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Section 1: 424B3 (424B3)

424B3
Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-226528

 

LOGO    LOGO

PROXY STATEMENT FOR THE SPECIAL MEETING OF

KLEIN FINANCIAL, INC. SHAREHOLDERS

and

PROSPECTUS OF

OLD NATIONAL BANCORP

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

 

 

The boards of directors of Klein Financial, Inc. (“Klein”) and Old National Bancorp (“Old National”) have unanimously approved an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Klein will merge with and into Old National (the “Merger”). If the Merger Agreement is approved by the shareholders of Klein and all other closing conditions are satisfied, each shareholder of Klein will be entitled to receive 7.92 shares of Old National common stock (the “Exchange Ratio”) for each share of Klein common stock owned before the Merger, subject to certain adjustments as described in the Merger Agreement (the “Merger Consideration”). The Klein board of directors unanimously determined that the Merger on the terms set forth in the Merger Agreement is in the best interests of Klein and the Klein shareholders.

The Merger value will fluctuate with the market price of Old National common stock and will not be known at the time Klein shareholders vote on the Merger. Based on the $19.05 closing price of Old National’s common stock on the Nasdaq Global Select Market on June 20, 2018, the date of execution of the Merger Agreement, the Exchange Ratio represented approximately $150.88 in value for each share of Klein common stock and an aggregate transaction value of approximately $433.8 million. Based on the $20.15 closing price of Old National’s common stock on August 23, 2018, the latest practicable date before the printing of this proxy statement and prospectus, the Exchange Ratio represented approximately $159.59 in value for each share of Klein common stock. Based on the Exchange Ratio and the number of shares of Klein common stock outstanding and issuable at the effective time of the Merger as of August 23, 2018, the number of shares of Old National common stock issuable in the Merger would be 22,771,631.52 reflecting an aggregate transaction value as of August 23, 2018 of approximately $458.8 million. The number of shares and values in this paragraph assume no adjustments to the Merger Consideration as described in the section entitled “The Merger AgreementMerger Consideration.” We urge you to obtain current market quotations for Old National (trading symbol “ONB”).

The Merger is conditioned upon, among other things, the approval of the Merger Agreement by the Klein shareholders. This document is a proxy statement that the Klein board of directors is using to solicit proxies for use at a special meeting of shareholders to be held on September 27, 2018. At the meeting, the Klein shareholders will be asked to (1) approve the Merger Agreement, (2) adjourn the meeting if necessary to solicit additional proxies, and (3) transact such other business as may properly be brought before the meeting or any adjournment or postponement thereof.

This document is also a prospectus relating to Old National’s issuance of shares of Old National common stock in connection with the completion of the Merger.

 

 

For a discussion of certain risk factors relating to the Merger, see “Risk Factors” beginning on page 14.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this proxy statement and prospectus or determined if this proxy statement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The securities to be issued in connection with completion of the Merger are not savings or deposit accounts or other obligations of any bank or nonbank subsidiary of any of the parties, and they are not insured by the Federal Deposit Insurance Corporation, the Deposit Insurance Fund or any other governmental agency.

This proxy statement and prospectus is dated August 23, 2018, and it

is first being mailed to Klein shareholders on or about August 27, 2018.


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AVAILABLE INFORMATION

As permitted by Securities and Exchange Commission (“SEC”) rules, this document incorporates certain important business and financial information about Old National from other documents that are not included in or delivered with this document. These documents are available to you without charge upon your written or oral request. Your requests for these documents should be directed to the following:

Old National Bancorp

One Main Street

P.O. Box 718

Evansville, Indiana 47705

Attn: Jeffrey L. Knight, Executive Vice President,

Corporate Secretary and Chief Legal Counsel

(812) 464-1363

In order to ensure timely delivery of these documents, you should make your request by September 17, 2018, to receive them before the special meeting.

You can also obtain documents incorporated by reference in this document through the SEC’s website at www..sec.gov. See “Where You Can Find More Information” beginning on page 81.


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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON SEPTEMBER 27, 2018

To the Shareholders of Klein Financial, Inc.:

We will hold a special meeting of the shareholders of Klein Financial, Inc. (“Klein”) on September 27, 2018, at 10:00 a.m., Central Time, at 1550 Audubon Rd, Chaska, Minnesota 55318, to consider and vote upon:

1. Merger Proposal. A proposal to approve the Merger Agreement pursuant to which Klein will merge with and into Old National.

2. Adjournment. A proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event there are not sufficient votes present at the special meeting in person or by proxy to approve the Merger Agreement (the “Adjournment Proposal”).

3. Other Matters. Such other matters as may properly come before the special meeting or any adjournment of the special meeting. The Klein board of directors is not aware of any such other matters as of the date of this proxy statement and prospectus.

The enclosed proxy statement and prospectus describes the Merger Agreement and the proposed Merger in detail and includes, as Annex A, the complete text of the Merger Agreement. We urge you to read these materials for a description of the Merger Agreement and the proposed Merger. In particular, you should carefully read “Risk Factors” beginning on page 14 of the enclosed proxy statement and prospectus for a discussion of certain risk factors relating to the Merger.

The board of directors of Klein unanimously recommends that shareholders vote (1) “FOR” approval of the Merger Agreement and (2) “FOR” approval of the Adjournment Proposal. The board of directors of Klein fixed the close of business on August 21, 2018, as the record date for determining the holders of Klein voting common stock entitled to notice of, and to vote at, the special meeting and any adjournments or postponements of the special meeting.

YOUR VOTE IS IMPORTANT. The Merger Agreement must be approved by the affirmative vote of the holders of at least a majority of the issued and outstanding shares of Klein common stock entitled to vote. If you do not return your proxy or do not vote in person at the special meeting, the effect will be the same as a vote against the Merger Agreement. Whether or not you plan to attend the special meeting in person, we urge you to date, sign and return promptly the enclosed proxy in the accompanying envelope. You may revoke your proxy at any time before the special meeting by sending a written notice of revocation, submitting a new proxy or by attending the special meeting and voting in person.

Under Minnesota law, if the Merger is completed, Klein shareholders of record who do not vote to approve the Merger Agreement, and otherwise comply with the applicable provisions of Minnesota law pertaining to objecting shareholders, will be entitled to exercise dissenters’ rights and obtain payment in cash for the fair value of their shares of Klein common stock by following the procedures set forth in detail in this proxy statement and prospectus. A copy of the sections of the Minnesota Business Corporation Act pertaining to dissenters’ rights are included as Annex C to this proxy statement and prospectus.

By Order of the Board of Directors

 

LOGO

W. Douglas Hile

President

August 24, 2018


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

     1  

SUMMARY

     5  

SELECTED CONSOLIDATED FINANCIAL DATA OF OLD NATIONAL

     12  

SELECTED CONSOLIDATED FINANCIAL DATA OF KLEIN

     13  

RISK FACTORS

     14  

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

     18  

SPECIAL MEETING OF THE KLEIN SHAREHOLDERS

     20  

Date, Place, Time, and Purpose

     20  

Record Date, Voting Rights, Quorum, and Required Vote

     20  

Voting and Revocability of Proxies

     20  

Solicitation of Proxies

     21  

Recommendation of the Klein Board of Directors

     21  

INFORMATION ABOUT THE COMPANIES

     22  

PROPOSAL 1 — THE MERGER

     23  

Background of the Merger

     23  

Klein’s Reasons for the Merger and Recommendation of the Board of Directors

     28  

Old National’s Reasons For the Merger

     31  

Effects of the Merger

     31  

Opinion of Financial Advisor to Klein

     32  

THE MERGER AGREEMENT

     43  

Structure of the Merger

     43  

Merger Consideration

     43  

Exchange and Payment Procedures

     44  

Dividends and Distributions

     44  

Representations and Warranties

     44  

Conduct of Business Prior to Completion of the Merger

     46  

Covenants

     48  

Acquisition Proposals by Third Parties

     50  

Conditions to the Merger

     51  

Expenses

     53  

Employee Benefit Matters

     53  

Termination

     54  

Termination Fee

     55  

Management and Operations After the Merger

     56  

Environmental Inspections

     56  

Effective Time of Merger

     56  

Regulatory Approvals for the Merger

     56  

Voting Agreements

     57  

Lock-Up Agreements

     57  

Accounting Treatment of the Merger

     57  

Nasdaq Global Select Market Listing

     57  

Dissenters’ Rights

     57  

 

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DISSENTERS’ RIGHTS OF KLEIN SHAREHOLDERS

     58  

INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF KLEIN IN THE MERGER

     61  

Indemnification and Insurance of Directors and Officers

     62  

COMPARISON OF THE RIGHTS OF SHAREHOLDERS

     63  

Authorized Capital Stock

     63  

Issuance of Additional Shares

     63  

Number, Classification and Qualifications of Directors

     64  

Election of Directors

     64  

Removal of Directors

     65  

Transactions Involving Directors

     65  

Director Liability

     66  

Indemnification of Directors, Officers and Employees

     66  

Advance Notice Requirements for Presentation of Business and Nominations of Directors at Annual Meetings of Shareholders

     68  

Special Meetings of Shareholders

     68  

Shareholder Action Without a Meeting

     69  

Amendment of Articles of Incorporation and By-laws

     69  

Business Combination Restrictions and Other Shareholder Limitations

     69  

Appraisal and Dissenters’ Rights

     72  

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

     74  

PROPOSAL 2 — ADJOURNMENT OF THE SPECIAL MEETING

     76  

KLEIN BUSINESS

     76  

KLEIN MARKET FOR COMMON STOCK AND DIVIDENDS

     77  

KLEIN SECURITY OWNERSHIP

     78  

Common Stock Ownership

     78  

Directors and Executive Officers

     79  

EXPERTS

     80  

LEGAL MATTERS

     80  

SHAREHOLDER PROPOSALS FOR NEXT YEAR

     80  

Old National

     80  

Klein

     80  

WHERE YOU CAN FIND MORE INFORMATION

     81  

 

Annex A

  

Agreement and Plan of Merger

    A-1  

Annex B

  

Opinion of Sandler O’Neill + Partners, L.P., Financial Advisor to Klein

    B-1  

Annex C

  

Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act

    C-1  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

Q: What am I voting on?

A: You are being asked to vote to approve the Merger Agreement, pursuant to which Klein will merge with and into Old National. Old National would be the surviving entity in the Merger, and Klein would no longer be a separate company.

Additionally, you are being asked to vote to approve the Adjournment Proposal.

Q: What will I receive in the Merger?

A: If the Merger is completed, each share of Klein common stock will be converted into the right to receive, as set forth in the Merger Agreement, 7.92 shares of Old National common stock (the “Exchange Ratio”), subject to adjustment as summarized below (the “Merger Consideration”). If the Klein Consolidated Shareholders’ Equity is less than the Minimum Shareholders’ Equity as of the end of the month prior to the effective time of the Merger (as those terms are defined in the Merger Agreement), the Exchange Ratio will be decreased as described in the section entitled “The Merger AgreementMerger Consideration.”

In addition, unless Old National increases the Exchange Ratio by exercising its option to increase the Exchange Ratio under the terms of the Merger Agreement, Klein will have the right to terminate the Merger Agreement pursuant to the section entitled “The Merger Agreement — Reasons for Termination,” at any time during the five day period commencing on the first date on which all regulatory approvals necessary for the consummation of the Merger have been received (the “Calculation Date”) if the Old National Market Value on the Calculation Date is less than $15.75 per share. Such termination would be effective on the 10th day following the Calculation Date. The Old National Market Value shall mean the volume weighted average price of a share of Old National common stock for the 15 consecutive trading days period ending on the day immediately preceding the Calculation Date.

Q: Will the Exchange Ratio adjust based on the trading price of Old National common stock prior to closing?

A: No. The Exchange Ratio will not increase or decrease solely due to changes in the trading price of Old National common stock prior to the closing of the Merger. The Exchange Ratio is subject to adjustment as described above.

Q: What is the value of the per share Merger Consideration?

A: The per share value of the Merger Consideration for Klein shareholders will fluctuate as the market price of Old National common stock fluctuates before the completion of the Merger. This price will not be known at the time of the Klein special meeting and may be more or less than the current price of Old National common stock or the price of Old National common stock at the time of the special meeting. Based on the $19.05 closing stock price of Old National common stock on the Nasdaq Global Select Market on June 20, 2018, the trading day immediately preceding the public announcement date of the Merger, the value of the per share Merger Consideration for Klein shareholders would be approximately $150.88, assuming no adjustments to the Merger Consideration as described in the section entitled “The Merger AgreementMerger Consideration.” Based on the $20.15 closing stock price of Old National common stock on the Nasdaq Global Select Market on August 23, 2018, the latest practicable date before the printing of this proxy statement and prospectus, the value of the per share Merger Consideration for Klein shareholders would be approximately $159.59, assuming no adjustments to the Merger Consideration as described in the section entitled “The Merger AgreementMerger Consideration.” We urge you to obtain current market quotations for shares of Old National common stock.

 

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Q: When will shareholders receive their share of the Merger Consideration?

A: Promptly after the effective time of the Merger, Old National will mail to each holder of Klein common stock a letter of transmittal with a form providing instructions for the exchange of shares for the Merger Consideration. Upon Old National’s receipt of a properly completed and executed letter of transmittal, Old National will issue to each holder of Klein common stock a statement of ownership of book-entry shares representing that number of shares of Old National common stock (including fractional shares) that each holder of Klein common stock has the right to receive.

Q: Why do Klein and Old National want to engage in the Merger?

A: Klein believes that the Merger will provide its shareholders with substantial benefits, and Old National believes that the Merger will further its strategic growth plans generally and specifically in Minnesota. To review the reasons for the Merger in more detail, see “Proposal 1 — The Merger — Klein’s Reasons for the Merger and Recommendation of the Board of Directors” beginning on page 28 and “Proposal 1 — The Merger — Old National’s Reasons for the Merger” beginning on page 31.

Q: What risks should I consider before I vote on the Merger Agreement?

A: You should review “Risk Factors” beginning on page 14.

Q: Will Old National shareholders receive any shares as a result of the Merger?

A: No. Old National shareholders will continue to own the same number of Old National shares they owned before the effective time of the Merger.

Q: Who is entitled to vote on each of the matters to be considered at the special meeting?

A: Shareholders of record of Klein’s voting common stock at the close of business on August 21, 2018, the record date for the special meeting, are entitled to vote on each of the proposals at the special meeting. At the close of business on the record date, there were 2,822,000 shares of common stock entitled to vote at the meeting.

Q: How many votes may I cast?

A: Each share of Klein voting common stock is entitled to one vote on each proposal at the special meeting. The proxy card included with this proxy statement indicates the number of voting shares owned by an account attributable to you.

Q: What vote is required to approve each proposal at the Klein special meeting and what happens if I do not return a proxy or otherwise do not vote?

A: Approval of the Merger Agreement requires the affirmative vote of the holders of at least a majority of the 2,822,000 shares of Klein voting common stock issued and outstanding on the record date.

Because the required vote of Klein shareholders on the Merger Agreement is based upon the number of issued and outstanding shares of Klein common stock entitled to vote rather than upon the number of shares actually voted, a failure to vote and abstentions will have the same practical effect as a vote “AGAINST” approval of the Merger Agreement.

In connection with the execution of the Merger Agreement, Daniel Klein, the Chairman of the Board and Chief Executive Officer, Alan Klein, the Vice Chairman and Executive Vice President, and James Klein, the Vice Chairman, executed voting agreements pursuant to which they agreed to vote their shares and shares held by trusts (subject to their fiduciary duties and the applicable trust agreement), under which they are individually beneficial owners in favor of the Merger Agreement. As of the record date, these shareholders beneficially

 

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owned 1,642,500 shares of Klein voting common stock, or approximately 58.2% of the issued and outstanding shares of Klein voting common stock. Accordingly, Klein expects that the Merger Agreement will be approved at the special meeting.

Approval of the Adjournment Proposal requires the affirmative vote of a majority of the shares present in person or by proxy at the special meeting and entitled to vote, whether or not a quorum is present. A failure to vote will have no effect on this proposal, but abstentions will have the same practical effect as a vote “AGAINST” approval of the Adjournment Proposal.

If you properly complete and sign your proxy but do not indicate how your shares of Klein voting common stock should be voted on a proposal, the shares of Klein voting common stock represented by your proxy will be voted as the Klein board of directors recommends and therefore, “FOR” approval of the Merger Agreement, and “FOR” approval of the Adjournment Proposal.

Q: Am I entitled to exercise dissenters’ rights instead of receiving the per share Merger Consideration for my shares of Klein common stock?

A: Klein shareholders are entitled to dissenters’ rights under Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act (the “MBCA”) provided they follow the procedures and satisfy the conditions set forth in Sections 302A.471 and 302A.473 of the MBCA. For more information regarding dissenters’ rights, see “Dissenters’ Rights of Klein Shareholders” beginning on page 58 of this proxy statement and prospectus.

In addition, a copy of Sections 302A.471 and 302A.473 of the MBCA are attached as Annex C to this proxy statement and prospectus. Failure to strictly comply with Sections 302A.471 and 302A.473 of the MBCA may result in your waiver of, or inability to, exercise dissenters’ rights.

Q: What do I need to do now?

A: After reading this proxy statement and prospectus, you may vote in one of two ways: (1) by mail (by completing and signing the proxy that accompanies this proxy statement and prospectus); or (2) in person (by either delivering the completed proxy or by casting a ballot if attending the special meeting). In the event that you choose not to exercise your vote in person, you should mail your signed proxy in the accompanying pre-addressed, postage-paid envelope as soon as possible so that your shares can be voted at the September 27, 2018 Klein special meeting.

Q: Can I change my vote after I have mailed my signed proxy?

A: Yes. You can change your vote at any time before your proxy is voted at the special meeting. You can do this in one of three ways. First, you can send a written notice stating that you revoke your proxy. Second, you can complete and submit a new proxy, dated at a date later than your most recent proxy. Third, you can attend the special meeting and vote in person. Your attendance at the special meeting will not, however, by itself revoke your proxy.

Q: What constitutes a quorum?

A: The holders of a majority of the issued and outstanding shares of Klein common stock entitled to vote as of the record date must be present in person or by proxy at the special meeting to constitute a quorum. In determining whether a quorum is present, shareholders who abstain will be treated as present for determining the presence or absence of a quorum.

Q: What happens if the Merger is not completed?

A: Klein and Old National expect to complete the Merger in the fourth quarter of 2018. However, neither Klein nor Old National can assure you of when or if the Merger will be completed. Klein and Old National must first

 

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obtain the approval of Klein shareholders for the Merger, as well as obtain necessary regulatory approvals and satisfy certain other standard closing conditions, as described in the section entitled “The Merger AgreementConditions to the Merger.” If the Merger is not completed, Klein shareholders will not receive any consideration for their shares and will continue to be Klein shareholders. Each of Klein and Old National will remain independent companies. Under certain circumstances, Klein may be required to pay Old National a fee with respect to the termination of the Merger Agreement and Old National may be required to pay Klein a fee with respect to the termination of the Merger Agreement, as described under “The Merger Agreement — Termination Fee.”

Q: When is the Merger expected to be completed?

A: We are working to complete the Merger as quickly as possible. We must obtain the necessary regulatory approvals and the approval of the Merger Agreement by Klein shareholders at the special meeting, and the Klein and Old National must satisfy certain other standard closing conditions, as described in the section entitled “The Merger AgreementConditions to the Merger.” We currently expect to complete the Merger in the fourth quarter of 2018.

Q: What are the tax consequences of the Merger to me?

A: The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). If the Merger qualifies, Klein shareholders will not recognize gain or loss on the exchange of shares of Klein common stock for shares of Old National common stock in the Merger.

As a condition to the closing, each of Klein and Old National must receive an opinion from Krieg DeVault LLP to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a)(1) of the Code. See “United States Federal Income Tax Consequences” beginning on page 74 for a more complete discussion of the United States federal income tax consequences of the Merger. Your tax consequences will depend on your personal situation. You should consult your tax advisor for a full understanding of the tax consequences of the Merger to you.

Q: Whom should I contact if I have other questions about the Merger Agreement or the Merger?

A: If you have more questions about the Merger Agreement or the Merger, you should contact:

Old National Bancorp

One Main Street

Evansville, Indiana 47708

(812) 464-1294

Attn: Jeffrey L. Knight, Executive Vice President, Chief Legal Counsel and Corporate Secretary

You may also contact:

Klein Financial, Inc.

1550 Audubon Road, Suite 200

Chaska, Minnesota 55318

(952) 361-9249

Attn: Doug Hile, President and COO

 

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SUMMARY

This summary highlights selected information in this proxy statement and prospectus and may not contain all of the information important to you. To understand the Merger more fully, you should read this entire document carefully, including the annexes and the documents referred to in this proxy statement and prospectus. A list of the documents incorporated by reference appears under the caption “Where You Can Find More Information” on page 81.

The Companies (page 22)

Old National Bancorp

One Main Street

Evansville, Indiana 47708

(812) 464-1294

Old National Bancorp (Nasdaq: ONB) is the holding company of Old National Bank. Headquartered in Evansville with $17.5 billion in assets as of June 30, 2018, it is a top 100 U.S. bank, the largest Indiana-based bank and has been recognized as a World’s Most Ethical Company by the Ethisphere Institute for seven consecutive years. For nearly 185 years, Old National has been a community bank committed to building long-term, highly valued relationships with clients. With locations in Indiana, Kentucky, Michigan, Minnesota and Wisconsin, Old National provides retail and commercial banking services along with comprehensive wealth management, investment and capital markets services. For information and financial data, please visit Investor Relations at oldnational.com.

Klein Financial, Inc.

1550 Audubon Road, Suite 200

Chaska, Minnesota 55318

(952) 361-9249

Klein Financial, Inc. is the holding company of KleinBank, a community bank which has 18 branches, more than 400 employees and assets of approximately $1.97 billion as of June 30, 2018. Over the past few years, KleinBank has received recognition as a Star Tribune top workplace, for providing best in class services for Business Banking and Mortgage Lending by the readers of Twin Cities Business, and as a recipient of the Better Business Bureau of Minnesota and North Dakota’s Torch Award for Ethics, as well as the Better Business Bureau International’s Torch Award for Ethics.

Special Meeting of Shareholders; Required Vote (page 20)

The special meeting of Klein shareholders is scheduled to be held at 1550 Audubon Rd, Chaska, Minnesota 55318, at 10:00 a.m., Central Time, on September 27, 2018. At the Klein special meeting, you will be asked to vote to approve the Merger Agreement. You will also be asked to approve the Adjournment Proposal. Only holders of record of Klein voting common stock as of the close of business on August 21, 2018 are entitled to notice of, and to vote at, the Klein special meeting and any adjournments or postponements of the Klein special meeting.

As of the record date, there were 2,875,206 shares of Klein common stock outstanding and 2,822,000 of those shares were entitled to vote at the special meeting. Each share of Klein voting common stock is entitled to one vote on each proposal at the special meeting.

Approval of the Merger Agreement requires the affirmative vote of holders of at least a majority of the issued and outstanding shares of Klein common stock entitled to vote. The vote on the Adjournment Proposal



 

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requires the affirmative vote of a majority of the shares of Klein common stock present in person or by proxy at the special meeting and entitled to vote.

As of the record date, the directors and executive officers of Klein (and their affiliates), as a group, beneficially owned 2,822,000 shares of Klein voting common stock, 100% of the issued and outstanding shares of Klein voting common stock. In connection with the execution of the Merger Agreement, Daniel Klein, Alan Klein and James Klein executed voting agreements pursuant to which they agreed to vote their shares and shares held by trusts (subject to their fiduciary duties and the applicable trust agreement), under which they are individually beneficial owners in favor of the Merger Agreement. As of the record date, these shareholders beneficially owned 1,642,500 shares of Klein voting common stock, or approximately 58.2% of the issued and outstanding shares of Klein voting common stock. Accordingly, Klein expects that the Merger Agreement will be approved at the special meeting.

No approval of the Merger Agreement by Old National shareholders is required.

The Merger and the Merger Agreement (pages 23 and 43)

The Merger Agreement provides that, if all of the conditions to closing are satisfied or waived, Klein will be merged with and into Old National, with Old National surviving. Effective simultaneously with the consummation of the Merger, KleinBank will be merged with and into Old National Bank, a wholly-owned subsidiary of Old National (the “Bank Merger”). We encourage you to read the Merger Agreement, which is included as Annex A to this proxy statement and prospectus and is incorporated by reference herein.

What Klein Shareholders Will Receive in the Merger (page 43)

If the Merger is completed, each share of Klein common stock will be converted into 7.92 shares of Old National common stock, provided that if the Klein Consolidated Shareholders’ Equity is less than Minimum Shareholders’ Equity as of the Determination Date, the Exchange Ratio will be decreased as provided in the section entitled “The Merger Agreement — Termination Fee.” In addition if the Old National Market Value on the Calculation Date is less than $15.75, Klein will have the right to terminate the Merger Agreement unless Old National increases the Exchange Ratio by exercising its option to increase the Exchange Ratio under the terms of the Merger Agreement.

Recommendation of Klein Board of Directors; Klein’s Reasons for the Merger (page 28)

The Klein board of directors unanimously determined that the Merger on the terms set forth in the Merger Agreement is in the best interests of Klein and the Klein shareholders. The Klein board of directors unanimously recommends that Klein shareholders vote “FOR” approval of the Merger Agreement. In reaching its determination, the Klein board of directors considered a number of factors, which are described in the section entitled “Proposal 1 — The Merger — Klein’s Reasons for the Merger and Recommendation of the Board of Directors” beginning on page 28. Because of the wide variety of factors considered, the Klein board of directors did not believe it practicable, nor did it attempt, to quantify or otherwise assign relative weight to the specific factors it considered in reaching its decision.

The Klein board of directors also unanimously recommends that you vote “FOR” approval of the Adjournment Proposal.

Dissenters’ Rights of Klein Shareholders (page 58)

Klein shareholders of record have dissenters’ rights under the MBCA in connection with the Merger.



 

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Klein shareholders who do not vote in favor of the approval of the Merger Agreement and who otherwise comply with applicable provisions of Sections 302A.471 and 302A.473 of the MBCA will be entitled to exercise dissenters’ rights thereunder. Any shares of Klein common stock held by a Klein shareholder as of the record date who has not voted in favor of the approval of the Merger Agreement and who has demanded appraisal for such shares in accordance with the MBCA will not be converted into a right to receive the Merger Consideration, unless such Klein shareholder fails to perfect, withdraws or otherwise loses such shareholder’s dissenters’ rights under the MBCA. If, after the consummation of the Merger, such holder of Klein common stock fails to perfect, withdraws or otherwise loses his, her or its dissenters’ rights, each such share will be treated as if it had been converted as of the consummation of the Merger into a right to receive the Merger Consideration. The relevant provisions of the MBCA are included as Annex C to this proxy statement and prospectus.

You are encouraged to read these provisions carefully and in their entirety. Due to the complexity of the procedures for exercising your dissenters’ rights, Klein shareholders who are considering exercising such rights are encouraged to seek the advice of legal counsel.

Failure to strictly comply with these provisions will result in the loss of dissenters’ rights. See the section entitled “Dissenters’ Rights of Klein Shareholders” beginning on page 58 of this proxy statement and prospectus and the text of Sections 302A.471 and 302A.473 of the MBCA reproduced in their entirety as Annex C to this proxy statement and prospectus for additional information.

Voting Agreements (page 57)

In connection with the execution of the Merger Agreement, Daniel Klein, Alan Klein and James Klein executed voting agreements pursuant to which they agreed to vote their shares and shares held by trusts (subject to their fiduciary duties and the applicable trust agreement), under which they are individually beneficial owners in favor of the Merger Agreement. As of the record date, these shareholders beneficially owned 1,642,500 shares of Klein voting common stock, or approximately 58.2% of the issued and outstanding shares of Klein voting common stock. Accordingly, Klein expects that the Merger Agreement will be approved at the special meeting.

Lock-Up Agreements (page 57)

In connection with the execution of the Merger Agreement, Daniel Klein, Alan Klein and James Klein executed lock-up agreements, and certain other holders of Klein common stock will execute lock-up agreements prior to the closing, covering in the aggregate approximately 18,200,000 shares of Old National common stock, assuming no adjustments to the Merger Consideration, or approximately 80% of the Old National common stock issued in the Merger. Such shareholders agree not to sell or enter into any transactions to dispose of their shares of Old National common stock received in the Merger, or publicly disclose an intention to effect any such transaction, for a period of 60 to 90 days after the Effective Time of the Merger, which may be waived by Old National’s prior written consent. As to the certain other shareholders who will execute lock-up agreements prior to the closing, such restrictions will apply only to 60% of each of these shareholders’ shares of Old National common stock received as Merger Consideration.

Opinion of Klein’s Financial Advisor (page 32)

In connection with the Merger, the Klein board of directors received an oral and a written opinion, dated June 20, 2018, from Klein’s financial advisor, Sandler O’Neill + Partners, L.P. (“Sandler O’Neill”), to the effect that, as of the date of the opinion and based on and subject to the various factors, assumptions and limitations described in the opinion, the Merger Consideration described in the Merger Agreement was fair, from a financial point of view, to the holders of Klein common stock. The full text of Sandler O’Neill’s written opinion, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications



 

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and limitations on the review undertaken by Sandler O’Neill in rendering its opinion, is attached to this document as Annex B. You should read the opinion carefully and in its entirety. The opinion of Sandler O’Neill is directed to the Klein board of directors, is directed only to the fairness, from a financial point of view, of the Merger Consideration to the holders of Klein common stock in the Merger as of the date of the opinion, does not address any other aspect of the transactions contemplated by the Merger Agreement and does not constitute a recommendation to any Klein shareholder as to how to vote at the Klein special meeting or any other matter relating to the Merger.

Regulatory Approvals (page 56)

Under the terms of the Merger Agreement, the Merger cannot be completed until Old National receives necessary regulatory approvals, which include the approval of the Minnesota Department of Commerce, the approval of the Office of the Comptroller of the Currency (the “OCC”) and the approval or waiver of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Old National has filed an application with the OCC and Federal Reserve Board for approval. The Minnesota Department of Commerce only requires a notification filing, which has been provided by Old National.

Issued Old National Shares Will be Eligible for Trading (page 57)

The shares of Old National common stock to be issued upon completion of the Merger will be eligible for trading on the Nasdaq Global Select Market.

Conditions to the Merger (page 51)

The respective obligations of Old National and Klein to consummate the Merger are subject to the satisfaction or waiver, on or before the effective time of the Merger, of a number of conditions, including:

 

   

the shareholders of Klein shall have approved and adopted the Merger Agreement;

 

   

approval of the Merger and the Bank Merger by the appropriate regulatory authorities;

 

   

the consummation of the Merger and the Bank Merger shall not be illegal or otherwise prohibited and no order, injunction or other legal restraint preventing the consummation of the Merger or the Bank Merger is in effect;

 

   

the Registration Statement on Form S-4, of which this proxy statement and prospectus is a part, relating to the shares of Old National common stock to be issued pursuant to the Merger Agreement, must have become effective under the Securities Act of 1933, and no stop order suspending the effectiveness of the Registration Statement shall have been issued or threatened by the SEC;

 

   

the representations and warranties made by the parties in the Merger Agreement must be true and correct as of the effective time of the Merger or as otherwise required in the Merger Agreement, unless the inaccuracies do not or would not reasonably be expected to result in a material adverse effect;

 

   

the obligations of the parties in the Merger Agreement must have been performed in all material respects;

 

   

the parties must have received the respective closing deliverables of the other party to the Merger Agreement;

 

   

dissenting shares must represent no more than 10% of the issued and outstanding shares of Klein common stock;

 

   

Old National has offered to enter into a tax indemnity letter with each Klein shareholder;



 

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Klein and Old National must have received an opinion from Krieg DeVault LLP (“Krieg DeVault”), dated as of the closing date, to the effect that the Merger constitutes a “reorganization” within the meaning of Section 368(a)(1) of the Code;

 

   

no person (other than a holder of shares of Klein common stock) will have asserted that such person (1) is the owner of, or has the right to acquire or to obtain ownership of, any capital stock of or any other voting, equity or ownership interest in, either of Klein or KleinBank or (2) is entitled to any of the Merger Consideration;

 

   

Klein’s Consolidated Shareholders’ Equity (computed in accordance with the Merger Agreement), as of the end of the month prior to the effective time of the Merger, shall be at least equal to the Minimum Shareholders’ Equity; and

 

   

Klein shareholders shall have executed lock-up agreements to restrict the sale of no less than 80% of the Old National common stock received by them for sixty (60) to ninety (90) days after the effective time of the Merger, which may be waived by Old National’s prior written consent.

We cannot be certain when, or if, the conditions to the Merger will be satisfied or waived, or that the Merger will be completed.

