Registration No. 333-29031
Filed with the Securities and Exchange Commission on June 31, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre-Effective Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CITIZENS BANCORP
(Exact name of registrant as specified in its charter)
Indiana 6712 35-2017500
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code No.) Identification No.)
incorporation or
organization)
60 South Main Street Fred W. Carter
P.O. Box 635 Citizens Savings Bank
Frankfort, Indiana 46041 of Frankfort
(765) 654-8533 60 South Main Street
P.O. Box 635
Frankfort, Indiana 46041
(765) 654-8533
Copy to:
Claudia V. Swhier, Esq.
Barnes & Thornburg
1313 Merchants Bank Building
11 South Meridian Street
Indianapolis, Indiana 46204
-----------------
Approximate date of commencement of proposed sale to the public: As
promptly as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Proposed Maximum Amount of
Title of each Class of Amount to be Maximum Offering Aggregate Offering Registration
Securities to be Registered Registered Price Per Unit Price (1) Fee
<S> <C> <C> <C> <C>
Common Stock, without par value 1,058,000 $10.00 $10,580,000 $3,206.06 (2)
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee.
(2) Previously filed with Form S-1 Registration Statement
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET
Item in Form S-1 Caption in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement and Outside Forepart of Registration Statement and Outside
Front Cover Page of Prospectus Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information, Risk Factors, and Ratio of "QUESTIONS AND ANSWERS ABOUT
Earnings to Fixed Charges THE STOCK OFFERING"; "SUMMARY"; "RISK
FACTORS"
4. Use of Proceeds "USE OF PROCEEDS"
5. Determination of Offering Price "THE CONVERSION - Stock Pricing"
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution "SUMMARY"; "THE CONVERSION - Subscription
Offering," "- Community Offering," "-Agent,"
"- Selected Dealers"
9. Description of Securities to be Registered "DESCRIPTION OF CAPITAL STOCK"
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to Registrant
(a) Description of Business "CITIZENS BANCORP"; "CITIZENS SAVINGS
BANK OF FRANFORT", "BUSINESS OF CITIZENS"
(b) Description of Property "BUSINESS OF CITIZENS - Properties"
(c) Legal Proceedings "BUSINESS OF CITIZENS - Legal Proceedings"
(d) Market Price of and Dividends on the "MARKET FOR THE COMMON STOCK;"
Registrant's Common Equity and Related "DIVIDENDS;" "PROPOSED PURCHASES
Stockholder Matters BY DIRECTORS AND EXECUTIVE OFFICERS";
"DESCRIPTION OF CAPITAL STOCK"
(e) Financial Statements "FINANCIAL STATEMENTS"; "PRO FORMA DATA"
(f) Selected Financial Data "SELECTED CONSOLIDATED FINANCIAL
DATA OF CITIZENS SAVINGS BANK
OF FRANKFORT AND SUBSIDIARY"
(g) Supplementary Financial Information Not Applicable
(h) Management's Discussion and Analysis of "MANAGEMENT'S DISCUSSION AND
Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CITIZENS
SAVINGS BANK OF FRANKFORT"
(i) Changes in and Disagreements with Accountants Not Applicable
on Accounting and Financial Disclosure
(j) Directors and Executive Officers "MANAGEMENT OF CITIZENS BANCORP";
"MANAGEMENT OF CITIZENS SAVINGS BANK
OF FRANKFORT"
(k) Executive Compensation "EXECUTIVE COMPENSATION
AND RELATED TRANSACTIONS OF CITIZENS"
(l) Security Ownership of Certain Beneficial "PROPOSED PURCHASES BY DIRECTORS AND
Owners and Management EXECUTIVE OFICERS"
(m) Certain Relationships and Related Transactions "EXECUTIVE COMPENSATION AND RELATED
TRANSACTIONS OF CITIZENS -
- Transactions with Certain Related Persons"
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
PROSPECTUS
Up to 920,000 Shares of Common Stock
Citizens Bancorp
P.O. Box 635
Frankfort, Indiana 46041
(765) 654-8533
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Citizens Savings Bank of Frankfort is converting from the mutual form to
the stock form of organization. As part of the conversion, Citizens Savings Bank
of Frankfort will become a wholly-owned subsidiary of Citizens Bancorp, which
was formed in June, 1997. Upon the completion of the conversion, Citizens
Bancorp will own all of the shares of Citizens Savings Bank of Frankfort. The
common stock of Citizens Bancorp is being offered to the public under the terms
of a Plan of Conversion which must be approved by a majority of the votes
eligible to be cast by members of Citizens Savings Bank of Frankfort and by the
Office of Thrift Supervision. The offering will not go forward if Citizens
Savings Bank of Frankfort does not receive these approvals and Citizens Bancorp
does not sell at least the minimum number of shares.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted
Citizens Savings Bank of Frankfort to be between $6,800,000 to $9,200,000, which
establishes the number of shares to be offered. Subject to Office of Thrift
Supervision approval, an additional 15% above the maximum number of shares may
be offered. Based on these estimates, we are making the following offering of
shares of common stock.
o Price Per Share: $10
o Number of Shares
Minimum/Maximum: 680,000 to 920,000
o Conversion Expenses
Minimum/Maximum: $433,400 to $466,600
o Net Proceeds to Citizens Bancorp
Minimum/Maximum: $6,366,600 to $8,733,400
o Net Proceeds per share to Citizens Bancorp
Minimum/Maximum: $9.36 to $9.49
Please refer to Risk Factors beginning on page 13 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Trident Securities, Inc. will use its best efforts to help Citizens Bancorp sell
at least the minimum number of shares but does not guarantee this number will be
sold. All funds received from subscribers will be held in a savings account at
Citizens Savings Bank of Frankfort until the completion or termination of the
Conversion.
For information on how to subscribe, call the Stock Information Center at (765)
659-5708.
TRIDENT SECURITIES, INC.
Prospectus dated August 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
Questions and Answers................................................... 3
Prospectus Summary...................................................... 5
Selected Consolidated Financial Data of
Citizens Savings Bank of Frankfort and Subsidiary.................... 7
Recent Developments of Citizens Savings Bank of Frankfort............... 10
Risk Factors............................................................ 13
Proposed Purchases by Directors and Executive Officers.................. 16
Citizens Bancorp........................................................ 16
Citizens Savings Bank of Frankfort...................................... 16
Market Area............................................................. 17
Use of Proceeds......................................................... 17
Dividends............................................................... 18
Market for the Common Stock............................................. 18
Competition............................................................. 19
Capitalization.......................................................... 19
Pro Forma Data.......................................................... 21
The Conversion.......................................................... 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations of
Citizens Savings Bank of Frankfort................................... 36
Business of Citizens.................................................... 47
Management of Citizens Bancorp.......................................... 63
Management of Citizens Savings Bank of Frankfort........................ 63
Executive Compensation and Related Transactions of Citizens............ 64
Regulation.............................................................. 69
Taxation................................................................ 75
Restrictions on Acquisition of the Holding Company...................... 76
Description of Capital Stock............................................ 80
Transfer Agent.......................................................... 81
Registration Requirements............................................... 81
Legal and Tax Matters................................................... 82
Experts................................................................. 82
Additional Information.................................................. 82
Index to Consolidated Financial Statements.............................. F-1
Glossary................................................................ G-1
This document contains forward-looking statements which involve risks and
uncertainties. Citizens Bancorp's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 13 of this Prospectus.
Please see the Glossary beginning on page G-1 for the meaning of
capitalized terms that are used in this Prospectus.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the offering?
A: The offering means that you will have the chance to become a
shareholder of our newly formed holding company, Citizens Bancorp,
which will allow you to share in our future as an indirect owner of a
federal stock savings bank. The stock offering will increase our
capital and the amount of funds available to us for lending and
investment activities. This will give us greater flexibility to
diversify operations and expand into other geographic markets if we
choose to do so. As a stock savings association operating through a
holding company structure, we will have the ability to plan and develop
long-term growth and improve our future access to the capital markets.
If our earnings are sufficient in the future, you might also receive
dividends and benefit from the long-term appreciation of our stock
price.
Q: How do I purchase the stock?
A: You must complete and return the Stock Order Form to us together with
your payment, on or before September 4, 1997.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250). The maximum purchase in
the Subscription Offering is 10,000 shares (or $100,000) for each
deposit account, subject to an overall maximum of 30,000 shares. The
maximum number of shares which may be purchased in the Community
Offering by any person is 10,000 shares (subject to an overall limit of
30,000 shares counting the shares purchased in the Subscription
Offering). For purposes of these limitations, joint account holders may
not collectively exceed the 10,000 and 30,000 share limits. In certain
instances, your purchase may be grouped together with purchases by
other persons who are associated with you. We may decrease or increase
the maximum purchase limitation without notifying you. If the offering
is oversubscribed, shares will be allocated based upon a formula.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription, the stock will be offered on a priority
basis to the following persons:
o Persons who had a deposit account with us on December 31,
1995. (Citizens Bancorp's employee stock ownership plan will
have priority over such persons if more than 920,000 shares
are sold, to the extent of any shares sold over 920,000 and up
to the number of shares subscribed for by such plan.) Any
remaining shares will be offered to:
o The employee stock ownership plan of Citizens Bancorp. Any
remaining shares will be offered to:
o Persons who had a deposit account with us on June 30, 1997.
Any remaining shares will be offered to:
o Other depositors of ours, as of July 25, 1997.
If the above persons do not subscribe for all of the shares, the
remaining shares will be offered to certain members of the general
public with preference given to people who live in Clinton County,
Indiana.
Q: What particular factors should I consider when deciding whether or not
to buy the stock?
A: Because of the small size of the offering, there likely will not be an
active market for the shares, which may make it difficult to resell any
shares you may own. Also, before you decide to purchase stock, you
should read the Risk Factors section on pages 13-15 of this document.
Q: As a depositor of Citizens Savings Bank of Frankfort, what will happen
if I do not purchase any stock?
A: You presently have voting rights while we are in the mutual form;
however, once we convert to the stock form you will lose your voting
rights unless you purchase stock. Even if you do purchase stock, your
voting rights will depend on the amount of stock that you own and not
on your deposit account at Citizens. You are not required to purchase
stock. Your deposit account, certificate accounts and any loans you may
have with us will not be affected by the Conversion.
<PAGE>
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. This section highlights selected information and may
not contain all of the information that is important to you. In
addition, you should contact:
Stock Information Center
Citizens Savings Bank of Frankfort
P.O. Box 635
Frankfort, Indiana 46041
(765) 659-5708
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the consolidated financial statements and the notes to the consolidated
financial statements of Citizens Savings Bank of Frankfort. References in this
document to "we", "us", "our" and "Citizens" refer to Citizens Savings Bank of
Frankfort. In certain instances where appropriate, "us" or "our" refers
collectively to Citizens Bancorp and Citizens Savings Bank of Frankfort.
References in this document to "the Holding Company" refer to Citizens Bancorp.
The Companies
Citizens Bancorp
P.O. Box 635
Frankfort, Indiana 46041
(765) 654-8533
Citizens Bancorp is not an operating company and has not engaged in any
significant business to date. It was formed in June, 1997, as an Indiana
corporation to be the holding company for Citizens Savings Bank of Frankfort.
The holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See page 16.
Citizens Savings Bank of Frankfort
P.O. Box 635
Frankfort, Indiana 46041
(765) 654-8533
We are a community- and customer-oriented federal mutual savings bank.
We provide financial services to individuals, families and small business.
Historically, we have emphasized residential mortgage lending, primarily one- to
four-family mortgage loans. We have a subsidiary engaged in real estate
development activities. On March 31, 1997, we had total assets of $45.2 million,
deposits of $37.3 million, and retained income of $5.6 million. See pages 16 to
17.
The Stock Offering
Citizens Bancorp is offering for sale between 680,000 and 920,000
shares of its Common Stock at $10 per share. This offering may be increased to
1,058,000 shares without further notice to you if market or financial conditions
change prior to the completion of this stock offering or if additional shares of
stock are needed to fill the order of our employee stock ownership plan.
Stock Purchases
Citizens Bancorp will offer shares of its Common Stock to our
depositors who held deposit accounts as of certain dates. The shares will be
offered first in a Subscription Offering and any remaining shares may be offered
in a Community Offering. See pages 27 to 31.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of shares.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro
forma market value of the Common Stock by Keller & Company, Inc., an appraisal
firm experienced in appraisals of savings associations. Keller & Company, Inc.
has estimated that, in its opinion, as of May 22, 1997 the aggregate pro forma
market value of the Common Stock ranged between $6.8 million and $9.2 million
(with a mid-point of $8 million). The pro forma market value of the shares is
our market value after taking into account the sale of shares in this offering.
<PAGE>
The appraisal was based in part upon our financial condition and operations and
the effect of the additional capital raised by the sale of Common Stock in this
offering. The $10.00 price per share was determined by our board of directors
and is the price most commonly used in stock offerings involving conversions of
mutual savings associations. The independent appraisal will be updated prior to
the completion of the Conversion. If the pro forma market value of the Common
Stock changes to either below $6.8 million or above $10.58 million, we will
notify you and provide you with the opportunity to modify or cancel your order.
See pages 34 to 35.
Termination of the Offering
The Subscription Offering will terminate at 12:00 noon, Frankfort time,
on September 4, 1997. The Community Offering, if any, may terminate at any time
without notice but no later than October 19, 1997, without approval by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in our employee stock
ownership plan, which is a form of retirement plan that will purchase shares of
Citizens Bancorp's Common Stock. We also intend to implement a management
recognition and retention plan and a stock option plan following completion of
the Conversion, which will benefit our officers and directors. If we adopt the
management recognition and retention plan, our executive officers and directors
will be awarded shares of Common Stock without paying cash for the shares.
However, the recognition and retention plan and stock option plan may not be
adopted until at least six months after the Conversion and are subject to
shareholder approval and compliance with OTS regulations. See pages 67 to 69.
Use of the Proceeds Raised from the Sale of Common Stock
Citizens Bancorp intends to use a portion of the proceeds from the
stock offering to make a loan to our employee stock ownership plan to fund its
purchase of 8% of the Common Stock issued in the Conversion. Citizens Bancorp
will use 50% of the proceeds that remain after it makes this loan and after it
pays expenses incurred in connection with the Conversion to purchase all of the
capital stock to be issued by Citizens Savings Bank of Frankfort. Citizens
Bancorp will retain the balance of the proceeds as a possible source of funds
for the payment of dividends to shareholders or to repurchase shares of Common
Stock in the future and for other general corporate purposes. See pages 17 to
18.
Dividends
Management of Citizens Bancorp has not yet made a decision regarding
the payment of dividends. Citizens Bancorp will consider a policy of paying cash
dividends on its Common Stock following the Conversion. See page 18.
Market for the Common Stock
Citizens Bancorp intends to list the Common Stock over-the-counter
through the OTC "Electronic Bulletin Board." Since the size of the offering is
relatively small, it is unlikely that an active and liquid trading market for
the shares will develop and be maintained. Investors should have a long-term
investment intent. If you purchase shares, you may not be able to sell them when
you want to at a price that is equal to or more than the price you paid. See
pages 18 to 19.
Important Risks in Owning the Holding Company's Common Stock
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages 13 to 15 of this document.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
CITIZENS SAVINGS BANK OF FRANKFORT AND SUBSIDIARY
The following tables set forth selected consolidated financial data of
Citizens Savings Bank of Frankfort and its subsidiary at and for the periods
indicated. The information for each of the five fiscal years ended June 30, 1992
through June 30, 1996 is derived from our audited financial statements. The
information as of March 31, 1997 and for the nine months ended March 31, 1997
and 1996 is unaudited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of this information. The following information is only a summary
and should be read in conjunction with our consolidated financial statements and
notes (including consolidated data from operations of our subsidiary) beginning
on page F-1.
<TABLE>
<CAPTION>
AT JUNE 30,
AT MARCH 31, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Summary of Selected Consolidated Financial Condition Data:
Total assets................................................. $45,153 $44,235 $39,727 $38,523 $34,460 $36,758
Loans receivable, net (1).................................... 37,216 34,391 29,275 26,141 23,436 23,191
Cash on hand and in other institutions (2)................... 4,251 3,308 4,310 7,210 6,962 9,632
Investment securities available for sale..................... 159 3,003 2,832 2,677 1,652 2,209
Cash surrender value of life insurance contract.............. 1,066 1,035 991 943 885 ---
FHLB advances................................................ 2,000 3,000 1,500 --- --- ---
Deposits..................................................... 37,255 35,600 33,175 34,037 30,136 32,811
Retained income.............................................. 5,564 5,320 4,841 4,435 4,154 3,823
Unrealized loss on investment securities
available for sale........................................ --- (51) (49) (50) --- ---
</TABLE>
(1) Net of allowance for loan losses, deferred fees and escrow.
(2) Includes certificates of deposit in other financial institutions.
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31, YEAR ENDED JUNE 30,
------------------ -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Selected Consolidated Operating Data:
Total interest income ...................................... $ 2,620 $ 2,365 $ 3,186 $ 2,742 $ 2,424 $ 2,563 $ 2,973
Total interest expense ..................................... 1,362 1,231 1,653 1,370 1,273 1,423 1,921
------- ------- ------- ------- ------- ------- -------
Net interest income ..................................... 1,258 1,134 1,533 1,372 1,151 1,140 1,052
Provision for loan losses .................................. 32 63 80 32 12 19 12
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ............................. 1,226 1,071 1,453 1,340 1,139 1,121 1,040
Other income:
Fees and service charges ................................ 105 114 152 151 120 97 92
Other ................................................... (1) 69 94 70 77 139 42
------- ------- ------- ------- ------- ------- -------
Total other income .................................... 104 183 246 221 197 236 134
Other expense:
Salaries and employee benefits .......................... 352 305 415 387 331 319 252
Occupancy expense ....................................... 84 82 118 109 105 102 108
Data processing expense ................................. 80 75 101 105 98 94 85
Federal insurance premiums .............................. 253 57 77 75 71 66 76
Other ................................................... 192 187 256 248 258 237 232
------- ------- ------- ------- ------- ------- -------
Total other expense .................................... 961 706 967 924 863 818 753
------- ------- ------- ------- ------- ------- -------
Income before income taxes ................................. 369 548 732 637 473 539 421
Income taxes ............................................... 125 192 253 231 166 207 158
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of
change in accounting principle .......................... 244 356 479 406 307 332 263
Cumulative effect of change in
accounting for income taxes ............................. -- -- -- -- (26) -- --
Net income .............................................. $ 244 $ 356 $ 479 $ 406 $ 281 $ 332 $ 263
======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31, YEAR ENDED JUNE 30,
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
Supplemental Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate spread during period............... 3.71% 3.76% 3.75% 3.69% 3.14% 3.29% 2.62%
Net yield on interest-earning assets (1) (2)..... 3.99 3.99 3.99 3.92 3.38 3.56 3.00
Return on assets (2) (3)......................... .72 1.15 1.15 1.07 .77 .94 .72
Return on equity (2) (4)......................... 6.05 9.56 9.52 8.89 6.58 8.30 7.15
Equity to assets (5)............................. 12.32 12.09 11.91 12.06 11.38 12.05 10.40
Average interest-earning assets to average
interest-bearing liabilities.................. 106.22 105.37 105.61 105.84 106.54 106.20 106.84
Non-performing assets to total assets (5)........ .45 .53 .50 .35 .61 1.02 1.27
Allowance for loan losses to total loans
outstanding (5)............................... .46 .37 .40 .16 .19 .16 .12
Allowance for loan losses to
non-performing loans (5)...................... 84.12 53.41 62.51 33.19 20.89 10.92 5.79
Net (charge-offs) recoveries to average
total loans outstanding ...................... .004 .04 .04 (.12) (.004) (.03) (.05)
Other expenses to average assets (2)(6)......... 2.82 2.28 2.32 2.44 2.38 2.33 2.06
Number of full service offices (5)............... 1 1 1 1 1 1 1
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) Information for nine months ended March 31, 1997 and 1996, has been
annualized. Interim results are not necessarily indicative of the results
of operations for an entire year.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) At end of period.
(6) Other expenses divided by average total assets.
-7-
<PAGE>
RECENT DEVELOPMENTS OF CITIZENS SAVINGS BANK OF FRANKFORT
The following table sets forth selected consolidated financial
condition data for Citizens Savings Bank of Frankfort at June 30, 1997 and June
30, 1996, and selected consolidated operating data for the three months and
twelve months ended June 30, 1997 and 1996. Information at June 30, 1997 and for
the three and twelve months ended June 30, 1997 is unaudited but, in the opinion
of management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of this information. The information
set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by our financial statements
and related notes beginning on page F-1.
AT JUNE 30, AT JUNE 30,
Selected Consolidated Financial Condition Data: 1997 1996
(In thousands)
Total amount of:
Total assets.................................... $46,353 $44,235
Loans receivable, net........................... 38,435 34,391
Cash on hand and in other institutions.......... 4,125 3,308
Investment securities available for sale........ 161 3,003
Cash surrender value of life insurance contract. 1,076 1,035
FHLB advances................................... 4,000 3,000
Deposits........................................ 36,355 35,600
Unrealized gain (loss) on investment securities
available for sale............................ --- (51)
Retained income................................. 5,691 5,320
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
Selected Consolidated Operating Data: 1997 1996 1997 1996
(In thousands)
<S> <C> <C> <C> <C>
Total interest income...................... $889 $821 $3,509 $3,186
Total interest expense..................... 452 422 1,814 1,653
Net interest income........................ 437 399 1,695 1,533
Provision for loan losses.................. 51 17 83 80
Net interest income after provision
for loan losses......................... 386 382 1,612 1,453
Other income............................... 55 63 159 246
Other expense.............................. 256 261 1,217 967
Income before income taxes................. 185 184 554 732
Income taxes............................... 58 61 183 253
Net income................................. $127 $123 $ 371 $ 479
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Twelve Months Ended
June 30, June 30,
1997 1996 1997 1996
Supplemental Data:
<S> <C> <C> <C> <C> <C>
Interest rate spread (average during period) (1)............... 3.84% 3.73% 3.75% 3.75%
Net yield on interest-earning assets (1)(2).................... 4.13 3.99 4.02 3.99
Return on assets (ratio of net income to
average total assets) (1)................................... 1.11 1.13 .82 1.15
Return on equity (ratio of net income to
average total equity) (1)................................... 9.00 9.40 6.81 9.52
Equity-to-assets, at end of period............................. 12.28 11.91 12.28 11.91
Average interest-earning assets to average
interest-bearing liabilities (1)............................ 106.71 106.24 106.31 105.61
Non-performing assets to total assets, at end of period (3).... .74 .50 .74 .50
Allowance for loan losses to total loans outstanding........... .55 .40 .55 .40
Net (charge-offs) recoveries to average total loans outstanding (.03) --- (.03) .04
Ratio of other expenses to average assets (1).................. 2.24 2.42 2.67 2.32
</TABLE>
(1) Ratios are annualized.
(2) Net interest income divided by average interest-earning assets.
(3) Non-performing assets consist of non-accruing loans, accruing loans 90
days or more past due, restructured loans and real estate owned.
Financial Condition at June 30, 1997 Compared to Financial Condition at June 30,
1996
Our total consolidated assets increased by $2.2 million, or 4.8%, to
$46.4 million at June 30, 1997 from $44.2 million at June 30, 1996. Net loans
receivable increased $4.0 million, or 11.8%, while investment securities
decreased $2.8 million and FHLB advances increased $1.0 million. We funded the
increased loans primarily with the increase in our interest-bearing deposits of
$755,000, the sale of our investment securities and with the additional FHLB
advance. Capital increased $371,000, or 7.0%, to $5.7 million in 1997 from $5.3
million in 1996.
Results of Operations for the Three Months Ended June 30, 1997 and 1996
Net Income. Net income increased $4,000, or 3.3%, to $127,000 for the
three-month period ended June 30, 1997 from $123,000 for the same period in
1996. The relatively small increase in net income was impacted by the $34,000
increase in our provision for loan losses during this period.
Net Interest Income. Net interest income increased $38,000, or 9.5%, to
$437,000 for the three-month period ended June 30, 1997, from $399,000 for the
comparable period in 1996. This increase was due primarily to an increase of
$4.0 million in net loans receivable to $38.4 million for the year ended June
30, 1997. Also, our interest rate spread increased to 3.8% for 1997 as compared
to 3.7% for the same period in 1996.
Provisions for Loan Losses. Our provisions for loan losses for the
three months ended June 30, 1997 and for the comparable period in 1996 were
$51,000 and $17,000, respectively, an increase of $34,000. We had chargeoffs of
$12,000 in consumer loans during the three months ended June 30, 1997 and did
not have any chargeoffs in the comparable period in 1996. We increased our loan
loss provisions primarily in recognition of the increase in consumer loan losses
occurring in the nation, regionally and locally as well as to give consideration
to individually large multi-family and non-residential real estate loans.
Other Income. Our other income decreased approximately $8,000, or
12.7%, for the three-month period ended June 30, 1997 as compared to the
comparable period in 1996. This decrease was due primarily to the decrease in
the net profit of our wholly-owned subsidiary, Citizens Loan and Service
Corporation ("CLSC"), and to decreases in our fee income during this period.
Other Expense. Our non-interest expense decreased $5,000, or 1.9%, to
$256,000 in 1997 from $261,000 in 1996. This decrease was due largely to the
reduction in our FDIC insurance premium beginning in January, 1997.
Income Tax Expense. Our income tax expense decreased $3,000, or 4.9%,
from $61,000 in 1996 to $58,000 in 1997.
Comparison of Operating Results for Fiscal Years Ended June 30, 1997 and 1996
Net Income. Net income decreased $108,000, or 22.5%, to $371,000 in
1997 from $479,000 for 1996. This decrease primarily resulted from our
recognition of the one-time, non-recurring SAIF special assessment in the amount
of $211,000, ($127,000 net of tax) and the sale of an investment at a loss of
approximately $60,000. We chose to sell the investment in order to use the
proceeds to pay down FHLB advances and to increase overall liquidity. These
expenses were offset by an increase of $162,000 in our net interest income to
$1.7 million for 1997 from $1.5 million for 1996. Excluding the SAIF assessment
and the loss on the sale of investments, net income would have increased
$55,000, or 11.5%, to $534,000 for the twelve months ending June 30, 1997 from
$479,000 in 1996.
Net Interest Income. Our net interest income increased $162,000, or
10.6%, to $1.7 million in 1997 from $1.5 million in 1996. This increase
primarily resulted from the growth in net loans receivable of $4.0 million, or
11.6%, to $38.4 million in 1997 from $34.4 million in 1996.
Provisions for Loan Losses. Our provisions for loan losses for 1997 and
1996 were $83,000 and $80,000, respectively. We increased our provision for 1997
to recognize the increase in consumer loan losses being experienced by financial
institutions nationally, regionally and locally as well as the risks associated
with individually large multi-family and nonresidential real estate loans. We
had no chargeoffs in fiscal year 1996 and we experienced $12,000 in recoveries.
We had chargeoffs of $12,000 in fiscal year 1997. Our allowance for loan loss as
of June 30, 1997 was $212,000.
Other Income. Our other income decreased approximately $87,000, or
35.4%, in 1997 as compared to 1996. This decrease resulted from the sale of an
investment security at a loss of approximately $60,000, a decrease in fees and
service charges and decreases in other miscellaneous income.
Other Expense. Our other expenses increased $250,000 or 25.9% to $1.2
million in 1997 from $967,000 in 1996. The increase was primarily attributable
to an increase of $47,000 in salaries and benefits, an increase of $196,000 in
SAIF insurance premiums and a $9,000 increase in occupancy expense relating to
the installation of new computers, a "Loan Doc Prep" software package and a
Local Area Network (LAN).
Income Tax Expense. Our income tax expense decreased $70,000, or 27.7%,
to $183,000 at June 30, 1997 from $253,000 at June 30, 1996. The decrease
resulted primarily from our reduced profits in 1997 caused by our recognition of
the one-time, non-recurring SAIF special assessment in the amount of $211,000
($127,000 net of tax) and our sale of an investment at a loss of approximately
$60,000.
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an
active trading market will develop and be maintained. If an active market does
not develop, you may not be able to sell your shares promptly or perhaps at all,
or sell your shares at a price equal to or above the price you paid for the
shares. The Common Stock may not be appropriate as a short-term investment. See
"Market for the Common Stock."
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
Return on average equity (net income divided by average equity) is a
ratio commonly used to compare the performance of a savings association to its
peers. For the nine-month periods ended March 31, 1997, and 1996, our returns on
average equity (on an annualized basis) were 6.05% and 9.56%, respectively. A
lower return on equity could reduce the trading price of our shares. As a result
of the Conversion, our equity will increase substantially. Our expenses also
will increase because of the costs associated with our employee stock ownership
plan ("ESOP"), management recognition and retention plan ("RRP"), and the costs
of being a public company. Because of the increases in our equity and expenses,
our return on equity is likely to decrease as compared to our performance in
previous years. Initially, Citizens intends to use a portion of the proceeds of
this offering to repay some or all of its short-term obligations owed to the
Federal Home Loan Bank of Indianapolis ("FHLB of Indianapolis"). Citizens may
also use some of the proceeds to purchase loan participations and
mortgage-backed securities on the secondary market and, on an interim basis, to
invest in U.S. government securities and federal agency securities which
generally have lower yields than residential mortgage loans. See "Use of
Proceeds."
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions,
substantially depends upon our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (such as
mortgage loans) and the interest expense we pay on our interest-bearing
liabilities (such as deposits). Approximately 70 percent of our mortgage loans
have rates of interest which are fixed for the term of the loan ("fixed rate")
and are originated with terms of 15 or 20 years, while deposit accounts have
significantly shorter terms to maturity. Because our interest-earning assets
generally have fixed rates of interest and have longer effective maturities than
our interest-bearing liabilities, the yield on our interest earning assets
generally will adjust more slowly to changes in interest rates than the cost of
our interest-bearing liabilities. As a result, our net interest income will be
adversely affected by material and prolonged increases in interest rates. In
addition, rising interest rates may adversely affect our earnings because there
might be a lack of customer demand for loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Citizens Savings
Bank of Frankfort -- Asset/Liability Management."
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Historically lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
Nonresidential Real Estate and Multi-Family Lending
As of March 31, 1997, we had nonresidential real estate and
multi-family loans of $846,000 and $1.6 million, respectively, or 2.3% and 4.2%,
respectively, of our total loan portfolio as of that date. Although
nonresidential real estate and multi-family loans provide higher interest rates
and shorter terms, these loans have higher credit risks than one- to four-family
residential loans. Nonresidential real estate and multi-family loans often
involve large loan balances to single borrowers or groups of related borrowers.
In addition, payment experience on loans secured by such properties is typically
dependent on the successful operation of the properties and thus may be subject
to a greater extent to adverse conditions in the real estate market or in the
general economy. Accordingly, the nature of the loans makes them more difficult
for management to monitor and evaluate. Although none of our nonresidential real
estate and multi-family loans was non-performing as of March 31, 1997, if
borrowers under these types of loans develop problems, we may be required to
increase by a significant amount our allowance for loan losses because of the
relatively large size of these loans. This, in turn, may result in significant
reductions in our net income. See "Business of Citizens--Lending Activities."
Dependence on President and Possible New Management
Our successful operations depend to a considerable degree on our
President, Fred W. Carter, who is 65 years of age. We have entered into a
three-year employment agreement with Mr. Carter. The employment agreement
requires certain payments to Mr. Carter if he is terminated by us or by an
entity that acquires us without "just cause," or if Mr. Carter terminates the
employment agreement "for cause." The loss of Mr. Carter's services could
adversely affect us. While the board of directors is seeking to attract and
retain additional management either as a successor or supplement to Mr. Carter,
there is no assurance that such individuals will be attracted or retained. If
such individuals are retained, their participation in our management could
result in changes to our operating strategy which could affect our
profitability. See "Management of Citizens Savings Bank of Frankfort" and
"Executive Compensation and Related Transactions of Citizens-- Employment
Contract."
Potential Impact of Future Changes in or the Discontinuance of the Business of
Citizens' Subsidiary
Our service corporation subsidiary, CLSC, has historically engaged in
purchasing and subdividing large tracts of land and selling the subdivided
tracts. We utilize the sale of CLSC's properties to provide an additional source
of income. During the fiscal years ended June 30, 1996, 1995 and 1994, we
realized net income (loss) of $24,000, $2,000, and $(163), respectively, from
the operations of CLSC. During the nine months ended March 31, 1997, net income
from the operations of CLSC was $6,000. Also at March 31, 1997, we had an
investment in CLSC of $465,000 and loans outstanding to CLSC of $575,000.
Although savings associations are presently permitted under federal law to
invest in service corporations that engage in real estate development, future
legislation may require us either to convert to a state or national commercial
bank charter or to divest of our investments in subsidiaries with real estate
holdings. In either case, we may be required to divest of our investment in
CLSC, possibly on terms which could result in a loss to us, and a future
reduction in our earnings. See "Regulation." In addition, our earnings are
affected by the activities of CLSC, which are in turn affected by underlying
economic factors such as interest rates, levels of unemployment and the general
health of the local and national economy. See "Business of Citizens--Service
Corporation Subsidiary."
Intent to Remain Independent
We have operated as an independent community oriented savings
association since 1916. It is our intention to continue to operate as an
independent community oriented savings association following the Conversion.
Accordingly, you are urged not to subscribe for shares of our Common Stock if
you are anticipating a quick sale by us. See "Business of Citizens."
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in the Holding Company's articles of incorporation, the
corporation law of the state of Indiana, and certain federal regulations may
make it difficult and expensive to pursue a tender offer, change in control or
takeover attempt which we oppose. As a result, shareholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current board of directors or
management of the Holding Company, or the appointment of new directors to the
Board, more difficult. For example, the Holding Company's Bylaws provide that
directors must be residents of Clinton County, Indiana, must have maintained a
deposit or loan relationship with us for at least 12 months and, with respect to
a non-employee director, must have served as a member of a civic or community
organization in Clinton County for at least 12 months in the five-year period
prior to being nominated to the Board. Further restrictions include:
restrictions on the acquisition of the Holding Company's equity securities and
limitations on voting rights; the classification of the terms of the members of
the board of directors; certain provisions relating to meetings of shareholders;
denial of cumulative voting by shareholders in the election of directors; the
issuance of preferred stock and additional shares of Common Stock without
shareholder approval; and super majority provisions for the approval of certain
business combinations. These provisions may reduce the trading price of our
stock. See "Restrictions on Acquisition of the Holding Company."
Possible Voting Control by Directors and Officers
Our directors and executive officers intend to subscribe for 170,000
shares of Common Stock which, at the midpoint of the Estimated Valuation Range,
would constitute 21.25% of the outstanding shares. When aggregated with the
shares of Common Stock our executive officers and directors expect to acquire
through the Stock Option Plan and RRP, our executive officers and directors
would own approximately 256,800 shares of Common Stock, or 29.8% of the
outstanding shares at the midpoint of the Estimated Valuation Range. This
<PAGE>
ownership of Common Stock by our management could make it difficult to obtain
majority support for shareholder proposals which are opposed by management. In
addition, our management would be able to block the approval of transactions or
actions (i.e., business combinations and amendment to our articles of
incorporation and bylaws) requiring the approval of 80% of the shareholders
under the Holding Company's articles of incorporation. See "Proposed Purchases
by Directors and Executive Officers," "Executive Compensation and Related
Transactions of Citizens," "Description of Capital Stock," and "Restrictions on
Acquisition of the Holding Company."
Possible Dilutive Effect of RRP and Stock Options
If the Conversion is completed and shareholders approve the RRP and
Stock Option Plan, we intend to issue shares to our officers and directors
through these plans. If the shares for the RRP are issued from our authorized
but unissued stock, your ownership percentage could be diluted by up to
approximately 3.9%. If the shares for the Stock Option Plan are issued from our
authorized by unissued stock, your ownership percentage could be diluted by up
to approximately 3.3% at the midpoint of the Estimated Valuation Range. In
either case, the trading price of our Common Stock may be reduced. See "Pro
Forma Data" and "Executive Compensation and Related Transactions of Citizens."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation (the "FDIC"). A bill has been introduced in the Congress that would
consolidate the OTS with the Office of the Comptroller of the Currency. If this
statute is approved we could be forced to become a state or national commercial
bank, and become subject to regulation by a different government agency. If we
become a commercial bank, our investment authority and the ability of the
Holding Company to engage in diversified activities, including the real estate
development activities of CLSC, may be limited or prohibited, which could affect
our profitability. It is impossible at this time to predict the impact of any
such legislation on our operations. See "Regulation."
