SUBSCRIPTION AND DIRECT COMMUNITY OFFERING PROSPECTUS
[HOME FINANCIAL BANCORP logo]
Spencer, Indiana
(Holding Company for Owen Community Bank, s.b.)
Up to 655,500 (Anticipated Maximum) Shares of Common Stock
Home Financial Bancorp, an Indiana corporation (the "Holding Company"), is
offering for sale, as described below, up to 655,500 shares of its common stock,
without par value (the "Common Stock"), in connection with its acquisition of
the common stock of Owen Community Bank, s.b. (the "Bank") to be issued upon the
conversion of the Bank from an Indiana mutual savings bank to an Indiana stock
savings bank (the "Conversion"). The purchase price for the Common Stock (the
"Purchase Price") is $10.00 per share. As part of the Conversion, the Bank will
adopt Articles of Stock Charter Conversion and amended and restated By-Laws. For
a description of the Conversion transaction, see "The Conversion." Pursuant to
the Conversion, the Common Stock is first being offered in a subscription
offering (the "Subscription Offering"), in order of priority and subject to
availability, to: (i) certain holders of deposit accounts at the Bank with an
aggregate balance of $50.00 or more as of March 31, 1994 ("Eligible Account
Holders"); (ii) the Bank's tax-qualified Employee Stock Ownership Plan and Trust
(the "ESOP"); (iii) certain holders of deposit accounts at the Bank with an
aggregate balance of $50.00 or more as of March 31, 1996 ("Supplemental Eligible
Account Holders"); and (iv) other deposit account holders and borrowers of the
Bank as of May 10, 1996 ("Other Members"), subject to the limitations described
herein. Pursuant to the Bank's Plan of Conversion (the "Plan" or the "Plan of
Conversion"), subscription rights granted to the above persons are
non-transferable; persons violating such provisions may lose their right to
purchase Common Stock in the Conversion. See "The Conversion -- Subscription
Offering." Commencing concurrently with the Subscription Offering, and subject
to the prior rights of holders of subscription rights, the Common Stock is also
being offered to members of the general public, with preference given to
residents of Owen County, Indiana, pursuant to a direct community offering (the
"Direct Community Offering"). The Bank has the right to terminate the Direct
Community Offering as soon as it has received orders for at least the minimum
number of shares available for purchase in the Conversion. See "The
Conversion--Direct Community Offering." (continued on next page)
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE CALL THE
STOCK INFORMATION CENTER AT (812) 829-2095. SEE "RISK FACTORS" FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. THE SHARES OF COMMON
STOCK BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY
OTHER GOVERNMENT AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), ANY STATE SECURITIES
COMMISSION, THE INDIANA DEPARTMENT OF FINANCIAL INSTITUTIONS (THE "DFI") OR THE
FDIC, NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION, THE DFI OR THE FDIC
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================================
Expenses, Including
Estimated Conversion Estimated
Marketing Expenses and Net Conversion
Purchase Price (1) Underwriting Commissions (2) Proceeds (3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share.................................... $10.00 $0.64 $9.36
Midpoint Per Share................................... $10.00 $0.54 $9.46
Maximum Per Share.................................... $10.00 $0.47 $9.53
Total Minimum........................................ $4,845,000 $310,000 $4,535,000
Total Midpoint....................................... $5,700,000 $310,000 $5,390,000
Total Maximum........................................ $6,555,000 $310,000 $6,245,000
Total Maximum, as adjusted (4)....................... $7,538,250 $310,000 $7,228,250
====================================================================================================================================
</TABLE>
<PAGE>
(1) The current aggregate value of the Common Stock is based on an independent
appraisal of the Bank by Keller & Company, Inc. ("Keller") as of April 5,
1996. See "The Conversion -- Stock Pricing." The total offering will be
within a range of $4,845,000 to $6,555,000 (the "Estimated Valuation
Range"), unless market and financial conditions necessitate a change in
this range, which change would be supported by a change in the appraisal.
Changes in the size of the offering will have an effect on the estimated
net proceeds of the offering and pro forma capitalization and book value
per share of the Holding Company. If the final valuation is not within a
range between the minimum of the Estimated Valuation Range to 15% above the
maximum of the Estimated Valuation Range, subscribers will be given notice
of such change, which notice will set a date by which subscribers must
elect whether to continue their subscriptions during any offering at a
revised Estimated Valuation Range. In such event, subscribers will be given
the right to have their subscriptions returned promptly after they inform
the Holding Company of their decision not to continue their subscriptions.
Subscriptions as to which the Holding Company receives no affirmative or
negative election by the date specified in the notice will be returned
promptly after such date. See "Use of Proceeds," "Capitalization," and "Pro
Forma Data."
(2) Consists of estimated costs to the Bank and the Holding Company arising
from the Conversion, including fixed fees of $50,000 and reimbursable
out-of-pocket expenses to be paid to Charles Webb & Company ("Webb") and
Friedman, Billings, Ramsey & Co., Inc. ("FBR") (collectively, the "Agents")
in connection with the Agents' engagement as exclusive sales agents and
financial advisors to the Holding Company and the Bank. Marketing fees are
estimated to be $50,000 assuming no sales are made through selected
dealers. See "Use of Proceeds." Offers and sales in the Direct Community
Offering will be on a best efforts basis. The Holding Company and the Bank
have agreed to indemnify the Agents against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended (the "1933
Act"). See "The Conversion -- Agents."
(3) Net Conversion proceeds may vary from the estimated amounts. All of the net
proceeds derived from the sale of Common Stock will be transferred to the
Bank, except for $2,267,500 to be retained by the Holding Company for
general corporate purposes. See "Pro Forma Data" and "Use of Proceeds."
(4) Gives effect to an increase in the number of shares which could occur due
to an increase of up to 15% above the maximum number of shares which may be
offered in the Conversion to reflect changes in market and financial
conditions following commencement of the Subscription and Direct Community
Offerings. No resolicitation of subscribers will be made and subscribers
will not be permitted to modify or cancel their subscriptions unless the
gross proceeds from the sale of Common Stock in the Conversion are less
than the minimum or more than 15% above the maximum of the Estimated
Valuation Range. See "The Conversion -- Number of Shares to be Issued."
Charles Webb & Company Friedman, Billings, Ramsey & Co., Inc.
The date of this Prospectus is May 16, 1996.
<PAGE>
The Subscription Offering will expire at 5:00 p.m., Spencer time, on June
17, 1996, unless extended by the Bank and the Holding Company. The Direct
Community Offering may expire as early as June 17, 1996, or at any time
thereafter (until August 1, 1996, unless extended by the Bank and the Holding
Company) when orders for at least 484,500 shares of Common Stock have been
received in both the Subscription Offering and the Direct Community Offering, if
any. Neither the Subscription Offering nor the Direct Community Offering may be
extended beyond August 1, 1996, without regulatory approval. See "The
Conversion--Subscription Offering" and "--Direct Community Offering." All
purchases will be subject to maximum and minimum purchase limitations, and to
certain other terms and conditions described below. Under the Plan, no person or
entity, alone or with an Associate (as herein defined) or group of persons
acting in concert, may purchase more than 10,000 shares of Common Stock offered
in the Conversion, except that the ESOP may purchase in the aggregate not more
than 10% of the total number of shares offered in the Conversion. The ESOP
currently intends to acquire 8% of the shares sold in the Conversion. The ESOP
will borrow the funds needed to purchase its shares of Common Stock in the
Conversion from the Holding Company. The ESOP's loan from the Holding Company is
expected to have an interest rate of 8.25% and a term of 10 years. See
"Executive Compensation and Related Transactions -- Employee Stock Ownership
Plan and Trust." The ESOP does not currently anticipate any future purchases of
the Common Stock. The ESOP may purchase Common Stock if shares remain available
after satisfying the subscriptions of Eligible Account Holders up to $6,555,000,
the maximum of the Estimated Valuation Range. The minimum number of shares of
Common Stock that may be purchased by any person or entity is 25 shares. The
Bank and the Holding Company in their sole discretion may increase or decrease
subscription rights and the purchase limitations. See "The Conversion
- --Limitations on Common Stock Purchases."
Shares of Common Stock may be ordered at $10.00 per share (the "Purchase
Price") directly from the Holding Company by returning the appropriate stock
order form and certification (the "Order Form") together with full payment, or
appropriate instructions authorizing withdrawals from accounts at the Bank, for
the shares to be purchased. Orders must be received at the Bank's Stock
Information Center, by 5:00 p.m., Spencer time, on June 17, 1996. All amounts
subscribed for by check or cash will be placed in a special escrow savings
account at the Bank and will earn interest at the then-current passbook rate,
which is currently 3.00% per annum (for an annual percentage yield of 3.03%),
from the date of receipt until completion or termination of the Conversion.
Subscriptions are irrevocable until 45 days after the expiration of the
Subscription Offering (August 1, 1996). Funds authorized for withdrawal from
accounts will continue to earn interest at the rate specified on the account
until completion of the Conversion and will not be subject to early withdrawal
penalties. If the Conversion is not completed by August 1, 1996, and the Bank
and the Holding Company elect to extend the time required to complete the
Conversion, subscribers will be given the right to increase, decrease or rescind
their subscriptions as set forth in the Plan of Conversion. If the Bank and the
Holding Company decide to extend the Subscription Offering, subscribers will be
given the right to have their subscriptions promptly refunded following the
conclusion of the current offering (which will end no later than August 1,
1996), and the Bank will return subscriptions with interest unless subscribers
affirmatively elect to continue their subscriptions during the period of
extension. If the offering period is not extended and the Conversion is not
completed, all funds held in escrow will be promptly returned, together with
accrued interest from the date of receipt, and all withdrawal authorizations
will be terminated. The offering may be extended, subject to DFI approval, until
24 months following the members' approval, or until June 14, 1998.
The maximum number of 655,500 shares of Common Stock offered hereby
represents the high end of a range from 484,500 shares to 655,500 shares at an
offering price of $10.00 per share, based upon an independent appraisal of the
aggregate pro forma market value of the Bank as of April 5, 1996, in accordance
with applicable regulations. The number of shares to be sold in the Conversion
must fall within this range unless market and financial conditions necessitate a
change in the range, which change would be supported by a change in the
appraisal. The Bank reserves the right to reject any orders received in the
Direct Community Offering in whole or in part. Funds received pursuant to
rejected orders will be refunded promptly with any interest due thereon.
<PAGE>
The Bank has engaged Webb and FBR as its exclusive sales agents to assist
on a best efforts basis in the sale of Common Stock in both the Subscription
Offering and the Direct Community Offering, if any. In addition to assisting in
the marketing of the Common Stock, the Agents will assist the Bank by, among
other things, training the Bank's employees regarding the mechanics and
regulatory requirements of the conversion process, conducting informational
meetings for subscribers and other potential purchasers and keeping records of
all stock subscriptions. The Agents will only be assisting the Holding Company
on a best efforts basis in effecting the sale of its Common Stock directly. The
Agents will have no obligation to take or purchase any Common Stock. See "The
Conversion --Agents." The Agents may, in the sole discretion of the Bank, use
the services of dealers selected by the Bank in the Direct Community Offering,
if any. If used, any selected dealers will solicit indications of interest on a
best efforts basis from their customers to place orders for Common Stock, which
orders will be placed only when and if the Agents and the Bank believe that
enough indications of interest and orders have been received in the Subscription
Offering and the Direct Community Offering to consummate the Conversion. See
"The Conversion -- Selected Dealers."
The Holding Company has received approval to have its Common Stock quoted
on the National Association of Securities Dealers Automated Quotation ("NASDAQ")
Small Cap Market under the symbol "HWEN," subject to certain conditions which
the Holding Company and the Bank believe will be met. Prior to this offering,
there was no public market for the Common Stock and there can be no assurance
that an established and liquid market for the Common Stock will develop or, if
such a market does develop, that it will continue. In addition, there can be no
assurance that resales of the Common Stock after completion of the Conversion
can be made at or above the Purchase Price. See "Market for the Common Stock."
The number of shares of Common Stock directors and executive officers of
the Bank may purchase is limited under the Plan. Directors and executive
officers and their Associates expect to purchase 36,050 shares, or 6.3% of the
total shares offered in the Conversion (at the midpoint of the Estimated
Valuation Range). See "Anticipated Management Purchases." Such purchases will
apply toward the minimum required number of shares (484,500) to be sold in the
Conversion and will be made for investment purposes only.
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
CONSUMMATION OF THE CONVERSION IS SUBJECT TO APPROVAL OF THE PLAN OF CONVERSION
BY A MAJORITY OF THE TOTAL VOTES OF THE BANK'S MEMBERS ELIGIBLE TO BE CAST AT A
SPECIAL MEETING CALLED FOR JUNE 14, 1996.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
OWEN COMMUNITY BANK, s.b.
SPENCER, INDIANA
[Graphic of the State of Indiana with Owen County "enlarged"
and the City of Spencer highlighted.]
<PAGE>
PROSPECTUS SUMMARY
This summary and the selected financial data which follow this summary do
not purport to be complete and are qualified in their entirety by the more
detailed information and financial statements appearing elsewhere herein.
Risk Factors
There are certain risk factors relating to the Holding Company and the Bank
which should be carefully examined by prospective purchasers of the Common
Stock, including risks inherent in the potential impact of changes in interest
rates, the potential impact of future changes in or the discontinuance of the
business of the Bank's subsidiary, the credit risk relating to the Bank's 90%
loan-to-value ratio lending and non-conforming loans, risks associated with the
Bank's mobile home lending, risks associated with the Bank's nonresidential and
multi-family real estate lending, the disparity between the Savings Association
Insurance Fund (the "SAIF") premiums payable by the Bank and the Bank Insurance
Fund (the "BIF") premiums payable by commercial banks, the possible dilutive
effect of stock-based benefit plans expected to be adopted by the Bank and the
Holding Company following the Conversion, the potential benefits to management
upon and subsequent to the Conversion, the absence of an established trading
market for the Common Stock, competition in the Bank's local market area, the
Bank's geographic concentration of loans, the risk of a delayed offering,
anti-takeover provisions, regulatory oversight and the possible effects of
recent legislation, and the potential income tax consequences of subscription
rights. See "Risk Factors."
The Holding Company
The Holding Company is an Indiana corporation recently organized to acquire
all of the common stock of the Bank and act as the Bank's holding company.
Pursuant to the Plan of Conversion, the Holding Company will offer the Common
Stock to Eligible Account Holders, the ESOP, Supplemental Eligible Account
Holders, Other Members, and to the general public. The holding company structure
will provide increased flexibility in conducting future business activities
related to the Bank. The Holding Company has received the approval of the Board
of Governors of the Federal Reserve System (the "FRB") to become a bank holding
company through the acquisition of the common stock of the Bank. Prior to the
Conversion, the Holding Company will not engage in any material operations. Upon
the consummation of the Conversion, the Holding Company will be a bank holding
company, the activities of which will be restricted generally by federal law and
FRB regulations to activities considered related to banking. See "Regulation
- --Bank Holding Company Regulation." Upon consummation of the Conversion, the
Holding Company will have no significant assets other than the common stock of
the Bank and $2,267,500 of the net Conversion proceeds, a portion of which is
expected to be used to lend funds to the ESOP to allow the ESOP to purchase
Common Stock in the Conversion. The Holding Company may also use a portion of
such funds to pay dividends and repurchase shares of its Common Stock. See "Use
of Proceeds." The Holding Company has no current arrangements, negotiations or
agreements, written or oral, with respect to any future acquisition. The Holding
Company's executive office is located at 279 East Morgan Street, Spencer,
Indiana, 47460, and its telephone number is (812) 829-2095. See "Home Financial
Bancorp."
The Bank
The Bank was organized as an Indiana savings and loan association in 1911
under the name Owen County Savings and Loan Association. In 1972, the Bank
converted to a federally chartered savings and loan association under the name
Owen County Federal Savings and Loan Association, and in 1989, the Bank
converted to a federally chartered savings bank known as Owen County Federal
Savings Bank. In 1994, the Bank became an Indiana savings bank known as Owen
Community Bank, s.b. Conducting business from its main office in Spencer,
Indiana, the Bank offers a variety of lending, deposit and other financial
services to its retail and commercial customers. See "Business." The Bank's
principal market area is Owen County in southern Indiana, approximately 55 miles
south of Indianapolis. According to the U.S. Bureau of Census, the city of
Spencer, the county seat of Owen County, had a population of 2,537, and Owen
County had a population of 17,281, at the time of the 1990 census. See "Market
Area." The Bank's deposits are insured up to applicable limits by the FDIC
through the SAIF.
At December 31, 1995, the Bank had total assets of $33.5 million, deposits
of $24.9 million and equity capital of $3.3 million, an amount equal to 9.85% of
total assets. For the year ended June 30, 1995, the Bank's net yield on weighted
average interest-earning assets was 4.54% compared to 4.42% and 4.43% for each
of the years ended June 30, 1994 and 1993, respectively. Historically, the Bank
has benefited from its good capital position and favorable interest rate spread
<PAGE>
which have resulted in a reasonably consistent level of operating earnings. See
"Business." The Bank has not made any acquisitions and, accordingly, has no
accounting goodwill on its balance sheet nor any other intangible assets. The
Bank's capital ratios are now, and on a pro forma basis will be, substantially
in excess of all regulatory capital requirements, as prescribed by the FDIC (the
"Capital Requirements"). See "Pro Forma Data -- Regulatory Capital Compliance."
The Bank has no current arrangements, negotiations, or agreements, written or
oral, with respect to any future acquisition.
The Bank is the oldest continuously operating financial institution
headquartered in Owen County. Management believes the Bank has developed a solid
reputation among its loyal customer base because of its commitment to personal
service and its strong support of the local community. The Bank is and
historically has been a significant residential real estate mortgage lender in
Owen County, originating approximately 14.4% of the mortgages recorded in Owen
County during the calendar year ended December 31, 1995.
The Bank provides a complement of services to its customers and, as a
result, has produced the following results:
o Profitability. The Bank's net income increased from $65,000 for the
year ended June 30, 1991 to $289,000 for the year ended June 30, 1995.
The Bank's net income for the six months ended December 31, 1995 was
$154,000. The Bank's average return on average assets for the five
years ended June 30, 1995 was 0.88%. The Bank's return on average
assets for the year ended June 30, 1995 and the six months ended
December 31, 1995 was 1.00% and 0.92%, respectively.
o Capital Position. At December 31, 1995, the Bank's equity capital was
$3.3 million, or 9.85% of total assets. Assuming net proceeds at the
midpoint of the Estimated Valuation Range, the Bank's pro forma equity
to assets ratio (excluding $2,267,500 of net proceeds to be retained by
the Holding Company), at such date, would have been 16.0%.
o Mobile Home and Non-Conforming Loans. The Bank has developed a unique
niche in its market area by (i) being the primary mobile home lender
in Owen County; (ii) originating a significant number of loans with a
ratio of the loan amount to the lesser of the current cost or
appraised value of the property securing the loan (the "Loan-to-Value
Ratio") of 90%; and (iii) extending credit to borrowers with prior
credit problems or lower credit quality. By focusing on this unique
lending niche, the Bank is able to improve its interest rate spread by
charging interest rates above prevailing market rates. See "Business."
The Bank's interest rate spread for the six months ended December 31,
1995 was 3.83%, and the Bank's interest rate spread for the years
ended June 30, 1995, 1994 and 1993 was 4.19%, 4.11% and 4.11%,
respectively. The Bank, however, has been successful in reducing the
risks inherent in these types of lending by undertaking diligent
collection efforts. At December 31, 1995, only $118,000, or 0.35%, of
the Bank's total assets were non-performing assets. At the same date,
$659,000, or 1.97%, of the Bank's total assets were delinquent more
than thirty days but less than ninety days. See "Business --
Non-Performing and Problem Assets.
o Community Orientation. The Bank is committed to meeting the financial
needs of the community in which it operates. The Bank believes it is
large enough to provide a wide range of personal and business financial
services, and yet is small enough to be able to provide such services
on a personalized and efficient basis. Management believes that the
Bank can be more effective in servicing its customers than many of its
non-local competitors because of the Bank's ability to quickly and
effectively provide senior management responses to customer needs and
inquiries.
The Conversion
General. The Board of Directors of the Bank unanimously adopted a Plan
of Conversion pursuant to which the Bank will convert from an Indiana mutual
savings bank to an Indiana stock savings bank. The Plan of Conversion and the
Articles of Stock Charter Conversion (the "Charter") will be submitted for the
approval of the members of the Bank at a special meeting currently scheduled for
June 14, 1996 (the "Special Meeting").
The proceeds from the sale of the Common Stock made as a part of the
Conversion will strengthen the Bank's capital position and will allow the Bank
to be structured in a corporate form similar to that of most business entities.
The Conversion will not adversely affect the Bank's normal business or its
existing services to depositors and borrowers. Deposits at the Bank will
continue to be insured by the FDIC up to the applicable limits. After the
Conversion, the Holding Company will have exclusive voting rights with respect
<PAGE>
to the Bank and no account holder or borrower will have any voting rights with
respect to, or be a member or a shareholder of, the Bank. Holders of shares of
Common Stock will have voting rights only with respect to the Holding Company.
Stock Pricing and Independent Appraisal. The aggregate purchase price of
the Common Stock being sold in the Conversion will be based on the aggregate pro
forma market value of the Common Stock, as determined by an independent
valuation. Keller, a financial advisory firm experienced in the valuation of
savings associations involved in the Conversion process, was retained by the
Bank to prepare an appraisal of the estimated pro forma market value of the
Bank. Keller's appraisal concluded that as of April 5, 1996, the Estimated
Valuation Range was from a minimum of $4,845,000 to a maximum of $6,555,000,
with a midpoint of $5,700,000. The aggregate number of shares of the Common
Stock to be sold at $10.00 per share will be within the range of 484,500 to
655,500, unless market and financial conditions necessitate a change in the
range. The appraisal will be updated shortly before the completion of the
Conversion. The Board of Directors reviewed with management Keller's methods and
assumptions and accepted Keller's appraisal as reasonable and adequate. The Bank
has agreed to pay Keller a fee of $15,000 for its appraisal services. Keller has
also prepared a business plan for the Bank for a fee of $4,000. See "The
Conversion -- Stock Pricing" and "-- Number of Shares to be Issued."
The independent valuation is not intended and must not be construed as a
recommendation of any kind as to the advisability of voting to approve the
Conversion or of purchasing the shares of the Common Stock. Moreover, because
the valuation is necessarily based upon estimates and projections of a number of
matters (including certain assumptions as to the amount of net proceeds and the
earnings thereon), all of which are subject to change from time to time, no
assurance can be given that persons purchasing shares in the Conversion will
thereafter be able to sell shares of Common Stock at prices related to the
valuation of the pro forma market value.
Members Meeting. The sale of shares of Common Stock in the Conversion is
conditioned upon approval of the Plan and the adoption of the Charter by a
majority of the votes eligible to be cast by the members of the Bank at the
Special Meeting. If the Conversion is not approved by the members at the Special
Meeting, no shares will be issued, the Conversion will not take place, all
subscription funds received will be promptly returned together with interest at
the passbook rate, which is currently 3.00% per annum, and all withdrawal
authorizations will be canceled.
Subscription Offering. Pursuant to the Plan of Conversion, up to 655,500
shares of Common Stock are being offered by the Holding Company at the price of
$10.00 per share in the Subscription Offering to the following persons in the
following order of priority: (i) savings deposit account holders as of March 31,
1994 with aggregate deposits at the close of business on such date of at least
$50.00 ("Eligible Account Holders"); (ii) the Bank's tax-qualified Employee
Stock Ownership Plan and Trust (the "ESOP"); (iii) savings deposit account
holders as of March 31, 1996 with aggregate deposits at the close of business on
such date of at least $50.00 ("Supplemental Eligible Account Holders") who are
not Eligible Account Holders; and (iv) deposit account holders and borrowers of
the Bank on May 10, 1996, who are not Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members"). The Subscription Offering expires at
5:00 p.m., Spencer time, on June 17, 1996, unless extended by the Bank and the
Holding Company. The Subscription Offering may be extended, until 24 months
after the Special Meeting, or until June 14, 1998. See "The Conversion
- --Subscription Offering."
Subscriptions may be paid by check or by withdrawal from accounts at the
Bank. Funds authorized for withdrawal from deposit accounts will continue to
earn interest at the rate specified for the account until completion of the
Conversion. All amounts paid will be placed in a segregated escrow account at
the Bank and will earn interest at the Bank's passbook rate from the date of
receipt until completion of the Conversion. That rate is currently 3.00%, for an
annualized percentage yield of 3.03%. Amounts may be withdrawn from certificate
accounts at the Bank to purchase Common Stock in the Conversion without the
payment of early withdrawal penalties. However, if the amount withdrawn reduces
the balance of the certificate account to less than the applicable required
minimum balance, such account after completion of the Conversion will earn
interest at the then-current passbook rate.
Refunds. In the event that a subscriber's order cannot be filled in full as
a result of an oversubscription or the Conversion is not consummated, refunds
(including interest at the passbook rate of interest for payments made other
than through authorization of withdrawal from deposit accounts) will be made
upon closing of the Conversion by check or, if payment was made through
authorization of withdrawal from a deposit account, through cancellation of an
appropriate portion of such withdrawal authorization.
<PAGE>
If the Conversion is not completed by August 1, 1996, and the Bank and the
Holding Company elect to extend the time required to complete the Conversion,
with the DFI's approval, subscribers will be given the right to increase,
decrease or rescind their subscriptions as set forth in the Plan of Conversion.
If the Bank and the Holding Company decide to extend the Subscription Offering,
subscribers will be given the right to have their subscriptions promptly
refunded following the conclusion of the current offering (which will end no
later than August 1, 1996), and the Bank will return subscriptions with interest
unless subscribers affirmatively elect to continue their subscriptions during
the period of extension.
Direct Community Offering. Commencing concurrently with the Subscription
Offering and subject to availability, shares of Common Stock are being offered
to the general public, giving preference to residents of Owen County, in a
Direct Community Offering. The purchase price in the Direct Community Offering
will also be $10.00 per share. The Direct Community Offering may, subject to DFI
approval, be extended until 24 months after the Special Meeting, or until June
14, 1998. The Bank reserves the absolute right to reject or accept any orders
received in the Direct Community Offering, in whole or in part, either at the
time of receipt of an order, or as soon as practicable following the expiration
of the Direct Community Offering.
The Direct Community Offering may expire as early as June 17, 1996, or at
any time thereafter (until August 1, 1996, unless extended by the Bank and the
Holding Company) when orders and indications of interest for at least 484,500
shares have been received in the Subscription Offering and the Direct Community
Offering. Accordingly, persons wishing to purchase Common Stock in the Direct
Community Offering directly from the Holding Company should return the Order
Form to the Bank on or before June 17, 1996. If a person waits until after that
date, the Direct Community Offering may be terminated prior to the time the
Order Form is submitted, and that person may be precluded from purchasing shares
of Common Stock in the Direct Community Offering. See "The Conversion --Direct
Community Offering."
In the event that the Bank, in its sole discretion, elects to use selected
dealers to assist with the Direct Community Offering, each such selected dealer
will receive commissions at an agreed upon rate, not to exceed 4.0%, for all
shares sold by the selected dealer. See "The Conversion -- Selected Dealers."
Purchase Limitations. The minimum purchase by any person or entity in the
Conversion is 25 shares. The maximum number of shares of Common Stock which may
be purchased by any person or entity, including such person's Associates (as
hereinafter defined) or group acting in concert is 10,000 (except that the ESOP
may purchase in the aggregate not more than 10% of the total number of shares of
Common Stock offered in the Conversion), subject to increase or decrease under
certain circumstances by the Boards of Directors of the Bank and the Holding
Company. See "The Conversion -- Limitations on Common Stock Purchases."
Participation of the Agents in the Offerings. The Bank has engaged the
Agents as its exclusive sales agents in the sale of Common Stock in both the
Subscription Offering and the Direct Community Offering, if any. In addition to
assisting in the marketing of the Common Stock, the Agents will assist the Bank
by, among other things, training the Bank's employees regarding the mechanics
and regulatory requirements of the conversion process, conducting informational
meetings for subscribers and other potential purchasers and keeping records of
all stock subscriptions. The Agents will only be assisting the Holding Company
on a best efforts basis in effecting the sale of its Common Stock directly. The
Agents will have no obligation to take or purchase any Common Stock. The Agents
may, in the sole discretion of the Bank, use the services of dealers selected by
the Bank in the Direct Community Offering, if any. If used, any selected dealers
will solicit indications of interest on a best efforts basis from their
customers to place orders for Common Stock, which orders will be placed only
when and if the Agents and the Bank believe that enough indications of interest
and orders have been received in the Subscription Offering and the Direct
Community Offering to consummate the Conversion. The Agents will receive a fixed
fee of $50,000 for acting as Agents in the Subscription Offering and the Direct
Community Offering, if any, and for providing consulting and financial advisory
services to the Holding Company and the Bank with respect to the Conversion. The
Agents will also be reimbursed for expenses, including legal fees, of up to
$30,000. See "The Conversion -- Agents."
<PAGE>
The engagement of the Agents by the Bank and the Agents' service as sales
agents and financial advisors for the Holding Company and the Bank should not be
construed as a recommendation of any kind as to the advisability of purchasing
Common Stock in the Conversion or as a representation regarding the accuracy or
adequacy of this prospectus. No report or opinion has been prepared by the
Agents for the Holding Company, the Bank or any other entity in connection with
the Conversion or regarding prices at which Common Stock may trade following the
Conversion.
Shares to be Purchased by Management and the ESOP. Directors and executive
officers of the Bank expect to purchase 36,050 shares at $10.00 per share, or
7.4% and 5.5% of the shares of Common Stock offered in the Conversion based upon
the minimum and maximum, respectively, of the Estimated Valuation Range. See
"Anticipated Management Purchases." Employees of the Bank, including its
executive officers, will also participate in the ESOP and be able to vote shares
allocated to their accounts under the ESOP, which is expected to purchase a
number of shares equal to 8% of the shares of Common Stock issued in the
Conversion through a loan from the Holding Company. The ESOP may purchase Common
Stock if shares remain available after satisfying the subscriptions of Eligible
Account Holders up to $6,555,000, the maximum of the Estimated Valuation Range.
Use of Proceeds
The net proceeds from the sale of Common Stock offered hereby are estimated
at $5.39 million, based upon the sale of 570,000 shares at $10.00 per share. It
is anticipated that $2,267,500 of the net Conversion proceeds will be retained
by the Holding Company for general corporate purposes, including the payment of
dividends and future repurchases of the Holding Company's Common Stock.
Additionally, the Holding Company intends to loan a portion of such retained
funds to the ESOP to allow the ESOP to purchase shares of Common Stock in the
Conversion. Assuming the sale of 570,000 shares of Common Stock in the
Conversion and the corresponding purchase of 45,600 shares by the ESOP, the
Holding Company will loan $456,000 to the ESOP.
The proceeds received by the Bank in the Conversion, estimated to be
$3,122,500 at the midpoint of the Estimated Valuation Range, will be used
primarily to support the Bank's lending and investment activities and may be
used to repay a portion of its $5.2 million in outstanding borrowings from the
Federal Home Loan Bank ("FHLB") of Indianapolis at December 31, 1995 which
mature on various dates primarily during the years 1996 through 2000 and have
interest rates ranging from 6.14% to 6.48%. See "Business --Sources of Funds
- --Borrowings." The Bank may also use Conversion proceeds for future renovation
and branch expansion. For a description of a construction project involving a
possible office facility for the Holding Company and additional storage and
office space for the Bank which is currently being considered by the Bank's
Board of Directors, see "Business -- Properties." Any remaining net proceeds may
be used by the Bank for general corporate purposes, including contributions to
the Bank's proposed management recognition and retention plan and trust (the
"RRP"). In the interim, the net proceeds at the Holding Company and the Bank
will be invested in U.S. government securities, other U.S. agency securities,
mortgage-backed securities and equity securities. See "Use of Proceeds."
Market for the Common Stock
The Holding Company will use its best efforts to develop a public trading
market for the Common Stock. The Holding Company has received approval to have
its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "HWEN"
upon successful closing of the Subscription and Direct Community Offerings,
subject to certain conditions which the Holding Company and the Bank believe
will be met. It is anticipated that upon the completion of the Conversion at
least two market makers will make a market in the Common Stock, although the
Holding Company has not yet obtained any market makers and will not do so until
the offering is completed. FBR intends to make a market in the Common Stock,
although it is under no obligation to do so. There can be no assurance that an
active and liquid market for the Common Stock will develop in the foreseeable
future or, if such a market does develop, that it will continue. In addition,
there can be no assurance that shareholders will be able to sell their shares at
or above the Purchase Price after the completion of the Conversion. See "Market
for the Common Stock."
<PAGE>
Dividend Policy
Although no decision has been made yet regarding the payment of dividends,
the Holding Company may consider a policy of paying cash dividends on the Common
Stock following the Conversion. Dividends, when and if paid, will be
subject to determination and declaration by the Board of Directors in its
discretion, which will take into account the Holding Company's consolidated
financial condition and results of operations, tax considerations, industry
standards, economic conditions, regulatory restrictions on dividend payments by
the Bank to the Holding Company, general business practices and other factors.
See "Dividend
Policy," "Regulation -- Regulatory Capital," and "-- Dividend Limitations."
Executive Compensation and Related Transactions
Employment Contracts. Effective as of the effective date of the Conversion,
the Bank has entered into three-year employment contracts with two of its key
employees. Each contract provides, among other things, for: (i) the payment to
the employee of such employee's current base salary, subject to increases as
approved by the Bank's Board of Directors, (ii) the employee's participation in
other fringe benefit and benefits plans available to the Bank's employees and
(iii) the payment of the employee's base compensation under the contract for
three additional years in certain circumstances involving the termination of the
employee's employment following a change in control (as defined therein). As of
date hereof, the cash compensation which would be paid under the contracts to
the employees if the contracts were terminated either after a change in control
of the Holding Company, without cause by the Bank, or for cause by the
employees, would be $141,960 for Kurt J. Meier, the Bank's President, Chief
Executive Officer and Treasurer, and $130,260 for Kurt D. Rosenberger, the
Bank's Vice President and Chief Financial Officer.
The Bank has also entered into a three-year employment agreement with Frank
R. Stewart, the Bank's Chairman of the Board, effective as of January 1, 1996.
Mr. Stewart's contract provides for the payment to Mr. Stewart of $44,980 in
annual compensation, subject to increases as approved by the Bank's Board of
Directors. Mr. Stewart's employment agreement also provides that Mr. Stewart
will continue to receive such compensation during the then-remaining term of the
agreement in the event Mr. Stewart's employment with the Bank is terminated
without cause. See "Executive Compensation and Related Transactions --
Employment Contracts."
Employee Stock Ownership Plan and Trust. In connection with the Conversion,
the Bank has established the ESOP effective January 1, 1996, for eligible
employees of the Bank, including executive officers. The ESOP intends to
purchase a number of shares equal to 8% of the Common Stock issued in the
Conversion for the benefit of its participants. The ESOP intends to borrow the
funds necessary to purchase the Common Stock from the Holding Company. See
"Executive Compensation and Related Transactions -- Employee Stock Ownership
Plan and Trust."
<PAGE>
RRP. At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors
intends to submit for shareholder approval the RRP, and at that time to make
certain awards pursuant to the RRP, as a means of providing the directors and
employees of the Bank and the Holding Company with an ownership interest in the
Holding Company in a manner designed to encourage such persons to remain with
the Holding Company and the Bank. If the RRP is approved by the Holding
Company's shareholders, the Bank will initially contribute funds to the RRP to
enable it to acquire an aggregate amount of Common Stock equal to up to 3.0% of
the shares issued in the Conversion, either directly from the Holding Company or
on the open market. A number of shares equal to 1.0% of the total number of
shares sold in the Conversion will remain available for future issuance under
the RRP. Shares awarded under the RRP will vest at a rate of 20% at the end of
each full twelve (12) months of service with the Bank after the date of grant,
subject to earlier vesting in the event of death or disability. Assuming the
shares purchased by the RRP have a market value on the date of grant of $10.00
per share, the shares available for distribution under the RRP would have an
aggregate market value of between $193,800 and $262,200, based upon the
Estimated Valuation Range. It is anticipated that on the date of the Holding
Company's first shareholder meeting following the Conversion, an award of a
number of shares equal to 0.5625% of the total number of shares of Common Stock
sold in the Conversion (or Common Stock valued at between $27,253 and $36,872,
based upon the Estimated Valuation Range and assuming a market value for the
Common Stock on such date of $10.00 per share) will be made to each of Mr. Meier
and Mr. Stewart, and an award of a number of shares equal to 0.375% of the total
number of shares sold in the Conversion (or Common Stock valued at between
$18,169 and $24,581, based upon the assumptions described above) will be made to
Mr. Rosenberger. It is also anticipated that an award of a number of shares
equal to 0.2% of the total number of shares sold in the Conversion (or Common
Stock valued at between $9,690 and $13,110, based upon the assumptions described
above) will be made at that time to each of the Bank's five outside directors.
Other employees of the Bank are expected to receive awards under the RRP equal
to an aggregate of 0.5% of the total number of shares sold in the Conversion (or
Common Stock valued at between $24,225 and $32,775, based upon the assumptions
described above) at that time. See "Executive Compensation and Related
Transaction -- RRP."
Stock Option Plan. At a meeting of the Holding Company's shareholders to be
held at least six months after completion of the Conversion, the Board of
Directors intends to submit for shareholder approval a stock option plan (the
"Stock Option Plan"), and at that time to make certain awards pursuant to the
Stock Option Plan. Options will become exercisable at a rate of 20% at the end
of each full twelve (12) months of service with the Bank after the date of
award, subject to early vesting in the event of death or disability. If approved
by the Holding Company's shareholders, Common Stock in an aggregate amount of
10.0% of the shares issued in the Conversion (or between 48,450 and 65,550
shares, based upon the Estimated Valuation Range) will be reserved for issuance
upon the exercise of options granted under the Stock Option Plan. It is
anticipated that on the date of the Holding Company's first shareholder meeting
following the Conversion, options to purchase a number of shares equal to 1.0%
of the total number of shares sold in the Conversion (or between 4,845 and 6,555
shares, based upon the Estimated Valuation Range) will be granted to each of Mr.
Meier and Mr. Stewart, and options to purchase a number of shares equal to 0.75%
of the total number of shares sold in the Conversion (or between 3,634 and 4,916
shares, based upon the Estimated Valuation Range) will be granted to Mr.
Rosenberger. It is also anticipated that options to purchase a number of shares
equal to 0.5% of the total number of shares sold in the Conversion (or between
2,423 and 3,278 shares, based on the Estimated Valuation Range) will be granted
at that time to each of the Bank's five outside directors. Other employees of
the Bank are expected to receive options to purchase an aggregate number of
shares equal to 2.25% of the total number of shares sold in the Conversion (or
between 10,901 and 14,749 shares, based on the Estimated Valuation Range) at
that time. The remaining options available for grant under the Stock Option Plan
(2.5% of the total number of shares sold in the Conversion) are expected to be
reserved for future issuance to employees and newly appointed directors of the
Holding Company and the Bank. Options granted under the Stock Option Plan will
have exercise prices per share equal to the fair market value of the shares on
the date of grant of the stock options. The ultimate value of any option granted
at fair market value will depend, therefore, on future appreciation in the fair
market value of the shares to which the option relates. See "Executive
Compensation and Related Transactions -- Stock Option Plan."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
OWEN COMMUNITY BANK, s.b. AND SUBSIDIARY
The following selected consolidated financial data of the Bank is qualified
in its entirety by, and should be read in conjunction with, the consolidated
financial statements, including notes thereto, included elsewhere in this
Prospectus. Information at December 31, 1995, and for the six months ended
December 31, 1995 and 1994 is unaudited. In the opinion of management of the
Bank, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of results for and such periods have been
included. The results of operations and other data for the six month period
ended December 31, 1995 are not necessarily indicative of the results of
operations for the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
AT JUNE 30,
AT DECEMBER 31, ------------------------------------------------------------
1995 1995 1994 1993 1992 1991
--------------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................................... $33,462 $30,839 $26,008 $23,460 $21,579 $21,535
Loans receivable, net.......................... 27,203 25,547 21,479 19,368 17,124 15,718
Mortgage-backed securities..................... 1,359 1,477 1,636 1,156 1,483 ---
Cash and cash equivalents...................... 2,325 1,386 1,237 1,343 1,323 1,764
Securities available for sale.................. 1,259 934 --- --- --- ---
Securities held to maturity.................... --- 350 778 677 678 175
Deposits....................................... 24,895 22,500 21,451 20,174 19,151 19,303
Federal Home Loan Bank advances................ 5,200 5,000 1,500 500 --- ---
Equity capital - substantially restricted...... 3,295 3,159 2,850 2,589 2,280 2,056
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------ ---------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
Summary of Operating Results:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ................................... $1,476 $1,147 $2,420 $2,023 $1,958 $1,981 $1,930
Interest expense .................................. 797 535 1,174 949 993 1,224 1,355
------ ------ ------ ------ ------ ------ ------
Net interest income ............................ 679 612 1,246 1,074 965 757 575
Provision for loan losses ......................... 43 21 36 14 6 -- 3
------ ------ ------ ------ ------ ------ ------
Net interest income after provision for
loan losses ................................. 636 591 1,210 1,060 959 757 572
Other income:
Service charges on deposit accounts ............ 18 15 27 23 22 22 19
Gain on sale of real estate acquired
for development .............................. 19 11 78 145 117 56 43
Other .......................................... 23 11 43 33 28 21 24
------ ------ ------ ------ ------ ------ ------
Total other income .......................... 60 37 148 201 167 99 86
------ ------ ------ ------ ------ ------ ------
Other expense:
Salaries and employee benefits ................. 204 176 404 344 254 248 218
Net occupancy and equipment expense ........... 57 52 109 109 91 74 99
Deposit insurance premium ...................... 25 25 49 48 32 42 37
Other .......................................... 155 144 304 306 255 247 195
------ ------ ------ ------ ------ ------ ------
Total other expense ....................... 441 397 866 807 632 611 549
------ ------ ------ ------ ------ ------ ------
Income before income taxes and cumulative
effect of change in accounting principle ....... 255 231 492 454 494 245
109
Income tax expense ................................ 101 91 203 169 186 85 44
Cumulative effect of change in
accounting principle -- -- -- (24) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income ..................................... $ 154 $ 140 $ 289 $ 261 $ 308 $ 159 $ 65
====== ====== ====== ====== ====== ====== ======
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
<CAPTION>
Supplemental Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Return on assets (1) .............................. .92% 1.00% 1.00% 1.03% 1.34% .72% .31%
Return on equity (2) .............................. 9.35 9.55 9.59 9.46 12.55 7.18 3.25
Interest rate spread (3) .......................... 3.83 4.37 4.19 4.11 4.11 3.25 2.50
Net yield on interest-earning assets (4) .......... 4.21 4.62 4.54 4.42 4.43 3.62 2.91
Other expenses to average assets .................. 2.63 2.82 2.99 3.17 2.75 2.77 2.63
Net interest income to other expenses ............. 1.54x 1.54x 1.44x 1.33x 1.53x 1.24x 1.05x
Equity-to-assets (5) .............................. 9.85 10.45 10.24 10.96 11.04 10.57 9.55
Average equity capital to
average total assets ........................... 9.68 10.42 10.42 10.85 10.69 10.61 9.59
Average interest-earning assets to average
interest-bearing liabilities ................... 1.08x 1.06x 1.13x 1.08x 1.07x 1.06x 1.06x
Non-performing assets to total assets ............. .35 .28 .32 .10 -- -- .24
Non-performing loans to total loans ............... .43 .34 .39 .13 -- -- .32
Loan loss allowance to total loans, net ........... .37 .18 .22 .12 .06 .08 .09
Loan loss allowance to non-performing loans ....... 84.75 53.75 57.00 108.33 -- -- 27.45
Net charge-offs to average loans .................. * * .02 * .04 * .02
</TABLE>
- ----------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(4) Net interest income divided by average interest-earning assets.
(5) Total equity divided by assets.
(*) Less than .01%
<PAGE>
RECENT FINANCIAL DATA
Summarized below are certain selected financial data for the Bank at March
31, 1996 and June 30, 1995 and for the three and nine months ended March 31,
1996 and 1995. Information at and for each of the periods presented is
unaudited. In the opinion of management of the Bank, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
results for or at such periods have been included. The results of operations and
other data for the three- and nine-month periods ended March 31, 1996, are not
necessarily indicative of the results of operations for the fiscal year ended
June 30, 1996.
