FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 0-28510
HOME FINANCIAL BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1975585
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
279 East Morgan Street, Spencer, Indiana 47460
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 829-2095
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 20, 1996, was $5,612,772.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of September 20, 1996, was 505,926 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page __
Page 1 of __ Pages
<PAGE>
PART I
Item 1. Business.
General
Home Financial Bancorp (the "Holding Company" and, together with the Bank
(as defined below), the "Company") is an Indiana corporation organized in
February, 1996, to become a bank holding company upon its acquisition of all the
issued and outstanding capital stock of Owen Community Bank, s.b. (the "Bank")
in connection with the Bank's conversion from mutual to stock form. The Holding
Company became the Bank's holding company on July 1, 1996; therefore, all
historical financial and other data contained herein relates solely to the Bank.
The principal asset of the Holding Company currently consists of 100% of the
issued and outstanding shares of common stock, $1.00 par value per share, of the
Bank. 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 Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (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) combination
land-mobile home loans ("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 Company 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 calendar year ended
December 31, 1995.
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 66.1% of the Bank's total
loan portfolio at June 30, 1996. 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 4.5% and
12.7% of the Bank's total loan portfolio at June 30, 1996, respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled approximately 2.2% and 9.2%, respectively, of the Bank's total loan
portfolio at June 30, 1996. Consumer loans constituted approximately 4.0% of the
Bank's total loan portfolio at June 30, 1996.
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 proposed by the OTS as part of the OTS' proposed capital
regulations. Although this methodology has not been implemented by the OTS and
the Bank would not be subject to the methodology if adopted in its current form,
the application of the NPV methodology 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
<PAGE>
interest rates are considered. If, under the OTS' proposed 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 would be required to
deduct 50% of the amount of the decrease in excess of such 2% in the calculation
of the institution's risk-based capital.
At June 30, 1996, 2% of the present value of the Bank's assets was
approximately $792,000. 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 $339,000 at June 30, 1996, the Bank would not
have been required to deduct any dollar amount from its capital under the OTS'
proposed methodology.
Presented below, as of June 30, 1996, is an analysis prepared by
Sendero 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.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of PV of Assets
Change ----------------------------------------------------- -----------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 bp * $3,091 $ (347) (10.09)% 8.30% (31) bp
+ 200 bp 3,367 (71) (2.07) 8.75 7 bp
0 bp 3,438 --- --- 8.68 ---
- 200 bp 3,099 (339) (9.86) 7.68 (100) bp
- 400 bp 3,181 (257) (7.48) 7.67 (101) bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 8.68%
Exposure Measure: Post-Shock NPV Ratio...................... 7.68%
Sensitivity Measure: Change in NPV Ratio.................... 100 bp
Change in NPV as % of PV of Assets.......................... 9.84%
Interest Rate Risk Capital Component........................ ---
* Basis points.
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 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") was
positive 10.6% as of June 30, 1996. A positive Interest Rate Gap leaves 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 June 30, 1996. 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 or furnished by the Sendero Corporation.
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996
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).... $ 4,604 $ 3,923 $ 6,375 $ 6,735 $ 2,009 $ 2,590 $ 992 $ 47 $ 27,275
Securities available
for sale (2) ............. -- -- -- 1,341 242 -- 195 -- 1,778
Mortgage-backed securities
available for sale (2) ..... 235 228 437 995 332 573 351 -- 3,151
FHLB stock ................... -- -- -- -- -- -- -- 360 360
Interest-bearing
demand deposits............. 5,335 -- -- -- -- -- -- -- 5,335
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-
earning assets ........ 10,174 4,151 6,812 9,071 2,583 3,163 1,538 407 37,899
-------- -------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Certificates of deposit ...... 2,302 1,481 6,546 6,801 1,516 -- -- -- 18,646
Passbook accounts ............ 1,222 1,028 1,591 2,881 720 233 9 -- 7,684
NOW accounts ................. 222 207 357 887 398 281 43 1 2,396
FHLB advances ................ 500 1,000 500 2,000 3,000 200 -- -- 7,200
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities.... 4,246 3,716 8,994 12,569 5,634 714 52 1 35,926
-------- -------- -------- -------- -------- -------- -------- -------- --------
Periodic Gap .................... $ 5,928 $ 435 (2,182) $ (3,498) $ (3,051) $ 2,449 $ 1,486 $ 406
======== ======== ======== ======== ======== ======== ======== ========
Gap Ratio .................... 2.40 1.12 0.76 0.72 0.46 4.43 29.58 407.00
Gap Percentage Total ......... 15.04% 1.10% (5.53)% (8.87)% (7.74)% 6.21% 3.77% 1.03%
Cumulative Gap .................. $ 5,928 $ 6,363 $ 4,181 $ 683 $ (2,368) $ 81 $ 1,567 $ 1,983 $ 1,983
======== ======== ======== ======== ======== ======== ======== ======== ========
Gap Ratio .................... 2.40 1.80 1.25 1.02 0.93 1.00 1.04 1.06
Gap Percentage Total ......... 15.04% 16.14% 10.61% 1.74% (6.00)% 0.21% 3.98% 5.01%
</TABLE>
(1) Excludes undisbursed loans of $319,000 and deferred loan costs of
$8,000.
(2) Excludes the unrealized loss on securities available for sale of
$28,000.
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 10.3% per year; (ii) three
year adjustable-rate first mortgage loans on one- to four-family residences will
prepay at the rate of 8.3% per year; (iii) greater than three year
adjustable-rate first mortgage loans on one- to four-family residences will
prepay at the rate of 10.3% 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 6.5% 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 9.7% per year; (vi) fixed-rate first mortgage loan on one-
to four-family residences will prepay at the rate of 12.8% per year; (vii)
fixed-rate consumer loans will prepay at a rate of 6.5% per year; and (viii)
fixed-rate mortgage-backed securities will prepay annually as follows:
Interest Rate Payment Assumption
------------- ------------------
less than 6% 6.6%
7% to 7.99% 10.9
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 to3 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>
Passbook savings............... 15.91% 13.38% 20.71% 37.50% 9.38% 3.03% 0.10% ---%
NOW accounts................... 9.53 8.62 14.85 36.92 16.58 11.68 1.79 0.03
</TABLE>
<PAGE>
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.
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 June 30,
-----------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------ --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Residential............... $18,240 66.12% $17,841 69.05% $15,621 72.52%
Combo..................... 3,513 12.73 2,748 10.64 1,513 7.02
Nonresidential............ 2,544 9.22 2,933 11.35 2,346 10.89
Multi-family.............. 604 2.19 11 0.04 12 0.06
Mobile home loans............ 1,241 4.50 1,615 6.25 1,464 6.80
Commercial and
industrial loans.......... 350 1.27 --- --- --- ---
Consumer loans............... 1,094 3.97 691 2.67 584 2.71
------- ------ ------- ------ ------- ------
Gross loans receivable.. $27,586 100.00% $25,839 100.00% $21,540 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate... $18,240 66.12% $17,841 69.05% $15,621 72.52%
Mobile home and land...... 3,513 12.73 2,748 10.64 1,513 7.02
Nonresidental real estate. 2,544 9.22 2,933 11.35 2,346 10.89
Multi-family real estate.. 604 2.19 11 0.04 12 0.06
Mobile home............... 1,241 4.50 1,615 6.25 1,464 6.80
Deposits.................. 217 0.79 225 0.87 159 0.74
Other security............ 1,227 4.45 466 1.80 425 1.97
------- ------ ------- ------ ------- ------
Gross loans receivable.. 27,586 100.00 25,839 100.00 21,540 100.00
Deduct:
Allowance for loan losses.... 150 0.54 57 0.22 26 0.12
Loans in process and
deferred loan costs....... 311 1.13 234 0.91 35 0.16
------- ------ ------- ------ ------- ------
Net loans receivable...... $27,125 98.33% $25,548 98.87% $21,479 99.72%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate........... $16,415 65.92% $17,736 75.37% $15,024 77.08%
Fixed-rate................ 8,486 34.08 5,797 24.63 4,468 22.92
------- ------ ------- ------ ------- ------
Total................... $24,901 100.00% $23,533 100.00% $19,492 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at June 30, 1996,
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.
<PAGE>
<TABLE>
Due during years ended June 30,
Balance --------------------------------------------------------------------
Outstanding 2000 2002 2007 2012
at June 30, to to to and
1996 1997 1998 1999 2001 2006 2011 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential..................... $18,240 $108 $264 $ 27 $206 $2,115 $2,156 $13,364
Combo........................... 3,513 29 4 --- 38 319 752 2,371
Nonresidential.................. 2,544 --- --- 1 8 333 1,277 925
Multi-family.................... 604 --- --- --- --- 33 60 511
Mobile home loans.................. 1,241 6 14 42 56 916 207 ---
Commercial and industrial loans.... 350 --- --- --- --- 99 79 172
Consumer loans..................... 1,094 820 36 65 43 94 36 ---
------- ---- ---- ---- ---- ------ ------ -------
Total......................... $27,586 $963 $318 $135 $351 $3,909 $4,567 $17,343
======= ==== ==== ==== ==== ====== ====== =======
</TABLE>
The following table sets forth, as of June 30, 1996, the dollar amount
of all loans due after one year which have fixed interest rates and floating or
adjustable rates.
<TABLE>
<CAPTION>
Due After June 30, 1997
--------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
Residential..................... $ 5,477 $12,655 $18,132
Combo ......................... 1,087 2,397 3,484
Nonresidential.................. 1,241 1,303 2,544
Multi-family.................... 500 104 604
Mobile home loans.................. 1,235 --- 1,235
Commercial and industrial loans.... 350 --- 350
Consumer loans..................... 274 --- 274
------- ------- -------
Total......................... $10,164 $16,459 $26,623
======= ======= =======
</TABLE>
Residential Loans. Residential loans consist primarily of one- to
four-family loans. Approximately $18.2 million, or 66.1% of the Bank's portfolio
of loans at June 30, 1996, consisted of one- to four-family residential mortgage
loans, of which approximately 68.9% 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.
<PAGE>
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 June
30, 1996, 31.1% 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.
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 June 30, 1996, residential loans amounting to $342,000, or 1.25% 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 generally
require a new appraisal.
Combo Loans. At June 30, 1996, $3.5 million, or 12.7% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 68.2% 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
<PAGE>
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 June 30, 1996, 31.8% 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 June 30, 1996, approximately $1.2 million, or 4.5% of
the Bank's portfolio of loans, consisted of mobile home loans. The Company'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.
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. None of the Bank's mobile
home loans was included in non-performing assets at June 30, 1996.
Nonresidential Real Estate Loans. At June 30, 1996, $2.5 million, or
9.2% of the Bank's total loan portfolio, consisted of nonresidential real estate
loans, of which $1.1 million 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
June 30, 1996, $425,000, or 14.1% 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 June 30, 1996 was $238,000. None of the
Bank's nonresidential real estate loans was included in non-performing assets at
that date.
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.
<PAGE>
Multi-Family Loans. Approximately $604,000, or 2.2% of the Bank's
portfolio of loans at June 30, 1996, consisted of multi-family loans. The
largest multi-family loan at June 30, 1996 had a balance of $467,000 and was
secured by an apartment complex. All of the Bank's multi-family loans were fully
performing as of June 30, 1996. 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 $1.1 million as of June 30, 1996, or
4.0% 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 June 30, 1996, consumer loans amounting to $17,000 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.
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 to Owen
County. At June 30, 1996, 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
<PAGE>
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 June 30, 1996, the Bank
held in its loan portfolio one participation in a mortgage loan for $40,000 that
it had purchased and was serviced by others.
The following table shows loan origination, purchase and repayment
activity for the Bank during the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended
June 30,
------------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period..................................... $25,839 $21,540 $19,608
Originations:
Mortgage loans:
Residential.............................................. 7,018 7,099 6,265
Other.................................................... 664 48 248
Total mortgage loans................................... 7,682 7,147 6,513
Mobile home loans.......................................... 146 286 269
Consumer loans:
Installment.............................................. 805 578 338
Share.................................................... 157 132 254
Home equity.............................................. --- --- ---
Total consumer loans................................... 962 710 592
Total originations................................ 8,790 8,143 7,374
Purchases (sales) of participation loans...................... (250) 62 ---
Repayments and other deductions............................... 6,793 3,906 5,442
------- ------- -------
Gross loans receivable at end of period.................... $27,586 $25,839 $21,540
======= ======= =======
</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") but
offers ATM cards to its 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 Company does not expect to derive any income from the ATM cards.
Mortgage-Backed Securities. At June 30, 1996, the Bank had $3.1 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 amortized cost and fair value of the
Bank's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Value Cost
--------- ---- --------- ---- --------- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Held to maturity........ $ --- $ --- $1,477 $1,462 $1,636 $1,580
Available for sale...... 3,151 3,119 --- --- --- ---
------ ------ ------ ------ ------ ------
Total mortgage-backed
securities............ $3,151 $3,119 $1,477 $1,462 $1,636 $1,580
====== ====== ====== ====== ====== ======
</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, 1996.
<TABLE>
<CAPTION>
Amount at June 30, 1996, which matures in
--------------------------------------------------------------------------
Less than 1 year Two through five years Over five years
--------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Value Yield
---- ----- ---- ----- ----- -----
(In thousands)
Mortgage-backed securities
<S> <C> <C> <C> <C> <C> <C>
available for sale.... $58 8.50% $1,185 5.72% $1,908 7.50%
</TABLE>
The following table sets forth the changes in the Bank's mortgage-backed
securities portfolio for the years ended June 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
For the Year Ended, June 30,
---------------------------------------
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Beginning balance............................................. $1,477 $1,636 $1,156
Purchases..................................................... 1,918 --- 1,020
Sales ....................................................... --- --- ---
Monthly repayments............................................ (248) (161) (540)
Premium and discount
amortization, net.......................................... --- 2 ---
Unrealized loss on securities
available for sale......................................... (28) --- ---
------ ------ ------
Ending balance................................................ $3,119 $1,477 $1,636
====== ====== ======
</TABLE>
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 June 30, 1996, $359,000, or 0.91% 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 total assets at
June 30, 1995. At June 30, 1996, residential loans and consumer loans accounted
for 95% and 5%, respectively, of non-performing assets. There were no
non-accruing investments at June 30, 1996. As of the same date, the Bank held
$49,000 of real estate owned.
<PAGE>
The table below sets forth the amounts and categories of the Bank's
non-performing assets.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------
1996 1995 1994
------- ------ -----
(In thousands)
<S> <C> <C> <C>
Non-accruing loans (1)............................... $ 359 $ 100 $ 27
Total non-performing assets.......................... 408 100 27
Non-performing loans to total loans.................. 1.32% 0.39% 0.13%
Non-performing assets to total assets................ 1.03 0.32 0.10
</TABLE>
- ---------------
(1) The Bank generally places loans on a non-accruing status when the loans
become contractually past due 90 days or more. At June 30, 1996, $342,000
of non-accruing loans were residential loans and $17,000 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 was $19,000 for the year ended June
30, 1996.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- ------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent
for (1):
30-89 days.......... 45 $ 993 3.64% 33 $730 2.85% 42 $1,018 4.73%
90 days and over.... 14 359 1.32 6 100 0.39 3 27 0.13
-- ------- -- ---- -- ---- ---- -- ------ ----
Total delinquent
loans.......... 59 $1,352 (2) 4.96% 39 $830 3.24% 45 $1,045 4.86%
== ====== ==== == ==== ==== == ====== ====
</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, $1,257,000 consists of residential real estate loans
and $95,000 consists of nonresidential real estate and consumer loans.
<PAGE>
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 June 30, 1996, the aggregate amount of the Bank's classified assets,
and of the Bank's general and specific loss allowances were as follows:
At June 30, 1996
(In thousands)
----------------
Substandard loans...................................... $594
Doubtful loans......................................... ---
Loss loans............................................. ---
Special mention loans.................................. 69
-----
Total classified loans.............................. $663
=====
General loss allowances................................ $150
Specific loss allowances............................... ---
-----
Total allowances.................................... $150
=====
The Company regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations. Not
all of the Company'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 June 30, 1996. 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 past five (5) one-year periods ended
June 30, 1996.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period................................ $ 57 $26 $ 12 $ 13 $ 14
Less charge offs:
Consumer loans........................... (1) (6) (1) (8) (3)
Add recoveries:
Consumer loans........................... 1 1 --- 2
Net (charge-offs) recoveries............. (1) (5) --- (8) (1)
Provisions for losses on loans.............. 94 36 14 7 ---
---- ---- ------ ---- ----
Balance of allowance at end of period....... $150 $57 $ 26 $ 12 $ 13
==== ==== ====== ==== ====
Net charge-offs to total average
loans receivable for period............ --- % 0.02% ---% 0.04% 0.01%
Allowance at end of period to
net loans receivable at end
of period (1).......................... 0.55 0.22 0.12 0.06 0.08
Allowance to total non-performing
loans at end of period................. 41.78 57.00 108.33 --- ---
</TABLE>
- ------------
(1) Total loans less net loans in process and deferred loan costs.
