dividends which shall have become payable with respect to such shares of German American Common (without interest and less the amount of taxes, if any, which may have been imposed thereon), between the Effective Time and the time of such surrender. Section 1.09. The Closing Date. The Closing shall take place on the last business day of the month during which each of the conditions in Sections 6.01(d) and 6.02(d) is satisfied or waived by the appropriate party, or on such later or earlier date as FSB and German American may agree (the "Closing Date"). The parties shall use their best efforts to cause the Effective Time of both Mergers to be as of the first day of the calendar month that follows the month in which the Closing occurs. Section 1.10. Actions At Closing. (a) At the Closing, FSB shall deliver to German American: (i) a certified copy of the Articles of Incorporation and Bylaws of FSB, as amended, and a certified copy of the Articles of Incorporation and Bylaws of FSB Bank, as amended; (ii) a certificate or certificates signed by the chief executive officer of FSB and FSB Bank stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article Two hereof is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing, and (B) FSB and FSB Bank have performed and complied in all material respects, unless waived by German American, with all of their obligations and agreements required to be performed hereunder prior to the Closing Date; (iii) certified copies of the resolutions of FSB's Board of Directors and shareholders, approving and authorizing the execution of this Agreement and the Plan of Merger and authorizing the consummation of the Holding Company Merger; (iv) a certified copy of the resolutions FSB Bank's Board of Directors and shareholder, as required for valid approval of the execution of this Agreement and the consummation of the Bank Merger; (v) a certificate of the Indiana Secretary of State, dated a recent date, stating that FSB is duly organized and exists under the IBCL; (vi) a certificate of the Indiana Secretary of State, dated a recent date, stating that FSB Bank is duly organized and exists under the IFIA; and -B 6- (vii) the legal opinion of Bose McKinney & Evans, counsel for FSB to the effect set forth as Exhibit 1.10(a)(vii). (b) At the Closing, German American shall deliver to FSB: (i) a certificate signed by the Chief Executive Officer of German American stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article Three is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing and (B) German American and Community have performed and complied in all material respects, unless waived by FSB with all of its obligations and agreements required to be performed hereunder prior to the Closing Date; (ii) a certified copy of the resolutions of German American's Board of Directors authorizing the execution of this Agreement and the Plan of Merger and the consummation of the Holding Company Merger; (iii) a certified copy of the resolutions of Community's (or Citizens', as the case may be) Board of Directors and shareholder, as required for valid approval of the execution of this Agreement and the consummation of the Bank Merger; (iv) the legal opinion of Leagre Chandler & Millard, counsel for German American, in the form attached hereto as Exhibit 1.10(b)(iv) ; and (v) certificates of the Indiana Secretary of State, dated a recent date, stating that German American exists under the IBCL and that Community exists under the IFIA. (c) At the Closing, the parties shall insert the Exchange Ratio determined in accordance with Section 1.03 of this Agreement into the Plan of Merger, and shall execute and/or deliver to one another such Plan of Merger and such other documents and instruments and take such other actions as shall be necessary or appropriate to consummate the Mergers. ARTICLE TWO REPRESENTATIONS AND WARRANTIES OF FSB AND FSB BANK FSB and FSB Bank hereby severally make the following representations and warranties: Section 2.01. Organization and Capital Stock. (a) FSB is a corporation duly organized and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. -B 7- (b) FSB Bank is a corporation duly incorporated and validly existing under the IFIA and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (c) FSB has authorized capital stock of (i) 3,000,000 shares of FSB Common, no par value, of which, as of the date of this Agreement, 48,916 shares are issued and outstanding, and (ii) 2,000,000 shares of preferred stock, none of which have been issued. All such shares of FSB Common are duly and validly issued and outstanding, fully paid and non-assessable. None of the outstanding shares of FSB Common has been issued in violation of any preemptive rights of the current or past shareholders of FSB or in violation of any applicable federal or state securities laws or regulations. (d) FSB Bank has authorized capital stock of 49,000 shares of common stock, $.01 stated value, all of which shares are issued and outstanding ("FSB Bank Common"). All of such shares of FSB Bank Common are duly and validly issued and outstanding and are fully paid and nonassessable. None of the outstanding shares of FSB Bank Common has been issued in violation of any preemptive rights of the current or past shareholders of FSB Bank or in violation of any applicable federal or state securities laws or regulations. (e) There are no shares of capital stock or other equity securities of FSB or FSB Bank authorized, issued or outstanding (except as set forth in this Section 2.01) and no outstanding options, warrants, rights to subscribe for, calls, puts, or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of the capital stock of FSB or FSB Bank, or contracts, commitments, understandings or arrangements by which FSB or FSB Bank are or may be obligated to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock. Section 2.02. Authorization; No Defaults. The Boards of Directors of FSB and FSB Bank have each, by all appropriate action, approved this Agreement, the applicable Plan of Merger and the Merger contemplated thereby and have authorized the execution of this Agreement and the applicable Plan of Merger on their behalf by their duly authorized officers and the performance by FSB and FSB Bank of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of FSB, as amended, or the Articles of Incorporation or Bylaws of FSB Bank, as amended, or in any material agreement or instrument, or any decree, proceeding, law or regulation (except as specifically referred to in or contemplated by this Agreement) by or to which FSB or FSB Bank is bound or subject, would prohibit FSB or FSB Bank from consummating, or would be violated or breached by FSB's or FSB Bank's consummation of, this Agreement and the Mergers and other transactions contemplated herein on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by FSB and FSB Bank and constitutes a legal, valid and binding obligation of FSB and FSB Bank, enforceable against FSB and FSB Bank in accordance with its terms. Neither FSB nor FSB Bank is, nor will be by reason of the consummation of the transactions contemplated herein, in material default under or in material violation of any provision of, nor will the consummation of the transactions contemplated herein afford any party a right to accelerate any indebtedness under, its articles of incorporation or bylaws, any material promissory note, indenture or other evidence of indebtedness or security therefor, or any material lease, contract, or other commitment or agreement to which it is a party or by which it or its property is bound. Section 2.03. Subsidiaries. Except as otherwise disclosed in a confidential writing delivered by FSB and FSB Bank to German American and executed by all the parties concurrently with the execution of this -B 8- Agreement (the "Disclosure Schedule") and except for the ownership by FSB of all the capital stock of FSB Bank, neither FSB nor FSB Bank has (or has had at any time in the last ten years) any direct or indirect ownership interest in any corporation, partnership, limited liability company, joint venture or other business. Section 2.04. Financial Information. (a) FSB has furnished to German American the consolidated balance sheets of FSB as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. Such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be reflected in the notes thereto), and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of FSB in all material respects as of the date and for the period indicated. (b) FSB Bank has furnished to German American its Consolidated Reports of Condition and Income as filed with the FFIEC for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 (the "Call Reports"). The Call Reports were prepared in accordance with the applicable regulatory instructions on a consistent basis with previous such reports, and fairly present the financial position and results of operations of FSB Bank in all material respects as of the dates and for the periods indicated, subject, however, to normal recurring year-end adjustments, none of which will be material. (c) Neither FSB nor FSB Bank has any material liability, fixed or contingent, except to the extent set forth in the financial statements and the Call Reports described in subsections (a) and (b) of this Section 2.04 (collectively, the "FSB Financial Statements") or incurred in the ordinary course of business since the date of the most recent balance sheet of FSB or FSB Bank included in the FSB Financial Statements. (d) FSB does not engage in the lending business (except by and through FSB Bank) or any other business or activity other than that which is incident to its ownership of all the capital stock of FSB Bank, and does not own any investment securities (except the capital stock of FSB Bank). Section 2.05. Absence of Changes. Since December 31, 1996, and except to the extent reflected in the Call Reports, there has not been any material adverse change in the financial condition, the results of operations or the business of FSB or FSB Bank, taken as a whole. Section 2.06. Absence of Agreements with Banking Authorities. Except as disclosed in the Disclosure Schedule, neither FSB nor FSB Bank is subject to any order (other than orders applicable to bank holding companies or banks generally) and neither is a party to any agreement or memorandum of understanding with any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation, the Federal Deposit Insurance Corporation (the "FDIC"), the FRB, and the DFI. Section 2.07. Tax Matters. FSB and FSB Bank have filed all federal, state and local tax returns due in respect of any of its business, income and properties in a timely fashion and has paid or made provision for all amounts shown due on such returns. All such returns fairly reflect the information required to be presented therein in all material respects. All provisions for accrued but unpaid taxes contained in the FSB Financial Statements were made in accordance with generally accepted accounting principles. -B 9- Section 2.08. Absence of Litigation. There is no material litigation, claim or other proceeding pending or, to the knowledge of FSB, threatened, before any judicial, administrative or regulatory agency or tribunal, to which FSB or FSB Bank is a party or to which any of their properties are subject. Section 2.09. Employment Matters. (a) Except as disclosed in the Disclosure Schedule, neither FSB nor FSB Bank is a party to or bound by any material contract arrangement or understanding (written or otherwise) for the employment, retention or engagement of any past or present officer, employee, agent, consultant or other person or entity which, by its terms, is not terminable by FSB or FSB Bank, respectively, on thirty (30) days' written notice or less without the payment of any amount by reason of such termination. (b) FSB and FSB Bank are and have been in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, any such laws respecting employment discrimination and occupational safety and health requirements, and (i) neither FSB nor FSB Bank is engaged in any unfair labor practice; (ii) there is no unfair labor practice complaint against FSB or FSB Bank pending or, to the knowledge of FSB, threatened before the National Labor Relations Board; (iii) there is no labor dispute, strike, slowdown or stoppage actually pending or, to the knowledge of FSB, threatened against or directly affecting FSB or FSB Bank; and (iv) neither FSB nor FSB Bank has experienced any material work stoppage or other material labor difficulty during the past five years. (c) Except as set forth in the Disclosure Schedule, neither the execution nor the delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby other than the Bonus Pool, will (i) result in any payment (including without limitation severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of FSB or FSB Bank from either of such entities, (ii) increase any benefit otherwise payable under any of their employee plans or (iii) result in the acceleration of the time of payment of any such benefit. No amounts paid or payable by FSB or FSB Bank to or with respect to any employee or former employee of FSB of FSB Bank will fail to be deductible for federal income tax purposes by reason of Section 280G of the Internal Revenue Code of 1986, as amended ("Code") or otherwise. Section 2.10. Reports. Since January 1, 1994, FSB and FSB Bank have filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, if any, that they were required to file with (i) the Securities and Exchange Commission ("SEC"), (ii) the FRB, (iii) the FDIC, (iv) the DFI and (v) any other governmental authority with jurisdiction over FSB or FSB Bank. As of their respective dates, each of such reports and documents, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. Section 2.11. Investment Portfolio. All United States Treasury securities, obligations of other United States Government agencies and corporations, obligations of States and political subdivisions of the United States and other investment securities held by FSB Bank, as reflected in the Call Reports, are carried on the books of FSB Bank in accordance with generally accepted accounting principles, consistently applied. FSB Bank does not engage in activities that would require that it establish a trading account under applicable regulatory guidelines and interpretations. -B 10- Section 2.12. Loan Portfolio. All loans and discounts shown in the Call Reports, or which were entered into after September 30, 1997, but before the Closing Date, were and will be made in all material respects for good, valuable and adequate consideration in the ordinary course of the business of FSB Bank, in accordance in all material respects with FSB Bank's lending policies and practices unless otherwise approved by FSB Bank's Board of Directors, and are not, to FSB Bank's knowledge, subject to any material defenses, set offs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes or other evidences of indebtedness evidencing such loans and all forms of pledges, mortgages and other collateral documents and security agreements are and will be, in all material respects, enforceable, valid, true and genuine and what they purport to be. FSB Bank has complied and will through the Closing Date continue to comply with all laws and regulations relating to such loans, or to the extent there has not been such compliance, such failure to comply will not materially interfere with the collection of any such loan. FSB Bank has not sold, purchased or entered into any loan participation arrangement except where such participation is on a pro rata basis according to the respective contributions of the participants to such loan amount. FSB has no knowledge that any condition of property in which FSB Bank has an interest as collateral to secure a loan or that is held as an asset of any trust violates the Environmental Laws (defined in Section 2.15) in any material respect or obligates FSB, or FSB Bank, or the owner or operator of such property to remedy, stabilize, neutralize or otherwise alter the environmental condition of such property. Section 2.13. ERISA. (a) Except as disclosed in the Disclosure Schedule, no person participates in any "employee welfare benefit plan" or "employee pension benefit plan" (as those terms are respectively defined in Sections 3(1) and 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA")), nor may any person reasonably expect to participate in any such plan, in either case, on account of his or her past or present employment with FSB or FSB Bank. FSB and FSB Bank do not maintain any retirement or deferred compensation plan, savings, incentive, stock option or stock purchase plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements (referred to collectively hereinafter as "fringe benefit arrangements") for any past or present employee, consultant or agent of FSB or FSB Bank, whether pursuant to contract, arrangement, custom or informal understanding, which does not constitute an "employee benefit plan" (as defined in Section 3(3) of ERISA), except as listed in the Disclosure Schedule. (b) During the past sixty months, FSB has not maintained any employee welfare benefit plans or employee pension benefit plans except for plans listed on the Disclosure Schedule. There have been no amendments to any of the employee pension benefit plans, employee welfare benefit plans or fringe benefit arrangements listed on the Disclosure Schedule since December 31, 1994. (c) All employee pension benefit plans, employee welfare benefit plans and fringe benefit arrangements listed on the Disclosure Schedule comply in form and in operation in all material respects with all applicable requirements of law and regulation. All employee pension benefit plans maintained by FSB and FSB Bank comply in form and in operation with all applicable requirements of Sections 401(a) and 401(k) of the Code. Except as disclosed in the Disclosure Schedule, neither FSB nor FSB Bank has (i) incurred any liability for tax under Section 4971 of the Code on account of any accumulated funding deficiency and no plan or -B 11- arrangement listed in the Disclosure Schedule has incurred any accumulated funding deficiency within the meaning of Section 412 or 418(B) of the Code; (ii) applied for or obtained a waiver by the IRS of any minimum funding requirement under Section 412 of the Code; (iii) become subject to any disallowance of deductions under Sections 419 or 419(A) of the Code; (iv) incurred any liability for excise tax under Sections 4972, 4975, or 4976 of the Code or any liability under Section 406 of ERISA; (v) incurred any liability to the Pension Benefit Guaranty Corporation; (vi) had a reportable event (within the meaning of Section 4043 of ERISA); or (vii) breached any of the duties or failed to perform any of the obligations imposed upon the fiduciaries or plan administrators under Title I or ERISA. (d) A true and correct copy of each of the plans and arrangements listed on the Disclosure Schedule as in effect on the date hereof and each trust agreement relating to each such plan and arrangement, has been supplied to German American. A true and correct copy of the annual report (as described in Section 103 of ERISA) most recently filed for each plan listed in the Disclosure Schedule has been supplied to German American, and there have been no material changes in the financial condition in the respective plans from that stated in the annual reports supplied. In the case of any plan or arrangement which is not in written form, the Disclosure Schedule includes an accurate description of such plan or arrangement. Neither FSB nor FSB Bank would have any liability or contingent liability if any plan or arrangement listed on the Disclosure Schedule (including without limitation the payment by FSB Bank of premiums for health care coverage for active employees or retirees) were terminated or if FSB or FSB Bank were to cease its participation therein. Except as disclosed in the Disclosure Schedule, and to the best of the knowledge of the present non-employee members of the Board of Directors of FSB and of FSB Bank (without any independent review of the books and records of FSB and FSB Bank or the making of any other independent inquiry), and to the best of the knowledge of the President of FSB Bank (after review of the books and records of FSB Bank but without the obligation to make any further independent inquiry), neither FSB nor FSB Bank nor any of their affiliates or persons acting on their behalf have made any written or oral promises or statements to employees or retirees who are now living which might reasonably have been construed by them as promising "lifetime" or other vested rights to benefits under any plan or arrangement that cannot be unilaterally terminated or modified by FSB Bank or FSB at their discretion at any time without further obligation. (e) Except as disclosed in the Disclosure Schedule, in the case of each plan or arrangement listed in the Disclosure Schedule which is a defined benefit plan (within the meaning of Section 3(35) of ERISA), the net fair market value of the assets held to fund such plan or arrangement equals or exceeds the present value of all accrued benefits thereunder, both vested and nonvested, as determined in accordance with an actuarial costs method acceptable under section 3(31) of ERISA. (f) On a timely basis, FSB and FSB Bank have made all contributions or payments to or under each plan or arrangement listed in the Disclosure Schedule as required pursuant to each such plan or arrangement, any collective bargaining agreements or other provision for reserves to meet contributions and payments under such plans or arrangements which have not been made because they are not yet due. (g) None of the plans or arrangements listed in the Disclosure Schedule owns (or has owned