Restrictions on Repurchase of Shares
During the first year following the Conversion, the Holding Company may
not generally repurchase its shares except in unusual circumstances as permitted
by the OTS. During each of the second and third years following the Conversion,
the Holding Company may repurchase up to 5% of its outstanding shares. During
those periods, if we decide that repurchases above those limits would be a good
use of funds, we would not be able to do so, without obtaining OTS approval.
There is no assurance that OTS approval would be given. See "The Conversion --
Restrictions on Repurchase of Stock by the Holding Company."
Competition
We experience strong competition in our local market area in both
originating loans and attracting deposits, primarily from commercial banks,
thrifts and credit unions. Such competition may limit our growth in the future.
See "Competition."
Geographic Concentration of Loans
Nearly all of our real estate mortgage loans are secured by properties
located in Indiana, mostly in Clinton County. A weakening in the local real
estate market or in the local or national economy, or a reduction in the
workforce at the manufacturing facilities in the area could result in an
increase in the number of borrowers who default on their loans and a reduction
in the value of the collateral securing the loans, which could reduce our
earnings.
Risk of Delayed Offering
Although we expect to complete the Conversion within the time periods
indicated in this Prospectus, it is possible that adverse market, economic or
other factors could significantly delay the completion of the Conversion, which
could significantly increase our Conversion costs. In this case, however, you
would have the right to modify or rescind your subscription and to have your
subscription funds returned to you promptly, with interest. See "The
Conversion."
Income Tax Consequences of Subscription Rights
If the Internal Revenue Service were to determine that the subscription
rights offered to you in connection with the Conversion have an ascertainable
value, your exercise of your subscription rights could result in the recognition
of taxable income. In the opinion of Keller & Company, Inc. ("Keller"), however,
the subscription rights do not have an ascertainable fair market value. See "The
Conversion -- Principal Effects of Conversion - Tax Effects."
<PAGE>
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the approximate purchases of Common
Stock by each director and executive officer and their Associates in the
Conversion. All shares will be purchased for investment purposes and not for
purposes of resale. The table assumes that 800,000 shares (the midpoint of the
Estimated Value Range) of the Common Stock will be sold at $10.00 per share and
that sufficient shares will be available to satisfy subscriptions.
<TABLE>
<CAPTION>
Aggregate Total
Price of Shares Proposed
Intended to be Subscribed Percent
Name Position Purchases For (1) of Shares
<S> <C> <C> <C> <C>
Robert F. Ayres Director $ 50,000 5,000 .625%
Fred W. Carter Director, President and 200,000 20,000 2.5
Chief Executive Officer
Perry W. Lewis Director 200,000 20,000 2.5
John J. Miller Director 300,000 30,000 3.75
Billy J. Wray Director 200,000 20,000 2.5
Ralph C. Hinshaw Advisory Director 200,000 20,000 2.5
Rawl V. Ransom Advisory Director 100,000 10,000 1.25
All Other Executive 450,000 45,000 5.625
Officers ---------- ------- ------
All Directors and $1,700,000 170,000 21.25%
Executive Officers ========== ======= ======
as a group (10 persons)(2)
</TABLE>
(1) Does not include shares subject to stock options which may be granted
under the Stock Option Plan, or shares which may be awarded under the
RRP.
(2) Assuming that all shares awarded under the RRP are purchased on the
open market and upon (i) the full vesting of the restricted stock
awards to directors and executive officers contemplated under the RRP
and (ii) the exercise in full of all options expected to be granted to
directors and executive officers under the Stock Option Plan, all
directors and executive officers as a group would beneficially own
243,780 shares (33.3%), 256,800 shares (29.8%), 269,820 shares (27.2%),
and 284,793 shares (25.0%) upon sales at the minimum, midpoint,
maximum, and 15% above the maximum of the Estimated Valuation Range,
respectively. See "Executive Compensation and Related Transactions of
Citizens -- RRP," "-- Stock Option Plan."
CITIZENS BANCORP
The Holding Company was formed in June, 1997 as an Indiana corporation
to be the holding company for Citizens. The Holding Company has not engaged in
any significant business to date and, for that reason, its financial statements
are not included herein. The Holding Company has received approval from the OTS
to become a savings and loan holding company through the acquisition of all of
the capital stock of Citizens to be issued upon completion of the Conversion.
The Holding Company will initially receive 50% of the net Conversion
proceeds, after providing for the loan to the Holding Company's ESOP to permit
the ESOP to purchase shares in the Conversion. The holding company structure
will provide the Holding Company with greater flexibility than Citizens to
diversify its business activites, either through newly-formed subsidiaries or
through acquisitions. The Holding Company has no present plans regarding
diversification, acquisitions or expansion, however. The Holding Company
initially will not conduct any active business and does not intend to employ any
persons other than its officers, although it may utilize our support staff from
time to time.
The office of the Holding Company is located at 60 South Main Street,
P.O. Box 635, Frankfort, Indiana, 46041. The telephone number is (765) 654-8533.
CITIZENS SAVINGS BANK OF FRANKFORT
We were originally organized as a state-chartered building and loan
association in 1916 and have operated since then as an independent,
community-oriented savings association. In 1997, we converted to a federal
charter, retaining our name "Citizens Savings Bank of Frankfort." We currently
conduct our business from a full-service office located in Frankfort, which is
located in Clinton County, Indiana. We believe that we have developed a solid
reputation among our loyal customer base because of our commitment to personal
service and our strong support of the local community. We offer a variety of
lending, deposit and other financial services to our retail and commercial
customers.
<PAGE>
We attract deposits from the general public and originate mortgage
loans, most of which are secured by one- to four-family residential real
property in Clinton County. We also offer multi-family loans, construction
loans, non-residential real estate loans, home equity loans and consumer loans,
including single-pay loans, loans secured by deposits, and installment loans. We
derive most of our funds for lending from deposits of our customers, which
consists primarily of certificates of deposit, demand accounts and savings
accounts.
We have maintained a relatively strong capital position by focusing on
residential real estate mortgage lending in Clinton County, Indiana. At March
31, 1997, we had total assets of $45.2 million, deposits of $37.3 million and
retained income of $5.6 million, or 12.3% of assets. For the fiscal year ended
June 30, 1996, we had net income of $479,000, a return on assets of 1.2% and a
return on equity of 9.5%. We have historically experienced very few asset
quality problems in our total loan portfolio, and at March 31, 1997, our ratio
of non-performing assets to total assets was .45%. During the fiscal year ended
June 30, 1996, we recovered $12,000 of loans previously charged off and did not
charge off any additional loans.
MARKET AREA
Our primary market area is Clinton County, Indiana. Frankfort, the county
seat of Clinton County, is located in central Indiana, approximately 48 miles
northwest of Indianapolis and 23 miles southeast of Lafayette, Indiana.
According to the U.S. Bureau of Census, the city of Frankfort had a population
of 14,754, and Clinton County had a population of 30,974, at the time of the
1990 census.
According to the Indiana Department of Workforce Development, the total
work force in Clinton County was 15,470 as of January, 1997. As of the same
date, 14,960 persons were employed, resulting in an unemployment rate for
Clinton County of approximately 3.3%. As of the same date, the unemployment rate
for Indiana was 3.4%, and the nationwide unemployment rate was 5.0%. According
to the Bureau of the Census-County Business Patterns, approximately 31.1% of the
jobs in Citizens' market area were in the manufacturing sector, approximately
27.5% of the jobs were in the services industry and approximately 18.5% were in
the wholesale/retail sector. Other significant employer groups in Citizens'
market area include agriculture/mining and construction, each with approximately
7% of the work force.
Clinton County's largest employers are Mallory Controls and Federal
Mogul, each with approximately700 employees, and Frito-Lay, which employs
approximately 1,300 persons in two plants.
According to the Data Users Center and the CACI Sourcebook, average per
capita income for residents of Clinton County totaled $14,535 for 1996, compared
to $16,738 for the United States and $15,275 for Indiana. The 1996 average per
capita income for Clinton County residents, however, increased nearly 23% from
the average per capita income of $11,849 for 1990. Median household income for
residents of Clinton County totaled $32,305 for 1996, compared to $26,148 for
1990. Median household income for the United States and Indiana totaled $34,530
and $32,816, respectively, for 1996.
According to the United States Department of Commerce and the CACI
Sourcebook, median housing values for Clinton County and Frankfort in 1990 were
$40,700 and $36,100, respectively. This compares to the national and state
medians of $79,100 and $53,500, respectively.
USE OF PROCEEDS
The Holding Company will retain 50% of the net proceeds from the
offering, after taking into account a loan to the ESOP, and will use the balance
of the proceeds to purchase all of the capital stock issued by Citizens in
connection with the Conversion. A portion of the net proceeds to be retained by
the Holding Company will be loaned to our employee stock plan to fund its
purchase of 8% of the shares of the Holding Company sold in the Conversion. On a
short-term basis, the balance of the net proceeds retained by the Holding
Company initially may be invested in short-term investments. The Holding Company
may also use the proceeds as a source of funds for the payment of dividends to
shareholders or for the repurchase of shares of Common Stock. The Holding
Company will not take any action in furtherance of an extraordinary capital
distribution during the year following the Conversion.
Citizens intends to use a portion of the net proceeds that it receives
from the Holding Company to make adjustable- and fixed-rate mortgage loans,
nonresidential real estate loans and consumer loans to the extent there is
demand for such loans and subject to market conditions. Citizens may also use a
portion of the net proceeds to fund the purchase of 4% of the shares for the RRP
which we anticipate will be adopted by our Board following the Conversion,
subject to shareholder approval, and to repay some or all of its borrowings from
the FHLB of Indianapolis. We anticipate that the balance of the proceeds will be
used to purchase loan participations and possibly mortgage-backed securities in
the secondary market. On an interim basis, we may use some of the net proceeds
to invest in U.S. government securities and other federal agency securities. See
"Business of Citizens -- Investments."
<PAGE>
The following table shows estimated gross and net proceeds based upon
shares of Common Stock being sold in the Conversion at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range.
<TABLE>
<CAPTION>
15% Above
Minimum, Midpoint, Maximum, Maximum,
680,000 800,000 920,000 1,058,000
Shares Shares Shares Shares
Sold at Price Sold at Price Sold at Price Sold at Price
of $10.00 of $10.00 of $10.00 of $10.00(2)
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Gross Proceeds.......................... $6,800 $8,000 $9,200 $10,580
Less:
Estimated Underwriting Commissions
and Other Expenses(1) (2)............ 433 450 467 486
------ ------ ------ -------
Estimated net Conversion
proceeds(1).......................... $6,367 $7,550 $8,733 $10,094
====== ====== ====== =======
</TABLE>
(1) In calculating estimated net Conversion proceeds, it has been assumed that
no sales will be made through selected dealers, that all shares are sold in
the Subscription Offering, that executive officers and directors of
Citizens and their Associates purchase 170,000 shares of Common Stock in
the Conversion, and that the ESOP acquires 8% of the shares of Common Stock
issued in the Conversion.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering and the Community Offering, if
any.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the Conversion,
commissions paid for sales made through other dealers, and the actual number of
shares of Common Stock sold in the Conversion. Any variance in the actual net
proceeds from the estimates provided in the table above is not expected to be
material.
DIVIDENDS
Although no decision has been made yet regarding the payment of
dividends, the Holding Company may consider a policy of paying cash dividends on
the Common Stock following the Conversion. Dividends, when and if paid, will be
subject to determination and declaration by the Board of Directors in its
discretion, which will take into account the Holding Company's consolidated
financial condition and results of operations, tax considerations, industry
standards, economic conditions, capital levels, regulatory restrictions on
dividend payments by us to the Holding Company, general business practices and
other factors. See "Regulation -- Savings Association Regulatory Capital" and
"-- Dividend Limitations."
The Holding Company is not subject to OTS regulatory restrictions on
the payment of dividends to its shareholders although the source of such
dividends will depend in part upon the receipt of dividends from us. The Holding
Company is subject, however, to the requirements of Indiana law, which generally
limit the payment of dividends to amounts that will not affect the ability of
the Holding Company, after the dividend has been distributed, to pay its debts
in the ordinary course of business and will not exceed the difference between
the Holding Company's total assets and total liabilities plus preferential
amounts payable to shareholders with rights superior to those of the holders of
Common Stock.
In addition to the foregoing, the portion of our earnings which has
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to the Holding Company
without the payment of federal income taxes by us at the then current income tax
rate on the amount deemed distributed, which would include the amount of any
federal income taxes attributable to the distribution. See "Taxation -- Federal
Taxation" and Note 9 to the Consolidated Financial Statements. The Holding
Company does not contemplate any distribution by us that would result in a
recapture of our bad debt reserve or otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
The Holding Company has never issued Common Stock to the public.
Consequently, there is no established market for the Common Stock. The Holding
Company intends to list the Common Stock over-the-counter through the OTC
<PAGE>
"Electronic Bulletin Board," and the Holding Company intends to request that
Trident Securities Inc. ("Trident Securities") undertake to match offers to buy
and offers to sell the Common Stock. Trident Securities has no obligation to
match offers to buy and offers to sell and may cease doing so at any time. There
can be no assurance that timely or accurate quotations will be available on the
OTC "Electronic Bulletin Board." In addition, the existence of a public trading
market will depend upon the presence in the market of both willing buyers and
willing sellers at any given time. The presence of a sufficient number of buyers
and sellers at any given time is a factor over which neither the Holding Company
nor any broker or dealer has control. Due to the relatively small number of
shares of Common Stock being offered in the Conversion and the concentration of
ownership, it is unlikely that an active or liquid trading market for the Common
Stock will be developed and be maintained. Further, the absence of an active and
liquid trading market may make it difficult to sell the Common Stock and may
have an adverse effect on the price of the Common Stock. Purchasers should
consider the potentially illiquid and long-term nature of their investment in
the shares offered hereby.
The aggregate price of the Common Stock is based upon an independent
appraisal of the pro forma market value of the Common Stock. However, there can
be no assurance that an investor will be able to sell the Common Stock purchased
in the Conversion at or above the Purchase Price.
COMPETITION
We originate most of our loans to and accept most of our deposits from
residents of Clinton County, Indiana. We are 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 Clinton County with significantly larger
resources than are available to us. In total, there are five other financial
institutions located in Clinton County. We also compete with money market funds
with respect to deposit accounts and with insurance companies with respect to
individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. We compete for loan
originations primarily through the efficiency and quality of the services that
we provide borrowers and through interest rates and loan fees charged.
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 we cannot readily predict.
CAPITALIZATION
The following table presents our historical capitalization at March 31,
1997, and the pro forma consolidated capitalization of the Holding Company as of
that date, giving effect to the sale of Common Stock offered by this Prospectus
based on the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, and subject to the other assumptions set forth below.
The pro forma data set forth below may change significantly at the time the
Holding Company completes the Conversion due to, among other factors, a change
in the Estimated Valuation Range or a change in the current estimated expenses
of the Conversion. If the Estimated Valuation Range changes so that between
680,000 and 1,058,000 shares are not sold in the Conversion, subscriptions will
be returned to subscribers who do not affirmatively elect to continue their
subscriptions during the offering at the revised Estimated Valuation Range.
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Holding Company
Capitalization Based on Sale of
680,000 800,000 920,000 1,058,000
Shares Shares Shares Shares
Sold at Sold at Sold at Sold at
Citizens Price of Price of Price of Price of
Historical $10.00 $10.00 $10.00 $10.00 (6)
---------- ------ ------ ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1)..................................... $37,255 $37,255 $37,255 $37,255 $37,255
Federal Home Loan Bank advances.................. $ 2,000 $ --- $ --- $ --- $ ---
Capital and retained earnings:
Preferred stock, without par
value, 2,000,000 shares
authorized, none issued....................... $ --- $ --- $ --- $ --- $ ---
Common Stock, without par
value, 5,000,000 shares
authorized; indicated number
of shares assumed outstanding (2) ............ --- 6,367 7,550 8,733 10,094
Additional paid in capital..................... --- --- --- --- ---
Retained earnings and net unrealized losses
on securities available for sale (3)......... 5,564 5,564 5,564 5,564 5,564
Common Stock acquired by ESOP(4) ................ --- (544) (640) (736) (846)
Common Stock acquired by the RRP (5)........... --- (272) (320) (368) (423)
-------- ------- ------- ------- -------
Total capital and retained earnings.............. $ 5,564 $11,115 $12,154 $13,193 $14,388
======== ======= ======= ======= =======
</TABLE>
(1) Excludes accrued interest. Withdrawals from deposit accounts for the
purchase of Common Stock are not reflected. Such withdrawals will reduce
pro forma deposits by the amount thereof.
(2) The number of shares to be issued in the Conversion may be increased or
decreased based on market and financial conditions prior to the completion
of the Conversion. Assumes estimated expenses of $433,400, $450,000,
$466,600 and $485,600 at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively. See "Use of
Proceeds."
(3) Retained earnings are substantially restricted. See Note 9 to Citizens'
Consolidated Financial Statements. See also "The Conversion -- Principal
Effects of Conversion -- Effect on Liquidation Rights." Retained earnings
do not reflect the federal income tax consequences of the restoration to
income of Citizens' special bad debt reserve for income tax purposes which
would be required in the unlikely event of a liquidation or if a
substantial portion of retained earnings were otherwise used for a purpose
other than absorption of bad debt losses and will be required as to
post-1987 reserves under a recently enacted law. See "Taxation -- Federal
Taxation." Equity capital includes retained earnings decreased by net
unrealized losses on securities available for sale.
(4) Assumes purchases by the ESOP of a number of shares equal to 8% of the
shares issued in the Conversion. The funds used to acquire the ESOP shares
will be borrowed from the Holding Company. See "Use of Proceeds." Citizens
intends to make contributions to the ESOP sufficient to service and
ultimately retire its debt. The Common Stock acquired by the ESOP is
reflected as a reduction of shareholders' equity. See "Executive
Compensation and Related Transactions of Citizens -- Employee Stock
Ownership Plan and Trust."
(5) Assuming the receipt of shareholder approval, the Holding Company intends
to implement the RRP. Assuming such implementation, the RRP will purchase
an amount of shares equal to 4% of the Common Stock sold in the Conversion
for issuance to directors and officers of the Holding Company and Citizens.
Such shares may be purchased from authorized but unissued shares or on the
open market. The Holding Company currently intends that the RRP will
purchase the shares on the open market. Under the terms of the RRP,
assuming it is adopted within one year of the Conversion, shares will vest
at the rate of 20% per year. The Common Stock to be purchased by the RRP
represents unearned compensation and is, accordingly, reflected as a
reduction to pro forma shareholders' equity. As shares of the Common Stock
granted pursuant to the RRP vest, a corresponding reduction in the charge
against capital will occur. In the event that authorized but unissued
shares are acquired, the interests of existing shareholders will be
diluted. Assuming that 800,000 shares of Common Stock, the midpoint of the
Estimated Valuation Range, are issued in the Conversion and that all awards
under the RRP are from authorized but unissued shares, the Holding Company
estimates that the per share book value for the Common Stock would be
diluted $.60 per share, or 3.85% on a pro forma basis as of March 31, 1997,
at the midpoint of the Estimated Valuation Range. The dilution would be
$.64 per share (3.85%) and $.57 per share (3.85%) at the minimum and
maximum levels, respectively, of the Estimated Valuation Range on a pro
forma basis as of March 31, 1997.
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering and Community Offering, if any.
<PAGE>
PRO FORMA DATA
The following table sets forth the pro forma combined consolidated net
income of the Holding Company for the nine months ended March 31, 1997 and for
the year ended June 30, 1996 as though the Conversion offering had been
consummated at the beginning of those periods, respectively, and the investable
net proceeds had been invested at 6.02% for the nine months ended March 31, 1997
and 5.74% for the year ended June 30, 1996 (the "risk free" interest rate
available on 1-year U.S. Treasury Bills as of these respective periods end). The
pro forma after-tax return for the Holding Company on a consolidated basis is
assumed to be 3.61% for the nine months ended March 31, 1997 and 3.44% for the
year ended June 30, 1996, after giving effect to (i) the yield on investable net
proceeds from the Conversion offering and (ii) adjusting for taxes using a
federal statutory tax rate of 34% and a net state statutory income tax rate of
6%. Historical and per share amounts have been calculated by dividing historical
amounts and pro forma amounts by the indicated number of shares of Common Stock
assuming that such number of shares had been outstanding during each of the
entire periods.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of the Holding Company computed
in accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, or the
amounts, if any, that would be available for distribution to shareholders in the
event of liquidation. See "The Conversion -- Principal Effects of Conversion --
Effect on Liquidation Rights." Book value also does not reflect the federal
income tax consequences of the restoration to income of our special bad debt
reserves for income tax purposes, which would be required in the unlikely event
of liquidation or if a substantial portion of retained earnings were otherwise
used for a purpose other than abosorption of bad debt losses. See "Taxation --
Federal Taxation." Pro forma book value includes only net proceeds from the
Conversion offering as though it occurred as of the indicated dates and does not
include earnings on the proceeds for the periods then ended.
The pro forma net income derived from the assumptions set forth above
should not be considered indicative of the actual results of operations of the
Holding Company that would have been attained for any period if the Conversion
had been actually consummated at the beginning of such periods and the
assumptions regarding investment yields should not be considered indicative of
the actual yield expected to be achieved during any future period. The pro forma
book values at the dates indicated should not be considered as reflecting the
potential trading value of the Holding Company's stock. There can be no
assurance that an investor will be able to sell the Common Stock purchased in
the Conversion at prices within the range of the pro forma book values of the
Common Stock or at or above the Purchase Price.
<PAGE>
<TABLE>
<CAPTION>
680,000 Shares 800,000 Shares 920,000 Shares
Sold at Sold at Sold at
$10.00 Per Share $10.00 Per Share $10.00 Per Share
Nine Months Year Nine Months Year Nine Months Year
ended ended ended ended ended ended
3/31/97 6/30/96 3/31/97 6/30/96 3/31/97 6/30/96
------- ------- ------- ------- ------- -------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Gross proceeds........................... $ 6,800 $ 6,800 $ 8,000 $ 8,000 $ 9,200 $ 9,200
Less offering expenses .................. (433) (433) (450) (450) (467) (467)
------- ------- ------- -------- ------- -------
Estimated net conversion proceeds (2) ... 6,367 6,367 7,550 7,550 8,733 8,733
Less:
Common Stock acquired
by ESOP (3) ........................ (544) (544) (640) (640) (736) (736)
Common Stock acquired
by the RRP (4) ..................... (272) (272) (320) (320) (368) (368)
------- ------- ------- -------- ------- -------
Investable net proceeds ................. $ 5,551 $ 5,551 $ 6,590 $ 6,590 $ 7,629 $ 7,629
======= ======= ======= ======== ======= =======
Consolidated net income:
Historical ............................ $ 244 $ 479 $ 244 $ 479 $ 244 $ 479
Pro forma income on investable
net proceeds (5) ..................... 150 191 179 227 207 263
Pro forma ESOP adjustment (3) ......... (24) (33) (29) (38) (33) (44)
Pro forma RRP adjustment (4) ............ (24) (33) (29) (38) (33) (44)
------- ------- ------- -------- ------- -------
Pro forma net income .................. $ 346 $ 604 $ 365 $ 630 $ 385 $ 654
======= ======= ======= ======== ======= =======
Consolidated earnings per share (7)(8):
Historical ............................ $ 0.39 $ 0.76 $ 0.33 $ 0.65 $ 0.29 $ 0.56
Pro forma income on investable
net proceeds ......................... 0.24 0.31 0.24 0.31 0.24 0.31
Pro forma ESOP adjustment (3) ......... (0.04) (0.05) (0.04) (0.05) (0.04) (0.05)
Pro forma RRP adjustment (4) .......... (0.04) (0.05) (0.04) (0.05) (0.04) (0.05)
------- ------- ------- -------- ------- -------
Pro forma earnings per share .......... $ 0.55 $ 0.97 $ 0.49 $ 0.86 $ 0.45 $ 0.77
======= ======= ======= ======== ======= =======
Consolidated book value (6) :
Historical ............................ $ 5,564 $ 5,269 $ 5,564 $ 5,269 $ 5,564 $ 5,269
Estimated net conversion proceeds (2) . 6,367 6,367 7,550 7,550 8,733 8,733
Less:
Common Stock acquired
by ESOP (3) ........................ (544) (544) (640) (640) (736) (736)
Common Stock acquired
by the RRP (4) ..................... (272) (272) (320) (320) (368) (368)
------- ------- ------- -------- ------- -------
Pro forma book value .................. $ 11,115 $ 10,820 $ 12,154 $ 11,859 $ 13,193 $ 12,898
======= ======= ======= ======== ======= =======
Consolidated book value per share(8):
Historical ............................ $ 8.18 $ 7.75 $ 6.96 $ 6.59 $ 6.05 $ 5.73
Estimated net conversion proceeds
per share ............................ 9.36 9.36 9.44 9.44 9.49 9.49
Less:
Common Stock acquired
by the ESOP (3) .................... (0.80) (0.80) (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by the RRP (4) ..................... (0.40) (0.40) (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------- ------- -------
Pro forma book value per share ........ $ 16.34 $ 15.91 $ 15.20 $ 14.83 $ 14.34 $ 14.02
======= ======= ======= ======== ======= =======
Offering price as a percentage of pro
forma book value per share ............ 61.22% 62.89% 65.78% 67.46% 69.73% 71.38%
======= ======= ======= ======== ======= =======
Ratio of offering price to pro forma
earnings per share .................... 18.18x 10.31x 20.41x 11.63x 22.22x 12.98x
======= ======= ======= ======== ======= =======
Number of shares used in
calculating EPS (7) ................... 631,040 631,040 742,400 742,400 853,760 853,760
======= ======= ======= ======== ======= =======
Number of shares used in
calculating book value per share ...... 680,000 680,000 800,000 800,000 920,000 921,000
======= ======= ======= ======== ======= =======
</TABLE>
<PAGE>
1,058,000 Shares (1)
Sold at
$10.00 Per Share
Nine Months Year
ended ended
3/31/97 6/30/96
------- -------
Gross proceeds........................... $ 10,580 $ 10,580
Less offering expenses .................. (486) (486)
--------- ---------
Estimated net conversion proceeds (2) ... 10,094 10,094
Less:
Common Stock acquired
by ESOP (3) ........................ (846) (846)
Common Stock acquired
by the RRP (4) ..................... (423) (423)
--------- ---------
Investable net proceeds ................. $ 8,825 $ 8,825
========= =========
Consolidated net income:
Historical ............................ $ 244 $ 479
Pro forma income on investable
net proceeds (5) ..................... 239 304
Pro forma ESOP adjustment (3) ......... (38) (51)
Pro forma RRP adjustment (4) ............ (38) (51)
--------- ---------
Pro forma net income .................. $ 407 $ 681
========= =========
Consolidated earnings per share (7)(8):
Historical ............................ $ 0.25 $ 0.49
Pro forma income on investable
net proceeds ......................... 0.24 0.32
Pro forma ESOP adjustment (3) ......... (0.04) (0.05)
Pro forma RRP adjustment (4) .......... (0.04) (0.05)
--------- ---------
Pro forma earnings per share .......... $ 0.41 $ 0.71
========= =========
Consolidated book value (6) :
Historical ............................ $ 5,564 $ 5,269
Estimated net conversion proceeds (2) . 10,094 10,094
Less:
Common Stock acquired
by ESOP (3) ........................ (846) (846)
Common Stock acquired
by the RRP (4) ..................... (423) (423)
--------- ---------
Pro forma book value .................. $ 14,389 $ 14,094
========= =========
Consolidated book value per share(8):
Historical ............................ $ 5.26 $ 4.98
Estimated net conversion proceeds
per share ............................ 9.54 9.54
Less:
Common Stock acquired
by the ESOP (3) .................... (0.80) (0.80)
Common Stock acquired
by the RRP (4) ..................... (0.40) (0.40)
--------- ---------
Pro forma book value per share ........ $ 13.60 $ 13.32
========= =========
Offering price as a percentage of pro
forma book value per share ............ 73.53% 75.07%
========= =========
Ratio of offering price to pro forma
earnings per share .................... 24.39x 14.08x
========= =========
Number of shares used in
calculating EPS (7) ................... 981,824 981,824
========= =========
Number of shares used in
calculating book value per share ...... 1,058,000 1,058,000
========= =========
(Footnotes on following page.)
<PAGE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up
to 15% to reflect changes in market and financial conditions following
commencement of the Subscription Offering and the Community Offering,
if any.
(2) See "Use of Proceeds" for assumptions utilized to determine the
investable net proceeds of the sale of Common Stock.
(3) It is assumed that 8% of the shares of Common Stock issued in the
Conversion will be purchased by the ESOP. The funds used to acquire the
ESOP shares will be borrowed by the ESOP from the Holding Company (see
"Use of Proceeds"). Citizens intends to make annual contributions to
the ESOP in an amount at least equal to the principal and interest
requirements on the debt. Citizens' total annual expense in payment of
the ESOP debt is based upon 10 equal annual installments of principal
with an assumed tax benefit of 40%. The pro forma net income assumes:
(i) Citizens' total contributions are equivalent to the debt service
requirement for the year, and (ii) the effective tax rate applicable to
the debt was 40%. Expense for the ESOP will be based on the number of
shares committed to be released to participants for the year at the
average market value of the shares during the year. Accordingly,
Citizens' total annual expense in payment of the ESOP for such years
may be higher than that discussed above. The loan to the ESOP is
reflected as a reduction of shareholders' equity.
(4) Assuming the receipt of shareholder approval, the Holding Company
intends to implement the RRP. Assuming such implementation, the RRP
will purchase an amount of shares equal to 4% of the Common Stock sold
in the Conversion for issuance to directors and officers of the Holding
Company and Citizens. Such shares may be purchased from authorized but
unissued shares or on the open market. The Holding Company currently
intends that the RRP will purchase the shares on the open market, and
the estimated net Conversion proceeds have been reduced for the
purchase of the shares in determining estimated proceeds available for
investment. Under the terms of the RRP, if it is adopted within one
year of the Conversion, shares will vest at the rate of 20% per year. A
tax benefit of 40% has been assumed. The Common Stock to be purchased
by the RRP represents unearned compensation and is, accordingly,
reflected as a reduction to pro forma shareholders' equity. As shares
of the Common Stock granted pursuant to the RRP vest, a corresponding
reduction in the charge against capital will occur. In the event that
authorized but unissued shares are acquired by the RRP, the interests
of existing shareholders will be diluted. Assuming that 800,000 shares
of Common Stock are issued in the Conversion, the midpoint of the
Estimated Valuation Range, and that all awards under the RRP are from
authorized but unissued shares, the Holding Company estimates that the
per share book value for the Common Stock would be diluted $.60 per
share, or 3.85% on a pro forma basis as of March 31, 1997, at the
midpoint of the Estimated Valuation Range. The dilution would be $.64
per share (3.85%) and $.57 per share (3.85%) at the minimum and maximum
levels, respectively, of the Estimated Valuation Range on a pro forma
basis as of March 31, 1997.
(5) Assuming investable net proceeds had been invested since the beginning
of the period at 6.02% for the nine months ended March 31, 1997 and
5.74% for the year ended June 30, 1996 (the "risk free" interest rate
available on 1-year U.S. Treasury Bills as of these respective dates)
and an assumed effective tax rate of 40%.
(6) Book value represents the excess of assets over liabilities. The effect
of the liquidation account is not reflected in these computations. (For
additional information regarding the liquidation account, see "The
Conversion -- Principal Effects of Conversion -- Effect on Liquidation
Rights.")
(7) The number of shares used in calculating earnings per share was
calculated using the indicated number of shares sold reduced by the
assumed number of ESOP shares that would be unallocated at the end of
the first allocation period. Allocation of ESOP shares is assumed to
occur on the first day of the fiscal year.
(8) Assuming the receipt of shareholder approval at a meeting of the
Holding Company's shareholders held at least six months following the
Conversion, the Holding Company intends to implement the Stock Option
Plan. Assuming such implementation, Common Stock in an aggregate amount
equal to 10% of the shares issued in the Conversion will be reserved
for issuance by the Holding Company upon the exercise of the stock
options granted under the Stock Option Plan. No effect has been given
to the shares of Common Stock reserved for issuance under the Stock
Option Plan. Upon the exercise of stock options granted under the Stock
Option Plan, the interest of existing shareholders will be diluted. The
Holding Company estimates that the per share book value for the Common
Stock would be diluted $.51 per share, or 3.26% on a pro forma basis as
of March 31, 1997, assuming the issuance of 800,000 shares in the
Conversion, the midpoint of the Estimated Valuation Range, and the
exercise of 80,000 options at an exercise price of $10.00 per share.
This dilution further assumes that the shares will be issued from
authorized, but unissued, shares. The dilution would be $.71 per share
(4.24%) and $.38 per share (2.57%) at the minimum and maximum levels,
respectively, of the Estimated Valuation Range on a pro forma basis as
of March 31, 1997.
Regulatory Capital Compliance
The following table compares our historical and pro forma regulatory
capital levels as of March 31, 1997 to our capital requirements after giving
effect to the Conversion.
<TABLE>
<CAPTION>
At March 31, 1997
Pro Forma Capital Based on Sale of
680,000 Shares 800,000 Shares 920,000 Shares 1,058,000 Shares
Citizens Sold at Price of Sold at Price of Sold at Price of Sold at Price of
Historical $10.00 $10.00 $10.00 $10.00
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Equity capital based upon
generally accepted
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
accounting principles........ $5,564 12.6% $8,476 19.2% $9,019 20.4% $9,563 21.6% $10,188 23.0%
====== === ====== ==== ====== ==== ====== ==== ======== ====
Tangible capital :
Historical or
pro forma.................. $4,529 10.2% $7,441 16.8% $7,984 18.0% $8,528 19.3% $ 9,153 20.7%
Required..................... 664 1.5 736 1.5 754 1.5 772 1.5 793 1.5
------ --- ------ ---- ------ ---- ------ ---- -------- ----
Excess..................... $3,865 8.7% $6,705 15.3% $7,230 16.5% $7,756 17.8% $ 8,360 19.2%
====== === ====== ==== ====== ==== ====== ==== ======== ====
Core capital :
Historical or
pro forma ................. $4,529 10.2% $7,441 16.8% $7,984 18.0% $8,528 19.3% $ 9,153 20.7%
Required..................... 1,328 3.0 1,472 3.0 1,508 3.0 1,544 3.0 1,585 3.0
------ --- ------ ---- ------ ---- ------ ---- -------- ----
Excess..................... $3,201 7.2% $5,969 13.8% $6,476 15.0% $6,984 16.3% $ 7,568 17.7%
====== === ====== ==== ====== ==== ====== ==== ======== ====
Risk-based capital:
Historical or
pro forma ................. $4,701 17.9% $7,613 27.7% $8,156 29.4% $8,700 31.1% $ 9,325 33.0%
Required..................... 2,098 8.0 2,200 8.0 2,219 8.0 2,238 8.0 2,260 8.0
------ --- ------ ---- ------ ---- ------ ---- -------- ----
Excess..................... $2,603 9.9% $5,413 19.7% $5,937 21.4% $6,462 23.1% $ 7,065 25.0%
====== === ====== ==== ====== ==== ====== ==== ======== ====
</TABLE>
- ----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up
to 15% to reflect changes in market and financial conditions following
commencement of the Subscription Offering and the Community Offering,
if any.
(2) Tangible and core capital levels are shown as a percentage of total
assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(3) Pro forma risk-based capital amounts and percentages assume net
proceeds have been invested in 20% risk-weighted assets. Computation of
ratios are based on historical adjusted total assets of $44,262,000 and
risk-weighted assets of $26,221,000.
(4) Historical tangible and core capital represent equity capital minus the
investment in Citizens Loan and Service Corp. of $1,043,000, which is
non-includable for regulatory capital purposes, plus non-withdrawable
deposit accounts of $8,000 which are includable.
