<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-63515
PROSPECTUS
FIRST CAPITAL, INC.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK)
BETWEEN 657,475 AND 1,022,954 SHARES OF COMMON STOCK
First Federal Bank, A Federal Savings Bank is converting from the mutual holding
company form of organization to the stock holding company form of organization.
First Capital, Inc., M.H.C., a federally-chartered mutual holding company,
currently owns 59.5% of the outstanding common stock of First Federal Bank. As a
result of the conversion, First Capital, Inc., M.H.C. will cease to exist and
First Federal Bank will become a wholly-owned subsidiary of First Capital, Inc.,
an Indiana corporation that was formed in September 1998. First Capital, Inc. is
offering its common stock to the public under the terms of a Plan of Conversion
which must be approved by the members of First Capital, Inc., M.H.C. and by the
stockholders of First Federal Bank. The conversion will not go forward if First
Capital, Inc., M.H.C. and First Federal Bank do not receive these approvals or
if First Capital, Inc. does not sell at least the minimum number of shares.
Pursuant to the Plan of Conversion, First Capital, Inc. will issue shares of its
common stock in this offering that will represent a 59.5% ownership interest in
First Capital, Inc., which is based on the percentage ownership that First
Capital, Inc., M.H.C. currently maintains in First Federal Bank. First Capital,
Inc. will also issue shares of its common stock to the public stockholders of
First Federal Bank in exchange for their shares of First Federal Bank's common
stock pursuant to an exchange ratio that will result in the public stockholders
of First Federal Bank owning in the aggregate approximately 40.5% of First
Capital, Inc.
- --------------------------------------------------------------------------------
OFFERING SUMMARY
Price Per Share: $10.00
<TABLE>
<CAPTION>
MINIMUM MIDPOINT MAXIMUM MAXIMUM, AS ADJUSTED
------- -------- ------- --------------------
<S> <C> <C> <C> <C>
Number of shares: 657,475 773,500 889,525 1,022,954
Gross offering proceeds: $ 6,574,750 $ 7,735,000 $ 8,895,250 $ 10,229,540
Estimated underwriting
commissions and other
offering expenses: $ 373,000 $ 392,000 $ 410,000 $ 432,000
Estimated net proceeds: $ 6,201,750 $ 7,343,000 $ 8,485,250 $ 9,797,540
Estimated net proceeds per share: $ 9.43 $ 9.49 $ 9.54 $ 9.58
</TABLE>
The amount of common stock being offered in the conversion is based on an
independent appraisal of the market value of First Federal Bank and First
Capital, Inc., M.H.C. after giving effect to the conversion. The independent
appraiser has stated that as of October 23, 1998, the estimated market value of
the converted First Federal Bank and First Capital, Inc., M.H.C. ranged from
$11,050,000 to $14,950,000. Based on this valuation and the 59.5% ownership
interest being sold in this offering, the minimum of the offering range was set
at $6,574,750 and the maximum was set at $8,895,250. Subject to approval of the
Office of Thrift Supervision, an additional 15% above the maximum number of
shares may be sold.
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc. will use its
best efforts to assist First Capital, Inc. in selling at least the minimum
number of shares but does not guarantee that this number will be sold. All funds
received from subscribers will be held in an interest-bearing savings account at
First Federal Bank until the completion or termination of the conversion.
First Capital, Inc. has received preliminary approval to have its common stock
quoted on the Nasdaq SmallCap Market under the symbol FCAP.
The subscription offering will terminate at 12:00 Noon, Eastern Standard Time,
on December 15, 1998, unless extended for up to 20 days.
- --------------------------------------------------------------------------------
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
For additional information about the conversion, refer to the more detailed
information in this prospectus. For assistance, contact the stock information
center at (812) 738-7676.
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this prospectus is November 12, 1998
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical
facts are forward-looking statements. These forward-looking statements include
statements of goals, intentions and expectations and involve risks and
uncertainties including, but not limited to, the following: changes in general
economic conditions; the performance of financial markets; interest rates; and
competitive, regulatory, legislative or tax changes that affect the cost of or
demand for the Bank's products. Because of these uncertainties, actual future
results may differ materially from those contemplated by such statements.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary................................................................. 1
Risk Factors............................................................ 10
Selected Financial Information.......................................... 15
Recent Developments..................................................... 17
Use of Proceeds......................................................... 22
Dividend Policy......................................................... 23
Market for Common Stock................................................. 24
Capitalization.......................................................... 26
Historical and Pro Forma
Regulatory Capital Compliance......................................... 28
Pro Forma Data.......................................................... 29
Effect of the Conversion on the Bank's
Stockholders.......................................................... 33
Subscriptions by Executive Officers and
Directors............................................................. 34
First Federal Bank, A Federal Savings
Bank Statements of Income............................................. 35
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................................. 36
Business of the Holding Company......................................... 45
Business of the Bank.................................................... 46
Management of the Holding Company....................................... 64
Management of the Bank.................................................. 64
Regulation.............................................................. 74
Taxation................................................................ 81
The Conversion.......................................................... 83
Comparison of Stockholders' Rights...................................... 100
Restrictions on Acquisition
of the Holding Company................................................ 104
Description of Capital Stock
of the Holding Company ............................................... 108
Registration Requirements............................................... 110
Legal and Tax Opinions.................................................. 110
Experts................................................................. 110
Additional Information.................................................. 110
Index to Financial Statements........................................... 111
Glossary................................................................ G-1
</TABLE>
<PAGE>
SUMMARY
The following summary explains the significant aspects of the
conversion. For additional information about the conversion and the stock
offering refer to the more detailed information in this prospectus. Throughout
this prospectus, First Federal Bank, A Federal Savings Bank is referred to as
the "Bank," First Capital, Inc., M.H.C. is referred to as the "MHC" and First
Capital, Inc. is referred to as the "Holding Company." See the glossary at the
back of this prospectus for the definitions of certain terms that are printed in
boldface type the first time they appear in this prospectus.
FIRST CAPITAL, INC.
The Bank formed the Holding Company under Indiana law in September
1998 for the purpose of owning all of the Bank's capital stock following
completion of the conversion. The Holding Company has received conditional
approval of the OTS to become a savings and loan holding company by acquiring
the capital stock of the Bank in the conversion. Before the completion of the
conversion, the Holding Company will not have any material assets or liabilities
and it will not conduct any business other than business related to the
conversion. After the conversion, the Holding Company's primary assets will be
all of the capital stock of the Bank, the loan that the Holding Company intends
to make to the Bank's ESOP and the net proceeds remaining from the sale of its
common stock after contributing 50% of the net proceeds to the Bank and funding
the ESOP loan. Initially, the primary activity of the Holding Company will be to
direct, plan and coordinate the Bank's business activities. In the future, the
Holding Company might become an operating company or acquire or organize other
operating subsidiaries, including other financial institutions, although it
currently has no specific plans or agreements to do so. The Holding Company's
main office is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and
its telephone number is (812) 738-2198.
FIRST CAPITAL, INC., M.H.C.
The MHC is the federally-chartered mutual holding company of the Bank.
The MHC was formed in February 1993 as a result of the reorganization of the
Bank into a federally chartered mutual holding company. The members of the MHC
consist of depositors of the Bank and those current borrowers of the Bank who
had loans outstanding as of the consummation date of the MHC reorganization
(February 1, 1993). The MHC's sole business activity is holding 300,000 shares
of the Bank's common stock, which represents 59.5% of the outstanding shares as
of the date of this prospectus. As part of the conversion, the MHC will merge
into the Bank, with the Bank as the surviving entity. As a result of this
merger, the MHC will cease to exist. The MHC's main office is located at 220
Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812)
738-2198.
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
The Bank was founded in 1891 as an Indiana-chartered mutual savings
and loan association. In 1934, the Bank converted to a federally-chartered
savings and loan association under the name "First Federal Savings and Loan
Association of Corydon." In February 1993, the Bank converted to a federally-
chartered capital stock savings bank and adopted its current name. The Bank's
main office, which was opened in July 1997, is located at 220 Federal Drive,
N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198.
The Bank is regulated by the OTS and the FDIC. The Bank's deposits
have been federally-insured by the FDIC since 1961 and are currently insured by
the FDIC under the SAIF. The Bank is a member of the FHLB-System.
The Bank's strategy is to operate as an independent, retail financial
institution dedicated to financing home ownership and other consumer needs in
Harrison County, its primary market area, and, to a lesser extent, in
surrounding counties. At June 30, 1998, the Bank operated from its main office
and a branch office in Corydon and had total assets of $94.0 million, deposits
of $77.5 million and stockholders' equity of $10.3 million. At that date, $57.8
million, or 74.6%, of the Bank's loans were residential mortgage loans, $4.4
million, or 5.6%, were commercial real estate loans, $3.8 million, or 4.9%, were
residential construction loans, $5.0 million, or 6.5%, were commercial business
loans and
1
<PAGE>
$6.3 million, or 8.1%, were consumer loans. The Bank originates all loans for
retention in its portfolio. For a discussion of the Bank's business strategy and
recent results of operations, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." For a discussion of the Bank's
business activities, see "BUSINESS OF THE BANK."
THE CONVERSION
The conversion is being undertaken pursuant to the PLAN OF CONVERSION
that was adopted by the Boards of Directors of the Bank and the MHC on June 18,
1998. Pursuant to the Plan of Conversion, (i) the MHC will merge into the Bank,
at which time the MHC will cease to exist and the outstanding shares of the
Bank's common stock held by the MHC will be canceled, and (ii) the Bank will
become a wholly-owned subsidiary of the Holding Company. As part of the
conversion, the Holding Company will sell shares of its common stock in this
offering that will represent an ownership interest in the Holding Company that
is based on the percentage ownership that the MHC currently maintains in the
Bank. The Holding Company will also issue shares of its common stock to the
public stockholders of the Bank (i.e., stockholders other than the MHC) in
----
exchange for their shares of Bank common stock pursuant to an exchange ratio
that will result in the public stockholders of the Bank owning in the aggregate
approximately 40.5% of the Holding Company, before giving effect to any (i)
payment of cash to the Bank's public stockholders who exercise and perfect their
rights of dissent and appraisal, (ii) payment of cash in lieu of issuing
fractional shares and (iii) shares purchased by the stockholders of the Bank in
the offering.
The following diagram illustrates the current organizational structure
and ownership of the Bank:
------------------------ ------------------------
First Capital, Inc., Public
M.H.C. Shareholders
59.5% 40.5%
------------------------ ------------------------
--------------------------------
------------------------
First Federal Bank
------------------------
The following diagram reflects the post-conversion organizational
structure and ownership of the Holding Company and the Bank. The ownership
interests presented assume no fractional shares of the Holding Company's common
stock are issued and does not give effect to purchases of any shares in this
offering by the Bank's public stockholders or to the exercise of outstanding
stock options.
2
<PAGE>
-------------------------- --------------------------
Purchasers in Offering Former Bank Stockholders
59.5% 40.5%
-------------------------- --------------------------
--------------------------------
------------------------
First Capital, Inc.
100%
------------------------
------------------------
First Federal Bank
------------------------
Completion of the conversion requires the following member and
shareholder approvals:
1. Approval by the holders of at least a majority of the total
number of votes eligible to be cast by the members of the MHC.
2. Approval by the holders of at least two-thirds of the outstanding
shares of the Bank's common stock (including those shares held by
the MHC).
3. Approval by the holders of at least a majority of the shares of
the Bank's common stock (not including those shares held by the
MHC) present in person or by proxy at a meeting of stockholders
called for the purpose of considering the Plan of Conversion.
The MHC has called a special meeting of its members to be held on
December 23, 1998 for the purpose of considering the Plan of Conversion. The
Bank's stockholders will consider the Plan of Conversion at the Bank's 1998
Annual Meeting of Stockholders which has been delayed until December 23, 1998
(the Annual Meeting is typically held in October of each year). The MHC intends
to vote its shares of Bank common stock, which amounts to 59.5% of the
outstanding shares, in favor of the Plan of Conversion at the special meeting of
stockholders. As of June 30, 1998, directors and executive officers of the Bank
and their associates beneficially owned 37,150 shares (not including shares that
may be acquired through the exercise of stock options), or 18.2%, of the
outstanding shares of Bank common stock held by the Bank's public shareholders
(i.e. shareholders other than the MHC), which they intend to vote in favor of
---
the Plan of Conversion.
REASONS FOR THE CONVERSION
The Boards of Directors of the Holding Company, the MHC and the Bank
believe that the conversion is in the best interests of the MHC and its members,
the Bank and its stockholders, and the communities served by the MHC and the
Bank. In their decision to pursue the conversion, the Boards of Directors
considered the various regulatory uncertainties associated with the mutual
holding company structure, including the MHC's future ability to waive any
dividends from the Bank. In addition, the Boards of Directors considered the
various advantages of the stock holding company form of organization, including:
(i) the potential increased liquidity in the Holding Company common stock
relative to the Bank common stock because of the larger number of shares to be
outstanding upon consummation of the conversion and the receipt by the Holding
Company of conditional approval to list its shares on the Nasdaq SmallCap
Market; (ii) the Holding Company's ability to repurchase shares of its common
stock without adverse tax consequences; (iii) the Holding Company's greater
flexibility under current law and regulations relative to the MHC to acquire
other financial institutions and diversify operations; and (iv) the larger
capital base of the Holding Company that will result from the sale of common
stock in this offering. Currently, the Boards of Directors of the Holding
Company and the
3
<PAGE>
Bank have no specific plans, arrangements or understandings, written or oral,
regarding any stock repurchases, acquisitions or diversification of operations.
See "THE CONVERSION -- Purposes of Conversion."
THE SUBSCRIPTION OFFERING AND THE DIRECT COMMUNITY OFFERING
The Holding Company is offering shares of its common stock in a
SUBSCRIPTION OFFERING to certain current and former depositor and borrower
customers of the Bank and to the Bank's ESOP. Pursuant to its Plan of
Conversion, the Bank has granted subscription rights in the following order of
priority in accordance with applicable regulatory requirements to:
1. "ELIGIBLE ACCOUNT HOLDERS" -- the Bank's depositors with $50 or
more on deposit as of March 31, 1997.
2. The Bank's ESOP.
3. "SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS" -- the Bank's depositors
with $50 or more on deposit as of September 30, 1998.
4. "OTHER MEMBERS" -- the Bank's depositors as of October 31, 1998
and borrowers of the Bank as of February 1, 1993 whose loans
continue to be outstanding as of October 31, 1998.
If the number of shares sold in the conversion is increased above the
maximum of the offering range the ESOP will have first priority to purchase any
such shares over the maximum of the offering range, up to a total of 8% of the
common stock sold in this offering.
IMPORTANT: Subscription rights are not transferable, and
persons with subscription rights may not subscribe for
shares for the benefit of any other person. Persons
violating this prohibition may lose their right to purchase
shares in the conversion and may be subject to criminal
prosecution and/or other sanctions.
The Subscription Offering will expire at 12:00 Noon, Eastern Standard
Time, on the EXPIRATION DATE of December 15, 1998, unless extended by the Bank
and the Holding Company for up to 20 days. In the event of an oversubscription,
shares will be allocated in accordance with the Plan of Conversion.
Concurrently with the Subscription Offering, shares will be offered to
the general public in a DIRECT COMMUNITY OFFERING. Public stockholders of the
Bank will have first preference to purchase shares in the Direct Community
Offering and natural persons and trusts of natural persons who are residents of
the Bank's LOCAL COMMUNITY will have second preference. The Direct Community
Offering will terminate on the Expiration Date unless extended with approval of
the OTS, if necessary. The Subscription Offering and the Direct Community
Offering are being managed by WEBB. Webb is a registered broker-dealer and a
member of the NASD. Webb is not obligated to purchase any shares of common stock
in this offering. Shares not sold in the Subscription Offering or Direct
Community Offering may be offered for sale in a SYNDICATED COMMUNITY OFFERING,
which would be an offering to the general public on a best efforts basis by a
selling group of broker-dealers managed by Webb. See "THE CONVERSION -- The
Subscription, Direct Community and Syndicated Community Offerings."
EXCHANGE OF THE BANK'S COMMON STOCK
As part of the conversion, each share of Bank common stock held by the
MHC will be canceled and each share of Bank common stock held by the Bank's
public stockholders will be exchanged for shares of Holding Company common
stock. The number of shares of Holding Company common stock to be issued to the
Bank's public stockholders will be based on an EXCHANGE RATIO that will result
in the Bank's public stockholders owning in the aggregate approximately 40.5% of
the outstanding shares of Holding Company common stock before giving effect to
any (i) payment of cash to the Bank's public stockholders who exercise and
perfect their rights of dissent and appraisal,
4
<PAGE>
(ii) payment of cash in lieu of issuing fractional shares of Holding Company
common stock and (iii) shares purchased by the Bank's public stockholders in the
offering. Bank. THE FINAL EXCHANGE RATIO WILL BE BASED ON THE PERCENTAGE
OWNERSHIP INTEREST OF THE BANK'S PUBLIC STOCKHOLDERS IN THE BANK AND THE NUMBER
OF SHARES SOLD IN THIS OFFERING AND NOT ON THE MARKET VALUE OF BANK COMMON
STOCK. ACCORDINGLY, THE VALUE OF THE SHARES OF HOLDING COMPANY COMMON STOCK TO
BE RECEIVED FOR EACH SHARE OF BANK COMMON STOCK MAY BE MORE OR LESS THAN THE
MARKET VALUE OF BANK COMMON STOCK AT THE TIME OF EXCHANGE. See "-- Stock
Pricing, Exchange Ratio and Number of Shares to be Issued in the Conversion."
Pursuant to OTS regulations, stockholders of the Bank will have
dissent and appraisal rights with respect to the conversion because the Bank's
common stock currently is not listed on a national securities exchange or quoted
on the Nasdaq Stock Market. Accordingly, even if the conversion is approved,
stockholders of the Bank who exercise and perfect their rights of dissent and
appraisal under OTS regulations will have the right to receive cash equal to the
fair market value of their shares of Bank common stock as determined by
regulation, rather than exchanging them for shares of Holding Company common
stock. DO NOT SEND YOUR BANK STOCK CERTIFICATES AT THIS TIME REGARDLESS OF
WHETHER OR NOT YOU INTEND TO EXERCISE AND PERFECT YOUR RIGHTS OF DISSENT AND
APPRAISAL. The Bank will send to each Bank stockholder a proxy statement for the
Bank's 1998 Annual Meeting of Stockholders at which the Plan of Conversion will
be considered, which will include detailed instructions on how to exercise and
perfect dissent and appraisal rights. See "THE CONVERSION -- Dissent and
Appraisal Rights." For Bank stockholders who do not wish to exercise their
dissent and appraisal rights but want to exchange their shares of Bank common
stock for shares of Holding Company common stock, the Holding Company will mail
to each such stockholder exchange instructions and a transmittal letter after
the consummation of the conversion. See "THE CONVERSION -- Delivery and Exchange
of Stock Certificates."
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED IN THE
CONVERSION
Between 657,475 and 889,525 shares of the common stock will be sold in
this offering, all at a price of $10.00 per share. With the approval of the OTS,
the number of shares may be increased to 1,022,954. There are no commissions to
pay in order to buy any shares in the conversion.
The amount of common stock being offered in the conversion is based on
an independent appraisal of the estimated pro forma market value of the Bank and
the MHC after giving effect to the conversion. KELLER & COMPANY, INC., the
independent appraiser, has estimated that, in its opinion, as of October 23,
1998, the aggregate pro forma market value of the Bank and the MHC was in an
ESTIMATED VALUATION RANGE of between $11,050,000 and $14,950,000 (with a
midpoint of $13,000,000). The pro forma market value is the estimated market
value of the Bank and the MHC after taking into account the sale of shares in
this offering and the formation of the Holding Company. The appraisal was based
in part on the Bank's financial condition and operations and the effect of the
additional capital raised by the sale of common stock in this offering. Based on
this valuation and the approximate 59.5% ownership interest being sold in this
offering, the Board of Directors of the Holding Company and the Bank established
an offering range of $6,574,750 to $8,895,250. The independent appraisal will be
updated prior to the completion of the conversion. If the pro forma market value
of the Bank and the MHC changes to either below $11,050,000 or above $17,192,500
(the adjusted maximum of the Estimated Valuation Range), subscribers will be
notified and provided with the opportunity to modify or cancel their orders. The
$10.00 per share purchase price was determined by the Boards of Directors of the
Holding Company and the Bank. See "THE CONVERSION -- Stock Pricing, Exchange
Ratio and Number of Shares to be Issued."
Based on the 204,015 shares of Bank common stock outstanding at the
date of this prospectus, and assuming a minimum of 657,475 and a maximum of
889,525 shares of Holding Company common stock are sold in the offering, the
Exchange Ratio is expected to range from approximately 2.1936 to 2.9678 as set
forth in the following table. If 1,022,954 shares of common stock are sold, the
Exchange Ratio will be 3.4130. The final Exchange Ratio will be adjusted if any
options to purchase shares of Bank common stock are exercised after the date of
this prospectus and before the consummation of the conversion.
5
<PAGE>
<TABLE>
<CAPTION>
Shares to be Sold Shares to be Exchanged
in this for Bank Total Shares
Offering(1) Common Stock (1) of Common
--------------------- ----------------------- Stock To Be Exchange
Amount Percent Amount Percent Outstanding(1) Ratio(1)
------ ------- ------ ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum.............. 657,475 59.5 447,525 40.5 1,105,000 2.1936
Midpoint............. 773,500 59.5 526,500 40.5 1,300,000 2.5807
Maximum.............. 889,525 59.5 605,475 40.5 1,495,000 2.9678
15% above
Maximum............ 1,022,954 59.5 696,296 40.5 1,719,250 3.4130
</TABLE>
_______________
(1) Assumes that outstanding options to purchase 7,245 shares of Bank
common stock are not exercised before consummation of the conversion.
PURCHASE LIMITATIONS
The minimum number of shares that may be purchased is 25. The Bank has
established the following additional purchase limitations:
1. No person may purchase more than 25,000 shares in the offering.
2. No person, either alone or together with associates or persons
acting in concert, may purchase shares in an amount that, when
combined with shares received in exchange for Bank common stock,
exceeds 62,500 shares.
Persons owning shares of Bank common stock may be limited in their
ability to subscribe for and purchase shares in this offering because OTS policy
requires that the maximum purchase limitation include shares to be received in
exchange for shares of Bank common stock.
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "THE CONVERSION -- Limitations on
Purchases of Shares of Common Stock."
PROCEDURE FOR PURCHASING COMMON STOCK
To subscribe for shares of common stock in the Subscription Offering,
send or deliver an original, signed stock order form together with full payment
(or appropriate instructions for withdrawal of full payment from permitted
deposit accounts, as described below) to the Bank in the postage-paid envelope
provided so that the stock order form is received before the end of the
Subscription Offering. The certification that is part of the stock order form
must also be signed. Payment for shares may be made in cash (if made in person)
or by check or money order. The Bank will pay interest at the rate it pays on
passbook accounts from the date funds are received until completion or
termination of the conversion. Subscribers who have deposit accounts with the
Bank may include instructions on the stock order form requesting withdrawal from
such deposit account(s) to purchase shares. Withdrawals from certificates of
deposit may be made without incurring an early withdrawal penalty. All funds
authorized for withdrawal from deposit accounts with the Bank will earn interest
at the applicable account rate, but a hold will be placed on such funds making
them unavailable until the completion of the conversion. After the Bank receives
an order, the order cannot be withdrawn or changed, except with the consent of
the Bank.
IMPORTANT: To ensure the proper identification of subscription rights,
list all qualifying savings accounts and loans, as of the respective qualifying
dates, on the stock order form. Persons who do not list all qualifying savings
accounts and loans may be subject to reduction or rejection of their
subscription.
6
<PAGE>
The Holding Company and the Bank have the discretion to accept or
reject orders received either through the Direct Community Offering or the
Syndicated Community Offering. If an order is rejected in part, there is no
right to cancel the remainder of the order.
Owners of self-directed IRAS who are eligible to purchase common stock
may use the assets of their IRAs to purchase shares of common stock in the
conversion, provided that their IRAs are not maintained on deposit with the
Bank. If you want to use funds in a self-directed IRA maintained by the Bank to
purchase shares of common stock, you must transfer your account to an
unaffiliated institution or broker. If you are interested in doing so, you
should contact the stock information center at least one week before the
Expiration Date.
For further information on how to purchase stock, see "THE CONVERSION--
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings."
USE OF PROCEEDS
The Holding Company will use the proceeds of the offering as follows:
. 50% of the net proceeds will be contributed to the Bank. The Bank
will use these funds to make loans and purchase investments similar
to the kinds it currently holds. Up to $700,000 of these funds will
also contribute to the construction of a new full-service branch
office. The Bank may also use these funds to expand its banking
operations through the acquisition of additional branches or other
financial institutions.
. The remaining net proceeds will be kept for general corporate
purposes. These purposes may include, for example, paying dividends
or buying back shares of common stock. Funds may also be used for
future diversification or acquisition activities or may be
contributed to the Bank to support its growth.
. An amount equal to 8% of the gross proceeds will be loaned to the
ESOP to fund its purchase of common stock.
For further discussion, see "USE OF PROCEEDS."
PURCHASES BY OFFICERS AND DIRECTORS
The Bank expects its directors and executive officers (together with
their associates) to subscribe for 42,500 shares, which equals approximately
4.0% of the shares sold at the midpoint of the offering range. The purchase
price paid by them will be the same $10.00 per share price as that paid by all
other persons who purchase shares in the conversion. See "SUBSCRIPTIONS BY
EXECUTIVE OFFICERS AND DIRECTORS."
BENEFITS OF THE CONVERSION TO MANAGEMENT
ESOP. The Bank's ESOP intends to purchase 8% of the shares of common
stock sold in this offering (71,162 shares of the maximum of the Estimated
Valuation Range for an aggregate value of $711,620 based on the purchase price
of $10.00 per share). If the ESOP's subscription is not filled in its entirety,
the ESOP may purchase shares in the open market or may purchase shares directly
from the Holding Company. If the number of shares sold in the conversion is
increased above the maximum of the offering range, the ESOP will have a first
priority to purchase any such shares over the maximum of the offering range, up
to a total of 8% of the common stock sold in the offering. The Holding Company
will recognize additional compensation expense as a result of the adoption of
the ESOP. For information about the ESOP, see "MANAGEMENT OF THE BANK --
Benefits -- Employee Stock Ownership Plan." See also "RISK FACTORS -- Expenses
Associated with ESOP and 1999 MRDP" and "PRO FORMA DATA."
MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN. After the conversion, the
Holding Company expects to adopt the First Capital, Inc. 1999 Management
Recognition and Development Plan ("1999 MRDP"). If the 1999 MRDP
7
<PAGE>
is implemented within one year after the conversion, under current OTS
regulations the plan will be subject to approval by stockholders at a meeting
which may be held no earlier than six months after completion of the conversion.
The 1999 MRDP will reserve a number of shares equal to 4% of the number of
shares sold in this offering (35,581 shares at the maximum of the Estimated
Valuation Range for an aggregate value of $355,810 based on the purchase price
of $10.00 per share). Pursuant to the 1999 MRDP, the Holding Company would be
able to make awards of shares of common stock to key employees and directors of
the Holding Company and the Bank at no cost to the recipient. All awards would
be subject to vesting over a period of years. The size of individual awards will
be determined prior to submitting the 1999 MRDP for stockholder approval, and
disclosure of anticipated awards will be included in the proxy materials for
such meeting. The Holding Company will recognize additional compensation expense
as a result of the adoption of the 1999 MRDP. For additional information about
the 1999 MRDP, see "MANAGEMENT OF THE BANK -- Benefits -- Management Recognition
and Development Plans." See also "RISK FACTORS -- Expenses Associated With ESOP
and 1999 MRDP" and "PRO FORMA DATA."
STOCK OPTION PLAN. After the conversion, the Holding Company expects to
adopt the First Capital, Inc. 1999 Stock Option Plan ("1999 Option Plan"). If
the 1999 Option Plan is implemented within one year after the conversion, under
current OTS regulations the plan will be subject to approval by stockholders at
a meeting which may be held no earlier than six months after completion of the
conversion. The 1999 Option Plan will reserve a number of shares equal to 10% of
the number of shares sold in this offering (88,952 shares at the maximum of the
Estimated Valuation Range). Pursuant to the 1999 Option Plan, the Holding
Company would be able to award options to acquire shares of common stock to key
employees and directors of the Holding Company and the Bank at no cost to the
recipient. The exercise price of such options would be 100% of the fair market
value of the common stock on the date the option is granted. All awards would be
subject to vesting over a period of years. Disclosure of anticipated awards,
including the size of such awards, will be included in the proxy materials for
the stockholder meeting. For additional information about the 1999 Option Plan,
see "MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plans."
EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN. The Holding Company and the
Bank plan to enter into employment agreements with J. Gordon Pendleton, the
Holding Company's and the Bank's Chairman and Chief Executive Officer, Samuel E.
Uhl, the Holding Company's and the Bank's President and Chief Operating Officer,
M. Chris Frederick, the Holding Company's and the Bank's Senior Vice President,
Chief Financial Officer and Treasurer, and Joel E. Voyles, the Holding Company's
and the Bank's Secretary. The employment agreements will provide certain
benefits to the executives if they are terminated following a change in control
of the Holding Company or the Bank. If there is a change in control of the
Holding Company or the Bank, each executive will be entitled to a package of
cash and/or benefits with a maximum value equal to 2.99 times his average annual
compensation during the five-year period preceding the change in control. If a
change in control had occurred as of June 30, 1998, the aggregate value of the
severance benefits payable to the executives under the proposed employment
agreements would have been approximately $646,000. See "RISK FACTORS -- Possible
Anti-takeover Effect of Employment and Severance Agreements" and "MANAGEMENT OF
THE BANK -- Executive Compensation -- Employment Agreements."
The Holding Company and the Bank plan to adopt an employee severance
compensation plan to provide benefits to eligible employees in the event of a
change in control of the Holding Company or the Bank. Officers who enter into
separate employment agreements with the Holding Company and the Bank will not be
eligible to participate in the severance plan. The severance plan will provide
that, in the event of a change in control of the Holding Company or the Bank,
eligible employees who are terminated or who terminate employment (but only upon
the occurrence of events specified in the plan) within 12 months of the
effective date of a change in control will be entitled to a payment based on
years of service with the Bank, subject to certain limits. Assuming that a
change in control had occurred at June 30, 1998 and the termination of all
eligible employees, the maximum aggregate payment due under the severance plan
would have been approximately $219,000. See "RISK FACTORS -- Possible Anti-
takeover Effect of Employment Agreements and Severance Plan" and "MANAGEMENT OF
THE BANK -- Executive Compensation -- Employee Severance Compensation Plan."
ASSUMPTION OF EXISTING BENEFIT PLANS. When the Bank converted from
mutual to stock form in 1993 as part of its reorganization into the mutual
holding company structure, the Bank did not implement either an employee stock
8
<PAGE>
ownership plan or a management recognition and development plan because
management believed the cost of such plans was not justified in light of the
relatively small dollar size of the stock offering. However, after the
consummation of the mutual holding company reorganization, the Bank adopted the
1994 Stock Option Plan ("1994 Option Plan"), which will be assumed by the
Holding Company upon consummation of the conversion. All stock options awarded
pursuant to the 1994 Option Plan that are outstanding at the consummation of the
conversion will be converted into options to purchase shares of Holding Company
common stock, with the number of shares subject to the option and the exercise
price per share to be adjusted based upon the Exchange Ratio so that the
aggregate exercise price remains unchanged. The duration of the options will
also be unchanged. At June 30, 1998, there were outstanding options to purchase
7,245 shares of Bank common stock at a weighted-average exercise price of $15.75
per share. See "MANAGEMENT OF THE BANK -- Benefits."
MARKET FOR COMMON STOCK
The Holding Company has obtained preliminary approval for its common
stock to be listed on the Nasdaq SmallCap Market under the symbol FCAP. The
Bank's common stock does not trade on an established market but rather in
privately negotiated transactions. Recent trades in the Bank's common stock have
occurred at a price of $20.00 per share, but this price is not necessarily
indicative of the price at which the Holding Company's common stock will be
issued in this offering or at which it will trade after the consummation of the
conversion. Upon consummation of the conversion, each outstanding share of Bank
common stock (other than those held by the MHC, which will be canceled, and
other than those held by the Bank's public stockholders who exercise and perfect
their rights of dissent and appraisal) will be exchanged for 2.1936, 2.5807,
2.9678 and 3.4130 shares of Holding Company common stock at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. After shares of the Holding Company's common stock commence
trading, interested investors may contact a stock broker to buy or sell shares.
The Holding Company cannot assure you that there will be an active trading
market for the common stock or that the common stock will trade at prices at or
above the $10.00 per share price when trading commences. See "RISK FACTORS --
Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
DIVIDEND POLICY
Following consummation of the conversion, the Holding Company's Board
of Directors intends to pay cash dividends on the common stock at an initial
quarterly rate equal to $0.175 per share divided by the final Exchange Ratio.
This formula will result in an initial quarterly dividend rate of approximately
$0.080, $0.068, $0.059 and $0.051 per share at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, respectively.
Dividends will be subject to determination and declaration by the Board of
Directors, which will take into account a number of factors, including the
Holding Company's consolidated operating results and financial condition, net
worth and capital requirements, as well as regulatory restrictions on the
payment of dividends from the Bank to the Holding Company (which would be a
primary source of funds for the Holding Company). The Holding Company cannot
guarantee you that dividends will in fact be paid or that if paid such dividends
will not be reduced or eliminated in the future. For further information about
the payment of dividends, see "DIVIDEND POLICY."
COMPARISON OF STOCKHOLDERS' RIGHTS
The Holding Company is an Indiana corporation subject to the provisions
of the Indiana Business Corporation Law, and the Bank is a federally-chartered
savings bank subject to federal laws and OTS regulations. Upon consummation of
the conversion, the stockholders of the Bank (who do not exercise and perfect
their rights of dissent and appraisal) will become stockholders of the Holding
Company and their rights as stockholders will be governed by the Holding
Company's Articles of Incorporation and Bylaws and Indiana law, rather than the
Bank's Federal Stock Charter and Bylaws, federal law and OTS regulations. For a
discussion of certain material differences in the rights of stockholders of the
Holding Company and the Bank and an explanation of possible antitakeover effects
of certain provisions of the Holding Company's Articles of Incorporation and
Bylaws, see "COMPARISON OF STOCKHOLDERS' RIGHTS" and "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY."
9
<PAGE>
RISK FACTORS
Before investing in the common stock please carefully consider the
matters discussed below. THE COMMON STOCK IS NOT A SAVINGS ACCOUNT OR DEPOSIT
AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ABOVE AVERAGE INTEREST RATE RISK ASSOCIATED WITH FIXED-RATE LOANS
At June 30, 1998, approximately 61.5% of the Bank's assets consisted of
residential mortgage loans held for investment. Such loans represented 74.6% of
the total loan portfolio at that date. While generally considered to involve
less risk than other types of lending, such as commercial mortgage loans,
commercial business loans and consumer loans, residential mortgage loans provide
relatively lower yields. The Bank's loan portfolio also includes a significant
amount of loans with fixed rates of interest. At June 30, 1998, $59.1 million,
or 76.3%, of the Bank's total loans receivable had fixed interest rates all of
which were held for investment. Although the Bank offers ARM LOANS, customer
demand for them is generally low in times of low market interest rates, as
currently exists. Unlike ARM loans, fixed-rate loans carry the risk that,
because they do not reprice to market interest rates, their yield may be
insufficient to offset increases in the Bank's cost of funds during a rising
interest rate environment. This risk is even greater in the case of the Bank
because it holds all loans for investment rather than originating fixed-rate
loans for sale in the secondary market. Accordingly, a material and prolonged
increase in market interest rates could be expected to have a greater adverse
effect on the Bank's net interest income compared to other institutions that
hold a materially larger portion of their assets in ARM loans or in fixed-rate
loans that are originated for committed sale in the secondary market, or in a
combination thereof. For a discussion of the Bank's loan portfolio, see
"BUSINESS OF THE BANK -- Lending Activities."
CERTAIN LENDING RISKS
CONSUMER LENDING RISKS. At June 30, 1998, the Bank's consumer loan
portfolio amounted to $6.3 million, or 8.1% of total loans. Subject to market
conditions and other factors, the Bank intends to expand its consumer lending
activities within its primary market area. Consumer lending is inherently
riskier than one- to four-family mortgage lending. Collateral such as
automobiles, boats and other personal property depreciate rapidly and are often
an inadequate repayment source if a borrower defaults. In addition, consumer
loan repayments depend on the borrower's continuing financial stability and are
more likely to be adversely affected by job loss, divorce, illness, personal
bankruptcy and other financial hardship. See "BUSINESS OF THE BANK -- Lending
Activities -- Consumer Loans."
COMMERCIAL BUSINESS LENDING RISKS. At June 30, 1998, the Bank's
commercial business loan portfolio amounted to $5.0 million, or 6.5% of total
loans. Subject to market conditions and other factors, the Bank intends to
expand its commercial business lending activities within its primary market
area. Commercial business lending is inherently riskier than one- to four-family
mortgage lending. Although commercial business loans are often collateralized by
equipment, inventory, accounts receivable or other business assets, the
liquidation value of these assets in the event of a borrower default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Commercial Business Loans."
COMMERCIAL REAL ESTATE LENDING RISKS. At June 30, 1998, the Bank's
commercial real estate loan portfolio amounted to $4.4 million, or 5.6% of total
loans. Commercial real estate lending is inherently riskier than one- to
four-family mortgage lending. Because payments on loans secured by commercial
properties often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy, among other things. See "BUSINESS OF THE BANK
- -- Lending Activities -- Commercial Real Estate Loans."
CONSTRUCTION LENDING RISKS. At June 30, 1998, the Bank's residential
construction loan portfolio amounted to $3.8 million, or 4.9% of total loans, of
which $832,000 consisted of speculative construction loans for which there is
not a commitment for permanent financing in place at the time the construction
loan is originated. Construction
10
<PAGE>
lending is inherently riskier than one- to four-family mortgage lending.
Construction loans generally have higher loan balances than one- to four-family
mortgage loans. In addition, the potential for cost overruns because of the
inherent difficulties in estimating construction costs and, therefore,
collateral values and the difficulties and costs associated with monitoring
construction progress, among other things, are major contributing factors to
this greater credit risk. Speculative construction loans have the added risk
that there is not an identified buyer for the completed home when the loan is
originated, with the risk that the builder will have to service the construction
loan debt and finance the other carrying costs of the completed home for an
extended time period until a buyer is identified. Furthermore, the demand for
construction loans and the ability of construction loan borrowers to service
their debt depends highly on the state of the general economy, including market
interest rate levels, as well as the state of the economy of the Bank's primary
market area. A material downturn in economic conditions would be expected to
have a material adverse effect on the credit quality of the construction loan
portfolio. See "BUSINESS OF THE BANK -- Lending Activities -- Construction
Loans."