March 31, June 30,
1996 1995
------- -------
(In thousands)
Selected Financial Condition Data:
Total assets ............................................. $33,999 $30,839
Loans receivable, net .................................... 26,568 25,547
Mortgage-backed securities available for sale ............ 1,281 --
Mortgage-backed securities held to maturity .............. -- 1,477
Cash and cash equivalents ................................ 3,865 1,386
Securities available for sale ............................ 885 934
Securities held to maturity .............................. -- 350
Deposits ................................................. 25,403 22,500
Federal Home Loan Bank advances .......................... 5,200 5,000
Equity capital - substantially restricted ................ 3,350 3,159
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ------ ------
(In thousands)
Selected Operations Data:
Interest income........................ $742 $612 $2,218 $1,753
Interest expense....................... 398 294 1,196 826
---- ---- ------ ------
Net interest income............... 344 318 1,022 927
Provision for loan losses.............. 21 7 64 29
---- ---- ------ ------
Net interest income after
provision for loan losses......... 323 311 958 898
Gain on sale of real estate
acquired for development.......... 19 33 38 44
Other income........................... 22 15 64 46
Other expense.......................... 245 210 683 609
---- ---- ------ ------
Income before income taxes............. 119 149 377 379
Income tax expense..................... 48 60 152 151
---- ---- ------ ------
Net income........................ $ 71 $ 89 $ 225 $ 228
==== ==== ====== ======
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1996 1995 1996 1995
------ ------ ---- ----
Selected Financial Ratios and Other Data:
<S> <C> <C> <C> <C>
Return on assets (ratio of net income to
average total assets) (1)........................................... .84% 1.23% .89% 1.07%
Return on equity (ratio of net income to
average total equity) (1)........................................... 8.51 11.67 9.16 10.23
Interest rate spread (average during period) (1)....................... 3.92 4.05 3.96 4.29
Net yield on interest-earning assets (1)(2)............................ 4.22 4.56 4.22 4.58
Ratio of other expenses to average total assets (1).................... 2.90 2.91 2.71 2.87
Net interest income to other expenses.................................. 1.40x 1.62x 1.48x 1.52x
Ratio of average interest-earning assets to average
interest-bearing liabilities (1).................................... 107.50 109.69 107.46 107.71
Non-performing assets to total assets,
at end of period(3)............................................... .24 .21 .24 .21
Non-performing loans to total loans.................................... .30 .26 .30 .26
Loan loss allowance to non-performing loans(4)......................... 151.05 72.41 151.05 72.41
Loan loss allowance to total loans..................................... .45 .20 .45 .20
Net charge-offs to average loans....................................... * * * *
Equity-to-assets, at end of period..................................... 9.85 10.24 9.85 10.24
Average equity capital to average total assets......................... 9.86 10.56 9.75 10.50
Number of full-service offices......................................... 1 1 1 1
</TABLE>
- ----------
(1) Ratios are annualized.
(2) Net interest income divided by average interest-earnings assets.
(3) Non-performing assets consist of non-accruing loans, accruing loans 90 days
or more past due, restructured loans and real estate owned.
(4) Non-performing loans consist of non-accruing loans, accruing loans 90 days
or more past due and restructured loans.
(*) Less than .01%
<PAGE>
Three months ended March 31, 1996 compared to three months ended March 31, 1995
The Bank's total interest income for the three months ended March 31, 1996,
was $742,000, an increase of $130,000 or 21%, from $612,000 for the three months
ended March 31, 1995. Interest expense was $398,000 for the three months ended
March 31, 1996, which was an increase of $104,000, or 35%, from $294,000
recorded for the three months ended March 31, 1995. As a result, net interest
income was $344,000 for the three months ended March 31, 1996, an increase of
$26,000, or 8%, from $318,000 for the three months ended March 31, 1995. The
increase in interest income was primarily due to a 4.8 million, or 17%, increase
in average interest-earning assets from $27.9 million for the three months ended
March 31, 1995, to $32.7 million for the three months ended March 31, 1996. In
addition to the increase in average interest-earning assets, the average yield
on interest-earning assets increased from 8.75% to 9.18%. The increase in
interest expense was primarily due to an increase in the average rate paid on
interest-bearing liabilities from 4.70% to 5.08%. In addition average
interest-bearing liabilities increased $5.9 million, or 23%.
The provision for losses on loans for the three months ended March 31,
1996, was $21,000. Although no losses were charged to the allowance for loan
losses during the first quarter of 1996, a provision was made due to inherent
losses that may occur as a result of the continued growth of the loan portfolio.
During the first quarter of 1995, no losses were charged to the allowance for
loan losses and no provision was considered necessary. At March 31, 1996 and
1995, the allowance was $119,000 and $50,000, respectively, a ratio of 0.45% and
0.20% to total loans at each date, and non-performing loans increased from 0.26%
of total loans at March 31, 1995 to .30% at March 31, 1996. Based on the Bank's
review of the loan portfolio during these periods, management considered the
allowance for loan losses at March 31, 1996 and 1995 to be adequate to cover
losses inherent in the loan portfolio. See "Business -- Allowance for Loan
Losses."
The Bank's net income for the three months ended March 31, 1996, was
$71,000, compared to $89,000 for the three months ended March 31, 1995, a
decrease of $18,000. As previously discussed, the Bank's net interest income
increased by $6,000. Gain on the sale of real estate acquired for development
decreased to $19,000 for the 1996 period compared to $33,000 for the 1995 period
as a result of lower sales volume. Other income for the first quarter of 1996
increased $7,000 from the first quarter of 1995. This increase in other income
result primarily from service charges on deposit accounts. Other expense for the
first quarter of 1996 increased $35,000 from the first quarter of 1995. This
increase in other expense resulted primarily from increases in salaries and
benefits.
Nine months ended March 31, 1996 compared to nine months ended March 31, 1995
The Bank's total interest income for the nine months ended March 31, 1996
was $2.2 million compared to $1.8 million for the same period in 1995. The $0.4
million increase primarily resulted from increased loan volume. Total interest
expense also increased during the nine months ended March 31, 1996 to $1.2
million from $0.8 million for the nine months ended March 31, 1995 primarily as
a result of the $2.9 million increase in interest-bearing deposits. As a result,
net interest income increased approximately $0.1 million in the 1996 period
compared to the 1995 period.
The provision for losses on loans for the period ended March 31, 1996 was
$64,000 compared to $29,000 for the 1995 period. There were no significant
losses charged off during either nine month period. The increase in the
provision for loan losses resulted from the $1 million increase in outstanding
loans and management's desire to increase the allowance for loan losses to be
more comparable to the level maintained by peer institutions. At March 31, 1996,
the allowance for loan losses was 0.45% of total loans compared to 0.20% at
March 31, 1995.
<PAGE>
Gain on sales of real estate acquired for development decreased slightly
from $44,000 for the nine months ended in 1995 compared to $38,000 for the same
period in 1996. Other income increased $18,000 in the 1996 period compared to
the 1995 period primarily as a result of increased service charges on deposit
accounts. Other expenses increased to $683,000, or 12%, for the nine months
ended March 31, 1996 compared to $609,000 for the same period in 1995. Increases
in salaries and benefits, depreciation expense and computer processing expenses
accounted for substantially all of the change.
Net income for the 1996 period was $225,000 compared to $228,000 for the
1995 period. The increase in net interest income and other income substantially
offset the increases in the provision for loan losses and other expenses.
March 31, 1996 Balance Sheet compared to June 30, 1995 Balance Sheet
The Bank's total assets were $34.0 million at March 31, 1996, an increase
of $3.2 million, or 10%, from June 30, 1995. Net loans receivable were $26.6
million at March 31, 1996, an increase of $1.1 million, or 4%, from $25.5
million at June 30, 1995. Cash and investments, consisting of securities
available for sale, securities held to maturity and mortgage backed securities,
were $6.0 and $4.2 million at March 31, 1996 and June 30, 1995. Deposits
increased $2.9 million, or 13% from June 30, 1995. The net unrealized loss on
securities available for sale was $23,000 at March 31, 1996 compared to an
unrealized gain of $34,000 at June 30, 1995.
Asset Quality
Total non-performing assets, which consisted only of non-performing loans,
decreased during the three- and nine-month periods ended March 31, 1996 to
$79,000 compared to $118,000 at December 31, 1995 and $100,000 at June 30, 1995.
As a result, the percentage of non-performing assets to total assets decreased
to 0.24%, at March 31, 1996, from 0.35% and 0.32% at December 31, 1995 and June
30, 1995, respectively. The percentage of non-performing loans to total loans
decreased to 0.30% at March 31, 1996 from 0.43% and 0.39% at December 31, 1995
and June 30, 1995, respectively.
During the nine months ended March 31, 1996, loans totalling $2,000 were
charged off. The ratio of the allowance for loan losses to non-performing loans
has increased from 57% at June 30, 1995, to 151% at March 31, 1996.
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should consider carefully the matters presented below.
Potential Impact of Changes in Interest Rates
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and other borrowings. At
December 31, 1995, based on information provided by Sendero Corporation,
Scottsdale, Arizona, it was estimated that the Bank's NPV (the present value of
the Bank's cash flows from assets, liabilities, and off-balance sheet items)
would increase 3.9% and would decrease 5.1% in the event of 2% and 4% increases
in market interest rates, respectively. The Bank's NPV at the same date would
decrease 15.3% and 26.0% in the event of 2% and 4% decreases in market rates,
respectively. These calculations indicate that the Bank's net portfolio value
could be adversely affected by decreases in interest rates but that the Bank's
interest rate risk is within the definition of "normal" level of exposure under
the new net market value methodology adopted by the Office of Thrift Supervision
(the "OTS"), which is 2% of the present value of its assets. As a result, if the
Bank had been subject to the OTS' reporting requirements under this methodology,
it would not have been required to take a deduction from capital available to
calculate its risk-based capital requirement. Currently, the Bank's banking
regulatory agencies, the FDIC and the DFI, would not require any reduction in
the Bank's capital for interest-rate risk. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management."
At December 31, 1995, the Bank's total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing in the same period by $6.1 million, representing a cumulative one
year gap (the difference between interest-earning assets anticipated by the Bank
to mature or reprice within one year and interest-bearing liabilities
anticipated by the Bank to mature or reprice within one year, as a percentage of
earning assets) (the "Interest Rate Gap") of a positive 18.1%. As a result,
based upon certain assumptions of management, the yield on interest-earning
assets of the Bank should adjust to changes in market interest rates at a faster
rate than the cost of the Bank's interest-bearing liabilities. Consequently, the
Bank's net interest income could be adversely affected during periods of falling
interest rates. A negative Interest Rate Gap would have the opposite effect. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management."
The Bank, like most financial institutions, will continue to be affected by
general changes in levels of interest rates and other economic factors beyond
its control.
Potential Impact of Future Changes in or the Discontinuance of the Business of
the Bank's Subsidiary
The Bank's service corporation subsidiary, BSF, Inc. ("BSF"), has
historically engaged in the purchasing and subdividing of large tracts of land
and the selling of the subdivided tracts, primarily on contract. The Bank
utilized the sale of BSF's properties to provide an additional source of income.
During the fiscal years ended June 30, 1995, 1994, and 1993, the Bank realized
net income of $59,000, $91,000, and $79,000, respectively, from the operations
of BSF. During the six months ended December 31, 1995, net income from the
operations of BSF, Inc. was $26,000. In connection with the Bank's conversion to
an Indiana mutual savings bank in May 1994, the FDIC required the Bank to (i)
immediately cease BSF's land acquisitions; (ii) divest all non-conforming real
estate holdings then owned by BSF within five (5) years or by November 16, 2000,
and (iii) maintain its capital at levels sufficient for it to be classified as a
well-capitalized institution. See "Regulation -- Regulatory Capital." BSF's
mandated discontinuance of land acquisitions and divestiture of real estate
holdings has already led to a reduction in net income from BSF's operations and
may have a negative impact on the Bank's results of operations in the future.
See "Business -- Service Corporation Subsidiary."
<PAGE>
Credit Risk Relating to 90% Loan-to-Value Ratio Lending and Non-Conforming Loans
A significant portion of the Bank's residential mortgage loan portfolio
consists of adjustable-rate residential mortgage loans with a Loan-to-Value
Ratio of 90%. The Bank began making a significant number of such loans in 1991.
While these loans have higher yields than similar loans with lower Loan-to-Value
Ratios, this type of lending entails greater risk than conventional residential
mortgage lending because such loans are often made to first-time home buyers and
other borrowers who lack adequate financial resources to absorb increases in
interest rates and who may be adversely affected by a downturn in the local
economy. Moreover, in the event of early defaults, the real estate securing such
loans may not provide an adequate source of repayment of the outstanding loan
balance. Although the Bank has not experienced any significant problems with its
90% Loan-to-Value Ratio loans to date, there can be no assurance that the Bank
will not experience losses from such loans in the future. The Bank also makes
mortgage loans to borrowers with past credit problems. Lending to borrowers with
lower credit quality generally involves higher average loan default rates than
is generally experienced with borrowers with higher credit quality. Although the
Bank has thus far been successful in managing the risks inherent in lending to
borrowers with lower credit quality through its diligent collection efforts, no
assurance can be given that the Bank will not experience increased losses from
such loans in the future.
Mobile Home Lending
The Bank originates loans for the purchase of new and used mobile homes and
for the purchase of mobile home and land combinations ("Combo Loans"). At
December 31, 1995, approximately $1.3 million, or 4.9% of the Bank's portfolio
of loans, consisted of mobile home loans and $3.2 million, or 11.5% of the
Bank's loan portfolio, consisted of Combo Loans. While mobile home loans have
shorter terms to maturity and higher yields than the Bank's residential mortgage
loans, mobile home lending entails greater risk than traditional residential
mortgage lending. Because Combo Loans are in part secured by mobile loans, Combo
Loans also entail greater risk than residential mortgage lending. Loans secured
by mobile homes involve more credit risk than residential mortgage loans because
of the type and nature of the collateral, the fact that such loans generally are
made to borrowers with lower income levels, and the fact that mobile homes tend
to rapidly depreciate in value. In many cases, any repossessed collateral for a
defaulting loan secured by a mobile home will not provide an adequate source of
repayment of the outstanding loan balance because of improper repair and
maintenance of the underlying security. As of December 31, 1995, none of the
Bank's Combo Loans was delinquent for 90 days or more. As of the same date, only
one of the Bank's mobile home loans in the amount of $11,000 was delinquent for
90 days or more. This mobile home has since been repossessed and sold by the
Bank at no loss. There can be no assurances, however, that additional
delinquencies will not occur in the future, or that the Bank will not experience
losses from such loans in the future.
Nonresidential and Multi-Family Real Estate Lending
The Bank originates loans for the purchase of nonresidential and
multi-family real estate, and after the Conversion expects to be more active in
the origination of such loans. At December 31, 1995, the Bank's total portfolio
of nonresidential real estate and multi-family loans amounted to $1.7 million
and $475,000, respectively, or 6.2% and 1.7%, respectively, of the Bank's total
loan portfolio. The Bank has historically been restricted in its ability to
originate such loans by the loans-to-one borrower limitation because such loans
often involve large balances to single borrowers or groups of related borrowers.
However, the additional capital that the Bank will have following the Conversion
will allow it to be more active in the origination of nonresidential and
multi-family real estate loans. Although nonresidential and multi-family real
estate loans provide higher interest rates and shorter terms, these loans have
higher credit risk than one- to four-family residential loans. Payment
experience on loans secured by such properties is typically dependent upon the
successful operation of the properties and thus may be subject to a greater
extent to adverse conditions in the real estate market or in the general
economy. Accordingly, the nature of the loans make them more difficult for
management to monitor and evaluate. At December 31, 1995, none of the Bank's
nonresidential real estate or multi-family loans was non-performing. There can
be no assurance, however, that the Bank will not experience losses from such
loans in the future or that the Bank's allowance for loan losses would be
adequate to absorb any future losses on such loans.
Disparity Between SAIF and BIF Premiums
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the BIF and the SAIF. The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to a target level within a reasonable time and may
decrease such rates if such target level has been met. The FDIC has established
a risk-based assessment system for both SAIF and BIF members. Under such system,
assessments may vary depending on the risk the institution poses to its deposit
insurance fund. Such risk level is determined by reference to the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF, deposit
insurance assessments paid by healthy BIF-insured institutions were recently
reduced significantly below the level paid by healthy SAIF-insured institutions.
Assessments paid by healthy SAIF-insured institutions exceeded those paid by
healthy BIF-insured institutions by approximately $.19 per $100 in deposits in
late 1995 and exceeded them by $.23 per $100 in deposits beginning in 1996. Such
premium disparity could have a negative competitive impact on the Bank and other
institutions with SAIF deposits.
<PAGE>
Congress is considering legislation to recapitalize the SAIF and to
eliminate the significant premium disparity between the BIF and the SAIF.
Currently, the recapitalization plan provides for a special assessment of
approximately $.85 per $100 of SAIF deposits held at some time in 1995, in order
to increase SAIF reserves to the level required by law. Certain banks holding
SAIF-insured deposits would pay a lower special assessment. In addition, the
cost of prior thrift failures would be shared by both the SAIF and the BIF. Such
cost sharing might increase BIF assessments by $.02 to $.025 per $100 in
deposits. SAIF assessments for healthy SAIF-insured institutions would be set at
a significantly lower level after the legislation is adopted and could never be
reduced below the level set for healthy BIF-insured institutions. The
recapitalization plan also provides for the merger of the SAIF and BIF on
January 1, 1998. It has also been proposed that the savings association charter
be eliminated in connection with such a merger.
The Bank had $24.9 million in deposits at December 31, 1995. If the
one-time special assessment in the legislative proposal is enacted into law, the
Bank will pay an additional assessment of approximately $211,650 (based upon
deposits at December 31, 1995), which will reduce capital and earnings for the
quarter in which any such assessment is recorded. However, it is expected that
quarterly SAIF assessments would be reduced significantly sometime after
adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the Holding
Company can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated. If the proposed legislation is not adopted, SAIF
premiums may increase and the disparity between BIF and SAIF premiums may become
greater, with a resulting adverse effect on the Bank's operations. See
"Regulation -- Insurance of Deposits."
Possible Dilutive Effect of Future Stock Benefit Plans
Following the Conversion, it is likely that the Holding Company and the
Bank will adopt, subject to shareholder approval, employee and management
benefit plans which may involve the issuance of additional shares of Common
Stock. In particular, the Holding Company and the Bank anticipate adopting the
RRP and the Stock Option Plan following the Conversion, subject to receiving
shareholder approval of such plans at a shareholders' meeting to be held at
least six months after the completion of the Conversion. Under the RRP,
directors and employees could be awarded an aggregate amount of Common Stock
equal to 4% of the shares issued in the Conversion. Under the Stock Option Plan,
directors and employees could be granted options to purchase an aggregate amount
of Common Stock equal to 10% of the shares issued in the Conversion at exercise
prices equal to the fair market value of the shares on the date of grant.
It is currently anticipated that the shares issued to directors and
employees under the RRP will be shares purchased on the open market. However, to
the extent shares are not available on the open market or the Holding Company
decides not to purchase such shares on the open market, authorized but unissued
shares of Common Stock may be issued to recipients of awards under the RRP. If
newly issued shares are used, the interests of existing shareholders will be
diluted. It is expected that the following awards will be made pursuant to the
RRP as of the date of the first shareholder meeting of the Holding Company
following the Conversion: (i) a number of shares equal to 0.5625% of the total
number of shares sold in the Conversion to each of Mr. Meier and Mr. Stewart;
(ii) a number of shares equal to 0.375% of the total number of shares sold in
the Conversion to Mr. Rosenberger; (iii) a number of shares equal to 0.2% of the
total number of shares sold in the Conversion to each of the Bank's five outside
directors; and (iv) an aggregate number of shares equal to 0.5% of the total
number of shares sold in the Conversion to other employees of the Bank. A number
of shares equal to 1.0% of the total number of shares sold in the Conversion
will remain available for future awards under the RRP. See "Executive
Compensation and Related Transactions -- RRP." Assuming that 570,000 shares of
Common Stock are issued in the Conversion and that all awards under the RRP are
from authorized but unissued shares, the Holding Company estimates that the per
share book value for the Common Stock would be diluted $0.54 per share, or 3.8%,
and earnings per share would be diluted $0.03 per share, or 7.9%, on a pro forma
basis as of December 31, 1995. See "Pro Forma Data."
<PAGE>
It is also expected that options to purchase shares of Common Stock will be
granted pursuant to the Stock Option Plan as follows: (i) options to purchase a
number of shares equal to 1.0% of the total number of shares sold in the
Conversion to each of Mr. Meier and Mr. Stewart; (ii) options to purchase a
number of shares equal to 0.75% of the total number of shares sold in the
Conversion to Mr. Rosenberger; (iii) options to purchase a number of shares
equal to 0.5% of the total number of shares sold in the Conversion to each of
the Bank's five outside directors; and (iv) options to purchase an aggregate
number of shares equal to 2.25% of the total number of shares sold in the
Conversion to other employees of the Bank. Options to purchase a number of
shares equal to 2.5% of the total number of shares of Common Stock sold in the
Conversion will be reserved for future issuance under the Stock Option Plan to
employees and newly appointed directors of the Holding Company and the Bank. The
grant of these stock options may also be considered dilutive of the interests of
shareholders.
Potential Benefits to Management Upon and Subsequent to Conversion
ESOP. The Holding Company has adopted the ESOP effective January 1, 1996,
for eligible employees of the Holding Company and the Bank, including executive
officers. As part of the Conversion, the ESOP intends to borrow funds from the
Holding Company and use such funds to purchase a number of shares of Common
Stock equal to 8% of the shares issued in the Conversion. Collateral for the
loan will be the Common Stock purchased by the ESOP in the Conversion. The loan
will be repaid principally from the Bank's discretionary contributions to the
ESOP over a period of 10 years. Shares purchased by the ESOP will be held in a
suspense account for allocation among participants as the loan is repaid.
Assuming shares of Common Stock appreciate in value over time, compensation
expense relating to the ESOP will also increase over time. It is impossible to
determine at this time the extent of such impact on future net income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Current Accounting Issues" and "Executive Compensation and Related
Transactions -- Employee Stock Ownership Plan and Trust."
Stock Options. The Board of Directors of the Holding Company intends to
implement the Stock Option Plan, contingent upon receipt of shareholder approval
at a meeting to be held at least six months following completion of the
Conversion. Assuming 570,000 shares of Common Stock are issued in the Conversion
and receipt of the required approval, it is expected that options to purchase
5,700 shares of Common Stock will be granted to each of Mr. Meier and Mr.
Stewart, and options to purchase 4,275 shares of Common Stock will be granted to
Mr. Rosenberger. In addition, options to purchase 2,850 shares of Common Stock
will be granted to each of the Bank's five outside directors assuming the sale
of 570,000 shares in the Conversion. Options for 12,825 shares will be awarded
to other employees. Options to purchase 14,250 shares that would be available
under the Stock Option Plan at the midpoint of the Estimated Valuation Range
will be reserved for future issuance under the Stock Option Plan. The exercise
price of the options, which would be granted at no cost to the recipient
thereof, would be the fair market value of the Common Stock subject to the
option on the date the option is granted, which is expected to be the date of
the shareholder meeting.
RRP. The Board of Directors of the Bank intends to implement the RRP
contingent upon receipt of approval from the Holding Company's shareholders at a
meeting to be held at least six months following completion of the Conversion.
Subject to such approval, the RRP will initially purchase an amount of shares
after the Conversion equal to up to 3% of the shares issued in the Conversion
(17,100 shares at the midpoint of the Estimated Valuation Range). Assuming
570,000 shares of Common Stock are sold in the Conversion, the Bank's Board of
Directors anticipates that upon receipt of the required approval, an award of
3,206 shares will be made to each of Mr. Meier and Mr. Stewart, and an award of
2,138 shares will be made to Mr. Rosenberger. In addition, RRP awards of 1,140
shares will be made to each of the Bank's outside directors, assuming the
issuance of 570,000 shares of Common Stock in the Conversion. Awards of 2,850
shares will be made to other employees. 5,700 shares of Common Stock that would
be available under the RRP at the midpoint of the Estimated Valuation Range (or
1% of the total number of share issued in the Conversion) will remain available
for future issuance to directors and employees of the Bank, including officers
of the Bank. Awards under the RRP would be granted at no cost to the recipient
thereof. For financial accounting purposes, awards under the proposed RRP will
result in the recording of compensation expense over the period of vesting.
<PAGE>
No Prior Market for Common Stock
The Holding Company has never issued Common Stock to the public.
Consequently, there is no established market for the Common Stock. The Holding
Company has received approval to have its Common Stock quoted on the NASDAQ
Small Cap Market under the symbol "HWEN" upon successful completion of the
offering, subject to certain conditions which the Holding Company and the Bank
believe will be met. The Holding Company anticipates that there will be at least
two market makers for the Common Stock upon the completion of the Conversion,
depending upon the volume of trading activity in the Common Stock and subject to
compliance with applicable provisions for federal and state securities laws and
other regulatory requirements. FBR intends to make a market for the Common
Stock, but is under no obligation to do so.
However, an active and liquid public trading market for the securities of
any issuer, including the Holding Company, depends upon the presence in the
marketplace of both willing buyers and willing sellers of the securities at any
given time. Although the Holding Company has received approval to have its
shares quoted on the NASDAQ Small Cap Market, no assurance can be given that an
active and liquid trading market will develop or that the trading price per
share of the Common Stock will equal or exceed the Purchase Price. Purchasers of
Common Stock should consider, therefore, the potentially illiquid and long-term
nature of their investment in the shares of Common Stock being offered hereby.
Even if a market develops, there can be no assurance that shareholders will be
able to sell their shares at or above the Purchase Price after the completion of
the Conversion. See "Market for the Common Stock."
Competition
The Bank experiences strong competition in its local market area in both
originating loans and attracting deposits. This competition arises principally
from commercial banks. The recent enactment of federal nationwide branching
legislation may also increase the Bank's competition in its market. Such
competition may limit the Bank's growth in the future. See "Competition."
Geographic Concentration of Loans
At December 31, 1995, all of the Bank's real estate mortgage loans were
secured by properties located in Indiana. A substantial portion of such loans is
located in the Bank's primary market area. While the Bank currently believes
that its loans are adequately secured or reserved for, in the event that real
estate prices in Owen County substantially weaken or economic conditions in the
Bank's primary market area deteriorate, reducing the value of properties
securing the Bank's loans, it is possible both that some borrowers may default
and that the value of the real estate collateral may be insufficient to fully
secure the loan. In either event, the Bank may experience increased levels of
delinquencies and related losses having an adverse impact on net income. Risk of
Delayed Offering
The Subscription Offering will expire at 5:00 p.m., Spencer time, on June
17, 1996, unless extended by the Holding Company and the Bank. The Direct
Community Offering may expire as early as June 17, 1996, or at any time
thereafter (until August 1, 1996, unless extended by the Bank and the Holding
Company) when orders for at least 484,500 shares have been received in both the
Subscription Offering and the Direct Community Offering. If the Subscription
Offering and/or the Direct Community Offering is extended beyond August 1, 1996,
all subscribers will have the right to modify or rescind their subscriptions and
to have their subscription funds returned promptly with interest.
A material delay in the completion of the sale of all unsubscribed shares
in the Direct Community Offering may result in a significant increase in the
costs of completing the Conversion. Significant changes in the Bank's operations
and financial condition, the aggregate market value of the shares to be issued
in the Conversion and general market conditions may occur during such material
delay.
<PAGE>
Anti-Takeover Provisions
Provisions in the Holding Company's Governing Instruments. The Articles of
Incorporation of the Holding Company contain certain provisions which could
impede a non-negotiated, unsolicited change in control of the Holding Company,
even if desired by a majority of the shareholders. The Articles of Incorporation
provide that: (i) no person shall directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of equity
security of the Holding Company (provided that such limitations shall not apply
to the acquisition of equity securities by any one or more tax-qualified
employee stock benefit plans maintained by the Holding Company, if the plan or
plans beneficially own no more than 25% of any class of such equity security of
the Holding Company); and that (ii) shares beneficially owned in violation of
the stock ownership restriction described above shall not be entitled to vote
and shall not be voted by any person or counted as voting stock in connection
with any matter submitted to a vote of the shareholders. For these purposes, a
person (including management) who has obtained the right to vote shares of the
Common Stock pursuant to revocable proxies shall not be deemed to be the
"beneficial owner" of those shares if that person is not otherwise deemed to be
the beneficial owner of those shares. See "Restrictions on Acquisition of the
Holding Company -- Provisions of the Holding Company's Articles and By-Laws." In
addition, the Articles of Incorporation provide for the issuance of serial
preferred stock with such designations and preferences as may be determined by
the Holding Company's Board of Directors, without obtaining shareholder
approval. Such preferred stock could be used by the Holding Company to impede a
non-negotiated change of control, even if the change in control might result in
shareholders receiving a substantial premium for their shares over then-current
market prices. Moreover, Indiana law contains provisions that restrict the
acquisition of control of the Holding Company or the Bank. Indiana law
specifically authorizes directors, in considering the best interest of the
corporation, to consider the effects of any action on shareholders, employees,
suppliers, and customers of the corporation, and communities in which offices or
other facilities of the corporation are located, and any other factors the
directors consider pertinent. Indiana law also provides that directors are not
required to approve a business combination or other corporate action if the
directors determine in good faith that such approval is not in the best interest
of the corporation. See "Restrictions on Acquisition of the Holding Company
- --Other Restrictions on Acquisition of the Holding Company and the Bank."
Although the Holding Company's Board of Directors believes that the
restrictions on acquisition are beneficial to shareholders, the provisions may
have the effect of rendering the Holding Company less attractive to potential
acquirors thereby discouraging future takeover attempts which would not be
approved by the Board of Directors but which certain shareholders might deem to
be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. These
provisions will also render the removal of the incumbent Board of Directors and
of management more difficult. The Board of Directors has, however, concluded
that the potential benefits of these restrictive provisions outweigh the
possible disadvantages.
Voting Control of Directors and Executive Officers. Directors and executive
officers of the Holding Company and the Bank and their Associates expect to
purchase 36,050 shares at $10.00 per share, or 7.4% and 5.5% of the shares of
Common Stock offered in the Conversion based upon the minimum and maximum,
respectively, of the Estimated Valuation Range. Employees of the Bank, including
its executive officers, will also be eligible to participate in the ESOP and be
able to vote shares allocated to their accounts under the ESOP. See "Executive
Compensation and Related Transactions -- Employee Stock Ownership Plan and
Trust." Moreover, the Holding Company and the Bank intend to adopt, after the
Conversion, stock benefit plans for employees and management of the Bank. See
"Executive Compensation and Related Transactions -- RRP" and "-- Stock Option
Plan." Accordingly, directors and executive officers of the Holding Company and
the Bank as a group may have effective control over an even greater amount of
stock in the future. Assuming the sale of 570,000 shares of Common Stock in the
Conversion and that all shares awarded under the RRP are purchased on the open
market and upon (i) the full vesting of the restricted stock awards to directors
and executive officers contemplated under the RRP and (ii) the exercise in full
of all options expected to be granted to directors and executive officers under
the Stock Option Plan, the Bank's and the Holding Company's directors and
executive officers would receive an additional 44,175 shares of Common Stock and
would exercise effective control of 13.4% of the outstanding shares of Common
Stock.
<PAGE>
Regulatory Oversight and Recent Legislation
The Bank is subject to extensive regulation, supervision and examination by
the DFI as its primary state regulator and by the FDIC, which insures its
deposits up to applicable limits and which is the primary federal regulator. The
Bank is a member of the FHLB of Indianapolis and is subject to certain limited
regulation by the FRB. As a bank holding company, the Holding Company will also
be subject to regulation and oversight by the FRB. See "Regulation." Such
regulation and supervision govern the activities in which an institution can
engage and are intended primarily for the protection of the insurance fund and
deposits. With a view to strengthening the banking industry, regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities. The assessments, filing fees and other
costs associated with reports, examinations and other regulatory matters are
significant, and increases in such costs may have an adverse effect on the
Holding Company's results of operations.
Congress is considering legislation that would consolidate the supervision
and regulation of all U.S. financial institutions into one administrative body,
would expand the powers of financial institutions, and would provide regulatory
relief to financial institutions (the "Legislation"). It cannot be predicted
with certainty whether or when the Legislation will be enacted or the extent to
which the Holding Company and the Bank would be affected thereby.
Under current tax laws, savings banks meeting certain requirements have
been able to deduct from income for tax purposes amounts designated as reserved
for bad debts. The Senate and the House have each recently passed legislation
prospectively repealing the percentage of taxable income method used by savings
associations to compute their bad debt deductions and further requiring,
generally, that bad debt reserves taken after 1987 using the percentage of
taxable income method be included in future taxable income of the savings bank
over a six-year period, although a two-year delay may be permitted for
institutions meeting a residential mortgage loan origination test. The
Legislation requires smaller thifts (i.e., less than $500 million in assets) to
use the experience method and larger thrifts (i.e., $500 million in assets or
more) to use the charge-off method to compute these tax deductions. The proposed
tax legislation could have an adverse effect on the Holding Company, although
until such proposal is enacted, the extent of such effect is uncertain. See
"Taxation -- Federal Taxation."
Income Tax Consequences of Subscription Rights
If the subscription rights granted in connection with the Conversion are
deemed to have an ascertainable value, receipt of such rights will be taxable to
recipients, either as ordinary income or capital gain, in an amount not in
excess of such value. In the opinion of Keller, the subscription rights have no
ascertainable fair market value. See "The Conversion -- Principal Effects of
Conversion -- Tax Effects."
<PAGE>
HOME FINANCIAL BANCORP
The Holding Company was incorporated under the laws of the State of Indiana
on February 21, 1996, for the purpose of acquiring all of the common stock of
the Bank and acting as the Bank's holding company. As the Holding Company was
not incorporated until recently and is currently a shell corporation, no Holding
Company financial statements are included herein. The holding company structure
will provide increased flexibility in conducting future business activities
related to the Bank. The Holding Company has received approval of the FRB to
become a bank holding company through the acquisition of all of the common stock
of the Bank to be issued upon completion of the Conversion.
As an Indiana corporation, the Holding Company is authorized to engage in
any activity that is permitted by the Indiana Business Corporation Law, as
amended (the "IBCL"). The Board of Directors of the Holding Company anticipates
that, after completion of the Conversion, the Holding Company will conduct its
business initially as a bank holding company and its activities will be limited
to those permitted by FRB regulations. The holding company structure will
provide the Holding Company with greater flexibility than the Bank to diversify
its business activities, either through newly-formed subsidiaries or through
acquisitions. Neither the Bank nor the Holding Company has any arrangements,
discussions or agreements, written or oral, regarding any such business
activities or acquisitions at this time. However, after the Conversion the
Holding Company will be able to take advantage of favorable business or
acquisition opportunities that may arise. The assets of the Holding Company will
initially consist of the common stock of the Bank and $2,267,500 of the net
proceeds of the Conversion. The Holding Company intends to use a portion of such
funds to make a loan to the ESOP to allow the ESOP to purchase shares of Common
Stock in the Conversion. The Holding Company may also use such funds for general
corporate purposes, including the payment of dividends and repurchases of shares
of its Common Stock in the future. Any activities of the Holding Company will
initially be funded from such net proceeds and through future dividends from the
Bank, which are subject to certain limitations. See "Dividend Policy,"
"Regulation -- Dividend Limitations," and "Use of Proceeds."
The executive office of the Holding Company is located at 279 East Morgan
Street, P.O. Box 187, Spencer, Indiana, 47460. Its telephone number is (812)
829-2095.
<PAGE>
OWEN COMMUNITY BANK, s.b.
Founded in 1911 under the name Owen County Savings and Loan Association,
the Bank is a Spencer, Indiana-based, Indiana mutual savings bank conducting its
business from its main office in Spencer. The Bank is the oldest continuously
operating financial institution headquartered in Owen County. Management
believes the Bank has developed a solid reputation among its loyal customer base
because of its commitment to personal service and its strong support of the
local community. The Bank is and historically has been a significant residential
real estate mortgage lender in Owen County, originating approximately 14.4% of
the mortgages recorded in Owen County during the calendar year ended December
31, 1995. The Bank offers a variety of lending, deposit and other financial
services to its retail and commercial customers.
The Bank attracts deposits from the general public and originates primarily
mortgage loans most of which are secured by one-to four-family residential real
property in Owen County. The Bank also offers mobile home loans, Combo Loans,
multi-family loans, nonresidential real estate loans and consumer loans,
including share loans and installment loans. The Bank derives most of the funds
for its lending from deposits of its customers consisting primarily of
certificates of deposit, savings accounts and checking accounts.
The Bank has maintained a good capital position by focusing on residential
real estate mortgage, Combo and mobile home lending in Owen County. At December
31, 1995, the Bank had total assets of $33.5 million, deposits of $24.9 million
and equity capital of $3.3 million. The Bank has no accounting goodwill or other
intangible assets on its balance sheet. For the fiscal year ended June 30, 1995,
the Bank had net income of $289,000, a return on assets of 1.00%, and a return
on equity of 9.59%. The Bank has experienced very few asset quality problems in
its total loan portfolio, and at December 31, 1995, its ratio of non-performing
assets to total assets was 0.35%. The Bank charged off only $6,000 of loans
during the year ended June 30, 1995.
At December 31, 1995, the Bank's equity capital equaled 9.85% of total
assets. Assuming net proceeds at the midpoint of the Estimated Valuation Range,
the Bank's pro forma equity to assets ratio at December 31, 1995, would have
been 16.0%. Assuming net proceeds are allocated to the Bank at the midpoint of
the Estimated Valuation Range (except for $2,267,500 retained by the Holding
Company), the Bank's pro forma total risk-based capital ratio, Tier I risk-based
capital ratio and leverage ratio would have been 28.6%, 28.1% and 14.2%,
respectively. The Bank's capital ratios are now, and on a pro forma basis will
be, substantially in excess of its Capital Requirements. See "Pro Forma Data
- --Regulatory Capital Compliance."
<PAGE>
MARKET AREA
The Bank, located in Spencer, Indiana, attracts deposits primarily from
Owen County in southern Indiana. As of December 31, 1995, the Bank's share of
deposits among Owen County financial institutions was 16.0%.
Spencer, the county seat of Owen County, is approximately 55 miles south of
Indianapolis. According to the U.S. Bureau of Census, Spencer had a population
of 2,537, and Owen County had a population of 17,281 at the time of the 1990
census.
According to the Indiana Department of Employment and Training Services,
the total work force in Owen County was 10,520 as of October, 1995. As of the
same date, 10,120 persons were employed, resulting in an unemployment rate for
Owen County of approximately 3.8%. As of the same date, the unemployment rate
for Indiana was 4.2%, and the nationwide unemployment rate was 5.5%.
According to the Chamber of Commerce of Spencer and Owen County, Owen
County's largest employer with approximately 350 employees is Cook Urological
which specializes in the manufacturing of medical instruments. Owen County's
second largest employer is Boston Scientific, which employs approximately 250
persons and also specializes in the manufacturing of medical and surgical
products.
USE OF PROCEEDS
All except $2,267,500 of the net Conversion proceeds received from the sale
of the Common Stock offered in the Subscription and Direct Community Offerings,
or 50.0%, 57.9%, 63.7% and 68.6% of the net Conversion proceeds at the minimum,
midpoint, maximum, and 15% above the maximum, respectively, will be used by the
Holding Company to purchase all of the common stock to be issued by the Bank in
the Conversion. The $2,267,500 retained by the Holding Company constitutes
50.0%, 42.1%, 36.3% and 31.4% of the net Conversion proceeds at the minimum,
midpoint, maximum and 15% above the maximum, respectively, and will be used for
general corporate purposes, including a loan to the ESOP to permit the ESOP to
purchase shares of Common Stock in the Subscription Offering. The Holding
Company may also use a portion of such retained proceeds for the payment of
dividends and future repurchases of its Common Stock.
The funds received by the Bank will be used primarily to support the Bank's
lending and investment activities and may be used to repay a portion of its $5.2
million in outstanding borrowings from the FHLB of Indianapolis at December 31,
1995 which mature on various dates primarily during the years 1996 through 2000
and have interest rates ranging from 6.14% to 6.48%. See "Business --Sources of
Funds -- Borrowings." The Bank may also use Conversion proceeds for future
renovation and branch expansion. For a description of a construction project
involving a possible office facility for the Holding Company and additional
storage and office space for the Bank which is currently being considered by the
Bank's Board of Directors, see "Business -- Properties." As part of its
asset/liability management, the Bank will seek to use the proceeds to make
adjustable-rate mortgage loans, mobile home loans, Combo Loans, nonresidential
real estate loans and consumer loans to the extent there is demand for such
loans and subject to market conditions. On an interim basis, the net proceeds
will be invested in U.S. government securities, other U.S. agency securities,
mortgage-backed securities and equity securities. See "Business -- Investments
and FHLB Stock," and "--Lending Activities --Mortgage-Backed Securities." Any
remaining net proceeds may be used for general corporate purposes, including
contribution to the Bank's proposed RRP. Neither the Holding Company nor the
Bank has any current intention to acquire any other financial institutions or
other entities.
<PAGE>
The following table shows estimated gross and net proceeds based upon
shares of Common Stock being sold in the Conversion at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range.
<TABLE>
<CAPTION>
15% Above
Minimum, Midpoint, Maximum, Maximum,
484,500 570,000 655,500 753,825
Shares Shares Shares Shares
Sold at Price Sold at Price Sold at Price Sold at Price
of $10.00 of $10.00 of $10.00 of $10.00(2)
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Gross Proceeds.......................... $4,845 $5,700 $6,555 $7,538
Less:
Estimated Advisory Fees
and Other Expenses(1)................ 310 310 310 310
------ ------ ------ ------
Estimated net Conversion
proceeds(1).......................... $4,535 $5,390 $6,245 $7,228
====== ====== ====== ======
</TABLE>
- ----------
(1) In calculating estimated net Conversion proceeds, it has been assumed that
no sales will be made through selected dealers.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription and Direct Community Offerings.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the Conversion,
commissions paid for sales made through other dealers, and the actual number of
shares of Common Stock sold in the Conversion. Any variance in the actual net
proceeds from the estimates provided in the table above is not expected to be
material.
<PAGE>
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Holding Company will have
the authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Board of Directors may consider a policy of paying
cash dividends on the Common Stock in the future. However, no decision has been
made as to the amount or timing of any such dividends. The declaration and
payment of dividends, if any, will depend upon a number of factors, including
the Holding Company's then-current and projected consolidated operating results
and financial condition, regulatory restrictions, future growth plans and such
other factors as the Board of Directors deems relevant.
After the Conversion, the Bank will be the sole direct subsidiary of the
Holding Company. Initially, the Holding Company will have no independent
operations or other subsidiaries to generate income. Consequently, other than
the net proceeds of the Conversion that the Holding Company will retain (after
funding the loan to the ESOP) and repayments of the ESOP loan, the ability of
the Holding Company to accumulate earnings for the payment of cash dividends to
its shareholders or possible repurchases of shares of Common Stock will depend
upon the ability of the Bank to pay dividends to the Holding Company.
In connection with the Conversion, the Bank will establish a liquidation
account which will serve to protect Eligible Account Holders and Supplemental
Eligible Account Holders in the unlikely event of a liquidation of the Bank. The
Bank will not pay dividends to the Holding Company to the extent the liquidation
account would be impaired. The balance of the liquidation account will initially
be $3,364,000 and will gradually decline. However, the initial amount available
for dividends to the Holding Company from the Bank will be approximately equal
to the portion of the net proceeds to be paid to the Bank, less adjustments for
the ESOP and RRP, or approximately $3.2 million at the maximum of the Estimated
Valuation Range. See "The Conversion -- Principal Effects of Conversion --Effect
on Liquidation Rights." In addition, the extent to which the Bank may pay
dividends or make capital distributions is subject to other regulatory
restrictions.
Income of the Bank appropriated to bad debt reserves and deducted from
gross income for federal income tax purposes is not available for payment of
cash dividends or other distributions to the Holding Company without the payment
of federal income taxes by the Bank on the amount of such income. At December
31, 1995, approximately $700,000 of the Bank's retained earnings represented bad
debt deductions for which no federal income tax provision had been made. See
"Taxation -- Federal Taxation." The Bank's unrecorded deferred income tax
liability on such accumulated bad debt deduction at December 31, 1995 was
$280,000. See Note 9 to the Notes to Consolidated Financial Statements. For a
description of proposed legislation concerning deductions for bad debt reserves,
see "Taxation -- Federal Taxation."
Generally, there is no regulatory restriction on the payment of dividends
by the Holding Company. Under FRB supervisory policy, a bank holding company
generally should not maintain its existing rate of cash dividends on common
shares unless (i) the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends and (ii) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FDIC also has authority under current law to prohibit a bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice in light of the financial condition of the bank.
Indiana law, however, would prohibit the Holding Company from paying a dividend,
if, after giving effect to the payment of that dividend, the Holding Company
would not be able to pay its debts as they become due in the usual course of
business or the Holding Company's total assets would be less than the sum of its
total liabilities plus preferential rights of holders of preferred stock, if
any. See "Regulation -- Regulatory Capital" and "-- Dividend Limitations."
<PAGE>
MARKET FOR THE COMMON STOCK
The Holding Company has never issued Common Stock to the public.