<PAGE>
THE CONVERSION
THE BOARDS OF DIRECTORS OF CITIZENS AND THE HOLDING COMPANY AND THE OTS
HAVE APPROVED THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY OUR MEMBERS AT A
SPECIAL MEETING OF MEMBERS, AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL, HOWEVER, DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS.
General
On April 9, 1997, our Board of Directors adopted a Plan of Conversion
(the "Plan") pursuant to which we will convert from a federal mutual savings
bank to a federal stock savings bank, and become a wholly-owned subsidiary of
the Holding Company. The Conversion will include adoption of the proposed
Federal Stock Charter and Bylaws which will authorize the issuance of capital
stock by us. Under the Plan, our capital stock is being sold to the Holding
Company and the Common Stock of the Holding Company is being offered to our
customers and then to the public. The Plan has also been approved by the OTS,
subject to approval of the Plan by our members. A Special Meeting of Members
(the "Special Meeting") has been scheduled for that purpose on September 11,
1997. The approval of the Plan by the OTS does not constitute a recommendation
or endorsement of the Plan by the OTS.
We have mailed to each person eligible to vote at the Special Meeting a
proxy statement (the "Proxy Statement"). The Proxy Statement contains
information concerning the business purposes of the Conversion and the effects
of the Plan and the Conversion on voting rights, liquidation rights, the
continuation of our business and existing savings accounts, FDIC insurance and
loans. The Proxy Statement also describes the manner in which the Plan may be
amended or terminated.
The following is a summary of all of the material aspects of the Plan,
the Subscription Offering, and the Community Offering. The Plan should be
consulted for a more detailed description of its terms.
Reasons for Conversion
As a stock institution, we will be structured in the form used by
commercial banks, most business entities, and a growing number of savings
associations. Converting to the stock form is intended to have a positive effect
on our future growth and performance by: (i) affording our depositors and
employees the opportunity to become shareholders of the Holding Company and
thereby participate more directly in our future and the Holding Company's
future; (ii) providing the Holding Company with the flexibility to grow through
mergers and acquisitions by permitting the offering of equity participations to
the shareholders of acquired companies; (iii) providing substantially increased
net worth and equity capital for investment in our business, thus enabling
management to pursue new and additional lending and investment opportunities and
to expand operations; and (iv) providing future access to capital markets
through the sale of stock of the Holding Company in order to generate additional
capital to accommodate or promote future growth. We believe that the increased
capital and operating flexibility will enhance our competitiveness with other
types of financial services organizations. Although our current members will,
upon Conversion, lose the voting and liquidation rights they presently have as
members (except to the limited extent of their rights in the liquidation account
established in the Conversion), they are being offered a priority right to
purchase shares in the Conversion and thereby obtain voting and liquidation
rights in the Holding Company.
The net proceeds to us from the sale of Common Stock offered hereby,
after retention by the Holding Company of 50% of the net proceeds after taking
into consideration the loan to the ESOP, will increase our existing net worth
and thus provide an even stronger capital base to support our lending and
investment activities. Although our regulatory capital at March 31, 1997,
exceeded our regulatory capital requirements, our Board of Directors believes
that it is desirable to increase regulatory capital in view of the competitive
and changing financial conditions in which we operate and the higher levels of
capital required by the OTS, and to enable us to take advantage of new
opportunities that may arise. In addition, the Conversion will provide us with
new opportunities to attract and retain talented and experienced personnel by
offering stock incentive programs.
Our Board of Directors believes that the Conversion to a holding
company structure is the best way to enable us to diversify our business
activities should we choose to do so. Currently, there are no plans, written or
oral, for the Holding Company to engage in any material activities apart from
holding our shares of stock that it acquires in connection with the Conversion,
although the Board may determine to further expand the Holding Company's
activities after the Conversion.
The additional Common Stock of the Holding Company being authorized in
the Conversion will be available for future acquisitions (although the Holding
Company has no current discussions, arrangements or agreements with respect to
any acquisition) and for issuance and sale to raise additional equity capital,
subject to market conditions and generally without shareholder approval. The
Holding Company's ability to raise additional funds through the sale of debt
securities to the public or institutional investors should also be enhanced by
the increase in its equity capital base provided by the Conversion. Although the
Holding Company currently has no plans with respect to future issuances of
equity or debt securities, the more flexible operating structure provided by the
Holding Company and the stock form of ownership is expected to assist us in
competing aggressively with other financial institutions in our market area.
The Conversion will also permit our members who subscribe for shares of
Common Stock to become shareholders of the Holding Company, thereby allowing
members to indirectly own stock in the financial institution in which they
maintain deposit accounts. Such ownership may encourage shareholders to promote
us to others, thereby further contributing to our growth.
Principal Effects of Conversion
General. Each savings depositor in a mutual savings bank such as
Citizens has both a savings account and a pro rata ownership in the net worth of
that institution, based upon the balance in his or her savings account. This
ownership interest has no tangible market value separate from the savings
account. Upon conversion to stock form, the ownership of our net worth will be
represented by the outstanding shares of stock to be owned by the Holding
Company. Certificates are issued to evidence ownership of the capital stock.
These stock certificates are transferable and, therefore, the shares may be
transferred with no effect on any account the seller may hold with us.
Continuity. While the Conversion is being accomplished, our normal
business of accepting deposits and making loans will be continued without
interruption. After the Conversion, we will continue to provide services for
account holders and borrowers under current policies carried on by our present
management and staff.
Our directors at the time of Conversion will continue to serve as our
directors after the Conversion until the expiration of their current terms, and
thereafter, if reelected. All of our executive officers at the time of
Conversion will retain their positions after the Conversion.
Effect on Deposit Accounts. Under the Plan, each of our depositors at
the time of the Conversion will automatically continue as a depositor after the
Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each account will also continue
to be insured by the FDIC in exactly the same way as before. Depositors will
continue to hold their existing certificates, passbooks and other evidence of
their accounts.
Effect on Loans of Borrowers. None of our loans will be affected by the
Conversion. The amount, interest rate, maturity and security for each loan will
be unchanged.
Effect on Voting Rights of Members. Currently in our mutual form, our
depositor members have voting rights and may vote for the election of directors.
Following the Conversion, depositors will cease to have voting rights. All
voting rights in Citizens will be vested in the Holding Company as our sole
shareholder. Voting rights in the Holding Company will be vested exclusively in
its shareholders, with one vote for each share of Common Stock. Neither the
Common Stock to be sold in the Conversion nor the capital stock of Citizens will
be insured by the FDIC or by any other government entity.
Effect on Liquidation Rights. Current federal regulations and the Plan
of Conversion provide for the establishment of a "liquidation account" by us for
the benefit of our deposit account holders with balances of no less than $50.00
on December 31, 1995 ("Eligible Account Holders"), and our deposit account
holders with balances of no less than $50.00 on June 30, 1997 ("Supplemental
Eligible Account Holders"), who continue to maintain their accounts with us
after the Conversion. The liquidation account will be credited with our net
worth as reflected in the latest statement of financial condition in the final
prospectus used in the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder will, with respect to each deposit account held, have a
related inchoate interest in a portion of the balance of the liquidation
account. This inchoate interest is referred to in the Plan as a "subaccount
balance." In the event of a complete liquidation of us after the Conversion (and
only in such event), Eligible Account Holders and Supplemental Eligible Account
Holders would be entitled to a distribution from the liquidation account in an
amount equal to the then current adjusted subaccount balance then held, before
any liquidation distribution would be made to the Holding Company as our sole
shareholder. We believe that a liquidation of Citizens is unlikely.
<PAGE>
Each Eligible Account Holder will have a subaccount balance in the
liquidation account for each deposit account held as of December 31, 1995 (the
"Eligibility Record Date"). Each Supplemental Eligible Account Holder will have
a subaccount balance in the liquidation account for each deposit account held as
of June 30, 1997 (the "Supplemental Eligibility Record Date"). Each initial
subaccount balance will be the amount determined by multiplying the total
opening balance in the liquidation account by a fraction, the numerator of which
is the amount of the qualifying deposit (a deposit of at least $50 as of
December 31, 1995, or June 30, 1997, respectively) of such deposit account, and
the denominator of which is the total of all qualifying deposits on that date.
If the amount in the deposit account on any subsequent annual closing date of
Citizens is less than the balance in such deposit account on any other annual
closing date, or the balance in such account on the Eligibility Record Date or
the Supplemental Eligibility Record Date, as the case may be, this interest in
the liquidation account will be reduced by an amount proportionate to any such
reduction, and will not thereafter be increased despite any subsequent increase
in the related deposit account. An Eligible Account Holder's, as well as a
Supplemental Eligible Account Holder's, interest in the liquidation account will
cease to exist if the deposit account is closed. The liquidation account will
never increase and will be correspondingly reduced as the interests in the
liquidation account are reduced or cease to exist. In the event of liquidation,
any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied will be
distributed to the Holding Company as our sole shareholder.
A merger, consolidation, sale of bulk assets, or similar combination or
transaction in which we are not the surviving entity would not be considered to
be a "liquidation" under which distribution of the liquidation account could be
made, provided the surviving institution is an FDIC-insured institution. In such
a transaction, the liquidation account would be assumed by the surviving
institution. The OTS has stated that the consummation of a transaction of the
type described in the preceding sentence in which the surviving entity is not an
FDIC-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then-remaining balance in the liquidation account.
The creation and maintenance of the liquidation account will not
restrict the use of or application of any of the net worth accounts, except that
we may not declare or pay a cash dividend on or repurchase our capital stock if
the effect of such dividend or repurchase would be to cause our net worth to be
reduced below the aggregate amount then required for the liquidation account.
Tax Effects. We intend to proceed with the Conversion on the basis of
an opinion from our special counsel, Barnes & Thornburg, Indianapolis, Indiana,
as to certain tax matters that are material to the Conversion. The opinion is
based, among other things, on certain representations made by us, including the
representation that the exercise price of the subscription rights to purchase
the Common Stock will be approximately equal to the fair market value of the
stock at the time of the completion of the Conversion. With respect to the
subscription rights, we have received an opinion of Keller which, based on
certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members do not have any economic value at the time of distribution or the time
the subscription rights are exercised, whether or not a Community Offering takes
place, and Barnes & Thornburg's opinion is given in reliance thereon. Barnes &
Thornburg's opinion provides substantially as follows:
1. Our change in form from a mutual savings bank to a stock savings bank
will qualify as a reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended (the "Code"), and no gain or
loss will be recognized to us in either our mutual form or our stock
form by reason of the Conversion.
2. No gain or loss will be recognized by the converted savings association
upon receipt of money from the Holding Company for the converted
savings association's capital stock, and no gain or loss will be
recognized by the Holding Company upon the receipt of money for Common
Stock of the Holding Company.
3. The basis of the assets of the converted savings bank will be the same
as the basis in our hands prior to the Conversion.
4. The holding period of the assets of the converted savings bank will
include the period during which the assets were held by us in our
mutual form prior to Conversion.
5. No gain or loss will be realized by our deposit account holders, upon
the constructive issuance to them of withdrawable deposit accounts of
the converted savings association immediately after the Conversion,
interests in the liquidation account, and/or on the distribution to
them of nontransferable subscription rights to purchase Common Stock.
6. The basis of an account holder's deposit accounts in the converted
savings bank after the Conversion will be the same as the basis of his
or her deposit accounts with us prior to the Conversion.
<PAGE>
7. The basis of each account holder's interest in the liquidation account
will be zero. The basis of the non-transferable subscription rights
will be zero.
8. The basis of the Holding Company Common Stock to its shareholders will
be the actual purchase price ($10.00) thereof, and a shareholder's
holding period for Common Stock acquired through the exercise of
subscription rights will begin on the date on which the subscription
rights are exercised.
9. No taxable income will be realized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members as a result of
the exercise of the nontransferable subscription rights.
10. The converted savings association in its stock form will succeed to and
take into account our earnings and profits or deficit in earnings and
profits, in our mutual form, as of the date of Conversion.
The opinion also concludes in effect that:
1. No taxable income will be realized by us on the issuance of
subscription rights to eligible subscribers to purchase shares of
Common Stock at fair market value.
2. The converted savings bank will succeed to and take into account the
dollar amounts of those accounts of Citizens in its mutual form which
represent bad debt reserves in respect of which Citizens in its mutual
form has taken a bad debt deduction for taxable years on or before the
date of the transfer.
3. The creation of the liquidation account will have no effect on our
taxable income, deductions, or additions to bad debt reserves or
distributions to shareholders under Section 593 of the Code.
Barnes & Thornburg has also issued an opinion stating in essence that
the Conversion will not be a taxable transaction to the Holding Company or to us
under any Indiana tax statute imposing a tax on income, and that our depositors
will be treated under such laws in a manner similar to the manner in which they
will be treated under federal income tax law.
The opinions of Barnes & Thornburg and Keller, unlike a letter ruling
issued by the Internal Revenue Service, are not binding on the Service and the
conclusions expressed herein may be challenged at a future date. The Service has
issued favorable rulings for transactions substantially similar to the proposed
Conversion, but any such ruling may not be cited as precedent by any taxpayer
other than the taxpayer to whom the ruling is addressed. We do not plan to apply
for a letter ruling concerning the transactions described herein.
Offering of Common Stock
Under the Plan of Conversion, up to 920,000 shares of Common Stock are
being offered for sale, initially through the Subscription Offering (subject to
a possible increase to 1,058,000 shares). See "-- Subscription Offering." The
Plan of Conversion requires, with certain exceptions, that a number of shares
equal to at least 680,000 be sold in order for the Conversion to be effective.
Shares may also be offered to the public in a Community Offering which will
commence after the Subscription Offering terminates, but only if fewer than
680,000 shares are subscribed for in the Subscription Offering. The Community
Offering may expire at any time when orders for at least 680,000 shares have
been received in the Subscription Offering and Community Offering, but no later
than October 19, 1997, unless extended by us and the Holding Company. The
offering may be extended, subject to OTS approval, until 24 months following the
members' approval of the Plan of Conversion, or until September 11, 1999. The
actual number of shares to be sold in the Conversion will depend upon market and
financial conditions at the time of the Conversion, provided that no fewer than
680,000 shares or more than 1,058,000 shares will be sold in the Conversion. The
per share price to be paid by purchasers in the Community Offering, if any, for
any remaining shares will be $10.00, the same price paid by subscribers in the
Subscription Offering. See "-- Stock Pricing."
The Subscription Offering expires at 12:00 noon, Frankfort time, on
September 4, 1997. OTS regulations and the Plan of Conversion require that we
complete the sale of Common Stock within 45 days after the close of the
Subscription Offering. This 45-day period expires on October 19, 1997. In the
event we are unable to complete the sale of Common Stock within this 45-day
period, we may request an extension of this time period from the OTS. No single
extension granted by the OTS, however, may exceed 90 days. No assurance can be
given that an extension would be granted if requested. The OTS has, however,
granted extensions due to the inability of mutual financial institutions to
complete a stock offering as a result of the development of adverse conditions
in the stock market. If an extension is granted, we will promptly notify
subscribers of the granting of the extension of time and will promptly return
subscriptions unless subscribers affirmatively elect to continue their
subscriptions during the period of extension. Such extensions may not be made
beyond September 11, 1999.
<PAGE>
As permitted by OTS regulations, the Plan of Conversion provides that
if, for any reason, purchasers cannot be found for an insignificant residue of
unsubscribed shares of the Common Stock, our Board of Directors will seek to
make other arrangements for the sale of the remaining shares. Such other
arrangements will be subject to the approval of the OTS. If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate. In the event
that the Conversion is not effected, we will remain a mutual savings bank, all
subscription funds will be promptly returned to subscribers with interest earned
thereon at our passbook rate, which is currently 3.25% per annum, or 3.30%
Annual Percentage Yield ("APY") (except for payments to have been made through
withdrawal authorizations which will have continued to earn interest at the
contractual account rates), and all withdrawal authorizations will be canceled.
Subscription Offering
In accordance with OTS regulations, nontransferable rights to subscribe
for the purchase of the Holding Company's Common Stock have been granted under
the Plan of Conversion to the following persons in the following order of
priority: (1) our Eligible Account Holders; (2) the ESOP; (3) our Supplemental
Eligible Account Holders; and (4) our depositors other than Eligible Account
Holders and Supplemental Eligible Account Holders, at the close of business on
July 25, 1997, the voting record date for the Special Meeting ("Other Members").
All subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering, and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion (and described below). The December 31,
1995, date for determination of Eligible Account Holders and the June 30, 1997
date for determination of Supplemental Eligible Account Holders were selected in
accordance with federal regulations applicable to the Conversion.
Category I: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, nontransferable subscription rights to
subscribe for up to10,000 shares of the Common Stock for each deposit account
held on December 31, 1995; provided, however, that no Eligible Account Holder
may purchase alone or with his or her Associates (as defined in the Plan, and
including relatives living in the same household) and persons acting in concert,
more than 30,000 shares of Common Stock.
If sufficient shares are not available in this Category I, shares will
be allocated in a manner that will allow each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Eligible Account
Holders in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Eligible Account Holders.
The "qualifying deposits" of an Eligible Account Holder is the amount
of the deposit balances (provided such aggregate balance is not less than
$50.00) in his or her deposit accounts, including demand deposit accounts, as of
the close of business on December 31, 1995. Subscription rights received by
directors and officers in this category based upon their increased deposits in
Citizens during the year preceding December 31, 1995, are subordinated to the
subscription rights of other Eligible Account Holders. Notwithstanding the
foregoing, shares of Common Stock with a value in excess of $9,200,000, the
maximum of the Estimated Valuation Range, may be sold to the ESOP before
satisfying the subscriptions of Eligible Account Holders.
Category II: The ESOP. The ESOP will receive, without payment therefor,
non-transferable subscription rights to purchase up to 10% of the total number
of shares of Common Stock offered in the Conversion on behalf of participants,
provided that shares remain available after satisfying the subscription rights
of Eligible Account Holders up to the maximum of the Estimated Valuation Range
as described above. The ESOP currently intends to purchase 8% of the shares sold
in the Conversion. If the ESOP is unable to purchase all or part of the shares
of Common Stock for which it subscribes, the ESOP may purchase such shares on
the open market or may purchase authorized but unissued shares of the Holding
Company. Any purchase by the ESOP of authorized but unissued shares could dilute
the interests of the Holding Company's shareholders.
Category III: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, nontransferable
subscription rights to subscribe for up to 10,000 shares of the Common Stock for
each deposit account held on June 30, 1997; provided, however, that no
Supplemental Eligible Account Holder may purchase alone or with his or her
Associates (as defined in the Plan, and including relatives living in the same
household) and persons acting in concert, more than 30,000 shares of Common
Stock. Such subscription rights will be applicable only to such shares as remain
available after the subscriptions of the Eligible Account Holders and the ESOP
have been satisfied. Any subscription rights received by a person as a result of
his or her status as an Eligible Account Holder will reduce to the extent
thereof the subscription rights granted to such person as a result of his or her
status as a Supplemental Eligible Account Holder.
<PAGE>
If sufficient shares are not available in this Category III, shares
will be allocated in a manner that will allow each Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her allocation consist of the lesser of 100 shares or the amount
subscribed for. Thereafter, unallocated shares will be allocated to subscribing
Supplemental Eligible Account Holders in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders.
The "qualifying deposits" of a Supplemental Eligible Account Holder is
the amount of the deposit balances (provided such aggregate balance is not less
than $50) in his or her deposit accounts, including demand deposit accounts, as
of the close of business on June 30, 1997.
Category IV: Other Members. The Other Members of Citizens will receive,
without payment therefor, nontransferable subscription rights to subscribe for
up to 10,000 shares of the Common Stock for each deposit account held as of July
25, 1997; provided, however, that no Other Member may purchase alone or with his
or her Associates (as defined in the Plan, and including relatives living in the
same household) and persons acting in concert, more than 30,000 shares of Common
Stock. Such subscription rights will be applicable only to such shares as remain
available after the subscriptions of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders have been satisfied.
If sufficient shares are not available in this Category IV, shares will
be allocated pro rata among subscribing Other Members in the same proportion
that the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
Timing of Offering and Method of Payment. The Subscription Offering
will expire at 12:00 noon, Frankfort time, on September 4, 1997 (the "Expiration
Date"). The Expiration Date may be extended by Citizens and the Holding Company
for successive 90-day periods, subject to OTS approval, to September 11, 1999.
Subscribers must, before the Expiration Date, or such date to which the
Expiration Date may be extended, return Order Forms to us, properly completed,
together with checks or money orders in an amount equal to the Purchase Price
($10.00 per share) multiplied by the number of shares for which subscription is
made. Payment for stock purchases can also be accomplished through authorization
on the order form of withdrawals from accounts with us (including a certificate
of deposit but excluding IRA accounts). We have the right to reject any orders
transmitted by facsimile and any payments made by wire transfer. The
beneficiaries of IRA accounts are deemed to have the same subscription rights as
other depositors. However, the IRA accounts maintained with us do not permit
investment in the Common Stock. A depositor interested in using his or her IRA
funds to purchase Common Stock must do so through a self-directed IRA account.
Since we do not offer such accounts, we will allow such a depositor to make a
trustee-to-trustee transfer of the IRA funds on deposit with us that he wishes
to invest. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner that we now hold the depositor's IRA funds. An annual
administrative fee would be payable to the new trustee.
Depositors interested in using funds in a Citizens IRA to purchase
Common Stock should contact us at (765) 659-5708 as soon as possible so that the
necessary forms may be forwarded for execution and returned prior to the
Expiration Date of the Subscription Offering.
Until completion or termination of the Conversion, subscribers who
elect to make payment through authorization of withdrawal from accounts with us
will not be permitted to reduce the deposit balance in any such accounts below
the amount required to purchase the shares for which they subscribed. In such
cases interest will continue to be credited on deposits authorized for
withdrawal until the completion of the Conversion. Interest at the passbook
rate, which is currently 3.25% per annum, for an APY of 3.30%, will be paid on
amounts submitted by check. Authorized withdrawals from certificate accounts for
the purchase of Common Stock will be permitted without the imposition of early
withdrawal penalties or loss of interest. However, withdrawals from certificate
accounts that reduce the balance of such accounts below the required minimum for
specific interest rate qualification will cause the cancellation of the
certificate accounts at the effective date of the Conversion, and the remaining
balance will earn interest at the passbook savings rate. Stock subscriptions
received and accepted by us are final. Subscriptions may be withdrawn only in
the event that we extend the Expiration Date of the Subscription Offering as
described above.
Members in Non-Qualified States or Foreign Countries. We will make
reasonable efforts to comply with the securities laws of all states in the
<PAGE>
United States in which persons entitled to subscribe for stock pursuant to the
Plan reside. However, no person will be offered or sold or receive any stock
pursuant to the Subscription Offering if such person resides in a foreign
country or resides in a state in the United States with respect to which all of
the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside in such state; (ii) the granting of
subscription rights or the offer or sale of Common Stock to such persons would
require us or the Holding Company or our respective officers and directors,
under the securities laws of such state, to register as a broker, dealer,
salesman or selling agent, or to register or otherwise qualify the Common Stock
for sale in such state; and (iii) such registration, qualification or filing in
our judgment or in the judgment of the Holding Company would be impracticable or
unduly burdensome for reasons of cost or otherwise.
To assist in the Subscription Offering and the Community Offering, if
any, the Holding Company has established a Stock Information Center that you may
contact at (765) 659-5708. Callers to the Stock Information Center will be able
to request a Prospectus and other information relating to the offering.
Community Offering
To the extent shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of the Common
Stock in a Community Offering to the general public, with preference given to
residents of Clinton County. The right of any person to purchase shares in the
Community Offering is subject to our right to accept or reject such purchase in
whole or in part. We may terminate the Community Offering as soon as we have
received orders for at least the minimum number of shares available for purchase
in the Conversion.
The Community Offering may expire at any time when orders for at least
680,000 shares have been received in the Subscription Offering and Community
Offering (but no later than October 19, 1997, unless extended by us and the
Holding Company). Persons wishing to purchase stock in the Community Offering,
if conducted, should return the Order Form to us, properly completed, together
with a check or money order in the amount equal to the Purchase Price ($10.00
per share) multiplied by the number of shares which that person desires to
purchase. Order Forms will be accepted until the completion of the Community
Offering. However, as noted above, we may terminate the Community Offering as
soon as we receive orders for at least the minimum number of shares available
for purchase in the Conversion.
The maximum number of shares of Common Stock which may be purchased in the
Community Offering by any person (including such person's Associates) or persons
acting in concert is 10,000 in the aggregate. A member who, together with his
Associates and persons acting in concert, has subscribed for shares in the
Subscription Offering may subscribe for a number of additional shares in the
Community Offering that does not exceed the lesser of (i) 10,000 shares or (ii)
the number of shares which, when added to the number of shares subscribed for by
the member (and his Associates and persons acting in concert) in the
Subscription Offering, would not exceed 30,000. We reserve the right to reject
any orders received in the Community Offering in whole or in part.
If all the Holding Company Common Stock offered in the Subscription
Offering is subscribed for, no Holding Company Common Stock will be available
for purchase in the Community Offering. Purchase orders received during the
Community Offering will be filled up to a maximum of 2% of the total number of
shares of Common Stock issued in the Conversion, with any remaining unfilled
purchase orders to be allocated on an equal number of shares basis. If the
Community Offering extends beyond 45 days following the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for stock previously submitted. All sales of Holding
Company Common Stock in the Community Offering will be at the same price per
share as the sales of Holding Company Common Stock in the Subscription Offering.
Cash and checks received in the Community Offering will be placed in a
special savings account with us, and will earn interest at the passbook rate,
which is currently 3.25% per annum, for an APY of 3.30%, from the date of
deposit until completion or termination of the Conversion. In the event that the
Conversion is not consummated for any reason, all funds submitted pursuant to
the Community Offering will be promptly refunded with interest as described
above.
Delivery of Certificates
Certificates representing shares issued in the Subscription Offering
and in the Community Offering, if any, pursuant to Order Forms will be mailed to
the persons entitled to them at the last addresses of such persons appearing on
the books of Citizens or to such other addresses as may be specified in properly
completed Order Forms as soon as practicable following consummation of the
Conversion. Any certificates returned as undeliverable will be held by the
Holding Company until claimed by the person legally entitled to them or
otherwise disposed of in accordance with applicable law.
<PAGE>
Agent
To assist us and the Holding Company in marketing the Common Stock, we
have retained the services of Trident Securities as our exclusive agent. Trident
Securities is a broker-dealer registered with the Securities and Exchange
Commission (the "SEC") and a member of the National Association of Securities
Dealers, Inc. (the "NASD"). Trident Securities will assist us in the Conversion
as follows: (1) in training and educating our employees regarding the mechanics
and regulatory requirements of the conversion process; (2) in keeping records of
all stock subscriptions; (3) in obtaining proxies from our members with respect
to the Special Meeting; and (4) in assisting with the Community Offering. For
providing these services, we have agreed to pay Trident Securities commissions
in an amount equal to 1.5% of the aggregate dollar amount of shares of Common
Stock sold in the Conversion other than shares sold to executive officers and
directors and their Associates or to the ESOP. Trident Securities will also be
reimbursed for out-of-pocket expenses, which are not to exceed $10,000 without
our consent (excluding certain reimbursable expenses), and for legal fees, which
are not to exceed $30,000 (excluding reimbursable expenses), without our
consent. Offers and sales in the Community Offering will be on a best efforts
basis and, as a result, Trident Securities is not obligated to purchase any
shares of the Common Stock. Trident Securities intends to match offers to buy
and offers to sell the Common Stock, although it is under no obligation to do
so and may cease doing so at any time.
We have also agreed to indemnify Trident Securities, under certain
circumstances, against liabilities and expenses (including legal fees) arising
out of Trident Securities' engagement by us, including liabilities under the
Securitities Act of 1933 (the "1933 Act").
Selected Dealers
Trident Securities may enter into an agreement with certain dealers
chosen by Citizens and Trident Securities (together, the "Selected Dealers") to
assist in the sale of shares in the Community Offering. Selected Dealers will
receive commissions at an agreed upon rate for all shares sold by such Selected
Dealers. During the Community Offering, Selected Dealers may only solicit
indications of interest from their customers to place orders with us as of a
certain date (the "Order Date") for the purchase of shares of Common Stock. When
and if the Holding Company, Citizens and Trident Securities believe that enough
indications of interest and orders have been received in the Subscription
Offering and the Community Offering, if any, to consummate the Conversion,
Trident Securities will request, as of the Order Date, Selected Dealers to
submit orders to purchase shares for which they have previously received
indications of interest from the customers. Selected Dealers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected Dealers will debit the accounts of their customers on the
date which will be three business days from the Order Date (the "Settlement
Date"). On the Settlement Date, funds received by Selected Dealers will be
remitted to us. It is anticipated that the Conversion will be consummated on the
Settlement Date. However, if consummation is delayed after payment has been
received by us from Selected Dealers, funds will earn interest at the passbook
rate, which is currently 3.25% per annum, for an APY of 3.30%, until the
completion of the offering. Funds will be returned promptly in the event the
Conversion is not consummated.
Limitations on Common Stock Purchases
The Plan includes a number of limitations on the number of shares of
Common Stock which may be purchased during the Conversion. These are summarized
below:
(1) No fewer than 25 shares may be purchased by any person purchasing shares
of Common Stock in the Conversion (provided that sufficient shares are
available).
(2) No subscribing member may purchase more than 10,000 shares of Common
Stock with respect to each deposit account held as of December 31, 1995, June
30, 1997 or July 25, 1997, as applicable. For this purpose, joint account
holders collectively may not exceed the 10,000 share limit. Notwithstanding
the foregoing sentences, no Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member, by himself or herself, or with an Associate
or group of persons acting in concert, may purchase more than 30,000 shares
of Common Stock in the Conversion (except for the ESOP which may purchase up
to 10% of the total number of shares of Common Stock offered in the
<PAGE>
Conversion). The maximum number of shares of Common Stock which may be
purchased in the Community Offering, if any, by any person (including such
person's Associates) or persons acting in concert is 10,000 in the aggregate.
A member who, together with his Associates and persons acting in concert, has
subscribed for shares in the Subscription Offering may subscribe for a number
of additional shares in the Community Offering that does not exceed the
lesser of (i) 10,000 shares or (ii) the number of shares which, when added to
the number of shares subscribed for by the member (and his Associates and
persons acting in concert) in the Subscription Offering, would not exceed
30,000. Citizens' and the Holding Company's Boards of Directors may, however,
in their sole discretion, increase the maximum purchase limitation set forth
above up to 9.99% of the shares of Common Stock sold in the Conversion,
provided that orders for shares exceeding 5% of the shares of Common Stock
sold in the Conversion may not exceed, in the aggregate, 10% of the shares
sold in the Conversion. If the Boards of Directors decide to increase the
purchase limitation, all persons who subscribe for the maximum number of
shares of Common Stock offered in the Conversion will be, and certain other
large subscribers in the sole discretion of the Holding Company and Citizens
may be, given the opportunity to increase their subscriptions accordingly,
subject to the rights and preferences of any person who has priority
subscription rights. The overall purchase limitation may be reduced in the
sole discretion of the Boards of Directors of the Holding Company and
Citizens.
(3) No more than 35% of the shares of Common Stock may be purchased in the
Conversion by directors and officers of Citizens and the Holding Company and
their Associates.
OTS regulations define "acting in concert" as (i) knowing participation
in a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise.
The term "Associate" of a person is defined to mean (i) any corporation
or organization (other than Citizens or its subsidiaries or the Holding Company)
of which such person is a director, officer, partner or 10% shareholder; (ii)
any trust or other estate in which such person has a substantial beneficial
interest or serves as trustee or in a similar fiduciary capacity; provided,
however that such term shall not include any employee stock benefit plan of the
Holding Company or Citizens in which such a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and (iii)
any relative or spouse of such person, or relative of such spouse, who either
has the same home as such person or who is a director or officer of Citizens or
its subsidiaries or the Holding Company. Directors are not treated as Associates
of one another solely because of their board membership. Compliance with the
foregoing limitations does not necessarily constitute compliance with other
regulatory restrictions on acquisitions of the Common Stock. For a further
discussion of limitations on purchases of the Common Stock during and subsequent
to Conversion, see "-- Restrictions on Sale of Stock by Directors and Officers,"
"-- Restrictions on Purchase of Stock by Directors and Officers Following
Conversion," and "Restrictions on Acquisition of the Holding Company."
Restrictions on Repurchase of Stock by the Holding Company
Repurchases of its shares by the Holding Company will be restricted for
a period of three years from the date of the Conversion. OTS regulations
currently prohibit the Holding Company from repurchasing any of its shares
within one (1) year following the Conversion except in exceptional
<PAGE>
circumstances. So long as we continue to meet certain capitalization
requirements, the Holding Company may repurchase shares in an open-market
repurchase program (which cannot exceed 5% of its outstanding shares in a
twelve-month period except in exceptional circumstances) during the second and
third year following the Conversion by giving appropriate prior notice to the
OTS. The OTS has authority to waive these restrictions under certain
circumstances. Unless repurchases are permitted under the foregoing regulations,
the Holding Company may not, for a period of three years from the date of the
Conversion, repurchase any of its capital stock from any person, except in the
event of an offer to purchase by the Holding Company on a pro rata basis from
all of its shareholders which is approved in advance by the OTS, except in
exceptional circumstances established to the satisfaction of the OTS, or except
for purchases of shares required to fund the RRP. The Holding Company may use
some of the net proceeds received from the sale of the Common Stock offered by
this Prospectus to repurchase such Common Stock, subject to OTS requirements.
Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Restrictions on Sale of Stock by Directors and Officers
All shares of the Common Stock purchased by directors and officers of
Citizens or the Holding Company in the Conversion will be subject to the
restriction that such shares may not be sold or otherwise disposed of for value
for a period of one year following the date of purchase, except for any
disposition of such shares (i) following the death of the original purchaser or
(ii) by reason of an exchange of securities in connection with a merger or
acquisition approved by the applicable regulatory authorities. Sales of shares
of the Common Stock by the Holding Company's directors and officers will also be
subject to certain insider trading and other transfer restrictions under the
federal securities laws. See "Regulation -- Federal Securities Laws" and
"Description of Capital Stock."
Each certificate for such restricted shares will bear a legend
prominently stamped on its face giving notice of the restrictions on transfer,
and instructions will be issued to the Holding Company's transfer agent to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of the
restriction. Any shares of Common Stock issued pursuant to a stock dividend,
stock split or otherwise with respect to restricted shares will be subject to
the same restrictions on sale.
Restrictions on Purchase of Stock by Directors and Officers Following Conversion
OTS regulations provide that for a period of three years following the
Conversion, without prior written approval of the OTS, neither directors nor
officers of Citizens or the Holding Company nor their Associates may purchase
shares of the Common Stock of the Holding Company, except from a dealer
registered with the SEC. This restriction does not, however, apply to negotiated
transactions involving more than one percent of the Holding Company's
outstanding Common Stock, to shares purchased pursuant to stock option or other
incentive stock plans approved by the Holding Company's shareholders, or to
shares purchased by employee benefit plans maintained by the Holding Company
which may be attributable to individual officers or directors.
Restrictions on Transfer of Subscription Rights and Common Stock
Prior to the completion of the Conversion, OTS regulations and the Plan
of Conversion prohibit any person with subscription rights, including our
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members, from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his or her account. Each person exercising such subscription rights
will be required to certify that he or she is purchasing shares solely for his
or her own account and that he or she has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Conversion. We will pursue any and all legal and equitable
remedies in the event we become aware of the transfer of subscription rights and
will not honor orders known by us to involve the transfer of such rights. In
addition, persons who violate the purchase limitations may be subject to
sanctions and penalties imposed by the OTS.
Stock Pricing
The aggregate purchase price of the Holding Company Common Stock being
sold in the Conversion will be based on the appraised aggregate pro forma market
value of the Common Stock, as determined by an independent valuation. We
retained Keller, which is experienced in the valuation and appraisal of
financial institutions, including savings associations involved in the
conversion process, to prepare an appraisal. Keller will receive a fee of
$15,000 for its appraisal, including out-of-pocket expenses. Keller has also
prepared a business plan for us for a fee of $4,000. We have agreed to indemnify
Keller, under certain circumstances, against liabilities and expenses (including
legal fees) arising out of Keller's engagement by us.