DEPENDENCE ON LOCAL ECONOMY
The Bank focuses on serving customers in Harrison County, Indiana,
which has a population of approximately 34,000 according to 1997 statistics. The
unemployment rate in Harrison County in June 1998 was 2.6%, which compared to
2.8% and 4.7% for Indiana and the U.S., respectively. Substantially all of the
Bank's loan portfolio consists of loans made to borrowers and collateralized by
properties located in Harrison County. Furthermore, substantially all of the
Bank's depositors reside in Harrison County. As a result of this concentration,
a downturn in the economy of Harrison County or the surrounding area could
increase the risk of loss associated with the Bank's loan portfolio. See
"BUSINESS OF THE BANK -- Market Area."
INTEREST RATE RISK
Changes in interest rates can have significant effects on the Bank's
profitability. The Bank's ability to make a profit, like that of most financial
institutions, depends largely on its net interest income, which is the
difference between the interest income received from its interest-earning assets
(such as loans and investment securities) and the interest expense incurred in
connection with its interest-bearing liabilities (such as deposits and
borrowings). The Bank's net interest income and the market value of its assets
and liabilities could be significantly affected by changes in interest rates. In
a rising interest rate environment, the Bank anticipates that its net interest
income could be adversely affected because its large percentage of fixed-rate
loans would not reprice to market interest rates at the same rate as its
interest-bearing liabilities. In addition, rising interest rates may adversely
affect the Bank's earnings because they may cause a decrease in customer demand
for loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Market Risk Analysis."
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. During periods of declining interest rates, loans
and mortgage-backed securities prepay faster as loans are prepaid and refinanced
at lower interest rates. During such periods, the Bank generally will not be
able to reinvest the proceeds of any such prepayments at comparable yields.
Conversely, during periods of rising interest rates, the rate of prepayments
generally slows. Moreover, volatility in interest rates also can result in
disintermediation, or the flow of funds away from savings institutions into
direct investments, such as U.S. Government and corporate securities and other
investment vehicles which, because of the absence of federal insurance premiums
and reserve requirements, generally pay higher rates of return than savings
institutions.
BELOW AVERAGE RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income divided by average equity) is a ratio used
by many investors to compare the performance of a particular company with other
companies. Because the proceeds of this offering will increase the Holding
Company's equity to a level greater than many of its peers, the Holding
Company's post-conversion return on equity will be below the average return on
equity for many publicly held savings associations and banks. In addition, the
expenses associated with the ESOP and 1999 MRDP as described immediately below
under "-- Expenses Associated
11
<PAGE>
with ESOP and 1999 MRDP," along with other post-conversion expenses, will limit
earnings growth levels. Over time, the Holding Company intends to deploy the net
proceeds from the conversion to increase earnings per share and book value per
share, without assuming undue risk, with the goal of achieving a return on
equity competitive with other publicly traded savings associations. This goal
could take a number of years to achieve, and the Holding Company cannot assure
you that this goal can be attained. Consequently, you should not expect a
competitive return on equity in the near future. See "SELECTED FINANCIAL
INFORMATION," "CAPITALIZATION" and "PRO FORMA DATA."
EXPENSES ASSOCIATED WITH ESOP AND 1999 MRDP
If the ESOP and 1999 MRDP are implemented, the Bank will recognize
additional material employee compensation and benefit expenses that stem from
the shares purchased or granted to employees and executives under those plans.
The Bank cannot predict the actual amount of these new expenses because
applicable accounting practices require that they be based on the fair market
value of the shares of common stock when the expenses are recognized. Expenses
for the ESOP would be recognized when shares are committed to be released to
participants' accounts, and expenses for the 1999 MRDP would be recognized over
the vesting period of awards made to recipients. These expenses have been
reflected in the pro forma financial information under "PRO FORMA DATA" assuming
the $10.00 per share purchase price as fair market value. Actual expenses,
however, will be based on the fair market value of the common stock at the time
of recognition, which may be higher or lower than $10.00. For further discussion
of these plans, see "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock
Ownership Plan" and "-- Benefits -- Management Recognition and Development
Plan."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
If the conversion is completed and stockholders approve the 1999 MRDP
and 1999 Option Plan, the Holding Company intends to issue shares to its
officers and directors through these plans. If the shares for the 1999 MRDP are
issued from authorized but unissued stock, your ownership interest could be
diluted by up to approximately 2.3%. If the shares for the 1999 Option Plan are
issued from authorized but unissued stock, your ownership interest could be
diluted by up to approximately 5.6%. In either case, the issuance of additional
shares would decrease net income per share and stockholders' equity per share.
Furthermore, the issuance of shares under the 1994 Option Plan from authorized
but unissued stock would also dilute your ownership interest and decrease net
income per share and stockholders' equity per share. If this occurs, your
ownership interest would be diluted and net income per share and stockholders'
equity per share may be decreased. See "PRO FORMA DATA."
POSSIBLE VOTING CONTROL BY MANAGEMENT AND EMPLOYEES
The 42,500 shares of common stock expected to be purchased by the
Bank's directors and executive officers and their associates in the conversion,
combined with shares such persons will receive in exchange for their shares of
Bank common stock and the shares expected to be awarded or sold to plan
participants under the ESOP, the 1999 MRDP, the 1999 Option Plan and the 1994
Option Plan, could ultimately result in management and employees and their
associates controlling up to approximately 25.2% of the outstanding shares of
the common stock (assuming the sale of 773,500 shares in the conversion and that
the shares issued under the 1999 MRDP, the 1999 Option Plan and the 1994 Option
Plan are repurchased treasury shares) and could permit management to benefit
from certain statutory and regulatory provisions, as well as certain provisions
in the Holding Company's Articles of Incorporation and Bylaws, that tend to
promote the continuity of existing management. If these individuals were to act
as a group or in concert with each other they could have significant influence
over the outcome of any stockholder vote requiring a majority vote and in the
election of directors and could effectively exercise veto power in matters
requiring the approval of stockholders, such as certain business combinations.
Management might thus have the power to authorize actions that might be viewed
as contrary to the best interests of non-affiliated holders of the common stock
and might have veto power over actions that such holders might deem to be in
their best interests. See "SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS,"
"MANAGEMENT OF THE BANK -- Executive Compensation" and "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY."
12
<PAGE>
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS THAT COULD DISCOURAGE HOSTILE
ACQUISITIONS OF CONTROL
Provisions in the Holding Company's Articles of Incorporation and
Bylaws, the corporation law of the State of Indiana, and certain federal
regulations might make it difficult and expensive to pursue a tender offer,
change in control or takeover attempt that management opposes. As a result,
stockholders who might desire to participate in such a transaction might not
have an opportunity to do so. Such provisions will also make the removal of the
current board of directors or management of the Holding Company, or the
appointment of new directors, more difficult. These provisions include:
limitations on voting rights of beneficial owners of more than 10% of the
Holding Company's common stock; supermajority voting requirements for certain
business combinations; the election of directors to staggered terms of three
years; the elimination of cumulative voting for directors; and the removal of
directors without cause only upon the vote of holders of two-thirds of the
outstanding voting shares. The Articles of Incorporation and/or Bylaws of the
Holding Company also contain provisions regarding the timing and content of
stockholder proposals and nominations and limiting the calling of special
meetings. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
POSSIBLE ANTI-TAKEOVER EFFECT OF EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN
The employment agreements of senior officers of the Holding Company and
the Bank and the severance plan for the benefits of other Bank employees provide
for cash severance payments and/or the continuation of health, life and
disability benefits in the event of their termination of employment following a
change in control of the Holding Company or the Bank. If a change in control had
occurred at June 30, 1998, the aggregate value of the severance benefits
available to these executive officers under the employment and agreements and to
employees under the severance plan would have been approximately $865,000. These
arrangements may have the effect of increasing the costs of acquiring the
Holding Company, thereby discouraging future attempts to take over the Holding
Company or the Bank. For information about the proposed employment and severance
agreements, see "MANAGEMENT OF THE BANK -- Executive Compensation."
COMPETITION
The Bank faces intense competition both in making loans and attracting
deposits. Competition for loans principally comes from commercial banks, savings
associations, credit unions, mortgage banking companies and insurance companies.
Historically, commercial banks, savings associations and credit unions have been
the Bank's most direct competition for deposits. The Bank also competes with
short-term money market funds and with other financial institutions, such as
brokerage firms and insurance companies, for deposits. In competing for loans,
the Bank may be forced periodically to offer lower loan interest rates.
Conversely, in competing for deposits, the Bank may be forced periodically to
offer higher deposit interest rates. Either case or both cases could adversely
affect net interest income. See "BUSINESS OF THE BANK -- Competition."
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the common stock. Although the Holding Company
has received preliminary approval to list its common stock on the Nasdaq
SmallCap Market under the symbol FCAP, the Holding Company cannot guarantee that
an active and liquid trading market for its common stock will develop, or if it
does develop, that it will continue. Furthermore, the Holding Company cannot
guarantee that if you purchase shares in the conversion you will be able to sell
your shares at or above the $10.00 purchase price. See "MARKET FOR COMMON
STOCK."
13
<PAGE>
POSSIBLE INCREASE IN ESTIMATED VALUATION RANGE AND NUMBER OF SHARES ISSUED
Keller & Company may increase the Estimated Valuation Range up to 15%
to reflect material changes in the financial condition or results of operations
of the Bank or changes in market conditions or general financial, economic or
regulatory conditions following the commencement of the offering. If the
Estimated Valuation Range is increased, the Holding Company anticipates that it
would sell, without any additional notice, up to 1,022,954 shares of common
stock for an aggregate price of up to $10,229,540. This increase in the number
of shares would decrease pro forma net earnings per share and stockholders'
equity per share, increase the Holding Company's pro forma consolidated
stockholders' equity and net earnings, and increase the purchase price as a
percentage of pro forma stockholders' equity per share and net earnings per
share. See "PRO FORMA DATA."
RISK OF YEAR 2000 DATA PROCESSING PROBLEMS
Computer programs that use only two digits to identify a year could
fail or create erroneous results by or at the year 2000. All of the material
data processing of the Bank is performed in-house . If the Bank is unable to
complete its Year 2000 adjustments in a timely fashion, or if the Bank does not
successfully make all the necessary Year 2000 adjustments, resulting computer
malfunctions could interrupt the operations of the Bank and have a significant
adverse impact on the Bank's financial condition and results of operations. The
Bank has developed a Year 2000 Action Plan to analyze how the Year 2000 will
impact its operations and to monitor the status of its vendors and commercial
borrowers. This plan is administered by senior Bank management who report
monthly to the Bank's Board of Directors. Currently, the total pre-tax costs
associated with required modifications and conversions is not expected to exceed
$75,000. To date, the Bank has expended approximately $14,000 toward Year 2000
compliance issues. Such estimate is based on assumptions regarding the continued
availability of various resources, third-party modification plans and other
factors. Accordingly, actual expenses may be different from estimates. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Year 2000 Issues."
FINANCIAL INSTITUTION REGULATION AND THE FUTURE OF THE THRIFT INDUSTRY
The Bank is subject to extensive regulation, supervision and
examination by the OTS and the FDIC. During the 105th Congress which completed
its term in October 1998, Congress considered, but did not pass, legislation
intended to modernize the financial services industry. Pursuant to this proposed
legislation, newly formed unitary savings and loan holding companies would not
be permitted to exercise the expanded powers otherwise available to unitary
savings and loan holding companies. Previous proposals would have eliminated the
federal savings association charter by requiring that all federal savings
associations convert to national banks or other banking charters, but such
provision was not included in the legislation that was passed only by the U.S.
House of Representatives. The Bank is a federal savings association and the
Holding Company, upon completion of the conversion, will be a unitary savings
and loan holding company. No assurance can be given whether federal legislation
will be enacted that affects the federal savings association charter or unitary
savings and loan holding companies, or if such legislation is enacted, what form
this legislation might take. Accordingly, management of the Bank and the Holding
Company cannot predict what effect, if any, such legislation would have on the
activities and operations of the Bank and the Holding Company.
RISK OF DELAYED OFFERING
The Holding Company and the Bank expect to complete the conversion
within the time periods indicated in this prospectus. Nevertheless, it is
possible that there could be a significant delay in the completion of the
conversion as a result of delays in receiving required regulatory approvals,
volatile stock market conditions or otherwise. If the conversion is not
completed by February 18, 1999 (45 days after the last day of the fully extended
Subscription Offering) and the OTS consents to an extension of time to complete
the conversion, subscribers will be given the right to modify or rescind their
subscriptions. In such event, unless an affirmative indication is received from
subscribers that they wish to continue to subscribe for shares, their funds will
be returned promptly, together with interest at the Bank's passbook rate, or
their withdrawal authorizations will be terminated.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
financial position and results of operations of the Bank at the dates and for
the periods indicated. This information should be read in conjunction with the
Financial Statements and Notes thereto presented elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets......................................... $93,958 $89,372 $81,317 $72,989 $69,551
Loans receivable, net................................ 74,887 69,909 63,365 59,174 55,351
Mortgage-backed securities, held to maturity......... 1,473 2,045 2,547 3,023 3,976
Other debt securities, held to maturity.............. 1,580 4,023 5,267 4,403 4,984
Securities available for sale........................ 4,849 3,684 2,135 603 547
Cash and interest-bearing deposits(1)................ 6,135 5,039 5,385 3,485 2,868
Deposits............................................. 77,462 70,756 68,232 61,722 61,121
Advances from FHLB................................... 5,250 8,250 3,750 2,750 750
Stockholders' equity , substantially restricted...... 10,341 9,493 8,805 8,087 7,315
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income...................................... $6,860 $6,500 $5,997 $5,637 $5,402
Interest expense..................................... 4,112 3,885 3,605 3,176 2,902
------- ------- ------- ------- -------
Net interest income.................................. 2,748 2,615 2,392 2,461 2,500
Provision for loan losses............................ -- -- -- 17 25
---------- ---------- ---------- --------- ---------
Net interest income after provision for loan losses.. 2,748 2,615 2,392 2,444 2,475
Non-interest income(2)............................... 411 176 159 125 155
Non-interest expense(3).............................. 1,612 1,854 1,200 1,140 1,044
------- ------- ------- ------- -------
Income before income taxes .......................... 1,547 937 1,351 1,429 1,586
Income tax expense................................... 589 131 501 526 685
------- ------- ------- ------- -------
Net income........................................... $ 958 $ 806 $ 850 $ 903 $ 901
====== ====== ====== ====== ======
PER SHARE DATA:
Net income - basic................................... $1.90 $1.61 $1.70 $1.81 $1.80
Net income - diluted................................. 1.88 1.58 1.68 1.79 1.80
Dividends............................................ 0.70 0.70 0.70 0.70 0.70
</TABLE>
(1) Includes interest-bearing deposits in other depository institutions.
(2) Includes one-time gain on sale of old main office building of $169,000 in
1998.
(3) Includes one-time SAIF assessment of $403,000 in 1997.
15
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding.......................... 1,242 1,270 1,229 1,241 1,193
Deposit accounts....................................... 7,783 7,181 6,744 6,968 6,745
Full-service offices................................... 2 2 1 1 1
</TABLE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
PERFORMANCE RATIOS:
Return on average assets(1) ............................ 1.08% 0.96% 1.10% 1.25% 1.33%
Return on average equity(2)............................. 9.56 8.81 10.00 11.64 12.98
Dividend payout ratio(3)................................ 36.74 43.77 41.19 38.78 38.84
Average equity to average assets........................ 11.30 10.94 11.02 10.72 10.24
Interest rate spread(4)................................. 2.72 2.70 2.59 2.97 3.43
Net interest margin(5).................................. 3.27 3.27 3.22 3.51 3.85
Non-interest expense to average assets.................. 1.82 2.22 1.56 1.58 1.54
Average interest-earning assets to
average interest-bearing liabilities................... 111.29 111.74 113.10 111.91 109.46
Capital Ratios:
Tangible................................................ 11.00 10.60 10.80 11.09 10.52
Core.................................................... 11.00 10.60 10.80 11.09 10.52
Risk-based.............................................. 19.10 18.60 20.70 18.65 17.24
Asset Quality Ratios:
Allowance for loan losses to total loans outstanding
at end of period....................................... 0.67 0.71 0.79 0.88 0.94
Net charge-offs (recoveries) to average
outstanding loans during the period.................... -- -- 0.02 0.04 --
Ratio of nonperforming assets to
total assets(6)........................................ 0.35 0.14 0.31 0.14 0.26
</TABLE>
______________________
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Computed for minority stockholders of Bank only, considering only their
proportionate share of net income. The MHC has, with the approval of the
OTS, waived receipt of all dividends declared and paid by the Bank.
(4) Difference between average yield on interest-earning assets and average cost
of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonaccrual loans and foreclosed real estate. The Bank does not accrue
interest on loans over 90 days past due.
16
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the financial
position and results of operations of the bank at the dates and for the periods
indicated. Information at September 30, 1998 and for the three months ended
September 30, 1998 and 1997 are unaudited, but, in the opinion of management,
contain all adjustments (none of which were other than normal recurring entries)
necessary for a fair presentation of the results for such periods. The selected
operating data for the three months ended September 30, 1998 are not necessarily
indicative of the results of operation for the entire fiscal year. This
information should be read in conjunction with the financial statements and
notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30, At June 30,
1998 1998
---------------- -----------
(In thousands)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................................. $96,581 $93,958
Loans receivable, net ................................... 76,019 74,887
Mortgage-backed securities held-to-maturity.............. 2,085 1,473
Other debt securities held-to-maturity................... 1,000 1,580
Securities available-for-sale............................ 7,962 4,849
Cash and interest-bearing deposits(1).................... 4,371 6,135
Deposits................................................. 79,026 77,462
Advances from FHLB....................................... 5,250 5,250
Stockholders' equity, substantially restricted .......... 10,557 10,341
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended September 30,
------------------
1998 1997
---- ----
(In thousands, except per share data)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income.......................................... $1,808 $1,714
Interest expense......................................... 1,075 1,048
----- -----
Net interest income...................................... 733 666
Provision for loan losses................................ 9 --
----- -----
Net interest income after provision for loan losses...... 724 666
Non-interest income...................................... 79 230
Non-interest expense..................................... 404 406
----- -----
Income before income tax expense......................... 399 490
Income tax expense....................................... 148 185
----- -----
Net income............................................... $ 251 $ 305
===== =====
PER SHARE DATA:
Net income - basic....................................... $0.50 $0.61
Net income - diluted..................................... 0.49 0.60
Dividends................................................ 0.18 0.18
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
KEY FINANCIAL RATIOS(2):
Performance Ratios:
Return on average assets(3).............................. 1.07% 1.39%
Return on average equity(4).............................. 9.55 12.55
Dividend payout ratio(5)................................. 36.09 28.81
Interest rate spread(6).................................. 2.75 2.69
Net interest margin(7)................................... 3.28 3.20
Non-interest expense as a percent
of average assets....................................... 1.72 1.84
Average interest-earning assets to
interest-bearing liabilities............................ 111.17 110.24
Capital Ratios:
Tangible................................................. 10.93 11.20
Core..................................................... 10.93 11.20
Risk-based............................................... 19.42 19.50
Asset Quality Ratios:
Allowance for losses to total loans outstanding
at end of period........................................ 0.68 0.71
Net charge offs (recoveries) to average outstanding
loans during the period................................. -- --
Ratio of nonperforming assets to total assets(8)......... 0.23 0.15
</TABLE>
_________________
(1) Includes interest-bearing deposits in other depository institutions.
(2) Annualized where appropriate.
(3) Net income divided by average assets.
(4) Net income divided by average equity.
(5) Computed for minority stockholders of the Bank only, considering only their
proportionate share of net income. The MHC, with the approval of the OTS,
has waived receipt of all dividends declared and paid by the Bank.
(6) Difference between average yield on interest-earning assets and average
cost of interest-bearing liabilities.
(7) Net interest income as a percentage of average interest-earning assets.
(8) Nonaccrual loans and foreclosed real estate. The Bank does not accrue
interest on loans over 90 days past due.
18
<PAGE>
REGULATORY CAPITAL
The table below sets forth the Bank's capital position relative to its
OTS capital requirements at the date indicated. The definitions of the terms
used in the table are those provided in the capital regulations issued by the
OTS. See "REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements."
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------------------------
Percent of Adjusted
Amount Total assets/(1)/
-------- -------------------
(In thousands)
<S> <C> <C>
Tangible capital......................................... $10,552 10.93%
Tangible capital requirement............................. 1,449 1.50
------ -----
Excess................................................... $9,103 9.43%
====== =====
Core capital............................................. $10,552 10.93%
Core capital requirement(2).............................. 2,897 3.00
------ -----
Excess................................................... $7,655 9.93%
====== =====
Risk-based capital(3).................................... $11,012 19.42%
Risk-based capital requirement........................... 4,536 8.00
------ -----
Excess................................................... $6,476 11.42%
====== =====
</TABLE>
- -----------------------
(1) Based on total tangible assets of $96.6 million for purposes of the
tangible capital requirement, on total adjusted assets of $96.6 million
for purposes of the core capital requirement, and on risk-weighted assets
of $56.7 million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements that
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
NON-PERFORMING ASSETS AND DELINQUENCIES
At September 30, 1998 and June 30, 1998, the Bank had $222,000 of loans
accounted for on a non-accrual basis. Non-accrual loans at June 30, 1998
consisted of $117,000 in residential real estate loans, $25,000 in commercial
real estate loans and $80,000 in commercial business loans. At September 30,
1998, the Bank had no accruing loans contractually past due 90 days or more, no
foreclosed real estate and no restructured loans.
The allowance for loan losses was $525,000 at September 30, 1998. There
were no charge-offs or recoveries for either the three months ended September
30, 1998 or 1997.
19
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by category at September 30, 1998.
<TABLE>
<CAPTION>
Percent of
Outstanding
Loans in
Amount Category
------ --------
(In thousands)
<S> <C> <C>
Residential real estate(1)....................... $247 80.80%
Commercial real estate
and land loans.................................. 108 4.23
Commercial business.............................. 131 6.75
Consumer......................................... 39 8.22
Unallocated...................................... -- --
----- -------
Total allowance for loan losses................ $525 100.00%
===== =======
</TABLE>
- ----------------------
/(1)/ Includes residential construction loans.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
At September 30, 1998, total assets were $96.6 million compared to $94.0
million at June 30, 1998. This increase was primarily the result of a $3.1
million increase in securities available-for-sale, a $1.1 million increase in
loans and a $612,000 increase in mortgage-backed securities held-to-maturity,
which were offset primarily by a $1.8 million decrease in cash and interest-
bearing deposits. The increase in loans primarily reflected residential mortgage
loan refinancings in the current low interest rate environment, rather than new
loan originations. Strong competition for loans also depressed new loan
originations. The current low interest rate environment also contributed to the
decline in securities held to maturity as a result of prepayments. The Bank
reduced the balance of cash and interest-bearing deposits and used such funds,
along with an increase in deposits discussed below, to purchase securities
available for sale.
At September 30, 1998, deposits were $79.0 million compared to $77.5
million at June 30, 1998. The increase in deposits resulted primarily from
growth in demand accounts and savings deposit accounts, which management
attributes to its promotional efforts to attract such lower cost accounts. Time
deposits remained virtually unchanged.
Total stockholders' equity increased $216,000 to $10.6 million at
September 30, 1998, primarily as a result of retained earnings of $251,000
offset by $35,000 in dividends paid to the Bank's minority stockholders.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
NET INCOME. Net income was $251,000 ($0.49 per share diluted) for the
three months ended September 30, 1998 compared to $305,000 ($0.60 per share
diluted) for the three months ended September 30, 1997. The results for 1997
included a one-time gain of $169,000 associated with the sale of the Bank's old
main office property. Without this one-time gain, net income for the three
months ended September 30, 1997 would have been $200,000 ($0.39 per share
diluted). For the three months ended September 30, 1998, the Bank's return on
average assets was 1.07% (annualized) and its return on average equity was 9.55%
(annualized).
NET INTEREST INCOME. Net interest income increased 10.1% to $733,000 for
the three months ended September 30, 1998 from $666,000 for the comparable
period in 1997 as a result of a 6 basis point increase in the interest rate
spread (from 2.69% in 1997 to 2.75% in 1998) and an increase in the average
balance of interest-earning assets.
20
<PAGE>
Total interest income increased $94,000, or 5.5%, to $1.8 million for
the three months ended September 30, 1998 from $1.7 million in the prior year,
primarily as a result of a higher balance of interest-earning assets. Interest
on loans receivable increased $76,000 primarily as a result of higher average
balances of residential mortgage loans due to high refinancing activity in the
low interest rate environment. Interest on mortgage-backed securities and other
securities increased $10,000 as a result of higher average balances. Interest on
interest-bearing deposits at banks increased $7,000 as a result of higher
average balances as available funds exceeded loan demand.
Total interest expense increased $27,000, or 2.6%, to $1.1 million for
the three months ended September 30, 1998 from $1.0 million for the three months
ended September 30, 1997 as a result of an increase in interest on deposits of
$54,000 due to higher average balances, offset by a slight decrease in the
average cost of deposits. The average cost of regular savings deposits decreased
as a result of growth in lower rate savings and interest-bearing deposits.
Interest on FHLB advances decreased $27,000 as a result of a lower average
balance and a decrease in the average cost of advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. The Bank made a provision for
loan losses of $9,000 for the three months ended September 30, 1998 compared to
no provision in the prior period in 1997. The provision for loan losses for the
three months ended September 30, 1998 increased the allowance for loan losses to
an amount considered reasonable by management based on an evaluation as of
September 30, 1998. Management's evaluation includes estimates of specific
allowances for problem loans and estimated allowances for inherent losses for
the various types of loans in the portfolio. Problem loans identified by
management increased from $293,000 at June 30, 1998 to $324,000 at September 30,
1998. In addition, during the three months ended September 30, 1998, commercial
real estate loans and commercial real estate loans (both of which possess an
inherent higher risk of loss than one- to- four family residential mortgage
loans) increased by $294,000 and $154,000, respectively. Total loans receivable
increased from $74.9 million at June 30, 1998 to $76.0 million at September 30,
1998. These changes in loan portfolio composition and in the level of problem
loans were considered in management's estimate of the allowance for loan losses
at September 30, 1998. Although management uses the best information available,
future adjustments to the allowance may be necessary due to changes in economic,
operating, regulatory and other conditions that may be beyond the Bank's
control. While the Bank maintains its allowance for loan losses at a level which
it considers to be adequate to provide for estimated losses, there can be no
assurance that further additions will not be made to the allowance for loan
losses and that actual losses will not exceed the estimated amounts. See
"BUSINESS OF THE BANK -- Lending Activities -- Allowance for Loan Losses" for
further information.
NON-INTEREST INCOME. Non-interest income decreased to $79,000 for the
three months ended September 30, 1998 from $230,000 for the three months ended
September 30, 1997. The decrease was primarily the result of a one-time gain of
$169,000 in 1997 associated with the sale of the Bank's old main office
property.
NON-INTEREST EXPENSES. Non-interest expenses remained stable at
$404,000 for the three months ended September 30, 1998 and $406,000 for the
comparable period in 1997. Compensation and benefits expenses and occupancy and
equipment expenses are expected to increase in future periods with the opening
of the proposed new full-service branch office as a result of the expected
hiring of up to four new full-time employees and the cost of operating and
equipping the office.
INCOME TAXES. Income tax expense was $148,000 for the three months ended
September 30, 1998 compared to $185,000 for the comparable period in 1997
primarily as a result of lower income before income tax expense.
21
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the common stock offered hereby are
estimated to range from $6.2 million to $8.5 million. If the Estimated Valuation
Range is increased by 15%, net proceeds are estimated to be $9.8 million. See
"PRO FORMA DATA" for the assumptions used to arrive at such amounts. The Holding
Company has received conditional OTS approval to contribute 50% of the net
proceeds of the offering to the Bank.
The following table presents the estimated net proceeds of the offering
based on the number of shares set forth below together with the amount to be
retained by the Holding Company and the amount to be contributed to the Bank.
<TABLE>
<CAPTION>
657,475 773,500 889,525 1,022,954
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Gross proceeds...................... $6,575 $7,735 $8,895 $10,230
Less expenses....................... 373 392 410 432
------ ------ ------ -------
Net proceeds........................ $6,202 $7,343 $8,485 $ 9,798
====== ====== ====== =======
Amount to be retained by the
Holding Company.................... $3,101 $3,672 $4,243 $4,899
Amount to be contributed to the
Bank............................... $3,101 $3,671 $4,242 $4,899
</TABLE>
Neither the Holding Company nor the Bank has any immediate specific use
for the proceeds to be raised in the offering. See "THE CONVERSION -- Purposes
of Conversion" for a discussion of management's business reasons for undertaking
the conversion. Receipt of 50% of the net proceeds of the sale of the common
stock will increase the Bank's capital and will support the expansion of the
Bank's existing business activities. The Bank will use the funds contributed to
it for general corporate purposes, including, initially, lending and investment
in short-term U.S. Government and agency obligations. Up to $700,000 of the
funds received by the Bank will contribute to the construction of a new
full-service branch office. See "BUSINESS OF THE BANK -- Properties." The Bank
may also use these funds to expand its banking operations through the
acquisition of additional branches or other financial institutions.
In connection with the conversion and the establishment of the ESOP,
the Holding Company intends to loan the ESOP the amount necessary to purchase 8%
of the shares of common stock sold in the conversion. The Holding Company's loan
to fund the ESOP may range from $525,980 to $711,620 based on the sale of 52,598
shares to the ESOP (at the minimum of the Estimated Valuation Range) and 71,162
shares (at the maximum of the Estimated Valuation Range), respectively, at
$10.00 per share. If 15% above the maximum of the Estimated Valuation Range, or
1,022,954 shares, are sold in the conversion, the Holding Company's loan to the
ESOP would be approximately $818,360 (based on the sale of 81,836 shares to the
ESOP). It is anticipated that the ESOP loan will have a 15-year term with
interest payable at the prime rate as published in THE WALL STREET JOURNAL on
the closing date of the conversion. The loan will be repaid principally from the
Bank's contributions to the ESOP and from any dividends paid on shares of common
stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in short-term U.S. Government and agency obligations.
Such proceeds will be available for additional contributions to the Bank in the
form of debt or equity, to support future diversification or acquisition
activities, as a source of dividends to the stockholders of the Holding Company
and for future repurchases of common stock to the extent permitted under Indiana
22
<PAGE>
law and federal regulations. The Holding Company will consider exploring
opportunities to use such funds to expand operations through acquiring or
establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any expansion activities.
Following consummation of the conversion, the Board of Directors will
have the authority to adopt plans for repurchases of common stock, subject to
statutory and regulatory requirements. Since the Holding Company has not yet
issued stock, there currently is insufficient information upon which an
intention to repurchase stock could be based. The facts and circumstances upon
which the Board of Directors may determine to repurchase stock in the future
would include but are not limited to: (i) market and economic factors such as
the price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the book
value and/or earnings per share of the remaining outstanding shares, and the
ability to improve the Holding Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Holding Company and its stockholders. Any stock repurchases will be subject to a
determination by the Board of Directors that both the Holding Company and the
Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that capital will be adequate, taking into
account, among other things, the Bank's level of nonperforming and classified
assets, the Holding Company's and the Bank's current and projected results of
operations and asset/liability structure, the economic environment and tax and
other regulatory considerations. For a discussion of the regulatory limitations
applicable to stock repurchases, see "REGULATION -- Restrictions on Repurchase
of Stock."
DIVIDEND POLICY
GENERAL
Since June 1993, the Bank has paid quarterly cash dividends on the Bank's
common stock. The MHC has waived receipt of all cash dividends paid by the Bank.
Upon completion of the conversion, the Holding Company's Board of Directors will
have the authority to declare dividends on the common stock, subject to
statutory and regulatory requirements. The Board of Directors of the Holding
Company intends to pay cash dividends on the common stock at an initial
quarterly rate equal to $0.175 per share divided by the final Exchange Ratio.
This formula will result in an initial quarterly dividend rate of approximately
$0.080, $0.068, $0.059 and $0.051 per share at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, respectively. By
adjusting the quarterly dividend in this fashion, the Holding Company intends to
achieve economic parity with the dividends currently paid on the Bank's common
stock. The first dividend payment on the Holding Company's common stock is
expected during the month following the end of the quarter in which the
conversion is consummated. In addition, the Board of Directors may determine to
pay periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. Declarations or payments of any dividends (regular and special) will
be subject to determination by the Holding Company's Board of Directors, which
will take into account the amount of the net proceeds retained by the Holding
Company, the Holding Company's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and other factors, including the regulatory restrictions that affect the payment
of dividends by the Bank to the Holding Company discussed below. Under Indiana
law, the Holding Company will be permitted to pay cash dividends after the
conversion so long as it is able to pay its debts as they become due in the
usual course of business and its assets are greater than the sum of its total
liabilities plus the amount that would be needed, if the Holding Company were to
be dissolved at the time of the dividend, to satisfy any rights that are
preferential to those of the persons receiving the dividend. In order to pay
such cash dividends, however, the Holding Company must have available cash
either from the net proceeds raised in the conversion and retained by the
Holding Company, borrowings by the Holding Company, dividends received from the
Bank or earnings on Holding Company assets. No assurances can be given that any
dividends, either regular or special, will be declared or, if declared, what the
amount of dividends will be or whether such dividends, if commenced, will
continue.
23
<PAGE>
CURRENT RESTRICTIONS
Dividends from the Holding Company will depend, in part, upon receipt
of dividends from the Bank because the Holding Company initially will have no
source of income other than dividends from the Bank and earnings from the
investment of the net proceeds from the offering retained by the Holding
Company. OTS regulations require the Bank to give the OTS 30 days' advance
notice of any proposed declaration of dividends to the Holding Company, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends to the Holding Company. The OTS imposes certain limitations on the
payment of dividends from the Bank to the Holding Company which utilize a
three-tiered approach that permits various levels of distributions based
primarily upon a savings association's capital level. The Bank currently meets
the criteria to be designated a Tier 1 association, as defined under "REGULATION
- -- Federal Regulation of Savings Associations -- Limitations on Capital
Distributions," and consequently could at its option (after prior notice to and
no objection made by the OTS) distribute up to 100% of its net income during the
calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to the Bank Plan of Conversion. See "REGULATION -- Federal Regulation of Savings
Associations -- Limitations on Capital Distributions," "THE CONVERSION --
Effects of Conversion on Depositors and Borrowers of the Bank -- Liquidation
Account" and Note 14 of the Notes to Financial Statements included elsewhere
herein.
Additionally, in connection with the conversion, the Holding Company and
the Bank have committed to the OTS that during the one-year period following
consummation of the conversion, the Holding Company will not take any action to
declare an extraordinary dividend to stockholders that would be treated by
recipients as a tax-free return of capital for federal income tax purposes.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Bank appropriated
to bad debt reserves and deducted for federal income tax purposes cannot be used
by the Bank to pay cash dividends to the Holding Company without the payment of
federal income taxes by the Bank at the then current income tax rate on the
amount deemed distributed, which would include the amounts of any federal income
taxes attributable to the distribution. See "TAXATION -- Federal Taxation" and
Note 8 of the Notes to Financial Statements included elsewhere herein. The
Holding Company does not contemplate any distribution by the Bank that would
result in a recapture of the Bank's bad debt reserve or create the above-
mentioned federal tax liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the common stock. Although the Holding Company
has received preliminary approval to list the common stock on the Nasdaq
SmallCap Market under the symbol FCAP, there can be no assurance that the
Holding Company will meet the Nasdaq SmallCap Market listing requirements, which
include a minimum market capitalization, at least three market makers and a
minimum number of record holders. Keefe, Bruyette & Woods, Inc. has agreed to
make a market for the common stock following consummation of the conversion,
although it has no obligation to do so, and will assist the Holding Company in
seeking to encourage at least two additional market makers to establish and
maintain a market in the common stock. Making a market involves maintaining bid
and ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. Based on the level of market making in the
Bank's common stock, the Holding Company anticipates that prior to the
completion of the conversion it will be able to obtain the commitment from at
least two additional broker-dealers to act as market maker for the common stock.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of the Holding Company, the Bank or any market maker. There can be no assurance
that an active and liquid trading market for the common stock
24
<PAGE>
will develop or that, if developed, it will continue. The number of active
buyers and sellers of the common stock at any particular time may be limited.
Under such circumstances, investors in the common stock could have difficulty
disposing of their shares on short notice and should not view the common stock
as a short-term investment. Furthermore, there can be no assurance that
purchasers will be able to sell their shares at or above the $10.00 purchase
price or that quotations will be available on the Nasdaq SmallCap Market as
contemplated.
The Bank's common stock does not trade on an established market but in
privately negotiated transactions, and there are no regularly quoted bid or
asked prices for the Bank's common stock. At June 30, 1998, there were 341
record holders (i.e., not holders in nominee or "street name") of the Bank's
---
common stock. The following table sets forth the high and low trading prices
known to the Bank's management and cash dividends paid during the periods
indicated. Other trades may have occurred during these periods, but at prices
unknown to management.
<TABLE>
<CAPTION>
Cash Dividend
High Low Declared
--- --- --------
<S> <C> <C> <C>
FISCAL 1997
- -----------
Quarter Ended September 30, 1996 $20.00 $20.00 $0.175
Quarter Ended December 31, 1996 22.00 20.00 0.175
Quarter Ended March 31, 1997 20.00 20.00 0.175
Quarter Ended June 30, 1997 20.00 20.00 0.175
FISCAL 1998
- -----------
Quarter Ended September 30, 1997 20.00 20.00 0.175
Quarter Ended December 31, 1997 20.00 20.00 0.175
Quarter Ended March 31, 1998 20.00 20.00 0.175
Quarter Ended June 30, 1998 20.00 20.00 0.175
FISCAL 1999
- -----------
Quarter Ended September 30, 1998
(through November 12, 1998) 23.00 20.00 0.175
</TABLE>
PURCHASERS IN THIS OFFERING ARE NOT BUYING SHARES OF BANK COMMON STOCK
FOR WHICH INFORMATION IS PRESENTED IN THE ABOVE TABLE. Upon consummation of the
conversion, each outstanding share of Bank common stock (other than those held
by the MHC, which will be canceled, and other than those held by the Bank's
public stockholders who exercise and perfect their rights of dissent and
appraisal) will be exchanged for 2.1936, 2.5807, 2.9678 and 3.4130 shares of
Holding Company common stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation range, respectively.