Consequently, there is no established market for the Common Stock. The Holding
Company has received approval to have its Common Stock quoted on the NASDAQ
Small Cap Market under the symbol "HWEN" upon successful closing of the
offering. The Holding Company anticipates that there will be at least two market
makers for its shares upon the completion of the Conversion, depending upon the
volume of trading activity in the Common Stock and subject to compliance with
applicable provisions of federal and state securities laws and other regulatory
requirements. The Holding Company has not yet obtained any market makers and
will not do so until the offering is completed. FBR intends to make a market for
the Common Stock, but is under no obligation to do so.
An active and liquid public trading market for the securities of any
issuer, including the Holding Company, depends upon the presence in the
marketplace of both willing buyers and willing sellers of the securities at any
given time. The Holding Company has received approval to have its shares quoted
on the NASDAQ Small Cap Market, subject to certain conditions which the Holding
Company and the Bank believe will be met, including having at least 300 holders
of Common Stock, at least 100,000 publicly held shares of Common Stock, and two
market makers for the Common Stock. However, no assurance can be given that an
active and liquid trading market will develop or that the trading price per
share of the Common Stock will equal or exceed the Purchase Price. Purchasers of
Common Stock should consider the potentially illiquid and long-term nature of
their investment in the shares being offered hereby.
The aggregate price of the Common Stock is based upon an independent
appraisal of the pro forma market value of the Common Stock. However, there can
be no assurance that an investor will be able to sell the Common Stock purchased
in the Conversion at or above the Purchase Price.
<PAGE>
ANTICIPATED MANAGEMENT PURCHASES
The following table sets forth information as to subscription rights to
Common Stock intended at this time to be exercised by each director of the Bank
and the one executive officer who is not director of the Bank (including shares
to be purchased by their Associates) and all directors and executive officers as
a group. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories
and that shares will be sold for $10.00 per share.
<TABLE>
<CAPTION>
Aggregate Amount of Shares Percent of Shares Percent of Shares Percent of Shares Percent of Shares
Purchase Proposed to be Assuming Assuming Assuming Assuming
Price of Subscribed 484,500 Shares 570,000 Shares 655,500 Shares 753,825 Shares
Name and Intended for all in are Sold in the are Sold in the are Sold in the are Sold in the
Position Purchases(1) Categories Conversion Conversion Conversion Conversion
- ----------------- -------------- ----------------- ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Frank R. Stewart $100,000 10,000 2.06% 1.75% 1.53% 1.32%
Chairman
Robert W. Raper, 20,000 2,000 0.41 0.35 0.30 0.27
Vice Chairman
John T. Gillaspy, 100,000 10,000 2.06 1.75 1.53 1.32
Director
Stephen Parrish, 20,000 2,000 0.41 0.35 0.30 0.27
Director
Tad Wilson, 100,000 10,000 2.06 1.75 1.53 1.32
Director
Charles W. Chambers, 5,000 500 0.11 0.09 0.08 0.07
Director and
Secretary
Kurt J. Meier, 8,000 800 0.17 0.14 0.12 0.11
Director, President
and Treasurer
Kurt D. Rosenberger, 7,500 750 0.16 0.13 0.11 0.10
Vice President -------- ------ ---- ---- ---- ----
All directors and $360,500 36,050 7.44% 6.32% 5.50% 4.78%
executive officers ======== ====== ==== ==== ==== ====
as a group
(8 persons)(2)
</TABLE>
- ----------
(footnotes on following page)
<PAGE>
(1) Does not include shares subject to stock options which may be granted under
the Stock Option Plan, shares which may be awarded under the RRP, or any
shares which may be allocated to officers under the ESOP.
(2) Assuming that all shares awarded under the RRP are purchased on the open
market and upon (i) the full vesting of the restricted stock awards to
directors and executive officers contemplated under the RRP and (ii) the
exercise in full of all options expected to be granted to directors and
executive officers under the Stock Option Plan, all directors and executive
officers as a group would beneficially own 73,599 shares (14.4%), 80,225
shares (13.4%), 86,852 shares (12.6%), and 94,472 shares (11.9%) upon sales
at the minimum, midpoint, maximum, and 15% above the maximum of the
Estimated Valuation Range, respectively. See "Executive Compensation and
Related Transactions -- RRP" and "-- Stock Option Plan."
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
December 31, 1995, and the pro forma consolidated capitalization of the Holding
Company as of that date, giving effect to the sale of Common Stock offered by
this Prospectus based on the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, and subject to the other assumptions
set forth below. The pro forma data set forth below may change significantly at
the time the Holding Company completes the Conversion due to, among other
factors, a change in the Estimated Valuation Range for the shares or a change in
the current estimated expenses of the Conversion. If the Estimated Valuation
Range changes so that between 484,500 and 753,825 shares are not sold in the
Conversion, subscriptions will be returned to subscribers who do not
affirmatively elect to continue their subscriptions during the offering at the
revised Estimated Valuation Range.
<TABLE>
<CAPTION>
At December 31, 1995
--------------------------------------------------------------------------------
Pro Forma Holding Company
Capitalization Based on Sale of
------------------------------------------------------------
484,500 570,000 655,500 753,825
Shares Shares Shares Shares
The Bank's Sold at Sold at Sold at Sold at
Historical Price of Price of Price of Price of
Capitalization $10.00 $10.00 $10.00 $10.00(6)
-------------- -------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1) ..................................... $ 24,895 $ 24,895 $ 24,895 $ 24,895 $ 24,895
Federal Home Loan Bank advances .................. $ 5,200 $ 5,200 $ 5,200 $ 5,200 $ 5,200
Capital and retained earnings:
Preferred stock, without par
value, 2,000,000 shares
authorized, none issued....................... $ -- $ -- $ -- $ -- $ --
Common Stock, without par
value, 5,000,000 shares
authorized; indicated number
of shares assumed outstanding (2) ............. -- 4,535 5,390 6,245 7,228
Retained earnings and net unrealized gain
on securities available for sale (3) .......... 3,295 3,295 3,295 3,295 3,295
Less:
Common Stock acquired by RRP (4) .............. -- (194) (228) (262) (302)
Common Stock acquired by the ESOP (5) ......... -- (388) (456) (524) (603)
-------- -------- -------- -------- --------
Total capital and retained earnings .............. $ 3,295 $ 7,248 $ 8,001 $ 8,754 $ 9,618
======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Excludes accrued interest. No effect is given to possible withdrawals from
deposit accounts to purchase the Common Stock.
(2) The number of shares to be issued in the Conversion may be increased or
decreased based on market and financial conditions prior to the completion
of the Conversion. Assumes estimated expenses of $310,000. See "Use of
Proceeds."
(3) Retained earnings are substantially restricted. See Notes 9 and 12 to the
Bank's Consolidated Financial Statements. See also "The Conversion --
Principal Effects of Conversion -- Effect on Liquidation Rights." Retained
earnings do not reflect the federal income tax consequences of the
restoration to income of the Bank's special bad debt reserve for income tax
purposes which would be required in the unlikely event of a liquidation or
if a substantial portion of retained earnings were otherwise used for a
purpose other than absorption of bad debt losses and may be required under
certain proposals currently pending in Congress. See "Taxation -- Federal
Taxation." Equity capital includes retained earnings increased by net
unrealized gain on securities available for sale.
(4) Assuming the receipt of shareholder approval at the Holding Company's first
meeting of shareholders, the Bank intends to implement the RRP. Assuming
such implementation, the RRP will eventually purchase an amount of shares
equal to 4.0% of the Common Stock sold in the Conversion for issuance to
directors, officers and employees of the Holding Company and the Bank
(although its initial grants are expected to be for only 3% of the Common
Stock sold in the Conversion). Such shares may be purchased from authorized
but unissued shares or on the open market. The Holding Company currently
intends that the RRP will purchase the shares on the open market. Under the
terms of the RRP, shares will vest at the rate of 20% per year. The Common
Stock to be purchased by the RRP represents unearned compensation and is,
accordingly, reflected as a reduction to pro forma shareholders' equity. As
shares of the Common Stock granted pursuant to the RRP vest, a
corresponding reduction in the charge against capital will occur. In the
event that authorized but unissued shares are acquired, the interests of
existing shareholders will be diluted. Assuming that 570,000 shares of
Common Stock are issued in the Conversion and that all awards under the RRP
are from authorized but unissued shares, the Holding Company estimates that
the per share book value for the Common Stock would be diluted $0.54 per
share, or 3.8% and earnings per share would be diluted $0.03 per share, or
7.9% on a pro forma basis as of December 31, 1995.
(footnotes continued on following page)
<PAGE>
(5) Assumes purchases by the ESOP of a number of shares equal to 8% of the
shares issued in the Conversion. The funds used to acquire the ESOP shares
will be borrowed from the Holding Company. See "Use of Proceeds." The Bank
intends to make contributions to the ESOP sufficient to service and
ultimately retire its debt. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Executive
Compensation and Related Transactions -- Employee Stock Ownership Plan and
Trust."
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription and Direct Community Offerings.
PRO FORMA DATA
Pro forma consolidated net income data of the Holding Company for the six
months ended December 31, 1995 and for the year ended June 30, 1995, have been
calculated as if the estimated net proceeds of the sale of Common Stock had been
received by the Holding Company and the Bank and invested at 4.96% (yield of a
six-month U.S. Treasury bill on February 1, 1996). The pro forma after tax yield
for the Holding Company and the Bank is assumed to be 3.0% for the reported
periods after adjusting for taxes using a federal statutory rate of 34%, and the
net effect of the state statutory income tax rate of 5.61%. Historical and pro
forma per share amounts have been calculated by dividing historical amounts and
the pro forma amounts of the Holding Company by the indicated number of shares
of Common Stock assuming that such number of shares had been outstanding during
each of the entire periods. Possible withdrawals from deposit accounts to
purchase Common Stock are not reflected in the pro forma adjustments. The
Holding Company is unable to estimate the potential impact of taking such
withdrawals into account.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of the Holding Company computed
in accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, and does not
reflect the effect of the liquidation account to be established in the
Conversion, see "The Conversion -- Principal Effects of Conversion -- Effect on
Liquidation Rights," or the federal income tax consequences of the restoration
to income of the Bank's special bad debt reserves for income tax purposes which
would be required in the unlikely event of liquidation and may be required under
certain proposals currently pending in Congress. See "Taxation -- Federal
Taxation." Pro forma book value includes only net proceeds as of the indicated
dates and does not include earnings on the proceeds for the periods then ended.
The pro forma net earnings derived from the assumptions set forth above
should not be considered indicative of the actual results of operations of the
Holding Company that would have been attained for any period if the Conversion
had been actually consummated at the beginning of such periods and the
assumptions regarding investment yields should not be considered indicative of
the actual yield expected to be achieved during any future period. The pro forma
book values at the dates indicated should not be considered as reflecting the
potential trading value of the Holding Company's stock. There can be no
assurance that an investor will be able to sell the Common Stock purchased in
the Conversion at prices within the range of the pro forma book values of the
Common Stock or at or above the Purchase Price.
<PAGE>
<TABLE>
<CAPTION>
484,500 Shares 570,000 Shares 655,500 Shares 753,825 Shares(1)
Sold at Sold at Sold at Sold at
$10.00 Per Share $10.00 Per Share $10.00 Per Share $10.00 Per Share
----------------- ------------------ -------------------- -----------------
Six Months Year Six Months Year Six Months Year Six Months Year
ended ended ended ended ended ended ended ended
12/31/95 6/30/95 12/31/95 6/30/95 12/31/95 6/30/95 12/31/95 6/30/95
-------- ------- -------- ------- -------- ------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross proceeds...................... $4,845 $4,845 $5,700 $5,700 $6,555 $6,555 $7,538 $7,538
Less offering expenses, advisory
fees and commissions ............. (310) (310) (310) (310) (310) (310) (310) (310)
------ ------- ------- ------- ------ ------ ------- -------
Estimated net conversion
proceeds (2)................... 4,535 4,535 5,390 5,390 6,245 6,245 7,228 7,228
Less:
Common Stock acquired by RRP (4).. (194) (194) (228) (228) (262) (262) (302) (302)
Common Stock acquired by ESOP (6). (388) (388) (456) (456) (524) (524) (603) (603)
------ ------- ------- ------- ------ ------ ------- -------
Estimated proceeds available
for investment.................... $3,953 $3,953 $4,706 $4,706 $5,459 $5,459 $6,323 $6,323
====== ======= ======= ======= ====== ====== ======= =======
Consolidated net income:
Historical ....................... $154 $289 $ 154 $ 289 $ 154 $ 289 $ 154 $ 289
Pro forma income (3).............. 60 119 71 141 82 164 95 190
Pro forma ESOP adjustment (6)..... (12) (23) (14) (28) (16) (32) (20) (39)
Pro forma RRP adjustment (4)...... (12) (23) (14) (28) (16) (32) (20) (39)
------ ------- ------- ------- ------ ------ ------- -------
Pro forma net income ............. $ 190 $ 362 $ 197 $ 374 $ 204 $ 389 $ 209 $ 401
====== ======= ======= ======= ===== ====== ======= =======
Consolidated net income
per share (7):
Historical ....................... $.34 $ .64 $ .29 $.55 $ .25 $ .48 $ .21 $ .40
Pro forma income (3).............. .13 .26 .13 .27 .13 .27 .13 .26
Pro forma ESOP adjustment (6)..... (.03) (.05) (.03) (.05) (.03) (.05) (.03) (.05)
Pro forma RRP adjustment (4)...... (.03) (.05) (.03) (.05) (.03) (.05) (.03) (.05)
------ ------- ------- ------- ------ ------ ------- -------
Pro forma net income per share.... $.41 $ .80 $ .36 $ .72 $ .32 $ .65 $ .28 $ .56
====== ======= ====== ======= ====== ====== ======= =======
Consolidated book value (5):
Historical ....................... $3,295 $3,159 $ 3,295 $3,159 $3,295 $3,159 $3,295 $3,159
Estimated net conversion
proceeds (2) .................... 4,535 4,535 5,390 5,390 6,245 6,245 7,228 7,228
Less:
Common Stock acquired by RRP (4). (194) (194) (228) (228) (262) (262) (302) (302)
Common Stock acquired by ESOP (6) (388) (388) (456) (456) (524) (524) (603) (603)
------ ------- ------- ------- ------ ------ ------- -------
Pro forma book value ............. $7,248 $7,112 $8,001 $7,865 $8,754 $8,618 $9,618 $9,482
====== ======= ======= ======= ====== ====== ======= =======
Consolidated book value
per share (5)(7):
Historical ....................... $ 6.80 $ 6.52 $ 5.78 $ 5.54 $ 5.03 $ 4.82 $ 4.20 $ 4.03
Estimated net conversion proceeds
per share ....................... 9.36 9.36 9.46 9.46 9.53 9.53 9.22 9.22
Less:
Common Stock acquired by RRP (4). (.40) (.40) (.40) (.40) (.40) (.40) (.39) (.39)
Common Stock acquired by ESOP (6) (.80) (.80) (.80) (.80) (.80) (.80) (.77) (.77)
------ ------- ------- ------- ------ ------ ------- -------
Pro forma book value per share.... $14.96 $ 14.68 $ 14.04 $ 13.80 $13.36 $13.15 $ 12.26 $ 12.09
====== ======= ======= ======= ====== ====== ======= =======
Offering price to pro forma net income
per share ........................ 12.20x 12.50x 13.89x 13.89x 15.63x 15.38x 17.86x 17.86x
Offering price as a percentage of pro
forma book value per share........ 66.85% 68.12% 71.23% 72.46% 74.85% 76.05% 81.57% 82.71%
Number of shares used in
calculating EPS................... 449,616 449,616 528,960 528,960 608,304 608,304 727,390 727,390
Number of shares used in
calculating book value............ 484,500 484,500 570,000 570,000 655,500 655,500 783,825 783,825
</TABLE>
- -------------
(footnotes continued on next page)
<PAGE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following
commencement of the Subscription and Direct Community Offerings.
(2) See "Use of Proceeds" for assumptions utilized to determine the estimated
net proceeds of the sale of Common Stock.
(3) Calculated based upon estimated proceeds available for investment.
(4) Assuming the receipt of shareholder approval at the Holding Company's first
meeting of shareholders, the Bank intends to implement the RRP. Assuming
such implementation, the RRP will eventually purchase an amount of shares
equal to 4.0% of the Common Stock sold in the Conversion for issuance to
directors, officers and employees of the Holding Company and the Bank
(although its initial grants are expected to be for only 3% of the Common
Stock sold in the Conversion). Such shares may be purchased from authorized
but unissued shares or on the open market. The Holding Company currently
intends that the RRP will purchase the shares on the open market, and the
estimated net conversion proceeds have been reduced for the purchase of the
shares in determining estimated proceeds available for investment. Under
the terms of the RRP, shares will vest at the rate of 20% per year. The
Common Stock to be purchased by the RRP represents unearned compensation
and is, accordingly, reflected as a reduction to pro forma shareholders'
equity. As shares of the Common Stock granted pursuant to the RRP vest, a
corresponding reduction in the charge against capital will occur. In the
event that authorized but unissued shares are acquired, the interests of
existing shareholders will be diluted. Assuming that 570,000 shares of
Common Stock are issued in the Conversion and that all awards under the RRP
are from authorized but unissued shares, the Holding Company estimates that
the per share book value for the Common Stock would be diluted $0.54 per
share, or 3.8%, and earnings per share would be diluted $0.03 per share, or
7.9%, on a pro forma basis as of December 31, 1995.
(5) Book value represents the excess of assets over liabilities. The effect of
the liquidation account is not reflected in these computations. (For
additional information regarding the liquidation account, see "The
Conversion -- Principal Effects of Conversion -- Effect on Liquidation
Rights.")
(6) It is assumed that 8% of the shares of Common Stock issued in the
Conversion will be purchased by the ESOP. The funds used to acquire the
ESOP shares will be borrowed by the ESOP from the Holding Company (see "Use
of Proceeds"). The Bank intends to make annual contributions to the ESOP in
an amount at least equal to the principal and interest requirements on the
debt. The Bank's total annual expense in payment of the ESOP debt is based
upon 10 equal annual installments of principal, with an assumed annual
interest rate of 8.25%. The pro forma net income assumes: (i) the Bank's
total contributions are equivalent to the debt service requirement for the
year and were made at the end of the period; (ii) the annual interest rate
applicable to the debt was 8.25%; and (iii) the effective tax rate
applicable to the debt was 39.61%. Expense for the fiscal year beginning on
July 1, 1996 and thereafter will be based on the number of shares committed
to be released to participants for the year at the average market value of
the shares during the year. Accordingly, the Bank's total annual expense in
payment of the ESOP for such years may be higher than that discussed above.
The amount borrowed is reflected as a reduction of shareholders' equity.
(7) Assuming the receipt of shareholder approval at the Holding Company's first
meeting of shareholders, the Holding Company intends to implement the Stock
Option Plan. Assuming such implementation, Common Stock in an aggregate
amount equal to 10.0% of the shares issued in the Conversion will be
reserved for issuance by the Holding Company upon the exercise of the stock
options granted under the Stock Option Plan. No effect has been given to
the shares of Common Stock reserved for issuance under the Stock Option
Plan. Upon the exercise of stock options granted under the Stock Option
Plan, the interests of existing shareholders will be diluted. Assuming the
issuance of 570,000 shares in the Conversion and the exercise of 57,000
options at an exercise price of $10.00 per share, the Holding Company
estimates that the per share book value for the Common Stock would be
diluted $.37 per share, or 2.64%, and earnings per share would be diluted
$.02 per share, or 5.88%, on a pro forma basis as of December 31, 1995.
<PAGE>
Regulatory Capital Compliance
In connection with the Bank's conversion to a state-chartered savings bank,
the FDIC imposed heightened capital requirements on the Bank because of the
impermissible real estate development activities of BSF, the Bank's subsidiary.
The FDIC currently requires that the Bank maintain capital (after deduction of
its investment in BSF) at levels sufficient for the Bank to be classified as a
well-capitalized institution. See "Regulation -- Regulatory Capital." The
following table compares the Bank's historical and pro forma regulatory capital
levels as of December 31, 1995 to the Bank's heightened capital requirements
after giving effect to the Conversion.
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------------------------------------------------------------------
Pro Forma Capital Based on Sale of
------------------------------------------------------------------------
484,500 Shares 570,000 Shares 655,500 Shares 753,825 Shares
The Bank Sold at Price of Sold at Price of Sold at Price of Sold at Price of
Historical $10.00 $10.00 $10.00 $10.00 (1)
---------- ------ ------ ------ ----------
Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2)
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Equity capital based upon
generally accepted
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
accounting principles (3).......... $3,295 9.9% $4,980 14.2% $5,733 16.0% $6,486 17.7% $7,350 19.6%
====== === ====== ==== ====== ==== ====== ==== ====== ====
Total risk-based capital (3):
Historical or
pro forma........................ $2,666 15.0% $4,351 24.4% $5,104 28.6% $5,857 32.9% $6,721 37.7%
Required........................... 1,783 10.0 1,783 10.0 1,783 10.0 1,783 10.0 1,783 10.0
------ --- ------ ---- ------ ---- ------ ---- ------ ----
Excess........................... $ 883 5.0% $2,568 14.4% $3,321 18.6% $4,074 22.9% $4,938 27.7%
====== === ====== ==== ====== ==== ====== ==== ====== ====
Tier I capital (3):
Historical or
pro forma........................ $2,566 14.4% $4,251 23.8% $5,004 28.1% $5,757 32.3% $6,621 37.1%
Required........................... 1,070 6.0 1,070 6.0 1,070 6.0 1,070 6.0 1,070 6.0
------ --- ------ ---- ------ ---- ------ ---- ------ ----
Excess........................... $1,496 8.4% $3,181 17.8% $3,934 22.1% $4,687 26.3% $5,551 31.1%
====== === ====== ==== ====== ==== ====== ==== ====== ====
Tier I leverage capital (3):
Historical or
pro forma........................ $2,566 7.8% $4,251 12.4% $5,004 14.2% $5,757 16.0% $6,621 18.0%
Required........................... 1,637 5.0 1,721 5.0 1,759 5.0 1,796 5.0 1,840 5.0
------ --- ------ ---- ------ ---- ------ ---- ------ ----
Excess........................... $ 929 2.8% $2,530 7.4% $3,245 9.2% $3,961 11.0% $4,781 13.0%
====== === ====== ==== ====== ==== ====== ==== ====== ====
- ----------------------
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following
commencement of the Subscription and Direct Community Offerings.
(2) Tier I leverage levels are shown as a percentage of total assets; total
risk-based and Tier I capital levels are shown as a percentage of
risk-weighted assets.
(3) Pro forma capital levels assume receipt by the Bank of all but $2,267,500
of the net Conversion proceeds and proceeds from the ESOP loan invested in
zero risk weighted assets, reduced for shares of Common Stock acquired by
the RRP.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Holding Company was recently formed as an Indiana corporation on
February 21, 1996, for the purpose of issuing the Common Stock and owning all of
the outstanding common stock of the Bank to be issued in the Conversion as a
unitary bank holding company. As a newly formed corporation, the Holding Company
has no operating history.
The principal business of savings banks, including the Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. The Bank's earnings are primarily
dependent upon its net interest income, the difference between interest income
and interest expense. Interest income is a function of the balances of loans and
investments outstanding during a given period and the yield earned on such loans
and investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. The Bank's earnings are also affected by provisions for
loan losses, service charges and other non-interest income, operating expenses
and income taxes.
The Bank is significantly affected by prevailing economic conditions, as
well as government policies and regulations concerning, among other things,
monetary and fiscal affairs, housing and financial institutions. See
"Regulation." Deposit flows are influenced by a number of factors, including
interest rates paid on competing investments, account maturities and level of
personal income and savings within the Bank's market. In addition, deposit
growth is affected by how customers perceive the stability of the financial
services industry amid various current events such as regulatory changes,
failures of other financial institutions and financing of the deposit insurance
fund. Lending activities are influenced by the demand for and supply of housing
lenders, the availability and cost of funds and various other items. Sources of
funds for lending activities of the Bank include deposits, payments on loans,
borrowings and income provided from operations.
Current Business Strategy
The Bank's business strategy is to operate a well-capitalized, profitable
and independent community savings bank dedicated primarily to residential and
mobile home lending with an emphasis on personal service. The Bank has sought to
implement this strategy by (1) originating mobile home and non-conforming
residential mortgage loans with interest rates above prevailing market rates for
conforming residential mortgage loans, (2) maintaining asset quality through
diligent collection efforts, and (3) maintaining acceptable levels of capital.
The highlights of the Bank's business strategy are as follows:
o Profitability. Although no assurance can be made regarding future
profitability, the Bank has been profitable in each of the past
five fiscal years. The Bank had net income of $289,000 in fiscal
1995, $261,000 in fiscal 1994, and $308,000 in fiscal 1993. The
Bank's net income for the six months ended December 31, 1995 was
$154,000. The Bank's average return on average assets for the five
years ended June 30, 1995 was 0.88%. The Bank's return on average
assets for the year ended June 30, 1995 and the six months ended
December 31, 1995, was 1.00% and 0.92%, respectively.
o Mobile Home and Non-Conforming Loans. The Bank has developed a
unique niche in its market area by (i) being the primary mobile
home lender in Owen County; (ii) originating a significant number
of loans with a Loan-to-Value Ratio of 90%; and (iii) extending
credit to borrowers with prior credit problems or lower credit
quality. By focusing on this unique lending niche, the Bank is
able to improve its interest rate spread by charging interest
rates above prevailing market rates. The Bank's interest rate
spread for the years ended June 30, 1995, 1994 and 1993 was 4.19%,
4.11% and 4.11%, respectively. The Bank's interest rate spread for
the six months ended December 31, 1995 was 3.83%. See "Business."
<PAGE>
o Nonresidential and Multi-Family Real Estate Loans. The Bank
anticipates becoming more active in the origination of
nonresidential and multi-family real estate loans following the
Conversion. At December 31, 1995, the Bank's total portfolio of
nonresidential real estate and multi-family loans amounted to $1.7
million and $475,000, respectively, or 6.2% and 1.7%,
respectively, of the Bank's total loan portfolio. The Bank has
historically been restricted in its ability to originate such
loans by the loans-to-one borrower limitation because such loans
often involve large balances to single borrowers or groups of
related borrowers. However, the additional capital that the Bank
will have following the Conversion will allow it to be more active
in the origination of nonresidential and multi-family real estate
loans.
o Asset Quality. Although mobile home loans and loans to borrowers
with prior credit problems or lower credit quality are typically
riskier than residential mortgage loans to borrowers with higher
credit quality, the Bank has been successful in maintaining its
asset quality through diligent collection efforts. At December
31, 1995, only $118,000, or 0.35%, of the Bank's total assets,
were included in non-performing assets. At the same date,
$659,000, or 1.97%, of the Bank's total assets were delinquent
more than 30 days but less than 90 days. See "Business --
Non-Performing and Problem Assets."
o Capital Position. At December 31, 1995, the Bank exceeded all of
its Capital Requirements, and its equity capital was $3.3 million,
or 9.85% of total assets. Assuming net proceeds at the midpoint of
the Estimated Valuation Range, the Bank's pro forma equity to
assets ratio (excluding $2,267,500 of net proceeds to be retained
by the Holding Company), at such date, would have been 16.0%.
Asset/Liability Management
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, the Bank uses the net portfolio value ("NPV") methodology
recently adopted by the OTS as part of the OTS' capital regulations. Although
the Bank is not subject to the supervision of or regulations promulgated by the
OTS, the application of the NPV methodology adopted by the OTS assists the Bank
in monitoring its interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the NPV which would result from a theoretical 200 basis point (1 basis
point equals .01%) change in market interest rates. Both a 200 basis point
increase in market interest rates and a 200 basis point decrease in market
interest rates are considered. If, under the OTS' NPV methodology, an increase
or a decrease in market rates would result in a decrease of more than 2% in the
present value of an institution's assets and such institution is required to
comply with the NPV regulation, the institution must deduct 50% of the amount of
the decrease in excess of such 2% in the calculation of the institution's
risk-based capital.
<PAGE>
At December 31, 1995, 2% of the present value of the Bank's assets was
approximately $674,000. Because the interest rate risk of a 200 basis point
decrease in market interest rates (which was greater than the interest rate risk
of a 200 basis point increase) was $520,000 at December 31, 1995, the Bank would
not have been required to deduct any dollar amount from its capital under the
OTS' methodology.
Presented below, as of December 31, 1995, is an analysis prepared by
Sendaro Corporation of the Bank's interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts of 200 basis point
increments in market interest rates.
Net Portfolio Value NPV as % of PV of Assets
Change --------------------------------------- ------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in thousands)
400 bp * $3,226 $ (173) (5.09)% 10.19% 11bp
+ 200 bp 3,530 131 3.85 10.74 66bp
0 bp 3,399 --- --- 10.08 ---
- - 200 bp 2,879 (520) (15.30) 8.41 (167bp)
- - 400 bp 2,516 (883) (25.98) 7.20 (288bp)
Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets.................. 10.08%
Exposure Measure: Post-Shock NPV Ratio......................... 8.41%
Sensitivity Measure: Change in NPV Ratio....................... (167bp)
Change in NPV as % of PV of Assets............................. 15.30%
Interest Rate Risk Capital Component........................... ---
- ----------
* Basis points.
<PAGE>
An additional key element in the Bank's asset/liability plan is to protect
net earnings from changes in interest rates by reducing the maturity or
repricing mismatch between its interest-earning assets and rate-sensitive
liabilities. This assumes that assets reprice based on assumptions indicated
below the following table. The Bank's Interest Rate Gap was positive 18.1% as of
December 31, 1995. A positive Interest Rate Gap would leave the Bank's earnings
vulnerable to periods of declining interest rates because during such periods
the interest income earned on assets will generally decrease more rapidly than
the interest expense paid on liabilities. Conversely, in a rising interest rate
environment, the total income earned on assets will generally increase more
rapidly than the interest expense paid on liabilities. A negative Interest Rate
Gap would have the opposite effect. The Bank's management believes that the
Bank's Interest Rate Gap has generally been maintained within an acceptable
range in view of the prevailing interest rate environment.
The following table illustrates the projected maturities and the repricing
of the major consolidated asset and liability categories of the Bank as of
December 31, 1995. Maturity and repricing dates have been projected by applying
the assumptions set forth below to contractual maturity and repricing dates. The
information presented in the following table is derived from data maintained by
the Bank and is not adjusted for prepayments. Since most of the loans are
adjustable rate loans which are due to reprice within three years or less,
management feels that loan prepayments will not have a significant impact on the
results of the table below.
<TABLE>
<CAPTION>
At December 31, 1995
Maturing or Repricing Within
-----------------------------------------------------------------------------------------------
0 to 3 4 to 6 7 to 12 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Months Months Months Years Years Years Years Years Total
------ ------ ------ ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross loans receivable (1) .... $4,929 $4,377 $6,567 $ 6,595 $ 2,131 $2,181 $ 646 $ --- $27,426
Securities available
for sale (1) ................ 35 500 --- 315 100 300 --- --- 1,250
Mortgage-backed securities
available for sale (1) ...... 179 165 305 630 87 --- --- --- 1,366
FHLB stock .................... --- --- --- --- --- --- --- 260 260
Interest-bearing
demand deposits ........... 2,056 --- --- --- --- --- --- --- 2,056
------ ------ ------ ------- ----- ------ ------ ------ -------
Total interest-earning
assets ................. 7,199 5,042 6,872 7,540 2,318 2,481 646 260 32,358
------ ------ ------ ------- ----- ------ ------ ------ -------
Interest-bearing liabilities:
Certificates of deposit ....... 3,397 3,647 2,977 6,899 1,742 --- --- --- 18,662
Passbook accounts ............. 361 324 558 1,388 623 439 67 1 3,761
NOW accounts .................. 178 219 377 936 420 296 45 1 2,472
FHLB advances and other
borrowed funds .............. 1,020 --- --- --- 4,000 200 --- --- 5,220
Total interest-bearing
liabilities............. 4,956 4,190 3,912 9,223 6,785 935 112 2 30,115
------ ------ ------ ------- ----- ------ ------ ------ -------
Periodic Gap ..................... $2,243 $ 852 $2,960 $(1,683) $(4,467) $1,546 $534 $258
====== ====== ====== ======= ===== ====== ====== ======
Gap Ratio ..................... 1.45 1.20 1.76 0.82 0.34 2.65 5.77 130.00
Gap Percentage Total .......... 6.70% 2.55% 8.85% (5.03) 4.62% 1.60% 0.77%
Cumulative Gap ................... $2,243 $3,095 $6,055 $ 4,372 $ (95) $1,451 $1,985 $2,243 $ 2,243
====== ====== ====== ======= ===== ====== ====== ====== =======
Gap Ratio ..................... 1.45 1.34 1.46 1.20 1.16 1.20 1.53 1.39
Gap Percentage Total .......... 6.70% 9.25% 18.10% 13.07% (0.28)% 4.34% 5.94% 6.71%
</TABLE>
- ---------------
(1) Excludes undisbursed loans of $123,000 and the unrealized gains on
securities available for sale of $2,000.
<PAGE>
In preparing the above table, it has been assumed:
o Zero growth and a constant percentage composition of the balance sheet
with respect to volume, mix, and other performance influences.
o The maturity composition of assset and liability rollover volumes is
defined to approximately replicate current short-term balance sheet
structure.
o Prepayment rates are those observed from industry data on or about
quarter end as tracked by Sendero Corporation. o Prepayment rate input
reflects expected future prepayments embedded in quarter end prices of
mortgage-backed instruments actively traded in financial markets.
o Except where national or regional assumptions are used, unique
prepayment rates are input corresponding to Indiana.
In assessing the interest rate sensitivity of the Bank's assets, it has
been assumed that (i) one year adjustable-rate first mortgage loans on one- to
four-family residences will prepay at the rate of 16.0% per year; (ii) three
year adjustable-rate first mortgage loans on one- to four-family residences will
prepay at the rate of 15.0% per year; (iii) greater than three year
adjustable-rate first mortgage loans on one- to four-family residences will
prepay at the rate of 16.0% per year; (iv) adjustable-rate first mortgage loans
on residential properties of five or more units and nonresidential properties
will prepay at the rate of 19.6% per year; (v) fixed-rate first mortgage loans
on residential properties of five or more units and nonresidential properties
will prepay at the rate of 9.0% per year; (vi) fixed-rate first mortgage loan on
one- to four-family residences will prepay at the rate of 18.0% per year; (vii)
fixed-rate consumer loans will prepay at a rate of 7.0% per year; and (viii)
fixed-rate mortgage-backed securities will prepay annually as follows:
Interest Rate Payment Assumption
------------- ------------------
less than 6% 8.0%
7% to 7.99% 19.0%
8% to 8.99% 26.0%
<PAGE>
Also, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, and that other deposits are withdrawn or reprice as follows:
<TABLE>
<CAPTION>
0 to 3 4 to 6 7 to 12 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
Months Months Months Years Years Years Years Years
------ ------ ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook deposits and NOW's........ 9.53% 8.62% 14.85% 36.92% 16.58% 11.68% 1.79% 0.03%
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
<PAGE>
Average Balances and Interest Rates and Yields
The following tables present at December 31, 1995, and for the six months
ended December 31, 1995 and 1994, and for the years ended June 30, 1995, 1994,
and 1993, the month-end average balances of each category of the Bank's
interest-earning assets and interest-bearing liabilities, and the average yields
earned and interest rates paid on such balances. Such yields and costs are
determined by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
Six Months Ended December 31,
At December 31, -------------------------------------------------------
1995 1995 1994
------------------ --------------------------- -------------------------
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits............ $ 2,056 5.43% $ 2,379 $ 66 5.55% $ 1,460 $ 39 5.34%
Investment securities (1)............ 1,259 7.82 1,252 44 7.03 867 29 6.69
Mortgage-backed securities (1)....... 1,359 5.92 1,415 42 5.94 1,592 48 6.03
Loans receivable (2)................. 27,303 9.88 26,939 1,314 9.76 22,376 1,024 9.15
Stock in FHLB of Indianapolis........ 260 7.75 258 10 7.75 222 7 6.31
------ ------ ----- ------ -----
Total interest-earning assets...... 32,237 9.33 32,243 1,476 9.16 26,517 1,147 8.65
Non-interest earning assets, net of
allowance for loan losses
and including unrealized gain on
securities available for sale........ 1,225 1,246 1,615
Total assets....................... $33,462 $33,489 $28,132
======= ======= =======
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings accounts..................... $ 3,761 3.00 $ 3,944 60 3.04 $ 4,952 76 3.07
NOW accounts......................... 2,472 2.45 2,260 28 2.48 2,522 32 2.54
Certificates of deposit.............. 18,662 6.01 18,526 545 5.88 14,379 347 4.83
Other borrowings..................... 20 --- 24 1 8.33 121 3 4.96
FHLB advances ....................... 5,200 6.36 5,167 163 6.31 3,000 77 5.13
------- ------- -------
Total interest-bearing
liabilities................... 30,115 5.40 29,921 797 5.33 24,974 535 4.28
Other liabilities....................... 52 326 227
------- ------- -------
Total liabilities.................. 30,167 30,247 25,201
------- ------- -------
Equity capital
Retained earnings.................... 3,293 3,231 2,927
Unrealized gain on securities
available for sale................. 2 11 4
------- ------- -------
Total equity capital............... 3,295 3,242 2,931
------- ------- -------
Total liabilities and
equity capital................. $33,462 $33,489 $28,132
======= ======= =======
Net interest-earning assets............. $ 2,122 $ 2,322 $ 1,543
======= ======= =======
Net interest income..................... $ 679 $ 612
======= =======
Interest rate spread.................... 3.93% 3.83% 4.37%
==== ==== ====
Net yield on weighted average
interest-earning assets.............. 4.21% 4.62%
==== ====
Average interest-earning assets to
average interest-bearing liabilities. 107.76% 106.18%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1995 1994 1993
-------------------------- --------------------------- -------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits....... $ 1,298 $ 77 5.93% $ 1,178 $ 44 3.74% $ 1,138 $ 39 3.43%
Investment securities (1)....... 1,032 67 6.49 775 46 5.94 675 47 6.96
Mortgage-backed
securities (1)................ 1,556 93 5.98 1,773 106 5.98 1,306 100 7.66
Loans receivable (2)............ 23,329 2,167 9.29 20,326 1,814 8.92 18,453 1,749 9.48
Stock in FHLB of Indianapolis... 224 16 7.14 222 13 5.86 222 23 10.36
------ ----- ------ ----- ------ -----
Total interest-earning assets. 27,439 2,420 8.82 24,274 2,023 8.33 21,794 1,958 8.98
Non-interest earning assets, net of
allowance for loan losses
and including unrealized gain on
securities available for sale... 1,495 1,172 1,181
------- ------- -------
Total assets.................. $28,934 $25,446 $22,975
======= ======= =======
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings accounts................ $ 4,460 138 3.09 $ 5,427 166 3.06 $ 5,226 183 3.50
NOW accounts.................... 2,349 62 2.64 2,517 67 2.66 2,385 70 2.94
Certificates of deposit......... 15,145 763 5.04 13,624 680 4.99 12,272 720 5.87
Other borrowings................ 102 10 9.80 109 8 7.34 94 8 8.51
FHLB advances................... 3,321 201 6.05 792 28 3.54 417 12 2.88
------ ----- ------ --- ------ ---
Total interest-bearing
liabilities 25,377 1,174 4.63 22,469 949 4.22 20,394 993 4.87
Other liabilities.................. 543 216 126
-------- -------- --------
Total liabilities............. 25,920 22,685 20,520
Equity capital
Retained earnings.............. 3,007 2,761 2,455
Unrealized gain on securities
available for sale............ 7 --- ---
-------- -------- --------
Total equity capital.......... 3,014 2,761 2,455
-------- -------- --------
Total liabilities and
equity capital............ $28,934 $25,446 $22,975
======== ======== ========
Net interest-earning assets........ $ 2,062 $ 1,805 $ 1,400
======== ======== ========
Net interest income................ $1,246 $1,074 $ 965
====== ====== =====
Interest rate spread............... 4.19% 4.11% 4.11%
==== ==== ====
Net yield on weighted average
interest-earning assets......... 4.54% 4.42% 4.43%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities.................. 108.13% 108.03% 106.86%
====== ====== ======
</TABLE>
- ----------
(1) Yields for investment and mortgage-backed securities available for sale are
computed based upon amortized cost.
(2) Non-accruing loans have been included in average balances.
<PAGE>
In the foregoing two tables, no adjustment of interest on tax-exempt
securities to a tax-equivalent basis was made since the adjustment was less than
$10,000 in each period presented.
Interest Rate Spread
The Bank's results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Net interest income is determined by the
interest rate spread between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest rate
earned by the Bank on its loan, investment portfolios and interest-earning
assets, the weighted average effective cost of the Bank's deposits and
borrowings, the interest rate spread of the Bank, and the net yield on weighted
average interest-earning assets for the periods and as of the date shown.
Average balances are based on month-end average balances.
<TABLE>
<CAPTION>
Six Months Ended
At December 31, December 31, Year Ended June 30,
--------------- ------------------ -----------------------------
1995 1995 1994 1995 1994 1993
---- ---- ---- ---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits................... 5.43% 5.55% 5.34% 5.93% 3.74% 3.43%
Investment securities....................... 7.82 7.03 6.69 6.49 5.94 6.96
Mortgage-backed securities.................. 5.92 5.94 6.03 5.98 5.98 7.66
Loans receivable............................ 9.88 9.76 9.15 9.29 8.92 9.48
Stock in FHLB of Indianapolis............... 7.75 7.75 6.31 7.14 5.86 10.36
Total interest-earning assets............. 9.33 9.16 8.65 8.82 8.33 8.98
Weighted average interest rate cost of:
Savings accounts............................ 3.00 3.04 3.07 3.09 3.06 3.50
NOW and money market accounts............... 2.45 2.48 2.54 2.64 2.66 2.94
Certificates of deposit..................... 6.01 5.88 4.83 5.04 4.99 5.87
Other borrowings............................ --- 8.33 4.96 9.80 7.34 8.51
FHLB advances............................... 6.36 6.31 5.13 6.05 3.54 2.88
Total interest-bearing liabilities........ 5.40 5.33 4.28 4.63 4.22 4.87
---- ---- ---- ---- ---- ----
Interest rate spread (1)....................... 3.93% 3.83% 4.37% 4.19% 4.11% 4.11%
==== ==== ==== ==== ==== ====
Net yield on weighted average
interest-earning assets (2)................. 4.21% 4.62% 4.54% 4.42% 4.43%
==== ==== ==== ==== ====
</TABLE>
- ----------
(1) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate earned for the period
indicated. Interest rate spread figures must be considered in light of the
relationship between the amounts of interest-earning assets and
interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated. No net yield percentage is presented at December
31, 1995, because the computation of net yield is applicable only over a
period rather than at a specific date.
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Bank's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (i.e.,
changes in rate multiplied by old volume) and (2) changes in volume (i.e.,
changes in volume multiplied by old rate). Changes attributable to both rate and
volume have been allocated proportionally to the change due to volume and the
change due to rate.
Increase (Decrease) in
Net Interest Income
-----------------------------------
Total Net Due to Due to
Change Rate Volume
------ ---- ------
(In thousands)
Six months ended December 31, 1995 compared to six months ended December 31,
1994
Interest-earning assets:
Interest-earning deposits................ $ 27 $ 2 $ 25
Investment securities.................... 15 (1) 16
Mortgage-backed securities............... 12 26 (14)
Loans receivable......................... 272 55 217
Stock in FHLB of Indianapolis............ 3 2 1
---- ------ ----
Total.................................. 329 84 245
---- ------ ----
Interest-bearing liabilities:
Savings accounts......................... (16) (1) (15)
NOW and money market accounts............ (4) (1) (3)
Certificates of deposit.................. 198 85 113
Other borrowings......................... (2) 3 (5)
FHLB advances............................ 86 21 65
---- ------ ----
Total.................................. 262 107 155
---- ------ ----
Change in net interest income............... $ 67 $ (23) $ 90
==== ====== ====
Year ended June 30, 1995 compared to Year ended June 30, 1994
Interest-earning assets:
Interest-earning deposits................ $ 33 $ 28 $ 5
Investment securities.................... 21 4 17
Mortgage-backed securities............... (13) --- (13)
Loans receivable......................... 353 76 277
Stock in FHLB of Indianapolis............ 3 3 ---
---- ------ ----
Total.................................. 397 111 286
---- ------ ----
Interest-bearing liabilities:
Savings accounts......................... (28) 2 (30)
NOW and money market accounts............ (5) (1) (4)
Certificates of deposit.................. 83 6 77
Other borrowings......................... 2 3 (1)
FHLB advances............................ 173 32 141
---- ------ ----
Total.................................. 225 42 183
---- ------ ----
Change in net interest income............... $172 $ 69 $103
==== ====== ====
Year ended June 30, 1994 compared to Year ended June 30, 1993
Interest-earning assets:
Interest-earning deposits................ $ 5 $ 4 $ 1
Investment securities.................... (1) (5) 4
Mortgage-backed securities............... 6 (25) 31
Loans receivable......................... 65 (106) 171
Stock in FHLB of Indianapolis............ (10) (10) ---
---- ------ ----
Total.................................. 65 (142) 207
---- ------ ----
Interest-bearing liabilities:
Savings accounts......................... (17) (24) 7
NOW and money market accounts............ (3) (7) 4
Certificates of deposit.................. (40) (114) 74
Other borrowings......................... --- (1) 1
FHLB advances............................ 16 3 13
---- ------ ----
Total.................................. (44) (143) 99
---- ------ ----
Change in net interest income............... $109 $ (1) $108
==== ====== ====
Financial Condition at December 31, 1995 Compared to Financial Condition at June
30, 1995
Total assets increased $2.6 million at December 31, 1995, compared to June
30, 1995. The increase was primarily a result of increases in net loans of $1.7
million, or 6.5%, which was funded by increased deposits and advances from the
FHLB of Indianapolis. Total cash and cash equivalents also increased $0.9
million. The increase in net loans was principally in real estate mortgage
loans.