Keller has prepared an appraisal that establishes the Estimated
Valuation Range of the pro forma market value of the Common Stock as of May 22,
1997 from a minimum of $6,800,000 to a maximum of $9,200,000, with a midpoint of
$8,000,000. A copy of the appraisal is on file and available for inspection at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and the
Central Regional Office of the OTS, 200 West Madison, Suite 1300, Chicago,
<PAGE>
Illinois 60606. The appraisal has also been filed as an exhibit to the Holding
Company's Registration Statement with the SEC, and may be reviewed at the SEC's
public reference facilities. See "Additional Information." The appraisal
involved a comparative evaluation of our operating and financial statistics with
those of other financial institutions. The appraisal also took into account such
other factors as the market for savings associations generally, prevailing
economic conditions, both nationally and in Indiana, which affect the operations
of savings associations, the competitive environment within which we operate,
and the effect of our becoming a subsidiary of the Holding Company. No detailed
individual analysis of the separate components of Citizens' and the Holding
Company's assets and liabilities was performed in connection with the
evaluation. The Board of Directors reviewed with management Keller's methods and
assumptions and accepted Keller's appraisal as reasonable and adequate. The
Holding Company, in consultation with Trident Securities, has determined to
offer the Common Stock in the Conversion at a price of $10.00 per share. The
Holding Company's decision regarding the Purchase Price was based solely on its
determination that $10.00 per share is a customary purchase price in conversion
transactions. The Estimated Valuation Range may be increased or decreased to
reflect market and financial conditions prior to the completion of the
Conversion.
Promptly after the completion of the Subscription Offering and the
Community Offering, if any, Keller will confirm to us that, to the best of
Keller's knowledge and judgment, nothing of a material nature has occurred which
would cause Keller to conclude that the amount of the aggregate proceeds
received from the sale of the Common Stock in the Conversion was incompatible
with its estimate of our total pro forma market value at the time of the sale.
If, however, the facts do not justify such a statement, a new Estimated
Valuation Range and price per share may be set. Under such circumstances, the
Holding Company will be required to resolicit subscriptions. In that event,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced;
provided that if our pro forma market value upon Conversion has increased to an
amount which does not exceed $10,580,000 (15% above the maximum of the Estimated
Valuation Range), the Holding Company and Citizens do not intend to resolicit
subscriptions unless it is determined after consultation with the OTS that a
resolicitation is required.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. A
change in the number of shares to be issued in the Conversion will not affect
subscription rights, which are based on the 800,000 shares being offered in the
Subscription Offering. In the event of an increase in the maximum number of
shares being offered, persons who exercise their maximum subscription rights
will be notified of such increase and of their right to purchase additional
shares. Conversely, in the event of a decrease in the maximum number of shares
being offered, persons who exercise their maximum subscription rights will be
notified of such decrease and of the concomitant reduction in the number of
shares for which subscriptions may be made. In the event of a resolicitation,
subscribers will be afforded the opportunity to increase, decrease or maintain
their previously submitted order. The Holding Company will be required to
resolicit if the price per share is changed such that the total aggregate
purchase price is not within the minimum and 15% above the maximum of the
Estimated Valuation Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE
SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND
THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE.
Number of Shares to be Issued
It is anticipated that the total offering of Common Stock (the number
of shares of Common Stock issued in the Conversion multiplied by the Purchase
Price of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Estimated Valuation Range. Unless otherwise required by the OTS,
no resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions so long as the change in the
number of shares to be issued in the Conversion, in combination with the
Purchase Price, results in an offering within the minimum and 15% above the
maximum of the Estimated Valuation Range.
An increase in the total number of shares of Common Stock to be issued
in the Conversion would decrease both a subscriber's ownership interest and the
Holding Company's pro forma net worth and net income on a per share basis while
increasing (assuming no change in the per share price) pro forma net income and
net worth on an aggregate basis. A decrease in the number of shares to be issued
in the Conversion would increase both a subscriber's ownership interest and the
Holding Company's pro forma net worth and net income on a per share basis while
decreasing (assuming no change in the per share price) pro forma net income and
net worth on an aggregate basis. For a presentation of the effects of such
changes, see "Pro Forma Data."
<PAGE>
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by
Citizens and the Holding Company will be final. The Plan provides that, if
deemed necessary or desirable by the Boards of Directors of the Holding Company
and Citizens, the Plan may be substantively amended by the Boards of Directors,
as a result of comments from regulatory authorities or otherwise, with the
concurrence of the OTS. Moreover, if the Plan of Conversion is so amended,
subscriptions which have been received prior to such amendment will not be
refunded unless otherwise required by the OTS.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes of
members eligible to be cast at the Special Meeting and the sale of all shares of
the Common Stock within 24 months following approval of the Plan by the members.
If these conditions are not satisfied, the Plan will be terminated and we will
continue business in the mutual form of organization. The Plan may be terminated
by the Boards of Directors of Citizens and the Holding Company at any time prior
to the Special Meeting and, with the approval of the OTS, by such Boards of
Directors at any time thereafter. Furthermore, OTS regulations and the Plan of
Conversion require that the Holding Company complete the sale of Common Stock
within 45 days after the close of the Subscription Offering. The OTS may grant
an extension of this time period if necessary, but no assurance can be given
that an extension would be granted. See "-- Offering of Common Stock."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF CITIZENS SAVINGS BANK OF FRANKFORT
General
Citizens Bancorp was recently formed as an Indiana corporation on June
10, 1997, for the purpose of issuing the Common Stock and owning all of the
capital stock of Citizens issued in the Conversion. As a newly formed
corporation, the Holding Company has no operating history. All information in
this section should be read in conjunction with the consolidated financial
statements and notes thereto included within this document.
Our principal business has historically consisted of attracting
deposits from the general public and making loans secured by residential real
estate. Our earnings primarily depend upon our net interest income, which is the
difference between our 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. Our earnings are
also affected by provisions for loan losses, service charges, operating expenses
and income taxes.
Our earnings are also affected by the activities of our service
corporation subsidiary, CLSC, which engages in real estate development
activities. CLSC's activities are significantly affected by underlying economic
factors, such as interest rates, levels of unemployment and the general health
of the local and national economy. See "Business of Citizens -- Service
Corporation Subsidiary."
We also are affected by prevailing economic conditions, as well as
govenment 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 our 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 our lending
activities include deposits, payments on loans, borrowings and income provided
from operations.
<PAGE>
Current Business Strategy
Our business strategy is to operate a well-capitalized, profitable and
independent community savings bank dedicated primarily to residential lending
with an emphasis on personal service. We have sought to implement this strategy
by (i) emphasizing the origination of one- to four-family residential mortgage
loans in our market area, (ii) investing in high-quality investment securities
and loans, and (iii) maintaining acceptable levels of capital.
The highlights of our business strategy are as follows:
o Profitability. Although no assurance can be made regarding
future profitability, we have been profitable in each of the
past five fiscal years. We had net income of $479,000 in
fiscal 1996, $406,000 in fiscal 1995, and $281,000 in fiscal
1994. Our net income for the nine months ended March 31, 1997,
was $244,000. Our average return on average assets for the
five years ended June 30, 1996, was 0.9%. Our returns on
average assets for the year ended June 30, 1996, and the nine
months ended March 31, 1997 (on an annualized basis) were
1.15% and .7%, respectively. Our net income for the nine
months ended March 31, 1997 would have been $371,000, and our
annualized return on average assets would have been 1.1% if
not for our recognition during that period of the one-time,
non-recurring special assessment of approximately $211,000
($127,000 net of tax) to replenish the Savings Association
Insurance Fund ("SAIF") of the FDIC. See "--Comparison of
Operation Results for the Nine Months ended March 31, 1997 and
1996."
o Asset Quality. Due largely to our conservative loan
underwriting standards, we have been successful in maintaining
a high level of asset quality. At March 31, 1997, only
$205,000, or 0.45% of our total assets were included in
nonperforming assets. At the same date, $253,000, or .7% of
our total assets were delinquent more than 60 days but less
than 90 days. See "Business of Citizens--Non-Performing and
Problem Assets."
o Capital Position. At March 31, 1997, we exceeded all of our
regulatory capital requirements, and our equity capital was
$5.6 million, or 12.3% of total assets. Assuming net proceeds
at the midpoint of the Estimated Valuation Range, our pro
forma equity to assets ratio (excluding $4.1 million of net
proceeds to be retained by the Holding Company), at such date,
would have been 18.6%.
<PAGE>
Asset/Liability Management
We are also subject to interest rate risk to the degree that our
interest-bearing liabilities, primarily deposits with short- and medium-term
maturities, mature or reprice at different rates than our interest-earning
assets. We believe it is critical to manage the relationship between interest
rates and the effect on our net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. We manage assets and liabilities
within the context of the marketplace, regulatory limitations and within limits
established by our Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of savings associations. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As we do not meet
either of these requirements, we are not required to file Schedule CMR, although
we do so voluntarily. Under the regulation, associations which must file are
required to take a deduction (the interest rate risk capital component) from
their total capital available to calculate their risk based capital requirement
if their interest rate exposure is greater than "normal." The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of March 31, 1997, is an analysis performed by the
OTS of our interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points. At March 31, 1997, 2% of the present value of our
assets was approximately $931,000. Because the interest rate risk of a 200 basis
point increase in market rates (which was greater than the interest rate risk of
a 200 basis point decrease) was $1.1 million at March 31, 1997, we would have
been required to deduct $84,000 from our total capital available to calculate
our risk based capital requirement if we had been subject to the OTS' reporting
requirements under this methodology. Our exposure to interest rate risk results
from the concentration of fixed rate mortgage loans in our portfolio.
<PAGE>
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of Present Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp * $4,592 $(2,337) (34)% 10.62% (427)bp
+ 300 bp 5,215 (1,714) (25)% 11.82% (307)bp
+ 200 bp 5,830 (1,099) (16)% 12.97% (192)bp
+ 100 bp 6,416 (513) (7)% 14.02% (87)bp
0 bp 6,929 --- --- % 14.89% --- bp
- 100 bp 7,274 345 5 % 15.44% 55 bp
- 200 bp 7,304 375 5 % 15.41% 52 bp
- 300 bp 7,218 289 4 % 15.17% 28 bp
- 400 bp 7,255 326 5 % 15.15% 26 bp
</TABLE>
* Basis points.
As with any method of measuring interest rate risk, the methods of
analysis presented above have certain short comings. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
<PAGE>
Average Balances and Interest Rates and Yields
The following tables present at March 31, 1997, and for the nine-month
periods ended March 31, 1997, and 1996, and the fiscal years ended June 30,
1996, 1995 and 1994, the average daily balances of each category of our
interest-earning assets and interest-bearing liabilities, and the interest
earned or paid on such amounts.
<TABLE>
<CAPTION>
At March 31, Nine Months Ended March 31,
1997 1997 1996
------------------- ----------------------------- -----------------------------
Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits.......... $ 3,928 5.97% $ 3,435 $ 129 5.02% $ 3,193 $ 144 6.00%
FHLB stock......................... 332 7.85 332 19 7.84 332 20 8.03
Investment securities
available for sale (1)........... 159 6.39 1,936 92 6.31 2,979 132 5.91
Loans receivable (2)............... 37,630 8.61 36,362 2,380 8.73 31,397 2,069 8.79
-------- -------- ------ -------- -----
Total interest-earning assets.... 42,049 8.35 42,065 2,620 8.30 37,901 2,365 8.32%
======== ======== ========
Interest-bearing liabilities:
Deposits........................... 37,255 4.52 36,325 1,227 4.50 34,169 1,149 4.48%
FHLB advances...................... 2,000 5.87 3,275 135 5.49 1,800 82 6.05
-------- -------- ------ -------- -----
Total interest-bearing liabilities 39,255 4.59 39,600 1,362 4.59 35,969 1,231 4.56%
-------- -------- ------ -------- -----
Net interest-earning assets........... $ 2,794 $ 2,465 $ 1,932
======== ======== ========
Net interest income (expenses)........ $1,258 $1,134
====== ======
Interest rate spread (3).............. 3.76% 3.71% 3.76%
==== ==== ====
Net yield on weighted average
interest-earning assets (4)........ ---% 3.99% 3.99%
==== ==== ====
Average interest-earning
assets to average interest-bearing
liabilities........................ 107.12% 106.22% 105.37%
====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits............ $ 3,109 $ 182 5.85% $ 3,713 $ 181 4.89% $ 6,640 $ 251 3.79%
FHLB stock........................... 332 26 7.91 332 23 7.06 332 19 5.83
Investment securities
available for sale (1)............. 3,001 174 5.81 2,832 154 5.43 2,470 108 4.35
Loans receivable (2)................. 31,980 2,804 8.77 28,121 2,384 8.48 24,564 2,046 8.33
------- ------ -------- ------ -------- -----
Total interest-earning assets...... 38,422 3,186 8.29 34,998 2,742 7.84% 34,006 2,424 7.13
====== ====== ======== ===== ======== =====
Interest-bearing liabilities:
Deposits............................. 34,456 1,539 4.47 32,605 1,341 4.12 31,917 1,273 3.99
FHLB advances........................ 1,923 114 5.94 462 29 6.24 --- --- ---
------- ------ -------- ------ -------- -----
Total interest-bearing liabilities. 36,379 1,653 4.54 33,067 1,370 4.15 31,917 1,273 3.99
------- ------ -------- ------ -------- -----
Net interest-earning assets............. $ 2,043 $ 1,931 $ 2,089
======= ======== ========
Net interest income..................... $1,533 $1,372 $1,151
====== ====== ======
Interest rate spread (3)................ 3.75% 3.69% 3.14%
==== ==== ====
Net yield on weighted average
interest-earning assets (4).......... 3.99% 3.92% 3.38%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities..................... 105.61% 105.84% 106.54%
====== ====== ======
</TABLE>
(1) Includes securities available for sale at amortized cost prior to SFAS
No. 115 adjustments.
(2) Total loans less loans in process. Average balances include non-accrual
loans.
(3) Interest rate spread is calculated by subtracting weighted average
interest rate cost from weighted average interest rate yield for the
period indicated.
(4) 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 amount is presented at
March 31, 1997, because the computation of net yield is applicable only
over a period rather than at a specific date.
<PAGE>
Interest Rate Spread
Our 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. Our net interest income is determined by
the interest rate spread between the yields we earn on interest-earning assets
and the rates we pay 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 that we earned on our loan and investment portfolios, the weighted average
effective cost of our deposits and advances, the interest rate spread, and net
yield on weighted average interest-earning assets for the periods and as of the
dates shown. Average balances are based on average monthly balances. Our
management believes that the use of month-end average balances instead of daily
average balances has not caused any material difference in the information
presented.
<TABLE>
<CAPTION>
Nine Months Ended
At March 31, March 31, Year Ended June 30,
1997 1997 1996 1996 1995 1994
------------------------------------------------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits.................... 5.97% 5.02% 6.00% 5.85% 4.89% 3.79%
FHLB stock................................... 7.85 7.84 8.03 7.91 7.06 5.83
Investment securities........................ 6.39 6.31 5.91 5.81 5.43 4.35
Loans receivable............................. 8.61 8.73 8.79 8.77 8.48 8.33
Total interest-earning assets.............. 8.35 8.30 8.32 8.29 7.84 7.13
Weighted average interest rate cost of:
Deposits..................................... 4.52 4.50 4.48 4.47 4.12 3.99
FHLB advances................................ 5.87 5.49 6.05 5.94 6.24 ---
Total interest-bearing liabilities......... 4.59 4.59 4.56 4.54 4.15 3.99
Interest rate spread (1)........................ 3.76% 3.71% 3.76% 3.75% 3.69% 3.14%
==== ==== ==== ==== ==== ====
Net yield on weighted average
interest-earning assets (2).................. ---% 3.99% 3.99% 3.99% 3.92% 3.38%
==== ==== ==== ==== ==== ====
</TABLE>
- ----------
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined 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 figure is presented at
March 31, 1997 because the computation of net yield is applicable only
over a period rather than at a specific date.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
our interest income and expense during the periods indicated. For each category
of interest-earning asset and interest-bearing liability, information is
provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
----------------------------------------------------
Total
Due to Due to Net
Rate Volume Change
(In thousands)
<S> <C> <C> <C>
Nine months ended March 31, 1997
compared to nine months ended March 31, 1996
Interest-earning assets:
Interest-bearing deposits.................................. $ (30) $ 15 $ (15)
FHLB stock................................................. --- --- ---
Investment securities...................................... 13 (54) (41)
Loans receivable........................................... (23) 334 311
------- ---- -----
Total.................................................... (40) 295 255
------- ---- -----
Interest-bearing liabilities:
Deposits................................................... 5 73 78
FHLB advances.............................................. (13) 66 53
------- ---- -----
Total.................................................... (8) 139 131
------- ---- -----
Net change in net interest income............................ $ (32) $156 $ 124
======= ==== =====
Year ended June 30, 1996 compared
to year ended June 30, 1995
Interest-earning assets:
Interest-bearing deposits.................................. $ 32 $ (32) $ ---
FHLB stock................................................. 3 --- 3
Investment securities...................................... 11 10 21
Loans receivable........................................... 84 336 420
------- ---- -----
Total.................................................... 130 314 444
------- ---- -----
Interest-bearing liabilities:
Deposits................................................... 118 79 197
FHLB advances.............................................. (2) 87 85
------- ---- -----
Total.................................................... 116 166 282
------- ---- -----
Net change in net interest income............................ $ 14 $ 148 $ 162
======= ==== =====
Year ended June 30, 1995 compared
to year ended June 30, 1994
Interest-earning assets:
Interest-bearing deposits.................................. $ 60 $ (130) $ (70)
FHLB stock................................................. 4 --- 4
Investment securities...................................... 29 17 46
Loans receivable........................................... 38 300 338
------- ---- -----
Total.................................................... 131 187 318
------- ---- -----
Interest-bearing liabilities:
Deposits................................................... 42 27 69
FHLB advances.............................................. --- 28 28
------- ---- -----
Total.................................................... 42 55 97
------- ---- -----
Net change in net interest income............................ $ 89 $ 132 $ 221
======= ==== =====
</TABLE>
<PAGE>
Financial Condition at March 31, 1997 Compared to Financial Condition at June
30, 1996
Total consolidated assets increased by $918,000, or 2.1% to $45.2
million at March 31, 1997 from $44.2 million at June 30, 1996. Our loan
portfolio increased $2.8 million and our investment securities decreased $2.8
million. The increase in the loan portfolio was funded primarily by an increase
in interest-bearing deposits of $1.7 million and by the sale of investments.
Financial Condition at June 30, 1996 Compared to Financial Condition at June 30,
1995
Total consolidated assets increased by $4.5 million, or 11.4%, to $44.2
million at June 30, 1996 from $39.7 million at June 30, 1995. The increase in
assets for the period was primarily attributable to the growth in our loan
portfolio of $5.1 million. This increase in loan volume was primarily due to
increased loan demand generated by economic growth in our market area, and a
more aggressive loan origination program. Loan growth was funded mainly from an
increase in deposits of approximately $2.4 million and an increase in Federal
Home Loan Bank advances of $1.5 million.
The increase in the loan portfolio was comprised primarily of mortgage
loans which increased approximately $4.0 million.
Comparison of Operating Results for the Nine Months Ended March 31, 1997 and
1996
Net Income. Net income decreased $112,000, or 31.5%, to $244,000 for
the nine-month period ended March 31, 1997 from $356,000 for the same period in
1996. The decrease primarily resulted from the recognition of the one-time,
non-recurring special assessment in the amount of approximately $211,000
($127,000 net of tax) to replenish the SAIF and from the sale of an investment
at a loss of approximately $60,000. This decrease in net income was offset by an
increase of $124,000 in our net interest income from $1.1 million for 1997 to
$1.25 million for 1996. Excluding the SAIF assessment and the loss on the sale
of investments, net income would have increased $52,000, or 14.6%, to
approximately $408,000 for the nine months ended March 31, 1997 from $356,000
for the nine months ended March 31, 1996.
Net Interest Income. Net interest income is the most significant
component of our income from operations. Net interest income is the difference
between interest we receive on our interest-earning assets (primarily loans and
investments) and interest we pay on our interest-bearing liabilities (primarily
deposits and borrowed funds). Net interest income depends on the volume of and
rates earned on assets and the volume of and rates paid on interest-bearing
liabilities. Our net interest income increased $124,000, or 10.9%, to $1.3
million for the nine-months ended March 31, 1997 from $1.1 million for the
comparable period in 1996. This increase was due primarily to the growth of
average interest-earning assets to $42.0 million in 1997 from $37.9 million in
1996.
The increase in our average interest-earning assets of $4.2 million
reflects an increase of approximately $5.0 million in average loans, an increase
in interest-earning deposits of $242,000 and a decrease of approximately $1.0
million in investments.
Our interest rate spread decreased during the nine-month period ended
March 31, 1997 as compared to the comparable period in 1996 to 3.71% from 3.76%,
and our net interest margin remained the same.
Provisions for Loan Losses. Our provisions for loan losses for the
nine-month period in 1997 and the comparable period in 1996 were $32,000 and
$63,000, respectively. We increased the loss provisions in 1996 to recognize the
increase in construction loans and the increase in consumer loan losses
occurring in the nation, regionally and locally as well as to recognize the
increase in the size of our consumer loan portfolio. The increase in the
provision was also made as a result of the added risks of individually large
nonresidential and multi-family real estate loans.
Historically we have emphasized our loss experience over other factors
in establishing the provision for loan losses. We review the allowance for loan
losses in relation to (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrowers'
ability to repay, (iv) the estimated value of any underlying collateral and (v)
current economic conditions. Our allowances for loan losses as of March 31, 1997
and 1996 were $172,000 and $121,000 respectively.
<PAGE>
Other Income. Our other income decreased approximately $79,000, or 43%,
during the nine-month period in 1997 as compared to the comparable period in
1996. This decrease resulted from the sale of an investment security at a loss
of $60,000, a decrease in fees and service charges of $9,000 and a decrease in
other income of $10,000. We chose to sell the available-for-sale security in
order to use the proceeds to pay down FHLB advances and increase overall
liquidity.
Other Expense. Our other expense increased $255,000, or 36.1%, to
$961,000 in 1997 from $706,000 in 1996. The increase was primarily attributable
to an increase of $47,000 in salaries and benefits and to the payment of the
one-time SAIF assessment of $211,000. Prior to the one-time SAIF assessment, our
premium was .23% of total assessable deposits, which was reduced to .0644% of
total assessable deposits subsequent to the special assessment.
Income Tax Expense. Our income tax expense decreased $67,000, or 34.9%,
from $192,000 in 1996 to $125,000 in 1997. The decrease was the result of the
decrease in our net income before taxes.
Comparison of Operating Results For Fiscal Years Ended June 30, 1996 and 1995
Net Income. Net income increased $73,000, or 18.0%, to $479,000 for
1996 from $406,000 for 1995. The increase was primarily due to the increase in
the size of our loan portfolio and the increase in our net interest income.
Net Interest Income. Our net interest income increased $161,000, or
11.7%, to $1.5 million in 1996 from $1.4 million in 1995. This increase was due
primarily to the growth of average interest earning assets to $38.4 million in
1996 from $35.0 million in 1995. In addition, our interest rate spread increased
to 3.75% in 1996 from 3.7% in 1995 and our net interest margin increased to 4.0%
in 1996 from 3.9% in 1995.
The increase in our average interest-earning assets of $3.4 million
reflects an increase of $3.9 million in average loans, an increase in
investments of $169,000 and a decrease in interest-bearing deposits of $604,000.
Our interest rate spread and net interest margin increased in 1996
compared to 1995. This was due to the increase in the yield on average
interest-earning assets to 8.3% in 1996 from 7.8% in 1995, while
interest-bearing liabilities increased to 4.5% in 1996 from 4.2% in 1995.
The yield on our average interest-earning assets increased in 1996 due
to an increase in the yield of both loans and investments. Generally positive
economic conditions resulted in sustained loan demand, which resulted in an
increase in the yield on our average interest-earning assets.
The increase in the cost of our average interest-bearing liabilities
was due primarily to increases in the cost of our interest-bearing deposits, to
4.5% in 1996 from 4.1% in 1995. This was partially offset by the decrease in the
cost of short-term borrowings to 5.9% in 1996 from 6.2% in 1995.
Provisions for Loan Losses. Our provisions for loan losses for 1996 and
1995 were $80,000 and $32,000, respectively. The increase of $48,000 in 1996 was
made to increase our allowance commensurate with an increase in residential
mortgage, construction and consumer lending. We did not charge off any amounts
during 1996 and we experienced a $12,000 recovery during that period. The
$37,000 charge off in 1995 was partially offset by a $2,000 recovery. Our
allowances for loan loss for 1996 and 1995 were $138,000 and $46,000
respectively.
Other Income. Our other income increased approximately $25,000, or
11.3%, in 1996 as compared to 1995. This increase was primarily the result of a
profit of $24,000 in 1996 from CLSC, our wholly-owned service corporation.
Other Expense. Our other expense increased $43,000, or 4.7%, to
$967,000 in 1996 from $924,000 in 1995. The increase was primarily attributable
to an increase of $28,000 in salaries and benefits, primarily due to hiring an
additional loan officer, and a $9,000 increase in occupancy in connection with
the installation of new computers, a "Loan Doc Prep" software package and a
Local Area Network (LAN).
Income Tax Expense. Our income tax expense increased $22,000, or 9.5%,
to $253,000 in 1996 from $231,000 in 1995. The increase was the result of the
increased net income earned in 1996.
Comparison of Operating Results For Fiscal Years Ended June 30, 1995 and 1994
Net Income. Net income increased $125,000, or 44.5%, to $406,000 for
1995 from $281,000 for 1994. The increase was primarily due to the increase in
our loan portfolio, the increase in our net interest income and an increase in
our net interest margin from 3.4% in 1994 to 3.9% in 1995.
Net Interest Income. Our net interest income increased $221,000, or
19.2%, to $1.4 million in 1995 from $1.2 million in 1994. This increase was due
primarily to the growth of average interest earning assets to $35 million in
1995 from $34 million in 1994 and to the increase in our net interest margin to
3.9% in 1995 from 3.4% in 1994.
The increase in our average interest-earning assets of $992,000
reflects an increase of $3.6 million in loans offset by a decrease of $2.9
million in interest-bearing deposits.
<PAGE>
Our interest rate spread increased from 3.1% in 1994 to 3.7% in 1995,
and our net interest margin increased from 3.4% in 1994 to 3.9% in 1995. This
increase was due to the increase in the yield on average interest-earning assets
to 7.8% in 1995 from 7.1% in 1994, while the interest-bearing liabilities only
increased to 4.2% in 1995 from 4.0% in 1994.
The yield on our average interest-earning assets increased in 1995 due
to an increase in the yield of both loans and investments. Strong economic
conditions resulted in continued demand for loans, which resulted in an increase
in the yield on our average interest-earning assets.
The increase in the cost of our average interest-bearing liabilities
was due primarily to increases in the cost of our interest-bearing deposits to
4.1% in 1995 from 4.0% in 1994. During 1995, we also obtained from the Federal
Home Loan Bank an advance in the amount of $1.5 million with an average rate of
6.2%.
Provisions for Loan Losses. Our provisions for loan losses for 1995 and
1994 were $32,000 and $12,000, respectively. The increase of $20,000 was due to
the increase in net charge offs experienced in 1995 as well as the increase in
the size of our loan portfolio. Our allowances for loan losses for 1995 and 1994
were $46,000 and $49,000 respectively.
Other Income. Our other income increased approximately $24,000, or
12.2%, in 1995 as compared to 1994. This increase was primarily the result of an
increase in fee income.
Other Expense. Our other expense increased $61,000, or 7.1%, to
$924,000 in 1995 from $863,000 in 1994. The increase was primarily attributable
to an increase of $25,000 in salaries and benefits, of which approximately
$10,000 was attributable to increased supplemental retirement expense that was
more than offset by income. Additionally, an increase of approximately $28,000
in expenses associated with deferred loan fees was included in employee salaries
and benefits.
Income Tax Expense. Our income tax expense increased $65,000, or 39.2%,
to $231,000 in 1995 from $166,000 in 1994. The increase was the result of the
increased net income earned in 1995.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings and the proceeds
from principal and interest payments on loans. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Our primary investing activity is the origination of loans. During the
years ended June 30, 1996, 1995 and 1994 we originated total loans in the
amounts of $15.4 million, $11.4 million and $11.1 million, respectively. We
purchased loans totaling $64,000 and $311,000 in the fiscal years ended June 30,
1996 and 1994, respectively. Loan principal repayments totaled $10.3 million,
$8.3 million and $8.6 million during the respective periods.
During the nine-month periods ended March 31, 1997 and 1996, we
originated loans of $13.0 million and $10.7 million, respectively. Loan
principal repayments totaled $10.0 million and $7.5 million, respectively,
during these periods.
During the years ended June 30, 1996, 1995, and 1994, we purchased
securities in the amounts of $169,000, $154,000 and $1,107,000, respectively. We
did not receive any proceeds for the sale of securities during 1996, 1995 or
1994. During the nine-month period ended March 31, 1997, however, we sold
approximately $2.9 million of securities for a loss of approximately $60,000.
We had outstanding loan commitments of $265,000 and unused lines of
credit of approximately $2.5 million at March 31, 1997. The unused lines
represent available borrowings under existing home equity lines of credit. We
anticipate that we will have sufficient funds from loan repayments and from our
ability to borrow additional funds from the FHLB of Indianapolis to meet our
current commitments. Certificates of deposit scheduled to mature in one year or
less at March 31, 1997 totaled $14.3 million. We believe that a significant
portion of such deposits will remain with us based upon historical deposit flow
data and our competitive pricing in our market area.
Liquidity management is both a daily and long-term function of our
management strategy. In the event that we should require funds beyond our
ability to generate them internally, additional funds are available through the
use of FHLB advances. We had outstanding FHLB advances in the amount of $2.0
million at March 31, 1997.
<PAGE>
The following is a summary of our cash flows, 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 we experience 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 nine-month periods ended
March 31, 1997 and 1996 and each year in the three-year period ended June 30,
1996.
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
------------------------- ------------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating activities .......................... $ 250 $ 350 $ 518 $ 494 $ 221
Investing activities:
Purchases of
investment securities .................... (36) (136) (169) (154) (1,107)
Sales of investment securities ............. 2,945 -- -- -- --
Principal collected on loans ............... 9,990 7,475 10,279 8,263 8,643
Loans originated ........................... (12,966) (10,724) (15,419) (11,434) (11,061)
Loans sold ................................. 91 -- -- -- --
Loans purchased ............................ -- -- (64) -- (311)
Change in land held
for development .......................... 30 (52) (3) (682) --
Purchases of equipment ..................... (16) (40) (69) (25) (39)
Financing activities:
Increase/(decrease) in NOW,
MMDA and passbook deposits ............... 100 596 460 (1,991) 2,599
Increase in certificates
of deposit ............................... 1,555 1,343 1,965 1,129 1,303
Advances from FHLB ......................... 11,500 3,500 4,500 6,000 --
Payments to FHLB ........................... (12,500) (3,000) (3,000) (4,500) --
-------- -------- -------- -------- --------
Net increase/(decrease) in cash
and cash equivalents ....................... $ 943 $ (688) $ (1,002) $ (2,900) $ 248
======== ======== ======== ======== ========
</TABLE>
Federal regulations require FHLB-member savings associations to
maintain an average daily balance of liquid assets equal to a monthly average of
not less than a specified percentage of their net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time-to-time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%,
although the OTS has proposed a reduction of the percentage to 4%. Also, a
savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings, although the OTS has proposed
eliminating this requirement. Monetary penalties may be imposed for failure to
meet these liquidity requirements. As of March 31, 1997, we had liquid assets of
$2.9 million, and a regulatory liquidity ratio of 7.6%, all of which constituted
short-term investments.
<PAGE>
Pursuant to OTS capital regulations, savings associations must
currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core
capital) requirement, and a total risk-based capital to risk-weighted assets
ratio of 8%. At March 31, 1997, our tangible capital ratio was 10.2%, our core
capital ratio was 10.2%, and our risk-based capital to risk-weighted assets
ratio was 17.9%. Therefore, at March 31, 1997, our capital levels exceeded all
applicable regulatory capital requirements currently in effect. The following
table provides the minimum regulatory capital requirements and our capital
ratios as of March 31, 1997:
<TABLE>
<CAPTION>
At March 31, 1997
OTS Requirement Citizens' Capital Level
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
- ---------------- ------ ------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital......... 1.5% $ 664 10.2% $4,529 $3,865
Core capital (2)......... 3.0 1,328 10.2 4,529 3,201
Risk-based capital....... 8.0 2,098 17.9 4,701 2,603
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total
assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) The OTS has proposed and is expected to adopt a core capital
requirement for savings associations comparable to that adopted by the
OCC for national banks. The new regulation, as proposed, would require
at least 3% of total adjusted assets for savings associations that
received the highest supervisory rating for safety and soundness, and
4% to 5% for all other savings associations. The final form of such new
OTS core capital requirement may differ from that which has been
proposed. We expect to be in compliance with such new requirements. See
"Regulation -- Savings Association Regulatory Capital."
For definitions of tangible capital, core capital and risk-based
capital, see "Regulation -- Savings Association Regulatory Capital."
As of March 31, 1997, 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 our
liquidity, capital resources or results of operations.
Current Accounting Issues
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." In October 1994, the FASB issued SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," which amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans. SFAS No.114, as
amended by SFAS No. 118 as to certain income recognition provisions and
financial statement disclosure requirements, is applicable to all creditors and
to all loans that are individually and specifically evaluated for impairment,
uncollateralized as well as collateralized, except those loans that are
accounted for at fair value or at the lower of cost or fair value. This
Statement requires that the expected loss of interest income on nonperforming
loans be taken into account when calculating loan loss reserves and that
specified impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral if the loan is collateral dependent. Our loans that may be affected
by these accounting standards are our multi-family loans, which are evaluated
based on discounted cash flows, and our collateral dependent loans, where our
current procedures for evaluating impairment result in carrying such loans at
the lower of cost or fair value. We adopted SFAS No. 114 on July 1, 1995,
without a significant detrimental effect on our overall consolidated financial
position or results of operations.
<PAGE>
In November 1993, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 93-6, "Employer's Accounting
for Employee Stock Ownership Plans." The SOP, among other things, changed the
measure of compensation expense recorded by employers from the cost of employee
stock ownership plan shares allocated to employees during the period to the fair
value of employee stock ownership plan shares allocated. Assuming the
acquisition of shares of stock by the ESOP, the application of SOP 93-6 is
likely to result in fluctuations in compensation expense due to changes in the
fair value of the stock.
In May, 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires us to recognize as separate assets rights to
service mortgage loans for others, regardless of how we acquired those servicing
rights. An institution that acquires mortgage servicing rights through either
the purchase or origination of mortgage loans and sells those loans with
servicing rights retained would allocate some of the cost of the loans to the
mortgage servicing rights.
SFAS No. 122 requires that capitalized mortgage servicing rights and
capitalized excess servicing rights be assessed for impairment. Impairment is
measured based on fair value.
SFAS No. 122 was effective for years beginning after December 15, 1995
(July 1, 1996, as to Citizens), for transactions in which an entity acquires
mortgage servicing rights and to impairment evaluations of all capitalized
mortgage servicing rights and capitalized excess servicing receivables whenever
acquired. Retroactive application was prohibited. The provisions of SFAS No. 122
were adopted without material effect.
In October, 1995, the FASB issued SFAS No. 123 entitled "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of
accounting and disclosing the amount of stock-based compensation paid to
employees. Historically, Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees" has measured compensation cost using
the method based on the award's intrinsic value. Those electing to remain with
the accounting in APB Opinion No. 25 must make pro forma disclosures of net
income and, when presented, earnings per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied. The disclosure
provisions of SFAS No. 123 will be adopted by management upon completion of the
Conversion. We do not believe that adoption of SFAS No. 123 disclosure
provisions will have a material adverse effect on our consolidated financial
position or results of operations.