25
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at June 30, 1998, and the pro forma consolidated capitalization of the
Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of common stock at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The shares that would be issued at the maximum, as
adjusted, of the Estimated Valuation Range would be subject to receipt of
OTS approval of an updated appraisal confirming such valuation. A CHANGE IN
THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT
PRO FORMA CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
------------------------------------------------------------------
Bank 657,475 773,500 889,525 1,022,954
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
June 30, 1998 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(in thousands)
Deposits(3)................................ $77,462 $77,462 $77,462 $77,462 $77,462
FHLB advances.............................. 5,250 5,250 5,250 5,250 5,250
------- ------- ------- ------- -------
Total deposits and borrowed funds.......... $82,712 $82,712 $82,712 $82,712 $82,712
======= ======= ======= ======= =======
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value
per share, authorized for Holding
Company (1,000,000 shares, $1.00
par value per share authorized for
the Bank); none issued or
outstanding.............................. $ -- $ -- $ -- $ -- $ --
Common stock:
5,000,000 shares, $.01 par value
per share, authorized for Holding
Company (4,000,000 shares, $1.00
par value per share authorized for
the Bank); specified number of
shares assumed to be issued and
outstanding(4)........................... 504 11 13 15 17
Additional paid-in capital................. 1,663 8,358 9,497 10,637 11,948
Retained earnings(5)....................... 8,174 8,174 8,174 8,174 8,174
Less:
Common stock acquired
by ESOP(6).............................. -- 526 619 712 818
Common stock to be acquired
by 1999 MRDP(7)......................... -- 263 309 356 409
------- ------- ------- ------- -------
Total stockholders' equity................. $10,341 $15,754 $16,756 $17,758 $18,912
======= ======= ======= ======= =======
</TABLE>
(footnotes on following page)
26
<PAGE>
_____________
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or results of
operations of the Bank or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the 1994 Option Plan or the 1999 Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of common stock issued in the
conversion is 15% above the maximum of the Estimated Valuation Range.
See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) The Bank's authorized capital consists solely of 4,000,000 shares of
common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 1,000,000 shares of preferred stock,
$1.00 par value per share, none of which will be issued in connection with
the conversion.
(5) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Bank will be prohibited from
paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the
benefit of the Bank's Eligible Account Holders and Supplemental Eligible
Account Holders at the time of the conversion and adjusted downward
thereafter as such account holders reduce their balances or cease to be
depositors. See "THE CONVERSION -- Effects of Conversion on Depositors and
Borrowers of the Bank -- Liquidation Account."
(6) Assumes that 8% of the common stock sold in the conversion will be
acquired by the ESOP in the conversion with funds borrowed from the
Holding Company. Under GAAP, the amount of common stock to be purchased by
the ESOP represents unearned compensation and is, accordingly, reflected
as a reduction of capital. As shares are released to ESOP participants'
accounts, a corresponding reduction in the charge against capital will
occur. Since the funds are borrowed from the Holding Company, the
borrowing will be eliminated in consolidation and no liability or interest
expense will be reflected in the consolidated financial statements of the
Holding Company. See "MANAGEMENT OF THE BANK -- Benefits -- Employee
Stock Ownership Plan."
(7) Assumes the purchase in the open market at $10.00 per share, pursuant to
the proposed 1999 MRDP, of a number of shares equal to 4% of the shares of
common stock issued in the conversion at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range. The shares are
reflected as a reduction of stockholders' equity. The issuance of
authorized but unissued shares of common stock to the proposed 1999 MRDP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 2.3%. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF
THE BANK -- Benefits -- Management Recognition Plan." The 1999 MRDP is
subject to stockholder approval at a meeting following consummation of the
conversion.
27
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Bank's historical and pro forma
capital position relative to its capital requirements at June 30, 1998. The
amount of capital infused into the Bank for purposes of the following table is
50% of the net proceeds of the offering. For purpose of the table below, the
amount expected to be borrowed by the ESOP and the cost of the shares expected
to be acquired by the 1999 MDRP are deducted from pro forma regulatory capital.
For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "USE OF PROCEEDS," "CAPITALIZATION" and "PRO
FORMA DATA." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to the Bank, see "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1998
--------------------------------------------------------------------------
Minimum of Estimated Midpoint of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range
----------------------- ----------------------- ---------------------
657,475 Shares 773,500 Shares 889,525 Shares
June 30, 1998 At $10.00 Per Share At $10.00 Per Share At $10.00 Per Share
---------------------- ----------------------- ----------------------- ---------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............. $10,341 11.0% $12,653 13.1% $13,084 13.5% $13,516 13.9%
======= ==== ======= ==== ======= ==== ======= ====
Tangible capital......... $10,338 11.0% $12,650 13.1% $13,081 13.5% $13,513 13.9%
Tangible capital
requirement............. 1,409 1.5 1,444 1.5 1,450 1.5 1,457 1.5
------- ---- ------- ---- ------- ---- ------- ----
Excess................... $ 8,929 9.5% $11,206 11.6% $11,631 12.0% $12,056 12.4%
======= ==== ======= ==== ======= ==== ======= ====
Core capital............. $10,338 11.0% $12,650 13.1% $13,081 13.5% $13,513 13.9%
Core capital
requirement(2).......... 2,819 3.0 2,888 3.0 2,901 3.0 2,914 3.0
------- ---- ------- ---- ------- ---- ------- ----
Excess................... $ 7,519 8.0% $ 9,762 10.1% $10,180 10.5% $10,599 10.9%
======= ==== ======= ==== ======= ==== ======= ====
Total capital(3)......... $10,799 19.1% $13,111 22.7% $13,542 23.3% $13,974 24.0%
Risk-based
capital requirement..... 4,513 8.0 4,624 8.0 4,645 8.0 4,668 8.0
------- ---- ------- ---- ------- ---- ------- ----
Excess................... $ 6,266 11.1% $ 8,487 14.7% $ 8,897 15.3% $ 9,308 16.0%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
PRO FORMA AT JUNE 30, 1998
-------------------------------------------
15% above
Maximum of Estimated
Valuation Range
------------------------
1,022,954 Shares
at $ 10.00 Per Share
------------------------
Percent of
Adjusted
Total
Amount Assets (1)
------ -----------
<S> <C> <C>
GAAP capital............. $14,012 14.4%
======= ====
Tangible capital......... $14,009 14.3%
Tangible capital
requirement............. 1,464 1.5
------- ----
Excess................... $12,545 12.8%
======= ====
Core capital............. $14,009 14.3%
Core capital
requirement(2).......... 2,929 3.0%
------- ----
Excess................... $11,080 11.3%
======= ====
Total capital(3)......... $14,470 24.7%
Risk-based
capital requirement..... 4,690 8.0
------- ----
Excess................... $ 9,781 16.7%
======= ====
</TABLE>
______________
(1) Tangible capital levels and core capital levels are shown as a percentage
of adjusted total assets of $94.0 million. Risk-based capital levels are
shown as a percentage of risk-weighted assets of $56.4 million.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 60.04% risk-weighting, the average risk weight of the Bank's assets
at June 30, 1998.
28
<PAGE>
PRO FORMA DATA
Pursuant to the Plan of Conversion, the amount of common stock being
offered in the conversion is based on an independent appraisal of the estimated
pro forma market value of the Bank and the MHC after giving effect to the
conversion. The Estimated Valuation Range as of October 23, 1998 is from a
minimum of $11.0 million to a maximum of $15.0 million with a midpoint of $13.0
million. Based on this valuation and the approximate 59.5% ownership interest
being sold in this offering, the Board of Directors of the Holding Company and
the Bank established an offering range of $6.6 million to $8.9 million, with a
midpoint of $7.7 million. At a price per share of $10.00, this results in a
minimum number of shares of 657,475, a maximum number of shares of 889,525 and a
midpoint number of shares of 773,500. The actual net proceeds from the sale of
the common stock cannot be determined until the conversion is completed.
However, net proceeds set forth on the following table are based upon the
following assumptions: (i) Webb will receive fees of approximately $98,000,
$117,000, $135,000 and $157,000 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range, respectively (see "THE CONVERSION
- -- Plan of Distribution and Selling Commissions"); (ii) all of the common stock
will be sold in the Subscription and Direct Community Offerings; and (iii)
conversion expenses, excluding the fees paid to Webb, will total approximately
$275,000 at each of the minimum, midpoint, maximum and 15% above the Estimated
Valuation Range. Actual expenses may vary from this estimate, and the fees paid
will depend upon the percentages and total number of shares sold in the
Subscription Offering, Direct Community Offering and Syndicated Community
Offering and other factors.
The following table summarizes the historical net income and retained
income of the Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. The pro forma
consolidated net income of the Bank for the year ended June 30, 1998 has been
calculated as if the conversion had been consummated at the beginning of the
period and the estimated net proceeds received by the Holding Company and the
Bank had been invested at 5.29% at the beginning of the period, which represents
the one-year U.S. Treasury Bill yield as of June 30, 1998. While OTS regulations
provide for the use of a yield representing the arithmetic average of the
weighted average yield earned by the Bank on its interest-earning assets and the
rates paid on its deposits, the Holding Company believes that the U.S. Treasury
Bill yield represents a more realistic yield on the investment of the conversion
proceeds. As discussed under "USE OF PROCEEDS," the Holding Company expects to
retain 50% of the net proceeds of the offering from which it will fund the ESOP
loan. A pro forma after-tax return of 3.28% is used for both the Holding Company
and the Bank for the year ended June 30, 1998, after giving effect to an
incremental combined federal and state income tax rate of 38.0%. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of common stock indicated in the footnotes
to the table. Per share amounts have been computed as if the common stock had
been outstanding at the beginning of the respective periods, but without any
adjustment of per share historical or pro forma stockholders' equity to reflect
the earnings on the estimated net proceeds.
No effect has been given to: (i) the shares to be reserved for issuance
under the Holding Company's 1999 Stock Option Plan, which is expected to be
voted upon by stockholders at a meeting following consummation of the
conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing
common stock in the conversion; or (iii) the establishment of a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. See "MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plan"
and "THE CONVERSION -- Stock Pricing, Exchange Ratio and Number of Shares to be
Issued."
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN
ACCORDANCE WITH GAAP. STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED
TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS
AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET
VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
29
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1998
------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ---------- ---------- ---------------
657,475 773,500 889,525 1,022,954(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds............................. $ 6,575 $ 7,735 $ 8,895 $10,230
Less: estimated expenses................... (373) (392) (410) (432)
------- ------- ------- ----
Estimated net proceeds..................... 6,202 7,343 8,485 9,796
Less: Common stock acquired by ESOP........ (526) (619) (712) (818)
Less: Common stock to be acquired
by 1999 MRDP .......................... (263) (309) (356) (409)
------- ------- ------- -------
Net investable proceeds................ $ 5,413 $ 6,415 $ 7,417 $ 8,571
======= ======= ======= =======
Consolidated net income:
Historical................................ $ 958 $ 958 $ 958 $ 958
Pro forma income on net proceeds(2)....... 178 210 243 281
Pro forma ESOP adjustments(3)............. (22) (26) (29) (34)
Pro forma 1999 MRDP adjustments(4)........ (33) (38) (44) (51)
------- ------- ------- -------
Pro forma net income.................... $ 1,081 $ 1,104 $ 1,128 $ 1,154
======= ======= ======= =======
Consolidated net income per share (5)(6):
Historical................................ $ 0.91 $ 0.77 $ 0.67 $ 0.58
Pro forma income on net proceeds.......... 0.17 0.17 0.17 0.17
Pro forma ESOP adjustments(3)............. (0.02) (0.02) (0.02) (0.02)
Pro forma 1999 MRDP adjustments(4)........ (0.03) (0.03) (0.03) (0.03)
------- ------- ------- -------
Pro forma net income per share(7)...... $ 1.03 $ 0.89 $ 0.79 $ 0.70
======= ======= ======= =======
Consolidated stockholders' equity (book value):
Historical................................ $10,341 $10,341 $10,341 $10,341
Estimated net proceeds.................... 6,202 7,343 8,485 9,798
Less: Common stock acquired by ESOP....... (526) (619) (712) (818)
Less: Common stock to be acquired
by 1999 MRDP(4)......................... (263) (309) (356) (409)
------- ------- ------- -------
Pro forma stockholders' equity(8)....... $15,754 $16,756 $17,758 $18,912
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(9):
Historical(6)............................. $ 9.36 $ 7.95 $ 6.92 $ 6.01
Estimated net proceeds.................... 5.61 5.65 5.68 5.70
Less: Common stock acquired by ESOP....... (0.48) (0.48) (0.48) (0.48)
Less: Common stock to be acquired
by 1999 MRDP(3)......................... (0.24) (0.24) (0.24) (0.24)
------- ------- ------- -------
Pro forma stockholders' equity per share(7) $ 14.25 $ 12.88 $ 11.88 $ 10.99
======= ======= ======= =======
Purchase price as a percentage of pro forma
stockholders' equity per share............ 70.18% 77.64% 84.18% 90.99%
Purchase price as a multiple of pro forma
net income per share ..................... 9.71x 11.24x 12.66x 14.29x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
30
<PAGE>
___________
(1) Gives effect to the sale of an additional 133,429 shares in the
conversion, which may be issued to cover an increase in the pro forma
market value of the Holding Company and the Bank as converted, without the
resolicitation of subscribers or any right of cancellation. The issuance
of such additional shares will be conditioned on a determination by Keller
& Company that such issuance is compatible with its determination of the
estimated pro forma market value of the Bank and the MHC as converted. See
"THE CONVERSION -- Stock Pricing, Exchange Ratio and Number of Shares to
be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing common stock in the conversion. Since funds on
deposit at the Bank may be withdrawn to purchase shares of common stock
(which will reduce deposits by the amount of such purchases), the net
amount of funds available to the Bank for investment following receipt of
the net proceeds of the conversion will be reduced by the amount of such
withdrawals.
(3) It is assumed that 8% of the shares of common stock sold in the offering
will be purchased by the ESOP. The funds used to acquire such shares will
be borrowed by the ESOP (at an interest rate equal to the prime rate as
published in THE WALL STREET JOURNAL on the closing date of the
conversion, which rate is currently 8.00%) from the net proceeds from the
offering retained by the Holding Company. The amount of this borrowing has
been reflected as a reduction from gross proceeds to determine estimated
net investable proceeds. The Bank intends to make contributions to the
ESOP in amounts at least equal to the principal and interest requirement
of the debt. As the debt is paid down, stockholders' equity will be
increased. The Bank's payment of the ESOP debt is based upon equal
installments of principal over a 15-year period, assuming a combined
federal and state income tax rate of 38.0%. Interest income earned by the
Holding Company on the ESOP debt offsets the interest paid by the Bank on
the ESOP loan. No reinvestment is assumed on proceeds contributed to fund
the ESOP. Applicable accounting practices require that compensation
expense for the ESOP be based upon shares committed to be released and
that unallocated shares be excluded from earnings per share computations.
The valuation of shares committed to be released would be based upon the
average market value of the shares during the year, which, for purposes of
this calculation, was assumed to be equal to the $10.00 per share purchase
price. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership
Plan."
(4) In calculating the pro forma effect of the 1999 MRDP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the 1999 MRDP at the beginning of the period presented in open
market purchases at the $10.00 per share purchase price, that 20% of the
amount contributed was an amortized expense during such period, and that
the combined federal and state income tax rate is 38.0%. The issuance of
authorized but unissued shares of the common stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 2.3% and pro forma net income per share would be $1.00,
$0.88, $0.77 and $0.69 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively, for the year ended
June 30, 1998, and pro forma stockholders' equity per share would be
$14.16, $12.82, $11.83 and $10.98 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively, at
June 30, 1998. Shares issued under the 1999 MRDP vest 20% per year and for
purposes of this table compensation expense is recognized on a straight-
line basis over each vesting period. In the event the fair market value
per share is greater than $10.00 per share on the date shares are awarded
under the 1999 MRDP, total 1999 MRDP expense would increase. No effect has
been given to the shares reserved for issuance under the proposed 1999
Option Plan.
(5) Per share amounts are based upon shares outstanding of
1,055,909,1,242,245,1,428,582 and 1,642,870 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, for the year ended June 30, 1998, which includes the shares
of common stock issued in the conversion less the number of shares assumed
to be held by the ESOP not committed to be released within the first year
following the conversion.
(6) Historical per share amounts have been computed as if the shares of common
stock expected to be issued in the conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment
of historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
conversion, the additional ESOP expense or the proposed 1999 MRDP expense,
as described above.
31
<PAGE>
(7) No effect has been given to the issuance of additional shares pursuant to
options granted pursuant to the 1994 Option Plan or the 1999 Option Plan.
Under the 1994 Option Plan, 20,000 shares were reserved for issuance and
options for 7,245 shares were outstanding at June 30, 1998 at a weighted
average exercise price of $15.75 per share. If stockholders approve the
1999 Option Plan following the conversion, the Holding Company will have
reserved for issuance under the 1999 Option Plan authorized but unissued
shares of common stock representing an amount of shares equal to 10% of
the shares sold in this offering. If all of these options were to be
exercised utilizing authorized but unissued shares rather than treasury
shares which could be acquired, the voting interests of existing
stockholders would be diluted by up to approximately 6.9%. Assuming
stockholder approval of the 1999 Option Plan, and that all options under
the 1994 Option Plan and the 1999 Option Plan were exercised at the end of
the period at an exercise price of $15.75 per share (to be adjusted for
the final Exchange Ratio) and $10.00 per share, respectively, pro forma
net earnings per share would be $0.95, $0.83, $0.74 and $0.66 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, for the year ended June 30, 1998, and pro
forma stockholders' equity per share would be $14.04, $12.76, $11.81 and
$10.99 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively, at June 30, 1998. See "MANAGEMENT
OF THE SAVINGS BANK -- Benefits -- Stock Option Plans" and "RISK
FACTORS -- Possible Dilutive Effect of Benefit Programs."
(8) "Book value" represents the difference between the stated amounts of the
Bank's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the
conversion, or the federal income tax consequences of the restoration to
income of the Bank's special bad debt reserves for income tax purposes
which would be required in the unlikely event of liquidation. See "THE
CONVERSION -- Effects of Conversion on Depositors and Borrowers of the
Bank" and "TAXATION." The amounts shown for book value do not represent
fair market values or amounts distributable to stockholders in the
unlikely event of liquidation.
(9) Per share amounts are based upon shares outstanding of 1,105,000,
1,300,000, 1,495,000 and 1,719,250 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
32
<PAGE>
EFFECT OF THE CONVERSION ON THE BANK'S STOCKHOLDERS
The following table illustrates the effect of the conversion on the
public stockholders of the Bank by setting forth selected comparative per share
data for the Bank on both an historical and a pro forma equivalent basis giving
effect to the conversion, assuming that at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, one share of Bank common
stock will be exchanged for 2.1936, 2.5807, 2.9678 and 3.4130 shares of Holding
Company common stock, respectively. Pro forma equivalent book value per share
and pro forma equivalent net income per share represent the pro forma amounts
set forth in the tables under "PRO FORMA DATA" above multiplied by the foregoing
Exchange Ratios. Pro forma equivalent dividends per share represent the intended
dividend payment set forth under "DIVIDEND POLICY" above multiplied by the
foregoing Exchange Ratios. This table should be read in conjunction with the
consolidated financial statements of the Bank, including the notes thereto,
appearing elsewhere in this prospectus. The following information is not
necessarily indicative of the results of operations or the financial position
that would have resulted had the conversion been consummated at the beginning of
the periods indicated.
At or For the
Year Ended
June 30, 1998
-------------
BOOK VALUE PER SHARE:
Historical...................................................... $20.51
Pro forma equivalent:
At minimum of Estimated Valuation Range...................... 31.26
At midpoint of Estimated Valuation Range..................... 33.24
At maximum of Estimated Valuation Range...................... 35.26
At 15% above maximum of Estimated Valuation Range............ 37.51
BASIC NET INCOME PER SHARE:
Historical...................................................... 1.90
Pro forma equivalent:
At minimum of Estimated Valuation Range...................... 2.26
At midpoint of Estimated Valuation Range..................... 2.30
At maximum of Estimated Valuation Range...................... 2.34
At 15% above maximum of Estimated Valuation Range............ 2.39
DIVIDENDS PER SHARE:
Historical...................................................... 0.70
Pro forma equivalent:
At minimum of Estimated Valuation Range...................... 0.70
At midpoint of Estimated Valuation Range..................... 0.70
At maximum of Estimated Valuation Range...................... 0.70
At 15% above maximum of Estimated Valuation Range............ 0.70
33
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, for each director and executive officer
of the Bank (and their associates) and for all of the directors and executive
officers as a group, (i) shares of Holding Company common stock to be received
in exchange for shares of Bank common stock based upon the number of shares
owned as of June 30, 1998, (ii) proposed purchases of common stock, assuming
shares available to satisfy their subscriptions, and (iii) total shares of
Holding Company common stock to be held upon consummation of the conversion, in
each case assuming that 773,500 shares are sold at the midpoint of the Estimated
Valuation Range. No individual has entered into a binding agreement with respect
to such intended purchases and, therefore, actual purchases could be more or
less than indicated below. Directors and executive officers and their associates
may not purchase in excess of 34% of the shares sold in the conversion. Because
OTS policy requires that the maximum purchase limitation include shares to be
received in exchange for shares of Bank common stock, certain officers and
directors of the Bank may be limited in their ability to purchase shares in this
offering.
<TABLE>
<CAPTION>
Number of
Shares Received Proposed Purchase of Total Common Stock
in Exchange Common Stock To be Held
for Bank --------------------------- ----------------------------
Common Stock Number Number Percentage
(1)(2) Amount of Shares of Shares of Total
------------ -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
James G. Pendleton 18,839 $50,000 5,000 23,839 1.8
Samuel E. Uhl 14,039 50,000 5,000 19,039 1.5
M. Chris Frederick 567 30,000 3,000 3,567 *
Joel E. Voyles -- 10,000 1,000 1,000 *
Kenneth R. Saulman 4,129 80,000 8,000 12,129 *
John W. Buschemeyer 18,839 20,000 2,000 20,839 1.6
Gerald L. Uhl 18,942 80,000 8,000 26,942 2.1
Mark D. Shireman 18,839 80,000 8,000 26,839 2.1
Dennis L. Huber 1,548 25,000 2,500 4,048 *
Sheri L. McGill -- -- -- -- --
--------- -------- -------- -------- ------
Total 95,742 $425,000 42,500 138,242 10.6%
========= ======== ======== ======== ======
</TABLE>
___________________
(*) Less than 1%.
(1) Excludes shares which may be received upon the exercise of outstanding
stock options granted under the 1994 Option Plan. Based upon the
Exchange Ratio of 2.5807 at the midpoint of the Estimated Valuation
Range, the following persons named in the table would have options to
purchase common stock as follows: Mr. Pendleton, no shares; Mr. S. Uhl,
5,161 shares; Mr. Frederick,3,612 shares; Mr.Voyles,3,483 shares; Mr.
Saulman, no shares; Mr. Buschemeyer, no shares; Mr. G. Uhl,154 shares
(granted to his spouse); Mr. Shireman, no shares; Mr. Huber, no shares;
and Ms. McGill, 3,096 shares.
(2) Does not include stock options that may be granted under the 1999
Option Plan and shares that may be awarded under the 1999 MRDP if such
plans are approved by stockholders. See "MANAGEMENT OF THE BANK --
Benefits."
34
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of First Federal Bank, A Federal
Savings Bank for the fiscal years ended June 30, 1998 and 1997 have been audited
by Monroe Shine & Co., Inc., independent auditors, whose report thereon appears
elsewhere in this prospectus. These statements should be read in conjunction
with the Financial Statements and related Notes included elsewhere herein.
YEARS ENDED JUNE 30,
---------------------
1998 1997
---- ----
INTEREST INCOME
Loans receivable:
Mortgage loans......................... $5,381,084 $4,864,498
Consumer and other loans................ 828,182 897,711
Mortgage-backed securities................ 111,751 144,644
Other securities:
Federal agency.......................... 264,847 367,140
Municipal............................... 9,363 23,573
Other................................... 46,245 44,589
Federal Home Loan Bank dividends.......... 45,653 41,555
Interest bearing deposits with banks...... 173,192 116,320
---------- ----------
Total interest income............... 6,860,317 6,500,030
---------- ----------
INTEREST EXPENSE
Deposits................................ 3,808,317 3,554,496
Advances from Federal Home Loan Bank.... 303,551 330,795
---------- ----------
Total interest expense.............. 4,111,868 3,885,291
Net interest income........................ 2,748,449 2,614,739
Provision for loan losses.................. -- --
---------- ----------
Net interest income after provision for
loan losses............................... 2,748,449 2,614,739
NON-INTEREST INCOME
Loan fees and service charges........... 38,684 57,674
Gain on sale of premises and equipment.. 169,087 --
Net rental income....................... 1,212 9,195
Service charges on deposit accounts..... 123,806 78,998
Other income............................ 77,993 30,313
---------- ----------
Total non-interest income........... 410,782 176,180
---------- ----------
NON-INTEREST EXPENSE
Compensation and benefits............... 858,303 803,045
Occupancy and equipment................. 309,943 190,440
Deposit insurance premiums.............. 44,198 493,068
Other expenses.......................... 399,120 367,182
---------- ----------
Total non-interest expense.......... 1,611,564 1,853,735
---------- ----------
Income before income taxes................. 1,547,667 937,184
Income tax expense......................... 589,215 131,498
---------- ----------
NET INCOME................................. $ 958,452 $ 805,686
========== ==========
NET INCOME PER COMMON SHARE, BASIC......... $ 1.90 $ 1.61
========== ==========
NET INCOME PER COMMON SHARE, DILUTED....... $ 1.88 $ 1.58
========== ==========
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Bank. The information contained in this section
should be read in conjunction with the financial statements and accompanying
notes thereto contained in this prospectus.
OPERATING STRATEGY
The business of the Bank consists principally of attracting deposits
from the general public and using such funds to originate for investment first
mortgage loans secured by single-family homes in Harrison County, Indiana, its
primary market area, and, to a lesser extent, in surrounding counties. The
Bank's lending activity also involves the origination of consumer loans,
commercial business loans, commercial real estate loans and residential
construction loans.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings. Net interest income is also affected by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Bank's
profitability is also affected by the level of non-interest income and
non-interest expenses. Non-interest income includes service charges and fees and
gain on sale of investments. Noninterest expenses primarily include compensation
and benefits, occupancy and equipment expenses, deposit insurance premiums and
data processing expenses. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.
The Bank's business strategy is to operate as a traditional,
community-oriented savings association dedicated to serving the financial needs
of individuals and small businesses in its primary market area and providing
quality customer service. Historically, the Bank has emphasized the origination
of loans secured by real estate and has retained for its portfolio almost all of
the loans that it originates. To help increase the yield on its loan portfolio,
decrease its interest rate risk profile associated with its high percentage of
fixed-rate residential mortgage loans, and better serve its customers, the Bank
has devoted attention in recent years to originating short-term consumer loans
as well as commercial loans to small businesses in its primary market area and
is seeking to hire a commercial loan officer to supervise its commercial lending
activities. In addition, to complement its commercial lending activities, the
Bank promotes checking accounts (which are lower cost than traditional time
deposits) through free checking programs and offering special services such as
debit cards, bank-by-phone services, and PC banking. Furthermore, to better
serve customers in Harrison County, the Bank relocated to a newly constructed
main office building during July 1997 and received OTS approval in July 1998 to
construct a new full-service branch office in New Salisbury in north-central
Harrison County. The Bank intends to open a temporary branch facility on the
site during October 1998 until the construction of the new building is
completed, which is estimated during April 1999. Management anticipates that the
opening of the New Salisbury office will require the hiring of up to four new
full-time employees, which will increase the Bank's future operating expenses.
See "USE OF PROCEEDS," "PRO FORMA DATA" and "BUSINESS OF THE BANK -- Properties"
for further information regarding the proposed New Salisbury office.
The conversion will increase the consolidated capital of the Holding
Company by the amount of the net proceeds after deducting the shares to be sold
to the ESOP. Funds withdrawn from deposit accounts will decrease
interest-bearing liabilities, and new funds used to purchase shares will
increase interest-earning assets. While the Holding Company expects these
changes to increase its net interest income, the Holding Company also expects
that the adoption of the ESOP and the 1999 MRDP will increase its non-interest
expenses. See "RISK FACTORS -- Expenses Associated With ESOP and 1999 MRDP." For
additional information regarding the effects of this offering, see "PRO FORMA
DATA."
36
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997
At June 30, 1998, total assets were $94.0 million compared to $89.4
million at June 30, 1997. This increase was primarily the result of a $5.0
million increase in loans, a $1.4 million increase in interest-bearing deposits
with banks and a $1.1 million increase in securities available for sale, which
were partially offset by a $3.0 million decrease in securities held to maturity.
The increase in loans primarily reflected residential mortgage loan refinancings
in the current low interest rate environment, rather than new loan originations.
Strong competition for loans also depressed new loan originations. The current
low interest rate environment also contributed to the decline in securities held
to maturity as a result of prepayments. The excess funds generated by the
prepayment of securities held to maturity, together with an increase in deposits
discussed below, were invested in interest-bearing deposits at banks and
securities available for sale, and were also used to reduce FHLB advances.
At June 30, 1998, deposits were $77.5 million compared to $70.8 million
at June 30, 1997. The increase in deposits resulted primarily from growth in
demand accounts and savings deposit accounts, which management attributes to its
promotional efforts to attract such lower cost accounts. Time deposits remained
virtually unchanged.
Total stockholders' equity increased $800,000 to $10.3 million at June
30, 1998, primarily as a result of retained earnings of $958,000 offset by
$143,000 in dividends paid to the Bank's minority stockholders.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NET INCOME. Net income was $958,000 ($1.88 per share diluted) in 1998
compared to $806,000 ($1.58 per share diluted) in 1997. The results for 1998
included a one-time gain of $169,000 associated with the sale of the Bank's old
main office property. Without this one-time gain, 1998 net income would have
been $854,000 ($1.67 per share diluted). The results for 1997 included the
payment of a one-time, industry-wide assessment to recapitalize the SAIF.
Without the SAIF assessment, 1997 net income would have been $1.1 million. 1997
net income was also benefitted by a change in tax law which reduced income tax
expense. See "- - Comparison of Operating Results for the Years Ended June 30,
1998 and 1997 - - Income Taxes" for further discussion. In 1998, the Bank's
return on average assets was 1.08% and its return on average equity was 9.56%.
NET INTEREST INCOME. Net interest income increased 3.8% to $2.7 million
in 1998 from $2.6 million in 1997 as a result of a 2 basis point increase in the
interest rate spread (from 2.70% in 1997 to 2.72% in 1998) and an increase in
the average balance of interest-earning assets.
Total interest income increased $400,000, or 6.2%, to $6.9 million in
1998 from $6.5 million in 1997, primarily as a result of a higher balance of
interest-earning assets and a slight increase in the average yield earned
thereon. Interest on loans receivable increased $500,000 primarily as a result
of higher average balances of residential mortgage loans due to high refinancing
activity in the low interest rate environment. Interest on mortgage-backed
securities and other securities decreased $148,000 as a result of lower average
balances and lower average rates earned on such assets. Interest on
interest-bearing deposits at banks increased $57,000 as a result of higher
average balances as available funds exceeded loan demand, and an increase in the
average rate earned on such funds.
Total interest expense increased $200,000, or 5.1%, to $4.1 million in
1998 from $3.9 million in 1997 as a result of an increase in interest on
deposits due to higher average balances and a slight increase in the average
cost of deposits. The average cost of regular savings deposits and
interest-bearing demand accounts increased as a result of competitive pressures,
while the average cost of time deposits declined as a result of maturities of
higher rate time deposits. Interest on FHLB advances was essentially unchanged
from 1997 to 1998.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit
37
<PAGE>
concentrations, trends in historical loss experience, specified impaired loans,
and economic conditions. The Bank made no provision for loan losses in either
1998 or 1997 because the Bank experienced net charge-offs of only $3,000 in each
year and the allowance for loan losses was considered adequate based upon
management's evaluation. Although management uses the best information
available, future adjustments to the allowance may be necessary due to changes
in economic, operating, regulatory and other conditions that may be beyond the
Bank's control. While the Bank maintains its allowance for loan losses at a
level which it considers to be adequate to provide for estimated losses, there
can be no assurance that further additions will not be made to the allowance for
loan losses and that actual losses will not exceed the estimated amounts. See
"BUSINESS OF THE BANK -- Lending Activities -- Allowance for Loan Losses" for
further information.
NON-INTEREST INCOME. Non-interest income increased to $411,000 in 1998
from $176,000 in 1997. The increase was primarily the result of a one-time gain
of $169,000 associated with the sale of the Bank's old main office property. The
Bank sold the property to a local non-profit organization for $425,000 and
financed $318,750 of the sales price over a 20 year term. Loan fees and service
charges decreased $19,000 as a result of a decrease in construction loan fees.
Service charges on deposit accounts increased $45,000 due to an increased number
of demand deposit accounts. Other income increased $48,000 as a result of
commissions earned on the sale of annuities and mutual funds. Net rental income
from the lease of the old main office building decreased from $9,000 in 1997 to
$1,000 in 1998 because of sale of the property during 1998.
NON-INTEREST EXPENSES. Non-interest expenses were $1.6 million in 1998
compared to $1.9 million in 1997. Compensation and benefits expenses increased
$55,000 due to normal compensation increases and increases in health and welfare
insurance premiums. Occupancy and equipment expenses increased $220,000 as a
result of the opening of the new main office. Compensation and benefits expenses
and occupancy and equipment expenses are expected to increase in future periods
with the opening of the proposed new full-service branch office as a result of
the expected hiring of up to four new full-time employees and the cost of
operating and equipping the office. Deposit insurance premiums decreased
$449,000 as a result of the $403,000 one-time SAIF assessment incurred in 1997,
as well as lower insurance premiums in effect after the SAIF recapitalization.
Other expenses increased $32,000 as a result of normal increases.
INCOME TAXES. Income tax expense was $589,000 in 1998 compared to
$131,000 in 1997 primarily as a result of an increase in the effective tax rate
from 14.0% in 1997 to 38.1% in 1998 due to the effect of a change in tax law
related to the allowance for loan losses and bad debt deduction. See Note 8 to
Notes to Financial Statements.
38
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth for the periods indicated information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average yields and costs.
Such yields and costs for the periods indicated are derived by dividing income
or expense by the average balances of assets or liabilities, respectively, for
the periods presented. Average balances were derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
balances causes any material differences in the information presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 ,
-------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance(2) Dividends Cost Balance(2) Dividends Cost
---------- --------- ---- ---------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:(1)
Mortgage loans........................ $62,311 $5,214 8.37% $57,181 $4,864 8.51%
Consumer loans........................ 7,558 687 9.09 6,563 556 8.47
Commercial business loans ............ 3,545 308 8.69 4,049 342 8.45
--------- --------- --------- --------
Total loans .................... 73,414 6,209 8.46 67,793 5,762 8.50
--------- --------- --------- --------
Mortgage-backed securities............... 1,816 112 6.15 2,275 145 6.35
Other securities(3) ..................... 5,773 366 6.34 7,684 477 6.21
Interest-bearing deposits with banks..... 3,057 173 5.66 2,101 116 5.52
--------- --------- --------- --------
Total interest-earning assets... 84,060 6,860 8.16 79,853 6,500 8.14
--------- --------- --------- --------
Non-interest earning assets.............. 4,621 3,774
--------- ---------
Total assets.................... $88,681 $83,627
========= =========
Interest-bearing liabilities:
Regular savings....................... $ 4,678 $ 166 3.55 $ 3,749 $ 120 3.20
Interest-bearing demand deposits...... 18,078 778 4.30 17,396 726 4.17
Time deposits......................... 47,904 2,864 5.98 44,898 2,708 6.03
--------- --------- --------- --------
Total deposits.................. 70,660 3,808 5.39 66,043 3,554 5.38
--------- --------- --------- --------
FHLB advances............................ 4,874 304 6.24 5,420 331 6.11
--------- --------- --------- --------
Total interest-bearing liabilities.... 75,534 4,112 5.44 71,463 3,885 5.44
--------- --------- --------- --------
Non-interest bearing liabilities:
Non-interest-bearing deposits......... 1,883 1,854
Other liabilities..................... 1,247 1,161
--------- ---------
Total liabilities............... 78,664 74,478
Stockholders' equity..................... 10,017 9,149
--------- ---------
Total liabilities and
stockholders' equity........... $88,681 $83,627
========= =========
Net interest income (net interest
income as a percentage of average
interest-earning assets)................ $2,748 $2,615
====== ======
Interest rate spread (spread between
weighted average rate to total
interest-earning assets and total
interest-bearing liabilities).......... 2.72% 2.70%
====== ======
Net interest margin...................... 3.27% 3.27%
====== ======
Ratio of average interest-earning assets
to average interest-bearing
liabilities............................ 111.29% 111.74%
====== ======
</TABLE>
__________________
(1) The Bank does not accrue interest on loans 90 days or more past due.
(2) Includes non-accrual loans.
(3) Includes other debt securities, securities classified as available for sale
and FHLB stock.
39
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth at the date and for the years indicated
the weighted average yields earned on the Bank's assets and the weighted average
rates paid on the Bank's liabilities, together with the Bank's interest rate
spread and net interest margin.
<TABLE>
<CAPTION>
Years Ended
At June 30,
June 30, ----------------
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average yield earned on:
Loan portfolio................................. 8.31% 8.46% 8.50%
Mortgage-backed securities..................... 6.74 6.15 6.35
Other securities............................... 6.40 6.34 6.21
Interest-bearing deposits with banks.......... 5.88 5.66 5.52
Total interest-earning assets................ 7.99 8.16 8.14
Weighted average rate paid on:
Total interest-bearing deposits................ 5.15 5.39 5.38
FHLB advances.................................. 5.54 6.24 6.11
Total interest-bearing liabilities........... 5.18 5.44 5.44
Interest rate spread............................. 2.81 2.72 2.70
Net interest margin.............................. N/A 3.27 3.27
</TABLE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and
volumes on net interest income of the Bank. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); (iii) changes
in rate/volume (change in rate multiplied by change in volume); and (iv) the net
change (the sum of the prior columns).
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1998 Compared to 1997
Increase (Decrease) Due to
----------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
(In thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1)............................. $(80) $437 $(7) $350
Consumer loans (1)............................ 41 84 6 131
Commercial business loans(1).................. 10 (43) (1) (34)
----- ------ ----- ------
Total loans ............................ (29) 478 (2) 447
----- ----- ----- -----
Mortgage-backed securities....................... (5) (29) 1 (33)
Other securities(2).............................. 10 (119) (2) (111)
Interest-bearing deposits with banks............. 3 53 1 57
------ ------ ----- ------
Total net change in income on
interest-earning assets................. (21) 383 (2) 360
----- ----- ---- -----
Interest-bearing liabilities:
Interest-bearing deposits..................... 7 247 -- 254
FHLB advances................................. 7 (33) (1) (27)
------ ------ ----- ------
Total net change in expense on
interest-bearing liabilities......... 14 214 (1) 227
----- ----- ----- -----
Net change in net interest income................ $(35) $169 $(1) $133
===== ==== ==== ====
</TABLE>
_______________
(1) The Bank does not accrue interest on loans 90 days or more past due.
(2) Includes other debt securities, securities classified as available for
sale and FHLB stock.
MARKET RISK ANALYSIS
QUANTITATIVE ASPECTS OF MARKET RISK. The Bank does not maintain a
trading account for any class of financial instrument nor does the Bank engage
in hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk. For information regarding the sensitivity to interest rate risk of
the Bank's interest-earning assets and interest-bearing liabilities, see the
tables under "BUSINESS OF THE BANK -- Lending Activities -- Loan Maturity and
Repricing," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Time Deposits by Maturities."