Average assets increased from $28.9 million for the period ended June 30,
1995, to $33.5 million for the period ended December 31, 1995, an increase of
15.7%. Average interest-earning assets represented 94.8% of average assets for
the period ended in June 1995 compared to 96.3% for the period ended December
31, 1995. Although the average of most interest-earning assets increased during
the period ended December 1995, average loans experienced the largest increase
amounting to $3.6 million compared to the June 1995 period. Average
interest-bearing liabilities as a percentage of average interest-earning assets
was 92.8% and 92.5% for the respective periods.
Total securities decreased approximately $143,000 from June 30, 1995 to
December 31, 1995. The primary change relating to the investment portfolio was
in the amounts available for sale and held to maturity. The Bank availed itself
of the opportunity in December 1995 to transfer all of its remaining held to
maturity securities to available for sale securities as permitted by the
Financial Accounting Standards Board (the "FASB"). The Bank determined that
maintaining all investment securities as available for sale provided the most
flexibility in managing the investment portfolio.
Loans and Allowance for Loan Losses. Average loans increased $3.6 million
from the period ended June 30, 1995, to December 31, 1995. The growth in loans
was funded by increased average deposits of $2.8 million and increased average
borrowings of $1.8 million. Average loans were $23.3 million for the June 1995
period and $26.9 million for the December 1995 period. The average rates on
loans were 9.76% for the December 1995 period and 9.29% for the June 1995
period, an increase of 47 basis points. The allowance for loan losses as a
percentage of net loans increased to 0.37% from 0.22% as a result of a larger
provision for loan losses and nominal charge-offs. The ratio of the allowance
for loan losses to non-performing loans was 84.8% at December 31, 1995 compared
to 57.0% at June 30, 1995.
Premises and Equipment. Premises and equipment increased slightly, net of
depreciation and the disposition of a possible location for future expansion,
from June 30, 1995 to December 31, 1995. The largest increase was related to the
purchase of a location for future expansion. A location purchased for a loan
origination office in a nearby community was sold on contract for a nominal gain
after management determined that a full service branch was more desirable. No
location for this future branch has been selected. The Bank owns two other
properties, one adjacent to and the second across the street from the Bank's
main office. The parcel located across the street is used for additional
customer and employee parking. Approximately one-half of the location adjacent
to the main office will be sold to a local business during 1996 with no gain or
loss expected. For a description of a construction project involving the other
one-half of the adjacent parcel which is currently being considered by the
Bank's Board of Directors, see "Business -- Properties."
Deposits. Deposits increased $2.4 million from $22.5 million to $24.9
million during the period from June 30, 1995 to December 31, 1995. Increased
deposits were utilized to fund loan growth. Savings accounts and NOW accounts
remained relatively constant between June 30 and December 31, 1995. Certificates
of deposit increased $1.9 million during this period. Average total deposits
increased $2.8 million to $24.7 million for the period December 31, 1995
contrasted to $22.0 million for the June 30, 1995 period.
Borrowed Funds. Borrowed funds increased $1.9 million from June 30, 1995 to
December 31, 1995. Management continued to fund a portion of the Bank's loan
growth with advances from the FHLB of Indianapolis. Although interest rates on
FHLB advances increased during the period ended December 31, 1995 compared to
the June 30, 1995 period, the maturities of these borrowings were longer than
local deposits at comparable rates. Average borrowed funds increased to $5.2
million for the December 1995 period compared to $3.4 million for the June 30,
1995 period.
Equity Capital. Equity capital increased $136,000 to $3.3 million at
December 31, 1995 compared to $3.2 million at June 30, 1995. The increase was
essentially due to net income during the period.
Financial Condition at June 30, 1995 Compared to Financial Condition at June 30,
1994
Total assets increased $4.8 million at June 30, 1995, compared to June 30,
1994. The increase was primarily a result of increases in net loans of $4.1
million, or 18.9%, which was primarily funded by a $3.5 million increase in
advances from the FHLB of Indianapolis. The increase in net loans of $4.1
million resulted primarily from increases in one-to-four family loans, Combo
Loans and nonresidential real estate mortgage loans.
Average assets increased from $25.4 million for the period ended June 30,
1994, to $28.9 million for the period ended June 30, 1995, an increase of 13.7%.
Average interest-earning assets represented 94.8% of average assets for the
period ended in 1995 compared to 95.4% for the period ended June 30, 1994.
Substantially all of the increase in average earning assets was attributable to
growth in the loan portfolio. Average interest-bearing liabilities as a
percentage of average interest-bearing assets was 92.5% and 92.6% for 1995 and
1994, respectively.
<PAGE>
Average balances of securities available for sale and held to maturity
increased $347,000, or 14.4%, to $2.7 million for the 1995 period from $2.4
million for the 1994 period due to purchases, while mortgage-backed securities
held to maturity decreased slightly as a result of principal repayments.
Mortgage-backed securities are purchased on occasion because such instruments
offer liquidity and lower credit risk than other types of investments. The
primary risk associated with these instruments is that in a declining interest
rate environment the prepayment level of the loans underlying these securities
will accelerate, which reduces the effective yield and exposes the Bank to
interest rate risk on the prepaid amounts. In an increasing rate environment,
the primary risk associated with these securities is that the fixed-rate portion
of such securities will not adjust to market rates which reduces the Bank's
spread. See "Business -- Lending Activities -- Mortgage-Backed Securities." See
Note 3 to Consolidated Financial Statements.
Loans and Allowance for Loan Losses. Loans increased $4.1 million from June
30, 1994 to June 30, 1995 primarily due to increases in real estate mortgage
loans. Average loans increased from $20.3 million to $23.3 million while the
average rates earned on such loans increased 37 basis points to 9.29%. This
increase in the average rate reflected the general increase in loan rates during
the fiscal year ended June 30, 1995. The allowance for loan losses as a
percentage of total loans increased to 0.22% from 0.12% as a result of a larger
provision for loan losses, increased loans and nominal charge-offs. The
allowance for loan losses as a percentage of non-performing loans was 57.0% and
108.3% at June 30, 1995 and 1994, respectively. Non-performing loans were
$100,000 and $27,000 at each date, respectively.
Premises and Equipment. Premises and equipment increased $115,000, net of
depreciation, from June 30, 1994 to June 30, 1995. The increase was primarily
related to the purchase of two separate properties for future expansion, the
purchase of teller equipment and purchases of various other equipment. One of
the properties was originally purchased for establishing a loan origination
office in a nearby community. Subsequently, management determined that a full
service branch was more desirable than a loan origination office. Since this
location was not adequate for a full service branch, it was sold under a
contract for sale subsequent to June 30, 1995. The other property is across the
street from the Bank's main office and is used for customer and employee
parking.
Deposits. Deposits increased approximately $1.0 million during the period
ended June 30, 1995. NOW and savings accounts decreased $1.8 million while
certificates of deposit increased $2.8 million. Increased rates paid on
certificates of deposit compared to those paid on NOW and savings accounts were
primarily responsible for the transfers and other increases in certificates of
deposit. Average deposits increased slightly from $21.6 million for 1994 to
$22.0 million for 1995.
Borrowed Funds. The growth in loans was funded by additional FHLB of
Indianapolis advances of $3.5 million from June 30, 1994 to June 30, 1995.
Management elected to utilize FHLB advances available at rates comparable to the
cost of acquiring local deposits to partially fund the increase in loans. The
maturities of these borrowings were slightly longer than local deposits at
similar interest rates. Average borrowed funds increased from $0.9 million for
the period ended June 30, 1994 to $3.4 million for the period ended June 30,
1995.
Equity Capital. Equity capital increased $310,000 to $3.2 million at June
30, 1995. This increase was primarily due to net income of $289,000. Equity
capital also increased during the fiscal year ended June 30, 1995 as a result of
the adoption of Statement of Financial Accounting Standard ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which resulted
in an unrealized gain on securities available for sale of approximately $20,000,
net of taxes, on available-for-sale securities at June 30, 1995. Securities
available for sale must be adjusted and carried at market value, with the
unrealized gain or loss reported in equity capital. The effect of adjusting
securities available for sale to market value can result in positive or negative
adjustments to equity and such adjustments may be material. Although management
has no present intention to sell these securities, the Bank could report gains
from the sales of these securities in the current interest rate environment if
it sold these securities.
<PAGE>
Comparison of Operating Results For Six Months Ended December 31, 1995 and 1994
General. Net income increased $14,000, or 10.3%, to $154,000 for the six
months ended December 31, 1995 compared to $140,000 for the six months ended
December 31, 1994. Net interest income after provision for losses on loans
increased $46,000, or 7.8%, to $636,000 for the period ended December 31, 1995
compared to $590,000 for the comparable 1994 period. This increase was achieved
despite an increase in the provision for loan losses of $21,000. The increase in
net interest income after provision for loan losses combined with a $23,000
increase in other income more than offset the $45,000 increase in other expenses
and the $10,000 increase in income taxes.
Interest Income. The Bank's total interest income was $1.5 million for the
1995 period compared to $1.1 million for the 1994 period. Volume accounted for
$245,000 of the increase while higher rates accounted for $84,000. Average
earning assets increased $5.7 million from $26.5 million for the 1994 period
compared to $32.2 million for the 1995 period. The average yield on
interest-earning assets increased from 8.65% for the six month period ended
December 31, 1994 to 9.16% for the comparable period in 1995, or 51 basis
points. Although the average yield on all earning assets increased during the
1995 period, the increase in yield on loans was the primary factor resulting in
the increase.
Interest Expense. Interest expense increased $262,000 for the six month
period ended December 31, 1995 compared to the 1994 period. Average
interest-bearing liabilities increased $4.9 million to $29.9 million for the
1995 period compared to $25.0 million during the 1994 period. The average
balances of NOW and savings accounts decreased $1.3 million reflecting
depositors' desire for higher rates than being offered on these types of
deposits. Certificates of deposits averaged $4.1 million more during the 1995
period compared to the 1994 period. Borrowed funds averaged $2.1 million higher
in the 1995 period compared to the 1994 period as management continued to use
FHLB advances to partially fund loan growth.
Net Interest Income. Net interest income increased $67,000 for the 1995
period compared to the 1994 period. The increase was primarily due to the
$90,000 increase due to volume increases while lower rates caused a decline of
$23,000. The Bank's interest spread was 3.83% for the six months ended December
31, 1995 compared to 4.37% for the comparable 1994 period.
Provision for Loan Losses. The Bank's provision for loan losses for the
period ended December 31, 1995 was $43,000 compared to $21,000 for the same
period in 1994. Although net charge-offs and problem loans have remained
nominal, management increased the provision for loan losses primarily due to the
substantial increase in outstanding loans. Management also considered the level
of the allowance for loan losses maintained by peers.
<PAGE>
Other Income. Service charges on deposit accounts increased to $19,000 for
the six month period ended December 31, 1995 compared to $15,000 for the same
period in 1994. Changes in the volume of activity and an increase in the number
of accounts subject to service charges resulted in the increase. General
increases in the volume of activity resulted in other income increasing from
$11,000 for the 1994 period to $23,000 for the 1995 period.
Acquiring land for development is the principal business activity of BSF,
the Bank's wholly owned subsidiary. Land is acquired, various improvements are
made to the land and lots are then sold, primarily on contract. The gain on sale
of real estate acquired for development was $19,000 for the 1995 period compared
to $11,000 for the same period in 1994. BSF also built residential properties
for future sale in the 1995 period. The level of income fluctuates depending on
the volume of activity and profits on residential properties. The Bank and BSF
will have to cease this activity as a result of the Bank's conversion to a state
savings bank in May 1994. BSF's mandated discontinuance of land acquisitions and
divestiture of real estate holdings may have a negative impact on the Bank's
results of operations in the future. See "Business -- Service Corporation
Subsidiary."
Salaries and Employee Benefits. Salaries and employee benefits were
$204,000 for the six-month period ended December 31, 1995 compared to $176,000
for the 1994 period, an increase of 15.8%. This increase resulted from the
addition of an additional full-time employee to the staff, normal increases in
employee compensation and increases in related payroll taxes.
Net Occupancy and Equipment Expenses. Occupancy and equipment expenses
increased approximately $5,000 during the 1995 period compared to the 1994
period. The increase resulted primarily from increased depreciation on new
equipment purchased to upgrade the teller line to a personal computer based
system and equipment purchased for the Bank's conversion to a new general ledger
system.
Deposit Insurance Expense. Deposit insurance remained stable during the
respective six-month periods ending December 31, 1995 and 1994. Assessment rates
were the same during both periods. For a discussion of pending legislation
concerning FDIC deposit insurance premiums, see "Regulation -- Insurance of
Deposits."
Other Expense. Other expenses, consisting primarily of expenses related to
computers, supplies, professional fees, advertising, supervisory examination
fees, telephone, postage, management fees and insurance expenses increased
$11,000 for the 1995 period compared to the 1994 period. Management fees paid to
Mr. Stewart in connection with the operations of BSF increased $4,000 during the
1995 period compared to the 1994 period. See "Business -- Service Corporation
Subsidiary." The balance of the increase resulted from nominal increases in a
variety of expense categories.
Income Tax Expense. Income tax expense increased $10,000 during the six
months ended December 31, 1995 compared to the 1994 period. The increase was
directly related to the increase in taxable income for the period. The effective
tax rate was 39.6% and 39.3% for the respective 1995 and 1994 periods.
<PAGE>
Comparison of Operating Results For Fiscal Years Ended June 30, 1995, 1994 and
1993
General. Net income for the fiscal year ended June 30, 1995 increased
$28,000, or 10.8%, to $289,000 compared to $261,000 for the 1994 period. Net
income for 1994 was reduced by $24,000 for a cumulative change in accounting for
income taxes effective because of the implementation of SFAS No. 109. Income for
1994 before the cumulative effect of the accounting change was $285,000. The
Bank's net income for 1993 was $308,000 or $23,000 greater than 1994's income
before the accounting method change. Return on average assets for the years
ended June 30, 1995, 1994 and 1993 was 1.00%, 1.03% and 1.34%, respectively.
Return on average equity was 9.59% for 1995, 9.46% for 1994 and 12.55% for 1993.
Interest Income. The Bank's total interest income was $2.4 million for 1995
compared to $2.0 million for 1994. Higher interest rates accounted for $111,000
of the increase while volume increases accounted for $286,000, primarily from
loans. Average earning assets increased $3.1 million from $24.3 million to $27.4
million from 1994 to 1995. The increase in average earning assets was
accompanied by an increase in average yields to 8.82% in 1995 from 8.33% in
1994. The increase in average loans was the primary factor contributing to these
increases. Total interest income increased $65,000 from 1993 to 1994. Although
average earning assets increased $2.5 million during this period, the average
yield on earning assets decreased 65 basis points to 8.33% from 8.98%.
Interest Expense. Interest expense increased $225,000 during the fiscal
year ended June 30, 1995 compared to 1994. The increase in interest expense was
the result of an increase in average interest-bearing liabilities of $2.9
million from $22.5 million to $25.4 million as well as an increase in the
average interest cost of interest-bearing liabilities 41 basis points from 4.22%
for 1994 to 4.63% for 1995. The average balances of NOW and savings accounts
decreased $1.1 million as depositors sought higher rates from alternative
sources while certificates of deposit increased $1.5 million during 1995.
Borrowed funds averaged $2.5 million higher in 1995 compared to 1994 as the Bank
utilized borrowings from the FHLB to meet increased loan and other asset growth.
Interest expense decreased $44,000 in 1994 compared to 1993 reflecting decreases
in interest rates of $143,000 and volume increases of $99,000. The average cost
of interest-bearing liabilities decreased to 4.22% in 1994 from 4.87% in 1993,
or 65 basis points.
Net Interest Income. Net interest income increased approximately $172,000
for 1995 to approximately $1.3 million compared to $1.1 million for 1994. The
increase was primarily due to the $103,000 increase due to volume increases
while rate increases accounted for $69,000. Substantially all of the $109,000
increase in 1994 compared to 1993 was the result of an increase in volume. There
is no assurance that the Bank can continue to increase volume in the future to
the extent attained during the last two years which may negatively affect net
interest income. The Bank's interest spread for 1995 was 4.19% compared to 4.11%
for both 1994 and 1993.
Provision for Loan Losses. The Bank's provision for loan losses for the
fiscal year ended June 30, 1995 was $36,000. The 1995 provision and the related
increase in the allowance for loan losses was considered adequate, based on
total charge-offs of $5,000, the level of the allowance and other factors
including the size, condition and components of the loan portfolio. Further,
additional consideration was given to the growth in the portfolio and the level
of the allowance maintained by peers . The provision of $14,000 for 1994 and
$6,600 for 1993 reflected more moderate growth and nominal charge-offs for the
two year period. The Bank provides a general allowance that reflects an estimate
of inherent losses based upon the types and categories of outstanding loans as
well as problem loans.
Other Income. Service charges on deposit accounts have remained between
$22,000 and $27,000 for each of the last three years reflecting changes in the
volume of activity and an increase in the number of accounts subject to such
charges. The increases in other income of $10,000 from 1994 to 1995 was
primarily a $5,000 increase in late fees on loans and a $4,000 increase in
income on other real estate owned. The $5,000 increase in other income from 1993
to 1994 was a general increase in various categories of such income.
Gain on sales of real estate acquired for development was $78,000, $145,000
and $117,000 for 1995, 1994 and 1993, respectively. Management utilizes the sale
of lots and residences to provide a source of income as well as maintain the
mobile home portion of the Bank's loan portfolio. The level of income from this
source fluctuates widely since it is dependent on the volume of activity,
primarily the number of lots sold, and profits on residential properties.
Salaries and Employee Benefits. Salaries and benefits increased 17.2% to
$404,000 for the fiscal year ended June 30, 1995 compared to 1994 reflecting
primarily increased directors' compensation, a full year's compensation of an
officer added to the staff in 1994 and normal increases in officers' and
employees' compensation and payroll taxes. These expenses increased 35.7% in
1994 compared to 1993. Approximately one-half of the increase was the result of
<PAGE>
paying a discretionary bonus to directors, officers and employees in 1994. See
"Executive Compensation and Related Transactions -- Benefits -- Bonus Program."
The balance of the increase reflected the addition of an officer, increased
contributions to the Bank's retirement plans and an increase in the number of
full-time equivalent employees.
Occupancy and Equipment Expenses. Occupancy and equipment expenses were
$109,000 for 1995, $109,000 for 1994 and $91,000 for 1993. While these expense
remained constant during 1995 and 1994, the increase from 1993 to 1994 was
related to depreciation expense on the replacement of various fully-depreciated
equipment.
Deposit Insurance Expense. Deposit insurance expense increased slightly
from 1994 to 1995 from $48,000 to $49,000 as result of relatively low deposit
growth. The increase from 1993 to 1994 resulted from relatively higher deposit
levels on assessment dates in 1994 compared to the preceding year. Assessment
rates were the same during the three year period. For a discussion of pending
legislation concerning FDIC deposit insurance premiums, see "Regulation
- --Insurance of Deposits."
Other Expenses. Other expenses, consisting primarily of expenses related to
computers, supplies, professional fees, advertising, supervisory examination
fees, telephone, postage, management fees and insurance expenses, remained
constant from 1994 to 1995. The increase from 1993 to 1994 of $51,000 reflected
general increases in practically all the expenses in this category including a
$16,000 increase in management fees paid to Mr. Stewart for the management of
BSF. See "Business -- Service Corporation Subsidiary."
Income Tax Expense. Income tax expense was $203,000 for 1995 compared to
$168,000 for 1994 and $186,000 for 1993. The level of tax expense was consistent
with the level of taxable income in each year. The effective tax rate was 41.3%,
37.2% and 37.6% for 1995, 1994 and 1993, respectively.
During fiscal 1994, the Bank adopted SFAS No. 109 and recorded a cumulative
effect of a change in method of accounting of $24,000. See Note 1 of the Notes
to Consolidated Financial Statements for further explanation.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, proceeds from principal
and interest payments on loans and proceeds from maturing securities. While
maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and the restructuring of the
thrift industry.
The primary investing activity of the Bank is the origination of mortgage
loans. During the years ended June 30, 1995, 1994 and 1993, the Bank originated
mortgage loans in the amounts of $7.1 million, $6.5 million and $7.1 million,
respectively. The Bank originated mobile home loans of $286,000, $269,000 and
$198,000, and consumer loans of $710,000, $592,000 and $326,000, respectively,
during these periods. Loan repayments and other deductions were $3.9 million,
$5.4 million and $5.3 million during the respective three one-year periods.
During the six month periods ended December 31, 1995 and 1994, the Bank
originated mortgage loans of $3.7 million and $3.3 million, respectively. During
the same periods, the Bank originated mobile home loans of $63,000 and $189,000,
respectively, and consumer loans of $590,000 and $332,000, respectively. Loan
repayments and other deductions were $2.7 million and $1.9 million,
respectively, during these periods.
During the years ended June 30, 1995 and 1994, the Bank purchased
securities (including mortgage-backed securities) in the amounts of $0.6 million
and $1.1 million, respectively. No securities were purchased during 1993.
Maturities and repayments of securities were $0.3 million in 1995, $0.6 million
in 1994 and $0.3 million in 1993. There was no significant activity in
securities during the six-month periods ended December 31, 1995 and 1994.
During each of the three years ended June 30, 1995, deposits grew
approximately $1 million each year. The Bank also utilized FHLB advances to fund
increases in loans. FHLB advances increased during each of the years in the
period.
The Bank's cash and cash equivalents remained fairly constant during the
three year period ended June 30, 1995 and were comparable at December 31, 1995
and 1994.
The Bank had outstanding loan commitments of $123,000 and unused lines of
credit of $251,000 at December 31, 1995. The Bank anticipates that it will have
sufficient funds from loan repayments to meet its current commitments without
borrowing additional funds from the FHLB of Indianapolis. Certificates of
deposit scheduled to mature in one year or less at December 31, 1995 totaled
$10.0 million. Management believes that a significant portion of such deposits
will remain with the Bank based upon historical deposit flow data and the Bank's
competitive pricing in its market area.
<PAGE>
Liquidity management is both a daily and long-term function of the Bank's
management strategy. In the event that the Bank should require funds beyond its
ability to generate them internally, additional funds are available through the
use of FHLB advances and through sales of securities. The Bank regularly
monitors its interest rate spread position to determine the appropriate mix
between retail and wholesale funds available to fund its loan activities. From
time-to-time the Bank offers higher cost deposit products to generate funds for
loans. The Bank also relies on advances from the FHLB of Indianapolis to fund
its lending activities when the cost of alternative sources of funds makes it
prudent to do so. The Bank will continue to monitor its interest rate spread
position and its mix of deposits and alternative sources of funds. FHLB advances
were $5.2 million at December 31, 1995. The Bank had $22.2 million in eligible
assets available as collateral for advances from the FHLB of Indianapolis as of
December 31, 1995. Based on the Bank's blanket collateral agreements, advances
from the FHLB of Indianapolis must be collateralized by 160% of eligible assets.
Therefore, the Bank's eligible collateral would have supported approximately
$13.9 million in advances from the FHLB of Indianapolis as of December 31, 1995.
However, the Bank's Board of Directors has by resolution limited the amount of
authorized borrowings to $7 million at December 31, 1995.
The following is a summary of cash flows for the Bank, which are of
three major types. Cash flows from operating activities consist primarily of net
income generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when the Bank is experiencing loan growth. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
The following table summarizes cash flows for the six months ended December 31,
1995 and 1994 and for each of the three years in the period ended June 30, 1995.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------ ------------------------------
1995 1994 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating activities................ $ 43 $ 88 $ 218 $ 225 $ 265
----- ----- ----- ----- -----
Investing activities:
Investment purchases ............. --- (200) (605) (112) ---
Investment maturities ............ --- 25 130 10
Mortgage-backed
securities purchases ........... --- --- --- (1,020) ---
Mortgage-backed
securities maturities .......... 111 73 161 540 327
Changes in loans ................. (1,640) (1,959) (4,134) (2,125) (2,276)
Other ............................ (161) (123) (118) 134 160
----- ----- ----- ----- -----
Total .......................... (1,690) (2,184) (4,566) (2,573) (1,789)
----- ----- ----- ----- -----
Financing activities:
Deposit increases ................ 2,395 473 1,049 1,277 1,023
Borrowings ....................... 191 2,067 3,448 965 521
----- ----- ----- ----- -----
Total .......................... 2,586 2,540 4,497 2,242 1,544
----- ----- ----- ----- -----
Net change in cash and
cash equivalents ................. $939 $444 $149 $(106) $20
===== ===== ===== ===== =====
</TABLE>
During the six-month period ended December 31, 1995 and 1994, cash flows
from operating and financing activities provided funds to support loan growth.
During the period ended December 31, 1995, deposit increases provided the
primary source of funds for increasing the loan portfolio. During the same
period in 1994, borrowings provided the most significant source of funds to
support loan portfolio growth.
During the years ended June 30, 1995, 1994 and 1993, operating and
financing activities provided the most significant portion of funds to support
growth in the loan portfolio. Deposit increases as well as borrowed funds,
particularly in 1995, funded loan growth during this three year period.
<PAGE>
As of December 31, 1995, management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on the
Bank's liquidity, capital resources, or results of operations other than the
proposed legislation regarding the recapitalization of the SAIF. See
"Regulation--Insurance of Deposits."
Current Accounting Issues
Accounting for Post-Retirement Benefits. In December, 1990, the FASB
issued SFAS No. 106, Employers' Accounting for Post-Retirement Benefits Other
Than Pensions. SFAS No. 106 requires that employers recognize the cost of
providing post-retirement benefits over the employees' active service periods to
the date they attain full eligibility for such benefits. SFAS No. 106 was
effective for the Bank for the fiscal year commencing July 1, 1995 and did not
have a material impact or either the Bank's financial position or results of
operations.
Fair Value Disclosures. In December, 1991, the FASB issued SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. SFAS No. 107 requires all
companies, including financial institutions, to disclose in notes to their
financial statements the fair value of all financial instruments for which it is
practicable to estimate the value. SFAS No. 107 is effective for companies with
assets of less than $150 million, including the Bank, for fiscal years ending
after December 31, 1995.
Accounting for Impairment of Loans. In 1993, the FASB issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. The purpose of SFAS No. 114 is
to eliminate inconsistencies in the accounting among different types of
creditors for loans with similar collection problems by requiring a single
method for measuring impaired loans. A loan is considered impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. The Bank will measure certain impaired loans pursuant to SFAS No. 114
at a discounted amount on the balance sheet based on the present value amount of
the expected future cash flows using the loan's effective interest rate. A
valuation reserve should be recorded if the present value of the expected cash
flows is less than the recorded amount of the loan. Formally restructured loans
and loans evaluated as groups or pools of homogeneous loans (e.g., single family
residence) are excluded from SFAS No. 114. In October 1994, the FASB issued SFAS
No. 118 ("SFAS No. 118"), entitled Accounting by Creditors for Impairment of
Loan - Income Recognition and Disclosures. SFAS No. 118 amends the disclosure
requirements of SFAS No. 114 to require information about the recorded
investment in certain impaired loans and about how a creditor recognizes
interest income related to those impaired loans. The effective date of SFAS No.
114 and SFAS No. 118 is for fiscal years beginning after December 31, 1994. The
Bank adopted SFAS No. 114 and SFAS No. 118 in the fiscal year ended June 30,
1995, and their adoption did not have a material impact on earnings or financial
condition.
Accounting for Impairment of Long-Lived Assets to be Disposed Of. SFAS No.
121 establishes guidance for recognizing and measuring impairment losses and
requires that the carrying amount of impaired assets be reduced to fair value.
SFAS No. 121 requires that the long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. A review is required only if events or
circumstances indicate the need.
After an impairment is recognized, the reduced carrying value of the asset
becomes its new cost. For depreciable assets, this new cost is depreciated over
the asset's useful life. Restoration of previously recognized losses is
prohibited.
<PAGE>
An impairment loss for assets to be held and used would be reported as a
component of income from continuing operations before income taxes. An entity
recognizing an impairment loss would be required to disclose all of the
following:
o Description of the assets impaired and the facts and circumstances
leading to the impairment;
o Amount of impairment loss and how fair value was determined;
o Which income statement line item the loss is included in, if not
presented as a single line item (or parenthetically); and
o The business segment affected (for public companies).
This Statement is effective for financial statements for fiscal years
beginning after December 15, 1995. The Bank believes that SFAS No. 121 will not
have a material impact on either the Bank's financial position or results of
operations.
Accounting for Mortgage Servicing Rights. During 1995, the FASB issued SFAS
No. 122, entitled Accounting for Mortgage Servicing Rights. SFAS No. 122
pertains to mortgage banking enterprises and financial institutions that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise. This Statement eliminates the accounting
distinction between mortgage servicing rights that are acquired through loan
origination activities and those through purchase transactions. Under this
Statement, if a mortgage banking enterprise sells or securitizes loans and
retains the mortgage servicing rights, the enterprise must allocate the total
cost of the mortgage loans to mortgage servicing rights and loans (without the
rights) based on their relative fair values if it is practicable to estimate
those fair values. If it is not practicable, the entire cost should be allocated
to the mortgage loans and no cost should be allocated to the mortgage servicing
rights. An entity would measure impairment of mortgage servicing rights and
loans based on the excess of the carrying amount of the mortgage servicing
rights portfolio over the fair value of that portfolio.
The Statement is to be applied prospectively in fiscal years beginning
after December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalize mortgage
servicing rights. The Bank believes that SFAS No. 122 will not have a material
impact on either the Bank's financial position or results of operations.
Accounting for Stock-based Compensation. SFAS No. 123, Accounting for
Stock-based Compensation, establishes a fair value based method of accounting
for stock-based compensation plans. The FASB encourages all entities to adopt
this method for accounting for all arrangements under which employees receives
shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of its stock.
Due to the extremely controversial nature of this project, the Statement
permits a company to continue the accounting for stock-based compensation
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. If a company elects that option, pro forma disclosures of
net income (and earnings per share, if presented) are required in the footnotes
as if the provisions of this Statement had been used to measure stock-based
compensation. The disclosure requirements of Opinion No. 25 have been superseded
by the disclosure requirements of this Statement.
Once an entity adopts the fair value based method for accounting for these
transactions, that election cannot be reversed. Equity instruments granted or
otherwise transferred directly to an employee by a principal stockholder are
stock-based employee compensation to be accounted for in accordance with either
Opinion 25 or this Statement, unless the transfer clearly is for a purpose other
than compensation.
The accounting requirements of this Statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The disclosure requirements are effective for financial statements for
fiscal years beginning after December 15, 1995. Pro forma disclosures required
for entities that elect to continue to measure compensation cost using Opinion
25 must include the effects of all awards granted in fiscal years that begin
after December 15, 1994.
<PAGE>
During the initial phase-in period, the effects of applying this Statement
are not likely to be representative of the effects on the reported net income
for future years because options vest over several years and additional awards
generally are made each year. If that situation exists, the entity shall include
a statement to that effect.
Management has not determined the impact of SFAS No. 123 on either the
Bank's financial position or results of operations.
Accounting for Employee Stock Plans. In November 1993, AICPA issued
Statement of Position ("SOP") 93-6 which addresses the accounting for shares of
stock issued to employees by an employee stock ownership plan ("Employee Plan").
SOP 93-6 requires that the employer record compensation expense in an amount
equal to the fair value of shares committed to be released to employees from the
Employee Plan. SOP 93-6 is effective for fiscal years beginning after December
15, 1993 and relates to shares purchased by an Employee Plan after December 31,
1992. Assuming shares of Common Stock appreciate in value over time, the
adoption of SOP 93-6 will likely increase compensation expense relative to the
ESOP to be established in connection with the Conversion, as compared with prior
guidance which would have required the recognition of compensation expense based
on the cost of shares acquired by the ESOP. However, the amount of the increase
has not been determined as the expense will be based on the fair value of the
shares committed to be released to employees, which is not yet determinable.
The AICPA's Accounting Standards Executive Committee has also issued SOP
94-6, Disclosure of Certain Significant Risks and Uncertainties. SOP 94-6
applies to financial statements prepared in conformity with generally accepted
accounting principles applicable to nongovernmental entities, and it applies to
all entities that issue such statements. SOP 94-6 requires reporting entities to
include in their financial statements disclosures about the nature of their
operations and the use of estimates in the preparation of financial statements.
In addition, if specified disclosure criteria are met, it requires entities to
make disclosures about:
o Amounts reported in the financial statements or in the notes that
are particularly sensitive to change in the near term (for example
- inventory subject to rapid technological obsolescence, valuation
allowances for commercial and real estate loans, and amounts
reported for long-term contacts); and
o Concentrations in the volume of business transacted with a
particular customer, supplier, lender, grantor or contributor; in
revenue from particular products, services or fund-raising events;
in the available sources of supply of materials, labor or
services, or of licenses or other rights used in the entity's
operation; or in the market or geographic area in which an entity
conducts its operations.
SOP 94-6 is effective for financial statements issued for fiscal years
ending after December 15, 1995.
Impact of Inflation
The consolidated financial statements presented herein have been prepared
in accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of financial institutions such as the
Bank are monetary in nature. As a result, interest rates have a more significant
impact on the Bank's performance than the effects of general levels of
inflation. Interest rates, however, do not necessarily move in the same
direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In a period of rapidly rising interest
rates, the liquidity and maturities structures of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans made by the Bank. The Bank is unable to determine the extent, if
any, to which properties securing the Bank's loans have appreciated in dollar
value due to inflation.
<PAGE>
BUSINESS
General
The Bank was organized under the name Owen County Savings and Loan
Association in 1911. In 1972, the Bank converted to a federally chartered
savings and loan and changed its name to Owen County Federal Savings and Loan
Association, and in 1989, the Bank converted to a federally chartered savings
bank known as Owen County Federal Savings Bank. In 1994, the Bank became an
Indiana savings bank known as Owen Community Bank, s.b. The Bank's principal
business consists of attracting deposits from the general public and originating
long-term adjustable-rate loans secured primarily by first mortgage liens on
one- to four-family real estate. The Bank's deposit accounts are insured up to
applicable limits by the SAIF of the FDIC.
The Bank is the oldest continuously operating financial institution
headquartered in Owen County, Indiana. Management believes the Bank has
developed a solid reputation among its loyal customer base because of its
commitment to personal service and its strong support of the local community.
The Bank offers a number of consumer and commercial financial services. These
services include: (i) residential real estate loans; (ii) indemnification
mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) Combo Loans;
(v) construction loans; (vi) share loans; (vii) nonresidential real estate
loans; (viii) multi-family loans; (ix) installment loans; (x) NOW accounts; (xi)
passbook savings accounts; and (xii) certificates of deposit. The Bank conducts
business out of its main office located in Spencer, Indiana. The Bank is and
historically has been a significant real estate mortgage lender in Owen County,
Indiana, originating approximately 14.4% of the mortgages recorded in Owen
County during the year ended December 31, 1995.
Lending Activities
The Bank historically has concentrated its lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
the Bank's loan origination activities, representing 72.1% of the Bank's total
loan portfolio at December 31, 1995. The Bank also offers mobile home loans,
multi-family mortgage loans, nonresidential real estate loans, Combo Loans and
consumer loans. Mobile home loans and Combo Loans totaled approximately 4.9% and
11.5% of the Bank's total loan portfolio at December 31, 1995, respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled approximately 1.7% and 6.2%, respectively, of the Bank's total loan
portfolio at December 31, 1995. Consumer loans constituted approximately 2.4% of
the Bank's total loan portfolio at December 31, 1995.
Under Indiana law, the total loans and extensions of credit by an
Indiana-chartered savings bank to a borrower outstanding at one time and not
fully secured may not exceed 15% of such bank's capital and unimpaired surplus.
An additional amount up to 10% of the bank's capital and unimpaired surplus may
be loaned to the same borrower if such loan is fully secured by a readily
marketable collateral having a market value, as determined by reliable and
continuously available price quotations, at least equal to the amount of such
additional loans outstanding.
As of December 31, 1995, the largest aggregate amount of loans which the
Bank had to any one borrower was approximately $475,000. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one
borrower limits. Although the Bank has historically been restricted in its
ability to originate nonresidential and multi-family loans by the loans-to-one
borrower limitation, the Bank does not believe that the loans-to-one borrower
limits will have a significant impact on its business, operations and earnings
following the Conversion because of the additional capital that the Bank
anticipates from the Conversion.
<PAGE>
Loan Portfolio Data. The following table sets forth the composition of the
Bank's loan portfolio by loan type and security type as of the dates indicated,
including a reconciliation of gross loans receivable after consideration of the
allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------ -------------------------------------------------------
1995 1995 1994 1993
------------------ ---------------- ----------------- -----------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- --------------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............... $19,764 72.06% $17,841 69.05% $15,621 72.52% $14,458 73.74%
Combo..................... 3,166 11.54 2,748 10.64 1,513 7.02 1,400 7.14
Nonresidential............ 1,693 6.17 2,933 11.35 2,346 10.89 1,797 9.16
Multi-family.............. 475 1.73 11 .04 12 .06 13 .07
Mobile home loans............ 1,349 4.92 1,615 6.25 1,464 6.80 1,592 8.12
Commercial and
industrial loans.......... 325 1.19 --- --- --- --- --- ---
Consumer loans............... 654 2.39 691 2.67 584 2.71 348 1.77
------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.. $27,426 100.00% $25,839 100.00% $21,540 100.00% $19,608 100.00%
======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate... $19,764 72.06% $17,841 69.05% $15,621 72.52% $14,458 73.74%
Mobile home and land...... 3,166 11.54 2,748 10.64 1,513 7.02 1,400 7.14
Nonresidental real estate. 1,693 6.17 2,933 11.35 2,346 10.89 1,797 9.16
Multi-family real estate.. 475 1.73 11 .04 12 .06 13 .07
Mobile home............... 1,349 4.92 1,615 6.25 1,464 6.80 1,592 8.12
Deposits.................. 212 .77 225 .87 159 .74 183 .93
Other security............ 767 2.81 466 1.80 425 1.97 165 .84
------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.. 27,426 100.00 25,839 100.00 21,540 100.00 19,608 100.00
Deduct:
Allowance for loan losses.... 100 .36 57 .22 26 .12 12 .06
Loans in process............. 123 .45 234 .91 35 .16 228 1.16
------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable...... $27,203 99.19% $25,548 98.87% $21,479 99.72% $19,368 98.78%
======= ====== ======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate........... $17,518 69.80% $17,736 75.37% $15,024 77.08% $14,062 79.59%
Fixed-rate................ 7,580 30.20 5,797 24.63 4,468 22.92 3,606 20.41
------- ------ ------- ------ ------- ------ ------- ------
Total................... $25,098 100.00% $23,533 100.00% $19,492 100.00% $17,668 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table sets forth certain information at June 30, 1995,
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on the contractual terms to maturity. Demand loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects prepayments will cause
actual maturities to be shorter.
<TABLE>
<CAPTION>
Due during years ended June 30,
Balance -------------------------------------------------------------------------
Outstanding 1999 2001 2006 2011
at June 30, to to to and
1995 1996 1997 1998 2000 2005 2010 following
----------- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................... $17,841 $ 32 $ 80 $ 9 $112 $2,233 $4,510 $10,865
Combo........................... 2,748 4 4 9 23 274 879 1,555
Nonresidential.................. 2,933 11 21 22 18 249 1,071 1,541
Multi-family.................... 11 --- --- --- --- --- --- 11
Mobile home loans.................. 1,615 --- 75 66 116 1,155 203 ---
Commercial and industrial loans.... --- --- --- --- --- --- --- ---
Consumer loans..................... 691 334 --- --- 115 83 148 11
------- ---- ---- ---- ---- ------ ------ -------
Total ............................ $25,839 $381 $180 $106 $384 $3,994 $6,811 $13,983
======= ==== ==== ==== ==== ====== ====== =======
</TABLE>
<PAGE>
The following table sets forth, as of June 30, 1995, the dollar amount of
all loans due after one year which have fixed interest rates and floating or
adjustable rates.
Due After
June 30, 1996
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Mortgage loans:
Residential..................... $4,694 $13,115 $17,809
Combo........................... 865 1,879 2,744
Nonresidential.................. 1,401 1,521 2,922
Multi-family.................... --- 11 11
Mobile home loans.................. 1,615 --- 1,615
Commercial and industrial loans.... --- --- ---
Consumer loans..................... 357 --- 357
------ ------- -------
Total......................... $8,932 $16,526 $25,458
====== ======= =======
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $19.8 million, or 72.1% of the Bank's portfolio
of loans at December 31, 1995, consisted of one- to four-family residential
mortgage loans, of which approximately 70.7% had adjustable rates. Pursuant to
federal regulations, such loans must require at least semi-annual payments and
be for a term of not more than 40 years, and, if the interest rate is
adjustable, they must be correlated with changes in a readily verifiable index.
The Bank currently offers three (3) types of adjustable-rate one- to
four-family residential mortgage loans ("ARMs"). The Bank offers ARMs which
adjust annually and are indexed to the Auction Average of One Year U.S. Treasury
Bills as published monthly by the FRB (the "Average 1 Year T-Bill"). The maximum
rate adjustment per year and over the life of the loan for the Bank's one-year
ARMs are 1%-1.5% and 4%-5%, respectively. These ARMs are generally underwritten
for terms of up to 25 years. The Bank also offers three-year and five-year ARMs
which are indexed to the National Average Contract Interest Rate for the
Purchase of Previously Occupied Homes as published by the Federal Housing
Finance Board (the "National Average Contract Rate") and have maximum rate
adjustments per adjustment period and over the life of the loan of 3% and 5%,
respectively. The Bank's three-year and five-year ARMs are generally
underwritten for terms of up to 25 years. The Bank will not lend more than
$75,000 for any residential loan with a Loan-to-Value Ratio of 90%.
The initial interest rate for each of the Bank's ARM loans is determined by
the Executive Committee of the Bank's Board of Directors based upon prevailing
rates in the Bank's market area and the Loan-to-Value Ratio. The interest rates
for loans with Loan-to-Value Ratios of greater than 80% and less than or equal
to 85% are typically 100 basis points higher than the same loans with
Loan-to-Value Ratios of 80% or less. The interest rates for loans with
Loan-to-Value Ratios of greater than 85% are generally 150 basis points higher
than the corresponding loans with Loan-to-Value Ratios of 80% or less. When the
initial interest rate is determined for an ARM loan, a margin is calculated by
subtracting the then-current index rate (i.e., the Average 1 Year T-Bill for
one-year ARMs and the National Average Contract Rate for three-year and
five-year ARMs) from the initial interest rate. Interest rate adjustments are
thereafter determined based on fluctuations of the index rate with a specific
loan's margin remaining constant.
Adjustable-rate loans decrease the risk associated with changes in interest
rates but involve other risks, primarily because as interest rates rise, the
payment by the borrowers may rise to the extent permitted by the terms of the
loan, thereby increasing the potential for default. Also, adjustable-rate loans
have features which restrict changes in interest rates on a short-term basis and
over the life of the loan. At the same time, the market value of the underlying
property may be adversely affected by higher interest rates.
The Bank also currently offers fixed-rate loans which provide for the
payment of principal and interest over a period not to exceed 20 years. At
December 31, 1995, 29.3% of the Bank's residential mortgage loans had fixed
rates of interest.
The Bank does not currently originate residential mortgage loans if the
Loan-to-Value Ratio exceeds 90% and does not currently require private mortgage
insurance on its residential single-family mortgage loans. The maximum
Loan-to-Value Ratio for non-owner occupied one- to four-family residential
mortgage loans is 80%.
Substantially all of the residential mortgage loans that the Bank
originates include "due-on-sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.
<PAGE>
The Bank's residential mortgage loans are not originated on terms and
conditions and using documentation that conform with the standard underwriting
criteria required to sell such loans in the secondary market. The Bank generally
retains its loans in its portfolio and does not anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."