<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 June 30,
------------------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period
applicable to:
<S> <C> <C> <C> <C> <C> <C>
Residential......................... $ 18 66.12% $--- 69.05% $--- 72.52%
Combo............................... 20 12.73 7 10.64 --- 7.02
Nonresidential...................... 20 10.91 7 11.35 --- 10.89
Multi-family........................ --- 0.50 --- 0.04 --- 0.06
Mobile home loans................... 25 4.50 12 6.25 --- 6.80
Commercial and industrial
loans............................ 1.27 --- --- --- ---
Consumer loans...................... 27 3.97 17 2.67 15 2.71
Unallocated......................... 40 --- 14 --- 11 ---
---- ------ --- ------ --- ------
Total............................... $150 100.00% $ 57 100.00% $ 26 100.00%
==== ====== === ====== ==== ======
</TABLE>
Investments and FHLB Stock
The Bank's investment portfolio (excluding mortgage-backed securities)
consists of U.S. government agency securities, state and municipal bonds and
FHLB stock. At June 30, 1996, approximately $2.1 million, including securities
at fair value for those classified as available for sale, or 5.43% 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 June 30, 1996.
The following table sets forth the amortized cost and fair value of the
Bank's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------ -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- -------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
Federal agencies......................... $1,100 $1,105 $ 934 $ 934 $ --- $ ---
State and municipal...................... 678 677 --- --- --- ---
Total securities
available for sale................ 1,778 1,782 934 934 --- ---
Securities held to maturity:
Federal agencies......................... --- --- 1,477 1,462 2,137 2,093
State and municipal...................... --- --- 350 346 277 272
Total securities
held to maturity.................. --- --- 1,827 1,808 2,414 2,365
FHLB stock (2).............................. 360 360 250 250 222 222
------ ------ ------ ------ ------ ------
Total investments...................... $2,138 $2,142 $3,011 $2,992 $2,636 $2,587
====== ====== ====== ====== ====== ======
</TABLE>
(1) Upon adoption of SFAS No. 115 as of July 1, 1994, securities available
for sale are recorded at fair value in the financial statements.
(2) Fair value approximates carrying value.
<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, 1996.
<TABLE>
<CAPTION>
Amount at June 30, 1996, which matures in
----------------------------------------------------------------
One to Over
Five Years Five Years
------------------------- --------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale :
Federal agencies..................... $1,100 6.08% $--- ---%
State and municipal.................. 483 4.63 195 5.00
------ ----
Total securities available for sale 1,583 5.64 195 5.00
FHLB stock.............................. --- 360 5.89
------ ----
Total investments.................. $1,583 5.64% $555 5.58%
====== ====
</TABLE>
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
June 30, 1996, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1996 Deposits Rate
- --------------- -------- ----------- -------- ---------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Passbook savings accounts......................... $ 10 $ 7,684 26.75% 3.00%
NOW and other transaction accounts................ 50 2,396 8.34 2.50
------- ------
Total withdrawable.............................. 10,080 35.09 2.88
------- ------
Certificates (original terms):
91 days........................................... 1,000 132 0.46 4.14
6 months.......................................... 1,000 758 2.64 4.95
12 months......................................... 1,000 8,023 27.93 5.66
24 months......................................... 1,000 2,562 8.92 6.26
30 months......................................... 1,000 1,494 5.20 4.85
36 months......................................... 1,000 337 1.17 5.50
48 months......................................... 1,000 1,055 3.67 5.50
60 months......................................... 1,000 4,285 14.92 5.77
------- ------
Total certificates.............................. 18,646 64.91 5.65
------- ------
Total deposits.................................. $28,726 100.00% 4.68%
======= ======
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of the Bank's at the dates indicated:
Year Ended June 30,
------------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
4.00% and under.................... $ 276 $ 1,169 $ 4,790
4.01 - 6.00 %...................... 13,402 10,053 8,231
6.01 - 8.00%....................... 4,968 5,507 603
8.01 - 10.00%...................... --- --- 283
------- ------- -------
Total ............................ $18,646 $16,729 $13,907
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following June
30, 1996, and the total amount maturing thereafter. Matured certificates which
have not been renewed as of June 30, 1996, have been allocated based upon
certain rollover assumptions:
<TABLE>
<CAPTION>
Amounts At
June 30, 1996, Maturing in
-----------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
----------- ------- ------- ------------
(In thousands)
<C> <C> <C> <C> <C>
4.00% and under................ $ 276 $ --- $ --- $ ---
4.01 - 6.00 %.................. 8,810 1,368 2,811 414
6.01-8.00%..................... 1,277 2,417 97 1,176
------- ------ ------ ------
Total ........................ $10,363 $3,785 $2,908 $1,590
======= ====== ====== ======
</TABLE>
<PAGE>
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 June 30,
1996.
Maturity (In thousands)
-------- --------------
Three months or less............................ $ 100
Greater than three months
through six months......................... 100
Greater than six months
through twelve months...................... 1,101
Over twelve months.............................. 1,354
------
Total...................................... $2,655
======
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 Balance at
June 30, % of June 30, June 30, % of June 30, June 30, % of
1996 Deposits 1995 1995 Deposits 1994 1994 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook savings accounts............ $ 7,684 26.75% $3,969 $ 3,715 16.51% $(1,412) $ 5,127 23.90%
NOW accounts......................... 2,396 8.34 340 2,056 9.14 (361) 2,417 11.27
------- ------ ------ ------- ------ ------- ------- ------
Total withdrawable................. 10,080 35.09 4,309 5,771 25.65 (1,773) 7,544 35.17
Certificates (original terms):
91 days.............................. 132 0.46 58 74 .33 4 70 .33
6 months............................. 758 2.64 (187) 945 4.20 (213) 1,158 5.40
12 months............................ 8,023 27.93 939 7,084 31.48 3,682 3,402 15.86
24 months............................ 2,562 8.92 1,890 672 2.99 367 305 1.42
30 months............................ 1,494 5.20 (332) 1,826 8.12 (796) 2,622 12.22
36 months............................ 337 1.17 (48) 385 1.71 211 174 .81
48 months............................ 1,055 3.67 (543) 1,598 7.10 (604) 2,202 10.26
60 months............................ 4,285 14.92 140 4,145 18.42 171 3,974 18.53
------- ------ ------ ------- ------ ------- ------- ------
Total certificates................. 18,646 64.91 1,917 16,729 74.35 2,822 13,907 64.83
------- ------ ------ ------- ------ ------- ------- ------
Total deposits................... $28,726 100.00% $6,226 $22,500 100.00% $ 1,049 $21,451 100.00%
======= ====== ====== ======= ====== ======= ======= ======
</TABLE>
During 1996, the Bank began offering to its customers a new deposit
product called the "Money Management Account." The Money Management Account is
similar to a money market checking account, but customers do 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 is limited by the Bank, and the Money
Management Account has a minimum required balance of $5,000.
Borrowings. The Bank focuses on generating high quality loans and then
seeks the best source of funding from deposits, investments or borrowings. At
June 30, 1996, the Bank had $7.2 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 5.78% to 6.86%. The Bank does
not anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. The Bank had $24.3 million in eligible assets
available as collateral for advances from the FHLB of Indianapolis as of June
30, 1996. 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
$15.2 million in advances from the FHLB of Indianapolis as of June 30, 1996.
However, the Bank's Board of Directors has by resolution limited the amount of
authorized borrowings to $13.0 million at June 30, 1996.
<PAGE>
The following table presents certain information relating to the Bank's
FHLB borrowings for the years ended June 30, 1996, 1995 and 1994.
At or for the Year
Ended June 30,
----------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
FHLB Advances:
Average balance outstanding............ $5,043 $3,321 $ 752
Maximum amount outstanding at any
month-end during the period.......... 7,200 5,000 1,500
Weighted average interest rate
during the period.................... 6.21% 6.03% 3.54%
Weighted average interest rate
at end of period..................... 6.08 6.36 4.53
Properties
The Company conducts business from its main office at 279 East Morgan
Street, Spencer, Indiana 47460. The Company owns its main office.
The following table provides certain information with respect to the
Company's office as of June 30, 1996:
<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 $28,726 $513 5,100
Spencer, IN 47460
</TABLE>
As of June 30, 1996, 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 Bank has agreed to sell
one-half of the West Parcel to a local insurance agency. The Company 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.
The Company 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 $4,625 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
<PAGE>
than the original predicted selling price. The total sales price for all tracts
of land was over $300,000. At June 30, 1996, 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 June 30, 1996, 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 June 30, 1996, and built one large lake and three small lakes in
this subdivision. As of June 30, 1996, 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 June
30, 1996, BSF had sold two of these tracts for cash and the other tract 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 June 30,
1996, 14 parcels had been sold for an aggregate sales price of $349,257.
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, six of which remained
unsold at June 30, 1996. The aggregate sales price for the four parcels which
had been sold at June 30, 1996 totaled $46,000. At June 30, 1996, BSF's total
investment in the Coon Path subdivision was approximately $27,432.
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. At June 30, 1996, only one of such contracts remained outstanding.
This contract had a balance of $25,870 and a contractual interest rate of 11%.
BSF also held a second contract at June 30, 1996, which was purchased from a
probate estate in 1992. This contract had a balance of $13,408 at that date.
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.
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 and the Holding Company's Chairman, Frank R. Stewart. 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
<PAGE>
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 June 30, 1996, the Bank's aggregate investment in BSF was $655,228.
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 June 30, 1996,
1995 and 1994, and a condensed income statement for BSF for the years ended June
30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30,
---------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Assets:
<S> <C> <C> <C>
Cash................................. $ 42 $ 57 $ 52
Loans, net........................... 457 644 693
Land acquired for development........ 172 188 153
---- ---- ----
Total assets..................... $671 $889 $898
==== ==== ====
Liabilities:
Other borrowings..................... $--- $ 29 $ 80
---- ---- ----
Other liabilities.................... 16 159 176
Total liabilities................ 16 188 256
Equity Capital.......................... 655 701 642
---- ---- ----
Total liabilities and
equity capital................. $671 $889 $898
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Condensed Income Statement
June 30,
-----------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest income......................... $84 $88 $ 91
Interest expense........................ 1 9 8
--- --- -----
Net interest income.................. 83 79 83
Income from sale of real estate......... 57 78 144
Non-interest expense:
Salaries and employee benefits....... 4 4 4
Printing and office supplies......... 8 7 7
Management fees...................... 23 33 50
Other expenses....................... 7 14 19
--- --- -----
Total non-interest expense....... 42 58 80
--- --- -----
Income before income tax................ 98 99 147
--- --- -----
Income tax expense................... 39 40 56
--- --- -----
Net income....................... $59 $59 $ 91
=== === =====
</TABLE>
<PAGE>
Employees
As of June 30, 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.
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 either the Bank or the Holding Company 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.
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
<PAGE>
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 Company.
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 Company.
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.
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
<PAGE>
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.
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 Office of Thrift Supervision ("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 June 30, 1996, the Bank's investment in
stock of the FHLB of Indianapolis was $360,000.
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,
1996, dividends paid to the Bank by the FHLB of Indianapolis totaled $21,210,
for an annual rate of 7.66%.
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.
<PAGE>
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.
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. 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 exceeded them by $.23 per $100 in deposits beginning
in 1996. Such premium disparity could have a negative competitive impact on the
Company and other institutions with SAIF deposits.
<PAGE>
Congress has recently considered many proposals designed to
recapitalize the SAIF and to eliminate the significant premium disparity between
the BIF and the SAIF. Among those considered is a recapitalization plan
providing for a special assessment currently estimated to be approximately $.65
per $100 of SAIF deposits, 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. 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 $28.7 million in deposits at June 30, 1996. If the
one-time special assessment in the legislative proposal is enacted into law, the
Bank will pay an additional assessment of approximately $187,000 (based upon
deposits at June 30, 1996), 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 a SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the 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 Company's operations.
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.
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 June 30,
1996, 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
<PAGE>
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.
In connection with the Conversion, the Bank established a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. 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 June 30, 1996, 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 $1.3 million, $3.0 million, and $1.1 million,
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.
<PAGE>
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 June 30, 1996, the largest aggregate amount of loans which the
Bank had to any one borrower was approximately $467,000. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one
borrower limits. The Company does not believe that the loans-to-one borrower
limits will have a significant impact on its business, operations or earnings.
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 Company 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 June 30, 1996, the Bank
was in compliance with the applicable reserve requirements of the FRB.
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."
<PAGE>
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 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.
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.
<PAGE>
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the 1934 Act. The Holding Company are subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
1934 Act and the rules of the SEC thereunder. After the third anniversary of 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
Historically, savings banks have been permitted to compute bad debt
deductions using either the bank experience method or the percentage of taxable
income method. However, for years beginning after December 31, 1995, the Bank
will no longer be able to use the percentage of taxable income method of
computing its allocable tax bad debt deduction. The Bank will be required to
compute its allocable deduction using the experience method. As a result of the
repeal of the percentage of taxable income method, reserves taken after 1987
using the percentage of taxable income method generally must be included in
future taxable income over a six-year period, although a two-year delay may be
permitted for institutions meeting a residential mortgage loan origination test.
In addition, the pre-1988 reserve, in which no deferred taxes have been
recorded, will not have to be recaptured into income unless (i) the Bank no
longer qualifies as a bank under the Code, or (ii) excess dividends are paid out
by the Bank.
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.
<PAGE>
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.
The Bank's state income tax returns have not been audited in recent
years.
Current Accounting Issues
Accounting for Post-Retirement Benefits. In December, 1990, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 106, Employers' Accounting for Post-Retirement Benefits
Other Than Pensions. Statement of Financial Accounting Standards ("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. This information is required to conform with
generally accepted accounting principles and is disclosed in a separate note to
the consolidated financial statements.
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, 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.
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:
<PAGE>
o Description of the assets impaired 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 Company'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 acquired 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 capitalized mortgage
servicing rights. Retroactive application is prohibited. The Bank believes that
SFAS No. 122 will not have a material impact on either the Company'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.
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.
<PAGE>
Management has not determined the impact of SFAS No. 123 on either the
Company's financial position or results of operations.
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, breaks new ground in resolving
long-standing questions about whether transactions should be accounted for as
secured borrowings or as sales. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets only if all of the following conditions are met:
o The transferred assets have been isolated from the transferor
- put presumptively beyond the reach of the transferor and its
creditors, even in bankruptcy or other receivership.
o Each transferee obtains the right - free of conditions that
constrain it from taking advantage of that right - to pledge
or exchange the transferred assets, or the transferee is a
qualifying special-purpose entity and the holders of
beneficial interests in that entity have the right - free of
conditions that constrain them from taking advantage of that
right - to pledge or exchange those interests.
o The transferor does not maintain effective control over the
transferred assets through an agreement that both entitles and
obligates the transferor to repurchase or redeem them before
their maturity, or an agreement that entitles the transferor
to repurchase or redeem transferred assets that are not
readily obtainable.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets, securitization,
transfers of sales-type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments of
liabilities.
The Statement supersedes FASB Statements No. 76, Extinguishment of
Debt, and No. 77, Reporting by Transferors for Transfers of Receivables with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights and amends FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in addition to clarifying or amending a number of other statements
and technical bulletins.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Earlier or retroactive application is not
permitted.
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 overtime, the adoption
of SOP 93-6 will likely increase compensation expense relative to the Company's
ESOP 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.
<PAGE>
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:
<PAGE>
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 was effective for the 1996 consolidated financial statements
and had no effect on the financial statements other than the additional
disclosures in the footnotes.
Item 2. Properties.
At June 30, 1996, the Bank and the Holding Company conducted business
from a single office at 279 East Morgan Steet, Spencer, Indiana. The Company
owns the land and the building, and at June 30, 1996, the net book value of the
land, building, equipment, furniture and fixtures was $513,000.
At June 30, 1996, 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 ("West Parcel"). The Bank has agreed to sell one-half of the West
Parcel to a local insurance agency. The Bank's Board of Directors is currently
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. The net book value of the additional real
estate owned by the Bank, including the West Parcel, was $162,000 as of June 30,
1996.
The Company 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 $4,625 per month.
Item 3. Legal Proceedings.
Neither the Holding Company nor the Bank is a party to any pending
legal proceedings, other than routine litigation incidental to the Bank's
business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended June 30, 1996.
Item 4.5. Executive Officers of the Registrant.
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Position
Kurt J. Meier President, Chief Executive Officer and Treasurer
Kurt D. Rosenberger Vice President and Chief Financial Officer
Charles W. Chambers Secretary
Kurt J. Meier (age 45) is President, Chief Executive Officer and
Treasurer of the Holding Company. Mr. Meier has also served as President of the
Bank since 1994. Theretofore, he served as Managing Officer of the Bank from
1990 to 1994.