<PAGE>
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 superseded
portions of SFAS No. 122. SFAS No. 125 introduces an approach to accounting for
transfers of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. Transactions subject to the provisions of SFAS
No. 125 include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations and transfers of
receivables with recourse. An entity that undertakes an obligation to service
financial assets recognizes either a servicing asset or liability for the
servicing contract. A servicing asset or liability that is purchased or assumed
is initially recognized at its fair value. Servicing assets and liabilities are
amortized in proportion to and over the period of estimated net servicing income
or net servicing loss and are subject to subsequent assessments for impairment
based on fair value. SFAS No. 125 provides that a liability is removed from the
balance sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor. SFAS No. 125 is effective for applicable transactions occurring after
December 31, 1996, and is to be applied prospectively. Retroactive application
is not permitted. We do not believe that adoption of SFAS No. 125 will have a
material adverse effect on our financial position or results of operations.
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.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities structures of our
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 that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
BUSINESS OF CITIZENS
General
We were organized as a state-chartered building and loan association in
1916 and currently conduct our business from one full-service office located in
Frankfort, Indiana. Our principal business consists of attracting deposits from
the general public and originating fixed-rate and adjustable-rate loans secured
primarily by first mortgage liens on one- to four-family real estate.
Our deposit accounts are insured up to applicable limits by the SAIF of the
FDIC.
<PAGE>
We believe that we have developed a solid reputation among our loyal
customer base because of our commitment to personal service and because of
strong support of the local community. We offer a number of consumer and
commercial financial services. These services include: (i) residential real
estate loans; (ii) multi-family loans; (iii) construction loans; (iv)
nonresidential real estate loans; (v) home equity loans (vi) single-pay loans;
(vii) installment loans; (viii) automobile loans; (ix) NOW accounts; (x) money
market demand accounts ("MMDAs") (xi) passbook savings accounts; (xii)
certificates of deposit and (xiii) individual retirement accounts.
Lending Activities
We have historically concentrated our 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
our loan origination activities, representing 79% of our total loan portfolio at
March 31, 1997. We also offer multi-family mortgage loans, construction loans,
nonresidential real estate loans, and consumer loans. Mortgage loans secured by
multi-family properties and nonresidential real estate totaled approximately
4.2% and 2.2%, respectively, of our total loan portfolio at March 31, 1997.
Construction loans totaled approximately 2.7% of our total loans as of March 31,
1997. Consumer loans constituted approximately 14.3% of our total loan portfolio
at March 31, 1997.
Loan Portfolio Data. The following table sets forth the composition of our
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 March 31, At June 30,
1997 1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amountof Total
------ -------- ------ -------- ------ -------- ------ -------- -------------- --------------
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............... $29,402 79.00% $26,240 76.30% $22,287 76.13% $20,677 79.10% $18,704 79.81% $18,267 78.77%
Non-residential........... 846 2.28 695 2.02 635 2.17 647 2.47 514 2.19 613 2.65
Multi-family.............. 1,563 4.20 1,596 4.64 1,680 5.74 1,665 6.37 1,680 7.17 1,579 6.81
Construction loans:.......... 991 2.66 870 2.53 356 1.22 --- --- --- --- --- ---
Consumer loans:
Single pay................ 1,825 4.90 2,110 6.14 1,795 6.13 558 2.13 361 1.54 303 1.31
Installment .............. 1,493 4.01 1,288 3.74 1,068 3.65 836 3.20 674 2.88 752 3.24
Share .................... 15 .04 63 .18 7 .02 5 .02 47 .20 138 .59
Home equity............... 2,003 5.38 1,949 5.67 1,973 6.74 1,863 7.13 1,549 6.61 1,517 6.54
Home improvement.......... 9 .03 11 .03 14 .04 22 .08 44 .19 97 .42
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans
receivable......... $38,147 102.50% $34,822 101.25% $29,815 101.84% $26,273 100.50% $23,573 100.59% $23,266 100.33%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate ..... $33,997 91.35% $30,860 89.73% $26,043 88.96% $23,248 88.93% $20,594 87.88% $20,191 87.07%
Non-residential.............. 1,108 2.98 1,072 3.12 1,116 3.81 647 2.47 514 2.19 613 2.65
Multi-family real estate..... 1,563 4.20 1,596 4.64 1,681 5.74 1,665 6.37 1,680 7.17 1,579 6.81
Deposits..................... 116 .31 165 .48 82 .28 50 .19 110 .47 207 .89
Auto ...................... 1,025 2.76 832 2.42 691 2.36 513 1.96 374 1.59 390 1.68
Other security............... 220 .59 214 .62 121 .41 66 .25 220 .94 173 .75
Unsecured ................... 118 .31 83 .24 81 .28 84 .33 81 .35 113 .48
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.. 38,147 102.50 34,822 101.25 29,815 101.84 26,273 100.50 23,573 100.59 23,266 100.33
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Deduct:
Deferred loan fees........... 103 .28 95 .28 86 .29 76 .28 52 .23 48 .21
Allowance for loan losses.... 172 .46 138 .40 46 .16 49 .19 38 .16 27 .12
Loans in process............. 656 1.76 197 .57 407 1.39 7 .03 47 .20 --- ---
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable...... $37,216 100.00% $34,392 100.00% $29,276 100.00% $26,141 100.00% $23,436 100.00% $23,191 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage Loans (1):
Adjustable-rate...........$ 9,798 30.67% $ 9,241 32.30%$ 9,319 37.68% $ 7,849 33.96%$ 8,357 39.77%$ 9,295 45.20%
Fixed-rate................ 22,153 69.33 19,368 67.70 15,410 62.32 15,266 66.04 12,657 60.23 11,270 54.80
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total................... $31,951 100.00% $28,609 100.00% $24,729 100.00% $23,115 100.00% $21,014 100.00% $20,565 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
(1) Balances in this category include escrows and reserves for uncollected
interest.
<PAGE>
The following table sets forth certain information at June 30, 1996,
regarding the dollar amount of loans maturing in our 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. We expect prepayments will cause actual
maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended June 30,
Outstanding at 2000 2002 2007 2012
June 30, to to to and
1996 1997 1998 1999 2001 2006 2011 following
------- ------ ---- ----- ---- ------ ------- -------
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans.................. $26,240 $ 33 $ 18 $ 104 $263 $2,890 $14,114 $ 8,818
Multi-family loans.................... 1,596 --- --- --- --- 245 1,351 ---
Non-residential loans.............. 695 --- --- --- 38 83 574 ---
Construction loans.................... 870 870 --- --- --- --- --- ---
Installment loans.................... 1,288 59 266 365 488 110 --- ---
Single pay loans...................... 2,110 1,748 167 96 99 --- --- ---
Loans secured by deposits............. 63 48 15 --- --- --- --- ---
Home equity loans..................... 1,949 --- --- --- --- --- --- 1,949
Home improvement loans................ 11 --- --- 3 8 --- --- ---
------- ------ ---- ----- ---- ------ ------- -------
Total............................ $34,822 $2,758 $466 $ 568 $896 $3,328 $16,039 $10,767
======= ====== ==== ===== ==== ====== ======= =======
</TABLE>
The following table sets forth, as of June 30, 1996, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 1997
Fixed Rates Variable Rates Total
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans.............. $19,221 $ 6,986 $26,207
Multi-family loans............. --- 1,596 1,596
Non-residential loans.......... 41 654 695
Construction loans................ --- --- ---
Installment loans................. 1,229 --- 1,229
Single pay loans.................. 202 160 362
Loans secured by deposits......... 15 --- 15
Home equity loans................. --- 1,949 1,949
Home improvement loans............ 11 --- 11
------- ------- -------
Total.......................... $20,719 $11,345 $32,064
======= ======= =======
</TABLE>
<PAGE>
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
one- to four-family residential mortgage loans in amounts up to 95% of the
lesser of the appraised value or purchase price, with private mortgage insurance
required on loans with a loan-to-value ratio in excess of 80%. The cost of such
insurance is factored into the annual percentage rate on such loans. We
originate and retain fixed rate loans which provide for the payment of principal
and interest over a 15- or 20-year period, or balloon loans having terms of up
to 20 years with principal and interest payments calculated using a 30-year
amortization period.
We also offer adjustable-rate mortgage ("ARM") loans. The interest rate
on ARM loans is indexed to the one-year U.S. Treasury securities yields adjusted
to a constant maturity. We may offer discounted initial interest rates on ARM
loans, but we require that the borrower qualify for the ARM loan at the
fully-indexed rate (the index rate plus the margin). A substantial portion of
the ARM loans in our portfolio at March 31, 1997 provide for maximum rate
adjustments per year and over the life of the loan of 1% and 6%, respectively.
Our residential ARMs are amortized for terms up to 25 years.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At March 31, 1997, approximately 29%
of our one- to four-family residential loans had adjustable rates of interest.
<PAGE>
All of the one- to four-family residential mortgage loans that we
originate include "due-on-sale" clauses, which give us 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. However, we occasionally permit assumptions
of existing residential mortgage loans on a case-by-case basis.
At March 31, 1997, approximately $29.4 million, or 79% of our portfolio
of loans, consisted of one- to four-family residential loans. Approximately
$95,000, or .32% of total residential loans, were included in non-performing
assets as of that date. See "--Non-Performing and Problem Assets."
Multi-Family Loans. At March 31, 1997, approximately $1.6 million, or
4.2% of our total loan portfolio, consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). Our
multi-family loans are generally written as one-year adjustable rate loans
indexed to the one-year U.S. Treasury rate or to our internal loan rate which we
establish from time-to-time. We write multi-family loans with maximum
Loan-to-Value ratios of 80%. Our largest multi-family loan as of March 31, 1997
was $841,000 and was secured by an apartment complex in Frankfort. On the same
date, there were no multi-family loans included in non-performing assets.
Multi-family loans, like nonresidential real estate loans, involve a
greater risk than do residential loans. See "-- Nonresidential Real Estate
Loans" below.
Construction Loans. We offer construction loans with respect to
residential and nonresidential real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). At March 31, 1997,
approximately $991,000, or 2.7% of our total loan portfolio, consisted of
construction loans. The largest construction loan at March 31, 1997, totaling
$180,000, was secured by a single-family residence near Frankfort.
None of our construction loans were included in non-performing assets on that
date.
Construction loans are generally written as six-month, fixed-rate loans
with interest calculated on the amount disbursed under the loan and payable
monthly. We generally require an 80% Loan-to-Value Ratio for our construction
loans. Inspections are made prior to any disbursement under a construction loan,
and we do not normally charge commitment fees for construction loans.
While providing us with a comparable, and in some cases higher, yield
than a conventional mortgage loan, construction loans involve a higher level of
risk. For example, if a project is not completed and the borrower defaults, we
may have to hire another contractor to complete the project at a higher cost.
Also, a project may be completed, but may not be salable, resulting in the
borrower defaulting and our taking title to the project.
Nonresidential Real Estate Loans. Our nonresidential real estate loans
are secured by churches, office buildings, and other commercial properties. We
generally originate non-residential real estate loans as one-year adjustable
rate loans indexed to the one-year U.S. Treasury securities yield adjusted to a
constant maturity, and are written for maximum terms of 20 years with maximum
Loan-to-Value ratios of 75%. At March 31, 1997, our largest nonresidential loan
was $161,000 and was secured by a manufacturing facility in Frankfort. At March
31, 1997, approximately $846,000, or 2.3% of our total loan portfolio, consisted
of nonresidential real estate loans. On the same date, there were no
nonresidential real estate loans included in non-performing assets.
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.
Consumer Loans. Our consumer loans, consisting primarily of home equity
loans, personal installment loans and "single pay" loans aggregated
approximately $5.3 million at March 31, 1997, or 14.3% of our total loan
portfolio. We consistently originate consumer loans to meet the needs of our
<PAGE>
customers and to assist in meeting our asset/liability management goals. All of
our consumer loans, except loans secured by deposits, are fixed-rate loans with
terms that vary from six months (for unsecured installment loans) to 60 months
(for home improvement loans and loans secured by new automobiles). At March 31,
1997, 97.8% of our consumer loans were secured by collateral. Our loans secured
by deposits are made up to 90% of the original account balance and, at March 31,
1997, accrued at a rate of 8.5%. This rate may change but will always be at
least 1% over the underlying passbook or certificate of deposit rate. Interest
on loans secured by deposits is paid semi-annually.
We also offer home equity lines of credit and home improvement loans
secured by real estate. The interest rate on a home equity line of credit is
ordinarily tied to the prime rate with a margin of positive 2.0% and a maximum
interest rate of 18%. We do not always hold a first mortgage on our home equity
lines of credit, although we do hold a first mortgage with respect to
approximately 90% of such loans in our portfolio. We ordinarily offer fixed-rate
home improvement loans secured by real estate with a term not to exceed five
years. We restrict the amount that a customer may borrow under an equity line of
credit to $100,000, subject to the general restriction applicable to all second
mortgage loans that limits the amount we may loan to a borrower to an amount
that, when added to any existing mortgage loans, does not exceed 80% of the
appraised value of the collateral property.
At March 31, 1997, we had outstanding approximately $2.0 million of
home equity loans, with unused lines of credit totaling approximately $2.5
million. Home equity loans in the amount of $51,000 were included in
non-performing assets on that date.
Consumer loans may entail greater risk than 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. 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 March 31, 1997, consumer loans amounting to $70,000 were included
in non-performing assets. See "-- Non-Performing and Problem Assets."
Single-Pay Loans. We offer single-pay loans, which are short-term loans
secured by real estate, automobiles or other types of collateral that are
payable with a single payment rather than by installment. Typically, single-pay
loans secured by real estate are written with terms of one year or less, while
single-pay loans secured by other types of collateral are written for terms of
90 days to six months. Of the approximately $1.8 million of single-pay loans in
our portfolio as of March 31, 1997, approximately $950,000 were secured by
residential mortgages and $137,000 were secured by land. The remaining
approximately $700,000 of loans in this category were consumer loans, typically
secured by automobiles or subordinate liens on real estate. At March 31, 1997,
we had one delinquent single-pay loan in the amount of $1,000 in our portfolio.
Origination, Purchase and Sale of Loans. We historically have
originated our mortgage loans pursuant to our own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA")
because we do not require current property surveys in most cases. We may begin
originating fixed-rate residential mortgage loans for sale to the FHLMC on a
servicing-retained basis in the future. In the event that we originate loans for
sale to the FHLMC in the secondary market, such loans will be originated in
accordance with the guidelines established by the FHLMC and will be sold
promptly after they are originated.
We confine our loan origination activities primarily to Clinton County.
At March 31, 1997, we had one loan totaling approximately $74,000 secured by
property located outside of Indiana. Our loan originations are generated from
referrals from existing customers, real estate brokers, and newspaper and
periodical advertising. Loan applications are underwritten and processed at our
office.
Our 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, we study the employment and credit history and information on the
historical and projected income and expenses of our mortgagors. All mortgage
loans are approved by our Loan Committee. Consumer loans up to $15,000 may be
approved by a Loan Officer. Consumer loans for more than $15,000 must be
approved by the senior loan officer or the President.
We generally require appraisals on all real property securing our loans
and require an attorney's opinion and a valid lien on the mortgaged real estate.
Appraisals for all real property securing mortgage loans are performed by
independent appraisers who are state-licensed. We require fire and extended
coverage insurance in amounts at least equal to the principal amount of the loan
and also require flood insurance to protect the property securing its interest
if the property is in a flood plain. We also generally require private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. We require escrow accounts for insurance premiums and taxes
for loans that require private mortgage insurance.
<PAGE>
Our 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 following table shows our loan origination and repayment activity
during the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans Originated:
Real estate mortgage loans:
Residential loans ........................ $ 7,344 $ 6,055 $ 8,738 $ 5,748 $ 7,216
Nonresidential loans ..................... 202 111 175 190 108
Multi-family loans ....................... 102 -- -- 56 48
Construction loans ......................... 1,559 1,183 1,603 356 --
Installment loans .......................... 973 746 1,076 961 767
Single pay loans ........................... 1,933 1,940 2,834 3,063 1,582
Loans secured by deposits .................. 5 27 63 6 5
Home equity loans .......................... 848 662 930 1,054 1,335
Home improvement loans ..................... -- -- -- -- --
-------- -------- -------- -------- --------
Total originations ..................... 12,966 10,724 15,419 11,434 11,061
Loans purchased ............................ -- -- 64 -- 311
Reductions:
Principal loan repayments .................. (9,990) (7,475) (10,279) (8,263) (8,643)
Loans sold ................................. (91) -- -- -- --
Transfers from loans to real estate owned .. -- -- -- -- --
-------- -------- -------- -------- --------
Total reductions ....................... (10,081) (7,475) (10,279) (8,263) (8,643)
Decrease in other items (1) ................ (60) (23) (88) (37) (24)
-------- -------- -------- -------- --------
Net increase (decrease) .................... $ 2,825 $ 3,226 $ 5,116 $ 3,134 $ 2,705
======== ======== ======== ======== ========
</TABLE>
(1) Other items consist of amortization of deferred loan origination costs
and the provision for losses on loans.
Our residential loan originations during the year ended June 30, 1996
totaled $8.7 million, compared to $5.7 million and $7.2 million in the years
ended June 30, 1995 and 1994, respectively.
Origination and Other Fees. We realize income from late charges,
checking account service charges, and fees for other miscellaneous services. We
currently charge origination fees on our mortgage loans of 1% of the loan
amount, up to $100,000, and .5% of the amount of the loan that exceeds $100,000.
We also may charge points on a mortgage loan as consideration for a lower
interest rate, although we do so infrequently. 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.
Non-Performing and Problem Assets
After a mortgage loan becomes 15 days past due, we deliver a
delinquency notice to the borrower. When loans are 30 to 60 days in default, we
send additional delinquency notices and make personal contact by telephone with
the borrower to establish acceptable repayment schedules. When loans become 60
days in default, we again contact the borrower, this time in person, to
establish acceptable repayment schedules. When a mortgage loan is 90 days
delinquent, we will have either entered into a workout plan with the borrower or
referred the matter to our attorney for collection. Management is authorized to
commence foreclosure proceedings for any loan upon making a determination that
it is prudent to do so.
We review mortgage loans on a regular basis and place such loans on a
non-accrual status when they become 90 days delinquent. Generally, when loans
are placed on a non-accrual status, unpaid accrued interest is written off, and
further income is recognized only to the extent received.
Non-performing Assets. At March 31, 1997, $205,000, or .45% of our
total assets, were non-performing (non-performing loans and non-accruing loans)
compared to $222,000, or .50%, of our total assets at June 30, 1996. At March
31, 1997, residential loans and consumer loans accounted for $95,000 and
$70,000, respectively, of non-performing assets. We had no Real Estate Owned
("REO") properties as of March 31, 1997.
<PAGE>
The table below sets forth the amounts and categories of our
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is our policy 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 in
excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At March 31, At June 30,
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C> <C>
Non-performing loans................... $165 $181 $ 98 $196
Troubled debt restructurings........... 40 41 42 40
---- ---- ---- ----
Total non-performing loans........... 205 222 140 236
Foreclosed real estate................. --- --- --- ---
---- ---- ---- ----
Total non-performing assets.......... $205 $222 $140 $236
==== ==== ==== ====
Non-performing loans to total loans....... 0.55% 0.64% 0.48% 0.90%
==== ==== ==== ====
Non-performing assets to total assets..... 0.45% 0.50% 0.35% 0.61%
==== ==== ==== ====
</TABLE>
Interest on loans was $3,000, $4,000, $2,000 and $6,000 less than would
have been reported for the nine months ended March 31, 1997 and the years ended
June 30, 1996, 1995 and 1994, respectively, if the non-performing loans
summarized above had been current in accordance with their original terms.
At March 31, 1997, we held loans delinquent from 30 to 59 days totaling
approximately $391,000. Other than these loans and the other delinquent loans
disclosed elsewhere in this section, we were not aware of any other loans, the
borrowers of which were experiencing financial difficulties.
<PAGE>
Delinquent Loans. The following table sets forth certain information at
March 31, 1997, and at June 30, 1996, 1995, and 1994, relating to delinquencies
in Citizens's portfolio. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At March 31, 1997 At June 30, 1996
------------------------------------------------- ------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ------------------------- ----------------------- -----------------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans of
-------- ----- -------- ----- -------- ----- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
mortgage loans.......... 4 $125 4 $ 95 7 $158 8 $ 89
Nonresidential
mortgage loans.......... --- --- --- --- --- --- --- ---
Multi-family
mortgage loans.......... --- --- --- --- --- --- --- ---
Installment loans.......... --- --- 5 18 6 16 8 35
Single pay loans........... --- --- 1 1 4 24 2 12
Loans secured
by deposit.............. --- --- --- --- --- --- --- ---
Home equity loans.......... 5 128 5 51 1 6 3 45
Home improvement loans..... --- --- --- --- --- --- --- ---
--- ---- -- ---- -- ---- -- ----
Total................... 9 $253 15 $165 18 $204 21 $181
= ==== == ==== == ==== == ====
Delinquent loans to
total loans............. 1.12% 1.12%
==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1995 At June 30, 1994
------------------------------------------------- ------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ------------------------- ----------------------- -----------------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans of
-------- ----- -------- ----- -------- ----- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
mortgage loans.......... 6 $133 3 $41 8 $199 10 $134
Nonresidential
mortgage loans.......... --- --- --- --- --- --- 1 27
Multi-family
mortgage loans.......... --- --- --- --- --- --- --- ---
Installment loans.......... 5 25 3 9 3 7 7 18
Single pay loans........... 1 2 3 27 --- --- --- ---
Loans secured
by deposit.............. --- --- --- --- --- --- --- ---
Home equity loans.......... 1 10 2 21 --- --- 3 15
Home improvement loans..... --- --- --- --- --- --- 1 2
-- ---- -- ----- -- ---- -- ----
Total................... 13 $170 11 $ 98 11 $206 22 $196
== ==== == ===== == ==== == ====
Delinquent loans to
total loans............. .91% 1.54%
=== ====
</TABLE>
<PAGE>
Classified assets. Federal regulations and our Asset Classification
Policy provide for the classification of loans and other assets such as debt and
equity securities considered by the OTS 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.
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. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At March 31, 1997, the aggregate amount of our classified assets, and
of our general and specific loss allowances were as follows:
At March 31, 1997
-----------------
(In thousands)
Substandard assets............................ $119
Doubtful assets............................... ---
Loss assets................................... ---
----
Total classified assets................... $119
====
General loss allowances....................... $172
Specific loss allowances...................... ---
----
Total allowances.......................... $172
====
We regularly review our loan portfolio to determine whether any loans
require classification in accordance with applicable regulations.
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 our review and evaluation of current economic
conditions (including those of our 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 our opinion, our allowance for
loan losses is adequate to absorb probable losses inherent in the loan portfolio
at March 31, 1997. However, there can be no assurance that regulators, when
reviewing our loan portfolio in the future, will not require increases in our
allowances for loan losses or that changes in economic conditions will not
adversely affect our loan portfolio.
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance during the past three fiscal years ended June 30, 1996, and the
nine-month periods ended March 31, 1997, and March 31, 1996.
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $138 $ 46 $ 46 $ 49 $ 38
Charge-offs:
Residential mortgage loans............. --- --- --- --- ---
Nonresidential mortgage loans.......... --- --- --- --- ---
Multi-family loans..................... --- --- --- --- ---
Construction loans.......................... --- --- --- --- ---
Installment loans...................... --- --- --- (11) (6)
Single pay loans....................... --- --- --- (26) ---
Loans secured by deposits.............. --- --- --- --- ---
Home equity loans...................... --- --- --- --- ---
Home improvement loans................. --- --- --- --- ---
---- ---- ---- ----- -----
Total charge-offs.................... --- --- --- (37) (6)
---- ---- ---- ----- -----
Recoveries:
Residential mortgage..................... --- 2 2 --- ---
Single pay............................... 2 1 1 --- 1
Installment.............................. --- 9 9 2 4
---- ---- ---- ----- -----
Total recoveries..................... 2 12 12 2 5
---- ---- ---- ----- -----
Net (charge-offs) recoveries................ 2 12 12 (35) (1)
Provision for losses on loans............... 32 63 80 32 12
---- ---- ---- ----- -----
Balance end of period.................... $172 $121 $138 $ 46 $ 49
==== ==== ==== ===== =====
Allowance for loan losses as a percent of
total loans outstanding.................. 0.46% 0.37% 0.40% 0.16% 0.19%
Ratio of net (charge-offs) recoveries
to average loans outstanding............. .004 .04 .04 (.12) (.004)
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of Citizens' allowance for loan losses at the
dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict our use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
At March 31, At June 30,
1997 1996 1996 1995 1994
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Real estate mortgage loans:
Residential............... $64 77.08% $41 75.25% $49 75.35% $15 74.75% $14 78.71%
Nonresidential............ 2 2.22 1 2.07 1 2.00 --- 2.13 --- 2.46
Multi-family.............. 3 4.10 2 4.86 3 4.58 1 5.64 1 6.34
Construction loans.......... 17 2.60 10 2.39 11 2.50 2 1.19 --- ---
Installment loans........... 49 3.91 36 3.57 41 3.70 11 3.58 17 3.18
Loans secured by deposits... --- .04 --- .08 --- .18 --- .02 --- .02
Home equity loans........... 6 5.25 6 5.70 6 5.60 6 6.62 5 7.09
Home improvement loans...... --- .02 --- .04 --- .03 --- .05 --- .08
Single pay loans............ 31 4.78 25 6.04 27 6.06 11 6.02 12 2.12
---- ------ ---- ------ ---- ------ --- ------ --- ------
Total....................... $172 100.00% $121 100.00% $138 100.00% $46 100.00% $49 100.00%
==== ====== ==== ====== ==== ====== === ====== === ======
</TABLE>
<PAGE>
Investments
Investments. Our investment portfolio consists of equity interests in
pooled investment trusts, and FHLB stock. At March 31, 1997, approximately
$491,000, or 1.1%, of our total assets consisted of such investments. We also
had $3.9 million in interest-earning deposits as of that date.
The following table sets forth the amortized cost and the market value
of our investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At June 30,
1997 1996 1995 1994
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
Equity interests in pooled
investment trusts................ $159 $159 $3,087 $3,003 $2,913 $2,832 $2,759 $2,677
FHLB stock............................ 332 332 332 332 332 332 332 332
---- ---- ------ ------ ------ ------ ------ ------
Total investments................ $491 $491 $3,419 $3,335 $3,245 $3,164 $3,091 $3,009
==== ==== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the amount of investment securities
(excluding FHLB stock) which mature during each of the periods indicated and the
weighted average yields for each range of maturities at March 31, 1997.
<TABLE>
<CAPTION>
Amount at March 31, 1997 which matures in
One Year One Year Five Years After
or Less to Five Years to Ten Years Ten Years
Amortized Average Amoritzed Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
Equity interests in
<S> <C> <C> <C> <C> <C> <C> <C> <C>
pooled investment trusts......... $159 6.39% $--- ---% $--- ---% $--- ---%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Sources of Funds
General. Deposits have traditionally been our primary source of funds
for use in lending and investment activities. In addition to deposits, we derive
funds from scheduled loan payments, investment maturities, loan prepayments,
retained earnings, income on earning assets and borrowings. 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. The deposits shown
below include approximately $4.4 million in public funds deposited by various
state, county and local governments which may fluctuate depending upon
prevailing interest rates and the rates offered by our competitors. 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.
Deposits. We attract deposits principally from within Clinton County
through the offering of a broad selection of deposit instruments, including
fixed-rate passbook accounts, NOW accounts, variable rate money market accounts,
fixed-term certificates of deposit, individual retirement accounts and savings
accounts. We do not actively solicit or advertise for deposits outside of
Clinton County, and substantially all of our 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. We do not pay broker fees for any deposits we receive.
We establish the interest rates paid, maturity terms, service fees and
withdrawal penalties 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. We rely, in part, on
customer service and long-standing relationships with customers to attract and
retain our deposits. We also closely price our deposits to the rates offered by
our competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
<PAGE>
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. We manage
the pricing of our deposits in keeping with our asset/liability management and
profitability objectives. Based on our experience, we believe that our passbook,
NOW and MMDAs are relatively stable sources of deposits. However, the ability to
attract and maintain certificates of deposit, and the rates we pay on these
deposits, have been and will continue to be significantly affected by market
conditions.
An analysis of our deposit accounts by type, maturity, and rate at
March 31, 1997, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening March 31, % of Average
Type of Account Balance 1997 Deposits Rate
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Fixed rate, passbook accounts......... $ 50 $6,665 17.90% 3.22%
Variable rate, money market........... 2,500 3,130 8.40 3.30
NOW accounts.......................... 50 4,133 11.09 2.16
------- ------
Total withdrawable.................. 13,928 37.39 2.92
Certificates (original terms):
3 months or less...................... 1,000 1,448 3.89 5.15
6 months.............................. 1,000 5,090 13.66 5.04
12 months............................. 1.000 923 2.48 4.77
13 months............................. 5,000 2,047 5.49 5.34
18 months............................. 1,000 583 1.57 4.93
23 months............................. 5,000 4,457 11.96 5.90
30 months ............................ 1,000 1,162 3.12 5.26
36 months............................. 1,000 939 2.52 5.12
Other certificates.................... 1,000 3,462 9.29 5.99
------- ------
Total certificates....................... 20,111 53.98 5.43
IRA's:
Variable rate, money market........... 50 198 0.53 3.30
6 months.............................. 1,000 33 0.09 4.48
12 months............................. 1.000 166 0.44 4.73
18 months............................. 1,000 33 0.09 4.91
23 months............................. 1,000 1,387 3.72 5.81
36 months............................. 1,000 1,261 3.39 5.14
Other certificates.................... 1,000 138 0.37 5.99
------- ------
Total IRA's.............................. 3,216 8.63 5.32
------- ------
Total deposits........................... $37,255 100.00% 4.52%
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of our time deposits at the dates indicated:
<TABLE>
<CAPTION>
At March 31, At June 30,
1997 1996 1995 1994
------- ------- ------- -------
(In thousands)
<C> <C> <C> <C> <C>
3.00 to 3.99%............................... $ --- $ --- $ 219 $ 5,454
4.00 to 4.99%............................... 4,191 5,173 6,588 6,187
5.00 to 5.99%............................... 15,388 10,629 7,000 3,869
6.00 to 6.99%............................... 3,425 5,283 4,349 1,199
7.00 to 7.99%............................... 120 484 866 790
8.00 to 8.99%............................... 5 5 587 981
------- ------- ------- -------
Total.................................... $23,129 $21,574 $19,609 $18,480
======= ======= ======= =======
</TABLE>
<PAGE>
The average amount of and average interest rate paid on, the following
deposits categories which were in excess of ten percent of average total
deposits are as follows:
<TABLE>
<CAPTION>
Nine months ended Years ended June 30,
March 31, 1997 1996 1995 1994
Average Average Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 6,653 3.22% $ 6,867 3.25% $ 7,523 3.24% $ 7,601 3.24%
NOW accounts 4,081 2.16 3,843 2.06 3,773 2.37 3,576 2.36
Money market accounts 3,286 3.30 3,233 3.30 3,389 3.30 3,956 3.00
Time deposit accounts 22,305 5.44 20,513 5.47 17,920 5.45 16,785 4.73
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following March
31, 1997. Matured certificates, which have not been renewed as of March 31,
1997, have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at March 31, 1997
One Year Two Three Greater Than
or Less Years Years Three Years
(In thousands)
<C> <C> <C> <C> <C>
3.00 to 3.99%............................... $ --- $ --- $ --- $ ---
4.00 to 4.99%............................... 3,833 358 --- ---
5.00 to 5.99%............................... 8,633 5,021 1,400 333
6.00 to 6.99%............................... 1,799 202 179 1,246
7.00 to 7.99%............................... --- 20 --- 100
8.00 to 8.99%............................... --- --- --- 5
------- ------ ------ ------
Total.................................... $14,265 $5,601 $1,579 $1,684
======= ====== ====== ======
</TABLE>
The following table indicates the amount of our other certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
1997.
At March 31, 1997
Maturity Period (In thousands)
Three months or less................................ $2,505
Greater than three months through six months........ 2,250
Greater than six months through twelve months....... ---
Over twelve months.................................. 499
------
Total.......................................... $5,254
======
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that we offer at the dates indicated, and the
amount of increase or decrease in such deposits as compared to the previous
period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance Increase
at (Decrease) at (Decrease)
March 31, % of from June 30, % of from
1997 Deposits 1996 1996 Deposits 1995
------- ------ ------ ------- ------ ------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts..... $6,665 17.90% $(33) $6,698 18.82% $(195)
Variable rate, money market....... 3,130 8.40 99 3,031 8.51 263
NOW accounts...................... 4,133 11.09 59 4,074 11.44 488
------- ------ ------ ------- ------ ------
Total withdrawable.............. 13,928 37.39 125 13,803 38.77 556
Certificates (original terms):
3 months.......................... 1,448 3.89 (1,414) 2,862 8.04 1,300
6 months.......................... 5,090 13.66 2,547 2,543 7.14 395
12 months......................... 923 2.48 (20) 943 2.65 (29)
13 months......................... 2,047 5.49 37 2,010 5.65 36
18 months......................... 583 1.57 282 301 0.85 63
23 months......................... 4,457 11.96 773 3,684 10.35 1,189
30 months ........................ 1,162 3.12 (168) 1,330 3.74 (466)
36 months......................... 939 2.52 (300) 1,239 3.48 (265)
Other certificates................ 3,462 9.29 (293) 3,755 10.54 (328)
------- ------ ------ ------- ------ ------
Total certificates................... 20,111 53.98 1,444 18,667 52.44 1,895
IRA's
Variable rate, money market....... 198 0.53 (26) 224 0.63 (95)
6 months.......................... 33 0.09 (3) 36 0.10 1
12 months......................... 166 0.44 3 163 0.46 (91)
18 months......................... 33 0.09 33 --- --- ---
23 months......................... 1,387 3.72 441 946 2.66 523
30 months......................... --- --- --- --- --- (6)
36 months ........................ 1,261 3.39 (368) 1,629 4.58 (326)
Other certificates................ 138 0.37 6 132 0.36 (32)
------- ------ ------ ------- ------ ------
Total IRA's....................... 3,216 8.63 86 3,130 8.79 (26)
------- ------ ------ ------- ------ ------
Total deposits....................... $37,255 100.00% $1,655 $35,600 100.00% $2,425
======= ====== ====== ======= ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance Increase Balance
at (Decrease) at
June 30, % of from June 30, % of
1995 Deposits 1994 1994 Deposits
------- ------ ----- ------- ------
Withdrawable:
<S> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts..... $6,893 20.78% $(1,278) $8,171 24.01%
Variable rate, money market....... 2,768 8.34 (401) 3,169 9.31
NOW accounts...................... 3,586 10.81 (120) 3,706 10.89
------- ------ ----- ------- ------
Total withdrawable.............. 13,247 39.93 (1,799) 15,046 44.21
Certificates (original terms):
3 months.......................... 1,562 4.71 (686) 2,248 6.61
6 months.......................... 2,148 6.47 (1,116) 3,264 9.59
12 months......................... 972 2.93 (338) 1,310 3.85
13 months......................... 1,974 5.95 1,974 --- ---
18 months......................... 238 0.72 (162) 400 1.17
23 months......................... 2,495 7.52 2,213 282 0.83
30 months ........................ 1,796 5.41 (500) 2,296 6.75
36 months......................... 1,504 4.53 (253) 1,757 5.16
Other certificates................ 4,083 12.31 (235) 4,318 12.68
------- ------ ----- ------- ------
Total certificates................... 16,772 50.55 897 15,875 46.64
IRA's
Variable rate, money market....... 319 0.97 (192) 511 1.50
6 months.......................... 35 0.11 (4) 39 0.11
12 months......................... 254 0.76 (102) 356 1.05
18 months......................... --- --- --- --- ---
23 months......................... 423 1.28 423 --- ---
30 months......................... 6 0.02 --- 6 0.02
36 months ........................ 1,955 5.89 (179) 2,134 6.27
Other certificates................ 164 0.49 94 70 0.20
------- ------ ----- ------- ------
Total IRA's....................... 3,156 9.52 40 3,116 9.15
------- ------ ----- ------- ------
Total deposits....................... $33,175 100.00% $(862) $34,037 100.00%
======= ====== ===== ======= ======
</TABLE>
<PAGE>
Total deposits at March 31, 1997 were approximately $37.3 million,
compared to approximately $34.0 million at June 30, 1994. Our deposit base is
somewhat dependent upon the manufacturing sector of Clinton County's economy.