Termination (page 54)

Old National or Klein may mutually agree at any time to terminate the Merger Agreement without completing the Merger, even if the Klein shareholders have approved it. Also, either party may decide, without the consent of the other party, to terminate the Merger Agreement under specified circumstances, including (1) if the Merger is not consummated by March 31, 2019 (but only if the party who is terminating the Merger Agreement did not breach the Merger Agreement in a way that caused the Merger to fail to occur on or before March 31, 2019), (2) if any governmental entity has issued a final and nonappealable order or taken any other action permanently enjoining, restraining or otherwise prohibiting the consummation of the Merger or (3) if the Klein shareholders do not approve the Merger Agreement at the Klein special meeting. In addition, either party may terminate the Merger Agreement if there is a breach of the Merger Agreement by the other party that would cause the failure of conditions to the terminating party’s obligation to close, unless the breach is capable of being cured and is cured by the earlier of March 31, 2019 or the date that is 30 days following written notice of the breach.

Old National has the right to terminate the Merger Agreement if the Klein board (1) fails to recommend in this proxy statement and prospectus that the Klein shareholders approve the Merger Agreement, or withdraws, modifies or qualifies such recommendation in a manner adverse to Old National, or resolves to do so, or fails to reaffirm such recommendation within five business days after Old National requests in writing that such action be taken, (2) recommends or endorses an acquisition proposal or (3) breaches certain obligations, including with respect to the non-solicitation of acquisition proposals or calling a meeting of its shareholders and recommending that they approve the Merger Agreement.

Old National has the right to terminate the Merger Agreement if the dollar amount of all remedial or other corrective actions and measures required by the applicable lease or applicable environmental laws and regulations to be taken with respect to Klein’s owned or leased real property or any adjoining properties is estimated to exceed, in the aggregate, $3,000,000.

Klein has the right to terminate the Merger Agreement if the Old National Market Value on the Calculation Date is below $15.75 and Old National does not increase the Exchange Ratio by exercising its option to increase the Exchange Ratio under the terms of the Merger Agreement. Klein also has the right to terminate the Merger Agreement to pursue an alternative transaction that its board of directors has determined, in exercising its fiduciary duties, is superior to the Merger.



 

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Termination Fee (page 55)

Old National is required to pay Klein $2,000,000 if the Merger Agreement is terminated by either party as a result of the failure to obtain any of the bank regulatory approvals and such failure is a result of a regulatory issue directly and solely related to Old National. Klein is required to pay Old National a $17,078,724 termination fee in connection with the termination of the transactions contemplated by the Merger Agreement under certain circumstances, including circumstances involving alternative acquisition proposals with respect to Klein, changes in the recommendation of the Klein board, and certain breaches of the Merger Agreement by Klein, and if the Merger Agreement is terminated due to Klein failing to obtain the requisite shareholder vote at the duly convened Klein meeting of shareholders or at any adjournment thereof at which a vote on the approval of the Merger Agreement was taken.

Interests of Certain Directors and Executive Officers of Klein in the Merger That are Different From Yours (page 61)

You should be aware that some of Klein’s directors and executive officers may have interests in the Merger that are different from, or in addition to, their interests as shareholders. The Klein board of directors was aware of these interests and took them into account in approving the Merger Agreement.

Additionally, Old National is obligated under the Merger Agreement to provide continuing indemnification to the officers and directors of Klein and KleinBank for a period of six years following the Merger and to provide such directors and officers with directors’ and officers’ liability insurance for a period of six years following the Merger.

Accounting Treatment of the Merger (page 57)

The Merger will be accounted for as a purchase transaction in accordance with United States generally accepted accounting principles.

Rights of Shareholders After the Merger (page 63)

When the Merger is completed, Klein shareholders, whose rights are currently governed by the Klein articles of incorporation and by-laws, will become Old National shareholders, and their rights then will be governed by Old National’s articles of incorporation and by-laws. Old National is organized under Indiana law and Klein is organized under Minnesota law. To review the differences in the rights of shareholders under each company’s governing documents, see “Comparison of the Rights of Shareholders” beginning on page 63.

United States Federal Income Tax Consequences of the Merger (page 74)

The Merger is intended to qualify as a “reorganization” for United States federal income tax purposes. If the Merger qualifies, Klein shareholders will not recognize gain or loss for United States federal income tax purposes on the exchange of shares of Klein common stock for shares of Old National common stock in the Merger.

To review the tax consequences of the Merger to Klein shareholders in greater detail, please see “United States Federal Income Tax Consequences” beginning on page 74.

Comparative Per Share Data

The following table shows information about Old National’s and Klein’s book value per share, cash dividends per share, and diluted earnings per share, and similar information as if the Merger had occurred on the



 

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date indicated, all of which is referred to as “pro forma” information. In presenting the comparative pro forma information for certain time periods, it has been assumed that Old National and Klein had been merged throughout those periods along with certain other assumptions.

The information listed as “Pro Forma Equivalent Klein Share” was obtained by multiplying the “Pro Forma Combined” amounts by an Exchange Ratio of 7.92, assuming no adjustments to the Merger Consideration as described in the section entitled “The Merger AgreementMerger Consideration.” This information is presented to reflect the fact that Klein shareholders will receive shares of Old National common stock for each share of Klein common stock exchanged in the Merger. It is also anticipated that the combined company will derive financial benefits from the Merger that include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the merged company under one set of assumptions, does not reflect these benefits and, accordingly, does not attempt to predict or suggest future results. Further, the pro forma information below excludes one-time expenses related to the Merger. The pro forma information also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during these periods.

 

     Old
National
Historical
     Klein
Historical
     Pro
Forma
Combined
     Pro Forma
Equivalent
Klein
Share
 

Book value per share:

           

At June 30, 2018

   $ 14.44      $ 71.51      $ 15.04      $ 119.12  

at December 31, 2017

     14.17        75.26        14.81        117.30  

Cash dividends per share:

           

Six months ended June 30, 2018

   $ 0.26      $ 4.49      $ 0.26      $ 2.06  

Year ended December 31, 2017

     0.52        4.17        0.52        4.12  

Diluted earnings per share:

           

Six months ended June 30, 2018

   $ 0.60      $ 5.39      $ 0.62      $ 4.91  

Year ended December 31, 2017

     0.69        9.04        0.70        5.54  

Market Prices and Share Information

The following table presents quotation information for Old National common stock on the Nasdaq Global Select Market on June 20, 2018, which was the last trading day prior to the announcement of the signing of the Merger Agreement and August 23, 2018, which was the latest practicable date before the printing of this proxy statement and prospectus. Klein common stock is privately-held and not traded.

 

     Old National Common Stock  
     High      Low      Close  
     (Dollars per share)  

June 20, 2018

   $ 19.05      $ 18.75      $ 19.05  

August 23, 2018

   $ 20.25      $ 20.00      $ 20.15  


 

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SELECTED CONSOLIDATED FINANCIAL DATA OF OLD NATIONAL

The selected consolidated financial data of Old National below, as of and for the six months ended June 30, 2018 and 2017, is derived from Old National’s unaudited historical financial statements. The selected consolidated financial data presented below, as of and for each of the years in the five-year period ended December 31, 2017, is derived from Old National’s audited historical financial statements. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto incorporated by reference in this proxy statement and prospectus that Old National has previously filed with the SEC. See the section entitled “Where You Can Find More Information” on page 81. Results for past periods are not necessarily indicative of results that may be expected for any future period.

 

    Six Months Ended June 30,     Year Ended December 31,  
           2018                   2017            2017     2016     2015     2014     2013  
    (Unaudited)                                
(Dollar amounts in thousands, except per share data)  

Results of Operations

             

Net interest income

  $ 260,535     $ 210,134     $ 437,168     $ 402,703     $ 366,116     $ 366,370     $ 317,424  

Provision for loan losses

    2,826       1,702       3,050       960       2,923       3,097       (2,319

Noninterest income

    91,194       92,191       183,382       252,830       230,632       165,129       184,758  

Noninterest expense

    247,617       204,702       448,836       454,147       430,932       386,438       361,984  

Income before income tax

    101,286       95,921       168,664       200,426       162,893       141,964       142,517  

Income tax

    9,302       21,075       72,939       66,162       46,177       38,297       41,597  

Net income

    91,984       74,846       95,725       134,264       116,716       103,667       100,920  

Dividends paid on common stock

    39,588       35,219       72,604       67,536       55,552       48,181       40,278  

Per Common Share

             

Earnings per share (basic)

    0.61       0.55       0.69       1.05       1.01       0.96       1.00  

Earnings per share (diluted)

    0.60       0.55       0.69       1.05       1.00       0.95       1.00  

Dividends paid

    0.26       0.26       0.52       0.52       0.48       0.44       0.40  

Book value — end of period

    14.44       13.92       14.17       13.42       13.05       12.54       11.64  

Market value — end of period

    18.60       17.25       17.45       18.15       13.56       14.88       15.37  

At Period End

             

Total assets

    17,482,990       14,957,281       17,518,292       14,860,237       11,991,527       11,646,051       9,581,744  

Investment securities

    3,707,383       3,509,477       3,880,270       3,542,264       3,290,332       3,471,885       3,134,935  

Loans, excluding held for sale

    11,295,629       9,232,040       11,118,121       9,010,512       6,948,405       6,318,201       5,082,964  

Allowance for loan losses

    53,660       50,986       50,381       49,808       52,233       47,849       47,145  

Total deposits

    12,596,376       10,683,714       12,605,764       10,743,253       8,400,860       8,490,664       7,210,903  

Borrowings

    2,530,104       2,259,918       2,578,204       2,152,086       1,920,246       1,469,911       1,018,720  

Shareholders’ equity

    2,200,215       1,886,594       2,154,397       1,814,417       1,491,170       1,465,764       1,162,640  

Financial Ratios

             

Return on average assets

    1.06     1.01     0.63     0.98     0.98     0.99     1.05

Return on average common shareholders’ equity

    8.46     8.11     4.98     7.84     7.88     7.91     8.54

Allowance for loan losses to total loans (period end) (excluding held for sale)

    0.48     0.55     0.45     0.55     0.75     0.76     0.93

Shareholders’ equity to total assets (period end)

    12.58     12.61     12.30     12.21     12.44     12.59     12.13

Average equity to average total assets

    12.48     12.46     12.57     12.55     12.42     12.57     12.33

Dividend payout ratio

    42.62     47.27     75.36     50.30     47.60     46.48     39.91

 

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SELECTED CONSOLIDATED FINANCIAL DATA OF KLEIN

The selected consolidated financial data of Klein below, as of and for the six months ended June 30, 2018 and 2017, is derived from Klein’s unaudited historical financial statements. The selected consolidated financial data presented below, as of and for each of the years in the five-year period ended December 31, 2017 is derived from Klein’s audited historical financial statements. Results for past periods are not necessarily indicative of results that may be expected for any future period.

 

    Six Months Ended June 30,     Year ended December 31,  
           2018                   2017            2017     2016     2015     2014     2013  
    (Unaudited)                                
(Dollar amounts in thousands, except per share data)  

Results of Operations

             

Net interest income

  $ 32,639     $ 29,557     $ 60,986     $ 56,741     $ 54,351     $ 49,000     $ 44,682  

Provision for loan losses

    —         —         —         (1,008     (1,008     —         600  

Noninterest income

    9,427       9,847       18,266       18,312       16,814       17,177       17,720  

Noninterest expense

    26,563       26,759       53,249       54,797       55,386       53,763       50,396  

Income before income tax

    15,502       12,645       26,003       21,264       16,787       12,414       11,406  

Income tax

    N/A       N/A       N/A       N/A       N/A       N/A       N/A  

Net income

    15,502       12,645       26,003       21,264       16,787       12,414       11,406  

Dividends paid on common stock

    12,900       9,000       12,000       8,300       3,383       5,525       2,523  

Per Common Share

             

Earnings per share (basic)

    5.39       4.40       9.04       7.40       5.84       4.32       3.97  

Earnings per share (diluted)

    5.39       4.40       9.04       7.40       5.84       4.32       3.97  

Dividends paid

    4.49       3.13       4.17       2.89       1.18       1.92       0.88  

Book value — end of period

    71.51       72.98       75.26       70.44       68.32       64.49       55.80  

Market value — end of period

    N/A       N/A       N/A       N/A       N/A       N/A       N/A  

At Period End

             

Total assets

    1,966,219       1,954,185       2,004,141       1,916,199       1,906,252       1,832,289       1,588,200  

Investment securities

    714,600       734,368       726,591       740,294       812,256       848,057       774,787  

Loans, excluding held for sale

    1,087,756       1,042,955       1,099,790       1,008,178       929,904       799,323       643,581  

Allowance for loan losses

    13,095       13,844       13,342       13,765       14,805       16,081       15,609  

Total deposits

    1,705,433       1,617,821       1,687,862       1,595,671       1,580,036       1,563,091       1,356,289  

Borrowings

    13,065       83,673       64,084       79,726       115,968       72,820       57,305  

Shareholders’ equity

    205,594       209,824       216,400       202,533       196,431       185,417       160,444  

Financial Ratios

             

Return on average assets

    1.58     1.32     1.33     1.12     0.91     0.76     0.71

Return on average common shareholders’ equity

    14.97     12.28     12.27     10.11     8.62     7.08     6.59

Allowance for loan losses to total loans (period end and excluding held for sale)

    1.20     1.33     1.21     1.37     1.59     2.01     2.43

Shareholders’ equity to total assets (period end)

    10.46     10.7     10.8     10.6     10.3     10.1     10.1

Average equity to average total assets

    10.54     10.79     10.86     11.08     10.50     10.69     10.77

Dividend payout ratio

    83.22     71.2     46.1     39.0     20.2     44.5     22.1

Average Assets

    1,980,983       1,919,447       1,949,995       1,897,979       1,854,625       1,639,164       1,606,269  

Average Equity

    208,831       207,032       211,843       210,303       194,778       175,240       173,058  

 

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RISK FACTORS

In addition to the other information contained in or incorporated by reference into this proxy statement and prospectus (See “Where You Can Find More Information”), including the risk factors included in Old National’s Annual Report on Form 10-K for the year ended December 31, 2017, you should consider carefully the risk factors described below in deciding how to vote for the proposals presented in this proxy statement and prospectus. You should keep these risk factors in mind when you read forward-looking statements in this document and in the documents incorporated by reference into this document. Please refer to the section of this proxy statement and prospectus titled “Caution About Forward-Looking Statements.”

Klein shareholders cannot be certain of the value of the Merger Consideration they will receive, because the market price of Old National common stock will fluctuate and the Exchange Ratio is subject to adjustment.

Upon completion of the Merger, each share of Klein common stock will be converted into the Merger Consideration, which consists of Old National common stock. The Exchange Ratio is subject to downward adjustment, as set forth in the Merger Agreement and described in this proxy statement and prospectus in the event that Klein’s Consolidated Shareholders’ Equity is less than the Minimum Shareholders’ Equity. See “The Merger Agreement — Merger Consideration” for a more complete discussion of the Merger Consideration to be paid in the Merger.

Additionally, the market value of the Merger Consideration may vary from the closing price of Old National common stock on the date the Merger was announced, on the date that this document was mailed to Klein shareholders, on the date of the special meeting of the Klein shareholders and on the date the Merger is completed and thereafter. Any change in the Exchange Ratio or the market price of Old National common stock prior to completion of the Merger will affect the number of shares of Old National common stock or the market value of the Merger Consideration that Klein shareholders will receive upon completion of the Merger. Accordingly, at the time of the special meeting, Klein shareholders will not know or be able to calculate with certainty the amount or the market value of the Merger Consideration they would receive upon completion of the Merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in business, operations and prospects, and regulatory considerations. Many of these factors are beyond Old National’s or Klein’s control. You should obtain current market quotations for shares of Old National common stock and for shares of Klein common stock before you vote.

The Merger Agreement may be terminated in accordance with its terms, and the Merger may not be completed, which could have a negative impact on Klein.

The Merger Agreement is subject to a number of conditions which must be fulfilled, or in certain cases, waived by Old National or Klein, as applicable, in order to close the Merger. Those conditions include: Klein shareholder approval, regulatory approvals, the continued accuracy of certain representations and warranties by both parties and the performance by both parties of certain covenants and agreements. In particular, Old National is not obligated to close the Merger if Klein’s Consolidated Shareholders’ Equity, as of the end of the month prior to the effective time of the Merger, is not at least equal to the Minimum Shareholders’ Equity, disregarding any transaction costs.

In addition, certain circumstances exist where Klein may choose to terminate the Merger Agreement, including a decline in Old National’s share price to below a certain threshold set forth in the Merger Agreement. See “The Merger Agreement — Merger Consideration” for a more complete discussion of the Merger Consideration to be paid in the Merger and “The Merger Agreement — Termination” for a more complete discussion of the circumstances under which the Merger Agreement could be terminated. There can be no assurance that the conditions to closing the Merger will be fulfilled or that the Merger will be completed.

 

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If the Merger Agreement is terminated, there may be various consequences to Klein, including:

 

   

Klein’s business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger;

 

   

Klein may have incurred substantial expenses in connection with the Merger, without realizing any of the anticipated benefits of completing the Merger;

 

   

Klein may experience negative reactions from its customers, vendors and employees; and

 

   

The reputation of Klein may be tarnished by the process undertaken with Old National, which may adversely impact its future operations.

If the Merger Agreement is terminated and the Klein board of directors seeks another merger or business combination, under certain circumstances, Klein may be required to pay Old National a termination fee of $17,078,724. Klein shareholders cannot be certain that Klein would be able to find a party willing to pay an equivalent or more attractive price than the price Old National has agreed to pay in the Merger.

Klein shareholders will have a reduced ownership and voting interest after the Merger and will exercise less influence over management.

The Klein shareholders currently have the right to vote in the election of the Klein board of directors and on other matters affecting Klein. When the Merger occurs, each Klein shareholder will become a shareholder of Old National with a percentage ownership of the combined organization that is much smaller than the shareholder’s percentage ownership of Klein. Because of this, the Klein shareholders will have less influence on the management and policies of Old National than they now have on the management and policies of Klein.

Old National may be unable to successfully integrate KleinBank’s operations and retain KleinBank’s employees.

KleinBank will be merged with and into Old National Bank effective simultaneously with the consummation of the Merger. The difficulties of merging the operations of KleinBank with Old National Bank include:

 

   

integrating personnel with diverse business backgrounds;

 

   

combining different corporate cultures; and

 

   

retaining key employees.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of Old National, Old National Bank or KleinBank, and the loss of key personnel. The integration of KleinBank with Old National Bank will require the experience and expertise of certain key employees of KleinBank who are expected to be retained by Old National. However, there can be no assurances that Old National will be successful in retaining these employees for the time period necessary to successfully integrate KleinBank into Old National Bank. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and integration of KleinBank into Old National Bank could have an adverse effect on the business and results of operations of Old National or Old National Bank.

The termination fee and the restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire Klein.

Until the completion of the Merger, with some exceptions, Klein is prohibited from soliciting, initiating, encouraging, or participating in any discussion of, or otherwise considering, any inquiries or proposals that may

 

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lead to an acquisition proposal, such as a merger or other business combination transaction, with any person or entity other than Old National. In addition, Klein has agreed to pay a termination fee of $17,078,724 to Old National if (1) Old National terminates the Merger Agreement because the Klein board changes its recommendation, enters into an agreement for an alternative transaction or fails to reaffirm its recommendation within five business days of Old National requesting it do so, (2) either party terminates the Merger Agreement because the Merger has not occurred before March 31, 2019, and prior to the termination, an acquisition proposal was made known, and within 12 months after termination Klein enters into a definitive agreement with respect to an acquisition proposal, (3) either party terminates the Merger Agreement because the approval of the Klein shareholders has not been obtained and within 12 months after termination Klein enters into a definitive agreement with respect to an acquisition proposal, or (4) Klein terminates the Merger Agreement to pursue an alternative transaction that its board of directors has determined, in exercising its fiduciary duties, is superior to the Merger. For more information regarding the termination fee, see the section entitled “The Merger Agreement —Termination Fee” beginning on page 55 of this proxy statement and prospectus. These provisions could discourage other companies from trying to acquire Klein even though such other companies might be willing to offer greater value to the Klein shareholders than Old National has offered in the Merger Agreement. The payment of the termination fee also could have a material adverse effect on Klein’s financial condition.

Certain of Klein’s executive officers and directors have interests that are different from, or in addition to, the interests of the Klein shareholders generally.

Certain of Klein’s executive officers and directors have interests in the Merger that are in addition to, or different from, the interests of the Klein shareholders. The Klein board of directors was aware of these interests when it approved the Merger Agreement. For a more detailed discussion of these interests, see “Interests of Certain Directors and Officers of Klein in the Merger” beginning on page 61.

The fairness opinion obtained by Klein will not reflect changes in the relative values of Old National and Klein between the time the opinion was obtained and the effective time of the Merger.

The fairness opinion of Sandler O’Neill was dated as of June 20, 2018. Klein does not intend to obtain any update of the Sandler O’Neill fairness opinion. Changes in the operations and prospects of Old National and Klein, general market and economic conditions, and other factors both within and outside of Old National’s and Klein’s control may alter the relative value of the companies. Therefore, the Sandler O’Neill opinion does not address the fairness of the Merger Consideration as of the date of this proxy statement and prospectus, the date of the special meeting or at the time the Merger will be completed.

The Merger may fail to qualify as a reorganization for federal tax purposes, resulting in your recognition of taxable gain or loss in respect of your Klein shares and Klein may be subject to significant tax liability at the corporate level.

The Merger is intended to qualify as a reorganization within the meaning of Section 368(a)(1) of the Code. Although the Internal Revenue Service (“IRS”) will not be requested to provide a ruling on the matter, Old National and Klein will, as a condition to closing, each obtain an opinion from Krieg DeVault that the Merger will constitute a reorganization for federal income tax purposes. This opinion does not bind the IRS or preclude the IRS from adopting a contrary position. If the Merger fails to qualify as a reorganization, you generally would recognize gain or loss, as applicable, on each share of Klein common stock surrendered in an amount equal to the difference between your adjusted tax basis in that share and the fair market value of the Old National common stock received in exchange for that share upon completion of the Merger. Furthermore, if the Merger fails to qualify as a reorganization, Old National, as successor to Klein, may incur a significant tax liability resulting from a taxable sale of Klein’s assets for United States federal income tax purposes.

 

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The shares of Old National common stock to be received by Klein shareholders as a result of the Merger will have different rights from the shares of Klein common stock.

The rights associated with Klein common stock are different from the rights associated with Old National common stock. See “Comparison of the Rights of Shareholders” beginning on page 63 for a discussion of the different rights associated with Old National common stock.

Each party is subject to business uncertainties and contractual restrictions while the Merger is pending, which could adversely affect each party’s business and operations.

In connection with the pendency of the Merger, it is possible that some customers and other persons with whom Old National or Klein has a business relationship may delay or defer certain business decisions or might seek to terminate, change or renegotiate their relationships with Old National or Klein, as the case may be, as a result of the Merger, which could negatively affect Old National’s or Klein’s respective revenues, earnings and cash flows, as well as the market price of Old National common stock or the value of Klein common stock, regardless of whether the Merger is completed.

Under the terms of the Merger Agreement, Klein is subject to certain restrictions on the conduct of its business prior to completing the Merger, which may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations could negatively affect Klein’s businesses and operations prior to the completion of the Merger.

 

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CAUTION ABOUT FORWARD-LOOKING STATEMENTS

This document, and the documents incorporated by reference into it, contain forward-looking statements, including statements about Old National’s and Klein’s financial condition, results of operations, earnings outlook, asset quality trends and profitability. Forward-looking statements express management’s current expectations or forecasts of future events and, by their nature, are subject to assumptions, risks and uncertainties. Certain statements contained in this filing that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, or the Reform Act, notwithstanding that such statements are not specifically identified.

In addition, certain statements may be contained in the future filings of Old National with the SEC, in press releases and in oral and written statements made by or with the approval of Old National that are not statements of historical fact and constitute forward-looking statements within the meaning of the Reform Act. Examples of forward-looking statements include, but are not limited to:

 

   

statements about the benefits of the Merger between Old National and Klein, including future financial and operating results, cost savings, enhanced revenues and accretion to reported earnings that may be realized from the Merger;

 

   

statements of plans, objectives and expectations of Old National or Klein or their managements or boards of directors;

 

   

statements of future economic performance; and

 

   

statements of assumptions underlying such statements.

Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may,” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

   

the risk that the businesses of Old National and Klein will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;

 

   

expected revenue synergies and cost savings from the Merger may not be fully realized or realized within the expected time frame;

 

   

revenues following the Merger may be lower than expected;

 

   

deposit attrition, operating costs, customer loss and business disruption following the Merger, including, without limitation, difficulties in maintaining relationships with employees, may be greater than expected;

 

   

the inability to obtain governmental approvals of the Merger on the proposed terms and schedule;

 

   

the failure of the Klein shareholders to approve the Merger;

 

   

local, regional, national and international economic conditions and the impact they may have on Old National and Klein and their customers and Old National’s and Klein’s assessment of that impact;

 

   

changes in the level of non-performing assets, delinquent loans, and charge-offs;

 

   

material changes in the stock market value of Old National common stock;

 

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changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

 

   

the risk that management’s assumptions and estimates used in applying critical accounting policies prove unreliable, inaccurate or not predictive of actual results;

 

   

inflation, interest rate, securities market and monetary fluctuations;

 

   

changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity;

 

   

prepayment speeds, loan originations and credit losses;

 

   

sources of liquidity;

 

   

competitive pressures among depository and other financial institutions may increase and have an effect on pricing, spending, third-party relationships and revenues;

 

   

changes in laws and regulations (including laws and regulations concerning taxes, banking, and securities) with which Old National and Klein, as applicable, must comply;

 

   

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

 

   

Old National’s and Klein’s common stock outstanding and Old National’s common stock price volatility;

 

   

legislation affecting the financial services industry as a whole, and/or Old National and Klein and their subsidiaries, individually or collectively;

 

   

governmental and public policy changes;

 

   

financial resources in the amounts, at the times and on the terms required to support Old National’s and Klein’s future businesses; and

 

   

the impact on Old National’s or Klein’s businesses, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts.

Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results.

Additional factors that could cause Old National’s results to differ materially from those described in the forward-looking statements can be found in Old National’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC. All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters and attributable to Old National or Klein or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements referenced above. Forward-looking statements speak only as of the date on which such statements are made. Old National and Klein undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events. For any forward-looking statements made in this proxy statement and prospectus or in any documents incorporated by reference into this proxy statement and prospectus, Old National claims the protection of the safe harbor for forward-looking statements contained in the Reform Act.

We caution you not to place undue reliance on the forward-looking statements.

 

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SPECIAL MEETING OF THE KLEIN SHAREHOLDERS

Date, Place, Time, and Purpose

The Klein board of directors is sending you this proxy statement and prospectus and proxy to use at the special meeting. At the special meeting, the Klein board of directors will ask you to vote (1) on a proposal to approve the Merger Agreement, and (2) on a proposal to approve the Adjournment Proposal. Klein does not expect any other items of business to be presented at the special meeting. If other matters do properly come before the special meeting, the accompanying proxy gives discretionary authority to the persons named in the proxy to vote on any other matters brought before the meeting. Those persons intend to vote the proxies in accordance with their judgment.

The special meeting will be held on September 27, 2018, at 10:00 a.m., Central Time, at 1550 Audubon Road, Chaska, Minnesota 55318.

Record Date, Voting Rights, Quorum, and Required Vote

Klein has set the close of business on August 21, 2018, as the record date for determining the holders of Klein voting common stock entitled to notice of and to vote at the special meeting. Only holders of Klein voting common stock at the close of business on the record date are entitled to notice of the special meeting. As of the record date, there were 2,875,206 shares of Klein common stock outstanding and 2,822,000 of those shares were entitled to vote at the special meeting. Each share of Klein voting common stock is entitled to one vote.

The holders of a majority of the issued and outstanding shares of Klein common stock entitled to vote as of the record date must be present in person or by proxy at the special meeting to constitute a quorum. In determining whether a quorum is present, shareholders who abstain will be treated as present for determining the presence or absence of a quorum.

Approval of the Merger Agreement will require the affirmative vote of holders of at least a majority of the shares of Klein common stock entitled to vote. Abstentions from voting will have the same effect as a vote against the Merger Agreement. As of the record date, the directors and executive officers of Klein (and their affiliates), as a group, beneficially owned 2,822,000 shares of Klein voting common stock, or approximately 100% of the outstanding shares of Klein voting common stock. In connection with the execution of the Merger Agreement, Daniel Klein, Alan Klein and James Klein executed voting agreements pursuant to which they agreed to vote their shares and shares held by trusts (subject to their fiduciary duties and the applicable trust agreement), under which they are individually beneficial owners in favor of the Merger Agreement. As of the record date, these shareholders beneficially owned 1,642,500 shares of Klein voting common stock, or approximately 58.2% of the outstanding shares of Klein voting common stock. Accordingly, Klein expects that the Merger Agreement will be approved at the special meeting.

The vote on the Adjournment Proposal requires the affirmative vote of a majority of the shares of Klein common stock present in person or by proxy at the special meeting and entitled to vote. Abstentions will have the same effect as a vote against this proposal.

Voting and Revocability of Proxies

You may vote in one of two ways: (1) by mail (by completing and signing the proxy that accompanies this proxy statement and prospectus); or (2) in person (by either delivering the completed proxy or by casting a ballot if attending the special meeting). To ensure your representation at the special meeting, we recommend you vote by proxy even if you plan to attend the special meeting. You may change your proxy vote at the special meeting.

Voting instructions are included on your proxy. If you properly complete and timely submit your proxy, your shares will be voted as you have directed. If you submit your proxy without specifying a voting instruction, your shares will be voted “FOR” approval of the Merger Agreement and “FOR” approval of the Adjournment Proposal.

 

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You may revoke your proxy before it is voted by:

 

   

filing with the Secretary of Klein a duly executed revocation of proxy;

 

   

submitting a new proxy with a later date; or

 

   

voting in person at the special meeting.

Attendance at the special meeting will not, in and of itself, constitute a revocation of a proxy. All written notices of revocation and other communication with respect to the revocation of proxies should be addressed to: Klein Financial, Inc., 1550 Audubon Road, Suite 200, Chaska, Minnesota 55318, Attn: Doug Hile, President and COO.

Solicitation of Proxies

Old National will pay the costs of the distribution of this proxy statement and prospectus. In addition to soliciting proxies by mail, directors, officers, and employees of Klein may solicit proxies personally and by telephone. None of these persons will receive additional or special compensation for soliciting proxies. Old National will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions.

Recommendation of the Klein Board of Directors

The Klein board of directors unanimously determined that the Merger on the terms set forth in the Merger Agreement is in the best interests of Klein and the Klein shareholders. The Klein board of directors unanimously recommends that Klein shareholders vote “FOR” approval of the Merger Agreement and “FOR” approval of the Adjournment Proposal.

See “The Merger — Background of the Merger” beginning on page 23 and — “Klein’s Reasons for the Merger and Recommendation of the Board of Directors” beginning on page 28 for a more detailed discussion of the Klein board of directors’ recommendation with regard to the Merger Agreement.

 

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INFORMATION ABOUT THE COMPANIES

Old National Bancorp

One Main Street

Evansville, Indiana 47708

(812) 464-1294

Old National Bancorp (Nasdaq: ONB) is the holding company of Old National Bank. Headquartered in Evansville with $17.5 billion in assets as of June 30, 2018, it is a top 100 U.S. bank, the largest Indiana-based bank and has been recognized as a World’s Most Ethical Company by the Ethisphere Institute for seven consecutive years. For nearly 185 years, Old National has been a community bank committed to building long-term, highly valued relationships with clients. With locations in Indiana, Kentucky, Michigan, Minnesota and Wisconsin, Old National provides retail and commercial banking services along with comprehensive wealth management, investment and capital markets services. For information and financial data, please visit Investor Relations at oldnational.com.

Additional information about Old National and its subsidiaries is included in documents incorporated by reference into this document. For more information, please see the section entitled “Where You Can Find More Information” beginning on page 81.

Klein Financial, Inc.

1550 Audubon Road, Suite 200

Chaska, Minnesota 55318

(952) 476-5245

Klein Financial, Inc. is the holding company of KleinBank, a community bank which has 18 branches, more than 400 employees and assets of approximately $1.97 billion as of June 30, 2018. Over the past few years, KleinBank has received recognition as a Star Tribune top workplace, for providing best in class services for Business Banking and Mortgage Lending by the readers of Twin Cities Business, and as a recipient of the Better Business Bureau of Minnesota and North Dakota’s Torch Award for Ethics, as well as the Better Business Bureau International’s Torch Award for Ethics.

 

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PROPOSAL 1 — THE MERGER

Background of the Merger

The Klein board of directors regularly reviews and discusses Klein’s business strategy, performance, prospects and operations in the context of the economic environment in Minnesota and the United States, developments in the regulation of financial institutions and the competitive landscape for community banking. This strategic review process has been guided in large part by the interests of the Klein family, which collectively controls 100% of the voting and non-voting stock of Klein, directly and through various trusts established for the benefit of Klein family members. All of the adult members of the Klein family who are shareholders or trustees of shareholders serve as members of the Klein board of directors and all of the individual and trust shareholders are represented on the board.

