<PAGE>
As filed with the Securities and Exchange Commission on November 4, 1998
Registration No. 333-63515
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
FIRST CAPITAL, INC.
-----------------------------------------
(Exact name of registrant in its charter)
Indiana 6035 [applied for]
- -------------- ---------------- --------------------
(State or other (Primary SIC No.) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
220 FEDERAL DRIVE, N.W.
CORYDON, INDIANA 47112
(812) 738-2198
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(Address and telephone number of principal executive offices and place of
business)
Paul M. Aguggia, Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA LLP
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
(202) 737-7900
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(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
==========================================================================================================
Calculation of Registration Fee
==========================================================================================================
<S> <C> <C> <C> <C>
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount Being Proposed Offering Aggregate Offering Amount of
Being Registered Registered(1) Price(1) Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------------
Common Stock, 1,719,250 $10.00 17,192,500 $5,853(2)
$0.01 Par Value
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold are subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) Previously paid based on a proposed maximum aggregate offering price of
$19,387,500 (1,938,750 shares at $10.00 per share).
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form SB-2
<TABLE>
<S> <C>
1. Front of Registration
Front of Registration Statement; Outside Front Cover Page
Statement and Outside Front
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Market for Common Stock; The Conversion -- Stock
Pricing, Exchange Ratio and Number of Shares to be Issued
6. Dilution *
7. Selling Security-Holders *
8. Plan of Distribution The Conversion
9. Legal Proceedings Business of the Bank -- Legal Proceedings
10. Directors, Executive Officers, Management of the Holding Company; Management of
Promoters and Control Persons the Bank
11. Security Ownership of Certain *
Beneficial Owners and Management
12. Description of Securities Description of Capital Stock of the Holding Company
13. Interest of Named Experts and Legal and Tax Opinions; Experts
Counsel
14. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Business of the Bank
Five Years
16. Description of Business Business of the Holding Company; Business of the Bank
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operation Financial Condition and Results of Operations
18. Description of Property Business of the Bank -- Properties
</TABLE>
<PAGE>
<TABLE>
<S> <C>
19. Certain Relationships and Management of the Bank -- Transactions with the Bank
Related Transactions
20. Market Price for Common Equity Outside Front Cover Page; Market for Common Stock;
and Related Stockholder Matters Dividend Policy
21. Executive Compensation Management of the Bank -- Executive Compensation;
and -- Benefits
22. Financial Statements Financial Statements; Pro Forma Data
23. Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
</TABLE>
____________________
*Item is omitted because answer is negative or item inapplicable.
<PAGE>
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., which is 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.
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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 $10,229,538
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 $ 9,797,538
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 ______________, 1998, unless extended for up to ___ days.
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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 __.
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)___________.
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this prospectus is November ___, 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>
<CAPTION>
TABLE OF CONTENTS
Page Page
---- ----
<S> <C> <C> <C>
Summary..................................... Business of the Holding Company.............
Risk Factors................................ Business of the Bank........................
Selected Financial Information............. Management of the Holding Company...........
Use of Proceeds............................. Management of the Bank......................
Dividend Policy............................. Regulation..................................
Market for Common Stock..................... Taxation....................................
Capitalization.............................. The Conversion..............................
Historical and Pro Forma Comparison of Stockholders' Rights..........
Regulatory Capital Compliance.............. Restrictions on Acquisition
Pro Forma Data.............................. of the Holding Company.....................
Effect of the Conversion on the Bank's Description of Capital Stock
Stockholders............................... of the Holding Company.....................
Subscriptions by Executive Officers and Registration Requirements...................
Directors.................................. Legal and Tax Opinions......................
First Federal Bank, A Federal Savings Experts.....................................
Bank Statements of Income.................. Additional Information......................
Management's Discussion and Index to Financial Statements..............
Analysis of Financial Condition Glossary.................................... G-1
and Results of Operations..................
</TABLE>
[Map of Corydon area showing branch and main office locations]
<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., M.H.C. Public Stockholders
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 FederalBank
-------------------
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
__________, 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 ____________, 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 37,110 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 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."
3
<PAGE>
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 ________, 1998, unless extended by the Bank and the
Holding Company for up to __ 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, (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
4
<PAGE>
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
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 2.5807 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.
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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 44,500 shares, which equals approximately 4.0% of
the shares issued 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
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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
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form in 1993 as part of its reorganization into the mutual holding company
structure, the Bank was unable to implement either an employee stock ownership
plan or a management recognition and development plan because the stock offering
was oversubscribed by the Bank's depositors and borrowers whose stock
subscription rights took preference over the stock subscription rights granted
to such stock benefit plans under then applicable OTS regulations. 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 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
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provisions of the Holding Company's Articles of Incorporation and Bylaws, see
"COMPARISON OF STOCKHOLDERS' RIGHTS" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY."
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, $17.4 million,
or 22.5%, 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."
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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 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
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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 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 3.8%. 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 8.5%. 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
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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."
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."
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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 $10,229,538. 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.
14
<PAGE>
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
__________, 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.
15
<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
<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 and cumulative effect
of a change in accounting principle................. 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.
16
<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
<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.
17
<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
<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
======= =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended September 30,
1998 1997
----------------- ---------------
(In Thousands,
Except Per Share Data)
<S> <C> <C>
PER SHARE DATA:
Net income - basic................................... $ 0.50 $ 0.61
Net income - diluted................................. 0.49 0.60
Dividends............................................ 0.18 0.18
<CAPTION>
At or For the
Three Months
Ended September 30,
1998 1997
----------------- ---------------
(In Thousands,
Except Per Share Data)
<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.
19
<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.
20
<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.
21
<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. Management deemed the provision
warranted in the current period in light of the growth in the loan portfolio.
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.
22
<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
law and federal regulations. The Holding Company will consider exploring
opportunities to use such funds to expand
23
<PAGE>
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.
24
<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
25
<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 _____________, 1998)
</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.
26
<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)
--------------------- ---------- ---------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
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)......................... - - 526 619 712 618
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)
27
<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 3.8%. 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.
28
<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 MRDP 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
Valuation Range Valuation Range
----------------------- ----------------------
657,475 Shares 773,500 Shares
June 30, 1998 at $10.00 Per Share at $10.00 Per Share
---------------------- ----------------------- ----------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
-------- ------- ---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital............... $10,341 11.0% $12,653 13.1% $13,084 13.5%
======= ==== ======= ==== ======= ====
Tangible capital........... $10,338 11.0% $12,650 13.1% $13,081 13.5%
Tangible capital
requirement............... 1,409 1.5 1,444 1.5 1,450 1.5
------- ---- ------- ---- ------- ----
Excess..................... $ 8,929 9.5% $11,206 11.6% $11,631 12.0%
======= ==== ======= ==== ======= ====
Core capital............... $10,338 11.0% $12,650 13.1% $13,081 13.5%
Core capital requirement(2) 2,819 3.0 2,888 3.0 2,901 3.0
------- ---- ------- ---- ------- ----
Excess..................... $ 7,519 8.0% $ 9,762 10.1% $10,180 10.5%
======= ==== ======= ==== ======= ====
Total capital(3)........... $10,799 19.1% $13,111 22.7% $13,542 23.3%
Risk-based
capital requirement....... 4,513 8.0 4,624 8.0 4,645 8.0
------- ---- ------- ---- ------- ----
Excess..................... $ 6,266 11.1% $ 8,487 14.7% $ 8,897 15.3%
======= ==== ======= ==== ======= ====
<CAPTION>
PRO FORMA AT JUNE 30, 1998
------------------------------------------------
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
----------------------- ----------------------
889,525 Shares 1,022,954 Shares
at $10.00 Per Share at $10.00 Per Share
----------------------- ----------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets (1) Amount Assets (1)
---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GAAP capital............... $13,516 13.9% $14,012 14.4%
======= ==== ======= ====
Tangible capital........... $13,513 13.9% $14,009 14.3%
Tangible capital
requirement............... 1,457 1.5 1,464 1.5
------- ---- ------- ----
Excess..................... $12,056 12.4% $12,545 12.8%
======= ==== ======= ====
Core capital............... $13,513 13.9% $14,009 14.3%
Core capital requirement(2) 2,914 3.0 2,929 3.0
------- ---- ------- ----
Excess..................... $10,599 10.9% $11,080 11.3%
======= ==== ======= ====
Total capital(3)........... $13,974 24.0% $14,470 24.7%
Risk-based
capital requirement....... 4,668 8.0 4,690 8.0
------- ---- ------- ----
Excess..................... $ 9,308 16.0% $ 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.
29
<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 $85,000, $101,000, $117,000 and $136,000 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.
30
<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)...................... (48) (56) (65) (74)
Pro forma 1999 MRDP adjustments(4)................. (33) (38) (44) (51)
-------- -------- -------- ------------
Pro forma net income............................ $ 1,055 $ 1,074 $ 1,092 $ 1,114
======== ======== ======== ============
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)...................... (0.05) (0.05) (0.05) (0.05)
Pro forma 1999 MRDP adjustments(4)................. (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- ------------
Pro forma net income per share(7)............... $ 1.00 $ 0.86 $ 0.76 $ 0.67
======== ======== ======== ============
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 $ 16,758 $ 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............................... 10.00x 11.63x 13.16x 14.93x
</TABLE>
(footnotes on following page)
31
<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 3.8% and pro forma net income per share would be $0.96,
$0.83, $0.74 and $0.65 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 $15.23, $13.93, $12.97 and $12.13 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.
32
<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 approximately 8.5%. 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
$0.90, $0.78, $0.69 and $0.61 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 $12.96, $11.72, $10.80 and $10.00 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.
33
<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.
<TABLE>
<CAPTION>
At or For the
Year Ended
June 30, 1998
---------------
<S> <C>
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............ 2.19
At midpoint of Estimated Valuation Range........... 2.22
At maximum of Estimated Valuation Range............ 2.26
At 15% above maximum of Estimated Valuation Range.. 2.29
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
</TABLE>
34
<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,180154 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."
35
<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.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
36
<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. Non-interest 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 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."
37
<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
38
<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.
39
<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.
40
<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).
41
<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.
42
<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
------------------------------ Percent of Present Value of Assets
Change Dollar Dollar Percent ----------------------------------
In Rates Amount Change Change NPV Ratio Change
-------- ------- ---------- --------- -------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400bp $ 9,071 $(3,077) (25)% 10.23% (246)bp
300bp 10,056 (2,092) (17) 11.10 (159)bp
200bp 10,979 (1,169) (10) 11.87 (82)bp
100bp 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.
43
<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
44
<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
45
<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.
46
<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.
47
<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
48
<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 approximately
$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
49
<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 approximately $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 secured by farm equipment. Such loan was performing
according to its terms at that date.
50
<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.
51
<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>
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.
52
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
(In thousands)
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.............................. 17,367 17,326
-------- --------
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 also required on
collateral for loans. The Bank requires escrows for insurance on all loans with
a loan-to-value exceeding 90%.
53
<PAGE>
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 15/th/ day of delinquency. A
delinquency notice is mailed to the borrower after the 30/th/ 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.
54
<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 is collateral dependent. A loan is
classified as impaired by management when, based on current information and
events,
55
<PAGE>
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
allowance for loan losses as a percentage of total loans outstanding as of the
end of a given period represents an
56
<PAGE>
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>
57
<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.
58
<PAGE>
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.
59
<PAGE>
The following table sets forth the securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Weighted Weighted
Fair Amortized Percent of Average Fair Amortized Percent of Average
Value Cost Portfolio Yield(2) Value Cost Portfolio Yield(2)
------- --------- ---------- -------- ------ --------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <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 21.50% 4.54%
Due after five years through ten years...... -- -- -- -- 476 483 4.95 6.72
Due after ten years through fifteen years... -- -- -- -- 999 1,000 10.24 7.75
Municipal:
Due in one year or less..................... 80 80 1.01 3.90 359 360 3.69 4.40
Due after one year through five years....... -- -- -- -- 79 80 0.82 3.90
Mortgage-backed securities(3)................ 1,463 1,473 18.65 6.74 2,025 2,045 20.94 6.48
------ ------ ------ ------ ------ -----
$3,036 $3,053 38.66% $6,006 $6,068 62.14%
====== ====== ====== ====== ====== =====
Securities Available for Sale
Debt securities:
U.S. agency:
Due after five years through ten years..... -- -- -- -- $ 992 $1,000 10.24% 7.50%
Due after ten years through fifteen years.. 4,002 4,000 50.65 7.01 2,003 2,000 20.48% 8.32
Equity securities:
Mutual fund(4)............................... 847 844 10.69 N/A 689 697 7.14% N/A
------ ------ ------ ------ ------ -----
$4,849 $4,844 61.34% $3,684 $3,697 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.
60
<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
<CAPTION>
Time Deposits
-------------
<S> <C> <C> <C> <C>
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>
61
<PAGE>
The following table presents the maturity distributions of time deposits of
$100,000 or more as of June 30, 1998.
<TABLE>
<CAPTION>
Maturity Period Balance
--------------------------- --------------
(In thousands)
<S> <C>
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
=======
</TABLE>
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>
62
<PAGE>
TIME DEPOSITS BY RATES
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
to 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
63
<PAGE>
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
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.
64
<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 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.
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.
65
<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:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
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
</TABLE>
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.
66
<PAGE>
DIRECTORS
<TABLE>
<CAPTION>
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
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
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
67
<PAGE>
to 1994. 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."
68
<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) 44,320 8.7
</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
69
<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
70
<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, $108,000 and $105,000,
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
71
<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.
72
<PAGE>
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
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.
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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.
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
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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 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,
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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 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
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(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.
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
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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 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
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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.
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
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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 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
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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 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
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company under common control are considered affiliates of the subsidiary savings
association under the HOLA. 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.
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,
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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."
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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 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
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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
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 _________, 1998 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
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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 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
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outstanding shares.
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.
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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."
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.
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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, 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
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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.
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
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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 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
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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.
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
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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.
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
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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 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
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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 -- Anti-takeover Provisions -- Amendment of Articles of Incorporation
and Bylaws."
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).
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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 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
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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 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
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"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.
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.
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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.
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.
110
<PAGE>
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 "THE 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 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.
111
<PAGE>
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.
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
112
<PAGE>
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.
113
<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................ 36
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-6
</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.
114
<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
<TABLE>
<CAPTION>
(2 - continued)
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 777,649 951,619
Automobile loans 1,574,208 1,418,620
Loans secured by savings accounts 465,613 399,421
Other consumer loans 3,479,984 4,090,810
----------- -----------
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
=========== ===========
An analysis of the allowance for loan losses is as follows:
1998 1997
----------- -----------
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
<S> <C> <C> <C> <C>
Fixed rate advances
maturing during the
year ending June 30:
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
<TABLE>
<CAPTION>
(15 - continued)
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, 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
<S> <C> <C> <C> <C>
(In thousands)
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 _________, 1998, the date on which the
Subscription Offering ends.
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
G-1
<PAGE>
value in the conversion and to advise
the Bank about its business plan.
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 Holders of accounts at the Bank with
balances 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>
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.
[Logo for 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 ___, 1998
UNTIL THE LATER OF _______, 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.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution*
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses $ 95,000
Securities marketing firm legal fees(1) 30,000
Securities marketing firm expenses(2) 117,000
EDGAR, printing, copying, postage, mailing 75,000
Appraisal/business plan fees and expenses 24,000
Accounting fees 25,000
Data processing fees and expenses 5,000
SEC filing fee 5,900
OTS filing fee 8,400
Other 6,700
---------
Total $392,000
=========
</TABLE>
_____________
*Estimated based on the midpoint of the Estimated Valuation Range.
(1) Includes blue sky legal fees and expenses.
(2) Webb & Company will receive a management fee of $25,000 plus a success fee
of 1.5% of the aggregate purchase price of the shares of common stock sold
in the Subscription Offering and the Direct Community Offering, excluding
shares purchased by the ESOP and by officers and directors of the Bank and
their associates. The success fee is reduced by the management fee. See
"THE CONVERSION AND REORGANIZATION -- Plan of Distribution and Selling
Commissions."
Item 14. Indemnification of Officers and Directors
Article VII of the Articles of Incorporation of First Capital, Inc.
requires indemnification of officers and directors as follows:
ARTICLE VII
INDEMNIFICATION
Section 7.01. General Provisions. The corporation shall, to the fullest
extent to which it is empowered to do so by the Indiana Business Corporation Act
or any other applicable laws, as from time to time in effect, indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal, by
reason of the fact that he is or was a director, officer or employee of the
corporation, or who, while serving as such director, officer or employee of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
whether for profit or not, against expenses (including attorneys' fees),
judgments, settlements, penalties and fines (including excise taxes assessed
with respect to employee benefit plans) actually or reasonably incurred by him
in accordance with such action, suit or proceeding, if he acted in good faith
and in a manner he reasonably believed, in the case of conduct in his official
capacity, was in the best interest of the corporation, and in all other cases,
was not opposed to the best interests of the corporation, and with respect to
any criminal action or proceeding, he either had reasonable cause to believe his
conduct was lawful or no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not meet the prescribed
standard of conduct.
II-1
<PAGE>
SECTION 7.02. INDEMNIFICATION AUTHORIZED. To the extent that a director,
officer or employee of the corporation has been successful, on the merits or
otherwise, in the defense of any action, suit or proceeding referred to in
Section 7.01 of this Article, or in the defense of any claim, issue or matter
therein, the corporation shall indemnify such person against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith. Any other indemnification under Section 7.01 of this Article (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case, upon a determination that indemnification of the director,
officer or employee is permissible in the circumstances because he has met the
applicable standard of conduct. Such determination shall be made (a) by the
board of directors by a majority vote of a quorum consisting of directors who
were not at the time parties to such action, suit or proceeding; or (b) if a
quorum cannot be obtained under subdivision (a), by a majority vote of a
committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two or more
directors not at the time parties to such action, suit or proceeding; or (c) by
special legal counsel: (i) selected by the board of directors or its committee
in the manner prescribed in subdivision (a) or (b), or (ii) if a quorum of the
board of directors cannot be obtained under subdivision (a) and a committee
cannot be designated under subdivision (b), selected by a majority vote of the
full board of directors (in which selection directors who are parties may
participate); or (d) by stockholders, but shares owned by or voted under the
control of directors who are at the time parties to such action, suit or
proceeding may not be voted on the determination.
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection
(c)to select counsel.