QUALITATIVE ASPECTS OF MARKET RISK. The Bank's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Bank has sought to reduce the exposure of
its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Bank has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and increase the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of short-term commercial and consumer loans, all of
which are retained by the Bank for its portfolio. The Bank relies on retail
deposits as its primary source of funds. Management believes retail deposits,
compared to brokered deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds.
41
<PAGE>
The Bank uses interest rate sensitivity analysis to measure its
interest rate risk by computing changes in NPV (net portfolio value) of its cash
flows from assets, liabilities and off-balance sheet items in the event of a
range of assumed changes in market interest rates. NPV represents the market
value of portfolio equity and is equal to the market value of assets minus the
market value of liabilities, with adjustments made for off-balance sheet items.
This analysis assesses the risk of loss in market risk sensitive instruments in
the event of a sudden and sustained 100 to 400 basis point increase or decrease
in market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report which measures interest rate risk by
modeling the change in NPV (net portfolio value) over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period).
The following table is provided by the OTS and sets forth the change in
the Bank's NPV at June 30, 1998, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------------------------------------------------------------
Net Portfolio Value
------------------------------------ Net Portfolio Value as a
Change Dollar Dollar Percent Percent of Present Value of Assets
----------------------------------
In Rates Amount Change Change NPV Ratio Change
- -------- ------ ------ ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 bp $ 9,071 $(3,077) (25)% 10.23% (246)bp
300 bp 10,056 (2,092) (17) 11.10 (159)bp
200 bp 10,979 (1,169) (10) 11.87 (82)bp
100 bp 11,746 (402) (3) 12.46 (23)bp
-- bp 12,148 -- -- 12.69 -- bp
(100)bp 12,332 184 2 12.70 1 bp
(200)bp 12,564 416 3 12.75 6 bp
(300)bp 12,090 742 6 12.87 18 bp
(400)bp 13,301 1,153 10 13.05 36 bp
</TABLE>
The above table indicates that in the event of a sudden and sustained
increase in prevailing market interest rates, the Bank's NPV would be expected
to decrease, and that in the event of a sudden and sustained decrease in
prevailing market interest rates, the Bank's NPV would be expected to increase.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. 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 ARM 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 deviate
significantly from those assumed in calculating the table.
42
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities) and, to a
lesser extent, maturities of mortgage-backed securities, other debt securities
and short-term investments and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic conditions,
and competition. The Bank attempts to price its deposits to meet its
asset/liability objectives discussed above, consistent with local market
conditions. Excess balances are generally invested in interest-bearing deposits
with banks. In addition, the Bank is eligible to borrow funds from the FHLB of
Indianapolis.
Liquidity management is both a short-term and long-term responsibility
of Bank management. The Bank adjusts its investments in liquid assets based upon
management's assessment of expected loan demand, projected loan repayments,
expected deposit flows, yields available on interest-bearing deposits and
liquidity of investments. Excess liquidity is invested generally in interest-
bearing overnight deposits and other short-term government and agency
obligations. The Bank adjusts the liquidity level in order to meet funding needs
for deposit outflows and loan commitments, as well as its asset/liability
management objectives. If the Bank requires funds beyond its ability to generate
them internally, it has additional borrowing capacity with the FHLB of
Indianapolis and collateral eligible for repurchase agreements.
OTS regulations require savings institutions to maintain an average
daily balance of liquid assets (cash and eligible investments) equal to at least
4.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings. The Bank's actual liquidity ratio at June 30, 1998 was
10.9%. See "-- Comparison of Financial Condition at June 30, 1998 and 1997" and
"BUSINESS OF THE BANK -- Investment Activities."
The Bank anticipates that it will have sufficient funds available to
meet current loan commitments and other credit commitments. At June 30, 1998,
the Bank has outstanding commitments to originate loans (including undisbursed
portion of construction loans in process) of approximately $5.4 million and
outstanding standby letters of credit of $185,000.
Certificates of deposit scheduled to mature in one year or less at
June 30, 1998 totaled approximately $19.6 million. Based upon management's
experience and familiarity with the customers involved and the Bank's pricing
policy relevant to that of its perceived competitors, management believes that a
significant portion of such deposits will remain with the Bank.
The Bank has diversified its lending to include home equity, second
mortgage and consumer loans. This diversification has been designed to increase
earnings and reduce interest rate risk. The Bank has increased the origination
of home equity and second mortgage loans secured by one- to- four family
dwellings and intends to reduce the balance of its mortgage-backed securities by
deploying funds into higher yielding whole loans. These changes in lending and
investment strategy have reduced the Bank's liquidity as lower-yielding, or
liquid assets are redeployed into higher-yielding, longer term assets.
As required by federal law and OTS regulations, the Bank is required
to maintain minimum levels of capital under three separate standards. The Bank
is required to maintain regulatory capital sufficient to meet tangible, core and
risk-based capital ratios of 1.50%, 3.00% and 8.00%, respectively. At June 30,
1998, the Bank exceeded each of its capital requirements, with tangible, core
and risk-based capital ratios of 11.00%, 11.00% and 19.10%, respectively.
YEAR 2000 ISSUES
The Year 2000 issue exists because many computer systems and
applications use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems may recognize the year 2000 as 1900, or
43
<PAGE>
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly.
The Bank performs all material data processing functions in-house with
a software operating system provided by a third party. In November 1997 the Bank
adopted a Year 2000 Action Plan to assess and monitor the state of readiness of
its internal systems and to identify potential Year 2000 problems. The Bank has
installed all new hardware that is Year 2000 compliant, except for its optical
disk storage system. The vendor for the optical disk storage system has informed
the Bank that its product will be Year 2000 compliant by January 1999. The
vendor for the software operating system has informed the Bank that its software
will be Year 2000 complaint by October 1998. The Bank has received letters from
all of its other vendors stating that they are Year 2000 compliant. Other than
Year 2000 compliance assessments performed by the OTS (the results of which are
confidential under applicable law), the Bank has not obtained any independent or
outside analysis of its Year 2000 risk exposure.
The Bank's Year 2000 Action Plan addresses the Bank's lending
activities. Recently, the Bank has upgraded its loan documentation system with a
Year 2000 compliant system. The Bank's Year 2000 Action Plan also requires the
Bank to assess the Year 2000 readiness of its current and prospective commercial
borrowers. See "BUSINESS OF THE BANK -- Lending Activities -- General" for
further information.
Management of the Bank continuously monitors the Bank's electronic
delivery systems for Year 2000 compliance and makes progress reports to the
Bank's Board of Directors each month. The Bank began testing its systems in
August 1998 and the test results have indicated that the systems tested are
compliant in all material respects.
The Bank has budgeted $75,000 towards its Year 2000 compliance
efforts, which generally would have been incurred in the normal course of
business. To date, the Bank has expended approximately $14,000 towards Year 2000
compliance issues. The Bank does not believe that the ultimate costs associated
with its Year 2000 compliance efforts will be material to the Bank. However, no
assurances can be given that such costs will not be higher and have a material
adverse effect on the Bank's financial condition and results of operations.
In the event the Bank's Year 2000 Action Plan fails in any material
respect, the Bank has formulated a contingency plan for its data processing
functions. The contingency plan calls for the purchase of alternate systems that
are compliant.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Comparative financial statements are required to be reclassified to reflect the
provisions of this statement.
SEGMENT INFORMATION. SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" establishes standards for the way public
business enterprises report information about operating segments and establishes
standards for related disclosures about products and services, geographic areas
and major customers. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Information required to be disclosed includes segment
profit or loss, certain specific revenue and expense
44
<PAGE>
items, segment assets and certain other information. This statement is effective
for the Holding Company for financial statements issued for the fiscal year
ending June 30, 1999.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," issued in February 1998, standardizes disclosure
requirements for pensions and other postretirement benefits and requires
additional disclosure on changes in benefit obligations and fair values of plan
assets in order to facilitate financial analysis. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position. Under this standard, all derivative instruments should be measured at
fair value. At the date of initial application, an entity may transfer any held-
to-maturity securities into the available-for-sale category or the trading
category, although the Holding Company has no intention of doing so. An entity
will then be able in the future to designate a security transferred into the
available-for-sale category as a hedged item. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999, with earlier
application permitted. The Holding Company does not intend to adopt SFAS No. 133
earlier than required. Because the Bank does not invest in derivative
instruments or enter into hedging transactions, adoption of this statement is
not anticipated to have a significant effect on the Holding Company's financial
position or results of operations.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized as an Indiana business corporation
at the direction of the Bank in September 1998 for the purpose of becoming the
holding company for the Bank upon completion of the conversion. As a result of
the conversion, the Bank will be a wholly-owned subsidiary of the Holding
Company and all of the issued and outstanding capital stock of the Bank will be
owned by the Holding Company.
BUSINESS
Prior to the conversion, the Holding Company has not and will not
engage in any significant activities other than of an organizational nature.
Upon completion of the conversion, the Holding Company's sole business activity
will be the ownership of the outstanding capital stock of the Bank. The Holding
Company also will hold a note receivable from the ESOP. In the future, the
Holding Company may acquire or organize other operating subsidiaries, although
there are no current plans, arrangements, agreements or understandings, written
or oral, to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Bank with the
payment of appropriate rental fees, as required by applicable law and
regulations.
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<PAGE>
Since the Holding Company will only hold the outstanding capital stock
of the Bank upon consummation of the conversion, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Bank. See "BUSINESS OF THE BANK -- Competition."
BUSINESS OF THE BANK
MARKET AREA
The Bank conducts its operations through its main office and one
branch office, both in Corydon, Indiana. The Bank plans to open a second branch
office in New Salisbury, Indiana. See "-- Properties." Corydon, the county seat
of Harrison County, is located approximately 35 miles west of Louisville,
Kentucky. The Bank considers Harrison County as its primary market area because
substantially all of the Bank's depositors live in the areas surrounding its
main office and branch office and most of the Bank's loans are made to persons
in Harrison County, Indiana.
Harrison County has a population of approximately 34,000 according to
1997 statistics. The June 1998 unemployment rate for Harrison County was 2.6%,
which was below both the state (2.8%) and national (4.7%) rates. Major employers
in Harrison County include Keller Manufacturing Corporation, South Harrison
Community School District and the Harrison County Hospital.
The Bank faces intense competition for deposits and loan originations
from the many financial institutions conducting business within its market area.
See "-- Competition" and "RISK FACTORS -- Competition."
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank is the origination
of residential mortgage loans. To a lesser extent, the Bank also originates
consumer, commercial business, commercial real estate (including farm
properties) and residential construction loans.
The Bank realizes that its current and prospective commercial
borrowers, like itself, must address the Year 2000 issue. Recently, the Bank
sent questionnaires to its 15 largest commercial borrowers asking them if they
are aware of the Year 2000 issue, if they are taking steps to address the issue,
and if they need help in addressing the issue. The Bank has received responses
form eight of the 15 borrowers and all have indicated they are aware of the
issue, they are addressing the issue, and they do not need help in addressing
the issue. In addition, when underwriting a prospective commercial loan, the
Bank considers what effect, if any, the Year 2000 issue may have on the business
of the prospective borrower as well as the borrower's ability to meet its
contractual obligations with the Bank in the event the Year 2000 issue affects
the borrower's business. See "RISK FACTORS -- Risk of Year 2000 Data Processing
Problems" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Year 2000 Issues" for further information.
46
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1998 1997
------------------------ ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential(1) ............................. $ 57,825 74.57% $52,980 72.34%
Land........................................ 218 0.28 270 0.37
Commercial real estate...................... 4,371 5.64 2,687 3.67
Residential construction.................... 3,787 4.88 4,352 5.94
-------- ------- -------- -------
Total mortgage loans....................... 66,201 85.37 60,289 82.32
-------- ------- -------- -------
Consumer Loans:
Home equity and second mortgage loans...... 2,799 3.61 2,773 3.79
Automobile loans............................ 1,574 2.03 1,419 1.94
Loans secured by savings accounts........... 466 0.60 399 0.54
Mobile home loans........................... 223 0.29 320 0.44
Unsecured loans............................. 125 0.16 154 0.21
Other(2).................................... 1,110 1.43 1,796 2.45
-------- ------- -------- -------
Total consumer loans...................... 6,297 8.12 6,861 9.37
-------- ------- -------- -------
Commercial business loans................... 5,048 6.51 6,083 8.31
-------- ------- -------- -------
Total loans............................... 77,546 100.00% 73,233 100.00%
-------- ======= -------- =======
Less:
Due to borrowers on loans in process........ 1,932 2,594
Deferred loan fees net of direct costs...... 211 211
Allowance for loan losses................... 516 519
-------- --------
Total loans receivable, net................. $ 74,887 $69,909
======== ========
</TABLE>
________________
(1) Includes conventional one- to four-family and multi-family residential
loans.
(2) Includes loans secured by lawn and farm equipment, unimproved land, and
other personal property.
RESIDENTIAL LOANS. The Bank's lending activities have concentrated on
the origination of residential mortgages, primarily for retention in the Bank's
loan portfolio. At June 30, 1998, residential mortgages constituted $57.8
million, or 74.6% of total loans. Residential mortgages secured by multi-family
properties are an immaterial portion of the residential loan portfolio.
Substantially all residential mortgages are collateralized by properties within
the Bank's market area.
The Bank offers both fixed-rate mortgage loans and ARM loans typically
with terms of 15 to 30 years. Although the Bank originates all residential
mortgage loans for investment, the Bank uses loan documents approved by FANNIE
MAE and the FREDDIE MAC. ARM loans originated have interest rates that adjust at
regular intervals of one year, with 1.5% annual and 5% lifetime caps, and at
intervals of five years with 2% per adjustment period and 6% lifetime caps,
based upon changes in the prevailing interest rates on U.S. Treasury Bills. The
Bank does not use below market interest rates and other marketing inducements to
attract ARM loan borrowers. The majority of ARM loans provide that the amount of
any increase or decrease in the interest rate is limited to two percentage
points (upward or downward) per adjustment period and generally contain minimum
and maximum interest rates. Borrower demand for ARMs versus fixed-rate mortgage
loans is a function of the level of interest rates, the expectations of changes
in the level of interest rates and the difference between the interest rates and
loan fees offered for fixed-rate mortgage loans
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<PAGE>
and interest rates and loan fees for ARM loans. The relative amount of fixed-
rate and ARM loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on fixed-rate and ARM loans to 90% of the lesser of the appraised value or
purchase price of the underlying residential property unless private mortgage
insurance to cover the excess over 90% is obtained, in which case the mortgage
is limited to 95% (or 97% under a new Freddie Mac program) of the lesser of
appraised value or purchase price. The loan-to-value ratio, maturity and other
provisions of the loans made by the Bank are generally reflected in the policy
of making less than the maximum loan permissible under federal regulations, in
accordance with established lending practices, market conditions and
underwriting standards maintained by the Bank. The Bank requires title, fire and
extended insurance coverage on all mortgage loans originated. All of the Bank's
real estate loans contain due on sale clauses. The Bank obtains appraisals on
all its real estate loans from outside appraisers.
CONSTRUCTION LOANS. At June 30, 1998, the Bank had $3.8 million, or 4.9% of
total loans, of construction loans for single-family residences. Construction
loans secured by multi-family or commercial properties are an immaterial portion
of the construction loan portfolio. At June 30, 1998, speculative construction
loans, for which there is not a commitment for permanent financing in place at
the time the construction loan was originated, amounted to $832,000.
Although the Bank originates construction loans that are repaid with the
proceeds of a permanent mortgage loan obtained by the borrower from another
lender, the majority of the construction loans that the Bank originates are
construction/permanent loans, which are originated with one loan closing at
either a fixed or variable rate of interest and for terms up to 30 years.
Construction loans originated without a commitment by the Bank to provide
permanent financing are generally originated for a term of six to 12 months and
at a variable interest rate based on the prime rate. In the case of
construction/permanent loans, the construction loan is also generally for a term
of six to 12 months and the rate charged is the rate chosen by the borrower for
the permanent loan. Accordingly, if the borrower chooses a fixed interest rate
for the permanent loan, the construction loan rate is also fixed at the same
rate. At June 30, 1998, the largest non-speculative construction loan was in the
amount of $220,000 and with an outstanding balance of $166,000. This loan was
performing according to its terms at June 30, 1998.
The Bank originates speculative construction loans to approximately six
builders operating and based in the Bank's primary market area and with whom the
Bank has well-established business relationships. The Bank generally limits the
number of speculative construction loans outstanding at any one time to any one
builder to two loans. At June 30, 1998, the largest speculative construction
loan relationship with a builder consisted of two loans in the committed
aggregate amount of $244,000 with an aggregate outstanding balance of $44,000.
Such loans were performing according to their respective terms at that date.
All construction loans are originated with a loan-to-value ratio not to
exceed 90% of the appraised estimated value of the completed property. The
construction loan documents require the disbursement of the loan proceeds in
increments as construction progresses. Disbursements are based on periodic on-
site inspections by an independent appraiser and/or Bank personnel approved by
the Board of Directors.
Construction lending is inherently riskier than one-to-four-family mortgage
lending. Construction loans, on average, generally have higher loan balances
than one-to-four-family mortgage loans. In addition, the potential for cost
overruns because of the inherent difficulties in estimating construction costs
and, therefore, collateral values and the difficulties and costs associated with
monitoring construction progress, among other things, are major contributing
factors to this greater credit risk. Speculative construction loans have the
added risk that there is not an identified buyer for the completed home when the
loan is originated, with the risk that the builder will have to service the
construction loan debt and finance the other carrying costs of the completed
home for an extended time period until a buyer is identified. Furthermore, the
demand for construction loans and the ability of construction loan borrowers to
service their debt depends highly on the state of the general economy, including
market interest rate levels, and the state of the
48
<PAGE>
economy of the Bank's primary market area. A material downturn in economic
conditions would be expected to have a material adverse effect on the credit
quality of the construction loan portfolio.
COMMERCIAL REAL ESTATE LOANS. The Bank had commercial real estate loans
outstanding of $4.4 million at June 30, 1998, or 5.6% of total loans. Commercial
real estate loans are generally secured by small retail stores, professional
office space and, in certain instances, farm properties.
Commercial real estate loans are generally originated with a loan-to-value
ratio not to exceed 80% of the appraised value of the property. Property
appraisals are performed by independent appraisers approved by the Bank's Board
of Directors. The Bank attempts to originate commercial real estate loans at
variable interest rates based on the U.S. Treasury Bill rate for terms not to
exceed five years. However, in the current low interest rate environment,
borrower demand for variable rate loans is low and the Bank is generally
originating commercial real estate loans with fixed interest rates for terms
ranging between ten and 15 years over which principal and interest is fully
amortized.
At June 30, 1998, the largest commercial real estate loan had an
outstanding balance of $571,000 and was secured by a church school building.
This loan was performing according to its terms at that date.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to-four family
residential lending. However, loans secured by such properties usually are
greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential mortgage
loans. Because payments on loans secured by multi-family and commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Bank also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
COMMERCIAL BUSINESS LOANS. At June 30, 1998, the Bank's commercial business
loan portfolio amounted to $5.0 million, or 6.5% of total loans. Unsecured
commercial business loans are an immaterial amount of the portfolio. Commercial
business loans are generally secured by inventory, accounts receivable, and
business equipment such as trucks and tractors. Many commercial business loans
also have real estate as collateral. The Bank generally requires a personal
guaranty of payment by the principals of a corporate borrower, and reviews the
personal financial statements and income tax returns of the guarantors.
Commercial business loans are generally originated with loan-to-value ratios not
exceeding 75%.
Aside from lines of credit, commercial business loans are generally
originated for terms not to exceed seven years with variable interest rates
based on the Bank's cost of funds. Most of the Bank's commercial business loan
portfolio is composed of secured lines of credit. Approved credit lines totalled
$2.1 million at June 30, 1998, of which $1.5 million was outstanding. Lines of
credit are originated at fixed interest rates for one year renewable terms.
A director of the Bank is a shareholder of a farm implement dealership that
has contracted with the Bank to provide sales financing to the dealership's
customers. The Bank does not grant preferential credit under this arrangement.
All sales contracts are presented to the Bank on a 50% recourse basis, with the
dealership responsible for the sale and disposition of any repossessed
equipment. During the fiscal year ended June 30, 1998, the Bank granted
approximately $612,000 of credit to customers of the dealership and such loans
had an aggregate outstanding balance of $1.6 million at June 30, 1998. At June
30, 1998, $21,000 of such loans were delinquent 30 days or more. See "BUSINESS
OF THE BANK -- Transactions With the Bank."
At June 30, 1998, the largest commercial business loan had an outstanding
balance of $496,000 and was unsecured. Such loan was performing according to its
terms at that date.
49
<PAGE>
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral-based lending with loan amounts
based on predetermined loan-to-collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often an insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
In 1993, the Bank purchased, without recourse, lease obligations originated
by Bennett Funding Group, Inc., Syracuse, New York ("Bennett Funding"). At June
30, 1998, these obligations had an aggregate outstanding balance of
approximately $79,000 and were secured by office business equipment. During the
fiscal year ended June 30, 1996, Bennett Funding filed for Chapter 11 bankruptcy
protection after securities fraud and other violations were alleged against it
by the U.S. Attorney's Office and the Securities and Exchange Commission. At
June 30, 1998, the Bank's allowance for loan losses included an allowance of
$55,000 related to these lease obligations, which were classified as impaired at
that date. The Bank entered into a settlement agreement with Bennett Funding on
March 18, 1997. The Bank chose an option which allows for a maximum recovery of
approximately $158,000 (77.5%) of the aggregate outstanding balance. As of June
30, 1998, the Bank had recovered approximately $124,000, net of fees charged by
the bankruptcy trustee.
As an incident to its commercial business lending activities, the Bank
issues standby letters of credit or performance bonds as an accommodation to its
borrowers. See "-- Loan Commitments and Letters of Credit."
CONSUMER LOANS. Consumer loans totalled $6.3 million at June 30, 1998, or
8.1% of the Bank's total loan portfolio. The Bank views consumer lending as an
important component of its business because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, the Bank believes that offering consumer loans expands and
creates stronger ties to its customer base. Subject to market conditions, the
Bank intends to expand its consumer lending activities.
The Bank offers a variety of secured or guaranteed consumer loans,
including automobile and truck loans (both new and used), home equity loans,
home improvement loans, student loans, boat loans, mobile home loans, and loans
secured by savings deposits. In addition, the Bank offers unsecured consumer
loans. Consumer loans are generally originated at fixed interest rates and for
terms not to exceed seven years. The largest portion of the Bank's consumer loan
portfolio consists of home equity and second mortgage loans ($2.8 million at
June 30, 1998) followed by automobile and truck loans ($1.6 million at June 30,
1998). Automobile and truck loans are originated on both new and used vehicles.
Such loans are generally originated at fixed interest rates for terms up to
seven years and at loan-to-value ratios up to 90% of the blue book value in the
case of used vehicles and 90% of the purchase price in the case of new vehicles.
The Bank does not engage in indirect automobile and truck lending.
Home equity and second mortgage loans are generally originated for terms
not to exceed 15 years and at fixed rates of interest. The loan-to-value ratio
on such loans is limited to 95%, taking into account the outstanding balance on
the first mortgage loan.
The Bank employs strict underwriting standards for consumer loans. These
procedures include an assessment of the applicant's payment history on other
debts and ability to meet existing obligations and payments on the proposed
loans. Although the applicant's creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount. The Bank underwrites and originates the
majority of its consumer loans internally, which management believes limits
exposure to credit risks relating to loans underwritten or purchased from
brokers or other outside sources.
50
<PAGE>
Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by the borrower against the Bank
as the holder of the loan, and a borrower may be able to assert claims and
defenses which it has against the seller of the underlying collateral. Of the
Bank's consumer loan portfolio, $6,000 was delinquent 30 days or more at June
30, 1998.
LOAN MATURITY AND REPRICING
The following table sets forth certain information at June 30, 1998
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, but does not include potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan balances
do not include undisbursed loan proceeds, unearned income and allowance for loan
losses.
<TABLE>
<CAPTION>
After After After After
One Year 3 Years 5 Years 10 Years
Within Through Through Through Through After
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
-------- ------- ------- -------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential real estate........ $ 2,962 $ 5,302 $ 5,470 $14,688 $ 11,166 $ 18,237 $ 57,825
Commercial real estate......... 1,132 636 518 1,176 816 309 4,587
Residential construction....... 3,787 -- -- -- -- -- 3,787
Consumer loans................... 3,886 2,215 1,066 500 120 55 7,842
Commercial business.............. 1,190 1,241 535 451 34 54 3,505
-------- -------- -------- ------- -------- -------- --------
Total gross loans........... $12,957 $ 9,394 $ 7,589 $16,815 $ 12,136 $ 18,655 $ 77,546
======== ======== ======== ======= ========= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after June
30, 1999, which have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed- Floating- or
Rates Adjustable-Rates
----- ----------------
(In thousands)
<S> <C> <C>
Mortgage Loans:
Residential................................ $37,964 $16,899
Commercial real estate..................... 2,530 926
Residential construction................... -- --
Consumer loans............................... 3,956 --
Commercial business.......................... 2,314 --
------- -------
Total gross loans.......................... $46,764 $17,825
======= =======
</TABLE>
51
<PAGE>
The following table sets forth total loans originated and repaid during the
periods indicated. There were no loan sales during any of the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Total loans at beginning of period......................... $73,233 $61,901
------- -------
Loans originated:
One- to four-family residential........................... 9,225 11,034
Multi-family residential and commercial real estate....... 999 267
Residential construction loans............................ 7,143 5,998
Consumer loans............................................ 5,521 3,493
Commercial business....................................... 1,901 4,642
--------- ---------
Total loans originated................................. 24,789 25,461
-------- -------
Loans purchased:
Commercial real estate(1)................................. 600 --
Loan principal repayments.................................. (23,720) (18,861)
Other (2).................................................. 2,644 4,732
--------- ---------
Net loan activity.......................................... 4,313 11,332
---------- ---------
Total loans at end of period............................... $77,546 $73,233
======= =======
</TABLE>
_______________
(1) Represents participation interest in two loans: (i) a 17% interest in a
loan secured by development property and (ii) a 7% interest in a loan
secured by a professional office building. At June 30, 1998, the Bank's
interests had an aggregate outstanding balance of $597,000. The loans
are performing according to their terms at June 30, 1998.
(2) Includes non-cash portion of refinancing transactions, foreclosures and
principal add-ons.
LOAN SOLICITATION AND PROCESSING. A majority of the loans originated by
the Bank are made to existing customers. Walk-ins and customer referrals are
also an important source of loans originations. Upon receipt of a loan
application, a credit report is ordered to verify specific information relating
to the loan applicant's employment, income and credit standing. A loan
applicant's income is verified through the applicant's employer or from the
applicant's tax returns. In the case of a real estate loan, an appraisal of the
real estate intended to secure the proposed loan is undertaken, generally by an
independent appraiser approved by the Bank. The mortgage loan documents used by
the Bank conform to secondary market standards.
Individual loan officers have individual lending limits commensurate
with their experience. All loans in excess of $150,000 or that are an exception
to lending policy are approved by the Loan Committee, consisting of the Bank's
President, Vice President, Treasurer and Operations Officer. All loans in excess
of $500,000 must be approved by the Bank's Board of Directors.
The Bank's policy is to require borrowers to obtain certain types of
insurance to protect its interest in the collateral securing the loan. The Bank
requires either a title insurance policy insuring that the Bank has a valid
first lien on the mortgaged real estate or an opinion by an attorney regarding
the validity of title. Fire and casualty insurance is
52
<PAGE>
also required on collateral for loans. The Bank requires escrows for insurance
on all loans with a loan-to-value exceeding 90%.
The Bank's lending practices generally limit the maximum loan to value
ratio on conventional residential mortgage loans to 90% (or 97% under a new
Freddie Mac program) of the appraised value of the property as determined by an
independent appraisal or the purchase price, whichever is less, and 80% for
commercial real estate loans.
LOAN COMMITMENTS AND LETTERS OF CREDIT. The Bank issues commitments for
fixed- and adjustable-rate single-family residential mortgage loans conditioned
upon the occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 60 days from the date
of application, depending on the type of transaction. The Bank had outstanding
net loan commitments of approximately $5.4 million at June 30, 1998. See Note 12
of Notes to Financial Statements.
As an accommodation to its commercial business loan borrowers, the Bank
issues standby letters of credit or performance bonds usually in favor of
municipalities for whom its borrowers are performing services. At June 30, 1998,
the Bank had outstanding letters of credit of $185,000. See Note 12 to Notes to
Financial Statements.
LOAN ORIGINATION AND OTHER FEES. The Bank, in most instances, receives loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal amount of the mortgage loan that are charged to the borrower for
funding the loan. The Bank usually charges origination fees of 0.5% to 3.0% on
one- to four-family residential real estate loans, long-term commercial real
estate loans and residential construction loans. Current accounting standards
require loan origination fees and certain direct costs of underwriting and
closing loans to be deferred and amortized into interest income over the
contractual life of the loan. Deferred fees and costs associated with loans that
are sold are recognized as income at the time of sale. The Bank had $211,000 of
net deferred loan fees at June 30, 1998.
DELINQUENCIES. The Bank's collection procedures provide for a series of
contacts with delinquent borrowers. A late charge is assessed and a late charge
notice is sent to the borrower after the 15th day of delinquency. A delinquency
notice is mailed to the borrower after the 30th day of delinquency. When payment
becomes 60 days past due, the Loan Collection Committee of the Board of
Directors generally meets and issues a default letter to the borrower. If a loan
continues in a delinquent status for 90 days or more, the Bank generally
initiates foreclosure proceedings. In certain instances, however, the Loan
Collection Committee may decide to modify the loan or grant a limited moratorium
on loan payments to enable the borrower to reorganize his financial affairs.
NONPERFORMING ASSETS. Loans are reviewed regularly and when loans become 90
days delinquent, the loan is placed in nonaccrual status and the previously
accrued interest income is reversed. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated. At the dates indicated, the Bank
had no restructured loans within the meaning of SFAS No. 15 and no accruing
loans which were past due 90 days or more.
53
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate............... $117 $ --
Residential construction.............. -- -
Commercial real estate................. 25 --
Commercial business................... 80 109
Consumer.............................. -- 20
---- ----
Total................................ 222 129
---- ----
Foreclosed real estate, net............. 104 --
---- ----
Total nonperforming assets.............. $326 $129
==== ====
Total loans delinquent 90
days or more to net loans.............. 0.30% 0.18%
Total loans delinquent
90 days or more to
total assets........................... 0.24% 0.14%
Total nonperforming assets
to total assets........................ 0.35% 0.14%
</TABLE>
The Bank does not accrue interest on loans over 90 days past due. However,
if interest on nonaccrual loans had been accrued, interest income of
approximately $10,000 would have been recorded for the year ended June 30, 1998.
No interest income was received and recorded on nonaccrual loans for the year
ended June 30, 1998.
CLASSIFIED ASSETS. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Bank.
On July 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which requires that impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or if expedient, at the loan's observable market price
or the fair value of collateral if the loan
54
<PAGE>
is collateral dependent. A loan is classified as impaired by management when,
based on current information and events, it is probable that the Bank will be
unable to collect all amounts due in accordance with the terms of the loan
agreement. If the fair value, as measured by one of these methods, is less than
the recorded investment in the impaired loan, the Bank establishes a valuation
allowance with a provision charged to expense. Management reviews the valuation
of impaired loans on a quarterly basis to consider changes due to the passage of
time or revised estimates. Assets that do not expose the Bank to risk sufficient
to warrant classification in one of the aforementioned categories, but which
possess some weaknesses, are required to be designated "special mention" by
management.
An insured institution is required to establish and maintain an allowance
for loan losses at a level that is adequate to absorb estimated credit losses
associated with the loan portfolio, including binding commitments to lend.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities. When an insured
institution classifies problem assets as "loss," it is required either to
establish an allowance for losses equal to 100% of the amount of the assets, or
charge off the classified asset. The amount of its valuation allowance is
subject to review by the OTS which can order the establishment of additional
general loss allowances. The Bank regularly reviews the loan portfolio to
determine whether any loans require classification in accordance with applicable
regulations.
At June 30, 1998 and 1997 the aggregate amounts of the Bank's classified
assets, general loss allowances and charge-offs for the periods then ended, were
as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Loss...................................................... $-- $--
Doubtful (impaired) ...................................... 79 109
Substandard .............................................. 293 531
General loss allowances:
Impaired loans............................................ 55 55
Other..................................................... 461 464
</TABLE>
FORECLOSED REAL ESTATE. Foreclosed real estate held for sale is carried at
the lower of fair value minus estimated costs to sell, or cost. Costs of holding
foreclosed real estate are charged to expense in the current period, except for
significant property improvements, which are capitalized. Valuations are
periodically performed by management and an allowance is established by a charge
to non-interest expense if the carrying value exceeds the fair value minus
estimated costs to sell. The net income from operations of foreclosed real
estate held for sale is reported in non-interest income. At June 30, 1998, the
Bank had $104,000 in foreclosed real estate, which consisted of two single-
family residences.
ALLOWANCE FOR LOAN LOSSES. Management evaluates the adequacy of the
allowance for losses on loans each year based on estimated losses on specific
loans and other procedures, including a review of all loans for which full
collectibility may not be reasonably assured and considers, among other matters,
the estimated market value of the underlying collateral of problem loans, prior
loss experience, economic conditions and overall portfolio quality. These
provisions for losses are charged against earnings in the year they are
established. The allowance for loan losses at June 30, 1998 was $516,000, or
0.67% of total loans outstanding, compared with $519,000, or 0.71% of total
loans outstanding, at June 30, 1997. The Bank made no provision for loan losses
in either 1998 or 1997 because it experienced net charge-offs of only $3,000 in
each year and the allowance for loan losses was considered adequate based upon
management's evaluation. Management's estimate of specific and inherent credit
losses in the loan portfolio as described above is intended to provide a
reasonable allowance for loan losses applicable to all loan categories. The
55
<PAGE>
allowance for loan losses as a percentage of total loans outstanding as of the
end of a given period represents an estimated loss percentage for the total loan
portfolio and a general measure of adequacy. However, in accordance with GAAP,
management assigns an estimated loss percentage or a range of loss to each loan
category in estimating the total allowance for loan losses. Management's
estimate also includes specifically identified loans having potential losses. It
is management's assessment that the allowance for loan losses at June 30, 1998
and 1997 was adequate and represents a reasonable estimate of the specific and
inherent credit losses consistent with the composition of the loan portfolio and
credit quality trends.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period.......... $519 $522
Provision for loan losses................. -- --
----- -----
519 522
----- -----
Recoveries:
Residential real estate.................. -- --
Commercial business...................... -- --
Consumer................................. -- --
----- -----
Total recoveries........................ -- --
----- -----
Charge-offs:
Residential real estate.................. 2 --
Commercial business...................... -- --
Consumer................................. 1 3
----- -----
Total charge-offs....................... 3 3
----- -----
Net charge-offs........................... (3) (3)
----- -----
Allowance at end of period................ $516 $519
===== =====
Ratio of allowance to total
loans outstanding at the
end of the period........................ 0.67% 0.71%
Ratio of net charge-offs
to average
loans outstanding during the period...... --% --%
</TABLE>
56
<PAGE>
ALLOWANCE FOR LOAN LOSSES ANALYSIS
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------
1998 1997
--------------------- -----------------------
Percent of Percent of
Outstanding Outstanding
Loans in Loans in
Amount Category Amount Category
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential real estate(1)....... $215 82.44% $135 81.41%
Commercial real estate and
land loans...................... 36 5.92 36 4.04
Commercial business.............. 117 4.52 113 6.48
Consumer......................... 32 7.12 56 8.07
Unallocated...................... 116 -- 179 --
----- ------ ---- ------
Total allowance for loan
losses........................ $516 100.00% $519 100.00%
===== ====== ==== ======
</TABLE>
_____________
(1) Includes residential construction loans.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the applicable FHLB, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. Savings institutions are also
required to maintain minimum levels of liquid assets which vary from time to
time. See "REGULATION -- Federal Regulation of Savings Associations -- Federal
Home Loan Bank System." The Bank may decide to increase its liquidity above the
required levels depending upon the availability of funds and comparative yields
on investments in relation to return on loans.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets and is also permitted to make certain other securities
investments. The balance of the Bank's investments in short-term securities in
excess of regulatory requirements reflects management's response to the
significantly increasing percentage of deposits with short maturities. It is the
intention of management to hold securities with short maturities in the Bank's
investment portfolio in order to enable the Bank to match more closely the
interest-rate sensitivities of its assets and liabilities.
The Bank periodically invests in mortgage-backed securities, including
mortgage-backed securities guaranteed or insured by either GINNIE MAE, Fannie
Mae or Freddie Mac. Mortgage-backed securities generally increase the quality of
the Bank's assets by virtue of the guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank. Of the Bank's total mortgage-backed securities
portfolio, securities with a book value of $440,000 have adjustable-rates as of
June 30, 1998. See Note 2 of Notes to Financial Statements for additional
information.
Investment decisions are made by the Investment Committee, consisting of
James G. Pendleton, Samuel E. Uhl and M. Chris Frederick. The Bank's investment
objectives are: (i) to provide and maintain liquidity within regulatory
guidelines; (ii) to maintain a balance of high quality, diversified investments
to minimize risk; (iii) to provide collateral for pledging requirements; (iv) to
serve as a balance to earnings; and (v) to maximize returns.
At June 30, 1998, the Bank had no investment in securities (other than U.S.
Government and agency securities and mutual funds that invest in such
securities) which exceeded 10% of the Bank's stockholders' equity at that date.
57
<PAGE>
The following table sets forth the securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------
1998 1997
--------------------------------------------- ---------------------
Weighted
Fair Amortized Percent of Average Fair Amortized
Value Cost Portfolio Yield(2) Value Cost
----- ---- --------- -------- ----- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity(1)
Debt securities:
U.S. agency:
Due after one year through five years........... $1,493 $1,500 19.00% 4.53% $2,068 $2,100
Due after five years through ten years.......... -- -- -- -- 476 483
Due after ten years through fifteen years....... -- -- -- -- 999 1,000
Municipal:
Due in one year or less......................... 80 80 1.01 3.90 359 360
Due after one year through five years........... -- -- -- -- 79 80
Mortgage-backed securities(3)..................... 1,463 1,473 18.65 6.74 2,025 2,045
------ ------ ------ ------ ------
$3,036 $3,053 38.66% $6,006 $6,068
====== ====== ====== ====== ======
Securities Available for Sale
Debt securities:
U.S. agency:
Due after five years through ten years.......... -- -- -- -- $ 992 $1,000
Due after ten years through fifteen years....... 4,002 4,000 50.65 7.01 2,003 2,000
Equity securities:
Mutual fund(4)................................... 847 844 10.69 N/A 689 697
------ ------ ------ ------ ------
$4,849 $4,844 61.34% $3,684 $3,697
====== ====== ====== ====== ======
<CAPTION>
Weighted
Percent of Average
Portfolio Yield(2)
--------- --------
<S> <C> <C>
Securities Held to Maturity(1)
Debt securities:
U.S. agency:
Due after one year through five years............ 21.50% 4.54%
Due after five years through ten years........... 4.95 6.72
Due after ten years through fifteen years........ 10.24 7.75
Municipal:
Due in one year or less.......................... 3.69 4.40
Due after one year through five years............ 0.82 3.90
Mortgage-backed securities(3)...................... 20.94 6.48
------
62.14%
======
Securities Available for Sale
Debt securities:
U.S. agency:
Due after five years through ten years........... 10.24% 7.50%
Due after ten years through fifteen years........ 20.48% 8.32
Equity securities:
Mutual fund(4).................................... 7.14% N/A
------
37.86%
======
</TABLE>
___________________
(1) Securities held to maturity are carried at amortized cost.