Although Clinton County's manufacturing sector is relatively diversified and not
significantly dependent upon any industry, a loss of a material portion of the
manufacturing workforce could adversely affect our ability to attract deposits
due to the loss of personal income attributable to the lost manufacturing jobs
and the attendant loss in service industry jobs.
In the unlikely event of our liquidation after the Conversion, all
claims of creditors (including those of deposit account holders, to the extent
of their deposit balances) would be paid first followed by distribution of the
liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Citizens. See "The Conversion -- Principal Effects of Conversion -- Effect on
Liquidation Rights."
Borrowings. We focus on generating high quality loans and then seek the
best source of funding from deposits, investments or borrowings. At March 31,
1997, we had borrowings in the amount of $2.0 million from the FHLB of
Indianapolis which bear fixed and variable interest rates and are due at various
dates through October, 1998. We are required to maintain eligible loans in our
portfolio of at least 170% of outstanding advances as collateral for advances
from the FHLB of Indianapolis. We do not anticipate any difficulty in obtaining
advances appropriate to meet our requirements in the future.
The following table presents certain information relating to our
borrowings at or for the nine months ended March 31, 1997 and 1996 and at or for
the years ended June 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
At or for the
Nine Months At or for the Year
Ended March 31, Ended June 30,
1997 1996 1996 1995 1994
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB Advances:
Outstanding at end of period.................... $ 2,000 $2,000 $3,000 $1,500 $ ---
Average balance outstanding for period.......... 3,275 1,800 1,923 462 ---
Maximum amount outstanding at any
month-end during the period................... 5,000 2,000 3,000 1,500 ---
Weighted average interest rate
during the period............................. 5.49 % 6.05% 5.94 % 6.24% ---%
Weighted average interest rate
at end of period.............................. 5.87 5.93 5.82 5.87 ---
</TABLE>
Properties
The following table provides certain information with respect to our
office as of March 31, 1997:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
60 South Main Street Owned 1977 $37,255 $589 13,924
Frankfort, IN 46041
</TABLE>
We own computer and data processing equipment which we use for
transaction processing, loan origination, and accounting. The net book value of
our electronic data processing equipment was approximately $24,000 at March 31,
1997.
We operate one automated teller machine ("ATM"), which is located in
the vestibule of our office. Our ATM participates in the Cirrus(R) and
MagicLine(R) networks.
We have also contracted for the data processing and reporting services
of BISYS, Inc. in Houston, Texas. The cost of these data processing services is
approximately $8,500 per month.
We also have contracted with the FHLB of Indianapolis for item
processing for a fee of approximately $3,000 per month.
<PAGE>
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries). Because CLSC's activities are
not permissible for national banks, our investment in CLSC is deducted from our
capital.
We currently own one subsidiary, CLSC, which primarily engages in the
purchase and development of tracts of undeveloped land. Because CLSC engages in
activities that are not permissible for a national bank, OTS regulations
prohibit us from including our investment in CLSC in our calculation of
regulatory capital. CLSC purchases undeveloped land, constructs improvements and
infrastructure on the land, and then sells lots to builders, who construct homes
for sale to homebuyers. CLSC ordinarily receives payment when title is
transferred.
CLSC owns a 104-acre tract of contiguous land on which it is presently
developing 59 acres. CLSC intends to complete the development of the remainder
of the property in approximately ten years. The 59 acres that are presently
being developed will include 64 building lots known as the Southridge Addition,
and 89 building lots known as the Meadow Brook Addition. Both of these Additions
have been annexed into the Town of Frankfort. We purchased this land in 1989
intending to develop these housing additions. However, following enactment of
the Financial Institutions Reform Recovery and Enforcement Act of 1989, the FDIC
directed us to transfer our interest in these developments to CLSC, which we
did, effective June 30, 1994. Phase I of the development includes 33 completed
lots in the Southridge Addition, of which 21 lots have been sold and on which 19
houses have been completed, and 26 lots in the Meadow Brook Addition, of which 3
lots have been sold with houses presently under construction on those lots, one
of which is a "speculative house" that we financed. The Southridge lots have
been priced generally at $19,000 to $22,000 each, with completed homes selling
generally for $90,000 to $120,000, and the Meadow Brook lots have been priced
generally at $23,000 to $26,000 with completed homes expected to sell generally
for $100,000 to $150,000. CLSC intends to develop the remaining 31 lots in the
Southridge Addition beginning in 1998. Phase II and Phase III of the Meadow
Brook development, consisting of approximately 63 lots, are still in the design
stage. CLSC also intends to develop a 25-acre tract located in Frankfort, with
homes generally selling for $175,000 to $300,000. This project is in the early
stages of development.
CLSC intends ultimately to develop the remaining 20-acre parcel of
land, known as the Mann tract, that it presently owns. The development of this
land, which is part of the 104-acre tract discussed above, likely will not be
completed for approximately 10 years. The Mann tract is presently being leased
for farming purposes. CLSC has no present intentions to acquire additional land
for development purposes.
For the year ended June 30, 1996, CLSC earned a profit of $24,000 for
the year ended June 30, 1996, and $2,000 for the year ended June 30, 1995. CLSC
recorded a loss of $163 for the 1994 fiscal year. At March 31, 1997, Citizens
had an investment in CLSC of $465,000 and loans outstanding to CLSC of
approximately $575,000 with an interest rate set at the prime rate plus 1
percent. Our consolidated statements of income included elsewhere herein include
the operations of CLSC. All intercompany balances and transactions have been
eliminated in the consolidation.
<PAGE>
Employees
As of March 31, 1997, we employed 11 persons on a full-time basis and 3
persons on a part-time basis. None of our employees is represented by a
collective bargaining group and we consider our employee relations to be good.
Citizens' employee benefits for full-time employees include, among
other things, a Pentegra Group (formerly known as Financial Institutions
Retirement Fund) defined benefit pension plan, a noncontributory,
multiple-employer comprehensive pension plan (the"Pension Plan"), and
hospitalization/major medical, long-term disability insurance and life
insurance.
We consider our employee benefits to be competitive with those offered
by other financial institutions and major employers in our area. See "Executive
Compensation and Related Transactions of Citizens."
Legal Proceedings
Although we are involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which we presently are a party or to which any of our property is
subject.
MANAGEMENT OF CITIZENS BANCORP
Directors and Executive Officers of the Holding Company
The Board of Directors of the Holding Company consists of the same
individuals who serve as directors of Citizens. The Holding Company's Articles
of Incorporation and Bylaws require that directors be divided into three
classes, as nearly equal in number as possible. Each class of directors serves
for a three-year period, with approximately one-third of the directors elected
each year. The Holding Company's officers will be elected annually by its Board
of Directors and will serve at the Board's discretion. The terms of the present
directors expire at the Holding Company's first shareholders' meeting, which is
anticipated to be held in March, 1998. At that meeting, it is anticipated that
the directors will be nominated to serve for the following terms: the terms of
Perry W. Lewis and John J.Miller will expire in 1998, the terms of Robert F.
Ayres and Billy J. Wray will expire in 1999 and the term of Fred W. Carter will
expire in 2000. See "Management of Citizens Savings Bank of Frankfort."
The Holding Company's Bylaws provide that directors must (1) be
residents of Clinton County, Indiana, (2) have had a loan or deposit
relationship with us which they have maintained for twelve months prior to their
nomination to the Board, and (3) with respect to nonemployee directors, must
have served as a member of a civic or community organization based in Clinton
County for at least 12 months during the five years prior to their nomination to
the Board. See "Restrictions on Acquisition of the Holding Company -- Provisions
of the Holding Company's Articles and Bylaws."
The executive officers of the Holding Company are identified below.
Name Position with Holding Company
Fred W. Carter Chairman of the Board, President
and Chief Executive Officer
Stephen D. Davis Treasurer
Cindy S. Chambers Secretary
MANAGEMENT OF CITIZENS SAVINGS BANK OF FRANKFORT
Directors of Citizens
Our Board of Directors currently consists of five persons with an
additional two persons who serve as advisory directors. Advisory directors
receive directors' fees for Board meetings they attend, but do not vote on
matters presented to the Board. Each director holds office for a term of three
years, and one-third of the Board is elected at each annual meeting of our
members.
<PAGE>
Our Board of Directors met 13 times during the fiscal year ended June
30, 1996. No director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and the Board's sole committee in the past 12
months.
Listed below are the current directors of Citizens:
Director of Position
Citizens Expiration with
Director Since of Term Citizens
Robert F. Ayres 1979 1999 Director
Fred W. Carter 1960-1966; 1997 Director, President and
1971 to Present Chief Executive Officer
Perry W. Lewis 1975 1998 Director
John J. Miller 1995 1998 Director
Billy J. Wray 1992 1999 Director
<PAGE>
Presented below is certain information concerning the directors of Citizens:
Robert F. Ayres (age 72) served as Superintendent of Community Schools
of Frankfort from 1965 until his retirement in 1989. He previously served as a
high school principal, teacher and coach at Frankfort Senior High School, in
Frankfort.
Fred W. Carter (age 65) has served as President and Chief Executive
Officer of Citizens and CLSC since 1972, and has been an employee of Citizens
since 1966. Mr. Carter is the father of Cindy S. Chambers, Citizens' Secretary
and Customer Service Manager.
Perry W. Lewis (age 75) has served as the Chairman of Lewis Ford Sales,
Inc. in Frankfort since 1984.
John J. Miller (age 57) has served as President of Goodwin Funeral
Home, Inc. in Frankfort since 1979.
Billy J. Wray (age 65) is part owner of Premium Auto Center, Inc. (a
used-car dealership), in Lebanon, Indiana. He also owns interests in various
real estate developments around Frankfort.
We also have an advisory director program pursuant to which our former
directors may continue to serve as advisors to the Board of Directors upon their
retirement or resignation from the Board. Currently, Ralph C. Hinshaw and Rawl
V. Ransom serve as advisory directors. Mr. Hinshaw and Mr. Ransom receive $500
for each meeting that they attend. They receive no fees for meetings they do not
attend. See "Executive Compensation and Related Transactions of Citizens --
Compensation of Directors."
Executive Officers of Citizens Who Are Not Directors
Presented below is certain information regarding our executive officers
who are not directors:
Name Position
Cindy S. Chambers Secretary, Customer Service Manager
Stephen D. Davis Controller
Ralph C. Peterson, II Senior Loan Officer
Cindy S. Chambers (age 42) has served as Citizens' Corporate Secretary
since 1988 and as our Customer Service Manager since 1982. She is the daughter
of Fred W. Carter, Citizens' President and Chief Executive Officer.
Stephen D. Davis (age 40) has served as our Controller since 1989.
Ralph C. Peterson, II (age 49) has served as our Senior Loan Officer
since 1989.
Committees of the Boards of Directors of Citizens and the Holding Company
The Commercial Loan Committee is the only committee of our Board of
Directors and is comprised of Perry W. Lewis, Billy J. Wray and Fred W. Carter.
It meets on an as-needed basis to review and approve all commercial and large
multi-family loans.
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF CITIZENS
Remuneration of Named Executive Officer
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to our President and Chief
Executive Officer for the fiscal year ended June 30, 1996. Other than Mr.
Carter, we had no other executive officers who earned over $100,000 in salary
and bonuses during that fiscal year.
<PAGE>
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation (4) Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fred Carter, President and 1996 $91,200 (1) $35,667 (2) -- $120 (3)
Chief Executive Officer
</TABLE>
(1) Includes $5,200 in fees received for service on Citizens Board of
Directors. Mr. Carter's annual salary has been increased to $95,000
effective January 1, 1997.
(2) For calendar year 1995, Mr. Carter received a bonus equal to 10% of the
profits of Citizens in excess of $426,000, after deducting certain
expenses incurred by Citizens. Beginning with calendar year 1996, Mr.
Carter receives a bonus equal to 10% of the profits of Citizens in
excess of $626,000 after deducting certain expenses incurred by
Citizens.
(3) This column includes amounts paid by Citizens for insurance premiums
with respect to a $10,000 term life insurance policy for the benefit of
Mr. Carter.
(4) Mr. Carter 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.
<PAGE>
Employment Contract
We have entered into a three-year employment contract with Mr. Carter.
The contract with Mr. Carter, effective as of the effective date of the
Conversion, extends annually for an additional one-year term to maintain its
three-year term if our Board of Directors determines to so extend it, unless
notice not to extend is properly given by either party to the contract. Mr.
Carter receives an initial salary under the contract equal to his current salary
subject to increases approved by the Board of Directors. The contract also
provides, among other things, for participation in other fringe benefits and
benefit plans available to our employees. Mr. Carter may terminate his
employment upon 60 days' written notice to us. We may discharge Mr. Carter for
cause (as defined in the contract) at any time or in certain specified events.
If we terminate Mr. Carter's employment for other than cause or if Mr. Carter
terminates his own employment for cause (as defined in the contract), Mr. Carter
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, and
for the balance of the contract if the termination does not follow a change in
control. In addition, during such period, Mr. Carter will continue to
participate in our 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, Mr. Carter will have the right to
cause us to purchase any stock options he holds for a price equal to the fair
market value (as defined in the contract) 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 Mr. Carter by us, 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 us 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 contract to Mr. Carter if the
contract were terminated either after a change of control of the Holding
Company, without cause by us, or for cause by Mr. Carter, would be $285,000. For
purposes of this employment contract, 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 Savings and Loan Holding Company Act.
The employment contract protects our confidential business information
and protects us from competition by Mr. Carter should he voluntarily terminate
his employment without cause or be terminated by us for cause.
Compensation of Directors
We pay our directors a monthly retainer of $300 plus $200 for each
month in which they attend one or more meetings. Rawl V. Ransom and Ralph C.
Hinshaw receive $500 per monthly meeting attended as advisory directors. Total
fees paid to our directors and advisory directors for the year ended June 30,
1996 were approximately $35,000.
Our directors and advisory directors may, pursuant to a deferred
compensation agreement, defer payment of some or all of their directors fees
into a retirement account. Under this agreement, deferred directors fees are to
be paid to a director beginning upon the first day of the month following the
director's seventieth (70th) birthday, and continuing in equal installments over
a 180-month period. A director may also receive his benefits in a lump sum in
the event of financial hardship. The agreement also provides for death and
disability benefits. At present, Mr. Carter is the only director who has
executed a deferred compensation agreement with Citizens.
Directors of the Holding Company and CLSC are not currently paid
directors' fees. The Holding Company may, if it believes it is necessary to
attract qualified directors or is otherwise beneficial to the Holding Company,
adopt a policy of paying directors' fees.
Benefits
Insurance Plans. Our officers and employees are covered by a
non-contributory disability and hospital insurance plan, and by a
non-contributory life insurance policy which pays benefits in the amount of 50
percent of salary in the event of the officer's or employee's death. This
coverage is provided pursuant to group plans sponsored by the Indiana League of
Savings Institutions Group Insurance Trust. We also provide hospitalization
coverage for Mr. Carter's family in addition to the coverage described above,
and have obtained a Supplemental Term Life Policy for Mr. Carter which provides
$10,000 in additional life insurance coverage.
Pension Plan. Our full-time employees are included in the Pension Plan.
Separate actuarial valuations are not made for individual employer members of
the Pension Plan. Our employees are eligible to participate in the plan once
they have attained the age of 21 and completed one year and at least 1,000 hours
of service for us. An employee's pension benefits are 100% vested after six
years of service.
<PAGE>
The Pension Plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary (for the employee's
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. We expensed approximately $1,300 for the
Pension Plan during the fiscal year ended June 30, 1996.
The estimated base annual retirement benefits presented on a
straight-line basis payable at normal retirement age (65) under the Pension Plan
to persons in specified salary and years of service classifications are as
follows (benefits noted in the table are not subject to any offset).
<TABLE>
<CAPTION>
Years of Service
Highest 5-Year
Average
Compensation 15 20 25 30 35 40 45
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 40,000 $ 9,000 $12,000 $15,000 $18,000 $ 21,000 $ 24,000 $ 27,000
$ 60,000 $13,500 $18,000 $22,500 $27,000 $ 31,500 $ 36,000 $ 40,500
$ 80,000 $18,000 $24,000 $30,000 $36,000 $ 42,000 $ 48,000 $ 54,000
$100,000 $22,500 $30,000 $37,500 $45,000 $ 52,500 $ 60,000 $ 67,500
$120,000 $27,000 $36,000 $45,000 $54,000 $ 63,000 $ 72,000 $ 81,000
</TABLE>
Benefits are currently subject to maximum Code limitations of $120,000
per year. The years of service credited to Mr. Carter under the Pension Plan as
of December 31, 1996 were 30.
Executive Supplemental Retirement Agreement. We have also entered into
non-qualified Executive Supplemental Retirement Agreements with Fred W. Carter,
Stephen D. Davis and Cindy S. Chambers. Under these agreements, we have agreed
to pay benefits to the named executives, in addition to the benefits payable
under the Pension Plan, in an amount based upon 80% of the officer's highest
base compensation earned for any 12-month period prior to the officer's normal
retirement date, less any payments received by the officer from the Pension Plan
during any year. Benefits payable to Mr. Carter under his Supplemental
Retirement Agreement are to be based upon 80% of the highest base salary, plus
bonuses, paid to him by us for any 12-month period prior to his normal
retirement date.
We have purchased a universal insurance policy on the covered
individuals under which we paid a one-time premium and will receive an income
stream that we will use to fund these Supplemental Retirement Plans. Our Board
of Directors may at a later date decide to assign the insurance policy and the
proceeds thereof to a "rabbi trust" that we may establish to secure the payment
of benefits due to the covered employees under the Supplemental Retirement
Plans. Under this arrangement, if adopted by our Board, the assets of the rabbi
trust will be irrevocably set aside and generally may be used only for payment
of benefits under the Supplemental Retirement Plans. The only exception is that
the assets of the rabbi trust must be used to satisfy claims of the Holding
Company's general creditors if the Holding Company were to become insolvent.
Transactions With Certain Related Persons
We have followed a policy of offering to our directors, officers, and
employees real estate mortgage loans secured by their principal residence as
well as other loans. All of our loans to our directors, officers and employees
are made on substantially the same terms, including interest rates and
collateral as those prevailing at the time for comparable transactions, and do
not involve more than minimal risk of collectibility. Loans to directors,
executive officers and their associates totaled approximately $2.2 million, or
approximately 40% of consolidated retained earnings at March 31, 1997. This
amount includes two loans to our directors Billy J. Wray and John J. Miller,
neither of whom were directors or employees of Citizens when we originated the
loans. The first loan, in the original principal amount of approximately $1.5
million, was originated in October, 1991 to both Mr. Wray and Mr. Miller and is
secured by the 48-unit Clinton Estates apartment complex located in Frankfort.
We sold a $542,000 nonrecourse participation in this loan to reduce the loan
balance to within our lending limit. At March 31, 1997, this loan was current
with a balance of approximately $1,343,000, of which approximately $841,000 was
owed to us. The second loan, dated February, 1994, was a construction line of
credit in the original amount of $620,000 to Mr. Miller, secured by eight
condominiums and other real estate located in Tipton, Indiana. At March 31,
1997, this loan was also current with a balance of approximately $395,000. We
are not obligated to advance additional funds pursuant to this line of credit.
In our management's opinion, these loans are adequately collateralized.
<PAGE>
Current law authorizes us to make loans or extensions of credit to our
executive officers, directors, and principal shareholders on the same terms that
are available with respect to loans made to all of our employees. At present,
our loans to executive officers, directors, principal shareholders and employees
are made on the same terms generally available to the public. We may in the
future, however, adopt a program under which we may waive loan application fees
and closing costs with respect to loans made to such persons. Loans made to a
director or executive officer in excess of the greater of $25,000 or 5% of our
capital and surplus (up to a maximum of $500,000) must be approved in advance by
a majority of the disinterested members of the Board of Directors. Our policy
regarding loans to directors and all employees meets the requirements of current
law.
Employee Stock Ownership Plan and Trust
The Holding Company has established for our eligible employees an ESOP
effective July 1, 1997, subject to our conversion to stock form. Employees with
at least one year of employment with us and who have attained age 21 are
eligible to participate. As part of the Conversion, the ESOP intends to borrow
funds from the Holding Company and use those funds to purchase a number of
shares equal to 8% of the Common Stock to be issued in the Conversion.
Collateral for the loan will be the Common Stock purchased by the ESOP. The loan
will be repaid principally from our discretionary contributions to the ESOP over
a period of ten years. It is anticipated that the initial interest rate for the
loan will be approximately 8.5%. Shares purchased by the ESOP will be held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense
accounts in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. Benefits generally become 100% vested after five years of credited
service. Prior to the completion of five years of credited service, a
participant who terminates employment for reasons other than death, retirement,
or disability will not receive any benefits under the ESOP. Forfeitures will be
reallocated among remaining participating employees upon the earlier of the
forfeiting participant's death or after the expiration of at least three years
from the date on which such participant's employment was terminated. Benefits
will be payable in the form of Common Stock or cash for fractional shares upon
death, retirement, early retirement, disability or separation from service. Our
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated. In November 1993, the American Institute of Certified
Public Accountants (the "AICPA") issued Statement of Position ("SOP") 93-6,
which requires us to record compensation expense in an amount equal to the fair
market value of the shares released from the suspense account.
In connection with the establishment of the ESOP, the Holding Company
will establish a committee of our employees to administer the ESOP. The
corporate trustee of the ESOP has not yet been selected. The ESOP committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held
in the ESOP in accordance with the instructions of participating employees.
Under the ESOP, nondirected shares, and shares held in the suspense account,
will be voted in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of ERISA.
Stock Option Plan
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors
intends to submit for shareholder approval the Stock Option Plan for directors
and officers of Citizens and of the Holding Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10.0% of the shares
issued in the Conversion would be reserved for issuance by the Holding Company
upon the exercise of the stock options granted under the Stock Option Plan.
Assuming the issuance of 800,000 shares in the Conversion, an aggregate of
80,000 shares would be reserved for issuance under the Stock Option Plan. No
options would be granted under the Stock Option Plan until the date on which
shareholder approval is received. At that time, it is anticipated that options
for the following number of shares will be granted to the following directors,
executive officers and employees of Citizens and the Holding Company:
Percentage of Shares
Optionee Issued in Conversion
-------- --------------------
Fred W. Carter...................................... 2.50%
Other Executive Officers as a group ................ 2.25
Directors .......................................... 3.00
----
Total........................................... 7.75%
====
<PAGE>
It is anticipated that these options would be granted for terms of 10
years (in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share equal to the fair
market value of the shares on the date of grant of the stock options. If the
Stock Option Plan is adopted within one year following the Conversion, options
will become exercisable at a rate of 20% at the end of each twelve (12) months
of service with us after the date of grant, subject to early vesting in the
event of death or disability. Options granted under the Stock Option Plan are
adjusted for capital changes such as stock splits and stock dividends. Unless
the Holding Company decides to call an earlier special meeting of shareholders,
the date of grant of these options is expected to be the date of the Holding
Company's annual meeting of shareholders to be held at least six months after
the Conversion.
The Stock Option Plan would be administered by a Committee of
non-employee members of the Holding Company's Board of Directors. Options
granted under the Stock Option Plan to employees could be "incentive" stock
options designed to result in a beneficial tax treatment to the employee but no
tax deduction to the Holding Company. Non-qualified stock options could also be
granted under the Stock Option Plan, and will be granted to the non-employee
directors to receive grants of stock options. In the event an option recipient
terminated his or her employment or service as an employee or director, the
options would terminate during certain specified periods.
RRP
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors also
intends to submit the RRP for shareholder approval. The RRP will provide our
directors and officers with an ownership interest in the Holding Company in a
manner designed to encourage them to continue their service with us. Citizens
will contribute funds to the RRP from time to time to enable it to acquire an
aggregate amount of Common Stock equal to up to 4% of the shares of Common Stock
issued in the Conversion, either directly from the Holding Company or on the
open market. Four percent of the shares issued in the Conversion would amount to
27,000 shares, 32,000 shares, 36,800 or 42,320 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. In the event that additional authorized but unissued shares would
be acquired by the RRP after the Conversion, the interests of existing
shareholders would be diluted. If the RRP is adopted, our executive officers and
directors will be awarded Common Stock under the RRP without having to pay cash
for the shares.
No awards under the RRP would be made until the date the RRP is
approved by the Holding Company's shareholders. At that time, it is anticipated
that awards of the following number of shares would be made to the following
directors and executive officers of the Holding Company and Citizens:
Percentage of Shares
Recipient of Issued in Conversion to be
Awards Awarded Under RRP
------ -----------------
Fred W. Carter.................................. 1.0%
Other Executive Officers as a group ............ 0.9
Directors....................................... 1.2
----
Total....................................... 3.1%
====
Awards would be nontransferable and nonassignable, and during the
lifetime of the recipient could only be earned by and made to him or her. If the
RRP is adopted within one year following the Conversion, the shares which are
subject to an award would vest and be earned by the recipient at a rate of 20%
of the shares awarded at the end of each full twelve (12) months of service with
us after the date of grant of the award. Awards are adjusted for capital changes
such as stock dividends and stock splits. Notwithstanding the foregoing, awards
would be 100% vested upon termination of employment or service due to death or
disability. If employment or service were to terminate for other reasons, the
grantee's nonvested awards will be forfeited. If employment or service is
terminated for cause (as would be defined in the RRP), or if conduct would have
justified termination or removal for cause, shares not already delivered under
the RRP, whether or not vested, could be forfeited by resolution of the Board of
Directors of the Holding Company.
When shares become vested and could actually be distributed in
accordance with the RRP, the participants would also receive amounts equal to
accrued dividends and other earnings or distributions payable with respect
thereto. When shares become vested under the RRP, the participant will recognize
income equal to the fair market value of the Common Stock earned, determined as
of the date of vesting, unless the recipient makes an election under ss. 83(b)
of the Code to be taxed earlier. The amount of income recognized by the
participant would be a deductible expense for tax purposes for the Holding
Company. Shares not yet vested under the RRP will be voted by the Trustee of the
RRP, taking into account the best interests of the recipients of the RRP awards.
<PAGE>
REGULATION
General
As a federally chartered, SAIF-insured savings association, we are
subject to extensive regulation by the OTS and the FDIC. For example, we must
obtain OTS approval before we may engage in certain activities and must file
reports with the OTS regarding our activities and financial condition. The OTS
periodically examines our books and records and, in conjunction with the FDIC in
certain situations, has examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. Our semi- annual assessment owed to the OTS, which is
based upon a specified percentage of assets, is approximately $7,800.
We are also subject to federal and state regulation as to such matters
as loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of our loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of our
securities, and limitations upon other aspects of banking operations. In
addition, our activities and operations are subject to a number of additional
detailed, complex and sometimes overlapping federal and state laws and
regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as Citizens, to either convert to
a national bank or a state-chartered bank by a specified date to be determined.
In addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and Citizens.
Savings and Loan Holding Company Regulation
As the holding company for Citizens, the Holding Company will be
regulated as a "non-diversified savings and loan holding company" within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject
to regulatory oversight of the Director of the OTS. As such, the Holding Company
is registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, we are subject to certain restrictions in our dealings with the
Holding Company and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from acquiring control of
another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Holding Company, or any person who owns more than 25%
of the Holding Company's stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
The Holding Company's Board of Directors presently intends to operate
the Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At March 31, 1997, our asset composition was in excess of that
required to qualify us as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with
Citizens, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
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approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Citizens or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies, or (vii) those activities
authorized by the Federal Reserve Board (the "FRB") as permissible for bank
holding companies, unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS before
a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
We are a member of the FHLB of Indianapolis, which is one of twelve
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, we are required to purchase and maintain stock in the FHLB
of Indianapolis in an amount equal to at least 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At March 31, 1997, our investment in stock of the
FHLB of Indianapolis was $332,000. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1996, dividends paid by the
FHLB of Indianapolis to us totaled approximately $26,000, for an annual rate of
7.9%.
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.
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The FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as Citizens and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. As of September 30, 1996, the reserves of the SAIF were below the
level required by law, primarily because a significant portion of the
assessments paid into the SAIF have been used to pay the cost of prior thrift
failures, while the reserves of the BIF met the level required by law in May,
1995. However, on September 30, 1996, provisions designed to recapitalize the
SAIF and eliminate the premium disparity between the BIF and SAIF were signed
into law. See "-- Assessments" below.
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 these rates if the 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. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
we were charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. We recognized this one-time assessment as
a non-recurring operating expense of $211,000 ($127,000 after tax) during the
three-month period ending September 30, 1996, and we paid this assessment on
November 27, 1996. The assessment was fully deductible for both federal and
state income tax purposes. Beginning January 1, 1997, our annual deposit
insurance premium was reduced from .23% to .0644% of total assessable deposits.
BIF institutions pay lower assessments than comparable SAIF institutions because
BIF institutions pay only 20% of the rate being paid by SAIF institutions on
their deposits with respect to obligations issued by the federally-chartered
corporation which provided some of the financing to resolve the thrift crisis in
the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and
the BIF by 1999, but not until such time as bank and thrift charters are
combined. Until the charters are combined, savings associations with SAIF
deposits may not transfer deposits into the BIF system without paying various
exit and entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF institution
converts to a bank charter or merges with a bank, as long as the resulting bank
continues to pay applicable insurance assessments to the SAIF, and as long as
certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
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capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At March 31, 1997, we were in compliance with all capital
requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, we
would be exempt from its provisions because we have less than $300 million in
assets and our risk-based capital ratio exceeds 12%. We nevertheless measure our
interest rate risk in conformity with the OTS regulation and, as of March 31,
1997, our interest rate risk was slightly outside the parameters set forth in
the regulation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Citizens Savings Bank of Frankfort --
Asset/Liability Management."
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions 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 March 31,
1997, we were categorized as "well capitalized," meaning that our total
risk-based capital ratio exceeded 10%, our Tier I risk-based capital ratio
exceeded 6%, our leverage ratio exceeded 5%, and we were not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution ("Tier 2 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3
Institution if the OTS determines that the institution is "in need of more than
normal supervision." We are currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
Accordingly, at March 31, 1997, we had available approximately $1,362,000 for
distribution, without consideration of any capital infusion from the Conversion.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Pursuant to the Plan of Conversion, we will establish a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
<PAGE>
Account Holders. See "The Conversion -- Principal Effects of Conversion." We
will not be permitted to pay dividends to the Holding Company if our net worth
would be reduced below the amount required for the liquidation account. We must
also must file a notice with the OTS 30 days before declaring a dividend to the
Holding Company.
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 the
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. We do not
believe that these regulations will have a materially adverse effect on our
current operations.
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. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, we may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of our unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At March 31, 1997, we did not have any loans or
extensions of credit to a single or related group of borrowers in excess of our
lending limits. We do not believe that the loans-to-one-borrower limits will
have a significant impact on our business operations or earnings following the
Conversion.
Qualified Thrift Lender
Savings associations must meet a QTL test. If we maintain an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, we will continue to
enjoy full borrowing privileges from the FHLB of Indianapolis. The required
<PAGE>
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of March 31, 1997, we were in compliance with our QTL
requirement, with approximately 88% of our assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities shall be
limited to those of a national bank; (iii) it shall not be eligible for any new
FHLB advances; and (iv) it shall be bound by regulations applicable to national
banks respecting payment of dividends. Three years after failing the QTL test
the association must (i) dispose of any investment or activity not permissible
for a national bank and a savings association and (ii) repay all outstanding
FHLB advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, 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, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation 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, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocial basis. The Indiana Branching
Law became effective March 15, 1996.
Transactions with Affiliates
We are 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 or savings
association 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.
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Federal Securities Law
The shares of Common Stock of the Holding Company will be registered
with the SEC under the Securities Exchange Act of 1934, as amended (the "1934
Act") as soon as practicable following the Conversion. The Holding Company will
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the 1934 Act and the rules of the SEC thereunder.
After three years following our 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 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 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 an
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 OTS has designated our record of meeting community credit needs as
outstanding, which is the highest available designation.
TAXATION
Federal Taxation
Historically, savings associations, such as Citizens, 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, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
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
associations meeting a residential mortgage loan origination test. Citizens will
recapture approximately $60,000 over a six-year period beginning with the June
30, 1997 federal tax return. In addition, the pre-1988 reserve, for which no
deferred taxes have been recorded, need not be recaptured into income unless (i)
the savings association no longer qualifies as a bank under the Code, or (ii)
the savings association pays out excess dividends or distributions.
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 on 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, we have been reporting our income and
expenses on the accrual method of accounting. Our federal income tax returns
have not been audited in recent years.
State Taxation
We are subject to Indiana's Financial Institutions Tax ("FIT"), which
is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
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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.
Our state income tax returns have not been audited in recent years.
For further information relating to the tax consequences of the
Conversion, see "The Conversion -- Principal Effects of Conversion -- Tax
Effects."
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
General
Although the Boards of Directors of Citizens and the Holding Company
are not aware of any effort that might be made to obtain control of the Holding
Company after the Conversion, the Boards of Directors believe that it is
appropriate to include certain provisions in the Holding Company's Articles of
Incorporation (the "Articles") to protect the interests of the Holding Company
and its shareholders from unsolicited changes in the control of the Holding
Company in circumstances that the Board of Directors of the Holding Company
concludes will not be in the best interests of Citizens, the Holding Company or
the Holding Company's shareholders.
Although the Holding Company's Board of Directors believes that the
restrictions on acquisition described below are beneficial to shareholders, the
provisions may have the effect of rendering the Holding Company less attractive
to potential acquirors, thereby discouraging future takeover attempts which
would not be approved by the Board of Directors but which certain shareholders
might deem to be in their best interest or pursuant to which shareholders might
receive a substantial premium for their shares over then current market prices.
These provisions will also render the removal of the incumbent Board of
Directors and of management more difficult. The Board of Directors has, however,
concluded that the potential benefits of these restrictive provisions outweigh
the possible disadvantages.
The following general discussion contains a summary of the material
provisions of the Articles, the Holding Company's Code of By-Laws (the
"By-Laws"), and certain other regulatory provisions, that may be deemed to have
an effect of delaying, deferring or preventing a change in the control of the
Holding Company. The following description of certain of these provisions is
general and not necessarily complete, and with respect to provisions contained
in the Articles and By-Laws, reference should be made in each case to the
document in question, each of which is part of our application for approval of
the Conversion or the Holding Company's Registration Statement filed with the
SEC. See "Additional Information."
Provisions of the Holding Company's Articles and By-Laws
Directors. Certain provisions in the Articles and By-Laws will impede
changes in majority control of the Board of Directors of the Holding Company.
The Articles provide that the Board of Directors of the Holding Company will be
divided into three classes, with directors in each class elected for three-year
staggered terms. Therefore, it would take two annual elections to replace a
majority of the Holding Company's Board. Moreover, the Holding Company's By-Laws
provide that directors of the Holding Company must be residents of Clinton
County, Indiana, must have had a loan or deposit relationship with us which they
have maintained for twelve (12) months prior to their nomination to the Board,
and, if nonemployee directors, must have served as a member of a civic or
community organization based in Clinton County, Indiana for at least twelve (12)
months during the five years prior to their nomination to the Board. Therefore,
the ability of a shareholder to attract qualified nominees to oppose persons
nominated by the Board of Directors may be limited.
The Articles also provide that the size of the Board of Directors shall
range between five and fifteen directors, with the exact number of directors to
be fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors of the Holding
Company.
The Articles provide that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term only by a
majority vote of the directors then in office. Finally, the By-Laws impose
certain notice and information requirements in connection with the nomination by
shareholders of candidates for election to the Board of Directors or the
proposal by shareholders of business to be acted upon at an annual meeting of
shareholders.
The Articles provide that a director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of at least 80%
of the shares eligible to vote generally in the election of directors. Removal
for "cause" is limited to the grounds for termination in the OTS regulation
relating to employment contracts of federally-insured savings associations.
<PAGE>
Restrictions on Call of Special Meetings. The Articles provide that a
special meeting of shareholders may be called only by the Chairman of the Board
of the Holding Company or pursuant to a resolution adopted by a majority of the
total number of directors of the Holding Company. Shareholders are not
authorized to call a special meeting.