Kurt D. Rosenberger (age 37) is Vice President and Chief Financial
Officer of the Holding Company. Mr. Rosenberger has also served as Vice
President of the Bank since 1994. Theretofore, he served as Senior Financial
Analyst for the OTS in Indianapolis, Indiana, from 1990 to 1994.
<PAGE>
Charles W. Chambers (age 80) is Secretary of the Holding Company. Mr.
Chambers has also served as a Staff Appraiser of the Bank since 1991 and as
Secretary of the Bank since 1990.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Bank converted from an Indiana mutual savings bank to an Indiana
stock savings bank effective July 1, 1996, and simultaneously formed a bank
holding company, the Holding Company. The Holding Company's common stock,
without par value ("Common Stock"), is quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), Small Cap Market,
under the symbol "HWEN." Because the Conversion was not effected until July 1,
1996, no prices were reported by NASDAQ for the Holding Company's Common Stock
during the year ended June 30, 1996, and no dividends were paid on the Common
Stock during the year. As of September 20, 1996, there were approximately 320
record holders of the Holding Company's Common Stock.
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependant upon the
earnings on its investment securities and the ability of the Bank to pay
dividends to the Holding Company.
Under current federal income tax law, dividend distributions with
respect to the Common Stock, to the extent that such dividends paid are from the
current or accumulated earnings and profits of the Bank (as calculated for
federal income tax purposes), will be taxable as ordinary income to the
recipient and will not be deductible by the Bank. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from the Bank's accumulated bad
debt reserves, which could result in increased federal income tax liability for
the Company. Moreover, the Bank may not pay dividends to the Holding Company if
such dividends would result in the impairment of the liquidation account
established in connection with the Conversion.
The Holding Company's ability to pay dividends on the Common Stock is
subject to certain regulatory restrictions. See "Regulation." In addition,
Indiana law would prohibit the Holding Company from paying a divided, 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 ordinary course of business or
if 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.
<PAGE>
Item 6. Selected Financial Data.
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 Form
10-K. In the opinion of management of the Company, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
results for and such periods have been included.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $39,426 $30,839 $26,008 $23,460 $21,579
Loans receivable, net.............................. 27,125 25,547 21,479 19,368 17,124
Cash and cash equivalents.......................... 5,721 1,386 1,237 1,343 1,323
Securities available for sale...................... 4,901 934 --- --- ---
Securities held to maturity........................ --- 1,827 2,414 1,833 2,161
Deposits........................................... 28,726 22,500 21,451 20,174 19,151
Federal Home Loan Bank advances.................... 7,200 5,000 1,500 500 ---
Equity capital - substantially restricted.......... 3,410 3,159 2,850 2,589 2,280
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
----- ------- ------- ------- -------
(Dollars in thousands)
Summary of Operating Results:
Interest income.................................. $2,955 $2,420 $2,023 $1,958 $1,981
Interest expense................................. 1,593 1,174 949 993 1,224
----- ------- ------- ------- -------
Net interest income........................... 1,362 1,246 1,074 965 757
Provision for loan losses........................ 94 36 14 6 ---
----- ------- ------- ------- -------
Net interest income after provision for
loan losses................................ 1,268 1,210 1,060 959 757
Other income:
Service charges on deposit accounts........... 37 27 23 22 22
Gain on sale of real estate acquired
for development............................ 57 78 145 117 56
Other......................................... 47 43 33 28 21
---- ------- ------- ------- -------
Total other income......................... 141 148 201 167 99
---- ------- ------- ------- -------
Other expense:
Salaries and employee benefits................ 415 404 344 254 248
Net occupancy and equipment expense.......... 123 109 109 91 74
Deposit insurance premium..................... 54 49 48 32 42
Other......................................... --- 304 306 255 247
---- ------- ------- ------- -------
Total other expense...................... 925 866 807 632 611
---- ------- ------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle...... 484 492 454 494 245
Income tax expense............................... 196 203 169 186 85
Cumulative effect of change in
accounting principle........................ --- --- (24) --- ---
---- ------- ------- ------- -------
Net income.................................... $ 288 $ 289 $ 261 $ 308 $ 159
==== ======= ======= ======= =======
Supplemental Data:
Return on assets (1) ............................ .84% 1.00% 1.03% 1.34% .72%
Return on equity (2)............................. 8.71 9.59 9.46 12.55 7.18
Interest rate spread (3) ........................ 3.78 4.19 4.11 4.11 3.25
Net yield on interest-earning assets (4)......... 4.13 4.54 4.42 4.43 3.62
Other expenses to average assets ................ 2.70 2.99 3.17 2.75 2.77
Net interest income to other expenses............ 1.47x 1.44x 1.33x 1.53x 1.24x
Equity-to-assets (5)............................. 8.65 10.24 10.96 11.04 10.57
Average equity capital to
average total assets.......................... 9.64 10.42 10.85 10.69 10.61
Average interest-earning assets to average
interest-bearing liabilities.................. 1.07x 1.08x 1.08x 1.07x 1.06x
Non-performing assets to total assets............ 1.03 .32 .10 --- ---
Non-performing loans to total loans.............. 1.32 .39 .13 --- ---
Loan loss allowance to total loans, net.......... .55 .22 .12 .06 .08
Loan loss allowance to non-performing loans...... 41.78 57.00 108.33 --- ---
Net charge-offs to average loans ................ * .02 * .04 *
</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>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
General
The Holding Company was 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 Company'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 Company's earnings are also affected by provisions
for loan losses, service charges and other non-interest income, operating
expenses and income taxes.
The Company 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.
Average Balances and Interest Rates and Yields
The following table presents for the years ended June 30, 1996, 1995,
and 1994, 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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- --------------------------
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> <C>
Interest-earning deposits....... $ 2,782 $ 136 4.89% $ 1,298 $ 77 5.93% $ 1,178 $ 44 3.74%
Investment securities (1)....... 1,291 89 6.89 1,032 67 6.49 775 46 5.94
Mortgage-backed
securities (1)................ 1,628 90 5.53 1,556 93 5.98 1,773 106 5.98
Loans receivable (2)............ 26,970 2,619 9.71 23,329 2,167 9.29 20,326 1,814 8.92
Stock in FHLB of Indianapolis... 274 21 7.66 224 16 7.14 222 13 5.86
------- ----- ------- ----- ------- -----
Total interest-earning assets. 32,945 2,955 8.97 27,439 2,420 8.82 24,274 2,023 8.33
Non-interest earning assets, net of
allowance for loan losses and including
unrealized gain (loss) on securities
available for sale.............. 1,367 1,495 1,172
------- ------- -------
Total assets.................. $34,312 $28,934 $25,446
======= ======= =======
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings accounts................ $ 4,235 117 2.76 $ 4,460 138 3.09 $ 5,427 166 3.06
NOW accounts.................... 2,320 58 2.50 2,349 62 2.64 2,517 67 2.66
Certificates of deposit......... 18,672 1,086 5.82 15,145 763 5.04 13,624 680 4.99
Other borrowings................ 15 1 6.67 102 10 9.80 109 8 7.34
FHLB advances................... 5,475 331 6.05 3,321 201 6.05 792 28 3.54
------- ----- ------- ----- ------- -----
Total interest-bearing
liabilities.............. 30,717 1,593 5.19 25,377 1,174 4.63 22,469 949 4.22
Other liabilities.................. 289 543 216
------- ------- -------
Total liabilities............. 31,006 25,920 22,685
------- ------- -------
Equity capital
Retained earnings.............. 3,305 3,007 2,761
Unrealized gain on securities
available for sale............ 1 7 ---
------- ------- -------
Total equity capital.......... 3,306 3,014 2,761
------- ------- -------
Total liabilities and
equity capital............ $34,312 $28,934 $25,446
======= ======= =======
Net interest-earning assets........ $ 2,228 $ 2,062 $ 1,805
======== ------ ======== ------ ======== ------
Net interest income................ $1,362 $1,246 $1,074
====== ====== ======
Interest rate spread............... 3.78% 4.19% 4.11%
==== ==== ====
Net yield on weighted average
interest-earning assets......... 4.13% 4.54% 4.42%
==== ==== ====
Average interest-earning assets to
average interest-
bearing liabilities............. 107.25% 108.13% 108.03%
</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 table, 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>
Year Ended June 30,
At June 30, ------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits......................... 5.48% 4.89% 5.93% 3.74%
Investment securities............................. 5.57 6.89 6.49 5.94
Mortgage-backed securities........................ 6.85 5.53 5.98 5.98
Loans receivable.................................. 9.62 9.71 9.29 8.92
Stock in FHLB of Indianapolis..................... 7.60 7.66 7.14 5.86
Total interest-earning assets................... 8.60 8.97 8.82 8.33
Weighted average interest rate cost of:
Savings accounts.................................. 3.00 2.76 3.09 3.06
NOW and money market accounts..................... 2.50 2.50 2.64 2.66
Certificates of deposit........................... 5.68 5.82 5.04 4.99
Other borrowings.................................. --- 6.67 9.80 7.34
FHLB advances..................................... 6.08 6.05 6.05 3.54
Total interest-bearing liabilities.............. 4.97 5.19 4.63 4.22
Interest rate spread (1)............................. 3.63% 3.78% 4.19% 4.11%
==== ==== ==== ====
Net yield on weighted average
interest-earning assets (2)....................... 4.13 4.54% 4.42%
==== ==== ====
</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 June 30,
1996, 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.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
------------------------------------------------
Total Net Due to Due to
Change Rate Volume
----------- ---------- --------
(In thousands)
Year ended June 30, 1996
compared to year ended June 30, 1995
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits.............................. $ 59 $ (16) $ 75
Investment securities.................................. 22 3 19
Mortgage-backed securities............................. (3) (7) 4
Loans receivable....................................... 452 102 350
Stock in FHLB of Indianapolis.......................... 5 1 4
------ ------ -----
Total................................................ 535 83 452
------ ------ -----
Interest-bearing liabilities:
Savings accounts....................................... (21) (14) (7)
NOW and money market accounts.......................... (4) (3) (1)
Certificates of deposit................................ 323 129 194
Other borrowings....................................... (9) (2) (7)
FHLB advances.......................................... 130 --- 130
------ ------ -----
Total................................................ 419 110 309
------ ------ -----
Change in net interest income............................. $ 116 $ (27) $ 143
====== ====== ======
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
====== ====== ======
</TABLE>
<PAGE>
Financial Condition at June 30, 1996 Compared to Financial Condition at June 30,
1995
General. Total assets increased $8.6 million at June 30, 1996 compared to
June 30, 1995. The increase was primarily a result of an increase in cash and
cash equivalents of $4.3 million. In addition, investment securities increased
$2.1 million and net loans increased $1.6 million. These increases in assets
were funded by increased deposits of $6.2 million or 27.6% and additional
advances of $2.2 million from the FHLB of Indianapolis. The increase in deposits
included $4.7 million of funds related to the sale of common stock associated
with the conversion of the Bank from a state mutual savings bank to a state
stock savings bank. The conversion and related formation of a bank holding
company were completed effective July 1, 1996.
Average assets increased from $28.9 million for the period ended June 30,
1995, to $34.3 million for the period ended June 30, 1996, an increase of 18.7%.
Average interest-earning assets represented 94.8% of average assets for the June
1995 period compared to 96.0% for the period ended June 30, 1996. Average loans
experienced the largest increase amounting to $3.6 million while other
interest-earning assets increased to a lesser extent. Average interest-bearing
liabilities as a percentage of average interest-earning assets were 93.2% for
the 1996 period compared to 92.5% for the 1995 period.
Investment Securities. Total securities increased $2.1 million, primarily
in mortgage-backed securities at June 30, 1996 compared to June 30, 1995. The
Bank availed itself of the opportunity in December 1995 to transfer all of its
held-to-maturity securities to available-for-sale as permitted by the Financial
Accounting Standards Board. All subsequent purchases have been classified as
available for sale. The Bank believes that maintaining all investment securities
as available for sale provides the most flexibility in managing the investment
portfolio.
Loans and Allowance for Loan Losses. Average loans increased approximately
$3.6 million from the period ended June 30, 1995 to June 30, 1996. The growth in
loans was funded by increased average deposits and increased average borrowings.
Average loans were $27.0 million for the June 1996 period compared to $23.3
million for the June 1995 period. The average rate on loans was 9.71% for the
June 1996 period compared to 9.29% for the June 1995 period, an increase of 42
basis points. The allowance for loans losses as a percentage of net loans
increased to .55% from .22% as a result of a larger provision for loan losses
and nominal charge-offs. The ratio of the allowance for loan losses to
nonperforming loans was 41.7% at June 30, 1996 compared to 57.0% at June 30,
1995.
Premises and Equipment. Premises and equipment increased approximately
$41,000, net of depreciation and the disposition of a possible location for
future expansion, from June 30, 1995 to June 30, 1996. The largest increases
were related to the purchase of a property adjacent to the Bank and a property
across the street from the Bank. The Bank intends to utilize one-half of the
location adjacent to the main office primarily for additional office space and
storage for the Bank. The Bank has agreed to sell the other one-half of this
property to a local insurance agency. The property located across the street
from the main office is used for employee parking. 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 the future branch has been selected. In addition, the Bank has
purchased new general ledger software to which it expects to convert in early
1997.
Deposits. Deposits increased $6.2 million from $22.5 million at June 30,
1995 to $28.7 million at June 30, 1996. Increased deposits were used to fund
loans and increases in other earning assets. Savings accounts increased
approximately $4 million, substantially all of which was attributable to funds
on deposit for the purchase of common stock related to the conversion of the
Bank from a mutual to a stock institution. Now accounts and certificates of
deposit increased $2.3 million during this period. Average total deposits
increased $3.3 million to $25.2 million for the June 1996 compared $22.0 million
for the June 1995 period.
Borrowed Funds. Borrowed funds increased $2.2 million from June 30, 1995 to
June 30, 1996. The increase in borrowed funds was used to fund a portion of the
Bank's loan growth. The weighted average interest rate on advances from the FHLB
of Indianapolis decreased from 6.36% at June 30, 1995 to 6.08% at June 30, 1996.
Average borrowed funds increased to $5.5 million for the June 1996 period from
$3.4 million for the June 1995 period.
Equity Capital. Equity capital increased $251,000 to $3.4 million at June
30, 1996 compared to $3.2 million at June 30, 1995 primarily due to net income
during the period.
<PAGE>
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.
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.
<PAGE>
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. Comparison of Operating Results For Fiscal Years Ended
June 30, 1996, 1995 and 1994
General. Net income for the three year period ended June 30, 1996 has
remained in a narrow range. Net income for the fiscal year ended June 30, 1996
decreased slightly to $288,000 compared to $289,000 for the 1995 period. Net
income for 1994 of $261,000 was reduced by $24,000 for a cumulative change in
accounting for income taxes because of the implementation of SFAS No. 109.
Income for 1994 before the cumulative effect of the accounting change was
$285,000. Return on average assets for the years ended June 30, 1996, 1995 and
1994 was .84%, 1.00% and 1.03%. Return on average equity was 8.71% for 1996,
9.59% for 1995 and 9.46% for 1994.
Interest Income. The Bank's total interest income was $3.0 million compared
to $2.4 million for 1995. Higher interest rates accounted for $83,000 of the
increase while volume increases accounted for $452,000, primarily from loans.
Average earning assets increased $5.5 million from $27.4 million to $32.9
million from 1995 to 1996. The increase in average earning assets was
accompanied by an increase in average yields from 8.82% in 1995 to 8.97% in
1996. The increases in average loans and loan rates was the primary factor
contributing to the increase in total interest income. Total interest income
increased $400,000 from 1994 to 1995. Average earning assets increased $3.2
million during the 1995 period compared to the 1994 period and the average yield
increased 49 basis points to 8.82% from 8.33%.
Interest Expense. Interest expense increased $419,000 during the fiscal
year ended June 30, 1996 compared to 1995. The increase in interest expense was
the result of an increase in average interest-bearing liabilities of $5.3
million from $25.4 million to $30.7 million as well as an increase in the
average cost of funds of 56 basis points from 4.63% for 1995 to 5.19% for 1996.
The average balances of NOW and savings accounts increased $254,000 while the
average balance of certificates of deposits increased $3.5 million during 1996.
Borrowed funds averaged $2.1 million higher during 1996 compared to 1995 as the
Bank continued to utilize borrowings from the FHLB to meet increased loan and
other asset growth. Interest expense increased $172,000 in 1995 compared to 1994
reflecting increases in interest rates of $69,000 and volume increases of
$103,000. The average cost of interest-bearing liabilities increased to 4.63% in
1995, or 41 basis points, compared to 4.22% in 1994.
Net Interest Income. Net interest income increased approximately $116,000
to $1.4 million for the fiscal year ended June 30, 1996 compared to the fiscal
year ended June 30,1995. The increase was due to an increase of $143,000 due to
volume while interest rates accounted for a decrease of $27,000. The increase of
$172,000 for the 1995 period was the result of $69,000 due to of volume and
$103,000 due to rates. Substantially all of the $109,000 increase in 1994 was
the result of an increase in volume. The Bank's interest spread for 1996 was
3.78% compared to 4.19% for 1995 and 4.11 % for 1994.