SECTION 7.03. DEFINITION OF GOOD FAITH. For purposes of any
determination under Section 7.01 of this Article, a person shall be deemed to
have acted in good faith and to have otherwise met the applicable standard of
conduct set forth in Section 7.01 if his action is based on information,
opinions, reports, or statements, including financial statements and other
financial data, if prepared or presented by (a) one or more officers or
employees of the corporation or other enterprise whom he reasonably believes to
be reliable and competent in the matters presented; (b) legal counsel, public
accountants, appraisers or other persons as to matters he reasonably believes
are within the person's professional or expert competence; or (c) a committee of
the board of directors of the corporation or another enterprise of which the
person is not a member if he reasonably believes the committee merits
confidence. The term "another enterprise" as used in this Section 7.03 shall
mean any other corporation or any partnership, joint venture, trust, employee
benefit plan or other enterprise of which such person is or was serving at the
request of the corporation as a director, officer, partner, trustee, employee or
agent. The provisions of this Section 7.03 shall not be deemed to be exclusive
or to limit in any way the circumstances in which a person may be deemed to have
met the applicable standards of conduct set forth in Section 7.01 of this
Article.
SECTION 7.04. ADVANCEMENT OF EXPENSES. Expenses incurred in connection
with any civil or criminal action, suit or proceeding may be paid for or
reimbursed by the corporation in advance of the final disposition of such
action, suit or proceeding, as authorized in the specific case in the same
manner described in Section 7.02 of this Article, upon receipt of a written
affirmation of the director, officer or employee's good faith belief that he has
met the standard of conduct described in Section 7.01 of this Article and upon
receipt of a written undertaking on behalf of the director, officer or employee
to repay such amount if it shall ultimately be determined that he did not meet
the standard of conduct set forth in this Article, and a determination is made
that the facts then known to those making the determination would not preclude
indemnification under this Article.
SECTION 7.05. NON-EXCLUSIVITY. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under these Articles of Incorporation,
the corporation's Bylaws, any resolution of the board of directors or
stockholders, any other authorization, whenever adopted, after notice, by a
majority vote of all voting stock then outstanding, or any contract, both as to
action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who
II-2
<PAGE>
has ceased to be a director, officer or employee, and shall inure to the benefit
of the heirs, executors and administrators of such a person.
SECTION 7.06. VESTMENT OF RIGHTS. The right of any individual to
indemnification under this Article shall vest at the time of occurrence or
performance of any event, act or omission giving rise to any action, suit or
proceeding of the nature referred to in Section 7.01 of this Article and, once
vested, shall not later be impaired as a result of any amendment, repeal,
alteration or other modification of any or all of these provisions.
Notwithstanding the foregoing, the indemnification afforded under this Article
shall be applicable to all alleged prior acts or omissions of any individual
seeking indemnification hereunder, regardless of the fact that such alleged acts
or omissions may have occurred prior to the adoption of this Article. To the
extent such prior acts or omissions cannot be deemed to be covered by this
Article, the right of any individual to indemnification shall be governed by the
indemnification provisions in effect at the time of such prior acts or
omissions.
SECTION 7.07. INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or who is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee or agent, whether or not the corporation would have
power to indemnify the individual against the same liability under this Article.
SECTION 7.08. OTHER DEFINITIONS.
For purposes of this Article, serving an employee benefit plan at the
request of the corporation shall include any service as a director, officer or
employee of the corporation which imposes duties on, or involves services by
such director, officer or employee with respect to an employee benefit plan, its
participants, or beneficiaries. A person who acted in good faith and in a manner
he reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" referred to in this
Article.
For purposes of this Article, "party" includes any individual who is or
was a plaintiff, defendant or respondent in any action, suit or proceeding.
For purposes of this Article, "official capacity," when used with
respect to a director, shall mean the office of director of the corporation; and
when used with respect to an individual other than a director, shall mean the
office in the corporation held by the officer or the employment or agency
relationship undertaking by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise, whether for profit or not, except as set forth in Section 7.01
of this Article.
SECTION 7.09. BUSINESS EXPENSES. Any payments made to any indemnified
party under this Article under any other right of indemnification shall be
deemed to be an ordinary and necessary business expense of the corporation, and
payment thereof shall not subject any person responsible for the payment, or the
board of directors, to any action for corporate waste or to any similar action.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits filed as part of this Registration Statement are as follows :
<TABLE>
<CAPTION>
<S> <C>
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among First Capital, Inc., First Federal Bank, A Federal
Savings Bank, First Capital, Inc., M.H.C. and Charles Webb & Company
1.2 -- Engagement Letter with First Federal Bank, A Federal Savings Bank and Charles Webb & Company (a)
2 -- Plan of Conversion and Agreement and Plan of Reorganization of First Capital, Inc., M.H.C. and
First Federal Bank, A Federal Savings Bank (a)
3.1 -- Articles of Incorporation of First Capital, Inc. (a)
3.2 -- Bylaws of First Capital, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia LLP regarding legality of securities registered (a)
8.1 -- Federal Income Tax Opinion of Breyer & Aguggia LLP
8.2 -- Indiana Income Tax Opinion of Monroe Shine & Co., Inc.
8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription rights (a)
10.1 -- Proposed Form of Employment Agreement for Executive Officers (a)
10.2 -- Proposed Form of Employee Severance Compensation Plan (a)
10.3 -- Proposed Form of Employee Stock Ownership Plan (a)
21 -- Subsidiaries of First Capital, Inc. (a)
23.1 -- Consent of Monroe Shine & Co., Inc.
23.2 -- Consent of Breyer & Aguggia LLP as to its Federal Income Tax Opinion
23.3 -- Consent of Keller & Company, Inc. (a)
24 -- Power of Attorney (included on signature page) (a)
99.1 -- Order Form (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with Keller & Company, Inc. (a)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
99.4 -- Appraisal Report of Keller & Company, dated August 14, 1998 and
updated as of October 23, 1998 (P)
99.5 -- Proxy Statement for Special Meeting of Members of First Capital, Inc., M.H.C.
99.6 -- Proxy Statement for Special Meeting of Stockholders of First Federal Bank,
A Federal Savings Bank
</TABLE>
- --------------
(a) Previously filed.
(P) Filed in paper pursuant to a continuing hardship exemption granted under
Rule 202 of Regulation S-T.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time shall be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore, unenforceable. In the event
that a claim for indemnification against liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amended
Registration Statement to be signed on its behalf by the undersigned, in the
City of Corydon, State of Indiana, on the 4th day of November 1998.
FIRST CAPITAL, INC.
By: /s/ James G. Pendleton
----------------------
James G. Pendleton
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amended Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
- ---------- ----- ----
/s/James G. Pendleton Chairman of the Board, November 4, 1998
- ----------------------- Chief Executive Officer
James G. Pendleton and Director (Principal
Executive Officer)
/s/Samuel E. Uhl President, Chief Operating November 4, 1998
- ----------------------- Officer and Director
Samuel E. Uhl
/s/M. Chris Frederick* Senior Vice President, Chief November 4, 1998
- ----------------------- Financial Officer and Treasurer
M. Chris Frederick (Principal Financial and
Accounting Officer)
/s/Mark D. Shireman* Director November 4, 1998
- -----------------------
Mark D. Shireman
/s/Dennis L. Huber* Director November 4, 1998
- -----------------------
Dennis L. Huber
/s/Kenneth R. Saulman* Director November 4, 1998
- -----------------------
Kenneth R. Saulman
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
- ---------- ----- ----
/s/John W. Buschemeyer* Director November 4, 1998
- ------------------------
John W. Buschemeyer
/s/Gerald L. Uhl* Director November 4, 1998
- ------------------------
Gerald L. Uhl
</TABLE>
- -------------------
* By power of attorney dated September 16, 1998.
<PAGE>
As filed with the Securities and Exchange Commission on November 4, 1998
Registration No. 333-63515
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
FIRST CAPITAL, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Indiana 6035 [to be applied for]
- ------------------------------- ------------------ -------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
220 FEDERAL DRIVE, n.w.
CORDYON, INDIANA 47112
(812) 738-2198
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
Paul M. Aguggia, Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA LLP
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
---------------------------------------
(Name and address of agent for service)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
1.1 -- Form of proposed Agency Agreement among First Capital, Inc., First
Federal Bank, A Federal Savings Bank, First Capital, Inc., M.H.C. and
Charles Webb & Company
1.2 -- Engagement Letter with First Federal Bank, A Federal Savings Bank and
Charles Webb & Company (a)
2 -- Plan of Conversion and Agreement and Plan of Reorganization of
First Capital, Inc., M.H.C. and First Federal Bank,
A Federal Savings Bank (a)
3.1 -- Articles of Incorporation of First Capital, Inc. (a)
3.2 -- Bylaws of First Capital, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia LLP regarding legality of securities
registered (a)
8.1 -- Federal Income Tax Opinion of Breyer & Aguggia LLP
8.2 -- Indiana Income Tax Opinion of Monroe Shine & Co., Inc. (a)
8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription
rights (a)
10.1 -- Proposed Form of Employment Agreement for Executive Officers (a)
10.2 -- Proposed Form of Employee Severance Compensation Plan (a)
10.3 -- Proposed Form of Employee Stock Ownership Plan (a)
21 -- Subsidiaries of First Capital, Inc. (a)
23.1 -- Consent of Monroe Shine & Co., Inc.
23.2 -- Consent of Breyer & Aguggia LLP as to its Federal Income Tax Opinion
23.3 -- Consent of Keller & Company, Inc. (a)
24 -- Power of Attorney (included on signature page) (a)
99.1 -- Order Form (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with Keller & Company, Inc. (a)
99.4 -- Appraisal Report of Keller & Company, dated August 14, 1998 and
updated as of October __, 1998 (P)
99.5 -- Proxy Statement for Special Meeting of Members of First Capital, Inc.,
M.H.C.
99.6 -- Proxy Statement for Special Meeting of Stockholders of First Federal
Bank, A Federal Savings Bank
</TABLE>
- ------------
(a) Previously filed.
(P) Filed in paper pursuant to a continuing hardship exemption granted under
Rule 202 of Regulation S-T.
<PAGE>
EXHIBIT 1.1
FIRST CAPITAL, INC.
(an Indiana corporation)
Up to 1,026,375 Shares
(Subject to Increase Up to 1,180,331 Shares)
COMMON STOCK
($0.01 Par Value)
Purchase Price $10.00 Per Share
AGENCY AGREEMENT
----------------
____________, 1998
Charles Webb & Company, a Division
of Keefe, Bruyette & Woods, Inc.
211 Bradenton Avenue
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
First Capital, Inc. (the "Holding Company"), First Capital, Inc., M.H.C.
(the "MHC") and First Federal Bank, A Federal Savings Bank (the "Bank" and,
together with the Holding Company and the MHC, the "Primary Parties") hereby
confirm, jointly and severally, their agreement with Charles Webb & Company, a
division of Keefe, Bruyette & Woods, Inc. (the "Agent"), as follows:
SECTION 1. THE OFFERING.
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(a) The Holding Company is offering up to 1,026,375 shares of common stock,
$0.01 par value per share (the "Common Stock") (subject to an increase up to
1,180,331 shares), in (i) an exchange offering (the "Exchange Offering") (ii) a
subscription offering (the "Subscription Offering"), (iii) a direct community
offering (the "Direct Community Offering") and, if necessary, (iv) a syndicated
community offering (the "Syndicated Community Offering"), in connection with the
reorganization of the Bank from a majority-owned subsidiary of the MHC to a
wholly-owned subsidiary of the Holding Company (the "Reorganization"), all
pursuant to a Plan of Conversion from Mutual Holding Company to Stock Holding
Company and Agreement and Plan of Reorganization (the "Plan"). Pursuant to the
Plan, the Reorganization will be effected as follows: (i) the MHC will convert
to an interim stock savings bank and merge simultaneously with and into the
Bank, with the Bank as the surviving entity and (ii) a newly-formed interim
stock savings bank ("Interim"), wholly owned by the Holding Company, will merge
with and into the Bank, resulting in the Bank becoming a wholly owned subsidiary
of the Holding Company.
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(b) In the Exchange Offering, each share of the common stock, $1.00 par
value, of the Bank (the "Bank Common Stock") held by the MHC will be cancelled
and each share of Bank Common Stock held by the Bank's other stockholders (the
"Public Stockholders") will be exchanged for shares of Common Stock ("Exchange
Shares") pursuant to an exchange ratio (the "Exchange Ratio") that will result
in the Public Stockholders owning in the aggregate approximately the same
percentage of the outstanding shares of Common Stock, upon consummation of the
Reorganization, as the percentage of outstanding Bank Common Stock they owned
immediately prior to the Reorganization, excluding fractional shares for which
cash will be received and shares purchased by the Public Stockholders in the
Conversion Offerings (defined below), all as described in the Plan.
(c) In the Subscription Offering, non-transferable rights to subscribe for
up to 1,026,375 shares (subject to an increase up to 1,180,331 shares) of the
Common Stock ("Subscription Rights") will be granted, in the following priority:
(1) the Bank's depositors with account balances of $50.00 or more as of March
31, 1997 ("Eligible Account Holders"); (2) the Bank's tax-qualified Employee
Stock Ownership Plan ("ESOP"); (3) the Bank's depositors with account balances
of $50.00 or more as of September 30, 1998 ("Supplemental Eligible Account
Holders"); and (4) the Bank's depositors as of __________, 1998 and borrowers of
the Bank as of February 1, 1993 whose loans continue to be outstanding as of
__________, 1998 ("Other Members"), subject to the priorities and purchase
limitations set forth in the Plan. Concurrently with the Subscription Offering,
the Holding Company will offer all shares of Common Stock offered but not
subscribed for in the Subscription Offering, if any, in the Direct Community
Offering to members of the general public, with first preference given to Public
Stockholders (who are not Eligible Account Holders or Supplemental Eligible
Account Holders) and then to natural persons and trusts of natural persons who
are permanent residents of Crawford, Clark, Floyd, Harrison and Washington
Counties of Indiana. Depending on market conditions, shares not subscribed for
in the Subscription Offering or purchased in the Direct Community Offering may
be offered in the Syndicated Community Offering to eligible members of the
general public on a best efforts basis by approved broker-dealer firms
("Assisting Brokers") which are members of the National Association of
Securities Dealers, Inc. ("NASD").
(d) The Holding Company will issue shares of its Common Stock (the
"Conversion Shares") in the Subscription Offering, Direct Community Offering,
and Syndicated Community Offering (collectively, the "Conversion Offerings") at
a purchase price of $10.00 per share (the "Purchase Price"). If the number of
Conversion Shares and Exchange Shares (collectively, the "Shares") is increased
or decreased in accordance with the Plan, the term "Shares" shall mean such
greater or lesser number, where applicable.
(e) The Holding Company has filed with the U.S. Securities and Exchange
Commission (the "Commission") a Registration Statement on Form SB-2 (File No.
333-63515) containing a prospectus relating to the Exchange Offering and the
Conversion Offerings (collectively, the
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Charles Webb & Company
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"Offerings") for the registration of the Shares under the Securities Act of
1933, as amended (the "1933 Act"), and has filed such amendments thereto as have
been required to the date hereof (the "Registration Statement"). The prospectus,
as amended, included in the Registration Statement at the time it initially
became effective is hereinafter called the "Prospectus," except that if any
prospectus is filed by the Holding Company pursuant to Rule 424(b) or (c) of the
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
differing from the prospectus included in the Registration Statement at the time
it initially becomes effective, the term "Prospectus" shall refer to the
prospectus filed pursuant to Rule 424(b) or (c) from and after the time said
prospectus is filed with the Commission and shall include any supplements and
amendments thereto from and after their dates of effectiveness or use,
respectively.
(f) The MHC has filed with the Office of Thrift Supervision (the "OTS") an
Application for Approval of Conversion, including exhibits and the Prospectus,
and has filed amendments and supplements thereto (as so amended and
supplemented, the "Conversion Application") as may have been required pursuant
to the Home Owners' Loan Act, as amended (the "HOLA"), and 12 C.F.R. 575.12(a)
and 12 C.F.R. Part 563b (the "Conversion Regulations"). In addition, the
Holding Company has filed with the OTS an application on Form H-(e)1, with
exhibits, and has filed such amendments or supplements thereto, if any (as so
amended and supplemented, the "Holding Company Application" and, together with
the Conversion Application, the "OTS Applications"), as may have been required
to become a registered savings and loan holding company under the HOLA and the
applicable rules and regulations of the OTS (the "Holding Company Regulations"
and, together with the Conversion Regulations, the "OTS Regulations").
SECTION 2. RETENTION OF AGENT; COMPENSATION AND EXPENSES; SALE AND
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DELIVERY OF THE SHARES.
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(a) Subject to the terms and conditions herein set forth, the Primary
Parties hereby appoint the Agent as their exclusive financial advisor and
marketing agent to utilize its best efforts to solicit subscriptions for the
Conversion Shares and to advise and assist the Primary Parties with respect to
the sale of the Conversion Shares in the Conversion Offerings.
(b) On the basis of the representations and warranties and the agreements
herein, but subject to the terms and conditions herein, the Agent accepts such
appointment and agrees to consult with and advise the Primary Parties as to the
matters set forth in Exhibit A to the letter agreement dated April 27, 1998 (the
---------
"Letter Agreement"), between the Bank and the Agent. The Agent shall not be
required to purchase any Conversion Shares or take any action inconsistent with
all applicable laws, regulations, decisions or orders. In the event the
Syndicated Community Offering is undertaken, the Agent (at the direction of the
Primary Parties after consultation with the Agent) shall seek to assemble and
manage a selling group of selected registered broker-dealers which are
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Charles Webb & Company
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members of the National Association of Securities Dealers, Inc. ("NASD") to
participate in the solicitation of purchase orders for shares under a selected
dealers' agreement in the form attached hereto as Exhibit A.
(c) The obligations of the Agent pursuant to this Agreement shall terminate
upon the completion, termination or abandonment of the Plan by the Primary
Parties or upon termination of the Offering, but in no event later than 45 days
after completion of the Subscription Offering and Direct Community Offering,
including any extensions of the Subscription Offering and Direct Community
Offering permitted pursuant to the Conversion Regulations (the "End Date"). All
unpaid fees and expenses due to the Agent shall be payable in next day funds at
the earlier of the Closing Date (as hereinafter defined) or the End Date. In
the event the Offering is extended beyond the End Date, the Primary Parties and
the Agent may agree to renew this Agreement under mutually acceptable terms.
(d) In the event the Holding Company is unable to sell a minimum of 758,625
Conversion Shares within the period herein provided, this Agreement shall
terminate and the Holding Company shall refund to all persons who have
subscribed for any of the Conversion Shares, the full amount of their
subscription plus accrued interest as set forth in the Prospectus and none of
the parties to this Agreement shall have any obligation to the other parties
hereunder, except as set forth in this Section 2 and in Sections 8, 9, and 10
hereof.