In 1907, C.H. Klein purchased the controlling interest in First National Bank of Chaska. Over the next 68 years, the banks controlled by the Klein family grew to include an additional six charters. In 1975, Klein was established to consolidate ownership of the banks under a single bank holding company. Over the next 30 years, Klein continued to expand through the acquisition of additional banks and a mortgage company, as well as the opening of additional bank branches. In 2005, the separate bank charters were merged into a single bank under the KleinBank name. Since 2005, KleinBank continued to expand through the acquisition of three additional banks and two bank branch openings. In January 2018, Klein chose to right size its banking operations and entered into an agreement to sell three non-core branches.

The Klein family has controlled Klein since its formation, and to this day remains active in overseeing its management and operations. Over the years, C.H. Klein’s descendants held positions in management and the board of directors. Daniel Klein assumed the role of Chairman of Klein in 1979 and was President of Klein from 1979 until 2017; he has also been Chairman of KleinBank since 2005 and was President and Chief Executive Officer of KleinBank from 2005 to 2009. James Klein has served as Vice Chairman and Executive Vice President of Klein since 1989, Vice Chairman of KleinBank since 2005 and Executive Vice President of KleinBank from 2005 until 2012. Alan Klein has served as Vice Chairman and Executive Vice President of Klein since 1979, Vice Chairman of KleinBank since 2005 and Executive Vice President of KleinBank from 2005 until 2013. In addition, Matthew, Christian and Jeffrey Klein have served and continue to serve in various capacities at KleinBank.

In recent years, the Klein family increased its focus on succession planning. In 2009, W. Douglas Hile became the first non-family member to serve as President and Chief Executive Officer of KleinBank. In 2017, Mr. Hile was appointed President of Klein, while Daniel Klein remained Chief Executive Officer of Klein. In 2018, Matthew Klein became President of KleinBank, while Mr. Hile continued to serve as the Chief Executive Officer of KleinBank. The Klein family also turned its attention to the capital condition of Klein, including the capital that would be required to grow the organization organically, pursue additional acquisitions and continue the payment of cash dividends, as well as the liquidity of their investment in Klein.

At the invitation of Klein management, in October 2017 Sandler O’Neill made presentations to Klein’s shareholders on the current operating environment for community banks, the Klein franchise, and its strategic options and opportunities. Specifically, the Sandler O’Neill presentations addressed:

 

   

The current state of the community bank operating environment, capital markets and M&A market;

 

   

Klein’s franchise and market position;

 

   

A projected earnings model and stand-alone valuation analysis;

 

   

An analysis of Klein as an acquirer;

 

   

The availability and utilization of subordinate debt to fund acquisitions;

 

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The potential benefits and challenges of a possible initial public offering of Klein common stock and illustrative initial public offering valuation; and

 

   

An analysis of Klein as a merger partner and illustrative sale valuation.

Also in October 2017 Klein Senior Vice President Nanci Olson presented an overview to Klein’s shareholders on the tax ramifications of the strategic options presented by Sandler O’Neill, taking into account the circumstances of both individual and trust shareholders. Following the October presentations by Sandler O’Neill and Ms. Olson, further discussions of the available strategic options took place among Klein shareholders with additional input from Klein management.

At the 2018 annual shareholder meeting held on January 22, 2018, the future of Klein was considered by the shareholders and a motion was approved by 66.5% of the shares of Klein voting common stock to explore the sale of the company.

A meeting of the Klein board of directors was then held on January 23, 2018. At this meeting, the Klein board of directors unanimously approved amended and restated bylaws for Klein. As amended, the by-laws provided for the formation of an executive committee of the board comprised of the chairman and two vice chairmen of the board (the “Executive Committee”). The amended by-laws empowered the Executive Committee to exercise the powers of the board of directors when it is not in session, reporting back to the board on its activities and matters or interest. The Klein board of directors then unanimously approved the proposed officers of Klein, including Daniel Klein as Chairman and James Klein and Alan Klein each as Vice Chairmen, and all three as the members of the Executive Committee. Finally, the Klein board of directors considered the implementation of the motion approved by the shareholders to explore a sale of the company and instructed the Executive Committee to address the process for exploring a sale and provide direction to management on the implementation of the shareholders’ motion.

A meeting of the Executive Committee was also held on January 23, 2018. At this meeting, Klein President Doug Hile was asked to present an overview of a process for exploring a sale of the company. Based on Mr. Hile’s presentation, the Executive Committee discussed the following key points: identifying and articulating the reasons for a sale, engaging qualified investment banking and legal advisors, establishing a suitable marketing approach for identifying prospective partners, and establishing criteria for evaluating competing proposals based primarily on total consideration but also taking into account employee, customer, culture and community considerations. Mr. Hile recommended that a management task force be formed to lead the sale process. The Executive Committee also discussed the impact of a proposed sale on change in control, severance and other transaction related incentives and agreements currently in place as well as those that should be considered in order to protect the Klein organization throughout the sale process. The Committee discussed the issuance of transaction bonuses to recognize members of the executive management team who are not shareholders, and therefore, will not directly participate in the value realized from a sale; changes to the employee severance plan and the establishment of a retention bonus pool to retain employees through and after the sale; and amendments to the change in control agreements. Mr. Hile also recommended that Matthew Klein be appointed as President of KleinBank, allowing Mr. Hile to shift his focus to the sale process. Finally, the committee discussed the pending Department of Justice litigation and the value of settling the litigation in advance of a sale of the company. Mr. Hile was then instructed to proceed with the implementation of the sales process.

The Executive Committee met on February 6, 2018 at which time Mr. Hile updated the committee on the engagement of advisors. Mr. Hile reported the engagement of Dorsey & Whitney LLP (“D&W”) as legal counsel. Mr. Hile also reported on a meeting with Sandler O’Neill, the evaluation of other investment banking firms and plans to meet with another investment banking firm before making a recommendation. Mr. Hile also reported that a management task force had been formed to lead the sale process.

 

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At a meeting held on February 26, 2018, the Executive Committee approved the recommendation of management to engage Sandler O’Neill as the investment banker advising the company. Management then updated the committee on plans to work with Sandler O’Neill to develop marketing materials, identify potential partners and recommend how to approach potential partners for initial indications of interest. Doug Hile also updated the committee on pricing considerations and the potential price range for a transaction. D&W presented and discussed in detail with the Executive Committee the fiduciary and legal obligations applicable to directors when considering a sale or merger of Klein.

Over the next two weeks, representatives of Sandler O’Neill worked with Klein management to identify parties that might be interested in a partnership with Klein and develop a confidential information memorandum for distribution to merger candidates. Representatives of Sandler O’Neill presented to management a list of ten potential merger candidates as the most likely to be interested and most capable of offering to Klein an attractive proposal. These candidates were in turn divided into five “A” list candidates with the greatest potential for offering an attractive proposal, including Old National, and five “B” list candidates. At a meeting held on March 12, 2018, the “A” and “B” list candidates were presented to the Executive Committee. Representatives of Sandler O’Neill presented their assessment of each candidate, and committee members’ questions were answered regarding the proposed candidates as well as other potential candidates. Sandler O’Neill then recommended that all “A” list candidates be given the opportunity to enter into confidentiality agreements and the opportunity to participate in the sale process. Sandler O’Neill further recommended that a soft calling process be used to determine the level of interest of each of the “B” list candidates before giving those candidates the opportunity to participate in the process. After further discussion by the Executive Committee, the “A” and “B” list candidates were approved along with the recommended soft calling process for determining which “B” list candidates would be provided an opportunity to participate in the sales process. At this meeting the Executive Committee also reviewed management proposals regarding the employee severance plan, retention bonus pool, management change in control agreements and transaction bonuses to be offered to certain employees upon consummation of a transaction. After further discussion by the committee, these proposals were approved.

Four of the five “A” list candidates and three of the five “B” list candidates entered into confidentiality agreements during March 2018. One of these potential merger partners declined to explore a potential transaction based on their limited interest in the Minneapolis/St. Paul metropolitan area. Each of the remaining six candidates had access to a virtual data room with certain limited due diligence information about Klein and held preliminary due diligence meetings and/or conference calls with Klein management. Based on input from Klein management, representatives of Sandler O’Neill distributed to the remaining six candidates a bid request letter with detailed instructions for submitting a non-binding indication of interest to enter into a transaction with Klein. Klein received indications of interest from four of the six remaining candidates, all of which were “A” list candidates. Representatives of Sandler O’Neill prepared and distributed to the Executive Committee in advance of its May 1, 2018 meeting a detailed summary of the indications of interest received.

On May 1, 2018, the Executive Committee met to review the indications of interest and to continue its consideration of Klein’s strategic options. At the meeting, representatives of Sandler O’Neill gave a presentation to the committee, which included a review of the discussions held between Klein management and each candidate, a summary of the bid proposals received, an analysis of Klein’s prospects as a stand-alone enterprise and profiles of the candidates. The presentation included an assessment of the willingness and capacity to pay, estimated transaction values and a comparison of the cash/stock consideration mix of each bid. The committee engaged in a comprehensive discussion of the four candidates and the perceived relative advantages and disadvantages of each one. The committee noted that the financial value of the four bids was very similar. The committee discussed the possible paths available to take going forward and decided to invite all four remaining candidates to complete due diligence and submit final non-binding indications of interest.

The next phase of due diligence included access to an expanded virtual data room, including additional due diligence materials and responses to requests for supplemental information, and loan due diligence through online access to credit files. Candidates were also provided a form merger agreement with comments to be

 

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provided as part of their final indication of interest. As an initial action in the reverse due diligence process, members of Klein management also visited with the management teams of each candidate at their respective office locations in order to give management an understanding of the cultural fit of each candidate and integration related topics.

Three of the four remaining candidates submitted final indications of interest and the fourth chose to withdraw from the process. Representatives of Sandler O’Neill prepared and distributed to the Executive Committee in advance of its meeting a detailed summary of the indications of interest received. A matrix reflecting the material comments received to the form merger agreement from each candidate was also prepared and distributed to the committee.

On May 30, 2018, the Executive Committee met to review the final indications of interest and to continue its consideration of Klein’s strategic options. At the meeting, representatives of Sandler O’Neill gave a presentation to the committee, which included a review of the discussions held between Klein management and the remaining candidates, a summary of the bid proposals received, an analysis of Klein’s prospects as a stand-alone enterprise and profiles of the possible candidates. The presentation included an assessment of the willingness and capacity to pay, estimated transaction values and a comparison of the cash/stock consideration mix of each bid. Although each indication of interest proposed a different mix of stock and cash consideration, the Old National proposal offered the highest aggregate consideration. In addition to the presentation by Sandler O’Neill, representatives of a fiduciary wealth management advisor to certain of the Klein individual and trust shareholders provided their assessment of the proposed stock consideration offered by each candidate, favoring the stock of Old National from the investment perspective of the individual and trust shareholders of Klein. Klein management reported that it believed Old National maintained a culture that was very comparable to that of Klein. Management also commented on the in-market synergies between Klein and Anchor Bank, which was acquired by Old National last year. Management also noted that the Old National proposal included a more generous severance plan and retention bonus pool than originally proposed by Klein management. The Executive Committee discussed the advantages of pursuing a transaction with Old National as a partner, including the attractive dividend payable on its stock, its superior liquidity in its public trading market and the belief that its culture would fit well with Klein. Although legal counsel prepared and distributed to the committee a matrix reflecting the material comments received to the form merger agreement from each candidate, the principal agreement comment of note was that Old National provided the most complete markup of the form merger agreement, leaving less to be negotiated in order to finalize the definitive merger agreement. Sandler O’Neill recommended that, if the Executive Committee preferred Old National as a transaction partner, then Klein seek to negotiate the following changes to Old National’s final indication of interest: (1) setting the exchange ratio based on the volume weighted average price prior to signing but no less than 8.033 shares of Old National common stock for each share of Klein common stock; (2) a single-trigger walkaway right that Klein could use to terminate the agreement if the average common stock closing price of Old National’s stock is below the 10-day volume weighted average price prior to signing, minus 15%; (3) a reverse termination fee in the event Old National failed to obtain regulatory approval in an amount between $1.5 million and $3.0 million, and (4) establishing the minimum net worth requirement as part of the final indication of interest, rather than during the negotiation of the definitive agreement. After further discussion, the Executive Committee concluded that Old National was the most desirable transaction partner and the committee authorized management, in consultation with Sandler O’Neill and D&W and subject to approval of the full board of directors, to seek to negotiate the recommended changes to the indication of interest with Old National and to negotiate exclusively with Old National to complete the negotiation of a definitive merger agreement based on the comments Old National previously provided to Klein’s form merger agreement.

On May 31, 2018, Sandler O’Neill reported that Old National agreed to the requested changes to their indication of interest, with the exception to the changes to the exchange ratio, which would remain fixed as initially proposed. Old National’s indication of interest, as revised, included an aggregate purchase price of $419.2 million consisting of 100% Old National stock (based on an Old National stock price as of May 25, 2018), which valued Klein at $145.80 per share of common stock. The exchange ratio for the stock consideration

 

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was fixed at 8.033 shares of Old National common stock for each share of Klein common stock. The revised proposal also included a single-trigger walkaway right and reverse termination fee. Upon consultation with Sandler O’Neill, and after informal consultation with members of the Executive Committee, Klein management concluded that this proposal was acceptable and to proceed with the negotiation of a definitive agreement for presentation to the Executive Committee and then the full board of directors for final approval. At management’s request, representatives of Sandler O’Neill informed Old National that Klein had determined to proceed with it to negotiate a definitive merger agreement and informed the other bidders that it had determined not to discuss anything further at that time.

From June 1, 2018 to June 15, 2018, Old National completed its due diligence on Klein, including a review of additional materials uploaded to a virtual data room and interviews of Klein management. During this period, Klein also presented Old National with a “reverse” due diligence list requesting information about Old National and its financial condition and operations. Old National populated a virtual data room with the requested documents. Klein and its advisors reviewed the documentation and held reverse due diligence meetings with Old National management. In addition, Klein and its advisors reviewed information about Old National that was publicly available, including reports and other materials filed with the SEC.

On June 16, 2018, Old National communicated to Klein a slightly revised proposal based on the results of its final due diligence review of Klein. The revised proposal changed the exchange ratio for the stock consideration from 8.033 shares of Old National common stock per share of Klein common stock to 7.86, based on the impact of additional tax dividends for the 2017 tax year paid in 2018 and a recalculation of certain amounts payable to employees upon consummation of the proposed transaction. Old National also raised issues regarding the calculation and payment of tax dividends for the remainder of the 2018 tax year. Between June 16 and June 18, 2018 the parties negotiated the resolution of these issues, ultimately agreeing on a mechanism to insure appropriate tax distributions for the 2018 tax year and a fixed exchange ratio of 7.92 shares of Old National common stock per share of Klein common stock.

From June 1, 2018 to June 20, 2018, Klein and Old National and their respective representatives and advisors also negotiated the terms of the merger agreement based on the form merger agreement previously provided by Klein and comments received from Old National with its final indication of interest. The parties and their legal advisors exchanged a number of drafts of the agreement and its exhibits, and worked toward finalizing the terms of the transaction. Also during this period, each party prepared, distributed and finalized a set of disclosure schedules listing certain supplemental information and exceptions to the representations and warranties contained in the merger agreement.

On June 20, 2018, Klein management distributed to Executive Committee and Klein board of directors a substantially final, negotiated version of the merger agreement and the Executive Committee met to review the substantially final version of the agreement.

Also on June 20, 2018 and immediately following the Executive Committee meeting, the full Klein board of directors held a special meeting to review and consider approving the Merger Agreement. All directors were present and participated in the meeting. At the meeting, the Klein board received a full report from Klein management and the members of the Executive Committee on the strategic process to date, including the identification of potential merger partners, the bidding process, management’s meetings with the three final candidates identified by the process and the decision to select one of the candidates, Old National, with which to negotiate a transaction, complete due diligence reviews and the negotiate a definitive merger agreement.

Representatives of Sandler O’Neill gave the board a presentation on the following topics:

 

   

The current state of the community banking industry and the M&A market;

 

   

The bidding process, including the approach taken in identifying likely transaction partners;

 

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An analysis of the value of Klein as a stand-alone entity, based on information provided by Klein;

 

   

Financial analysis and summary of key terms of Old National’s proposal;

 

   

A comparison of the proposal to values received in comparable transactions; and

 

   

A company profile and business and financial information about Old National.

At the meeting, D&W provided a comprehensive review of the Merger Agreement. Various provisions of the Merger Agreement were discussed and director questions regarding the Merger Agreement were answered. D&W also reviewed the terms of the related shareholder voting agreements and standstill agreements to be executed by certain shareholders.

D&W also reviewed with the Klein board the fiduciary and legal obligations applicable to directors when considering a sale or merger of Klein, including the consideration of any superior proposals that might be received, the board and shareholder approvals required in order to approve and consummate the merger, and the fiduciary obligations of the trustees of the trust shareholders of Klein that would asked to vote on the transaction.

Sandler O’Neill delivered its oral fairness opinion, which was subsequently confirmed in writing, to the effect that, as of June 20, 2018, and based on certain assumptions, limitations and qualifications, the Merger Consideration was fair to the common shareholders of Klein from a financial point of view.

The Klein board engaged in a discussion of the Merger Agreement, the financial analyses and the fairness opinion. The Klein board considered the analyses of Sandler O’Neill regarding the valuation of Klein as a stand-alone entity and discussed the attributes of Old National’s common stock, including its recent market performance, its dividend payout ratio, its trading volume and its relative valuation compared to its peers. The Klein board also discussed Old National’s commitment to community banking and its business culture and philosophy. Following the board’s discussion and questions and answers, including consideration of the factors described under “Klein’s Reasons for the Merger and Recommendation of the Board of Directors,” the Klein board of directors unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, were in the best interests of Klein and its shareholders and authorized Klein’s management to execute and deliver the Merger Agreement.

Following the Klein board meeting, on June 20, 2018, Klein and Old National executed and delivered the Merger Agreement and a respective set of disclosure schedules. On that same date, certain of the shareholders of Klein executed and delivered to Old National voting agreements and lock-up agreements, as required by the Merger Agreement. On June 21, 2018, before the U.S. financial markets opened, Klein and Old National issued a joint press release announcing the execution of the Merger Agreement and the terms of the Merger. Throughout the process, the Klein family, through its representation in management and on Klein’s board of directors, provided feedback and support in favor of the proposed transaction with Old National.

Klein’s Reasons for the Merger and Recommendation of the Board of Directors

After careful consideration, at a meeting held on June 20, 2018, the Klein board of directors unanimously determined that the Merger Agreement, including the Merger and the other transactions contemplated thereby, is in the best interests of Klein and its shareholders and approved the Merger Agreement.

In reaching its decision to approve the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement and recommend that its shareholders vote “FOR” the Merger Agreement, the Executive Committee and the Klein board of directors consulted with Klein management, as well as its independent financial and legal advisors, and considered a number of factors, including the following material factors:

 

   

the direction from Klein shareholders to explore a sale of the company as evidenced by the resolution passed by the shareholders at their January 22, 2018 meeting;

 

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the report and recommendation of the Executive Committee;

 

   

the shareholders’, board’s and Executive Committee’s review of the risks and prospects of remaining independent, including the challenges of the current financial, operating and regulatory climate, the increasing costs associated with banking regulation and Klein’s need to raise capital to continue to grow or acquire;

 

   

the desirable attributes of Old National as a transaction partner, as compared to other prospective merger candidates;

 

   

the purchase price to be paid by Old National, which based on the price per share of Old National’s common stock as of June 19, 2018, of $18.75, was equal to 232.0% of Klein’s tangible book value and 21.1x of Klein’s earnings for the 12-month period ending on March 31, 2018;

 

   

the financial analyses of Sandler O’Neill and its written opinion, dated as of June 20, 2018, delivered to the Klein board of directors to the effect that, as of that date, and subject to and based on the various assumptions, considerations, qualifications and limitations set forth in the opinion, the Merger Consideration was fair, from a financial point of view, to Klein’s shareholders;

 

   

Old National’s current annual cash dividend of $0.52 per share, which is equivalent to $4.12 per share on the Klein shares of common stock exchanged for Old National shares of common stock, compared to Klein’s current annual dividend of $2.02 per share on an after tax basis;

 

   

the support of the Klein family of the decision to enter into the Merger Agreement, which was demonstrated by the unanimous approval of the board which is comprised of all adult members of the Klein family;

 

   

the shared values, common cultures and commitments of Klein and Old National to serving their clients and communities;

 

   

its knowledge of Klein’s business, operations, financial condition, asset quality, earnings, loan portfolio, capital and prospects both as an independent organization, and as a part of a combined company with Old National;

 

   

its understanding of Old National’s business, operations, regulatory and financial condition, asset quality, earnings, capital and prospects taking into account the due diligence review of Old National by Klein management and information furnished by Sandler O’Neill;

 

   

the belief the Executive Committee and board that the Merger, taking into account Old National’s 2017 acquisition of Anchor Bancorp, will result in a stronger commercial banking franchise with a diversified revenue stream, strong capital ratios, a well-balanced loan portfolio and an attractive funding base that has the potential to deliver a higher value to Klein’s shareholders as compared to continuing to operate as a stand-alone entity;

 

   

the expanded possibilities, including organic growth and future acquisitions, that would be available to the combined company, given its larger size, asset base, capital, market capitalization and footprint;

 

   

the anticipated pro forma impact of the Merger on Old National, including potential synergies with Old National and the recently acquired Anchor Bancorp, and the expected impact on financial metrics such as earnings and tangible common equity per share, as well as on regulatory capital levels;

 

   

the stock Merger Consideration, which offers Klein shareholders the opportunity to participate as shareholders of Old National in the future performance of the combined company;

 

   

the historical performance of each of Klein’s common stock and Old National’s common stock;

 

   

the fact that upon completion of the Merger, Klein shareholders will own approximately 13.0% of the outstanding shares of the combined company (based on the price per share of Old National’s common stock as of June 19, 2018, of $18.75);

 

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the active trading market in Old National common stock that would give Klein shareholders greater liquidity for their investment if they desire to sell their shares of Old National received upon completion of the Merger;

 

   

the benefits to Klein and its customers of operating as a larger organization, including enhancements in products and services, higher lending limits and greater financial resources;

 

   

the expected social and economic impact of the Merger on the constituencies served by Klein, including its borrowers, customers, depositors, employees and communities;

 

   

the effects of the Merger on Klein employees, including the prospects for continued employment in a larger organization and various benefits agreed to be provided to Klein employees;

 

   

the Executive Committee and board’s understanding of the current and prospective environment in which Klein and Old National operate, including national and local economic conditions, the interest rate environment, increasing operating costs resulting from regulatory initiatives and compliance mandates and the competitive effects of the continuing consolidation in the banking industry;

 

   

the ability of Old National to complete the Merger from a financial and regulatory perspective, as demonstrated by Old National’s ability to successfully complete numerous previous merger transactions;

 

   

the board’s understanding that the Merger will qualify as a “reorganization” under Section 368(a)(1) of the Code, providing favorable tax consequences to Klein’s shareholders in the Merger; and

 

   

the Executive Committee and board’s review with its independent legal advisor, D&W, of the material terms of the Merger Agreement, including the board’s ability, under certain circumstances, to change its recommendation to Klein’s shareholders and to consider and pursue a better unsolicited acquisition proposal, subject to the potential payment by Klein of a termination fee to Old National, which the board of directors concluded was reasonable in the context of termination fees in comparable transactions and in light of the overall terms of the Merger Agreement, as well as the nature of the covenants, representations and warranties and termination provisions in the Merger Agreement.

The Executive Committee and Klein board of directors also considered a number of potential risks and uncertainties associated with the Merger in connection with its deliberation of the proposed transaction, including, without limitation, the following:

 

   

the risk that the consideration to be paid to Klein shareholders could be adversely affected by a decrease in the trading price of Old National common stock during the pendency of the Merger;

 

   

the potential risk of diverting management attention and resources from the operation of Klein’s business and towards the completion of the Merger;

 

   

the restrictions on the conduct of Klein’s business prior to the completion of the Merger, which are customary for merger agreements involving financial institutions, but which, subject to specific exceptions, could delay or prevent Klein from undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of Klein absent the pending Merger;

 

   

the potential risks associated with achieving anticipated cost synergies and savings and successfully integrating Klein’s business, operations and workforce with those of Old National;

 

   

the fact that the interests of certain of Klein’s directors and executive officers may be different from, or in addition to, the interests of Klein’s other shareholders as described under the heading “Interests of Certain Directors and Executive Officers of Klein in the Merger”;

 

   

that there can be no assurances that all conditions to the parties’ obligations to complete the Merger Agreement will be satisfied, including the risk that necessary regulatory approvals or the Klein shareholder approval might not be obtained and, as a result, the Merger may not be completed;

 

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the risk of potential employee attrition or adverse effects on business and customer relationships as a result of the pending Merger; and

 

   

the fact that Klein would be obligated to pay to Old National a termination fee if the Merger Agreement is terminated under certain circumstances, which may discourage other parties potentially interested in a strategic transaction with Klein from pursuing such a transaction.

The foregoing discussion of the information and factors considered by the Executive Committee and the Klein board of directors is not intended to be exhaustive, but includes the material factors considered by the Klein board of directors. In reaching its decision to approve the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, the Klein board of directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The Executive Committee and Klein board of directors considered all these factors as a whole, including discussions with, and questioning of Klein’s management and Klein’s independent financial and legal advisors, and overall considered the factors to be favorable to, and to support, its determination.

The board of directors of Klein unanimously recommends that you vote “FOR” approval of the Merger Agreement and the transactions contemplated therein. Klein shareholders should be aware that certain Klein executive officers have interests in the Merger that are different from, or in addition to, those of other Klein shareholders. The Klein Executive Committee and board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement, and in recommending that the Merger proposal be approved by the shareholders of Klein. See “Interests of Certain Directors and Executive Officers of Klein in the Merger.”

Old National’s Reasons For the Merger

Old National’s board of directors concluded that the Merger Agreement is in the best interests of Old National and its shareholders. In deciding to approve the Merger Agreement, Old National’s board of directors considered a number of factors, including, without limitation, the following:

 

   

KleinBank’s presence in the demographically attractive and economically vibrant Twin Cities and its western communities which Old National believes strengthens and complements its entry in this market in 2017 and offers it even more robust commercial and industrial lending and retail client growth and opportunities to cross sell many of Old National’s existing products and services;

 

   

Klein represents one of few remaining significant community bank expansion opportunities into Minnesota’s most attractive banking market;

 

   

The combination with Klein positions Old National to hold the fifth largest deposit market share in the Minneapolis metropolitan statistical area and in the state of Minnesota;

 

   

Klein’s business philosophies and operating cultures are compatible with Old National’s; and

 

   

Old National’s management’s review of the business, operating efficiencies and cost savings, earnings, and financial condition, including capital levels and asset quality, of Klein and KleinBank.

Effects of the Merger

The respective boards of directors of Old National and Klein believe that, over the long-term, the Merger will be beneficial to Old National shareholders, including the current shareholders of Klein who will become Old National shareholders if the Merger is completed. The Old National board of directors believes that one of the potential benefits of the Merger is the cost savings that may be realized by combining the two companies and integrating KleinBank into Old National Bank, which savings are expected to enhance Old National’s earnings.

Old National expects to reduce expenses by combining accounting, data processing, retail and lending support, and other administrative functions after completion of the Merger, which will enable Old National to

 

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achieve economies of scale in these areas. Promptly following the completion of the Merger, which is expected to occur in the fourth quarter of 2018, Old National plans to begin the process of eliminating redundant functions and eliminating duplicative expenses.

The amount of any cost savings Old National may realize in 2018 and beyond will depend upon how quickly and efficiently Old National is able to implement the processes outlined above.

Old National has based these assumptions on its present assessment of where savings could be realized based upon the present independent operations of the two companies. Actual savings in some or all of these areas could be higher or lower than is currently expected.

Old National also believes that the Merger will be beneficial to the customers of Klein as a result of the additional products and services offered by Old National and its subsidiaries and because of the increased lending capability.

Opinion of Financial Advisor to Klein

By letter dated February 23, 2018, the Klein board of directors engaged Sandler O’Neill to act as its financial advisor in connection with a possible business combination. Sandler O’Neill is a nationally recognized investment banking firm whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, Sandler O’Neill is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.

Sandler O’Neill acted as financial advisor to the Klein board of directors in connection with the Merger with Old National and participated in certain of the negotiations leading to the execution of the Merger Agreement. At the June 20, 2018 meeting of the Klein board of directors, Sandler O’Neill delivered to the Klein board of directors its oral opinion, which was subsequently confirmed in writing, to the effect that, as of such date, the Exchange Ratio was fair to the holders of Klein common stock from a financial point of view. The full text of Sandler O’Neill’s fairness opinion (the “Opinion”) is attached hereto as Annex B. The Opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Sandler O’Neill in rendering its Opinion. The description of Sander O’Neill’s Opinion set forth below is qualified in its entirety by reference to the Opinion. Klein’s shareholders are urged to read the entire Opinion carefully in connection with their consideration of the Merger.

Sandler O’Neill’s Opinion speaks only as of the date of the Opinion. The Opinion was directed to Klein’s board of directors and is directed only to the fairness of the Exchange Ratio to the holders of Klein common stock from a financial point of view. It does not address the underlying business decision of Klein to engage in the Merger, the relative merits of the Merger as compared to any other alternative business strategies that might exist for Klein, the effect of any other transaction in which Klein might engage or any other aspect of the Merger, and is not a recommendation to any Klein shareholder as to how such shareholder should vote at the special shareholder meeting with respect to the Merger or any other matter. Sandler O’Neill did not express any opinion as to the fairness of the amount or nature of the compensation to be received in the merger by Klein’s officers, directors, or employees, or class of such persons, if any, relative to the Merger Consideration to be received by Klein’s common shareholders. Sandler O’Neill’s opinion was approved by its fairness opinion committee.

In connection with rendering its Opinion, Sandler O’Neill reviewed and considered, among other things:

 

   

a draft of the Merger Agreement, dated June 20, 2018;

 

   

certain publicly available financial statements and other historical financial information of Klein that Sandler O’Neill deemed relevant;

 

   

certain publicly available financial statements and other historical financial information of Old National that Sandler O’Neill deemed relevant;

 

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certain internal financial projections for Klein for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Klein;

 

   

publicly available consensus mean analyst earnings per share estimates for Old National for the years ending December 31, 2018 and December 31, 2019, as well as a long-term earnings per share growth rate for the years thereafter and dividends per share for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Old National;

 

   

the pro forma financial impact of the Merger on Old National based on certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as well as estimated annual regulatory costs following the closing of the Merger, as provided by the senior management of Old National;

 

   

the publicly reported historical price and trading activity for Old National common stock, including a comparison of certain stock market information for Old National common stock and certain stock indices as well as publicly available information for certain other similar companies, the securities of which are publicly traded;

 

   

a comparison of certain financial information for Klein and Old National with similar financial institutions for which information is publicly available;

 

   

the financial terms of certain recent business combinations in the banking industry (on a regional and nationwide basis), to the extent publicly available;

 

   

the current market environment generally and the banking environment in particular; and

 

   

such other information, financial studies, analyses and investigations and financial, economic and market criteria as Sandler O’Neill considered relevant.

Sandler O’Neill also discussed with certain members of the management of Klein and its representatives the business, financial condition, results of operations and prospects of Klein and held similar discussions with certain members of the management of Old National and its representatives regarding the business, financial condition, results of operations and prospects of Old National.

In performing its review, Sandler O’Neill relied upon the accuracy and completeness of all of the financial and other information that was available to and reviewed by Sandler O’Neill from public sources, that was provided to Sandler O’Neill by Klein or Old National or their respective representatives or that was otherwise reviewed by Sandler O’Neill, and Sandler O’Neill assumed such accuracy and completeness for purposes of rendering its Opinion without any independent verification or investigation. Sandler O’Neill relied on the assurances of the respective managements of Klein and Old National that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Sandler O’Neill was not asked to and did not undertake an independent verification of any of such information and Sandler O’Neill did not assume any responsibility or liability for the accuracy or completeness thereof. Sandler O’Neill did not make an independent evaluation or perform an appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of Klein or Old National or any of their respective subsidiaries, nor was Sandler O’Neill furnished with any such evaluations or appraisals. Sandler O’Neill rendered no opinion or evaluation on the collectability of any assets or the future performance of any loans of Klein or Old National. Sandler O’Neill did not make an independent evaluation of the adequacy of the allowance for loan losses of Klein or Old National, or of the combined entity after the Merger, and Sandler O’Neill did not review any individual credit files relating to Klein or Old National. Sandler O’Neill assumed, with Klein’s consent, that the respective allowances for loan losses for both Klein and Old National were adequate to cover such losses and would be adequate on a pro forma basis for the combined entity.