Provision for Loan Losses. The Bank provided $94,000 for future loan losses
for the fiscal year ended June 30, 1996. The allowance for loan losses at June
30, 1996 was considered adequate based on historical net chargeoffs and other
factors including the size, condition and components of the loan portfolio.
Consideration was also given to the growth in the loan portfolio and the level
of the allowance maintained by peers. The provision for loan losses was $36,000
for 1995 and $14,000 for 1994. The Bank provides a general allowance that
reflects inherent losses based upon the types of outstanding loans as well as
the level of problem or nonperforming loans.
Other Income. Service charges on deposit accounts increased approximately
$10,000 in 1996 compared to 1995 primarily as a result of an increase in the
number of accounts subject to such charges. Service charges on deposit accounts
remained relatively constant in 1995 and 1994. The increase in other income in
1996 of $5,000 compared to 1995 was primarily the result of an increase the
number of late fees on loans assessed. The increase of $10,000 in 1995 compared
to 1994 was the result of a $5,000 increase in late fees on loans and a $4,000
increase in income on other real estate owned.
<PAGE>
BSF's gain on sales of real estate acquired for development was $57,000,
$78,000 and $145,000 for 1996, 1995 and 1994. Management has utilized the sale
of lots and residences to provide an additional source of income for the Bank.
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. In connection with the Bank's conversion to an Indiana
mutual savings bank in 1995, the FDIC required the Bank to cease BSF's land
acquisitions and divest of BSF's non-conforming real estate holdings within five
years, among other conditions. BSF has ceased to acquire land and is in process
of divesting of its real estate holdings. BSF currently anticipates that all
non-conforming real estate will be sold within the required disposition period.
The loss of the income from this source will have an adverse effect on net
income subsequent to discontinuance of this business activity.
Salaries and Employee Benefits. Salaries and benefits increased 2.7% to
$415,000 for the fiscal year ended June 30, 1996 compared to 1995 reflecting
normal increases in officers' and employees' compensation and payroll taxes.
Salaries and benefits increased 17.2% to $404,000 in 1995 compared to 1994 as a
result of 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.
Management anticipates that these expenses will increase in future years
compared to the 1996 increase as a result of certain benefit plans which were
adopted or may be approved by stockholders as a result of the conversion of the
Bank to a stock savings bank and the related formation of a bank holding
company. An increase in these expenses will have an adverse effect on future net
income. As part of the conversion (which was effective July 1, 1996), the Board
of Directors established an Employee Stock Ownership Plan ("ESOP") which
acquired 40,474 shares of the bank holding company at $10 per share with funds
provided from the holding company. Future compensation expense related to the
ESOP will be recorded equal to the fair market value of the stock when
contributions are made by the Bank to the ESOP. Also as part of the conversion,
the Board of Directors approved a Stock Option Plan ("SOP") and a Recognition
and Retention Plan ("RRP"). The SOP and RRP are subject to stockholders'
approval. Under the SOP, stock options representing up to 10% of the common
stock sold in the conversion may be granted to directors, officers and employees
of the Holding Company or Bank. Restricted stock awards covering up to 4% of the
common stock sold in the conversion may be awarded to the Bank's directors,
officers and key employees under the RRP. Management has not determined the
future impact of accounting for the ESOP or other benefit plans (if approved by
the stockholders) on the Bank's financial position or results of operations.
Net Occupancy and Equipment Expenses. Occupancy and equipment expenses were
$123,000 for 1996, $109,000 for 1995 and $109,000 for 1994. The increase in 1996
resulted primarily from increased depreciation on new equipment to upgrade the
teller line to a personal computer based system and equipment and software
purchased for the Bank's conversion to a new automated general ledger system.
Management anticipates converting to the new general ledger system in January
1997. Depreciation expense in 1995 and 1994 were constant. Depreciation on 1995
additions was offset by the reduced expense on assets which were fully
depreciated in 1994.
Deposit Insurance Expense. Deposit insurance increased during each of the
last three as a direct result of increased deposits on which the assessment is
based. Assessment rates were the same during each of the last three years.
The deposits of the Bank are insured by the Savings Association Insurance
Fund ("SAIF"). A recapitalization plan for the SAIF under consideration by
Congress provides for a special assessment on all SAIF-insured institutions to
enable SAIF to achieve its required level of reserves. If the proposed
assessment of .65% was effected based on deposits as of June 30, 1996, the
Bank's special assessment would amount to approximately $187,000 before taxes.
Accordingly, this special assessment would significantly increase other expenses
and adversely affect results of operations. Depending upon the capital level and
supervisory rating of the bank, and assuming the insurance premium levels for
commercial banks and SAIF members again equalized, future deposit insurance
premiums could decrease from .23% of deposits currently paid by the Bank. Such
reduction in premiums would reduce other expenses for future periods.
Other Expenses. Expenses other than those discussed above, consisting
primarily of expenses related to computer processing, supplies, professional
fees, advertising, management fees, supervisory examination fees, telephone,
postage and insurance expenses increased $30,000 in 1996 compared to 1995 and
<PAGE>
remained constant in 1995 compared to 1994. In 1996, computer processing
expenses increased $7,000 compared to 1995 as a result of increased usage and a
higher volume of activity. Printing and office supplies in fiscal year 1996
increased $12,000 due to increased volume and general price increases compared
to 1995. Legal and professional fees increased $12,000 during the year ended
June 30, 1996 primarily as a result of fees related to the possible conversion
of the Bank to a stock company and obtaining information about various employee
plans. Management fees paid to Mr. Stewart in connection with the operations of
BSF decreased $10,000 during 1996 as a result of the termination of such fees
effective January 1, 1996. Other increases occurred as a result of general
increases in a variety of expense categories.
Income Tax Expense. Income tax expense was $196,000 for 1996 compared to
$203,000 for 1995 and $168,000 for 1994. The level of tax expense was consistent
with the amount of taxable income each year. The effective tax rate was 40.5%,
41.3% and 37.2% for 1996, 1995 and 1994, respectively.
During fiscal year 1994, the Bank adopted SFAS No. 109, Accounting for
Income Taxes, and recorded a cumulative effect of a change in method of
accounting of $24,000.
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
maturates and scheduled amortization of loans are predictable sources 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, 1996, 1995 and 1994, the Bank originated
mortgage loans in the amounts of $7.6 million, $7.1 million and $6.5 million,
respectively. The Bank originated mobile home loans of $146,000, $286,000 and
$269,000, and consumer loans of $962,000, $710,000 and $592,000, respectively,
during these periods. Loan repayments and other deductions were $6.8 million,
$3.9 million and $5.4 million during the respective three one-year periods.
During the years ended June 30, 1996 and 1995, the Bank purchased
investment securities (including mortgage-backed securities) in the amounts of
$3.3 million and $0.6 million. Securities totaling $1.1 million were purchased
during 1994. Maturities and repayments of securities were $1.1 million in 1996,
$0.3 million in 1995 and $0.6 million in 1994.
During the year ended June 30, 1996, deposits grew approximately $6.2
million which included $4.7 million of funds on deposit related to the sale of
stock associated with the conversion. During each of the years ended June 30,
1995 and 1994, 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 periods presented.
The Bank's cash and cash equivalents increased $4.3 million during the year
ended June 30, 1996. Such amount is substantially higher than the preceding two
years as a result of deposits related to the conversion being invested short
term. The Bank's cash and cash equivalents remained fairly constant during the
years ended June 30, 1995 and 1994.
The Bank had outstanding loan commitments of $1.7 million and unused lines
of credit of $0.2 million at June 30, 1996. The Bank anticipates that it will
have sufficient funds from loan repayments and cash and cash equivalents 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
June 30, 1996 totaled $10.4 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.
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
<PAGE>
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 $7.2 million at June 30, 1996. The Bank had $23.6
million in eligible assets available as collateral for advances from the FHLB of
Indianapolis as of June 30, 1996. 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 $14.7 million in advances from the FHLB of Indianapolis
as of June 30, 1996. However, the Bank's Board of Directors has by resolution
limited the amount of authorized borrowings to $13 million at June 30, 1996.
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 each of the three years in the
period ended June 30, 1995.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1996 1995 1994
------ -------- --------
(In thousands)
<S> <C> <C> <C>
Operating activities...................................... $ 261 $ 218 $ 225
------ -------- --------
Investing activities:
Investment purchases................................... (1,918) (605) (112)
Investment maturities.................................. 870 130 10
Mortgage-backed
securities purchases................................. (1,399) --- (1,020)
Mortgage-backed
securities maturities and repayments................. 244 161 540
Changes in loans....................................... (1,762) (4,134) (2,125)
Other.................................................. (98) (118) 134
------ -------- --------
Total................................................ (4,063) (4,566) (2,573)
------ -------- --------
Financing activities:
Deposit increases...................................... 6,226 1,049 1,277
Borrowings............................................. 2,171 3,448 965
Other.................................................. (260) --- ---
------ -------- --------
Total................................................ 8,137 4,497 2,242
------ -------- --------
Net change in cash and
cash equivalents....................................... $4,335 $ 149 $ (106)
====== ======== ========
</TABLE>
During the years ended June 30, 1996, 1995 and 1994, 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 1996 and 1995, funded loan growth during this three year period.
As of December 31, 1996, 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."
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
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data.
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. and subsidiary as of June 30, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, 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.
/s/ Geo S. Olive & Co. LLC
Indianapolis, Indiana
July 31, 1996
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Consolidated Statement of Financial Condition
Year Ended June 30 1996 1995
- --------------------------------------------------------------------------------
Assets
Cash $ 385,824 $ 259,105
Short-term interest-bearing deposits 5,334,796 1,126,874
----------------------------
Total cash and cash equivalents 5,720,620 1,385,979
Investment securities
Available for sale 4,901,120 933,962
Held to maturity 1,826,914
----------------------------
Total investment securities 4,901,120 2,760,876
Loans 27,274,557 25,604,648
Allowance for loan losses (149,833) (57,467)
----------------------------
Net loans 27,124,724 25,547,181
Real estate acquired for development 171,580 188,385
Premises and equipment 512,768 471,637
Federal Home Loan Bank stock 360,000 250,000
Interest receivable 235,678 186,609
Prepaid stock conversion costs 260,067
Other assets 139,754 48,506
----------------------------
Total assets $39,426,311 $30,839,173
============================
Liabilities
Interest bearing deposits $28,725,700 $22,500,002
Federal Home Loan Bank advances 7,200,000 5,000,000
Other borrowings 28,773
Other liabilities 90,539 151,236
----------------------------
Total liabilities 36,016,239 27,680,011
----------------------------
Commitments and Contingencies
Equity Capital
Retained earnings--
substantially restricted 3,427,201 3,138,811
Net unrealized gain (loss) on
securities available for sale (17,129) 20,351
----------------------------
Total equity capital 3,410,072 3,159,162
----------------------------
Total liabilities and equity capital $39,426,311 $30,839,173
============================
See notes to consolidated financial statements.
(2)
<PAGE>
<TABLE>
<CAPTION>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Consolidated Statement of Income
Year Ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans $2,618,394 $2,166,726 $1,813,706
Deposits with financial institutions 135,553 76,678 43,716
Investment securities
Taxable 161,258 143,426 142,655
Tax exempt 18,206 17,745 9,956
Other interest and dividend income 21,210 15,728 12,916
--------------------------------------------------------
Total interest and dividend income 2,954,621 2,420,303 2,022,949
--------------------------------------------------------
Interest Expense
Deposits 1,261,043 962,764 913,141
Federal Home Loan Bank advances 330,458 201,463 28,244
Other interest expense 1,282 9,994 8,101
--------------------------------------------------------
Total interest expense 1,592,783 1,174,221 949,486
--------------------------------------------------------
Net Interest Income 1,361,838 1,246,082 1,073,463
Provision for losses on loans 94,000 36,134 14,065
--------------------------------------------------------
Net Interest Income After Provision for
Losses on Loans 1,267,838 1,209,948 1,059,398
--------------------------------------------------------
Other Income
Service charges on deposit accounts 37,478 27,345 23,272
Gain on sale of real estate acquired for
development 56,944 78,499 144,794
Other income 47,535 42,567 32,670
--------------------------------------------------------
141,957 148,411 200,736
--------------------------------------------------------
Other Expenses
Salaries and employee benefits 414,986 403,787 344,546
Net occupancy expenses 67,213 73,761 72,647
Equipment expenses 55,436 35,302 36,509
Deposit insurance expense 53,686 49,444 47,676
Computer processing fees 55,410 47,945 47,506
Printing and office supplies 33,479 32,215 31,802
Legal and professional fees 47,324 35,125 35,740
Advertising expense 24,346 25,518 15,049
Management fees 22,998 33,005 49,627
Other expenses 150,563 129,824 126,069
--------------------------------------------------------
925,441 865,926 807,171
--------------------------------------------------------
Income Before Income Tax and Cumulative
Effect of Change in Accounting Method 484,354 492,433 452,963
Income tax expense 195,964 203,210 168,421
--------------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Method 288,390 289,223 284,542
Cumulative Effect of Change in Method of
Accounting for Income Taxes 23,628
--------------------------------------------------------
Net Income $ 288,390 $ 289,223 $ 260,914
========================================================
</TABLE>
See notes to consolidated financial statements.
(3)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Consolidated Statement of Changes in Equity Capital
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Retained Available
Earnings For Sale Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, July 1, 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, net of taxes
of $4,533 $ 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 1996 288,390 288,390
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $24,584 (37,480) (37,480)
------------------------------------------------------------
Balances, June 30, 1996 $3,427,201 $(17,129) $3,410,072
============================================================
</TABLE>
See notes to consolidated financial statements.
(4)
<PAGE>
<TABLE>
<CAPTION>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended June 30 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 288,390 $ 289,223 $ 260,914
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 94,000 36,134 14,065
Investment securities amortization, net 464 683 973
Depreciation and amortization 74,367 58,813 55,496
Deferred income tax (benefit) (41,460) (198) 14,624
Gain on sale of real estate
acquired for development (56,944) (78,499) (144,794)
Gain on sale of other real estate (3,250) (11,019)
Change in
Interest receivable (49,069) (74,994) (2,114)
Other assets (10,361) (13,636) (3,970)
Other adjustments (34,852) 11,360 29,825
-----------------------------------------------------
Net cash provided by operating activities 261,285 217,867 225,019
-----------------------------------------------------
Investing Activities
Purchases of securities available for sale (3,316,533) (399,719) (112,231)
Purchase of securities held to maturity (205,000) (1,020,000)
Proceeds from maturities and paydowns of
securities available for sale 1,002,691
Proceeds from maturities and paydowns of
securities held to maturity 111,071 290,803 550,138
Net changes in loans (1,761,684) (4,134,319) (2,125,354)
Proceeds from real estate owned sales 44,202 41,284
Purchase of premises and equipment (164,998) (173,327) (29,123)
Proceeds from disposal of premises and equipment 58,000
Purchase of real estate acquired for development (38,421) (231,464) (152,649)
Proceeds from sale of real estate acquired for development 112,170 274,247 316,159
Purchase of FHLB of Indianapolis stock (110,000) (28,500)
-----------------------------------------------------
Net cash used by investing activities (4,063,502) (4,565,995) (2,573,060)
-----------------------------------------------------
Financing Activities
Net change in
NOW and savings deposits 4,309,021 (1,774,297) 71,941
Certificates of deposit 1,916,677 2,822,850 1,205,273
Advances from Federal Home Loan Bank of Indianapolis 2,200,000 3,500,000 1,500,000
Payments on advances from Federal Home
Loan Bank of Indianapolis (500,000)
Other borrowings 75,000 45,000
Payments on other borrowings (28,773) (126,400) (79,994)
Prepaid stock conversion costs 8,136,858
-----------------------------------------------------
Net cash provided by financing activities 8,396,925 4,497,153 2,242,220
-----------------------------------------------------
Net Change in Cash and Cash Equivalents 4,334,641 149,025 (105,821)
Cash and Cash Equivalents, Beginning of Year 1,385,979 1,236,954 1,342,775
-----------------------------------------------------
Cash and Cash Equivalents, End of Year $8,136,858 $1,385,979 $1,236,954
=====================================================
Additional Cash Flows and Supplementary Information
Interest paid $1,592,783 $1,174,221 $949,486
Income tax paid 179,305 144,375 225,900
</TABLE>
See notes to consolidated financial statements.
(5)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1--Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Owen Community Bank, s.b. ("Bank") and
its wholly owned subsidiary, BSF, Inc. ("BSF"), conform to generally accepted
accounting principles and reporting practices followed by the thrift industry.
The more significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Bank operates under a state thrift charter and provides full banking
services. As a state-chartered thrift, the Bank is subject to regulation by the
Department of Financial Institutions, State of Indiana and the Federal Deposit
Insurance Corporation ("FDIC").