within the past 60 months) any FSB Common or other securities of FSB, FSB Bank or a related entity. Section 2.14. Title to Properties; Insurance. FSB and FSB Bank have marketable title, insurable at standard rates, free and clear of all liens, charges and encumbrances (except taxes which are a lien but not yet -B 12- payable and liens, charges or encumbrances reflected in the FSB Financial Statements and easements, rights-of-way, and other restrictions which are not material and, in the case of Other Real Estate Owned, as such real estate is internally classified on the books of FSB Bank, rights of redemption under applicable law) to all real properties reflected on the FSB Financial Statements as being owned by FSB or FSB Bank, respectively. All material leasehold interests used by FSB and FSB Bank in their respective operations are held pursuant to lease agreements which are valid and enforceable in accordance with their terms. All such properties comply in all material respects with all applicable private agreements, zoning requirements and other governmental laws and regulations relating thereto and there are no condemnation proceedings pending or, to the knowledge of FSB, threatened with respect to such properties. FSB and FSB Bank have valid title or other ownership or use rights under licenses to all material intangible personal or intellectual property used by FSB and FSB Bank in their respective business free and clear of any claim, defense or right of any other person or entity which is material to such property, subject only to rights of the licensor pursuant to applicable license agreements, which rights do not materially adversely interfere with the use or enjoyment of such property. All insurable properties owned or held by FSB or FSB Bank are insured in such amounts, and against fire and other risks insured against by extended coverage and public liability insurance, as is customary with companies of the same size and in the same business. Section 2.15. Environmental Matters. (a) As used in this Agreement, "Environmental Laws" means all local, state and federal environmental, health and safety laws and regulations in all jurisdictions in which FSB or FSB Bank has done business or owned property, including, without limitation, the Federal Resource Conservation and Recovery Act, the Federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Clean Water Act, the Federal Clean Air Act, and the Federal Occupational Safety and Health Act. (b) Except as disclosed the Disclosure Schedule, neither (i) the conduct by FSB and FSB Bank of operations at any property, nor (ii) any condition of any property owned by FSB or FSB Bank within the past ten (10) years and used in their business operations, nor (iii) to the knowledge of FSB the condition of any property owned by them within the past ten (10) years but not used in their business operations, nor (iv) to the knowledge of FSB the condition of any property held by them as a trust asset within the past ten (10) years, violates or violated Environmental Laws in any material respect, and no condition or event has occurred with respect to any such property that, with notice or the passage of time, or both, would constitute a material violation of Environmental Laws or obligate (or potentially obligate) FSB or FSB Bank to remedy, stabilize, neutralize or otherwise alter the environmental condition of any such property. Neither FSB nor FSB Bank has received any notice from any person or entity that FSB or FSB Bank or the operation of any facilities or any property owned by either of them, or held as a trust asset, are or were in violation of any Environmental Laws or that either of them is responsible (or potentially responsible) for the cleanup of any pollutants, contaminants, or hazardous or toxic wastes, substances or materials at, on or beneath any such property. Section 2.16. Compliance with Law. FSB and FSB Bank each have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable it to conduct their respective businesses as presently conducted and are in compliance in all material respects with all applicable laws and regulations, the violation of which would be material. -B 13- Section 2.17. Brokerage. Except as set forth in the Disclosure Schedule, there are no claims, agreements, arrangements, or understandings (written or otherwise) for brokerage commissions, finders' fees or similar compensation in connection with the Mergers payable by FSB or FSB Bank. Section 2.18. Material Contracts. Except as set forth in the Disclosure Schedule, neither FSB nor FSB Bank is a party to or bound by any oral or written (i) material agreement, contract or indenture under which it has borrowed or will borrow money (not including federal funds and money deposited, including without limitation, checking and savings accounts and certificates of deposit and borrowings from the FHLBB and the FRB); (ii) material guaranty of any obligation for the borrowing of money or otherwise, excluding endorsements made for collection and guarantees made in the ordinary course of business and letters of credit issued in the ordinary course of business; (iii) contract, arrangement or understanding with any present or former officer, director or shareholder (except for deposit or loan agreements entered into in the ordinary course of business); (iv) material license, whether as licensor or licensee; (v) contract or commitment for the purchase of materials, supplies or other real or personal property in an amount in excess of $10,000 or for the performance of services over a period of more than thirty days and involving an amount in excess of $10,000; (vi) joint venture or partnership agreement or arrangement; (vii) contract arrangement or understanding with any present or former consultant, advisor, investment banker, broker, attorney or accountant; or (viii) contract, agreement or other commitment not made in the ordinary course of business. Section 2.19. Compliance with Americans with Disabilities Act. (a) To the best of FSB's knowledge, FSB and FSB Bank and their respective properties (including those held by either of them in a fiduciary capacity) are in compliance with all applicable provisions of the Americans with Disabilities Act (the "ADA"), and (b) no action under the ADA against FSB, FSB Bank or any of its properties has been initiated nor, to the best of FSB's knowledge, has been threatened or contemplated. Section 2.20. Statements True and Correct. None of the information supplied or to be supplied by FSB or FSB Bank for inclusion in any documents to be filed with the FRB, the SEC, the DFI, the FDIC, or any other regulatory authority in connection with the Mergers will, at the respective times such documents are filed, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading. Section 2.21. FSB's Knowledge. With respect to representations and warranties herein that are made or qualified as being made "to the knowledge of FSB" or words of similar import, it is understood and agreed that matters within the knowledge of the directors and the officers of FSB and FSB Bank shall be considered to be within the knowledge of FSB. ARTICLE THREE REPRESENTATIONS AND WARRANTIES OF GERMAN AMERICAN, GAHC AND COMMUNITY German American, GAHC and Community hereby severally make the following representations and warranties: Section 3.01. Organization and Capital Stock. -B 14- (a) German American is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (b) GAHC is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. All of the capital stock of GAHC is owned by German American. (c) Community is a corporation duly incorporated and validly existing under the IFIA and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. All of the capital stock of Community is owned by GAHC. (d) German American has authorized capital stock of (i) 20,000,000 shares of German American Common, $10 par value, $1 stated value, of which, as of the date of this Agreement, 5,096,209 shares are issued and outstanding, and approximately 254,810 shares are to be issued and delivered on December 20, 1997 pursuant to German American's 1997 five percent stock dividend, and (ii) 500,000 shares of preferred stock, $10.00 par value per share, of which no shares are issued and outstanding. All of the issued and outstanding shares of German American Common are duly and validly issued and outstanding, fully paid and non-assessable. (e) Community has authorized capital stock of 4,000 shares of common stock, $25.00 par value per share (the "Community Common"). As of the date of this Agreement, all of the shares of Community Common are duly and validly issued and outstanding, fully paid, and owned by German American. (f) The shares of German American Common that are to be issued to the shareholders of FSB pursuant to the Holding Company Merger have been duly authorized and, when issued in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and non-assessable. Section 3.02. Authorization. The Boards of Directors of German American, GAHC and Community have each, by all appropriate action, approved this Agreement and the Mergers and authorized the execution hereof on their behalf by their duly authorized officers and the performance by each such entity of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of German American, GAHC or Community, as amended, or any other agreement, instrument, decree, proceeding, law or regulation (except for the possible need for approval of the issuance of additional shares pursuant to the Merger by the shareholders of German American under the National Market System listing standards of NASDAQ, and except as specifically referred to in or contemplated by this Agreement) by or to which either of them or any of their subsidiaries is bound or subject would prohibit German American, GAHC or Community from entering into and consummating this Agreement and the Mergers on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by German American, GAHC and Community and constitutes a legal, valid and binding obligation of German American and Community enforceable against German American and Community in accordance with its terms and no other corporate acts or proceedings are required by law to be taken by German American, GAHC or Community to authorize the execution, delivery and performance of this Agreement. Except for any requisite approvals of the FRB, FDIC and DFI, and the SEC's order declaring effective German American's registration statement under the Securities Act of 1933 with -B 15- respect to the Holding Company Merger, no notice to, filing with, authorization by, or consent or approval of, any federal or state regulatory authority is necessary for the execution and delivery of this Agreement or the consummation of the Mergers by German American, GAHC or Community. Section 3.03. Subsidiaries. Each of German American's subsidiaries is duly organized and validly existing under the laws of the jurisdiction of its incorporation and has the corporate power to own its respective properties and assets, to incur its respective liabilities and to carry on its respective business as now being conducted. Section 3.04. Financial Information. The consolidated balance sheet of German American and its subsidiaries as of December 31, 1996 and related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended together with the notes thereto, included in German American's most recent Annual Report on Form 10-K, as filed with the SEC (the "10-K"), and the unaudited consolidated balance sheets of German American and its subsidiaries as of March 31, June 30, and September 30, 1997 and the related unaudited consolidated statements of income, changes in shareholders' equity and cash flows for the periods then ended included in German American's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1997 as filed with the SEC (the "10-Q Reports") (collectively the financial statements and notes thereto included in the 10-Q Reports and the 10-K are sometimes referred to as the "German American Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as disclosed therein) and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of German American and its consolidated subsidiaries as of the dates and for the periods indicated (subject, in the case of interim financial statements, to normal recurring year-end adjustments, none of which will be material). Section 3.05. Absence of Changes. Since December 31, 1996 (and except to the extent reflected in the 10-Q Reports), there has not been any material adverse change in the consolidated financial condition or the consolidated results of operations or the business of German American and its subsidiaries, taken as a whole. Section 3.06. Reports. Since January 1, 1994 (or, in the case of subsidiaries of German American, the date of acquisition thereof by German American, if later), German American and each of its subsidiaries have filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, that it was required to file with (i) the SEC, (ii) the FRB, (iii) the FDIC, (iv) the DFI, (v) any applicable state securities or banking authorities, and (vi) any other governmental authority with jurisdiction over German American or any of its subsidiaries. As of their respective dates, each of such reports and documents, as amended, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. None of the information included in such reports or documents was, at their respective dates of filing, false or misleading with respect to any material fact, or omitted to state any material fact necessary in order to make the statements therein not misleading, on a consolidated basis, taking into account the circumstances under which such reports or documents were filed and considering the total mix of information that was at the time publicly available concerning German American and its subsidiaries. Section 3.07. Absence of Litigation. There is no material litigation, claim or other proceeding pending or, to the knowledge of German American, threatened, before any judicial, administrative or regulatory agency -B 16- or tribunal against German American or any of its subsidiaries, or to which the property of German American or any of its subsidiaries is subject, which is required to be disclosed in SEC reports under Item 103 of Regulation S-K, and which has not been so disclosed. Section 3.08. Absence of Agreements with Banking Authorities. Neither German American nor any of its subsidiaries is subject to any order (other than orders applicable to bank holding companies or banks generally) or is a party to any agreement or memorandum of understanding with any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation the FDIC, the DFI and the FRB. Section 3.09. Compliance with Law. German American and its subsidiaries have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable them to conduct their respective businesses as presently conducted and are in compliance in all material respects with all applicable laws and regulations, the violation of which would be material. ARTICLE FOUR COVENANTS OF FSB AND FSB BANK Section 4.01. Conduct of Business. (a) FSB and FSB Bank shall continue to carry on their respective businesses, and shall discharge or incur obligations and liabilities, only in the ordinary course of business as heretofore conducted and, by way of amplification and not limitation with respect to such obligation, neither FSB nor FSB Bank will, without the prior written consent of German American: (i) declare or pay any dividend or make any other distribution to shareholders, whether in cash, stock or other property; or (ii) issue (or agree to issue) any common or other capital stock or any options, warrants or other rights to subscribe for or purchase common or any other capital stock or any securities convertible into or exchangeable for any capital stock; or (iii) directly or indirectly redeem, purchase or otherwise acquire (or agree to redeem, purchase or acquire) (except for shares acquired in satisfaction of a debt previously contracted) any of their own common or any other capital stock; or (iv) effect a split, reverse split, reclassification, or other similar change in, or of, any common or other capital stock or otherwise reorganize or recapitalize; or (v) change the Articles of Incorporation or Bylaws of FSB or the Articles of Incorporation or Bylaws of FSB Bank; or (vi) pay or agree to pay, conditionally or otherwise, any bonus (other than bonuses for calendar year 1997 that, when aggregated with other bonuses paid or payable with respect to 1997, -B 17- would not exceed the aggregate amount of bonuses paid for calendar year 1996), additional compensation (other than ordinary and normal salary increases consistent with past practices) or severance benefit or otherwise make any changes out of the ordinary course of business with respect to the fees or compensation payable or to become payable to consultants, advisors, investment bankers, brokers, attorneys, accountants, directors, officers or employees or, except as required by law, adopt or make any change in any Employee Plan or other arrangement or payment made to, for or with any of such consultants, advisors, investment bankers, brokers, attorneys, accountants, directors, officers or employees; provided, however, that (A) FSB and FSB Bank may pay the fees, expenses and other compensation of consultants, advisors, investment bankers, brokers, attorneys and accountants when, if, and as earned in accordance with the terms of the contracts, arrangements or understandings of FSB or FSB Bank specifically disclosed on the Disclosure Schedule, and (B) FSB Bank may establish an executive bonus pool to secure the continued attention of the executive officers of FSB Bank to its affairs through the Effective Time (the "Bonus Pool") which Bonus Pool shall be funded entirely from net income (loss) of FSB Bank for periods ended on or before the last day of the month preceding the Closing Date; (vii) borrow or agree to borrow any material amount of funds except in the ordinary course of business, or directly or indirectly guarantee or agree to guarantee any material obligations of others except in the ordinary course of business or pursuant to outstanding letters of credit; or (viii) make or commit to make any new loan or issue or commit to issue any new letter of credit or any new or additional discretionary advance under any existing line of credit, or purchase or agree to purchase any interest in a loan participation, in aggregate principal amounts (A) in excess of $100,000 to any one borrower (or group of affiliated borrowers) or (B) that would cause FSB Bank's credit extensions or commitments to any one borrower (or group of affiliated borrowers) to exceed $250,000 (German American's consent to credit extensions in the ordinary course of business will not be unreasonably withheld); or (ix) other than U.S. Treasury obligations or asset-backed securities issued or guaranteed by United States governmental agencies or financial institution certificates of deposit insured by the FDIC, in either case having an average remaining life of five years or less (except that maturities may extend to seven years on variable-rate securities), purchase or otherwise acquire any investment security for their own accounts, or sell any investment security owned by either of them which is designated as held-to-maturity, or engage in any activity that would require the establishment of a trading account for investment securities; or (x) increase or decrease the rate of interest paid on time deposits, or on certificates of deposit, except in a manner and pursuant to policies consistent with past practices; or (xi) enter into or amend any agreement, contract or commitment out of the ordinary course of business; or (xii) except in the ordinary course of business, place on any of their assets or properties any mortgage, pledge, lien, charge, or other encumbrance; or -B 18- (xiii) except in the ordinary course of business, cancel, release, compromise or accelerate any material indebtedness owing to FSB or FSB Bank, or any claims which either of them may possess, or voluntarily waive any material rights with respect thereto; or (xiv) sell or otherwise dispose of any real property or any material amount of any personal property other than properties acquired in foreclosure or otherwise in the ordinary course of collection of indebtedness to FSB or FSB Bank; or (xv) foreclose upon or otherwise take title to or possession or control of any real property without first obtaining a phase one environmental report thereon, prepared by a reliable and qualified person or firm acceptable to German American, which indicates that the property is free of pollutants, contaminants or hazardous or toxic waste materials; provided, however, that neither FSB nor FSB Bank shall be required to obtain such a report with respect to single family, non-agricultural residential property of one acre or less to be foreclosed upon unless it has reason to believe that such property might contain such materials or otherwise might be contaminated; or (xvi) commit any act or fail to do any act which will cause a material breach of any material agreement, contract or commitment; or (xvii) violate any law, statute, rule, governmental regulation or order, which violation might have a material adverse effect on its business, financial condition, or earnings; or (xviii) purchase any real or personal property or make any other capital expenditure where the amount paid or committed therefor is in excess of $100,000 other than purchases of property made in the ordinary course of business in connection with loan collection activities or foreclosure sales in connection with any of FSB's or FSB Bank's loans; (xix) issue certificate(s) for shares of FSB Common to any FSB shareholder in replacement of certificate(s) claimed to have