(e) In the event the Offering is terminated for any reason not attributable
to the action or inaction of the Agent, the Agent shall have earned and be
entitled to be paid the fees and expenses accruing to the date of such
termination pursuant to this Section 2.
(f) If all conditions precedent to the consummation of the Reorganization,
including, without limitation, the receipt of subscriptions for the minimum
number of Conversion Shares permitted to be sold in the Reorganization on the
basis of the most recent updated appraisal report and compliance by the Primary
Parties with the conditions set forth in Section 7 hereof to the reasonable
satisfaction of the Agent and its counsel, are satisfied, the Holding Company
agrees to issue, or have issued, the Conversion Shares sold in the Offering and
release for delivery certificates for such Conversion Shares on the Closing Date
(as hereinafter defined) against payment to the Holding Company by any means
authorized by the Plan. The release of Conversion Shares against payment
therefor shall be made at a time, date and place mutually acceptable to the
Primary Parties and the Agent. Certificates for Conversion Shares shall be
delivered directly to the purchasers in accordance with their directions. The
date upon which the Holding Company shall release or deliver the Conversion
Shares sold in the Offering, in accordance with the terms herein, is called the
"Closing Date."
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Charles Webb & Company
____________, 1998
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(g) As soon as practicable after the Closing Date, the Holding Company and
the Bank shall cause a letter of transmittal to be mailed to each Public
Stockholder advising such Public Stockholder of the terms of the Exchange
Offering and the procedure for surrendering to an agent, duly appointed by the
Holding Company (the "Exchange Agent"), the certificates evidencing shares of
Bank Common Stock issued and outstanding as of the Closing Date. Upon surrender
of each such certificate to the Exchange Agent, the Holding Company agrees to
issue to the holder thereof or his or her designee a certificate or certificates
representing the number of full Exchange Shares to which such holder is entitled
based on the Exchange Ratio.
(h) The Agent shall receive the following compensation for its services
hereunder:
(1) A management fee of $25,000, payable in four consecutive monthly
installments, all of which the Primary Parties and the Agent
acknowledge has been paid.
(2) A success fee equal to (i) 1.5% of the aggregate purchase price of the
Conversion Shares sold in the Subscription Offering and Direct
Community Offering, excluding Conversion Shares subscribed or purchased
by the ESOP or by the Bank's officers, directors or employees (or their
immediate family members) or by any tax-qualified or stock-based
compensation plans (except Individual Retirement Accounts) or similar
plan created by the Bank for some or all of its directors or employees,
less (ii) the management fee described in subsection (1) above.
(3) For Conversion Shares sold in the Syndicated Community Offering by
selected broker-dealers, the Agent shall receive a fee not to exceed
5.5% of the aggregate purchase price of the Conversion Shares sold by
such selected broker-dealers, and the Agent shall pass on to such
selected broker-dealers an amount competitive with gross underwriting
discounts charged at such time for comparable amounts of stock sold at
a comparable price per share in a similar market environment. In the
event any fees are paid pursuant to this subsection (3) with respect to
the sale of specific Conversion Shares, such fees shall be in lieu of,
and not in addition to, the fees paid pursuant to subsections (1) and
(2) above with respect to such Conversion Shares. Fees with respect to
purchases effected with the assistance of broker-dealers other than the
Agent shall be transmitted by the Agent to such broker-dealer. The
decision to utilize selected broker dealers will be made by the Primary
Parties upon consultation with the Agent.
(i) Whether or not the Reorganization is completed or the sale of the
Conversion Shares by the Holding Company is consummated, the Primary Parties
jointly and severally agree to pay or reimburse the Agent, from time to time
upon the Agent's request, for the reasonable legal fees and
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Charles Webb & Company
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expenses of its counsel. Such reimbursement of legal fees (including any legal
fees for "Blue Sky" legal work) will not exceed $30,000.
(j) The Primary Parties alone shall bear the expenses of the Offering
customarily borne by issuers of securities including, without limitation, OTS,
Commission, "Blue Sky," and NASD filing and registration fees; the fees of
accountants, attorneys, appraiser, transfer agent and registrar, and other Agent
fees and expenses; any stock issue or transfer taxes; printing, mailing and
marketing and syndicate expenses associated with the Reorganization. The out-of-
pocket expenses of the Agent (including expenses of Agent's counsel) to be
reimbursed by the Primary Parties will not exceed $5,000 without the approval of
the Primary Parties.
(k) Full payment of the Agent's fees and expenses, as described above,
shall be made in next day funds on the earlier of the Closing Date or the End
Date.
(l) The Agent further agrees to provide financial advisory assistance to
the Primary Parties for a period of one year following completion of the
Reorganization, including formation of a dividend policy and share repurchase
program, assistance with shareholder reporting and shareholder relations
matters, general advice on mergers and acquisitions and other related financial
matters, without the payment by the Primary Parties of any fees in addition to
these set forth in this Section 2. Nothing in this Agreement requires the
Primary Parties to obtain such services from the Agent.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PRIMARY PARTIES. The
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Primary Parties jointly and severally represent and warrant to the Agent as
follows:
(a) The Registration Statement has been declared effective by the
Commission; at the time the Registration Statement, including the Prospectus
contained therein, became effective, the Registration Statement, including the
Prospectus contained therein, complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations, and the
Registration Statement, including the Prospectus contained therein, and any
information regarding the Primary Parties contained in Sales Information (as
such term is defined in Section 11 hereof) authorized by the Primary Parties for
use in connection with the Offering, did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and at the time any Rule 424(b) or (c)
Prospectus was filed with the Commission, and as of the Closing Date, the
Registration Statement, including the Prospectus contained therein (including
any amendment or supplement thereto), and any information regarding the Primary
Parties contained in Sales Information (as such term is defined in Section 8
hereof) authorized by the Primary Parties for use in connection with the
Offerings, did not contain an untrue statement of a
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Charles Webb & Company
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Page 7
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the representations and warranties in
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this Section 3(a) shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Primary Parties
by the Agent expressly regarding the Agent for use in the Prospectus under the
captions "Market for Common Stock" and "The Conversion--Plan of Distribution and
Selling Commissions."
(b) The Conversion Application has been approved by the OTS and the related
Prospectus and the proxy statement of the MHC relating to the special meeting of
members at which the Plan shall be considered for approval by the MHC's eligible
voting members, and the proxy statement of the Bank relating to the annual
meeting of stockholders at which the Plan shall be considered for approval by
the Bank's eligible voting stockholders have each been authorized for use by the
OTS; at the time of the approval of the Conversion Application, including the
Prospectus contained therein, and as of the date of this Agreement, the
Conversion Application, including the Prospectus, complied as to form in all
material respects with the Conversion Regulations. At the time of the approval
of the Conversion Application, including the Prospectus contained therein, and
as of the date of this Agreement, the Conversion Application, including the
Prospectus contained therein, did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the representations and
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warranties in this Section (3)(b) shall not apply to statements or omissions
made in reliance upon and in conformity with written information furnished to
the Primary Parties by the Agent expressly regarding the Agent for use in the
Prospectus under the captions "Market for Common Stock" and "The Conversion--
Plan of Distribution and Selling Commissions."
(c) The Holding Company Application has been approved by the OTS. At the
time of the approval of the Holding Company Application and as of the date of
this Agreement, the Holding Company Application complied as to form in all
material respects with the Holding Company Regulations.
(d) No order has been issued by the OTS, the Commission or any other
governmental agency preventing or suspending the use of the Prospectus and no
action by or before any governmental entity to revoke any approval, authority or
order of effectiveness related to the Reorganization is pending or, to the best
knowledge of the Primary Parties, threatened. The Plan complies with the OTS
Regulations and has been adopted by the Boards of Directors of the MHC and the
Bank as required by the OTS Regulations and has been approved by the Board of
Directors of the Holding Company. To the best knowledge of the Primary Parties,
no person has sought to obtain review of the final action of the OTS in
approving the Plan or in approving the OTS Applications pursuant to the HOLA and
the OTS Regulations.
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Charles Webb & Company
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(e) The Bank is organized and is validly existing as a federally chartered
capital stock savings bank in good standing under the laws of the United States
and is duly authorized to conduct its business and own its property as described
in the Registration Statement and the Prospectus; the Bank has obtained all
licenses, permits and other governmental authorizations required for the conduct
of its business, except where the failure to obtain such licenses, permits or
other governmental authorizations would not materially and adversely affect the
financial condition, earnings, capital, assets or properties of the Primary
Parties, taken as a whole; all such licenses, permits and governmental
authorizations are in full force and effect and the Bank is complying therewith
in all material respects; the Bank is duly qualified as a foreign corporation to
transact business in each jurisdiction in which the failure to be so qualified
would have a material adverse effect on the financial condition, earnings,
capital, assets, properties or business of the Primary Parties, taken as a
whole.
(f) The Bank does not own any equity securities or any equity interest in
any business enterprise except as described in the Prospectus.
(g) The MHC is organized and is validly existing as a federally chartered
mutual holding company in good standing under the laws of the United States and
is duly authorized to conduct its business and own its property as described in
the Registration Statement and the Prospectus; the MHC has obtained all
licenses, permits and other governmental authorizations required for the conduct
of its business, except where the failure to obtain such licenses, permits or
other governmental authorizations would not materially adversely affect the
financial condition, earnings, capital, assets or properties of the Primary
Parties, taken as a whole; all such licenses, permits and governmental
authorizations are in full force and effect and the MHC is complying therewith
in all material respects; the MHC is duly qualified as a foreign corporation to
transact business in each jurisdiction in which the failure to be so qualified
would have a material adverse effect on the financial condition, earnings,
capital, assets, properties or business of the Primary Parties, taken as a
whole.
(h) The MHC does not own any equity securities or any equity interest in
any business enterprise except as described in the Prospectus.
(i) The Holding Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Indiana, with
corporate power and authority to conduct its business and own its property as
described in the Registration Statement and the Prospectus; the Holding Company
has obtained all licenses, permits and other governmental authorizations
required for the conduct of its business, except where the failure to obtain
such licenses, permits or other governmental authorizations would not materially
adversely affect the financial condition, earnings, capital, assets or
properties of the Primary Parties, taken as a whole;
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Charles Webb & Company
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all such licenses, permits and governmental authorizations are in full force and
effect and the Holding Company is complying therewith in all material respects;
the Holding Company is duly qualified as a foreign corporation to transact
business in each jurisdiction in which the failure to be so qualified would have
a material adverse effect on the financial condition, earnings, capital, assets,
properties or business of the Primary Parties, taken as a whole.
(j) The Holding Company does not own any equity securities or any equity
interest in any business enterprise except as described in the Prospectus.
(k) The Bank is a member of the Federal Home Loan Bank of Indianapolis
("FHLB-Indianapolis"); the deposit accounts of the Bank are insured by the FDIC
under the SAIF up to applicable legal limits; and no proceedings for the
termination or revocation of such membership or insurance are pending or, to the
best knowledge of the Bank, threatened.
(l) The Primary Parties have good and marketable title to all real property
and other assets material to the business of the Primary Parties and to those
properties and assets described in the Prospectus as owned by the Primary
Parties, free and clear of all liens, charges, encumbrances or restrictions,
except as described therein or are not material to the business of the Primary
Parties, taken as a whole; and all of the leases and subleases material to the
business of the Primary Parties, including those described in the Registration
Statement and the Prospectus, are in full force and effect, and the Primary
Parties are complying therewith in all material respects.
(m) The Primary Parties have received an opinion of Breyer & Aguggia LLP,
Washington, D.C., with respect to the federal income tax consequences of the
Reorganization and an opinion from Monroe Shine & Company, Inc., New Albany,
Indiana, with respect to the Indiana income tax consequences of the
Reorganization as described in the Prospectus; and the facts and representations
upon which such opinions are based are true, accurate and complete, and the
Primary Parties have not taken any actions inconsistent therewith.
(n) Each of the Primary Parties has all such power, authority,
authorizations, approvals and order as may be required to enter into this
Agreement, to carry out the provisions and conditions hereof, to consummate the
Reorganization and to issue and sell the Conversion Shares as provided herein
and as described in the Prospectus; the consummation of the Reorganization, the
execution, delivery and performance of this Agreement and the consummation of
the transactions herein contemplated have been duly and validly authorized by
all necessary corporate action on the part of the Primary Parties, and this
Agreement has been validly executed and delivered by and is the valid, legal and
binding Agreement of each of the Primary Parties, enforceable in accordance with
its terms, except as the enforceability thereof may be limited by (i)
bankruptcy, insolvency, moratorium, reorganization, conservatorship,
receivership or other similar laws relating to or affecting the
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Charles Webb & Company
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enforcement or creditors' rights generally or the rights of creditors of insured
financial institutions and their holding companies, the accounts of whose
subsidiaries are insured by the FDIC, (ii) general equity principles regardless
of whether such enforceability is considered in a proceeding in equity or at
law, (iii) laws relating to the safety and soundness of insured depository
institution and their affiliates, or (iv) to the extent that the provisions of
Section 8 and 9 hereof may be unenforceable as against public policy or by
applicable law, including without limitation Sections 23A and 23B of the Federal
Reserve Act, as amended.
(o) The execution, delivery and performance of this Agreement by the
Primary Parties will not: (i) conflict with or constitute a breach of, or
default under, the articles of incorporation or bylaws of the Holding Company or
the respective charter or bylaws of the MHC or the Bank, or any material
contract, lease or other instrument to which any of the Primary Parties is or
immediately following the Reorganization will be a party, or any applicable law,
rule, regulation or order; (ii) violate any authorization, approval, judgement,
decree, order, statute, rule or regulation applicable to the Primary Parties,
except for a violation which would not have a material adverse effect on the
financial condition and results of operations of the Primary Parties, taken as a
whole; or (iii) result in the creation of any material lien, charge or
encumbrance upon any property of the Primary Parties.
(p) Upon consummation of the Reorganization, the authorized, issued and
outstanding equity capital of the Holding Company will be within the range set
forth in the Prospectus under the caption "Capitalization," and except for any
shares of Common Stock held by the Bank, which will be canceled as of the
Closing Date, no shares of Common Stock have been or will be issued and
outstanding prior to the Closing Date; the Shares have been duly and validly
authorized for issuance and, when issued and delivered by the Holding Company
Bank pursuant to the Plan against payment of the consideration calculated as set
forth in the Plan and in the Prospectus, will be duly and validly issued, fully
paid and non-assessable; the issuance of the Shares is not subject to preemptive
rights, except for the Subscription Rights granted pursuant to the Plan; and the
terms and provisions of the Shares will conform in all material respects to the
description thereof contained in the Prospectus. Upon the issuance of the
Shares, good title to the Shares will be transferred from the Holding Company to
the Public Stockholders in the Exchange Offering and to the purchasers of
Conversion Shares against payment therefor in the Conversion Offerings, subject
to such claims as may be asserted against the purchasers thereof by third-party
claimants.
(q) None of the Primary Parties is in violation of any directive from the
OTS, FDIC or any other governmental agency to make any change in the method of
conducting its business so as to comply in all material respects with all
applicable statutes and regulations; and, except as set forth in the Prospectus,
there is no suit, proceeding, charge or action before or by any court,
regulatory authority or governmental agency or body, pending or, to the best
knowledge of the Primary Parties, threatened, which might materially and
adversely affect the Reorganization, the performance of this
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Agreement, the consummation of the transactions contemplated by the Plan and as
described in the Prospectus or which might have a material adverse affect on the
financial condition, earnings, capital, properties, assets or business of the
Primary Parties, taken as a whole.
(r) The financial statements of the Bank which are included in the OTS
Applications, the Registration Statement and the Prospectus present fairly the
financial condition, results of operations, retained earnings and cash flows of
the Bank at the respective dates thereof and for the respective periods covered
thereby, and comply as to form in all material respects with the applicable
accounting requirements of the OTS Regulations, Item 310 of Regulation S-B of
the Commission and generally accepted accounting principles ("GAAP") properly
and consistently applied through the periods involved (except as noted therein).
Such financial statements are consistent with the most recent financial
statements and other reports filed by the Bank with the OTS, except that
accounting principles employed in such regulatory filings conform to the
requirements of the OTS and not necessarily to GAAP. The other financial,
statistical and pro forma information and related notes included in the
Prospectus present fairly the information shown therein on a basis consistent
with the audited financial statements of the Bank included in the OTS
Applications, the Registration Statement and the Prospectus, and as to the pro
forma adjustments, the adjustments made therein have been properly applied on
the basis described therein.
(s) Since the respective dates as of which information is given in the
Prospectus, except as may otherwise be stated therein: (i) there has not been
any material adverse change in the financial condition, earnings, capital,
properties or business of the Primary Parties, taken as a whole, whether or not
arising in the ordinary course of business; (ii) with respect to the Bank, there
has not been any material increase in loans past due 90 days or more or in real
estate acquired by foreclosure, by deed-in-lieu of foreclosure, or deemed in-
substance foreclosure; (iii) there has not been any material decrease in
stockholders' equity, reserves or total assets of the Bank; (iv) none of the
Primary Parties has issued any securities (other than equity securities issued
by the Holding Company in connection with its formation which will be canceled
as of the Closing Date) or incurred any liability or obligation for borrowing
other than in the ordinary course of business; (v) there have not been any
transactions entered into by any of the Primary Parties, except with respect to
those transactions entered into in the ordinary course of business; (vi) the
properties and business of the Primary Parties conform in all material respects
to the descriptions thereof contained in the Prospectus; and (vii) none of the
Primary Parties has any material contingent liabilities except as disclosed in
the Prospectus.
(t) None of the Primary Parties is, or immediately following the
Reorganization will be, in violation of its articles of incorporation or bylaws,
or charter or bylaws, as applicable, or in default in the performance or
observance of any obligation, agreement, covenant, or condition contained in any
contract, lease, loan agreement, indenture or other instrument to which it is a
party or by which
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Charles Webb & Company
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it or any of its property may be bound, which would result in a material adverse
effect on the financial condition, earnings, capital, assets, properties or
business of the Primary Parties, taken as a whole.
(u) No default exists, and no event has occurred which with notice or lapse
of time, or both, would constitute a default on the part of any of the Primary
Parties in the due performance and observance of any term, covenant or condition
of any indenture, mortgage, deed of trust, note, bank loan or credit agreement
or any other instrument or agreement to which such Primary Party is a party or
by which any Primary Party or any of its property is bound or affected, except
such defaults which would not have a material adverse affect on the financial
condition, earnings, capital, assets, properties or business of the Primary
Parties, taken as a whole; and such agreements are in full force and effect and
no other party to any such agreements has instituted or, to the best knowledge
of the Primary Parties, threatened any action or proceeding wherein any of the
Primary Parties might be alleged to be in default thereunder under circumstances
where such action or proceeding, if determined adversely to such Primary Party,
would have a material adverse effect on the financial condition, earnings,
capital, assets, properties or business of the Primary Parties, taken as a
whole.