The Bank generates mortgage and consumer loans and receives deposits located
primarily in Owen and surrounding counties. The Bank's loans are generally
secured by specific items of collateral including real property and consumer
assets.
In May, 1994, the Bank received approval to convert from a federal mutual
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.
BSF engages in purchasing and developing large tracts of real estate. After land
is purchased, BSF subdivides the real estate into lots, makes improvements such
as streets and sells individual lots, usually on contract. In connection with
the Bank's conversion to an Indiana mutual savings bank, the FDIC required the
Bank to cease BSF's land acquisitions, divest of BSF's nonconforming real estate
holdings by November 16, 2000 and maintain the Bank's capital at levels
suficient to classify the Bank as a well-capitalized institution. BSF has ceased
land acquisitions and is in the process of divesting of its real estate
holdings. BSF's net income for the years ended June 30, 1996, 1995 and 1994,
included in the Bank's consolidated net income, totaled $59,000, $59,000 and
$91,000.
Consolidation--The consolidated financial statements include the accounts of the
Bank and subsidiary after elimination of all material intercompany transactions
and accounts.
Investment Securities--The Bank 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 Bank 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.
(6)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans, except for installment loans with
add-on interest, for which a method that approximates the level yield method is
used. 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 nonaccrual and
impaired 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.
Allowance for loan losses is maintained to absorb potential loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of June
30, 1996, the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
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 sales 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
principally 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.
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.
(7)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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. Prior to 1996, the Bank filed consolidated income tax
returns with its subsidiary. Commencing in 1996, the Bank and subsidiary intend
to file separate income tax returns.
Note 2--Conversion to State Stock Savings Bank
In October, 1995, the Board of Directors adopted a Plan of Conversion ("Plan")
to convert the Bank from a state-chartered mutual savings bank to a
state-chartered stock savings bank through amendment of its charter and the sale
of common stock to a holding company formed in connection with the conversion.
On July 1, 1996, the Bank completed the conversion and the formation of Home
Financial Bancorp ("Holding Company") as the Holding Company of the Bank. As
part of the conversion, the Holding Company issued 505,926 shares of common
stock at $10 per share. Net proceeds of the Holding Company's stock issuance,
after costs, were approximately $4,740,000 of which $2,472,548 was used to
acquire 100% of the stock and ownership of the Bank. Costs associated with the
conversion were deducted from the proceeds of stock sold by the Holding Company.
The transaction was accounted for in a manner similar to a pooling of interests.
The Holding Company had not commenced operations as of June 30, 1996, and
accordingly, financial statements of the Holding Company have been omitted.
At the date of conversion, the Bank established a liquidation account of
$3,293,000 which equaled the Bank's retained earnings as of the most recent
financial statements, December 31, 1995, 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 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, qualifying depositors
would receive a liquidation distribution based on their proportionate share of
the then total remaining qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not be reduced below the amount then
required for the 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.
(8)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 3--Investment Securities
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $1,100 $ 5 $1,105
State and municipals 678 4 $ 5 677
Mortgage-backed securities 3,151 23 55 3,119
-------------------------------------------------------------------------------
Total investment securities $4,929 $32 $60 $4,901
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 900 $34 $ 934
-------------------------------------------------------------------------------
Held to maturity at June 30, 1995
State and municipal 350 1 $ 5 346
Mortgage-backed securities 1,477 9 24 1,462
-------------------------------------------------------------------------------
Total held to maturity 1,827 10 29 1,808
-------------------------------------------------------------------------------
Total investment securities $2,727 $44 $29 $2,742
===============================================================================
</TABLE>
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1996, 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.
(9)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1996
-------------------------------
Available for Sale
-------------------------------
Amortized Fair
Maturity Distribution at June 30 Cost Value
- --------------------------------------------------------------------
One to five years $1,583 $1,589
After ten years 195 193
-------------------------------
1,778 1,782
Mortgage-backed securities 3,151 3,119
-------------------------------
Totals $4,929 $4,901
===============================
Securities with a carrying value of $3,119,000 and $1,477,000 were pledged at
June 30, 1996 and 1995 to secure certain deposits and for other purposes as
permitted or required by law.
There were no sales of securities during the years ended June 30, 1996, 1995 or
1994.
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 $1,716,000 and a fair value of $1,707,000. Other than the
initial adoption of SFAS No. 115 and the preceding, there were no transfers or
sales of investment securities during the periods presented.
Note 4--Loans and Allowance
June 30 1996 1995
- --------------------------------------------------------------------------------
Real estate mortgage loans
Residential $18,240 $17,841
Mobile home and land 3,513 2,748
Nonresidential 2,544 2,933
Multi-family 604 11
Mobile home loans 1,241 1,609
Commercial and industrial 350
Consumer loans 1,094 691
--------------------------------
27,586 25,833
--------------------------------
Undisbursed portion of loans (319) (234)
Deferred loan costs 8 6
--------------------------------
(311) (228)
--------------------------------
Total loans $27,275 $25,605
================================
(10)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended June 30 1996 1995 1994
- -----------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 $ 57 $26 $12
Provision for loan losses 94 36 14
Recoveries on loans 1 1
Loans charged off (1) (6) (1)
--------------------------------
Balances, June 30 $150 $57 $26
================================
The Bank adopted SFAS Nos. 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
Nos. 114 and 118 did not have a material impact on the Bank's financial position
or results of operations.
At June 30, 1996, the Bank had nonaccrual loans of approximately $359,000, for
which impairment had not been recognized. If interest on these loans had been
recognized at the original interest rates, interest income would have increased
approximately $19,000.
The Bank has no commitments to loan additional funds to the borrowers of
nonaccrual loans.
Nonaccruing loans totaled approximately $71,000 and $16,000 at June 30, 1995 and
1994. 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 was immaterial for each period.
(11)
<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, July 1, 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 326
Payments, etc. including renewals (335)
--------
Balances, June 30, 1996 $508
========
Note 5--Premises and Equipment
June 30 1996 1995
- --------------------------------------------------------------------------------
Land $188 $133
Building 606 634
Equipment 321 233
----------------------------------
Total cost 1,115 1,000
Accumulated depreciation (602) (528)
----------------------------------
Net $513 $472
==================================
Note 6--Deposits
June 30 1996 1995
- --------------------------------------------------------------------------------
Interest-bearing demand $ 2,396 $ 2,056
Savings 7,684 3,715
Certificates and other time
deposits of $100,000 or more 2,655 1,936
Other certificates and time deposits 15,991 14,793
----------------------------------
Total deposits $28,726 $22,500
==================================
(12)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Certificates maturing in years ending June 30:
1997 $10,363
1998 3,786
1999 2,907
2000 1,304
2001 286
----------
$18,646
==========
Note 7--Federal Home Loan Bank Advances
1996
-----------------------------
Weighted
Average
June 30 Amount Rate
- -----------------------------------------------------------------------
Maturities in years ending
1997 $2,000 5.78%
1998 1,000 6.26
1999 500 6.22
2000 3,500 6.14
Thereafter 200 6.86
---------
$7,200 6.08%
=========
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.
(13)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 June 30, 1996 and 1995, there were no borrowings on this line of
credit.
BSF had two mortgage loans payable to individuals. The loans, which have an
interest rate of 9%, were paid off during 1996. The balances at June 30, 1996
and 1995 were $0 and $28,773.
Note 9--Income Tax
Year Ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $185 $153 $141
State 52 50 37
Deferred
Federal (32) (8)
State (9) (2)
---------------------------------------
Total income tax expense $196 $203 $168
=======================================
Year Ended June 30 1996 1995 1994
- ------------------------------------------------------------------------------
Reconciliation of federal
statutory to actual tax expense
Federal statutory income tax at 34% $165 $167 $154
Effect of state income taxes 28 33 23
Tax exempt interest (5) (5) (3)
Other 8 8 (6)
---------------------------------------
Actual tax expense $196 $203 $168
=======================================
(14)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset is included in other assets at June 30,
1996, and a cumulative net deferred tax liability is included in other
liabilities at June 30, 1995. The components of the asset (liability) are as
follows:
June 30 1996 1995
- --------------------------------------------------------------------------------
Differences in depreciation methods $ (7) $ (9)
Differences in accounting for loan fees (6) (9)
Differences in accounting for loan losses 36 (2)
State income tax (3) (1)
Differences in accounting for
securities available for sale 12 (13)
-----------------
$ 32 $(34)
=================
Assets $ 48
Liabilities (16) $(34)
-----------------
$ 32 $(34)
=================
No valuation allowance was necessary during any time in 1996 and 1995.
Effective 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.
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 June 30, 1996 and 1995, 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 June 30, 1996 and 1995.
(15)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
1996 1995
- -------------------------------------------------------------------------------
Financial instruments whose contract
amount represents credit risk
were as follows:
Mortgage loan commitments:
At variable rates $989 $395
At fixed rates 752 704
Unused line of credit 205 151
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 has entered into agreements with three officers which provide for
salary continuation for a three year period under certain circumstances,
primarily related to change of control of the Bank, as defined. Under the terms
of the agreements, these payments could occur if, following a change of control,
such officers are terminated other than for cause or unreasonable changes are
made in their employment relationships. These agreements extend automatically
for one year on each anniversary date unless certain conditions are met. One of
the agreements was effective January 1, 1996 and the other two agreements were
effective July 1, 1996.
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund ("SAIF"). A recapitalization plan for the SAIF under
consideration by Congress provides for a special assessment 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 March 31,
1995 (as originally proposed), the Bank's special assessment would amount to
approximately $200,000 before taxes. Accordingly, this special assessment would
significantly increase other expenses and adversely affect results of
operations. Depending upon the capital level and supervisory rating of the Bank,
and assuming the insurance premium levels for commercial banks and SAIF members
again equalized, future deposit insurance premiums could decrease from the .23%
of deposits currently paid by the Bank. Such reduction in premiums would reduce
other expenses for future periods.
(16)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
Note 11--Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by the regulatory agencies that, if undertaken, could have a
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
At June 30, 1996, the Bank believes that it meets all capital adequacy
requirements to which it is subject and the most recent notification from the
regulatory agency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.
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 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.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------
Required Required
for Adequate To Be Well
Actual Capital (1) Capitalized (1)
----------------------------------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (1)
(to risk weighted assets) $2,922 17.6% $1,327 8.0% $1,659 10.0%
Tier I capital (1) (to risk weighted assets) 2,772 16.7% 664 4.0% 996 6.0%
Tier I capital (1) (to average assets) 2,772 8.2% 1,350 4.0% 1,687 5.0%
</TABLE>
- ----------
1 As defined by the regulatory agencies
(17)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12--Employee 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, 1996, the date of the latest
actuarial valuation. The plan required contributions in the amount of $15,700,
$17,900 and $10,000 for the years ended June 30, 1996, 1995, and 1994. 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
$9,200, $8,550, and $6,060 for the years ended June 30, 1996, 1995, and 1994.
As part of the conversion, the Holding Company established an Employee Stock
Ownership Plan ("ESOP") covering substantially all employees of the Bank. The
ESOP acquired 40,474 shares of the Holding Company common stock at $10 per share
in the conversion with funds provided by the Holding Company. Accordingly, the
$404,740 of common stock acquired by the ESOP will be shown as a reduction of
stockholders' equity in subsequently issued financial statements. Compensation
expense will be recorded equal to the fair market value of the stock when
contributions, which are determined annually by the Board of Directors of the
Bank, are made to the ESOP. Since the conversion was not completed until July 1,
1996, no compensation expense is reflected in the accompanying consolidated
financial statements.
Also as part of the conversion, the Board of Directors approved a Stock Option
Plan and a Recognition and Retention Plan ("RRP"). The Plans are subject to
stockholders' approval. Under the stock option plan, stock options representing
up to 10% of the common stock sold in the conversion may be granted to
directors, officers and employees of the Company or Bank. Restricted stock
awards covering up to 4% of the common stock sold in the conversion may be
awarded to the Bank's directors, officers and key employees under the RRP.
Note 13--Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Securities and Mortgage-backed Securities--Fair values are based on quoted
market prices.
(18)
<PAGE>
OWEN COMMUNITY BANK, S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans, are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable--The fair values of interest receivable approximate carrying
values.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits--The fair values of interest-bearing demand, NOW, money market deposit
and savings accounts are equal to the amount payable on demand at the balance
sheet date. The carrying amounts for variable rate, fixed-term certificates of
deposit approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt. Long-term debt consists of adjustable instruments tied to a
variable market interest rate. Fair value approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage loans, and extend lines of credit and are generally of a short-term
nature. The fair value of such commitments are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
1996
--------------------------------
Carrying Fair
June 30 Amount Value
- -----------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 5,721 $ 5,721
Securities available for sale 4,901 4,901
Loans, net 27,125 27,183
Stock in FHLB 360 360
Interest receivable 236 236
Liabilities
Deposits 28,726 28,856
FHLB advances 7,200 7,236
Off-Balance Sheet Assets
Commitments to extend credit
(19)
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
There were no such changes and disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Holding Company's executive officers is
included in Item 4.5 in Part I of this report. Because the Conversion was not
effected until July 1, 1996, disclosure regarding compliance with Section 16(a)
of the 1934 Act is not meaningful.
Presented below is certain information concerning the directors of the
Holding Company:
Charles W. Chambers, (age 80) has served as a director of the Holding
Company since its formation and of the Bank since 1978. Mr. Chambers has also
served as a staff appraiser for the Bank since 1991 and as Secretary of the Bank
since 1990.
John T. Gillaspy, (age 68) has served as a director of the Holding
Company since its formation and of the bank since 1986. Mr. Gillaspy has also
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 a director of the Holding Company
since its formation and of the Bank since 1991. Mr. Meier has also served as
President of the Bank since 1994. From 1990 to 1994, Mr. Meier served as
Managing Officer of the Bank.
Steven Parrish, (age 56) has served as a director of the Holding
Company since its formation and of the Bank since 1982. Mr. Parrish has also
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 a director of the Holding
Company since its formation and of the Bank since 1970, with which he has served
as Vice Chairman since 1994. Prior to 1994, Mr. Raper served as Vice President
of the Bank.
Frank R. Stewart, (age 70) has served as a director of the Holding
Company since its formation and of the Bank since 1963. Mr. Stewart served as
President of the Bank from 1982 until 1994. Mr. Stewart has also served as
President of BSF, Inc. since its formation in 1989. Mr. Stewart has extensive
experience in real estate development and sales.
<PAGE>
Tad Wilson,(age 61) has served as a director of the Holding Company
since its formation and of the Bank since 1978. Mr. Wilson is also the co-owner
of Metropolitan Printing Services, Inc., a printing company based in
Bloomington, Indiana, and is the owner of a retail book store and various rental
properties located in Bloomington, Indiana.
There are no arrangements or understandings between the Holding Company
and any person pursuant to which that person has been selected a director of the
Holding Company.
Item 11. Executive Compensation.
No cash compensation is paid directly by the holding company to any of
its executive officers. Each of such officers is compensated by the bank.
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,
1996. There were no executive officers of the Bank, as of June 30, 1996, 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 1996 $51,520 (1) $--- -- --
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
<PAGE>
$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.
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.
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 $10 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.
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 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).
<PAGE>
<TABLE>
<CAPTION>
Years of Service
Highest 5-Year ---------------------------------------------------------------------------------------
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, 1996, were 15.
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, 1996, the Bank made contributions aggregating
$7,885 to this plan, $1,399 of which were allocable to Mr. Meier.
Bonus Program. During the year ended June 30, 1996, 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,
1996, the Bank did not pay any cash bonuses under the Bonus Program; however,
the Bank paid discretionary bonuses to employees other than officers aggregating
$7,000.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of September 20, 1996, by each
person who is known by the Holding Company to own beneficially 5% or more of the
Common Stock. Unless otherwise indicated, the named beneficial owner has sole
voting and dispositive power with respect to the shares reported.
Name and Address of Number of Shares of Percent of
Beneficial Owner Common Stock Owned Class (1)
- ------------------------------ ------------------- ----------
Chiplease, Inc. 50,592 9.99%
c/o Goldsher & Goldsher
640 N. LaSalle Street
Suite 300
Chicago, Illinois 60610
William Lannan 32,000 6.33%
R.R. 4, Box 12
Loogootee, Indiana 47533
Frank R. Stewart 25,500 5.04%
c/o Owen Community Bank, s.b.
279 East Morgan Street
Spencer, Indiana 47460
(1) Based upon 505,926 shares of Common Stock outstanding.
<PAGE>
The following table sets forth certain information regarding directors and
executive officers of the Holding Company, including the number and percent of
shares of Common Stock beneficially owned by such persons as of September 20,
1996. Unless otherwise indicated, each person in the table below has sole
investment and/or voting power with respect to the shares beneficially owned by
him. Mr. Parrish is married to Mr. Wilson's sister. No other director is related
to any other director or executive officer of the Holding Company by blood,
marriage or adoption. The table below also sets forth the number of shares of
the Holding Company's Common Stock beneficially owned by all directors and
executive officers as a group.