been lost or destroyed without first obtaining from such shareholder(s), at the expense of such shareholder(s), a surety bond from a recognized insurance company in an amount that would indemnify FSB (and its successors) against lost certificate(s) (but not less than 150% of the estimated per share value of the Merger Consideration under this Agreement) per share of FSB Common, and obtaining a usual and customary affidavit of loss and indemnity agreement from such shareholder(s); provided, however, that FSB may waive the surety bond requirement in connection with the issuance of replacement certificates to any shareholder if the number of shares of FSB Common so reissued (together with the number of shares previously reissued since October 1, 1997 to such shareholder and all other shareholders who are affiliated or associated with such shareholder) does not exceed an aggregate of 150 shares; or (xx) hold a special, regular or annual meeting (or take action by consent in lieu thereof) of the Board of Directors or the sole shareholder of FSB Bank for the purpose of appointing or electing any new member to the Board of Directors of FSB Bank (whether to fill a vacancy or otherwise) unless such new member is approved in advance in writing by German American. -B 19- (b) Neither FSB nor FSB Bank shall, without the prior written consent of German American, engage in any transaction or take any other action that would render untrue in any material respect any of the representations and warranties of FSB or FSB Bank contained in Article Two hereof if such representations and warranties were given as of the date of such transaction or action. (c) FSB shall promptly notify German American in writing of the occurrence of any matter or event known to FSB or FSB Bank that is, or is likely to become, materially adverse to the business, operations, properties, assets or condition (financial or otherwise) of FSB or FSB Bank taken as a whole. (d) Neither FSB nor FSB Bank shall (a) directly or indirectly solicit, encourage or facilitate (nor shall they permit any of their respective officers, directors, employees or agents directly or indirectly to solicit, encourage or facilitate), including by way of furnishing information other than the terms of this Agreement, any inquiries or proposals from third parties for a merger, consolidation, share exchange or similar transaction involving FSB or FSB Bank or for the acquisition of the stock or substantially all of the assets or business of FSB or FSB Bank, or (b) subject to the fiduciary duties of the Directors of FSB as advised by counsel in a written opinion, discuss with or enter into conversations with any person concerning any such merger, consolidation, share exchange, acquisition or other transaction. FSB shall promptly notify German American orally (to be confirmed in writing as soon as practicable thereafter) of all of the relevant details concerning any inquiries or proposals that it may receive relating to any such matters, including actions it intends to take with respect to such matters. Section 4.02. Breaches. FSB shall, in the event it has knowledge of the occurrence of any event or condition which would cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known prior to the date of this Agreement) of any of its or FSB Bank's representations or agreements contained or referred to in this Agreement, give prompt notice thereof to German American and use its best efforts to prevent or promptly remedy the same. Section 4.03. Submission to Shareholders. FSB shall cause to be duly called and held, on a date mutually selected by German American and FSB, a special meeting of its shareholders (the "FSB Shareholders' Meeting") for submission of this Agreement and the Holding Company Merger for approval of FSB shareholders as required by the IBCL. In connection with the FSB Shareholders' Meeting, (i) FSB shall cooperate with and assist German American in preparing and filing a Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") with the SEC in accordance with SEC requirements and FSB shall mail it to its shareholders, (ii) FSB shall furnish German American all information concerning itself that German American may reasonably request in connection with such Proxy Statement/Prospectus, and (iii) the Board of Directors of FSB shall (unless in the written opinion of counsel for FSB the fiduciary duties of the Board of Directors prohibit such a recommendation, in which event the individual members of the Board of Directors shall nevertheless remain personally obligated to support the Agreement and the Holding Company Merger pursuant to their personal undertakings on the signature page of this Agreement) unanimously recommend to its shareholders the approval of this Agreement and the Holding Company Merger contemplated hereby and use its best efforts to obtain such shareholder approval. Section 4.04. Consummation of Agreement. FSB shall use its best efforts to perform and fulfill all conditions and obligations on its part to be performed or fulfilled under this Agreement and to effect the Mergers in accordance with the terms and provisions hereof. FSB shall furnish to German American in a timely -B 20- manner all information, data and documents in the possession of FSB or FSB Bank requested by German American as may be required to obtain any necessary regulatory or other approvals of the Mergers or to file with the SEC a registration statement on Form S-4 (the "Registration Statement") relating to the shares of German American Common to be issued to the shareholders of FSB pursuant to the Mergers and this Agreement, and shall otherwise cooperate fully with German American to carry out the purpose and intent of this Agreement. Section 4.05. Financial Information. German American shall direct its independent accounting firm, at German American's expense, to prepare financial statements, Guide 3 statistical data, selected financial data, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Items 301, 302, and 303 of SEC Regulation S-K) ("MD&A") in compliance with SEC requirements for inclusion in the Registration Statement, including unaudited financial statements and related Guide 3 and MD&A as of and for the appropriate quarterly and year-to-date periods ending September 30, 1997. FSB shall cooperate with German American and its accounting firm in connection with the preparation of all such information, and FSB shall use its best efforts to provide such financial statements and data and MD&A to German American in EDGAR format as soon as practicable. Section 4.06. Environmental Reports. Except as German American shall otherwise consent with respect to any residential real estate (which consent will not be unreasonably withheld by German American), FSB shall, at German American's expense, cooperate with an environmental consulting firm designated by German American in connection with the conduct by such firm of a phase one environmental investigation on all real property owned or leased by FSB or its subsidiaries as of the date of this Agreement, and any real property acquired or leased by FSB or its subsidiaries after the date of this Agreement, except as otherwise provided in Section 4.01(a)(xv). If further investigation procedures are required as to any property by the report of the phase one investigation in German American's reasonable opinion, FSB shall as soon as practicable, at German American's expense, commission the taking of such further procedures and provide a report of the results of such further procedures to German American; provided, however, that should the costs of taking such further procedures be estimated to be greater than $10,000, and should FSB not agree to assume the excess amount of such costs, then German American may terminate its obligations under this Agreement by written notice to FSB. German American shall have fifteen (15) business days from the receipt of any such investigation report to notify FSB of any objection to the contents of any such report. Should the cost of taking all remedial and corrective actions and measures (i) required by applicable law, or (ii) recommended or suggested by such report or reports and prudent in light of the findings of such report, in the aggregate, exceed the sum of $100,000, as reasonably estimated by the environmental expert retained for such purpose by German American and reasonably acceptable to FSB, or if the cost of such actions and measures cannot be so reasonably estimated by such expert with any reasonable degree of certainty, then German American shall have the right pursuant to Section 7.03 hereof, for a period of 10 business days following receipt of such estimate or indication that the cost of such actions and measures cannot be so reasonably estimated, to terminate this Agreement without further obligation to FSB, which shall be German American's sole remedy in such event. Section 4.07. Restriction on Resales. FSB shall obtain and deliver to German American, at least thirty (30) days prior to the Closing Date, signed representations, in form reasonably acceptable to German American, of each shareholder who may reasonably be deemed an "affiliate" of FSB as of the date of the Shareholders' Meeting within the meaning of such term as used in Rule 145 under the Securities Act of 1933, as amended (the "Securities Act"), regarding their prospective compliance with the provisions of such Rule 145. FSB shall also -B 21- obtain and deliver to German American at least 30 days prior to the Closing Date, the signed agreements of each shareholder who may reasonably be deemed an "affiliate" (as such term is described in the preceding sentence) of FSB as of the date of the Shareholders' Meeting agreeing not to sell any shares of German American Common or otherwise reduce his or her risk relative to such shares, until such time as financial results covering at least thirty (30) days of post-Merger combined operations have been filed by German American with the SEC in a quarterly report on Form 10-Q or in an annual report on Form 10-K. Section 4.08. Access to Information. FSB shall permit German American reasonable access, in a manner which will avoid undue disruption or interference with FSB's normal operations, to its and FSB Bank's properties and shall disclose and make available to German American all books, documents, papers and records relating to its and FSB Bank's assets, stock, ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including general ledgers), tax records, minute books of directors' and shareholders' meetings, organizational documents, material contracts and agreements, loan files, filings with any regulatory authority, accountants' workpapers, litigation files, plans affecting employees, and any other business activities or prospects in which German American may have an interest in light of the transactions contemplated by this Agreement. During the period from the date of this Agreement to the Effective Time, FSB will cause one or more of it or FSB Bank's designated representatives to confer on a regular basis with the President of German American, or any other person designated in a written notice given to FSB by German American pursuant to this Agreement, to report the general status of the ongoing operations of FSB and FSB Bank. FSB will promptly notify German American of any material change in the normal course of the operation of its business or properties and of any regulatory complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of litigation involving FSB or FSB Bank, and will keep German American fully informed of such events. Section 4.09. Absence of Retiree Health Care Programs. As soon as practicable but in no event later than January 31, 1998, FSB and FSB Bank shall give to all employees, retirees and consultants, except for the single retiree disclosed to German American to whom FSB Bank has previously committed to make benefit payments on a special basis, written notice of the position of FSB and FSB Bank that they are not obligated to provide any retiree health care benefits to any active or inactive employee, retiree or consultant. ARTICLE FIVE COVENANTS OF GERMAN AMERICAN, GAHC AND COMMUNITY Section 5.01. Regulatory Approvals and Registration Statement. (a) German American shall file (or cause Community and/or Citizens as the case may be to file or cooperate with FSB and FSB Bank in filing) all regulatory applications required in order to consummate the Mergers, including all necessary applications for the prior approvals of the FRB under the Bank Holding Company Act and the FDIC under the Bank Merger Act, and (if deemed appropriate or necessary) the DFI. German American shall use its best efforts to cause such banking agency regulatory applications to be filed on or before January 22, 1998. German American shall keep FSB reasonably informed as to the status of such -B 22- applications and promptly send or deliver copies of such applications, and of any supplementally filed materials, to counsel for FSB. (b) German American shall file with the SEC the Registration Statement relating to the shares of German American Common to be issued to the shareholders of FSB pursuant to this Agreement, and shall use its best efforts to become effective as soon as practicable. At the time the Registration Statement becomes effective, the form of the Registration Statement shall comply in all material respects with the provisions of the Securities Act and the published rules and regulations thereunder, and shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not false or misleading. At the time of the mailing thereof to the shareholders and at the time of any Shareholders' Meeting, the Proxy Statement/Prospectus included as part of the Registration Statement, as amended or supplemented by any amendment or supplement, shall not contain any untrue statement of a material fact or omit to state any material fact regarding German American, GAHC or the Holding Company Merger necessary to make the statements therein not false or misleading. German American shall timely file all documents required to obtain all necessary Blue Sky permits and approvals, if any, required to carry out the Merger, shall pay all expenses incident thereto and shall use its best efforts to obtain such permits and approvals on a timely basis. German American shall promptly and properly prepare and file any other filings required under the Securities Exchange Act of 1934 (the "Exchange Act") relating to the Mergers, or otherwise required of it under the Exchange Act prior to the Effective Time, and shall deliver copies thereof to FSB's counsel promptly upon the filing thereof with the SEC. Section 5.02. Breaches. German American shall, in the event it has knowledge of the occurrence of any event or condition which would cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known prior to the date of this Agreement) of any of its representations or agreements contained or referred to in this Agreement, give prompt notice thereof to FSB and use its best efforts to prevent or promptly remedy the same. Section 5.03. Consummation of Agreement. German American shall use its best efforts to perform and fulfill all conditions and obligations to be performed or fulfilled under this Agreement and to effect the Mergers in accordance with the terms and conditions of this Agreement, and use its best efforts to cause the Closing to occur on March 31, 1998 or as soon thereafter as practicable. Section 5.04. Directors' and Officers' Indemnification. (a) For six (6) years after the Effective Time, German American shall (and shall cause the Surviving Bank to) indemnify, defend and hold harmless the present and former officers and directors of FSB and FSB Bank (each, an "Indemnified Party") against all losses, expenses, claims, damages or liabilities arising out of actions or omissions (arising from their present or former status as officers or directors) occurring on or prior to the Effective Time to the full extent then permitted under the applicable provisions of the IBCL and the IFIA, and public policy. (b) If during the six (6) year period after the Effective Time German American or the Surviving Bank or any of its or their successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such -B 23- consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case, proper provision shall be made so that the successors and assigns of German American and/or the Surviving Bank shall assume the obligations set forth in this Section 5.04. Section 5.05. Board of Directors of Community. German American shall cause Michael B. McConnell to be appointed to the Board of Directors of Community (or, as the case may be, Citizens) promptly after the Effective Time. Section 5.06. Preservation of Business. German American shall: (a) conduct its business substantially in the manner as is presently being conducted and in the ordinary course of business and not amend its articles of incorporation in any manner that requires the approval of shareholders of German American under the IBCL; (b) file, and cause its subsidiaries to file, all required reports with applicable regulatory authorities; (c) comply with all laws, statutes, ordinances, rules or regulations applicable to it and to the conduct of its business, the noncompliance with which results or could result in a material adverse effect on the financial condition, results of operations, business, assets or capitalization of German American on a consolidated basis; and (d) comply in all material respects with each contract, agreement, commitment, obligation, understanding, arrangement, lease or license to which it is a party by which it is or may be subject or bound, the breach of which could result in a material adverse effect on the financial condition, results of operations, business, assets or capitalization of German American on a consolidated basis. Section 5.07. Securities and Exchange Commission Filings. German American will provide FSB with copies of all filings made by German American with the SEC under the Securities Exchange Act of 1934 ("1934 Act"), and the Securities Act of 1933 ("1933 Act") and the respective rules and regulations of the SEC thereunder as soon as practicable after such filings are made at any time prior to the Effective Time. Section 5.08. Rule 144(c) Information. For not less than the twelve months immediately following the Effective Time, German American shall make available adequate current public information about itself as that terminology is used in and as required by Rule 144(c) of the SEC under the 1933 Act. Section 5.09. Authorization of Common Stock. At the Effective Time and on such subsequent dates when the former shareholders of FSB surrender their FSB share certificates for cancellation, the shares of German American Common to be exchanged with former shareholders of FSB shall have been duly authorized and validly issued by German American and shall be fully paid and non-assessable and subject to no pre-emptive rights. Section 5.10. Past Service Credit. All employees of FSB Bank will be eligible to participate in German American's employee benefit plans (in accordance with the terms of the German American plans) as soon as practicable following the Effective Time. Employees of FSB Bank shall receive full vesting and eligibility credit under German American's defined contribution retirement plans and other benefit programs for their years of service to FSB Bank. -B 24- ARTICLE SIX CONDITIONS PRECEDENT TO THE MERGERS Section 6.01. Conditions of German American's Obligations. The obligations of German American, GAHC and Community to effect the Mergers shall be subject to the satisfaction (or waiver by German American, GAHC and Community) prior to or on the Closing Date of the following conditions: (a) The representations and warranties made by FSB and FSB Bank in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date. (b) FSB and FSB Bank shall have performed and complied in all material respects with all of its obligations and agreements required to be performed on or prior to the Closing Date under this Agreement. (c) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers shall be in effect, nor shall any proceeding by any bank regulatory authority, governmental agency or other person seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Mergers which makes the consummation of the Mergers illegal. (d) All necessary regulatory approvals, consents, authorizations and other approvals required by law or stock market requirements for consummation of the Mergers, including any approval of the Mergers by the shareholders of German American in order to comply with the NASDAQ NMS listing standards, shall have been obtained and all waiting periods required by law shall have expired. (e) German American shall have received the environmental reports required by Sections 4.06 and 4.01(a)(xv) hereof and shall not have elected, pursuant to Section 4.06 hereof, to terminate and cancel this Agreement. (f) German American shall have received all documents required to be received from FSB or FSB Bank on or prior to the Closing Date, all in form and substance reasonably satisfactory to German American. (g) German American shall have received a letter, dated as of the Effective Time, from Crowe, Chizek and Company LLP, its independent public accountants, to the effect that the Mergers will qualify for pooling of interests accounting treatment under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with this Agreement. (h) The Registration Statement shall be effective under the Securities Act and no stop orders suspending the effectiveness of the Registration Statement shall be in effect or proceedings for such purpose pending before or threatened by the SEC. -B 25- (i) German American shall have received from its counsel, Leagre Chandler & Millard, an opinion to the