(2) Yields are calculated on a fully taxable equivalent basis using a marginal
federal income tax rate of 34%.
(3) The expected maturities of mortgage-backed securities may differ from
contractual maturities because the mortgages underlying the obligations
may be prepaid without penalty.
(4) The mutual fund invests primarily in U.S. Government agency securities.
58
<PAGE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major source of the
Bank's funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowing may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or may also be used
on a longer term basis for general business purposes.
DEPOSIT ACCOUNTS. Deposits are attracted from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including negotiable order of withdrawal ("NOW") accounts, money market
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary, according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of its deposit accounts, the
Bank considers the rates offered by its competition, profitability to the Bank,
matching deposit and loan products and its customer preferences and concerns.
The Bank generally reviews its deposit mix and pricing weekly.
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at June 30, 1998.
<TABLE>
<CAPTION>
Weighted-
Average Percentage
Interest of Total
Rate Term Category Balance Deposits
---- ---- -------- ------- --------
(In thousands)
SAVINGS AND DEMAND DEPOSITS
---------------------------
<S> <C> <C> <C> <C>
4.08% None NOW accounts $ 11,039 14.24%
3.41 None Regular savings 4,805 6.20
3.00 90 days 90-day passbook 218 0.28
3.60 None Money market accounts 10,447 13.49
-- None Non-interest checking 3,096 4.00
-- None Christmas clubs 50 0.06
4.88 None Cash management 84 0.11
TIME DEPOSITS
-------------
5.02 32-91 days Fixed term, fixed-rate 917 1.18
4.60 92-182 days Fixed term, fixed-rate 2,181 2.82
5.07 183-365 days Fixed term, fixed-rate 2,925 3.78
5.60 366-730 days Fixed term, fixed-rate 11,211 14.47
5.78 731-1095 days Fixed term, fixed-rate 8,023 10.36
5.44 1096-1460 days Fixed term, fixed-rate 3,647 4.71
6.26 1461-1825 days Fixed term, fixed-rate 4,552 5.88
6.70 1826-and up Fixed term, fixed-rate 14,267 18.42
-------- ------
$ 77,462 100.00%
======== ======
</TABLE>
59
<PAGE>
The following table presents the maturity distributions of time
deposits of $100,000 or more as of June 30, 1998.
MATURITY PERIOD BALANCE
--------------- -------
(In thousands)
Three months or less.................................. $ 1,863
Three through six months.............................. 412
Six through twelve months............................. 1,197
Over twelve months.................................... 7,530
-------
Total................................................. $11,002
=======
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1998 1997
---------------------------------- --------------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Non-interest-bearing demand............... $ 3,096 4.00% $1,161 $ 1,935 2.73%
NOW accounts.............................. 11,039 14.24 3,773 7,266 10.27
Cash management........................... 84 0.11 (175) 259 0.37
Regular savings accounts.................. 4,805 6.20 455 4,350 6.15
Money market accounts..................... 10,447 13.49 1,547 8,900 12.58
90-day passbooks.......................... 218 0.28 (27) 245 0.35
Fixed rate time deposits which mature:
Within one year.......................... 19,578 25.28 (4,463) 24,041 33.98
After one year, but within three years... 20,510 26.48 2,530 17,980 25.41
After three years, but within five years. 6,637 8.57 1,667 4,970 7.02
After five years......................... 998 1.29 233 765 1.08
Club accounts............................. 50 0.06 5 45 0.06
------- ------ ------ ------- ------
Total................................... $77,462 100.00% $6,706 $70,756 100.00%
======= ====== ====== ======= ======
</TABLE>
60
<PAGE>
The following table sets forth the amount and maturities of time
deposits by weighted average rates at June 30, 1998.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------------
Percent
of Total
Less Than 1-3 3-5 After 5 Time
One Year Years Years Years Total Deposits
-------- ----- ----- ----- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Below 5.00%.......... $ 5,624 $ 2,150 $ 52 $ -- $ 7,826 16.40%
5.00 - 5.99%......... 9,043 7,585 3,235 123 19,986 41.88
6.00 - 6.99%......... 3,341 7,421 2,987 527 14,276 29.91
7.00 - 7.99%......... 766 1,770 299 340 3,175 6.65
8.00 - 8.99%......... 77 889 31 8 1,005 2.11
9.00 - 9.99%......... 528 695 33 -- 1,256 2.63
10.00 - 10.99%....... 199 -- -- -- 199 0.42
------- ------- ------ ---- ------- ------
Total............. $19,578 $20,510 $6,637 $998 $47,723 100.00%
======= ======= ====== ==== ======= ======
</TABLE>
The following table sets forth the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Beginning balance................................ $70,756 $68,232
------- -------
Net increase (decrease)
before interest credited........................ 3,622 (288)
Interest credited................................ 3,084 2,812
------- -------
Net increase in savings
deposits........................................ 6,706 2,524
------- -------
Ending balance................................... $77,462 $70,756
======= =======
</TABLE>
In the unlikely event the Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Bank. Substantially all of the Bank's depositors
are residents of the State of Indiana.
BORROWINGS. Deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has at times relied upon advances from the FHLB of Indianapolis to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB of Indianapolis are secured by certain
first mortgage loans and investment and mortgage-backed securities. At June 30,
1998, the Bank had advances from the FHLB of Indianapolis of $5.3 million. See
Note 6 of Notes to Financial Statements.
The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
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<PAGE>
based either on a fixed percentage of an institution's net worth or on the
FHLB's assessment of the institution's creditworthiness. Under its current
credit policies, the FHLB generally limits advances to 20% of a member's assets,
and short-term borrowing of less than one year may not exceed 10% of the
institution's assets. The FHLB determines specific lines of credit for each
member institution.
The following table sets forth certain information regarding
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At or For the Year Ended
June 30,
-------------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Maximum amount of FHLB advances
outstanding at any month end........................ $6,250 $8,250
Approximate average FHLB advances outstanding........ 4,874 5,420
Year end balance of FHLB advances outstanding........ 5,250 8,250
Approximate weighted average rate paid on
FHLB advances at end of year........................ 5.54% 6.16%
Approximate weighted average rate paid on
FHLB advances during year........................... 6.24% 6.11%
</TABLE>
COMPETITION
The Bank faces intense competition in its primary market area for the
attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from the four commercial banks operating in Corydon and, to a lesser
extent, from other financial institutions, such as brokerage firms and insurance
companies. Three of the four commercial banks in Corydon are affiliated with
large, multi-state bank holding companies and, therefore, have significantly
greater resources than the Bank. Particularly in times of high interest rates,
the Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes primarily from the commercial
banks operating in Corydon. When the Bank opens its new branch office in New
Salisbury, Indiana (see "-- Properties"), it will face competition from two
commercial banks in that town that are affiliated with large, multi-state bank
holding companies. Such competition for deposits and the origination of loans
may limit the Bank's growth in the future. See "RISK FACTORS -- Competition."
PERSONNEL
As of June 30, 1998, the Bank had 26 full-time employees and seven
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees is good.
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<PAGE>
PROPERTIES
The following table sets forth information relating to the Bank's main
office and existing branch office as of June 30, 1998.
<TABLE>
<CAPTION>
Year Approximate
Location Opened Net Book Value (1) Owned/leased Square Footage
- -------- ------ ------------------ ------------ --------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office
- -----------
220 Federal Drive, N.W. 1997 $2,503 Owned 12,000
Corydon, Indiana 47112
Branch Office
- -------------
391 Old Capitol Plaza, N.W. 1997 98 Leased 425
Corydon, Indiana 47112
</TABLE>
________________________
(1) Represents the net book value of land, buildings, furniture, fixtures
and equipment owned by the Bank.
In July 1998, the Bank received approval from the OTS to construct a
full-service branch office on a four acre plot located at 8095 State Highway
135, N.E. in New Salisbury, Indiana, in northern Harrison County. The Bank has
paid a deposit toward the purchase price of the land and is currently
investigating the real estate for compliance with sewer and other land use
regulations. The Bank intends to build a one-story, 3,200 square foot building,
with a drive-up facility, which is under design. The Bank estimates the total
cost of acquiring the land and constructing and equipping the facility at
approximately $700,000. See "USE OF PROCEEDS" and "PRO FORMA DATA." The Bank
opened a temporary branch facility on November 9, 1998 in which to operate until
the construction of the new building is completed, which is estimated during
April 1999.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving
the Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Bank's business. The Bank is not a party to any pending legal proceedings that
it believes would have a material adverse effect on the financial condition or
results of operations of the Bank.
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<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
Directors are elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
The Holding Company's Board of Directors consists of seven persons divided into
three classes, each of which contains approximately one third of the Board. One
class, consisting of John W. Buschemeyer and Kenneth R. Saulman, has a term of
office expiring at the first annual meeting of stockholders after their initial
election by stockholders; a second class, consisting of Samuel E. Uhl and Mark
D. Shireman, has a term of office expiring at the second annual meeting of
stockholders after their initial election by stockholders; and a third class,
consisting of James G. Pendleton, Gerald L. Uhl and Dennis L. Huber, has a term
of office expiring at the third annual meeting of stockholders after their
initial election by stockholders. The Holding Company anticipates holding its
first annual meeting of stockholders in October 1999. If the Holding Company
decides to implement the 1999 Option Plan and the 1999 MRDP prior to the first
anniversary of the conversion, the Holding Company will not hold its first
annual meeting of stockholders until at least six months following consummation
of the conversion so that it may obtain approval of such plans in accordance
with OTS regulations.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The
executive officers of the Holding Company are:
NAME POSITION
---- --------
James G. Pendleton Chairman of the Board and Chief Executive
Officer
Samuel E. Uhl President and Chief Operating Officer
M. Chris Frederick Senior Vice President, Chief Financial
Officer and Treasurer
Joel E. Voyles Secretary
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. Initially, no separate compensation will be paid for service as
an executive officer of the Holding Company. For information concerning the
principal occupations, employment and compensation of the directors and
executive officers of the Holding Company during the past five years, see
"MANAGEMENT OF THE BANK -- Biographical Information."
MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Bank is presently composed of seven
members who are elected for terms of three years, approximately one-third of
whom are elected annually in accordance with the Bylaws of the Bank. The
executive officers of the Bank are elected annually by the Board of Directors
and serve at the Board's discretion. The following table sets forth information
with respect to the directors and executive officers of the Bank, all of whom
will continue to serve as directors and executive officers of the Bank and the
Holding Company.
64
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
Current
Director Term
Name Age (1) Position Since Expires
- ---- ------- -------- ----- -------
<S> <C> <C> <C> <C>
James G. Pendleton 64 Chairman of the Board, Chief 1963 2000
Executive Officer of the Bank
and Director
Mark D. Shireman 46 Director 1989 2000
Dennis L. Huber 58 Director 1997 2000
Samuel E. Uhl(2) 52 President, Chief Operating 1995 1999
Officer and Director
Kenneth R. Saulman 57 Director 1997 1998
John W. Buschemeyer 58 Vice Chairman of the Board 1973 1998
and Director
Gerald L. Uhl(2) 57 Director 1973 1998
<CAPTION>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
NAME AGE (1) POSITION
- ---- ------- --------
<S> <C> <C>
M. Chris Frederick 31 Senior Vice President, Chief Financial Officer and Treasurer
Joel E. Voyles 46 Vice President - Operations and Secretary
C. Howard Egger 29 Vice President - Lending
Sheri L. McGill 35 Vice President - Retail Banking
</TABLE>
_________________
(1) As of June 30, 1998.
(2) Samuel E. Uhl and Gerald L. Uhl are brothers.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the directors and
executive officers of the Bank. Unless otherwise stated, each director and
executive officer has held his or her current occupation for the last five
years.
JAMES G. PENDLETON has been affiliated with the Bank since 1961 and
served as President from 1961 to 1996. He is past President of Corydon Rotary
Club, a Board member of the South Harrison 1998 School Building Corporation,
Vice President of the Harrison County Chamber of Commerce, a member of the
Harrison County Education Council and a member of the Board of Directors of the
Capitol Courts Senior Housing Council.
MARK D. SHIREMAN is the President of James L. Shireman Construction Co.,
Inc. in Corydon, Indiana. He is a director of the Harrison County Chamber of
Commerce and the Southern Indiana Economic Development Council. Mr. Shireman is
also a member of the Corydon Rotary Club, the Lanesville Lions Club and the
Community Foundation of Southern Indiana.
DENNIS L. HUBER is the President and Publisher of O'Bannon Publishing
Company, Inc. in Corydon, Indiana. He is a member of the Corydon Rotary Club,
the Harrison County Chamber of Commerce and the Downtown Corydon Merchants
Association.
SAMUEL E. UHL has been affiliated with the Bank since 1994 and succeeded
Mr. Pendleton as the Bank's President in 1996. Before joining the Bank, Mr. Uhl
was a First Vice President with First Nationwide Bank from 1988 to 1994.
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<PAGE>
He is a director of the United Way, a director of the Corydon Rotary Club and a
committee member of the Harrison County Chamber of Commerce.
KENNETH R. SAULMAN has been employed as a right-of-way supervisor for
Clark County REMC, an electrical service company in Sellersburg, Indiana, since
March 1995. From July 1991 to March 1995 he was an area supervisor for Asplundh
Tree Trimming in Ramsey, Indiana. He served as Harrison County Commissioner from
1992 to 1996. Mr. Saulman is a member of the South Harrison Water Co. and the
Pleasant Ridge United Methodist Church.
JOHN W. BUSCHEMEYER is the President and sole owner of Hurst Lumber Co.
in Corydon, Indiana. He is a member of the Corydon Rotary Club and the Downtown
Corydon Merchants Association.
GERALD L. UHL is the Business Manager for Jacobi Sales, Inc., a farm
implement dealership in Palmyra, Indiana.
M. CHRIS FREDERICK has been affiliated with the Bank since 1990 and has
served in his present position since 1997. He is a member of Leadership Harrison
County and the Parish Relations Board of the Corydon United Methodist Church.
JOEL E. VOYLES has been affiliated with the Bank since December 1996 and
has served in his present position since 1997. From November 1975 to December
1996, he served as Vice President - Deposit Operations Manager of Cumberland
Savings Bank in Louisville, Kentucky.
C. HOWARD EGGER has been affiliated with the Bank since July 1991 and has
served in his present position since 1994. He is the Harrison County President
of the American Heart Association, the Treasurer of the Downtown Corydon
Merchants Association and a member of the Dollars for Scholars Committee.
SHERI L. MCGILL has been affiliated with the Bank since January 1988 and
has held her present position since 1992. She is a member of Leadership Harrison
County.
BENEFICIAL OWNERSHIP OF BANK COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
Persons and groups who beneficially own in excess of 5% of the Bank's
common stock are required to file certain reports disclosing such ownership
pursuant to the EXCHANGE ACT. Based on such reports, the following table sets
forth, as of June 30, 1998, certain information as to those persons who were
beneficial owners of more than 5% of the outstanding shares of Bank common
stock. To the Bank's knowledge, no other person or entity beneficially owned
more than 5% of the Bank's outstanding common stock at June 30, 1998.
The following table also sets forth, as of June 30, 1998, information as
to the shares of Bank common stock beneficially owned by (a) each director and
(b) all executive officers and directors of the Bank as a group. For information
regarding proposed non-binding purchases of Holding Company common stock by the
directors and officers and their anticipated stock ownership upon consummation
of the conversion, see "SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS."
66
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percent of Shares
Name Beneficially Owned (1)(2) Outstanding
- ---- ------------------------- ------------------
<S> <C> <C>
BENEFICIAL OWNERS OF MORE THAN 5%
First Capital, Inc., M.H.C. 300,000 59.52%
DIRECTORS AND EXECUTIVE OFFICERS
James G. Pendleton 7,300 1.4
Mark D. Shireman 7,300 1.4
Dennis L. Huber 600 *
Samuel E. Uhl 7,440 1.5
Kenneth R. Saulman 1,600 *
John W. Buschemeyer 7,300 1.4
Gerald L. Uhl 7,400 1.5
M. Chris Frederick 1,620 *
Joel E. Voyles 1,350 *
C. Howard Egger 1,250 *
Sheri L. McGill 1,200 *
All executive officers and
directors as a group (11 persons) 44,360 8.8
</TABLE>
________________
* Less than 1%.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of Bank
common stock if he or she has voting and/or investment power with respect to
such security. The table includes shares owned by spouses, other immediate
family members in trust, shares held in retirement accounts or funds for the
benefit of the named individuals, and other forms of ownership, over which
shares the persons named in the table may possess voting and/or investment
power.
(2) Includes stock options as follows: Samuel E. Uhl, 2,000 shares; Gerald L.
Uhl, 60 shares (granted to his spouse); M. Chris Frederick, 1,400 shares; Joel
E. Voyles, 1,350 shares; C. Howard Egger, 1,200 shares; Sheri L. McGill, 1,200
shares; and all executive officers and directors as a group, 7,210 shares.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings and
committees of the Board. The Board of Directors held 12 meetings during the
fiscal year ended June 30, 1998. No director attended fewer than 75% of the
total meetings of the Board of Directors and committee meetings on which he
served during the fiscal year ended June 30, 1998.
The Executive Committee, which consists of Directors Buschemeyer,
Saulman, Shireman and Pendleton, meets as necessary between meetings of the full
Board of Directors. All actions of the Executive Committee must be ratified by
the full Board of Directors. The Executive Committee reviews directors' and
officers' compensation and makes recommendations to the full Board of Directors
in this regard. The Executive Committee met two times during the fiscal year
ended June 30, 1998.
The Audit Committee, consisting of Directors Pendleton, G. Uhl and
Shireman, is responsible for developing and monitoring the Bank's audit program.
The Audit Committee selects the outside auditor and meets with them to discuss
the results of the annual audit and any related matters. The Audit Committee
also receives and reviews all the
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<PAGE>
reports and findings and other information presented to them by officers
regarding financial reporting policies and practices. The Audit Committee meets
as necessary and met once during the fiscal year ended June 30, 1998.
The Compensation Committee, consisting of Directors S. Uhl, Buschemeyer
and Shireman, is responsible for establishing and recommending employee and
executive compensation policy to the full Board of Directors. The Compensation
Committee met once during the fiscal year ended June 30, 1998.
The full Board of Directors serves as a nominating committee. The Board
of Directors met once in its capacity as the nominating committee during the
1998 fiscal year.
DIRECTORS' COMPENSATION
FEES. Members of the Bank's Board of Directors receive $400 per month.
Members of committees of the Board of Directors also receive $50 per committee
meeting attended. The Bank paid total Board and committee fees of approximately
$33,000 for the fiscal year ended June 30, 1998.
DIRECTORS' DEFERRED COMPENSATION PLAN. Directors may elect to defer
their monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. Upon the director's termination
of service on or after attaining age 70, the retired director receives between
$217 and $676 per month for 180 months. Benefits are also payable upon
disability, early retirement, other termination of service or death. All
directors participate in the plan other than Directors S. Uhl, Huber and
Saulman, who have elected not to participate.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for
the Chief Executive Officer of the Bank and for each executive officer of the
Bank who received salary and bonus in excess of $100,000 during the year ended
June 30, 1998.
<TABLE>
<CAPTION>
Long-term Compensation
---------------------------
Annual Compensation Awards
-------------------------------- ---------------------------
Restricted Securities
Name And Fiscal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Award Options(#) Compensation(1)
- -------- ------ ------- ----- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
James G. Pendleton 1998 $82,409 $615 $2,262 -- -- $8,810
Chairman of the 1997 77,484 650 2,792 -- -- 7,159
Board and Chief 1996 72,480 600 539 -- -- 7,557
Executive Officer
</TABLE>
________________
(1) Includes directors' fees from the Bank.
EMPLOYMENT AGREEMENTS. In connection with the conversion, the Holding
Company and the Bank (collectively, the "Employers") will enter into three-year
employment agreements with James G. Pendleton, Samuel E. Uhl, M. Chris Frederick
and Joel E. Voyles.
Under the employment agreement, the initial salary levels for Messrs.
Pendleton, Uhl, Frederick and Voyles will be $90,000, $85,000, $45,000 and
$40,000, respectively, which amounts will be paid by the Bank and may be
increased at the discretion of the Board of Directors. On each anniversary of
the commencement date of the employment agreements, the term of each agreement
may be extended for an additional year at the discretion of the Board. The
agreements are terminable by the Employers at any time, by the executive if the
executive is assigned duties inconsistent with his initial position, duties,
responsibilities and status, or upon the occurrence of certain events specified
by federal regulations. In the event that an executive's employment is
terminated without cause or upon the executive's voluntary termination in
certain circumstances, the Bank would be required to honor the terms of the
agreement through
68
<PAGE>
the expiration of the then current term, including payment of current cash
compensation and continuation of employee benefits.
The employment agreements also provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, an executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of the Holding Company's
common stock pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Holding Company representing 25% or more of the combined voting power of the
Holding Company's then outstanding securities, (c) the membership of the Board
of Directors changes as the result of a contested election, or (d) stockholders
of the Holding Company approve a merger, consolidation, sale or disposition of
all or substantially all of the Holding Company's assets, or a plan of partial
or complete liquidation.
The maximum value of the severance benefits under the employment
agreements is 2.99 times the executive's average annual compensation during the
five-year period preceding the effective date of the change in control (the
"base amount"). The employment agreements provide that the value of the maximum
benefit may be distributed, at the executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total present value of which does not exceed 2.99 times the
executive's base amount. Assuming that a change in control had occurred at June
30, 1998 and that said executives elected to receive a lump sum cash payment,
Messrs. Pendleton, Uhl, Frederick and Voyles would be entitled to payments of
approximately $224,000, $209,000, $105,000 and $108,000, respectively. Section
280G of the Internal Revenue Code provides that severance payments that equal or
exceed three times the individual's base amount are deemed to be "excess
parachute payments" if they are contingent upon a change in control. Individuals
receiving excess parachute payments are subject to a 20% excise tax on the
amount of such excess payments, and the Employers would not be entitled to
deduct the amount of such excess payments.
The employment agreement restricts the executive's right to compete
against the Employers for a period of one year from the date of termination of
the agreement if an executive's employment is terminated without cause, except
if such termination occurs after a change in control.
EXECUTIVE RETIREMENT INCOME AGREEMENTS. The Bank has entered into an
agreement with James G. Pendleton to provide him with additional retirement
income. The agreement provides for an annual benefit of $24,500 upon Mr.
Pendleton's retirement at or after attaining age 65, payable for 15 years
following retirement. Benefits are also payable upon disability, early
retirement, other termination of service or death. The Bank has purchased a life
insurance policy with Mr. Pendleton as insured to assist in funding the Bank's
obligation under the agreement. During the fiscal year ended June 30, 1998, the
Bank accrued compensation expense of $19,700 with respect to its obligation
under the agreement.
EMPLOYEE SEVERANCE COMPENSATION PLAN. The Board of Directors of the
Bank plans to adopt an Employee Severance Compensation Plan to provide benefits
to eligible employees in the event of a change in control of the Holding Company
or the Bank (as defined in the plan). Eligible employees are employees with a
minimum of one year of service with the Bank. In general, all employees (except
for officers who enter into separate employment or severance agreements with the
Holding Company and the Bank) will be eligible to participate in the plan. Under
the plan, in the event of a change in control of the Holding Company or the
Bank, eligible employees, other than officers of the Bank, who are terminated or
who terminate employment (but only upon the occurrence of events specified in
the plan) within 12 months of the effective date of a change in control will be
entitled to a payment based on years of service with the Bank with a minimum
payment equal to four weeks of then current base salary and a maximum payment
equal to 26 weeks of then current base salary. However, the maximum payment for
any eligible employee would be equal
69
<PAGE>
to 26 weeks of their then current base salary. In addition, certain officers of
the Bank would be eligible to receive a severance payment in an amount up to the
maximum payment without regard to their length of service. Assuming that a
change in control had occurred at June 30, 1998 and the termination of all
eligible employees, the maximum aggregate payment due under the severance plan
would be approximately $219,000.
BENEFITS
INSURANCE. Full-time employees are provided, with minimal contribution
or expense to them, with group plan insurance that covers hospitalization,
dependent coverage, long-term disability and life insurance. This insurance is
available generally and on the same basis to all full-time employees.
401(K) PLAN. The Bank maintains the First Federal Bank, FSB Profit
Sharing with 401(k) Option Plan (the "401(k) Plan") for the benefit of eligible
employees of the Bank. The 401(k) Plan is intended to be a tax-qualified plan
under Sections 401(a) and 401(k) of the Code. Employees of the Bank who have
completed 1,000 hours of service during 12 consecutive months and who are
employed with the Bank at the end of such period are eligible to participate in
the 401(k) Plan. Participants may contribute up to 20% of their annual
compensation to the 401(k) Plan through a salary reduction election. The Bank
matches participant contributions on a discretionary basis to a maximum of 6% of
the participant's annual compensation. Additional employer profit sharing
contributions of 3% are also made. Participants are at all times 100% vested in
their 401(k) Plan accounts. For the year ended June 30, 1998, the Bank incurred
total contribution-related expenses of approximately $25,000 in connection with
the 401(k) Plan.
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized
the adoption by the Bank of an ESOP for employees of the Bank to become
effective upon the completion of the conversion. The ESOP is intended to satisfy
the requirements for an employee stock ownership plan under the Internal Revenue
Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Full-time employees of the Holding Company and the Bank who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the common stock to be
sold in the conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the common stock. The loan to the ESOP will be repaid principally from the
Bank's contributions to the ESOP and dividends payable on common stock held by
the ESOP over the anticipated 15-year term of the loan. The interest rate for
the ESOP loan is expected to be the prime rate as published in THE WALL STREET
JOURNAL on the closing date of the conversion. See "PRO FORMA DATA." To the
extent that the ESOP is unable to acquire 8% of the common stock sold in the
offering, it is anticipated that such additional shares may be acquired
following the conversion through open market purchases.
In any plan year, the Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the
rate of 20% per year, beginning upon the completion of two years of service. A
participant is fully vested at retirement, in the event of disability or upon
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<PAGE>
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Bank's contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.
It is anticipated that members of the Bank's Board of Directors will
serve as trustees of the ESOP. Under the ESOP, the trustees must vote all
allocated shares held in the ESOP in accordance with the instructions of plan
participants and unallocated shares and allocated shares for which no
instructions are received must be voted in the same ratio on any matter as those
shares for which instructions are given.
Pursuant to Statement of Position 93-6, compensation expense for a
leveraged ESOP is recorded at the fair market value of the ESOP shares when
committed to be released to participants' accounts. See "PRO FORMA DATA."
The ESOP will be subject to the requirements of ERISA and the
regulations of the IRS and the Department of Labor issued thereunder. The Bank
intends to request a determination letter from the IRS regarding the
tax-qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Bank expects that a favorable
determination letter will be received by the ESOP.
STOCK OPTION PLANS. Following its conversion to stock form, the Bank
adopted the 1994 Option Plan for the benefit of key employees and nonemployee
directors, pursuant to which 20,000 shares of Bank common stock were reserved
for issuance upon the exercise of stock options awarded thereunder. As of June
30, 1998, stock options with respect to 7,245 shares reserved under the 1994
Option Plan were outstanding. The Holding Company will assume the 1994 Option
Plan in connection with the conversion, and appropriate adjustments to the
exercise price and the number of shares subject to stock options outstanding
under the plan will be made in accordance with the final Exchange Ratio.
Following the conversion, the Holding Company's Board of Directors
intends to adopt the 1999 Option Plan in order to attract and retain qualified
management personnel and nonemployee directors, to provide such key employees
and nonemployee directors with a proprietary interest in the Holding Company as
an incentive to contribute to the success of the Holding Company and the Bank,
and to reward officers and key employees for outstanding performance. The 1999
Option Plan will provide for the grant of incentive stock options ("ISOs")
intended to comply with the requirements of Section 422 of the Code and for
nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the
1999 Option Plan, stock options may be granted to nonemployee directors and key
employees of the Holding Company and its subsidiaries. Unless sooner terminated,
the 1999 Option Plan will continue in effect for a period of ten years from the
date the 1999 Option Plan is approved by stockholders. Under current OTS
regulations, the approval of a majority vote of the Holding Company's
outstanding shares is required prior to the implementation of the 1999 Option
Plan within one year of the consummation of the conversion.
A number of authorized shares of common stock equal to 10% of the
number of shares sold in connection with the conversion will be reserved for
future issuance under the 1999 Option Plan (88,952 shares based on the issuance
of 889,525 shares at the maximum of the Estimated Valuation Range). Shares
acquired upon exercise of options will be authorized but unissued shares or
treasury shares. In the event of a stock split, reverse stock split, stock
dividend, or similar event, the number of shares of common stock under the 1999
Option Plan, the number of shares to which any award relates and the exercise
price per share under any option may be adjusted by the Committee (as defined
below) to reflect the increase or decrease in the total number of shares of
common stock outstanding.
The 1999 Option Plan will be administered and interpreted by the Board
of Directors. Subject to applicable OTS regulations, the Board will determine
which nonemployee directors and key employees will be granted options, whether,
in the case of officers and employees, such options will be ISOs or NQOs, the
number of shares subject to each option, and the exercisability of such options.
All options granted to nonemployee directors will be NQOs. The per share
exercise price of all options will equal at least 100% of the fair market value
of a share of common stock on the date the option is granted.
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It is anticipated that all options granted under the 1999 Option Plan
will be granted subject to a vesting schedule whereby the options become
exercisable over a specified period following the date of grant. Under OTS
regulations, if the 1999 Option Plan is implemented within the first year
following consummation of the conversion the minimum vesting period will be five
years. All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the 1999 Option Plan) of the
Holding Company or the Bank to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that, if the
1999 Option Plan is implemented prior to the first anniversary of the
conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Bank.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Board. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. Except as authorized by the Board,
all stock options are nontransferable except by will or the laws of descent or
distribution.
Under current provisions of the Internal Revenue Code, the federal tax
treatment of ISOs and NQOs is different. With respect to ISOs, an optionee who
satisfies certain holding period requirements will not recognize income at the
time the option is granted or at the time the option is exercised. If the
holding period requirements are satisfied, the optionee will generally recognize
capital gain or loss upon a subsequent disposition of the shares of common stock
received upon the exercise of a stock option. If the holding period requirements
are not satisfied, the difference between the fair market value of the common
stock on the date of grant and the option exercise price, if any, will be
taxable to the optionee at ordinary income tax rates. A federal income tax
deduction generally will not be available to the Holding Company as a result of
the grant or exercise of an ISO, unless the optionee fails to satisfy the
holding period requirements. With respect to NQOs, the grant of an NQO generally
is not a taxable event for the optionee and no tax deduction will be available
to the Holding Company. However, upon the exercise of an NQO, the difference
between the fair market value of the common stock on the date of exercise and
the option exercise price generally will be treated as compensation to the
optionee upon exercise, and the Holding Company will be entitled to a
compensation expense deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time,
the Holding Company and the Bank anticipate that if stockholder approval is
obtained, the Holding Company and the Bank would provide awards to its directors
and key employees to the extent and under terms and conditions permitted by
applicable regulations. Under current OTS regulations, if the 1999 Option Plan
is implemented within one year of the consummation of the conversion, (i) no
officer or employee may receive an award of options covering in excess of 25%,
(ii) no nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, may not receive in excess of 30% of the number of shares
reserved for issuance under the 1999 Option Plan.
MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN. Following the conversion,
the Holding Company's Board of Directors intends to adopt the 1999 MRDP for
non-employee directors, officers and employees of the Holding Company and the
Bank. The Board of Directors believes that adoption of the 1999 MRDP is
important to the Bank's overall compensation strategy, which emphasizes
providing appropriate incentives to attract and retain capable employees.
Specifically, the adoption of the 1999 MRDP will enable the Holding Company to
provide participants with a proprietary interest in the Holding Company as an
incentive to contribute to the success of the Holding Company.
The 1999 MRDP will be submitted to stockholders for approval at a
meeting following consummation of the conversion. The approval of a majority
vote of the Holding Company's stockholders is required prior to implementation
of the 1999 MRDP within one year of the consummation of the conversion. The 1999
MRDP expects to acquire a number of shares of common stock equal to 4% of the
shares sold in the offering (35,581 shares based on the sale of
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889,525 shares at the maximum of the Estimated Valuation Range). Such shares
will be acquired on the open market, if available, with funds contributed by the
Bank to a trust which the Holding Company may establish in conjunction with the
1999 MRDP ("1999 MRDP Trust") or from authorized but unissued shares or treasury
shares of the Holding Company.
The Board of Directors will administer the 1999 MRDP, members of which
will also serve as trustees of the 1999 MRDP Trust, if formed. The trustees will
be responsible for the investment of all funds contributed by the Bank to the
1999 MRDP Trust.
It is anticipated that shares of common stock granted pursuant to the
1999 MRDP will be in the form of restricted stock payable ratably over a
five-year period following the date of grant. During the period of restriction,
all shares will be held in escrow by the Holding Company or by the 1999 MRDP
Trust. If a recipient terminates employment for reasons other than death or
disability, the recipient will forfeit all rights to allocated shares that are
then subject to restriction. In the event of the recipient's death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. In addition, all allocated shares will become unrestricted in the
event of a change in control (as defined in the 1999 MRDP) of the Holding
Company to the extent authorized or not prohibited by applicable law or
regulations. Current OTS regulations, however, do not permit accelerated vesting
of 1999 MRDP awards in the event of a change in control. Compensation expense in
the amount of the fair market value of the common stock at the date of the grant
to the recipient will be recognized during the years in which the shares vest.
The Board of Directors may terminate the 1999 MRDP at any time and,
upon termination, all unallocated shares of common stock will revert to the
Holding Company.
A recipient of a 1999 MRDP award in the form of restricted stock
generally will not recognize income upon an award of shares of common stock, and
the Holding Company will not be entitled to a federal income tax deduction,
until the termination of the restrictions. Upon such termination, the recipient
will recognize ordinary income in an amount equal to the fair market value of
the common stock at the time and the Holding Company will be entitled to a
deduction in the same amount after satisfying federal income tax withholding
requirements. However, the recipient may elect to recognize ordinary income in
the year the restricted stock is granted in an amount equal to the fair market
value of the shares at that time, determined without regard to the restrictions.
In that event, the Holding Company will be entitled to a deduction in such year
and in the same amount. Any gain or loss recognized by the recipient upon
subsequent disposition of the stock will be either a capital gain or capital
loss.
Although no specific award determinations have been made, the Bank
anticipates that if stockholder approval is obtained it would provide awards to
its key employees to the extent permitted by applicable regulations. OTS
regulations currently provide that no individual officer or employee may receive
more than 25% and no individual non-employee director may receive more than 5%
(30% in the aggregate) of the shares reserved for issuance under any stock
compensation plan.
TRANSACTIONS WITH THE BANK
Director Gerald L. Uhl is a shareholder and the Business Manager of
Jacobi Sales, Inc. ("JSI"), a farm implement dealership that has contracted with
the Bank to provide sales financing to customers of JSI. The Bank does not grant
preferential credit under this arrangement. All sales contracts are presented to
the Bank on a 50% recourse basis, with JSI responsible for the sale and
disposition of any repossessed equipment. During the fiscal year ended June 30,
1998, the Bank granted approximately $612,000 of credit to JSI customers. At
June 30, 1998, $21,000 of such loans were delinquent 30 days or more.
Federal regulations require that all loans or extensions of credit by
the Bank to executive officers and directors must generally be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons (unless
the loan or extension of credit is made under a benefit
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program generally available to all other employees and does not give preference
to any insider over any other employee) and must not involve more than the
normal risk of repayment or present other unfavorable features. The Bank's
policy is not to make any new loans or extensions of credit to the Bank's
executive officers and directors at different rates or terms than those offered
to the general public. In addition, loans made to a director or executive
officer in an amount that, when aggregated with the amount of all other loans to
such person and his or her related interests, are in excess of the greater of
$25,000, or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors. See "REGULATION -- Federal Regulation of Savings
Associations -- Transactions with Affiliates." The aggregate amount of loans by
the Bank to its executive officers and directors and their associates was
approximately $960,000 at June 30, 1998, or approximately 5.4% of the Holding
Company's pro forma stockholders' equity (based on the issuance of shares at the
maximum of the Estimated Valuation Range), all of which were current at that
date.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Bank's mortgage documents. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Bank's compliance with various regulatory requirements. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Bank and its operations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member
of the FHLB-Indianapolis, is required to acquire and hold shares of capital
stock in the FHLB-Indianapolis in an amount equal to the greater of (i) 1.0% of
the aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Indianapolis. The
Bank complied with this requirement with an investment in FHLB-Indianapolis
stock of $589,000 at June 30, 1998. Among other benefits, the FHLB-Indianapolis
provides a central credit facility primarily for member institutions. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the
FHLB-Indianapolis.
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FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the BIF and the SAIF. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over the Bank.
The Bank's accounts are insured by the SAIF to the maximum extent
permitted by law. The Bank pays deposit insurance premiums based on a risk-based
assessment system established by the FDIC. Under applicable regulations,
institutions are assigned to one of three capital groups that are based solely
on the level of an institution's capital -- "well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory concern.
The matrix so created results in nine assessment risk classifications, with
rates that until September 30, 1996 ranged from 0.23% for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the SAIF
achieving its designated reserve ratio. In connection therewith, the FDIC
reduced the assessment schedule for SAIF members, effective January 1, 1997, to
a range of 0% to 0.27%, with most institutions, including the Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency
is required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
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substantially similar regulations to implement this system of prompt corrective
action. Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, has a Tier I risk-based
capital ratio of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized;"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0%
or has a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the Bank may not make any new investment or
engage in activities that would not be permissible for national banks; (ii) the
Bank may not establish any new branch office where a national bank located in
the savings institution's home state would not be able to establish a branch
office; (iii) the Bank shall be ineligible to obtain new advances from any FHLB;
and (iv) the payment of dividends by the Bank shall be subject to the rules
regarding the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
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Currently, the QTL test requires that either an institution qualify as
a domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At June 30,
1998, the Bank was in compliance with the QTL test.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMELS examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less
than 1.5% of adjusted total assets. "Tangible capital" is defined, generally, as
core capital minus any "intangible assets" other than purchased mortgage
servicing rights.