Common Stock Percent of
Name Owned (1) Class
- ------------------- ------------ ----------
Directors:
Charles W. Chambers 500 (2) 0.10%
John T. Gillaspy 13,000 (3) 1.98%
Kurt J. Meier 1,000 (4) 0.20%
Stephen Parrish 4,000 (5) 0.59%
Robert W. Raper 5,000 (6) 0.99%
Frank R. Stewart 25,500 5.04%
Tad Wilson 11,500 (7) 2.27%
Executive Officer:
Kurt D. Rosenberger 850 (8) 0.17%
------ -----
All directors and executive 61,350 11.34%
====== =====
officers as a group (8 persons)
- ----------------
(1) Based upon information furnished by the respective directors and
executive officer.
(2) Owned jointly by Mr. Chambers and his wife.
(3) Owned jointly by Mr. Gillaspy and his wife.
(4) Owned jointly by Mr. Meier and his wife.
(5) Owned jointly by Mr. Parrish and his wife.
(6) Owned jointly by Mr. Raper and his wife.
(7) Of these shares, 11,000 are owned jointly by Mr. Wilson and his wife
and 500 are owned solely by his wife.
(8) Owned jointly by Mr. Rosenberger and his wife.
Item 13. Certain Relationships and Related Transactions.
The Bank makes available to its directors, officers and employees real
estate mortgage loans secured by their principal residences 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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements
Consolidated Statement of Financial Condition
at June 30, 1996, and 1995
Consolidated Statement of Income for the Years Ended
June 30, 1996, 1995, and 1994
Consolidated Statement of Changes in Equity Capital for the Years Ended June 30,
1996, 1995, and 1994
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended June 30, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits are
Executive Compensation Plans and Arrangements which are identified as
Exhibits 10(1) through 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
HOME FINANCIAL BANCORP
Date: September 27, 1996 By: /s/ Kurt J. Meier
-------------------------------------
Kurt J. Meier, President,
Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of September,
1996.
/s/ Kurt J. Meier
- -------------------------------------
Kurt J. Meier
President, Chief Executive Officer,
Treasurer and Director
(Principal Executive Officer)
/s/ Kurt D. Rosenberger
- -------------------------------------
Kurt D. Rosenberger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles W. Chambers
- -------------------------------------
Charles W. Chambers, Secretary and Director
/s/ John T. Gillaspy
- -------------------------------------
John T. Gillaspy, Director
/s/ Stephen Parrish
- -------------------------------------
Stephen Parrish, Director
/s/ Robert W. Raper
- -------------------------------------
Robert W. Raper, Vice Chairman
/s/ Frank R. Stewart
- -------------------------------------
Frank R. Stewart, Chairman
/s/ Tad Wilson
- -------------------------------------
Tad Wilson, Director
<PAGE>
EXHIBIT INDEX
Exhibit Index* Page
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the Registration
Statement on Form S-1 (Registration No. 333-1746).
3(2) The Code of By-Laws of the Registrant are incorporated by
reference to Exhibit 3(2) to the Registration Statement on
Form S-1 (Registration No. 333-1746).
10(1) Exempt Loan and Share Purchase Agreement between ESOP Trust
and Home Financial Bancorp.
10(2) Share Pledge Agreement between ESOP Trust and Home Financial
Bancorp.
10(3) Employment Agreement between Owen Community Bank, s.b. and
Kurt J. Meier is incorporated by reference to Exhibit 10(5)
to the Registration Statement on Form S-1 (Registration No.
333-1746).
10(4) Employment Agreement between Owen Community Bank, s.b. and
Kurt D. Rosenberger is incorporated by reference to Exhibit
10(6) to the Registration Statement on Form S-1 (Registration
No. 333-1746).
10(5) Employment Contract between Owen Community Bank, s.b. and
Frank R. Stewart is incorporated by reference to Exhibit
10(7) to the Registration Statement on Form S-1 (Registration
No. 333-1746).
21 Subsidiaries of the Registrant are incorporated by reference
to Exhibit 21 to the Registration Statement on Form S-1
(Registration No. 333-1746).
27 Financial Data Schedule
<PAGE>
Exhibit 10(1)
EXEMPT LOAN AND SHARE PURCHASE AGREEMENT
between
TRUST UNDER
OWEN COMMUNITY BANK, S.B.
EXEMPT STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
and
HOME FINANCIAL BANCORP
Dated July 1, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS AND INTERPRETATION................................. 1
Section 1.1 General Interpretation.......................... 1
Section 1.2 Certain Definitions............................. 2
ARTICLE II - TRUST LOAN; TRUST NOTE; PAYMENTS.............................. 2
Section 2.1 Trust Loan...................................... 2
Section 2.2 Use of Trust Loan Proceeds...................... 2
Section 2.3 Trust Note...................................... 3
Section 2.4. Interest........................................ 3
Section 2.5 Payments........................................ 3
Section 2.6 Optional Prepayment............................. 3
Section 2.7 Place and Time of Payment....................... 4
Section 2.8 Application of Certain Payments................. 4
Section 2.9 Due Date Extension.............................. 4
Section 2.10 Computations.................................... 4
Section 2.11 Interest on Overdue Amounts..................... 4
ARTICLE III - SECURITY..................................................... 4
Section 3.1 Security........................................ 4
Section 3.2 Release of Shares............................... 5
ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS..................... 5
Section 4.1 Representations and Warranties of Trustee....... 5
Section 4.2 Representations and Warranties of Company....... 6
Section 4.3 Covenants of Company............................ 7
ARTICLE V - CONDITIONS PRECEDENT........................................... 8
Section 5.1 Documentation Satisfactory
to Company...................................... 8
Section 5.2 Other Conditions Precedent
to Company Obligations.......................... 8
Section 5.3 Documentation Satisfactory to Trustee........... 8
Section 5.4 Other Conditions Precedent to
Trustee's Obligation............................ 9
ARTICLE VI - EVENTS OF DEFAULT AND THEIR EFFECT............................ 9
Section 6.1 Events of Default; Effect....................... 9
i
<PAGE>
ARTICLE VII - SHARE PURCHASES............................................ 9
Section 7.1 Purchase of Shares............................ 9
Section 7.2 Manner of Purchase............................ 9
Section 7.3 Readily Tradeable............................. 10
Section 7.4 No Prohibited Transactions.................... 10
Section 7.5 Maximum Number of Shares...................... 10
ARTICLE VIII - GENERAL................................................... 10
Section 8.1 Waivers; Amendments........................... 10
Section 8.2 Confirmations; Information.................... 10
Section 8.3 Captions...................................... 10
Section 8.4 Governing Law................................. 10
Section 8.5 Notices....................................... 10
Section 8.6 Expenses...................................... 11
Section 8.7 Reimbursement................................. 11
Section 8.8 Entire Agreement.............................. 11
Section 8.9 Severability.................................. 11
Section 8.10 No Assignment................................. 11
Section 8.11 Counterparts.................................. 11
ARTICLE IX - LIMITED RECOURSE............................................ 11
Section 9.1 Limited Recourse.............................. 11
Section 9.2 No Personal Recourse Against Trustee.......... 12
Exhibit A - Trust Note................................................... 1
Exhibit B - Share Pledge Agreement....................................... 1
Exhibit C - Certificate of Trustee....................................... 9
Exhibit D - Certificate of the Company................................... 10
ii
<PAGE>
EXEMPT LOAN AND SHARE PURCHASE AGREEMENT
THIS EXEMPT LOAN AND SHARE PURCHASE AGREEMENT (this "Agreement" or
"Loan Agreement"), dated July 1, 1996, between the Trust (the "Trust")
established pursuant to the provisions of OWEN COMMUNITY BANK, S.B. EMPLOYEE
STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JULY 1, 1996) (the
"ESOP") by Community Trust & Investment Company, Inc., as Trustee (the
"Trustee"), and HOME FINANCIAL BANCORP, an Indiana corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company has duly established the ESOP in connection with
which the Trust has been created;
WHEREAS, pursuant to the ESOP and direction of the Company pursuant to
Section 8.7 of the ESOP, the Trust desires to borrow from the Company, and the
Company desires to lend to the Trust, an aggregate principal amount equal to up
to Four Hundred and Four Thousand Seven Hundred and Forty Dollars ($404,740)
(the "Trust Loan"), representing the cost of 8% of the shares of Common Stock,
without par value, of the Company (the "Common Stock"), offered in the
Subscription Offering and the Direct Community Offering of the Company's Common
Stock being made in connection with the Company's acquisition of the common
stock of Owen Community Bank, s.b. (the "Bank") upon conversion of the Bank from
an Indiana mutual savings bank to an Indiana stock savings bank (the
"Conversion"), on the terms and conditions hereof;
WHEREAS, the parties hereto intend that the Trust Loan constitute an
"exempt loan" within the meaning of Section 4975(d)(3) of the Code, Treasury
Regulation ss. 54.4975-7(b), Section 408(b)(3) of ERISA, and Department of Labor
Regulation ss. 2550.408b-3 (collectively, the "Exempt Loan Rules") and an
"Exempt Loan" within the meaning of Sections 1.20 and 8.7 of the ESOP;
WHEREAS, the parties intend that the Trustee will utilize the Trust
Loan for the purpose of effecting purchases in the Subscription Offering and
Direct Community Offering (collectively, the "Offering") or otherwise of shares
of Company Common Stock, without par value ("Shares"), to be held in the Trust
for participants in the ESOP.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained and other good and valuable
consideration (the receipt, adequacy and sufficiency of which each party hereto
respectively acknowledges by its execution hereof), the parties hereto intending
legally to be bound do hereby agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.1. General Interpretation. This Agreement shall be construed
and interpreted so as to maintain the status of the ESOP as a qualified
leveraged employee stock ownership plan under Sections 401(a) and 4975(e)(7) of
the Code, the Trust as exempt from taxation under Section 501(a)
<PAGE>
of the Code, and the Trust Loan as an "exempt loan" under the Exempt Loan Rules,
and as an "Exempt Loan" under Section 8.7 of the ESOP (collectively, the
"Required Status").
Section 1.2. Certain Definitions. In this Agreement, unless a clear
contrary intention appears, the terms set forth below have the following
meanings when used herein. Other terms are defined elsewhere herein.
(a) "Business Day" means a day, other than a Saturday, Sunday or public
holiday, on which commercial banks are open in Spencer, Indiana for the purpose
of conducting commercial banking business.
(b) "Code" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
(c) "Default" means an event or circumstance which, with notice or
lapse of time or both, would constitute an Event of Default as defined in
Section 6.1.
(d) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and regulations promulgated thereunder.
(e) "Loan Documents" shall mean, collectively, this Agreement, the
Trust Note, the Share Pledge Agreement and any other instruments or documents
required to be delivered pursuant hereto or thereto, in each case as amended and
in effect from time to time.
ARTICLE II
TRUST LOAN; TRUST NOTE; PAYMENTS
Section 2.1. Trust Loan. Subject to the terms and conditions of this
Agreement, the Company agrees to make available to the Trust, and the Trust may
borrow from the Company, on the Closing Date (hereinafter defined), the Trust
Loan under this Agreement in an amount up to Four Hundred and Four Thousand
Seven Hundred and Forty Dollars ($404,740), representing the cost of 8% of the
Shares offered in the Offering. The Company shall, upon fulfillment of the
applicable conditions set forth in Article V, on the Closing Date make the Trust
Loan up to such amount available to the Trustee in immediately available funds,
at its principal office. Notwithstanding the foregoing, the Company shall not be
obligated to make any portion of the Trust Loan available to the Trust if the
Conversion is not consummated, or if the ESOP is not permitted to purchase any
shares because of an oversubscription in the first category of eligible
subscribers. The Closing of the Trust Loan (the "Closing") will occur at the
offices of Barnes & Thornburg, 1313 Merchants Bank Building, 11 South Meridian
Street, Indianapolis, Indiana 46204, on the same date that the Conversion
closes, or such later date as the parties shall agree upon (the "Closing Date").
Section 2.2. Use of Trust Loan Proceeds. The Trust will use the
proceeds of the Trust Loan to purchase Shares in the Offering, in accordance
with Article VII hereof.
2
<PAGE>
Section 2.3. Trust Note. The Trust Loan will be represented by a
promissory note of the Trust (the "Trust Note"), substantially in the form of
Exhibit A hereto, appropriately completed, dated the Closing Date, payable to
the order of the Company in the original principal amount of the Trust Loan, or
so much thereof as may at any time have been advanced hereunder and thereunder,
on the maturity date thereof.
Section 2.4. Interest. The portion of the Trust Loan principal
outstanding at any time shall accrue and bear daily interest at a fixed rate per
annum equal to the prime rate as published in "The Wall Street Journal" on the
Closing Date (the "Interest Rate"), payable annually in accordance with Section
2.5. On any stated or accelerated maturity of the Trust Loan all accrued and
unpaid interest thereon shall be forthwith due and payable.
Section 2.5. Payments. The Trust shall pay the principal amount of the
Trust Loan together with accrued interest as follows:
(a) an initial principal installment of one twentieth (1/20)
of the initial principal amount of the Trust Loan, shall be due and
payable on December 31, 1996, together with all interest accrued on the
Trust Loan from the Closing Date through and including December 31,
1996; and
(b) thereafter, payments of principal and interest shall be
made in annual installments due and payable on the last business day of
December of each year, commencing on December 31, 1996, through and
including December 31, 2005, which annual installments shall include a
principal payment in the amount of one-tenth of the initial principal
amount of the Trust Loan, plus all interest accrued on the Trust Loan
through and including the date of such payment; and
(c) a final payment of principal in the amount of one
twentieth (1/20) of the initial principal amount of the Trust Loan,
together with all interest accrued on the Trust Loan through and
including the date of such payment shall be due and payable on June 30,
2006.
The outstanding principal of the Trust Loan, together with all accrued and
unpaid interest and any other obligations then outstanding, will in any event be
due and payable in full on June 30, 2006.
Section 2.6. Optional Prepayment.
(a) Upon compliance with this Section 2.6, the Trust, at its
option, may prepay the Trust Note at any time and from time to time,
either in whole or in part, by payment of the principal amount of the
Trust Note or portion thereof to be prepaid and accrued interest
thereon to the date of such prepayment.
(b) The Trustee will give notice of any prepayment of the
Trust Note pursuant to this Section 2.6 to the Company not less than 3
days nor more than 60 days before the date fixed for such optional
prepayment specifying (i) such date, (ii) that prepayment is to be made
under Section 2.6 of this Agreement, (iii) the principal amount of the
Trust Note to be prepaid on such date, and (iv) accrued interest
applicable to the prepayment. Such notice of
3
<PAGE>
prepayment shall be signed by the Trustee. Notice of prepayment having
been so given, the aggregate principal amount of the Trust Note
specified in such notice, together with accrued interest thereon shall
become due and payable on the prepayment date.
(c) Partial prepayments of the Trust Note made pursuant to
this Section 2.6 shall be credited in each case against remaining
scheduled payments on the Trust Note in the inverse order of the due
dates of such payments.
(d) No such prepayment shall, however, be permitted if such
prepayment would adversely affect the Required Status.
Section 2.7. Place and Time of Payment. All payments of principal of,
or interest on, the Trust Note shall be made by the Trust to the Company in same
day funds at Spencer, Indian, not later than 11:00 a.m. on the date due. Funds
received after that hour shall be deemed to have been received on the next
following Business Day.
Section 2.8. Application of Certain Payments. If, and to the extent,
Shares acquired with proceeds of the Trust Loan, held in the Trust and not yet
allocated to participant accounts are sold, then, to the extent allowable by the
Exempt Loan Rules and applicable law, the Trustee, at the direction of the ESOP
Committee administering the ESOP (the "Committee"), may apply the proceeds
thereof toward the repayment of the Trust Loan. Dividends or other cash
distribution paid on the Shares purchased with the proceeds of the Trust Loan
(whether or not allocated to the accounts of Participants) shall be used by the
Trustee, at the discretion of the Committee, to the extent permissible to repay
the Trust Loan in accordance with the provisions of Section 4.5 of the ESOP.
Section 2.9. Due Date Extension. If any payment of principal of, or
interest on, the Trust Note falls due on a day that is not a Business Day, then
such due date shall be extended to the next following Business Day, and
additional interest shall accrue and be payable for the period of such
extension.
Section 2.10. Computations. All computations of interest on the Trust
Loan and other amounts due hereunder shall be based on a year of 360 days,
comprising twelve 30-day months.
Section 2.11. Interest on Overdue Amounts. If any payment of principal
of, or interest on, the Trust Note is not made when due, interest shall accrue
on the amount thereof, commencing on such due date through the date on which
such amount is paid in full, at a rate per annum equal to the Interest Rate plus
two percent (2%).
ARTICLE III
SECURITY
Section 3.1. Security. Payment of the Trust Note and performance by the
Trust of its obligations under this Agreement and the Trust Note will be secured
by a pledge of, and the grant of a security interest in, the Shares by the
Trustee on behalf of the Trust to and in favor of the
4
<PAGE>
Company under a Share Pledge Agreement, substantially in the form of Exhibit B
hereto (the "Share Pledge Agreement").