At December 31, 1995, residential loans amounting to $103,000, or 0.38% of
total loans, were included in non-performing assets. See "-- Non-Performing and
Problem Assets."
The Bank offers mortgage loans for the construction of residential real
estate. Such loans are made with respect to owner-occupied residential real
estate and, in limited cases, to builders or developers constructing such
properties on a speculative investment basis (i.e., before the builder/developer
obtains a commitment from a buyer). Substantially all of such loans are made to
owners who are to occupy the premises.
These loans are written as permanent mortgage loans such that only
disbursed principal and interest are payable during the construction phase,
which is typically limited to six (6) months. Inspections are made prior to any
disbursement under a such a loan.
Mortgage loans written for the construction of residential real estate,
like construction loans generally, involve a higher level of risk than loans
secured by existing properties. For example, if a project is not completed and
the borrower defaults, the Bank may have to hire another contractor to complete
the project at a higher cost. Also, a house may be completed, but not salable,
resulting in the borrower defaulting and the Bank taking title to the house.
The Bank also offers ID Mortgage Loans. ID Mortgage Loans are similar to
home equity loans in that such loans create a line of credit secured by a real
estate mortgage against which a borrower may draw, and are typically written as
second mortgage loans. The Bank generally writes its ID Mortgage Loans so that
all future indebtedness of a borrower is secured by the ID Mortgage without the
necessity of recording an additional security instrument. ID Mortgage loans
carry fixed rates and are generally written for terms not exceeding 20 years.
The maximum Loan-to-Value Ratio for ID Mortgage Loans is 90% if the subject real
estate is not encumbered by another mortgage or the Bank holds the first
mortgage on the subject real estate, and 80% if another lender holds the first
mortgage on the subject real estate. If an appraisal has been completed on the
subject property within 5 years, the Bank does not require a new appraisal.
Combo Loans. At December 31, 1995, $3.2. million, or 11.5% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 68.9% had
adjustable rates. The Bank currently offers three (3) types of adjustable-rate
Combo Loans. The Bank's one-year adjustable-rate Combo Loans are indexed to the
Average 1 Year T-Bill and have maximum rate adjustments per year and over the
life of the loan of 1.5% and 3%, respectively. The Bank also offers three-year
and five-year adjustable-rate Combo Loans which are indexed to National Average
Contract Rate and have maximum rate adjustments per adjustment period and over
the life of the loan of 3% and 5%, respectively. The Bank's Combo Loans are
generally underwritten for terms of up to 25 years. The maximum Loan-to-Value
Ratio for a Combo Loan is 90%.
The initial interest rate for each of the Bank's Combo Loans is determined
by the Executive Committee of the Bank's Board of Directors based upon
prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The Bank
generally establishes its base interest rates for Combo Loans at a level 100
basis points higher than the corresponding rate for a residential ARM loan. The
interest rates for Combo Loans with a Loan-to-Value Ratio of more than 80% are
typically 100 basis points higher than the same Combo Loans with Loan-to-Value
Ratios of 80% or less. An interest rate margin is determined for each Combo Loan
in the same manner as described above for residential ARM loans.
The Bank also offers fixed-rate Combo Loans with terms of 10 years, 15
years and 20 years. At December 31, 1995, 31.1% of the Bank's Combo Loans had
fixed rates of interest.
Mobile Home Loans. The Bank originates loans for the purchase of new and
used mobile homes. At December 31, 1995, approximately $1.3 million, or 4.9% of
the Bank's portfolio of loans, consisted of mobile home loans. The Bank's mobile
home loans are fixed-rate loans with maximum terms of 15 years for new mobile
homes and 10 years for previously owned mobile homes. The maximum Loan-to-Value
Ratio for mobile home loans is 90%.
The Bank has emphasized mobile home loans because they generally have
shorter terms to maturity and higher yields than the Bank's residential mortgage
loans. In addition, the Bank is the primary lender in its market area making
mobile home loans, and mobile home lending significantly enhances the Bank's
compliance under the Community Reinvestment Act of 1977. The Bank anticipates
that it will continue to be an active originator of mobile home loans.
<PAGE>
Mobile home lending entails greater risk than traditional residential
mortgage lending. Loans secured by mobile homes involve more credit risk than
residential mortgage loans because of the type and nature of the collateral, the
fact that such loans generally are made to borrowers with low income levels, and
the fact that mobile homes tend to rapidly depreciate in value. In many cases,
any repossessed collateral for a defaulting mobile home loan will not provide an
adequate source of repayment of the outstanding loan balance because of improper
repair and maintenance of the underlying security. As of December 31, 1995, one
of the Bank's mobile home loans amounting to $11,000 was included in
non-performing assets.
Nonresidential Real Estate Loans. At December 31, 1995, $1.7 million, or
6.2% of the Bank's total loan portfolio, consisted of nonresidential real estate
loans, of which $910,000 constituted loans secured by unimproved land only. Of
these loans, $40,000 constituted a participation in a loan secured by
nonresidential real estate which was purchased from another financial
institution. See "-- Origination, Purchase and Sale of Loans." The
nonresidential real estate loans included in the Bank's portfolio are primarily
secured by real estate such as a motel, a funeral home and several churches. At
December 31, 1995, $462,000, or 27.3% of the Bank's nonresidential loan
portfolio, was secured by churches. The Bank currently originates nonresidential
real estate loans as five-year adjustable-rate loans indexed to the prime rate
with a margin of 1% to 2% above such index. In addition, the maximum rate
adjustment per adjustment period and over the life of the loan is 3% and 5%,
respectively. The Bank underwrites these loans on a case-by-case basis and, in
addition to its normal underwriting criteria, the Bank evaluates the borrower's
ability to service the debt from the net operating income of the property. The
largest nonresidential real estate loan on December 31, 1995 was $242,000. None
of the Bank's nonresidential real estate loans was included in non-performing
assets at that date. The loans-to-one borrower limitation has historically
restricted the Bank's ability to originate nonresidential loans. However, the
additional capital from the Conversion will permit the Bank to emphasize
nonresidential real estate loans and thus originate more nonresidential real
estate loans following the Conversion.
Loans secured by nonresidential real estate generally are larger than
one-to four-family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Multi-Family Loans. Approximately $475,000, or 1.7% of the Bank's portfolio
of loans at December 31, 1995, consisted of a multi-family loan secured by an
apartment complex. This multi-family loan was fully performing as of December
31, 1995. The Bank's multi-family loans are written for maximum terms of 20
years, and the Bank does not originate multi-family loans if the Loan-to-Value
Ratio exceeds 80%.
Consumer Loans. The Bank's consumer loans, consisting primarily of
installment and share loans, aggregated $654,000 as of December 31, 1995, or
2.4% of the Bank's total loan portfolio. The Bank consistently originates
consumer loans to meet the needs of its customers and to assist in meeting its
asset/liability management goals. All of the Bank's consumer loans are
fixed-rate loans, and substantially all are secured loans.
The Bank's installment loans are fixed-rate loans generally secured by
collateral, including automobiles, and are made for maximum terms of up to five
years (depending on the collateral). The Bank generally will not make
installment loans in amounts greater than $5,000.
The Bank's share loans are made up to 80% of the original account balance
and accrue at a rate of 2% over the underlying certificate of deposit rate.
Interest on share loans is paid semi-annually.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At December 31, 1995, consumer loans amounting to $4,000 were
included in non-performing assets. See "--Non-Performing and Problem Assets."
There can be no assurances, however, that additional delinquencies will not
occur in the future.
<PAGE>
Origination, Purchase and Sale of Loans. The Bank currently originates its
mortgage loans pursuant to its own underwriting standards which are not in
conformity with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it
desired to sell its mortgage loans, the Bank might therefore experience some
difficulty selling such loans quickly in the secondary market. The Bank has no
intention, however, of attempting to sell such loans. The Bank's ARMs vary from
secondary market criteria because, among other things, the Bank does not require
current property surveys in most cases, does not require escrow accounts for
taxes and insurance and does not permit the conversion of those loans to fixed
rate loans in the first three years of their term.
The Bank confines its loan origination activities primarily in Owen County.
At December 31, 1995, no loans were secured by property located outside of
Indiana. The Bank's loan originations are generated from referrals from real
estate dealers and existing customers, and newspaper and periodical advertising.
All loan applications are processed and underwritten at the Bank's main office.
The Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, the Bank studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. Mortgage loans up to $150,000 and mobile home loans may be approved
by the Executive Committee. All mortgage loans for more than $150,000 must be
approved in advance by the Board of Directors. Consumer loans up to $5,000 may
be approved by the Bank's Senior Installment Loan Officer. Consumer loans for
more than $5,000 must be approved by the Executive Committee.
The Bank generally requires appraisals on all property securing its loans
and requires title insurance and a valid lien on its mortgaged real estate.
Appraisals for residential real property valued at less than $250,000 are
performed by an in-house appraiser. Appraisals for residential properties valued
in excess of $250,000 and appraisals for all nonresidential real estate are
performed by an appraiser who is a state-licensed residential appraiser. The
Bank requires fire and extended coverage insurance in amounts at least equal to
the principal amount of the loan and requires vandalism coverage on all mobile
home loans. It also requires flood insurance to protect the property securing
its interest if the property is in a flood plane. The Bank does not require
escrow accounts to be established by its borrowers for the payment of insurance
premiums or taxes and does not require private mortgage insurance for its loans.
The Bank's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The Bank historically has sold participations in its mortgage loans on a
limited number of occasions to ensure compliance with the loans-to-one borrower
restrictions. See "Regulation -- Loans-to-One Borrower." The Bank also
occasionally purchases participations in nonresidential real estate and
multi-family loans from other financial institutions. At December 31, 1995, the
Bank held in its loan portfolio two participations in mortgage loans aggregating
$51,700 that it had purchased, both of which were serviced by others.
<PAGE>
The following table shows loan origination, purchase and repayment activity
for the Bank during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------ ------------------------------
1995 1994 1995 1994 1993
(In thousands)
Gross loans receivable
<S> <C> <C> <C> <C> <C>
at beginning of period........................ $25,839 $21,540 $21,540 $19,608 $17,241
Originations:
Mortgage loans:
Residential................................. 3,659 3,251 7,099 6,265 6,838
Other....................................... 58 6 48 248 244
------- ------- ------- ------- -------
Total mortgage loans...................... 3,717 3,257 7,147 6,513 7,082
------- ------- ------- ------- -------
Mobile home loans............................. 63 189 286 269 198
------- ------- ------- ------- -------
Consumer loans:
Installment................................. 510 297 578 338 226
Share....................................... 80 35 132 254 90
Home equity................................. --- --- --- --- 10
------- ------- ------- ------- -------
Total consumer loans...................... 590 332 710 592 326
------- ------- ------- ------- -------
Total originations................... 4,370 3,778 8,143 7,374 7,606
Purchases (sales) of participation loans...... (125) 62 62 --- 40
Repayments and other deductions............... 2,658 1,899 3,906 5,442 5,279
------- ------- ------- ------- -------
Gross loans receivable at end of period....... $27,426 $23,481 $25,839 $21,540 $19,608
======= ======= ======= ======= =======
</TABLE>
Origination and Other Fees. The Bank realizes income from origination fees,
late charges, checking account service charges, and fees for other miscellaneous
services. The Bank does not currently charge any points on its loans. However,
the Bank currently charges $300 plus closing costs on its mortgage loans. Late
charges are generally assessed if payment is not received within a specified
number of days after it is due. The grace period depends on the individual loan
documents.
The Bank does not maintain any automated teller machines ("ATMs") and has
not offered ATM cards to its customers. However, during the first quarter of
1996, the Bank began issuing ATM cards to interested customers. The Bank's ATM
cards will permit customers to use ATMs operating in the MAC(R) regional network
and the CIRRUS(R) nationwide network. The Bank does not expect to derive any
income from the ATM cards upon their issuance.
Mortgage-Backed Securities. At December 31, 1995, the Bank had $1.4 million
of mortgage-backed securities outstanding, all of which were classified as
available for sale. These fixed-rate mortgage-backed securities may be used as
collateral for borrowings and, through repayments, as a source of liquidity.
Mortgage-backed securities generally offer yields above those available for
investments of comparable credit quality and duration.
<PAGE>
The following table sets forth the carrying value and market value of the
Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
---------------------------------------- --------------------------------------------------------------
1995 1994 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
Carrying Market Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(In thousands)
Mortgage-backed securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity........ $ --- $ --- $1,564 $1,460 $1,477 $1,462 $1,636 $1,580 $1,156 $1,210
Available for sale...... 1,359 1,359 --- --- --- --- --- --- --- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage-backed
securities............ $1,359 $1,359 $1,564 $1,460 $1,477 $1,462 $1,636 $1,580 $1,156 $1,210
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 1995.
Amount at June 30, 1995, which matures in
-------------------------------------------
1998 1999
-------------------- -------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- ------- -------- -------
(Dollars in thousands)
Mortgage-backed securities
held to maturity.............. $963 5.29% $514 7.00%
==== ==== ==== ====
<PAGE>
The following table sets forth the changes in the Bank's mortgage-backed
securities portfolio for the six-month periods ended December 31, 1995 and 1994
and for the years ended June 30, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended December 31, June 30,
-------------------- ------------------------------------------
1995 1994 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance................. $1,477 $1,636 $1,636 $1,156 $1,483
Purchases......................... --- --- --- 1,020 ---
Sales............................. --- --- --- --- ---
Monthly repayments................ (111) (73) (161) (540) (327)
Premium and discount
amortization, net.............. --- --- 2 --- ---
Unrealized loss on securities
available for sale............. (7) --- --- --- ---
------ ------ ------ ------ ------
Ending balance.................... $1,359 $1,563 $1,477 $1,636 $1,156
====== ====== ====== ====== ======
</TABLE>
<PAGE>
Non-Performing and Problem Assets
Mortgage loans are reviewed by the Bank on a regular basis and are placed
on a non-accrual status when the loans become contractually past due ninety days
or more. It is the policy of the Bank that all earned but uncollected interest
on all loans be reviewed monthly to determine if any portion thereof should be
classified as uncollectible for any loan past due less than 90 days. Delinquency
notices are sent three times per month with respect to all mortgage loans for
which payments have not been received. Contact by phone or in person is made, if
feasible, with respect to all such loans. When loans are forty days in default,
an additional delinquency notice is sent and personal contact is made with the
borrower to establish an acceptable repayment schedule. When loans are sixty
days in default, contact is again made with the borrower to establish an
acceptable repayment schedule. The Bank also provides free in-house credit
counseling to all borrowers. Management is authorized to commence foreclosure
proceedings for any loan upon making a determination that it is prudent to do
so. All loans for which foreclosure proceedings have been commenced are placed
on non-accrual status.
Non-performing assets. At December 31, 1995, $118,000, or 0.35% of the
Bank's total assets, were non-performing assets (loans delinquent more than 90
days and non-accruing loans) compared to $100,000, or 0.32%, of the Bank's total
assets at June 30, 1995. At December 31, 1995, residential loans and consumer
loans accounted for 87% and 13%, respectively, of non-performing assets. There
were no REO or non-accruing investments at December 31, 1995. As of the same
date, the Bank held $12,800 of repossessed consumer collateral.
The table below sets forth the amounts and categories of the Bank's
non-performing assets.
<TABLE>
<CAPTION>
At June 30,
At December 31, ------------------------------------------
1995 1995 1994 1993
--------------- ------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-accruing loans (1)......................... $118 $100 $ 27 $ ---
Total non-performing assets.................... $118 $100 $ 27 $ ---
Non-performing loans to total loans............ .43% .39% .13% ---%
Non-performing assets to total assets.......... .35 .32 .10 ---
</TABLE>
- ---------------
(1) The Bank generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At December 31, 1995,
$103,000 of non-accruing loans were residential loans, $11,000 was a mobile
home loan and $4,000 were consumer loans. Additional interest income that
would have been recorded had income on nonaccruing loans been considered
collectible and accounted for in accordance with their original terms is
immaterial for each period.
<PAGE>
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
December 31, 1995 1995 1994 1993
------------------------- ------------------------ ------------------------ -------------------------
Percent Percent Percent Percent
of total of total of total of total
Number Amount loans Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
Loans delinquent
for (1):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-89 days.......... 32 $659 2.41% 33 $730 2.85% 42 $1,018 4.73% 35 $833 4.30%
90 days and over.... 7 118 .43 6 100 .39 3 27 .13 1 --- ---
-- ------ ---- -- ---- ---- -- ------ ---- -- ---- ----
Total delinquent
loans.......... 39 $777(2) 2.84% 39 $830 3.24% 45 $1,045 4.86% 36 $833 4.30%
== ====== ==== == ==== ==== == ====== ==== == ==== ====
</TABLE>
- ----------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) Of such amount, $528,000 consists of residential real estate loans and
$249,000 consists of nonresidential real estate and consumer loans.
Classified assets. The Bank's Asset Classification Policy provides for the
classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
At December 31, 1995, the aggregate amount of the Bank's classified assets,
and of the Bank's general and specific loss allowances were as follows:
At December 31, 1995
--------------------
(In thousands)
Substandard loans....................................... $ 439
Doubtful loans.......................................... 2
Loss loans.............................................. ---
Special mention loans................................... 113
-----
Total classified loans............................... $ 554
=====
General loss allowances................................. $ 100
Specific loss allowances................................ ---
-----
Total allowances..................................... $ 100
=====
<PAGE>
The Bank regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Not all
of the Bank's classifed assets constitute non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with management's review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, the Bank's allowance for loan losses is adequate to absorb anticipated
future losses from loans at December 31, 1995. However, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect the Bank's loan
portfolio.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance for loan losses during the six-month periods ended December 31,
1995 and 1994 and during the past five (5) one-year periods ended June 30, 1995.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
----------------- ---------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period................................ $ 57 $ 26 $ 26 $ 12 $ 13 $ 14 $14
Less charge offs:
Consumer loans........................... --- (6) (6) (1) (8) (3) (8)
Add recoveries:
Consumer loans........................... --- 2 1 1 --- 2 5
----- ---- ---- ---- ---- ---- ---
Net (charge-offs) recoveries............. --- (4) (5) --- (8) (1) (3)
----- ---- ---- ---- ---- ---- ---
Provisions for losses on loans.............. 43 21 36 14 7 --- 3
----- ---- ---- ---- ---- ---- ---
Balance of allowance at end of period....... $100 $ 43 $ 57 $ 26 $ 12 $ 13 $14
==== ==== ===== ==== ==== ==== ===
Net charge-offs to total average
loans receivable for period............ ---% ---% .02% ---% .04% .01% .02%
Allowance at end of period to
net loans receivable at end
of period (1).......................... .37% .18% .22% .12% .06% .08% .09%
Allowance to total non-performing
loans at end of period................. 84.75% 53.75% 57.00% 108.33% ---% ---% 27.45%
</TABLE>
- ----------
(1) Total loans less loans in process.
<PAGE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the Bank's allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
---------------------------------- ----------------------------------------------------------------
1995 1994 1995 1994 1993
---------------- ---------------- ----------------- -------------------- -------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential.....................$ --- 72.06% $--- 73.13% $--- 69.05% $--- 72.52% $--- 73.74%
Combo........................... 8 11.54 --- 8.94 7 10.64 --- 7.02 --- 7.14
Nonresidential.................. 4 6.17 --- 8.76 7 11.35 --- 10.89 --- 9.16
Multi-family.................... 5 1.73 --- .05 --- .04 --- .06 --- .07
Mobile home loans............... 13 4.92 --- 6.17 12 6.25 --- 6.80 --- 8.12
Commercial and industrial
loans........................ --- 1.19 --- --- --- --- --- --- --- ---
Consumer loans.................. 16 2.39 17 2.95 17 2.67 15 2.71 8 1.77
Unallocated..................... 54 --- 26 14 --- 11 --- 4 ---
---- ------ --- ------ --- ------ --- ------ --- ------
Total........................ $100 100.00% $43 100.00% $57 100.00% $26 100.00% $12 100.00%
==== ====== === ====== === ====== === ====== === ======
</TABLE>
<PAGE>
Investments and FHLB Stock
The Bank's Investment Policy, which is established and implemented by the
Bank's Executive Committee, is designed primarily to maximize the yield on the
investment portfolio subject to minimal liquidity risk, default risk, interest
rate risk, and prudent asset/liability management.
The Bank's investment portfolio consists of U.S. government agency
securities, state and municipal bonds and FHLB stock. At December 31, 1995,
approximately $2.9 million, including securities at market value for those
classified as available for sale, or 8.6% of the Bank's total assets, consisted
of such investments. All of the Bank's securities, except for FHLB stock, were
classified as available for sale at December 31, 1995.
The following table sets forth the carrying value and market value of the
Bank's investments at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
---------------------------------------- --------------------------------------------------------------
1995 1994 1995 1994 1993
------------------ ------------------- ------------------- ------------------ -----------------
Carrying Market Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies........ $2,271 $2,271 $ 602 $ 602 $ 934 $ 934 $ --- $ --- $ --- $ ---
State and municipal..... 347 347 --- --- --- --- --- --- --- ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total securities
available for sale.. 2,618 2,618 602 602 934 934 --- --- --- ---
Securities held to maturity:
Federal agencies........ --- --- 1,564 1,460 1,477 1,462 2,137 2,093 1,658 1,753
State and municipal..... --- --- 350 341 350 346 277 272 175 179
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total securities
held to maturity.... --- --- 1,914 1,801 1,827 1,808 2,414 2,365 1,833 1,932
FHLB stock (2)............. 260 260 222 222 250 250 222 222 222 222
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total investments..... $2,878 $2,878 $2,738 $2,625 $3,011 $2,992 $2,636 $2,587 $2,055 $2,154
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Upon adoption of SFAS No. 115 as of July 1, 1994, securities available for
sale are recorded at market value in the financial statements.
(2) Market value approximates carrying values.
<PAGE>
The following table sets forth investment securities and FHLB stock which
mature during each of the periods indicated and the weighted average yields for
each range of maturities at June 30, 1995.
<TABLE>
<CAPTION>
Amount at June 30, 1995, which matures in
One One to Five to Over
Year or Less Five Years Ten Years Ten Years
--------------------- -------------------- ------------------- --------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale :
Federal agencies................ $500 7.75 % $ 434 8.23% $ --- --- % $ --- ---%
Securities held to maturity:
Federal agencies................ --- --- 1,477 5.89 --- --- --- ---
State and municipal............. 35 5.90 315 4.42 --- --- --- ---
---- ---- ------ ---- ----- --- ---- ----
Total securities
held to maturity........... 35 5.90 1,792 5.63 --- --- --- ---
FHLB stock...................... --- --- --- --- --- --- 250 7.75
---- ---- ------ ---- ----- --- ---- ----
Total investments............. $535 7.63 % $2,226 6.14% $ --- --- % $250 7.75%
==== ==== ====== ==== ===== === ==== ====
</TABLE>
Management intends to temporarily hold the proceeds from the Conversion in
U.S. government securities, other U.S. agency securities, equity securities and
mortgage-backed securities. See "Use of Proceeds."
Sources of Funds
General. Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Bank derives funds from scheduled loan payments, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the FHLB of Indianapolis
may be used in the short-term to compensate for reductions in deposits or
deposit inflows at less than projected levels. The Bank rarely borrows on a
longer-term basis, for example, to support expanded activities or to assist in
its asset/liability management.
Deposits. Deposits are attracted, principally from within Owen County,
through the offering of a broad selection of deposit instruments including
fixed-rate certificates of deposit, NOW and other transaction accounts, and
savings accounts. The Bank does not actively solicit or advertise for deposits
outside of Owen County. Substantially all of the Bank's depositors are residents
of that county. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank does not pay a fee for any deposits it receives.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and applicable regulations. The Bank relies, in
part, on customer service and long-standing relationships with customers to
attract and retain its deposits, but also closely prices its deposits in
relation to rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, have been and will continue to be significantly
affected by market conditions.
<PAGE>
An analysis of the Bank deposit accounts by type, maturity, and rate at
December 31, 1995, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1995 Deposits Rate
- ----------------------------- ------- ------------ -------- --------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Passbook savings accounts......................... $ 10 $ 3,761 15.11% 3.00%
NOW and other transaction accounts................ 50 2,472 9.93 2.45
Total withdrawable................................... $ 6,233 25.04 2.79
------- ------
Certificates (original terms):
91 days........................................... 1,000 88 .35 4.00
6 months.......................................... 1,000 766 3.08 5.00
12 months......................................... 1,000 7,525 30.23 6.44
24 months......................................... 1,000 2,611 10.49 6.24
30 months......................................... 1,000 1,603 6.44 4.58
36 months......................................... 1,000 339 1.36 5.43
48 months......................................... 1,000 1,355 5.44 5.63
60 months......................................... 1,000 4,375 17.57 5.92
------- ------
Total certificates................................... 18,662 74.96 6.01
------- ------
Total deposits....................................... $24,895 100.00% 5.18%
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank's at the dates indicated:
At June 30,
At December 31, ----------------------------------
1995 1995 1994 1993
------- ------- ------- -------
(In thousands)
4.00% and under.......... $ 349 $ 1,169 $ 4,790 $ 3,278
4.01 - 6.00 %............ 11,318 10,053 8,231 5,557
6.01 - 8.00%............. 6,995 5,507 603 2,050
8.01 - 10.00%............ --- --- 283 1,816
------- ------- ------- -------
Total .................. $18,662 $16,729 $13,907 $12,701
======= ======= ======= =======
<PAGE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1995, and the total amount maturing thereafter. Matured
certificates which have not been renewed as of December 31, 1995, have been
allocated based upon certain rollover assumptions:
Amounts At
December 31, 1995, Maturing in
----------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
4.00% and under............ $ 349 $ --- $ --- $ ---
4.01 - 6.00 %.............. 5,547 1,575 3,339 857
6.01-8.00%................. 4,125 1,981 --- 889
------- ------ ------ ------
Total .................... $10,021 $3,556 $3,339 $1,746
======= ====== ====== ======
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1995.
Maturity (In thousands)
Three months or less....................................... $ ---
Greater than three months
through six months.................................... 704
Greater than six months
through twelve months................................. 100
Over twelve months......................................... 1,444
Total................................................. $2,248
<PAGE>
The following table sets forth the dollar amount of savings in the
various types of deposits programs offered by the Bank at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
<TABLE>
<CAPTION>
Deposit Activity
---------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
December 31, % of June 30, June 30, % of June 30,
1995 Deposits 1995 1995 Deposits 1994
------------ -------- ---- ---- -------- ----
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Passbook savings accounts............ $ 3,761 15.11% $ 46 $ 3,715 16.51% $(1,412)
NOW accounts......................... 2,472 9.93 416 2,056 9.14 (361)
------- ------ ------ ------- ------ -------
Total withdrawable...................... 6,233 25.04 462 5,771 25.65 (1,773)
------- ------ ------ ------- ------ -------
Certificates (original terms):
91 days.............................. 88 .35 14 74 .33 4
6 months............................. 766 3.08 (179) 945 4.20 (213)
12 months............................ 7,525 30.23 441 7,084 31.48 3,682
24 months............................ 2,611 10.49 1,939 672 2.99 367
30 months............................ 1,603 6.44 (223) 1,826 8.12 (796)
36 months............................ 339 1.36 (46) 385 1.71 211
48 months............................ 1,355 5.44 (243) 1,598 7.10 (604)
60 months............................ 4,375 17.57 230 4,145 18.42 171
------- ------ ------ ------- ------ -------
Total certificates...................... 18,662 74.96 1,933 16,729 74.35 2,822
------- ------ ------ ------- ------ -------
Total deposits.......................... $24,895 100.00% $2,395 $22,500 100.00% $ 1,049
======= ====== ====== ======= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deposit Activity
-----------------------------------------------------------------
Increase
(Decrease)
Balance at from Balance at
June 30, % of June 30, June 30, % of
1994 Deposits 1993 1993 Deposits
---------- -------- ---- ---- --------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C>
Passbook savings accounts............ $ 5,127 23.90% $ (21) $ 5,148 25.52%
NOW accounts......................... 2,417 11.27 92 2,325 11.52
------- ------ ------- ------- ------
Total withdrawable...................... 7,544 35.17 71 7,473 37.04
------- ------ ------- ------- ------
Certificates (original terms):
91 days.............................. 70 .33 (42) 112 .56
6 months............................. 1,158 5.40 (49) 1,207 5.98
12 months............................ 3,402 15.86 138 3,264 16.18
24 months............................ 305 1.42 245 60 .30
30 months............................ 2,622 12.22 (711) 3,333 16.52
36 months............................ 174 .81 91 83 .41
48 months............................ 2,202 10.26 (1,415) 3,617 17.93
60 months............................ 3,974 18.53 2,949 1,025 5.08
------- ------ ------- ------- ------
Total certificates...................... 13,907 64.83 1,206 12,701 62.96
------- ------ ------- ------- ------
Total deposits.......................... $21,451 100.00% $ 1,277 $20,174 100.00%
======= ====== ======= ======= ======
</TABLE>
<PAGE>
During 1996, the Bank expects to begin offering to its customers a new
deposit product called the "Money Management Account." The Money Management
Account will be similar to a money market checking account, but customers will
not have check writing privileges. Funds may be transferred from
non-interest-bearing accounts or interest-bearing accounts paying lower rates
into the Money Management Account. Funds may also be transferred from the Money
Management Account into other accounts at the Bank when such funds are needed by
the customer. The number of fund transfers per month will be limited by the
Bank, and the Money Management Account will have a minimum required balance of
$5,000.
In the unlikely event of liquidation of the Bank after the Conversion,
certain deposit account holders will be entitled to full payment of their
accounts prior to any payment being made to the Holding Company as the holder of
the Bank's capital stock. See "The Conversion -- Principal Effects of Conversion
- -- Effect on Liquidation Rights."
Borrowings. The Bank focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings. At
December 31, 1995, the Bank had $5.2 million in borrowings from the FHLB of
Indianapolis which mature on various dates primarily during the years 1996
through 2000 and have interest rates ranging from 6.14% to 6.48%. The Bank does
not anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. The Bank had $22.2 million in eligible assets
available as collateral for advances from the FHLB of Indianapolis as of
December 31, 1995. Based on the Bank's blanket collateral agreements, advances
from the FHLB of Indianapolis must be collateralized by 160% of eligible assets.
Therefore, the Bank's eligible collateral would have supported approximately
$13.9 million in advances from the FHLB of Indianapolis as of December 31, 1995.
However, the Bank's Board of Directors has by resolution limited the amount of
authorized borrowings to $7 million at December 31, 1995.
The following table presents certain information relating to the Bank's
borrowings at or for the six months ended December 31, 1995 and 1994 and at or
for the year ended June 30, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
At or for the
Six Months At or for the Year
Ended December 31, Ended June 30,
------------------------ -------------------------------
1995 1994 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C> <C> <C>
Average balance outstanding.......................... $5,167 $3,000 $3,321 $ 752 $ 417
Maximum amount outstanding at any
month-end during the period..................... 5,200 4,000 5,000 1,500 5,000
Weighted average interest rate
during the period............................... 6.31% 5.13% 6.03% 3.54% 2.88%
Weighted average interest rate
at end of period................................ 6.22 5.85 6.36 4.53 3.90
</TABLE>
<PAGE>
Properties
The Bank conducts its business from its main office at 279 East Morgan
Street, Spencer, Indiana 47460. The Bank owns its main office.
The following table provides certain information with respect to the Bank's
office as of December 31, 1995:
<TABLE>
<CAPTION>
Net Book Value
of Property,
Owned or Year Total Furniture & Approximate
Description and Address Leased Opened Deposits Fixtures Square Footage
- ----------------------- ------ ------ -------- -------- --------------
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
279 East Morgan Street Owned 1987 $24,895 $552 5,100
Spencer, IN 47460
</TABLE>
As of December 31, 1995, the Bank also owned a parcel of real estate
located across the street from its office which is utilized for employee
parking. In January, 1996, the Bank purchased another parcel of real estate
located adjacent to its office (the "West Parcel"). The tenants of the building
currently situated on the West Parcel are expected to vacate the premises in
May, 1996, and the building is expected to be demolished thereafter. The Bank
has agreed to sell one-half of the West Parcel to a local insurance agency. The
Bank's Board of Directors is presently considering possible improvements to the
remaining one-half of the West Parcel, including a possible office facility for
the Holding Company and additional storage and office space for the Bank.
<PAGE>
The Bank owns computer and data processing equipment which is used for
transaction processing, loan origination, and accounting.
The Bank has also contracted for the data processing and reporting services
of On-Line Financial Services, Inc. in Oak Brook, Illinois, which was acquired
in 1995 by Argo Federal Savings Bank, FSB. The cost of these data processing
services is approximately $4,250 per month.
Service Corporation Subsidiary
BSF, Inc., the Bank's service corporation subsidiary ("BSF"), was organized
in 1989 and has historically engaged in the purchasing and developing of large
tracts of real estate. After land was acquired, BSF subdivided the real estate
into lots, made improvements such as streets and sold individual lots, usually
on contract. Each subdivision has separate restrictive covenants, but most
permit mobile or modular homes. Each of BSF's subdivisions is described in
detail below.
On April 6, 1989, BSF purchased the 128 acre 10 O'Clock Line subdivision in
Owen County for $110,000. The purchase was funded by a capital infusion from the
Bank. At that time, the appraised value of the land was $180,000. The property
was divided into 19 separate tracts and sold on contract to buyers. The actual
selling price per acre of tracts sold was slightly higher than the original
predicted selling price. The total sales price for all tracts of land was over
$300,000. At December 31, 1995, seven of the contracts have been paid and title
to the respective tracts of land have passed to the buyers.
A second piece of property in Owen County totalling approximately 160
acres, the Autumn Hill Subdivision, was purchased on contract by BSF for $96,000
on September 21, 1990. BSF anticipates that the contract for this parcel will be
paid in full in December, 1996. The appraised value at the time of sale was
$110,000. The area was divided into 23 separate tracts of land, 21 of which had
been sold as of December 31, 1995, for an aggregate price of $245,850.
On May 21, 1991, BFS purchased a 215 acre tract of heavily wooded land in
Greene County, Indiana, now known as the Greene Woods subdivision, for $92,500.
BSF divided this tract into sixteen parcels, all of which had been sold on
contract at December 31, 1995, and built one large lake and three small lakes in
this subdivision. As of December 31, 1995, ten of the Greene Woods contracts had
been paid in full, and title to the corresponding parcels had been transferred
to the purchasers. The aggregate sales price for the sixteen parcels in the
Greene Woods subdivision was $257,605.
On May 8, 1992, BFS purchased approximately 60 acres of land now known as
the Watkins Farm subdivision for $32,000. This property is also located in
Greene County, Indiana. Prior to dividing this parcel into the three existing
tracts of land, BSF cleared and sold approximately $26,000 of timber. As of
December 31, 1995, BSF had sold one of these tracts for cash and the other two
tracts on contract. The aggregate sales price for these three parcels totalled
$86,157.
On May 21, 1993, BSF purchased approximately 16 acres of land in Owen
County for $58,500. BSF divided this property, now known as the County Line
East, Phase I subdivision, into thirteen separate parcels and installed
underground power, telephone, cable television and water lines. As of December
31, 1995, ten parcels had been sold on contract, all of which had been paid in
full, for an aggregate sales price of $308,500.
On November 29, 1993, BSF purchased approximately thirty acres of land
located in Owen County for $20,359. This land, now known as the Coon Path
subdivision, was divided into ten separate tracts of land, eight of which
remained unsold at December 31, 1995. The aggregate sales price for the two
parcels which had been sold at December 31, 1995 totaled $26,000.00. At December
31, 1995, BSF's total investment in the Coon Path subdivision was approximately
$36,175.
On February 6, 1992, BSF purchased four contracts with an aggregate balance
of $123,875 from an Owen County couple for a discounted principal amount of
$87,500. These contracts have contractual interest rates of 11% and are expected
to yield BSF approximately 18% on its investment. BSF also holds a fifth
contract which was purchased from a probate estate in 1992. BSF also anticipates
an 18% return on this purchased contract.
BSF, from time to time, keeps a number of its tracts for mobile home
repossession. BSF purchases repossessed mobile homes from the Bank at book
value. The mobile homes are then placed on the vacant tracts of land and sold by
BSF, thereby protecting the Bank from related losses. Currently, the Bank has no
mobile homes on lots waiting for sale.
<PAGE>
BSF pays the Bank rent of $500 per month for the use of its facilities and
management and staff support. The operations of BSF are managed by the Bank's
Chairman, Frank R. Stewart. As consideration for his services and in addition to
the annual salary paid by the Bank, Mr. Stewart has historically been paid 25%
of BSF's pretax net income. However, beginning in January, 1996, Mr. Stewart is
no longer receiving compensation from BSF. For a description of an employment
agreement which the Bank entered into with Mr. Stewart effective January 1,
1996, see "Executive Compensation and Related Transactions -- Employment
Contracts." All of the Bank's directors serve as directors of BSF, and BSF's
executive officers are as follows:
Frank R. Stewart President
Robert W. Raper Vice President
Charles W. Chambers Secretary and Treasurer
In connection with the Bank's conversion to an Indiana mutual savings bank,
the FDIC required the Bank to (i) immediately cease BSF's land acquisitions,
(ii) divest BSF's non-conforming real estate holdings within five years (or by
November 16, 2000), provided, however, the Bank is not precluded from requesting
an extension of the divestiture period, and (iii) maintain capital at levels
sufficient to classify the Bank as a well-capitalized institution. The FDIC's
authorization for the Bank and BSF to undertake the required divestiture of
BSF's non-conforming real estate holdings over a five-year period is conditioned
on, among other things, BSF continuing to be satisfactorily capitalized and
operated separately for the Bank, and the Bank and BSF complying with Sections
23A and 23B of the Federal Reserve Act in connection with future transactions
between the Bank and BSF. BSF is currently completing the divestiture of its
real estate holdings, and upon such divestiture is expected to dissolve. It is
anticipated that this divestiture will be accomplished through the sale of the
parcels to BSF's contract purchasers who will obtain mortgage loans from the
Bank to facilitate their purchase of the parcels. As parcels are purchased by
BSF's contract purchasers, BSF and such purchasers will terminate the
corresponding land contracts. The Bank currently anticipates that all
non-conforming real estate will be sold prior to November 16, 2000 as required
by the FDIC.
At December 31, 1995, the Bank's aggregate investment in BSF was $727,302.
The consolidated statements of income of the Bank and its subsidiary included
elsewhere herein include the operations of BSF. All significant intercompany
balances and transactions have been eliminated in the consolidation. The
following are a condensed balance sheet for BSF at December 31, 1995 and at June
30, 1995, 1994 and 1993, and a condensed income statement for BSF for the six
months ended December 31, 1995 and 1994 and for the years ended June 30, 1995,
1994 and 1993.
Condensed Balance Sheet
-----------------------------------------
December 31, June 30,
1995 1995 1994 1993
---- ---- ---- ----
(unaudited) (In thousands)
Assets:
Cash.............................. $ 54 $ 57 $ 52 $ 27
Loans, net........................ 571 644 693 629
Land acquired for development..... 200 188 153 171
---- ---- ---- ----
Total assets.................. $825 $889 $898 $827
==== ==== ==== ====
Liabilities:
Other borrowings.................. $ 20 $ 29 $ 80 $115
Other liabilities................. 78 159 176 161
---- ---- ---- ----
Total liabilities............. 98 188 256 276
Equity Capital:
Retained earnings................. 727 701 642 551
---- ---- ---- ----
$825 $889 $898 $827
==== ==== ==== ====
<PAGE>
<TABLE>
<CAPTION>
Condensed Income Statement
---------------------------------------------------------
Six Months Ended Year Ended
December 31, June 30,
------------------ ------------------------------
1995 1994 1995 1994 1993
---- ---- ---- ---- ----
(unaudited) (In thousands)
<S> <C> <C> <C> <C> <C>
Interest income......................... $ 45 $ 43 $ 88 $ 91 $ 70
Interest expense........................ 1 3 9 8 8
----- ----- ----- ----- -----
Net interest income.................. 44 40 79 83 62
Income from sale of real estate......... 19 7 78 144 117
Non-interest expense:
Salaries and employee benefits....... 2 2 4 4 2
Printing and office supplies......... 3 3 7 7 8
Management fees...................... 14 10 33 50 34
Other expenses....................... 1 6 14 19 6
----- ----- ----- ----- -----
Total non-interest expense....... 20 21 58 80 50
Income before income tax................ 43 26 99 147 129
Income tax expense................... 17 12 40 56 50
----- ----- ----- ----- -----
Net income....................... $ 26 $ 14 $ 59 $ 91 $ 79
===== ===== ===== ===== =====
</TABLE>
Employees
As of January 31, 1996, the Bank employed 14 persons on a full-time basis
and 2 persons on a part-time basis. None of the Bank's employees is represented
by a collective bargaining group. Management considers its employee relations to
be excellent.
The Bank's employee benefits for full-time employees include, among other
things, a Pentegra (formerly known as Financial Institutions Retirement Fund)
defined benefit pension plan ("Pension Plan"), a Pentegra thrift plan, and major
medical, dental, and short-term and long-term disability insurance.
Employee benefits are considered by management to be competitive with those
offered by other financial institutions and major employers in the Bank's area.
See "Executive Compensation and Related Transactions."
Legal Proceedings
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank is a party or to which any of its property is
subject.
COMPETITION
The Bank originates most of its loans to and accepts most of its deposits
from residents of Owen County, Indiana. The Bank is the oldest continuously
operating financial institution headquartered in Owen County, Indiana.
The Bank is subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, and certain nonbanking consumer lenders that provide similar
services in Owen County with significantly larger resources than the Bank. In
total, there are three financial institutions located in Owen County, Indiana,
including the Bank. The Bank also competes with money market funds with respect
to deposit accounts and with insurance companies with respect to individual
retirement accounts.
Indiana law permits acquisitions of certain federal and state SAIF-insured
savings associations and their holding companies ("Savings Associations")
located in Indiana, Ohio, Kentucky, Illinois, and Michigan (the "Region") by
other Savings Associations located in the Region. Savings Associations with
their principal place of business in one of the states in the Region (other than
Indiana) may acquire Savings Associations with their principal place of business
in Indiana if, subject to certain other conditions, the state of the acquiring
association has reciprocal legislation permitting the acquisition of Savings
Associations and their holding companies in that state by Indiana Savings
Associations. Each of the states in the Region has, at least to a certain
degree, reciprocal legislation. The Indiana statute also authorizes Indiana
Savings Associations to acquire other Savings Associations in the Region.
Following the acquisition, an acquired Indiana Savings Association and any other
Indiana Savings Association subsidiary owned by the acquiror must hold no more
than 15% of the total Savings Association deposits in Indiana.
<PAGE>
Indiana laws allow nationwide acquisitions of Indiana banks by bank holding
companies on a reciprocal basis as of July 1, 1992. Moreover, Indiana banks are
also permitted to acquire other Indiana banks and to establish branches
throughout Indiana.
In addition, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, and effective as of June 1, 1997, allows banks to acquire
out-of-state branches either through merger or de novo expansion. The State of
Indiana recently passed a law establishing interstate branching provisions for
Indiana state-chartered banks consistent with those established by the
Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law
authorizes Indiana banks to branch interstate by merger or de novo expansion and
authorizes out-of-state banks meeting certain requirements to branch into
Indiana by merger or de novo expansion. The Indiana Branching Law became
effective March 15, 1996, provided that prior to June 1, 1997 interstate mergers
and de novo branches are not permitted to out-of-state banks unless the laws of
their home states permit Indiana banks to merge or establish de novo branches on
a reciprocal basis. This new legislation may also result in increased
competition for the Holding Company and the Bank.
Under current law, bank holding companies may acquire savings associations.
Savings associations may also acquire banks under federal law. To date, several
bank holding company acquisitions of savings associations and savings
association acquisitions of banks in Indiana have been completed. Affiliations
between banks and savings associations based in Indiana may also increase the
competition faced by the Holding Company and the Bank.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes for loan
originations primarily through the efficiency and quality of services it
provides borrowers and through interest rates and loan fees it charges.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that are not readily predictable.
<PAGE>
MANAGEMENT
Directors and Executive Officers of the Holding Company
The Board of Directors of the Holding Company currently consists of seven
directors, each of whom is also a director of the Bank. The directors of the
Holding Company are divided into three classes, and approximately one-third of
the Board is to be elected at each annual meeting of the shareholders of the
Holding Company. The terms of the directors expire at the Holding Company's
first shareholders' meeting, which is anticipated to be held in December, 1996.
At that meeting, it is anticipated that the directors will be nominated to serve
for the following terms: the terms of Messrs. Raper and Gillaspy will expire in
1997, the terms of Messrs. Chambers and Parrish will expire in 1998, and the
terms of Messrs. Meier, Stewart and Wilson will expire in 1999.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
Frank R. Stewart Chairman
Robert W. Raper Vice Chairman
Kurt J. Meier President, Chief Executive Officer and Treasurer
Kurt D. Rosenberger Vice President and Chief Financial Officer
Charles W. Chambers Secretary
Directors of the Bank
The Board of Directors of the Bank currently consists of seven persons.