In preparing its analyses, Sandler O’Neill used certain internal financial projections for Klein for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Klein. In addition, Sandler O’Neill used publicly available consensus mean analyst earnings per share estimates for Old

 

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National for the years ending December 31, 2018 and December 31, 2019, as well as a long-term earnings per share growth rate for the years thereafter and dividends per share for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Old National. Sandler O’Neill also received and used in its pro forma analyses certain assumptions relating to purchase accounting adjustments, cost savings and transaction expenses, as well as estimated annual regulatory costs following the closing of the Merger, as provided by the senior management of Old National. With respect to the foregoing information, the respective senior managements of Klein and Old National confirmed to Sandler O’Neill that such information reflected (or, in the case of the publicly available consensus mean analyst estimates referred to above, were consistent with) the best currently available projections, estimates and judgments of those respective managements as to the future financial performance of Klein and Old National, respectively, and the other matters covered thereby, and Sandler O’Neill assumed that the future financial performance reflected in such information would be achieved. Sandler O’Neill expressed no opinion as to such information, or the assumptions on which such information was based. Sandler O’Neill also assumed that there had been no material change in the respective assets, financial condition, results of operations, business or prospects of Klein or Old National since the date of the most recent financial statements made available to Sandler O’Neill. Sandler O’Neill assumed in all respects material to its analyses that Klein and Old National would remain as going concerns for all periods relevant to its analyses.

Sandler O’Neill also assumed, with Klein’s consent, that (i) each of the parties to the Merger Agreement would comply in all material respects with all material terms of the Merger Agreement and all related agreements, that all of the representations and warranties contained in such agreements were true and correct in all material respects, that each of the parties to such agreements would perform in all material respects all of the covenants required to be performed by such party under the agreements and that the conditions precedent in such agreements were not and would not be waived, (ii) in the course of obtaining the necessary regulatory or third party approvals, consents and releases with respect to the Merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on Klein, Old National or the Merger or any related transactions, and (iii) the Merger and any related transactions would be consummated in accordance with the terms of the Merger Agreement without any waiver, modification or amendment of any material term, condition or agreement thereof and in compliance with all applicable laws and other requirements. Finally, with Klein’s consent, Sandler O’Neill relied upon the advice that Klein received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the Merger and the other transactions contemplated by the Merger Agreement. Sandler O’Neill expressed no opinion as to any such matters.

Sandler O’Neill’s Opinion was necessarily based on financial, economic, regulatory, market and other conditions as in effect on, and the information made available to Sandler O’Neill as of, the date of the Opinion. Events occurring after the date of Sandler O’Neill’s Opinion could materially affect the Opinion. Sandler O’Neill has not undertaken to update, revise, reaffirm or withdraw its Opinion or otherwise comment upon events occurring after the date of its Opinion. Sandler O’Neill expressed no opinion as to the trading value of Old National common stock at any time or what the value of Old National common stock would be once it is actually received by the holders of Klein common stock.

In rendering its Opinion, Sandler O’Neill performed a variety of financial analyses. The summary below is not a complete description of the analyses underlying Sandler O’Neill’s Opinion or the presentation made by Sandler O’Neill to Klein’s board of directors, but is a summary of all material analyses performed and presented by Sandler O’Neill. The summary includes information presented in tabular format. In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Sandler O’Neill believes that its analyses must be considered as a whole and that selecting portions of the factors and analyses to be considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and

 

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analyses, could create an incomplete view of the evaluation process underlying its Opinion. Also, no company included in Sandler O’Neill’s comparative analyses described below is identical to Klein or Old National and no transaction is identical to the Merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of Klein and Old National and the companies to which they are being compared. In arriving at its Opinion, Sandler O’Neill did not attribute any particular weight to any analysis or factor that it considered. Rather, Sandler O’Neill made qualitative judgments as to the significance and relevance of each analysis and factor. Sandler O’Neill did not form an opinion as to whether any individual analysis or factor (positive or negative) considered in isolation supported or failed to support its Opinion, rather, Sandler O’Neill made its determination as to the fairness of the Exchange Ratio on the basis of its experience and professional judgment after considering the results of all its analyses taken as a whole.

In performing its analyses, Sandler O’Neill also made numerous assumptions with respect to industry performance, business and economic conditions and various other matters, many of which are beyond the control of Klein, Old National and Sandler O’Neill. The analyses performed by Sandler O’Neill are not necessarily indicative of actual values or future results, both of which may be significantly more or less favorable than suggested by such analyses. Sandler O’Neill prepared its analyses solely for purposes of rendering its Opinion and provided such analyses to Klein’s board of directors at its June 20, 2018 meeting. Estimates on the values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. Accordingly, Sandler O’Neill’s analyses do not necessarily reflect the value of Klein common stock or the prices at which Klein common stock or Old National common stock may be sold at any time. The analyses of Sandler O’Neill and its Opinion were among a number of factors taken into consideration by Klein’s board of directors in making its determination to approve the Merger Agreement and should not be viewed as determinative of the Exchange Ratio or the decision of Klein’s board of directors or management with respect to the fairness of the Merger. The type and amount of Merger Consideration payable in the Merger were determined through negotiation between Klein and Old National.

Summary of Merger Consideration and Implied Transaction Metrics. Sandler O’Neill reviewed the financial terms of the Merger. Pursuant to the terms of the Merger Agreement, upon the Effective Time of the Merger, holders of Klein common stock are entitled to receive, in exchange for each share of Klein common stock, subject to adjustments set forth in the Merger Agreement, Merger Consideration equal to 7.92 shares of Old National common stock, equating to an implied deal price per share of $148.50 based on Old National’s closing price on June 19, 2018, or $18.75. Sandler O’Neill calculated an aggregate implied transaction value of approximately $427.0 million, based upon 2,875,206 Klein common shares outstanding.

Based upon financial information for Klein as of or for the twelve-month period ended March 31, 2018, Sandler O’Neill calculated the following implied transaction metrics:

Transaction Multiples (GAAP Basis)

 

Transaction Value / Book Value

     200.7

Transaction Value / Tangible Book Value

     232.0

Price / LTM Earnings (1)

     21.1x  

Price / 2018 Estimated Earnings (2)(3)

     15.9x  

Tangible Book Premium / Core Deposits (4)

     14.8

 

(1)

Klein’s LTM earnings adjusted at an assumed 28% blended tax rate, per Klein management.

(2)

Forward earnings estimates provided by Klein management.

(3)

Forward earnings estimates adjusted at an assumed 23.8% tax rate, per Klein management.

(4)

Core deposits are defined as total deposits less time deposits greater than $100,000.

 

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Stock Trading History. Sandler O’Neill reviewed the history of the publicly reported trading prices of Old National’s common stock for the periods of one year and three years, respectively, ended June 19, 2018. Sandler O’Neill also compared the relationship between the movements in the price of Old National’s common stock, to movements in its peer group (as described below) as well as certain stock indices.

Old National’s One Year Stock Performance

 

     Beginning Index Value
June 19, 2017
    Ending Index Value
June 19, 2018
 

Old National

     100     108.4

Old National Peer Group

     100     121.1

NASDAQ Bank Index

     100     115.0

S&P 500 Index

     100     113.5

Old National’s Three Year Stock Performance

 

     Beginning Index Value
June 19, 2015
    Ending Index Value
June 19, 2018
 

Old National

     100     129.9

Old National Peer Group

     100     162.6

NASDAQ Bank Index

     100     150.4

S&P 500 Index

     100     130.9

Comparable Company Analysis. Sandler O’Neill used publicly available information to compare selected financial information for Klein and a group of financial institutions selected by Sandler O’Neill. The Klein peer group consisted of major exchange traded banks headquartered in the Midwest with total assets between $1.5 billion and $3.0 billion (the “Klein Peer Group”).

The Klein Peer Group consisted of the following financial institutions:

 

First Financial Corporation

   First Internet Bancorp

First Mid-Illinois Bancshares, Inc.

   Independent Bank Corporation

United Community Financial Corp.

   Old Second Bancorp, Inc.

Farmers National Banc Corp.

   West Bancorporation, Inc.

MutualFirst Financial, Inc.

   First Business Financial Services, Inc.

Macatawa Bank Corporation

   Southern Missouri Bancorp, Inc.

Bridgewater Bancshares, Inc.

   Civista Bancshares, Inc.

BankFinancial Corporation

  

 

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The analysis compared publicly available data for Klein with the corresponding data for the Klein Peer Group as of or for the twelve months ended March 31, 2018, with pricing data as of June 19, 2018. The table below sets forth the data for Klein and the high, low, mean and median data for the Klein Peer Group.

Comparable Group Analysis

 

     Klein
Financial, Inc.
    Klein Peer Group  
    High Result     Low Result     Mean Result     Median Result  

Total Assets (in millions)

   $ 1,972     $ 2,957     $ 1,560     $ 2,213     $ 2,092  

Gross Loans/Deposits

     63.7     114.0     77.5     93.4     94.1

Tangible Common Equity/Tangible Assets

     9.5     13.0     7.7     9.6     9.2

MRQ Return on Average Assets (1)

     1.1     1.7     0.8     1.2     1.2

MRQ Return on Average Equity (1)

     10.7     18.8     7.1     12.3     11.4

MRQ Net Interest Margin

     3.5     4.1     2.4     3.5     3.7

MRQ Efficiency Ratio

     66.6     60.2     42.1     59.2     60.2

Loan Loss Reserve/Gross Loans

     1.2     1.3     0.6     1.0     1.1

Nonperforming Assets/Total Assets

     0.7     2.4     0.1     0.8     0.7

Market Capitalization (in millions)

     —       $ 636     $ 231     $ 425     $ 422  

Price/Tangible Book Value

     —         242.8     133.6     196.3     201.1

Price/ LQA Earnings Per Share

     —         22.8x       11.3x       15.7x       15.6x  

Price / Estimated 2018 Earnings per Share

     —         19.8x       11.8x       14.9x       14.7x  

 

(1)

Klein’s MRQ earnings adjusted at an assumed 23.8% tax rate, per Klein management.

Sandler O’Neill used publicly available information to perform a similar analysis for Old National and a group of financial institutions as selected by Sandler O’Neill. The Old National peer group consisted of major exchange traded banks headquartered in the Midwest, Arkansas and Tennessee with total assets of between $10.0 billion and $30.0 billion and MRQ ROAA greater than 0.75% (the “Old National Peer Group”).

The Old National Peer Group consisted of the following financial institutions:

 

Wintrust Financial Corporation

   Commerce Bancshares, Inc.

TCF Financial Corporation

   Pinnacle Financial Partners, Inc.

Bank of the Ozarks

   UMB Financial Corporation

Chemical Financial Corporation

   Simmons First National Corporation

First Midwest Bancorp, Inc.

   Home BancShares, Inc.

Great Western Bancorp, Inc.

   Heartland Financial USA, Inc.

The analysis compared publicly available financial information for Old National with the corresponding data for the Old National Peer Group as of or for the twelve months ended March 31, 2018, with pricing data as of June 19, 2018. The table below sets forth the data for Old National and the high, low, mean and median data for the Old National Peer Group.

 

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Comparable Group Analysis

 

     Old National
Bancorp
    Old National Peer Group  
    High Result     Low Result     Mean Result     Median Result  

Total Assets (in millions)

   $ 17,496     $ 28,457     $ 10,056     $ 19,043     $ 20,372  

Gross Loans/Deposits

     87.9     103.7     66.6     91.2     95.3

Tangible Common Equity/Tangible Assets

     7.8     13.2     7.6     9.2     9.1

MRQ Return on Average Assets

     1.1     2.1     0.8     1.4     1.4

MRQ Return on Average Equity

     8.9     15.0     6.9     10.4     10.1

MRQ Net Interest Margin

     3.5     4.6     3.1     3.9     3.8

MRQ Efficiency Ratio

     62.5     68.6     37.0     54.9     56.2

Loan Loss Reserve/Gross Loans

     0.4     1.1     0.4     0.8     0.8

Nonperforming Assets/Total Assets

     0.9     1.5     0.2     0.7     0.6

Market Capitalization (in millions)

   $ 2,853     $ 7,059     $ 1,953     $ 4,204     $ 4,101  

Price/Tangible Book Value

     219.2     319.2     199.3     249.1     249.1

Price/ LQA Earnings Per Share

     15.1x       20.3x       13.6x       16.3x       16.5x  

Price / Estimated 2018 Earnings per Share

     14.3x       18.3x       13.0x       15.0x       14.8x  

Net Present Value Analysis. Sandler O’Neill performed an analysis that estimated the net present value per share of Klein’s common stock assuming Klein performed in accordance with internal projections for Klein for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Klein. To approximate the terminal value of a share of Klein common stock at December 31, 2022, Sandler O’Neill applied price to earnings multiples of 12.5x to 20.0x and multiples of tangible book value ranging from 145% to 220%. The terminal values were then discounted to present values using discount rates ranging from 10.0% to 15.0%, which were selected to reflect different assumptions regarding potential desired rates of return of holders of Klein common stock.

As illustrated in the following tables, the analysis indicated an imputed range of values per share of Klein common stock of $95 to $179 when applying multiples of earnings per share and $83 to $148 when applying multiples of tangible book value per share.

 

     Earnings Multiples     
Discount    (Value shown is a per share valuation)     

Rate

  

12.5x

  

14.0x

  

15.5x

  

17.0x

  

18.5x

  

20.0x

10%

   $116    $129    $141    $154    $166    $179

11%

   $111    $123    $135    $147    $159    $171

12%

   $107    $118    $130    $141    $153    $164

13%

   $103    $114    $125    $136    $147    $158

14%

   $99    $109    $120    $130    $141    $151

15%

   $95    $105    $115    $125    $135    $145

 

     Tangible Book Value Multiples     
Discount    (Value shown is a per share valuation)     

Rate

  

145%

  

160%

  

175%

  

190%

  

205%

  

220%

10%

   $102    $111    $120    $129    $139    $148

11%

   $97    $106    $115    $124    $133    $142

12%

   $93    $102    $111    $119    $128    $136

13%

   $90    $98    $106    $114    $122    $131

14%

   $86    $94    $102    $110    $118    $125

15%

   $83    $90    $98    $105    $113    $120

Sandler O’Neill also considered and discussed with Klein’s board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate

 

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this impact, Sandler O’Neill performed a similar analysis assuming Klein’s net income varied from 20.0% above projections to 20.0% below projections. This analysis resulted in the following range of per share values for Klein common stock applying the price to 2022 earnings per share multiples range of 12.5x to 20.0x referred to above and using a discount rate of 13.51%.

 

Earnings Projection    Earnings Multiples     
Change from    (Value shown is a per share valuation)     

Base Case

  

12.5x

  

14.0x

  

15.5x

  

17.0x

  

18.5x

  

20.0x

(20.0)%

   $83    $91    $100    $108    $117    $126

(10.0)%

   $92    $101    $111    $121    $130    $140

0.0%

   $101    $111    $122    $133    $144    $154

10.0%

   $109    $121    $133    $145    $157    $169

20.0%

   $118    $131    $144    $157    $170    $183

Sandler O’Neill also performed an analysis that estimated the net present value per share of Old National common stock assuming that Old National performed in accordance with publicly available consensus mean analyst earnings estimates for Old National for the years ending December 31, 2018 through December 31, 2019 and an estimated long term earnings per share growth rate for the years thereafter and estimated cash dividends per share of Old National common stock for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Old National. To approximate the terminal value of a share of Old National common stock at December 31, 2022, Sandler O’Neill applied price to earnings multiples ranging from 14.0x to 19.0x and multiples of tangible book value ranging from 205% to 255%. The terminal values were then discounted to present values using different discount rates ranging from 8.0% to 13.0%, which were chosen to reflect different assumptions regarding required rates of return of holders of Old National common stock.

As illustrated in the following tables, the analysis indicated an imputed range of values per share of Old National common stock of $15.15 to $24.30 when applying multiples of earnings per share and $16.89 to $25.16 when applying multiples of tangible book value per share.

 

     Earnings Multiples     
Discount    (Value shown is a per share valuation)     

Rate

  

14.0x

  

15.0x

  

16.0x

  

17.0x

  

18.0x

  

19.0x

8%

   $18.56    $19.70    $20.85    $22.00    $23.15    $24.30

9%

   $17.80    $18.90    $20.00    $21.10    $22.20    $23.30

10%

   $17.09    $18.14    $19.19    $20.25    $21.30    $22.35

11%

   $16.41    $17.42    $18.42    $19.43    $20.44    $21.45

12%

   $15.76    $16.73    $17.70    $18.66    $19.63    $20.59

13%

   $15.15    $16.08    $17.00    $17.93    $18.85    $19.78

 

     Tangible Book Value Multiples     
Discount    (Value shown is a per share valuation)     

Rate

  

205%

  

215%

  

225%

  

235%

  

245%

  

255%

8%

   $20.71    $21.60    $22.49    $23.38    $24.27    $25.16

9%

   $19.86    $20.72    $21.57    $22.42    $23.27    $24.12

10%

   $19.06    $19.88    $20.69    $21.51    $22.32    $23.14

11%

   $18.30    $19.08    $19.86    $20.64    $21.42    $22.20

12%

   $17.57    $18.32    $19.07    $19.82    $20.57    $21.32

13%

   $16.89    $17.60    $18.32    $19.04    $19.75    $20.47

Sandler O’Neill also considered and discussed with the Klein board of directors how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate this impact, Sandler O’Neill performed a similar analysis assuming Old National’s net income varied from 20% above estimates to 20% below estimates. This analysis resulted in the following range of per share values for Old

 

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National common stock, using the same price to earnings per share multiples of 14.0x to 19.0x referred to above and a discount rate of 9.08%.

 

Earnings Projection    Earnings Multiples     
Change from    (Value shown is a per share valuation)     

Base Case

  

14.0x

  

15.0x

  

16.0x

  

17.0x

  

18.0x

  

19.0x

(20.0)%

   $14.68    $15.55    $16.43    $17.31    $18.18    $19.06

(10.0)%

   $16.21    $17.20    $18.18    $19.17    $20.16    $21.14

0.0%

   $17.75    $18.84    $19.94    $21.03    $22.13    $23.22

10.0%

   $19.28    $20.48    $21.69    $22.89    $24.10    $25.30

20.0%

   $20.81    $22.13    $23.44    $24.76    $26.07    $27.38

In connection with its analyses, Sandler O’Neill considered and discussed with the Klein board of directors how the net present value analyses would be affected by changes in the underlying assumptions. Sandler O’Neill noted that the net present value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

Analysis of Selected Merger Transactions. Sandler O’Neill reviewed two groups of comparable merger and acquisition transactions. The first group included merger transactions announced from January 1, 2015 through June 19, 2018 with target banks headquartered in the Midwest with assets between $1.0 billion and $5.0 billion and disclosed deal values (the “Midwest Transaction Group”).

The Midwest Transaction Group was composed of the following transactions:

 

Acquirer / Target

  

 

      

WesBanco, Inc.

     /      Farmers Capital Bank Corporation

Meta Financial Group, Inc.

     /      Crestmark Bancorp Inc.

Byline Bancorp, Inc.

     /      First Evanston Bancorp, Inc.

Midland States Bancorp, Inc.

     /      Alpine Bancorporation, Inc.

Old National Bancorp

     /      Anchor Bancorp, Inc.

First Financial Bancorp.

     /      MainSource Financial Group, Inc.

First Merchants Corporation

     /      Independent Alliance Banks, Inc.

First Busey Corporation

     /      First Community Financial Partners, Inc.

First Midwest Bancorp, Inc.

     /      Standard Bancshares, Inc.

WesBanco, Inc.

     /      Your Community Bankshares, Inc.

First Busey Corporation

     /      Pulaski Financial Corp.

Great Western Bancorp, Inc.

     /      HF Financial Corp.

MB Financial, Inc.

     /      American Chartered Bancorp, Inc.

Chemical Financial Corporation

     /      Lake Michigan Financial Corporation

The second group included merger transactions announced from January 1, 2017 through June 19, 2018 with target banks headquartered nationwide with seller assets between $1.0 billion and $3.0 billion and disclosed deal values (the “Nationwide Transaction Group”).

 

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The Nationwide Transaction Group was composed of the following transactions:

 

Acquirer / Target

           

Allegiance Bancshares, Inc.

     /      Post Oak Bancshares, Inc.

WesBanco, Inc.

     /      Farmers Capital Bank Corporation

Renasant Corporation

     /      Brand Group Holdings, Inc.

Ameris Bancorp

     /      Hamilton State Bancshares, Inc.

Meta Financial Group, Inc.

     /      Crestmark Bancorp Inc.

TriCo Bancshares

     /      FNB Bancorp

Byline Bancorp, Inc.

     /      First Evanston Bancorp, Inc.

Glacier Bancorp, Inc.

     /      Inter-Mountain Bancorp., Inc.

Midland States Bancorp, Inc.

     /      Alpine Bancorporation, Inc.

Arvest Bank Group, Inc.

     /      Bear State Financial, Inc.

CenterState Bank Corporation

     /      HCBF Holding Company, Inc.

Pacific Premier Bancorp, Inc.

     /      Plaza Bancorp

Old National Bancorp

     /      Anchor Bancorp, Inc.

OceanFirst Financial Corp.

     /      Sun Bancorp, Inc.

Carolina Financial Corporation

     /      First South Bancorp, Inc.

Southside Bancshares, Inc.

     /      Diboll State Bancshares, Inc.

Berkshire Hills Bancorp, Inc.

     /      Commerce Bancshares Corp.

Sandy Spring Bancorp, Inc.

     /      WashingtonFirst Bankshares, Inc.

TowneBank

     /      Paragon Commercial Corporation

Home BancShares, Inc.

     /      Stonegate Bank

First Merchants Corporation

     /      Independent Alliance Banks, Inc.

Heartland Financial USA, Inc.

     /      Citywide Banks of Colorado, Inc.

FB Financial Corporation

     /      American City Bank/Clayton Bank and Trust

First Busey Corporation

     /      First Community Financial Partners, Inc.

Simmons First National Corporation

     /      First Texas BHC, Inc.

Renasant Corporation

     /      Metropolitan BancGroup, Inc.

Columbia Banking System, Inc.

     /      Pacific Continental Corporation

Using the latest publicly available information prior to the announcement of the relevant transaction, Sandler O’Neill reviewed the following transaction metrics: transaction price to book value, transaction price to tangible book value, transaction price to last twelve months earnings, and core deposit premium. Sandler O’Neill compared the indicated transaction metrics for the Merger to the high, low, mean and median metrics of the Midwest Transaction Group and the Nationwide Transaction Group.

Comparable Midwest Transaction Multiples

 

    Old National Bancorp /
Klein

Financial, Inc.
    Midwest Transaction Group  
    High Result     Low Result     Mean Result     Median Result  

Transaction Value / Book Value

    200.7     356.4     128.9     195.4     184.7

Transaction Value / Tangible Book Value

    232.0     404.0     135.5     211.6     192.7

Transaction Value / LTM Earnings

    21.1x       27.8x       14.5x       19.8x       18.2x  

Core Deposit Premium (1)

    14.8     25.7     5.0     12.1     10.9

 

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Comparable Nationwide Transaction Multiples

 

    Old National Bancorp /
Klein

Financial, Inc.
    Nationwide Transaction Group  
  High Result     Low Result     Mean Result     Median Result  

Transaction Value / Book Value

    200.7     356.4     128.6     202.5     195.0

Transaction Value / Tangible Book Value

    232.0     404.0     138.3     225.7     214.2

Transaction Value / LTM Earnings

    21.1x       55.9x       9.8x       24.4x       22.1x  

Core Deposit Premium (1)

    14.8     25.7     3.0     14.3     14.5

 

(1)

Core deposits defined as total deposits less time deposits greater than $100,000 Note: Transaction multiples assume holders of Klein common stock are entitled to receive, in exchange for each share of Klein common stock, subject to certain adjustments set forth in the Merger Agreement, Merger Consideration equal to 7.92 shares of Old National common stock equating to an implied deal price per share of $148.50 based on Old National’s closing price on June 19, 2018, or $18.75.

Pro Forma Merger Analysis. Sandler O’Neill analyzed certain potential pro forma effects of the Merger, based on the following information and assumptions: (i) the Merger closes in the third calendar quarter of 2018; (ii) 100.0% of outstanding Klein common shares are converted into the right to receive Old National common stock utilizing a fixed Exchange Ratio of 7.92 multiplied by Old National’s volume-weighted average closing price for the fifteen trading days ending at or near the time of closing.

Sandler O’Neill also incorporated the following assumptions, as provided by the senior management of Old National (unless otherwise noted): (a) certain internal financial projections for Klein for the years ending December 31, 2018 through December 31, 2022, as provided by senior management of Klein; (b) publicly available consensus mean analyst earnings per share estimates for Old National for the years ending December 31, 2018 through December 31, 2019, as well as an estimated long-term earnings per share growth rate for the years thereafter and estimated cash dividends per share of Old National common stock for the years ending December 31, 2018 through December 31, 2022, as provided by the senior management of Old National; (c) estimated transaction expenses; (d) purchase accounting adjustments; (e) estimated cost savings; and (f) the anticipated regulatory and compliance costs. The analysis indicated that the Merger (excluding transaction expenses) could be accretive to Old National’s earnings per share in 2018 and could be dilutive to Old National’s tangible book value per share at the closing of the Merger.

Sandler O’Neill’s Relationship. Sandler O’Neill is acting as financial advisor to the board of directors of Klein in connection with the Merger. Klein has agreed to pay Sandler O’Neill a transaction fee in connection with the Merger in an amount equal to (i) 0.95% of the aggregate purchase price, plus (ii) 1.30% of the amount by which the aggregate purchase price exceeds $375.0 million. At the time of announcement, based on Old National’s closing price of $18.75 as of June 19, 2018, the calculated transaction fee was approximately $4.7 million of which $100,000 was paid to Sandler O’Neill upon signing of the Merger Agreement. Sandler O’Neill also received a $350,000 fee upon rendering its Opinion to the Klein board of directors, which opinion fee will be credited in full towards the remaining transaction fee which will become payable to Sandler O’Neill on the day of closing of the Merger. Klein has also agreed to indemnify Sandler O’Neill against certain claims and liabilities arising out of its engagement and to reimburse Sandler O’Neill for certain of its out-of-pocket expenses incurred in connection with its engagement. Sandler O’Neill did not provide any other investment banking services to Klein in the two years preceding the date of its Opinion, nor did Sandler O’Neill provide any investment banking services to Old National in the two years preceding the date of the Opinion. In the ordinary course of its business as a broker-dealer, Sandler O’Neill may purchase securities from and sell securities to Old National and its affiliates. Sandler O’Neill may also actively trade the equity and debt securities Old National or its affiliates for its own account and for the accounts of its customers.

 

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THE MERGER AGREEMENT

Structure of the Merger

Subject to the terms and conditions of the Merger Agreement, at the completion of the Merger, Klein will merge with and into Old National, with Old National as the surviving corporation. The separate existence of Klein will terminate as a consequence of the Merger. Old National common stock will continue to be listed on the Nasdaq Global Select Market under the symbol “ONB”. Simultaneous with the Merger, KleinBank will be merged with and into Old National Bank, a wholly-owned subsidiary of Old National.

Under the Merger Agreement, the officers and directors of Old National serving at the effective time of the Merger will continue to serve as the officers and directors of Old National after the Merger is consummated.

Merger Consideration

If the Merger is completed, your shares of Klein common stock will be converted into the right to receive 7.92 shares of Old National common stock, subject to adjustment as summarized below. If the Klein Consolidated Shareholders’ Equity as of the last calendar day of the month immediately preceding the month in which the closing date occurs (the “Determination Date”) is less than Minimum Shareholders’ Equity, the Exchange Ratio shall be decreased to a quotient determined by dividing the Adjusted Stock Purchase Price (as defined below) by the total number of shares of Klein common stock outstanding at the effective time on the first calendar day of the month following the closing date (the “Effective Date”) of the Merger, and further dividing that number by the Old National Closing Date Stock Price. Minimum Shareholders’ Equity shall mean (1) $231,358,000 if the closing date occurs on a date for which the Determination Date would be August 31, 2018, (2) $233,429,000 if the closing date occurs on a date for which the Determination Date would be September 30, 2018, (3) $237,866,000 if the closing date occurs on a date for which the Determination Date would be November 30, 2018, and (4) $240,717,000 if the closing date occurs on a date for which the Determination Date would be December 31, 2018, or later. For purposes of the computation, Old National Closing Date Stock Price shall mean the volume weighted average price of a share of Old National common stock for the period ending on the day immediately preceding the closing date, and the Adjusted Stock Purchase Price shall be equal to (x) the Purchase Price less (y) the amount by which Klein Consolidated Shareholders’ Equity as of the Determination Date is less than Minimum Shareholders’ Equity. The Purchase Price shall be the Old National Closing Date Stock Price multiplied by the total number of shares of Old National common stock to be issued as though the Exchange Ratio was not adjusted.

The Klein Consolidated Shareholders’ Equity shall be the consolidated shareholders’ equity of Klein as of the Determination Date determined in accordance with U.S. generally accepted accounting principles (“GAAP”), less the net accumulated other comprehensive income/(loss), and to which shall be added the following (which amounts shall also be calculated in accordance with GAAP):

 

   

any accruals, reserves or charges resulting from expenses of the Merger and other transactions contemplated by the Merger Agreement;

 

   

any accruals, reserves or charges taken by Klein at the request of Old National pursuant to the terms set forth in the Merger Agreement; and

 

   

any dividends or capital distributions paid by Klein to holders of Klein common stock paid after the date of the Merger Agreement and on or before the Determination Date in accordance with the terms set forth in the Merger Agreement.

If the Merger closes on September 30, 2018, the earliest Closing Date under the Merger Agreement, as of August 23, 2018, no adjustment is anticipated to the Merger Consideration based upon the Klein Consolidated Shareholders’ Equity at August 31, 2018. The Exchange Ratio remains subject to change, however, based upon the Klein Consolidated Shareholders’ Equity (computed in accordance with the terms of the Merger Agreement) as of the Determination Date.

 

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Additionally, Klein may terminate the Merger Agreement if the Old National Market Value on the Calculation Date is less than $15.75. If Klein elects to exercise its termination right as described above, it must give prompt written notice thereof to Old National. During the five-business day period commencing with its receipt of such notice, Old National shall have the option to increase the Exchange Ratio to equal the quotient determined by dividing the Initial Old National Market Value, or $18.53, by the Old National Market Value on the Calculation Date, and multiplying the quotient by the product of the Exchange Ratio and 0.85. If Old National delivers, within such five-business day period, written notice to Klein of such election and the revised Exchange Ratio, no termination shall be deemed to have occurred and the Merger Agreement shall remain in full force and effect in accordance with its terms.

Exchange and Payment Procedures

At and after the effective time of the Merger, each share of Klein common stock will represent only the right to receive the Merger Consideration and any dividends or distributions which the holder thereof has the right to in accordance with the terms of the Merger Agreement. Old National will reserve a sufficient number of shares of Old National common stock to be issued as part of the Merger Consideration. As soon as practicable after the Effective Time of the Merger, but in no event more than five business days thereafter, Old National will distribute a letter of transmittal to each holder of record of Klein common stock with a form providing detailed instructions and requesting usual and customary information (the “Letter of Transmittal”) necessary to effect the issuance of shares of Old National common stock in exchange for shares of Klein common stock.

Old National will provide a written notice of ownership of uncertificated shares to each former Klein registered shareholder setting forth the number of shares of Old National common stock that each holder of Klein common stock has received in the Merger upon receipt by Old National of a properly completed and executed Letter of Transmittal. No interest will be paid on any Merger Consideration that any such holder shall be entitled to receive.

The stock transfer books of Klein will be closed immediately at the effective time of the Merger and after the effective time there will be no transfers on the stock transfer records of Klein of any shares of Klein common stock. Old National will be entitled to rely on Klein’s stock transfer books to establish the identity of those persons entitled to receive the Merger Consideration.

Dividends and Distributions

Until Old National receives the Letter of Transmittal, any dividends or other distributions declared after the effective time of the Merger with respect to shares of Old National common stock into which shares of Klein common stock may have been converted will accrue but will not be paid. When Old National receives the Letter of Transmittal, Old National will pay any unpaid dividends or other distributions, without interest.

Representations and Warranties

The Merger Agreement contains representations and warranties of Klein, on the one hand, and Old National, on the other hand, to each other as to, among other things:

 

   

the corporate organization and existence of each party;

 

   

the authority of each party to enter into the Merger Agreement, perform its obligations under the Merger Agreement and make it valid and binding;

 

   

the fact that the Merger Agreement does not conflict with or violate:

 

  (1)

the articles of incorporation and by-laws of each party,

 

  (2)

applicable law, and

 

  (3)

agreements, instruments or obligations of each party;

 

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the capitalization of Klein and Old National;

 

   

each party’s compliance with applicable law;

 

   

the accuracy of statements made and materials provided to the other party;

 

   

the absence of material litigation;

 

   

each party’s financial statements and filings with applicable regulatory authorities;

 

   

tax matters;

 

   

the adequacy of each party’s deposit insurance and other policies of insurance;

 

   

books and records;

 

   

compliance with the Bank Secrecy Act;

 

   

agreements with regulatory agencies;

 

   

internal controls; and

 

   

payments to be made to any brokers or finders in connection with the Merger.