Section 3.2. Release of Shares. Notwithstanding any provision of this
Agreement or the Share Pledge Agreement to the contrary contained or implied,
the Company will release from the pledge and security interest under the Share
Pledge Agreement, such Shares as must be allocated to ESOP participants under
the ESOP pursuant to Section 8.7(h) of the ESOP and otherwise under the Code,
the Exempt Loan Rules or other applicable law, provided that Section 8.7(h) of
the ESOP shall not be amended without the Trustee's prior consent.
ARTICLE IV
REPRESENTATIONS, WARRANTIES
AND COVENANTS
Section 4.1. Representations and Warranties of Trustee. To induce the
Company to enter this Agreement and to make the Trust Loan, the Trustee
represents and warrants to the Company as follows:
(a) The Trustee has determined that the Trust Loan is
primarily for the benefit of ESOP participants and their beneficiaries
and bears interest at a rate not in excess of a reasonable rate and
that the terms of the loan are at least as favorable to the Trust and
the ESOP participants as the terms of a comparable loan resulting from
arm's-length negotiations between completely independent parties;
(b) The Trustee is an Indiana corporation, legally existing
and in good standing under Indiana law, has corporate power and
authority and is duly authorized to enter into and perform the Trust;
(c) The Trustee has full right, power and authority to
execute, deliver and perform on behalf of the Trust under the Trust
Agreement, the ESOP and otherwise the obligations set forth in the Loan
Documents, and the execution and performance of such obligations will
not conflict with or result in a breach of the terms of the ESOP or the
Trust or result in a breach or violation of the Trustee's Articles of
Incorporation or By-Laws or of any law or regulation, order, writ,
injunction or decree of any court or governmental authority binding on
the Trust or Trustee;
(d) The ESOP (and related Trust) has been duly authorized by
all necessary corporate action on the part of the Trustee, if any, has
been duly executed by an authorized officer of the Trustee and
delivered and constitutes a legal, valid and binding obligation of the
Trustee and declaration of trust enforceable in accordance with its
terms;
(e) The Loan Documents have been duly authorized, executed and
delivered by the Trustee and constitute legal, valid and binding
obligations, contracts and agreements of the Trustee on behalf of the
Trust, enforceable in accordance with their respective terms;
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(f) The execution, delivery and performance of the Loan
Documents do not conflict with, or result in the creation or imposition
of any lien or encumbrance upon any of the property of the Trustee
(other than the Collateral, as defined in the Share Pledge Agreement)
pursuant to the provisions of the ESOP (and related Trust) or any other
agreement or other instrument to which the Trustee is a party or may be
bound; and
(g) No approval, consent or withholding of objection on the
part of, or filing, registration or qualification with, any
governmental body, Federal, state or local, is necessary in connection
with the execution, delivery and performance by the Trustee of the Loan
Documents.
Section 4.2. Representations and Warranties of Company. To induce the
Trust to enter this Agreement and undertake the obligations hereunder, the
Company represents and warrants to the Trust as follows:
(a) The Company is a corporation duly organized and validly
existing under the laws of the State of Indiana, has corporate power
and authority and is duly authorized to enter into and perform its
obligations under this Agreement;
(b) Neither the execution and delivery of this Agreement, nor
the performance of the terms hereof nor the establishment of the ESOP
or the Trust violates, conflicts with or constitutes a default under
Company's Articles of Incorporation or By-Laws or any material
agreement to which the Company is a party or by which the Company or
any of its assets is bound, or violates any law, regulation, order or
decree of any court, arbitration or governmental authority applicable
to the Company, in any manner that would have a material adverse effect
on the Trust, the ESOP, the Required Status or the Company;
(c) The Company and the Bank have taken all actions required
to be taken by it to establish the ESOP and the related Trust. The ESOP
and related Trust are intended to, and the terms thereof have been
drafted with the purpose to, comply with the requirements of Sections
401(a) and 501(a) of the Code, as applicable, with the requirements for
treatment as a leveraged employee stock ownership plan, as that term is
defined in Section 4975(e)(7) of the Code, and with other applicable
laws;
(d) The Bank has duly appointed the Trustee as trustee of the
Trust and the Committee under the ESOP;
(e) The Company has delivered to Trustee copies of its
Articles of Incorporation and its By-Laws, the ESOP, and resolutions of
its Board of Directors with respect to approval of this Agreement and
entering into of the transactions and execution of all documents
contemplated by this Agreement, in each case certified by the Secretary
of the Company, which copies are true, correct and complete. None of
such documents or resolutions has been amended or modified in any
respect and such documents and resolutions remain in full force and in
effect, in the form previously delivered to the Trustee;
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(f) Other than the Common Stock, the Company has no other
classes of shares outstanding or treasury shares.
(g) The Company's ability to honor put options (the "Put
Options"), which would obligate the Company to repurchase shares of
Common Stock distributed from time to time to ESOP participants and
beneficiaries under Section 6.13 of the ESOP, is not presently
restricted by the provisions of any law, rule or regulation in effect
on the date hereof (except for capital, liquidation account,
requirements to obtain regulatory approval of material repurchase
transactions, and similar constraints imposed by regulatory authorities
on savings associations) or by the terms of any loan, financing or
other agreement or instrument to which the Company is a party or by
which the Company is or may be bound.
(h) There are no actions, proceedings, or investigations
pending or, to the Company's knowledge, threatened against or affecting
the Company or any of its property or rights at law or in equity or
before or by any court or tribunal that have not been disclosed to the
Trustee and may have a material adverse effect on the value of the
Common Stock.
(i) All employee plans of the Bank and the Company are in
compliance, in all material respects, with all applicable reporting,
disclosure and filing requirements pertaining to employee benefit plans
set forth in the Code and ERISA.
(j) No consent, approval or other authorization or notice to
any governmental authority or expiration of any government-imposed
waiting period is required in connection with the execution or delivery
of this Agreement, except such as has been obtained, given or expired.
(k) The shares of Common Stock constitute "qualifying employer
securities" within the meaning of Section 409(l) of the Code.
Section 4.3. Covenants of Company. The Company covenants that:
(a) The Company shall submit or cause to be submitted to the
Internal Revenue Service within ninety (90) days following the Closing
Date an application for a determination letter confirming that the
ESOP, effective as of July 1, 1996, and the related Trust are qualified
and exempt from taxation under Sections 401(a) and 501(a),
respectively, of the Code and that the ESOP meets the requirements of
Section 4975(e)(7) of the Code.
(b) The Company and the Bank shall make all changes reasonably
requested by the Internal Revenue Service as a condition of obtaining a
determination letter from the Internal Revenue Service with respect to
the ESOP, effective July 1, 1996. The Company and the Bank shall
continue to do all things necessary to cause the ESOP and the Trust at
all times to be operated and administered such that the ESOP remains
qualified under Section 401(a) and remains an employee stock ownership
plan under Section 4975(e)(7) of the Code and the Trust remains
tax-exempt under Section 501(a) of the Code.
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(c) If at any time the ESOP is required, by applicable law,
court order, or otherwise, to make distributions of Shares that
otherwise would be in violation of Federal or state securities laws,
the Company shall take all actions necessary to permit such required
distributions to be made in full compliance with such laws.
(d) The Company shall honor the Put Options if, and to the
extent, required by Section 409(h) of the Code and regulations
thereunder, and shall not permit its ability to honor such Options to
be materially restricted in any way.
(e) The Company or the Bank shall provide to the Trustee all
governmental filings relating to the ESOP and all ESOP amendments
within sixty days of the date on which such filing or amendment is
effected, and, on an annual basis, shall provide complete financial
statements of the ESOP and the Company.
ARTICLE V
CONDITIONS PRECEDENT
Section 5.1. Documentation Satisfactory to Company. The obligation of
the Company to make the Trust Loan is, in addition to the conditions precedent
contained in Section 5.2, subject to the condition precedent that the Company
shall have received each of the following, duly executed and dated as of the
Closing Date (or such earlier date as shall be satisfactory to the Company) and
in form and substance satisfactory to the Company:
(a) the Trust Note;
(b) the Share Pledge Agreement; and
(c) a certificate of the Trustee, substantially in the form of
Exhibit C hereto, with such changes thereto as shall be acceptable to
the Company and its counsel, and with respect to such other matters as
the Company may reasonably request.
Section 5.2. Other Conditions Precedent to Company Obligations. In
addition to the condition precedent contained in Section 5.1, the obligation of
the Company to make the Trust Loan available is subject to the conditions
precedent that (i) the Conversion is consummated, (ii) the representations and
warranties made by the Trustee herein shall be true and correct in all material
respects on the Closing Date as if made on and as of the Closing Date; and (iii)
the ESOP shall be permitted to purchase Shares in the Conversion.
Section 5.3. Documentation Satisfactory to Trustee. The obligation of
the Trust to enter into the Trust Loan is subject to the condition precedent
that the Trustee shall have received each of the following, duly executed and
dated as of the Closing Date (or such earlier date as shall be satisfactory to
Trustee) and in form and substance satisfactory to Trustee:
(a) The Share Pledge Agreement; and
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(b) A certificate of the Company, substantially in the form of
Exhibit D hereto, with such changes thereto as shall be acceptable to
the Trustee and its counsel, and with respect to such other matters as
the Trustee may reasonably request.
Section 5.4. Other Conditions Precedent to Trustee's Obligation. The
obligation of the Trustee to enter into the Trust Loan is subject to the
conditions precedent that (i) the Conversion is consummated, (ii) the
representations and warranties made by the Company herein shall be true and
correct in all material respects on the Closing Date as if made on and as of the
Closing Date, and (iii) no injunction or restraining order shall be in effect or
litigation pending or threatened to forbid or enjoin the consummation of the
transaction contemplated by this Agreement.
ARTICLE VI
EVENTS OF DEFAULT AND THEIR EFFECT
Section 6.1. Events of Default; Effect. If default in the payment when
due of any principal of, or default (and continuance thereof for 5 days) in the
payment when due of interest on, the Trust Note (an "Event of Default") occurs,
unless the effect thereof as an Event of Default has been waived in writing by
the Company, then the Company may declare the Trust Note to be due and payable,
whereupon the Trust Note shall become immediately due and payable, without
presentment, demand, protest or notice to the Trust or other action by the
Company of any kind whatsoever, all of which actions the Trust hereby waives to
the maximum extent permitted by law. The Company shall promptly advise the Trust
of any declaration of default, but failure to do so or delay in doing so shall
not impair the effect of such declaration. Notwithstanding anything to the
contrary herein or in the Trust Note or the Share Pledge Agreement contained or
implied, if a Default or Event of Default occurs with respect to the Trust Loan
by the Trust, the value of Trust assets transferred in satisfaction thereof
shall not exceed the amount of such default. In addition, such a transfer of
such Trust assets shall only occur upon and to the extent of the failure of the
Trust to meet the payment schedule of the Trust Loan provided in Article II.
ARTICLE VII
SHARE PURCHASES
Section 7.1. Purchase of Shares. The Company is making the Trust Loan
available to the Trustee for the purpose of allowing the Trustee to purchase
Shares in the Conversion. To the extent the ESOP is permitted to purchase 40,474
Shares in the Conversion, the Trustee agrees to use all of the proceeds of the
Trust Loan to purchase Shares in accordance with this Article VII.
Section 7.2. Manner of Purchase. The Trustee shall timely subscribe to
purchase the Shares the ESOP is permitted to purchase in the Conversion pursuant
to the Bank's Plan of Conversion. The Trustee shall draw upon the Trust Loan and
use the proceeds thereof to purchase the number of Shares the ESOP may purchase
in the Offering, simultaneously with consummation of the Conversion.
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<PAGE>
Section 7.3. Readily Tradeable. The Company agrees to use reasonable
efforts to cause the Shares to be, and to maintain the Shares' status as,
"readily tradeable on an established securities market" within the meaning of
Section 409(l)(1) of the Code.
Section 7.4. No Prohibited Transactions. The Trustee in the performance
of its obligations under this Agreement, shall observe its fiduciary obligations
under Section 404 of ERISA, shall not engage in any transaction prohibited by
ERISA or contrary to such fiduciary obligations, and, in acquiring Shares, shall
not (and shall not be deemed obligated to) pay more than "adequate
consideration", as defined in Section 3(18) of ERISA.
Section 7.5. Maximum Number of Shares. The Trust shall not purchase
Shares with proceeds of the Trust Loan in excess of 8% of the outstanding Shares
of the Company at the time of purchase.
ARTICLE VIII
GENERAL
Section 8.1. Waivers; Amendments. No delay on the part of the Company,
or the holder of the Trust Note in the exercise of any right, power or remedy
shall operate as a waiver thereof, nor shall any single or partial exercise by
any of them of any right, power or remedy preclude other or further exercise
thereof, or the exercise of any other right, power or remedy. No amendment,
modification or waiver of, or consent with respect to, any provision of this
Agreement, the Trust Note or the Share Pledge Agreement shall in any event be
effective unless the same shall be in writing and signed and delivered by the
Company and then any such amendment, modification, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
Section 8.2. Confirmations; Information. The Company and the Trust (or
holder of the Trust Note) agree from time to time, upon written request received
by it from the other, to confirm to the other in writing the aggregate unpaid
principal balance then outstanding under the Trust Note and such other matters
relating to the Trust Loan, the Trust, the ESOP or the purchase of Shares as may
reasonably be the subject of inquiry.
Section 8.3. Captions. Section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
Section 8.4. Governing Law. To the extent not preempted by ERISA, this
Agreement and the Trust Note shall be a contract made under and governed by the
laws of the State of Indiana, without regard to conflict of laws principles. All
obligations of the Trust and rights of the Company and other holder of the Trust
Note expressed herein or in such Trust Note shall be in addition to and not in
limitation of those provided by law.
Section 8.5. Notices. All communications and notices hereunder shall be
in writing and shall be deemed to be given when sent by registered or certified
mail, postage prepaid, return receipt requested, or by telecopier, duly
confirmed, and addressed to such party at the address indicated
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below or to such other address as such party may designate in writing pursuant
to this Section 8.5.
Home Financial Bancorp
279 E. Morgan Street
P.O. Box 381
Spencer, Indiana 47460
Attention: Kurt J. Meier, President
Community Trust & Investment Company, Inc.
105 N. Pete Ellis Drive
Suite B
P.O. Box 5996
Bloomington, Indiana 47407
Section 8.6. Expenses. All expenses of the transaction contemplated by
this Agreement shall be paid by the Company.
Section 8.7. Reimbursement. If the Trustee uses proceeds from the Trust
Loan to purchase Common Stock directly from the Company and it is subsequently
determined by a court of competent jurisdiction that the Trustee paid in excess
of "adequate consideration" within the meaning of ERISA for such shares, the
Company shall, as soon as practicable following such judgment, reimburse the
Trustee for the amount of the excess payment.
Section 8.8. Entire Agreement. This Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings between the parties.
Section 8.9. Severability. Should any clause, paragraph or part of this
Agreement be held or declared to be void or illegal for any reason, all other
clauses, paragraphs or parts of this Agreement which can be affected without
such illegal clause, paragraph or part shall nevertheless remain in full force
and effect.
Section 8.10. No Assignment. This Agreement and the obligations of the
parties herein may not be assigned or assumed by any other parties.
Section 8.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
put together shall constitute one and the same instrument.
ARTICLE IX
LIMITED RECOURSE
Section 9.1. Limited Recourse. Notwithstanding anything to the contrary
herein or in the Trust Note, the Share Pledge Agreement or any other instrument,
agreement or document contained or implied, the obligations of the Trust under
this Agreement, the Trust Note and the Share Pledge
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Agreement (collectively, the "Trust Loan Obligations") shall be enforceable to
the extent permitted under law, including (without limitation) the Exempt Loan
Rules, only against the Trust to the extent of the Collateral (as defined in the
Share Pledge Agreement) not theretofore released from the pledge and security
interest under the Share Pledge Agreement as provided in Section 3.2 and
contributions and other payments (other than contributions of employer
securities) made to the Trust in accordance with the ESOP to enable the Trust to
pay and satisfy the Trust Loan Obligations and from earnings attributable to the
Shares purchased with Trust Loan proceeds and the investment of such
contributions and payments (collectively, the "Trust Loan Collateral"). No
recourse shall be had to or against the Trust or the assets thereof (other than
the Trust Loan Collateral) for any deficiency judgment against the Trust for the
purpose of obtaining payment or other satisfaction of the Trust Loan
Obligations.
Section 9.2. No Personal Recourse Against Trustee. Without limiting the
provisions of Section 9.1, the Trustee of the Trust shall have no personal
liability for any of the Trust Loan Obligations.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their respective representatives thereunto duly
authorized as of the date first above written.