Each director holds office for a term of three years, and approximately
one-third of the Board is elected at each annual meeting of the members of the
Bank. There are no arrangements or understandings between the Bank and any
person pursuant to which that person has been selected a director of the Bank.
The Board of Directors of the Bank met 12 times during the fiscal year
ended June 30, 1995. No director attended fewer than 75% of the meetings of the
Board of Directors held while he served as a director and the meetings of
committees on which he served. Tad Wilson is the brother-in-law of Stephen
Parrish.
Listed below are the directors of the Bank:
Director of Position
the Bank Expiration with
Director Since of Term the Bank
- -------- ----- ------- --------
Charles W. Chambers 1978 1998 Director, Secretary
John T. Gillaspy 1986 1997 Director
Kurt J. Meier 1991 1996 Director, President,
Chief Executive
Officer and Treasurer
Stephen Parrish 1982 1998 Director
Robert W. Raper 1970 1997 Vice Chairman
Frank R. Stewart 1963 1996 Chairman
Tad Wilson 1978 1996 Director
Presented below is certain information concerning the directors of the Bank:
Charles W. Chambers (age 80) has served as a Staff Appraiser of the Bank
since 1991 and as Secretary of the Bank since 1990.
John T. Gillaspy (age 68) has served as President and Chief Executive
Officer of the Spencer Evening World, Inc., a newspaper based in Spencer,
Indiana, for over the past five years.
Kurt J. Meier (age 45) has served as President of the Bank since 1994;
theretofore, he served as Managing Officer of the Bank since 1990.
<PAGE>
Stephen Parrish (age 56) has served as a funeral director for the
West-Parrish-Pedigo Funeral Home in Spencer, Indiana, for more than five years.
Robert W. Raper (age 78) has served as Vice Chairman of the Bank since
1994; theretofore, he served as Vice President of the Bank since prior to 1990.
Frank R. Stewart (age 70) has served as Chairman of the Board of the Bank
since 1994; theretofore, he served as President of the Bank from 1982 until
1994; he has served as President of BSF, Inc. since its formation in 1989. He
has extensive experience in real estate development and sales.
Tad Wilson (age 61) is the co-owner of Metropolitan Printing Services,
Inc., a printing company based in Bloomington, Indiana, and an owner of a retail
book store and rental properties located in Bloomington, Indiana.
Executive Officers of the Bank Who Are Not Directors
Presented below is certain information regarding the only executive officer
of the Bank who is not a director:
Name Position
---- --------
Kurt D. Rosenberger Vice President and Chief Financial Officer
Kurt D. Rosenberger, age 37, has served as Vice President of the Bank since
1994; theretofore, he served as Senior Financial Analyst for the OTS in
Indianapolis, Indiana, since 1990.
Committees of the Boards of Directors of the Bank and the Holding Company
The Executive Committee is comprised of Directors Raper, Gillaspy and
Stewart. It meets weekly and is responsible for taking actions when the full
Board cannot meet and making recommendations to the Board of Directors.
The Chairman of the Board of Directors of the Bank is required by the
Bank's By-Laws to appoint a nominating committee consisting of three members of
the Bank 30 days prior to each annual meeting. Such Committee is authorized to
make nominations for directors in writing to the Bank's Secretary at least 15
days prior to the annual meeting which nominations are then posted at the Bank's
office. Nominations for directors may also be made in writing by members and
delivered to the Bank's Secretary at least 10 days prior to the Bank's annual
meeting.
<PAGE>
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS
Remuneration of Named Executive Officer
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to the President, Chief
Executive Officer and Treasurer of the Bank for the fiscal year ended June 30,
1995. There were no executive officers of the Bank, as of June 30, 1995, who
earned over $100,000 in salary and bonuses during that fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
----------------------------------------------------------------
Annual Compensation
------------------------------------------------
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation
<S> <C> <C> <C> <C> <C>
Kurt J. Meier, President 1995 $49,440 (1) $5,600 -- --
Chief Executive Officer
and Treasurer
</TABLE>
- ----------
(1) Includes fees received for service on the Bank's Board of Directors.
(2) Mr. Meier received certain perquisites, but the incremental cost of
providing such perquisites did not exceed the lesser of $50,000 or 10% of
his salary and bonus.
Employment Contracts
The Bank has entered into three-year employment contracts with each of
Messrs. Meier and Rosenberger (together, the "Employees"). The contracts with
the Employees, effective as of the effective date of the Conversion, extend
annually for an additional one-year term to maintain their three-year term if
the Board of Directors of the Bank determines to so extend them, unless notice
not to extend is properly given by either party to the contract. Each Employee
receives an initial salary under the contract equal to his current salary
subject to increases approved by the Board of Directors. Each contract also
provides, among other things, for participation in other fringe benefits and
benefit plans available to the Bank's employees. Each Employee may terminate his
employment upon sixty days' written notice to the Bank. The Bank may discharge
each Employee for cause (as defined in the contract) at any time or in certain
specified events. If the Bank terminates an Employee's employment for other than
cause or if the Employee terminates his own employment for cause (as defined in
the contract), the Employee will receive his base compensation under the
contract for an additional three years if the termination follows a change of
control in the Holding Company (as defined below). In addition, during such
period, the Employee will continue to participate in the Bank's group insurance
plans and retirement plans, or receive comparable benefits. Moreover, within a
period of three months after such termination following a change of control,
each Employee will have the right to cause the Bank to purchase any stock
options he holds for a price equal to the fair market value (as defined in the
contact) of the shares subject to such options minus their option price. If the
payments provided for in the contract, together with any other payments made to
the Employee by the Bank, are deemed to be payments in violation of the "golden
parachute" rules of the Code, such payments will be reduced to the largest
amount which would not cause the Bank to lose a tax deduction for such payments
under those rules. As of the date hereof, the cash compensation which would be
paid under the contracts to the Employees if the contracts were terminated
either after a change of control of the Holding Company, without cause by the
Bank, or for cause by the Employees, would be $141,960 for Mr. Meier and
$130,260 for Mr. Rosenberger. For purposes of these employment contracts, a
change of control of the Holding Company is generally an acquisition of control,
as defined in regulations issued under the Change in Bank Control Act and the
Bank Holding Company Act.
<PAGE>
The employment contracts provide the Bank protection of its confidential
business information and protection from competition by each of the Employees
should he voluntarily terminate his employment without cause or be terminated by
the Bank for cause.
The Bank also entered into a three-year employment contract with Mr.
Stewart effective as of January 1, 1996. Mr. Stewart's employment agreement
provides for the payment by the Bank to the Mr. Stewart of an annual salary
equal to $44,980, subject to increases as determined by the Board of Directors.
In the event Mr. Stewart's employment is terminated by the Bank without cause,
Mr. Stewart will continue to receive such compensation during the then-remaining
term of the contract.
The Bank is the owner and beneficiary of $100,000 in key man life insurance
on the lives of Mr. Meier and Mr. Rosenberger.
Compensation of Directors
All directors of the Bank are entitled to receive monthly director fees for
their services. Each of Mr. Gillapsy and Mr. Raper receive $650 per month, and
Mr. Stewart receives $450 per month. All other directors of the Bank receive
$350 per month. Total fees paid to directors of the Bank for the year ended June
30, 1995 were $35,760.
Directors of the Holding Company are not currently paid directors' fees.
The Holding Company may, if it believes it is necessary to attract qualified
directors or otherwise beneficial to the Holding Company, adopt a policy of
paying directors' fees.
Directors of BSF receive director fees of $150 per meeting. The Board of
BSF meets quarterly.
Benefits
Insurance Plans. The Bank's directors, officers and employees are provided
with hospitalization, major medical, major dental, life insurance, short-term
and long-term disability insurance, and other insurance benefits under group
plans sponsored by the Indiana League of Savings Institutions Group Insurance
Trust. Employees of the Bank pay $5 per week for employee coverage and an
additional $5 per week for coverage on dependents.
Pension Plan. The Bank's full-time employees are included in the Financial
Institutions Retirement Fund, a noncontributory multiple employer comprehensive
pension plan (the "Pension Plan"). Separate actuarial valuations are not made
for individual employer members of the Pension Plan. The Bank's employees are
eligible to participate in the plan once they have completed one year of service
for the Bank and attained age 21, if they complete 1,000 hours of service in a
calendar year. An employee's pension benefits are 100% vested after five years
of service.
<PAGE>
The Pension Plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary (for his highest
five consecutive years of salary) times his years of service. Salary includes
base annual salary as of each January 1, exclusive of overtime, bonuses, fees
and other special payments. Early retirement, disability, and death benefits are
also payable under the Pension Plan, depending upon the participant's age and
years of service. The Bank expensed $17,900 for the Pension Plan during the
fiscal year ended June 30, 1995. The Bank's expense for the fiscal year ending
June 30, 1996 is anticipated to approximate the amount of 1995's expense.
The estimated base annual retirement benefits presented on a straight-line
basis payable at normal retirement age (65) under the Pension Plan to persons in
specified salary and years of service classifications are as follows (benefits
noted in the table are not subject to any offset).
<TABLE>
<CAPTION>
Highest 5-Year Years of Service
Average -------------------------------------------------------------------------------------------------
Compensation 15 20 25 30 35 40 50
--------------- ------- ------- ------- ------- ------- ------- - ------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 40,000 $ 9,000 $12,000 $15,000 $18,000 $21,000 $24,000 $ 30,000
$ 60,000 $13,500 $18,000 $22,500 $27,000 $31,500 $36,000 $ 45,000
$ 80,000 $18,000 $24,000 $30,000 $36,000 $42,000 $48,000 $ 60,000
$100,000 $22,500 $30,000 $37,500 $45,000 $52,500 $60,000 $ 75,000
$120,000 $27,000 $36,000 $45,000 $54,000 $63,000 $72,000 $ 90,000
</TABLE>
Benefits are currently subject to maximum Code limitations of $120,000 per
year. The years of service credited to Mr. Meier under the Pension Plan as of
June 30, 1995, were 14.
Thrift Plan. The Bank's employees also participate in Pentegra's Thrift
Plan, a contributory multiple employer tax-exempt trust and savings plan.
Participants may elect to make monthly contributions up to 15% of their salary.
The Bank makes a matching contribution of 50% of the employee's contribution
that does not exceed 6% of salary. Contributions may be invested in an equity
fund which invests in the widely traded stocks, a fixed income fund which
invests in guaranteed investment contract, an equity growth mutual fund that
invests in higher risk stocks and/or a fund composed of government agency debt
securities. Benefits under the plan vest at the rate of 20% per year beginning
after an employee's second year of service. The normal distribution is a lump
sum upon termination of employment. Other payment options may be elected. During
the fiscal year ended June 30, 1995, the Bank made contributions aggregating
$8,600 to this plan, $1,357 of which were allocable to Mr. Meier.
Bonus Program. During each of the years ended June 30, 1994 and 1995, the
Bank paid discretionary cash bonuses to its officers and other employees
pursuant to a bonus program adopted by the Bank's Board of Directors (the "Bonus
Program"). The Bonus Program provides that cash bonuses are paid to officers and
other employees of the Bank in the discretion of the Board of Directors if the
Bank exceeds a targeted 1.00% return on assets for a fiscal year. Bonuses are
paid according to an established formula based on employees' salary and years of
service with the Bank. The aggregate amount paid to officers and employees
pursuant to the Bonus Program is equal to the amount required to reduce the
Bank's return on assets to the targeted 1.00% level. For the year ended June 30,
1995, the Bank paid an aggregate of $47,580 in cash bonuses under the Bonus
Program.
Transactions With Certain Related Persons
The Bank has followed a policy of offering to its directors, officers,
and employees real estate mortgage loans secured by their principal residence
and other loans. These loans are made in the ordinary course of business with
the same collateral, interest rates and underwriting criteria as those of
comparable transactions prevailing at the time and do not involve more than the
normal risk of collectibility or present other unfavorable features. Loans to
directors and executive officers totaled approximately $600,000, or 7.5% of pro
forma shareholders' equity on a consolidated basis at the midpoint of the
Estimated Valuation Range at December 31, 1995. All such loans at December 31,
1995 were secured by the principal residences of directors and executive
officers except one loan to an outside director relating to such director's
business.
<PAGE>
Current law requires that all loans or extensions of credit to executive
officers, directors, and principal shareholders be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the greater
of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors. The Bank's policy regarding loans to directors and all
employees meets the requirements of current law. All loans to officers,
directors and employees of the Bank are and have been approved by a majority of
the disinterested members of the Board of Directors.
For a discussion regarding compensation paid to Mr. Stewart in connection
with his services to BSF, See "Business -- Service Corporation Subsidiary."
Employee Stock Ownership Plan and Trust
The Bank has established for eligible employees an ESOP effective January
1, 1996, subject to its conversion to stock form. Employees with at least one
year of employment with the Bank and who have attained age twenty-one are
eligible to participate. As part of the Conversion, the ESOP intends to borrow
funds from the Holding Company and use such funds to purchase a number of shares
equal to 8% of the Common Stock to be issued in the Conversion. Collateral for
the loan will be the Common Stock purchased by the ESOP. The loan will be repaid
principally from the Bank's discretionary contributions to the ESOP over a
period of 10 years. It is anticipated that the initial interest rate for the
loan will be approximately 8.25%. Shares purchased by the ESOP will be held in a
suspense account for allocation among participants as the loan is repaid. The
ESOP does not currently anticipate any future purchases of Common Stock.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation.
Benefits generally become 100% vested after five years of credited service.
Prior to the completion of five years of credited service, a participant who
terminates employment for reasons other than death, retirement, or disability
will not receive any benefit under the ESOP. Forfeitures will be reallocated
among remaining participating employees upon the earlier of the forfeiting
participant's death or after the expiration of at least five years from the date
on which such participant's employment was terminated. Benefits may be payable
in the form of Common Stock or cash upon death, retirement, early retirement,
disability or separation from service. The Bank's contributions to the ESOP are
not fixed, so benefits payable under the ESOP cannot be estimated. SOP 93-6
requires the Bank to record compensation expense in an amount equal to the fair
market value of the shares released from the suspense account. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Current Accounting Issues."
In connection with the establishment of the ESOP, the Bank will establish a
committee of employees of the Bank to administer the ESOP. The Bank will serve
as corporate trustee of the ESOP, and administrative services will be provided
by Pentegra. The ESOP Committee may instruct the trustee regarding investment of
funds contributed to the ESOP. The ESOP trustee, subject to its fiduciary duty,
must vote all allocated shares held in the ESOP in accordance with the
instructions of participating employees. Under the ESOP, nondirected shares, and
shares held in the suspense account, will be voted in a manner calculated to
most accurately reflect the instructions it has received from participants
regarding the allocated stock so long as such vote is in accordance with the
provisions of ERISA.
<PAGE>
Stock Option Plan
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors
intends to submit for shareholder approval a Stock Option Plan (the "Stock
Option Plan") for directors, officers and employees of the Bank and of the
Holding Company. If approved by the shareholders, Common Stock in an aggregate
amount equal to 10.0% of the shares issued in the Conversion would be reserved
for issuance by the Holding Company upon the exercise of the stock options
granted under the Stock Option Plan. Assuming the issuance of 570,000 shares in
the Conversion, an aggregate of 57,000 shares would be reserved for issuance
under the Stock Option Plan. No options would be granted under the Stock Option
Plan until the date on which shareholder approval is received. At that time, it
is anticipated that options for the following number of shares will be granted
to the following directors and executive officers of the Bank and the Holding
Company:
Percentage of Shares
Optionee Issued in Conversion
-------- --------------------
Kurt J. Meier 1.0%
Frank R. Stewart 1.0%
Kurt D. Rosenberger 0.75%
Outside directors of the Bank
as a group (5 persons) 2.5%
Other employees 2.25%
----
Total 7.5%
====
<PAGE>
Options to purchase a number of shares equal to 2.5% of the total number of
shares of Common Stock issued in the Conversion are expected to be reserved for
future issuance under the Stock Option Plan to employees and newly appointed
directors of the Holding Company and the Bank.
It is anticipated that these options would be granted for terms of 10 years
(in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share equal to the fair
market value of the shares on the date of grant of the stock options. Options
will become exercisable at a rate of 20% at the end of each twelve (12) months
of service with the Bank after the date of grant, subject to early vesting in
the event of death or disability. Unless the Holding Company decides to call an
earlier special meeting of shareholders, the date of grant of these options
would be the date of the Holding Company's annual meeting of shareholders to be
held in December, 1996.
Each person who is elected as an outside director of the Holding Company
(other than persons who were previously employees of the Holding Company or the
Bank) after completion of the Conversion will be granted on the date he or she
becomes an outside director stock options to purchase a number of shares of
Common Stock equal to 0.5% of the shares issued in the Conversion at an option
price equal to the fair market value of a share of such Common Stock on the date
he or she becomes an outside director.
The Stock Option Plan would be administered by a Committee of disinterested
directors of the Holding Company's Board of Directors. Options granted under the
Stock Option Plan to employees could be "incentive" stock options designed to
result in a beneficial tax treatment to the employee but no tax deduction to the
Holding Company. Non-qualified stock options could also be granted under the
Stock Option Plan. In the event an option recipient terminated his or her
employment for reasons other than retirement, disability, or death, the options
would terminate during certain specified periods.
RRP
At a meeting of the Holding Company's shareholders to be held at least six
months after the completion of the Conversion, the Board of Directors also
intends to submit for shareholder approval a management recognition and
retention plan and trust (the "RRP") as a means of providing the directors and
employees of the Bank and of the Holding Company with an ownership interest in
the Holding Company in a manner designed to encourage such persons to continue
their service with the Bank and the Holding Company. The Bank will contribute
funds to the RRP from time to time to enable it to acquire an aggregate amount
of Common Stock equal to up to 4.0% of the shares of Common Stock issued in the
Conversion, either directly from the Holding Company or on the open market. In
the event that additional authorized but unissued shares would be acquired by
the RRP after the Conversion, the interests of existing shareholders would be
diluted. No awards under the RRP would be made until the date the RRP is
approved by the Holding Company's shareholders. At that time, it is anticipated
that awards of the following number of shares would be made to the following
directors, officers and employees of the Holding Company and the Bank:
Percentage of Shares
Recipient of Issued in Conversion
Awards Awards Under RRP
------------ --------------------
Kurt J. Meier............................... 0.5625%
Frank R. Stewart............................ 0.5625%
Kurt D. Rosenberger......................... 0.375%
Outside directors of the Bank
as a group (5 persons)...................... 1.0%
Other employees............................. 0.5%
Total................................... 3.0%
<PAGE>
A number of shares equal to 1% of the shares issued in the Conversion will
remain available for future issuance under the RRP.
Awards would be nontransferable and nonassignable, and during the lifetime
of the recipient could only be earned by and made to him or her. The shares
which are subject to an award would vest and be earned by the recipient at a
rate of 20% of the shares awarded at the end of each full twelve (12) months of
service with the Bank after the date of grant of the award. Awards are adjusted
for capital changes such as stock dividends and stock splits. Notwithstanding
the foregoing, awards would be 100% vested upon termination of employment or
service due to death or disability. If employment or service were to terminate
for other reasons, the grantee's nonvested awards will be forfeited. If
employment or service is terminated for cause (as would be defined in the RRP),
or if conduct would have justified termination or removal for cause, shares not
already delivered under the RRP, whether or not vested, could be forfeited by
resolution of the Board of Directors of the Holding Company.
When shares become vested and could actually be distributed in accordance
with the RRP, the participants would also receive amounts equal to accrued
dividends and other earnings or distributions payable with respect thereto. When
shares became vested under the RRP, the participant would recognize income equal
to the fair market value of the Common Stock earned, determined as of the date
of vesting, unless a prior election under ss. 83(b) of the Code to be taxed
earlier is made by the recipient of the award. The amount of income recognized
by the participant would be a deductible expense for tax purposes for the
Holding Company. Shares not yet vested under the RRP will be voted by the
Trustee of the RRP, taking into account the best interests of the recipients of
the RRP awards.
REGULATION
Bank Holding Company Regulation
The Holding Company is registered as a bank holding company, and is subject
to the regulations of the FRB under the Bank Holding Company Act of 1956, as
amended ("BHCA"). Bank holding companies are required to file periodic reports
with, and are subject to periodic examination by, the FRB. The FRB has issued
regulations under the BHCA requiring a bank holding company to serve as a source
of financial and managerial strength to its subsidiary banks. It is the policy
of the FRB that, pursuant to this requirement, a bank holding company should
stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. Additionally,
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA"), a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency up to the lesser
of (i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under the BHCA, the FRB has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
FRB's determination that such activity or control constitutes a serious risk to
the financial soundness and stability of any bank subsidiary of the bank holding
company.
The Holding Company is prohibited by the BHCA from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
FRB. Additionally, the Holding Company is prohibited by the BHCA from engaging
in or from acquiring ownership or control of more than 5% of the outstanding
shares of any class of voting stock of any company engaged in a nonbanking
business unless such business is determined by the FRB to be so closely related
to banking as to be a proper incident thereto.
Capital Adequacy Guidelines for Bank Holding Companies
The FRB is the federal regulatory and examining authority for bank holding
companies. The FRB has adopted capital adequacy guidelines for bank holding
companies.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines which require a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must be "Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which
the bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of 3% in the case of bank holding companies
which have the highest regulatory examination ratings and are not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.
<PAGE>
Bank Regulation
The Bank is organized under the laws of Indiana and as such is subject to
the supervision of the DFI, whose examiners conduct periodic examinations of
state banks. In 1994, the Bank converted from a federal savings bank to an
Indiana savings bank. Prior to such conversion, it was subject to regulation at
the federal level primarily by the OTS. The Bank is not a member of the Federal
Reserve System, so its principal federal regulator is the FDIC, which also
conducts periodic examinations of the Bank. The Bank's deposits continue to be
insured by the SAIF administered by the FDIC and are subject to FDIC's rules and
regulations respecting the insurance of deposits. See "-- Insurance of
Deposits".
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Insured state-chartered banks are prohibited under FedICIA from engaging as
principal in activities that are not permitted for national banks, unless: (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards. As a result of its
conversion to an Indiana savings bank, the Bank is required to cease the real
estate development operations and divest the non-conforming real estate holdings
of BSF. See "Business -- Service Corporation Subsidiary."
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings and loan
associations and savings banks and other member financial institutions. The Bank
is required to hold shares of capital stock in the FHLB of Indianapolis in an
amount at least equal to the greater of 1% of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts and similar
obligations at the end of each calendar year, 0.3% of its assets or 1/20 (or
such greater fraction established by the FHLB) of outstanding FHLB advances,
commitments, lines of credit and letters of credit. The Bank is currently in
compliance with this requirement. At December 31, 1995, the Bank's investment in
stock of the FHLB of Indianapolis was $260,000.
In past years, the Bank has received dividends on its FHLB stock. All 12
FHLBs are required by law to provide funds for the resolution of troubled
savings associations and to establish affordable housing programs through direct
loans or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the FHLBs' ability to pay
dividends and the value of FHLB stock in the future. For the year ended June 30,
1995, dividends paid to the Bank by the FHLB of Indianapolis totaled $15,728,
for an annual rate of 7.14%.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans less
than 60 days delinquent or securities evidencing interests therein, securities
(including mortgage-backed securities) issued, insured or guaranteed by the
federal government or any agency thereof, FHLB deposits and, to a limited
extent, real estate with readily ascertainable value in which a perfected
security interest may be obtained. Other forms of collateral may be accepted as
over collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances are required to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost
of funds to the FHLB of Indianapolis and the purpose of the borrowing.
<PAGE>
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations and banks that have
acquired deposits from savings associations. The FDIC is required to maintain
designated levels of reserves in each fund. The reserves of the SAIF are
currently below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions do not
prohibit a SAIF member from converting to a bank charter or merging with a bank
during the moratorium as long as the resulting bank continues to pay the
applicable insurance assessments to the SAIF during such period and as long as
certain other conditions are met. Consequently, although the Bank converted to a
state savings bank in 1994, the Bank's deposits continue to be insured by the
SAIF.
Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time and may decrease such rates if such target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF, deposit
insurance assessments paid by healthy BIF-insured institutions were recently
reduced significantly below the level paid by healthy SAIF-insured institutions.
Assessments paid by healthy SAIF-insured institutions exceeded those paid by
healthy BIF-insured institutions by approximately $.19 per $100 in deposits in
late 1995 and will exceed them by $.23 per $100 in deposits beginning in 1996.
Such premium disparity could have a negative competitive impact on the Bank and
other institutions with SAIF deposits.
Congress is considering legislation to recapitalize the SAIF and to
eliminate the significant premium disparity between the BIF and the SAIF.
Currently, the recapitalization plan provides for a special assessment of
approximately $.85 per $100 of SAIF deposits held at some time in 1995, in order
to increase SAIF reserves to the level required by law. Certain banks holding
SAIF-insured deposits would pay a lower special assessment. In addition, the
cost of prior thrift failures would be shared by both the SAIF and the BIF. Such
cost sharing might increase BIF assessments by $.02 to $.025 per $100 in
deposits. SAIF assessments for healthy SAIF-insured institutions would be set at
a significantly lower level after the legislation is adopted and could never be
reduced below the level set for healthy BIF-insured institutions. The
recapitalization plan also provides for the merger of the SAIF and BIF on
January 1, 1998. It is also proposed that the savings association charter be
eliminated in connection with that merger.
The Bank had $24.9 million in deposits at December 31, 1995. If the
one-time special assessment in the legislative proposal is enacted into law, the
Bank will pay an additional assessment of approximately $211,650 (based upon
deposits at December 31, 1995), which will reduce capital and earnings for the
quarter in which any such assessment is recorded. However, it is expected that
quarterly SAIF assessments would be reduced significantly sometime after
adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the Holding
Company can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated. If the proposed legislation is not adopted, SAIF
premiums may increase and the disparity between BIF and SAIF premiums may become
greater, with a resulting adverse effect on the Bank's operations.
<PAGE>
Regulatory Capital
The FDIC has adopted risk-based capital ratio guidelines to which the Bank
generally is subject. The guidelines establish a systematic analytical framework
that makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance sheet commitments to four risk
weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
Like the capital guidelines established by the FRB for the Holding Company,
these guidelines divide a bank's capital into two tiers. The first tier ("Tier
I") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The
FDIC may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
In connection with the Bank's conversion to a state savings bank, the FDIC
imposed heightened capital requirements on the Bank because of the impermissible
real estate development activities of BSF, the Bank's subsidiary. The FDIC
currently requires that the Bank maintain capital (after deduction of its
investment in BSF) at levels sufficient for the Bank to be classified as a
well-capitalized institution (i.e., total risk-based capital ratio of 10% or
greater, Tier I risk-based capital ratio of 6% or greater, and leverage capital
ratio of 5% or greater). The Bank currently exceeds its heightened Capital
Requirements and will increase its capital as a result of the Conversion.
<PAGE>
Prompt Corrective Regulatory Action
FedICIA requires, among other things, federal bank regulatory authorities
to take "prompt corrective action" with respect to banks that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1995, the Bank was categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4%
or greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%; and (d)
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth limitations and are required
to submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by any company that controls the undercapitalized
institution as described above. See "-- Bank Holding Company Regulation." If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of requirements and restrictions,
including an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks, and restrictions on compensation of executive
officers. "Critically undercapitalized" institutions may not, beginning 60 days
after becoming "critically undercapitalized," make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any transaction outside the ordinary course of
business. In addition, "critically undercapitalized" institutions are subject to
appointment of a receiver or conservator.
Dividend Limitations
Under FRB supervisory policy, a bank holding company generally should not
maintain its existing rate of cash dividends on common shares unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition. The FDIC also has authority
under the Financial Institutions Supervisory Act to prohibit a bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice in light of the financial condition of the bank.
Under Indiana law, the Holding Company is precluded from paying cash dividends
if, after giving effect to such dividends, the Holding Company would be unable
to pay its debts as they become due or the Holding Company's total assets would
be less than its liabilities and obligations to preferential shareholders.
<PAGE>
Pursuant to the Plan of Conversion, the Bank will establish a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. See "The Conversion -- Principal Effects of Conversion." The
Bank will not be permitted to pay dividends to the Holding Company if its net
worth would be reduced below the amount required for the liquidation account.
Under Indiana law, the Bank may pay dividends without DFI approval so long
as its capital is unimpaired and those dividends in any calendar year do not
exceed the net profits of the Bank for that year plus the retained net profits
of the Bank for the previous two years. Dividends may not exceed undivided
profits on hand (less losses, bad debts and expenses). Additional stringent
regulatory requirements affecting dividend payments by the Bank, however, are
established by the prompt corrective action provisions of FedICIA, which are
discussed above. The Bank's capital levels currently exceed the criteria
established to be designated as a "well capitalized" institution. Such
institutions are required to have a total risk-based capital ratio of 10% or
greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater. At December 31, 1995, the Bank's total risk-based capital,
Tier I risk-based capital and leverage capital exceeded the amounts required to
be designated "well capitalized" by $883,000, $1.5 million and $929,000,
respectively.
Repurchase Limitations
Regulations promulgated by the FRB provide that a bank holding company must
file written notice with the FRB prior to any repurchase of its equity
securities if the gross consideration for the purchase, when aggregated with the
net consideration paid by the bank holding company for all repurchases during
the preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. This notice requirement is not applicable, however, to a
bank holding company that exceeds the thresholds established for a well
capitalized bank and that satisfies certain other regulatory requirements.
Under Indiana law, the Holding Company will be precluded from repurchasing
its equity securities if, after giving effect to such repurchase, the Holding
Company would be unable to pay its debts as they become due or the Holding
Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Loans-to-One Borrower
Under Indiana law, the total loans and extension of credit by an
Indiana-chartered savings bank to a borrower outstanding at one time and not
fully secured may not exceed 15% of such bank's capital and unimpaired surplus.
An additional amount up to 10% of the bank's capital and unimpaired surplus may
be loaned to the same borrower if such loan is fully secured by readily
marketable collateral having a market value, as determined by reliable and
continuously available price quotations, at least equal to the amount of such
additional loans outstanding.
As of December 31, 1995, the largest aggregate amount of loans which the
Bank had to any one borrower was approximately $475,000. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one
borrower limits. The Bank does not believe that the loans-to-one borrower limits
will have a significant impact on its business, operations and earnings
following the Conversion.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in such depository institution's
normal market area. Under these regulations, "well-capitalized" depository
institutions may accept, renew or roll such deposits over without restriction,
"adequately capitalized" depository institutions may accept, renew or roll such
deposits over with a waiver from the FDIC (subject to certain restrictions on
payments of rates) and "undercapitalized" depository institutions may not
accept, renew or roll such deposits over. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" will be the same as the definition adopted by the agencies to
implement the corrective action provisions of FedICIA. The Bank does not believe
that these regulations will have a materially adverse effect on its current
operations.
Federal Reserve System
FRB regulations require savings associations and savings banks to maintain
reserves against their transaction accounts (primarily negotiable order of
withdrawal accounts) and certain nonpersonal time deposits. The reserve
requirements are subject to adjustment by the FRB. As of December 31, 1995, the
Bank was in compliance with the applicable reserve requirements of the FRB.
<PAGE>
Additional Limitations on Activities
Recent FDIC law and regulations generally provide that the Bank may not
engage as principal in any type of activity, or in any activity in an amount,
not permitted for national banks, or directly acquire or retain any equity
investment of a type or in an amount not permitted for national banks. The FDIC
has authority to grant exceptions from these prohibitions (other than with
respect to non-service corporation equity investments) if it determines no
significant risk to the insurance fund is posed by the amount of the investment
or the activity to be engaged in, and if the Bank is and continues to be in
compliance with fully phased-in capital standards. National banks are generally
not permitted to hold equity investments other than shares of service
corporations and certain federal agency securities. Moreover, the activities in
which service corporations are permitted to engage are limited to those of
service corporations for national banks. As a result of its conversion to an
Indiana savings bank, the Bank is required to cease the real estate development
operations and divest the non-conforming real estate holdings of BSF. See
"Business -- Service Corporation Subsidiary."
Other Indiana Regulations
As an Indiana-chartered savings bank, the Bank derives its authority from,
and is regulated by, the DFI. The DFI has the right to promulgate rules and
regulations necessary for the supervision and regulation of Indiana-chartered
savings banks under its jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the DFI includes,
but is not limited to, the establishment of reserve requirements; the regulation
of the payment of dividends; the regulation of stock repurchases, the regulation
of incorporators, shareholders, directors, officers and employees; the
establishment of permitted types of withdrawable accounts and types of contracts
for savings programs, loans and investments; and the regulation of the conduct
and management of savings banks, chartering and branching of institutions,
mergers, conversions and conflicts of interest.
The DFI generally conducts regular annual examinations of Indiana-chartered
savings banks such as the Bank. The purpose of such examination is to assure
that institutions are being operated in compliance with applicable Indiana law
and regulations and in a safe and sound manner. In addition, the DFI is required
to conduct an examination of any institution as often as it deems necessary. The
DFI has the power to issue cease and desist orders if any person or institution
is engaging in, or has engaged in, any unsafe or unsound practice in the conduct
of its business or has or is violating any other law, rule or regulation and, as
to officers and directors of an Indiana savings bank, breached his fiduciary
duty as an officer or director.
With the approval of the DFI, a savings bank may merge or consolidate with
another savings bank, a state bank, a national bank, or a federal or state
savings association. In considering whether to approve or disapprove such a
merger or consolidation, the DFI is to consider the following factors: (i)
whether the institutions are operated in a safe, sound and prudent manner; (ii)
whether the financial conditions of any of the institutions will jeopardize the
financial stability of the other institutions; (iii) whether the proposed merger
or consolidation will result in an institution that has inadequate capital,
unsatisfactory management or poor earnings prospects; (iv) whether the
management or other principals of the resulting institution are qualified by
character and financial responsibility to control and operate in a legal and
proper manner the resulting institution; (v) whether the interests of the
depositors and creditors of the institutions and the public generally will be
jeopardized by the transaction; and (vi) whether in institutions furnish all of
the information the DFI requires in reaching the DFI's decision.
Acquisitions of control of the Bank by a bank or bank holding company
require the prior approval of the DFI. Control is defined as the power, directly
or indirectly, (i) to vote 25.0% or more of the voting stock of an
Indiana-chartered savings bank or (ii) to exercise a controlling influence over
the management or policies of a savings bank.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings.
<PAGE>
Transactions with Affiliates
The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company will be registered with
the SEC under the 1934 Act. The Holding Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following the Bank's conversion to stock form, if the Holding Company has
fewer than 300 shareholders, it may deregister its shares under the 1934 Act and
cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended
(the "1933 Act"). If the Holding Company meets the current public information
requirements under Rule 144, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including the two-year holding period and
those that require the affiliate's sale to be aggregated with those of certain
other persons) would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of each
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The examiners have determined that the Bank has a satisfactory record of
meeting community credit needs.
TAXATION
Federal Taxation
Savings banks are permitted to compute bad debt deductions using either the
bank experience method or the percentage of taxable income method. In the case
of the percentage of taxable income method, the portion of taxable income (as
specially adjusted for purposes of application of this method) that may be
deducted as an addition to a reserve for bad debts is set at 8%. Any savings
association which holds 60% of its assets in qualifying assets, defined as loans
which are secured by an interest in improved real property or secured by an
interest in real property that is to be improved out of the proceeds of the
loan, will be eligible for the full 8% of taxable income deduction. The 8%
amount must be reduced (but not below zero) by the amount determined to be a
reasonable addition to the reserve for losses on nonqualifying loans. Reserves
for nonqualifying loans are computed on the basis of a six-year moving average
of the institution's own experience.
The excess of the percentage of taxable income deduction over the deduction
that would have been allowable on the basis of actual experience is treated as a
preference item for the purpose of computing the corporate minimum tax.
In addition, the bad debt deduction cannot exceed the amount necessary to
increase the year end balance in the bad debt reserve accumulated for
"qualifying real property loans" to an amount equal to 6% of such loans
outstanding at the end of the taxable year. The bad debt reserve deduction is
also limited to the amount by which 12% of deposits at year-end exceeds the sum
of the institution's surplus, undivided profits, and reserves, as defined for
federal income tax purposes, at the beginning of the year.
<PAGE>
A savings bank organized in stock form that utilizes the percentage method
bad debt reserve deduction described above will be subject to recapture taxes on
such reserve in the event it makes certain types of distributions to its
shareholders. Cash dividends may be paid out of unappropriated retained earnings
without the imposition of any tax on a savings bank to the extent that the
amounts paid as dividends do not exceed such savings bank's current or
accumulated earnings and profits as calculated for federal income tax purposes.
Stock redemptions, dividends paid in excess of a savings bank's current or
accumulated earnings and profits as calculated for tax purposes, and other
distributions made with respect to a savings bank's stock, however, are deemed
under applicable provisions of the Code to be made from the savings bank's tax
bad debt reserve. To the extent additions to a savings bank's bad debt reserves
for "qualifying real property loans" deducted for federal income tax purposes
exceed the allowable amount of such reserves computed under the experience
method and to the extent of the savings bank's supplemental reserves for losses
on loans ("Excess"), such Excess may not, without adverse tax consequences, be
utilized for payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a savings bank to a shareholder is treated as made: first out of the
savings bank's current and post-1951 accumulated earnings and profits; second
out of the Excess; and third out of such other amounts as may be proper. To the
extent a distribution to a shareholder by the savings bank is deemed paid out of
its Excess under these rules, the Excess would be reduced and the savings bank's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the Excess. The amount
of tax that would be payable upon any distribution which is being treated as
having been made from a savings bank's bad debt reserve could result in a tax
which is equal to approximately 40% of the amount of such distributions, unless
offset by net operating losses. At December 31, 1995, the Bank had approximately
$0.7 million of retained earnings, cash dividends paid from which would cause
federal income tax to be paid by the Bank.
The House and the Senate have each recently passed legislation
prospectively repealing the percentage of taxable income method and further
requiring, generally, that reserves taken after 1987 using the percentage of
taxable income method must be included in future taxable income of the
institution over a six-year period, although a two-year delay may be permitted
for institutions meeting a residential mortgage loan origination test. This
legislation requires smaller thrifts (i.e., less than $500 million in assets) to
use the experience method and larger thrifts (i.e., more than $500 million in
assets) to use the charge-off method to compute these deductions.
The Holding Company cannot be certain of the impact of the proposed change
in tax accounting for bad debt reserves until the legislation requiring such
change is enacted.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, the Bank has been reporting its income and
expenses on the accrual method of accounting. The Bank's federal income tax
returns have not been audited in recent years.
The Holding Company and the Bank may elect to file a consolidated federal
income tax return, which would have the effect of eliminating intercompany
distributions, including dividends, in the computation of consolidated taxable
income. Income of the Holding Company generally would not be taken into account
in determining the bad debt deduction allowed to the Bank, regardless of whether
a consolidated tax return is filed. However, certain "functionally related"
losses of the Holding Company would be required to be taken into account in
determining the permitted bad debt deduction, which, depending upon the
particular circumstances, could reduce the bad debt deduction.
State Taxation
The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which
is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
income," for purposes of FIT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by several Indiana modifications. Other applicable state taxes include
generally applicable sales and use taxes plus real and personal property taxes.
<PAGE>
The Bank's state income tax returns have not been audited in recent years.
For further information relating to the tax consequences of the Conversion,
see "The Conversion -- Principal Effects of Conversion -- Tax Effects."
THE CONVERSION
THE BOARDS OF DIRECTORS OF THE BANK AND THE HOLDING COMPANY AND THE DFI
HAVE APPROVED THE PLAN OF CONVERSION SUBJECT TO APPROVAL BY THE MEMBERS OF THE
BANK AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. DFI APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE DFI.
General
On October 24, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion pursuant to which the Bank will convert from an Indiana mutual
savings bank to an Indiana stock savings bank, all the outstanding shares of
which will be held by the Holding Company formed under Indiana law. Certain
amendments to the Plan of Conversion were made on February 21, 1996. The Plan
has also been approved by the Board of Directors of the Holding Company and by
the DFI, subject to approval of the Plan by the Bank's members. A Special
Meeting of Members has been scheduled for that purpose on June 14, 1996. Such
approval by the DFI does not constitute a recommendation or endorsement of the
Plan by the DFI.
In connection with the Special Meeting, the Bank has mailed to each person
eligible to vote at the Special Meeting a proxy statement (the "Proxy
Statement"). The Proxy Statement contains information concerning the business
purposes of the Conversion and the effects of the Plan and the Conversion with
respect to voting rights, liquidation rights, continuation of the Bank's
business and of existing savings accounts, FDIC insurance and loans. The Proxy
Statement also describes the manner in which the Plan may be amended or
terminated.
The following is a summary of all of the pertinent aspects of the Plan, the
Subscription Offering, and the Direct Community Offering. The Plan should be
consulted for a more detailed description of its terms.
Reasons for Conversion
As a stock institution, the Bank will be structured in the form used by
commercial banks, most business entities, and a growing number of savings
associations. Converting to the stock form is intended to have a positive effect
on the future growth and performance of the Bank by: (i) affording depositors,
other customers and employees of the Bank the opportunity to become shareholders
of the Holding Company and thereby participate more directly in both the Bank's
and the Holding Company's future; (ii) providing the Holding Company with the
flexibility, if deemed appropriate, to engage in new banking-related activities,
to improve the breadth of services offered by the Bank, and potentially to
expand through mergers and acquisitions by permitting the offering of equity
participations to the shareholders of acquired companies; (iii) providing
substantially increased net worth and equity capital for investment in its
business, thus enabling management to pursue new and additional lending and
investment opportunities and to expand operations; and (iv) providing future
access to capital markets through the sale of stock of the Holding Company in
order to generate additional capital to accommodate or promote future growth.
The Bank believes that the increased capital and operating flexibility will
enhance its competitiveness with other types of financial services
organizations. Although the Bank's current members will, upon Conversion, lose
the voting and liquidation rights they presently have as members (except to the
limited extent of their rights in the liquidation account established in the
Conversion), they are being offered a priority right to purchase shares in the
Conversion and thereby obtain voting and liquidation rights in the Holding
Company.
The net proceeds to the Bank from the sale of Common Stock offered hereby,
after retention by the Holding Company of $2,267,500 of the net proceeds,
estimated at $3,122,500, based upon the sale of 570,000 shares at $10.00 per
share, will increase the Bank's already significant net worth and thus provide
an even stronger capital base to support the Bank's lending and investment
activities. Although the Bank's regulatory capital at December 31, 1995,
exceeded its Capital Requirements, the Bank's Board of Directors believes that
it is desirable to increase regulatory capital for the foregoing purposes in
view of the competitive and changing financial conditions in which the Bank
operates and the new opportunities created and higher levels of regulatory
capital required by recent federal legislation.
In addition, the Conversion will provide the Bank with new opportunities to
attract and retain talented and experienced personnel through offering stock
incentive programs.
<PAGE>
The Board of Directors of the Bank believes that the Conversion to a
holding company structure is the best way to enable the Bank to diversify its
business activities should it choose to do so. Currently, there are no plans,
written or oral, for the Holding Company to engage in any material activities
apart from holding the shares of the Bank, and loaning funds to the ESOP to
purchase shares of Common Stock in the Conversion, although the Board may
determine to expand the Holding Company's activities after the Conversion.
The preferred stock and additional Common Stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions
(although the Holding Company has no current discussions, arrangements or
agreements, written or oral, with respect to any acquisition) and for issuance
and sale to raise additional equity capital, subject to market conditions and
generally without shareholder approval. The Holding Company's ability to raise
additional funds through the sale of debt securities to the public or
institutional investors should also be enhanced by the increase in its equity
capital base provided by the Conversion. Although the Holding Company currently
has no plans with respect to future issuances of equity or debt securities, the
more flexible operating structure provided by the Holding Company and the stock
form of ownership is expected to assist the Bank in competing aggressively with
other financial institutions in its market area.
The Conversion will also permit the Bank's members who subscribe for shares
of Common Stock to become shareholders of the Holding Company, thereby allowing
members to indirectly own stock in the financial organization in which they
maintain deposit accounts. Such ownership may encourage shareholders to promote
the Bank to others, thereby further contributing to the Bank's growth.
Principal Effects of Conversion
General. Each savings depositor in a mutual savings bank such as the Bank
has both a savings account and a pro rata ownership in the net worth of that
institution, based upon the balance in his or her savings account, which has no
tangible market value separate from the savings account. Any other depositor who
opens a savings account obtains a pro rata interest in the net worth of the bank
without any additional payment beyond the amount of the deposit. A depositor who
reduces or closes his or her account receives a portion or all of the balance in
the account but nothing for his or her ownership interest, which is lost to the
extent that the balance in the account is reduced. As a result, depositors
normally can only realize the value of their ownership in the unlikely event
that the mutual bank is liquidated. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual retained earnings
(any remaining net worth) after other claims are paid.