Savings associations must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned
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a 100% risk weight, as are nonqualifying residential mortgage loans and that
portion of land loans and nonresidential construction loans that do not exceed
an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (I.E., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
Bank's assets, as calculated in accordance with guidelines set forth by the OTS.
A savings association whose measured interest rate risk exposure exceeds 2% must
deduct an interest rate risk component in calculating its total capital under
the risk-based capital rule. The interest rate risk component is an amount equal
to one-half of the difference between the institution's measured interest rate
risk and 2%, multiplied by the estimated economic value of the Bank's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and risk-
based capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. The rule also provides that the
Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the OTS-calculated
amount. The OTS has postponed the date that the component will first be deducted
from an institution's total capital.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a
table that sets forth in terms of dollars and percentages the OTS tangible, core
and risk-based capital requirements, the Bank's historical amounts and
percentages at June 30, 1998 and pro forma amounts and percentages based upon
the assumptions stated therein.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends. The
regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its capital
requirement (both before and after the proposed capital distribution). A Tier 1
savings association may make (without application but upon prior notice to, and
no objection made by, the OTS) capital distributions during a calendar year up
to 100% of its net income to date during the calendar year plus one-half its
surplus capital ratio (I.E., the amount of capital in excess of its requirement)
at the beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its requirement (both before
and after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of its
net income during the previous four quarters depending on how close the Bank is
to meeting its capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the
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minimum capital requirement (either before or after the proposed capital
distribution). Tier 3 associations may not make any capital distributions
without prior approval from the OTS.
The Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
RESTRICTIONS ON REPURCHASE OF STOCK
Pursuant to OTS regulations, an OTS-regulated savings association (and
its holding company) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director. Furthermore, repurchases of
any common stock are prohibited if the effect thereof would cause the
association's regulatory capital to be reduced below (a) the amount required for
the liquidation account or (b) the regulatory capital requirements imposed by
the OTS. Repurchases are generally prohibited during the first year following
conversion. Upon ten days' written notice to the OTS, and if the OTS does not
object, an institution may make open market repurchases of its outstanding
common stock during years two and three following the conversion, provided that
certain regulatory conditions are met and that the repurchase would not
adversely affect the financial condition of the association. Any repurchases of
common stock by the Holding Company, therefore, would be subject to these
regulatory restrictions unless the OTS would provide otherwise.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At June 30, 1998, the Bank's regulatory limit on
loans to one borrower was $2.6 million. At June 30, 1998, the Bank's largest
aggregate amount of loans to one borrower was $707,000.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings
association may establish operating subsidiaries to engage in any activity that
the savings association may conduct directly and may establish service
corporation subsidiaries to engage in certain preapproved activities or, with
approval of the OTS, other activities reasonably related to the activities of
financial institutions. When a savings association establishes or acquires a
subsidiary or elects to conduct any new activity through a subsidiary that the
Bank controls, the savings association must notify the FDIC and the OTS 30 days
in advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the Bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
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Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or extension
of credit by the Bank to an affiliate must be secured by collateral in
accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
COMMUNITY REINVESTMENT ACT. Savings associations are also subject to
the provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the saving association's record
in meeting the credit needs of the community serviced by the savings
association, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, such assessment is required of any savings association which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding
company, the Holding Company generally is not subject to activity restrictions
under the HOLA. If the Holding Company acquires control of another savings
association as a separate subsidiary other than in a supervisory acquisition, it
would become a multiple savings and loan holding company. There generally are
more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets
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owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized 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 as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which the
Bank ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
FEDERAL TAXATION
GENERAL. Upon consummation of the conversion, the Holding Company and
the Bank will report their income on a fiscal year basis using the accrual
method of accounting and will be subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly the
Bank's reserve for bad debts discussed below. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company. For
additional information regarding income taxes, see Note 8 of Notes to
Consolidated Financial Statements.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the percentage of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture all
or a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). For taxable years beginning after
December 31, 1995, the Bank's bad debt deduction must be determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if the Bank is a "large" association (assets in excess of
$500 million) on the basis of net charge-offs during the taxable year. The new
rules allowed an institution to suspend bad debt reserve recapture for the 1996
and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to postpone
the reserve recapture, it must begin its six year recapture no later than the
1998 tax year. The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continues to
be subject to provisions of present law referred to below that require recapture
of the pre-1988 bad debt reserve in the case of certain excess distributions to
shareholders.
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DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" and "DIVIDEND POLICY" for
limits on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a
tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess
of the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. In
addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI
is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Bank will not file a consolidated tax
return, except that if the Holding Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
AUDITS. Neither the MHC's not the Bank's federal income tax returns
have been audited within the last five years.
INDIANA TAXATION
Indiana imposes an 8.5% franchise tax based on a financial
institution's adjusted gross income as defined by statute. In computing adjusted
gross income, deductions for municipal interest, U.S. Government interest, the
bad debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. The MHC's and the Bank's state income tax returns were
audited for the years ended June 30, 1993, 1994 and 1995 without amendment and
without additional tax liability. The MHC's and the Bank's state income tax
returns have not been audited for any subsequent period.
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THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY
THE MEMBERS OF THE MHC AND THE STOCKHOLDERS OF THE BANK ENTITLED TO VOTE THEREON
AND TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS
APPROVAL. OTS APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
THE PLAN OF CONVERSION.
GENERAL
On June 18, 1998, the Boards of Directors of the MHC and the Bank
unanimously adopted the Plan of Conversion, pursuant to which the Bank will
convert from the mutual holding company form of organization to the stock
holding company form of organization. THE FOLLOWING DISCUSSION OF THE PLAN OF
CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION,
WHICH IS ATTACHED AS EXHIBIT A TO BOTH THE MHC'S PROXY STATEMENT AND THE BANK'S
PROXY STATEMENT, AND WHICH IS AVAILABLE TO BOTH MEMBERS OF THE MHC AND
STOCKHOLDERS OF THE BANK UPON REQUEST. The Plan of Conversion is also filed as
an exhibit to the Registration Statement. See "ADDITIONAL INFORMATION." The OTS
has approved the Plan of Conversion, subject to its approval by the members of
the MHC and the stockholders of the Bank and to the satisfaction of certain
other conditions.
Pursuant to the Plan of Conversion, (i) the MHC will convert from a
federally-chartered mutual holding company to a federally-chartered interim
stock savings bank (Interim A) and simultaneously merge with and into the Bank
and (ii) an interim federal stock savings bank (Interim B) will be formed as a
wholly-owned subsidiary of the Holding Company and Interim B will merge with and
into the Bank. As a result of the merger of Interim A with and into the Bank,
the MHC will cease to exist and the shares of Bank common stock held by the MHC
will be canceled. As a result of the merger of Interim B with and into the Bank,
the Bank will become a wholly owned subsidiary of the Holding Company and the
common stock of the Bank will be converted into common stock of the Holding
Company pursuant to the Exchange Ratio, which will result in the holders of such
shares owning in the aggregate approximately the same percentage of the Holding
Company common stock to be outstanding upon the completion of the conversion as
the percentage of the Bank common stock owned by them in the aggregate
immediately prior to consummation of the conversion, but before giving effect to
(a) the payment of cash in lieu of issuing fractional shares and (b) any shares
of common stock purchased by the Bank's stockholders in this offering.
As part of the conversion, the Holding Company is offering shares of
its common stock in the Subscription Offering to holders of subscription rights
in the following order of priority: (i) Eligible Account Holders (depositors of
the Bank with $50.00 or more on deposit as of the close of business on March 31,
1997); (ii) Supplemental Eligible Account Holders (depositors of the Bank with
$50.00 or more on deposit as of the close of business on September 30, 1998);
and (iii) Other Members (depositors of the Bank as of the close of business on
October 31, 1998 and borrowers of the Bank with loans outstanding as of the
close of business on February 1, 1993, which continue to be outstanding as of
the close of business on October 31, 1998).
Concurrently with the Subscription Offering, any shares of common stock
not subscribed for in the Subscription Offering may be offered for sale in the
Direct Community Offering to members of the general public, with priority being
given first to stockholders of the Bank as of the close of business on the
Voting Record Date (who are not Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members) and then to natural persons and trusts of
natural persons residing in the Local Community. Shares of common stock not sold
in the Subscription Offering and the Direct Community Offering may be offered in
the Syndicated Community Offering. Regulations require that the Direct Community
Offering and the Syndicated Community Offering be completed within 45 days after
completion of the fully extended Subscription Offering unless extended by the
Bank or the Holding Company with the approval of the regulatory authorities. If
the Syndicated Community Offering is determined not to be feasible because of
market conditions or otherwise, the Board of Directors of the Bank will consult
with the regulatory authorities to determine an appropriate alternative method
for selling the unsubscribed shares of common stock. The Plan of
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Conversion provides that the conversion must be completed within 24 months after
the date of the approval of the Plan of Conversion by the members of the MHC.
No sales of common stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offering unless the
Plan of Conversion is approved by the members of the MHC and the stockholders of
the Bank. The completion of this offering, however, is subject to market
conditions and other factors beyond the Bank's control. No assurance can be
given as to the length of time after approval of the Plan of Conversion by the
members of the MHC and the stockholders of the Bank that will be required to
complete the Direct Community Offering or Syndicated Community Offering or other
sale of the shares of common stock. If delays are experienced, significant
changes may occur in the estimated pro forma market value of the MHC and the
Bank, as converted, together with corresponding changes in the net proceeds
realized by the Holding Company from the sale of its common stock.
Orders for shares of common stock will not be filled until at least
$6,574,750 of common stock has been subscribed for or sold and the OTS approves
the final valuation and the conversion closes. If the conversion is not
completed within 45 days after the last day of the fully extended Subscription
Offering and the OTS consents to an extension of time to complete the
conversion, subscribers will be given the right to increase, decrease or rescind
their subscriptions. Unless an affirmative indication is received from
subscribers that they wish to continue to subscribe for shares, the funds will
be returned promptly, together with accrued interest at the Bank's passbook rate
from the date payment is received until the funds are returned to the
subscriber. If such period is not extended, or, in any event, if the conversion
is not completed, all withdrawal authorizations will be terminated and all funds
received will be promptly returned together with accrued interest at the Bank's
passbook rate from the date payment is received until the conversion is
terminated.
PURPOSES OF CONVERSION
The MHC, as a federally chartered mutual holding company, does not have
stockholders and has no authority to issue capital stock. As a result of the
conversion, the Holding Company will be structured in the form used by holding
companies of commercial banks, most business entities and a growing number of
savings institutions. The holding company form of organization will provide the
Holding Company with the ability to diversify the Holding Company's and the
Bank's business activities through acquisition of or mergers with both stock
savings institutions and commercial banks, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Holding Company will be in a position after the
conversion, subject to regulatory limitations and the Holding Company's
financial position, to take advantage of any such opportunities that may arise.
In their decision to pursue the conversion, the Boards of Directors of
the MHC and the Bank considered various regulatory uncertainties associated with
the mutual holding company structure including the ability to waive dividends in
the future as well as the general uncertainty regarding a possible elimination
of the federal savings association charter.
The conversion will be important to the future growth and performance
of the holding company organization by providing a larger capital base to
support the operations of the Bank and Holding Company and by enhancing their
future access to capital markets, their ability to diversify into other
financial services related activities, and their ability to provide services to
the public.
The conversion also will result in a larger number of shares of Holding
Company common stock to be outstanding as compared to the number of outstanding
shares of Bank common stock, which will increase the likelihood of the
development of an active and liquid trading market for the common stock. See
"MARKET FOR COMMON STOCK." In addition, the conversion will permit the Holding
Company to engage in stock repurchases without adverse federal income tax
consequences. The Bank cannot repurchase its common stock without triggering
adverse federal income tax consequences. Currently, the Holding Company has no
specific plans regarding any stock repurchases.
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An additional benefit of the conversion will be an increase in the
accumulated earnings and profits of the Bank for federal income tax purposes.
When the Bank (as a mutual institution) transferred substantially all of its
assets and liabilities to its stock savings bank successor in the MHC
reorganization, its accumulated earnings and profits tax attribute was not able
to be transferred to the Bank because no tax-free reorganization was involved.
Accordingly, this tax attribute was retained by the Bank when it converted its
charter to that of the MHC, even though the underlying retained earnings were
transferred to the Bank. The conversion has been structured to re-unite the
accumulated earnings and profits tax attribute retained by the MHC in the MHC
reorganization with the retained earnings of the Bank by merging the MHC with
and into the Bank in a tax-free reorganization. This transaction will increase
the Bank's ability to pay dividends to the Holding Company in the future. See
"DIVIDEND POLICY."
If the Bank had undertaken a standard conversion involving the
formation of a stock holding company in 1993, applicable OTS regulations would
have required a greater amount of common stock to be sold than the amount sold
in the MHC reorganization. Management believed that it was advisable to invest
profitably the proceeds raised in the MHC reorganization prior to raising the
larger amount of capital that would have been raised at one time in a standard
conversion. A standard conversion in 1993 also would have immediately eliminated
all aspects of the mutual form of organization.
In light of the foregoing, the Boards of Directors of the MHC and the
Bank believe that the conversion is in the best interests of the MHC and the
Bank, their respective members and stockholders, and the communities served by
the Bank.
EFFECTS OF CONVERSION ON DEPOSITORS AND BORROWERS OF THE BANK
GENERAL. Prior to the conversion, each depositor in the Bank has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the MHC based upon the balance in his or her account, which interest
may only be realized in the event of a liquidation of the MHC. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from such deposit account. A depositor who reduces or closes his
or her account receives a portion or all of the balance in the account but
nothing for his or her ownership interest in the net worth of the MHC, which is
lost to the extent that the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to
realize the value of their ownership interest in the MHC, which has realizable
value only in the unlikely event that the MHC is liquidated. In such event, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of the MHC after other claims are paid.
Upon consummation of the conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of the net worth of the Holding
Company. The common stock is separate and apart from deposit accounts and cannot
be and is not insured by the FDIC or any other governmental agency. Certificates
are issued to evidence ownership of the permanent stock. The stock certificates
are transferable, and therefore the stock may be sold or traded if a purchaser
is available with no effect on any deposit and/or loan account(s) the seller may
hold in the Bank.
CONTINUITY. The conversion will not interrupt the Bank's normal
business of accepting deposits and making loans. The Bank will continue to be
subject to regulation by the OTS and the FDIC. After the conversion, the Bank
will continue to provide services for depositors and borrowers under current
policies by its present management and staff.
The directors and officers of the Bank at the time of the conversion
will continue to serve as directors and officers of the Bank after the
conversion. The directors and officers of the Holding Company consist of
individuals currently serving as directors and officers of the MHC and the Bank,
and they will retain their positions in the Holding Company after the
conversion.
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EFFECT ON THE BANK'S COMMON STOCK. Under the Plan of Conversion, upon
consummation of the conversion, each share of the Bank's common stock held by
the Bank's public stockholders (other than the Bank's public stockholders who
exercise and perfect their rights of dissent and appraisal) will be converted
into shares of Holding Company common stock based upon the Exchange Ratio
without any further action on the part of the holder thereof. Upon surrender of
certificates representing shares of Bank common stock, Holding Company common
stock will be issued in exchange for such shares. See "-- Delivery and Exchange
of Stock Certificates."
Upon consummation of the conversion, the public stockholders of the
Bank will become stockholders of the Holding Company. For a description of
certain changes in the rights of stockholders as a result of the conversion, see
"COMPARISON OF STOCKHOLDERS' RIGHTS."
VOTING RIGHTS. Presently, depositors and borrowers of the Bank are
members of, and have voting rights in, the MHC as to all matters requiring
membership action. Upon completion of the conversion, the MHC will cease to
exist and all voting rights in the Bank will be vested in the Holding Company as
the sole stockholder of the Bank. Exclusive voting rights with respect to the
Holding Company will be vested in the holders of the Holding Company's common
stock. Depositors and borrowers of the Bank will not have voting rights in the
Holding Company after the conversion, except to the extent that they become
stockholders of the Holding Company.
SAVINGS ACCOUNTS AND LOANS. The Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the conversion. Furthermore, the conversion will not affect the loan
accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Bank.
TAX EFFECTS. The Bank has received an opinion from Breyer & Aguggia
LLP, Washington, D.C., that the conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(A) of the Internal Revenue Code.
Among other things, the opinion provides that:
(i) the conversion of the MHC from a mutual holding company to a
federally-chartered interim stock savings bank (Interim A) and
its simultaneous merger with and into the Bank, with the Bank as
the surviving entity, will qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Internal Revenue
Code;
(ii) no gain or loss will be recognized by the Bank upon the receipt
of the assets of the MHC in such merger;
(iii) the merger of Interim B with and into the Bank, with the Bank as
the surviving entity, will qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Internal Revenue
Code;
(iv) no gain or loss will be recognized by Interim B upon the
transfer of its assets to the Bank;
(v) no gain or loss will be recognized by the Bank upon the receipt
of the assets of Interim B;
(vi) no gain or loss will be recognized by the Holding Company upon
the receipt of Bank common stock solely in exchange for Holding
Company common stock;
(vii) no gain or loss will be recognized by the Public Stockholders
upon the receipt of shares of the Holding Company's common stock
in exchange for their shares of Bank common stock;
(viii) the basis of the shares of common stock of the Holding Company
to be received by the Bank's public stockholders will be the
same as the basis of the shares of common stock of the Bank
surrendered in exchange therefor, before giving effect to any
payment of cash in lieu of fractional shares;
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(ix) the holding period of the shares of Holding Company common stock
to be received by the Bank's public stockholders will include
the holding period of the Bank common stock, provided that the
shares of Bank common stock were held as a capital asset on the
date of the exchange;
(x) no gain or loss will be recognized by the Holding Company upon
the sale of shares of its common stock in this offering;
(xi) the Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members will recognize gain, if any, upon the
issuance to them of withdrawable savings accounts in the Bank
following the conversion, interests in the liquidation account
and nontransferable subscription rights to purchase common
stock, but only to the extent of the value, if any, of the
subscription rights; and
(xii) the tax basis to the holders of shares of common stock purchased
in this offering will be the amount paid therefor, and the
holding period for the shares of common stock will begin on the
date of consummation of this offering, if purchased through the
exercise of Subscription Rights, and on the day after the date
of purchase, if purchased in the Direct Community Offering or
the Syndicated Community Offering.
Unlike a private letter ruling issued by the IRS, an opinion of counsel
is not binding on the IRS and the IRS could disagree with the conclusions
reached therein. In the event of such disagreement, no assurance can be given
that the conclusions reached in an opinion of counsel would be sustained by a
court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of subscription rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the subscription rights are deemed to have a
fair market value. Keller & Company, a financial consulting firm retained by the
Bank, whose findings are not binding on the IRS, has issued a letter indicating
that the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration and afford the recipients the right only to purchase shares of
the common stock at a price equal to its estimated fair market value, which will
be the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of common stock. If the subscription rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their subscription rights. The Bank could also recognize a
gain on the distribution of such subscription rights. Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisors as to the tax consequences in the event the
subscription rights are deemed to have a fair market value.
The Bank has also received an opinion from Monroe Shine & Co., Inc.
that, assuming the conversion does not result in any federal income tax
liability to the Bank, its account holders, or the Holding Company,
implementation of the Plan of Conversion will not result in any Indiana tax
liability to such entities or persons.
The opinions of Breyer & Aguggia LLP and Monroe Shine & Co., Inc. and
the letter from Keller & Company, are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
THE PRECEDING DISCUSSION SUMMARIZES THE MATERIAL TAX CONSEQUENCES OF
THE CONVERSION. PROSPECTIVE INVESTORS, HOWEVER, ARE URGED TO CONSULT WITH THEIR
OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO
THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the MHC, each depositor of the Bank would receive his or her pro rata share of
any assets of the MHC remaining after payment of claims of all creditors. Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his or her
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deposit account was to the total value of all deposit accounts in the Bank at
the time of liquidation. After the conversion, each depositor, in the event of a
complete liquidation of the Bank, would have a claim as a creditor of the same
general priority as the claims of all other general creditors of the Bank.
However, except as described below, his or her claim would be solely in the
amount of the balance in his or her deposit account plus accrued interest. Each
stockholder would not have an interest in the value or assets of the Bank or the
Holding Company above that amount.
The Plan of Conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in an
amount equal to the amount of any dividends waived by the MHC plus the greater
of (i) the Bank's retained earnings of $4.0 million at June 30, 1992, the date
of the latest statement of financial condition contained in the final offering
circular utilized in the MHC reorganization, or (ii) 59.5% of the Bank's total
stockholders' equity as reflected in its latest statement of financial condition
contained in the final prospectus utilized in this offering. As of the date of
this prospectus, the initial balance of the liquidation account would be $7.3
million. Each Eligible Account Holder and Supplemental Eligible Account Holder,
if he or she were to continue to maintain his or her deposit account at the
Bank, would be entitled, upon a complete liquidation of the Bank after the
conversion to an interest in the liquidation account prior to any payment to the
Holding Company as the sole stockholder of the Bank. Each Eligible Account
Holder and Supplemental Eligible Account Holder would have an initial interest
in such liquidation account for each deposit account, including passbook
accounts, transaction accounts such as checking accounts, money market deposit
accounts and certificates of deposit, held in the Bank at the close of business
on March 31, 1997 or September 30, 1998, as the case may be. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account for each of his or her deposit
accounts based on the proportion that the balance of each such deposit account
on the Eligibility Record Date (March 31, 1997) or the Supplemental Eligibility
Record Date (September 30, 1998), as the case may be, bore to the balance of all
deposit accounts in the Bank on such date.
If, however, on any June 30 annual closing date of the Bank, commencing
June 30, 1998, the amount in any deposit account is less than the amount in such
deposit account on June 30, 1998, as the case may be, or any other annual
closing date, then the interest in the liquidation account relating to such
deposit account would be reduced by the proportion of any such reduction, and
such interest will cease to exist if such deposit account is closed. In
addition, no interest in the liquidation account would ever be increased despite
any subsequent increase in the related deposit account. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Holding
Company as the sole stockholder of the Bank.
EXCHANGE OF BANK COMMON STOCK
As part of the conversion, each share of Bank common stock held by the
MHC (300,000 shares, or 59.5% of the outstanding shares, as of the date of this
prospectus) will be canceled and each share of Bank common stock held by the
Bank's public stockholders (204,015 shares, or 40.5% of the outstanding shares,
as of the date of this prospectus) will be exchanged for shares of Holding
Company common stock. The number of shares of Holding Company common stock to be
issued to the Bank's public stockholders will be based on an Exchange Ratio that
will result in the Bank's public stockholders owning in the aggregate
approximately 40.5% of the outstanding shares of Holding Company common stock
before giving effect to any (i) payment of cash to the Bank's public
stockholders who exercise and perfect their rights of dissent and appraisal,
(ii) payment of cash in lieu of issuing fractional shares of Holding Company
common stock and (iii) shares purchased by the Bank's public stockholders in the
offering. The final Exchange Ratio will be based on the percentage ownership
interest of the Bank's public stockholders in the Bank and the number of shares
sold in this offering and not on the market value of Bank common stock.
Accordingly, the value of the shares of Holding Company common stock to be
received for each share of Bank common stock may be less than the market value
of Bank common stock at the time of exchange. See "-- Stock Pricing, Exchange
Ratio and Number of Shares to be Issued in the Conversion."
Pursuant to OTS regulations, stockholders of the Bank will have dissent
and appraisal rights with respect to the conversion because the Bank's common
stock is not listed on the Nasdaq Stock Market. Accordingly, even if the
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conversion is approved, stockholders of the Bank who exercise and perfect their
rights of dissent and appraisal under OTS regulations will have the right to
receive cash equal to the fair market value of their shares of Bank common stock
as determined by regulation, rather than exchanging them for shares of Holding
Company common stock. DO NOT SEND YOUR BANK STOCK CERTIFICATES AT THIS TIME
REGARDLESS OF WHETHER OR NOT YOU INTEND TO EXERCISE AND PERFECT YOUR RIGHTS OF
DISSENT AND APPRAISAL. The Bank will send to each Bank stockholder a proxy
statement for the Bank's 1998 Annual Meeting of Stockholders at which the Plan
of Conversion will be considered, which will include detailed instructions on
how to exercise and perfect dissent and appraisal rights. See "THE CONVERSION --
Dissent and Appraisal Rights." For Bank stockholders who do not wish to exercise
their dissent and appraisal rights but want to exchange their shares of Bank
common stock for shares of Holding Company common stock, the Holding Company
will mail to each such stockholder exchange instructions and a transmittal
letter after the consummation of the conversion. See "-- Delivery and Exchange
of Stock Certificates."
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion,
nontransferable subscription rights to purchase shares of common stock have been
issued to persons and entities entitled to purchase the common stock in the
Subscription Offering. The amount of the common stock which these parties may
purchase will be subject to the availability of the common stock for purchase
under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the common stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at the Bank as of the close of business on March 31, 1997 will
receive nontransferable Subscription Rights to subscribe for up to the greater
of 25,000 shares of common stock, one-tenth of one percent of the total offering
of common stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock to be issued
by a fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of subscription rights
in this category results in an oversubscription, shares of common stock will be
allocated among subscribing Eligible Account Holders so as to permit each
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make such person's total allocation equal 100 shares or the number
of shares actually subscribed for, whichever is less. Thereafter, unallocated
shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all subscribing Eligible Account
Holders. Subscription rights received by officers and directors in this category
based on their increased deposits in the Bank in the one year period preceding
March 31, 1997 are subordinated to the subscription rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable subscription rights to purchase up to 8% of the shares
of common stock sold in the conversion. The ESOP intends to purchase 8% of the
shares of common stock sold in the conversion. In the event the number of shares
offered in the conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the common stock sold in the conversion. If the ESOP's subscription is
not filled in its entirety, the ESOP may purchase shares in the open market.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of the close of business on September 30, 1998 will
receive nontransferable subscription rights to subscribe for up to the greater
of 25,000 shares of common stock, one-tenth of one percent of the total offering
of common stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock to be issued
by a fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of common stock
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will be allocated among subscribing Supplemental Eligible Account Holders so as
to permit each Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation equal
100 shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Supplemental
Eligible Account Holders proportionately, based on the amount of their
respective qualifying deposits as compared to total qualifying deposits of all
subscribing Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Bank as of the close
of business on the Voting Record Date (October 31, 1998) and each borrower with
a loan outstanding as of the close of business on February 1, 1993, which
continues to be outstanding as of the close of business on the Voting Record
Date, will receive nontransferable subscription rights to purchase up 25,000
shares of common stock or one-tenth of one percent of the total offering of
common stock to the extent shares are available following subscriptions by
Eligible Account Holders and Supplemental Eligible Account Holders. In the event
of an oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH
PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE
IS PURCHASING SUCH SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE
HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER
OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE
CONSENT OF THE BANK AND THE HOLDING COMPANY.
The Holding Company and the Bank will make reasonable attempts to
provide a prospectus and related offering materials to holders of subscription
rights. However, the Subscription Offering and all subscription rights under the
Plan of Conversion will expire at 12:00 Noon, Eastern Standard Time, on the
Expiration Date, whether or not the Bank has been able to locate each person
entitled to such subscription rights. ORDERS FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING RECEIVED IN HAND BY THE BANK AFTER THE EXPIRATION DATE
WILL NOT BE ACCEPTED. The Subscription Offering may be extended by the Holding
Company and the Bank up to January 4, 1999 without the OTS's approval. OTS
regulations require that the Holding Company complete the sale of common stock
within 45 days after the close of the Subscription Offering, unless extended by
the OTS. If the Direct Community Offering and the Syndicated Community Offerings
are not completed within such period all funds received will be promptly
returned with interest at the Bank's passbook rate and all withdrawal
authorizations will be canceled. If regulatory approval of an extension of the
time period has been granted, all subscribers will be notified of such extension
and of the duration of any extension that has been granted, and will be given
the right to increase, decrease or rescind their orders. If an affirmative
response to any resolicitation is not received by the Holding Company from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest (or withdrawal authorizations will be
canceled). No single extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Concurrently with the Subscription Offering,
the common stock will be offered by the Holding Company to certain members of
the general public in a Direct Community Offering, with preference given first
to the Bank's public stockholders as of the close of business on the Voting
Record Date (who are not eligible to subscribe for shares of common stock in the
Subscription Offering) and then to natural persons and trusts of natural persons
residing in the Local Community. Purchasers in the Direct Community Offering are
eligible to purchase up to 25,000 shares of common stock. In the event an
insufficient number of shares are available to fill orders in the Direct
Community Offering, the available shares will be allocated on a pro rata basis
determined by the amount of the respective orders. The Direct Community Offering
will terminate at 12:00 Noon, Eastern Standard Time, on the Expiration Date,
unless extended by the Holding Company and the Bank, with approval of the OTS if
necessary. If regulatory approval of an extension beyond 45 days after the close
of the Subscription Offering has been granted, all subscribers will be notified
of such extension and of the duration of any extension that has been granted,
and will be
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given the right to increase, decrease or rescind their orders. If an affirmative
response to any resolicitation is not received by the Holding Company from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest. THE RIGHT OF ANY PERSON TO PURCHASE SHARES
IN THE DIRECT COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE HOLDING
COMPANY AND THE BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. IF
AN ORDER IS REJECTED IN PART, THE PURCHASER DOES NOT HAVE THE RIGHT TO CANCEL
THE REMAINDER OF THE ORDER. THE HOLDING COMPANY PRESENTLY INTENDS TO TERMINATE
THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR ALL SHARES
AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the common stock offered in the Subscription Offering is
subscribed for, no common stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be promptly refunded with interest.
SYNDICATED COMMUNITY OFFERING. The Plan of Conversion provides that, if
necessary, all shares of common stock not purchased in the Subscription Offering
and Direct Community Offering, if any, may be offered for sale to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers to be formed and managed by Webb acting
as agent of the Holding Company. THE HOLDING COMPANY AND THE BANK HAVE THE RIGHT
TO REJECT ORDERS, IN WHOLE OR IN PART, IN THEIR SOLE DISCRETION IN THE
SYNDICATED COMMUNITY OFFERING. Neither Webb nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the common stock in
the Syndicated Community Offering; however, Webb has agreed to use its best
efforts in the sale of shares in the Syndicated Community Offering.
Shares of common stock sold in the Syndicated Community Offering also
will be sold at the $10.00 purchase price. See "-- Stock Pricing, Exchange Ratio
and Number of Shares to be Issued." No person will be permitted to subscribe for
more than 25,000 shares of common stock in the Syndicated Community Offering.
See "-- Plan of Distribution and Selling Commissions" for a description of the
commission to be paid to the selected dealers and to Webb.
Webb may enter into agreements with selected dealers to assist in the
sale of shares in the Syndicated Community Offering. During the Syndicated
Community Offering, selected dealers may only solicit indications of interest
from their customers to place orders with the Holding Company as of a certain
date ("Order Date") for the purchase of shares of common stock. When and if Webb
and the Holding Company believe that enough indications of interest and orders
have been received in the Subscription Offering, the Direct Community Offering
and the Syndicated Community Offering to consummate the conversion, Webb will
request, as of the Order Date, selected dealers to submit orders to purchase
shares for which they have received indications of interest from their
customers. Selected dealers will send confirmations to such customers on the
next business day after the Order Date. Selected dealers may debit the accounts
of their customers on a date which will be three business days from the Order
Date ("Settlement Date"). Customers who authorize selected dealers to debit
their brokerage accounts are required to have the funds for payment in their
account on but not before the Settlement Date. On the Settlement Date, selected
dealers will remit funds to the account that the Holding Company established for
each selected dealer. Each customer's funds so forwarded to the Holding Company,
along with all other accounts held in the same title, will be insured by the
FDIC up to the applicable $100,000 legal limit. After payment has been received
by the Holding Company from selected dealers, funds will earn interest at the
Bank's passbook rate until the completion of this offering. At the completion of
the conversion, the funds received in this offering will be used to purchase the
shares of common stock ordered. The shares issued in the conversion cannot and
will not be insured by the FDIC or any other government agency. In the event the
conversion is not consummated as described above, funds with interest will be
returned promptly to the selected dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may terminate no more than 45 days
after the close of the Subscription Offering, unless extended by the Holding
Company and the Bank, with approval of the OTS.
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In the event the Bank is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Bank, if feasible. Such other arrangements will be
subject to the approval of the OTS. The OTS may grant one or more extensions of
this offering period, provided that (i) no single extension exceeds 90 days,
(ii) subscribers are given the right to increase, decrease or rescind their
subscriptions during the extension period, and (iii) the extensions do not go
more than two years beyond the date on which the members of the MHC approved the
Plan of Conversion. If the conversion is not completed within 45 days after the
close of the Subscription Offering, either all funds received will be returned
with interest (and withdrawal authorizations canceled) or, if the OTS has
granted an extension of time, all subscribers will be given the right to
increase, decrease or rescind their subscriptions at any time prior to 20 days
before the end of the extension period. If an extension of time is obtained, all
subscribers will be notified of such extension and of their rights to modify
their orders. If an affirmative response to any resolicitation is not received
by the Holding Company from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of the Bank and the Holding Company, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS and may provide for purchases for investment purposes by directors,
officers, their associates and other persons in excess of the limitations
provided in the Plan of Conversion and in excess of the proposed director
purchases set forth herein, although no such purchases are currently intended.
If such other purchase arrangements cannot be made, the Plan of Conversion will
terminate.
PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Bank will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
Plan of Conversion reside. However, the Holding Company and the Bank are not
required to offer stock in the Subscription Offering to any person who resides
in a foreign country or resides in a state of the United States if (i) a small
number of persons otherwise eligible to subscribe for shares of common stock
reside in such state or (ii) the Holding Company or the Bank determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request or
requirement that the Holding Company and the Bank or their officers, directors
or trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request or requirement to register or
otherwise qualify the subscription rights or common stock for sale or submit any
filing with respect thereto in such state. Where the number of persons eligible
to subscribe for shares in one state is small, the Holding Company and the Bank
will base their decision as to whether or not to offer the common stock in such
state on a number of factors, including the size of accounts held by account
holders in the state, the cost of reviewing the registration and qualification
requirements of the state (and of actually registering or qualifying the shares)
or the need to register the Holding Company, its officers, directors or
employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION AND SELLING COMMISSIONS
The Holding Company and the Bank have retained Webb to consult with and
to advise the Bank and the Holding Company, and to assist the Holding Company on
a best efforts basis, in the distribution of the common stock in the
Subscription Offering and Direct Community Offering. The services that Webb will
provide include, but are not limited to (i) training the employees of the Bank
who will perform certain ministerial functions in the Subscription Offering and
the Direct Community Offering regarding the mechanics and regulatory
requirements of the stock offering process, (ii) managing the Bank's stock
information center by assisting interested stock subscribers and by keeping
records of all stock orders, (iii) preparing marketing materials, and (iv)
assisting in the solicitation of proxies from the MHC's members and the
stockholders of the Bank. For its services, Webb will receive a management fee
of $25,000 and a success fee of 1.5% of the aggregate purchase price of the
shares sold in the Subscription Offering and the Direct Community Offering,
excluding shares purchased by the ESOP and officers, directors and employees of
the Bank, or members of their immediate families. The management fee will be
applied to the success fee. If selected broker-dealers are used to assist in the
sale of the common stock in the Syndicated Community Offering, Webb will be paid
a fee of
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up to 5.5% of the aggregate purchase price of the shares sold by such
broker-dealers and Webb will pay to such broker-dealers an amount competitive
with gross underwriting commissions then charged for comparable amounts of stock
sold at a comparable price per share in a similar market environment. The
Holding Company and the Bank have agreed to reimburse Webb for its out-of-pocket
expenses up to $5,000 and its legal fees and expenses up to $30,000. The Holding
Company and the Bank have also agreed to indemnify Webb against certain claims
and liabilities under the federal securities laws, including those in connection
with material misstatements in or omissions from this prospectus or otherwise
arising from the use of this prospectus (except for claims and liabilities
arising out of Webb's bad faith or gross negligence), and will contribute to
payments Webb may be required to make in connection with any such claims or
liabilities.
DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription Offering and
Direct Community Offering principally by the distribution of this prospectus and
through activities conducted at the Bank's stock information center at its main
office facility. The stock information center is expected to operate during
normal business hours throughout the Subscription Offering and Direct Community
Offering. It is expected that at any particular time one or more Webb employees
will be working at the stock information center. Stock information center
personnel will be responsible for mailing materials relating to the offering,
responding to questions regarding the conversion and the offering and processing
stock orders.
The management and employees of the Holding Company and the Bank may
participate in this offering in clerical capacities, providing administrative
support in effecting sales transactions or answering questions of a mechanical
nature relating to the proper execution of the order form. Management of the
Holding Company and the Bank may answer questions regarding the respective
businesses of the Holding Company and the Bank. Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. The management and
employees of the Holding Company and the Bank have been instructed not to
solicit offers to purchase common stock or to provide advice regarding the
purchase of common stock. None of the employees or directors who participate in
this offering will receive any special compensation or other remuneration for
such activities.
None of the Holding Company and Bank personnel participating in the
Subscription and Direct Community Offering are registered or licensed as a
broker or dealer or an agent of a broker or dealer. Holding Company and Bank
personnel will assist in the above-described sales activities pursuant to an
exemption from registration as a broker or dealer provided by Rule 3a4-1
promulgated under the Exchange Act. Rule 3a4-1 generally provides that an
"associated person of an issuer" of securities shall not be deemed a broker
solely by reason of participation in the sale of securities of such issuer if
the associated person meets certain conditions. Such conditions include, but are
not limited to, that the associated person participating in the sale of an
issuer's securities not be compensated in connection therewith at the time of
participation, that such person not be associated with a broker or dealer and
that such person observe certain limitations on his participation in the sale of
securities. For purposes of this exemption, "associated person of an issuer" is
defined to include any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by or is under common control
with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus. The Bank will accept for
processing only orders submitted on original order forms. The Bank will not
accept orders submitted on photocopied or telecopied order forms. ORDERS CANNOT
AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON
THE REVERSE SIDE OF THE ORDER FORM.
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To purchase shares in the Subscription Offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Bank (which may be given by completing the appropriate
blanks in the order form), must be received by the Bank by 12:00 Noon, Eastern
Standard Time, on the Expiration Date. Order forms which are not received by
such time or are executed defectively or are received without full payment (or
without appropriate withdrawal instructions) are not required to be accepted.