effect that if the Mergers are consummated in accordance with the terms set forth in this Agreement, (i) the Holding Company Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by the holders of shares of FSB Common upon receipt of the Merger consideration (except for cash received in lieu of fractional shares); (iii) the basis of shares of German American Common received by the shareholders of FSB will be the same as the basis of shares of FSB Common exchanged therefor; and (iv) the holding period of the shares of German American Common received by the shareholders of FSB will include the holding period of the shares of FSB Common exchanged therefor, provided such shares were held as capital assets as of the Effective Time. Section 6.02. Conditions of FSB's and FSB Bank's Obligations. FSB's and FSB Bank's obligations to effect the Mergers shall be subject to the satisfaction (or waiver by FSB and FSB Bank) prior to or on the Closing Date of the following conditions: (a) The representations and warranties made by German American, GAHC and Community in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on the Closing Date. (b) German American, GAHC and Community shall each have performed and complied in all material respects with all of its obligations and agreements required to be performed prior to the Closing Date under this Agreement. (c) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers shall be in effect, nor shall any proceeding by any bank regulatory authority, other governmental agency or other person seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, enforced or deemed applicable to the Mergers which makes the consummation of the Mergers illegal. (d) All necessary regulatory approvals, consents, authorizations and other approvals required by law for consummation of the Mergers, including the requisite approval of the Mergers by the shareholders of FSB, shall have been obtained and all waiting periods required by law shall have expired. (e) FSB shall have received all documents required to be received from German American, GAHC and Community on or prior to the Closing Date, all in form and substance reasonably satisfactory to FSB. (f) The Registration Statement shall be effective under the Securities Act and no stop orders suspending the effectiveness of the Registration Statement shall be in effect or proceedings for such purpose pending before or threatened by the SEC. (g) FSB shall have received from counsel for German American, Leagre Chandler & Millard, an opinion reasonably satisfactory to FSB to the effect that if the Mergers are consummated in accordance with the -B 26- terms set forth in this Agreement, (i) the Holding Company Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by the holders of shares of FSB Common upon receipt of the Merger Consideration (except for cash received in lieu of fractional shares); (iii) the basis of German American Common received by the shareholders of FSB will be the same as the basis of FSB Common exchanged therefor; and (iv) the holding period of the shares of German American Common received by the shareholders of FSB will include the holding period of the shares of FSB Common exchanged therefor, provided such shares were held as capital assets as of the Effective Time. (h) FSB shall have received from Citizens representations, warranties and covenants of Citizens substantially the same as those made by Community in Articles Three and Five of this Agreement in a form reasonable satisfactory to FSB. ARTICLE SEVEN TERMINATION OR ABANDONMENT Section 7.01. Mutual Agreement. This Agreement may be terminated by the mutual written agreement of the parties approved by their respective Boards of Directors at any time prior to the Effective Time, regardless of whether shareholder approval of this Agreement and the Mergers by the shareholders of FSB or German American shall have been previously obtained. Section 7.02. Breach of Representations, Warranties or Covenants. (a) In the event that there is a material breach in any of the representations and warranties or covenants of the parties, which breach is not cured within thirty (30) days after notice to cure such breach is given by the non-breaching party, then the Board of Directors of the non-breaching party, regardless of whether approval by the shareholders of this Agreement and the Mergers shall have been previously obtained, and in addition to any other remedies to which the non-breaching party may be entitled, may terminate and cancel this Agreement effective immediately by providing written notice thereof to the other party hereto. (b) In the event that this Agreement is terminated due to the failure of the Holding Company Merger to be approved by the requisite vote of shareholders of FSB or the failure of FSB to cause the Holding Company Merger to be submitted to a vote of shareholders of FSB, following the making by any other person or entity not a party to this Agreement of a proposal to FSB or FSB Bank contemplating a merger, consolidation, plan of stock exchange, sale of all or substantially all assets, or other business combination with FSB or FSB Bank, if, but only if, FSB shall publicly announce within twelve months following a termination described by this clause (b) that FSB has accepted a proposal for a business combination with any third party, then, in lieu of specific performance but in addition to whatever other legal rights or remedies to which German American may be entitled against any third party, FSB shall, upon German American's demand and not later than the second business day after the making of such demand, (i) pay to German American a termination fee of $40,000 and (ii) reimburse German American for all its out-of-pocket costs and expenses in connection with the Mergers incurred from and after October 1, 1997 (but not more than $100,000, including its legal, accounting, environmental and other consulting fees and expenses. If FSB should fail or refuse to pay any amount demanded by German American pursuant to the preceding sentence and German American recovers such -B 27- disputed amount pursuant to a legal proceeding, FSB shall, in addition thereto, pay to German American all costs, charges, expenses (including without limitation the fees and expenses of counsel) and other amounts expended by German American in connection with or arising out of such legal proceeding. The parties agree that the actual damages and loss that would be caused to German American by reason of any such termination cannot be determined with certainty due to German American's "opportunity cost" in proceeding with the Mergers compared to proceeding with other opportunities that are available to German American and other factors. The parties therefore agree that the amounts payable pursuant to this Section 7.02 represent a reasonable estimate of German American's opportunity cost and other damages and loss that may be awarded as either a termination fee or as liquidated damages to German American if it chooses not to seek specific performance of this Agreement, and that such amounts represent the sole damages from FSB and FSB Bank to which German American would be entitled. Section 7.03. Adverse Environmental Reports. German American may terminate this Agreement as provided by Section 4.06 by giving written notice thereof to FSB. Section 7.04. Failure of Conditions. In the event any of the conditions to the obligations of either party are not satisfied or waived on or prior to the Closing Date, and if any applicable cure period provided in Section 7.02 (a) hereof has lapsed, then the Board of Directors of such party may, regardless of whether approval by its shareholders of this Agreement and the Mergers shall have been previously obtained, terminate and cancel this Agreement on the Closing Date by delivery of written notice thereof to the other party on such date. Section 7.05. Termination Upon Adverse Regulatory Determination. In connection with the filings that the German American, Community, FSB and/or FSB Bank may be required to make in connection with the Mergers with banking, securities, and antitrust regulatory agencies ("Agencies"), each party shall use their best efforts to obtain all necessary approvals of, or clearances from, the Agencies, and shall cause their respective agents and advisors to cooperate and use their best efforts in connection therewith. German American (or its subsidiaries) shall be responsible for making the required Merger filings (except to the limited extent that the applicable law, regulations, or forms specify that FSB (or FSB Bank) is the appropriate filing party) with the Agencies, and for discussing such filings with the Agencies and responding to comments thereon. If any required filing is disapproved by any of the Agencies, or any determination is made by any of the Agencies that either of the Mergers cannot be consummated except on terms and conditions that are materially adverse from a financial point of view to German American (an "Adverse Determination"), then German American shall promptly advise FSB of such Adverse Determination and German American's intended course of action with respect thereto. In the event that German American in its sole discretion determines to seek a judicial or regulatory appeal or review (formal or informal) of the Adverse Determination, FSB and FSB Bank (and their agents and advisors) shall continue to cooperate with such appeal and review procedure and use its best efforts to assist in connection with obtaining reversal or modification of such Adverse Determination. In the event that (a) German American in its sole discretion elects not to seek an appeal or review of the Adverse Determination or elects in its sole discretion at any time after seeking such an appeal or review to discontinue that effort, or (b) German American seeks such an appeal or review but all avenues for such appeal or review are exhausted without the Adverse Determination having been vacated or overruled or modified in such a manner that the Adverse Determination is no longer materially adverse ("Relief Determination"), then either German American or FSB may terminate this Agreement without obligation to the other on account of the Adverse Determination. -B 28- Section 7.06. Shareholder Approval Denial. If this Agreement and consummation of the Holding Company Merger is not approved by the shareholders of FSB, or if the issuance of the additional German American Common Stock is required to be approved by the shareholders of German American pursuant to the NASDAQ NMS listing standards and is not so approved at the meeting of German American's shareholders called to consider such issuance, then either party may terminate this Agreement by giving written notice thereof to the other party, subject to Section 7.02(b). Section 7.07. Regulatory Enforcement Matters. In the event that FSB or FSB Bank shall become a party or subject to any memorandum of understanding, cease and desist order, or civil money penalties imposed by any federal or state agency charged with the supervision or regulation of banks or bank holding companies after the date of this Agreement, then German American may terminate this Agreement by giving written notice thereof to FSB. Section 7.08. Lapse of Time. If the Closing Date does not occur on or prior to June 30, 1998, then this Agreement may be terminated by the Board of Directors of either FSB or German American by giving written notice thereof to the other party. ARTICLE EIGHT GENERAL PROVISIONS Section 8.01. Liabilities. In the event that this Agreement is terminated or the Mergers are abandoned pursuant to the provisions of Article Seven hereof, no party hereto shall have any liability to any other party for costs, expenses, damages, termination fees, or otherwise except to the extent specifically set forth in Section 7.02(b). Directors, officers and employees of each party hereto shall have no personal liability under this Agreement with respect to the representations and warranties of their respective parties except for fraud or for their personal intentional and knowing participation in the making of false or misleading statements in such representation and warranties. Section 8.02. Notices. Any notice or other communication hereunder shall be in writing and shall be deemed to have been given or made (a) on the date of delivery, in the case of hand delivery, or (b) three (3) business days after deposit in the United States Registered or Certified Mail, with mailing receipt postmarked by the Postal Service to show date of mailing, postage prepaid, or (c) upon actual receipt if transmitted during business hours by facsimile (but only if receipt of a legible copy of such transmission is confirmed by the recipient); addressed (in any case) as follows: (a) If to German American or Community: German American Bancorp 711 Main Street Box 810 Jasper, Indiana 47546 Attn: George W. Astrike, Chairman of the Board with a copy to: Leagre Chandler & Millard -B 29- 9100 Keystone Crossing Suite 800 P. O. Box 40609 Indianapolis, Indiana 46240-0609 Attn: Mark B. Barnes and (b) If to FSB or FSB Bank: FSB Financial Corporation 102 Main Street Francisco, Indiana 47659 Attn: __________________________ with a copy to: Bose McKinney & Evans 2700 First Indiana Plaza 135 North Pennsylvania Street Indianapolis, Indiana 46204 Attn: R.J. McConnell or to such other address as any party may from time to time designate by notice to the other. Section 8.03. Non-survival of Representations and Agreements. No representation, warranty or covenant contained in this Agreement shall survive (and no claims for the breach or nonperformance thereof may be brought after) the Effective Time except the covenants of German American in Sections 5.04, 5.05, 5.08, 5.09, and 5.10 which shall survive the Effective Time. No representation, warranty or covenant contained in this Agreement shall survive (and no claims for the breach or nonperformance thereof may be brought after) the termination of this Agreement pursuant to Article Seven hereof. The reliability and binding effect of any representation or warranty made by any party in this Agreement shall not be diminished or limited in any way by any review, or by the opportunity to conduct any review, by or on behalf of the intended beneficiary of the subject matter of the representation or warranty, whether before or after the date of this Agreement, unless and to the extent that the reviewing party and the other party expressly agree otherwise in writing. Section 8.04. Entire Agreement. Except for that certain confidentiality agreement previously executed among the parties hereto, this Agreement constitutes the entire agreement between the parties and supersedes and cancels any and all prior discussions, negotiations, undertakings and agreements between the parties relating to the subject matter hereof, including, without limitation, the letter of intent signed October 6, 1997 by German American and accepted by FSB on October 9, 1997. Section 8.05. Headings and Captions. The captions of Articles and Sections hereof are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. -B 30- Section 8.06. Waiver, Amendment or Modification. The conditions of this Agreement which may be waived may only be waived by written notice specifically waiving such condition addressed to the party claiming the benefit of the waiver. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. This Agreement may not be amended or modified except by a written document duly executed by the parties hereto. Section 8.07. Rules of Construction. Unless the context otherwise requires (a) a term used herein has the meaning assigned to it, and (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles. Section 8.08. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall be deemed one and the same instrument. Section 8.09. Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors including, but not limited to Citizens if it should be the surviving bank in a merger of Community into Citizens. There shall be no third party beneficiaries hereof. Section 8.10. Governing Law; Assignment. This Agreement shall be governed by the laws of the State of Indiana. This Agreement may not be assigned by any of the parties hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written, with the unanimous approval of their respective Boards of Directors. GERMAN AMERICAN BANCORP By____________________________ George W. Astrike Chairman of the Board and Chief Executive Officer GERMAN AMERICAN HOLDINGS CORPORATION By____________________________ George W. Astrike Chief Executive Officer COMMUNITY TRUST BANK -B 31- By____________________________ Its___________________________ FSB FINANCIAL CORPORATION By____________________________ Its___________________________ FSB BANK By____________________________ Its___________________________ APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF FSB FINANCIAL CORPORATION: The undersigned Directors of FSB Financial Corporation hereby (a) evidence their approval of this Agreement and the Mergers contemplated thereby, and (b) agree to vote their shares of FSB Common that are registered in their personal names (and agree to use their best efforts to cause all additional shares of FSB Common over which they have voting influence or control to be voted) in favor of the Holding Company Merger at the FSB Shareholders Meeting. - ----------------------------------- ---------------------------------- - ----------------------------------- ---------------------------------- - ----------------------------------- ---------------------------------- - ----------------------------------- ---------------------------------- -B 32- APPENDIX C INDIANA CODE 23-1-44 DISSENTERS RIGHTS Ind. Code 23-1-44-1. "Corporation" defined As used in this chapter, "corporation" means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer. Ind. Code 23-1-44-2. "Dissenter" defined As used in this chapter, "dissenter" means a shareholder who is entitled to dissent from corporate action under section 8 [IC 23-1-44-8] of this chapter and who exercises that right when and in the manner required by sections 10 through 18 [IC 23-1-44-10 through IC 23-1-44-18] of this chapter. Ind. Code 23-1-44-3. "Fair value" defined As used in this chapter, "fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. Ind. Code 23-1-44-4. "Interest" defined As used in this chapter, "interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. Ind. Code 23-1-44-5. "Record shareholder" defined As used in this chapter, "record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent that treatment as a record shareholder is provided under a recognition procedure or a disclosure procedure established under IC 23-1-30-4. Ind. Code 23-1-44-6. "Beneficial shareholder" defined -C 1- As used in this chapter, "beneficial shareholder" means the person who is a beneficial owner of shares held by a nominee as the record shareholder. Ind. Code 23-1-44-7. "Shareholder" defined As used in this chapter, "shareholder" means the record shareholder or the beneficial shareholder. Ind. Code 23-1-44-8. Shareholder dissent (a) A shareholder is entitled to dissent from, and obtain payment of the fair value of the shareholder's shares in the event of, any of the following corporate actions: (1) Consummation of a plan of merger to which the corporation is a party if: (A) Shareholder approval is required for the merger by IC 23-1-40-3 or the articles of incorporation; and (B) The shareholder is entitled to vote on the merger. (2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan. (3) Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one (1) year after the date of sale. (4) The approval of a control share acquisition under IC 23-1-42. (5) Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. -C 2- (b) This section does not apply to the holders of shares of any class or series if, on the date fixed to determine the shareholders entitled to receive notice of and vote at the meeting of shareholders at which the merger, plan of share exchange, or sale or exchange of property is to be acted on, the shares of that class or series were: (1) Registered on a United States securities exchange registered under the Exchange Act (as defined in IC 23-1-43-9); or (2) Traded on the National Association of Securities Dealers, Inc. Automated Quotations System Over-the-Counter Markets ---- National Market Issues or a similar market. (c) A shareholder: (1) Who is entitled to dissent and obtain payment for the shareholder's shares under this chapter; or (2) Who would be so entitled to dissent and obtain payment but for the provisions of subsection (b); may not challenge the corporate action creating (or that, but for the provisions of subsection (b), would have created) the shareholder's entitlement. Ind. Code 23-1-44-9. Beneficial shareholder dissent (a) A record shareholder may assert dissenters' rights as to fewer than all the shares registered in the shareholder's name only if the shareholder dissents with respect to all shares beneficially owned by any one (1) person and notifies the corporation in writing of the name and address of each person on whose behalf the shareholder asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which the shareholder dissents and the shareholder's other shares were registered in the names of different shareholders. (b) A beneficial shareholder may assert dissenters' rights as to shares held on the shareholder's behalf only if: (1) The beneficial shareholder submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights; and (2) The beneficial shareholder does so with respect to all the beneficial shareholder's shares or those shares over which the beneficial shareholder has power to direct the vote. Ind. Code 23-1-44-10. Notice of dissenters' rights preceding shareholder vote (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters' rights