Upon conversion to stock form, the ownership of the bank's net worth will
be represented by the outstanding shares of stock to be owned by its holding
company. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the shares may be
transferred with no effect on any account the seller may hold in the bank.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank in accepting deposits and making loans will be continued without
interruption. After the Conversion, the Bank will continue to provide services
for account holders and borrowers under current policies carried on by its
present management and staff.
The directors serving the Bank at the time of Conversion will continue to
serve in such capacity after the Conversion until the expiration of their
current terms, and thereafter, if reelected. See "Management -- Directors of the
Bank." All executive officers of the Bank at the time of Conversion will retain
their positions after the Conversion.
Effect on Deposit Accounts. Under the Plan, each holder of a deposit
account in the Bank at the time of the Conversion will automatically continue as
a deposit account holder in the Bank after the Conversion to stock form, and
each such deposit account will remain the same with respect to deposit balance,
interest rate and other terms. Each such account will be insured by the FDIC in
exactly the same way as before. Depositors will continue to hold their existing
certificates, passbooks and other evidence of their accounts.
Effect on Loans of Borrowers. No loan from the Bank will be affected by the
Conversion. The amount, interest rate, maturity and security for each loan will
be unchanged.
Effect on Voting Rights of Members. Currently, all savings, demand, and
other account holders of the Bank and all borrowers of the Bank are members of,
and have voting rights in, the Bank as to all matters requiring membership
action. Each savings, demand and other account holder has one vote for each
$100, or fraction thereof, of the withdrawal value (deposit balance) of accounts
held by such member. Each borrower has one vote. However, no member may cast
more than 1,000 votes.
<PAGE>
Following the Conversion, the Bank's members will cease to be members and
will no longer have voting rights in the Bank, and therefore will not be able to
elect directors of the Bank or control its affairs. All voting rights in the
Bank will be vested in the Holding Company as the sole shareholder of the Bank.
Voting rights in the Holding Company will be vested exclusively in its
shareholders, with one vote for each share of Common Stock. Neither the Common
Stock to be sold in the Conversion nor the capital stock of the Bank will be
insured by the FDIC or any other government entity.
Effect on Liquidation Rights. If the Bank were to liquidate as a mutual
savings bank, all claims of creditors (including those of deposit account
holders, to the extent of their deposit balances) would be paid first and, if
there were any assets remaining, account holders would then receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
accounts just prior to liquidation. If the Bank were to liquidate after the
Conversion, all claims of creditors (including those of deposit account holders,
to the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain deposit account holders (as
described below), with any assets remaining thereafter distributed to the
Holding Company as the sole shareholder of the Bank.
The Plan of Conversion provides for the establishment of a "liquidation
account" which is a memorandum account (i.e., an account not appearing on the
Bank's balance sheet) for the benefit of its deposit account holders with
balances of no less than $50.00 on March 31, 1994 ("Eligible Account Holders"),
and its deposit account holders with balances of no less than $50.00 on March
31, 1996 ("Supplemental Eligible Account Holders"), who continue to maintain
their accounts in the Bank after Conversion. The liquidation account will be
established as a memorandum account (i.e., an account not appearing on the
Bank's balance sheet) and will be credited with the net worth of the Bank as
reflected in the latest statement of financial condition in the final prospectus
used in the Conversion. Each Eligible Account Holder and Supplemental Eligible
Account Holder will, with respect to each deposit account held, have a related
inchoate interest in a portion of the balance of the liquidation account. This
inchoate interest is referred to in the Plan as a "subaccount balance." In the
event of a complete liquidation of the Bank after the Conversion (and only in
such event), Eligible Account Holders and Supplemental Eligible Account Holders
of the Bank would be entitled to a distribution from the liquidation account in
an amount equal to the then current adjusted subaccount balance then held,
before any liquidation distribution would be made to the Holding Company as sole
shareholder of the Bank. Management believes that a liquidation of the Bank is
unlikely.
Each Eligible Account Holder will have a subaccount balance in the
liquidation account for each deposit account held as of March 31, 1994 (the
"Eligibility Record Date"). Each Supplemental Eligible Account Holder will have
a subaccount balance in the liquidation account for each deposit account held as
of March 31, 1996 (the "Supplemental Eligibility Record Date"). Each initial
subaccount balance will be the amount determined by multiplying the total
opening balance in the liquidation account by a fraction, the numerator of which
is the amount of the qualifying deposit (a deposit of at least $50 as of March
31, 1994, or March 31, 1996, respectively) of such deposit account, and the
denominator of which is the total of all qualifying deposits on that date. If
the amount in the deposit account on any subsequent annual closing date of the
Bank is less than the balance in such deposit account on any other annual
closing date, or the balance in such account on the Eligibility Record Date or
the Supplemental Eligibility Record Date, as the case may be, this interest in
the liquidation account will be reduced by an amount proportionate to any such
reduction, and will not thereafter be increased despite any subsequent increase
in the related deposit account. An Eligible Account Holder's, as well as a
Supplemental Eligible Account Holder's, interest in the liquidation account will
cease to exist if the deposit account is closed. The liquidation account will
never increase and will be correspondingly reduced as the interests in the
liquidation account are reduced or cease to exist. In the event of liquidation,
any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied will be
distributed to the Holding Company as the sole shareholder of the Bank.
A merger, consolidation, sale of bulk assets, or similar combination or
transaction in which the Bank is not the surviving entity would not be
considered to be a "liquidation" under which distribution of the liquidation
account could be made, provided the surviving institution is an FDIC-insured
institution. In such a transaction, the liquidation account would be assumed by
the surviving institution.
The creation and maintenance of the liquidation account will not restrict
the use of or application of any of the net worth accounts of the Bank, except
that the Bank may not declare or pay a cash dividend on or repurchase its
capital stock if the effect of such dividend or repurchase would be to cause its
net worth to be reduced below the aggregate amount then required for the
liquidation account.
<PAGE>
Tax Effects. The Bank intends to proceed with the Conversion on the basis
of an opinion from its special counsel, Barnes & Thornburg, Indianapolis,
Indiana, as to certain tax matters. The opinion is based, among other things, on
certain representations made by the Bank, including the representation that the
exercise price of the subscription rights to purchase Holding Company Common
Stock will be approximately equal to the fair market value of the stock at the
time of the completion of the Conversion. With respect to the subscription
rights, the Bank has received an opinion of Keller which, based on certain
assumptions, concludes that the subscription rights to be received by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members do not
have any economic value at the time of distribution or the time the subscription
rights are exercised, whether or not a Direct Community Offering takes place,
and Barnes & Thornburg's opinion is given in reliance thereon. The material
aspects of Barnes & Thornburg's opinion are as follows:
1. The change in form of the Bank from a mutual savings bank to a stock
savings bank will qualify as a reorganization under Section 368(a)(1)(F) of
the Code and no gain or loss will be recognized to the Bank in either its
mutual form or its stock form by reason of the Conversion.
2. No gain or loss will be recognized by the converted bank upon receipt of
money from the Holding Company for the converted bank's capital stock, and
no gain or loss will be recognized to the Holding Company upon the receipt
of money for Common Stock of the Holding Company.
3. The basis of the assets of the converted bank will be the same as the basis
in the Bank's hands prior to the Conversion.
4. The holding period of the assets of the converted bank will include the
period during which the assets were held by the Bank in its mutual form
prior to Conversion.
5. No gain or loss will be realized by the deposit account holders of the
Bank, upon the constructive issuance to them of withdrawable deposit
accounts of the converted bank immediately after the Conversion, interests
in the liquidation account, and/or on the distribution to them of
nontransferable subscription rights to purchase Holding Company Common
Stock. 6. The basis of an account holder's deposit accounts in the
converted bank after the Conversion will be the same as the basis of his or
her deposit account in the Bank prior to the Conversion.
7. The basis of each account holder's interest in the liquidation account will
be zero. The basis of the non-transferable subscription rights will be
zero.
8. The basis of the Holding Company Common Stock to its shareholders will be
the actual purchase price ($10.00) thereof, and a shareholder's holding
period for Holding Company Common Stock acquired through the exercise of
subscription rights will begin on the date on which the subscription rights
are exercised.
9. No taxable income will be realized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members as a result of the
exercise of the nontransferable subscription rights. 10. The converted bank
in its stock form will succeed to and take into account the earnings and
profits or deficit in earnings and profits of the Bank, in its mutual form,
as of the date of Conversion.
<PAGE>
The opinion also concludes in effect that:
1. No taxable income will be realized by the Bank on the issuance of
subscription rights to eligible subscribers to purchase shares of Holding
Company Common Stock at fair market value.
2. The converted bank will succeed to and take into account the dollar amounts
of those accounts of the Bank in its mutual form which represent bad debt
reserves in respect of which the Bank in its mutual form has taken a bad
debt deduction for taxable years on or before the date of the transfer.
3. The creation of the liquidation account will have no effect on the Bank's
taxable income, deductions, or additions to bad debt reserves or
distributions to shareholders under Section 593 of the Code.
Barnes & Thornburg has also issued an opinion stating in essence that the
Conversion will not be a taxable transaction to the Holding Company or the Bank
under any Indiana tax statute imposing a tax on income, and that the Bank's
depositors will be treated under such laws in a manner similar to the manner in
which they will be treated under federal income tax law.
The opinions of Barnes & Thornburg and Keller, unlike a letter ruling
issued by the Internal Revenue Service, are not binding on the Service and the
conclusions expressed herein may be challenged at a future date. The Service has
issued favorable rulings for transactions substantially similar to the proposed
Conversion, but any such ruling may not be cited as precedent by any taxpayer
other than the taxpayer to whom the ruling is addressed. The Bank does not plan
to apply for a letter ruling concerning the transactions described herein.
<PAGE>
Offering of Holding Company Common Stock
Under the Plan of Conversion, up to 655,500 shares of Common Stock are
being offered for sale, initially through the Subscription Offering (subject to
a possible increase to 753,825 shares). See "-- Subscription Offering." The Plan
of Conversion requires, with certain exceptions, that a number of shares equal
to at least 484,500 be sold in order for the Conversion to be effective. Shares
will also be offered to the public in a Direct Community Offering which will
commence concurrently with the Subscription Offering. The Direct Community
Offering may expire as early as June 17, or at any time thereafter (until August
1, unless extended by the Bank and the Holding Company) when orders for at least
484,500 shares have been received in the Subscription Offering and Direct
Community Offering. The offering may be extended until 24 months following the
members' approval of the Plan of Conversion, or until June 14, 1998. The actual
number of shares to be sold in the Conversion will depend upon market and
financial conditions at the time of the Conversion, provided that no fewer than
484,500 shares or more than 753,825 shares will be sold in the Conversion. The
per share price to be paid by purchasers in the Direct Community Offering for
any remaining shares will be $10.00, the same price paid by subscribers in the
Subscription Offering. See "-- Stock Pricing."
The Subscription Offering expires at 5:00 p.m., Spencer time, on June 17,
1996. The Plan of Conversion requires that the Bank complete the sale of Common
Stock within 45 days after the close of the Subscription Offering. This 45-day
period expires on August 1, 1996. In the event the Bank is unable to complete
the sale of Common Stock within the 45-day period, an extension of this time
period may be provided by the Bank and the Holding Company. If an extension is
granted, the Bank will promptly notify subscribers of the granting of the
extension of time and will promptly return subscriptions unless subscribers
affirmatively elect to continue their subscriptions during the period of
extension. Such extensions may not be made beyond June 14, 1998.
The Plan of Conversion provides that if, for any reason, shares remain
unsold after the Subscription Offering and the Direct Community Offering, if
any, the Board of Directors of the Bank will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to the
approval of the DFI. If such other purchase arrangements cannot be made, the
Plan of Conversion will terminate. In the event that the Conversion is not
effected, the Bank will remain a mutual savings bank, all subscription funds
will be promptly returned to subscribers with interest earned thereon at the
passbook rate, which is currently 3.00% per annum (except for payments to have
been made through withdrawal authorizations which will have continued to earn
interest at the contractual account rates), and all withdrawal authorizations
will be canceled.
Subscription Offering
Nontransferable rights to subscribe for the purchase of the Holding
Company's Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of priority: (1) savings, demand, and
other account holders of the Bank with balances no less than $50.00 as of March
31, 1994 ("Eligible Account Holders"); (2) the Bank's ESOP; (3) savings, demand,
and other account holders of the Bank with balances no less than $50.00 as of
March 31, 1996 ("Supplemental Eligible Account Holders"); and (4) depositor and
borrower members of the Bank other than Eligible Account Holders and
Supplemental Eligible Account Holders, at the close of business on May 10, 1996,
the voting record date for the Special Meeting ("Other Members"). All
subscriptions received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering, and to the maximum and minimum purchase limitations set
forth in the Plan of Conversion (and described below). The March 31, 1994, date
for determination of Eligible Account Holders and the March 31, 1996 date for
determination of Supplemental Eligible Account Holders were selected in
accordance with FDIC regulations applicable to the Conversion.
Category I: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, nontransferable subscription rights to
purchase up to 10,000 shares of the Common Stock offered in the Conversion.
If sufficient shares are not available in this Category I, shares will be
allocated in a manner that will allow each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Eligible Account
Holders in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Eligible Account Holders.
<PAGE>
The "qualifying deposits" of an Eligible Account Holder is the amount of
the deposit balances (provided such aggregate balance is not less than $50.00)
in his or her deposit accounts as of the close of business on March 31, 1994.
Subscription rights received by directors and officers in this category based
upon their increased deposits in the Bank during the year preceding March 31,
1994, are subordinated to the subscription rights of other Eligible Account
Holders. Notwithstanding the foregoing, shares of Common Stock in excess of
$6,555,000, the maximum of the Estimated Valuation Range, may be sold to the
ESOP before fully satisfying the subscriptions of Eligible Account Holders.
Category II: The ESOP. The ESOP will receive, without payment therefor,
nontransferable subscription rights to purchase up to 10% of the total number of
shares of Common Stock offered in the Conversion on behalf of participants,
provided that shares remain available after satisfying the subscription rights
of Eligible Account Holders up to the maximum of the Estimated Valuation Range
as described above. The ESOP currently intends to purchase 8% of the shares sold
in the Conversion. If the ESOP is unable to purchase all or part of the shares
of Common Stock for which it subscribes, the ESOP may purchase such shares on
the open market or may purchase authorized but unissued shares of the Holding
Company. If the ESOP purchases authorized but unissued shares from the Bank,
such purchases could have a dilutive effect on the interests of the Holding
Company's shareholders.
Category III: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, nontransferable
subscription rights to purchase up to 10,000 shares of the Common Stock offered
in the Conversion. Such subscription rights will be applicable only to such
shares as remain available after the subscriptions of the Eligible Account
Holders and the ESOP have been satisfied. Any subscription rights received by a
person as a result of his or her status as an Eligible Account Holder will
reduce to the extent thereof the subscription rights granted to such person as a
result of his or her status as a Supplemental Eligible Account Holder.
If sufficient shares are not available in this Category III, shares will be
allocated in a manner that will allow each Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Supplemental
Eligible Account Holders in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of qualifying deposits of all
subscribing Supplemental Eligible Account Holders.
The "qualifying deposits" of a Supplemental Eligible Account Holder is the
amount of the deposit balances (provided such aggregate balance is not less than
$50) in his or her deposit accounts as of the close of business on March 31,
1996.
Category IV: Other Members. The Other Members of the Bank will receive,
without payment therefor, nontransferable subscription rights to purchase up to
10,000 shares of the Common Stock offered in the Conversion. Such subscription
rights will be applicable only to such shares as remain available after the
subscriptions of Eligible Account Holders, the ESOP and Supplemental Eligible
Account Holders have been satisfied.
If sufficient shares are not available in this Category IV, shares will be
allocated pro rata among subscribing Other Members in the same proportion that
the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
Timing of Offering and Method of Payment. The Subscription Offering will
expire at 5:00 p.m., Spencer time, on June 17, 1996 (the "Expiration Date"). The
Expiration Date may be extended by the Bank and the Holding Company to June 14,
1998.
Subscribers must, before the Expiration Date, or such date to which the
Expiration Date may be extended, return Order Forms to the Bank, properly
completed, together with cash, checks or money orders in an amount equal to the
Purchase Price ($10.00 per share) multiplied by the number of shares for which
subscription is made. Payment for stock purchases can also be accomplished
through authorization on the Order Form of withdrawals from accounts (including
a certificate of deposit). The Bank has the right to reject any orders
transmitted by facsimile and any payments made by wire transfer.
Until completion or termination of the Conversion, subscribers who elect to
make payment through authorization of withdrawal from accounts with the Bank
will not be permitted to reduce the deposit balance in any such accounts below
the amount required to purchase the shares for which they subscribed. In such
cases interest will continue to be credited on deposits authorized for
withdrawal until the completion of the Conversion. Interest at the passbook
rate, which is currently 3.00% per annum, for an annualized percentage yield of
3.03%, will be paid on amounts submitted in cash or by check. Authorized
withdrawals from certificate accounts for the purchase of Common Stock will be
permitted without the imposition of early withdrawal penalties or loss of
interest. However, withdrawals from certificate accounts that reduce the balance
of such accounts below the required minimum for specific interest rate
qualification will cause the cancellation of the certificate accounts at the
effective date of the Conversion, and the remaining balance will earn interest
at the passbook savings rate. Stock subscriptions received by the Bank may not
be withdrawn by the subscriber before August 1, 1996, and, if accepted by the
Bank, are final until that date.
<PAGE>
Members in Non-Qualified States or Foreign Countries. The Bank and the
Holding Company will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
stock pursuant to the Plan reside. However, no person will be offered or sold or
receive any stock pursuant to the Subscription Offering if such person resides
in a foreign country or resides in a state in the United States with respect to
which all of the following apply: (i) a small number of persons otherwise
eligible to subscribe for shares of Common Stock reside in such state; (ii) the
granting of subscription rights or the offer or sale of Common Stock to such
persons would require the Bank or the Holding Company or their respective
officers and directors, under the securities laws of such state, to register as
a dealer, dealer, salesman or selling agent, or to register or otherwise qualify
the Common Stock for sale in such state; and (iii) such registration,
qualification or filing in the judgment of the Holding Company and the Bank
would be impracticable or unduly burdensome for reasons of cost or otherwise.
To assist in the Subscription and Direct Community Offerings, the Holding
Company has established a Stock Information Center ((812) 829-2095). Callers to
the Stock Information Center will be able to request a Subscription and Direct
Community Offering Prospectus and other information relating to the offering.
Direct Community Offering
Commencing concurrently with the Subscription Offering, the Bank is
offering shares of Holding Company Common Stock in the Direct Community Offering
to the general public, with preference given to residents of Owen County, to the
extent such shares remain available after satisfaction of all orders received in
the Subscription Offering. The right of any person to purchase shares in the
Direct Community Offering is subject to the right of the Bank to accept or
reject such purchase in whole or in part. The Bank has the right to terminate
the Direct Community Offering as soon as it has received orders for at least the
minimum number of shares available for purchase in the Conversion.
The Direct Community Offering may expire as early as June 17, 1996, or at
any time thereafter (until August 1, 1996, unless extended by the Bank and the
Holding Company) when orders for at least 484,500 shares have been received in
the Subscription Offering and Direct Community Offering. Accordingly, persons
wishing to purchase stock in the Direct Community Offering directly from the
Holding Company should return the Order Form on or before June 17, 1996, to the
Bank, properly completed, together with cash, check or money order in the amount
equal to the Purchase Price ($10.00 per share) multiplied by the number of
shares which that person desires to purchase. Order Forms will be accepted in
the Direct Community Offering until its completion, which is expected to occur
on or after June 17, 1996, and before August 1, 1996. However, as mentioned
above, the Bank may terminate the Direct Community Offering as soon as it has
received orders for at least the minimum number of shares available for purchase
in the Conversion. Therefore, persons who submit a Order Form after June 17,
1996, may be precluded from purchasing stock in the Direct Community Offering
because the Direct Community Offering may have been terminated before the Order
Form is submitted.
If all the Holding Company Common Stock offered in the Subscription
Offering is subscribed for, no Holding Company Common Stock will be available
for purchase in the Direct Community Offering and all funds submitted pursuant
to the Direct Community Offering will be promptly refunded, with interest, as
hereafter described. Purchase orders received during the Direct Community
Offering will be filled up to a maximum of 2% of the total number of shares of
Common Stock issued in the Conversion, with any remaining unfilled purchase
orders to be allocated on an equal number of shares basis. If the Direct
Community Offering extends beyond 45 days following the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for stock previously submitted. All sales of Holding
Company Common Stock in the Direct Community Offering will be at the same price
per share as the sales of Holding Company Common Stock in the Subscription
Offering.
Cash and checks received in the Direct Community Offering will be placed in
a special escrow account at the Bank, and will earn interest at the passbook
rate, which is currently 3.00% per annum, for an annualized percentage yield of
3.03%, from the date of deposit until completion or termination of the
Conversion. In the event that the Conversion is not consummated for any reason,
all funds submitted pursuant to the Direct Community Offering will be promptly
refunded with interest as described above.
<PAGE>
Delivery of Certificates
Certificates representing shares issued in the Subscription Offering and in
the Direct Community Offering pursuant to Order Forms will be mailed to the
persons entitled to them at the last addresses of such persons appearing on the
books of the Bank or to such other addresses as may be specified in properly
completed Order Forms as soon as practicable following consummation of the
Conversion. Any certificates returned as undeliverable will be held by the
Holding Company until claimed by the person legally entitled to them or
otherwise disposed of in accordance with applicable law.
Agents
To assist the Bank and the Holding Company in marketing the Holding Company
Common Stock offered hereby, the Bank has retained the services of Charles Webb
& Company and Friedman, Billings, Ramsey & Co., Inc. as its exclusive agents
(the "Agents"). Each of the Agents is a broker-dealer registered with the SEC
and a member of the National Association of Securities Dealers, Inc. (the
"NASD"). The Agents will assist the Bank in the Conversion as follows: (1) in
training and educating the Bank's employees regarding the mechanics and
regulatory requirements of the conversion process; (2) in conducting
informational meetings for subscribers and other potential purchasers; (3) in
keeping records of all stock subscriptions; and (4) in obtaining proxies from
the Bank's members with respect to the Special Meeting. For providing these
services, the Bank has agreed to pay the Agents a fixed fee of $50,000. Offers
and sales in the Direct Community Offering will be on a best efforts basis and,
as a result, the Agents are not obligated to purchase any shares of the Common
Stock.
The Bank has also agreed to reimburse the Agents for their out-of-pocket
expenses (including legal fees and disbursements) in an amount not to exceed
$30,000 without the Bank's consent. The Bank and the Holding Company have also
agreed to indemnify the Agents, under certain circumstances, against liabilities
and expenses (including legal fees) arising out of the Agents' engagement by the
Bank, including liabilities under the 1933 Act.
Selected Dealers
At the sole discretion of the Bank, the Agents may enter into an agreement
with certain dealers chosen by the Bank (together, the "Selected Dealers") to
assist in the sale of shares in the Direct Community Offering. FBR, with whom
Webb has a joint marketing arrangement, may be used as one such selected dealer.
It is anticipated that FBR will provide research coverage and act as a market
maker in the Common Stock following the Conversion. Selected Dealers will
receive commissions at an agreed upon rate, not to exceed 4.0%, for all shares
sold by such Selected Dealers. During the Direct Community Offering, Selected
Dealers may only solicit indications of interest from their customers to place
orders with the Bank as of a certain date (the "Order Date") for the purchase of
shares of Common Stock. When and if the Bank believes that enough indications of
interest and orders have been received in the Subscription Offering and Direct
Community Offering to consummate the Conversion, the Agent will request, as of
the Order Date, Selected Dealers to submit orders to purchase shares for which
they have previously received indications of interest from the customers.
Selected Dealers will send confirmations of the orders to such customers on the
next business day after the Order Date. Selected Dealers will debit the accounts
of their customers on the date which will be three business days from the Order
Date (the "Settlement Date"). On the Settlement Date, funds received by Selected
Dealers will be remitted to the Bank. It is anticipated that the Conversion will
be consummated on the Settlement Date. However, if consummation is delayed after
payment has been received by the Bank from Selected Dealers, funds will earn
interest at the passbook rate, which is currently 3.00% per annum, for an
annualized percentage yield of 3.03%, until the completion of the offering.
Funds will be returned promptly in the event the Conversion is not consummated.
<PAGE>
Limitations on Common Stock Purchases
The Plan includes a number of limitations on the number of shares of Common
Stock which may be purchased during the Conversion. These are summarized below:
(1) No fewer than 25 shares may be purchased by any person purchasing shares of
Common Stock in the Conversion (provided that sufficient shares are
available).
(2) No more than 10,000 shares of Common Stock offered in the Conversion may be
purchased in the Conversion by any person, including within such
limitation, purchases of any Associate (as defined below) or group of
persons acting in concert (except for the ESOP which may purchase up to 10%
of the total number of shares of Common Stock offered in the Conversion).
The Bank's and the Holding Company's Boards of Directors may, however, in
their sole discretion, increase the maximum purchase limitation set forth
above up to 9.99% of the shares of Common Stock sold in the Conversion,
provided that orders for shares exceeding 5% of the shares of Common Stock
sold in the Conversion may not exceed, in the aggregate, 10% of the shares
sold in the Conversion, except that the ESOP may purchase in the aggregate
up to 10% of the shares of Common Stock sold in the Conversion and not be
included in the order limit. If the Boards of Directors decide to increase
the purchase limitation, all persons who subscribe for the maximum number
of shares of Common Stock offered in the Conversion will be, and certain
other large subscribers in the sole discretion of the Bank may be, given
the opportunity to increase their subscriptions accordingly, subject to the
rights and preferences of any person who has priority subscription rights.
The overall purchase limitation may be reduced in the sole discretion of
the Board of Directors of the Bank.
(3) No more than 35% of the shares of Common Stock may be purchased in the
Conversion by directors and officers of the Bank and the Holding Company
and their Associates (excluding shares allocable to such persons under the
ESOP).
The term "Associate" of a person is defined to mean (i) any corporation or
organization (other than the Bank or its subsidiary or the Holding Company) of
which such person is a director, officer, partner or 10% stockholder; (ii) any
trust or other estate in which such person has a substantial beneficial interest
or serves as trustee or in a similar fiduciary capacity; provided, however that
such term shall not include any employee stock benefit plan of the Holding
Company or the Bank in which such a person has a substantial beneficial interest
or serves as a trustee or in a similar fiduciary capacity, and (iii) any
relative or spouse of such person, or relative of such spouse, who either has
the same home as such person or who is a director or officer of the Bank or its
subsidiary or the Holding Company. Directors are not treated as Associates of
one another solely because of their board membership. Compliance with the
foregoing limitations does not necessarily constitute compliance with other
regulatory restrictions on acquisitions of the Common Stock. For a further
discussion of limitations on purchases of the Holding Company Common Stock
during and subsequent to Conversion, see "-- Restrictions on Sale of Stock by
Directors and Officers," "-- Restrictions on Purchase of Stock by Directors and
Officers Following Conversion," and "Restrictions on Acquisition of the Holding
Company."
<PAGE>
Restrictions on Repurchase of Stock by Holding Company
Regulations promulgated by the FRB provide that a bank holding company must
file written notice with the FRB prior to any repurchase of its equity
securities if the gross consideration for the purchase, when aggregated with the
net consideration paid by the bank holding company for all repurchases during
the preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. This notice requirement is not applicable, however, to a
bank holding company that exceeds the thresholds established for a well
capitalized bank and that satisfies certain other regulatory requirements.
Under Indiana law, the Holding Company will be precluded from repurchasing
its equity securities if, after giving effect to such repurchase, the Holding
Company would be unable to pay its debts as they become due or the Holding
Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Restrictions on Sale of Stock by Directors and Officers
All shares of the Common Stock purchased by directors and officers of the
Bank or the Holding Company in the Conversion will be subject to the restriction
that such shares may not be sold or otherwise disposed of for value for a period
of one year following the date of purchase, except for any disposition of such
shares (i) following the death of the original purchaser or (ii) by reason of an
exchange of securities in connection with a merger or acquisition approved by
the applicable regulatory authorities. Sales of shares of the Common Stock by
the Holding Company's directors and officers will also be subject to certain
insider trading and other transfer restrictions under the federal securities
laws. See "Regulation -- Federal Securities Laws" and "Description of Capital
Stock."
Each certificate for such restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to the Holding Company's transfer agent to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of the
restriction. Any shares of Common Stock issued pursuant to a stock dividend,
stock split or otherwise with respect to restricted shares will be subject to
the same restrictions on sale.
Restrictions on Purchase of Stock by Directors and Officers Following Conversion
For a period of three years following the Conversion, without prior written
approval of the DFI, neither directors nor officers of the Bank or the Holding
Company nor their Associates may purchase shares of the Common Stock of the
Holding Company, except from a dealer registered with the SEC. This restriction
does not, however, apply to negotiated transactions involving more than one
percent of the Holding Company's outstanding Common Stock, to shares purchased
pursuant to stock option or other incentive stock plans approved by the Holding
Company's shareholders, or to shares purchased by employee benefit plans
maintained by the Holding Company which may be attributable to individual
officers or directors.
<PAGE>
Restrictions on Transfer of Subscription Rights and Common Stock
Prior to the completion of the Conversion, the Plan of Conversion prohibits
any person with subscription rights, including Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Bank, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the Plan
or the shares of Common Stock to be issued upon their exercise. Such rights may
be exercised only by the person to whom they are guaranteed and only for his/her
account. Each person exercising such subscription rights will be required to
certify that he/she is purchasing shares solely for his/her own account and that
he/she has no agreement or understanding regarding the sale or transfer of such
shares.
The Holding Company and the Bank will pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Stock Pricing
The aggregate purchase price of the Holding Company Common Stock being sold
in the Conversion will be based on the appraised aggregate pro forma market
value of the Common Stock, as determined by an independent valuation. Keller &
Company, Inc. ("Keller"), which is experienced in the valuation and appraisal of
business entities, including savings institutions involved in the conversion
process, was retained by the Bank to prepare an appraisal. Keller will receive a
fee of $15,000 for its appraisal. Keller has also prepared a business plan for
the Bank for a fee of $4,000. The Bank has agreed to indemnify Keller, under
certain circumstances, against liabilities and expenses (including legal fees)
arising out of Keller's engagement by the Bank.
Keller has prepared an appraisal of the estimated pro forma market value of
the Bank. Keller's appraisal concluded that as of April 5, 1996, the appropriate
valuation range (the "Estimated Valuation Range") for the estimated pro forma
market value of the Common Stock was from a minimum of $4,845,000 to a maximum
of $6,555,000, with a midpoint of $5,700,000. A copy of the appraisal is on file
and available for inspection at the offices of the Bank, 279 East Morgan Street,
Spencer, Indiana 47460. The appraisal has also been filed as an exhibit to the
Holding Company's Registration Statement with the SEC, and may be reviewed at
the SEC's public reference facilities. See "Additional Information." The
appraisal involved a comparative evaluation of the operating and financial
statistics of the Bank with those of other savings institutions. The appraisal
also took into account such other factors as the market for savings institutions
generally, prevailing economic conditions, both nationally and in Indiana, which
affect the operations of savings institutions, the competitive environment
within which the Bank operates, and the effect of the Bank becoming a subsidiary
of the Holding Company. No detailed individual analysis of the separate
components of the Bank's and the Holding Company's assets and liabilities was
performed in connection with the evaluation. The Board of Directors reviewed
with management Keller's methods and assumptions and accepted Keller's appraisal
as reasonable and adequate. The Holding Company, in consultation with Webb, has
determined to offer the Common Stock in the Conversion at a price of $10.00 per
share. The Holding Company's decision regarding the Purchase Price was based
solely on its determination that $10.00 per share is a customary purchase price
in conversion transactions. The Estimated Valuation Range may be increased or
decreased to reflect market and financial conditions prior to the completion of
the Conversion.
Promptly after the completion of the Subscription Offering and the Direct
Community Offering, if any, Keller will confirm to the Bank that, to the best of
Keller's knowledge and judgment, nothing of a material nature has occurred which
would cause Keller to conclude that the amount of the aggregate proceeds
received from the sale of the Common Stock in the Conversion was incompatible
with its estimate of the total pro forma market value of the Bank at the time of
the sale. If, however, the facts do not justify such a statement, a new
Estimated Valuation Range and price per share may be set. Under such
circumstances, the Holding Company may resolicit subscriptions. In that event,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced;
provided that if the pro forma market value of the Bank upon Conversion has
increased to an amount which does not exceed $7,538,250 (15% above the maximum
of the Estimated Valuation Range), the Holding Company and the Bank do not
intend to resolicit subscriptions.
<PAGE>
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. A change in
the number of shares to be issued in the Conversion will not affect subscription
rights, which are based on the 655,500 shares being offered in the Subscription
Offering. In the event of an increase in the maximum number of shares being
offered, persons who exercise their maximum subscription rights will be notified
of such increase and of their right to purchase additional shares. Conversely,
in the event of a decrease in the maximum number of shares being offered,
persons who exercise their maximum subscription rights will be notified of such
decrease and of the concomitant reduction in the number of shares for which
subscriptions may be made. In the event of a resoliciation, subscribers will be
afforded the opportunity to increase, decrease or maintain their previously
submitted order. The Holding Company will be required to resolicit if the price
per share is changed such that the total aggregate purchase price is not within
the minimum and 15% above the maximum of the Estimated Valuation Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE
SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND
THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE.
Number of Shares to be Issued
It is anticipated that the total offering of Common Stock (the number of
shares of Common Stock issued in the Conversion multiplied by the Purchase Price
of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Estimated Valuation Range. Unless otherwise required by the DFI,
no resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions so long as the change in the
number of shares to be issued in the Conversion, in combination with the
Purchase Price, results in an offering within the minimum and 15% above the
maximum of the Estimated Valuation Range. An increase in the total number of
shares of Common Stock to be issued in the Conversion would decrease both a
subscriber's ownership interest and the Holding Company's pro forma net worth on
a per share basis while increasing (assuming no change in the per share price)
pro forma net income and net worth on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Holding Company's pro forma net worth on
a per share basis while decreasing (assuming no change in the per share price)
pro forma net income and net worth on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the Bank
and the Holding Company will be final. The Plan provides that, if deemed
necessary or desirable by the Boards of Directors of the Holding Company and the
Bank, the Plan may be substantively amended by the Boards of Directors, as a
result of comments from regulatory authorities or otherwise. Moreover, if the
Plan of Conversion is so amended, subscriptions which have been received prior
to such amendment will not be refunded unless otherwise required by the DFI.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes of the
members of the Bank eligible to be cast at the Special Meeting and the sale of
all shares of the Common Stock within 24 months following approval of the Plan
by the members. If these conditions are not satisfied, the Plan will be
terminated and the Bank will continue its business in the mutual form of
organization. The Plan may be terminated by the Boards of Directors of the Bank
and the Holding Company at any time prior to the Special Meeting and, with the
approval of the DFI, by such Boards of Directors at any time thereafter.
Furthermore, the Plan of Conversion requires that the Holding Company complete
the sale of Common Stock within 45 days after the close of the Subscription
Offering. The Holding Company and the Bank may extend this time period if
necessary, but no assurance can be given that an extension would be undertaken.
See "-- Offering of Holding Company Common Stock."
<PAGE>
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
General
Although the Boards of Directors of the Bank and the Holding Company are
not aware of any effort that might be made to obtain control of the Holding
Company after the Conversion, the Boards of Directors believe that it is
appropriate to include certain provisions in the Holding Company's Articles of
Incorporation (the "Articles") to protect the interests of the Holding Company
and its shareholders from unsolicited changes in the control of the Holding
Company in circumstances under which the Board of Directors of the Holding
Company concludes will not be in the best interests of the Bank, the Holding
Company or the Holding Company's shareholders.
Although the Holding Company's Board of Directors believes that the
restrictions on acquisition described below are beneficial to shareholders, the
provisions may have the effect of rendering the Holding Company less attractive
to potential acquirors thereby discouraging future takeover attempts which would
not be approved by the Board of Directors but which certain shareholders might
deem to be in their best interest or pursuant to which shareholders might
receive a substantial premium for their shares over then current market prices.
These provisions will also render the removal of the incumbent Board of
Directors and of management more difficult. The Board of Directors has, however,
concluded that the potential benefits of these restrictive provisions outweigh
the possible disadvantages.
The following general discussion contains a summary of the material
provisions of the Articles, the Holding Company's Code of By-Laws (the
"By-Laws"), and certain other regulatory provisions, that may be deemed to have
an effect of delaying, deferring or preventing a change in the control of the
Holding Company. The following description of certain of these provisions is
general and not necessarily complete, and with respect to provisions contained
in the Articles and By-Laws, reference should be made in each case to the
document in question, each of which is part of the Holding Company's
Registration Statement filed with the SEC. See "Additional Information."
Provisions of the Holding Company's Articles and By-Laws
Directors. Certain provisions in the Articles and By-Laws will impede
changes in majority control of the Board of Directors of the Holding Company.
The Articles provide that the Board of Directors of the Holding Company will be
divided into three classes, with directors in each class elected for three-year
staggered terms. Therefore, it would take two annual elections to replace a
majority of the Holding Company's Board.
The Articles also provide that the size of the Board of Directors shall
range between five and fifteen directors, with the exact number of directors to
be fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors of the Holding
Company.
The Articles provide that any vacancy occurring in the Board of Directors,
including a vacancy created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term only by a majority vote of the
directors then in office. Finally, the By-Laws impose certain notice and
information requirements in connection with the nomination by shareholders of
candidates for election to the Board of Directors or the proposal by
shareholders of business to be acted upon at an annual meeting of shareholders.
The Articles provide that a director or the entire Board of Directors may
be removed only for cause and only by the affirmative vote of at least 80% of
the shares eligible to vote generally in the election of directors. Removal for
"cause" is limited to the grounds for termination in the federal regulation
relating to employment contracts of federally-insured savings associations.
Restrictions on Call of Special Meetings. The Articles provide that a
special meeting of shareholders may be called only by the Chairman of the Board
of the Holding Company or pursuant to a resolution adopted by a majority of the
total number of directors of the Holding Company. Shareholders are not
authorized to call a special meeting.
No Cumulative Voting. The Articles provide that there shall be no
cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Articles authorize 2,000,000 shares
of preferred stock, without par value. The Holding Company is authorized to
issue preferred stock from time to time in one or more series subject to
applicable provisions of law, and the Board of Directors is authorized to fix
the designations, powers, preferences and relative participating, optional and
other special rights of such shares, including voting rights (if any and which
could be as a separate class) and conversion rights. In the event of a proposed
merger, tender offer or other attempt to gain control of the Holding Company not
approved by the Board of Directors, it might be possible for the Board of
<PAGE>
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that would impede the completion of such a transaction. An
effect of the possible issuance of preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the Board of Directors deems to
be in the best interests of the Holding Company and its shareholders.
Limitations on 10% Shareholders. The Articles provide that: (i) no person
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company (provided that such limitation shall not apply to the acquisition of
equity securities by any one or more tax-qualified employee stock benefit plans
maintained by the Holding Company, if the plan or plans beneficially own no more
than 25% of any class of such equity security of the Holding Company); and that
(ii) shares beneficially owned in violation of the stock ownership restriction
described above shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to a
vote of shareholders. For these purposes, a person (including management) who
has obtained the right to vote shares of the Common Stock pursuant to revocable
proxies shall not be deemed to be the "beneficial owner" of those shares if that
person is not otherwise deemed to be a beneficial owner of those shares.
Evaluation of Offers. The Articles of the Holding Company provide that the
Board of Directors of the Holding Company, when determining to take or refrain
from taking corporate action on any matter, including making or declining to
make any recommendation to the Holding Company's shareholders, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Holding Company, the Bank and the shareholders of the Holding
Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Holding Company's customers and the Bank's present and future account holders,
borrowers, employees and suppliers; the effect on the communities in which the
Holding Company and the Bank operate or are located; and the effect on the
ability of the Holding Company to fulfill the objectives of a bank holding
company and of the Bank or future savings association subsidiaries to fulfill
the objectives of a stock savings bank under applicable statutes and
regulations. The Articles of the Holding Company also authorize the Board of
Directors to take certain actions to encourage a person to negotiate for a
change of control of the Holding Company or to oppose such a transaction deemed
undesirable by the Board of Directors including the adoption of so-called
shareholder rights plans. By having these standards and provisions in the
Articles of the Holding Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Holding Company, even if
the price offered is significantly greater than the then market price of any
equity security of the Holding Company.
Procedures for Certain Business Combinations. The Articles require that
certain business combinations between the Holding Company (or any majority-owned
subsidiary thereof) and a 10% or greater shareholder either be approved (i) by
at least 80% of the total number of outstanding voting shares of the Holding
Company or (ii) by a majority of certain directors unaffiliated with such 10% or
greater shareholder or involve consideration per share generally equal to the
higher of (A) the highest amount paid by such 10% shareholder or its affiliates
in acquiring any shares of the Common Stock or (B) the "Fair Market Value"
(generally, the highest closing bid paid for the Common Stock during the thirty
days preceding the date of the announcement of the proposed business combination
or on the date the 10% or greater shareholder became such, whichever is higher).
Amendments to Articles and Bylaws. Amendments to the Articles must be
approved by a majority vote of the Holding Company's Board of Directors and also
by a majority of the shares of the Holding Company voting at the applicable
shareholder meeting; provided, however, that approval by at least 80% of the
outstanding voting shares is required for certain provisions (i.e., provisions
relating to number, classification, and removal of directors; amendment of the
By-Laws; call of special shareholder meetings; criteria for evaluating certain
offers; certain business combinations; and amendments to provisions relating to
the foregoing). The provisions concerning limitations on the acquisition of
shares may be amended only by an 80% vote of the Holding Company's outstanding
shares unless at least two-thirds of the Holding Company's Continuing Directors
(directors of the Holding Company on February 21, 1996, or directors recommended
for appointment or election by a majority of such directors) approve such
amendments in advance of their submission to a vote of shareholders (in which
case only a majority vote of shareholders is required).
The By-Laws may be amended only by a majority vote of the total number of
directors of the Holding Company.
<PAGE>
Purpose and Effects of the Anti-Takeover Provisions of the Holding Company
Articles and By-Laws. The Holding Company's Board of Directors believes that the
provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist in the orderly deployment of the Conversion proceeds into
productive assets during the initial period after the Conversion. The Board of
Directors believes these provisions are in the best interest of the Bank and the
Holding Company and its shareholders. In the judgment of the Board of Directors,
the Holding Company's Board of Directors will be in the best position to
determine the true value of the Holding Company and to negotiate more
effectively for what may be in the best interests of the Holding Company and its
shareholders. The Board of Directors believes that these provisions will
encourage potential acquirors to negotiate directly with the Board of Directors
of the Holding Company and discourage hostile takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflecting the
true value of the Holding Company and which is in the best interests of all
shareholders.
Attempts to take over financial institutions and their holding companies
have recently increased. Takeover attempts that have not been negotiated with
and approved by the Board of Directors present to shareholders the risk of a
takeover on terms that may be less favorable than might otherwise be available.
A transaction that is negotiated and approved by the Board of Directors, on the
other hand, can be carefully planned and undertaken at an opportune time to
obtain maximum value for the Holding Company and its shareholders, with due
consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of the Holding Company's
assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to undertake defensive measures at a
great expense. Although a tender offer or other takeover attempt may be made at
a price substantially above then current market prices, such offers are
sometimes made for less than all of the outstanding shares of a target company.
As a result, shareholders may be presented with the alternative of partially
liquidating their investment at a time that may be disadvantageous, or retaining
their investment in an enterprise which is under different management and whose
objective may not be similar to that of the remaining shareholders. The
concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive the Holding Company's remaining
shareholders of the benefits of certain protective provisions of the 1934 Act,
if the number of beneficial owners becomes less than the 300 required for
continued registration under the 1934 Act.
Despite the belief of the Holding Company's Board of Directors in the
benefits to shareholders of the foregoing provisions, the provisions may also
have the effect of discouraging future takeover attempts which would not be
approved by the Board of Directors, but which certain shareholders might deem to
be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. These provisions will also render the removal
of the incumbent Board of Directors and of management more difficult. The Board
of Directors has, however, concluded that the potential benefits of these
restrictive provisions outweigh the possible disadvantages.
<PAGE>
Other Restrictions on Acquisition of the Holding Company and the Bank
State Law. Under Indiana law, no person can acquire effective control
(including, without limitation, acquisition of 25% or more of its voting stock)
of the Holding Company or the Bank without prior approval of the DFI.