The Merger Agreement contains representations and warranties of Klein to Old National as to:

 

   

title to its assets;

 

   

Community Reinvestment Act;

 

   

outstanding Klein common stock;

 

   

the absence of undisclosed obligations or liabilities;

 

   

the adequacy of its loan loss allowances;

 

   

interest in LLCs;

 

   

material contracts;

 

   

loans and investments;

 

   

absence of certain developments;

 

   

employee benefits plans;

 

   

affiliate transactions;

 

   

shareholder rights plan;

 

   

registration obligation;

 

   

shareholder approval;

 

   

intellectual property;

 

   

fiduciary accounts; and

 

   

the receipt of a fairness opinion from Klein’s financial advisor.

The Merger Agreement contains representations and warranties of Old National to Klein as to:

 

   

the validity of the Old National common stock to be issued pursuant to the Merger Agreement; and

 

   

compliance with the applicable listing rules and corporate governance rules and regulations of Nasdaq.

None of the representations and warranties of the parties will survive the consummation of the Merger. Additionally, the parties qualified many of the representations and warranties contained in the Merger Agreement with exceptions set forth in disclosure letters which were separately delivered by each party to the other party.

 

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Conduct of Business Prior to Completion of the Merger

Klein Restrictions

Under the Merger Agreement, Klein has agreed to certain restrictions on its activities until the Merger is completed or terminated. In general, Klein and its subsidiary, KleinBank, are required to conduct their business diligently, substantially in the manner as it is presently being conducted, and in the ordinary course of business.

The following is a summary of the more significant restrictions imposed upon Klein, subject to the exceptions set forth in the Merger Agreement. Specifically, without the prior consent of Old National, Klein, KleinBank and their respective subsidiaries may not:

 

   

amend, or propose to amend, or restate their respective organizational documents;

 

   

authorize a class of stock or issue, or sell any of its equity, securities, securities convertible into or exchangeable for its equity securities, warrants, options or other rights and acquire its equity securities, or any bonds or other securities;

 

   

redeem, purchase or acquire any of its outstanding shares of capital stock or other ownership interest of Klein, KleinBank or any of their subsidiaries except as required by the Merger Agreement;

 

   

make any change in the capitalization, except for the payment of certain dividends as set forth in the Merger Agreement, or the number of issued and outstanding shares of Klein or KleinBank or their subsidiaries;

 

   

incur any material indebtedness in an aggregate amount exceeding $250,000 other than as provided for in the Merger Agreement;

 

   

discharge or satisfy any material encumbrance on its properties or assets or pay any material liability except in the ordinary course of business;

 

   

sell, transfer, assign, mortgage, pledge, or encumber, any of its assets (other than in the ordinary course of business or as otherwise provided in the Merger Agreement);

 

   

cancel any material indebtedness or claims or waive any rights or material value, except in the ordinary course of business;

 

   

merge, combine, consolidate, or effect a share exchange with, or sell its assets or any of its securities to any other person, corporation, or entity, or enter into any other similar transaction not in the ordinary course of business;

 

   

change in any material respect its accounting methods, except as may be necessary and appropriate to conform to changes in tax law requirements, changes in GAAP or regulatory accounting principles;

 

   

cancel or terminate its current insurance policies or allow any of the coverage thereunder to lapse, except as provided for in the Merger Agreement;

 

   

enter into or modify any employment, severance or similar agreement or arrangements with any director, officer, or management employee or enter into or modify any independent contractor or consultant contract, or terminate the employment of any employee of Klein, KleinBank or any of their respective subsidiaries other than in the ordinary course of business;

 

   

terminate or amend any bonus, profit sharing, stock option, restricted stock, pension, retirement, deferred compensation, or other employee benefit plan, trust, fund, contract or arrangement for the benefit or welfare of any employees, except as contemplated in the Merger Agreement or by law;

 

   

make, change or revoke any material tax election, file any material amended tax return, enter into any closing agreement with respect to a material amount of taxes, settle any material tax claim or assessment or surrender any right to claim a refund of a material amount of taxes;

 

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enter into any contract, agreement, lease, commitment, understanding, arrangement, or transaction or incur any liability or obligation, other than as specifically contemplated under the Merger Agreement, requiring payments by Klein or any Klein subsidiary that exceed $250,000, whether individually or in the aggregate;

 

   

enter into or propose to enter into, or modify or propose to modify, any material contract with respect to any of the matters set forth in Section 5.1(c) of the Merger Agreement;

 

   

without consent, which consent shall be deemed received unless Old National objects within three business days after receipt of written notice from Klein:

 

   

make, renew or otherwise modify any loan or commitment to lend money, or issue any letter of credit, interest rate swap or other extension of credit to any person if the loan is an existing credit on the books of Klein or any Klein subsidiary and is, or in accordance with bank regulatory definitions should be, classified as “Special Mention,” “Substandard Accruing” and is in the amount of $1,000,000 or greater or, in accordance with bank regulatory definitions should be, classified as “Substandard-Nonaccruing” or “Doubtful,” or “Loss” and is in an amount of $500,000 or greater;

 

   

make, renew or otherwise modify any loan or loans if immediately after making a loan or loans, such person would be directly indebted to Klein or any Klein subsidiary in an aggregate amount of $5,000,000 or greater; or

 

   

make, renew or otherwise modify any loan or loans in an aggregate amount of $300,000 or greater secured by an owner-occupied 1-4 single-family residence that does not conform with secondary market underwriting standards.

 

   

change in any material respects its underwriting, operating, investment or risk management or other similar policies of Klein or any Klein subsidiary except as required by applicable law or policies imposed by any regulatory authority or governmental entity;

 

   

purchase any assets or securities or assume any liabilities of another bank holding company, bank, corporation, or other entity, except in the ordinary course of business necessary in managing its investment portfolio, and then only to the extent such securities have a quality rating of “AAA”;

 

   

make any investment subject to any restrictions, whether contractual or statutory, which materially impairs the ability of Klein or any Klein subsidiary to dispose freely of such investment at any time;

 

   

sell any securities prior to maturity for gain;

 

   

open, close, move, or, in any material respect, expand, diminish, renovate, alter, or change any of its offices or branches other than as contemplated in the Merger Agreement; or

 

   

pay or commit to pay any management or consulting or other similar type of fees other than as contemplated in the Merger Agreement.

Old National Restrictions

The following is a summary of the more significant restrictions imposed upon Old National, subject to the exceptions set forth in the Merger Agreement. In particular, Old National may not knowingly take any action that is intended or reasonably likely to result in any of its representations and warranties set forth in the Merger Agreement being or becoming untrue in any respect at or prior to the effective time of the Merger, any of the conditions to the Merger not being satisfied, a material violation of any provision of the Merger Agreement, or a delay in the consummation of the Merger, except, in each case, as may be required by applicable law or regulation.

 

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Covenants

In addition to the restrictions noted above, the Merger Agreement contains certain other covenants and agreements, including the following covenants:

 

   

in the case of Klein, to give Old National’s representatives and agents, including loan review officers, attorneys or accountants, upon reasonable notice, access during normal business hours throughout the period prior to the effective time of the Merger to Klein’s properties, facilities operations, books and records and to treat any confidential information or trade secrets received in the course of the consummation of the Merger confidentially;

 

   

in the case of Klein, promptly notify Old National of any emergency or other change in the ordinary course of business of Klein, KleinBank or any of their respective subsidiaries to the extent permitted by law;

 

   

in the case of Klein, to furnish to Old National a complete and accurate list as of the end of each calendar month beginning with June 2018 of (a) all of the periodic internal credit quality reports of KleinBank prepared during such calendar month (which reports will be prepared in a manner consistent with past practices), (b) all loans of KleinBank classified as non-accrual, as restructured, as 90 days past due, as still accruing and doubtful of collection or any comparable classification, (c) all OREO, including in-substance foreclosures and real estate in judgment, (d) all new loans where the principal amount advanced exceeds $1,000,000, (e) any current repurchase obligations of KleinBank with respect to any loans, loan participations or state or municipal obligations or revenue bonds and (f) any standby letters of credit issued by KleinBank;

 

   

in the case of Klein, to deliver to Old National updated financial statements in accordance with the Merger Agreement;

 

   

in the case of Klein, to use commercially reasonable efforts to obtain any required consents for the consummation of the transactions contemplated in the Merger Agreement;

 

   

in the case of Klein and KleinBank, to prepare and timely file all tax returns required to be filed on or before the Effective Date;

 

   

in the case of Old National, to prepare and timely file all tax returns of Klein and KleinBank required to be filed after the Effective Date;

 

   

in the case of Old National, not to amend any income or franchise tax returns that Klein filed as an S corporation if such amendment could result in material additional tax liability for a Klein shareholder during the tax period covered by the return, except as required by applicable law;

 

   

in the case of Klein, not to declare and pay cash dividends to its shareholders in connection with any quarterly estimated tax payments. Old National agrees to indemnify and reimburse each Klein shareholder for any tax penalties and interest payable for the 2018 tax year and any subsequent tax period ending on or before the Effective Date of the Merger, by offering to enter into a tax indemnity letter with each Klein shareholder;

 

   

in the case of Old National, to pay Klein shareholders a tax distribution in an amount equal to the difference between the shareholder tax liability reflected on returns prepared and filed on or before the Effective Date and the tax dividends actually paid for the 2018 tax year and any subsequent tax period ending on or before the Effective Date;

 

   

in the case of Klein and Old National, to not knowingly (a) take any action that is intended or is reasonably likely to result in (1) any of its representations and warranties set forth in the Merger Agreement being or becoming untrue in any material respect, (2) any of the conditions to the Merger not being satisfied, (3) a material violation of any provision of the Merger Agreement or (4) a material delay in the consummation of the Merger, or (b) take any action that would disqualify the Merger as a reorganization and in the case of Klein and KleinBank, to use their best efforts to cause their representatives to not make any announcements or disclose information about the Merger or the Merger Agreement in accordance with the Merger Agreement;

 

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in the case of Klein, to cause KleinBank to maintain the allowance for possible loan and lease losses (“ALLL”) of KleinBank in compliance with GAAP and Regulatory Accounting Principles and KleinBank’s existing methodology for determining the adequacy of the ALLL, as well as the standards established by all applicable governmental entities and GAAP;

 

   

in the case of Klein, to cause the board of directors of KleinBank to approve the Merger promptly after the execution of the Merger Agreement and vote all of the shares of KleinBank common stock in favor of the Merger and the Merger Agreement;

 

   

in the case of Klein, to cooperate and use commercially reasonable efforts to assist Old National in procuring all consents, authorizations, approvals, registrations and certificates, in completing all filings and applications and in satisfying all other requirements prescribed by law which are necessary for consummation of the Merger, and to ensure that any materials or information provided by Klein to Old National for use by Old National in any filing with any state or federal regulatory agency or authority shall not contain any untrue or misleading statement of material fact or shall omit to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not false or misleading;

 

   

in the case of Klein, to submit the Merger Agreement to its shareholders at a meeting to be called and held at the earliest possible reasonable date;

 

   

in the case of Old National, to file a registration statement with the SEC and applicable state securities agencies within 45 days after the execution of the Merger Agreement, and to use commercially reasonable efforts to register and list the shares of Old National common stock to be issued as Merger Consideration;

 

   

in the case of Old National, to use all commercially reasonable efforts to prepare and file all applications and notices to obtain the necessary regulatory approvals for the transactions contemplated by the Merger Agreement;

 

   

in the case of Klein, to continue to accrue reserves for employee benefits and Merger related expenses, and to consult and cooperate in good faith with Old National on (1) conforming the loan and accounting policies and practices of Klein to those policies and practices of Old National for financial accounting and/or income tax reporting purposes and (2) determining the amount and timing for recognizing Klein’s expenses of the Merger and for financial accounting and/or income tax reporting purposes; provided, that no such modifications need be effected prior to the 5th day next preceding the closing date of the Merger and until Old National has certified to Klein that all conditions to the obligation of Old National to consummate the Merger have been satisfied;

 

   

in the case of Klein, unless Old National directs Klein otherwise, to terminate its 401(k) Plan immediately before the effective time of the Merger;

 

   

in the case of Klein, at the request of Old National, to terminate any employee benefit plans immediately on or prior to the effective time and pay out amounts accrued thereunder to the participants in that plan;

 

   

in the case of Old National, to permit continuing employees of Klein participating in Klein’s employee benefit plans to participate in Old National’s employee benefit plans in accordance with their terms if Klein’s plan is terminated by Old National;

 

   

in the case of Old National, as of the effective time, to assume change in control and other employment agreements between Klein and its subsidiaries and their respective employees;

 

   

in the case of Old National, to provide severance benefits to those employees of Klein whose employment is terminated without cause by Old National within six months after the effective time, as provided in the Old National Bancorp Severance Pay Plan;

 

   

in the case of Klein, freeze the deferral amounts and deferral elections of all participants in the Klein deferred compensation arrangements at the effective time;

 

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in the case of Klein and Old National, to establish an employee retention bonus program in accordance with the Merger Agreement before the effective time;

 

   

in the case of Klein, to pay the transaction-related incentives for designated employees of Klein in accordance with the Merger Agreement;

 

   

in the cause of Klein and KleinBank, and each commonly controlled entity, to file all appropriate filings with the IRS;

 

   

in the case of Klein and Old National, to supplement, amend and update the disclosure schedules to the Merger Agreement as necessary;

 

   

in the case of Old National, maintain a directors’ and officers’ liability insurance policy for six years after the effective time of the Merger to cover the present and former officers and directors of Klein and KleinBank with respect to claims against such directors and officers arising from facts or events which occurred on before the effective time, and for six years after the effective time, continue the indemnification and exculpation rights of the present and former officers and directors of Klein and KleinBank for any proceedings that arise by reason that such person was a director or officer at or prior to the effective time to the full extent then permitted under the articles of incorporation or by-laws of Klein or KleinBank or any indemnification arrangement or agreement disclosed to Old National or as required by applicable law; and

 

   

in the case of Klein, to cooperate with an environmental consulting firm designated by Old National in the conduct by such firm of a Phase I environmental investigation on all real property owned or leased by Klein or any Klein subsidiary as of the date of the Merger Agreement, and any real property acquired or leased by Klein or any Klein subsidiary prior to the closing date, and if a Phase II assessment is recommended based on the findings of the Phase I, to be responsible for 50% of the cost of any Phase II assessments of property owned by Klein.

Acquisition Proposals by Third Parties

Until the Merger is completed or the Merger Agreement is terminated, Klein has agreed that it, and its officers, directors and representatives, and those of each Klein subsidiary, will not:

 

   

solicit, initiate, encourage, induce or facilitate, any inquiries, offers or proposals to acquire Klein;

 

   

furnish any information regarding Klein, KleinBank or any of their respective subsidiaries in connection with or response to any proposal to acquire Klein;

 

   

engage in any discussions or negotiations or otherwise knowingly cooperate regarding an offer or proposal to acquire Klein;

 

   

approve, endorse or recommend any proposal to acquire Klein; or

 

   

enter into any letter of intent or similar document or any contract contemplating or otherwise related to any acquisition of Klein;

Klein may, however, furnish information regarding Klein, KleinBank or their respective subsidiaries to, or enter into and engage in discussion with, any person or entity in response to a superior proposal if:

 

   

neither Klein, nor KleinBank, nor any of their respective subsidiaries have violated the restrictions described above; and

 

   

Klein’s board of directors (after consultation with its outside legal counsel) determines in good faith that failure to consider such proposal would likely result in a breach of the fiduciary duties of Klein’s board of directors; and

 

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at least two business days prior to furnishing such nonpublic information, Klein provides the identity of the person or entity and notice of Klein’s intent to furnish information to that person or entity to Old National, and Klein obtains an executed confidentiality agreement from that person or entity; and

 

   

at least two business days prior to furnishing such nonpublic information, Klein provides any information to Old National that it intends to provide to such person or entity.

In addition, Klein must promptly notify Old National orally and in writing of any acquisition proposal, any inquiry that could lead to an acquisition proposal and keep Old National fully informed with respect to the status of any such acquisition proposal.

For purposes of the Merger Agreement, the term “superior proposal” means any acquisition proposal relating to Klein or KleinBank, or to which Klein or KleinBank may become a party, that the Klein board of directors determines in good faith (after having received the advice of its financial advisors) to be more favorable to the shareholders of Klein from a financial point of view than the Merger (1) after taking into account the likelihood of consummation of such transaction without undue delay, as well as all legal, financial (including the $17,078,724 termination fee), regulatory and other aspects of such proposal, (2) after giving Old National at least five business days to respond to such acquisition proposal and (3) after taking into account any amendment or modification to the Merger Agreement proposed by Old National.

Conditions to the Merger

The obligations of Old National and Klein to consummate the Merger are subject to the satisfaction or waiver, on or before the completion of the Merger, of a number of conditions, including:

 

   

the Merger Agreement must receive the approval of Klein’s shareholders;

 

   

the representations and warranties made by the parties in the Merger Agreement must be true and correct in all material respects as of the effective time of the Merger unless the inaccuracies do not or will not have a Material Adverse Effect (as defined below) on the party making the representations and warranties. For purposes of the Merger Agreement, Material Adverse Effect is defined to mean any effect (i) that is material and adverse to the business, assets, liabilities, properties, condition (financial or otherwise), results of operations or value of Klein and KleinBank and their respective subsidiaries, taken as a whole, or Old National and its subsidiaries, taken as a whole, as the case may be or (ii) that would materially impair the ability of Old National or Klein to perform their respective obligations under the Merger Agreement or otherwise materially threaten or materially impede the consummation of the Merger and the other transactions contemplated by the Merger Agreement; provided, however, that Material Adverse Effect will not be deemed to include the impact of (a) changes after the date of the Merger Agreement to laws of general applicability to banks and bank holding companies or interpretation thereof by any governmental entity, (b) changes after the date of the Merger Agreement to GAAP or regulatory accounting principles, (c) changes after the date of the Merger Agreement in economic conditions generally affecting banks and bank holding companies, (d) changes caused by the public announcement of the Merger, (e) the escalation or worsening of acts of war (whether or not declared), armed hostilities or terrorism, (f) changes resulting from expenses (such as legal, accounting and investment bankers’ fees) incurred in connection with the Merger Agreement or the transactions contemplated therein, (g) any action required by the Merger Agreement or actions taken or omitted to be taken by one party to the Merger Agreement with the consent of the other party and (h) with respect to either Klein or KleinBank, the effects of any action taken with the prior written consent of Old National;

 

   

Old National shall have registered its shares of Old National common stock to be issued to the shareholders of Klein in the Merger with the SEC, all state securities and blue sky approvals, authorizations and exemptions required to offer and sell such shares shall have been received and the Registration Statement on Form S-4, of which this proxy statement and prospectus is a part, shall have

 

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been declared effective by the SEC and no stop order suspending the effectiveness of the Registration Statement has been issued or threatened;

 

   

all regulatory approvals required to consummate the transactions contemplated by the Merger Agreement shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired, and no such approvals shall contain any conditions, restrictions or requirements which the Old National board of directors reasonably determines in good faith would have a Material Adverse Effect on Klein or on Old National to such a degree that Old National would not have entered into the Merger Agreement had such conditions, restrictions or requirements been known;

 

   

no injunction or other order entered by a state or federal court of competent jurisdiction will have been issues and remain in effect which would impair the consummation of the Merger; and

 

   

there will be no action taken, or any statute, rule, regulation, judgement, order or injunction, which prohibits, prevents or makes illegal completion of the Merger, and no material claim, litigation or proceeding shall have been initiated or threatened relating to the Merger Agreement or the Merger.

The obligation of Old National to consummate the Merger also is subject to the fulfillment of other conditions, including:

 

   

Klein and KleinBank must have performed, in all material respects, all of their agreements as required by the Merger Agreement at or prior to the effective time of the Merger;

 

   

Old National must have received from Klein at the closing of the Merger all the items, documents, and other closing deliveries of Klein, in form and content reasonably satisfactory to Old National, required by the Merger Agreement;

 

   

Old National must have received an opinion from Krieg DeVault that the Merger constitutes a tax free “reorganization” for purposes of Section 368 of the Code;

 

   

no person (other than a holder of shares of Klein common stock) will have asserted that such person (1) is the owner of, or has the right to acquire or to obtain ownership of, any capital stock of or any other voting, equity or ownership interest in, either of Klein or KleinBank or (2) is entitled to any of the merger consideration;

 

   

shareholders of Klein shall have executed lock-up agreements in the form provided and delivered to Old National;

 

   

Old National must have received certificates from Klein signed by its Chief Executive Officer and its Chief Financial Officer, dated as of the effective time, certifying that (1) the representations and warrants of Klein are true, accurate and correct in all respects on and as of the effective time, subject to the terms of the Merger Agreement; (2) all the covenants of Klein have been compiled with in all material respects from the date of the Merger Agreement through and as of the effective time; and (3) Klein has satisfied and fully complied with all conditions necessary to make the Merger Agreement effective as to it;

 

   

Old National must have received a certificate from Klein signed by its Secretary that (1) contains copies of the text of the resolutions by which corporate action on the part of Klein necessary to approve the Merger Agreement and transactions contemplated thereby were taken, and (2) contains a certification from the Secretary that such copies are true, correct and complete copies of such resolutions and that such resolutions were duly adopted and have not been amended or rescinded;

 

   

as of the end of the month prior to the effective time, the Klein Consolidated Shareholders’ Equity (as adjusted under the Merger Agreement) shall be at least equal to the Minimum Shareholders’ Equity; and

 

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holders of record of no more than 10% of the total issued and outstanding shares of Klein common stock shall have perfected, or continue to have a right to exercise dissenters rights under the MBCA with respect to their shares of Klein common stock by virtue of the Merger.

The obligation of Klein to consummate the Merger also is subject to the fulfillment of other conditions, including:

 

   

Old National must have performed, in all material respects, all of its agreements as required by the Merger Agreement at or prior to the effective time of the Merger;

 

   

Klein must have received from Old National at the closing of the Merger all the items, documents, and other closing deliveries of Old National, in form and content reasonably satisfactory to Klein, required by the Merger Agreement;

 

   

Klein must have received a certificate from Old National signed by its Chief Financial Officer, dated as of the effective time, certifying that (1) the representations and warrants of Old National are true, accurate and correct in all respects on and as of the effective time, subject to the terms of the Merger Agreement; (2) all the agreements of Old National have been complied with in all material respects from the date of the Merger Agreement through and as of the effective time and (3) Old National has satisfied and fully complied with all conditions necessary to make the Merger Agreement effective as to it;

 

   

Klein must have received a certificate from Old National signed by its Secretary that (1) contains copies of the text of the resolutions by which corporate action on the part of Old National necessary to approve the Merger Agreement and transactions contemplated thereby were taken, and (2) contains a certification from the Secretary that such copies are true, correct and complete copies of such resolutions and that such resolutions were duly adopted and have not been amended or rescinded; and

 

   

Klein must have received an opinion from Krieg DeVault that the Merger constitutes a “reorganization” for purposes of Section 368 of the Code, as amended.

Expenses

Except as otherwise provided in the Merger Agreement, Klein and Old National will be responsible for their respective expenses incidental to the Merger.

Employee Benefit Matters

The Merger Agreement requires Old National to make available to the former employees of Klein no longer covered by a Klein plan substantially the same employee benefits on substantially the same terms and conditions as Old National offers to similarly situated officers and employees. Klein and KleinBank employees will receive full credit, after the Merger, for all prior service with Klein, Klein subsidiaries or their predecessors for purposes of any applicable eligibility and vesting service requirements under any of Old National’s employee benefit plans. Klein and KleinBank employees who become employees of Old National or any of its subsidiaries will become eligible to participate in Old National’s employee benefit plans as soon as reasonably practicable after the effective time of the Merger, or if later, as of the termination of the corresponding Klein benefit plan.

Unless Old National directs Klein otherwise, the Klein board of directors will adopt resolutions, effective immediately prior to the Effective Date, permanently discontinuing contributions to and terminating the Klein Financial, Inc. Retirement Savings Plan (the “Klein 401(k) Plan”). Except for the Deferred Compensation Arrangements described below, at the request of Old National, Klein will terminate any other plans as of the effective time of the Merger in accordance with their terms and subject to applicable laws.

Klein will freeze all deferral amounts and elections for all participants in the Deferred Compensation Arrangements, which include the Klein Financial, Inc. Deferred Compensation Plan, as amended, and the

 

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deferred salary and deferred bonus agreements between Klein and certain employees. No additional deferrals will be allowed under the terms of these arrangements. Old National will assume all of Klein’s obligations under the terms of these arrangements and maintain these arrangements until terminated with the consent of each of the participants.

To the extent that Old National terminates any Klein employee without cause at or within six months of the effective time of the Merger, and such employee is not otherwise entitled to severance benefits under a separate contractual obligation with Klein or KleinBank, Old National will offer the employee severance benefits under the Old National Bancorp Severance Pay Plan.

Old National and Klein have established an employee retention bonus program and will allocate cash awards to retain certain Klein employees through the closing date of the Merger, or through a date following the closing date of the Merger established by Old National. As of the effective time of the Merger, Old National will assume Klein and its subsidiaries’ change in control and other employment agreements with their employees.

Klein will pay any amounts accrued as of the closing date but not yet paid under any employee incentive compensation and bonus plan.

Termination

Subject to conditions and circumstances described in the Merger Agreement, either Old National or Klein may terminate the Merger Agreement if, among other things, any of the following occur:

 

   

Klein shareholders do not approve the Merger Agreement at the Klein special meeting;

 

   

any governmental authority permanently restrains, enjoins or otherwise prohibits or makes illegal the consummation of the Merger, and such order shall have become final and non-appealable;

 

   

the Merger has not been consummated by March 31, 2019 (provided the terminating party is not then in willful breach of the Merger Agreement); or

 

   

the respective boards of directors of Old National and Klein mutually agree to terminate the Merger Agreement.

Additionally, Old National may terminate the Merger Agreement at any time prior to the effective time of the Merger if any of the following occur:

 

   

any event shall have occurred which is not capable of being cured prior to March 31, 2019 and would result in a condition to the Merger not being satisfied;

 

   

Klein breaches any of its representations, warranties or agreements contained in the Merger Agreement which breach or failure to perform would give rise to the failure of a condition to the Merger, and such condition is not capable of being cured by March 31, 2019, or has not been cured by Klein within 30 days after Klein’s receipt of written notice of such breach from Old National;

 

   

there has been a Material Adverse Effect on Klein on a consolidated basis as of the effective time, as compared to that in existence as of June 20, 2018;

 

   

Old National elects to exercise its right of termination pursuant to the Merger Agreement regarding certain environmental matters (see the section entitled “Environmental Inspections”);

 

   

Klein’s board of directors shall fail to include its recommendation to approve the Merger in the proxy statement and prospectus related to Klein’s special meeting;

 

   

Klein’s board of directors, after receiving an acquisition proposal from a third party, has withdrawn, modified or changed its approval or recommendation of the Merger Agreement and approved or recommended an acquisition proposal with a third party;

 

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Klein shall have entered into, or publicly announced its intention to enter into, a definitive agreement, agreement in principle or letter of intent with respect to an acquisition proposal;

 

   

if the Klein board of directors fails to publicly reaffirm its recommendation of the Merger Agreement, the Merger or the other transactions contemplated by the Merger Agreement within five business days of a written request by Old National to provide such reaffirmation; or

 

   

a quorum could not be convened at the meeting of the shareholders of Klein or at a reconvened meeting held at any time prior to or on March 31, 2019.

Klein may terminate the Merger Agreement at any time prior to the effective time of the Merger if any of the following occur:

 

   

any event shall have occurred which is not capable of being cured prior to March 31, 2019 and would result in a condition to the Merger not being satisfied;

 

   

Old National breaches or fails to perform any of its representations, warranties or agreement contained in the Merger Agreement which breach or failure to perform would give rise to the failure of a condition to the Merger, and such condition is not capable of being cured by March 31, 2019, or has not been cured by Old National within 30 days after Old National’s receipt of written notice of such breach from Klein or if any of the conditions to close become impossible to satisfy;

 

   

if, prior to Klein’s special shareholder meeting, (1) Klein has received a superior proposal, and in accordance with the Merger Agreement, has provided Old National with written notice of its intent to enter into an acquisition agreement with respect to the superior proposal, (2) five business days have elapsed following Klein’s delivery of notice to Old National, (3) during the five business-day period, Klein has fully complied with the terms of the Merger Agreement in providing certain information to Old National so that it may enable Old National to negotiate a modification of the Merger Agreement, (4) at the end of the five business-day period, the Klein board of directors continues reasonably to believe that the acquisition proposal constitutes a superior proposal, (5) Klein pays to Old National a $17,078,724 termination fee, and (6) Klein will have entered into an agreement to effect the superior proposal or the Klein board of directors will have resolved to do so; or

 

   

the Old National Market Value on the Calculation Date is less than $15.75 per share, and within five days commencing on the Calculation Date, Klein has notified Old National of its intention to terminate the Agreement effective on the tenth day following the Calculation Date, and Old National has not increased the Exchange Ratio and Old National has not exercised its option to increase the Exchange Ratio under the terms of the Merger Agreement.

Under certain circumstances described in the Merger Agreement, a $17,078,724 termination fee may be payable by Klein to Old National if the Merger Agreement is terminated and the Merger is not consummated. See “The Merger Agreement — Termination Fee.”

Termination Fee

Old National shall pay Klein an amount in cash equal to $2,000,000 if either party terminates the Merger Agreement because the closing has not occurred by March 31, 2019, as a result of the failure to obtain any of the bank regulatory approvals and such failure is a result of a regulatory issues directly and solely related to Old National.

Klein shall pay Old National a $17,078,724 termination fee if the Merger Agreement is terminated for any of the following reasons:

 

   

if Old National terminates the Merger Agreement because Klein’s board of directors fails to include its recommendation to approve the Merger in the proxy statement and prospectus delivered to

 

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shareholders or has withdrawn, modified or changed its approval or recommendation of the Merger Agreement or approves or publicly recommends an acquisition proposal with a third party, or Klein has entered into or publicly announced an intention to enter into another acquisition proposal;

 

   

if the Klein board of directors fails to publicly reaffirm its recommendation of the Merger Agreement, the Merger or the other transactions contemplated in the Merger Agreement within five business days of a written request by Old National to provide such reaffirmation;

 

   

if either party terminates the Merger Agreement because it is not approved by the requisite vote of the shareholders of Klein at the meeting called for such purpose or by Old National because a quorum could not be convened at Klein’s shareholder meeting called to approve the Merger and, prior to the date that is 12 months after such termination, Klein or any Klein subsidiary enters into any acquisition agreement with a third party or an acquisition proposal is consummated;

 

   

if either party terminates the Merger Agreement because the consummation of the Merger has not occurred by March 31, 2019 and (A) prior to the date of such termination an acquisition proposal was made by a third party and (B) prior to the date that is 12 months after such termination, Klein or any Klein subsidiary enters into any acquisition agreement or any acquisition proposal is consummated; or

 

   

if Klein terminates the Merger Agreement because on the Calculation Date the Old National Market Value is less than $15.75.

Management and Operations After the Merger

Old National’s officers and directors serving at the effective time of the Merger shall continue to serve as Old National’s officers and directors until such time as their successors have been duly elected and qualified or until their earlier resignation, death, or removal from office. Old National’s articles of incorporation and by-laws in existence as of the effective time of the Merger shall remain Old National’s articles of incorporation and by-laws following the effective time, until such articles of incorporation and by-laws are further amended as provided by applicable law.

Environmental Inspections

Old National has the right to terminate the Merger Agreement if the dollar amount of all remedial or other corrective actions and measures required by the applicable lease or applicable environmental laws and regulations to be taken with respect to Klein’s owned or leased real property or any adjoining properties is estimated to exceed, in the aggregate, $3,000,000.

Effective Time of Merger

Unless otherwise mutually agreed to by the parties, the effective time of the Merger is expected to occur at 12:01 a.m. on the first calendar day of the month following the date in which the closing of the Merger occurs. The parties currently expect to complete the Merger in the fourth quarter of 2018. The closing date will occur on the last business day of the month following fulfillment of all conditions precedent to the Merger and the expiration of all waiting periods in connection with the bank regulatory applications filed for the approval of the Merger. However, if the closing date were to occur on the last business day of November, then it will be postponed until the last business day of December. The closing date will not occur prior to September  30, 2018.

Regulatory Approvals for the Merger

Under the terms of the Merger Agreement, the Merger cannot be completed until Old National receives necessary regulatory approvals, which include the approval of the Minnesota Department of Commerce, the

 

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approval of the OCC and the approval or waiver of the Federal Reserve Board. Old National has filed an application with these regulators for approval. Old National cannot be certain when such approval will be obtained or if they will be obtained. The Minnesota Department of Commerce only requires a notification filing, which has been provided by Old National.