(v) No approval of any regulatory or supervisory or other public authority
is required in connection with the execution and delivery of this Agreement by
any of the Primary Parties or the issuance of the Shares by the Holding Company,
except for the approvals of the OTS and the Commission, and any necessary
qualification, notification, registration or exemption under the state
securities laws and regulations (collectively, "Blue Sky Laws") of the various
jurisdictions in which the Shares are to be offered.
(w) Monroe Shine & Company, Inc., which has certified the financial
statements of the Bank contained in the OTS Applications and the Prospectus,
are, with respect to the Primary Parties, independent public accountants within
the meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants, the OTS Regulations and the 1933 Act Regulations.
(x) Keller & Company, Inc., which has prepared the Reorganization Valuation
Appraisal Report as of August 14, 1998, as amended or supplemented, if so
amended or supplemented (the "Appraisal"), is independent of the Primary Parties
within the meaning of the OTS Regulations.
(y) The Primary Parties have timely filed all required federal, state and
local tax returns and have paid all taxes due and payable in respect of such
returns, except where permitted to be extended, and have made adequate reserves
for similar future tax liabilities and no deficiency has been asserted with
respect thereto by any taxing authority.
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Charles Webb & Company
____________, 1998
Page 13
(z) The Bank complies in all material respects with the applicable
financial recordkeeping and reporting requirements of the Currency and Foreign
Transactions Reporting Act of 1970, as amended, and the regulations and rules
thereunder.
(aa) None of the Primary Parties has lent any funds for the purchase of
Shares or has made any other payment of funds prohibited by law, and no funds
have been set aside to be used for any payment prohibited by law.
(bb) None of the Primary Parties has: (i) issued any securities within the
last 18 months (except for (A) notes to evidence other bank loans or other
liabilities in the ordinary course of business or as described in the
Prospectus, (B) with respect to the Holding Company, shares issued in connection
with its initial capitalization which will be canceled as of the Closing Date,
and (C) with respect to the Bank, shares of Bank Common Stock issued pursuant to
options under the Bank's 1994 Stock Option Plan); (ii) had any dealings within
the immediate prior 12 months with any NASD member (other than the Agent with
respect to the transactions contemplated hereunder), or any person related to or
associated with such member, other than discussions and meetings relating to the
Offerings and purchases and sales of United States government and agency and
other securities in the ordinary course of business; (iii) entered into a
financial or management consulting agreement except as contemplated hereunder
and except for the Letter Agreement; and (iv) engaged any intermediary other
than the Agent in connection with the Offerings, and no person other than the
Agent is being compensated in any manner for such service.
(cc) None of the Primary Parties has relied upon the Agent or the Agent's
counsel for any legal, tax or accounting advice in connection with the
Reorganization.
(dd) All documents delivered by the Primary Parties or their
representatives in connection with the issuance and sale of the Common Stock and
the Agent's exercise of due diligence, were, on the dates on which they were
delivered, accurate and complete in all material respects or were amended in
writing to be accurate and complete in all material respects.
(ee) The records of Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are accurate and complete in all material respects.
The Agent will have no liability to any person for the accuracy, reliability and
completeness of such records or for any denial or reduction of a subscription or
order to purchase Common Stock, whether as a result of a properly calculated
allocation pursuant to the Plan or otherwise, based upon such records.
(ff) To the best knowledge of the Primary Parties, each of the Primary
Parties complies with all laws, rules and regulations relating to environmental
protection, and none of the Primary Parties has been notified or is not
otherwise aware that any of the Primary Parties is or, following
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Charles Webb & Company
____________, 1998
Page 14
the Reorganization, will be, potentially liable, or is or will be considered
potentially liable, under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any other federal, state or local
environmental laws and regulations; no action, suit, regulatory investigation or
other proceeding is pending, or to the best knowledge of the Primary Parties,
threatened against any of the Primary Parties relating to environmental
protection, nor do any of the Primary Parties have any reason to believe any
such proceedings may be brought against any of the Primary Parties; and to the
best knowledge of the Primary Parties, no disposal, release or discharge of
hazardous or toxic substances, pollutants or contaminants, including petroleum
and gas products, as any of such terms may be defined under federal, state or
local law, has occurred on, in, at or about any facilities or properties owned
or leased by any of the Primary Parties or in which the Bank has a security
interest.
(gg) The Bank's authorized capital stock consists of 4,000,000 shares of
Bank Common Stock, $1.00 par value per share, of which [504,015] shares are
issued and outstanding as of the date hereof, and 1,000,000 shares of preferred
stock, $1.00 par value per share, none of which is issued and outstanding as of
the date hereof. The Holding Company's authorized capital stock consists of
5,000,000 shares of Common Stock, $.01 par value per share, of which ________
shares are issued and outstanding as of the date hereof (all of which will be
canceled as of the Closing Date), and 1,000,000 shares of preferred stock,
$.01 par value per share, none of which is issued and outstanding as of the date
hereof. The MHC is not authorized to issue any shares of capital stock.
Any certificate signed by an officer of any of the Primary Parties pursuant
to the conditions of this Agreement and delivered to the Agent or its counsel
that refers to this Agreement shall be deemed to be a representation and
warranty by such Primary Party to the Agent as to the matters covered thereby
with the same effect as if such representation and warranty were set forth
herein.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE AGENT.
-------------------------------------------
The Agent represents and warrants to the Bank that:
(a) The Agent is a corporation in good standing under the laws of the State
of New York with full power and authority to provide the services to be
furnished to the Primary Parties hereunder.
(b) The Agent is a registered broker dealer in good standing with the
Commission and the NASD.
(c) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate
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Charles Webb & Company
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Page 15
action on the part of the Agent, and this Agreement has been duly and validly
executed and delivered by the Agent and is the legal, valid and binding
agreement of the Agent, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or other similar laws relating to
or affecting the enforcement or creditors' rights generally, or (ii) general
equity principles regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(d) The execution and delivery of this Agreement by the Agent, the
consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof will not conflict with, or result in a breach of,
any of the terms, provisions or conditions of, or constitute a default (or event
which with notice or laps of time or both would constitute a default) under, the
articles of incorporation of the Agent or any material agreement, indenture or
other instrument to which the Agent is a party or by which it or its property is
bound.
(e) The Agent and its employees, and to the best knowledge of the Agent,
its agents and representatives, who shall perform any of the services hereunder
shall be duly authorized and empowered, and shall have all licenses, approvals
and permits necessary to perform such services.
(f) No approval of any regulatory, supervisory or other public authority
other than the NASD is required in connection with the Agent's execution and
delivery of this Agreement.
(g) There is no suit, proceeding, charge, or action before or by any court,
regulatory authority or government agency or body pending or, to the best
knowledge of the Agent, threatened, which might materially and adversely affect
the Agent's performance of this Agreement.
(h) The Agent is a registered broker dealer in good standing in all
jurisdictions in which the Company will offer and sell the Shares and will
remain so registered until the consummation of the Reorganization.
SECTION 5. COVENANTS OF THE PRIMARY PARTIES. The Primary Parties hereby
--------------------------------
jointly and severally covenant with the Agent as follows:
(a) From the time the Registration Statement, including the Prospectus
contained therein (including any amendment or supplement thereto), became
effective and up to the Closing Date, the Registration Statement, including the
Prospectus contained therein (including any amendment or supplement thereto),
and any information regarding the Primary Parties contained in Sales Information
(as such term is defined in Section 8 hereof) authorized by the Primary Parties
for use in connection with the Offerings, will not contain an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances
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Charles Webb & Company
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Page 16
under which they were made, not misleading; provided, however, that the covenant
-------- -------
in this Section 5(a) will not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Primary Parties
by the Agent expressly regarding the Agent for use in the Prospectus under the
captions "Market for Common Stock" and The Conversion-Plan of Distribution and
Selling Commissions."
(b) From the time of the approval of the Conversion Application, including
the Prospectus contained therein, became effective and up to the Closing Date,
the Conversion Application, including the Prospectus contained therein will not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the covenant
-------- -------
in this Section 5(b) will not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Primary Parties
by the Agent expressly regarding the Agent for use in the Prospectus under the
captions "Market for Common Stock" and The Conversion-Plan of Distribution and
Selling Commissions."
(c) The Holding Company will not file any amendment or supplement to the
Registration Statement (including the Prospectus therein) without providing the
Agent and its counsel an opportunity to review such amendment or supplement, and
will not file any amendment or supplement to which the Agent or its counsel
shall reasonably object.
(d) The MHC will not file any amendment or supplement to the Conversion
Application (including the Prospectus therein) without providing the Agent and
its counsel an opportunity to review such amendment or supplement, and will not
file any amendment or supplement to which the Agent or its counsel shall
reasonably object.
(e) The Holding Company will not file any amendment or supplement to the
Holding Company Application without providing the Agent and its counsel an
opportunity to review such amendment or supplement, and will not file any
amendment or supplement to which the Agent or its counsel shall reasonably
object.
(f) The Primary Parties will notify the Agent in writing of any violation
of its articles of incorporation or bylaws, in the case of the Holding Company,
or its charter or bylaws, in the case of the Bank or the MHC, at any time after
the date hereof and prior to the Closing Date. Unless waived in writing by the
Agent, which waiver shall not be unreasonably withheld, the Company shall not be
in violation of its articles of incorporation or bylaws, and neither the MHC nor
the Bank shall be in violation of its charter or bylaws, at any time after the
date hereof and prior to the Closing Date.
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Charles Webb & Company
____________, 1998
Page 17
(g) The Primary Parties will use their best efforts to cause any post-
effective amendment to the Registration Statement to be declared effective by
the Commission and any post-approval amendment to the OTS Applications to be
approved by the OTS, and will immediately notify the Agent upon receipt of any
information concerning any of the following events: (i) when any post-effective
amendment to the Registration Statement has become effective; (ii) when any
post-approval amendment to the OTS Applications has been approved; (iii) when
any comments from the Commission, the OTS or any other governmental entity are
issued with respect to the Registration Statement, the OTS Applications or the
transactions contemplated by this Agreement; (iv) when any request is made by
the Commission, the OTS or any other governmental entity for any amendment or
supplement to the Registration Statement, the OTS Applications or for any other
additional information; (v) when the Commission, the OTS or any other
governmental entity issues any order or takes or threatens any action to suspend
any of the Offerings or the use of the Prospectus or any other filing of the
Primary Parties under the 1933 Act Regulations, the OTS Regulations, or other
applicable law; (vi) the issuance by the Commission, the OTS or any other
governmental authority of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or the approval
of any of the OTS Applications, or of the initiation or threat of initiation of
any proceedings for any such purpose; or (vii) the occurrence of any event
mentioned in subsection (n) below; and the Primary Parties will make every
reasonable effort to prevent the issuance by the Commission, the OTS or any
state authority of any order referred to in (v) and (vi) above, and if any such
order shall at any time be issued, to obtain the lifting thereof at the earliest
possible time.
(h) As of the Closing Date, the Bank shall have all approvals and authority
to issue and sell its common stock to the Holding Company and the Holding
Company shall have all approvals and orders to issue and sell the Shares as
provided for herein and as described in the Prospectus.
(i) The shares of Bank Common Stock issued and outstanding to the MHC on
the Closing Date shall be canceled on the Closing Date.
(j) The Primary Parties shall deliver to the Agent and to its counsel two
conformed copies of each of the Registration Statement and the OTS Applications
as originally filed and of each amendment or supplement thereto, including all
exhibits. The Primary Parties shall also deliver such additional copies of the
foregoing documents to counsel to the Agent as may be required for any NASD
filings.
(k) The Primary Parties will furnish to the Agent, from time to time during
the period when the Prospectus is required to be delivered under OTS Regulations
or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies
of such Prospectus as the Agent may reasonably request for the purposes
contemplated by the 1933 Act, the OTS Regulations, the 1934
<PAGE>
Charles Webb & Company
____________, 1998
Page 18
Act or the rules and regulations promulgated under the 1934 Act (the "1934 Act
Regulations"); and the Primary Parties authorize the Agent to use the Prospectus
in any lawful manner contemplated by the Plan in connection with the sale of the
Shares.
(l) The Primary Parties shall deliver to the Agent and to its counsel at
least two copies of each proxy statement delivered to members of the MHC or
stockholders of the Bank, as applicable.
(m) The Primary Parties will comply with all terms, conditions,
requirements and provisions with respect to the Reorganization and the
transactions contemplated thereby imposed by the Commission or the OTS or by the
1933 Act Regulations, the 1934 Act Regulations or the OTS Regulations to be
complied with subsequent to the Closing Date; and when the Prospectus is
required to be delivered, the Primary Parties will comply, at their own expense,
with all requirements imposed upon them by the Commission or the OTS, or by the
1933 Act Regulations, the 1934 Act Regulations or the OTS Regulations, in each
case as from time to time in force, so far as necessary to permit the
continuance of sales or dealing in shares of Common Stock during such period in
accordance with the provisions hereof and the Prospectus.
(n) If, at any time during the period when the Prospectus is required to be
delivered, any event relating to or affecting any of the Primary Parties shall
occur, as a result of which it is necessary or appropriate, in the opinion of
counsel for the Primary Parties and in the opinion of the Agent's counsel, to
amend or supplement the Registration Statement or Prospectus in order to make
the Registration Statement or Prospectus not misleading in light of the
circumstances existing at the time the Prospectus is delivered, the Primary
Parties shall, at their own expense, prepare and file with the Commission and
the OTS and furnish to the Agent a reasonable number of copies of an amendment
or amendments of, or a supplement or supplements to, the Registration Statement
or Prospectus (in form and substance satisfactory to the Agent and its counsel
after a reasonable time for review) which shall amend or supplement the
Registration Statement or Prospectus, so that as amended or supplemented the
Registration Statement and the Prospectus shall not contain an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading.
(o) The offer, sale and issuance of the Shares will be conducted in all
material respects in accordance with the Plan and the 1933 Act Regulations and
OTS Regulations and all other applicable laws, regulations, decisions and
orders, including all terms, conditions, requirements and provisions precedent
to the Reorganization imposed upon the Primary Parties by the Commission, the
OTS or any other applicable regulatory authority and in the manner described in
the Prospectus.
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Charles Webb & Company
____________, 1998
Page 19
(p) The Primary Parties shall timely furnish to the Agent such information
with respect to the Primary Parties as the Agent may from time to time
reasonably request.
(q) The Holding Company shall take all necessary action required to
register the Shares for offering and sale by the Holding Company or to exempt
such Shares from registration and to exempt the Holding Company as a broker-
dealer and its or the Bank's officers, directors and employees as broker-dealers
or agents under the Blue Sky Laws of such jurisdictions in which the Agent and
the Primary Parties may reasonably agree upon; provided, however, that the
-------- -------
Holding Company shall not be obligated to file any general consent to service of
process or to qualify to do business in any jurisdiction in which it is not so
qualified; and in each jurisdiction where any of the Shares shall have been
qualified or registered the Holding Company shall prepare and file, at its own
expense, such statements and reports as may be required by the laws of such
jurisdiction.
(r) The Holding Company shall not sell or issue, contract or sell or
otherwise dispose of, for a period of 180 days after the Closing Date, without
the prior written consent of the Agent, any shares of Common Stock other than in
connection with any plan or arrangement described in the Prospectus.
(s) The Common Stock shall be the subject of an effective registration
statement under Section 12(g) of the 1934 Act as of the Closing Date, and the
Holding Company shall maintain the effectiveness of such registration for not
less than three years.
(t) The liquidation account for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holder will be duly established and maintained by
the Bank in accordance with the Conversion Regulations.
(u) During the period during which the Common Stock is registered under the
1934 Act or for three years from the Closing Date, whichever period is greater,
the Holding Company shall furnish to its shareholders as soon as practicable
after the end of each fiscal year an annual report in accordance with Rule 14a-
3(b) of the 1934 Act Regulations.
(v) During the period of three years from the Closing Date, the Holding
Company shall furnish to the Agent upon the Agent's request: (i) as soon as
practicable after such information is publicly available, a copy of each report
of the Holding Company furnished to or filed with the Commission under the 1934
Act or any national securities exchange or system on which any class of
securities of the Holding Company is listed or quoted (including, but not
limited to, reports on Forms 10-K, 10-Q and 8-K and all proxy statements and
annual reports to shareholders), (ii) a copy of each other non-confidential
report of the Holding Company mailed to its shareholders or filed with the
Commission, the OTS or any other supervisory or regulatory authority or any
national
<PAGE>
Charles Webb & Company
____________, 1998
Page 20
securities exchange or system on which any class of securities of the
Holding Company is listed or quoted, each press release and material news items
and additional documents and information with respect to the Holding Company or
the Bank as the Agent may reasonably request; and (iii) from time to time, such
other non-confidential information concerning the Holding Company or the Bank as
the Agent may reasonably request.
(w) The Holding Company and the Bank will use the net proceeds from the
sale of the Shares in the manner set forth in the Prospectus under the caption
"Use of Proceeds." The Holding Company will report the use of proceeds of the
Conversion Offerings as required pursuant to Rule 463 under the 1933 Act.
(x) The Primary Parties will not distribute any prospectus, as defined in
Section 2(10) of the Securities Act of 1933, as amended (the "1933 Act"), other
than the Prospectus and the Sales Information (as defined in Section 8 hereof),
in connection with the offer and sale of the Shares without first notifying the
Agent.
(y) The Holding Company shall use its best efforts to (i) encourage and
assist three market makers to establish and maintain a market for the Shares and
(ii) list the Shares on a national securities exchange or on the Nasdaq Stock
Market effective on or prior to the Closing Date.
(z) In accordance with the Plan and as described in the Prospectus, the
Primary Parties will maintain appropriate arrangements for depositing all funds
received from persons mailing subscriptions for or orders to purchase Shares in
the Offerings on an interest-bearing basis at the rate described in the
Prospectus until the Closing Date and satisfaction of all conditions precedent
to the release of the obligation to refund payments received from persons
subscribing for or ordering Shares in the Offerings in accordance with the Plan
and as described in the Prospectus or until refunds of such funds have been made
to the persons entitled thereto or withdrawal authorizations canceled in
accordance with the Plan and as described in the Prospectus. The Primary
Parties will ensure that the funds of each subscriber are separately insured by
the FDIC (to the maximum extent allowable), and the Primary Parties will make
the appropriate refunds of such funds in the event that such refunds are
required to be made in accordance with the Plan and as described in the
Prospectus.