Several provisions of the Indiana Business Corporation Law, as amended (the
"IBCL"), could also affect the acquisition of shares of the Common Stock or
otherwise affect the control of the Holding Company. Chapter 43 of the IBCL
prohibits certain business combinations, including mergers, sales of assets,
recapitalizations, and reverse stock splits, between corporations such as the
Holding Company (assuming that it has over 100 shareholders) and an interested
shareholder, defined as the beneficial owner of 10% or more of the voting power
of the outstanding voting shares, for five years following the date on which the
shareholder obtained 10% ownership unless the acquisition was approved in
advance of that date by the board of directors. If prior approval is not
obtained, several price and procedural requirements must be met before the
business combination can be completed. These requirements are similar to those
contained in the Holding Company Articles and described in " -- Provisions of
the Holding Company's Articles and By-Laws -- Procedures for Certain Business
Combinations". In general, the price requirements contained in the IBCL may be
more stringent than those imposed in the Holding Company Articles. However, the
procedural restraints imposed by the Holding Company Articles are somewhat
broader than those imposed by the IBCL. Also, the provisions of the IBCL may
change at some future date, but the relevant provisions of the Holding Company
Articles may only be amended by an 80% vote of the shareholders of the Holding
Company.
In addition, the IBCL contains provisions designed to assure that minority
shareholders have some say in their future relationship with Indiana
corporations in the event that a person made a tender offer for, or otherwise
acquired, shares giving that person more than 20%, 33 1/3%, and 50% of the
outstanding voting securities of corporations having 100 or more shareholders
(the "Control Share Acquisitions Statute"). Under the Control Share Acquisitions
Statute, if an acquiror purchases those shares at a time that the corporation is
subject to the Control Share Acquisitions Statute, then until each class or
series of shares entitled to vote separately on the proposal, by a majority of
all votes entitled to be cast by that group (excluding shares held by officers
of the corporation, by employees of the corporation who are directors thereof
and by the acquiror), approves in a special or annual meeting the rights of the
acquiror to vote the shares which take the acquiror over each level of ownership
as stated in the statute, the acquiror cannot vote these shares. An Indiana
corporation otherwise subject to the Control Share Acquisitions Statute may
elect not to be covered by the statute by so providing in its Articles of
Incorporation or By-Laws. The Holding Company, however, will be subject to this
statute following the Conversion because of its desire to discourage
non-negotiated hostile takeovers by third parties.
The IBCL specifically authorizes Indiana corporations to issue options,
warrants or rights for the purchase of shares or other securities of the
corporation or any successor in interest of the corporation. These options,
warrants or rights may, but need not be, issued to shareholders on a pro rata
basis.
The IBCL specifically authorizes directors, in considering the best
interest of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. As described above, the
Holding Company Articles contain a provision having a similar effect. Under the
IBCL, directors are not required to approve a proposed business combination or
other corporate action if the directors determine in good faith that such
approval is not in the best interest of the corporation. In addition, the IBCL
states that directors are not required to redeem any rights under or render
inapplicable a shareholder rights plan or to take or decline to take any other
action solely because of the effect such action might have on a proposed change
of control of the corporation or the amounts to be paid to shareholders upon
such a change of control. The IBCL explicitly provides that the different or
higher degree of scrutiny imposed in Delaware and certain other jurisdictions
upon director actions taken in response to potential changes in control will not
apply. The Delaware Supreme Court has held that defensive measures in response
to a potential takeover must be "reasonable in relation to the threat posed".
In taking or declining to take any action or in making any recommendation
to a corporation's shareholders with respect to any matter, directors are
authorized under the IBCL to consider both the short-term and long-term
interests of the corporation as well as interests of other constituencies and
other relevant factors. Any determination made with respect to the foregoing by
a majority of the disinterested directors shall conclusively be presumed to be
valid unless it can be demonstrated that such determination was not made in good
faith.
Because of the foregoing provisions of the IBCL, the Board will have
flexibility in responding to unsolicited proposals to acquire the Holding
Company, and accordingly it may be more difficult for an acquiror to gain
control of the Holding Company in a transaction not approved by the Board.
<PAGE>
Federal Limitations. The Change in Bank Control Act provides that no
"person," acting directly or indirectly, or through or in concert with one or
more persons, other than a company, may acquire control of a bank or of a bank
holding company unless at least 60 days prior written notice is given to the FRB
and the FRB has not objected to the proposed acquisition.
The Bank Holding Company Act also prohibits any "company," directly or
indirectly or acting in concert with one or more other persons, or through one
or more subsidiaries or transactions, from acquiring control of an insured
institution without the prior approval of the FRB. In addition, any company that
acquires such control becomes a "bank holding company" subject to registration,
examination and regulation as a bank holding company by the FRB.
The term "control" for purposes of the Change in Bank Control Act and the
Bank Holding Company Act includes the power, directly or indirectly, to vote
more than 25% of any class of voting stock of the savings association or to
control, in any manner, the election of a majority of the directors of the
savings association. It also includes a determination by the FRB that such
company or person has the power, directly or indirectly, to exercise a
controlling influence over or to direct the management or policies of the
savings association.
FRB regulations also set forth certain "rebuttable control determinations"
which arise upon (a) the acquisition of any voting securities of a state member
bank or bank holding company if, after the transaction, the acquiring person (or
persons acting in concert) owns, controls, or holds with power to vote 25
percent or more of any class of voting securities of the institution; or (b) the
acquisition of any voting securities of a state member bank or bank holding
company if, after the transaction, the acquiring person (or persons acting in
concert) owns, controls, or holds with power to vote 10 percent or more (but
less than 25 percent) of any class of voting securities of the institution, and
if (i) the institution has registered securities under Section 12 of the 1934
Act or (ii) no other person will own a greater percentage of that class of
voting securities immediately after the transaction.
The regulations also specify the criteria which the FRB uses to evaluate
control applications. The FRB is empowered to disapprove an acquisition of
control if it finds, among other things, that (i) the acquisition would
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the institution or its depositors, or (iii) the
competency, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors, the institution, or the public
to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK
The Holding Company is authorized to issue 5,000,000 shares of Holding
Company Common Stock, without par value, all of which have identical rights and
preferences, and 2,000,000 shares of preferred stock, without par value. The
Holding Company expects to issue up to 753,825 shares of Common Stock and no
shares of preferred stock in the Conversion. The Holding Company has received an
opinion of its counsel that the shares of Common Stock issued in the Conversion
will be validly issued, fully paid, and not liable for further call or
assessment. This opinion was filed with the SEC as an exhibit to the Holding
Company's Registration Statement under the 1933 Act. The following sets forth
the material aspects of the Common Stock.
Shareholders of the Holding Company will have no preemptive rights to
acquire additional shares of Holding Company Common Stock which may be
subsequently issued. The Common Stock will represent nonwithdrawable capital,
will not be of an insurable type and will not be federally insured by the FDIC
or any government entity.
Under Indiana law, the holders of the Common Stock will possess exclusive
voting power in the Holding Company, unless preferred stock is issued and voting
rights are granted to the holders thereof. Each shareholder will be entitled to
one vote for each share held on all matters voted upon by shareholders, subject
to the limitations discussed under the caption "Restrictions on Acquisition of
the Holding Company."
In the unlikely event of the liquidation or dissolution of the Bank and the
Holding Company, the holders of the Common Stock will be entitled to receive --
after payment or provision for payment of all debts and liabilities of the
Holding Company (including all deposits in the Bank and accrued liabilities
thereon) and after payment of the liquidation account established in the
Conversion for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who continue their deposit accounts at the Bank -- all assets of
the Holding Company available for distribution, in cash or in kind. See "The
Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights."
If preferred stock is issued subsequent to the Conversion, the holders thereof
may have a priority over the holders of Common Stock in the event of liquidation
or dissolution.
The Board of Directors of the Holding Company will be authorized to issue
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The holders of preferred stock will be entitled to vote as a separate
class or series under certain circumstances, regardless of any other voting
rights which such holders may have.
<PAGE>
Except as discussed elsewhere herein, the Holding Company has no specific
plans for the issuance of the additional authorized shares of Common Stock or
for the issuance of any shares of preferred stock. In the future, the authorized
but unissued and unreserved shares of Common Stock will be available for general
corporate purposes including, but not limited to, possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, or in future underwritten or
other public or private offerings. The authorized but unissued shares of
preferred stock will similarly be available for issuance in future mergers or
acquisitions, in future underwritten public offerings or private placements or
for other general corporate purposes. Except as described above or as otherwise
required to approve the transaction in which the additional authorized shares of
Common Stock or authorized shares of preferred stock would be issued, no
shareholder approval will be required for the issuance of these shares.
Accordingly, the Holding Company's Board of Directors without shareholder
approval can issue preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock.
The offering and sale of Common Stock in the Conversion will be registered
under the 1933 Act. The subsequent sale or transfer of Common Stock is governed
by the 1933 Act, which requires that sales or exchanges of subject securities be
made pursuant to an effective registration statement or qualified for an
exemption from registration requirements of the 1933 Act. Similarly, the
securities laws of the various states also require generally the registration of
shares offered for sale unless there is an applicable exemption from
registration.
The Holding Company, as a newly organized corporation, has never issued
capital stock, and, accordingly, there is no market for the Common Stock. See
"Market for the Common Stock." See "Restrictions on Acquisition of the Holding
Company -- Provisions of the Holding Company's Articles and By-Laws" for a
description of certain provisions of the Holding Company's Articles and By-Laws
which may affect the ability of the Holding Company's shareholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company. Also, see "Dividend Policy" for a description of certain
matters relating to the possible future payment of dividends on the Common
Stock.
TRANSFER AGENT
Fifth Third Bank of Cincinnati, Ohio ("Fifth Third") will act as transfer
agent and registrar for the Common Stock. Fifth Third's phone number is (513)
579-5417.
REGISTRATION REQUIREMENTS
Upon the Conversion, the Holding Company's Common Stock will be registered
pursuant to Section 12(g) of the 1934 Act and will not be deregistered for a
period of at least three years following the Conversion. As a result of the
registration under the 1934 Act, certain holders of Common Stock will be subject
to certain reporting and other requirements imposed by the 1934 Act. For
example, beneficial owners of more than 5% of the outstanding Common Stock will
be required to file reports pursuant to Section 13(d) or Section 13(g) of the
1934 Act, and officers, directors and 10% shareholders of the Holding Company
will generally be subject to reporting requirements of Section 16(a) and to the
liability provisions for profits derived from purchases and sales of Holding
Company Common Stock occurring within a six-month period pursuant to Section
16(b) of the 1934 Act. In addition, certain transactions in Common Stock, such
as proxy solicitations and tender offers, will be subject to the disclosure and
filing requirements imposed by Section 14 of the 1934 Act and the regulations
promulgated thereunder.
<PAGE>
LEGAL AND TAX MATTERS
Barnes & Thornburg, 1313 Merchants Bank Building, 11 South Meridian Street,
Indianapolis, Indiana 46204, special counsel to the Bank, will pass upon the
legality and validity of the shares of Common Stock being issued in the
Conversion. Barnes & Thornburg has issued an opinion concerning certain federal
and state income tax aspects of the Conversion and that the Conversion, as
proposed, constitutes a tax-free reorganization under federal and Indiana law.
Barnes & Thornburg have consented to the references herein to their opinions.
Certain legal matters related to this offering will be passed upon for the
Agents by Selman & Munson P.C., 111 Congress Avenue, Austin, Texas.
EXPERTS
The financial statements of the Bank as of and for the years ended June 30,
1995, 1994, and 1993, included herein and elsewhere in the registration
statement, have been audited by Geo. S. Olive & Co. LLC, independent certified
public accountants, and included herein and in the registration statement in
reliance upon the report of Geo. S. Olive & Co. LLC, independent certified
public accountants, appearing elsewhere herein, and upon the authority of such
firm as experts in accounting and auditing.
Keller has consented to the publication of the summary herein of its
appraisal report as to the estimated pro forma market value of the Common Stock
of the Holding Company to be issued in the Conversion, to the reference to its
opinion relating to the value of the subscription rights, and to the filing of
the appraisal report as an exhibit to the registration statement filed by the
Holding Company under the 1933 Act.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement under
the 1933 Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
inspected and copied at the Commission's public reference facilities located at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional
Offices in New York (Seven World Trade Center, 13th Floor, New York, New York
00048) and Chicago (Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511) and copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Holding Company has also filed with the FRB of Chicago an Application
to Form a Holding Company on Form FR Y-3. This Prospectus omits certain
information contained in such Application. The Application may be inspected at
the offices at the FRB of Chicago, 230 South LaSalle Street, Chicago, Illinois
60604-1413.
The Bank has filed with the DFI an Application to Convert to an Indiana
stock savings bank. This Prospectus omits certain information contained in such
Application. The Application may be inspected at the offices of the DFI, 402
West Washington Street, Room W-066, Indianapolis, Indiana 46204.
The most recent appraisal report prepared by Keller can be inspected at the
Bank's office, 279 East Morgan Street, Spencer, Indiana 47460.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Index to Consolidated Financial Statements
Financial Statements Page
Independent auditor's report F-2
Consolidated statement of financial
condition--December 31, 1995 (unaudited)
and June 30, 1995 and 1994 F-3
Consolidated statement of income--for the
six months ended December 31,
1995 and 1994 (unaudited)
and the years ended June 30,
1995, 1994, and 1993 F-4
Consolidated statement of changes in
equity capital--for the six months ended
December 31, 1995 (unaudited) and
the years ended June 30, 1995, 1994, and 1993 F-5
Consolidated statement of cash flows--for
the six months ended December 31, 1995 and
1994 (unaudited) and the years ended
June 30, 1995, 1994, and 1993 F-6
Notes to consolidated financial statements F-7
All schedules are omitted because the required information is not applicable or
is included in the consolidated financial statements and related notes.
Home Financial Bancorp, the Holding Company, has not commenced operations as of
December 31, 1995 and will not commence operations prior to the conversion of
Owen Community Bank, s.b. from a state mutual savings bank to a state stock
savings bank. Accordingly, the financial statements of the Holding Company have
been omitted and are not required.
<PAGE>
Independent Auditor's Report
Board of Directors
Owen Community Bank, s.b.
Spencer, Indiana
We have audited the consolidated statement of financial condition of Owen
Community Bank, s.b. (formerly Owen Federal Savings Bank) and subsidiary as of
June 30, 1995 and 1994, and the related consolidated statements of income,
changes in equity capital and cash flows for each of the three years in the
period ended June 30, 1995. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Owen
Community Bank, s.b. and subsidiary as of June 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the Bank
changed its method of accounting for investments in securities effective July 1,
1994 and income taxes effective July 1, 1993.
Geo. S. Olive & Co., llc
Indianapolis, Indiana
July 21, 1995, except for notes 12 and 13
for which the date is December 31, 1995
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30,
December 31, ------------------------------
1995 1995 1994
----------- ----------- -----------
(Unaudited)
Assets
<S> <C> <C> <C>
Cash $ 268,114 $ 259,105 $ 504,360
Short-term interest-bearing deposits 2,056,407 1,126,874 732,594
----------- ----------- -----------
Total cash and cash equivalents 2,324,521 1,385,979 1,236,954
Securities available for sale 1,259,392 933,962
Mortgage-backed securities available for sale 1,358,963
Securities held to maturity (approximate
market value $346,000 and $785,000) 350,000 778,028
Mortgage-backed securities held to maturity
(approximate market value ($1,462,000
and $1,580,000) 1,476,914 1,635,916
Loans 27,303,005 25,604,648 21,504,940
Allowance for loan losses (99,967) (57,467) (25,679)
----------- ----------- -----------
Net loans 27,203,038 25,547,181 21,479,261
Real estate acquired for development 199,831 188,385 152,669
Premises and equipment 551,808 471,637 357,123
Federal Home Loan Bank of Indianapolis
stock, at cost 260,000 250,000 221,500
Interest receivable 216,208 186,609 111,615
Other assets 87,799 48,506 34,870
----------- ----------- -----------
Total assets $33,461,560 $30,839,173 $26,007,936
=========== =========== ===========
Liabilities
Deposits $24,895,146 $22,500,002 $21,451,449
Advances from Federal Home Loan Bank
of Indianapolis 5,200,000 5,000,000 1,500,000
Other borrowings 20,005 28,773 80,173
Other liabilities 51,606 151,236 126,726
----------- ----------- -----------
Total liabilities 30,166,757 27,680,011 23,158,348
----------- ----------- -----------
Commitments and Contingencies
Equity Capital
Retained earnings--substantially restricted 3,292,959 3,138,811 2,849,588
Net unrealized gain on securities available
for sale 1,844 20,351
----------- ----------- -----------
Total equity capital 3,294,803 3,159,162 2,849,588
----------- ----------- -----------
Total liabilities and equity capital $33,461,560 $30,839,173 $26,007,936
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Consolidated Statement of Income
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
-------------------------- -----------------------------------------
1995 1994 1995 1994 1993
----------- ------------ ------------ ----------- -------------
(Unaudited)
Interest Income
<S> <C> <C> <C> <C> <C>
Loans $ 1,315,656 $ 1,024,861 $ 2,166,726 $ 1,813,706 $ 1,749,029
Mortgage-backed securities 42,337 47,570 93,017 105,584 100,496
Interest-bearing deposits 65,843 38,715 76,678 43,716 37,105
Securities
Taxable 35,560 18,417 50,409 37,071 38,092
Tax exempt 8,225 9,841 17,745 9,956 9,828
Other interest and dividend income 10,393 7,118 15,728 12,916 23,341
----------- ------------ ------------ ----------- -------------
Total interest and dividend income 1,476,014 1,146,522 2,420,303 2,022,949 1,957,891
----------- ------------ ------------ ----------- -------------
Interest Expense
Deposits 633,177 455,074 962,764 913,141 972,912
Federal Home Loan Bank advances 162,837 76,615 201,463 28,244 12,125
Other interest expense 1,132 3,230 9,994 8,101 7,788
----------- ------------ ------------ ----------- -------------
Total interest expense 797,146 534,919 1,174,221 949,486 992,825
----------- ------------ ------------ ----------- -------------
Net Interest Income 678,868 611,603 1,246,082 1,073,463 965,066
Provision for losses on loans 42,500 21,428 36,134 14,065 6,627
----------- ------------ ------------ ----------- -------------
Net Interest Income After Provision for
Losses on Loans 636,368 590,175 1,209,948 1,059,398 958,439
----------- ------------ ------------ ----------- -------------
Other Income
Service charges on deposit accounts 18,613 15,000 27,345 23,272 22,354
Gain on sale of real estate acquired
for development 18,641 10,631 78,499 144,794 116,921
Other income 22,895 11,095 42,567 32,670 27,848
----------- ------------ ------------ ----------- -------------
60,149 36,726 148,411 200,736 167,123
----------- ------------ ------------ ----------- -------------
Other Expenses
Salaries and employee benefits 204,005 176,224 403,787 344,546 253,939
Net occupancy expenses 34,995 36,722 73,761 72,647 68,699
Equipment expenses 21,944 15,134 35,302 36,509 22,142
Deposit insurance expense 25,315 24,694 49,444 47,676 31,987
Computer processing fees 26,784 23,684 47,945 47,506 45,277
Printing and office supplies 14,295 15,459 32,215 31,802 28,993
Legal and professional fees 16,340 15,690 35,125 35,740 45,684
Advertising expense 14,903 12,475 25,518 15,049 18,158
Management fees 14,113 9,772 33,005 49,627 34,093
Other expenses 68,405 66,626 129,824 126,069 82,816
----------- ------------ ------------ ----------- -------------
441,099 396,480 865,926 807,171 631,788
----------- ------------ ------------ ----------- -------------
Income Before Income Tax and Cumulative
Effect of Change in Accounting Method 255,418 230,421 492,433 452,963 493,774
Income tax expense 101,270 90,612 203,210 168,421 185,570
----------- ------------ ------------ ----------- -------------
Income Before Cumulative Effect of
Change in Accounting Method 154,148 139,809 289,223 284,542 308,204
Cumulative Effect of Change in Method of
Accounting for Income Taxes --- --- --- 23,628 ---
----------- ------------ ------------ ----------- -------------
Net income $ 154,148 $ 139,809 $ 289,223 $ 260,914 $ 308,204
=========== ============ ============ =========== =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Consolidated Statement of Changes in Equity Capital
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Securities
Retained Available
Earnings For Sale Total
----------- -------- ------------
<S> <C> <C> <C>
Balances, July 1, 1992 $ 2,280,470 $ 2,280,470
Net income for 1993 308,204 308,204
Balances, June 30, 1993 2,588,674 2,588,674
Net income for 1994 260,914 260,914
Balances, June 30, 1994 2,849,588 2,849,588
Net income for 1995 289,223 289,223
Cumulative effect of change in method of
accounting for securities $ 6,912 6,912
Net change in unrealized gain on securities
available for sale, net of taxes of $8,815 13,439 13,439
----------- -------- ------------
Balances, June, 30, 1995 3,138,811 20,351 3,159,162
Net income for the six months ended
December 31, 1995 (unaudited) 154,148 154,148
Net change in unrealized gain on securities
available for sale, net of taxes of $12,139
(unaudited) (18,507) (18,507)
----------- -------- ------------
Balances, December 31, 1995 (unaudited) $ 3,292,959 $ 1,844 $ 3,294,803
=========== ======== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
-------------------------- --------------------------------------
1995 1994 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(Unaudited)
Operating Activities
<S> <C> <C> <C> <C> <C>
Net income $ 154,148 $ 139,809 $ 289,223 $ 260,914 $ 308,204
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 42,500 21,428 36,134 14,065 6,627
Securities amortization, net 744 733 683 973 1,211
Depreciation and amortization 28,677 25,200 58,813 55,496 43,097
Deferred income tax (benefit) (18,999) (4,533) (198) 14,624 (11,050)
Gain on sale of real estate acquired
for development (18,641) (10,631) (78,499) (144,794) (116,921)
Gain on sale of other real estate (11,019) (5,537)
Change in
Interest receivable (29,569) (19,721) (74,994) (2,114) (1,034)
Other assets (39,293) (9,257) (13,636) (3,970) 39,784
Other adjustments (76,992) (54,858) 11,360 29,825
----------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 42,575 88,170 217,867 225,019 264,381
----------- ---------- ---------- ---------- ----------
Investing Activities
Purchases of securities available for sale (100,000) (399,719) (112,231)
Purchase of securities held to maturity (100,000) (205,000)
Proceeds from maturities of securities
held to maturity 25,000 130,000 10,000
Purchases of mortgage-backed securities
held to maturity (1,020,000)
Payments on mortgage-backed securities
held to maturity 93,833 72,630 160,803 540,138 326,865
Payments on mortgage-backed securities
available for sale 17,238
Net changes in loans (1,640,357) (1,958,733) (4,134,319) (2,125,354) (2,276,072)
Proceeds from real estate owned sales 41,284 25,000
Purchase of premises and equipment (158,348) (19,552) (173,327) (29,123) (27,121)
Purchase of real estate acquired for
development (29,655) (131,464) (231,464) (152,649) (92,050)
Proceeds from sale of real estate acquired
for development 36,850 28,047 274,247 316,159 254,617
Purchase of FHLB of Indianapolis stock (10,000) (28,500)
----------- ---------- ---------- ---------- ----------
Net cash used by investing activities (1,690,439) (2,184,072) (4,565,995) (2,573,060) (1,788,761)
----------- ---------- ---------- ---------- ----------
Financing Activities
Net change in
NOW and savings deposits 462,638 52,011 (1,774,297) 71,941 708,956
Certificates of deposit 1,932,506 420,635 2,822,850 1,205,273 314,018
Advances from Federal Home Loan
Bank of Indianapolis 200,000 2,500,000 3,500,000 1,500,000 500,000
Repayment of advances from Federal Home
Loan Bank of Indianapolis (500,000) (500,000)
Other borrowings 75,000 75,000 45,000 45,000
Payments on other borrowings (8,768) (8,016) (126,400) (79,994) (23,707)
----------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 2,586,376 2,539,630 4,497,153 2,242,220 1,544,267
----------- ---------- ---------- ---------- ----------
Net Change in Cash and Cash Equivalents 938,512 443,728 149,025 (105,821) 19,887
Cash and Cash Equivalents, Beginning of Year 1,385,979 1,236,954 1,236,954 1,342,775 1,322,888
----------- ---------- ---------- ---------- ----------
Cash and Cash Equivalents, End of Year $ 2,324,491 $1,680,682 $1,385,979 $1,236,954 $1,342,775
=========== ========== ========== ========== ==========
Additional Cash Flows and
Supplementary Information
Interest paid $797,146 $534,919 $1,174,221 $949,486 $992,825
Income tax paid 129,000 50,719 144,375 225,900 186,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- Accounting Policies
The accounting and reporting policies of Owen Community Bank, s.b. ("Bank") and
its wholly owned subsidiary, BSF, Inc., conform to generally accepted accounting
principles and reporting practices followed by the thrift industry. The more
significant of the policies are described below.
Consolidation--The consolidated financial statements include the accounts of the
Bank and subsidiary after elimination of all material intercompany transactions
and accounts.
Description of business--In May, 1994, the Bank received approval to convert
from a federal savings bank to an Indiana mutual savings bank. At such time, the
Bank changed its name from Owen Federal Savings Bank to Owen Community Bank,
s.b. The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in Owen County. The Bank's loans are generally
secured by specific items of collateral including real property and consumer
assets. BSF, Inc. is involved in the acquisition, development and sale of land
for residential housing.
Securities--The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, on July 1, 1994.
Debt securities are classified as held to maturity when the Company has the
positive intent and ability to hold the securities to maturity. Securities held
to maturity are carried at amortized cost.
Debt securities not classified as held to maturity are classified as available
for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately, net of tax, in equity capital.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
At July 1, 1994, investment securities with an approximate carrying value of
$501,000 were reclassified as available for sale. This reclassification resulted
in an increase in total equity capital, net of tax, of $6,900.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Prior to the adoption of SFAS No. 115, investment securities were carried at
cost, adjusted for amortization of premiums and discounts. Realized gains and
losses on sales were included in other income. Gains and losses on the sale of
securities were determined on the specific-identification method.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Mortgage-backed securities available for sale are carried at fair
value with unrealized gains and losses reported in equity capital, net of tax.
Mortgage-backed securities held to maturity are carried at unpaid principal
balances, adjusted for unamortized premiums and discounts, because management
has the ability and intent to hold to maturity. Premiums and discounts are
amortized using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Realized gains and losses on the
sale of mortgage-backed securities are determined using the
specific-identification method and are included in other income.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. Loans are placed in a nonaccrual
status when the collection of interest becomes doubtful. Interest income
previously accrued but not deemed collectible is reversed and charged against
current income. Interest on these loans is then recognized as income when
collected. Certain loan fees and direct costs are being deferred and amortized
as an adjustment of yield on the loans. When a loan is paid off, any unamortized
loan origination fee balance is credited to income.
Allowance for loan losses is maintained to absorb potential losses based on
management's continuing review and evaluation of the portfolio and its judgment
as to the impact of economic conditions on the portfolio. The evaluations by
management include consideration of past loss experience, changes in the
composition of the portfolio, and the current condition and amount of loans
outstanding.
Real estate acquired for development is carried at the lower of cost or fair
value. Costs relating to development and improvements of property are allocated
to individual lots and capitalized, whereas costs relating to holding the
property are expensed. Gains on sale of lots are determined on the
specific-identification method.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the accelerated and straight-line methods based
on the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
Pension plan costs are based on actuarial computations and charged to current
operations. The funding policy is to pay at least the minimum amounts required
by ERISA.
Advertising costs are expensed when incurred.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Bank
has adopted the provisions of SFAS No. 109, Accounting for Income Taxes, for the
year ended June 30, 1994. The Bank files consolidated income tax returns with
its subsidiary.
Reclassifications of certain amounts in the June 30, 1995 and 1994 consolidated
financial statements have been made to conform to the December 31, 1995
presentation.
Note 2 -- Securities
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Available for sale at December 31, 1995
(unaudited)
<S> <C> <C> <C> <C>
Federal agencies $ 900 $ 12 $ 912
State and municipals 350 1 $ 4 347
------- ---- --- -------
Total securities $ 1,250 $ 13 $ 4 $ 1,259
======= ==== === =======
Available for sale at June 30, 1995
Federal agencies $ 900 $ 34 $ 934
Held to maturity at June 30, 1995
State and municipal 350 1 $ 5 346
------- ---- --- -------
Total securities $ 1,250 $ 35 $ 5 $ 1,280
======= ==== === =======
Held to maturity at June 30, 1994
Federal agencies $ 501 $ 12 $ 513
State and municipal 277 1 $ 6 272
------- ---- --- -------
Total securities $ 778 $ 13 $ 6 $ 785
======= ==== === =======
</TABLE>
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
On December 26, 1995, the Bank transferred certain securities from held to
maturity to available for sale in accordance with a transition reclassification
allowed by the Financial Accounting Standards Board. Such securities had a
carrying value of $350,000 and a fair value of $347,000. Other than the initial
adoption of SFAS No. 115 and the December 26, 1995 transfers, there were no
transfers or sales of investment securities during the periods presented.
The amortized cost and approximate market value of securities held to maturity
and available for sale at December 31 and June 30, 1995, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------- --------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----------- --------- -----------
Maturity Distribution at December 31,
<S> <C> <C> <C> <C>
1995 (unaudited)
Due in one year or less $ 535 $ 539
Due after one through five years 715 720
------- -------
Totals $ 1,250 $ 1,259
======= =======
Maturity Distribution at June 30,
1995
Due in one year or less $ 500 $ 506 $ 35 $ 35
Due after one through five years 400 428 315 311
------- ------- ----- ------
Totals $ 900 $ 934 $ 350 $ 346
======= ======= ===== ======
</TABLE>
Note 3 -- Mortgage-Backed Securities
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
Available for sale at December 31, 1995
(unaudited)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ 1,366 $ 11 $ 18 $1,359
======= ==== ==== ======
Held to maturity at June 30, 1995
Federal Home Loan Mortgage Corporation $ 1,477 $ 9 $ 24 $1,462
======= ==== ==== ======
Held to maturity at June 30, 1994
Federal Home Loan Mortgage Corporation $ 1,636 $ 4 $ 60 $1,580
======= ==== ==== ======
</TABLE>
On December 26, 1995, the Bank transferred certain mortgage-backed securities
from held to maturity to available for sale in accordance with a transition
reclassification allowed by the Financial Accounting Standards Board. Such
securities had a carrying value of $1,366,000 and a fair value of $1,360,000.
Other than the initial adoption of SFAS No. 115 and the December 26, 1995
transfers, there were no transfers or sales of mortgage-backed securities during
the periods presented.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 -- Loans and Allowance
June 30,
December 31, -------------------------
1995 1995 1994
------------ ---------- -----------
(Unaudited)
Loans
Real estate mortgage loans
Residential $ 19,764 $ 17,841 $ 15,621
Mobile home and land 3,166 2,748 1,513
Nonresidential 1,693 2,933 2,346
Multi-family 475 11 12
Mobile home loans 1,349 1,615 1,464
Commercial and industrial 325
Consumer loans 654 691 584
---------- --------- ----------
Total loans 27,426 25,839 21,540
Less--undisbursed portion of loans (123) (234) (35)
---------- --------- ----------
$ 27,303 $ 25,605 $ 21,505
========== ========= ==========
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
-------------------- ---------------------------
1995 1994 1995 1994 1993
--------- ------- ---- ---- ----
(Unaudited)
Allowance for loan losses
<S> <C> <C> <C> <C> <C>
Balances, beginning of period $ 57 $ 26 $ 26 $ 12 $ 13
Provision for loan losses 43 22 36 14 7
Recoveries on loans 1 1 1
Loans charged off (6) (6) (1) (8)
------ ----- ----- ---- -----
Balances, end of period $ 100 $ 43 $ 57 $ 26 $ 12
====== ===== ===== ==== =====
</TABLE>
December 31, June 30,
1995 1995 1994 1993
------------ ---- ---- ----
(Unaudited)
Nonperforming loans
Nonaccruing loans $ 118 $ 71 $ 16
Loans contractually
past due 90 days or more 29 11
Additional interest income that would have been recorded had income on
nonaccruing loans been considered collectible and accounted for in accordance
with their original terms is immaterial for each period.
The Bank adopted SFAS No. 114 and No. 118, Accounting by Creditors For
Impairment of a Loan and Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures, on July 1, 1995. The adoption of SFAS No.
114 and 118 did not have a material impact on the Bank's financial position or
results of operations.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has entered into transactions with certain directors and officers. Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amount of loans, as
defined, to such related parties were as follows:
Balances, June 30, 1994 $ 355
Changes in composition of related parties 60
New loans, including renewals 136
Payments, etc. including renewals (34)
------
Balances, June 30, 1995 517
New loans, including renewals (unaudited) 169
Payments, etc. including renewals (unaudited) (86)
------
Balances, December 31, 1995 (unaudited) $ 600
======
Note 5 -- Premises and Equipment
June 30,
December 31, ---------------------
1995 1995 1994
----------- ----------- -------
(Unaudited)
Cost
Land $ 189 $ 133 $ 34
Building 601 634 596
Equipment 319 233 197
-------- -------- ------
Total costs 1,109 1,000 827
Accumulated depreciation (557) (528) (470)
-------- -------- ------
Net $ 552 $ 472 $ 357
======== ======== ======
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Deposits
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ -------------------------------------------------
1995 1995 1994
------------------------ ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
----------- --------- -------- -------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 2,472 2.45% $ 2,056 2.55% $ 2,417 2.58%
Savings 3,761 3.00 3,715 3.00 5,127 3.00
Certificates of deposit of
$100,000 or more 2,248 5.69 1,936 5.68 1,852 4.68
Other certificates 16,414 5.96 14,793 5.80 12,055 4.85
---------- --------- ---------- ----
Total deposits $ 24,895 5.18% $ 22,500 5.03% $ 21,451 4.14%
========== ==== ========= ==== ========== ====
</TABLE>
At June 30, 1995, certificates mature as follows:
<TABLE>
<CAPTION>
Years Ending June 30,
-------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Total
---------- -------- --------- ------- ------ ----------
Certificates by rates
<S> <C> <C> <C> <C> <C> <C>
4.00% and under $ 943 $ 226 $ 1,169
4.01 to 6.00% 4,912 851 $ 1,604 $ 2,395 $ 291 10,053
6.01 to 8.00% 4,405 449 32 621 5,507
---------- -------- --------- -------- ------ ----------
$ 10,260 $ 1,526 $ 1,604 $ 2,427 $ 912 $ 16,729
========== ======== ========= ======== ====== ==========
</TABLE>
Interest expense on deposits is summarized as follows:
Six Months Ended
December 31, Year Ending June 30,
--------------------- ---------------------------------
1995 1994 1995 1994 1993
------ ------ ---- ---- -----
(Unaudited)
NOW $ 28 $ 33 $ 62 $ 67 $ 70
Savings 60 76 138 166 183
Certificates 545 346 763 680 720
---- ---- ---- ---- ----
$633 $455 $963 $913 $973
==== ==== ==== ==== ====
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Advances from Federal Home Loan Bank
<TABLE>
<CAPTION>
June 30,
December 31, --------------------------------------------------
1995 1995 1994
--------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------- -------- --------- -------- --------- --------
(Unaudited)
Maturities in years ending
<S> <C> <C> <C> <C> <C> <C>
1995 $1,000 4.01%
1996 $ 1,000 6.37% $ 1,000 6.79%
1999 3,000 6.14 3,000 6.25 500 5.58
2000 1,000 6.27 1,000 6.27
Thereafter 200 6.48
-------- --------- ---------
$ 5,200 6.22% $ 5,000 6.36% $ 1,500 4.53%
======== ========= =========
</TABLE>
The terms of the security agreement with the FHLB require the Bank to pledge as
collateral for advances qualifying first mortgage loans in an amount equal to at
least 170 percent of these advances and all stock in the FHLB. Advances are
subject to restrictions or penalties in the event of prepayment.
Note 8 -- Other Borrowings
During February, 1992, BSF, Inc. obtained a $200,000 line of credit at prime
plus 100 basis points from a local financial institution. The line of credit is
renewable annually at the option of the lender and borrower, subject to any
material changes in the capitalization or operations of either BSF, Inc. or the
Bank. At December 31, 1995, June 30, 1995 and 1994, borrowings under this line
totalled $0, $0 and $35,000.
BSF, Inc. has two mortgage loans payable to individuals. The loans, which have
an interest rate of 9%, mature December 1, 1996 and total to $28,773 and $45,173
at June 30, 1995 and 1994.
Note 9 -- Income Tax
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
---------------------- -----------------------------------------
1995 1994 1995 1994 1993
------ ------- ----- -------- ------
(Unaudited)
Income tax expense
Currently payable
<S> <C> <C> <C> <C> <C>
Federal $ 94 $ 76 $ 153 $ 141 $ 152
State 26 20 50 37 45
Deferred
Federal (15) (6) (8) (11)
State (4) 1 (2)
------ ----- ------ ------ ------
Total income tax expense $ 101 $ 91 $ 203 $ 168 $ 186
====== ===== ====== ====== ======
</TABLE>
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1993
----
Current benefit relating to
Cash to accrual adjustment $ (8)
Other (3)
Deferred benefit $(11)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
---------------- -------------------------
1995 1994 1995 1994 1993
---- ----- ------ ------ -----
(Unaudited)
Reconciliation of federal statutory to actual tax expense
<S> <C> <C> <C> <C> <C>
Federal statutory income tax at 34% $ 87 $ 78 $ 167 $ 154 $ 168
Effect of state income taxes 15 13 33 23 30
Tax exempt interest (3) (5) (5) (3)
Other 2 5 8 (6) (12)
----- ---- ------ ----- ------
Actual tax expense $ 101 $ 91 $ 203 $ 168 $ 186
===== ==== ====== ===== ======
</TABLE>
If certain conditions are met, the Bank, in determining taxable income, is
allowed special bad debt deductions of approximately 8 percent of taxable income
before such deductions.
Retained earnings at December 31, 1995 (unaudited), June 30, 1995 and 1994,
include approximately $700,000 for which no deferred federal income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from carryback of
net operating losses would create income for tax purposes only, which income
would be subject to the then-current corporate income tax rate. The unrecorded
deferred federal income tax liability on the above amounts was approximately
$280,000 at December 31, 1995 and June 30, 1995 and 1994.
A cumulative net deferred tax liability is included in other liabilities. The
components of the liability are as follows:
<TABLE>
<CAPTION>
June 30,
December 31, ---------------------
1995 1995 1994
------------ -------- -------
(Unaudited)
<S> <C> <C> <C>
Differences in depreciation methods $ (9) $ (9) $ (10)
Differences in accounting for loan fees (7) (9) 6
Differences in accounting for loan losses 16 (2) (16)
State income tax (2) (1) (1)
Unrealized gain on securities available for sale (1) (13)
$ (3) $ (34) $ (21)
==== ====== ======
Assets $ 16 $ 6
Liabilities (19) $ (34) (27)
---- ------ ------
$ (3) $ (34) $ (21)
==== ====== ======
</TABLE>
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
No valuation allowance was necessary during any time in 1995 and 1994.
As of July 1, 1993, the Bank adopted SFAS No. 109, Accounting for Income Taxes.
As a result, the beginning deferred tax liability was increased by $23,628,
which is reported as the cumulative effect of a change in accounting method.
Note 10 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit is represented by the contractual
or notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated statement of financial condition.
June 30,
December 31, ------------------
1995 1995 1994
------------ ------- -----
(Unaudited)
Financial instruments whose contract amount
represents credit risk were as follows:
Mortgage loan commitments
At variable rates $ 110 $ 395 $ 722
At fixed rates 13 704 305
Unused line of credit 251 151 25
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate, or
other assets of the borrower.
The Bank and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Bank.
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund ("SAIF"), which along with the Bank Insurance Fund ("BIF"), is
one of the two insurance funds administered by the FDIC. Financial institutions
which are members of the BIF are experiencing substantially lower deposit
insurance premiums because BIF has achieved its required level of reserves while
SAIF has not yet achieved its required reserves. A recapitalization plan for the
SAIF under consideration by Congress reportedly provides for a special
assessment of approximately .85% of deposits on all SAIF-insured institutions to
enable the SAIF to achieve its required level of reserves. If the proposed
assessment of .85% was effected based on deposits as of December 31, 1995, the
Bank's special assessment would amount to approximately $212,000 before taxes.
Accordingly, this special assessment would significantly increase noninterest
expense and adversely affect the Bank's results of operations. Conversely,
depending upon the Bank's capital level and supervisory rating, and assuming the
insurance premium levels for BIF and SAIF members again equalized, future
deposit insurance premiums are expected to decrease significantly, to as low as
.04% from the .23% of deposits currently paid by the Bank which would reduce
noninterest expense for future periods.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 11 -- Benefit Plans
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund ("FIRF"). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1994, the date of the latest
actuarial valuation. The plan required contributions in the amount of $10,200
and $7,700 for the six-month periods ended December 31, 1995 and 1994
(unaudited) and $17,900 and $10,000 for the years ended June 30, 1995 and 1994.
No contributions to the plan were required for the year ended June 30, 1993. The
plan provides pension benefits for substantially all of the Bank's employees.
Effective January 1, 1993, the Bank adopted a retirement savings Section 401(k)
plan in which substantially all employees may participate. The Bank matches
employees' contributions at the rate of 50 percent of the first 6 percent of
base salary contributed by participants. The Bank's expense for the plan was
$4,700 for each of the six-month periods ended December 31, 1995 and 1994
(unaudited) and $8,550, $6,060 and $2,895 for the years ended June 30, 1995,
1994 and 1993.
Note 12 -- Subsequent Event -- Plan of Conversion
In October, 1995, the Board of Directors adopted a Plan of Conversion (Plan)
whereby the Bank will convert from a state chartered mutual institution to a
state chartered stock savings bank. The Plan is subject to approval of
regulatory authorities and members at a special meeting. The stock of the Bank
will be issued to a holding company formed in connection with the conversion.
Pursuant to the Plan, shares of capital stock of the holding company are
expected to be offered initially for subscription to eligible members of the
Bank and certain other persons as of specific dates subject to various
subscription priorities as provided in the Plan. The capital stock will be
offered at a price to be determined by the Board of Directors based upon an
appraisal to be made by an independent appraisal firm. The exact number of
shares to be offered will be determined by the Board of Directors in conjunction
with the determination of the subscription price. At least the minimum number of
shares offered in the conversion must be sold. Any stock not purchased in the
subscription offering will be sold in the community offering to be commenced
simultaneously with the subscription offering.
The Plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the retained income of the Bank as of
the date of the most recent financial statements contained in the final
conversion prospectus. The liquidation account is established to provide a
limited priority claim to the assets of the Bank to qualifying depositors
("eligible account holders") and other depositors ("supplemental eligible
account holders") who continue to maintain deposits in the Bank after
conversion. In the unlikely event of a complete liquidation of the Bank, and
only in such event, eligible account holders would receive from the liquidation
account a liquidation distribution based on their proportionate share of the
then total remaining qualifying deposits.
<PAGE>
Owen Community Bank, s.b. And Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned liquidation account. Also, capital
distribution regulations limit the Bank's ability to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged to
the capital account based on its capital level and supervisory condition.
Costs of conversion will be netted from the proceeds of sale of common stock and
recorded as a reduction of additional paid-in capital or common stock. If the
conversion is not completed, such costs, totaling $25,475 at December 31, 1995
(unaudited), would be charged to expense.
Note 13--Unaudited Financial Statements
The accompanying consolidated statement of financial condition as of December
31, 1995, and the consolidated statements of income, changes in equity capital
and cash flows for the six-months ended December 31, 1995 and 1994 are
unaudited, but management is of the opinion that all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
results of the periods reported, have been included in the accompanying
financial statements. The results of operations for the six-months ended
December 31, 1995 are not necessarily indicative of those expected for the
remainder of the year.
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Holding Company or the Bank. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the shares Common Stock offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 5
Selected Consolidated Financial Data of
Owen Community Bank, s.b................................................12
Recent Financial Data......................................................13
Risk Factors...............................................................16
Home Financial Bancorp.....................................................21
Owen Community Bank, s.b...................................................22
Market Area................................................................23
Use of Proceeds............................................................23
Dividend Policy............................................................24
Market for the Common Stock................................................25
Anticipated Management Purchases...........................................25
Capitalization.............................................................26
Pro Forma Data.............................................................27
Management's Discussion and Analyis of
Financial Condition and Results of Operations...........................31
Business...................................................................47
Competition................................................................63
Management.................................................................65
Executive Compensation and Related Transactions............................66
Regulation.................................................................71
Taxation...................................................................77
The Conversion.............................................................79
Restrictions on Acquisition of the Holding Company.........................90
Description of Capital Stock...............................................94
Transfer Agent.............................................................95
Registration Requirements..................................................95
Legal and Tax Matters......................................................95
Experts....................................................................95
Additional Information.....................................................96
Index to Financial Statements..............................................F-1
----------
Until August 14, 1996, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
Up to 655,500 Shares
[HOME FINANCIAL BANCORP logo]
(Holding Company for
Owen Community Bank, s.b.)
----------
Common Stock
(without par value)
----------
SUBSCRIPTION AND DIRECT
COMMUNITY OFFERING
PROSPECTUS
Charles Webb & Co.
Friedman, Billings, Ramsey
& Co., Inc.
May 16, 1996
================================================================================