under this chapter. -C 3- (b) If corporate action creating dissenters' rights under section 8 of this chapter is taken without a vote of shareholders, the corporation shall notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in section 12 [IC 23-1-44-12] of this chapter. Ind. Code 23-1-44-11. Notice of intent to dissent (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights: (1) Must deliver to the corporation before the vote is taken written notice of the shareholder's intent to demand payment for the shareholder's shares if the proposed action is effectuated; and (2) Must not vote the shareholder's shares in favor of the proposed action. (b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to payment for the shareholder's shares under this chapter. Ind. Code 23-1-44-12. Notice of dissenters' rights following action creating rights (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is authorized at a shareholders' meeting, the corporation shall deliver a written dissenters' notice to all shareholders who satisfied the requirements of section 11 [IC 23-1-44-11] of this chapter. (b) The dissenters' notice must be sent no later than ten (10) days after approval by the shareholders, or if corporate action is taken without approval by the shareholders, then ten (10) days after the corporate action was taken. The dissenters' notice must: (1) State where the payment demand must be sent and where and when certificates for certificated shares must be deposited; (2) Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; (3) Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not the person acquired beneficial ownership of the shares before that date; (4) Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty (30) nor more than sixty (60) days after the date the subsection (a) notice is delivered; and (5) Be accompanied by a copy of this chapter. -C 4- Ind. Code 23-1-44-13. Demand for payment by dissenter (a) A shareholder sent a dissenters' notice described in IC 23-1-42-11 or in section 12 [IC 23-1-44-12] of this chapter must demand payment, certify whether the shareholder acquired beneficial ownership of the shares before the date required to be set forth in the dissenter's notice under section 12(b)(3) [IC 23-1-44-12(b)(3)] of this chapter, and deposit the shareholder's certificates in accordance with the terms of the notice. (b) The shareholder who demands payment and deposits the shareholder's shares under subsection (a) retains all other rights of a shareholder until these rights are canceled or modified by the taking of the proposed corporate action. (c) A shareholder who does not demand payment or deposit the shareholder's share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for the shareholder's shares under this chapter and is considered, for purposes of this article, to have voted the shareholder's shares in favor of the proposed corporate action. Ind. Code 23-1-44-14. Transfer of shares restricted after demand for payment (a) The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under section 16 [IC 23-1-44-16] of this chapter. (b) The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are canceled or modified by the taking of the proposed corporate action. Ind. Code 23-1-44-15. Payment to dissenter (a) Except as provided in section 17 [IC 23-1-44-17] of this chapter, as soon as the proposed corporate action is taken, or, if the transaction did not need shareholder approval and has been completed, upon receipt of a payment demand, the corporation shall pay each dissenter who complied with section 13 [IC 23-1-44-13] of this chapter the amount the corporation estimates to be the fair value of the dissenter's shares. (b) The payment must be accompanied by: (1) The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen (16) months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; (2) A statement of the corporation's estimate of the fair value of the shares; and (3) A statement of the dissenter's right to demand payment under section 18 [IC 23-1-44-18] of this chapter. -C 5- Ind. Code 23-1-44-16. Return of shares and release of restrictions (a) If the corporation does not take the proposed action within sixty (60) days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. (b) If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must send a new dissenters' notice under section 12 [IC 23-1-44-12] of this chapter and repeat the payment demand procedure. Ind. Code 23-1-44-17. Offer of fair value for shares obtained after first announcement (a) A corporation may elect to withhold payment required by section 15 [IC 23-1-44-15] of this chapter from a dissenter unless the dissenter was the beneficial owner of the shares before the date set forth in the dissenters' notice as the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action. (b) To the extent the corporation elects to withhold payment under subsection (a), after taking the proposed corporate action, it shall estimate the fair value of the shares and shall pay this amount to each dissenter who agrees to accept it in full satisfaction of the dissenter's demand. The corporation shall send with its offer a statement of its estimate of the fair value of the shares and a statement of the dissenter's right to demand payment under section 18 [IC 23-1-44-18] of this chapter. Ind. Code 23-1-44-18. Dissenter demand for fair value under certain conditions (a) A dissenter may notify the corporation in writing of the dissenter's own estimate of the fair value of the dissenter's shares and demand payment of the dissenter's estimate (less any payment under section 15 [IC 23-1-44-15] of this chapter), or reject the corporation's offer under section 17 [IC 23-1-44-17] of this chapter and demand payment of the fair value of the dissenter's shares, if: (1) The dissenter believes that the amount paid under section 15 of this chapter or offered under section 17 of this chapter is less than the fair value of the dissenter's shares; (2) The corporation fails to make payment under section 15 of this chapter within sixty (60) days after the date set for demanding payment; or (3) The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty (60) days after the date set for demanding payment. (b) A dissenter waives the right to demand payment under this section unless the dissenter notifies the corporation of the dissenter's demand in writing under subsection (a) within thirty (30) days after the corporation made or offered payment for the dissenter's shares. -C 6- Ind. Code 23-1-44-19. Effect of failure to pay demand -- Commencement of judicial appraisal proceeding (a) If a demand for payment under IC 23-1-42-11 or under section 18 [IC 23-1-44-18] of this chapter remains unsettled, the corporation shall commence a proceeding within sixty (60) days after receiving the payment demand and petition the court to determine the fair value of the shares. If the corporation does not commence the proceeding within the sixty (60) day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. (b) The corporation shall commence the proceeding in the circuit or superior court of the county where a corporation's principal office (or, if none in Indiana, its registered office) is located. If the corporation is a foreign corporation without a registered office in Indiana, it shall commence the proceeding in the county in Indiana where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. (c) The corporation shall make all dissenters (whether or not residents of this state) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. (d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) is plenary and exclusive. The court may appoint one (1) or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. (e) Each dissenter made a party to the proceeding is entitled to judgment: (1) For the amount, if any, by which the court finds the fair value of the dissenter's shares, plus interest, exceeds the amount paid by the corporation; or (2) For the fair value, plus accrued interest, of the dissenter's after-acquired shares for which the corporation elected to withhold payment under section 17 [IC 23-1-44-17] of this chapter. Ind. Code 23-1-44-20. Judicial determination and assessment of costs (a) The court in an appraisal proceeding commenced under section 19 [IC 23-1-44-19] of this chapter shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against such parties and in such amounts as the court finds equitable. (b) The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: -C 7- (1) Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of sections 10 through 18 [IC 23-1-44-10 through IC 23-1-44-18] of this chapter; or (2) Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. (c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefitted. -C 8- [OLIVE CORPORATE FINANCE, LLC LETTERHEAD] _____________,1998 Board of Directors CSB Bancorp Main and Seventh Streets Petersburg, IN 47567 Gentlemen: You have requested our opinion as to the fairness, from a financial point of view, to the shareholders of CSB Bancorp ("CSB") of the merger ("Merger") of CSB with a wholly owned interim subsidiary of German American Bancorp ("German American"), as set forth in the Agreement and Plan of Reorganization ("Agreement") among CSB and German American dated December 8, 1997. The terms of the Agreements provide, among other things, that subject to the Merger receiving approvals from the shareholders of CSB; from the Federal Reserve Board and the Indiana Department of Financial Institutions; approval of the Registration Statement by the Securities and Exchange Commission relating to the shares of German American Common Stock to be issued to the shareholders of CSB pursuant to the Agreement; and subject to the satisfaction of certain other conditions, each of the 160,000 issued and outstanding shares of CSB common stock, no par value, shall be converted into shares of German American Common Stock, $10 par value, which total number of shares of German American common stock shall have a value of at least $22,750,000, or $142.1875 per CSB common share, with cash payment in lieu of fractional shares, and after which each share of CSB common stock shall be canceled and extinguished. The terms provide further that German American will issue no more than 1,137,500 shares or fewer than 928,572 shares (subject to adjustment, if any, as provided in the Agreement, Section 1.03(f)). In connection with our opinion, we have reviewed, among other things, the Agreement; the Proxy Statement relating to the Special Meeting of Shareholders of CSB to be held in connection with the merger; Annual Reports to shareholders for CSB for each of the five years ended December 31, 1992 through December 31, 1996; Annual Reports on Form 10-K for German American for each of the three years ended December 31, 1994, 1995, and 1996; Quarterly Reports on Form 10-Q for the periods ended March, June, and September, 1997; Draft of the Registration Statement on Form S-4 relating to this transaction; certain communications in the form of press releases from German American to its shareholders; each of German American's filings on Form 8-K during the year ended December 31, 1997; audited financial statements of CSB for the five years ended December 31, 1992 through December 31, 1996, and unaudited financial statements of CSB dated September 30, 1997; Uniform Bank Performance Reports dated December 31, 1992 through December 31, 1996, and September 30, 1997; Consolidated Reports of Condition and Income filed with the Federal Deposit -C 9- Board of Directors CSB Bancorp ____________________, 1998 Page 2 Insurance Corporation dated December 31, 1996, September 30, 1997 and December 31 1997; various internal financial reports regarding the operations and the financial condition of CSB; reported market prices, trading activity and yields of the common stock of CSB for recent years, as well as the prices, trading activity and yields of comparably-traded and/or sized companies and their securities. In conducting our review and arriving at our opinion, we have relied upon the accuracy and completeness of all financial and other information provided to us without independent verification. We have not made any independent valuation or appraisal of the assets or reserves against future liabilities or losses of CSB or German American. We have held discussions with members of the senior management of CSB regarding past and current business operations, financial condition and future prospects of the company. In addition, we have reviewed the reported price and trading activity of the common stock of German American, reviewed the financial terms of certain recent business combinations of Indiana commercial banking companies and performed such other studies and analyses as we considered appropriate. We have also taken into account our assessment of general economic, market, and financial conditions and our experience in other transactions, as well as our experience in securities valuation and our knowledge of the banking industry generally. Olive, as part of its investment banking business, is engaged in the valuation of commercial banks and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for various purposes. Olive has never acted as a market maker for the common stock of CSB or German American. Except for this engagement, CSB has not had any material or compensable relationship with Olive or its affiliates during the past two years. Neither Olive nor any of its affiliates has a material financial interest in CSB or German American. Based upon and subject to the foregoing and such other matters we considered relevant, it is our opinion that as of the date hereof, the terms and consideration of the Transaction are fair to CSB's shareholders from a financial point of view. Sincerely, OLIVE CORPORATE FINANCE LLC -C 10- [OLIVE CORPORATE FINANCE, LLC LETTERHEAD] _______________, 1998 Board of Directors FSB Financial Corporation 102 Main Street Francisco, IN 47659 Gentlemen: You have requested our opinion as to the fairness, from a financial point of view, to the shareholders of FSB Financial Corporation ("FSB") of the merger ("Merger") of FSB with a wholly owned interim subsidiary of German American Bancorp ("German American"), as set forth in the Agreement and Plan of Reorganization ("Agreement") among FSB and German American dated December ___, 1998. The terms of the Agreements provide, among other things, that subject to the Merger receiving approvals from the shareholders of FSB; from the Federal Reserve Board and the Indiana Department of Financial Institutions; approval of the Registration Statement by the Securities and Exchange Commission relating to the shares of German American to be issued to the shareholders of FSB pursuant to the Agreement; and subject to the satisfaction of certain other conditions, each of the 48,916 issued and outstanding shares of FSB common stock, no par value, shall be converted into shares of German American Common Stock, $10 par value, which total number of shares of German American common stock shall have a value equal to 150% of the sum of June 30, 1997 shareholders equity plus (or minus) the amount of net income (loss) retained after dividends, if any, but before securities transaction gains of FSB from June 30, 1997, to the end of the month immediately preceding the Closing Date, with cash payment in lieu of fractional shares, and after which each share of FSB common stock shall be canceled and extinguished. In connection with our opinion, we have reviewed, among other things, the Agreement; the Proxy Statement relating to the Special Meeting of Shareholders of FSB to be held in connection with the merger; Annual Reports on Form 10-K for German American for each of the three years ended December 31, 1994, 1995, and 1996, and the Quarterly Report on Form 10-Q for the periods ended March, June, and September, 1997; Draft of the Registration Statement on Form S-4 relating to this transaction; certain communications in the form of press releases from German American to its shareholders; each of German American's filings on Form 8-K during the year ended December 31, 1997; audited financial statements of FSB for the six years ended September 30, 1992 through September 30, 1996, and a draft of audited financial statements of FSB dated September 30, 1997; Uniform Bank Performance Reports dated December, 1992 through December 31, 1996, and September 30, 1997; Call Reports dated December 31, 1996, September 30, 1997 and December 31, 1997, and various internal financial and policy reports regarding the operations and the financial condition of FSB; and prices, trading activity and yields for comparably-traded and/or sized -C 11- Board of Directors FSB Financial Corp. _____________, 1998 Page 2 companies and their securities. In conducting our review and arriving at our opinion, we have relied upon the accuracy and completeness of all financial and other information provided to us without independent verification. We have not made any independent valuation or appraisal of the assets or reserves against future liabilities or losses of FSB or German American. We have held discussions with members of the senior management of FSB regarding past and current business operations, financial condition including recent years earnings losses, and future prospects of the company. In addition, we have reviewed the reported price and trading activity of the common stock of German American, reviewed the financial terms of certain recent business combinations of Indiana commercial banking companies and performed such other studies and analyses as we considered appropriate. We have also taken into account our assessment of general economic, market, and financial conditions and our experience in other transactions, as well as our experience in securities valuation and our knowledge of the banking industry generally. Olive, as part of its investment banking business, is engaged in the valuation of commercial banks and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for various purposes. Olive has never acted as a market maker for the common stock of FSB or German American. Except for this engagement, FSB has not had any material or compensable relationship with Olive or its affiliates during the past two years. Neither Olive nor any of its affiliates has a material financial interest in FSB or German American. Based upon and subject to the foregoing and such other matters we considered relevant, it is our opinion that as of the date hereof, the terms and consideration of the Transaction are fair to FSB's shareholders from a financial point of view. Sincerely, OLIVE CORPORATE FINANCE LLC -C 12- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Officers and Directors. Under the Indiana Business Corporation Law and Article IV of German American's Restated Bylaws, German American's officers, Directors, and employees are entitled to indemnification against all liability and expense with respect to any civil or criminal claim, action, suit or proceeding in which they are wholly successful. If they are not wholly successful and even if they are adjudged liable or guilty, they are entitled to indemnification if it is determined, with respect to a civil action, by disinterested Directors, a special legal counsel, or a majority vote of the shares of German American's voting stock held by disinterested shareholders, that they acted in good faith in what they reasonably believed to be the best interests of German American. With respect to any criminal action, it must also be determined that they had no reasonable cause to believe their conduct unlawful. Under the Indiana Business Corporation Law, a Director of German American cannot be held liable for actions that do not constitute wilful misconduct or recklessness. The Articles of Incorporation of German American provide that Directors of German American shall be immune from personal liability for any action taken as a Director, or any failure to take any action, to the fullest extent permitted by the applicable provisions of the Indiana Business Corporation Law from time to time in effect and by general principles of corporate law. In addition, a Director of German American against whom a shareholders' derivative suit has been filed cannot be held liable if a committee of disinterested Directors of German American, after a good faith investigation, determines either that the shareholder has no right or remedy or that pursuit of that right or remedy will not serve the best interests of German American. At present, there are no claims, actions, suits or proceedings pending where indemnification would be required under the above, and German American does not know of any threatened claims, actions, suits or proceedings which may result in a request for such indemnification. In addition, officers and Directors of German American are entitled to indemnification under an insurance policy of German American for expenditures incurred by them in connection with certain acts in their capacities as such, and providing reimbursement to German American for expenditures in indemnifying such Directors and officers for such acts. The maximum aggregate coverage for German American and insured individuals is $2,000,000 for claims made during each policy year, with the policies subject to self-retention and deductible provisions. Item 21. Exhibits and Financial Statement. The exhibits described in the Exhibit List immediately following the "Signatures" page of this Registration Statement (which Exhibit List is incorporated by reference) are hereby filed as part of this Registration Statement. Item 22. Undertakings. -II 1- The undersigned registrant hereby undertakes that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. The registrant undertakes that every prospectus (i) that is filed pursuant to the paragraph immediately proceeding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to Directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a Director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such Director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, 13 or 18 of this form within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; -II 2- (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; and (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. -II 3- SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jasper, State of Indiana, on February 24, 1998. GERMAN AMERICAN BANCORP By /s/ George W. Astrike George W. Astrike, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed on February 24, 1998 by the following persons in the capacities indicated. Principal Executive Officer: /s/ George W. Astrike George W. Astrike Chairman of the Board and Chief Executive Officer Principal Financial Officer: /s/ Richard Trent Richard Trent Chief Financial Officer Principal Accounting Officer: /s/ John M. Gutgsell John M. Gutgsell Vice President and Controller /s/ George W. Astrike George W. Astrike Director /s/ David G. Buehler David G. Buehler Director -II 4- - ---------------------------- David B. Graham Director /s/ William R. Hoffman William R. Hoffman Director - ---------------------------- Michael B. Lett Director /s/ Gene C. Mehne Gene C. Mehne Director /s/ A. Wayne ("Skip") Place, Jr. A. Wayne ("Skip") Place, Jr. Director - --------------------------- Robert L. Ruckriegel Director /s/ Mark A. Schroeder Mark A. Schroeder Director - --------------------------- Larry J. Seger Director /s/ Joseph F. Steurer Joseph F. Steurer Director - --------------------------- Chet L. Thompson Director -II 5- EXHIBIT INDEX Exhibit Number Description 2.1 Agreement and Plan of Reorganization between German American and CSB (included as Appendix A to the Prospectus/Proxy Statement). 