(aa) The Holding Company will register as a savings and loan holding
company under the HOLA within 90 days after the Closing Date.
(bb) The Holding Company will comply with Section 11(a) of the 1933 Act and
Rule 158 of the 1933 Act.
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Charles Webb & Company
____________, 1998
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(cc) The Primary Parties will take such actions and furnish such
information as are reasonably requested by the Agent in order for the Agent to
ensure compliance with the NASD's "Interpretation Relating to Free Riding and
Withholding."
(dd) The Primary Parties will not amend the Plan without notifying the
Agent prior thereto.
(ee) The Primary Parties will assist the Agent, if necessary, in connection
with the allocation of the Conversion Shares in the event of an oversubscription
and will provide the Agent with any information necessary in allocating the
Conversion Shares in such event.
(ff) The Primary Parties shall conduct the Reorganization in accordance
with the Plan, all applicable laws and regulations and in the manner described
in the Prospectus.
(gg) The Primary Parties shall use all reasonable efforts to comply with,
or cause to be complied with, the conditions precedent to the several
obligations of the Agent specified in Section 7 hereof.
(hh) The Primary Parties shall conduct their respective businesses in
material compliance with all applicable federal and state laws, rules,
regulations, decisions, directives and orders, including all decisions,
directives and orders of the Commission, the OTS and the FDIC.
(ii) Upon completion of the sale by the Holding Company of the Shares
contemplated by the Prospectus, (i) the MHC shall have been converted pursuant
to the Plan to a federally chartered interim stock savings bank and
simultaneously merged with and into the Bank, (ii) all of the authorized, issued
and outstanding capital stock of the Bank shall be owned by the Holding Company,
(iii) the Holding Company shall have no direct subsidiaries other than the Bank,
and (iv) the Reorganization shall have been effected in accordance with all
applicable statutes, regulations, decisions and orders; and all terms,
conditions, requirements and provisions with respect to the Reorganization
(except those that are conditions subsequent) imposed by the Commission, the OTS
or any other governmental agency, if any, shall have been complied with by the
Primary Parties in all material respects or appropriate waivers shall have been
obtained and all notice and waiting periods shall have been satisfied, waived or
elapsed.
(jj) The Primary Parties will use their best efforts to assure that the
representations and warranties set forth in Section 3 of this Agreement remain
true and complete in all material respects throughout the period from the date
of this Agreement up to and including the Closing Date.
SECTION 6. COVENANTS OF THE AGENT. The Agent hereby covenants with the
----------------------
Primary Parties as follows:
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Charles Webb & Company
____________, 1998
Page 22
(a) During the Offerings, the Agent shall comply in all material respects
with all requirements imposed upon it by the OTS and, to the extent applicable,
by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act
Regulations.
(b) The Agent shall distribute the Prospectus in connection with the sales
of the Common Stock in accordance with the 1933 Act, the 1933 Act Regulations,
the 1934 Act and the 1934 Act Regulations.
(c) The Agent shall remain a registered broker dealer in good standing with
the Commission and the NASD and in each jurisdiction in which the Holding
Company shall offer and sell the Shares.
(d) During the Offerings, the Agent will cause sufficient number of
personnel of the Agent to be at the Bank to handle all transactions associated
with the Offerings without the use of Bank personnel.
SECTION 7. CONDITIONS TO THE AGENT'S OBLIGATIONS. The Agent's obligations
-------------------------------------
hereunder are subject, to the extent not waived in writing by the Agent, to the
condition that all representations and warranties of the Primary Parties herein
are, at and as of the commencement of the Offerings and at and as of the Closing
Date, true and correct in all material respects, the condition that the Primary
Parties shall have performed all of their respective obligations hereunder to be
performed on or before such dates, and to the following further conditions:
(a) At the Closing Date, the Primary Parties shall have conducted the
Reorganization in all material respects in accordance with the Plan, the OTS
Regulations, and all other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions precedent to the
Reorganization imposed upon them by the OTS, the Commission and any state
securities agency.
(b) The Registration Statement shall have been declared effective by the
Commission, the Conversion Applications shall have been approved by the OTS and
the Holding Company Application shall have been approved by the OTS not later
than 5:30 p.m., Eastern Time, on the date of this Agreement, or with the
Agent's consent at a later time and date; and at the Closing Date, no order or
other action suspending the effectiveness of the Registration Statement shall
have been issued under the 1933 Act or proceedings therefor initiated or, to the
knowledge of the Primary Parties, threatened by the Commission, or any state
authority and no order or other action suspending the authorization of the
Prospectus or the consummation of the Reorganization shall have been issued or
proceedings therefor initiated or, to the knowledge of the Primary Parties,
threatened by the OTS or any other federal or state authority.
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Charles Webb & Company
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(c) At the Closing Date, the Agent shall have received:
(1) The favorable opinion, dated as of the Closing Date and addressed
to the Agent for its benefit, of Breyer & Aguggia LLP, special counsel for
the Primary Parties, in form and substance to the effect that:
(i) The Holding Company has been duly incorporated and is validly
existing under the laws of the State of Indiana with full corporate
power and authority to conduct its business and own its property as
described in the Prospectus; the Holding Company is duly qualified as
a foreign corporation to transact business in each jurisdiction in
which the failure to so qualify would have a material adverse effect
on the financial condition, results of operations or the business of
the Primary Parties, taken as a whole; and upon consummation of the
Reorganization, all of the Shares issued and outstanding shall be duly
authorized and, upon payment therefor, shall be validly issued, fully
paid and non-assessable.
(ii) The Bank is validly existing as a federally chartered
savings bank in capital stock form of organization under the laws of
the United States, with full corporate power and authority to conduct
its business and own its property as described in the Prospectus; the
Bank is duly qualified as a foreign corporation to transact business
in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the financial condition, results of
operations or the business of the Bank; and upon consummation of the
Reorganization, all of the issued and outstanding capital stock of the
Bank shall be duly authorized and, upon payment therefor, shall be
validly issued, fully paid and non-assessable, and all of such capital
stock shall be owned of record and, to such counsel's knowledge,
beneficially by the Holding Company, free and clear of any liens,
encumbrances or claims.
(iii) The Bank is a member of the FHLB-Indianapolis; the deposit
accounts of the Bank are insured by the FDIC under the SAIF up to the
maximum amount allowed under law; and, to such counsel's knowledge, no
proceedings for the termination or revocation of such membership or
insurance are pending or threatened.
(iv) The MHC is validly existing as a federally chartered mutual
holding company under the laws of the United States, with full
corporate power and authority to conduct its business and own its
property as described in the Prospectus.
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Charles Webb & Company
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(v) Upon consummation of the Reorganization, the authorized,
issued and outstanding capital stock of the Holding Company shall be
within the range set forth in the Prospectus under the caption
"Capitalization," and except for shares issued upon incorporation of
the Holding Company which will be canceled as part of the
Reorganization, no shares of Common Stock have been issued prior to
the Closing Date; the issuance of the Shares is not subject to
statutory or regulatory preemptive rights except as contemplated by
the Conversion Regulations; the terms and provisions of the Shares
conform to the description thereof contained in the Prospectus; and
the form of certificate used to evidence the Common Stock complies
with applicable law. To such counsel's knowledge, upon the issuance
of the Shares, good title to the Shares will be transferred from the
Holding Company to the purchasers thereof against payment therefor,
subject to such claims as may be asserted against the purchasers
thereof by third-party claimants.
(vi) The Plan has been duly adopted by the vote of the directors
of each of the Primary Parties as required by the OTS Regulations and
approved by the eligible voting members of the MHC and the eligible
voting stockholders of the Bank in accordance with the OTS Regulations
and the MHC's and the Bank's respective charter and bylaws.
(vii) The Registration Statement has been declared effective
under the 1933 Act and no stop order suspending the effectiveness
thereof has been issued or proceedings therefor initiated or, to such
counsel's knowledge, threatened by the Commission or any other
governmental agency.
(viii) The OTS Applications and the Plan have been approved by
the OTS and the Prospectus and the proxy statements of the MHC and the
Bank have been authorized for use by the OTS; to such counsel's
knowledge, no order has been issued by the OTS or the Commission to
suspend the Offerings or the use of the Prospectus, and no action for
such purposes has been instituted or threatened; and, to such
counsel's knowledge, no person has sought to obtain regulatory or
judicial review of the final action of the OTS approving the Plan, the
OTS Applications or the Prospectus, and no action is pending or, to
such counsel's knowledge, threatened to revoke any such authorizations
or approvals.
(ix) At the time the OTS Applications, including the Prospectus
contained therein, were approved by the OTS, the OTS Applications,
including the Prospectus contained therein (other than the financial
statements, the notes thereto, financial tables, and other financial,
statistical and appraisal data included therein or omitted
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Charles Webb & Company
____________, 1998
Page 25
therefrom, as to which no opinion need be rendered), complied as to
form in all material respects with the requirements of the OTS
Regulations.
(x) At the time the Registration Statement became effective, the
Registration Statement, including the Prospectus contained therein
(other than the financial statements, the notes thereto, financial
tables, and other financial, statistical and appraisal data included
therein or omitted therefrom, as to which no opinion need be
rendered), complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
(xi) To such counsel's knowledge, the Primary Parties have
conducted the Reorganization in all material respects in accordance
with the Plan, the 1933 Act, the 1933 Act Regulations, the OTS
Regulations, and the HOLA. The Plan complies in all material respects
with the HOLA and the OTS Regulations.
(xii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of the
Primary Parties; and this Agreement is a valid and binding obligation
of each of the Primary Parties, enforceable in accordance with its
terms, except as the enforceability thereof may be limited (a) by
bankruptcy, insolvency, moratorium, reorganization, conservatorship,
receivership or other similar laws now or hereafter in effect relating
to or affecting the enforcement of creditors' rights generally or the
rights of creditors of savings institutions and their holding
companies, (b) by general equitable principles, regardless of whether
such enforceability is considered in a proceeding in equity or at law,
(c) laws relating to the safety and soundness of insured depository
institution and their affiliates, or (d) to the extent that the
provisions of Section 8 and 9 hereof may be unenforceable as against
public policy or by applicable law, including without limitation
Sections 23A and 23B of the Federal Reserve Act, as amended.
(xiii) The execution, delivery and performance of this Agreement
and the incurrence of the obligations set forth herein by the Primary
Parties do not (a) result in any violation of the HOLA or the OTS
Regulations, (b) conflict with or violate the charter and bylaws of
the MHC or the Bank or the articles of incorporation and bylaws of the
Holding Company, or (c) constitute a breach of, or default under (or
an event which, with notice or lapse of time or both, would constitute
a default under), or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of any of the
Primary Parties pursuant to any contract, indenture, mortgage, loan
agreement, note, lease or other instruments filed as an exhibit to the
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Charles Webb & Company
____________, 1998
Page 26
Registration Statement or the OTS Applications to which any of the
Primary Parties is a party or by which any of the Primary Parties may
be bound, or to which any of the property or assets of any of the
Primary Parties is subject that, individually or in the aggregate
would have a material adverse effect on the financial condition,
results of operations or business of the Primary Parties, taken as a
whole.
(xiv) Subject to the satisfaction of the conditions to the OTS
approval of the Reorganization, no further approval, registration,
authorization, consent or other order of or notice to any governmental
agency is required with respect to any of the Primary Parties in
connection with the execution and delivery of this Agreement, the
issuance of the Shares and the consummation of the Reorganization,
except as may be required under the Blue Sky Laws of various
jurisdictions (as to which no opinion need be rendered).
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against any of the
Primary Parties or principals of any of the Primary Parties that are
required to be disclosed in the Prospectus other than those disclosed
therein (provided that for this purpose such counsel need not regard
any litigation or governmental proceeding to be "threatened" unless
the potential litigant or governmental authority has manifested to the
management of the Primary Parties or to such counsel a present
intention to initiate such litigation or proceeding).
(xvi) The descriptions in the OTS Applications and the
Registration Statement of the contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments filed as exhibits
thereto are accurate in all material respects and fairly present the
information required to be shown.
(xvii) To such counsel's knowledge, the Bank has obtained all
Federal banking licenses, permits and authorizations currently
required for the conduct of its business as described in the
Prospectus, except for such licenses, approvals or authorizations the
failure of which to have would not result in a material adverse change
in the financial condition, results of operation or the business of
the Bank, and, to such counsel's knowledge, all such licenses, permits
and other governmental authorizations are in full force and effect,
and, to such counsel's knowledge, the Bank is in all material respects
in compliance therewith.
(xviii) To such counsel's knowledge, the MHC and the Bank are
not in violation of their respective charter and bylaws, and the
Holding Company is not in
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Charles Webb & Company
____________, 1998
Page 27
violation of its articles of incorporation and bylaws nor, to such
counsel's knowledge, is either the MHC or the Bank in default (nor has
any event occurred which, with notice or lapse of time or both, would
constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument filed as an exhibit to the Registration Statement or the
OTS Applications to which the MHC or the Bank is a party or by which
the MHC or the Bank or any of its property may be bound in any respect
that would have a material adverse effect upon the financial
condition, results of operations or business of the Primary Parties,
taken as a whole.
(xix) To such counsel's knowledge, neither the MHC nor the Bank
is in violation of any directive from the OTS or the FDIC to make any
material change in the method of conducting its business.
(xx) The information in the Prospectus under the captions
"Regulation," "The Conversion," "Comparison of Stockholders' Rights,"
"Restrictions on Acquisition of the Holding Company," "Taxation--
Federal Taxation" and "Description of Capital Stock of the Holding
Company," to the extent that such information constitutes matters of
law, summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is accurate and
complete in all material respects.
In giving such opinion, such counsel may rely as to all matters of fact on
certificates of officers or directors of the Primary Parties and certificates of
public officials. All references to "to such counsel's knowledge" in such
opinion shall have the meaning of "actual knowledge" as set forth in the
American Bar Association Legal Opinion Accord (1991) (the "Accord"). For
purposes of such opinion, no proceedings shall be deemed to be pending, no order
or stop order shall be deemed to be issued, and no action shall be deemed to be
instituted unless, in each case, a director or executive officer of a Primary
Party, or their counsel, shall have received a copy of such proceedings, order,
stop order or action. Such counsel may assume that any agreement is the valid
and binding obligation of any parties to such agreement other than the Primary
Parties.
In addition, such counsel shall provide a letter stating that during the
preparation of the Registration Statement, the OTS Applications and the
Prospectus, such counsel participated in conferences with certain officers and
other representatives of the Primary Parties, representatives of the Agent,
counsel to the Agent, representatives of the independent public accountants for
the Primary Parties at which the contents of the Registration Statement, the OTS
Applications and the Prospectus and related matters were discussed and, although
they are not passing upon and do not
<PAGE>
Charles Webb & Company
____________, 1998
Page 28
assume the responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement, the OTS Applications and
Prospectus, on the basis of the foregoing (relying as to factual matters on
certificates of officers and other factual representations by the Primary
Parties), nothing has come to such counsel's attention that caused them to
believe that the Prospectus as of its date and as of the Closing Date, contained
or contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel shall express no
comment or opinion with respect to the financial statements, schedules and other
financial information and statistical and stock valuation data included or
omitted from, or statistical methodology employed, in the Registration
Statement, the OTS Applications and Prospectus).
(2) The favorable opinion, dated as of the Closing Date, of Bose
McKinney & Evans, Indianapolis, Indiana, counsel to the Agent, with respect
to such matters as the Agent may reasonably require. Such opinion may
rely, as to matters of fact, upon certificates of officers and directors of
the Primary Parties delivered pursuant hereto or as such counsel shall
reasonably request.
(3) The favorable opinion, dated as of the Closing Date and addressed
to the Agent for its benefit, of ____________, counsel for the Primary
Parties, in form and substance to the effect that:
(i) The execution, delivery and performance of this Agreement and
the incurrence of the obligations set forth herein by the Primary
Parties do not (a) result in any violation of any applicable law or
regulation (except that no opinion need be rendered with respect to
the HOLA, the OTS Regulations or the Blue Sky Laws of various
jurisdictions) or (b) constitute a breach of, or default under (or an
event which, with notice or lapse of time or both, would constitute a
default under), or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Primary
Parties pursuant to any contract, indenture, mortgage, loan agreement,
note, lease or other instruments to which any of the Primary Parties
is a party or by which any of the Primary Parties may be bound, or to
which any of the property or assets of any of the Primary Parties is
subject that, individually or in the aggregate would have a material
adverse effect on the financial condition, results of operations or
business of the any of the Primary Parties, taken as a whole.
(ii) To such counsel's knowledge, each of the MHC and the Bank
has good and marketable title to all properties and assets which are
material to its
<PAGE>
Charles Webb & Company
____________, 1998
Page 29
business and to those properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Prospectus, or as are not material in relation to the business of the
Primary Parties, taken as a whole.
(iii) To such counsel's knowledge, all of the leases and
subleases material to the business of the Primary Parties under which
any of the Primary Parties holds properties, as described in the
Prospectus, are in full force and effect.
(iv) To such counsel's knowledge, none of the Primary Parties is
in default (nor has any event occurred which, with notice or lapse of
time or both, would constitute a default) in the performance or
observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which such Primary Party
is a party or by which such Primary Party or any of its property may
be bound in any respect that would have a material adverse effect upon
the financial condition, results of operations or business of the
Primary Parties, taken as a whole.
(d) At the Closing Date, the Agent shall receive a certificate of the
Chief Executive Officer and the Chief Financial Officer of each of the Primary
Parties, dated as of the Closing Date, that states that: (i) they have reviewed
the Registration Statement and, at the time the Registration Statement was
declared effective, the Registration Statement did not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (ii) since the date as of which information is given
in the Prospectus and as of the Closing Date, no material adverse change in the
financial condition or in the earnings, capital, properties or business of the
Primary Parties, taken as a whole, has occurred and no other event has occurred,
which should have been set forth in an amendment or supplement to the Prospectus
which has not been so set forth, and the conditions set forth in this Section 7
have been satisfied; (iii) the representations and warranties in Section 3 are
true and correct with the same force and effect as though expressly made at and
as of the Closing Date; (iv) the Primary Parties have complied in all material
respects with all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to the Closing Date and will comply in all
material respects with all obligations to be satisfied by them after the Closing
Date; (v) no order suspending the effectiveness of the Registration Statement or
suspending the Offerings or the Reorganization has been issued and no
proceedings for that purpose are pending or, to their knowledge, threatened by
the Commission, the OTS or any other authority; and (vi) to their knowledge no
person has sought to obtain review of the final action of the OTS approving the
Plan.