Voting Agreements

In connection with the execution of the Merger Agreement, Daniel Klein, Alan Klein and James Klein executed voting agreements pursuant to which they agreed to vote their shares and shares held by trusts (subject to their fiduciary duties and the applicable trust agreement), under which they are individually beneficial owners in favor of the Merger Agreement. As of the record date, these shareholders beneficially owned 1,642,500 shares of Klein voting common stock, or approximately 58.2% of the outstanding shares of Klein voting common stock. Accordingly, Klein expects that the Merger Agreement will be approved at the special meeting.

Lock-Up Agreements

In connection with the execution of the Merger Agreement, Daniel Klein, Alan Klein and James Klein executed and certain other holders of Klein common stock will execute lock-up agreements prior to the closing, covering in the aggregate approximately 18,200,000 shares of Old National common stock, assuming no adjustments to the Merger Consideration, or approximately 80% of the Old National common stock issued in the Merger. Such shareholders agreed not to sell or enter into any transactions to dispose of their shares of Old National common stock received in the Merger, or publicly disclose an intention to effect any such transaction, for a period of 60 to 90 days after the effective time of the Merger, which may be waived by Old National’s prior written consent. As to the certain other shareholders who will execute lock-up agreements prior to the closing, such restrictions will apply only to 60% of each of these shareholders’ shares of Old National common stock received in the Merger.

Accounting Treatment of the Merger

Old National will account for the Merger under the “acquisition method of accounting” in accordance with U.S. generally accepted accounting principles. Using the acquisition method of accounting, the assets (including identified intangible assets) and liabilities of Klein will be recorded by Old National at their respective fair values at the time of the completion of the Merger. The excess of Old National’s purchase price over the net fair value of the tangible and identified intangible assets acquired less liabilities assumed, will be recorded as goodwill.

Nasdaq Global Select Market Listing

Old National common stock currently is listed on the Nasdaq Global Select Market under the symbol “ONB.” The shares to be issued to the Klein shareholders in the Merger will be eligible for trading on the Nasdaq Global Select Market.

Dissenters’ Rights

Dissenters’ rights are statutory rights that, if available under law, enable shareholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction. The shareholders of Klein have dissenters’ rights under Section 302A.471 of the MBCA.

 

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DISSENTERS’ RIGHTS OF KLEIN SHAREHOLDERS

Section 302A.471 of the MBCA entitles any Klein shareholder who does not vote in favor of the proposal to approve the Merger Agreement to file a notice of intent to demand the “fair value” of his, her or its Klein shares. Any Klein shareholder contemplating an attempt to assert and exercise dissenters’ rights in connection with the Merger should review carefully the provisions of Sections 302A.471 and 302A.473 of the MBCA (copies of which are provided in Annex C), particularly the specific procedural steps required to perfect such rights. DISSENTERS’ RIGHTS ARE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 302A.473 OF THE MBCA ARE NOT FULLY SATISFIED.

Set forth below (to be read in conjunction with the full text of Section 302A.473 of the MBCA appearing in Annex C) is a brief description of the procedures relating to the exercise of dissenters’ rights applicable to the Merger. The following description does not purport to be a complete statement of the provisions of Section 302A.473 of the MBCA and is qualified in its entirety by reference thereto.

Under Section 302A.471, Subd. 3(b) of the MBCA, only persons who are either: (1) a Klein shareholder of record as of the record date or (2) a beneficial owner of Klein shares as of the record date are entitled to exercise dissenters’ rights.

Under Section 302A.473, Subd. 3 of the MBCA, a Klein shareholder who wishes to exercise dissenters’ rights, which we refer to as a dissenter, must file a written notice of intent to demand the “fair value” of the Klein shares owned by the dissenter, which we refer to as a fair value notice, with Klein (at Klein Financial, Inc., 1550 Audubon Road, Suite 200, Chaska, Minnesota 55318, Attn: Doug Hile) before the shareholder vote on the proposal to approve the Merger Agreement. Under Section 302A.471, Subd. 2 of the MBCA, beneficial owners of Klein shares who desire to exercise statutory dissenters’ rights must obtain a signed, written consent of the holder of record of the shares held on behalf of such beneficial owner that memorializes the holder of record’s assent to the beneficial owner’s exercise of dissenters’ rights, which we refer to as a record holder consent. The beneficial owner must submit the record holder consent to Klein in addition to his, her or its fair value notice, in each case prior to the shareholder vote on the Merger.

IN ADDITION, THE KLEIN SHAREHOLDER MUST NOT VOTE HIS, HER OR ITS SHARES IN FAVOR OF THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. A VOTE AGAINST THE MERGER DOES NOT IN ITSELF CONSTITUTE A FAIR VALUE NOTICE AND A FAILURE TO VOTE DOES NOT AFFECT THE VALIDITY OF A TIMELY FAIR VALUE NOTICE. HOWEVER, THE SUBMISSION OF A PROPERLY SIGNED, BLANK PROXY WILL CONSTITUTE A VOTE IN FAVOR OF APPROVING THE MERGER AGREEMENT AND A WAIVER OF STATUTORY DISSENTERS’ RIGHTS.

If the proposal to approve the Merger Agreement is approved by Klein shareholders, then Klein must, pursuant to Section 302A.473, Subd. 4 of the MBCA, send a procedural notice to each dissenter who did not vote in favor of the proposal to approve the Merger Agreement and who timely submitted his, her or its fair value notice (and, if applicable, record holder consent), which we refer to as the procedural notice. Pursuant to Section 302A.473, Subd. 4 of the MBCA, the procedural notice must contain certain required information, including, without limitation, the address to which a dissenter must send a demand for payment in order to obtain payment for such shares and the date by which they must be received. In order to receive the fair value of his, her or its Klein shares under Section 302A.473 of the MBCA, a dissenter must demand payment within 30 days after Klein sends its procedural notice to dissenters. Under Minnesota law, notice by mail is given by a corporation when deposited in the United States mail with sufficient postage affixed.

A KLEIN SHAREHOLDER WHO FAILS TO MAKE A DEMAND FOR PAYMENT AS REQUIRED BY SECTION 302A.473, SUBD. 4, OF THE MBCA LOSES THE RIGHT TO RECEIVE THE FAIR VALUE OF HIS, HER OR ITS KLEIN SHARES UNDER SUCH SECTION

 

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NOTWITHSTANDING THE TIMELY FILING OF NOTICE OF INTENT TO DEMAND PAYMENT UNDER SECTION 302A.473, SUBD. 3. OF THE MBCA PRIOR TO THE SHAREHOLDER VOTE ON THE MERGER.

Except as provided below, if a demand for payment is duly made by a dissenter with Klein as required by the procedural notice, then after Klein’s receipt of such demand or the Effective Date of the Merger, whichever is later, Klein must pay the dissenter an amount which Klein estimates to be the fair value of the dissenter’s Klein shares, with interest, if any. For the purpose of a dissenter’s appraisal rights under Sections 302A.471 and 302A.473 of the MBCA, “fair value” means the value of the Klein shares immediately before the Effective Date of such Merger. IT IS POSSIBLE THAT THE FAIR VALUE OF KLEIN SHARES AS DETERMINED PURSUANT TO DISSENTERS’ RIGHTS PROCEDURES MAY BE DETERMINED TO BE LESS THAN THE VALUE OF THE MERGER CONSIDERATION. Additionally, “interest” means interest commencing five days after the Effective Date of such Merger until the date of payment, calculated at the rate provided in Minnesota Statutes Section 549.09, Subd. 1, Paragraph (c), clause (1), which is currently 2.3%. If a dissenter believes the payment received from Klein is less than the fair value of the Klein shares, with interest, if any, such dissenter must give written notice to Klein of his, her or its own estimate of the fair value of the Klein shares, with interest, if any, within 30 days after the date Klein remits its estimate of fair value to such dissenter by mail, which we refer to as the counter demand. The dissenter’s counter demand must demand payment of the difference between his, her or its estimate and the amount remitted by Klein. If such dissenter fails to give written notice of such estimate to Klein, or fails to demand payment of the difference, within the 30-day time period, such dissenter is entitled only to the amount remitted by Klein.

Klein may withhold the remittance described in the preceding paragraph with respect to a dissenter demanding payment who was not the holder of record of Klein shares as of June 21, 2018 — the date of the first public announcement of the Merger — or who is asserting dissenters’ rights on behalf of a person who was not a beneficial owner of Klein shares on such date.

If Klein and a dissenter (including both dissenters who held Klein shares on or prior to June 21, 2018, which was the date the Merger was first publicly announced, and dissenters who purchased Klein shares after such date who have complied with their respective demand requirements) do not settle the dissenter’s demand within 60 days after Klein receives the dissenter’s estimate of the fair value of his, her or its Klein shares, then Klein must file a petition in a court of competent jurisdiction in the county in which the registered office of Klein is located, requesting that the court determine the statutory fair value of stock with interest, if any. All dissenters whose demands are not settled within the applicable 60-day settlement period must be made parties to this proceeding.

The court will then determine whether each dissenter in question has fully complied with the provisions of Section 302A.473 of the MBCA, and for all dissenters who have fully complied and not forfeited statutory dissenters’ rights, will determine the fair value of the Klein shares, taking into account any and all factors the court finds relevant (including, without limitation, the recommendation of any appraisers which may have been appointed by the court), computed by any method that the court, in its discretion, sees fit to use, whether or not used by Klein or a dissenter. The fair value of the Klein shares as determined by the court will be binding on all dissenters. However, under the statute, dissenters will not be liable to Klein for the amount, if any, by which payments previously remitted to the dissenters exceed the fair value of such Klein shares determined by a court, with interest. The costs and expenses of such a court proceeding will be assessed against Klein, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment is found to be arbitrary, vexatious or not in good faith.

Under Section 302A.471, Subd. 2 of the MBCA, a Klein shareholder may not assert dissenters’ rights with respect to less than all of the shares of stock registered in such shareholder’s name, unless the shareholder dissents with respect to all shares beneficially owned by another person and discloses the name and address of such other person.

 

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Under Section 302A.471, Subd. 4 of the MBCA, a Klein shareholder has no right at law or in equity to have the Merger Agreement set aside or rescinded, except if approval or consummation of such Merger Agreement is fraudulent with respect to such shareholder or Klein.

In view of the complexity of Section 302A.471 and Section 302A.473 of the MBCA, Klein shareholders who may wish to pursue dissenters’ rights should consult their legal and financial advisors.

 

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INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF KLEIN IN THE MERGER

When considering the recommendation of the Klein board of directors, you should be aware that some of the directors and executive officers of Klein have interests that are different from, or in potential conflict with, your interests. The Klein board of directors was aware of these interests when it approved the Merger Agreement. Except as described below, to the knowledge of Klein, the directors and executive officers of Klein do not have any material interest in the Merger apart from their interests as shareholders of Klein.

Klein Deferred Compensation Arrangements

Klein will freeze all deferral amounts and elections for all participants in the Deferred Compensation Arrangements, which include the Klein Financial, Inc. Deferred Compensation Plan, as amended, and the deferred salary and deferred bonus agreements between Klein and each of the following executive officers: Daniel G. Klein, Alan C. Klein, James C. Klein, NanciAnn S. Olson, Ronald W. Seib and Kevin J. Valois. No additional deferrals will be allowed under the terms of these arrangements. Old National will assume all of Klein’s obligations under the terms of the Deferred Compensation Arrangements and maintain the arrangements unless otherwise terminated with the consent of each of the participants.

Employee Agreements and Incentives

Old National will assume the existing change of control and other employment agreements between Klein and its subsidiaries and their respective employees, including agreements with the following executive officers: Mr. Hile, Mr. Seib, Jr., Mr. Valois, and Ms. Olson. Payments under the change in control agreements are subject to a double trigger, which requires both a change in control and a qualifying termination of employment, including a termination of employment without cause or a resignation for good reason. While a change in control will occur as a result of the Merger, it is not currently known if and when a qualifying termination might occur.

As provided in the Merger Agreement, Old National and Matthew C. Klein will use commercially reasonable effects to enter into an employment agreement prior to the closing. Old National will assume Mr. Klein’s existing employment agreement with KleinBank until all obligations thereunder have been paid to Mr. Klein and his employment agreement with Old National becomes effective. When his employment agreement with Old National becomes effective, his agreement with KleinBank will be cancelled.

Klein will pay amounts accrued but unpaid as of the closing date prorated pursuant to the terms of existing employee incentive compensation and bonus plans, including the following payments to executive officers assuming a closing date of September 30, 2018: Mr. Hile $141,000, Mr. Klein $72,188, Mr. Seib $77,438, Mr. Valois $63,000 and Ms. Olson $34,446, which reflect each officer’s target bonus amounts and may be subject to adjustment based on actual performance. In addition, under the terms of Klein’s Long Term Incentive Plan (“LTIP”) the proposed transaction will accelerate the vesting and payment of LTIP awards. As a result of this accelerated vesting, the LTIP amounts payable to each executive officer are estimated to increase by $116,267 for Mr. Hile; $50,000 for Mr. Klein; $58,333 for Mr. Seib; $47,000 for Mr. Valois; and $18,400 for Ms. Olson, subject to adjustment based on actual performance.

Mr. Hile also has a Supplemental Executive Retirement Plan (“SERP”) with Klein, the obligations under which will be assumed by Old National. Payments under the SERP are subject to a double trigger, which requires both a change in control followed by a voluntary or involuntary separation from service prior to Mr. Hile’s retirement in 2021. While a change in control will occur as a result of the Merger, it is not currently known if and when a separation from service might occur prior to 2021.

Most of the executive management team of Klein is comprised of individuals who are not Klein family members or shareholders and as a result, will not directly not participate in the shareholder value realized from

 

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the closing of the Merger. In recognition of their contribution to the creation of this shareholder value, the Executive Committee authorized transaction bonuses to be awarded to certain non-shareholder executive officers of Klein and payable upon closing of the Merger. In addition, Mr. Hile’s transaction bonus recognizes his contributions in leading the sale process and includes a variable component equal to 2% of the amount by which the Merger Consideration exceeds $350.0 million. The variable component was calculated assuming Merger Consideration valued at $427.0 million, based on the $19.05 closing price of Old National common stock on the day before execution of the Merger Agreement. The transaction bonuses payable to each executive officer are $3,540,000 to Mr. Hile, of which $1,540,000 is the variable component; $750,000 to Mr. Seib; $500,000 to Mr. Valois; and $200,000 to Ms. Olson.

Potential for Future Arrangements

It is possible that continuing executive officers of Klein will enter into new compensation arrangements with Old National or its affiliates. Such arrangements may include agreements regarding future terms of employment and the right to receive equity or equity-based awards. Any such arrangements are currently expected to be entered into after the completion of the Merger. There can be no assurance that the applicable parties will reach an agreement, and the Merger is not conditioned upon any executive officer or director of Klein entering into any such agreement, arrangement or understanding.

Indemnification and Insurance of Directors and Officers

Old National has agreed that all rights to indemnification and exculpation from liabilities for acts or omissions occurring prior to the effective time of the Merger existing in favor of current or former directors and officers of Klein and KleinBank as provided in the articles of incorporation or by-laws of Klein and any existing indemnification agreements or arrangements disclosed to Old National shall survive the Merger and shall continue in full force and effect in accordance with their terms to the extent permitted by law, and shall not be amended, repealed or otherwise modified for a period of six years after the effective time of the Merger in any manner that would adversely affect the rights thereunder of such individuals for acts or omissions occurring or alleged to occur at or prior to the effective time of the Merger.

In addition, Old National has agreed to cause Klein’s and KleinBank’s directors and officers to be covered for a period of six years after the effective time of the Merger by Klein’s existing directors’ and officers’ liability insurance policy (or a substitute policy obtained by Old National having the same coverages and amounts and terms and conditions that are not less advantageous to such directors and officers) with respect to acts or omissions occurring before the effective time of the Merger; provided that Old National shall not be required to spend an amount per year that is more than 200% of the annual premium paid by Klein for such insurance as of the effective time of the Merger. If the cost of insurance exceeds such limit, Old National will use its reasonable efforts to obtain as much comparable coverage as possible.

 

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COMPARISON OF THE RIGHTS OF SHAREHOLDERS

Under the Merger Agreement, Klein shareholders will exchange their shares of Klein common stock for shares of Old National common stock. Klein is organized under the laws of the State of Minnesota, and the rights of Klein shareholders are governed by the applicable laws of the State of Minnesota, including the MBCA, and the Klein Second Amended and Restated Articles of Incorporation, as amended (the “Klein Articles”) and Amended and Restated By-Laws (the “Klein By-Laws”). Old National is organized under the laws of the State of Indiana, and the rights of Old National’s shareholders are governed by the applicable laws of the State of Indiana, including the Indiana Business Corporation Law (the “IBCL”), and Old National’s Fourth Amended and Restated Articles of Incorporation (the “Old National Articles”) and Amended and Restated By-Laws (the “Old National By-Laws”). In addition, as Old National common stock is listed on the Nasdaq Global Select Market, Old National’s corporate governance is subject to compliance with the Nasdaq Corporate Governance Rules. Upon consummation of the Merger, the Klein shareholders will become Old National shareholders, and the Old National Articles, the Old National By-Laws, the IBCL and the rules and regulations applying to public companies will govern their rights as Old National shareholders.

The following discussion is a summary of the material differences between the current rights of Old National shareholders and the current rights of Klein shareholders, but does not purport to be a complete description of those differences. These differences may be determined in full by reference to the IBCL, the MBCA, the Old National Articles, the Klein Articles, the Old National By-Laws, the Klein By-Laws and such other governing documents referenced in this summary of shareholder rights. Old National has filed with the SEC and/or made available on its corporate website its respective governing documents referenced in this summary of shareholder rights and will send copies of these documents to you, without charge, upon your request. See “Where You Can Find More Information” beginning on page 81.

 

Old National    Klein
Authorized Capital Stock
Old National currently is authorized to issue up to 300,000,000 shares of common stock, without par value, of which approximately 152,351,000 shares were outstanding as of June 30, 2018. Old National is also authorized to issue up to 2,000,000 shares of preferred stock, without par value. As of the date of this proxy statement and prospectus, there are no shares of preferred stock outstanding.    Klein currently is authorized to issue up to 12,000,000 common shares, consisting of 10,000,000 shares of voting common stock, without par value and 2,000,000 shares of nonvoting common stock, without par value. As of August 21, 2018, 2,875,206 shares of common stock are issued and outstanding, of which 2,822,000 are shares of voting common stock.
Issuance of Additional Shares
Old National’s board of directors may authorize the issuance of additional shares of common stock up to the amounts authorized in the Old National Articles, without shareholder approval, subject only to the restrictions of the IBCL, the Old National Articles and the Nasdaq Global Select Market. Old National’s board of directors may also authorize the issuance of preferred stock up to the amounts authorized in the Old National Articles, without shareholder approval, possessing voting and conversion rights that could adversely affect the voting power of Old National’s common shareholders, subject to any restrictions imposed on the issuance of such shares by the IBCL, the Old National    Klein’s board of directors may authorize the issuance of additional shares of common stock up to the amounts authorized in the Klein Articles, without shareholder approval, subject only to the restrictions of the MBCA, and the Klein Articles. Under the Klein Articles, the board of directors has the power to, without shareholder approval, issue voting or non-voting common shares to holders of either voting or non-voting common shares to effectuate share dividends, splits or conversion of its outstanding shares; grant rights and options in respect to shares, make allotments of shares; and accept or reject subscriptions for shares and establish by resolution

 

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Articles and the Nasdaq Global Select Market. Any preferred shares issued may also rank senior to Old National’s common stock as to rights upon liquidation, winding-up or dissolution.    additional or different series of shares and may fix the rights and preferences of said shares in any series.
Number, Classification and Qualifications of Directors

The Old National By-Laws provide that the board of directors shall be comprised of 15 members. All directors of Old National are elected for terms expiring at the next annual meeting of the shareholders and until their respective successors have been duly elected and qualified or such director’s earlier resignation, death or removal. Any vacancy occurring on the board of directors, whether resulting from an increase in the number of directors or otherwise, may be filled by the affirmative vote of not less than a majority of the remaining directors then in office, even though such directors remaining in office may constitute less than a quorum of the board of directors.

 

The Old National Articles provide that directors need not be shareholders of Old National. The Old National By-Laws provide that a director shall not qualify to serve as such effective as of the end of the term during which he or she becomes 75 years of age. The Old National By-Laws further provide that the board of directors may establish other qualifications for directors in its Corporate Governance Guidelines in effect from time to time.

   The Klein By-Laws provide that the board of directors shall consist of at least three and not more than 20 directors. The board of directors shall fix the number of directors. Directors hold office until the next regular meeting of shareholders and until such director’s successor is duly elected and qualified, or until such director’s earlier death, resignation, retirement, disqualification or removal. Any vacancy occurring on the board due to death, resignation, retirement, disqualification or removal of an existing director or a vacancy due to an increase in the size of the board may be filled by the affirmative vote of a majority of the remaining directors, even if less than a quorum. The Klein By-Laws provide that directors need not be residents of Minnesota or shareholders of Klein.
Election of Directors
Old National’s directors are elected by a plurality of the votes cast by the shares entitled to vote at a meeting at which a quorum is present. Old National’s board of directors has adopted a corporate governance policy regarding director elections that is contained in Old National’s Corporate Governance Guidelines. The policy provides that in any uncontested election, any nominee for director who receives a greater number of votes “withheld” for his or her election than votes “for” such election will tender his or her resignation as a director promptly following the certification of the shareholder vote. Old National’s Corporate Governance and Nominating Committee of its board of directors, without participation by any director so tendering his or her resignation, will consider the resignation offer and recommend to the board of directors whether to accept it. The board of directors, without participation by any director so tendering his or her resignation, will act on    Klein’s directors are elected by a majority of the shares present, whether in person or by proxy, and entitled to vote in the election at a meeting at which a quorum is present.

 

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the Corporate Governance and Nominating Committee’s recommendation no later than 90 days following the date of the annual meeting of shareholders at which the election occurred. If the board of directors decides to accept the director’s resignation, the Corporate Governance and Nominating Committee will recommend to the board of directors whether to fill the resulting vacancy or to reduce the size of the board. Old National will promptly disclose the decision of its board of directors and the reasons for the decision in a broadly disseminated press release that will also be filed with the SEC on a Form 8-K.   
Removal of Directors
Under the IBCL, directors may be removed in any manner provided in the corporation’s articles of incorporation. In addition, the shareholders or directors may remove one or more directors with or without cause, unless the articles of incorporation provide otherwise. The Old National By-Laws provide that any director or the entire board of directors (exclusive of directors who may be elected by the holders of one or more series of preferred stock) may be removed, with or without cause, only by (1) the affirmative vote of the holders of not less than two-thirds (2/3) of the outstanding shares of Old National common stock at a meeting of shareholders called expressly for the purpose of removing one or more directors, or (2) the affirmative vote of not less than two-thirds (2/3) of the actual number of directors elected and qualified and then in office.    Pursuant to the MBCA and Klein’s By-Laws, any one or all of the directors may be removed at any time, with or without cause, by the affirmative vote of a majority of shares entitled to vote at an election of directors; provided that, according to the MBCA, if a director has been elected solely by one class of shares, then that director may only be removed by the affirmative vote of a majority of such class.
Transactions Involving Directors
The Old National Articles allow directors to have an interest in a contract or transaction with Old National, if the interest is disclosed to or known by the board of directors, and the board authorizes, approves or ratifies the contract or transaction by a majority vote of those present, with the interested director to be counted in determining the existence of a quorum, but not in calculating a majority to approve the transaction. In addition, the IBCL allows a director to have a direct or indirect interest in a transaction with Old National if any of the following circumstances have been established: (1) the transaction was fair to Old National; (2) the material facts of the transaction and the director’s interest were disclosed or known to the board of directors or a committee of the board and the board of directors or committee authorized, approved or ratified    Pursuant to the MBCA, a contract or transaction between Klein and one or more of its directors, or between Klein and an organization in or of which one or more of the Klein’s directors are directors, officers, or legal representatives or have a material financial interest, is not void or voidable solely by reason of the conflict, provided that (1) the contract or transaction was, and the person asserting the validity of the contract or transaction sustains the burden of establishing that the contract or transaction was, fair and reasonable to Klein at the time it was authorized, approved, or ratified; (2) the material facts as to the contract or transaction and the director’s interests are fully disclosed or known to the holders of all of Klein’s outstanding shares, whether or not entitled to vote, and the contract or transaction

 

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the transaction; or (3) the material facts of the transaction and the director’s interest were disclosed or known to the shareholders entitled to vote and they authorized, approved or ratified the transaction. A transaction is authorized, approved or ratified under clause (2) above if it received the affirmative vote of the majority of the directors on the board or the committee who had no interest in the transaction, but a transaction may not be authorized, approved or ratified by a single director. For purposes of the shareholder vote to authorize, approve or ratify a transaction under clause (3) above, shares owned by or voted under the control of the interested director may be counted in the vote.    is approved, in good faith, by two-thirds of the Klein’s disinterested shareholders entitled to vote (or by the unanimous affirmative vote of the holders of all of Klein’s outstanding shares, whether or not entitled to vote); (3) the material facts as to the contract or transaction and the director’s interests are fully disclosed or known to the Klein board of directors and (4) a majority of disinterested directors, in good faith, authorizes, approves, or ratifies the contract or transaction.
Director Liability
Pursuant to the IBCL, an Old National director will not be liable to Old National shareholders for any action or failure to act in his or her capacity as director, unless the director has breached or failed to perform his or her duties as a director in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the director reasonably believes to be in the best interests of the corporation, and the breach or failure to perform these duties constitutes willful misconduct or recklessness.    Pursuant to the MBCA and the Klein Articles, a director will not be personally liable to Klein or its shareholders for monetary damages for breach of fiduciary duty. Pursuant to the MBCA, personal liability is limited, except for (1) any breach of the director’s duty of loyalty to the corporation or its shareholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 302A.559 of the MBCA, which relates to illegal distributions or Section 80A.76 of the Minnesota statutes, which relates to violations of Minnesota securities laws, (4) any transaction from which the director derives an improper personal benefit, or (5) for any act or omission occurring prior to the effective date of the personal liability of directors provision of the Klein Articles. The Klein Articles provides that no amendment to or repeal of the personal liability of directors provision of the Klein Articles shall apply to or have any effect on the liability or alleged liability of any director of Klein for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.
Indemnification of Directors, Officers and Employees
Under the IBCL, an Indiana corporation may indemnify an individual made a party to a proceeding because the individual is or was a director against liability incurred in the proceeding if (1) the individual’s conduct was in good faith, (2) the individual reasonably believed, in the case of conduct in the individual’s official capacity with the corporation, that the individual’s conduct was in the best interests of the corporation, and in all other cases, that the individual’s conduct was at least not opposed to the corporation’s best interests, and (3) in the case of    Pursuant to the Klein By-Laws, the corporation shall indemnify a person made a party to any threatened, pending or contemplated action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director, officer, employee or agent of Klein or is or was serving at the request of Klein as a director, officer, employee, trustee or agent of another company, partnership, joint venture, trust or other enterprise against expenses (including attorneys’

 

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any criminal proceeding, the individual either had reasonable cause to believe that the individual’s conduct was lawful, or the individual had no reasonable cause to believe that the individual’s conduct was unlawful.

 

Unless limited by its articles of incorporation, a corporation must indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because the director is or was a director of the corporation against reasonable expenses incurred by the director in defense of the proceeding. In addition, unless limited by its articles of incorporation, an officer of a corporation, whether or not a director, is entitled to mandatory indemnification to the same extent as a director, and a corporation may also indemnify and advance expenses to an officer, employee or agent to the same extent as to a director.

 

The Old National Articles and Old National By-Laws provide that every person who is or was a director, officer or employee of Old National or any other corporation for which he is or she is or was serving in any capacity at the request of Old National shall be indemnified by Old National against any and all liability and expense that may be incurred by him or her in connection with, resulting from, or arising out of any claim, action, suit or proceeding, provided that the person is wholly successful with respect to the claim, action, suit or proceeding, or acted in good faith in what he reasonably believed to be in or not opposed to the best interests of Old National or any other corporation for which he or she is or was serving in any capacity at the request of Old National. Old National will also indemnify each director, officer and employee acting in such capacity in connection with criminal proceedings provided the director, officer or employee had no reasonable cause to believe that his or her conduct was unlawful. The indemnification by Old National extends to attorney fees, disbursements, judgments, fines, penalties or settlements. Old National may also advance expenses or undertake the defense of a director, officer or employee upon receipt of an undertaking by such person to repay such expenses if it should ultimately be determined that he or she is not entitled to indemnification.

 

In order for a director, officer or employee to be entitled to indemnification, the person must be wholly successful with respect to such claim or either the board of directors of Old National acting by a quorum consisting of directors who are not parties to, or who

  

fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, to the extent and under the circumstances permitted by the MBCA.

 

Pursuant to the MBCA, Klein shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, settlements, and reasonable expenses incurred by the person in connection with the proceeding if, with respect to the acts or omissions of the person complained of in the proceeding, the person, (1) has not been indemnified by another organization for the same judgments, penalties, fines, settlements, and reasonable expenses incurred by the person in connection with the proceeding with respect to the same acts or omissions; (2) acted in good faith; (3) received no improper personal benefit and section 302A.255, if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions occurring in their official capacity, reasonably believed that the conduct was not opposed to the best interests of Klein.

 

Pursuant to the MBCA, the articles or bylaws may prohibit indemnification or advances of expenses otherwise required or may impose conditions on indemnification or advances of expenses in addition to the conditions contained above including, without limitation, monetary limits on indemnification or advances of expenses, if the prohibition or conditions apply equally to all persons (or persons within a given class).

 

The MBCA permits Klein to purchase and maintain insurance on behalf of a person in that person’s official capacity against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the corporation would have been required to indemnify the person against the liability.

 

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have been wholly successful with respect to such claim, action, suit or proceeding, or independent legal counsel must determine that the director, officer or employee has met the standards of conduct required by the Old National Articles.

 

The IBCL permits Old National to purchase insurance on behalf of its directors, officers, employees and agents against liabilities arising out of their positions with Old National, whether or not such liabilities would be within the above indemnification provisions. Pursuant to this authority, Old National maintains such insurance for the directors, officers and employees of Old National and any subsidiary of Old National.

  
Advance Notice Requirements for Presentation of Business and Nominations of Directors at Annual Meetings of Shareholders

The Old National By-Laws provide that nominations for the election of directors may be made only by the board of directors following the recommendation of the Old National Corporate Governance and Nominating Committee. The Committee will consider candidates for election suggested by shareholders, subject to the suggestions having been made in compliance with the requirements set forth in Article IV, Section 9 of the Old National By-Laws.

 

Additionally, shareholders may submit proposals for business to be considered at Old National’s annual meeting of shareholders, and include those proposals in Old National’s proxy statement and form of proxy delivered to shareholders, in accordance with the requirements of Rule 14a-8 of Regulation 14A promulgated under the Securities Exchange Act of 1934.

   The Klein By-Laws do not include provisions relating to the nomination of directors or the submission of proposals by shareholders.
Special Meetings of Shareholders
The Old National By-Laws provide that special meetings of shareholders may be called by the board of directors, the Chairman of the Board, the Chief Executive Officer or the President of Old National, and shall be called by the Chairman of the Board, the Chief Executive Officer, the President or the Secretary at the written request of a majority of the members of the board of directors or upon delivery to Old National’s Secretary of a signed and dated written demand for a special meeting from the holders of at least 25% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting.   

The Klein By-Laws provide that special meetings of shareholders may be called by the president, by the board of directors, or by written order of at least two directors, and shall be called by the president or the secretary at the request in writing of the shareholders holding at least 10% of the shares entitled to vote. Such request shall state the purposes of the proposed meeting.

 

The Klein By-Laws further provide that the president or directors so calling, or the shareholders so requesting, any such meeting shall fix the time and place (if other than at the KleinBank Corporate Center) as the place for holding such meeting, which shall be not less than two (2) nor more than sixty (60) days after the receipt of such request.

 

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Shareholder Action Without a Meeting
The Old National Articles provide that any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if a consent in writing setting forth the action is signed by all the shareholders entitled to vote with respect to it, and the consent is filed with the minutes of the proceedings of the shareholders.   

The MBCA provides that an action required or permitted to be taken at any annual or special meeting of shareholders may be taken without a meeting by written action signed, or consented to by authenticated electronic communication, by all of the shareholders entitled to vote on the action.

Amendment of Articles of Incorporation and By-laws

The IBCL generally requires the approval of at least a majority of a quorum of shareholders present at a shareholders’ meeting (and, in certain cases, a majority of all shares held by any voting group entitled to vote) for amendments to an Indiana corporation’s articles of incorporation. However, the IBCL permits a corporation in its articles of incorporation to specify a higher shareholder vote requirement for certain amendments. Certain provisions of the Old National Articles may only be altered, amended or repealed by the affirmative vote of the holders of not less than 80% of the outstanding shares of Old National common stock, given at a meeting of shareholders duly called for that purpose, upon a proposal adopted and recommended by the vote of two-thirds (2/3) of the entire board of directors of Old National. These provisions include Article VIII, Section 11 (relating to the approval of certain business combinations), Article VIII, Section 12 (relating to the board’s consideration of certain non-financial factors in the evaluation of business combinations) and Article VIII, Section 13 (relating to limitations on further purchases of shares by shareholders who own 15% or more of Old National’s outstanding shares).