2.2 Agreement and Plan of Reorganization between German American and FSB (included as Appendix B to the Prospectus/Proxy Statement). 3.1 Restated Articles of Incorporation of German American Bancorp, as amended April 24, 1995. The copy of this exhibit filed as Exhibit 3.1 to German American's Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 3.2 Restated Bylaws of German American Bancorp, as amended August 14, 1990. The copy of this exhibit filed as Exhibit 3.2 to German American's Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 5 Opinion of Leagre Chandler & Millard regarding legality of securities being offered, including consent. 8.1 Opinion of Leagre Chandler & Millard regarding federal income tax consequences of CSB Merger, including consent. 8.2 Opinion of Leagre Chandler & Millard regarding federal income tax consequences of FSB Merger, including consent. 10.1 German American Bancorp 1992 Stock Option Plan. The copy of this exhibit filed as Exhibit 10.1 to Amendment No. 1 to German American's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) is incorporated herein by reference. 10.2 Executive Deferred Compensation Agreement dated December 1, 1992 between The German American Bank and George W. Astrike. The copy of this exhibit filed as Exhibit 10.3 to Amendment No. 1 to German American's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) and is incorporated herein by reference. 10.3 Director Deferred Compensation Agreement between The German American Bank and all but one of its Directors. The documents filed as Exhibit 10.4 to Amendment No. 1 to German American's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) are incorporated herein by reference. (The Agreement entered into by George W. Astrike, a copy of which was filed as Exhibit 10.4 to the S-4, is substantially identical to the Agreements entered into by the other Directors.) The schedule following Exhibit 10.4 to the S-4 lists the Agreements with the other -II 6- Directors and sets forth the material detail in which such Agreements differ from the Agreement filed as Exhibit 10.4 to the Unibancorp S-4. 10.4 Sublease entered by and between Buehler Foods, Inc. and The German American Bank, dated January 2, 1987 (Huntingburg Banking Center Branch). The copy of this exhibit filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 filed February 28, 1994 (No. 33-75762) (the "Otwell S-4") is incorporated herein by reference. 10.5 Sublease entered by and between Buehler Foods, Inc. and The German American Bank dated August 1, 1990 (The Crossing Shopping Center Branch). The copy of this exhibit filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 filed November 19, 1996 (No. 333-16331) is incorporated herein by reference. 10.6 Letter dated January 5, 1995 from the German American Bank to Buehler Foods, Inc. notifying Buehler Foods, Inc. of exercise of renewal option on The Crossing Shopping Center Branch. The copy of this exhibit filed as Exhibit 10.4 of the Registrant's Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. 10.7 Incentive stock option agreement between German American and George W. Astrike dated April 20, 1993. The copy of this exhibit filed as Exhibit 10.6 to the Otwell S-4 is incorporated herein by reference. 10.8 Form of Incentive Stock Option Agreement. The copy of this exhibit filed as Exhibit 10.7 to the Otwell S-4 is incorporated herein by reference. The Incentive Stock Option Agreement between German American Bancorp and Mark A. Schroeder dated April 20, 1993, is substantially identical to the Form of Incentive Stock Option Agreements entered into by German American and the following other executive officers of German American, all on April 20, 1993: James E. Essany (1,500 shares); Urban R. Giesler (1,500 shares); Stan J. Ruhe (3,000 shares) (all numbers and prices unadjusted for subsequent stock splits). 13 Annual Report to Shareholders for the year ended December 31, 1996. The copy of this exhibit filed as Exhibit 13 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K") is incorporated herein by reference. This exhibit, except to the extent specifically incorporated by reference into the 1996 10-K, is furnished for the information of the Commission only and is not to be deemed "filed" as a part of the 1996 10-K or this Registration Statement. 21 Subsidiaries of German American. 23.1 Consent of Crowe, Chizek and Company, LLP. 23.2 Consent of Crowe, Chizek and Company, LLP. 23.3 Consent of Gaither Rutherford & Co., LLP. 23.4 Consents of counsel are filed as part of Exhibits 5 and 8 to this Registration Statement. -II 7- 23.5 Consent of Olive Corporate Finance, LLC. 23.6 Consent of Olive Corporate Finance, LLC. 24 Power of Attorney, included on signature page. 99.1 Form of Proxy (CSB). 99.2 Form of Proxy (FSB). 99.3 Form of Cover Letter to Shareholders (CSB). 99.4 Form of Cover Letter to Shareholders (FSB). -II 8- EX-5 2 EXHIBIT 5 EXHIBIT 5 [LEAGRE CHANDLER & MILLARD LETTERHEAD] February 24, 1998 German American Bancorp 711 Main Street P.O. Box 810 Jasper, Indiana 47546-3042 Re: Registration Statement on Form S-4 Gentlemen: In connection with a certain Registration Statement on Form S-4 (the "Registration Statement") filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules and regulations promulgated thereunder, you have requested that we furnish you our opinion as to the legality of the shares of the common stock, $10.00 par value (the "Common Stock"), of German American Bancorp (the "Company") registered thereunder, which Common Stock is to be issued pursuant to an Agreement and Plan of Reorganization, dated December 8, 1997, among the Company, CSB Bancorp, The Citizens State Bank of Petersburg, German American Holdings Corporation, and Community Trust Bank, and the Agreement and Plan of Reorganization, dated January 30, 1998, among the Company, FSB Financial Corporation, FSB Bank, German American Holdings Corporation, and Community Trust Bank (collectively, the "Merger Agreements"). As counsel to the Company, we have participated in the preparation of the Registration Statement. We have examined and are familiar with the Company's Articles of Incorporation, Bylaws, as amended, records of corporate proceedings and such other information and documents as we have deemed necessary or appropriate. Based upon the foregoing, we are of the opinion that the Common Stock has been duly authorized and will, when issued as contemplated in the Registration Statement and the Merger Agreements, be validly issued, fully paid and non-assessable. We consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus/Proxy Statement included in the Registration Statement as having passed upon the matters covered hereby. Very truly yours, /s/ LEAGRE CHANDLER & MILLARD LEAGRE CHANDLER & MILLARD 11279 EX-8 3 EXHIBIT 8.1 EXHIBIT 8.1 [FORM OF TAX OPINION] February __, 1998 German American Bancorp 711 Main Street Box 810 Jasper, Indiana 47546 Subject: Agreement and Plan of Reorganization by and among CSB Bancorp, The Citizens State Bank of Petersburg, German American Bancorp, German American Holdings Corporation, and Community Trust Bank. Gentlemen: You have requested our opinion on certain of the federal income tax consequences with respect to certain transactions set forth in the Agreement and Plan of Reorganization by and among CSB Bancorp, an Indiana corporation ("CSB"), The Citizens State Bank of Petersburg, an Indiana banking corporation, ("Citizens"), German American Holdings Corporation, an Indiana corporation ("GAHC"), German American Bancorp, an Indiana corporation ("German American"), and Community Trust Bank, an Indiana banking corporation ("Community"), and dated December 8, 1997 ("Agreement and Plan of Reorganization"). Subject to the terms and conditions of the Agreement and Plan of Reorganization, CSB shall merge with and into GAHC. This transaction is referred to herein as the "Holding Company Merger." Simultaneously, Community shall be merged with and into Citizens, subject to the terms and conditions of the Agreement and Plan of Reorganization. This transaction is referred to herein as the "Bank Merger." Collectively, the Holding Company Merger and the Bank Merger are referred to herein as the "Mergers." Documents Reviewed. We have, for purposes of the opinion, reviewed the following documents: 1. The Agreement and Plan of Reorganization. 2. The Registration Statement on Form S-4 to be filed by German American with the Securities and Exchange Commission on February ___, 1998, under the Securities Act of 1933, as amended (the "Registration Statement"). 3. Such other documents, records, and matters of law as we have deemed necessary or appropriate in connection with rendering this opinion. We have relied upon the above documents as to matters of fact. We have not independently checked or verified the accuracy or completeness of the information set forth in such documents, but we know of no facts that indicate to us that the information set forth in such documents is inaccurate or incomplete. Factual and Legal Assumptions. For purposes of this opinion, we have made the following assumptions as to factual and legal matters: 1. The representations and warranties of the parties contained in the Agreement and Plan of Reorganization that may be deemed material to this opinion will be true in all material respects as of the effective date of the Mergers, except as may be otherwise set forth in or contemplated by the Agreement and Plan of Reorganization. 2. The representations of German American, Community, GAHC, CSB and Citizens contained in the Representation Certificates attached hereto will be true in all material respects as of the effective date of the Mergers. 3. The Mergers and all transactions related thereto or contemplated by the Agreement and Plan of Reorganization shall be consummated in accordance with the terms and conditions of the Agreement and Plan of Reorganization. Limitations on Opinion. The following limitations apply with respect to this opinion: 1. Our opinion is based upon the Internal Revenue Code (the "Code"), Treasury Regulations, court decisions and Internal Revenue Service policies and rulings as of this date. These fundamentals of our opinion are subject to change at any time, and some of these changes have been applied in the past, retroactively, to affect adversely transactions that had occurred prior to the change. 2. We have not been asked to render an opinion with respect to any federal income tax matters, except those set forth below, nor have we been asked to render an opinion with respect to any state or local tax consequences of the Mergers. Accordingly, this opinion should not be construed as applying in any manner to any tax aspect of the Mergers other than as set forth below. 3. All of the factual and legal assumptions set forth above are material to the opinion herein rendered and have been relied upon by us in rendering such opinion. Any material inaccuracy in any one or more of the factual or legal assumptions may render all or part of our opinion inapplicable to the Mergers. Opinion. Based upon and subject to the foregoing, it is our opinion that: 1. The Mergers will constitute a reorganization within the meaning of Section 368(a) of the Code. 2. No gain or loss will be recognized by German American, Community, GAHC, CSB, or Citizens as a result of the consummation of the Mergers. 3. No gain or loss will be recognized by the CSB shareholders upon exchange of their shares of CSB Common solely for shares of German American Common. 4. The basis of the shares of German American Common received by CSB shareholders will be the same, in each instance, as the basis of the shares of CSB Common surrendered in exchange therefor. 5. The holding period of the shares of German American Common received by each shareholder of shares of CSB Common will include the period during which the shares of CSB Common surrendered in exchange therefor were held, provided that the shares of CSB Common so exchanged were held as a capital asset by such shareholder. 6. Cash payments in lieu of fractional share interests of German American Common will be treated as having been received as distributions in full payment in exchange for the stock converted as provided in Section 302 of the Code. We consent to the reference to this opinion and to our firm in the Registration Statement. Very truly yours, 8438 FORM OF REPRESENTATION CERTIFICATE German American Bancorp ("German American"), German American Holdings Corporation ("GAHC"), and Community Trust Bank ("Community") make the following representations to Leagre Chandler & Millard to be used by Leagre Chandler & Millard in rendering its opinion as to certain federal income tax consequences with respect to certain transactions set forth in the Agreement and Plan of Reorganization by and among CSB Bancorp ("CSB"), The Citizens State Bank of Petersburg ("Citizens"), GAHC, German American, and Community and dated December 8, 1997 ("Agreement and Plan of Reorganization"). Subject to the terms and conditions of the Agreement and Plan of Reorganization, CSB shall merge with and into GAHC. This transaction is referred to herein as the "Holding Company Merger." Simultaneously, Community shall be merged with and into Citizens, subject to the terms and conditions of the Agreement and Plan of Reorganization. This transaction is referred to herein as the "Bank Merger." Collectively, the Bank Merger and the Holding Company Merger are referred to herein as the "Mergers." German American, Community and GAHC acknowledge and agree that each of the following representations constitutes a material representation to be relied upon by Leagre Chandler & Millard in rendering its opinion and that any material inaccuracy in any of the following representations may render the conclusions drawn in the opinion of Leagre Chandler & Millard inapplicable to the Mergers. The representations of each party hereto are limited to the extent that each specific representation is made solely with respect to information applicable to itself. "Control" for purposes of these representations means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock. The specific representations made are as follows: 1. The fair market value of the German American Common Stock received by each CSB shareholder will be approximately equal to the fair market value of the CSB Common Stock surrendered in the exchange. 2. There is no plan or intention by the shareholders of CSB who own five percent or more of CSB Common Stock and to the best of the knowledge of the managements of German American, Community and GAHC there is no plan or intention on the part of the remaining shareholders of CSB, to sell, exchange, or otherwise dispose of a number of shares of German American Common Stock received in the Mergers that would reduce the CSB shareholders' ownership of German American Common Stock to a number of shares having a value, at the close of business on the effective date of the Mergers ("Effective Time"), of less than 50 percent of the value of all the formerly outstanding Common Stock of CSB as of the same date. For purposes of this representation, shares of CSB Common Stock surrendered by dissenters, or exchanged for cash in lieu of fractional shares of German American Common Stock, will be treated as outstanding CSB Common Stock as of the Effective Time. Moreover, shares of CSB Common Stock and shares of German American Common Stock held by CSB shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Mergers, Citizens will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of Community net assets and at least 70 percent of the fair market value of Community gross assets, held immediately prior to the Mergers. For purposes of this representation, amounts used by Citizens or Community to pay reorganization expenses and all redemptions and distributions (except for regular, normal dividends) made by Citizens will be included as assets of Citizens or Community, respectively, immediately prior to the Mergers. 4. Prior to the Mergers, German American will be in control of Community and GAHC. 5. Neither GAHC nor Citizens has any plan or intention to issue additional shares of its stock after the Mergers that would result in German American losing control, respectively, of GAHC or Citizens. 6. German American has no plan or intention to reacquire any of its Common Stock issued in the Mergers. 7. German American and GAHC have no plan or intention to sell or otherwise dispose of any of the assets of CSB acquired in the Mergers, to liquidate Citizens, to sell or otherwise dispose of the Citizens stock, or to cause Citizens to sell or otherwise dispose of any of its assets or of any of the assets acquired from Community, except for dispositions made in the ordinary course of business. 8. The liabilities of CSB to be assumed by GAHC, the liabilities of Community to be assumed by Citizens, and the liabilities to which the assets of CSB and Community are subject, were incurred in the ordinary course of business of CSB and Community. 9. Following the Mergers, GAHC will continue the historic business of CSB or use a significant portion of CSB's historic business assets in a business, and Citizens will continue the historic business of Community or use a significant portion of Community historic business assets in a business. 10. German American, Community, GAHC, CSB, Citizens and their respective shareholders will each pay their own expenses, if any, incurred in connection with the Mergers. 11. There is no intercorporate indebtedness existing between (i) German American or GAHC and Citizens, (ii) Community and Citizens, or (iii) German American or GAHC and CSB that was issued, acquired, or will be settled at a discount. 12. In the Mergers, shares of CSB's Common Stock representing control of CSB will be exchanged solely for voting stock of German American. For purposes of this representation, shares of CSB's Common Stock exchanged for cash or other property originating with German American will be treated as outstanding CSB Common Stock as of the Effective Time. 13. At the Effective Time, CSB and Citizens will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in CSB and Citizens that, if exercised or converted, would affect German American's acquisition or retention of control of CSB and Citizens, respectively. 14. German American does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any Common Stock of CSB or Citizens. 15. No party to the Mergers is an investment company regulated under the Investment Company Act of 1940, a real estate investment trust, or a corporation 50 percent or more of the value of whose total assets are stock and securities and 80 percent or more of the value of whose total assets are held for investment. 16. On the date of the Mergers, the fair market value of the assets of Citizens will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 17. Neither CSB nor Citizens is under the jurisdiction of a court in a case under Title 11 of the United States Code or a receivership, foreclosure, or similar proceeding. 18. The payment of cash in lieu of fractional shares of German American's Common Stock is solely for the purpose of avoiding the expense and inconvenience to German American of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Mergers to the CSB shareholders instead of issuing fractional shares of German American Common Stock will not exceed one percent of the total consideration that will be issued in the Mergers to the CSB shareholders in exchange for their shares of CSB Common Stock. The fractional share interests of each CSB shareholder will be aggregated, and no CSB shareholder will receive cash in an amount equal to or greater than the value of one full share of German American Common Stock. 