The Holding Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed order forms, but do not
represent that they will do so. Pursuant to the Plan of Conversion, the
interpretation by the Holding Company and the Bank of the terms and conditions
of the Plan of Conversion and of the order form will be final. In order to
purchase shares in the Direct Community Offering, the order form, accompanied by
the required payment for each share subscribed for, must be received by the Bank
prior to the time the Direct Community Offering terminates, which is expected to
be at 12:00 Noon on the Expiration Date. Once received, an executed order form
may not be modified, amended or rescinded without the consent of the Bank unless
the conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the close of business on the Eligibility
Record Date (March 31, 1997) and/or the Supplemental Eligibility Record Date
(September 30, 1998) and/or the Voting Record Date (October 31, 1998) must list
all accounts on the order form giving all names in each account, the account
number and the approximate account balance as of such date. Failure to list an
account could result in fewer shares being allocated in the event of an
oversubscription than if all accounts had been disclosed.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Bank's stock information center, (ii) by check, bank draft, or
money order, or (iii) by authorization of withdrawal from deposit accounts
maintained with the Bank. Appropriate means by which such withdrawals may be
authorized are provided on the order form. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check, bank draft or money order
at the Bank's passbook rate from the date payment is received until the
completion or termination of the conversion. If payment is made by authorization
of withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates until
completion or termination of the conversion (unless the certificate matures
after the date of receipt of the order form but prior to closing, in which case
funds will earn interest at the passbook rate from the date of maturity until
consummation of the conversion), but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or termination
of the conversion. At the completion of the conversion, the funds received in
this offering will be used to purchase the shares of common stock ordered. THE
SHARES OF COMMON STOCK ISSUED IN THE CONVERSION CANNOT AND WILL NOT BE INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. If the conversion is not consummated
for any reason, all funds submitted will be promptly refunded with interest as
described above.
If a subscriber authorizes the Bank to withdraw the amount of the
aggregate purchase price from his or her deposit account, the Bank will do so as
of the effective date of the conversion, though the account must contain the
full amount necessary for payment at the time the subscription order is
received. The Bank will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will earn interest at the Bank's passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of common stock
subscribed for at the $10.00 purchase price upon consummation of the conversion,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Holding
Company to lend to the ESOP, at such time, the aggregate purchase price of the
shares for which it subscribed.
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IRAs maintained in the Bank 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. Since the Bank does not offer such
accounts, it will allow such a depositor to make a trustee-to-trustee transfer
of the IRA funds to a trustee offering a self-directed IRA program with the
agreement that such funds will be used to purchase the Holding Company's common
stock in the offering. 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 as the Bank now holds the depositor's
IRA funds. An annual administrative fee may be payable to the new trustee.
Depositors interested in using funds in a Bank IRA to purchase common stock
should contact the stock information center as soon as possible so that the
necessary forms may be forwarded for execution and returned prior to the
Expiration Date. In addition, the provisions of ERISA and IRS regulations
require that officers, directors and 10% shareholders who use self-directed IRA
funds to purchase shares of common stock in the Subscription Offering, make such
purchases for the exclusive benefit of IRAs.
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED
Federal regulations and the Plan of Conversion require that the
purchase price of the common stock be based on the appraised pro forma market
value of the MHC and the Bank, as converted (i.e., taking into account the
---
expected receipt of proceeds from the sale of securities in the conversion), as
determined on the basis of an independent valuation. The Bank has retained
Keller & Company to make such valuation. For its services in making such
appraisal and any expenses incurred in connection therewith, Keller & Company
will receive a fee of $18,000 plus out-of-pocket expenses, together with a fee
of $6,000 plus out-of-pocket expenses for the preparation of a business plan and
other services performed in connection with the Holding Company's holding
company application to the OTS. The Bank has agreed to indemnify Keller &
Company and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Keller & Company's liability results
from its negligence or bad faith.
The appraisal has been prepared by Keller & Company in reliance upon
the information contained in this prospectus, including the Consolidated
Financial Statements. Keller & Company also considered the following factors,
among others: the present and projected operating results and financial
condition of the Holding Company, the Bank and the MHC and the economic and
demographic conditions in the Bank's existing market area; certain historical,
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other
similarly situated publicly-traded companies located in Indiana and other
regions of the United States; the aggregate size of this offering of the Holding
Company's common stock; the impact of the conversion on the Bank's capital and
earnings potential; the proposed dividend policy of the Holding Company and the
Bank; and the trading market for the Bank common stock and securities of
comparable companies and general conditions in the market for such securities.
On the basis of the foregoing, Keller & Company has advised the Holding
Company, the Bank and the MHC that, in its opinion, as of October 23, 1998 the
estimated pro forma market value of the MHC and the Bank, as converted, ranged
from $11,050,000 to $14,950,000. Because the Bank's public stockholders will
continue to hold approximately the same aggregate percentage ownership interest
in the Holding Company as they currently hold in the Bank (before giving effect
to the payment of cash to the Bank's public stockholders who exercise and
perfect their rights of dissent and appraisal, the payment of cash in lieu of
issuing fractional shares, and any shares of common stock purchased in this
offering by the Bank's stockholders), the appraisal was multiplied by 50.5%,
which represents the MHC's percentage interest in the Bank adjusted upward for
assets held by the MHC . The resulting amount represents an offering range of
$6,574,750 to $8,895,250. Based on such valuation, the Boards of Directors of
the Holding Company and the Bank determined that the shares of common stock
would be sold at $10.00 per share, resulting in a range of 657,475 to 889,525
shares of common stock being offered and a range of 447,525 to 605,475 shares
being issued in exchange for the shares of the Bank's common stock. Upon
consummation of the conversion, the shares sold in this offering and the shares
issued in exchange for Bank common stock will represent approximately 59.5% and
40.5%, respectively, of the Holding Company's total outstanding shares.
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The Boards of Directors of the Holding Company, the Bank and the MHC
reviewed Keller & Company's appraisal report, including the methodology and the
assumptions used by Keller & Company, and determined that the Estimated
Valuation Range was reasonable and adequate. The Boards of Directors of the
Holding Company, the Bank and the MHC also established the formula for
determining the Exchange Ratio. Based upon such formula and the Estimated
Valuation Range, the Exchange Ratio will range from a minimum of 2.1936 to a
maximum of 2.9678, with a midpoint of 2.5807. Based upon these Exchange Ratios,
the Holding Company expects to issue between 447,525 and 605,475 shares of
Holding Company common stock to the holders of Bank common stock at the
consummation of the conversion. The Estimated Valuation Range and the Exchange
Ratio may be amended with the approval of the OTS, if required, or if
necessitated by subsequent developments in the financial condition of any of the
Holding Company, the Bank and the MHC or market conditions generally. If the
appraisal is updated to below $11,050,000 or above $17,192,500 (the maximum of
the Estimated Valuation Range, as adjusted by 15%), such appraisal will be filed
with the SEC by post-effective amendment.
If, upon completion of the Subscription and Direct Community
Offerings, at least the minimum number of shares are subscribed for, Keller &
Company, after taking into account factors similar to those involved in its
prior appraisal, will determine its estimate of the pro forma market value of
the Bank and the MHC as converted, as of the close of the Subscription Offering
and Direct Community Offering.
No sale of the shares will take place unless prior thereto Keller &
Company confirms to the OTS that, to the best of Keller & Company's knowledge
and judgment, nothing of a material nature has occurred that would cause it to
conclude that the actual total purchase price on an aggregate basis was
incompatible with its estimate of the total pro forma market value of the Bank
and the MHC as converted at the time of the sale. If, however, the facts do not
justify such a statement, the offering or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held. Under such circumstances,
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.
Depending upon market and financial conditions, the number of shares
sold may be more or less than the range in number of shares discussed herein. In
the event the total amount of shares sold is less than 657,475 or more than
1,022,954 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $6,574,750 or more than $10,229,538,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is established
by Keller & Company, such new range will be subject to approval by the OTS.
In formulating its appraisal, Keller & Company relied upon the
truthfulness, accuracy and completeness of all documents the Bank furnished to
it. Keller & Company also considered financial and other information from
regulatory agencies, other financial institutions, and other public sources, as
appropriate. While Keller & Company believes this information to be reliable,
Keller & Company does not guarantee the accuracy or completeness of such
information and did not independently verify the financial statements and other
data provided by the Bank and the Holding Company or independently value the
assets or liabilities of the Bank and the Holding Company. THE APPRAISAL BY
KELLER & COMPANY IS NOT INTENDED TO BE, AND MUST NOT BE INTERPRETED AS, A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE PLAN
OF CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE
APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH CHANGE FROM TIME TO TIME,
THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH SHARES IN THE CONVERSION
WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE
PRICE.
The appraisal report of Keller & Company has been filed as an exhibit
to the Registration Statement and Application for Conversion of which this
prospectus is a part and is available for inspection in the manner set forth
under "ADDITIONAL INFORMATION."
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LIMITATIONS ON PURCHASES OF SHARES OF COMMON STOCK
The Plan of Conversion provides for certain limitations to be placed
upon the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares of common
stock. The Plan of Conversion provides for the following purchase limitations:
(i) No person may purchase in either the Subscription Offering,
Direct Community Offering or Syndicated Community Offering
more than 25,000 shares of common stock; and
(ii) The maximum number of shares of common stock which may be
subscribed for or purchased in all categories in the
conversion by any person, together with any associate or any
group of persons acting in concert, when combined with any
shares received in exchange for Bank common stock, shall not
exceed 62,500 shares.
For purposes of the Plan of Conversion, the directors are not deemed
to be acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
BECAUSE OTS POLICY REQUIRES THE MAXIMUM PURCHASE LIMITATION TO INCLUDE
SHARES TO BE ISSUED TO THE BANK'S PUBLIC STOCKHOLDERS IN EXCHANGE FOR THEIR BANK
COMMON STOCK, CERTAIN OF THE BANK'S PUBLIC STOCKHOLDERS MAY BE LIMITED IN THEIR
ABILITY TO PURCHASE SHARES IN THIS OFFERING, OR MAY EVEN BE PREVENTED FROM
PURCHASING SHARES OF COMMON STOCK. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED IN THE PLAN, AND EXCEPT AS MAY BE REQUIRED BY THE OTS, THE BANK'S
PUBLIC STOCKHOLDERS WILL NOT BE REQUIRED TO SELL OR DIVEST ANY SHARES OF HOLDING
COMPANY COMMON STOCK WHICH THEY MAY PURCHASE OR RECEIVE IN EXCHANGE FOR THEIR
SHARES OF BANK COMMON STOCK, EVEN IF THEIR PERCENTAGE OWNERSHIP OF BANK COMMON
STOCK WOULD EXCEED AN APPLICABLE PURCHASE LIMITATION WHEN ACCOUNTING FOR THE
EXCHANGE OF THEIR SHARES OF BANK COMMON STOCK FOR SHARES OF HOLDING COMPANY
COMMON STOCK.
The Boards of Directors of the Bank and the MHC may, 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 which exceed 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. The Bank
and the MHC do not intend to increase the maximum purchase limitation unless
market conditions are such that an increase in the maximum purchase limitation
is necessary to sell a number of shares in excess of the minimum of the
Estimated Valuation Range. If the Boards of Directors decide to increase the
purchase limitation above, persons who subscribed for the maximum number of
shares of common stock will be, and other large subscribers in the discretion of
the Holding Company and the Bank may be, given the opportunity to increase their
subscriptions accordingly, subject to the rights and preferences of any person
who has priority subscription rights.
The term "acting in concert" is defined in the Plan of Conversion to
mean (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. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion
to mean (i) any corporation or organization (other than the Bank or a
majority-owned subsidiary of the Bank) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity (excluding tax-qualified employee
plans); and (iii) any relative or spouse of such person,
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or any relative of such spouse, who either has the same home as such person or
who is a director or officer of the Bank or any of its parents or subsidiaries.
For example, a corporation of which a person serves as an officer would be an
associate of such person and, therefore, all shares purchased by such
corporation would be included with the number of shares which such person could
purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Holding Company, the Bank or the MHC, including its
Chief Executive Officer, President, Executive Vice Presidents, Senior Vice
Presidents, Vice Presidents in charge of principal business functions, Secretary
and Controller.
Shares purchased in the conversion will be freely transferable, except
for shares purchased by directors and officers of the Bank and the Holding
Company and by NASD members. See "-- Restrictions on Transferability by
Directors and Officers and NASD Members."
DISSENT AND APPRAISAL RIGHTS
The exchange of Bank common stock for Holding Company common stock in
the conversion is not mandatory because of dissent and appraisal rights granted
to Bank stockholders under OTS regulations. Stockholders of the Bank have
dissent and appraisal rights because the Bank's common stock is not listed on
the Nasdaq Stock Market. Accordingly, even if the conversion is approved, a Bank
stockholder who exercises and perfects his or her dissent and appraisal rights
will receive cash for the fair market value of his shares of Bank common stock
as determined by regulation, rather than receive shares of Holding Company
common stock in exchange therefor as discussed below under "-- Delivery and
Exchange of Stock Certificates." A detailed discussion of dissent and appraisal
rights and the procedures that must be followed in order to exercise and perfect
them is contained in the proxy statement for the Bank's 1998 Annual Meeting of
Stockholders at which the Plan of Conversion will be considered. IF YOU INTEND
TO EXERCISE AND PERFECT YOUR DISSENT AND APPRAISAL RIGHTS, YOU SHOULD NOT
FORWARD CERTIFICATES FOR BANK COMMON STOCK TO THE BANK UNTIL YOU RECEIVE THE
BANK'S PROXY STATEMENT AND FOLLOW THE INSTRUCTIONS THEREIN FOR EXERCISING AND
PERFECTING YOUR DISSENT AND APPRAISAL RIGHTS.
DELIVERY AND EXCHANGE OF STOCK CERTIFICATES
SHARES PURCHASED IN THIS OFFERING. Certificates representing shares of
Holding Company common stock will be mailed by the Holding Company's transfer
agent to the persons entitled thereto at the addresses of such persons appearing
on the order form as soon as practicable following the consummation of the
conversion. Any undeliverable certificates will be held by the Holding Company
until claimed by persons legally entitled thereto or otherwise disposed of
according to applicable law. Purchasers of shares of Holding Company common
stock may be unable to sell such shares until certificates are available and
delivered to them.
SHARES ISSUED TO NON-DISSENTING BANK STOCKHOLDERS IN EXCHANGE FOR BANK
COMMON STOCK. After the consummation of the conversion, each holder of a
certificate(s) theretofore evidencing issued and outstanding shares of Bank
common stock (other than the MHC and stockholders who have exercised and
perfected dissent and appraisal rights), upon surrender of the same to an agent,
duly appointed by the Holding Company, which is anticipated to be the transfer
agent for the common stock ("Exchange Agent"), shall be entitled to receive in
exchange therefor a certificate(s) representing the number of full shares of
Holding Company common stock into which such shares have been converted based on
the Exchange Ratio, and cash in lieu of any fractional shares. The Exchange
Agent shall mail a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to such certificate shall
pass, only upon delivery of such certificate to the Exchange Agent) advising
such holder of the terms of the exchange offering and the procedure for
surrendering to the Exchange Agent such certificates in exchange for a
certificate(s) evidencing Holding Company common stock and cash in lieu of any
fractional shares. YOU SHOULD NOT FORWARD CERTIFICATES FOR BANK COMMON STOCK TO
THE BANK OR THE EXCHANGE AGENT UNTIL YOU HAVE RECEIVED THE TRANSMITTAL LETTER.
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No holder of a certificate theretofore representing shares of the Bank
common stock shall be entitled to receive any dividends on the Holding Company
common stock until the certificate representing such shares is surrendered in
exchange for certificates representing shares of Holding Company common stock.
In the event that dividends are declared and paid by the Holding Company in
respect of common stock after the consummation of the conversion, but before
surrender of certificates representing shares of Bank common stock, dividends
payable in respect of shares of common stock not then issued shall accrue
(without interest). Any such dividends shall be paid (without interest) upon
surrender of the certificates representing such shares of Bank common stock.
After the consummation of the conversion, the Holding Company shall be entitled
to treat certificates representing shares of Bank common stock as evidencing
ownership of the number of full shares of common stock into which the shares of
Bank common stock represented by such certificates shall have been converted,
notwithstanding the failure on the part of the holder thereof to surrender such
certificates.
The Holding Company shall not be obligated to deliver a certificate(s)
representing shares of common stock to which a holder of Bank common stock would
otherwise be entitled as a result of the conversion until such holder surrenders
the certificate(s) representing the shares of Bank common stock for exchange as
provided above, or, in default thereof, an appropriate affidavit of loss and
indemnity agreement and/or a bond as may be required in each case by the Holding
Company. If any certificate evidencing shares of common stock is to be issued in
a name other than that in which the certificate evidencing Bank common stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange Agent any transfer or other tax required by reason
of the issuance of a certificate for shares of common stock in any name other
than that of the registered holder of the certificate surrendered or otherwise
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of common stock purchased in this offering by directors and
officers of the Holding Company may not be sold for a period of one year
following consummation of the conversion, except in the event of the death of
the stockholder or in any exchange of the common stock in connection with a
merger or acquisition of the Holding Company. Shares of common stock received by
directors or officers through the ESOP or the 1999 MRDP or upon exercise of
options issued pursuant to the exercise of stock options or purchased subsequent
to the conversion are not subject to this restriction. Accordingly, shares of
common stock issued by the Holding Company to directors and officers shall bear
a legend giving appropriate notice of the restriction and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's common stock with respect to the restriction on transfers. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted common stock shall be subject to the same
restrictions.
Purchases of outstanding shares of common stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion ) and their
associates during the three-year period following the conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding common stock or to the purchase of stock pursuant to the exercise of
stock options.
The Holding Company has filed with the SEC a registration statement
under the SECURITIES ACT for the registration of the common stock to be issued
pursuant to the conversion. This registration does not cover the resale of such
shares. Shares of common stock purchased by persons who are not affiliates of
the Holding Company may be resold without registration. Shares purchased by an
affiliate of the Holding Company will be subject to the resale restrictions of
Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, 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
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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.
Provision may be made in the future by the Holding Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances.
Under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
COMPARISON OF STOCKHOLDERS' RIGHTS
As a result of the conversion, stockholders of the Bank will become
stockholders of the Holding Company, an Indiana corporation. There are certain
differences in stockholder rights arising from distinctions between the Bank's
Federal Stock Charter and Bylaws and the Holding Company's Articles of
Incorporation and Bylaws and from distinctions between laws with respect to
federally chartered savings institutions and Indiana law.
The discussion herein is not intended to be a complete statement of
the differences affecting the rights of stockholders, but rather summarizes the
material differences affecting the rights of stockholders. The discussion herein
is qualified in its entirety by reference to the Articles of Incorporation and
Bylaws of the Holding Company and Indiana law. See "ADDITIONAL INFORMATION" for
procedures for obtaining a copy of the Holding Company's Articles of
Incorporation and Bylaws.
ISSUANCE OF CAPITAL STOCK. Pursuant to applicable laws and
regulations, the MHC is required to own not less than a majority of the
outstanding Bank common stock. There will be no such restriction applicable to
the Holding Company following consummation of the conversion.
The Holding Company's Articles of Incorporation do not contain
restrictions on the issuance of shares of capital stock to directors, officers
or controlling persons of the Holding Company, whereas the Bank's Federal Stock
Charter restricts such issuance to general public offerings, or if qualifying
shares, to directors, unless the share issuance or the plan under which they
would be issued has been approved by a majority of the total votes eligible to
be cast at a legal stockholders' meeting. Therefore, stock-related compensation
plans, such as stock option plans, could be adopted by the Holding Company
without stockholder approval and shares of Holding Company capital stock could
be issued directly to directors or officers without stockholder approval. The
Bylaws of the NASD, however, generally require corporations with securities
which are quoted on the Nasdaq SmallCap Market to obtain stockholder approval of
most stock compensation plans for directors, officers and key employees of the
corporation. Moreover, although generally not required, stockholder approval of
stock related compensation plans may be sought in certain instances in order to
qualify such plans for favorable federal income tax and securities law treatment
under current laws and regulations. The Holding Company plans to submit the
stock compensation plans discussed herein to its stockholders for approval.
VOTING RIGHTS. Neither the Bank's Federal Stock Charter or Bylaws nor
the Holding Company's Articles of Incorporation or Bylaws currently provide for
cumulative voting in elections of directors. For additional information
regarding voting rights, see "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
- -- Anti-takeover Provisions -- Limitation on Voting Rights" below.
PAYMENT OF DIVIDENDS. The ability of the Bank to pay dividends on its
capital stock is restricted by OTS regulations and by federal income tax
considerations related to savings institutions such as the Bank. See "REGULATION
- -- Federal Regulation of Savings Associations -- Capital Requirements" and
"TAXATION." Although the Holding Company is not subject to these restrictions as
an Indiana corporation, such restrictions will indirectly affect the Holding
Company because dividends from the Bank will be a primary source of funds of the
Holding Company for the payment of dividends to stockholders of the Holding
Company.
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Certain restrictions generally imposed on Indiana corporations may
also have an impact on the Holding Company's ability to pay dividends. Indiana
law generally provides that the Holding Company is permitted to pay cash
dividends so long as it is able to pay its debts as they become due in the usual
course of business and its assets are greater than the sum of its total
liabilities plus the amount that would be needed, if the Holding Company were to
be dissolved at the time of the dividend, to satisfy any rights that are
preferential to those of the persons receiving the dividend.
BOARD OF DIRECTORS. The Bank's Federal Stock Charter and Bylaws and
the Holding Company's Articles of Incorporation and Bylaws each require the
Board of Directors of the Bank and the Holding Company to be divided into three
classes as nearly equal in number as possible and that the members of each class
shall be elected for a term of three years and until their successors are
elected and qualified, with one class being elected annually.
Under the Bank's Bylaws, any vacancies in the Board of Directors of
the Bank may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the Board of Directors. Persons elected
by the directors of the Bank to fill vacancies may only serve until the next
annual meeting of stockholders. Under the Holding Company's Articles of
Incorporation, any vacancy occurring in the Board of Directors of the Holding
Company, including any vacancy created by reason of an increase in the number of
directors, may be filled by the remaining directors, and any director so chosen
shall hold office for the remainder of the term to which the director has been
elected and until his or her successor is elected and qualified.
Under the Bank's Bylaws, any director may be removed for cause by the
holders of a majority of the outstanding voting shares. The Holding Company's
Articles of Incorporation provides that any director may be removed before the
expiration of his her her term only for cause and only upon the vote of
two-thirds of the outstanding shares of voting stock. In the absence of this
provision, the vote of the holders of a majority of the shares could remove one
or more directors with or without cause.
LIMITATIONS ON LIABILITY. The Holding Company's Articles of
Incorporation provides that the directors of the Holding Company shall not be
personally liable for monetary damages to the Holding Company for actions as
directors, except for liabilities that involve a breach of the director's duty
of loyalty to the Holding Company or its stockholders, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or authorization of unlawful payment of dividends or unlawful stock
purchase or redemption. This provision might, in certain instances, discourage
or deter shareholders or management from bringing a lawsuit against directors
for a breach of their duties even though such an action, if successful, might
have benefitted the Holding Company.
Currently, federal law does not permit federally chartered savings
institutions such as the Bank to limit the personal liability of directors in
the manner provided by Indiana law and the laws of many other states.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The
Bank's Federal Stock Charter and Bylaws do not contain any provision relating to
indemnification of directors and officers of the Bank. Under current OTS
regulations, however, the Bank will indemnify its directors, officers and
employees for any costs incurred in connection with any litigation involving any
such person's activities as a director, officer or employee if such person
obtains a final judgment on the merits in his or her favor. In addition,
indemnification is permitted in the case of a settlement, a final judgment
against such person or final judgment other than on the merits, if a majority of
disinterested directors determine that such person was acting in good faith
within the scope of his or her employment as he or she could reasonably have
perceived it under the circumstances and for a purpose he or she could
reasonably have believed under the circumstances was in the best interest of the
Bank or its stockholders. The Bank also is permitted to pay ongoing expenses
incurred by a director, officer or employee if a majority of disinterested
directors concludes that such person may ultimately be entitled to
indemnification. Before making any indemnification payment, the Bank is required
to notify the OTS of its intention and such payment cannot be made if the OTS
objects thereto.
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The officers, directors, agents and employees of the Holding Company
are indemnified with respect to certain actions pursuant to the Holding
Company's Articles of Incorporation, which complies with Indiana law regarding
indemnification. Indiana law allows the Holding Company to indemnify the
aforementioned persons for expenses, settlements, judgments and fines in suits
in which such person has made a party by reason of the fact that he or she is or
was an agent of the Holding Company; provided, however, that such persons acted
in good faith and in a manner he reasonably believed, in the case of conduct in
his official capacity, was in the best interests of the Holding Company, and in
all other cases, was not opposed to the best interests of the Holding Company,
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.
SPECIAL MEETINGS OF STOCKHOLDERS. The Holding Company's Articles of
Incorporation provides that special meetings of the stockholders of the Holding
Company may be called only by the chairman of the board of directors or by the
board of directors pursuant to a resolution adopted by a majority of the total
number of directors which the Holding Company would have if there were no
vacancies on the board of directors. The Bank's Federal Stock Charter provides
that special meetings may be called by the Chairman, President, a majority of
the Board of Directors or the holders of not less than a majority of the
outstanding capital stock of the Bank entitled to vote at the meeting.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bank's Bylaws generally
provide that stockholders may submit nominations for election as director at an
annual meeting of stockholders and any new business to be taken up at such a
meeting by filing such in writing with the Bank at least thirty days before the
date of any such meeting.
The Holding Company's Bylaws generally provide that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to the
Holding Company at least 60 days and not more than 90 days in advance of the
meeting, together with certain information relating to the nomination or new
business. However, if less than 70 days' notice or prior public disclosure of
the date of the meeting is given, stockholders must submit such written notice
no later than the tenth day following the date on which notice of the meeting is
mailed to stockholders or such public disclosure was made. Failure to comply
with these advance notice requirements will preclude such nominations or new
business from being considered at the meeting.
STOCKHOLDER ACTION WITHOUT A MEETING. The Bank's Bylaws provide that
any action to be taken or which may be taken at any annual or special meeting of
stockholders may be taken if a consent in writing, setting forth the actions so
taken, is given by the holders of all outstanding shares entitled to vote.
Indiana law also permits stockholders to act without a meeting by unanimous
written consent.
STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS. A federal regulation
which is applicable to the Bank provides that stockholders may inspect and copy
specified books and records of a federally chartered savings institution after
proper written notice for a proper purpose. Indiana law similarly provides that
a stockholder may inspect books and records upon written demand stating the
purpose of the inspection, if such demand is made in good faith and for a proper
purpose.
LIMITATIONS ON ACQUISITIONS OF VOTING STOCK AND VOTING RIGHTS. Neither
the Bank's Federal Stock Charter nor Bylaws contains any provision limiting a
person's right to directly or indirectly acquire shares of the Bank's capital
stock. The Holding Company's Articles of Incorporation provides certain
limitations on the ability of a person who owns in excess of 10% of the Holding
Company's outstanding shares of common stock to vote shares in excess of such
limit. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY -- Anti-takeover
Provisions -- Limitation on Voting Rights."
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. A federal regulation
requires the approval of two-thirds of the Board of Directors of the Bank and
the holders of two-thirds of the outstanding stock of the Bank entitled to vote
thereon for mergers, consolidations and sales of all or substantially all of the
Bank's assets. Such regulation permits the Bank
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to merge with another corporation without obtaining the approval of its
stockholders if: (i) it does not involve an interim savings institution; (ii)
the Bank's Federal Stock Charter is not changed; (iii) each share of the Bank's
stock outstanding immediately prior to the effective date of the transaction is
to be an identical outstanding share or a treasury share of the Bank after such
effective date; and (iv) either: (A) no shares of voting stock of the Bank and
no securities convertible into such stock are to be issued or delivered under
the plan of combination or (B) the authorized unissued shares or the treasury
shares of voting stock of the Bank to be issued or delivered under the plan of
combination, plus those initially issuable upon conversion of any securities to
be issued or delivered under such plan, do not exceed 15% of the total shares of
voting stock of the Bank outstanding immediately prior to the effective date of
the transaction.
The Holding Company's Articles of Incorporation requires the approval
of the holders of at least 80% of the Holding Company's outstanding shares of
voting stock to approve certain "Business Combinations" (as defined therein)
involving a "Related Person" (as defined therein) except in cases where the
proposed transaction has been approved in advance by a majority of those members
of the Holding Company's Board of Directors who are unaffiliated with the
Related Person and were directors prior to the time when the Related Person
became a Related Person. Under Indiana law, absent this provision, business
combinations, including mergers, consolidations and sales of substantially all
of the assets of a corporation must, subject to certain exceptions, be approved
by the vote of the holders of a majority of the outstanding shares of common
stock of the Holding Company and any other affected class of stock. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY -- Anti-takeover Provisions
- -- Stockholder Vote Required to Approve Certain Business Combinations."
The Holding Company's Articles of Incorporation requires the Holding
Company's Board of Directors to consider certain factors in addition to the
amount of consideration to be paid when evaluating certain business combinations
or a tender or exchange offer. These additional factors include: (i) the social
and economic effects of the transaction; (ii) the business and financial
condition and earnings prospects of the acquiring person or entity; and (iii)
the competence, experience, and integrity of the acquiring person or entity and
its management.
DISSENTERS' RIGHTS OF APPRAISAL. OTS regulations generally provide
that a stockholder of a federally chartered savings institution that engages in
a merger, consolidation or sale of all or substantially all of its assets shall
have the right to demand from such institution payment of the fair or appraised
value of his or her stock in the institution, subject to specified procedural
requirements. This regulation also provides, however, that the stockholders of a
federally chartered savings institution with stock which is listed on a national
securities exchange or quoted on the Nasdaq Stock Market are not entitled to
dissenters' rights in connection with a merger involving such savings
institution if the stockholder is required to accept only "qualified
consideration" for his or her stock, which is defined to include cash, shares of
stock of any institution or corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the Nasdaq
National Market or any combination of such shares of stock and cash.
Under Indiana law, appraisal rights are available for the shares of
any class or series of stock of a corporation that is a party to a merger,
consolidation, sale of assets or dissolution. However, stockholders generally
will not have appraisal rights if the corporation's stock is listed on a
national securities exchange or the Nasdaq National Market or similar market, or
if stockholder approval is not required by Indiana law for the corporate action.
AMENDMENT OF GOVERNING INSTRUMENTS. No amendment of the Bank's Federal
Stock Charter may be made unless it is first proposed by the Board of Directors
of the Bank, then preliminarily approved by the OTS, and thereafter approved by
the holders of a majority of the total votes eligible to be cast at a legal
meeting. The Holding Company's Articles of Incorporation may be amended by the
vote of the holders of a majority of the outstanding shares of Holding Company
Common stock, except that the provisions of the Articles of Incorporation
governing certain matters may not be repealed, altered, amended or rescinded
except by the vote of the holders of at least two-thirds of the outstanding
shares of the Holding Company. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY -- Antitakeover Provisions -- Amendment of Articles of Incorporation and
Bylaws."
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The Bylaws of the Bank may be amended by a majority vote of the full
Board of Directors of the Bank or by a majority vote of the votes cast by the
stockholders of the Bank at any legal meeting. The Holding Company's Bylaws may
only be amended by a resolution adopted by a two-thirds majority of the
directors then in office.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal
law and regulations and Indiana corporate law, as well as the Articles of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of the Holding
Company contained in the Registration Statement filed with the SEC. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing
an intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of
an insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include the
acquiror being one of the two largest stockholders. The determination of control
may be rebutted by submission to the OTS, prior to the acquisition of stock or
the occurrence of any other circumstances giving rise to such determination, of
a statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification form that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which
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would result in a determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable. There are also rebuttable
presumptions in the regulations concerning whether a group "acting in concert"
exists, including presumed action in concert among members of an "immediate
family."
The OTS may prohibit an acquisition of control if it finds, among
other things, that (i) the acquisition would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
ANTI-TAKEOVER PROVISIONS IN THE HOLDING COMPANY'S ARTICLES OF INCORPORATION AND
BYLAWS AND IN INDIANA LAW
A number of provisions of the Holding Company's Articles of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Holding Company's Articles of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Holding Company stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders 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 incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Articles of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made in each case to such Articles of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to where to
obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the
Holding Company provide that in no event shall any record owner of any
outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of common stock ("Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit, unless permitted by a resolution adopted by
a majority of the board of directors. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act
and includes shares beneficially owned by such person or any of his or her
affiliates (as defined in the Articles of Incorporation), shares which such
person or his or her affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his or her
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by directors, officers and employees of the Bank or
Holding Company or shares that are subject to a revocable proxy and that are not
otherwise beneficially, or deemed by the Holding Company to be beneficially,
owned by such person and his or her affiliates.
BOARD OF DIRECTORS. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class shall
be elected for a term of three years, with the terms of office of all members of
one class expiring each year so that approximately one-third of the total number
of directors are elected each year. The Articles of Incorporation provide that
any vacancy occurring in the Board, including a vacancy created by an increase
in the number of directors, may be filled by a vote of a majority of the
directors then in office and any director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of the class to
which the director has been chosen expires. The classified Board is intended to
provide for continuity of the Board of Directors and to make it more difficult
and time consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without the consent of the incumbent Board of
Directors of the Holding Company. The Articles of Incorporation of the Holding
Company provide that a director may be removed from the Board of Directors prior
to the expiration of his or her term only for cause and only upon the vote of
two-thirds of the outstanding shares of voting
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stock. In the absence of this provision, the vote of the holders of a majority
of the shares could remove one or more directors with or without cause.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation do not provide for cumulative voting for any purpose.
Moreover, the Articles of Incorporation provide that special meetings of
stockholders of the Holding Company may be called only by the Chairman of the
Board of Directors or by the Board of Directors of the Holding Company. Under
Indiana law, action may be taken by shareholders without a meeting only if
evidenced by a written consent signed by all shareholders entitled to vote.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the
issuance of 5,000,000 shares of common stock and 1,000,000 shares of preferred
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to determine
the terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of preferred stock
to persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of the Holding
Company, and thereby assist members of management to retain their positions. The
Holding Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of common stock upon exercise of stock
options and in connection with the MRDP.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH
PRINCIPAL STOCKHOLDERS. The Articles of Incorporation require the approval of
the holders of at least 80% of the Holding Company's outstanding shares of
voting stock to approve certain "Business Combinations" (as defined therein)
involving a "Related Person" (as defined therein) except in cases where the
proposed transaction has been approved in advance by a majority of those members
of the Holding Company's Board of Directors who are unaffiliated with the
Related Person and were directors prior to the time when the Related Person
became a Related Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity (other than the Holding
Company or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the Holding
Company or an affiliate of such person or entity. This provision of the Articles
of Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into any
Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into the Holding Company
or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Indiana law, absent this provision, business combinations,
including mergers, share exchanges and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of the
Holding Company and any other affected class of stock. The increased stockholder
vote required to approve a business combination may have the effect of
foreclosing mergers and other business combinations which a majority of
stockholders deem desirable and placing the power to prevent such a merger or
combination in the hands of a minority of stockholders.
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AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the
Holding Company's Articles of Incorporation must be approved by a two-thirds
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least
two-thirds of the outstanding voting stock entitled to vote (after giving effect
to the provision limiting voting rights) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Articles of Incorporation. The
Holding Company's Bylaws may be amended by a two-thirds vote of its Board of
Directors.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of the Holding
Company require a stockholder who intends to nominate a candidate for election
to the Board of Directors, or to raise new business at a stockholder meeting to
give not less than 60 nor more than 90 days' advance notice to the Secretary of
the Holding Company. The notice provision requires a stockholder who desires to
raise new business to provide certain information to the Holding Company
concerning the nature of the new business, the stockholder and the stockholder's
interest in the business matter. Similarly, a stockholder wishing to nominate
any person for election as a director must provide the Holding Company with
certain information concerning the nominee and the proposing stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS. The Boards of Directors of the Holding
Company and the Bank believes that the provisions described above are prudent
and will reduce the Holding Company's vulnerability to takeover attempts and
certain other transactions that have not been negotiated with and approved by
its Board of Directors. These provisions will also assist the Holding Company
and the Bank in the orderly deployment of the conversion proceeds into
productive assets during the initial period after the conversion. The Board of
Directors believes these provisions are in the best interest of the Bank and
Holding Company and its stockholders. In the judgment of the Board of Directors,
the Holding Company's Board 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 its stockholders. Accordingly, the Board of Directors
believes that it is in the best interest of the Holding Company and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations 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 a price reflective of
the true value of the Holding Company and that is in the best interest of all
stockholders.
Attempts to acquire control of financial institutions and their
holding companies have recently become increasingly common. Takeover attempts
that have not been negotiated with and approved by the Board of Directors
present to stockholders 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 in order to obtain maximum value of
the Holding Company for its stockholders, 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 great expense. Although a tender
offer or other takeover attempt may be made at a price substantially above the
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders 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
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
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Despite the belief of the Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's Articles
of Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt that would not be approved by the Holding
Company's Board of Directors, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Boards of Directors of the Bank and the Holding Company, however, have
concluded that the potential benefits outweigh the possible disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, the Holding Company may adopt additional
anti-takeover charter provisions or other devices regarding the acquisition of
its equity securities that would be permitted for an Indiana business
corporation.
The cumulative effect of the restrictions on acquisition of the
Holding Company contained in the Articles of Incorporation and Bylaws of the
Holding Company and in Federal and Indiana law may be to discourage potential
takeover attempts and perpetuate incumbent management, even though certain
stockholders of the Holding Company may deem a potential acquisition to be in
their best interests, or deem existing management not to be acting in their best
interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
GENERAL
The Holding Company is authorized to issue 5,000,000 shares of common
stock having a par value of $.01 per share and 1,000,000 shares of preferred
stock having a par value of $.01 per share. Each share of the Holding Company's
common stock will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. Upon payment of the purchase
price for the common stock, in accordance with the Plan of Conversion, all such
stock will be duly authorized, fully paid and nonassessable.
THE COMMON STOCK OF THE HOLDING COMPANY WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "DIVIDEND
POLICY" and "REGULATION." The holders of common stock of the Holding Company
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues preferred stock, the holders
thereof may have a priority over the holders of the common stock with respect to
dividends.
STOCK REPURCHASES. The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "REGULATION -- Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
VOTING RIGHTS. The holders of common stock of the Holding Company will
possess exclusive voting rights in the Holding Company. They will elect the
Holding Company's Board of Directors and act on such other matters as are
required to be presented to them under Federal law or as are otherwise presented
to them by the Board of Directors. Except as discussed in "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY," each holder of common stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of
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directors. If the Holding Company issues preferred stock, holders of preferred
stock may also possess voting rights. Certain matters require a vote of 80% of
the outstanding shares entitled to vote thereon. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY."
As a federal stock savings bank, corporate powers and control of the
Bank are vested in the Board of Directors, who elect the officers of the Bank
and who fill any vacancies on the Board of Directors as it exists upon
conversion. Subsequent to conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, all of which will be
owned by the Holding Company, and voted at the direction of the Holding
Company's Board of Directors. Consequently, the holders of the Holding Company's
common stock will not have direct control of the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding
up of the Bank, the Holding Company, as holder of the Bank's capital stock would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "THE CONVERSION"), all assets of the Bank available for distribution. In
the event of liquidation, dissolution or winding up of the Holding Company, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of the
Holding Company available for distribution. If the Holding Company issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the common stock of the Holding Company
will not be entitled to preemptive rights with respect to any shares that may be
issued. The common stock is not subject to redemption.