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Charles Webb & Company
____________, 1998
Page 30
(e) Prior to and at the Closing Date; (i) in the reasonable opinion of the
Agent, there shall have been no material adverse change in the financial
condition, or in the earnings or business of the Primary Parties, taken as a
whole, from that as of the latest date as of which such condition is set forth
in the Prospectus other than transactions referred to or contemplated therein;
(ii) none of the Primary Parties shall have received any directive from the
Commission, the OTS or the FDIC to make any material change in the method of
conducting its business with which it has not complied in al material respects
(which directive, if any, shall have been disclosed to the Agent) or which
materially and adversely would affect the business, operations or financial
condition or income of the Primary Parties, taken as a whole; (iii) none of the
Primary Parties shall have been in material default (nor shall an event have
occurred which, with notice or lapse of time or both, would constitute a
default) under any provision of any agreement or instrument relating to any
outstanding indebtedness; (iv) no action, suit or proceedings, at law or in
equity or before or by any federal or state commission, board or other
administrative agency, shall be pending or, to the knowledge of the Primary
Parties; threatened against any of the Primary Parties or affecting any of their
respective properties wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business operations, financial condition or
income of the Primary Parties, taken as a whole; and (v) where required, the
Shares have been qualified or registered for offering and sale under the Blue
Sky Laws of the jurisdictions in which the Shares have been offered for sale.
(f) Concurrently with the execution of this Agreement, the Agent shall
receive a letter from Monroe Shine & Co., Inc. dated the date hereof and
addressed to the Primary Parties and the Agent; (i) confirming that Monroe Shine
& Co., Inc. are independent public accountants within the meaning of the 1933
Act, the 1933 Act Regulations, 12 C.F.R. (S)571.2(c)(3) and the Code of
Professional Ethics of the American Institute of Certified Public Accountants,
and stating in effect that in their opinion the financial statements of the Bank
as of June 30, 1998, and 1997 and for the years ended June 30, 1998, and 1997
included in the Prospectus and covered by their opinion included therein, comply
as to form in all material respects with the applicable accounting requirements
of the 1933 Act, the 1933 Act Regulations (and specifically Item 310 of
Regulation S-B thereof), OTS Regulations and GAAP applied consistently (except
as noted therein); (ii) stating in effect that, on the basis of certain agreed
upon procedures (but not an audit examination in accordance with generally
accepted auditing standards) consisting of a reading of the latest available
unaudited interim financial statements of the Bank prepared by the Bank, a
reading of the minutes of the meetings of the Board of Directors of the Primary
Parties, the members of the MHC and the stockholders of the Bank, and
consultations with officers of the Bank responsible for financial and accounting
matters, nothing came to its attention which caused it to believe that: (A) the
unaudited financial statements of the Bank included in the Prospectus are not in
conformity with GAAP applied on a basis substantially consistent with that of
the audited financial statements included in the Prospectus; and (B) during the
period from that date of the latest audited financial statements included in the
Prospectus to a specified date not more than three business days prior to the
date
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Charles Webb & Company
____________, 1998
Page 31
hereof, there was any increase in borrowings by or in non-performing assets
of the Bank; and (C) except as otherwise discussed in the Prospectus, there was
any decrease in retained earnings of the Bank at the date of such letter as
compared with amounts shown in the latest audited statement of condition
included in the Prospectus or there was any decrease in net income or net
interest income of the Bank for the number of full months commencing immediately
after the period covered by the latest audited income statement included in the
Prospectus and ended on the latest month end prior to the date of the Prospectus
or in such letter as compared to the corresponding period in the preceding year
(included in any Recent Developments section of the Prospectus); and
(iii) stating that, in addition to the audit referred to in its opinion included
in the Prospectus and the performance of the procedures referred to in clause
(ii) of this subsection (f), it has compared with the general accounting records
of the Bank which are subject to the internal controls of the Bank's accounting
system and other data prepared by the Bank directly from such accounting
records, to the extent specified in such letter, such amounts and/or percentages
set forth in the Prospectus as you may reasonably request, and it has found such
amounts and percentages to be in agreement therewith.
(g) At the Closing Date, the Agent shall receive a letter from Monroe Shine
& Company, Inc. dated the Closing Date, addressed to the Agent, confirming the
statements made by them in the letter delivered by them pursuant to subsection
(f) of this Section 10, the "specified date" referred to in clause (ii) of
subsection (f) thereof to be a date specified in such letter, which shall not be
more than three business days prior to the Closing Date.
(h) At the Closing Date, the Agent shall have received the favorable
opinion, dated as of the Closing Date and addressed to the Agent for its
benefit, of Monroe Shine & Company, Inc. in form and substance to the effect
that the information in the Prospectus under the caption "Taxation-Indiana
Taxation" has been reviewed by such firm and is accurate and complete in all
material respects.
(i) At the Closing Date, the Agent shall receive a letter from
Keller & Company, Inc., dated the Closing Date and addressed to the Agent,
(i) confirming that said firm is independent of the Primary Parties and is
experienced and expert in the area of corporate appraisals within the meaning of
the OTS Regulations, (ii) stating in effect that the Appraisal prepared by such
firm complies in all material respects with the applicable requirements of the
OTS Regulations, and (iii) further stating that its opinion of the pro forma
market value of the MHC and the Bank expressed in the appraisal as most recently
updated, remains in effect.
(j) The Bank shall not have sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
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Charles Webb & Company
____________, 1998
Page 32
or court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus.
(k) At or prior to the Closing Date, the Agent shall receive: (i) a copy of
the order of the Commission declaring the Registration Statement effective;
(ii) a copy of the letters from the OTS approving the OTS Applications and
authorizing the use of the Prospectus; (iii) a certificate from the Secretary of
State of Indiana evidencing the existence of the Holding Company; (iv)
certificates from the OTS evidencing the existence of the MHC and the Bank;
(v) a certificate from the FDIC evidencing the Bank's insurance of accounts;
(vi) a letter of the FHLB-Indianapolis evidencing the Bank's membership therein,
and (vii) any other documents that the Agent shall reasonably request.
(l) The Agent shall receive a copy of the Bank's federal stock charter as
executed by the OTS, certified by an officer of the Bank, and a copy of the
Holding Company's articles of incorporation and bylaws certified by an officer
of the Holding Company.
(m) Subsequent to the date hereof, there shall not have occurred any of the
following: (i) a suspension or limitation in trading in securities generally on
the New York Stock Exchange or in the over-the-counter market, or quotations
halted generally on The Nasdaq Stock Market, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required by either of such exchanges or The Nasdaq Stock Market or by order of
any governmental authority; (ii) a general moratorium on the operations of
commercial banks, Indiana or federal savings and loan associations or a general
moratorium on the withdrawal of deposits from commercial banks, Indiana or
federal savings and loan associations declared by federal or state authorities;
(iii) the engagement by the United States in hostilities which have resulted in
the declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities in the effect
of any of the above in the Agent's reasonable judgment, makes it impracticable
or inadvisable to proceed with the Offerings or the delivery of the Shares on
the terms and in the manner contemplated in the Prospectus.
SECTION 8. INDEMNIFICATION.
---------------
(a) The Primary Parties jointly and severally agree to indemnify and hold
harmless the Agent, its officers, directors, agents, servants and employees and
each person, if any, who controls the Agent within the meaning of Section 20(a)
of the 1934 Act, against any and all loss, liability, claim, damage or expense
whatsoever (including but not limited to settlement expenses), joint or several,
that the Agent or any of them may suffer or to which the Agent and any such
persons may become subject under all applicable federal or state laws or
otherwise, and to promptly reimburse the Agent and any such persons upon written
demand for any expenses (including reasonable fees and disbursements of counsel)
incurred by the Agent or any of them in connection with investigating,
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Charles Webb & Company
____________, 1998
Page 33
preparing to defend or defending any actions, proceedings or claims (whether
commenced or threatened) to the extent such losses, claims, damages, liabilities
or actions: (i) arise out of or are related to the Reorganization or any action
taken by the Agent where acting as agent of the Primary Parties; (ii) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (or any amendment or supplement
thereto), the OTS Applications (or any amendment or supplement thereto) or any
blue sky application or other instrument or document executed by any of the
Primary Parties or based upon written information supplied by any of the Primary
Parties filed in any state or jurisdiction to register or qualify any or all of
the Shares or to claim an exemption therefrom, or provided to any state or
jurisdiction to exempt any of the Primary Parties as a broker-dealer or their
respective officers, directors and employees as broker-dealers or agents, under
the securities laws thereof (collectively, the "Blue Sky Application"), or any
application or other document, advertisement, oral statement or communication
("Sales Information") prepared, made or executed by or on behalf of any of the
Primary Parties based upon written or oral information furnished by or on behalf
of any of the Primary Parties, whether or not filed in any jurisdiction, in
order to qualify or register the Shares or to claim an exemption therefrom under
the securities laws thereof; (iii) arise out of or based upon the omission or
alleged omission to state in any of the foregoing documents or information, a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; or (iv) arise from any theory of liability whatsoever relating to or
arising from or based upon the Registration Statement or Prospectus (or any
amendment or supplement thereto), the OTS Applications (or any amendment or
supplement thereto), any Blue Sky Application or Sales Information or any
documentation distributed in connection with the Reorganization; provided,
however, that no indemnification is required under this paragraph (a) to the
extent such losses, claims, damages, liabilities or actions arise out of or are
based upon any untrue material statement or alleged untrue material statements
in, or material omissions or alleged material omission from, the Registration
Statement or Prospectus (or any amendment or supplement thereto), the OTS
Applications (or any amendment or supplement thereto), any Blue Sky Application
or Sales Information made in reliance upon and in conformity with information
furnished in writing to any of the Primary Parties by the Agent regarding the
Agent; and provided further, however, that the Primary Parties shall not be
liable under this Section 8(a) to the extent that any loss, claim, damage,
liability or action is found in a final judgment by a court of competent
jurisdiction to have resulted from the Agent's bad faith, willful misconduct or
gross negligence.
(b) The Agent agrees to indemnify and hold harmless the Primary Parties,
their respective directors and officers and each person, if any, who controls
any of the Primary Parties within the meaning of Section 20(a) of the 1934 Act
against any and all loss, liability, claim, damage or expense whatsoever
(including but not limited to settlement expenses), joint or several, which
they, or any of them, may suffer or to which they, or any of them may become
subject under all applicable federal and state laws or otherwise, and to
promptly reimburse the Primary Parties and any such
<PAGE>
Charles Webb & Company
____________, 1998
Page 34
persons upon written demand for any expenses (including reasonable fees and
disbursements of counsel) incurred by them, or any of them, in connection with
investigating, preparing to defend or defending any actions, proceedings or
claims (whether commenced or threatened) to the extent such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) or the OTS Applications (or any amendment or supplement thereto), and
Blue Sky Application or Sales Information, or are based upon the omission or
alleged omission to state in any of the foregoing documents a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Agent's obligations under this Section 8(b)
- -------- -------
shall exist only if and only to the extent (i) that such untrue statement or
alleged untrue statement was made in, or such material fact or alleged material
fact was omitted from, the Registration Statement or the Prospectus (or any
amendment or supplement thereto) or the OTS Applications (or any amendment or
supplement thereto), and Blue Sky Application or Sales Information in reliance
upon and in conformity with information furnished in writing to the Primary
Parties by the Agent regarding the Agent.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 8 or
otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action,
proceeding or claim, other than reasonable costs of investigation. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for each indemnified party in connection with any one action, proceeding
or claim or separate but similar or related actions, proceedings or claims in
the same jurisdiction arising out of the same general allegations or
circumstances.
SECTION 9. CONTRIBUTION. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from any of the Primary Parties or the
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Charles Webb & Company
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Page 35
Agent, as the case may be, the Primary Parties and the Agent shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding of any claims
asserted, but after deducting any contribution received by the Primary Parties
or the Agent from persons other than the other party thereto, who may also be
liable for contribution) in such proportion so that the Agent is responsible for
that portion represented by the percentage that the fees paid to the Agent
pursuant to Section 2 of this Agreement bears to the gross proceeds received by
the Holding Company from the sale of the Conversion Shares in the Offerings, and
the Primary Parties shall be jointly and severally responsible for the balance.
If, however, the allocation provided above is not permitted by applicable law or
if the indemnified party failed to give the notice required under Section 8
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative fault of the Primary Parties, on the one hand,
and the Agent, on the other, in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions,
proceedings or claims in respect thereto), but also the relative benefits
received by the Primary Parties, on the one hand, and the Agent, on the other,
from the Offerings (before deducting expenses). The relative benefits received
by the Primary Parties, on the one hand, and the Agent, on the other, shall be
deemed to be in the same proportion as the gross proceeds from the Offerings
received by the Primary Parties bear to the total fees and expenses received by
the Agent. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Primary Parties, on the one hand, or the Agent, on the other,
and the parties' relative intent, good faith, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Primary
Parties and the Agent agree that it would not be just and equitable if
contribution pursuant to this Section 9 were determined by pro-rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to above in this Section 9. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions, proceedings or claims in respect thereof) referred to
above in this Section 9 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, proceeding or claim. It is expressly agreed that
the Agent shall not be required to contribute any amount which in the aggregate
exceeds the amount paid (excluding reimbursable expenses) to the Agent under
this Agreement. It is understood that the above stated limitation on the Agent's
liability is essential to the Agent and that the Agent would not have entered
into this Agreement if such limitation had not been agreed to by the parties to
this Agreement. No person found guilty of any fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act of 1933, as amended)
shall be entitled to contribution from any person who was not found guilty of
such fraudulent misrepresentation. The obligations of the Primary Parties under
this Section 9 and under Section 8 shall be in addition to any liability which
the Primary Parties may otherwise have. For purposes of
<PAGE>
Charles Webb & Company
____________, 1998
Page 36
this Section 9, each of the Agent's officers and directors or the officers and
directors of the Primary Parties and each person, if any, who controls the Agent
or the Primary Parties within the meaning of the 1934 Act shall have the same
rights to contribution as the Agent or the Primary Parties. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action,
suit, claim or proceeding against such party in respect of which a claim for
contribution may be made against another party under this Section 9, shall
notify such party from whom contribution may be sought, but the omission to so
notify such party shall not relieve the party from whom contribution may be
sought from any other obligation it may have hereunder or otherwise that under
this Section 9. To the extent applicable, the Primary Parties' and the Agent's
obligations under this Section 9 are subject to and limited by public policy and
the provisions of applicable law.
SECTION 10. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND INDEMNITIES. The
-------------------------------------------------------
respective indemnities of the Primary Parties and the Agent, and the
representations and warranties and other statements of the Primary Parties and
the Agent set forth in or made pursuant to this Agreement, shall survive and
remain in full force and effect, regardless of (i) any termination or
cancellation of this Agreement or (ii) any investigation made by or on behalf of
the Agent, the Primary Parties or any officer, director, controlling person
referred to in Section 8 hereof, agent or employee, and (iii) the issuance and
delivery of and payment for the Shares; and any legal representative, successor
or assign of the Agent, the Primary Parties, and any such controlling person
shall be entitled to the benefit of the respective agreements, indemnities,
warranties and representations.
SECTION 11. TERMINATION. (a) The Agent may terminate its obligations
-----------
under this Agreement by giving the notice indicated below in subsection (b) at
any time after this Agreement becomes effective as follows:
(i) In the event the Holding Company fails to sell the required
minimum number of Conversion Shares by the End Date, and in accordance with
the provisions of the Plan or as required by the OTS Regulations, and
applicable law, this Agreement shall terminate upon refund by the Primary
Parties to each person who has subscribed for or ordered any of the
Conversion Shares the full amount which it may have received from such
person, together with interest as provided in the Prospectus, and no party
to this Agreement shall have any obligation to the other hereunder, except
for such obligations of Primary Parties as are set forth in Sections 2,
8(a), 9 and 10 hereof.
(ii) If any of the conditions specified in Section 7 shall not have
been fulfilled when and as required by this Agreement unless waived in
writing, or by the Closing Date, this Agreement and all of the Agent's
obligations hereunder may be canceled by the Agent by notifying the Primary
Parties of such cancellation as provided in Section 12 hereof in writing or
at any time at or prior to the Closing Date, and any such cancellation
shall be
<PAGE>
Charles Webb & Company
____________, 1998
Page 37
without liability of any party to any other party except as otherwise
provided in Sections 2, 8, 9 and 10 hereof.
(iii) In the event any of the Primary Parties is in material breach
of the representations and warranties or covenants contained in Sections 3
and 5 and such breach has not been cured after the Agent has provided the
Primary Parties with notice of such breach.
(b) If the Agent elects to terminate this Agreement with respect to it as
provided in this Section 11, the Primary Parties shall be notified promptly by
telephone, confirmed by letter.
(c) The Primary Parties may collectively terminate this Agreement with
respect to the Agent in the event the Agent is in material breach of the
representations and warranties or covenants contained in Sections 4 and 6 and
such breach has not been cured after the Primary Parties have provided the Agent
with notice of such breach.
(d) This Agreement may also be terminated by mutual written consent of the
parties hereto.
SECTION 12. NOTICES. All communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing; and if sent to the Agent,
shall be mailed or delivered and confirmed to Charles Webb & Company, 211
Bradenton, Dublin, Ohio 43017-5034, Attention: Harold T. Hanley, III (with a
copy to Bose McKinney & Evans, 135 North Pennsylvania Street, Suite 2700,
Indianapolis, Indiana 46204, Attention: David A. Butcher, Esquire); and if sent
to the Primary Parties, shall be mailed or delivered and confirmed to the
Primary Parties at 220 Federal Drive, N.W., Corydon, Indiana 47112, Attention:
James G. Pendleton (with a copy to Breyer & Aguggia LLP, 1300 I Street, N.W.,
Suite 470 East, Washington, D.C. 20005, Attention: Paul M. Aguggia, Esquire).
SECTION 13. PARTIES. The Primary Parties shall be entitled to act and
-------
rely on any request, notice, consent, waiver or agreement given on behalf of the
Agent when the same shall have been given by the undersigned. The Agent shall
be entitled to act and rely on any request, notice, consent, waiver or agreement
purportedly given on behalf of any of the Primary Parties, when the same shall
have been given by the undersigned or any other officer of the Primary Parties.
This Agreement shall inure solely to the benefit of, and shall be binding upon,
the Agent, the Primary Parties and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained.
<PAGE>
Charles Webb & Company
____________, 1998
Page 38
SECTION 14. ENTIRE AGREEMENT. It is understood and agreed that this
----------------
Agreement is the exclusive agreement among the parties hereto, and supersedes
any prior agreement among the parties (except for specific references herein to
the Letter Agreement) and may not be varied except in writing signed by all the
parties.