19. None of the compensation received by any shareholder-employees of CSB or Citizens will be separate consideration for, or allocable to, any of their shares of CSB Common Stock; none of the shares of German American Common Stock received by any shareholder-employees of CSB or Citizens will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees of CSB or Citizens will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 20. The Bank Merger and Holding Company Merger will occur on the same date. 21. GAHC will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, held by CSB immediately prior to the Mergers. For purposes of this representation, amounts used by CSB to pay its reorganization expenses, amounts paid by CSB to shareholders who receive cash or other property, and all redemptions and distribution (except for regular, normal dividends) made by CSB immediately preceding the transfer will be included as assets of CSB held immediately prior to the Mergers. 22. The adjusted basis and fair market value of the assets of CSB transferred to GAHC will each equal or exceed the sum of CSB's liabilities assumed by GAHC, plus any other liabilities to which the transferred assets are subject. 23. CSB will distribute the stock, securities, and other property it receives in the Mergers, and its other properties, in pursuance of the Merger Agreements. IN WITNESS WHEREOF, German American, Community and GAHC, each acting by an authorized officer with full corporate authority, have executed and delivered this Representation Certificate to Leagre Chandler & Millard as of the date written below. GERMAN AMERICAN BANCORP Date: ______________________ By____________________________ George W. Astrike, Chairman of the Board and Chief Executive Officer GERMAN AMERICAN HOLDINGS CORPORATION Date: ______________________ By____________________________ George W. Astrike, Chief Executive Officer THE COMMUNITY TRUST BANK Date: ______________________ By____________________________ Its___________________________ FORM OF REPRESENTATION CERTIFICATE CSB Bancorp ("CSB") and The Citizens State Bank of Petersburg ("Citizens") make the following representations to Leagre Chandler & Millard to be used by Leagre Chandler & Millard in rendering its opinion as to certain federal income tax consequences with respect to certain transactions set forth in the Agreement and Plan of Reorganization by and among CSB, Citizens, German American Holdings Corporation ("GAHC"), German American Bancorp ("German American"), and Community Trust Bank ("Community") and dated December 8, 1997 ("Agreement and Plan of Reorganization"). Subject to the terms and conditions of the Agreement and Plan of Reorganization, CSB shall merge with and into GAHC. This transaction is referred to herein as the "Holding Company Merger." Simultaneously, Community shall be merged with and into Citizens, subject to the terms and conditions of the Agreement and Plan of Reorganization. This transaction is referred to herein as the "Bank Merger." Collectively, the Bank Merger and the Holding Company Merger are referred to herein as the "Mergers." CSB and Citizens acknowledge and agree that each of the following representations constitutes a material representation to be relied upon by Leagre Chandler & Millard in rendering its opinion and that any material inaccuracy in any of the following representations may render the conclusions drawn in the opinion of Leagre Chandler & Millard inapplicable to the Mergers. The representations of each party hereto are limited to the extent that each specific representation is made solely with respect to information applicable to itself. "Control" for purposes of these representations means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock. The specific representations made are as follows: 1. The fair market value of the German American Common Stock received by each CSB shareholder will be approximately equal to the fair market value of the CSB Common Stock surrendered in the exchange. 2. There is no plan or intention by the shareholders of CSB who own one percent or more of CSB Common Stock and to the best of the knowledge of the managements of CSB and Citizens there is no plan or intention on the part of the remaining shareholders of CSB, to sell, exchange, or otherwise dispose of a number of shares of German American Common Stock received in the Mergers that would reduce the CSB shareholders' ownership of German American Common Stock to a number of shares having a value, at the close of business on the effective date of the Mergers ("Effective Time"), of less than 50 percent of the value of all the formerly outstanding Common Stock of CSB as of the same date. For purposes of this representation, shares of CSB Common Stock surrendered by dissenters, or exchanged for cash in lieu of fractional shares of German American Common Stock, will be treated as outstanding CSB Common Stock as of the Effective Time. Moreover, shares of CSB Common Stock and shares of German American Common Stock held by CSB shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Mergers, Citizens will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of Community net assets and at least 70 percent of the fair market value of Community gross assets, held immediately prior to the Mergers. For purposes of this representation, amounts used by Citizens or Community to pay reorganization expenses and all redemptions and distributions (except for regular, normal dividends) made by Citizens will be included as assets of Citizens or Community, respectively, immediately prior to the Mergers. 4. Neither CSB nor Citizens has any plan or intention to issue additional shares of its stock prior to the Mergers that would result in German American losing control, respectively, of CSB or Citizens. 5. The liabilities of CSB to be assumed by GAHC, the liabilities of Community to be assumed by Citizens, and the liabilities to which the assets of CSB and Community are subject, were incurred in the ordinary course of business of CSB and Community, respectively. 6. German American, Community, GAHC, CSB, Citizens and their respective shareholders will each pay their own expenses, if any, incurred in connection with the Mergers. 7. There is no intercorporate indebtedness existing between (i) German American or GAHC and Citizens, (ii) Community and Citizens, or (iii) German American or GAHC and CSB that was issued, acquired, or will be settled at a discount. 8. In the Mergers, shares of CSB Common Stock representing control of CSB will be exchanged solely for voting stock of German American. For purposes of this representation, shares of CSB Common Stock exchanged for cash or other property originating with German American will be treated as outstanding CSB Common Stock as of the Effective Time. 9. At the Effective Time, CSB and Citizens will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in CSB and Citizens that, if exercised or converted, would affect German American's acquisition or retention of control of CSB and Citizens, respectively. 10. German American does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any Common Stock of CSB or Citizens. 11. No party to the Mergers is an investment company regulated under the Investment Company Act of 1940, a real estate investment trust, or a corporation 50 percent or more of the value of whose total assets are stock and securities and 80 percent or more of the value of whose total assets are held for investment. 12. On the date of the Mergers, the fair market value of the assets of Citizens will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 13. Neither CSB nor Citizens is under the jurisdiction of a court in a case under Title 11 of the United States Code or a receivership, foreclosure, or similar proceeding. 14. The payment of cash in lieu of fractional shares of German American's Common Stock is solely for the purpose of avoiding the expense and inconvenience to German American of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Mergers to the CSB shareholders instead of issuing fractional shares of German American Common Stock will not exceed one percent of the total consideration that will be issued in the Mergers to the CSB shareholders in exchange for their shares of CSB Common Stock. The fractional share interests of each CSB shareholder will be aggregated, and no CSB shareholder will receive cash in an amount equal to or greater than the value of one full share of German American Common Stock. 15. None of the compensation received by any shareholder-employees of CSB or Citizens will be separate consideration for, or allocable to, any of their shares of CSB Common Stock; none of the shares of German American Common Stock received by any shareholder-employees of CSB or Citizens will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees of CSB or Citizens will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 16. GAHC will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, held by CSB immediately prior to the Mergers. For purposes of this representation, amounts used by CSB to pay its reorganization expenses, amounts paid by CSB to shareholders who receive cash or other property, and all redemptions and distribution (except for regular, normal dividends) made by CSB immediately preceding the transfer will be included as assets of CSB held immediately prior to the Mergers. 17. The fair market value of the assets of CSB transferred to GAHC will equal or exceed the sum of CSB's liabilities assumed by GAHC, plus any other liabilities to which the transferred assets are subject. 18. CSB will distribute the stock, securities, and other property it receives in the Mergers, and its other properties, in pursuance of the Merger Agreements. IN WITNESS WHEREOF, CSB and Citizens, each acting by an authorized officer with full corporate authority, have executed and delivered this Representation Certificate to Leagre Chandler & Millard as of the date written below. CSB BANCORP Date: ______________________ By____________________________ Its___________________________ THE CITIZENS STATE BANK OF PETERSBURG Date: ______________________ By____________________________ Its___________________________ EX-8 4 EXHIBIT 8.2 EXHIBIT 8.2 [FORM OF TAX OPINION] February ___, 1998 German American Bancorp 711 Main Street Box 810 Jasper, Indiana 47546 Subject: Agreement and Plan of Reorganization by and among FSB Financial Corporation, FSB Bank, German American Bancorp, German American Holdings Corporation, and Community Trust Bank. Gentlemen: You have requested our opinion on certain of the federal income tax consequences with respect to certain transactions set forth in the Agreement and Plan of Reorganization by and among FSB Financial Corporation, an Indiana corporation ("FSB"), FSB Bank, an Indiana banking corporation, ("FSB Bank"), German American Holdings Corporation, an Indiana corporation ("GAHC"), German American Bancorp, an Indiana corporation ("German American"), and Community Trust Bank, an Indiana banking corporation ("Community") and dated January 30, 1998 ("Agreement and Plan of Reorganization"). Subject to the terms and conditions of the Agreement and Plan of Reorganization, FSB shall merge with and into GAHC. This transaction is referred to herein as the "Holding Company Merger." Simultaneously, FSB Bank shall be merged with and into Community, subject to the terms and conditions of the Agreement and Plan of Reorganization. This transaction is referred to herein as the "Bank Merger." Collectively, the Holding Company Merger and the Bank Merger are referred to herein as the "Mergers." Documents Reviewed. We have, for purposes of the opinion, reviewed the following documents: 1. The Agreement and Plan of Reorganization. 2. The Registration Statement on Form S-4 to be filed by German American with the Securities and Exchange Commission on February ___, 1998, under the Securities Act of 1933, as amended (the "Registration Statement"). 3. Such other documents, records, and matters of law as we have deemed necessary or appropriate in connection with rendering this opinion. We have relied upon the above documents as to matters of fact. We have not independently checked or verified the accuracy or completeness of the information set forth in such documents, but we know of no facts that indicate to us that the information set forth in such documents is inaccurate or incomplete. Factual and Legal Assumptions. For purposes of this opinion, we have made the following assumptions as to factual and legal matters: 1. The representations and warranties of the parties contained in the Agreement and Plan of Reorganization that may be deemed material to this opinion will be true in all material respects as of the effective date of the Mergers, except as may be otherwise set forth in or contemplated by the Agreement and Plan of Reorganization. 2. The representations of German American, Community, GAHC, FSB and FSB Bank contained in the Representation Certificates attached hereto will be true in all material respects as of the effective date of the Mergers. 3. The Mergers and all transactions related thereto or contemplated by the Agreement and Plan of Reorganization shall be consummated in accordance with the terms and conditions of the Agreement and Plan of Reorganization. Limitations on Opinion. The following limitations apply with respect to this opinion: 1. Our opinion is based upon the Internal Revenue Code (the "Code"), Treasury Regulations, court decisions and Internal Revenue Service policies and rulings as of this date. These fundamentals of our opinion are subject to change at any time, and some of these changes have been applied in the past, retroactively, to affect adversely transactions that had occurred prior to the change. 2. We have not been asked to render an opinion with respect to any federal income tax matters, except those set forth below, nor have we been asked to render an opinion with respect to any state or local tax consequences of the Mergers. Accordingly, this opinion should not be construed as applying in any manner to any tax aspect of the Mergers other than as set forth below. 3. All of the factual and legal assumptions set forth above are material to the opinion herein rendered and have been relied upon by us in rendering such opinion. Any material inaccuracy in any one or more of the factual or legal assumptions may render all or part of our opinion inapplicable to the Mergers. Opinion. Based upon and subject to the foregoing, it is our opinion that: 1. The Mergers will constitute a reorganization within the meaning of Section 368(a) of the Code. 2. No gain or loss will be recognized by German American, Community, GAHC, FSB, or FSB Bank as a result of the consummation of the Mergers. 3. No gain or loss will be recognized by the FSB shareholders upon exchange of their shares of FSB Common solely for shares of German American Common. 4. The basis of the shares of German American Common received by FSB shareholders will be the same, in each instance, as the basis of the shares of FSB Common surrendered in exchange therefor. 5. The holding period of the shares of German American Common received by each shareholder of shares of FSB Common will include the period during which the shares of FSB Common surrendered in exchange therefor were held, provided that the shares of FSB Common so exchanged were held as a capital asset by such shareholder. 6. Cash payments in lieu of fractional share interests of German American Common will be treated as having been received as distributions in full payment in exchange for the stock converted as provided in Section 302 of the Code. We consent to the reference to this opinion and to our firm in the Registration Statement. Very truly yours, 8433 FORM OF REPRESENTATION CERTIFICATE German American Bancorp ("German American"), German American Holdings Corporation ("GAHC"), and Community Trust Bank ("Community") make the following representations to Leagre Chandler & Millard to be used by Leagre Chandler & Millard in rendering its opinion as to certain federal income tax consequences with respect to certain transactions set forth in the Agreement and Plan of Reorganization by and among FSB Financial Corporation ("FSB"), FSB Bank ("FSB Bank"), GAHC, German American, and Community and dated January 30, 1998 ("Agreement and Plan of Reorganization"). Subject to the terms and conditions of the Agreement and Plan of Reorganization, FSB shall merge with and into GAHC. This transaction is referred to herein as the "Holding Company Merger." Simultaneously, FSB Bank shall be merged with and into Community, subject to the terms and conditions of the Agreement and Plan of Reorganization. This transaction is referred to herein as the "Bank Merger." Collectively, the Bank Merger and the Holding Company Merger are referred to herein as the "Mergers." German American, Community and GAHC acknowledge and agree that each of the following representations constitutes a material representation to be relied upon by Leagre Chandler & Millard in rendering its opinion and that any material inaccuracy in any of the following representations may render the conclusions drawn in the opinion of Leagre Chandler & Millard inapplicable to the Mergers. The representations of each party hereto are limited to the extent that each specific representation is made solely with respect to information applicable to itself. "Control" for purposes of these representations means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock. The specific representations made are as follows: 1. The fair market value of the German American Common Stock received by each FSB shareholder will be approximately equal to the fair market value of the FSB Common Stock surrendered in the exchange. 2. There is no plan or intention by the shareholders of FSB who own five percent or more of FSB Common Stock and to the best of the knowledge of the managements of German American, Community and GAHC there is no plan or intention on the part of the remaining shareholders of FSB, to sell, exchange, or otherwise dispose of a number of shares of German American Common Stock received in the Mergers that would reduce the FSB shareholders' ownership of German American Common Stock to a number of shares having a value, at the close of business on the effective date of the Mergers ("Effective Time"), of less than 50 percent of the value of all the formerly outstanding Common Stock of FSB as of the same date. For purposes of this representation, shares of FSB Common Stock surrendered by dissenters, or exchanged for cash in lieu of fractional shares of German American Common Stock, will be treated as outstanding FSB Common Stock as of the Effective Time. Moreover, shares of FSB Common Stock and shares of German American Common Stock held by FSB shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Mergers, Community will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of FSB Bank net assets and at least 70 percent of the fair market value of FSB Bank gross assets, held immediately prior to the Mergers. For purposes of this representation, amounts used by FSB Bank or Community to pay reorganization expenses and all redemptions and distributions (except for regular, normal dividends) made by Community will be included as assets of FSB Bank or Community, respectively, immediately prior to the Mergers. 4. Prior to the Mergers, German American will be in control of Community and GAHC. 5. Neither GAHC nor Community has any plan or intention to issue additional shares of its stock after the Mergers that would result in German American losing control, respectively, of GAHC or Community. 6. German American has no plan or intention to reacquire any of its Common Stock issued in the Mergers. 7. German American and GAHC have no plan or intention to sell or otherwise dispose of any of the assets of FSB acquired in the Mergers, to liquidate Community, to sell or otherwise dispose of the Community stock, or to cause Community to sell or otherwise dispose of any of its assets or of any of the assets acquired from FSB Bank, except for dispositions made in the ordinary course of business. 8. The liabilities of FSB to be assumed by GAHC, the liabilities of FSB Bank to be assumed by Community, and the liabilities to which the assets of FSB and FSB Bank are subject, were incurred in the ordinary course of business of FSB and FSB Bank. 9. Following the Mergers, GAHC will continue the historic business of FSB or use a significant portion of FSB's historic business assets in a business, and Community will continue the historic business of FSB Bank or use a significant portion of FSB Bank historic business assets in a business. 10. German American, Community, GAHC, FSB, FSB Bank and their respective shareholders will each pay their own expenses, if any, incurred in connection with the Mergers. 11. There is no intercorporate indebtedness existing between (i) German American or GAHC and FSB Bank, (ii) Community and FSB Bank, or (iii) German American or GAHC and FSB that was issued, acquired, or will be settled at a discount. 12. In the Mergers, shares of FSB's Common Stock representing control of FSB will be exchanged solely for voting stock of German American. For purposes of this representation, shares of FSB's Common Stock exchanged for cash or other property originating with German American will be treated as outstanding FSB Common Stock as of the Effective Time. 13. At the Effective Time, FSB and FSB Bank will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in FSB and FSB Bank that, if exercised or converted, would affect German American's acquisition or retention of control of FSB and FSB Bank, respectively. 14. German American does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any Common Stock of FSB or FSB Bank. 15. No party to the Mergers is an investment company regulated under the Investment Company Act of 1940, a real estate investment trust, or a corporation 50 percent or more of the value of whose total assets are stock and securities and 80 percent or more of the value of whose total assets are held for investment. 