 

The Old National Articles and the Old National By-Laws provide that the Old National By-Laws may only be altered, amended or repealed by a majority vote of the total number of directors of Old National.

  

Pursuant to the MBCA, a resolution approved by the affirmative vote of a majority of the directors present, or proposed by a shareholder or shareholders holding three percent or more of the voting power of the shares entitled to vote, that sets forth the proposed amendment to the Articles shall be submitted to a vote at the next regular or special meeting of the shareholders.

 

To approve an amendment to the Articles, the shareholders must approve the amendment by the affirmative vote of the holders of the greater of (1) a majority of the voting power of the shares present and entitled to vote on the amendment, or (2) a majority of the voting power of the minimum number of the shares entitled to vote that would constitute a quorum for the transaction of business at the meeting.

 

Klein’s By-Laws provide that the board of directors is authorized and empowered to make and alter the By-Laws for the governance of the corporation to the full extent permitted by MBCA.

 

Business Combination Restrictions and Other Shareholder Limitations

 

Business Combinations

 

The Old National Articles require the affirmative vote of not less than 80% of the outstanding shares of Old National common stock to approve certain business combinations, including a merger or consolidation of Old National with or into any other corporation, which are not approved and recommended by the vote of two-

  

 

Business Combinations

 

Klein is not an issuing public corporation, and therefore, not subject to the following business combination provision of the MBCA:

 

The MBCA generally prohibits issuing public corporations from engaging in any “business

 

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thirds (2/3) of the entire board of directors of Old National. All other business combinations require the affirmative vote of a majority of the outstanding shares of Old National common stock. This provision of the Old National Articles may not be altered, amended or repealed except by the affirmative vote of the holders of not less than 80% of the outstanding shares of Old National common stock, given at a meeting of shareholders duly called for that purpose, upon a proposal adopted and recommended by the vote of two-thirds (2/3) of the entire board of directors of Old National.

 

In taking or declining to take any action or in making any recommendation to a corporation’s shareholders with respect to any matter, the IBCL provides that directors of Indiana corporations, in their discretion, may consider both the short-term and long-term interests of the corporation, taking into account and weighing, as the directors deem appropriate, the effects of such action or inaction on the corporation’s shareholders and other constituencies as well as certain interests described in the IBCL and any other factors the directors consider relevant. The Old National Articles require the board of directors, in connection with exercising its business judgment in determining what is in the best interests of Old National and its shareholders when evaluating a business combination or a tender or exchange offer, consider factors in addition to the adequacy of the financial consideration, such as the following factors and any other factors it deems relevant: the social and economic effects of the transaction on Old National and its subsidiaries, depositors, loan and other customers, creditors and other elements of the communities in which Old National and its subsidiaries operate or are located; the business and financial condition and earning prospects of the acquiring person or entity, including, but not limited to, debt service and other existing or likely financial obligations of the acquiring person or entity, and the possible effect of such conditions upon Old National and its subsidiaries and the other elements of the communities in which Old National and its subsidiaries operate or are located; and the competence, experience and integrity of the acquiring person or entity and its management. This provision of the Old National Articles may not be altered, amended or repealed except by the affirmative vote of the holders of not less than 80% of the outstanding shares of Old National common stock, given at a meeting of shareholders duly called for that purpose, on a proposal

  

combination” with any “interested shareholder” for a period of four years following the interested shareholder’s share acquisition date unless the business combination or the interested shareholder’s acquisition of shares is approved by a committee of disinterested directors of the board of directors before the interested shareholder’s share acquisition date or on the share acquisition date but prior to the interested shareholder becoming an interested shareholder on the share acquisition date.

 

The MBCA generally defines “business combination” to include mergers, sales or other dispositions to the interested shareholder.

 

The MBCA generally defines “interested shareholder” as (i) any person owning 10% or more of the outstanding voting power of the outstanding shares entitled to vote of the issuing public corporation or (ii) any affiliate or associate of the issuing public corporation that at any time within the four-year period immediately before the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding shares entitled to vote of the issuing public corporation.

 

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adopted and recommended by the vote of two-thirds (2/3) of the entire board of directors of Old National.

 

The inclusion of the foregoing requirement in the Old National Articles, as well as the flexibility provided to directors under the IBCL to consider non-financial factors and other interests in connection with the evaluation of a business combination transaction, may place the Old National board of directors in a stronger position to oppose a business combination transaction if the board concludes that the transaction would not be in the best interests of Old National and its shareholders, even if the price offered in connection with the proposed business combination is significantly greater than the then market price of Old National’s common stock. Accordingly, it may be more difficult for an acquirer to gain control of Old National in a transaction not approved by its boards of directors.

 

Under the business combinations provision of the IBCL, any shareholder who acquires a 10%-or-greater ownership position in an Indiana corporation with a class of voting shares registered under Section 12 of the Securities Exchange Act of 1934 (and that has not opted-out of this provision) is prohibited for a period of five years from completing a business combination (generally a merger, significant asset sale or disposition or significant issuance of additional shares) with the corporation unless, prior to the acquisition of such 10% interest, the board of directors of the corporation approved either the acquisition of such interest or the proposed business combination. If such board approval is not obtained, then five years after a 10% shareholder has become such, a business combination with the 10% shareholder is permitted if all provisions of the articles of incorporation of the corporation are complied with and either a majority of disinterested shareholders approves the transaction or all shareholders receive a price per share determined in accordance with the fair price criteria of the business combinations provision of the IBCL.

 

An Indiana corporation may elect to remove itself from the protection provided by the Indiana business combinations provision, but such an election remains ineffective for 18 months and does not apply to a combination with a shareholder who acquired a 10% ownership position prior to the election. Old National has not elected to remove itself from the protections of this provision.

  

 

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Control Share Acquisitions

 

The IBCL includes a “control share acquisition” provision. Under the control share acquisition provision, unless otherwise provided in the corporation’s articles of incorporation or by-laws, if a shareholder acquires shares of the corporation’s voting stock (referred to as control shares) within one of several specified ranges (one-fifth or more but less than one-third, one-third or more but less than a majority, or a majority or more), approval of a majority of the disinterested shareholders must be obtained before the acquiring shareholder may vote the control shares. Under certain circumstances, including in the event that shareholder approval is not obtained, the shares held by the acquirer may be redeemed by the corporation at the fair value of the shares as determined by the control share acquisition provision. Old National is subject to the control share acquisition provision. The control share acquisition provision does not apply to a plan of merger or share exchange if the corporation complies with the applicable merger provisions and is a party to the plan of merger or plan of share exchange.

  

Control Share Acquisitions

 

Klein is not an issuing public corporation, and therefore, not subject to the following control share acquisition provision of the MBCA:

 

The MBCA includes a “control share acquisition” provision. Under the control share acquisition provision, unless otherwise provided in the issuing public corporation’s articles of incorporation or by-laws, if a shareholder acquires 20% or more of the corporation’s voting stock (referred to as control shares), then approval of a majority of the disinterested shareholders must be obtained before the acquiring shareholder may vote the control shares.

 

Limitations on Significant Shareholders

 

The Old National Articles provide that shareholders who acquire 15% of the outstanding Old National common stock and who seek to acquire, directly or indirectly, additional shares of common stock in connection with a tender or exchange offer, open market purchase or business combination must offer and pay for such additional shares a consideration that is at least equal to the highest percent over market value paid to acquire Old National common stock then held by such person. Any purchases of shares in violation of this provision are null and void. This provision of the Old National Articles may not be altered, amended or repealed except by the affirmative vote of the holders of not less than 80% of the outstanding shares of Old National common stock, given at a meeting of shareholders duly called for that purpose, upon a proposal adopted and recommended by the vote of two-thirds (2/3) of the entire board of directors of Old National.

  

 

Limitations on Significant Shareholders

 

Neither the Klein Articles nor the Klein By-Laws contain limitations on significant shareholders.

 

Appraisal and Dissenters’ Rights

 

Under the IBCL, shareholders who dissent from a merger or similar transaction can exercise dissenters’ rights except (1) with respect to shares of any class or series of stock that are “covered securities” under Section 18(b)(1)(A) or (B) of the Securities Act of 1933,

  

 

Under the MBCA, shareholders are entitled to dissent and obtain payment of fair value of the shareholder’s shares in the event of (1) an amendment to the articles of incorporation that materially and adversely affects rights or preferences of the dissenter’s shares,

 

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or (2) if they were not entitled to vote on the merger. As a result, shareholders of Old National will not be afforded dissenters’ rights as long as the Old National common stock continues to be listed on a national securities exchange.    unless otherwise provided in the articles of incorporation; (2) a sale, lease, transfer or other disposition of property and assets of the corporation that requires shareholder approval; (3) a plan of merger; (4) a plan of exchange where the corporation’s shares will be acquired by the acquiring organization; (5) a plan of conversion that is adopted and becomes effective; (6) an amendment to the articles of incorporation in connection with a class or series that reduces the number of shares of the class or series owned by the shareholder to a fraction of a share if the corporation exercises its right to repurchase the fractional share so created; or (7) any other corporate action taken pursuant to a shareholder vote if the articles of incorporation, bylaws, or a resolution of the board of directors provide that shareholders are entitled to dissent and obtain payment.

 

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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

General. The following is a summary of the anticipated United States federal income tax consequences of the Merger generally applicable to a U.S. Holder (as defined below) of Klein common stock with respect to the exchange of Klein common stock for Old National common stock pursuant to the Merger. This discussion assumes that U.S. Holders hold their Klein common stock as capital assets within the meaning of section 1221 of the Code. This summary is based on the Code, Treasury Regulations, judicial decisions and administrative pronouncements, each as in effect as of the date of this proxy statement and prospectus. All of the foregoing are subject to change at any time, possibly with retroactive effect, and all are subject to differing interpretation. No advance ruling has been or will be sought or obtained from the IRS regarding the United States federal income tax consequences of the Merger. As a result, no assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below.

This summary does not address any tax consequences arising under tax laws other than United States federal income tax laws, nor does it address estate or gift tax laws, excise tax or the laws of any state, local, foreign or other taxing jurisdiction, nor does it address any aspect of income tax that may be applicable to non-U.S. Holders of Klein common stock, nor does it address any tax imposed on net investment income under Section 1411 of the Code or alternative minimum tax imposed under Section 55 of the Code. In addition, this summary does not address all aspects of United States federal income taxation that may apply to U.S. Holders of Klein common stock in light of their particular circumstances or U.S. Holders that are subject to special rules under the Code, such as holders of Klein common stock that are grantor trusts or testamentary trusts (and persons holding their Klein common stock through a grantor trust or testamentary trust).

For purposes of this summary, a “U.S. Holder” is a beneficial owner of Klein common stock that is for United States federal income tax purposes:

 

   

an individual that is a United States citizen or resident alien;

 

   

a corporation, or other entity taxable as a corporation for United States federal income tax purposes, created or organized under the laws of the United States or any state therein or the District of Columbia;

 

   

a trust if (1) the administration of which is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) it was in existence on August 20, 1996 and has a valid election in effect under applicable Treasury Regulations to be treated as a United States person; or

 

   

an estate, the income of which is subject to United States federal income taxation regardless of its source.

The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. The obligations of Old National and Klein to consummate the Merger are conditioned upon the receipt of an opinion from Krieg DeVault to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code.

In the opinion of Krieg DeVault, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code, with the tax consequences described below. This opinion was and will be based on facts, assumptions and representations set forth or referred to in the opinions and representations made by Old National and Klein, as well as on certain covenants, procedures and undertakings by Old National and Klein including the assumption that the Merger will be completed in the manner described in the Merger Agreement and this proxy statement and prospectus.

 

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Exchange of Klein Common Stock for Old National Common Stock. In accordance with the qualification of the Merger as a “reorganization” under Section 368(a) of the Code, the U.S. federal income tax consequences of the Merger to Klein shareholders will be as follows:

 

   

No gain or loss will be recognized by any U.S. Holder of Klein common stock on the exchange of Klein common stock for Old National common stock in the Merger;

 

   

A U.S. Holder’s aggregate tax basis in the Old National common stock received in the Merger will be equal to the shareholder’s aggregate tax basis in such shareholder’s Klein common stock surrendered;

 

   

A U.S. Holder’s holding period for Old National common stock received in the Merger will include the holding period of the Klein common stock surrendered in the Merger.

Under rules pertaining to the nontaxable exchange of shares, a U.S. Holder’s basis in and holding periods for shares of Old National common stock received in the Merger may vary among shares if blocks of Klein common stock surrendered in the Merger were acquired at different times or for different prices. Klein shareholders should consult their own tax advisors regarding the tax consequences of these rules in their particular circumstances.

A U.S. Holder of Klein common stock, as a result of having received Old National common stock in the Merger, will be required to retain records pertaining to the Merger. In addition, each U.S. Holder of Klein common stock who is a “significant holder” will be required to file a statement with such holder’s U.S. federal income tax return in accordance with Treasury Regulations Section 1.368-3(b) setting forth such holder’s basis in the Klein common stock surrendered and the fair market value of the Old National common stock received in the Merger. A “significant holder” is a holder of Klein common stock who, immediately before the Merger, owned at least 1% of the vote or value of the outstanding stock of Klein or securities of Klein with a basis for federal income tax purposes of at least $1 million.

The preceding discussion is intended only as a summary of United States federal income tax consequences of the Merger. It is not a complete analysis or discussion of all potential tax effects that may impact you. Thus, Klein shareholders should consult their own tax advisors as to the specific tax consequences to them that result from the Merger, including tax return reporting and disclosure requirements, the implications and effect of federal, state, local, and other applicable tax laws and the effect and ramifications of any proposed legislation or the prospective enactment of changes in the tax laws.

 

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PROPOSAL 2 — ADJOURNMENT OF THE SPECIAL MEETING

The shareholders of Klein are being asked to approve a proposal to adjourn or postpone the special meeting to permit further solicitation of proxies in the event that an insufficient number of shares is present in person or by proxy to approve the Merger Agreement.

Under the MBCA and the Klein By-Laws, the affirmative vote of the holders of at least a majority of the outstanding shares of Klein common stock entitled to vote is required to approve the Merger Agreement. In the event that shareholder participation at the special meeting is lower than expected, Klein would like the flexibility to postpone or adjourn the meeting in order to attempt to secure broader shareholder participation. If Klein desires to adjourn the special meeting, Klein will request a motion that the special meeting be adjourned, and delay the vote on the proposal to approve the Merger Agreement until the special meeting is reconvened. If Klein adjourns the special meeting for 30 days or less and announces at the special meeting the date, time and location at which the special meeting will be reconvened, Klein will not set a new record date or issue any other notice.

Any adjournment will permit Klein to solicit additional proxies and will permit a greater expression of the views of Klein shareholders with respect to the Merger. Such an adjournment would be disadvantageous to shareholders who are against the proposal to approve the Merger Agreement because an adjournment will give Klein additional time to solicit favorable votes and increase the chances of approving that proposal. Klein has no reason to believe that an adjournment of the special meeting will be necessary at this time.

The Klein board of directors unanimously recommends that Klein shareholders vote “FOR” approval of the Adjournment Proposal.

KLEIN BUSINESS

For 111 years, the Klein Family through Klein Financial, Inc. and its wholly owned subsidiary KleinBank have been committed to growing a strong and stable community bank built on a foundation of financial and personal strength. Today, with 18 branches, more than 400 employees and assets of approximately $1.97 billion as of June 30, 2018, those strengths still guide KleinBank in its service to customers, employees and communities. Over the past few years, KleinBank has received recognition as a Star Tribune top workplace, for providing best in class services for Business Banking and Mortgage Lending by the readers of Twin Cities Business, and as a recipient of the Better Business Bureau of Minnesota and North Dakota’s Torch Award for Ethics, as well as the Better Business Bureau International’s Torch Award for Ethics.

Klein’s principal executive office is located at 1550 Audubon Road, Suite 200, Chaska, Minnesota 55318. The telephone number for Klein is (952) 361-9249.

 

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KLEIN MARKET FOR COMMON STOCK AND DIVIDENDS

The outstanding shares of Klein common stock are privately held and are not traded on any national or regional securities exchange and are not quoted on any over-the-counter market. There have been no sales of Klein common stock since its incorporation in 1975. The following table sets forth the cash dividends declared per share for the periods indicated for Klein common stock, including dividends distributed to Klein’s shareholders for their payment of tax obligations because of Klein’s status as an S corporation under the Code.

 

Quarter Data    Dividend Declared  

First quarter 2016

   $ 0.10  

Second quarter 2016

     2.78  

Third quarter 2016

     —    

Fourth quarter 2016

     —    

First quarter 2017

   $ 0.35  

Second quarter 2017

     2.78  

Third quarter 2017

     0.35  

Fourth quarter 2017

     0.70  

First quarter 2018

   $ 0.28  

Second quarter 2018

     4.21  

Third quarter (through August 23, 2018)

     —    

On June 20, 2018, the trading day immediately prior to the public announcement date of the Merger Agreement, the closing price of Old National common stock was $19.05. On August 23, 2018, the latest practicable date before the printing of this proxy statement and prospectus, the closing price of Old National common stock was $20.15.

Klein shareholders are urged to obtain current market quotations for shares of Old National common stock and to review carefully the other information contained in this proxy statement and prospectus or incorporated by reference into this proxy statement and prospectus in considering whether to approve the Merger Agreement. The market price of Old National common stock will fluctuate between the date of this proxy statement and prospectus and the date of completion of the Merger. No assurance can be given concerning the market price of Old National common stock before or after the effective time of the Merger. Changes in the market price of Old National common stock prior to the completion of the Merger will affect the market value of the Merger Consideration that Klein shareholders will receive upon completion of the Merger.

 

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KLEIN SECURITY OWNERSHIP

Common Stock Ownership

Listed below are the beneficial owners of more than 5% of the outstanding shares of Klein voting common stock as of the record date:

 

Name of Beneficial Owner

   Shares
Beneficially
Owned (1)
     Percent
of
Class
 

George Klein Share Family Trust FBO Daniel Klein (2)

     411,100        14.6

George Klein Share Family Trust FBO James Klein (3)

     411,000        14.6

George Klein Share Family Trust FBO Alan Klein (4)

     411,000        14.6

The Revocable Trust of Angela D. Vukovich c/u/a/d 5/22/98, as amended and restated 1/28/02 (5)

     178,700        6.3

Revocable Trust of Matthew C. Klein U/A Dtd. 7/23/02 (6)

     178,700        6.3

Alyssa L. Klein Revocable Trust U/A Dtd. 1/16/07 (7)

     201,350        7.1

Christian G. Klein Revocable Trust U/A Dtd 7/23/07, as amended and restated 5/23/11 (8)

     161,050        5.7

 

(1)

Includes shares as to which such person, directly or indirectly, has or shares voting power or dispositive power with respect to the security. The address for each shareholder listed in the table above is c/o Klein Financial, Inc., 1550 Audubon Road, Suite 200, Chaska, Minnesota 55318.

(2)

Daniel G. and Matthew C. Klein, as trustees, share voting and dispositive power over the shares.

(3)

James C. and Alyssa L. Klein, as trustees, share voting and dispositive power over the shares.

(4)

Alan C. and Jeffrey A. Klein, as trustees, share voting and dispositive power over the shares.

(5)

Angela D. Vukovich and Matthew C. Klein, as trustees, share voting and dispositive power over the shares.

(6)

Matthew C. Klein, as trustee, has voting and dispositive power over the shares.

(7)

Alyssa L. Klein, James C. Klein and Christian G. Klein, as trustees, share voting and dispositive power over the shares.

(8)

Christian G. Klein and James C. Klein, as trustees, share voting and dispositive power over all shares.

For a description of the trustees’ total voting and dispositive power over Klein voting common stock, in their capacities as trustees and as individuals, please see the table below.

 

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Directors and Executive Officers

The following table sets forth information concerning the number of shares of Klein voting and non-voting common stock beneficially owned as of the record date by Klein’s directors and executive officers and all of Klein’s directors and executive officers as a group as of the record date. The same shares are listed for multiple beneficial owners, to the extent that the shares are held in family trusts for which these beneficial owners share voting and dispositive power.

 

Name of Beneficial Owner

   Voting
Shares Beneficially
Owned (1)
     Percent of
Class
    Non-Voting
Shares Beneficially
Owned (1)
     Percent of
Class
 

W. Douglas Hile

     —          *           

Alan C. Klein (2)

     967,900        34.3     

Alyssa L. Klein (3)

     747,050        26.5     

Christian G. Klein (4)

     497,100        17.6     

Daniel G. Klein (5)

     547,200        19.4     

James C. Klein (6)

     909,500        32.2     

Jeffrey A. Klein (7)

     685,500        24.3     

Kevin J. Klein (8)

     274,500        9.7     

Matthew C. Klein (9)

     943,200        33.4     

Kelly A. Lampe (10)

     139,900        5.0     

NanciAnn S. Olson (11)

     40,000        1.4     53,206        100.0

Ronald W. Seib

     —          *           

Kevin J. Valois

     —          *           

Angela D. Vukovich (12)

     353,400        12.5     

All Directors & Executive Officers as a group (14 persons)

     2,822,000        100.0     53,206        100.0

 

*

Denotes percentage is less than 1%.

(1)

Includes shares as to which such person, directly or indirectly, has or shares voting power or dispositive power with respect to the security. There are no shares as to which the person has a right to acquire beneficial ownership within 60 days. The address for each shareholder listed in the table above is c/o Klein Financial, Inc., 1550 Audubon Road, Suite 200, Chaska, Minnesota 55318.

(2)

Includes 2,600 shares owned by Mr. Klein as an individual and 965,300 shares held in various family trusts, for which Mr. Klein and other individuals serve as trustees and share voting and dispositive power.

(3)

Includes 747,050 shares held in various family trusts, for which Ms. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(4)

Includes 497,100 shares held in various family trusts, for which Mr. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(5)

Includes 1,400 shares owned by Mr. Klein as an individual and 545,800 shares held in various family trusts, for which Mr. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(6)

Includes 1,400 shares owned by Mr. Klein as an individual and 908,100 shares held in various family trusts, for which Mr. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(7)

Includes 685,500 shares held in various family trusts, for which Mr. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(8)

Includes 274,500 shares held in various family trusts, for which Mr. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(9)

Includes 943,200 shares held in various family trusts, for which Mr. Klein and other members of the Klein family serve as trustees and share voting and dispositive power.

(10)

Includes 139,900 shares held in various family trusts, for which Ms. Lampe and members of the Klein family serve as trustees and share voting and dispositive power.

(11)

Includes 40,000 voting shares and 53,206 non-voting shares held in various family trusts, for which Ms. Olson and other individuals serve as trustees and share voting and dispositive power.

(12)

Includes 353,400 shares held in various family trusts, for which Ms. Vukovich and other members of the Klein family serve as trustees and share voting and dispositive power.

 

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EXPERTS

The consolidated financial statements of Old National incorporated herein by reference to Old National’s Annual Report on Form 10-K for the year ended December 31, 2017 have been audited by Crowe LLP, independent registered public accounting firm (“Crowe”), as set forth in their report thereon and incorporated by reference in this proxy statement and prospectus in reliance upon such report given on the authority of Crowe as experts in accounting and auditing.

LEGAL MATTERS

Certain matters pertaining to the validity of the Old National common stock to be issued in connection with the Merger will be passed upon for Old National by Krieg DeVault LLP, Indianapolis, Indiana. Certain matters pertaining to the United States federal income tax consequences of the Merger will be passed upon for Old National and Klein by Krieg DeVault LLP.

SHAREHOLDER PROPOSALS FOR NEXT YEAR

Old National

If the Merger is completed, Klein shareholders will become shareholders of Old National. To be included in Old National’s proxy statement and voted on at Old National’s regularly scheduled 2019 annual meeting of shareholders, shareholder proposals must be submitted in writing by November 15, 2018, to Old National’s Secretary, P.O. Box 718, Evansville, Indiana 47705-0718, which date is 120 calendar days before the date of the release of Old National’s proxy statement for 2019. If notice of any other shareholder proposal intended to be presented at the annual meeting is not received by Old National on or before January 29, 2019, the proxy solicited by the Old National board of directors for use in connection with that meeting may confer authority on the proxies to vote in their discretion on such proposal, without any discussion in the Old National proxy statement for that meeting of either the proposal or how such proxies intend to exercise their voting discretion. Any such proposals will be subject to the requirements of the proxy rules and regulations adopted under the Exchange Act. If the date of the 2019 annual meeting is changed, the dates set forth above may change.

Pursuant to Old National’s By-Laws, any shareholder wishing to nominate a candidate for director or propose other business at an annual meeting must give Old National written notice not less 120 days before the meeting, and the notice must provide certain other information as described in the By-Laws. Copies of the By-Laws are available to shareholders free of charge upon request to Old National’s Secretary.

Klein

If the Merger occurs, there will be no Klein annual meeting of shareholders for 2019. In that case, shareholder proposals must be submitted to Old National in accordance with the procedures described above.

If the Merger is not completed, then Klein will hold an annual meeting in 2019.

 

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WHERE YOU CAN FIND MORE INFORMATION

Old National files annual, quarterly, and current reports, proxy statements, and other information with the SEC. You may read and copy these reports, statements, and other information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Old National’s public filings also are available to the public from commercial document retrieval services and on the Internet site maintained by the SEC at “http://www..sec.gov.” The reports and other information filed by Old National with the SEC are also available at Old National’s website at www..oldnational.com under the heading “Investor Relations,” and then under the heading “Financial Information.” The web addresses of the SEC and Old National are included as inactive textual references only. Except as specifically incorporated by reference into the proxy statement and prospectus, information on those web sites is not a part of the proxy statement and prospectus. Shares of Old National common stock are listed on the Nasdaq Global Select Market under the symbol “ONB.”

Old National has filed with the SEC a registration statement on Form S-4 under the Securities Act of 1933 with respect to the common stock of Old National being offered in the Merger. This proxy statement and prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement. Parts of the registration statement are omitted from the proxy statement and prospectus in accordance with the rules and regulations of the SEC. For further information, your attention is directed to the registration statement. Statements made in this proxy statement and prospectus concerning the contents of any documents are not necessarily complete, and in each case are qualified in all respects by reference to the copy of the document filed with the SEC.

The SEC allows Old National to “incorporate by reference” the information filed by Old National with the SEC, which means that Old National can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this proxy statement and prospectus.

Old National incorporates by reference the documents and information listed below:

(1) Annual Report on Form 10-K for the year ended December 31, 2017;

(2) Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018;

(3) Current Reports on Form 8-K filed January 25, 2018, April 26, 2018, June 21, 2018 and July 26, 2018 (except, with respect to each of the foregoing, for portions of such reports which were deemed to be furnished and not filed); and

(4) The description of Old National’s common stock set forth in the registration statement on Form 8-A filed pursuant to Section 12 of the Exchange Act on August 14, 2013, including any amendment or report filed with the SEC for the purpose of updating such description.

Old National is also incorporating by reference any filings Old National made with the SEC under Sections 13(a), 13(c), 14, and 15(d) of the Securities Exchange Act of 1934 between the date hereof and the date of the special meeting of Klein shareholders; provided, however, that Old National is not incorporating by reference any information furnished, but not filed.

Any statement contained in a document incorporated or deemed to be incorporated herein shall be deemed modified or superseded for purposes of this proxy statement and prospectus to the extent that a statement

 

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contained herein or in any other subsequently filed document that is deemed to be incorporated herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this proxy statement and prospectus.

Documents incorporated by reference are available from Old National without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference as an exhibit in this proxy statement and prospectus. You can obtain documents incorporated by reference in this proxy statement and prospectus by requesting them in writing or by telephone from Old National at the following address and phone number:

Old National Bancorp

One Main Street

P.O. Box 718

Evansville, Indiana 47705

Attn: Jeffrey L. Knight, Executive Vice President,

Chief Legal Counsel and Corporate Secretary

(812) 464-1363

Klein shareholders requesting documents must do so by September 17, 2018 to receive them before the special meeting. You will not be charged for any of the documents that you request. If you request any incorporated documents, Old National will mail them to you by first class mail, or another equally prompt means, within one business day after receiving your request.

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is inconsistent with information contained in this document or any document incorporated by reference. This proxy statement and prospectus is not an offer to sell these securities in any state where the offer and sale of these securities is not permitted. The information in this proxy statement and prospectus is current as of the date it is mailed to security holders, and not necessarily as of any later date. If any material change occurs during the period that this proxy statement and prospectus is required to be delivered, this proxy statement and prospectus will be supplemented or amended.

All information regarding Old National in this proxy statement and prospectus has been provided by Old National, and all information regarding Klein in this proxy statement and prospectus has been provided by Klein.

 

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Annex A

AGREEMENT AND PLAN OF MERGER

DATED AS OF JUNE 20, 2018

BY AND BETWEEN

OLD NATIONAL BANCORP

AND

KLEIN FINANCIAL, INC.