PREFERRED STOCK
Preferred stock may be issued with such designations, powers,
preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued in
the conversion and there are no plans to issue preferred stock.
RESTRICTIONS ON ACQUISITION
Acquisitions of the Holding Company are restricted by provisions in
its Articles of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
EFFECT OF RECEIVERSHIP ON THE COMMON STOCK
In the event of the receivership of the Bank, the FDIC, as receiver,
shall, by operation of law, succeed to, among other things, all the rights,
titles, powers and privileges of the Bank and its stockholder, the Holding
Company. As provided by the procedures and priorities applicable to
receiverships of savings institutions, the holders of the common stock would be
entitled to receive any funds remaining after all depositors, creditors, other
claimants (other than holders of stock ranking junior to or on a parity with the
common stock) and administrative expenses are paid.
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company, Cranford, New Jersey is the transfer
agent and registrar for shares of the common stock.
109
<PAGE>
REGISTRATION REQUIREMENTS
The Holding Company has registered the common stock with the SEC
pursuant to Section 12(g) of the Exchange Act and will not deregister its common
stock for a period of at least three years following the completion of the
conversion. As a result of such registration, the proxy solicitation and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for the Holding
Company by Breyer & Aguggia LLP, Washington, D.C. The federal and Indiana tax
consequences of the conversion have been opined upon by Breyer & Aguggia LLP and
Monroe, Shine & Co., Inc., respectively. Breyer & Aguggia LLP and Monroe Shine &
Co., Inc. have consented to the references herein to its opinions. Certain legal
matters will be passed upon for Webb by Bose McKinney & Evans, Indianapolis,
Indiana.
EXPERTS
The financial statements of the Bank as of June 30, 1998 and 1997 and
for the years then ended have been included herein and in the Registration
Statement in reliance upon the report of Monroe Shine & Co., Inc., independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
Keller & Company has consented to the publication herein of the
summary of its report to the Bank setting forth its opinion as to the estimated
pro forma market value of the MHC and the Bank, as converted, and its letter
with respect to subscription rights and to the use of its name and statements
with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form SB-2 (File No. 333-63515) under the Securities Act with respect to the
common stock offered in the conversion. This prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. You may read
and copy such information at the SEC's public reference room in Washington, D.C.
You can request copies of those documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Registration
Statement also is available through the SEC's World Wide Web site on the
Internet (http://www.sec.gov).
The MHC has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the special meetings of the
members of the MHC and the stockholders of the Bank. This prospectus omits
certain information contained in such Application. The Application, including
the proxy materials, exhibits and certain other information that are a part
thereof, may be inspected, without charge, at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the office of the Regional Director
of the OTS at the OTS Central Regional Office, Madison Plaza, 200 West Madison
Street, Suite 1300, Chicago, Illinois 60606.
110
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................................................ F-1
Balance Sheets as of June 30, 1998 and 1997................................................. F-2
Statements of Income for the Years Ended June 30, 1998 and 1997............................. 35
Statements of Stockholders' Equity for the Years Ended June 30, 1998 and 1997............... F-3
Statements of Cash Flows for the Years Ended June 30, 1998 and 1997......................... F-4
Notes to Financial Statements.............................................................. F-5
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Financial Statements or related Notes.
Separate financial statements for the MHC have not been included
herein because the MHC has no material assets other than shares of Bank common
stock (which will be canceled as part of the conversion) and no significant
liabilities (contingent or otherwise), revenues or expenses, and has not engaged
in any significant activities to date.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
111
<PAGE>
[LETTERHEAD OF MONROE SHINE & CO., INC. APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FIRST FEDERAL BANK,
A FEDERAL SAVINGS BANK
Corydon, Indiana
We have audited the accompanying balance sheets of FIRST FEDERAL BANK, A FEDERAL
SAVINGS BANK as of June 30, 1998 and 1997, and the related statements of income,
stockholders' equity and cash flows for years then ended. 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 financial position of FIRST FEDERAL BANK, A FEDERAL
SAVINGS BANK as of June 30, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ MONROE SHINE & CO., INC.
July 22, 1998
F-1
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 894,657 $ 1,244,687
Interest bearing deposits with banks 5,239,904 3,794,547
Securities available for sale, at fair value 4,848,534 3,684,479
Securities held to maturity:
Mortgage-backed securities (fair value $1,462,917;
1997 $2,024,833) 1,472,972 2,044,598
Other debt securities (fair value $1,573,450; 1997 $3,981,996) 1,580,000 4,023,176
Loans receivable, net of allowance for loan losses of $515,959
in 1998 and $518,645 in 1997 74,887,358 69,908,541
Federal Home Loan Bank stock, at cost 588,800 559,100
Foreclosed real estate 103,874 -
Premises and equipment 2,600,772 2,440,792
Accrued interest receivable:
Loans 432,274 412,296
Mortgage-backed securities 11,681 17,272
Other debt securities 88,244 110,137
Cash value of life insurance 1,038,340 992,196
Other assets 170,653 140,133
-------------------------
TOTAL ASSETS $93,958,063 $89,371,954
=========================
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 3,146,552 $ 1,979,937
Savings and interest bearing demand deposits 26,593,058 21,020,171
Time deposits 47,722,424 47,756,201
-------------------------
Total deposits 77,462,034 70,756,309
Advances from Federal Home Loan Bank 5,250,000 8,250,000
Advance payments by borrowers for taxes and insurance 33,722 35,173
Accrued interest payable on deposits 372,845 207,493
Accrued expenses and other liabilities 498,527 630,467
-------------------------
Total Liabilities 83,617,128 79,879,442
-------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $1 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $1 par value per share
Authorized 4,000,000 shares; issued 504,015 shares
(1997; 502,490 shares) 504,015 502,490
Additional paid-in capital 1,663,281 1,643,046
Retained earnings-substantially restricted 8,170,645 7,354,737
Unrealized gain (loss) on securities available for sale, net of
tax of $1,964; 1997 ($5,090) 2,994 (7,761)
-------------------------
Total Stockholders' Equity 10,340,935 9,492,512
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $93,958,063 $89,371,954
=========================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
ADDITIONAL SECURITIES
COMMON PAID-IN RETAINED AVAILABLE
STOCK CAPITAL EARNINGS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C>
Balances at July 1, 1996 $ 501,000 $ 1,623,696 $6,690,533 $(10,459) $ 8,804,770
Net income - - 805,686 - 805,686
Exercise of stock options 1,490 19,350 - - 20,840
Dividends to minority
stockholders ($.70 per share) - - (141,482) - (141,482)
Net change in unrealized loss on
securities available for sale - - - 2,698 2,698
--------------------------------------------------------------
Balances at June 30, 1997 502,490 1,643,046 7,354,737 (7,761) 9,492,512
Net income - - 958,452 - 958,452
Exercise of stock options 1,525 20,235 - - 21,760
Dividends to minority
stockholders ($.70 per share) - - (142,544) - (142,544)
Net change in unrealized loss on
securities available for sale - - - 10,755 10,755
--------------------------------------------------------------
Balances at June 30, 1998 $ 504,015 $ 1,663,281 $8,170,645 $ 2,994 $10,340,935
==============================================================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 958,452 $ 805,686
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of premises and equipment (169,087) -
Amortization of premium on securities 12,228 12,297
Depreciation expense 174,935 102,494
Deferred income taxes (9,321) (187,647)
(Increase) decrease in accrued interest receivable 7,506 (77,768)
Increase in accrued interest payable 165,352 130,851
Net change in other assets/liabilities (162,280) 343,371
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 977,785 1,129,284
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks (1,445,357) 194,221
Purchase of securities available for sale (4,146,245) (3,044,589)
Proceeds from maturities of securities available for sale 3,000,000 1,500,000
Proceeds from maturities of securities held to maturity 2,440,000 1,240,000
Principal collected on mortgage-backed securities 562,574 492,762
Net increase in loans receivable (4,163,306) (6,492,913)
Purchase of participation loans (600,000) -
Purchase of Federal Home Loan Bank stock (29,700) (38,100)
Proceeds from sale of premises and equipment 106,250 -
Purchase of premises and equipment (590,828) (1,989,294)
Increase in cash value of life insurance (46,144) (45,849)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (4,912,756) (8,183,762)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 6,739,502 (756,029)
Net increase (decrease) in time deposits (33,777) 3,280,299
Advances from Federal Home Loan Bank 8,500,000 10,000,000
Repayment of advances from Federal Home Loan Bank (11,500,000) (5,500,000)
Exercise of stock options 21,760 20,840
Dividends paid (142,544) (141,482)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,584,941 6,903,628
------------ -----------
NET DECREASE IN CASH AND DUE FROM BANKS (350,030) (150,850)
Cash and due from banks at beginning of year 1,244,687 1,395,537
------------ -----------
CASH AND DUE FROM BANKS AT END OF YEAR $ 894,657 $ 1,244,687
============ ===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Federal Bank, a Federal Savings Bank (the Bank) is a federal savings
bank which provides a variety of banking services to individuals and
business customers through two offices in Corydon, Indiana. The Bank's
primary source of revenue is single-family residential loans.
BASIS OF PRESENTATION
The Bank is a majority owned subsidiary of First Capital, Inc., M.H.C., a
federally chartered mutual holding company. The financial statements
include only the accounts of the Bank. The financial statements have been
prepared in accordance with generally accepted accounting principles and
conform to general practices within the banking industry.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Bank has defined cash and
cash equivalents as those amounts included in the balance sheet caption
"Cash and due from banks."
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current
year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of foreclosed real estate. In connection with the determination
of estimated losses on loan and foreclosed real estate, management obtains
appraisals for significant properties.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt and equity securities and are
stated at fair value. Amortization of premium and accretion of discount are
recognized in interest income using the interest method over the remaining
period to maturity, adjusted for anticipated prepayments. Unrealized gains
and losses, net of tax, on securities available for sale are reported as a
separate component of stockholders' equity until realized. Realized gains
and losses on the sale of securities available for sale are determined
using the specific identification method.
F-5
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(1 - continued)
SECURITIES HELD TO MATURITY
Debt securities for which the Bank has the positive intent and ability to
hold to maturity are carried at cost, adjusted for amortization of premium
and accretion of discount using the interest method over the remaining
period to maturity, adjusted for anticipated prepayments. Mortgage-backed
securities represent participating interests in pools of long-term first
mortgage loans originated and serviced by issuers of the securities.
LOANS
Loans receivable are stated at unpaid principal balances, less net deferred
loan fees and the allowance for loan losses. The Bank's real estate loan
portfolio consists primarily of long-term loans, collateralized by first
mortgages on single-family residences and multi-family residential
properties located in the southern Indiana area and commercial real estate
loans. In addition to real estate loans, the Bank makes commercial loans
and consumer loans.
Loan origination fees and certain direct costs of underwriting and closing
loans are deferred and the net fee or cost is recognized as an adjustment
to interest income over the contractual life of the loans using the
interest method.
The accrual of interest is discontinued on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The Bank does not accrue interest
on loans past due 90 days or more except when the estimated value of
collateral and collection efforts are deemed sufficient to ensure full
recovery. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income.
Subsequent receipts on nonaccrual loans, including specific impaired loans
are recorded as a reduction of principal, and interest income is only
recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specified impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
F-6
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(1 - continued)
FORECLOSED REAL ESTATE
Foreclosed real estate is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real estate
are charged to expense in the current period, except for significant
property improvements, which are capitalized. Valuations are periodically
performed by management and an allowance is established by a charge to non-
interest expense if the carrying value exceeds the fair value minus
estimated costs to sell. The net expense from operations of foreclosed real
estate held for sale is reported in non-interest expense.
PREMISES AND EQUIPMENT
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises and
equipment are valued at cost. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets sold, or
otherwise disposed of, are removed from the related accounts and any gain
or loss is included in earnings.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
available for sale securities, allowance for loan losses, accumulated
depreciation and accrued income and expenses for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
STOCK-BASED COMPENSATION
The Bank applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based
compensation plan. Accordingly, no compensation costs are charged to
earnings for the incentive stock options granted under the Bank's stock-
based compensation plan.
ADVERTISING
Advertising costs are charged to operations when incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Statement provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets
it controls and liabilities it has incurred, derecognizes financial assets
when control has been surrendered and derecognizes liabilities when
extinguished. The provisions of SFAS No. 125 are effective for transactions
occurring after December 31, 1996, except those provisions relating to
repurchase agreements, securities lending, and other similar transactions
and pledged collateral, which have been delayed until after December 31,
1997 by SFAS No. 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125, an amendment of FASB Statement No. 125. The
adoption of these statements has no material impact on financial position
or results of operations.
F-7
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(1 - continued)
Effective June 30, 1998, the Bank adopted SFAS No. 128, Earnings Per Share.
The Statement specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common
stock. All reported prior period earnings per share information has been
restated in accordance with SFAS No. 128.
(2) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent. The Bank's investment in securities at
June 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
JUNE 30, 1998:
Securities available for sale:
Mutual fund $ 843,576 $ 3,395 $ - $ 846,971
Federal agency debt securities 4,000,000 1,563 - 4,001,563
---------- ------- ------- ----------
Total securities available
for sale $4,843,576 $ 4,958 $ - $4,848,534
========== ======= ======= ==========
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 683,762 $ 6,378 $ 2,012 $ 688,128
GNMA certificates 371,297 - 7,068 364,229
FNMA certificates 417,913 2,273 9,626 410,560
---------- ------- ------- ----------
1,472,972 8,651 18,706 1,462,917
---------- ------- ------- ----------
Other debt securities:
Federal agency 1,500,000 - 6,562 1,493,438
Municipal 80,000 12 - 80,012
---------- ------- ------- ----------
1,580,000 12 6,562 1,573,450
---------- ------- ------- ----------
Total securities held to
maturity $3,052,972 $ 8,663 $25,268 $3,036,367
========== ======= ======= ==========
</TABLE>
F-8
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(2 - continued)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
JUNE 30, 1997:
Securities available for sale:
Mutual fund $ 697,331 $ - $ 8,164 $ 689,167
Federal agency debt securities 3,000,000 3,125 7,813 2,995,312
---------- ------- ------- ----------
Total securities available
for sale $3,697,331 $ 3,125 $15,977 $3,684,479
========== ======= ======= ==========
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $1,124,979 $14,067 $ 9,542 $1,129,504
GNMA certificates 459,570 - 15,641 443,929
FNMA certificates 460,049 1,964 10,613 451,400
---------- ------- ------- ----------
2,044,598 16,031 35,796 2,024,833
---------- ------- ------- ----------
Other debt securities:
Federal agency 3,582,880 - 39,707 3,543,173
Municipal 440,296 - 1,473 438,823
---------- ------- ------- ----------
4,023,176 - 41,180 3,981,996
---------- ------- ------- ----------
Total securities held to
maturity $6,067,774 $16,031 $76,976 $6,006,829
========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of debt securities as of June 30, 1998,
by contractual maturity, are shown below. Expected maturities of mortgage-
backed securities may differ from contractual maturities because the
mortgages underlying the obligations may be prepaid without penalty.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $1,580,000 $1,573,450
Due after ten years 4,000,000 4,001,563 - -
---------- ---------- ---------- ------------
4,000,000 4,001,563 1,580,000 1,573,450
Mortgage-backed securities - - 1,472,972 1,462,917
---------- ---------- ---------- ------------
$4,000,000 $4,001,563 $3,052,972 $3,036,367
========== ========== ========== ============
</TABLE>
Certain debt securities were pledged to secure advances from the Federal
Home Loan Bank at June 30, 1998. (See Note 6)
F-9
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(3) LOANS
Loans receivable at June 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Real estate mortgage loans:
One-to four-family residential $57,620,258 $52,742,046
Multi-family residential 205,243 238,453
Land 217,720 269,642
Residential construction 3,786,787 4,351,835
Commercial real estate 4,370,446 2,687,234
Commercial business loans 5,048,291 6,083,187
Consumer loans:
Home equity and second mortgage loans 2,799,309 2,772,708
Automobile loans 1,574,208 1,418,620
Loans secured by savings accounts 465,613 399,421
Other consumer loans 1,458,324 2,269,721
----------- -----------
Gross loans receivable 77,546,199 73,232,867
----------- -----------
Less:
Deferred loan origination fees, net 210,572 211,383
Undisbursed portion of loans in process 1,932,310 2,594,298
Allowance for loan losses 515,959 518,645
----------- -----------
2,658,841 3,324,326
----------- -----------
Loans receivable, net $74,887,358 $69,908,541
=========== ===========
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Beginning balances $ 518,645 $ 522,000
Provision - -
Loans charged-off (2,686) (3,355)
----------- -----------
Ending balances $ 515,959 $ 518,645
=========== ===========
</TABLE>
At June 30, 1998 and 1997, the Bank had loans amounting to $79,343 and
$109,132, respectively, that were specifically classified as impaired. The
average recorded investment in impaired loans amounted to $92,291 and
$180,627 for 1998 and 1997, respectively. The allowance for loan losses
related to impaired loans amounted to $54,566 at June 30, 1998 and 1997.
There was no interest income recognized on impaired loans during 1998 and
1997, respectively.
F-10
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(3 - continued)
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time
for comparable transactions with other persons and does not involve more
than normal risk of collectibility or present other unfavorable features.
The following table represents the aggregate activity for related party
loans which exceeded $60,000 in total:
<TABLE>
<CAPTION>
<S> <C>
Balance-July 1, 1997 $2,475,934
Adjustments 341,710
New loans 724,507
Payments (307,955)
----------
Balance-June 30, 1998 $3,234,196
==========
</TABLE>
The Bank has purchased commercial paper from a corporation where a director
is considered a related party. In the opinion of management, these
transactions were made in the ordinary course of business on substantially
the same terms, including interest rate and collateral, as those prevailing
at the time for comparable transactions with unrelated parties.
(4) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and land improvements $ 379,547 $ 418,799
Leasehold improvements 46,847 46,847
Office building 1,729,512 408,135
Furniture, fixtures and equipment 941,544 758,241
Automobile 18,894 18,894
Construction in progress - 1,364,759
---------- ----------
3,116,344 3,015,675
Less accumulated depreciation 515,572 574,883
---------- ----------
Totals $2,600,772 $2,440,792
========== ==========
Gross rental income and expense were as follows:
1998 1997
---------- ----------
Gross rental income $ 1,440 $ 11,698
Gross rental expenses 228 2,503
---------- ----------
Net $ 1,212 $ 9,195
========== ==========
</TABLE>
F-11
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(5) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or
more was approximately $11,002,000 and $11,050,000 at June 30, 1998 and
1997, respectively.
At June 30, 1998, scheduled maturities of time deposits were as follows:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1999 $19,578,731
2000 12,964,385
2001 7,562,008
2002 2,645,401
2003 and thereafter 4,971,899
-----------
Total $47,722,424
===========
</TABLE>
The Bank held deposits of approximately $1,469,000 and $1,067,000 for
related parties at June 30, 1998 and 1997, respectively.
Deposit account balances in excess of $100,000 are not federally insured.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Savings and demand deposits $ 944,007 $ 846,453
Time deposits 2,864,310 2,708,043
---------- ----------
$3,808,317 $3,554,496
========== ==========
</TABLE>
(6) ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1998 and 1997, advances from the Federal Home Loan Bank were
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
Fixed rate advances
maturing during the
year ending June 30:
<S> <C> <C> <C> <C>
1998 - $ - 5.58% $7,500,000
1999 5.17% 4,500,000 - -
2002 7.75% 750,000 7.75% 750,000
----------- -----------
$5,250,000 $8,250,000
=========== ===========
</TABLE>
The advances are secured under a blanket collateral agreement. At June
30, 1998, eligible collateral included conventional mortgage loans with
a carrying value of $53,059,703 and debt securities with a carrying
value of $6,948,082 which were pledged as security for the advances.
F-12
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(7) LEASE COMMITMENT
On April 1, 1997, the Bank entered into a noncancellable sub-lease
agreement for a branch office for an initial lease term of eight years.
The sub-lessor has a fixed term lease with the owner with an initial term
expiring November 30, 2003.
The following is a schedule by years of future minimum rental payments
required under this operating lease:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1999 $12,690
2000 12,690
2001 12,690
2002 12,690
2003 12,690
-------
Total minimum payments required $63,450
=======
</TABLE>
Total minimum rental expense for all operating leases for the years
ended June 30, 1998 and 1997 amounted to $12,690 and $4,230,
respectively.
(8) INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current $ 598,536 $ 319,145
Deferred (9,321) (187,647)
--------- ---------
Totals $ 589,215 $ 131,498
========= =========
</TABLE>
Significant components of the Bank's deferred tax assets and liabilities as
of June 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities:
Depreciation $ 65,634 $ 65,436
Deferred loan fees 26,446 20,134
Deferred compensation plans (127,170) (110,274)
Allowance for loan losses (204,371) (205,436)
Post-1987 bad debt deduction 171,797 171,797
Unrealized gain (loss) on securities available for sale 1,964 (5,090)
--------- ---------
Net deferred tax asset $ (65,700) $ (63,433)
========= =========
</TABLE>
F-13
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(8 - continued)
The reconciliation of income tax expense with the amount which would have
been provided at the federal statutory rate of 34 percent follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Provision at federal statutory tax rate $526,207 $ 318,643
State income tax-net of federal tax benefit 83,515 22,109
Tax exempt interest income (8,813) (16,230)
Tax effect of change in tax law related to the allowance
for loan losses and bad debt deduction - (177,480)
Increase in cash value of life insurance (15,689) (15,589)
Other 3,995 45
-------- ---------
Totals $589,215 $ 131,498
======== =========
EFFECTIVE TAX RATE 38.1% 14.0%
======== =========
</TABLE>
Prior to July 1, 1996, the Bank was permitted by the Internal Revenue Code
to deduct from taxable income an annual addition to a statutory bad debt
reserve subject to certain limitations. Retained earnings at June 30, 1998
includes approximately $909,000 of cumulative deductions for which no
deferred federal income tax liability has been recorded. Reduction of
these reserves for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for tax
purposes subject to the then current corporate income tax rate. The
unrecorded deferred liability on these amounts was approximately $309,000
at June 30, 1998.
Recently enacted federal legislation repealed the reserve method of
accounting for bad debts by qualified thrift institutions for tax years
beginning after December 31, 1995. As a result, the Bank will no longer be
able to calculate the annual addition to the statutory bad debt reserve
using the percentage-of-taxable-income method. Instead, the Bank will be
required to compute its federal tax bad debt deduction based on actual loss
experience over a period of years. The legislation requires the Bank to
recapture into taxable income over a six-year period its post-1987
additions to the statutory bad debt reserve, thereby generating additional
tax liability. At June 30, 1998, the remaining balance of the post-1987
reserves totaled $505,284 for which a deferred tax liability of $171,797
has been recorded.
The legislation also provides that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet the
qualifying thrift definitional tests and if the Bank continues to qualify
as a "bank" under existing provisions of the Internal Revenue Code.
(9) RETIREMENT PLAN
The Bank has a qualified contributory defined contribution plan available
to all eligible employees. The plan allows participating employees to make
tax-deferred contributions under Internal Revenue Code Section 401(k). The
Bank contributed $24,991 and $22,989 to the plan for 1998 and 1997,
respectively.
(10) DEFERRED COMPENSATION PLANS
The Bank has a deferred compensation plan whereby certain officers will be
provided specific amounts of income for a period of fifteen years following
normal retirement. The benefits under the agreements become fully vested
after four years of service beginning with the effective date of the
agreements. The Bank accrues the present value of the benefits so the
amounts required will be provided at the normal retirement dates and
thereafter.
F-14
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(10 - continued)
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1997 and 2022. The Bank is the owner and
beneficiary of insurance policies on the lives of these officers which may
provide funds for a portion of the required payments. The agreements also
provide for payment of benefits in the event of disability, early
retirement, termination of employment or death. At June 30, 1998 and 1997,
the accrued deferred compensation liability amounted to $206,209 and
$177,171, respectively. Deferred compensation expense for this plan was
$33,866 and $43,820 for 1998 and 1997, respectively.
The Bank also has a directors' deferred compensation plan whereby a
director defers into a retirement account a portion of his monthly director
fees for a specified period to provide a specified amount of income for a
period of fifteen years following normal retirement. The Bank also accrues
the interest cost on the deferred obligation so the amounts required will
be provided at the normal retirement dates and thereafter.
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1995 and 2037. The agreements also provide for
payment of benefits in the event of disability, early retirement,
termination of service or death. At June 30, 1998 and 1997, the accrued
deferred compensation liability for this plan amounted to $94,845 and
$82,552, respectively. Deferred compensation expense for this plan was
$16,633 and $18,950 for 1998 and 1997, respectively.
(11) STOCK-BASED COMPENSATION PLAN
The Bank has an incentive stock option plan that provides for issuance of
up to 20,000 shares of the Bank's authorized but unissued common stock to
all employees, including any officer or employee-director of the Bank.
Under the plan, the Bank may grant both non-qualified stock options and
incentive stock options. In the case of incentive stock options, the
aggregate fair value of the stock (determined at the time the incentive
stock option is granted) for which any optionee may be granted incentive
options which are first exercisable during any calendar year shall not
exceed $100,000. Option prices may not be less than the fair market value
at the date of the grant. Options granted vest ratably over five years and
are exercisable in whole or in part for a period up to ten years from the
date of the grant. As of June 30, 1998, only incentive stock options have
been granted under the plan.
The following summarizes the Bank's stock options as of June 30, 1998 and
1997, and the changes for the years then ended:
<TABLE>
<CAPTION>
1998
-------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding beginning of year 7,710 $14.83
Granted 1,900 19.00
Exercised (1,525) 14.27
Forfeited (840) 16.00
------
Outstanding at end of year 7,245 15.75
======
Exercisable at end of year 610 $16.00
======
</TABLE>
F-15
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(11 - continued)
<TABLE>
<CAPTION>
1997
-------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at beginning of year 4,000 $13.00
Granted 5,200 16.00
Exercised (1,490) 13.99
Forfeited - -
------
Outstanding at end of year 7,710 14.83
======
Exercisable at end of year - $ -
======
</TABLE>
The calculated compensation cost based on the fair value method at the
grant date under SFAS No. 123 is immaterial in relation to net income and
earnings per share for the years ended June 30, 1998 and 1997. In
accordance with SFAS No. 123, the Bank elected to continue to apply the
provisions of APB No. 25 and related interpretations in accounting for its
stock-based compensation plan.
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as commitments to extend credit and legal
claims, which are not reflected in the financial statements.
Commitments under outstanding standby letters of credit totaled $185,000
and $102,000 at June 30, 1998 and 1997, respectively.
The following is a summary of the commitments to extend credit at June 30,
1998:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
<S> <C> <C> <C> <C>
Fixed rate loans:
Residential mortgage loans
with 10 to 30 year terms 7.65% $1,422,750 8.51% $ 935,385
Consumer and commercial
loans with 1 to 10 year terms 8.86% 162,847 9.52% 91,725
Adjustable rate residential
mortgage loans - 207,500
Undisbursed commercial and
personal lines of credit 1,628,128 2,113,456
Undisbursed portion of
construction loans in process 1,932,310 2,594,298
Other loans in process 249,893 -
---------- ---------
Total commitments to
extend credit $5,395,928 $5,942,364
========== ==========
</TABLE>
F-16
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments (see Note 12). The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount and type of collateral obtained, if deemed necessary by the Bank
upon extension of credit, varies and is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters
of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank's policy for obtaining
collateral, and the nature of such collateral, is essentially the same as
that involved in making commitments to extend credit.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1998 or 1997.
(14) STOCKHOLDERS' EQUITY
DIVIDENDS
The payment of dividends by the Bank is subject to regulation by the Office
of Thrift Supervision (OTS). The Bank may not declare or pay a cash
dividend or repurchase any of its capital stock if the effect thereof would
cause retained earnings of the Bank to be reduced below regulatory capital
requirements imposed by the OTS.
First Capital Inc., M.H.C., with the approval of the OTS, waived all
dividends applicable to its shares in the Bank for the years ended June 30,
1998 and 1997, respectively. The cumulative amount of dividends waived by
First Capital, Inc., M.H.C. is $1,137,000 at June 30, 1998 and is
considered a restriction of retained earnings of the Bank.
CAPITAL STOCK
The Bank has the power to issue shares of capital stock (including common
and preferred stock) to persons other than the mutual holding company. So
long as the mutual holding company is in existence, the aggregate amount of
voting stock that may be issued to persons other than the mutual holding
company must be less than 50 percent of the issued and outstanding voting
stock of the Bank. The Bank may issue any amount of non-voting stock to
persons other than the mutual holding company.
F-17
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(14 - continued)
PLAN OF CONVERSION AND REORGANIZATION
On June 18, 1998, the Boards of Directors of First Capital, Inc., M.H.C.
("MHC") and the Bank adopted a plan of conversion and reorganization
whereby the MHC will convert from mutual to stock form of organization and
the Bank will reorganize as a wholly-owned subsidiary of the newly formed
stock holding company ("Holding Company").
Pursuant to this plan, shares of Holding Company common stock will be
offered as part of the conversion in a subscription offering pursuant to
nontransferable subscription rights at a predetermined and uniform price
first to the Bank's eligible account holders, second to the tax-qualified
employee stock benefit plans, third to the Bank's supplemental eligible
account holders and fourth to other members of the MHC. Shares not
subscribed for in the subscription offering will be offered to the general
public in a direct community offering. Shares still remaining may then be
offered to the general public in a syndicated community offering. Each
minority stockholder of the Bank will receive common stock of the Holding
Company in exchange for their shares of common stock of the Bank.
At the time of the conversion and reorganization, the Bank will establish a
liquidation account in an amount equal to the amount of the cumulative
dividends with respect to the Bank's common stock waived by the MHC plus
the greater of the Bank's total retained earnings as of the date of the
latest balance sheet contained in the final offering circular used in
connection with the Bank's reorganization as a majority owned subsidiary of
the MHC, or 59.5% of the Bank's total stockholders' equity as of the date
of the latest balance sheet contained in the final prospectus used in
connection with the conversion and reorganization. The liquidation account
will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore
an eligible or supplemental eligible account holders interest in the
liquidation account. In the event of a complete liquidation of the Bank,
each eligible account holder and supplemental eligible account holder will
be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held.
Consummation of the conversion and reorganization is subject to the
approval of the plan by the OTS and by the members of the MHC at a special
meeting of the members to be called to consider the conversion and
reorganization.
Upon completion of the conversion stock offering, the costs related to the
conversion and offering will be charged against the proceeds from the stock
sold in the conversion. If the transactions are not consummated, all costs
will be charged to expense. At June 30, 1998, the amount of deferred costs
related to the conversion and offering totaled approximately $13,000.
(15) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by its primary federal regulator, the OTS. 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
quantitative judgments by the regulators about components, risk weightings,
and other factors.
F-18
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(15 - continued)
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of tangible capital to adjust total assets (as
defined) Tier I (core) capital (as defined) to adjusted total assets,
Tier I capital to risk-weighted assets (as defined), and of total risk-
based capital (as defined) to risk-weighted assets. Management believes,
as of June 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 1998, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk in
either year.
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
AS OF JUNE 30, 1998:
Total equity capital and
ratio to total assets $10,341 11.0%
Adjustments to equity
capital (3)
------
Tangible capital and ratio
to adjusted total assets $10,338 11.0% $1,409 1.5%
====== =====
Tier I (core) capital and
ratio to adjusted total
assets $10,338 11.0% $2,819 3.09% $4,698 5.0%
====== ===== =====
Tier I capital and ratio to
risk-weighted assets $10,338 18.3% $3,385 6.0%
=====
Allowance for loan losses 461
------
Total risk-based capital
and ratio to risk-weighted
assets $10,799 19.1% $4,513 8.0% $5,642 10.0%
====== ===== =====
Total assets $93,958
======
Adjusted total assets $93,955
======
Risk-weighted assets $56,415
======
</TABLE>
F-19
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(15 - continued)
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1997:
Total equity capital and
ratio to total assets $ 9,493 10.6%
Adjustments to equity
capital 8
-------
Tangible capital and ratio
to adjusted total assets $ 9,501 10.6% $ 1,341 1.5%
======= =======
Tier I (core) capital and
ratio to adjusted total
assets $ 9,501 10.6% $ 2,681 3.0% $ 4,469 5.0%
======= ======= ========
Tier I capital and ratio to
risk-weighted assets $ 9,501 17.8% $ 3,212 6.0%
=======
Allowance for loan losses 464
-------
Total risk-based capital
and ratio to risk-weighted
assets $ 9,965 18.6% $ 4,282 8.0% $ 5,353 10.0%
======= ========= =======
Total assets $89,372
=======
Adjusted total assets $89,380
=======
Risk-weighted assets $53,525
=======
</TABLE>
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments at June 30
are as follows:
<TABLE>
<CAPTION>
1998 1997
----- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 895 $ 895 $ 1,245 $ 1,245
Interest bearing deposits in banks 5,240 5,240 3,795 3,795
Securities available for sale 4,849 4,849 3,684 3,684
Securities held to maturity 3,053 3,036 6,068 6,007
Loans receivable 75,403 75,789 70,427 69,704
Less: allowance for loan losses 516 516 518 518
------- ------- ------- -------
Loans receivable, net 74,887 75,273 69,909 69,186
------- ------- ------- -------
Federal Home Loan Bank stock 589 589 559 559
Financial liabilities:
Deposits 77,462 77,798 70,756 70,697
Advances from Federal Home
Loan Bank 5,250 4,960 8,250 8,273
Unrecognized financial instruments:
Commitments to extend credit - 24 - 32
</TABLE>
F-20
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(16 - continued)
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
CASH AND SHORT-TERM INVESTMENTS
For short-term investments, including cash and due from banks and interest
bearing deposits with banks, the carrying amount is a reasonable estimate
of fair value.
DEBT AND EQUITY SECURITIES
For debt securities, including mortgage-backed securities, the fair values
are based on quoted market prices. For restricted equity securities held
for investment, the carrying amount is a reasonable estimate of fair value.
MORTGAGE LOANS HELD FOR SALE
For mortgage loans held for sale, the fair values are based on market price
quotations from dealers.
LOANS RECEIVABLE
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, money market deposit
accounts and other transaction accounts is the amount payable on demand at
the balance sheet date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar remaining maturities.
BORROWED FUNDS
The fair value of advances from Federal Home Loan Bank is estimated by
discounting the future cash flows using the current rates at which similar
loans with the same remaining maturities could be obtained.
COMMITMENTS TO EXTEND CREDIT
The majority of commitments to extend credit would result in loans with a
market rate of interest if funded. The fair value of these commitments are
the fees that would be charged to customers to enter into similar
agreements. For fixed rate loan commitments, the fair value also considers
the difference between current levels of interest rates and the committed
rates.
F-21
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
(17) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
BASIC:
Earnings:
Net income $958,452 $805,686
======== ========
Shares:
Weighted average common shares outstanding 503,358 501,899
======== ========
Net income per common share, basic $ 1.90 $ 1.61
======== ========
DILUTED:
Earnings:
Net income $958,452 $805,686
======== ========
Shares:
Weighted average common shares outstanding 503,358 501,899
Add: Dilutive effect of outstanding options 7,507 8,309
-------- --------
Weighted average common shares outstanding, as adjusted 510,865 510,208
======== ========
Net income per common share, diluted $ 1.88 $ 1.58
======== ========
</TABLE>
(18) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
CASH PAYMENTS FOR:
Interest $3,946,516 $3,740,753
Income taxes 486,206 350,699
NONCASH INVESTING ACTIVITIES:
Transfers from loans to real estate
acquired through foreclosure $ 105,734 $ -
Proceeds from sales of foreclosed
real estate financed through loans - 51,300
Loans originated to facilitate sale of premises and
equipment 318,750 -
</TABLE>
F-22
<PAGE>
GLOSSARY
ARM loans Adjustable-rate mortgage loans.
Direct Community Offering The offering of shares of the common stock to
the general public with preference given
first to the public stockholders of the Bank
and second to natural persons and trusts of
natural persons who are residents of the
Bank's Local Community.
Eligible Account Holders Holders of savings accounts at the Bank with
balances of at least $50 as of March 31,
1997.
ESOP Employee Stock Ownership Plan to be
implemented by the Bank in the conversion.
Estimated Valuation Range The range of the aggregate pro forma market
value of the Bank and the MHC as of October
23, 1998, ranging between $11,050,000 and
$14,950,000 (with a midpoint of $13,000,000).
Exchange Act The Securities Exchange Act of 1934, as
amended.
Exchange Ratio The ratio at which shares of Bank
common stock will be exchanged for shares of
Holding Company common stock.
Expiration Date December 15, 1998, ending date of the
Subscription Offering.
FASB Financial Accounting Standards Board.
FDIC Federal Deposit Insurance Corporation.
FHLB Federal Home Loan Bank.
Fannie Mae Federal National Mortgage Association.
Freddie Mac Federal Home Loan Mortgage Corporation.
GAAP Generally accepted accounting principles.
Ginnie Mae Government National Mortgage Association.
IRA Individual Retirement Account.
IRS Internal Revenue Service.
Keller & Company Keller & Company, Inc., the firm the Bank
engaged to prepare the appraisal of its
estimated pro forma market value in the
conversion and to advise the Bank about its
business plan.
G-1
<PAGE>
Local Community Crawford, Clark, Floyd, Harrison and
Washington Counties, Indiana.
NASD National Association of Securities Dealers,
Inc.
Other Members Depositors of the Bank as of October
31, 1998 and borrowers of the Bank as of
February 1, 1993 whose loans continue to be
outstanding as of October 31, 1998.
OTS Office of Thrift Supervision of the United
States Department of the Treasury.
Plan of Conversion The plan of conversion adopted
by the Bank and the MHC, pursuant to which
the conversion is being undertaken.
SAIF Savings Association Insurance Fund.
SEC Securities and Exchange Commission.
Securities Act The Securities Act of 1933, as amended.
SFAS Statement of Financial Accounting Standards.
Subscription Offering The offering of shares of the common stock,
in order of priority, to Eligible Account
Holders, the ESOP, Supplemental Eligible
Account Holders and Other Members.
Supplemental Eligible Account Holders of accounts at the Bank with balances
Holders of at least $50 as of September 30, 1998.
Syndicated Community Offering The offering of shares of the common stock to
the general public by a group of selected
dealers.
Webb Charles Webb & Company, a Division of Keefe
Bruyette & Woods, Inc.
G-2
<PAGE>
[Map of Corydon area showing branch and main office locations]
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST CAPITAL, INC. OR FIRST FEDERAL BANK, A FEDERAL
SAVINGS BANK. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR 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 IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST CAPITAL, INC. OR FIRST
FEDERAL BANK, A FEDERAL SAVINGS BANK SINCE ANY OF THE DATES AS OF WHICH
INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
FIRST CAPITAL, INC.
(Proposed Holding Company for
First Federal Bank, A Federal Savings Bank)
657,475 TO 1,022,954 SHARES OF
COMMON STOCK
PROSPECTUS
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
NOVEMBER 12 , 1998
UNTIL THE LATER OF DECEMBER 15, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS THAT BUY,
SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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