No Cumulative Voting. The Articles provide that there shall be no
cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Articles authorize 2,000,000
shares of preferred stock, without par value. The Holding Company is authorized
to issue preferred stock from time to time in one or more series subject to
applicable provisions of law, and the Board of Directors is authorized to fix
the designations, powers, preferences and relative participating, optional and
other special rights of such shares, including voting rights (if any and which
could be as a separate class) and conversion rights. In the event of a proposed
merger, tender offer or other attempt to gain control of the Holding Company not
approved by the Board of Directors, it might be possible for the Board of
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that would impede the completion of such a transaction. An
effect of the possible issuance of preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the Board of Directors deems to
be in the best interests of the Holding Company and its shareholders.
Limitations on 10% Shareholders. The Articles provide that: (i) no
person shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company (provided that such limitation shall not apply to the acquisition of
equity securities by any one or more tax-qualified employee stock benefit plans
maintained by the Holding Company, if the plan or plans beneficially own no more
than 25% of any class of such equity security of the Holding Company); and that
(ii) shares beneficially owned in violation of the stock ownership restriction
described above shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to a
vote of shareholders. For these purposes, a person (including management) who
has obtained the right to vote shares of the Common Stock pursuant to revocable
proxies shall not be deemed to be the "beneficial owner" of those shares if that
person is not otherwise deemed to be a beneficial owner of those shares.
Evaluation of Offers. The Articles of the Holding Company provide that
the Board of Directors of the Holding Company, when determining to take or
refrain from taking corporate action on any matter, including making or
declining to make any recommendation to the Holding Company's shareholders, may,
in connection with the exercise of its judgment in determining what is in the
best interest of the Holding Company, Citizens and the shareholders of the
Holding Company, give due consideration to all relevant factors, including,
without limitation, the social and economic effects of acceptance of such offer
on the Holding Company's customers and Citizens' present and future account
holders, borrowers, employees and suppliers; the effect on the communities in
which the Holding Company and Citizens operate or are located; and the effect on
the ability of the Holding Company to fulfill the objectives of a holding
company and of us or future financial institution subsidiaries to fulfill the
objectives of a financial institution under applicable statutes and regulations.
The Articles of the Holding Company also authorize the Board of Directors to
take certain actions to encourage a person to negotiate for a change of control
of the Holding Company or to oppose such a transaction deemed undesirable by the
Board of Directors including the adoption of so-called shareholder rights plans.
By having these standards and provisions in the Articles of the Holding Company,
the Board of Directors may be in a stronger position to oppose such a
transaction if the Board concludes that the transaction would not be in the best
interest of the Holding Company, even if the price offered is significantly
greater than the then market price of any equity security of the Holding
Company.
Procedures for Certain Business Combinations. The Articles require that
certain business combinations between the Holding Company (or any majority-owned
subsidiary thereof) and a 10% or greater shareholder either be approved (i) by
at least 80% of the total number of outstanding voting shares of the Holding
Company or (ii) by a majority of certain directors unaffiliated with such 10% or
greater shareholder or involve consideration per share generally equal to the
<PAGE>
higher of (A) the highest amount paid by such 10% shareholder or its affiliates
in acquiring any shares of the Common Stock or (B) the "Fair Market Value"
(generally, the highest closing bid paid for the Common Stock during the thirty
days preceding the date of the announcement of the proposed business combination
or on the date the 10% or greater shareholder became such, whichever is higher).
Amendments to Articles and Bylaws. Amendments to the Articles must be
approved by a majority vote of the Holding Company's Board of Directors and also
by a majority of the outstanding shares of the Holding Company's voting shares;
provided, however, that approval by at least 80% of the outstanding voting
shares is required for certain provisions (i.e., provisions relating to number,
classification, and removal of directors; provisions relating to the manner of
amending the By-Laws; call of special shareholder meetings; criteria for
evaluating certain offers; certain business combinations; and amendments to
provisions relating to the foregoing). The provisions concerning limitations on
the acquisition of shares may be amended only by an 80% vote of the Holding
Company's outstanding shares unless at least two-thirds of the Holding Company's
Continuing Directors (directors of the Holding Company on June 10, 1997, or
directors recommended for appointment or election by a majority of such
directors) approve such amendments in advance of their submission to a vote of
shareholders (in which case only a majority vote of shareholders is required).
The By-Laws may be amended only by a majority vote of the total number
of directors of the Holding Company.
Purpose and Effects of the Anti-Takeover Provisions of the Holding
Company Articles and By-Laws. The Holding Company's Board of Directors believes
that the provisions described above are prudent and will reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its Board of Directors.
These provisions will also assist in the orderly deployment of the Conversion
proceeds into productive assets during the initial period after the Conversion.
The Board of Directors believes these provisions are in the best interest of
Citizens and the Holding Company and its shareholders. In the judgment of the
Board of Directors, the Holding Company's Board of Directors will be in the best
position to determine the true value of the Holding Company and to negotiate
more effectively for what may be in the best interests of the Holding Company
and its shareholders. The Board of Directors believes that these provisions will
encourage potential acquirors to negotiate directly with the Board of Directors
of the Holding Company and discourage hostile takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflecting the
true value of the Holding Company and which is in the best interests of all
shareholders.
Attempts to take over financial institutions and their holding
companies have recently increased. Takeover attempts that have not been
negotiated with and approved by the Board of Directors present to shareholders
the risk of a takeover on terms that may be less favorable than might otherwise
be available. A transaction that is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time to obtain maximum value for the Holding Company and its
shareholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to undertake defensive measures at a
great expense. Although a tender offer or other takeover attempt may be made at
a price substantially above then current market prices, such offers are
sometimes made for less than all of the outstanding shares of a target company.
As a result, shareholders may be presented with the alternative of partially
liquidating their investment at a time that may be disadvantageous, or retaining
their investment in an enterprise which is under different management and whose
objective may not be similar to that of the remaining shareholders. The
concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive the Holding Company's remaining
shareholders of the benefits of certain protective provisions of the 1934 Act,
if the number of beneficial owners becomes less than 300 and the Holding Company
terminates its registration under the 1934 Act.
Despite the belief of the Holding Company's Board of Directors in the
benefits to shareholders of the foregoing provisions, the provisions may also
have the effect of discouraging future takeover attempts which would not be
approved by the Board of Directors, but which certain shareholders might deem to
be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. These provisions will also render the removal
of the incumbent Board of Directors and of management more difficult. The Board
of Directors has, however, concluded that the potential benefits of these
restrictive provisions outweigh the possible disadvantages.
Other Restrictions on Acquisition of the Holding Company and Citizens
State Law. Several provisions of the Indiana Business Corporation Law,
as amended (the "IBCL"), could affect the acquisition of shares of the Common
Stock or otherwise affect the control of the Holding Company. Chapter 43 of the
IBCL prohibits certain business combinations, including mergers, sales of
<PAGE>
assets, recapitalizations, and reverse stock splits, between corporations such
as the Holding Company (assuming that it has over 100 shareholders) and an
interested shareholder, defined as the beneficial owner of 10% or more of the
voting power of the outstanding voting shares, for five years following the date
on which the shareholder obtained 10% ownership unless the acquisition was
approved in advance of that date by the board of directors. If prior approval is
not obtained, several price and procedural requirements must be met before the
business combination can be completed. These requirements are similar to those
contained in the Holding Company Articles and described in " -- Provisions of
the Holding Company's Articles and By-Laws -- Procedures for Certain Business
Combinations." In general, the price requirements contained in the IBCL may be
more stringent than those imposed in the Holding Company Articles. However, the
procedural restraints imposed by the Holding Company Articles are somewhat
broader than those imposed by the IBCL. Also, the provisions of the IBCL may
change at some future date, but the relevant provisions of the Holding Company
Articles may only be amended by an 80% vote of the shareholders of the Holding
Company.
In addition, the IBCL contains provisions designed to assure that
minority shareholders have some say in their future relationship with Indiana
corporations in the event that a person made a tender offer for, or otherwise
acquired, shares giving that person more than 20%, 33 1/3%, and 50% of the
outstanding voting securities of corporations having 100 or more shareholders
(the "Control Share Acquisitions Statute"). Under the Control Share Acquisitions
Statute, if an acquiror purchases those shares at a time that the corporation is
subject to the Control Share Acquisitions Statute, then until each class or
series of shares entitled to vote separately on the proposal, by a majority of
all votes entitled to be cast by that group (excluding shares held by officers
of the corporation, by employees of the corporation who are directors thereof
and by the acquiror), approves in a special or annual meeting the rights of the
acquiror to vote the shares which take the acquiror over each level of ownership
as stated in the statute, the acquiror cannot vote these shares. An Indiana
corporation otherwise subject to the Control Share Acquisitions Statute may
elect not to be covered by the statute by so providing in its Articles of
Incorporation or By-Laws. The Holding Company, however, will be subject to this
statute following the Conversion because of its desire to discourage
non-negotiated hostile takeovers by third parties.
The IBCL specifically authorizes Indiana corporations to issue options,
warrants or rights for the purchase of shares or other securities of the
corporation or any successor in interest of the corporation. These options,
warrants or rights may, but need not be, issued to shareholders on a pro rata
basis.
The IBCL specifically authorizes directors, in considering the best
interest of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. As described above, the
Holding Company Articles contain a provision having a similar effect. Under the
IBCL, directors are not required to approve a proposed business combination or
other corporate action if the directors determine in good faith that such
approval is not in the best interest of the corporation. In addition, the IBCL
states that directors are not required to redeem any rights under or render
inapplicable a shareholder rights plan or to take or decline to take any other
action solely because of the effect such action might have on a proposed change
of control of the corporation or the amounts to be paid to shareholders upon
such a change of control. The IBCL explicitly provides that the different or
higher degree of scrutiny imposed in Delaware and certain other jurisdictions
upon director actions taken in response to potential changes in control will not
apply. The Delaware Supreme Court has held that defensive measures in response
to a potential takeover must be "reasonable in relation to the threat posed".
In taking or declining to take any action or in making any
recommendation to a corporation's shareholders with respect to any matter,
directors are authorized under the IBCL to consider both the short-term and
long-term interests of the corporation as well as interests of other
constituencies and other relevant factors. Any determination made with respect
to the foregoing by a majority of the disinterested directors shall conclusively
be presumed to be valid unless it can be demonstrated that such determination
was not made in good faith.
Because of the foregoing provisions of the IBCL, the Board will have
flexibility in responding to unsolicited proposals to acquire the Holding
Company, and accordingly it may be more difficult for an acquiror to gain
control of the Holding Company in a transaction not approved by the Board.
Federal Limitations. For three years following the Conversion, OTS
regulations prohibit any person (including entities), without the prior approval
of the OTS, from offering to acquire or acquiring more than 10% of any class of
equity security, directly or indirectly, of a converted savings association or
<PAGE>
its holding company. This restriction does not apply to the acquisition by any
one or more tax-qualified employee stock benefit plans maintained by Citizens or
the Holding Company, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Holding Company. For these purposes, a person (including management) who has
obtained the right to vote shares of the Common Stock pursuant to revocable
proxies shall not be deemed to be the "beneficial owner" of those shares if that
person is not otherwise deemed to be a beneficial owner of those shares.
The Change in Bank Control Act provides that no "person," acting
directly or indirectly, or through or in concert with one or more persons, other
than a company, may acquire control of a savings association or a savings and
loan holding company unless at least 60 days prior written notice is given to
the OTS and the OTS has not objected to the proposed acquisition.
The Savings and Loan Holding Company Act also prohibits any "company,"
directly or indirectly or acting in concert with one or more other persons, or
through one or more subsidiaries or transactions, from acquiring control of an
insured savings institution without the prior approval of the OTS. In addition,
any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination and regulation as a savings and
loan holding company by the OTS.
The term "control" for purposes of the Change in Bank Control Act and
the Savings and Loan Holding Company Act includes the power, directly or
indirectly, to vote more than 25% of any class of voting stock of the savings
association or to control, in any manner, the election of a majority of the
directors of the savings association. It also includes a determination by the
OTS that such company or person has the power, directly or indirectly, to
exercise a controlling influence over or to direct the management or policies of
the savings association.
OTS regulations also set forth certain "rebuttable control
determinations" which arise (i) upon an acquisition of more than 10% of any
class of voting stock of a savings association; or (ii) upon an acquisition of
more than 25% of any class of voting or nonvoting stock of a savings
association; provided that, in either case, the acquiror is subject to any of
eight enumerated "control factors," which are: (1) the acquiror would be one of
the two largest holders of any class of voting stock of the association; (2) the
acquiror would hold more than 25% of the total shareholders' equity of the
association; (3) the acquiror would hold more than 35% of the combined debt
securities and shareholders' equity of the savings association; (4) the acquiror
is a party to any agreement pursuant to which the acquiror possesses a material
economic stake in the savings association or which enables the acquiror to
influence a material aspect of the management or policies of the association;
(5) the acquiror would have the ability, other than through the holding of
revocable proxies, to direct the votes of more than 25% of a class of the voting
stock or to vote in the future more than 25% of such voting stock upon the
occurrence of a future event; (6) the acquiror would have the power to direct
the disposition of more than 25% of the association's voting stock in a manner
other than a widely dispersed or public offering; (7) the acquiror and/or his
representative would constitute more than one member of the association's board
of directors; or (8) the acquiror would serve as an executive officer or in a
similar policy-making position with the association. For purposes of determining
percentage share ownership, a person is presumed to be acting in concert with
certain specified persons and entities, including members of the person's
immediate family, whether or not those family members share the same household
with the person.
The regulations also specify the criteria which the OTS uses to
evaluate control applications. The OTS is empowered to disapprove an acquisition
of control if it finds, among other things, that (i) the acquisition would
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the institution or its depositors, or (iii) the
competency, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors, the institution, or the public
to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK
The Holding Company is authorized to issue 5,000,000 shares of Common
Stock, without par value, all of which have identical rights and preferences,
and 2,000,000 shares of preferred stock, without par value. The Holding Company
expects to issue up to 1,058,000 shares of Common Stock and no shares of
preferred stock in the Conversion. The Holding Company has received an opinion
of its counsel that the shares of Common Stock issued in the Conversion will be
validly issued, fully paid, and not liable for further call or assessment. This
opinion was filed with the SEC as an exhibit to the Holding Company's
Registration Statement under the 1933 Act.
Shareholders of the Holding Company will have no preemptive rights to
acquire additional shares of Common Stock which may be subsequently issued. The
Common Stock will represent nonwithdrawable capital, will not be of an insurable
type and will not be federally insured by the FDIC or any government entity.
Under Indiana law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company, unless preferred stock is issued
<PAGE>
and voting rights are granted to the holders thereof. Each shareholder will be
entitled to one vote for each share held on all matters voted upon by
shareholders, subject to the limitations discussed under the caption
"Restrictions on Acquisition of the Holding Company." Shareholders may not
cumulate their votes in the election of the Board of Directors. Holders of
Common Stock will be entitled to payment of dividends as may be declared from
time to time by the Holding Company's Board of Directors.
In the unlikely event of the liquidation or dissolution of the Holding
Company, the holders of the Common Stock will be entitled to receive after
payment or provision for payment of all debts and liabilities of the Holding
Company, all assets of the Holding Company available for distribution, in cash
or in kind. See "The Conversion -- Principal Effects of Conversion -- Effect on
Liquidation Rights." If preferred stock is issued subsequent to the Conversion,
the holders thereof may have a priority over the holders of Common Stock in the
event of liquidation or dissolution.
The Board of Directors of the Holding Company will be authorized to
issue preferred stock in series and to fix and state the voting powers,
designations, preferences and relative, participating, optional or other special
rights of the shares of each such series and the qualifications, limitations and
restrictions thereof. Preferred stock may rank prior to the Common Stock as to
dividend rights, liquidation preferences, or both, and may have full or limited
voting rights. The holders of preferred stock will be entitled to vote as a
separate class or series under certain circumstances, regardless of any other
voting rights which such holders may have.
Except as discussed elsewhere herein, the Holding Company has no
specific plans for the issuance of the additional authorized shares of Common
Stock or for the issuance of any shares of preferred stock. In the future, the
authorized but unissued and unreserved shares of Common Stock will be available
for general corporate purposes including, but not limited to, possible issuance
as stock dividends or stock splits, in future mergers or acquisitions, under a
cash dividend reinvestment and stock purchase plan, or in future underwritten or
other public or private offerings. The authorized but unissued shares of
preferred stock will similarly be available for issuance in future mergers or
acquisitions, in future underwritten public offerings or private placements or
for other general corporate purposes. Except as described above or as otherwise
required to approve the transaction in which the additional authorized shares of
Common Stock or authorized shares of preferred stock would be issued, no
shareholder approval will be required for the issuance of these shares.
Accordingly, the Holding Company's Board of Directors without shareholder
approval can issue preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock.
The offering and sale of Common Stock in the Conversion will be
registered under the 1933 Act. The subsequent sale or transfer of Common Stock
is governed by the 1934 Act, which requires that sales or exchanges of subject
securities be made pursuant to an effective registration statement or qualified
for an exemption from registration requirements of the 1933 Act. Similarly, the
securities laws of the various states also require generally the registration of
shares offered for sale unless there is an applicable exemption from
registration.
The Holding Company, as a newly organized corporation, has never issued
capital stock, and, accordingly, there is no market for the Common Stock. See
"Market for the Common Stock." See "Restrictions on Acquisition of the Holding
Company -- Provisions of the Holding Company's Articles and By-Laws" for a
description of certain provisions of the Holding Company's Articles and By-Laws
which may affect the ability of the Holding Company's shareholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company. Also, see "Dividends" for a description of certain matters
relating to the possible future payment of dividends on the Common Stock.
TRANSFER AGENT
Fifth Third Bank will act as transfer agent and registrar for the
Common Stock. Fifth Third Bank's phone number is (513) 579-5320 or (800)
837-2755.
REGISTRATION REQUIREMENTS
As soon as practicable following the Conversion, the Holding Company's
Common Stock will be registered pursuant to Section 12(g) of the 1934 Act and
may not be deregistered for a period of at least three years following the
Conversion. As a result of the registration under the 1934 Act, certain holders
of Common Stock will be subject to certain reporting and other requirements
imposed by the 1934 Act. For example, beneficial owners of more than 5% of the
outstanding Common Stock will be required to file reports pursuant to Section
<PAGE>
13(d) or Section 13(g) of the 1934 Act, and officers, directors and 10%
shareholders of the Holding Company will generally be subject to reporting
requirements of Section 16(a) and to the liability provisions for profits
derived from purchases and sales of Holding Company Common Stock occurring
within a six-month period pursuant to Section 16(b) of the 1934 Act. In
addition, certain transactions in Common Stock, such as proxy solicitations and
tender offers, will be subject to the disclosure and filing requirements imposed
by Section 14 of the 1934 Act and the regulations promulgated thereunder.
LEGAL AND TAX MATTERS
Barnes & Thornburg, 11 South Meridian Street, Indianapolis, Indiana
46204, special counsel to Citizens, will pass upon the legality and validity of
the shares of Common Stock being issued in the Conversion. Barnes & Thornburg
has issued an opinion concerning certain federal and state income tax aspects of
the Conversion and that the Conversion, as proposed, constitutes a tax-free
reorganization under federal and Indiana law. Barnes & Thornburg have consented
to the references herein to their opinions. Certain legal matters related to
this offering will be passed upon for Trident Securities by Baker & Daniels, 300
North Meridian Street, Indianapolis, Indiana 46204.
EXPERTS
Our consolidated financial statements at June 30, 1996 and 1995, and
for each of the three years in the period ended June 30, 1996 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
Keller has consented to the publication of the summary herein of its
appraisal report as to the estimated pro forma market value of the Common Stock
of the Holding Company to be issued in the Conversion, to the reference to its
opinion relating to the value of the subscription rights, and to the filing of
the appraisal report as an exhibit to the registration statement filed by the
Holding Company under the 1933 Act.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the 1933 Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information can be
inspected and copied at the SEC's public reference facilities located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Offices in
New York (Seven World Trade Center, 13th Floor, New York, New York 00048) and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. This information can also be found on the SEC's
website, located at www.sec.gov.
Citizens has filed with the OTS an Application for Conversion from a
federal mutual savings bank to a federal stock savings bank, and the Holding
Company has filed with the OTS an Application to become a savings and loan
holding company. This Prospectus omits certain information contained in such
Applications. The Applications may be inspected at the offices of the OTS, 1700
G Street, N.W., Washington, D.C. 20552 and at the Central Regional Office of the
OTS, 200 West Madison, Suite 1300, Chicago, Illinois 60606.
<PAGE>
Citizens Savings Bank of Frankfort
Index to Consolidated Financial Statements
Contents
Report of Independent Auditors........................................ F-2
Consolidated Statements of Condition - March 31, 1997 (unaudited)
and June 30, 1996 and 1995................................... F-3
Consolidated Statements of Income - Nine months ended March 31, 1997
and 1996 (unaudited) and years ended June 30, 1996,
1995 and 1994 ............................................... F-4
Consolidated Statements of Changes in Retained
Income Nine months ended March
31, 1997 (unaudited) and the years ended
June 30, 1996, 1995 and 1994 ................................ F-5
Consolidated Statements of Cash Flows - Nine months ended
March 31, 1997 and
1996 (unaudited) and the years ended
June 30, 1996, 1995 and 1994 ............................... F-6
Notes to Consolidated Financial Statements ........................... F-7
All schedules are omitted because the required information is not applicable or
is included in the financial statements and related notes.
The financial statements of the Holding Company have been omitted because of the
Holding Company has not issued any stock, has no assets and no liabilities, has
not conducted any business other than of an organizational nature.
F-1
<PAGE>
Ernst & Young LLP One Indiana Square Phone: 317 671 7000
Suite 3400 Fax: 317 681 7216
Indianapolis, Indiana
Report of Independent Auditors
Board of Directors
Citizens Savings Bank of Frankfort
We have audited the accompanying consolidated statements of condition of
Citizens Savings Bank of Frankfort and subsidiary as of June 30, 1996 and 1995,
and the related consolidated statements of income and retained income and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Savings
Bank of Frankfort and subsidiary at June 30, 1996 and 1995, and the consolidated
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 described in Note 8 to the consolidated financial statements, the Bank
changed its method of accounting for income taxes effective July 1, 1993.
/s/ Ernst & Young
August 16, 1996
F-2
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Consolidated Statements of Condition
<TABLE>
<CAPTION>
March 31 June 30
1997 1996 1995
-------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Cash on hand and in other institutions $322,976 $655,488 $777,048
Interest-bearing deposits 3,927,787 2,652,686 3,532,891
Investment securities available for sale 158,853 3,003,242 2,832,047
Stock in Federal Home Loan Bank
of Indianapolis 331,600 331,600 331,600
Loans receivable, net 37,216,332 34,391,405 29,275,181
Land held for development 1,042,676 1,072,800 1,069,458
Cash surrender value of
life insurance contract 1,065,508 1,034,553 991,009
Property and equipment 588,892 603,464 575,193
Other assets 498,364 490,058 342,735
--------------------------------------------------------
Total assets $45,152,988 $44,235,296 $39,727,162
========================================================
Liabilities and Retained Income
Deposits $37,254,858 $35,600,140 $33,175,007
Federal Home Loan Bank advances 2,000,000 3,000,000 1,500,000
Other liabilitiies 333,962 366,157 260,195
--------------------------------------------------------
Total liabilities 39,588,820 38,966,297 34,935,202
Commitments and contingencies --- --- ---
Retained income - substantially restricted 5,564,168 5,319,852 4,840,922
Unrealized loss on investment
securities available for sale, net of tax --- (50,853) (48,962)
--------------------------------------------------------
5,564,168 5,268,999 4,791,960
--------------------------------------------------------
Total liabilities and retained income $45,152,988 $44,235,296 $39,727,162
========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
Nine months ended March 31 Year ended June 30
1997 1996 1996 1995 1994
-------------------------------------------------------------------------
(Unaudited)
Interest income:
<S> <C> <C> <C> <C> <C>
Interest on loans $2,379,618 $2,069,266 $2,803,774 $2,383,591 $2,045,736
Other interest income 240,329 295,711 382,453 358,661 378,080
-------------------------------------------------------------------------
2,619,947 2,364,977 3,186,227 2,742,252 2,423,816
Interest expense:
Interest on deposits 1,227,014 1,148,894 1,538,886 1,341,925 1,273,229
Interest on borrowings 134,852 81,731 114,253 28,812 ---
-------------------------------------------------------------------------
1,361,866 1,230,625 1,653,139 1,370,737 1,273,229
-------------------------------------------------------------------------
Net interest income 1,258,081 1,134,352 1,533,088 1,371,515 1,150,587
Provision for loan losses 32,000 63,000 80,000 32,000 12,000
-------------------------------------------------------------------------
Net interest income
after provision for loan losses 1,226,081 1,071,352 1,453,088 1,339,515 1,138,587
Other income:
Fees and service charges 105,152 114,298 152,379 151,726 120,440
Loss on sale of investments (60,244) --- --- --- ---
Other 59,391 68,734 94,097 69,731 76,850
-------------------------------------------------------------------------
104,299 183,032 246,476 221,457 197,290
Other expense:
Salaries and employee benefits 351,710 304,683 414,730 387,245 330,924
Occupancy expense 83,750 82,311 117,967 109,842 105,049
Data processing expense 80,387 75,002 101,675 104,619 97,932
Federal insurance premium 252,960 56,946 76,868 75,078 71,468
Other 192,195 186,835 256,137 247,470 257,935
-------------------------------------------------------------------------
961,002 705,777 967,377 924,254 863,308
-------------------------------------------------------------------------
Income before income taxes 369,378 548,607 732,187 636,718 472,569
Income taxes 125,062 192,027 253,257 230,549 165,976
-------------------------------------------------------------------------
Income before cumulative
effect of change
in accounting principle 244,316 356,580 478,930 406,169 306,593
Cumulative effect of change in
accounting for income taxes --- --- --- --- 25,972
-------------------------------------------------------------------------
Net income $244,316 $356,580 $478,930 $406,169 $280,621
=========================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Consolidated Statements of Changes in Retained Income
<TABLE>
<CAPTION>
Retained Unrealized loss on
income - investment securities
substantially available for sale,
restricted net of tax Total
-------------------------------------------------------------
<S> <C> <C> <C>
Balance as of July 1, 1993 $4,154,132 --- $4,154,132
Net income 280,621 --- 280,621
-------------------------------------------------------------
Net change in unrealized
loss on equity interest
in pooled investment trust --- (49,697) (49,697)
Balance as of June 30, 1994 4,434,753 (49,697) 4,385,056
Net income 406,169 --- 406,169
Net change in unrealized loss on
investment securities available for
sale, net of tax --- 735 735
-------------------------------------------------------------
Balance as of June 30, 1995 4,840,922 (48,962) 4,791,960
Net income 478,930 --- 478,930
Net change in unrealized loss on
investment securities available for
sale, net of tax --- (1,891) (1,891)
-------------------------------------------------------------
Balance as of June 30, 1996 5,319,852 (50,853) 5,268,999
Net income (Unaudited) 244,316 --- 244,316
Net change in
unrealized loss on
investment securities available for
sale, net of tax (Unaudited) --- 50,853 50,853
-------------------------------------------------------------
Balance as of March 31, 1997
(Unaudited) $5,564,168 $ --- $5,564,168
=============================================================
</TABLE>
F-5
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended March 31 Year ended June 30
1997 1996 1996 1995 1994
-------------------------------------------------------------------------
(Unaudited)
Operating activities
<S> <C> <C> <C> <C> <C>
Net income $244,316 $356,580 $478,930 $406,169 $280,621
Adjustments to reconcile
net income to net cash provided
by operating activities:
Provision for loan losses 32,000 63,000 80,000 32,000 12,000
Depreciation and amortization 33,901 29,783 48,055 39,148 43,841
Deferred federal income
tax credit (35,509) (56,069) (74,473) (21,753) (15,204)
Increase in other assets (8,306) (104,526) (140,525) (78,522) (77,389)
Increase (decrease) in
other liabilities (16,195) 61,423 126,311 116,650 (22,990)
-------------------------------------------------------------------------
Net cash provided by
operating activities 250,207 350,191 518,298 493,692 220,879
Investing activities
Purchases of investment securities (36,451) (136,285) (169,304) (153,930) (1,107,427)
Proceeds from sale of
investment securities 2,945,410 --- --- --- ---
Principal collected on loans 9,989,574 7,474,558 10,279,567 8,262,649 8,642,816
Loans originated (12,966,000) (10,724,000) (15,419,000) (11,433,731) (11,060,024)
Loans purchased --- --- (64,000) --- (310,500)
Proceeds from sale of loans 91,000 --- --- --- ---
(Increase) decrease in land held
for development 30,124 (51,598) (3,342) (681,907) ---
Purchases of equipment (15,993) (39,830) (69,117) (24,516) (39,025)
-------------------------------------------------------------------------
Net cash provided (used)
by investing activities 37,664 (3,477,155) (5,445,196) (4,031,435) (3,874,160)
Financing activities
Increase (decrease) in NOW,
MMDA and passbook deposits 99,562 595,529 460,126 (1,990,873) 2,598,578
Increase in certificates of deposit 1,555,156 1,343,341 1,965,007 1,128,535 1,303,180
Advances from Federal
Home Loan Bank 11,500,000 3,500,000 4,500,000 6,000,000 ---
Payments to Federal
Home Loan Bank (12,500,000) (3,000,000) (3,000,000) (4,500,000) ---
-------------------------------------------------------------------------
Net cash provided by
financing activities 654,718 2,438,870 3,925,133 637,662 3,901,758
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 942,589 (688,094) (1,001,765) (2,900,081) 248,477
Cash and cash equivalents
at beginning of period 3,308,174 4,309,939 4,309,939 7,210,020 6,961,543
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period $4,250,763 $3,621,845 $3,308,174 $4,309,939 $7,210,020
=========================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Citizens Savings
Bank ("Bank") of Frankfort, Indiana, and its wholly owned subsidiary, Citizens
Loan and Service Corporation ("Service Corp."). The Bank operates as a
traditional savings bank in Clinton County. The Service Corp. develops land for
residential housing. All significant intercompany accounts and transactions have
been eliminated.
Interim Financial Information
The unaudited consolidated financial information as of, and for the nine months
ended, March 31, 1997 and 1996, has been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the nine-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended June 30, 1997.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in other institutions and
interest-bearing deposits. Interest-bearing deposits are available on demand.
Investment Securities
At June 30, 1996 and 1995, investment securities, which consist of equity
interests in pooled investment trusts, are classified as available-for-sale and
carried at fair value with the unrealized loss as a separate component of
equity, net of tax. At June 30, 1996 and 1995, the cost basis of investment
securities was $3,087,450 and $2,913,124, respectively and the gross unrealized
loss was $84,208 and $81,077, respectively. There were no realized gains during
the nine month period ended March 31, 1997 (unaudited). Gains and losses on the
sale of these securities are based on the specific cost of the individual
security being sold. At March 31, 1997, the Bank's investment in equity
interests in pooled investment trusts is classified as available-for-sale with
cost equaling fair value.
Management determines the
appropriate classification of investment securities at the time of purchase.
Securities classified as held to maturity are those which management has the
positive intent and ability to hold until the scheduled maturity. Securities
classified as held to maturity are stated at amortized cost. Securities
classified as available for sale are those which may be sold for liquidity
purposes, or other reasons, prior to reaching scheduled maturity.
Stock in Federal Home Loan Bank of Indianapolis
Stock in the Federal Home Loan Bank of Indianapolis is stated at cost and the
amount of stock held is determined by regulation.
Loans Receivable
The Bank has a first mortgage lien on all property securing loans classified as
residential and commercial real estate mortgage loans. Further, a portion of
certain mortgage loan balances is insured by private or government guaranty
insurance policies. Interest income is computed monthly based upon the principal
amount of the loans outstanding. The Bank discontinues the accrual of interest
on loans when, in management's opinion, the collection of all or a portion of
interest has become doubtful. Mortgage loans are placed on non-accrual status
when they become 90 days delinquent. When a loan is placed on nonaccrual, the
Bank charges all previously accrued and unpaid interest against income. Loan
origination and commitment fees and certain direct loan origination costs are
deferred and amortized as an adjustment of yield over the contractual life of
the related loans.
F-7
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (Continued)
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's determination of
the adequacy of the allowance is based on an evaluation of the portfolio
including consideration of past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income and reduced by net charge-offs.
In 1995, Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures" ("SFAS 118"), an amendment to SFAS 114,
were adopted. Any allowance for loan losses related to troubled loans identified
for evaluation in accordance with SFAS 114 is based on estimated discounted cash
flows using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. Consumer loans and
one-to-four family residential loans are collectively evaluated for impairment
as homogeneous loan groups which are outside the scope of SFAS 114. Under SFAS
118, no interest income on loans determined to be impaired is accrued. Interest
income on such loans is recognized only upon cash receipt. SFAS 114 and SFAS 118
have not had a significant impact on results of operations in 1996 or 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives (5 to 40 years) of the related assets.
Use of Estimates
Preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain elements of the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the presentation herein.
F-8
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
March 31 June 30
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Real estate mortgage loans: (Unaudited)
One-to four-family residential $29,401,637 $26,239,965 $22,287,040
Commercial 2,409,705 2,290,739 2,315,329
Construction loans 991,000 870,000 355,706
Installment loans 5,330,142 5,358,258 4,849,329
Loans secured by deposits 15,000 62,559 7,368
--------------------------------------------------
38,147,484 34,821,521 29,814,772
Less:
Allowance for loan losses 172,198 138,606 46,416
Deferred loan fees 102,771 94,665 86,156
Undisbursed portion of loan proceeds 656,183 196,845 407,019
--------------------------------------------------
931,152 430,116 539,591
--------------------------------------------------
$37,216,332 $34,391,405 $29,275,181
==================================================
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
March 31 June 30
1997 1996 1996 1995 1994
-----------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $138,606 $46,416 $46,416 $ 49,267 $ 38,263
Provision for losses 32,000 63,000 80,000 32,000 12,000
Charge-offs - - - (36,721) (5,637)
Recoveries 1,592 12,190 12,190 1,870 4,641
------------------------------------------------------------------------
Balance at end of year $172,198 $121,606 $138,606 $ 46,416 $ 49,267
========================================================================
</TABLE>
At March 31, 1997 and June 30, 1996 the Bank had loan commitments of
approximately $265,000 (unaudited) and $611,000, respectively. The $265,000 in
loan commitments are fixed rate commitments at 8.25%.
The Bank's loan portfolio consists primarily of loans originated in its
principal market area of Frankfort, Indiana, Clinton County and its contiguous
counties. The economy of the Bank's market area primarily includes some
diversified industries and agriculture. At March 31, 1997, and for the nine
months then ended (unaudited), the Bank had no loans considered to be impaired
under SFAS 114. At June 30, 1996, and for the year then ended, the Bank had no
loans considered to be impaired under SFAS 114. Advances from the Federal Home
Loan Bank of Indianapolis are secured by a floating lien on the Bank's
one-to-four family residential mortgage loans (see Note 7).
F-9
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. Loans to Related Parties
The Bank has granted loans to certain of its directors, officers and their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties and do not involve more than
normal risk of collectibility. The aggregate dollar amounts of these loans were
$2,250,000 (unaudited) at March 31, 1997 and $1,644,000 and $1,525,000 at June
30, 1996 and 1995, respectively. During the nine months ended March 31, 1997,
related party loans were increased $809,000 (unaudited) by loan advances and
reduced $203,000 (unaudited) by loan repayments. During 1996, related party
loans were increased $535,000 by loan advances and reduced $416,000 by loan
repayments.
4. Land Held for Development
The Bank, through its Service Corp., holds approximately 59 acres of land for
the development of a three phase residential housing addition in Frankfort. In
January 1992, the Bank received regulatory approval of a plan to develop this
land. During the nine months ended March 31, 1997 and during fiscal 1996, 1995
and 1994, approximately $56,000 (unaudited) $240,000, $654,000 and $0 was
expended to create the infrastructure for the development and provide further
improvements to the first and second phase of the project. During the nine
months ended March 31, 1997 and during fiscal 1996 approximately $98,000
(unaudited) and $270,000 was received from the sale of lots in the development
resulting in gains from sale of these lots of $12,000 (unaudited) and $33,000.
The Service Corp. owns an additional 45 acres of land for future development.
5. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31 June 30
1997 1996 1995
-------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $137,307 $137,307 $ 137,307
Office building 647,154 647,154 647,154
Furniture, fixtures and equipment 311,151 295,158 241,561
1,095,612 1,079,619 1,026,022
Less accumulated depreciation 506,720 476,155 450,829
------------------------------------------------
$588,892 $603,464 $575,193
================================================
</TABLE>
F-10
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Deposits
Deposits consist of the following:
<TABLE>
<CAPTION>
March 31 June 30
1997 1996 1995
--------------------------------------------------------------------------
Average Average Average
Interest Interest Interest
Type Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Savings accounts:
<S> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook $ 6,665,523 3.22% $ 6,698,172 3.25% $ 6,893,754 3.24%
Variable rate, money market 3,327,585 3.30 3,252,183 3.30 3,086,973 3.30
------------ ------------ ------------
9,993,108 3.24 9,950,355 3.27 9,980,727 3.25
Negotiable order of withdrawal
(NOW) accounts 4,132,925 2.16 4,076,132 2.06 3,585,634 2.37
Certificate accounts (original term):
3 months or less 1,447,548 5.15 456,505 4.90 1,561,726 5.76
6 months 5,123,009 5.04 2,129,690 4.56 2,183,016 4.58
12 months 1,088,151 4.77 1,105,698 4.88 1,225,702 4.67
13 months 2,046,713 5.34 2,009,878 5.59 1,973,966 5.55
18 months 615,945 4.93 301,032 5.08 237,923 4.13
23 months 5,843,717 5.88 4,629,213 6.10 2,918,100 6.13
30 months 1,162,372 5.26 1,330,297 4.97 1,801,943 4.49
36 months 2,200,941 5.13 2,868,783 4.94 3,458,851 4.88
Other certificates 3,600,430 5.99 6,742,557 5.77 4,247,419 6.44
------------ ------------ ------------
23,128,825 5.44 21,573,653 5.47 19,608,646 5.45
------------ ------------ ------------
$37,254,858 4.52% $35,600,140 4.47% $33,175,007 4.46%
==========================================================================
</TABLE>
The following table presents interest expense on deposits for the nine months
ended March 31, 1997 and 1996 (unaudited) and for the years ended June 30, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
For the Nine Months For the Year
Ended March 31, Ended June 30,
1997 1996 1996 1995 1994
-------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Fixed rate, passbooks $161,838 $165,221 $224,314 $230,077 $252,205
Variable rate, money markets 66,593 80,898 79,569 84,406 86,427
NOWs 81,920 59,538 107,232 105,566 121,539
Certificates 916,663 843,237 1,127,771 921,876 813,058
-------------------------------------------------------------------------
Total interest on deposits $1,227,014 $1,148,894 $1,538,886 $1,341,925 $1,273,229
=========================================================================
</TABLE>
F-11
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Deposits (continued)
The average interest rates represent the weighted average interest rates in
effect at March 31, 1997 and June 30, 1996 and 1995. Accrued interest payable,
which relates primarily to certificate accounts, totaled $53,000 (unaudited) at
March 31, 1997 and $39,000 at June 30, 1996 and 1995 and is included in other
liabilities. Cash paid for interest was $1,213,000 and $1,130,000 (unaudited)
for the nine months ended March 31, 1997 and 1996 and was $1,539,000,
$1,341,000, and $1,283,000 for the years ended June 30, 1996, 1995 and 1994,
respectively. Deposit accounts with balances in excess of $100,000 totaled
$6,596,000 with a weighted average interest rate of 4.65% as of June 30, 1996.
Deposits over $100,000 are not federally insured.
Contractual maturities of certificates of deposit were:
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
----------------------------------------------- -------------------------------------------
Year ended Certificates All other Certificates All other
June 30, over $100,000 Certificates Total over $100,000 Certificates Total
---------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
1997 $2,810,147 $2,933,169 $5,743,316 $3,801,300 $9,972,930 $13,774,230
1998 2,450,000 7,627,615 10,077,615 200,000 3,957,393 4,157,393
1999 200,000 4,281,908 4,481,908 100,000 1,685,798 1,785,798
2000 --- 1,279,876 1,279,876 100,000 690,018 790,018
2001 200,000 653,610 853,610 100,000 499,295 599,295
Thereafter 109,356 583,145 692,500 104,227 362,692 466,919
---------------------------------------------------------------------------------------------
$5,769,503 $17,359,323 $23,128,825 $4,405,527 $17,168,126 $21,573,653
=============================================================================================
</TABLE>
7. Advances from Federal Home Loan Bank of Indianapolis
Advances from the Federal Home Loan Bank of Indianapolis totaling $3,000,000 at
June 30, 1996 bear fixed and variable interest rates and are due at various
dates through October 1998. The Bank is required to maintain eligible loans in
its portfolio of at least 170% of outstanding advances as collateral for
advances from the Federal Home Loan Bank of Indianapolis.
The following table presents certain information relating to advances at
or for the nine months ended March 31, 1997 and 1996 and at or for the years
ended June 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
At or for the
Nine Months At or for the Year
Ended March 31, Ended June 30,
1997 1996 1996 1995 1994
----------------------------------------------------------------
(unaudited) (unaudited)
FHLB Advances:
<S> <C> <C> <C> <C> <C>
Outstanding at end of period............... $2,000,000 $2,000,000 $3,000,000 $1,500,000 $ ---
Average balance outstanding for period..... 3,275,000 1,800,000 1,923,000 462,000 ---
Maximum amount outstanding at any
month-end during the period.............. 5,000,000 2,000,000 3,000,000 1,500,000 ---
Weighted average interest rate
during the period..................... 5.49% 6.05% 5.94% 6.24% ---%
Weighted average interest rate
at end of period...................... 5.87 5.93 5.82 5.87 ---
</TABLE>
F-12
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Advances from Federal Home Loan Bank of Indianapolis (continued)
Advances outstanding are scheduled to mature as follows:
March 31, June 30,
1997 1996
Year ended June 30, Amount Amount
-------------------------------------------------------------------
(unaudited)
1997 $1,000,000 $2,000,000
1998 --- ---
1999 $1,000,000 1,000,000
-------------------------------------
$2,000,000 $3,000,000
=====================================
8. Income Taxes
Effective July 1, 1993, the Bank changed its method of accounting for income
taxes from the deferred method to the liability method required by SFAS 109,
"Accounting for Income Taxes." As permitted, prior year's financial statements
were not restated. The cumulative effect of adopting SFAS 109 (computed as of
July 1, 1993) was to decrease net income for the year ended June 30, 1994 by
$25,972. Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended
March 31, Year ended June 30
1997 1996 1996 1995 1994
(unaudited) (unaudited)
Federal:
<S> <C> <C> <C> <C> <C>
Current $124,870 $193,530 $255,830 $196,285 $138,145
Deferred (31,558) (44,264) (58,491) (17,119) (9,448)
-----------------------------------------------------------------
93,312 149,266 197,339 179,166 128,697
State:
Current 35,701 54,565 71,900 56,017 43,035
Deferred (3,951) (11,804) (15,982) (4,634) (5,756)
-----------------------------------------------------------------
31,750 42,761 55,918 51,383 37,279
-----------------------------------------------------------------
Income tax expense $125,062 $192,027 $253,257 $230,549 $165,976
=================================================================
</TABLE>
Federal income taxes vary from the amount computed using the corporate statutory
rate due principally to income on the cash surrender value of a life insurance
policy (see Note 10).
F-13
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The reconciliation of income tax computed at the federal statutory rate to the
Bank's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Nine months ended
March 31, Year ended June 30
----------------------------------------------------------------
1997 1996 1996 1995 1994
----------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Tax rate at federal statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
State franchise tax, net of
federal benefit 6.4 6.5 6.4 5.8 6.0
Income on cash surrender value of
life insurance policy (6.3) (6.1) (5.9) (5.0) (8.0)
Other (.2) .6 .1 1.4 3.1
----------------------------------------------------------------
Effective tax rate 33.9% 35.0% 34.6% 36.2% 35.1%
================================================================
</TABLE>
Deferred federal income taxes relate primarily to differing financial reporting
and income tax recognition principles regarding the allowance for loan losses,
investment security loss provisions and loan origination fees and costs. The
components of the Bank's net deferred tax asset included in other assets are as
follows:
<TABLE>
<CAPTION>
March 31, June 30
-------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
(unaudited)
Deferred tax assets:
<S> <C> <C> <C>
Deferred loan origination fees $124,560 $118,904 $ 111,442
Unrealized loss on investment --- 35,698 34,458
Officer supplemental retirement plan 92,562 67,681 38,347
Allowance for loan losses 73,184 58,908 19,727
Other 11,429 15,621 7,747
------------------------------------------------------
301,735 296,812 211,721
Deferred tax liabilities:
FHLB stock dividend (27,132) (27,132) (27,132)
Deferred loan origination costs (80,883) (78,680) (74,826)
Percentage bad debt deduction (58,915) (58,915) (58,915)
Other (13,840) (13,116) (7,592)
------------------------------------------------------
(180,770) (177,843) (168,465)
------------------------------------------------------
Net deferred tax asset $120,965 $118,969 $ 43,256
======================================================
</TABLE>
The Bank and its wholly owned subsidiary file a consolidated federal income tax
return. The Bank paid $260,209 (unaudited) in the nine months ended March 31,
1997 and $248,646, $168,539 and $181,180 of federal and state income taxes in
1996, 1995 and 1994, respectively.
F-14
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Retained Income
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
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. Management believes that the Bank meets all
capital adequacy requirements to which it is subject.
Pursuant to the Financial Institutions Reform Recovery and Enforcement Act of
1989 (FIRREA), as implemented by a rule promulgated by the Office of Thrift
Supervision ("OTS"), savings institutions must meet three separate minimum
capital-to-assets requirements: (i) a risk-based capital requirement of 8% of
risk-weighted assets, (ii) a leverage ratio of 3% core capital to total assets
and (iii) a tangible capital requirement of 1.5% tangible core capital to total
assets. The following table summarizes, the Bank's capital requirements under
FIRREA and its actual capital and capital ratios.
<TABLE>
<CAPTION>
Capital Actual
Requirements Capital Amount
% $ % $ of Excess
---------------------------------------------------------------------------------
March 31, 1997 (unaudited):
<S> <C> <C> <C> <C> <C>
Risk-based 8.0% $2,098,000 17.9% $4,701,000 $ 2,603,000
Leverage 3.0 1,328,000 10.2 4,529,000 3,201,000
Tangible 1.5 664,000 10.2 4,529,000 3,865,000
June 30, 1996:
Risk-based 8.0% $2,072,000 16.8% $4,343,000 $ 2,271,000
Leverage 3.0 1,298,000 9.6 4,204,000 2,906,000
Tangible 1.5 649,000 9.6 4,204,000 3,555,000
June 30, 1995:
Risk-based 8.0% $1,816,000 16.6% $3,773,000 $ 1,957,000
Leverage 3.0 1,164,000 9.6 3,726,000 2,562,000
Tangible 1.5 582,000 9.6 3,726,000 3,144,000
</TABLE>
At March 31, 1997 and at June 30, 1996 and 1995, the Bank, through its Service
Corp., had approximately $1,043,000 (unaudited), $1,073,000 and $1,069,000,
respectively, invested in land held for development. Since enactment of FIRREA,
regulatory capital rules require a reduction of regulatory capital for such an
investment. The amount of regulatory capital reduction was 100% as of March 31,
1997 and June 30, 1996 and 1995. The reductions were partially offset by
non-withdrawable deposits includable in regulatory capital of $8,000
(unaudited), $8,000 and $3,000 at March 31, 1997, June 30, 1996 and June 30,
1995, respectively.
F-15
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Retained Income (continued)
Pursuant to the Federal Deposit Insurance Corporation Improvement Act Prompt
Corrective Action regulations, for all periods presented, including the nine
months ended March 31, 1997 (unaudited), the Office of Thrift Supervision
categorized the Bank as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized the Bank must
maintain a total risk-based (as defined) ratio of 10%, a Tier 1 risk-based (as
defined) ratio of 6%, and a Tier 1 leverage (as defined) ratio of 5%. The Bank's
ratios were as follows:
<TABLE>
<CAPTION>
Total risk-based Tier 1 risk-based Tier 1 leveraged
<S> <C> <C> <C>
March 31, 1997 (unaudited) 17.9% 17.3% 10.2%
June 30, 1996 16.8% 16.2% 9.6%
June 30, 1995 16.6% 16.4% 9.6%
</TABLE>
Citizens has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision for such losses charged against income. Accordingly, retained
income includes income of approximately $1,349,000 for which no provision for
federal income taxes has been made. If, in the future, this portion of retained
income is used for any purpose other than to absorb loan losses, federal income
taxes may be imposed at the then applicable rates.
10. Employee Benefits
Substantially all full-time employees are covered by a defined benefit pension
plan administered by the Financial Institutions Retirement Fund (FIRF), a
multi-employer, industry sponsored plan. Plan information is not available for
the Bank as an individual entity within the multi-employer group. Pension
expense consisting primarily of plan administration costs amounted to
approximately $13,000 and $1,300 (unaudited) for the nine months ended March 31,
1997 and 1996 and $1,300, $16,400 and $27,300 for the years ended June 30, 1996,
1995 and 1994, respectively.
In addition to the above plan, the Bank adopted a supplemental non-qualified
pension plan during 1993 that provides certain officers with defined pension
benefits in excess of those provided in the qualified plan. To fund the plan,
the Bank purchased single premium life insurance contracts on the participating
employees. The carrying value of this investment, representing the cash
surrender value of the policies, was $1,065,000 and $1,025,000 (unaudited) at
March 31, 1997 and 1996 and $1,035,000 and $991,000 at June 30, 1996 and 1995,
respectively. During the nine months ended March 31, 1997 and 1996 and during
the years ended June 30, 1996, 1995 and 1994, $58,500 and $50,800 (unaudited),
$69,000, $47,400 and $29,600, respectively, were charged to expense under this
plan.
F-16
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. Fair Value of Financial Instruments
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and interest bearing deposits: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate those assets'
fair values.
Investment securities available for sale: Fair values for investment
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Stock in Federal Home Loan Bank of Indianapolis: The amount of stock held
in the Federal Home Loan Bank is determined by regulation and is stated at
cost which approximates market.
Loans receivable: For variable-rate loans that reprice frequently, fair
values are based on carrying values. The fair values for all 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.
Deposit liabilities: The fair values disclosed for demand deposits,
including interest-bearing and noninterest-bearing accounts, passbook
savings, and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). 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 time deposits.
Federal Home Loan Bank advances: The carrying amounts approximate their
fair values.
F-17
<PAGE>
Citizens Savings Bank of Frankfort and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. Fair Value of Financial Instruments (continued)
The estimated fair values of the Bank's financial instruments at June 30, 1996
are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
----------------------------------
Assets:
<S> <C> <C>
Cash on hand and in other institutions $655,488 $655,488
Interest bearing deposits 2,652,686 2,652,686
Investment securities available for sale 3,003,242 3,003,242
Stock in Federal Home Loan Bank of Indianapolis 331,600 331,600
Loans receivable 34,391,405 33,131,000
Liabilities:
Deposits 35,600,140 35,701,000
Federal Home Loan Bank advances 3,000,000 3,000,000
</TABLE>
12. Plan of Conversion (Unaudited)
On April 9, 1997, the Board of Directors adopted a Plan of Conversion ("Plan"),
whereby the Bank will convert from a federally-chartered mutual savings bank to
a federally-chartered capital stock savings bank. The Plan is subject to
approval by the regulatory authorities and members at a special meeting.
Pursuant to the Plan, non-transferable subscription rights to purchase shares of
stock of the savings Bank will be offered first to eligible account holders of
the Bank, then to an ESOP to be formed, then to supplemental eligible account
holders of the Bank, and then to the extent that stock is available, to certain
other members as of a specified dates, and then to members of the general public
wit hpreference given to residents of Clinton County. The capital stock will be
offered at $10.00 per share. The exact number of shares to be offered will be
determined by the Board of Directors based upon an appraisal to be made by an
independent appraisal firm. At least the minimum number of shares offered in the
conversion must be sold.
The plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the regulatory capital of the Bank as
of the latest practicable date prior to consummation of the conversion. The
liquidation account is established to provide a limited priority claim to the
assets of the Bank to qualifying depositors ("eligible account holders") who
continue to maintain deposits in the Bank after conversion. In the unlikely
event of a complete liquidation of the Bank, and only in such an event, eligible
account holders would receive from the liquidation account, a liquidation
distribution based on their proportionate share of the total remaining
qualifying deposits.
The Bank may pay dividends on its stock after the conversion if its regulatory
capital would not thereby be reduced below the amount then required for the
aforementioned liquidation account and if such dividends are otherwise permitted
under applicable regulations. In general, regulations permit dividends within
guidelines based on current levels of net income and capital.
The OTS also has authority to prohibit an institution 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 institution.
Costs of the conversion will be deducted from the proceeds of sale of common
stock and recorded as a reduction of common stock. If the conversion is not
completed, such costs will be charged to expense. No conversion costs had been
incurred as of March 31, 1997.
F-18
<PAGE>
GLOSSARY
1933 Act Securities Act of 1933, as amended
1934 Act Securities Exchange Act of 1934, as amended
APY Annual Percentage Yield
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other than Citizens or
its subsidiaries or the Holding Company) of which such
person is a director, officer, partner or 10% shareholder;
(ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as trustee or in a
similar fiduciary capacity; provided, however that such term
shall not include any employee stock benefit plan of the
Holding Company or Citizens in which such a person has a
substantial beneficial interest or serves as a trustee or in
a similar fiduciary capacity, and
(iii) any relative or spouse of such person, or relative of
such spouse, who either has the same home as such person or
who is a director or officer of Citizens or its subsidiaries
or the Holding Company.
ATM Automated Teller Machine
BIF Bank Insurance Fund of the FDIC
Citizens Citizens Savings Bank of Frankfort
CLSC Citizens Loan and Service Corporation, a wholly-owned
subsidiary of Citizens Savings Bank of Frankfort
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general public of any
shares of Common Stock not subscribed for in the
Subscription Offering, with preference given to residents of
Clinton County, Indiana
Common Stock Up to 1,058,000 shares of Common Stock, with no par value,
offered by Citizens Bancorp in connection with the
Conversion
Conversion Simultaneous conversion of Citizens Savings Bank of
Frankfort to stock form, the issuance of Citizens'
outstanding capital stock to Citizens Bancorp and Citizens
Bancorp's offer and sale of Common Stock
Eligible
Account Holders Savings account holders of Citizens with account balances of
at least $50 as of the close of business on December 31,
1995
ERISA Employee Retirement Income Security Act of 1974, as amended
ESOP The Citizens Bancorp Employee Stock Ownership Plan and Trust
Estimated Valuation
Range Estimated pro forma market value of the Common Stock ranging
from $6,800,000 to $9,200,000
Expiration Date 12:00 noon, Frankfort Time, on September 4, 1997
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
G-1
<PAGE>
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
FedICIA Federal Deposit Insurance Corporation Improvement Act of
1991, as amended
Holding Company Citizens Bancorp
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Keller Keller & Company, Inc.
MMDA Money Market Demand Account
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
OCC Office of the Comptroller of the Currency
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Savings account holders (other than Eligible Account Holders
and Supplemental Eligible Account Holders) who are entitled
to vote at the Special Meeting due to the existence of a
savings account on the Voting Record Date for the Special
Meeting
OTS Office of Thrift Supervision
Pension Plan Multiple-employer, noncontributory defined benefit
retirement plan adopted by Citizens for its full-time
employees through Pentegra Group (formerly known as
Financial Institutions Retirement Fund)
Plan or Plan of
Conversion Plan of Citizens Savings Bank of Frankfort to convert from a
federally chartered mutual savings bank to a federally
chartered stock savings bank and the issuance of all of
Citizens' outstanding capital stock to Citizens Bancorp and
the issuance of Citizens Bancorp's Common Stock to the
public
Purchase Price $10.00 per share price of the Common Stock
QTI Qualified thrift investment
QTL Qualified thrift lender
REO Real Estate Owned
RRP Management Recognition and Retention Plan to be submitted
for approval at a meeting of the Holding Company's
shareholders to be held at least six months after the
completion of the Conversion
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Special Meeting Special Meeting of members of Citizens called for
the purpose of approving the Plan
Stock Option
Plan The Citizens Bancorp Stock Option Plan for directors and
officers to be submitted for approval at a meeting of the
Holding Company's shareholders to be held at least six
months after the completion of the Conversion
G-2
<PAGE>
Subscription
Offering Offering of non-transferable rights to subscribe for the
Common Stock, in order of priority, to Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and
Other Members
Supplemental
Eligible
Account Holders Depositors of Citizens Savings Bank of Frankfort who are not
Eligible Account Holders, with account balances of at least
$50 on June 30, 1997
Trident Securities Trident Securities, Inc.
Voting Record
Date The close of business on July 25, 1997, the date for
determining members entitled to vote at the Special Meeting.
G-3
<PAGE>
===========================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or
made, such information or representation must not be relied upon as having
been authorized by the Holding Company or Citizens. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy any
security other than the shares of Common Stock offered hereby to any person
in any jurisdiction in which such offer or solicitation is not authorized,
or in which the person making such offer or solicitation is not qualified
to do so, or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale
hereunder shall, under any circumstances, create any implication that
information herein is correct as of any time subsequent to the date hereof.
Citizens Bancorp
(Proposed Holding Company for
Citizens Savings Bank of Frankfort)
Up to 920,000 Shares
Common Stock
(without par value)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
August 1, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until October 30, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1).
Blue Sky Legal Services and Registration Fees $ 15,000
OTS Filing Fees $ 8,400
NASD Filing Fee $ 1,558
Securities and Exchange Commission Registration Fee $ 3,206
NASDAQ Small Cap Market Listing Fee $ 1,000
Legal Services and Disbursements - Issuer's counsel $100,000
Accounting Services $ 75,000
Appraisal fees and expenses $ 15,000
Business plan fees and expenses $ 4,000
Conversion agent fees and expenses $ 6,000
Printing costs $ 55,000
Postage and mailing $ 20,000
Commissions and other offering fees (2) $ 88,950
Expenses of Sales Agents
(Including Counsel Fees and Disbursements) $ 45,000
Advertising $ 2,000
Transfer agent fees $ 2,000
Other expenses $ 7,886
--------
TOTAL (3) $450,000
========
(1) Costs represented by salaries and wages of regular employees and
officers of the Registrant are excluded.
(2) Assumes that the Common Stock is sold for $8,000,000, the midpoint of
the Estimated Valuation Range, that no shares of stock will be sold
through brokers, that all shares are sold in the Subscription Offering,
and that executive officers and directors of the Registrant and of
Citizens Savings Bank of Frankfort and their Associates and the
Citizens Bancorp Employee Stock Ownership Plan acquire 204,000 shares.
(3) All the above items, except the Registration, OTS and NASD Filing Fees,
are estimated.
Item 14. Indemnification of Directors and Officers.
Section 21 of the Indiana Business Corporation Law, as amended (the "BCL"),
grants to each corporation broad powers to indemnify directors, officers,
employees or agents against expenses incurred in certain proceedings if the
conduct in question was found to be in good faith and was reasonably believed to
be in the corporation's best interests. This statute provides, however, that
this indemnification should not be deemed exclusive of any other indemnification
rights provided by the articles of incorporation, by-laws, resolution or other
authorization adopted by a majority vote of the voting shares then issued and
outstanding. Section 10.05 and Article 13 of the Articles of Incorporation of
the Registrant state as follows:
Section 10.05. Limitation of Liability and Reliance on Corporate Records
and Other Information.
Clause 10.051. General Limitation. No Director, member of any committee
of the Board of Directors, or of another committee appointed by the Board,
Officer, employee or agent of the Corporation ("Corporate Person") shall be
liable for any loss or damage if, in taking or omitting to take any action
causing such loss or damage, either (1) such Corporate Person acted (A) in
good faith, (B) with the care an ordinarily prudent person in a like
position would have exercised under similar circumstances, and (C) in a
manner such Corporate Person reasonably believed was in the best interests
of the Corporation, or (2) such Corporate Person's breach of or failure to
act in accordance with the standards of conduct set forth in Clause
10.051(1) above (the "Standards of Conduct") did not constitute willful
misconduct or recklessness.
Clause 10.052. Reliance on Corporate Records and Other Information. Any
"Corporate Person" shall be fully protected, and shall be deemed to have
complied with the Standards of Conduct, in relying in good faith, with
respect to any information contained therein, upon (1) the Corporate
Records, or (2) information, opinions, reports or statements (including
financial statements and other financial data) prepared or presented by (A)
one or more other Corporate Persons whom such Corporate Person reasonably
believes to be competent in the matters presented, (B) legal counsel,
public accountants or other persons as to matters that such Corporate
Person reasonably believes are within such person's professional or expert
competence, (C) a committee of the Board of Directors or other committee
appointed by the Board of Directors, of which such Corporate Person is not
a member, if such Corporate Person reasonably believes such committee of
the Board of Directors or such appointed committee merits confidence, or
(D) the Board of Directors, if such Corporate Person is not a Director and
reasonably believes that the Board merits confidence.
<PAGE>
ARTICLE 13
Indemnification
Section 13.01. General. The Corporation shall, to the fullest extent to
which it is empowered to do so by the Act, or any other applicable laws, as
from time to time in effect, indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, by reason of the fact that he
is or was a Director, Officer, employee or agent of the Corporation, or
who, while serving as such Director, Officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, whether for profit or not, against expenses (including
counsel fees), judgments, settlements, penalties and fines (including
excise taxes assessed with respect to employee benefit plans) actually or
reasonably incurred by him in accordance with such action, suit or
proceeding, if he acted in good faith and in a manner he reasonably
believed, in the case of conduct in his official capacity, was in the best
interest of the Corporation, and in all other cases, was not opposed to the
best interests of the Corporation, and, with respect to any criminal action
or proceeding, he either had reasonable cause to believe his conduct was
lawful or no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not meet the prescribed standard of conduct.
Section 13.02. Authorization of Indemnification. To the extent that a
Director, Officer, employee or agent of the Corporation has been
successful, on the merits or otherwise, in the defense of any action, suit
or proceeding referred to in Section 13.01 of this Article, or in the
defense of any claim, issue or matter therein, the Corporation shall
indemnify such person against expenses (including counsel fees) actually
and reasonably incurred by such person in connection therewith. Any other
indemnification under Section 13.01 of this Article (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific
case, upon a determination that indemnification of the Director, Officer,
employee or agent is permissible in the circumstances because he has met
the applicable standard of conduct. Such determination shall be made (1) by
the Board of Directors by a majority vote of a quorum consisting of
Directors who were not at the time parties to such action, suit or
proceeding; or (2) if a quorum cannot be obtained under subdivision (1), by
a majority vote of a committee duly designated by the Board of Directors
(in which designation Directors who are parties may participate),
consisting solely of two or more Directors not at the time parties to such
action, suit or proceeding; or (3) by special legal counsel: (A) selected
by the Board of Directors or its committee in the manner prescribed in
subdivision (1) or (2), or (B) if a quorum of the Board of Directors cannot
be obtained under subdivision (1) and a committee cannot be designated
under subdivision (2), selected by a majority vote of the full Board of
Directors (in which selection Directors who are parties may participate);
or (4) by the Shareholders, but shares owned by or voted under the control
of Directors who are at the time parties to such action, suit or proceeding
may not be voted on the determination.
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as
to reasonableness of expenses shall be made by those entitled under
subsection (3) to select counsel.
Section 13.03. Good Faith Defined. For purposes of any determination
under Section 13.01 of this Article 13, a person shall be deemed to have
acted in good faith and to have otherwise met the applicable standard of
conduct set forth in Section 13.01 if his action is based on information,
opinions, reports, or statements, including financial statements and other
financial data, if prepared or presented by (1) one or more Officers or
employees of the Corporation or another enterprise whom he reasonably
believes to be reliable and competent in the matters presented; (2) legal
counsel, public accountants, appraisers or other persons as to matters he
reasonably believes are within the person's professional or expert
competence; or (3) a committee of the Board of Directors of the Corporation
or another enterprise of which the person is not a member if he reasonably
believes the committee merits confidence. The term "another enterprise" as
used in this Section 13.03 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other
enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent.
The provisions of this Section 13.03 shall not be deemed to be exclusive or
to limit in any way the circumstances in which a person may be deemed to
have met the applicable standards of conduct set forth in Section 13.01 of
this Article 13.
<PAGE>
Section 13.04. Payment of Expenses in Advance. Expenses incurred in
connection with any civil or criminal action, suit or proceeding may be
paid for or reimbursed by the Corporation in advance of the final
disposition of such action, suit or proceeding, as authorized in the
specific case in the same manner described in Section 13.02 of this
Article, upon receipt of a written affirmation of the Director, Officer,
employee or agent's good faith belief that he has met the standard of
conduct described in Section 13.01 of this Article and upon receipt of a
written undertaking by or on behalf of the Director, Officer, employee or
agent to repay such amount if it shall ultimately be determined that he did
not meet the standard of conduct set forth in this Article 13, and a
determination is made that the facts then known to those making the
determination would not preclude indemnification under this Article 13.
Section 13.05. Provisions Not Exclusive. The indemnification provided
by this Article shall not be deemed exclusive of any other rights to which
a person seeking indemnification may be entitled under these Articles of
Incorporation, the Corporation's Code of By-Laws, any resolution of the
Board of Directors or Shareholders, any other authorization, whenever
adopted, after notice, by a majority vote of all Voting Stock then
outstanding, or any contract, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a Director, Officer, employee
or agent, and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 13.06. Vested Right to Indemnification. The right of any
individual to indemnification under this Article shall vest at the time of
occurrence or performance of any event, act or omission giving rise to any
action, suit or proceeding of the nature referred to in Section 13.01 of
this Article 13 and, once vested, shall not later be impaired as a result
of any amendment, repeal, alteration or other modification of any or all of
these provisions. Notwithstanding the foregoing, the indemnification
afforded under this Article shall be applicable to all alleged prior acts
or omissions of any individual seeking indemnification hereunder,
regardless of the fact that such alleged acts or omissions may have
occurred prior to the adoption of this Article. To the extent such prior
acts or omissions cannot be deemed to be covered by this Article 13, the
right of any individual to indemnification shall be governed by the
indemnification provisions in effect at the time of such prior acts or
omissions.
Section 13.07. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a Director, Officer,
employee or agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against any liability
asserted against or incurred by the individual in that capacity or arising
from the individual's status as a Director, Officer, employee or agent,
whether or not the Corporation would have power to indemnify the individual
against the same liability under this Article.
Section 13.08. Additional Definitions. For purposes of this Article,
references to the "Corporation" shall include any domestic or foreign
predecessor entity of the Corporation in a merger or other transaction in
which the predecessor's existence ceased upon consummation of the
transaction.
For purposes of this Article, serving an employee benefit plan at the
request of the Corporation shall include any service as a Director,
Officer, employee or agent of the Corporation which imposes duties on, or
involves services by such Director, Officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries. A
person who acted in good faith and in a manner he reasonably believed to be
in the best interests of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interest of the Corporation" referred to in this Article.
<PAGE>
For purposes of this Article, "party" includes any individual who is or
was a plaintiff, defendant or respondent in any action, suit or proceeding,
or who is threatened to be made a named defendant or respondent in any
action, suit or proceeding.
For purposes of this Article, "official capacity," when used with
respect to a Director, shall mean the office of director of the
Corporation; and when used with respect to an individual other than a
Director, shall mean the office in the Corporation held by the Officer or
the employment or agency relationship undertaken by the employee or agent
on behalf of the Corporation. "Official capacity" does not include service
for any other foreign or domestic corporation or any partnership, joint
venture, trust, employee benefit plan, or other enterprise, whether for
profit or not.
Section 13.09. Payments a Business Expense. Any payments made to any
indemnified party under this Article under any other right to
indemnification shall be deemed to be an ordinary and necessary business
expense of the Corporation, and payment thereof shall not subject any
person responsible for the payment, or the Board of Directors, to any
action for corporate waste or to any similar action.
<PAGE>
Under the Act, an Indiana corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against any
liability asserted against him or incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of the Act.
The Registrant has purchased insurance designed to protect and indemnify the
Registrant and its officers and directors in case they are required to pay any
amounts arising from certain claims, including claims under the Securities Act
of 1933, which might be made against the officers and directors by reason of any
actual or alleged act, error, omission, misstatement, misleading statement,
neglect, or breach of duty while acting in their respective capacities as
officers or directors of the Registrant.
Item 15. Recent Sales of Unregistered Securities.
Because the Registrant was only recently incorporated to act as a holding
company upon the completion of the offering registered by means of this
Registration Statement, the Registrant has not yet issued any shares of its
capital stock or other securities.
Item 16. Exhibits and Financial Statement Schedules.
(a) The exhibits furnished with this Registration Statement are
listed beginning on page E-l.
(b) No financial statement schedules are required.
<PAGE>
Item 17. Undertakings.
(1) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table on the effective registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement. (b) That, for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of an action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Frankfort,
State of Indiana, on July 31, 1997.
CITIZENS BANCORP
By /s/ Fred W. Carter
-------------------------------
Fred W. Carter
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
(1) Principal Executive
Officer and Director:
/s/ Fred W. Carter President and )
-------------------------- Chief Executive Officer )
Fred W. Carter )
)
)
)
(2) Principal Financial )
and Accounting )
Officer: )
)
)
/s/ Stephen D. Davis Controller )
------------------------- )
Stephen D. Davis )
)
)
(3) The Board of Directors: )
)
)
ROBERT F. AYRES Director ) July 31, 1997
)
)
FRED W. CARTER Director )
)
)
PERRY W. LEWIS Director )
)
)
JOHN J. MILLER Director )
)
)
BILLY J. WRAY Director )
)
)
By: /s/ Fred W. Carter
---------------------------
Fred W. Carter
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
1 Form of Agency Agreement to be entered into among Registrant,
Citizens Savings Bank of Frankfort, and Trident Securities, Inc.*
2 Plan of Conversion*
3 (1) Registrant's Articles of Incorporation*
(2) Registrant's Code of By-Laws*
4 Form of Stock Certificate*
5 Opinion of Barnes & Thornburg re legality of securities being
registered*
8 (1) Opinion of Barnes & Thornburg re tax matters*
(2) Opinion of Keller & Company, Inc. re economic value of
Subscription Rights*
10(1) Letter Agreements entered into between Registrant and Keller &
Company, Inc. relating to appraisal and business plan*
(2) Citizens Bancorp Stock Option Plan*
(3) Citizens Savings Bank of Frankfort Recognition and Retention Plan
and Trust*
(4) Citizens Bancorp Employee Stock Ownership Plan and Trust
Agreement*
(5) Employment Agreement between Citizens Savings Bank of Frankfort
and Fred W. Carter*
(6) Director Deferred Compensation Agreement -- Fred W. Carter*; First
Amendment thereto
(7) Executive Supplemental Retirement Agreement and First Amendment
thereto -- Fred W. Carter*; Second Amendment thereto*
(8) Executive Supplemental Retirement Agreement and First Amendment
thereto -- Stephen D. Davis*; Second Amendment thereto*
(9) Executive Supplemental Retirement Agreement and First Amendment
thereto -- Cindy S. Chambers*; Second Amendment thereto*
(10) Exempt Loan and Share Purchase Agreement between Trust under
Citizens Bancorp Employee Stock Ownership Plan and Trust Agreement
and Citizens Bancorp*
21 Subsidiaries of the Registrant*
23(1) Consent of Keller & Company, Inc.*
(2) Consent of Ernst & Young, LLP
(3) Consent of Barnes & Thornburg (included in Exhibit 5)*
24 Power of Attorney included on page S-6 of the Registration
Statement*
99(1) Appraisal Report of Keller & Company, Inc.*
(2) Stock Order Form*
- -------------
*Previously filed
E-1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 16, 1996 on the consolidated financial statements
of Citizens Savings Bank of Frankfort and subsidiary, in the Amendment No 2 to
the Registration Statement (Form S-1) and related Prospectus of Citizens Bancorp
dated August 1, 1997.
/s/ Ernst & Young, LLP
Indianapolis, Indiana
July 30, 1997