TRUST UNDER OWEN COMMUNITY BANK,
S.B. EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
By: Community Trust & Investment Company,
Inc., Trustee
By:
Printed:
Its:
HOME FINANCIAL BANCORP
By:
Kurt J. Meier
Printed: Kurt J. Meier
Its: President
12
Exhibit 10(2)
SHARE PLEDGE AGREEMENT
between
TRUST UNDER
OWEN COMMUNITY BANK, S.B.
STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
and
HOME FINANCIAL BANCORP
Dated: July 1, 1996
<PAGE>
SHARE PLEDGE AGREEMENT
THIS SHARE PLEDGE AGREEMENT (this "Agreement" or "Share Pledge
Agreement"), dated as of July 1, 1996, between the Trust (the "Trust")
established pursuant to the provisions of OWEN COMMUNITY BANK, S.B. EMPLOYEE
STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JULY 1, 1996) (the
"Plan") by COMMUNITY TRUST & INVESTMENT COMPANY, INC., as Trustee ("Trustee"),
and HOME FINANCIAL BANCORP an Indiana corporation (the "Company").
WITNESSETH:
WHEREAS, contemporaneously herewith, the Trust and the Company have
entered into that certain Exempt Loan and Share Purchase Agreement (the "Loan
Agreement"; definitions of terms appearing in which have the same meanings
herein, unless a clear contrary intention appears), dated July 1, 1996, pursuant
to which the Company has agreed to lend to the Trust, and the Trust has agreed
to borrow from the Company, the Trust Loan, and the Trust, to evidence its
indebtedness to the Company with respect to the Trust Loan, has executed and
delivered the Trust Note to the Company; and
WHEREAS, it is a condition precedent to the obligation of the Company
to make the Trust Loan that, among other things, the Trust execute and deliver
this Agreement to the Company,
NOW, THEREFORE, in consideration of the Loan Agreement and the Trust
Loan and other good and valuable consideration (the receipt, adequacy and
sufficiency of which the Trust acknowledges by its execution hereof, the Trust
intending to be legally bound does hereby covenant and agree with the Company as
follows:
Section 1. Pledge. To secure the due and punctual payment and
performance of the obligations of the Trust hereunder and under the Loan
Agreement and the Trust Note (collectively, the "Liabilities"), the Trustee on
behalf of the Trust hereby pledges, hypothecates, assigns, transfers, sets over
and delivers unto the Company, its successors and assigns and hereby grants to
the Company, its successors and assigns a security interest in:
(a) All Shares of Company Common Stock purchased or to be
purchased with the proceeds of the Trust Loan (collectively, the
"Pledged Shares") and the certificates representing or evidencing the
Pledged Shares, and, to the extent permitted by Section 4975(e)(7) of
the Internal Revenue Code of 1986, as amended, and Reg. ss.
54.4975-7(b)(5) promulgated thereunder, all cash, securities, interest,
dividends, rights and other property at any time and from time to time
received in respect of or in exchange for any or all of the Pledged
Shares; and
(b) all proceeds of all of the foregoing
(all such Pledged Shares, certificates, cash, securities, interest, dividends,
rights and other property, and proceeds thereof, other than as released, sold or
otherwise applied by the Company pursuant to
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the' terms hereof, being herein collectively called the "Collateral"), TO HAVE
AND TO HOLD such Collateral, together with all rights, titles, interests,
privileges and preferences appertaining or incidental thereto, forever, subject,
however, to the terms, covenants and conditions hereafter set forth.
Section 2. Warranties and Covenants.
(a) The Trust represents and warrants to the Company that the
Trust is, or at the time of any future delivery, pledge, assignment or
transfer will be, the lawful owner of the Collateral, free of all
claims and liens other than the security interest hereunder, with full
right to deliver, pledge, assign and transfer the Collateral to the
Company as Collateral hereunder.
(b) So long as any of the Liabilities remain outstanding, the
Trust will, unless the Company shall otherwise consent in writing:
(i) promptly deliver to the Company from time to time
certificates representing Pledged Shares as the Trustee
acquires them and, upon request of the Company, such stock
powers and other documents, satisfactory in form and substance
to the Company, with respect to the Collateral as the Company
may reasonably request to preserve and protect, and to enable
the Company to enforce, its rights and remedies hereunder;
(ii) not create or suffer to exist any lien, security
interest or other charge or encumbrance against, in or with
respect to any of the Collateral except for the pledge
hereunder and the security interest created hereby;
(iii) not make or consent to any amendment or other
modification or waiver with respect to any of the Collateral
or enter into any agreement or permit to exist any restriction
with respect to any of the Collateral other than pursuant
hereto; and
(iv) not take or fail to take any action which would
in any manner impair the value or enforceability of the
Company's security interest in any of the Collateral.
Section 3. Care of Collateral. The Company shall be deemed to have
exercised reasonable care with respect to the interest of the Trust in the
custody and preservation of the Collateral if it takes such action for that
purpose as the Trust shall request in writing or as it would with respect to
similar assets of its own, but failure of the Company to comply with any such
request shall not of itself be deemed a failure to exercise reasonable care.
Section 4. Certain Rights Regarding Collateral and Liabilities.
(a) The Company may from time to time, whether before or after any of
the Liabilities shall become due and payable, without notice to the Trust, to
the extent otherwise permitted (i) retain or obtain a security interest in the
Collateral, to secure payment and performance of any of the
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Liabilities, (ii) retain or obtain the primary or secondary liability of any
party or parties, in addition to the Trust, with respect to any of the
Liabilities, (iii) extend or renew for any period (whether or not longer than
the original period) or exchange any of the Liabilities or release or compromise
any obligation of any nature of any party with respect thereto, and (iv)
surrender, release or exchange all or any part of any property, in addition to
the Collateral, securing payment and performance of any of the Liabilities, or
compromise or extend or renew for any period (whether or not longer than the
original period) any obligations of any nature of any party with respect to any
such property.
(b) The Company shall have no right to vote the Pledged Shares prior to
the occurrence of an Event of Default (hereinafter in Section 6(a) hereof
defined). After the occurrence of an Event of Default, the Trust shall have the
right to vote any and all of the Pledged Shares in accordance with the Plan
unless and until it receives notice from the Company that such right has been
terminated with respect to shares subject to execution as a result of the
Default.
Section 5. Dividends, etc.
(a) So long as no Default or Event of Default, shall have occurred and
be continuing, the Trust shall be entitled to receive any and all cash dividends
on the Pledged Shares which it is otherwise entitled to receive, and to vote the
Pledged Shares in accordance with the terms of the Plan and to give consents,
waivers and ratifications in respect of the Pledged Shares, but any and all
stock and/or liquidating dividends, distributions in property, returns of
capital or other distributions made on or in respect of the Pledged Shares,
whether resulting from a subdivision, combination or reclassification of the
outstanding capital stock of any issuer thereof or received in exchange for the
Pledged Shares or any part thereof or as a result of any merger, consolidation,
acquisition or other exchange of assets to which any issuer may be a party or
otherwise, and any and all cash and other property received in exchange for any
Collateral shall be, and become part of the Collateral pledged hereunder and, if
received by the Trust, shall forthwith be delivered to the Company or its
designated nominee (accompanied, if appropriate, by proper instruments of
assignment and/or stock powers executed by the Trust in accordance with the
Company's instructions) to be held subject to the terms of this Agreement and
the Plan.
(b) Upon the occurrence and during the continuance of an Event of
Default, subject to the terms of Section 4(b) hereof, all rights of the Trust
pursuant to Section 5(a) hereof shall cease and the Company shall have the sole
and exclusive right and authority to receive and retain the dividends which the
Trust would otherwise be authorized to retain and, to the extent permitted by
law, to vote and give consents, waivers and ratifications pursuant to Section
5(a) hereof. Any and all money and other property paid over to or received by
the Company pursuant to the provisions of this paragraph (b) shall be retained
by the Company as additional Collateral hereunder and be applied in accordance
with the provisions hereof.
Section 6. Event of Default.
(a) The occurrence of any of the following shall constitute an Event
of Default hereunder nonpayment, when due, whether by acceleration or otherwise,
of any amount payable on any of the Liabilities; an Event of Default as defined
in the Loan Agreement; any representation or
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<PAGE>
warranty of the Trust contained herein or given pursuant hereto being untrue in
any material respect; or the Trust's failure to perform any covenant or
agreement contained herein.
(b) Upon the occurrence of an Event of Default, (i) the Company may
exercise from time to time any rights and remedies available to it under the
Uniform Commercial Code as in effect from time to time in Indiana or otherwise
available to it, including, but not limited to, sale, assignment, or other
disposal of the Pledged Shares in exchange for cash or credit, and (ii) the
Company may, without demand or notice of any kind, but subject to Section 7,
appropriate and apply toward the payment of such of the Liabilities, and in such
order of application, as the Company may from time to time elect, any balances,
credits, deposits, accounts or moneys of the Trust. If any notification of
intended disposition of any of the Collateral is required by law, such
notification, if mailed, shall be deemed reasonably and properly given if mailed
at least five (5) days before such disposition, postage prepaid, addressed to
the Trust, either at the address of the Trust shown below, or at any other
address of the Trust appearing on the records of the Company. Any proceeds of
any disposition of Collateral shall be applied as provided in Section 7 hereof.
All rights and remedies of the Company expressed hereunder are in addition to
all other rights and remedies possessed by it, including those under any other
agreement or instrument relating to any of the Liabilities or security therefor.
No delay on the part of the Company in the exercise of any right or remedy shall
operate as a waiver thereof, and no single or partial exercise by the Company of
any right or remedy shall preclude other or further exercise thereof or the
exercise of any other right or remedy. No action of the Company permitted
hereunder shall impair or affect the rights of the Company in and to the
Collateral.
(c) The Trust agrees that in any sale of any of the Collateral
whenever an Event of Default hereunder shall have occurred and be continuing,
the Company is hereby authorized to comply with any limitation or restriction in
connection with such sale as it may be advised by counsel is necessary in order
to avoid any violation of law (including, without limitation, compliance with
such procedures as may restrict the number of prospective bidders and
purchasers, require that such prospective bidders and purchasers have certain
qualification, and restrict such prospective bidders and purchasers to persons
who will represent and agree that they are purchasing for their own account for
investment and not with a view to the distribution or resale of such
Collateral), or in order to obtain any required approval of the sale or of the
purchaser by any governmental regulatory authority or official, and the Trust
further agrees that such compliance shall not result in such sale being
considered or deemed not to have been made in a commercially reasonable manner,
nor shall the Company be liable nor accountable to the Trust for any discount
allowed by the reason of the fact that such Collateral is sold in compliance
with any such limitation or restriction.
(d) Notwithstanding anything to the contrary herein or in the Trust
Note or the Loan Agreement contained or implied, if an Event of Default occurs
with respect to the Trust Loan by the Trust, the value of Trust assets
transferred in satisfaction thereof shall not exceed the amount of such default.
In addition, such a transfer of such Trust assets shall only occur upon, and to
the extent of the failure of, the Trust to meet the payment schedule of the
Trust Loan provided in Article II of the Loan Agreement.
5
<PAGE>
Section 7. Application of Proceeds of Sale or Cash Held as
Collateral. The proceeds of sale of Collateral sold pursuant to the terms of
Section 6 hereof and/or, after an Event of Default, the cash held as Collateral
hereunder, shall be applied by the Company, to the extent permitted by
applicable law, as follows:
First: to payment of the costs and expenses of such sale,
including the out-of-pocket costs and expenses of the Company and the
reasonable fees and out-of-pocket costs and expenses of counsel
employed in connection therewith, and to the payment of all advances
made by the Company for the account of the Trust hereunder and the
payment of all costs and expenses incurred by the Company in
connection with the administration and enforcement of this Agreement,
to the extent that such advances, costs and expenses shall not have
been reimbursed to the Company;
Second: to the payment in full of the Liabilities; and
Third: the balance, if any, of such proceeds shall be paid to
the Trust, its successors and assigns, or as a court of competent
jurisdiction may direct.
Section 8. Authority of Company. The Company shall have and be
entitled to exercise all such powers hereunder as are specifically delegated to
the Company by the terms hereof, together with such powers as are incidental
thereto. The Company may execute any of its duties hereunder by or through
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of such counsel concerning all matters pertaining to
its duties hereunder. Neither the Company, nor any director, officer or employee
of the Company, shall be liable for any action taken or omitted to be taken by
it or them hereunder or in connection herewith, except for its or their own
gross negligence or wilful misconduct. The Trust hereby agrees, to the extent
permitted by applicable law, to reimburse the Company, on demand, for all costs
and expenses incurred by the Company in connection with the enforcement of this
Agreement (including costs and expenses incurred by any agent employed by the
Company).
Section 9. Termination. This Agreement shall terminate when all the
Liabilities have been fully paid and performed, at which time the Company shall
reassign and redeliver (or cause to be reassigned and redelivered) to the Trust,
or to such person or persons as the Trust shall designate, against receipt, such
of the Collateral (if any) as shall not have been theretofore released, sold or
otherwise applied by the Company pursuant to the terms hereof and shall still be
held by it hereunder, together with any appropriate instruments of reassignment
and release. Any such reassignment shall be without recourse upon, or
representation or warranty by, the Company.
Section 10. Required Release of Collateral. Notwithstanding any
provision of this Agreement or the Loan Agreement to the contrary, the Company
from time to time will release from the pledge and security interest under the
Loan Agreement, such Collateral as must be allocated to participants under the
Plan pursuant to Section 8.7(h) of the Plan and otherwise under the Code, the
Exempt Loan Rules or other applicable law.
Section 11. Limited Recourse. Notwithstanding anything to the contrary
herein or in the Trust Note, the Loan Agreement or any other instrument,
agreement or document contained or
6
<PAGE>
implied, the Liabilities shall be enforceable to the extent permitted under
applicable law, including, without limitation, the Exempt Loan Rules, only
against the Trust to the extent of the Collateral not theretofore released from
the pledge and security interest under this Agreement as provided herein and
contributions (other than contributions of employer securities) made to the
Trust in accordance with the Plan to enable the Trust to pay and satisfy the
Liabilities and from earnings attributable to the Shares and the investment of
such contributions (collectively, the "'Trust Loan Collateral"). No recourse
shall be had to or against the Trust or the assets thereof (other than the Trust
Loan Collateral) for any deficiency judgment against the Trust for the purpose
of obtaining payment or other satisfaction of the Liabilities. Without limiting
the foregoing, the Trustee of the Trust shall have no personal liability for any
of the Liabilities, other than as required by or arising under applicable law.
Section 12. Notices. All communications and notices hereunder shall
be in writing and, if mailed, shall be deemed to be given when sent by
registered or certified mail, postage prepaid, return receipt requested, or by
telecopier, duly confirmed, and addressed to such party at the address indicated
below or to such other address as such party may designate in writing pursuant
to this Section 12.
HOME FINANCIAL BANCORP
279 E. Morgan
P.O. Box 381
Spencer, Indiana 47460
Attention: Kurt J. Meier, President
Community Trust & Investment Company, Inc.
105 N. Pete Ellis Drive
Suite B
P.O. Box 5996
Bloomington, Indiana 47407
Section 13. Binding Agreement Assignment. This Agreement, and the
terms, covenants and conditions hereof, shall be binding upon and inure to the
benefit of the parties hereto, and their respective successors and assigns,
except the Trust shall not be permitted to assign this Agreement or any interest
herein or in the Collateral, or any part thereof, or otherwise grant any option
with respect to the Collateral, or any part thereof and the Company shall not
assign any interest herein or in the Collateral unless such assignment is
expressly made subject to the terms of the Loan Documents.
Section 14. Miscellaneous Provisions. Neither this Agreement nor any
provision hereof may be amended, modified, waived, discharged or terminated nor
may any of the Collateral be released or the pledge or the security interest
created hereby extended, except by an instrument in writing duly signed by or on
behalf of the Company hereunder. The section headings used herein are for
convenience of reference only and shall not define or limit the provisions of
this Agreement. This Agreement may be executed in any number of counterparts and
by the different parties on separate counterparts and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same Agreement.
7
<PAGE>
Section 15. Governing Law; Interpretation. This Agreement has been
made and delivered at Spencer, Indiana, and, except to the extent preempted by
ERISA, shall be governed by the internal laws of the State of Indiana, without
regard to principles of conflict of laws. Wherever possible each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be prohibited
by or invalid under such law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
Section 16. Filing as a Financing Statement. At the option of the
Company, this Agreement, or a carbon, photographic or other reproduction of this
Agreement or of any Uniform Commercial Code financing statement covering the
Collateral or any portion thereof shall be sufficient as a Uniform Commercial
Code financing statement and may be filed as such.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective representatives thereunto duly authorized
as of the date first above written.
TRUST UNDER OWEN COMMUNITY BANK,
S.B. EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
By: Community Trust & Investment Company,
Inc., Trustee
By:
Printed:
Its:
HOME FINANCIAL BANCORP
By:
Printed: Kurt J. Meier
Its: President
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001009242
<NAME> Home Financial Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 386
<INT-BEARING-DEPOSITS> 5,335
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