Table of Contents

TABLE OF CONTENTS

 

         Page  

ARTICLE 1 DEFINITIONS

     A-1  

ARTICLE 2 MERGER

     A-9  

2.1

 

THE MERGER

     A-9  

2.2

 

EFFECT OF MERGER

     A-9  

2.3

 

RESERVATION OF RIGHT TO REVISE STRUCTURE

     A-9  

2.4

 

CONVERSION OF KFI COMMON STOCK

     A-10  

2.5

 

ADJUSTMENTS TO ACQUIRER COMMON STOCK

     A-10  

2.6

 

ADJUSTMENT TO EXCHANGE RATIO

     A-10  

2.7

 

RIGHTS OF HOLDERS OF KFI COMMON STOCK; CAPITAL STOCK OF ACQUIRER

     A-10  

2.8

 

PAYMENT AND EXCHANGE OF CERTIFICATES

     A-11  

2.9

 

DISSENTING SHARES

     A-12  

2.10

 

THE CLOSING

     A-12  

2.11

 

WITHHOLDING

     A-13  

2.12

 

TAX-FREE REORGANIZATION

     A-14  

2.13

 

BANK MERGER

     A-14  

2.14

 

ABSENCE OF CONTROL

     A-14  

2.15

 

ADDITIONAL ACTIONS

     A-14  

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF ACQUIRER

     A-14  

3.1

 

ORGANIZATION AND QUALIFICATION

     A-15  

3.2

 

AUTHORITY RELATIVE TO THIS AGREEMENT ; NON-CONTRAVENTION

     A-15  

3.3

 

VALIDITY OF ACQUIRER COMMON STOCK

     A-16  

3.4

 

CAPITAL STOCK

     A-16  

3.5

 

EXCHANGE ACT REPORTS

     A-17  

3.6

 

REPORTS AND FILINGS

     A-17  

3.7

 

COMPLIANCE WITH LAWS, PERMITS

     A-17  

3.8

 

REGULATORY APPROVALS, ORDERS AND AGREEMENTS

     A-18  

3.9

 

CERTAIN TAX MATTERS

     A-18  

3.10

 

LITIGATION

     A-18  

3.11

 

DEPOSIT INSURANCE

     A-19  

3.12

 

BOOKS AND RECORDS, INTERNAL CONTROLS

     A-19  

3.13

 

NASDAQ GLOBAL MARKET

     A-19  

3.14

 

NO BROKERS OR FINDERS

     A-19  

3.15

 

NO OTHER REPRESENTATIONS OR WARRANTIES

     A-19  

 

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Table of Contents

ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF KFI

     A-19  

4.1

 

ORGANIZATION AND QUALIFICATION

     A-20  

4.2

 

AUTHORITY RELATIVE TO THIS AGREEMENT ; NON-CONTRAVENTION

     A-20  

4.3

 

CAPITALIZATION

     A-21  

4.4

 

OUTSTANDING KFI COMMON STOCK

     A-21  

4.5

 

FINANCIAL STATEMENTS

     A-21  

4.6

 

ABSENCE OF UNDISCLOSED LIABILITIES

     A-22  

4.7

 

LOANS AND INVESTMENTS

     A-22  

4.8

 

DEPOSIT INSURANCE

     A-23  

4.9

 

REPORTS AND FILINGS

     A-23  

4.10

 

SUBSIDIARIES; INTERESTS IN LLCS; OFF BALANCE SHEET ARRANGEMENTS

     A-23  

4.11

 

BOOKS AND RECORDS, INTERNAL CONTROLS

     A-24  

4.12

 

ABSENCE OF CERTAIN DEVELOPMENTS

     A-24  

4.13

 

PROPERTIES

     A-25  

4.14

 

INTELLECTUAL PROPERTY

     A-26  

4.15

 

COMMUNITY REINVESTMENT ACT

     A-27  

4.16

 

TAX MATTERS

     A-27  

4.17

 

CONTRACTS AND COMMITMENTS

     A-28  

4.18

 

LITIGATION

     A-29  

4.19

 

NO BROKERS OR FINDERS

     A-29  

4.20

 

EMPLOYEE BENEFIT PLANS

     A-30  

4.21

 

INSURANCE

     A-32  

4.22

 

AFFILIATE TRANSACTIONS

     A-33  

4.23

 

COMPLIANCE WITH LAWS; PERMITS

     A-33  

4.24

 

NO FIDUCIARY ACCOUNTS

     A-34  

4.25

 

REGULATORY APPROVALS

     A-34  

4.26

 

REGISTRATION OBLIGATION

     A-34  

4.27

 

DISCLOSURE

     A-34  

4.28

 

SHAREHOLDER RIGHTS PLAN

     A-34  

4.29

 

OPINION OF FINANCIAL ADVISOR

     A-34  

4.30

 

SHAREHOLDER APPROVAL

     A-34  

ARTICLE 5 CONDUCT OF BUSINESS PENDING THE MERGER

     A-35  

5.1

 

CONDUCT OF BUSINESS

     A-35  

5.2

 

ACCESS TO INFORMATION; CONFIDENTIALITY

     A-37  

 

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Table of Contents

5.3

 

NOTICE OF DEVELOPMENTS

     A-38  

5.4

 

CERTAIN LOANS AND RELATED MATTERS

     A-38  

5.5

 

FINANCIAL STATEMENTS

     A-39  

5.6

 

CONSENTS AND AUTHORIZATIONS

     A-39  

5.7

 

TAX MATTERS

     A-39  

5.8

 

NO SOLICITATION

     A-40  

5.9

 

MAINTENANCE OF ALLOWANCE FOR LOAN AND LEASE LOSSES

     A-41  

5.10

 

KFI FORBEARANCES

     A-41  

ARTICLE 6 ADDITIONAL COVENANTS AND AGREEMENTS

     A-42  

6.1

 

THE BANK MERGER

     A-42  

6.2

 

FILINGS AND REGULATORY APPROVALS

     A-42  

6.3

 

SHAREHOLDER MEETING; REGISTRATION STATEMENT

     A-42  

6.4

 

ESTABLISHMENT OF ACCRUALS

     A-44  

6.5

 

EMPLOYEE MATTERS

     A-44  

6.6

 

TAX TREATMENT

     A-47  

6.7

 

UPDATED SCHEDULES

     A-47  

6.8

 

INDEMNIFICATION; DIRECTORSAND OFFICERS ’ INSURANCE

     A-47  

6.9

 

ACQUIRER CONFIDENTIAL INFORMATION

     A-48  

6.10

 

ENVIRONMENTAL

     A-48  

ARTICLE 7 CONDITIONS

     A-48  

7.1

 

CONDITIONS TO OBLIGATIONS OF EACH PARTY

     A-48  

7.2

 

ADDITIONAL CONDITIONS TO OBLIGATION OF KFI

     A-49  

7.3

 

ADDITIONAL CONDITIONS TO OBLIGATION OF ACQUIRER

     A-50  

ARTICLE 8 TERMINATION, AMENDMENT AND WAIVER

     A-51  

8.1

 

REASONS FOR TERMINATION

     A-51  

8.2

 

EFFECT OF TERMINATION

     A-53  

8.3

 

EXPENSES

     A-53  

8.4

 

TERMINATION FEES

     A-53  

8.5

 

AMENDMENT

     A-54  

8.6

 

WAIVER

     A-54  

ARTICLE 9 GENERAL PROVISIONS

     A-54  

9.1

 

PRESS RELEASES AND ANNOUNCEMENTS

     A-54  

9.2

 

NOTICES

     A-54  

 

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Table of Contents

9.3

 

ASSIGNMENT

     A-55  

9.4

 

NO THIRD PARTY BENEFICIARIES

     A-56  

9.5

 

SCHEDULES

     A-56  

9.6

 

INTERPRETATION

     A-56  

9.7

 

SEVERABILITY

     A-56  

9.8

 

COMPLETE AGREEMENT

     A-56  

9.9

 

GOVERNING LAW

     A-57  

9.10

 

SUBMISSION TO JURISDICTION

     A-57  

9.11

 

SPECIFIC PERFORMANCE

     A-57  

9.12

 

WAIVER OF JURY TRIAL

     A-57  

9.13

 

INVESTIGATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS

     A-58  

9.14

 

NO SURVIVAL OF REPRESENTATIONS

     A-58  

 

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “Agreement”), is dated to be effective as of June 20, 2018, by and between Old National Bancorp, an Indiana corporation (“Acquirer”), and Klein Financial, Inc., a Minnesota corporation (“KFI”).

WHEREAS, Acquirer and KFI seek to affiliate through a corporate reorganization whereby KFI will merge with and into Acquirer, and thereafter, KleinBank (“Bank”), a Minnesota state bank and wholly owned subsidiary of KFI, will be merged with and into Old National Bank (“Acquirer Bank”), a national banking association and wholly-owned subsidiary of Acquirer;

WHEREAS, the respective boards of directors of Acquirer and KFI have determined that it is advisable and in the best interests of their respective corporations and their respective shareholders to consummate the merger of KFI with and into Acquirer as described in Article 2 (the “Merger”) and have approved this Agreement and authorized its execution and designated this Agreement a plan of reorganization and a plan of merger;

WHEREAS, as an inducement to Acquirer to enter into this Agreement, certain shareholders of KFI have each agreed to execute and deliver concurrently with the execution of this Agreement to Acquirer voting agreements substantially in the form attached hereto as Exhibit D (the “Shareholder Voting Agreements”); and

WHEREAS, as an inducement to Acquirer to enter into this Agreement, KFI shall deliver concurrently with execution of this Agreement to Acquirer executed lock-up agreements substantially in the form attached hereto at Exhibit E from the shareholders listed on the KFI Disclosure Schedule, and from additional shareholders prior to the Closing Date in the second form attached at Exhibit E, restricting the sale of Acquirer Common Stock for sixty (60) to ninety (90) days after the Effective Time (collectively, the “Lock Up Agreements”);

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained herein, the parties hereto make this Agreement and prescribe the terms and conditions of the Merger as follows:

ARTICLE 1

DEFINITIONS

Acquirer Closing Date Stock Price” means the Volume Weighted Average Price of a share of Acquirer Common Stock for the period ending on the day immediately preceding the Closing Date.

Acquirer Common Stock” means the authorized shares of common stock, no par value per share, of Acquirer.

“Acquirer Disclosure Schedule” has the meaning set forth in the introduction to Article 3.

Acquisition Proposal” means any offer, proposal, inquiry or indication of interest (other than an offer, proposal, inquiry or indication of interest by Acquirer) contemplating or otherwise relating to, or that could reasonably be expected to lead to, any direct or indirect Acquisition Transaction.

Acquisition Transaction” means, other than the transactions contemplated by or described in this Agreement, any transaction or series of transactions involving (a) any merger, consolidation, share exchange, business combination, issuance of securities, recapitalization, liquidation, dissolution, joint venture, acquisition of securities, tender offer, exchange offer or other similar transaction (i) in which KFI or KleinBank is a constituent corporation, (ii) in which a Person or “group” (as defined in the Exchange Act and the rules

 

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promulgated thereunder) of Persons directly or indirectly acquires beneficial or record ownership of securities representing more than 15% of the outstanding securities of any class of voting securities of KFI or KleinBank or (iii) in which KFI or KleinBank issues or sells securities representing more than 20% of the outstanding securities of any class of equity securities of KFI or KleinBank or if any resulting parent company of KFI or KleinBank, (b) any sale (other than sales in the Ordinary Course of Business), lease (other than in the Ordinary Course of Business), exchange, transfer (other than in the Ordinary Course of Business), license (other than nonexclusive licenses in the Ordinary Course of Business), acquisition or disposition of any business or businesses or assets that constitute or account for 20% or more of the consolidated net revenues, net income or assets of KFI, or (c) any other transaction the consummation of which could reasonably be expected to impede, interfere with, prevent or materially delay the Merger or that could reasonably be expected to dilute materially the benefits to Acquirer of the transactions contemplated hereby.

Adjusted Stock Purchase Price” shall be equal to (x) the Purchase Price less (y) the amount by which KFI Consolidated Shareholders’ Equity as of the Determination Date is less than Minimum Shareholders’ Equity.

Affiliate” has the meaning set forth in Rule 12b-2 under the Exchange Act.

Ancillary Documents” means the Shareholder Voting Agreement, the M. Klein Employment Agreement, the NDA and any and all other agreements, certificates and documents required to be delivered by either party hereto prior to or at the Closing pursuant to the terms of this Agreement.

Articles of Incorporation” means, with respect to any corporation, those instruments that constitute its articles or certificate of incorporation, including any amendments thereto.

Bank Regulators” means, collectively, the FRB, the MDC and the OCC.

Business Day” means any day other than Saturday, Sunday or a day on which a state bank is required to be closed under Minnesota Law.

Bylaws” mean, with respect to any corporation, those instruments that at that time constitute its bylaws, including any amendments thereto.

Code” means the Internal Revenue Code of 1986, as amended.

Commonly Controlled Entity” means any entity under common control with KFI within the meaning of Sections 414(b), (c), (m), (o) or (t) of the Code.

Consent” means any authorization, consent, approval, filing, waiver, exemption or other action by or notice to any Person.

Contract” means a contract, agreement, lease, commitment or binding understanding, whether oral or written, that is in effect as of the date of this Agreement or any time after the date of this Agreement.

CRA” means the Community Reinvestment Act.

Determination Date” means the last calendar day of the month immediately preceding the month in which the Closing Date occurs.

Encumbrance” means any charge, claim, community property interest, easement, covenant, condition, equitable interest, lien, option, pledge, security interest, right of first refusal or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership.

ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

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GAAP” means generally accepted accounting principles in the United States applied on a consistent basis during the periods involved.

Governmental Authorization” means any approval, consent, license, permit, waiver, registration or other authorization issued, granted, given, made available or otherwise required by any Governmental Entity or pursuant to applicable Law.

Governmental Entity” means any federal, state, local, foreign, international or multinational entity or authority exercising executive, legislative, judicial, regulatory, administrative or taxing functions of or pertaining to government.

Governmental Order” means any judgment, injunction, writ, order, ruling, award or decree by any Governmental Entity or arbitrator.

Indebtedness” means, with respect to any Person, without duplication: (i) all obligations of such Person for borrowed money, or with respect to deposits or advances of any kind; (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (iii) all obligations of such Person upon which interest charges are customarily paid (other than trade payables incurred in the Ordinary Course of Business consistent with past practices); (iv) all obligations of such Person under conditional sale or other title retention agreements relating to any property purchased by such Person; (v) all obligations of such Person issued or assumed as the deferred purchase price of property or services (excluding obligations of such Person to creditors for services and supplies incurred in the Ordinary Course of Business); (vi) all lease obligations of such Person that are required to be or otherwise are capitalized on the books and records of such Person in accordance with GAAP; (vii) all obligations of others secured by a lien on property or assets owned or acquired by such Person, whether or not the obligations secured thereby have been assumed; (viii) all obligations of such Person under interest rate, currency or commodity derivatives or hedging transactions (valued at the termination value thereof); (ix) all letters of credit or performance bonds issued for the account of such Person (excluding letters of credit issued for the benefit of suppliers to support accounts payable to suppliers incurred in the Ordinary Course of Business consistent with past practices) and (x) all guarantees and arrangements having the economic effect of a guarantee of such Person of any Indebtedness of any other Person.

Intellectual Property” means: (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereon, and all patents, patent applications and patent disclosures, together with all reissues, continuations, continuations-in-part, divisions, extensions and re-examinations thereof; (b) all trademarks and service marks, whether registered or unregistered, and all applications, registrations and renewals in connection therewith; (c) all domain names, corporate names and all combinations thereof, and associated therewith; (d) all copyrights whether registered or unregistered, and all applications, registrations and renewals in connection therewith; (e) all datasets, databases and related documentation and (f) all other intellectual property and proprietary rights.

IRS” means the Internal Revenue Service.

KFI 401(k)” means the Klein Financial, Inc. Retirement Savings Plan.

KFI Common Stock” means the authorized shares of common stock, no par value per share, of KFI.

KFI Consolidated Shareholders’ Equity” shall be calculated as set forth in Exhibit F and shall be the consolidated shareholders’ equity of KFI as of the Determination Date determined in accordance with GAAP, excluding the net accumulated other comprehensive income/(loss) and to which shall be added the following amounts (which amounts shall also be calculated in accordance with GAAP): (i) any accruals, reserves or charges resulting from Transaction Expenses and other transactions contemplated by this Agreement (ii) any accruals, reserves or charges taken by KFI at the request of Acquirer pursuant to Section 5.9 and 6.4 hereof, and (iii) any dividends or capital distributions paid after the date of this Agreement and on or before the Determination Date in accordance with Section 5.1(c)(iv) or 5.7(f).

 

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KFI Converted Common Share” means each share of KFI Common Stock that will be converted into the Merger Consideration pursuant to Section 2.4(a).

KFI Deferred Compensation Arrangements” means the Klein Financial, Inc. Deferred Compensation Plan, as amended, and the Deferred Compensation Agreements between KFI and the individuals listed in the KFI Disclosure Schedule, each as amended.

KFI Disclosure Schedule” has the meaning set forth in the introduction to Article 4.

Kleins” means, collectively, Alan Klein, Daniel Klein and James Klein.

Knowledge” or other similar phrase means facts that are known by a director of KFI or executive officer of either KFI and its Subsidiaries or Acquirer and its Subsidiaries, as the case may be.

Law” means any constitution, law, ordinance, principle of common law, regulation, rule, statute or treaty of any Governmental Entity.

Liability” means any liability or obligation whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due, whether known or unknown, and regardless of when asserted.

Litigation” means any claim, action, arbitration, mediation, audit, hearing, investigation, proceeding, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Entity or arbitrator or mediator.

M. Klein Employment Agreement” means an Employment Agreement that Acquirer, Acquirer Bank and Matthew Klein, shall use commercially reasonable efforts to negotiate and enter into prior to the Closing and when effective will supersede and cancel the Employment Agreement dated February 1, 2018, between KleinBank and Mr. Klein; provided, however, that such supersession and cancellation shall not occur until all obligations thereunder have been paid in full.

Material Adverse Effect” means any effect (i) that is material and adverse to the business, assets, liabilities, properties, condition (financial or otherwise), results of operations or value of KFI and KleinBank and their respective Subsidiaries, taken as a whole, or Acquirer and its Subsidiaries, taken as a whole, as the case may be or (ii) that would materially impair the ability of Acquirer or KFI to perform their respective obligations under this Agreement or otherwise materially threaten or materially impede the consummation of the Merger and the other transactions contemplated by this Agreement; provided, however, that “Material Adverse Effect” will not be deemed to include the impact of (a) changes after the date hereof to Laws of general applicability to banks and bank holding companies or interpretation thereof by any Governmental Entity, (b) changes after the date hereof to GAAP or Regulatory Accounting Principles, (c) changes after the date hereof in economic conditions generally affecting banks and bank holding companies, (d) changes caused by the public announcement of the Merger, (e) the escalation or worsening of acts of war (whether or not declared), armed hostilities or terrorism, (f) changes resulting from expenses (such as legal, accounting and investment bankers’ fees) incurred in connection with this Agreement or the transactions contemplated herein, (g) any action required by this Agreement or actions taken or omitted to be taken by one party to this Agreement with the consent of the other party and (h) with respect to either KFI or KleinBank, the effects of any action taken with the prior written consent of Acquirer.

Minimum Shareholders’ Equity” means (i) $231,358,000 if the Closing Date occurs on a date for which the Determination Date would be August 31, 2018, (ii) $233,429,000 if the Closing Date occurs on a date for which the Determination Date would be September 30, 2018, (iii) $237,866,000 if the Closing Date occurs on a date for which the Determination Date would be November 30, 2018, and (iv) $240,717,000 if the Closing Date occurs on a date for which the Determination Date would be December 31, 2018, or later.

 

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NDA” means the Confidentiality and Non-Disclosure Agreement dated March 22, 2018 between Acquirer and KFI.

Ordinary Course of Business” means the ordinary course of business of KFI and KleinBank or Acquirer or their respective Subsidiaries, as the case may be, consistent with past custom and practice (including with respect to nature, scope, magnitude, quantity and frequency).

OREO” means other real estate owned.

Permitted Encumbrances” means (a) Encumbrances for Taxes and other governmental charges and assessments that are not yet due and payable or which are being contested in good faith by appropriate proceedings (provided required payments have been made and adequate accruals or reserves have been established in connection with any such contest), (b) Encumbrances of carriers, warehousemen, mechanics’ and materialmen and other like Encumbrances arising in the Ordinary Course of Business (provided lien statements have not been filed as of the Closing Date), (c) easements, rights of way and restrictions, zoning ordinances and other similar Encumbrances affecting the Real Property and which do not unreasonably restrict the use thereof in the Ordinary Course of Business, (d) statutory Encumbrances in favor of lessors arising in connection with any property leased to KFI, KleinBank or their respective Subsidiaries, (e) Encumbrances reflected in the Latest Balance Sheets and the Related Statements or arising under Material Contracts and (f) Encumbrances that will be removed prior to or in connection with the Closing.

Person” means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, Governmental Entity or other entity.

Plan” means every plan, fund, contract, program and arrangement (whether written or not) for the benefit of present or former employees, including those intended to provide (a) medical, surgical, health care, hospitalization, dental, vision, workers’ compensation, life insurance, death, disability, legal services, severance, sickness or accident benefits (whether or not defined in Section 3(1) of ERISA), (b) pension, profit sharing, stock bonus, retirement, supplemental retirement or deferred compensation benefits (whether or not Tax qualified and whether or not defined in Section 3(2) of ERISA) or (c) salary continuation, unemployment, supplemental unemployment, severance, termination pay, change-in-control, vacation or holiday benefits (whether or not defined in Section 3(3) of ERISA), (i) that is maintained or contributed to by either KFI or KleinBank or any Commonly Controlled Entity, (ii) that KFI, KleinBank or any Commonly Controlled Entity has committed to implement, establish, adopt or contribute to in the future, (iii) for which KFI, KleinBank or any Commonly Controlled Entity is or will be financially liable as a result of the direct sponsor’s affiliation with KFI and KleinBank or their shareholders (whether or not such affiliation exists at the date of this Agreement and notwithstanding that the Plan is not maintained by KFI, KleinBank or any Commonly Controlled Entity for the benefit of its employees or former employees) or (iv) for or with respect to which any of KFI, KleinBank or a Commonly Controlled Entity is or will become liable under any common law successor doctrine, express successor liability provisions of Law, provisions of a collective bargaining agreement, labor or employment Law or agreement with a predecessor employer. “Plan” does not include any arrangement that has been terminated and completely wound up prior to the date of this Agreement and for which neither KFI nor KleinBank nor any Commonly Controlled Entity has any present or reasonably predictable future Liability.

Purchase Price” shall be equal to the Acquirer Closing Date Stock Price multiplied by the total number of shares of Acquirer Common Stock to be issued pursuant to Section 2.4 as though the Exchange Ratio was not adjusted pursuant to Section 2.6.

Regulatory Accounting Principles” means accounting principles of Governmental Entities generally applicable to banks and bank holding companies.

 

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Remedies Exception” means except to the extent enforceability may be limited by applicable bankruptcy, insolvency, fraudulent transfer, reorganization, liquidation, moratorium, readjustment of debt or other Laws affecting the enforcement of creditors’ rights generally and by general equitable principles and principles of public policy.

Return” means any return, declaration, report, estimate, information return or statement filed with a government authority or agency and pertaining to any Taxes.

Severance Costs” means (a) all amounts paid or payable to any employee of KFI, KleinBank or their respective Subsidiaries as a result of the execution of this Agreement or the performance and consummation of the transactions contemplated hereby (including any amounts due and payable pursuant to any existing employment, change in control, salary continuation, deferred compensation, non-competition, retention, bonus or other similar agreement, plan or arrangement) and (b) any severance payments required to be made on or after the Closing Date to any employee of KFI, KleinBank or their respective Subsidiaries that are required to be made pursuant to an agreement with KFI, KleinBank or their respective Subsidiaries to such Person if his or her employment with the surviving corporation in the Merger or Bank Merger, as the case may be, is terminated without “cause” (as defined in such agreement); provided, however, that Severance Costs will not include any payments made by Acquirer pursuant to Section 6.5(e)or (ii) any severance amounts paid or payable in connection with the M. Klein Employment Agreement.

Shareholder Representatives” means the Kleins and as to post-Closing tax matters, Nanci Olson or such other person as the Kleins may designate in writing.

Subsidiary” means, with respect to any Person, any other Person (other than a natural person), whether incorporated or unincorporated, (a) in which such Person, directly or indirectly, (i) has a 50% or more equity interest or (ii) owns at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions, or (b) is required to be consolidated with such Person for financial reporting purposes pursuant to GAAP; provided, however, that the term will not include any such entity in which such voting securities or equity interest is owned or controlled in a fiduciary capacity, without sole voting power, or was acquired in securing or collecting a debt previously contracted in good faith.

Superior Proposal” means any Acquisition Proposal (but changing references to “more than 20%” and to “more than 15%” in the definition of Acquisition Transaction to “more than 50%”) by a third party on terms which the board of directors of KFI determines in its good faith judgment, after consultation with, and receipt of written advice from, its financial advisors (which advice will be communicated to Acquirer), to be more favorable from a financial point of view to its shareholders than the Merger and the other transactions contemplated hereby, (a) after taking into account the likelihood of consummation of such transaction on the terms set forth therein without undue delay, taking into account all legal, financial (including the financing terms of any such proposal and any break-up fees and expense reimbursement provisions under this Agreement), regulatory and other aspects of such proposal, and any other relevant factors permitted under applicable Law, (b) after giving Acquirer at least five (5) Business Days to respond to such third-party Acquisition Proposal once the board of directors of KFI has notified Acquirer that in the absence of any further action by Acquirer it would consider such Acquisition Proposal to be a Superior Proposal, and then (c) after taking into account any amendment or modification to this Agreement proposed by Acquirer.

Taxes” means all taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, social security, unemployment, excise, estimated, severance, stamp, occupation, property, capital, replacement or other taxes, customs, duties, fees, assessments or charges of any kind whatsoever, including all interest and penalties thereon, and additions to tax or additional amounts imposed by any Governmental Entity.

 

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Transaction Expenses” means all amounts paid, to be paid, accrued or to be accrued by KFI, KleinBank or their respective Subsidiaries (or by Acquirer or Acquirer Bank, as successors to, or owners of, KFI, KleinBank and their respective Subsidiaries) that arise out of or in connection with the execution of this Agreement and the performance and consummation of the transactions contemplated hereby (whether arising before, at or after the Effective Time), including (a) legal, accounting and financial advisory fees or commissions, (b) Severance Costs and (c) other expenses incurred in connection with the termination of any Contract of KFI, KleinBank or their respective Subsidiaries (including Contracts relating to information technology or card services); provided, however, that, for the avoidance of doubt, Transaction Expenses will not include any (x) Dissenting Shareholder Payments or (y) regular cash bonuses payable by KFI, KleinBank or their respective Subsidiaries to certain officers or employees of KFI, KleinBank or their respective Subsidiaries in the Ordinary Course of Business and consistent with past practices.

Volume Weighted Average Price” as of any date means (a) the sum, for each of the fifteen (15) consecutive trading days ending on and including the trading day immediately preceding such date, of the product of (i) the closing price of Acquirer Common Stock as quoted on the NASDAQ for such trading day, multiplied by, (ii) the trading volume of Acquirer Common Stock reported on the NASDAQ for such trading day, divided by (b) the aggregate trading volume over such 15-day period.

The following terms not defined above are defined in the sections indicated below:

 

Definition

  

Defined

Acquirer

   Preamble

Acquirer 10-K Reports

   3.5(a)

Acquirer 10-Q Report

   3.5(a)

Acquirer Bank

   Recitals

Acquirer Market Value

   8.1(c)(iii)

Acquirer Plans

   6.5(d)

Acquirer Regulatory Reports

   3.6

Affordable Care Act

   4.20(k)

Agents

   5.2(a)

ALLL

   4.7(c)

Bank Holding Company Act

   3.1(a)

Bank Merger

   2.13

Bank Merger Agreement

   2.13

Bank Regulatory Approvals

   3.2(b)

Blue Sky Laws

   3.2(b)

Calculation Date

   8.1(c)(iii)

Call Report

   4.5(b)

Change of KFI Board Recommendation

   6.3(a)

Closing

   2.10

Closing Date

   2.2(d)

D&O Insurance

   6.8(b)

Dissenting Shareholder

   2.9(b)

Dissenting Shareholder Payments

   2.9(d)

Dissenting Shares

   2.9(c)

Effective Date

   2.2(d)

Effective Time

   2.2(d)

Environmental Law

   4.13(b)

Exchange Act

   3.2(b)

Exchange Ratio

   2.4(a)

Expenses

   8.3

FDIA

   3.1(b)

 

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Definition

  

Defined

FDIC

   3.11

FRB

   3.2(b)

Indemnified Party

   6.8(a)

Indiana Articles of Merger

   2.2(c)

Initial Acquirer Market Value

   8.1(c)(iii)

Insurance Amount

   6.8(b)

KFI

   Preamble

KFI Annual Financial Statements

   4.5(a)

KleinBank Common Stock

   4.3(a)

KleinBank Annual Financial Statements

   4.5(b)

KleinBank Financial Statements

   4.5(b)

Kleins

   ARTICLE 1

KFI Board Recommendation

   6.3(a)

KFI Financial Statements

   4.5(a)

KFI Regulatory Reports

   4.9

KFI Shareholder Meeting

   6.3(a)

Latest Balance Sheets

   4.5(c)

Letter of Transmittal

   2.8

Loan

   5.1(c)(xix)

Lock Up Agreements

   Recitals

Material Contracts

   4.17(a)

MBCA

   2.1

MDC

   3.2(b)

Merger

   Recitals

Merger Consideration

   2.4(a)

Minnesota Articles of Merger

   2.2(c)

Minnesota Banking Statutes

   3.2(b)

OCC

   3.2(b)

NASDAQ

   3.2(b)

Proxy Statement/Prospectus

   6.3(b)

Registration Statement

   6.3(b)

Real Property

   4.13(a)

REC

   6.10

Related KleinBank Statements

   4.5(b)

Related KFI Statements

   4.5(a)

Related Statements

   4.5(c)

Representatives

   5.8(a)

Required Consents

   5.6

Required KFI Shareholder Vote

   4.2(a)

SEC

   3.5(a)

SEC Reports

   3.5(a)

Securities Act

   3.2(b)

Shareholder Tax Liability

   5.7(f)

Shareholder Voting Agreement

   Recitals

Sandler

   4.19

Surviving Corporation

   2.1

Termination Date

   8.1(b)(iii)

Transfer Tax

   5.7(d)

 

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ARTICLE 2

MERGER

2.1    The Merger. Under the terms of this Agreement and subject to the satisfaction or waiver of the conditions set forth in Article 7, at the Effective Time, KFI will be merged with and into Acquirer. Acquirer, in its capacity as the corporation surviving the Merger, is sometimes referred to herein as the “Surviving Corporation.” The Merger will be effected pursuant to the provisions of, and with the effect provided in, the Indiana Business Corporation Law, Indiana Code 23-1-40 and Section 302A.651 of the Minnesota Business Corporation Act (the “MBCA”).

2.2    Effect of Merger.

(a)    At the Effective Time, KFI will be merged with and into Acquirer, and the separate existence of KFI will cease. The Articles of Incorporation and the Bylaws of Acquirer, as in effect immediately prior to the Effective Time, will be the Articles of Incorporation and the Bylaws of the Surviving Corporation, until the same may be amended as provided therein and in accordance with applicable Law. The directors and officers of Acquirer immediately prior to the Effective Time will be the directors and officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and will qualify.

(b)    At the Effective Time, the title to all assets, real estate and other property owned by KFI shall vest in the Surviving Corporation as set forth in Indiana Code Section 23-1-40-6, as amended, without reversion or impairment. At the Effective Time, all liabilities of KFI shall be assumed by the Surviving Corporation as set forth in Indiana Code Section 23-1-40-6, as amended.

(c)    To effect the Merger, on or before the Closing Date, the parties hereto will cause the Articles of Merger substantially in the form attached hereto as Exhibit B (the “Indiana Articles of Merger”) and Articles of Merger substantially in the form attached hereto as Exhibit C (the “Minnesota Articles of Merger”) relating to the Merger to be filed with the Indiana Secretary of State and the Secretary of State of Minnesota, respectively.

(d)    Upon the terms and subject to the conditions specified in this Agreement, unless otherwise mutually agreed to by the parties hereto, the closing date will occur on the last business day of the month following (i) the fulfillment of all conditions precedent to the Merger set forth in Article 7 of this Agreement and (ii) the expiration of all waiting periods in connection with the bank regulatory applications filed for the approval of the Merger (the “Closing Date”). Notwithstanding the foregoing, (i) if the Closing Date were to occur on the last business day of November, then the Closing Date will be the last business day of December, and (ii) the Closing Date will not occur prior to September 30, 2018. The Merger will be effective as of 12:01 a.m. on the first calendar day of the month following the Closing Date (the “Effective Date”) as specified in the Indiana Articles of Merger and the Minnesota Articles of Merger (the “Effective Time”).

2.3    Reservation of Right to Revise Structure. At Acquirer’s election, the Merger may alternatively be structured so that (a) KFI is merged with and into any other direct or indirect wholly-owned subsidiary of Acquirer or (b) any direct or indirect wholly-owned subsidiary of Acquirer is merged with and into KFI; provided, however, that no such change shall (x) alter or change the amount or kind of the Merger Consideration (as hereinafter defined) or the treatment of the holders of KFI Common Stock, (y) prevent KFI from obtaining the opinion of counsel referred to in Section 7.2(e) or otherwise cause the transaction to fail to qualify for the tax treatment described in Section 2.12 or (z) materially impede or delay consummation of the transactions contemplated by this Agreement. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement (to the extent such amendment only changes the method of effecting the business combination and does not substantively affect this Agreement or the rights and obligations of the parties or their respective shareholders) in order to reflect such election.

 

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2.4    Conversion of KFI Common Stock.

(a)    To effectuate the Merger, at the Effective Time, and without any further action of Acquirer, KFI or any holder of KFI Common Stock, each share of KFI Common Stock issued and outstanding immediately prior to the Effective Time (other than (i) shares held as treasury stock of KFI, (ii) shares held directly or indirectly by Acquirer, except shares held in a fiduciary capacity or in satisfaction of a debt previously contracted, if any, and (iii) Dissenting Shares (as hereinafter defined)) will be canceled and extinguished and be converted into and become a right to receive 7.92 shares (the “Exchange Ratio”) (as adjusted in accordance with the terms of this Agreement) of Acquirer Common Stock (the “Merger Consideration”).

(b)    Fractional shares of Acquirer Common Stock will be issued for KFI Converted Common Shares.

(c)    Each share of KFI Common Stock held as treasury stock of KFI or held directly or indirectly by Acquirer (other than shares held in a fiduciary capacity or in satisfaction of Indebtedness previously contracted) will be canceled, retired and cease to exist, and no exchange or payment will be made with respect thereto.

2.5    Adjustments to Acquirer Common Stock. If Acquirer changes (or establishes a record date for changing) the number of shares of Acquirer Common Stock issued and outstanding prior to the Effective Time by way of a stock split, stock dividend, extraordinary cash dividend, recapitalization, reclassification, combination, exchange of shares, readjustment or similar transaction with respect to the outstanding Acquirer Common Stock, and the record date therefor shall be prior to the Effective Time, the Exchange Ratio shall be adjusted so the shareholders of KFI at the Effective Time shall receive, in the aggregate, such number of shares of Acquirer Common Stock representing the same percentage of outstanding shares of Acquirer Common Stock as would have been represented by the number of shares of Acquirer Common Stock the shareholders of KFI would have received if any of the foregoing actions had not occurred. No adjustment shall be made under this Section 2.5 solely as a result of Acquirer issuing additional shares of Acquirer Common Stock provided it receives fair market value consideration for such shares or such shares are issued in connection with the Acquirer employee benefit plans.

2.6    Adjustment to Exchange Ratio. At the Effective Time, the Exchange Ratio shall be adjusted, if applicable (which Exchange Ratio, as adjusted as provided below and in Section 2.5, shall become the “Exchange Ratio” for purposes of this Agreement), in accordance with this Section 2.6. If KFI Consolidated Shareholders’ Equity as of the Determination Date is less than Minimum Shareholders’ Equity, the Exchange Ratio shall be decreased to a quotient determined by dividing the Adjusted Stock Purchase Price by the total number of shares of KFI Common Stock outstanding at the Effective Time, and further dividing that number by the Acquirer Closing Date Stock Price.

2.7    Rights of Holders of KFI Common Stock; Capital Stock of Acquirer.

(a)    As of the Effective Time, each outstanding stock certificate which immediately prior to the Effe