16. On the date of the Mergers, the fair market value of the assets of FSB Bank will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 17. Neither FSB nor FSB Bank is under the jurisdiction of a court in a case under Title 11 of the United States Code or a receivership, foreclosure, or similar proceeding. 18. The payment of cash in lieu of fractional shares of German American's Common Stock is solely for the purpose of avoiding the expense and inconvenience to German American of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Mergers to the FSB shareholders instead of issuing fractional shares of German American Common Stock will not exceed one percent of the total consideration that will be issued in the Mergers to the FSB shareholders in exchange for their shares of FSB Common Stock. The fractional share interests of each FSB shareholder will be aggregated, and no FSB shareholder will receive cash in an amount equal to or greater than the value of one full share of German American Common Stock. 19. None of the compensation received by any shareholder-employees of FSB or FSB Bank will be separate consideration for, or allocable to, any of their shares of FSB Common Stock; none of the shares of German American Common Stock received by any shareholder-employees of FSB or FSB Bank will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees of FSB or FSB Bank will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 20. The Bank Merger and Holding Company Merger will occur on the same date. 21. GAHC will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, held by FSB immediately prior to the Mergers. For purposes of this representation, amounts used by FSB to pay its reorganization expenses, amounts paid by FSB to shareholders who receive cash or other property, and all redemptions and distribution (except for regular, normal dividends) made by FSB immediately preceding the transfer will be included as assets of FSB held immediately prior to the Mergers. 22. The adjusted basis and fair market value of the assets of FSB transferred to GAHC will each equal or exceed the sum of FSB's liabilities assumed by GAHC, plus any other liabilities to which the transferred assets are subject. 23. FSB will distribute the stock, securities, and other property it receives in the Mergers, and its other properties, in pursuance of the Merger Agreements. IN WITNESS WHEREOF, German American, Community and GAHC, each acting by an authorized officer with full corporate authority, have executed and delivered this Representation Certificate to Leagre Chandler & Millard as of the date written below. GERMAN AMERICAN BANCORP Date: ______________________ By____________________________ George W. Astrike, Chairman of the Board and Chief Executive Officer GERMAN AMERICAN HOLDINGS CORPORATION Date: ______________________ By____________________________ George W. Astrike, Chief Executive Officer THE COMMUNITY TRUST BANK Date: ______________________ By____________________________ Its___________________________ FORM OF REPRESENTATION CERTIFICATE FSB Financial Corporation ("FSB") and FSB Bank ("FSB Bank") make the following representations to Leagre Chandler & Millard to be used by Leagre Chandler & Millard in rendering its opinion as to certain federal income tax consequences with respect to certain transactions set forth in the Agreement and Plan of Reorganization by and among FSB, FSB Bank, German American Holdings Corporation ("GAHC"), German American Bancorp ("German American"), and Community Trust Bank ("Community") and dated January 30, 1998 ("Agreement and Plan of Reorganization"). Subject to the terms and conditions of the Agreement and Plan of Reorganization, FSB shall merge with and into GAHC. This transaction is referred to herein as the "Holding Company Merger." Simultaneously, FSB Bank shall be merged with and into Community, subject to the terms and conditions of the Agreement and Plan of Reorganization. This transaction is referred to herein as the "Bank Merger." Collectively, the Bank Merger and the Holding Company Merger are referred to herein as the "Mergers." FSB and FSB Bank acknowledge and agree that each of the following representations constitutes a material representation to be relied upon by Leagre Chandler & Millard in rendering its opinion and that any material inaccuracy in any of the following representations may render the conclusions drawn in the opinion of Leagre Chandler & Millard inapplicable to the Mergers. The representations of each party hereto are limited to the extent that each specific representation is made solely with respect to information applicable to itself. "Control" for purposes of these representations means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock. The specific representations made are as follows: 1. The fair market value of the German American Common Stock received by each FSB shareholder will be approximately equal to the fair market value of the FSB Common Stock surrendered in the exchange. 2. There is no plan or intention by the shareholders of FSB who own one percent or more of FSB Common Stock and to the best of the knowledge of the managements of FSB and FSB Bank there is no plan or intention on the part of the remaining shareholders of FSB, to sell, exchange, or otherwise dispose of a number of shares of German American Common Stock received in the Mergers that would reduce the FSB shareholders' ownership of German American Common Stock to a number of shares having a value, at the close of business on the effective date of the Mergers ("Effective Time"), of less than 50 percent of the value of all the formerly outstanding Common Stock of FSB as of the same date. For purposes of this representation, shares of FSB Common Stock surrendered by dissenters, or exchanged for cash in lieu of fractional shares of German American Common Stock, will be treated as outstanding FSB Common Stock as of the Effective Time. Moreover, shares of FSB Common Stock and shares of German American Common Stock held by FSB shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Mergers, Community will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of FSB Bank net assets and at least 70 percent of the fair market value of FSB Bank gross assets, held immediately prior to the Mergers. For purposes of this representation, amounts used by FSB Bank or Community to pay reorganization expenses and all redemptions and distributions (except for regular, normal dividends) made by Community will be included as assets of FSB Bank or Community, respectively, immediately prior to the Mergers. 4. Neither FSB nor FSB Bank has any plan or intention to issue additional shares of its stock prior to the Mergers that would result in German American losing control, respectively, of FSB or FSB Bank. 5. The liabilities of FSB to be assumed by GAHC, the liabilities of FSB Bank to be assumed by Community, and the liabilities to which the assets of FSB and FSB Bank are subject, were incurred in the ordinary course of business of FSB and FSB Bank, respectively. 6. German American, Community, GAHC, FSB, FSB Bank and their respective shareholders will each pay their own expenses, if any, incurred in connection with the Mergers. 7. There is no intercorporate indebtedness existing between (i) German American or GAHC and FSB Bank, (ii) Community and FSB Bank, or (iii) German American or GAHC and FSB that was issued, acquired, or will be settled at a discount. 8. In the Mergers, shares of FSB Common Stock representing control of FSB will be exchanged solely for voting stock of German American. For purposes of this representation, shares of FSB Common Stock exchanged for cash or other property originating with German American will be treated as outstanding FSB Common Stock as of the Effective Time. 9. At the Effective Time, FSB and FSB Bank will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in FSB and FSB Bank that, if exercised or converted, would affect German American's acquisition or retention of control of FSB and FSB Bank, respectively. 10. German American does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any Common Stock of FSB or FSB Bank. 11. No party to the Mergers is an investment company regulated under the Investment Company Act of 1940, a real estate investment trust, or a corporation 50 percent or more of the value of whose total assets are stock and securities and 80 percent or more of the value of whose total assets are held for investment. 12. On the date of the Mergers, the fair market value of the assets of FSB Bank will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 13. Neither FSB nor FSB Bank is under the jurisdiction of a court in a case under Title 11 of the United States Code or a receivership, foreclosure, or similar proceeding. 14. The payment of cash in lieu of fractional shares of German American's Common Stock is solely for the purpose of avoiding the expense and inconvenience to German American of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Mergers to the FSB shareholders instead of issuing fractional shares of German American Common Stock will not exceed one percent of the total consideration that will be issued in the Mergers to the FSB shareholders in exchange for their shares of FSB Common Stock. The fractional share interests of each FSB shareholder will be aggregated, and no FSB shareholder will receive cash in an amount equal to or greater than the value of one full share of German American Common Stock. 15. None of the compensation received by any shareholder-employees of FSB or FSB Bank will be separate consideration for, or allocable to, any of their shares of FSB Common Stock; none of the shares of German American Common Stock received by any shareholder-employees of FSB or FSB Bank will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees of FSB or FSB Bank will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 16. GAHC will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, held by FSB immediately prior to the Mergers. For purposes of this representation, amounts used by FSB to pay its reorganization expenses, amounts paid by FSB to shareholders who receive cash or other property, and all redemptions and distribution (except for regular, normal dividends) made by FSB immediately preceding the transfer will be included as assets of FSB held immediately prior to the Mergers. 17. The fair market value of the assets of FSB transferred to GAHC will equal or exceed the sum of FSB's liabilities assumed by GAHC, plus any other liabilities to which the transferred assets are subject. 18. FSB will distribute the stock, securities, and other property it receives in the Mergers, and its other properties, in pursuance of the Merger Agreements. IN WITNESS WHEREOF, FSB and FSB Bank, each acting by an authorized officer with full corporate authority, have executed and delivered this Representation Certificate to Leagre Chandler & Millard as of the date written below. FSB FINANCIAL CORPORATION Date: _______________________ By____________________________ Its___________________________ FSB BANK Date: _______________________ By____________________________ Its___________________________ EX-21 5 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT STATE OF NAME INCORPORATION THE GERMAN AMERICAN BANK INDIANA GAB MORTGAGE CORP INDIANA GERMAN AMERICAN HOLDINGS CORP. INDIANA COMMUNITY TRUST BANK INDIANA FIRST STATE BANK, SOUTHWEST INDIANA INDIANA THE PEOPLES NATIONAL BANK AND TRUST COMPANY OF WASHINGTON UNITED STATES PEOPLES INVESTMENT CENTER, INC. INDIANA Exhibit 21 EX-23 6 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Independent Auditors Board of Directors German American Bancorp Jasper, Indiana We consent to the inclusion in the Registration Statement Form S-4 and Prospectus of German American Bancorp, relating to the issuance of securities in the proposed mergers of CSB Bancorp and FSB Financial Corporation into a wholly owned subsidiary of German American Bancorp, of our Independent Auditor's Report, dated January 30, 1997, on the consolidated financial statements of German American Bancorp as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, of our Independent Auditor's Report, dated March 4, 1997, on the supplemental consolidated financial statements of German American Bancorp as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, and we consent to the use of our name and the statements with respect to us appearing under the heading "Experts" in the Prospectus. /s/ Crowe, Chizek and Company, LLP Crowe, Chizek and Company, LLP February 23, 1998 Indianapolis, Indiana 11251 EX-23 7 EXHIBIT 23.2 EXHIBIT 23.2 Consent of Independent Auditors Board of Directors German American Bancorp Jasper, Indiana We consent to the inclusion in the Registration Statement Form S- 4 and Prospectus of German American Bancorp, relating to the issuance of securities in the proposed mergers of CAB Bancorp and FSB Financial Corporation into a wholly owned subsidiary of German American Bancorp, of our Independent Auditor's Report, dated January 13, 1998, on the consolidated financial statements of FSB Financial Corporation as of September 30, 1997 and for the year then ended, and we consent to the use of our name and the statements with respect to us appearing under the heading "Experts" in the Prospectus. /s/ Crowe, Chizek and Company, LLP Crowe, Chizek and Company LLP February 23, 1998 Indianapolis, Indiana 11473 EX-23 8 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in the Prospectus/Proxy Statement forming a part of the Registration Statement Form S-4 filed by German American Bancorp of our report dated February 7, 1997, on our audit of the consolidated balance sheets of CSB Bancorp and subsidiary, as of December 31, 1996 and 1995 and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. We also consent to the reference to our firm under the caption "Experts" in the Prospectus/Proxy Statement. /s/ Gaither Rutherford & Co. LLP February 24, 1997 GAITHER RUTHERFORD & CO., LLP Evansville, Indiana 11330 11330 EX-23 9 EXHIBIT 23.5 EXHIBIT 23.5 [OLIVE CORPORATE FINANCE, LLC LETTERHEAD] February 24, 1998 We hereby consent to the use of our firm's name in the Registration Statement on Form S-4, as filed with the Securities and Exchange Commission and the joint Prospectus/Proxy Statement of German American Bancorp and CSB Bancorp contained therein relating to the Merger, as defined therein, and consent to references to our fairness opinion in such Registration Statement and joint Prospectus/Proxy Statement. We further consent to the filing of the aforementioned fairness opinion as an exhibit to each of the Registration Statement and joint Prospectus/Proxy Statement. Our fairness opinion is to be dated of even date with the joint Prospectus/Proxy Statement when, as, and if declared effective, provided that conditions at that time warrant the giving of such fairness opinion. Sincerely, /s/ Olive Corporate Finance, LLC OLIVE CORPORATE FINANCE, LLC 11470 EX-23 10 EXHIBIT 23.6 EXHIBIT 23.6 [OLIVE CORPORATE FINANCE, LLC LETTERHEAD] February 24, 1998 We hereby consent to the use of our firm's name in the Registration Statement on Form S-4, as filed with the Securities and Exchange Commission and the joint Prospectus/Proxy Statement of German American Bancorp and FSB Financial Corporation contained therein relating to the Merger, as defined therein, and consent to references to our fairness opinion in such Registration Statement and joint Prospectus/Proxy Statement. We further consent to the filing of the aforementioned fairness opinion as an exhibit to each of the Registration Statement and joint Prospectus/Proxy Statement. Our fairness opinion is to be dated of even date with the joint Prospectus/Proxy Statement when, as, and if declared effective, provided that conditions at that time warrant the giving of such fairness opinion. Sincerely, /s/ Olive Corporate Finance, LLC OLIVE CORPORATE FINANCE, LLC 11441 EX-99 11 EXHIBIT 99.1 Exhibit 99.1 FORM OF PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS OF CSB BANCORP I hereby appoint _________________________ and ____________________________, and each of them, my proxies, with power of substitution, to vote all Common Shares of CSB Bancorp (the "Corporation") that I am entitled to vote at the Special Meeting of Shareholders to be held at the Southside branch of The Citizens State Bank of Petersburg located at Highway 61 and Illinois Street, Petersburg, Indiana, on _______________, 1998 at _____[a.m./p.m.], Petersburg time, and any adjournments thereof, as provided herein. THIS PROXY WILL BE VOTED AS SPECIFIED. IN THE ABSENCE OF SPECIFICATIONS, THIS PROXY WILL BE VOTED FOR ITEM 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1. This proxy may be revoked at any time prior to its exercise upon compliance with the procedures set forth in the Corporation's Prospectus/Proxy Statement, dated ________, 1998. SHAREHOLDERS SHOULD MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POST-PAID ENVELOPE. 1. MERGER OF CSB BANCORP WITH AND INTO A WHOLLY OWNED SUBSIDIARY OF GERMAN AMERICAN BANCORP [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting Dated: _________________ _______________________ _______________________ Signature or Signatures (Please sign exactly as your name appears on this proxy. If shares are issued in the name of two or more persons, all such persons should sign. Trustees, executors and others signing in a representative capacity should indicate the capacity in which they sign.) 11264 EX-99 12 EXHIBIT 99.2 Exhibit 99.2 FORM OF PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS OF FSB FINANCIAL CORPORATION I hereby appoint _________________________ and ____________________________, and each of them, my proxies, with power of substitution, to vote all Common Shares of FSB Financial Corporation (the "Corporation") that I am entitled to vote at the Special Meeting of Shareholders to be held at ________________________________, _____________, Indiana, on _______________, 1998 at _____[a.m./p.m.], Francisco time, and any adjournments thereof, as provided herein. THIS PROXY WILL BE VOTED AS SPECIFIED. IN THE ABSENCE OF SPECIFICATIONS, THIS PROXY WILL BE VOTED FOR ITEM 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1. This proxy may be revoked at any time prior to its exercise upon compliance with the procedures set forth in the Corporation's Prospectus/Proxy Statement, dated ________, 1998. SHAREHOLDERS SHOULD MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POST-PAID ENVELOPE. 1. MERGER OF FSB FINANCIAL CORPORATION WITH AND INTO A WHOLLY OWNED SUBSIDIARY OF GERMAN AMERICAN BANCORP [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting Dated: _________________ _______________________ _______________________ Signature or Signatures (Please sign exactly as your name appears on this proxy. If shares are issued in the name of two or more persons, all such persons should sign. Trustees, executors and others signing in a representative capacity should indicate the capacity in which they sign.) 11265 EX-99 13 EXHIBIT 99.3 Exhibit 99.3 CSB BANCORP MAIN AND SEVENTH STREETS PETERSBURG, INDIANA 47567 __________, 1998 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of CSB Bancorp ("CSB"), to be held at the Southside branch of The Citizens State Bank of Petersburg located at Highway 61 and Illinois Street, Petersburg, Indiana, on ______________, 1998, at _______ [a.m./p.m.], local time. The purpose of the meeting is to consider and vote upon adoption of the Agreement and Plan of Reorganization and the related Plan of Merger under which CSB will merge with a wholly owned subsidiary of German American Bancorp ("German American"). If the proposed merger is consummated, shares of CSB Common Stock will be converted into shares of German American Common Stock, all as described in the accompanying Prospectus/Proxy Statement. Your Board of Directors believes that the proposed merger is in the best interests of CSB and its shareholders and has unanimously approved the proposed merger. Attached are a notice of the meeting and a Prospectus/Proxy Statement containing information about the proposed merger and German American. Whether you plan to attend the meeting, please mark, sign, date, and promptly return the enclosed proxy card. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ADOPTION OF THE PROPOSED MERGER. Very truly yours, Jerry A. Church Executive Vice President 11266 EX-99 14 EXHIBIT 99.4 Exhibit 99.4 FORM OF LETTER TO SHAREHOLDERS FSB FINANCIAL CORPORATION 102 MAIN STREET FRANCISCO, INDIANA 47659 __________, 1998 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of FSB Financial Corporation ("FSB"), to be held at _______________________________________, ______________, Indiana, on ______________, 1998, at _______ [a.m./p.m.], local time. The purpose of the meeting is to consider and vote upon adoption of the Agreement and Plan of Reorganization and the related Plan of Merger under which FSB will merge with a wholly owned subsidiary of German American Bancorp ("German American"). If the proposed merger is consummated, shares of FSB Common Stock will be converted into shares of German American Common Stock, all as described in the accompanying Prospectus/Proxy Statement. Your Board of Directors believes that the proposed merger is in the best interests of FSB and its shareholders and has unanimously approved the proposed merger. Attached are a notice of the meeting and a Prospectus/Proxy Statement containing information about the proposed merger and German American. Whether you plan to attend the meeting, please mark, sign, date, and promptly return the enclosed proxy card. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ADOPTION OF THE PROPOSED MERGER. Very truly yours, Glenn Young President 11267 -----END PRIVACY-ENHANCED MESSAGE-----