SECTION 15. PARTIAL INVALIDITY. In the event that any term, provision or
------------------
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
SECTION 16. CONSTRUCTION. This Agreement shall be construed in accordance
------------
with the laws of the State of New York, except to the extent that federal law
shall apply.
SECTION 17. COUNTERPARTS. This Agreement may be executed in separate
------------
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
<PAGE>
Charles Webb & Company
____________, 1998
Page 39
If the foregoing correctly sets forth the arrangement between the Primary
Parties and the Agent, please indicate acceptance thereof in the space provided
below for that purpose, whereupon this letter and the Agent's acceptance shall
constitute a binding agreement.
Very truly yours,
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
By:______________________________
James G. Pendleton
Chairman and Chief Executive Officer
FIRST CAPITAL, INC., M.H.C.
By:______________________________
James G. Pendleton
Chairman and Chief Executive Officer
FIRST CAPITAL, INC.
By:______________________________
James G. Pendleton
Chairman and Chief Executive Officer
<PAGE>
Charles Webb & Company
____________, 1998
Page 40
Accepted as of the date first above written
CHARLES WEBB & COMPANY, A
DIVISION OF KEEFE, BRUYETTE &
WOODS, INC.
By:______________________________
Patricia A. McJoynt
Executive Vice President
<PAGE>
EXHIBIT A
FIRST CAPITAL, INC.
Up to __________ Conversion Shares
($0.01 Par Value)
Selected Dealers' Agreement
---------------------------
_____________, 1998
Gentlemen:
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc.
("Webb"), has agreed to assist First Capital, Inc., Corydon, Indiana (the
"Holding Company"), an Indiana corporation, in connection with the offer and
sale (the "Offering") of up to 1,026,375 shares of its common stock, $0.01 par
value ("Common Stock"), to be issued in connection with the reorganization (the
"Reorganization") of First Capital, Inc., M.H.C. (the "MHC") and its majority-
owned subsidiary, First Federal Bank, A Federal Savings Bank (the "Bank") from a
stock savings bank subsidiary of a federally-chartered mutual holding company to
a stock savings bank subsidiary of the Holding Company pursuant to the Home
Owners' Loan Act, as amended, and 12 C.F.R. Part 575. The total number of
shares of Common Stock to be offered may be decreased to a minimum of 758,625
shares and increased to an adjusted maximum of 1,180,331 shares. The price per
share has been fixed at $10.00. The Common Stock, the number of shares to be
issued, and certain of the terms on which they are being offered, are more fully
described in the enclosed Prospectus dated November __, 1998 (the "Prospectus").
In connection with the Reorganization, the Holding Company, on a best efforts
basis, is offering for sale such shares of Common Stock ("Shares"), in a
Subscription Offering and a Direct Community Offering (each as defined in the
Prospectus). Any Shares not sold in the Subscription Offering and Direct
Community Offering shall be offered to the general public in the Syndicated
Community Offering (as defined in the Prospectus) giving preference first, to
natural persons residing in Crawford, Clark, Floyd, Harrison and Washington
Counties, Indiana.
The Subscription and Community Offerings are being conducted under an
Agreement and Plan of Reorganization (the "Plan"), adopted by the Bank's and the
MHC's Board of Directors. The Subscription and Community Offerings are further
being conducted in accordance with the regulations of the Office of Thrift
Supervision (the "OTS") and subject to the provisions contained in the Plan.
A-1
<PAGE>
The Shares are also being offered by broker-dealers licensed by the
National Association of Securities Dealers, Inc. (the "NASD") which have been
selected by Webb and the Holding Company.
Webb is offering the selected dealers (of which you are one) the
opportunity to participate in the solicitation of offers to buy the Shares and
as consideration for your services Webb will pay you a selling concession equal
to an agreed upon percentage of the dollar amount of the Shares sold on behalf
of the Holding Company by you, as evidenced by the authorized designation of
your firm on the order form or forms for payment therefor to the Holding
Company. It is understood, of course, that payment of your fee will be made
only out of compensation received by Webb for the Common Stock sold on behalf of
the Holding Company by you, as evidenced in accordance with the preceding
sentence. As soon as practicable after the closing date of the Offering, Webb
will remit to you, only out of Webb's compensation as provided above, the fees
to which you are entitled hereunder.
Each order form for the purchase of Shares must set forth the identity and
address of each person to whom the certificates for such Shares should be issued
and delivered. Such order form also must clearly identify your firm in order
for you to receive compensation. You shall instruct any subscriber who elects
to send his order form directly to you to make any accompanying check payable to
"First Capital, Inc." unless you elect to hold and escrow such funds in
accordance with the terms and conditions specified below.
This offer is made subject to the terms and conditions herein set forth and
is made only to selected dealers who are members in good standing of the NASD
who are to comply with all applicable rules of the NASD, including, without
limitation, the NASD's Interpretation With Respect to Free-Riding and
Withholding and NASD Rule 2110.
Orders for Shares will be subject to confirmation and Webb, acting on
behalf of the Holding Company, reserves the right in its unfettered discretion
to reject any order in whole or in part, to accept or reject orders in the order
of their receipt or otherwise, and to allot. Neither you nor any other person
is authorized by the Holding Company, or by Webb to give any information or make
any representations other than those contained in the Prospectus in connection
with the sale of any of the Shares. No selected dealer is authorized to act as
agent for Webb when soliciting offers to buy the Shares from the public or
otherwise.
As a selected dealer assisting in selling the Shares pursuant hereto, you
hereby agree to comply with the applicable requirements of the Act and
applicable state rules and regulations. In addition, you confirm that you have
complied with the prospectus delivery requirements of Rule 15c2-8 under Act.
As a selected dealer you will either: (1) no later than the business day
following receipt transmit all customer orders and customer checks in payment
therefor to the Holding Company or (2) if your customers desire to pay for their
shares with funds on deposit with you or forwarded by such customers to you and
retained by you, you will (a) deposit such customer funds no later than
A-2
<PAGE>
twelve noon Eastern Time of the business day next following your receipt of the
orders or funds in a segregated account all in accordance with Rule 15c2-4 of
the Act; (b) timely transmit such orders or a summary hereof to the Holding
Company; and (c) remit funds deposited in accordance with (a) above to the
Holding Company on Webb's instructions no later than 24 hours before the closing
date of the transaction.
Unless earlier terminated by Webb, this Agreement shall terminate upon the
closing date of the Offering. Webb may terminate this Agreement or any
provisions hereof any time by written or telegraphic notice to you. Of course,
Webb's obligations hereunder are subject to the successful completion of the
Offering.
You agree that at any time or times prior to the termination of this
Agreement you will, upon Webb's request, report to Webb the number of Shares
ordered by you under this Agreement and provide, if applicable, a list of
beneficial owners for the Shares.
Webb shall have full authority to take such actions as Webb may deem
advisable in respect of all matters pertaining to the Offering. Webb shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by Webb in this Agreement.
Upon application to Webb, Webb will inform you as to the states in which
Webb believes the Shares have been qualified for sale under, or are exempt from
the requirements of, the respective blue sky laws of such states, however, Webb
assumes no responsibility or obligation as to your rights to sell Shares in any
state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from Webb to you shall be deemed to have been duly given if
mailed, telephoned, or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the State
of New York.
A-3
<PAGE>
Please confirm your agreement hereto by signing and returning the
confirmations accompanying this letter at once to Webb at Charles Webb &
Company, 211 Bradenton Avenue, Dublin, Ohio 43017. The enclosed duplicate copy
shall evidence the agreement between us.
CHARLES WEBB & COMPANY,
A DIVISION OF
KEEFE, BRUYETTE & WOODS, INC.
By:_____________________________
CONFIRMED AS OF:
_____________________, 199__
________________________________
(Name of Dealer)
By:_____________________________
Its:____________________________
A-4
<PAGE>
EXHIBIT 8.1
1300 I Street, N.W.
Suite 470 East
Washington, DC 20005
Telephone (202)737-7900
Breyer & Aguggia LLP Facsimile (202)737-7979
================================================================================
ATTORNEYS AT LAW
October 20, 1998
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M.H.C.
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112-0130
Gentlemen:
In accordance with your request, set forth herein is our opinion
relating to the federal income tax consequences of the two integrated
transactions described herein. Capitalized terms used herein which are not
expressly defined herein shall have the meaning ascribed to them in the Plan of
Conversion from Mutual Holding Company to Stock Holding Company and Agreement
and Plan of Reorganization dated June 18, 1998, between First Federal Bank, A
Federal Savings Bank (the "Savings Bank") and First Capital, Inc. (the "MHC")
(the "Plan").
The Proposed Transactions
- -------------------------
Based upon our review of the Plan, we understand that the relevant facts
are as follows:
In February 1993, the Savings Bank, a federally-chartered mutual savings
bank, reorganized into the mutual holding company form of organization. In
connection with the foregoing transaction, which resulted in the conversion of
the Savings Bank to a stock institution, the Savings Bank simultaneously sold
200,000 shares of the common stock (the "Savings Bank Common Stock") to
depositors of the Savings Bank, including directors, officers and employees of
the Savings Bank, and members of the general public. As of the date hereof, the
MHC and the other stockholders ("Public Stockholders") own an aggregate of 59.5%
and 40.5%, respectively, of the outstanding Savings Bank Common Stock.
At the present time, two transactions are being undertaken. The first
transaction, which is sometimes referred to herein as "Merger 1," is the
conversion of the MHC from the mutual form of organization to a federal interim
stock savings bank ("Interim") and the simultaneous merger of Interim with and
into the Savings Bank. The second transaction, which is sometimes referred to
herein as "Merger 2," is the acquisition of the Savings Bank by First Capital,
Inc. (the "Holding
<PAGE>
Breyer & Aguggia LLP
====================
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M.H.C.
First Capital, Inc.
October 20, 1998
Page 2
Company"), a newly organized Indiana corporation, by means of the merger of the
Savings Bank with a federal interim stock savings institution (the "Interim
Savings Bank"), which will be organized as a wholly-owned subsidiary of the
Holding Company. Merger 1 and Merger 2 are sometimes collectively referred to
herein as the "Conversion and Reorganization."
Merger 1 and Merger 2 are being accomplished pursuant to the Plan. The
Plan complies in all material respects with the provisions of Subpart A of 12
C.F.R. Part 563b, the Office of Thrift Supervision ("OTS") regulations governing
the conversion of mutual institutions to stock form. The Plan also complies in
all material respects with the provisions of 12 C.F.R. Section 575.12(a),
governing the conversion of mutual holding companies to stock form. Because the
proposed transaction involves two mergers, the Plan also includes two related
plans of merger with language that complies in all material respects with 12
C.F.R. Section 552.13, governing mergers involving federal stock associations.
In Merger 1, a liquidation account is being established by the Savings
Bank for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. Pursuant to Section XIV of the Plan, the initial balance of the
liquidation account will equal the amount of any dividends waived by the MHC
plus the greater of (1) $4.0 million, which is equal to 100% of the retained
earnings of Savings Bank as of June 30, 1992, the date of the latest statement
of financial condition contained in the final offering circular utilized in the
formation of the MHC, or (2) 59.5% of the Savings Bank's total stockholders'
equity as reflected in its latest statement of financial condition contained in
the final Prospectus to be utilized in the Conversion and Reorganization. The
$7.3 million is the amount that the liquidation account would have been if the
MHC formation had been a standard conversion not involving a mutual holding
company.
Upon consummation of Merger 1, the shares of Savings Bank Common Stock
held by the MHC will be canceled.
Upon consummation of Merger 2 (the "Effective Date"), all of the then
outstanding shares of Savings Bank Common Stock held by the Public Stockholders
will be converted into and become shares of common stock of the Holding Company
("Holding Company Common Stock") at the Exchange Ratio (the "Exchange Stock").
The common stock of the Interim Savings Bank owned by the Holding Company prior
to Merger 2 will be converted into and become shares of common stock of the
Savings Bank on the Effective Date. The Holding Company Common Stock held by the
Savings Bank immediately prior to Merger 2 will be canceled on the Effective
Date.
Immediately following Merger 2, Holding Company Common Stock will be
sold pursuant to the Offerings. The stockholders of the Holding Company will be
the Public Stockholders, plus
<PAGE>
Breyer & Aguggia LLP
====================
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M.H.C.
First Capital, Inc.
October 20, 1998
Page 3
those persons who purchase Holding Company Common Stock in the Offerings.
Nontransferable rights to subscribe for Holding Company Common Stock will be
granted to eligible depositors and other persons in the priorities set forth in
the Plan (the "Subscription Rights").
Upon the Effective Date, Interim Savings Bank will be merged with and
into the Savings Bank and Interim Savings Bank will cease to exist as a legal
entity. As a result, the Holding Company will be a publicly held corporation,
will register the Holding Company Common Stock under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and will become subject to the
rules and regulations thereunder and file periodic reports and proxy statements
with the Securities and Exchange Commission ("SEC"). The Savings Bank will
become a wholly owned subsidiary of the Holding Company and will continue to
carry on its business and activities as conducted immediately prior to Merger 2.
Federal Tax Opinion
- -------------------
In connection with the opinion expressed herein below, we have relied
upon the assumption that the representations required for advance rulings
outlined in Rev. Proc. 86-42, 1986-2 C.B. 722, are true and correct as it
applies to the Conversion and Reorganization.
Based on the foregoing assumptions and the description of Merger 1 and
Merger 2, the representations which have been made to us by management of the
Savings Bank, the MHC and the Holding Company in an affidavit dated October 20,
1998, attached hereto as Exhibit A, and subject to the qualifications and
limitations set forth in this letter, we are of the opinion that, if Merger 1
were to be consummated as described above as of the date hereof, then:
1. Merger 1 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code.
2. No gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of the MHC in Merger 1.
In addition, we are of the opinion that, if Merger 2 were to be
consummated as described above as of the date hereof, then:
1. Merger 2 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the
Code, Merger 2 is not disqualified from qualifying as a
reorganization within the meaning of Section 368(a)(1)(A)
<PAGE>
Breyer & Aguggia LLP
====================
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M.H.C.
First Capital, Inc.
October 20, 1998
Page 4
because Holding Company Common Stock will be conveyed to the Savings
Bank's stockholders in exchange for their Savings Bank Common Stock.
2. No gain or loss will be recognized by the Interim Savings Bank upon
the transfer of its assets to the Savings Bank.
3. No gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of Interim Savings Bank.
4. No gain or loss will be recognized by the Holding Company or Savings
Bank upon the exchange of Exchange Stock for Savings Bank Common
Stock.
5. No gain or loss will be recognized by the Public Stockholders upon
the receipt of the Exchange Stock solely in exchange for their
shares of Savings Bank Common Stock.
6. The basis of the Exchange Stock to be received by the Public
Stockholders will be the same as the basis of the Savings Bank
Common Stock surrendered in exchange therefor, before giving effect
to any payment of cash in lieu of fractional shares.
7. The holding period of the Exchange Stock to be received by the
Public Stockholders will include the holding period of the Savings
Bank Common Stock, provided that the Savings Bank Common Stock was
held as a capital asset on the date of the exchange.
8. No gain or loss will be recognized by the Holding Company upon the
sale of Holding Company Common Stock in the Offerings.
9. Eligible Account Holders and Supplemental Eligible Accounts Holders
will realize gain, if any, upon the constructive issuance to them of
Subscription Rights and/or interest in the liquidation account of
Savings Bank. Any gain resulting therefrom will be recognized, but
only in an amount not in excess of the fair market value of the
liquidation accounts and/or Subscription Rights received. The
liquidation account will have normal, if any, fair market value.
Based solely on the accuracy of the conclusion reached by Keller &
Company, Inc. in its written opinion to Savings Bank (the
"Appraiser's Opinion") that the Subscription Rights have no value at
the time of distribution or exercise and our reliance thereon, no
gain or loss will be required to be recognized by depositors upon
receipt or distribution of Subscription Rights. (Section 1001 of the
Code.) See Paulsen v. Commissioner, 469 U.S. 131,139 (1985).
--- -----------------------
<PAGE>
Breyer & Aguggia LLP
====================
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M.H.C.
First Capital, Inc.
October 20, 1998
Page 5
Based solely on the accuracy of the conclusions reached in the
Appraiser's Opinion, and our reliance thereon, we are of the opinion
that: (a) no taxable income will be recognized by the borrowers,
directors, officers and employees of Savings Bank upon the
distribution to them of Subscription Rights or upon the exercise or
lapse of the Subscription Rights to acquire Holding Company Common
Stock at fair market value; (b) no taxable income will be realized
by the depositors of Savings Bank as result of the exercise of lapse
of the Subscription Rights to purchase Holding Company Common Stock
at fair market value. Rev. Rul. 56-572, 1956-2 C.B. 182; and (c) no
taxable income will be realized by Savings Bank, or Holding Company
upon the issuance or distribution of Subscription Rights to
depositors of Savings Bank to purchase shares of Holding Company
Common Stock at fair market value. (Section 311 of the Code.)
Notwithstanding the Appraiser's Opinion, if the Subscription Rights
are subsequently found to have a fair market value, income may be
recognized by various recipients of the Subscription Rights (in
certain cases, whether or not the rights are exercised) and Holding
Company and/or Savings Bank may be taxable on the distribution of
the Subscription Rights. (Section 311 of the Code.) In this regard,
the Subscription Rights may be taxed partially or entirely at
ordinary income tax rates.
10. The tax basis to the holders of the Holding Company Common Stock
purchased in the Offerings will be the amount paid therefor, and the
holding period for such shares will begin on the date of
consummation of the Offerings if purchased through the exercise of
Subscription Rights. If purchased in the Direct Community Offering
or Syndicated Community Offering, the holding period for such stock
will begin on the day after the date of purchase.
* * * * *
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any local,
foreign or other tax considerations. However, we believe our opinion addresses
all the material federal tax consequences of the Conversion and Reorganization.
If any of the information upon which we have relied is incorrect, or if changes
in the relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on the case law, Code, Treasury
Regulations thereunder, Internal Revenue Service rulings as they now exist.
These authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion.
<PAGE>
Breyers & Aguggia LLP
=====================
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M.H.C.
First Capital, Inc.
October 20, 1998
Page 6
This opinion is not binding on the Internal Revenue Service and there can be no
assurance, and none is hereby given, that the Internal Revenue Service will not
take a position contrary to one or more of the positions reflected in the
foregoing opinion, or that our opinion will be upheld by the courts if
challenged by the Internal Revenue Service.
We hereby consent to the filing of this opinion with the OTS as an
exhibit to the Application H-(e)1-S filed by the Holding Company with the OTS in
connection with the Conversion and Reorganization and the reference to our firm
in the Application H-(e)1-S under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and
the OTS as exhibits to the Registration Statement and the Savings Bank's
Application for Conversion on Form AC ("Form AC"), respectively, and the
reference on our firm in the Prospectus, which is a part of both the
Registration Statement and the Form AC, under the headings "THE CONVERSION --
Effects of Conversion on Depositors and Borrowers of the Bank -- Tax Effects"
and "LEGAL AND TAX OPINIONS."
Very truly yours,
/s/ Breyer & Aguggia LLP
BREYER & AGUGGIA LLP
<PAGE>
EXHIBIT A
---------
Affidavit of Representations
----------------------------
The following statements, representations, and declarations are made in
support of the federal tax opinion to be issued by Breyer & Aguggia, LLP
Washington, D.C., in connection with the transactions contemplated by the Plan
of Conversion and Agreement and Plan of Reorganization dated June 18, 1998
between First Federal Bank, A Federal Savings Bank and First Capital, Inc.,
M.H.C. (the AMHC@) whereby (i) the MHC will convert from a mutual holding
company to a federal interim savings bank and merge with and into the Savings
Bank and (ii) Savings Bank will be acquired by the Holding Company by means of
the merger of Savings Bank with Interim Savings Bank. All capitalized terms have
the same meaning as in the federal tax opinion, unless otherwise indicated.
1. The fair market value of the interest of each member who is an Eligible
Account Holder or Supplemental Eligible Account Holder in the Liquidation
Account established in the Savings Bank will be approximately equal to the
fair market value of the voting and liquidation rights surrendered by such
members in the exchange.
2. The Savings Bank has no plan or intention to reacquire any portion of the
Liquidation Account or the subscription rights transferred to the former MHC
members who are Eligible Account Holders and Supplemental Eligible Account
Holders in exchange for their voting and liquidation rights in the MHC.
3. The Savings Bank has no plan or intention to sell or otherwise dispose of
any of the assets of the MHC acquired in Merger 1, except for dispositions
made in the ordinary course of business or transfers described in IRC (S)
368(a)(2)(C).
4. The liabilities of the MHC assumed by the Savings Bank, if any, and the
liabilities to which the transferred assets of the MHC are subject, if any,
were incurred by the MHC in the ordinary course of business.
5. Following Merger 1, the Savings Bank will continue its historic business,
the historic business of the MHC or use a significant portion of the MHC's
historic business assets in the Savings Bank's business.
6. The Savings Bank, the MHC, and the shareholders of the Savings Bank and
members of the MHC will pay their respective expenses, if any, incurred in
connection with Merger 1.
7. There is no inter-corporate indebtedness existing between the MHC and the
Savings Bank that was issued, acquired or will be settled at a discount.
8. No parties to the transaction are investment companies as defined in IRC
(S)(S)368(a)(2)(F)(iii) and (iv).
<PAGE>
9. The MHC is not under the jurisdiction of a court in a title 11 or similar
case within the meaning of IRC '368(a)(3)(A).
10. The fair market value of the assets of the MHC transferred to the Savings
Bank will equal or exceed the sum of the liabilities assumed by the Savings
Bank plus the amount of the liabilities, if any, to which the transferred
assets are subject.
11. Following Merger 2, the Savings Bank will hold at least 90% of the fair
market value of its net assets and at least 70% of the fair market value of
its gross assets and at least 90% of the fair market value of Interim
Savings Bank's net assets (other than stock of Holding Company distributed
to Savings Bank's shareholders in the transaction) and are least 70% of the
fair market value of Interim Savings Bank's gross assets (other than stock
of Holding Company distributed to Savings Bank's shareholders in Merger 2)
held immediately prior to Merger 2. For purposes of this representation,
amounts paid by the Savings Bank or Interim Savings Bank to dissenters,
amounts paid by the Savings Bank or Interim Savings Bank to shareholder who
receive cash or other property, amounts used by the Savings Bank or interim
II to pay reorganization expenses, and all redemptions and distributions
(except for regular, normal dividends) made by the Savings Bank will be
included as assets of the Savings Bank or Interim Savings Bank,
respectively, immediately prior to Merger 2.
12. The Savings Bank has no plan or intention to sell or otherwise dispose of
any of the assets of Interim Savings Bank acquired in Merger 2, except for
disposition made in the ordinary course of business or transferred described
in IRC (S)368(a)(2)(C).
13. The Savings Bank has no plan or intention to issue additional shares of its
stock that would result in the Holding Company losing control of the Savings
Bank within the meaning of IRC (S)368(c).
14. The Holding Company has no plan or intention to reacquire any of its stock
issued in Merger 2.
15. The Holding Company has no plan or intention to liquidate the Savings Bank;
to merge the Savings Bank with or into another corporation, to sell or
otherwise dispose of the stock of the Savings Bank, except for transfers of
stock to corporations controlled by Holding Company; or to cause the Savings
Bank to sell or otherwise dispose of any of its assets or any of the assets
acquired from Interim Savings Bank, except for dispositions made in the
ordinary course of business or transfers of assets to a corporation
controlled by the Savings Bank.
16. Interim Savings Bank will have no liabilities to be assumed by the Savings
Bank, and will not transfer to the Savings Bank any assets subject to
liabilities in Merger 2.
A-2
<PAGE>
17. Following Merger 2, the Savings Bank will continue its historic business or
use a significant portion of its historic business assets in a business.
18. The Holding Company, Interim Savings Bank, the Savings Bank, and the
shareholders of the Savings Bank will pay their respective expenses, if
any, incurred in connection with Merger 2.
19. There is no inter-corporate indebtedness existing between the Holding
Company and the Savings Bank or between Interim Savings Bank and the
Savings Bank that was issued, acquired, or will be settled at a discount.
20. In Merger 2, shares of Savings Bank stock representing control of the
Savings Bank, as defined in IRC (S)368(c), will be exchanged solely for
voting stock of the Holding Company. For purposes of this representation,
shares of Savings Bank stock exchanged for cash or other property
originating with the Holding Company will be treated as outstanding Savings
Bank stock on the date of Merger 2.
21. At the time of the Savings Bank merger, the Savings Bank will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock in the
Savings Bank that, if exercised or converted, would affect the Holding
Company's acquisition or retention of control of the Savings Bank, as
defined in IRC (S)368(c).
22. The Holding Company does not own, nor has it owned during the past five
years, any shares of stock of the Savings Bank.
23. No parties to Merger 2 are investment companies as defined in IRC
(S)(S)368(a)(2)(F)(iii) and (iv).
24. On the date of Merger 2, the fair market value of the assets of the Savings
Bank will exceed the sum of its liabilities, plus the amount of
liabilities, if any to which the assets are subject.
25. The Savings Bank is not under the jurisdiction of an court in a title 11 or
similar case within the meaning of IRC (S)368(a)(3)(A).
26. The fair market value of Holding Company voting common stock to be received
by each Savings Bank shareholder will be approximately equal to the fair
market value of Savings Bank stock surrendered in the exchange.
A-3
<PAGE>
This Affidavit of Representations was executed by a duly-authorized
officer of the undersigned entities on this 20th day of October 1998.
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
By: /s/ James G. Pendleton
-------------------------
Chief Executive Officer
FIRST CAPITAL, INC., M.H.C.
By: /s/ James G. Pendleton
-------------------------
Chief Executive Officer
FIRST CAPITAL, INC.
By: /s/ James G. Pendleton
-------------------------
Chief Executive Officer
A-4
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF MONROE SHINE & CO., INC.]
October 27, 1998
Boards of Directors
First Federal Bank, A Federal Savings Bank
First Capital, Inc., M. H. C.
First Capital, Inc.
220 Federal Drive, NW
Corydon, Indiana 47112-0130
Gentlemen:
In accordance with your request, set forth herein is our opinion regarding
certain Indiana income tax consequences of the proposed Plan of Conversion and
Agreement and Plan of Reorganization ("Plan") adopted by First Federal Bank, A
Federal Savings Bank, ("Savings Bank") and First Capital Inc., M. H. C. ("MHC")
on June 18, 1998.
In connection with the opinions expressed below, we have examined and relied
upon originals or copies of the Plan as adopted by the Boards of Directors of
the Savings Bank and MHC on June 18, 1998; the federal stock association charter
and bylaws of the Savings Bank; the federal mutual charter and bylaws of the
MHC; the articles of incorporation and bylaws of First Capital, Inc. ("Holding
Company"); the prospectus included in the Registration Statement on Form SB-2
filed with the Securities and Exchange Commission ("SEC") on September 16, 1998
(the Registration Statement). We have assumed the representations are true and
that the parties to the Plan will act in accordance with the Plan. Also, we
have relied upon the Federal Tax Opinion of Breyer & Aguggia dated October 20,
1998 ("Federal Tax Opinion"), incorporated hereunder by reference.
Pursuant to the Plan, (i) the MHC will convert to an interim federal stock
savings bank and simultaneously merge with and into the Savings Bank, pursuant
to which the MHC will cease to exist and the outstanding shares of common stock
of the Savings Bank held by the MHC will be cancelled, and (ii) an additional
interim federal stock savings bank will be formed as a wholly-owned subsidiary
of the Holding Company, a newly organized Indiana corporation, and will merge
with and into the Savings Bank, resulting in the Savings Bank becoming a wholly-
owned subsidiary of the Holding Company and the outstanding shares of Savings
Bank common stock held by the Savings Bank minority
<PAGE>
stockholders will be converted into shares of common stock of the Holding
Company pursuant to an exchange ratio as described in the Plan.
The exchange ratio will result in minority stockholders of the Savings Bank
owning in the aggregate approximately the same percentage of the common stock of
the Holding Company to be outstanding upon the completion of the conversion as
the percentage of Savings Bank common stock owned by them in the aggregate
immediately before consummation of the conversion, before giving effect to any
(i) payment of cash in lieu of issuing fractional exchange shares, (ii) the
payment of cash to minority stockholders of the Savings Bank who exercise and
perfect their rights of dissent and appraisal pursuant to 12 C. F. R. 552.14,
and (iii) shares of the common stock of the Holding Company purchased by the
minority stockholders in the conversion stock offerings.
Also, pursuant to the Plan, the Holding Company will offer its shares of common
stock for sale in a subscription offering, in a direct community offering and,
if necessary, a syndicated community offering. The aggregate purchase price at
which all shares of common stock will be offered and sold pursuant to the Plan
and the total number of shares of common stock to be offered in the conversion
will be determined by the Boards of Directors of the Savings Bank and the MHC on
the basis of the estimated pro forma market value of the Savings Bank as a
subsidiary of the Holding Company. The estimated pro forma market value will be
determined by an independent appraiser.
The Plan provides for the establishment of a liquidation account by the Savings
Bank for the benefit of eligible account holders and supplemental account
holders in an amount equal to the amount of the cumulative dividends with
respect to the Savings 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 Savings Bank's
reorganization as a majority-owned subsidiary of the MHC, or 59.5% of the
Savings 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 Savings 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 holder's interest in the
liquidation account. In the event of a complete liquidation of the Savings
Bank, each eligible account holder and supplemental eligible account holder will
be
<PAGE>
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
Based on and subject to the foregoing, and the conclusions stated in the Federal
Tax Opinion as to the federal income tax consequences of the Conversion and
Reorganization, it is our opinion that for Indiana income tax purposes, under
current law:
1. The Conversion and Reorganization transactions and the subsequent stock
offering will be treated in an identical manner as it is treated for federal
income tax purposes under the Internal Revenue Code. The Internal Revenue
Code in effect as of January 1, 1998, is incorporated by reference into the
income tax laws of the state of Indiana.
2. Under the income tax laws of the state of Indiana, consummation of the
Conversion and Reorganization will not be a taxable event to the Savings
Bank, its account holders, or the Holding Company.
This opinion is given solely for the benefit of the parties to the Plan, the
shareholders of the Holding Company and eligible account holders, supplemental
eligible account holders and other investors who purchase common stock pursuant
to the Conversion and Reorganization, and may not be relied upon by any other
party or entity or referred to in any document without our express written
consent. As noted above, this opinion is limited to the Indiana income tax
consequences of the Conversion and Reorganization and we undertake no
responsibility to update or supplement our opinion.
We hereby consent to the filing of this opinion with the SEC and the Office of
Thrift Supervision as exhibits to the Registration Statement and the Savings
Bank's Application for Conversion on Form AC, respectively, and the reference to
our firm in the prospectus which is a part of both the Registration Statement
and the Form AC under the headings "THE CONVERSION" and "LEGAL and TAX
OPINIONS".
Yours truly,
/s/ Monroe Shine & Co., Inc.
Monroe Shine & Co., Inc.
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF MONROE SHINE & CO., INC. APPEARS HERE]
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
First Capital, Inc.
First Federal Bank, a Federal Savings Bank
Corydon, Indiana
We consent to the use in this Amendment No. 1 to the Registration Statement on
Form SB-2 on behalf of First Capital, Inc. of our report dated July 22, 1998,
relating to the financial statements of First Federal Bank, a Federal Savings
Bank which appear in the Prospectus contained in such Registration Statement.
We also consent to the reference to us under the heading "Legal and Tax
Opinions" and "Experts" contained in the Prospectus.
Monroe Shine & Co., Inc.
Monroe Shine & Co., Inc.
New Albany, Indiana 47150
November 3, 1998
<PAGE>
EXHIBIT 23.2
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
Telephone (202) 737-7900
Breyer & Aguggia LLP Facsimile (202) 737-7979
================================================================================
ATTORNEYS AT LAW
November 4, 1998
Board of Directors
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
RE: First Capital, Inc.
Registration Statement on Form SB-2
To the Board of Directors:
We hereby consent to the filing of the form of our federal income tax
opinion as an exhibit to the Registration Statement and to the reference to us
in the Prospectus included therein under the headings "THE CONVERSION -- Effects
of Conversion on Depositors and Borrowers of the Bank" and "LEGAL AND TAX
OPINIONS."
Sincerely,
/s/ Breyer & Aguggia LLP
BREYER & AGUGGIA LLP
Washington, D.C.
<PAGE>
EXHIBIT 99.5
FIRST CAPITAL, INC., M.H.C.
220 FEDERAL DRIVE, N.W.
CORYDON, INDIANA 47112
(812) 738-2198
NOTICE OF SPECIAL MEETING OF MEMBERS
TO BE HELD ON DECEMBER ___, 1998
Notice is hereby given that a special meeting of members ("Special
Meeting") of First Capital, Inc., M.H.C. ("MHC") will be held at the main office
of First Federal Bank, A Federal Savings Bank ("Bank"), 220 Federal Drive, N.W.,
Corydon, Indiana, on _________, December __, 1998, at ___:____ __.m., Eastern
Standard Time. Business to be taken up at the Special Meeting shall be:
(1) To approve a Plan of Conversion from Mutual Holding Company to
Stock Holding Company and Agreement and Plan of Reorganization
("Plan of Conversion") adopted by the MHC and the Bank, pursuant to
which (i) the MHC will convert to a federally chartered interim
stock savings bank and merge into the Bank, with the Bank being the
surviving institution, (ii) the Bank and a newly formed federally
chartered interim stock savings bank will merge, with the Bank
being the surviving institution and becoming a wholly-owned
subsidiary of a newly formed stock corporation named First Capital,
Inc. ("Holding Company") and (iii) the Holding Company will sell
shares of its common stock to the public and issue shares of its
common stock in exchange for shares of the Bank's common stock, all
on and subject to the terms and conditions contained therein.
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
Note: As of the mailing date of this Notice, the Board of Directors is
not aware of any other matters that may come before the Special
Meeting.
The members entitled to vote at the Special Meeting shall be those
members of the MHC at the close of business on October 31, 1998, and who
continue as members until the Special Meeting, and should the Special Meeting
be, from time to time, adjourned to a later time, until the final adjournment
thereof.
BY ORDER OF THE BOARD OF DIRECTORS
JOEL E. VOYLES
SECRETARY
Corydon, Indiana
November ____, 1998
PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL
MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE
PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF)
AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY BY
WRITTEN INSTRUMENT DELIVERED TO JOEL E. VOYLES, SECRETARY, FIRST CAPITAL, INC.,
M.H.C., AT THE ABOVE ADDRESS AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR
BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
<PAGE>
FIRST CAPITAL, INC., M.H.C.
220 FEDERAL DRIVE, N.W.
CORYDON, INDIANA 47112
(812) 738-2198
PROXY STATEMENT
NOVEMBER ___, 1998
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS
OF FIRST CAPITAL, INC., M.H.C. FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE
HELD ON _________, DECEMBER ____, 1998, AND ANY ADJOURNMENT OF THAT MEETING, FOR
THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF
DIRECTORS AND MANAGEMENT URGE YOU TO VOTE FOR THE PLAN OF CONVERSION.
PURPOSE OF MEETING--SUMMARY
A special meeting of members ("Special Meeting") of First Capital, Inc.,
M.H.C. ("MHC") will be held at the main office of First Federal Bank, A Federal
Savings Bank ("Bank"), 220 Federal Drive, N.W., Corydon, Indiana, on _________,
December ___, 1998, at ___:____ __.m., Eastern Standard Time, for the purpose of
considering and voting upon a Plan of Conversion and Agreement and Plan of
Reorganization ("Plan of Conversion"), which, if approved by a majority of the
total votes of the members eligible to be cast, will permit the Bank to become a
subsidiary of the Holding Company, a newly organized Indiana corporation formed
by the Bank. The reorganization of the Bank and the acquisition of control of
the Bank by the Holding Company are collectively referred to herein as the
"conversion."
Pursuant to the MHC's Federal Mutual Holding Company Charter, depositors
of the Bank and borrowers of the Bank with a loan outstanding as of February 1,
1993 and for as long as such loan remains outstanding are members of the MHC.
Members entitled to vote on the Plan of Conversion are members of the MHC as of
October 31, 1998 ("Voting Record Date") who continue as members until the
Special Meeting, and should the Special Meeting be, from time to time, adjourned
to a later time, until the final adjournment thereof. The conversion requires
the approval of not less than a majority of the total votes eligible to be cast
at the Special Meeting.
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 ratio at which shares of Bank common stock will be
exchanged for shares of Holding Company common stock (AExchange 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, (b) the payment of cash to stockholders of the Bank
who exercise and perfect their rights of dissent and appraisal, and (c) 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
1
<PAGE>
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) ("Subscription Offering").
Concurrently with the Subscription Offering, any shares of common stock
not subscribed for in the Subscription Offering may be offered for sale 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
Crawford, Clark, Floyd, Harrison and Washington Counties, Indiana ("Local
Community") ("Direct Community Offering"). Shares of common stock not sold in
the Subscription Offering and the Direct Community Offering may be offered to
the general public by a group of selected dealers ("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 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.
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 organized 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 Office of Thrift Supervision and the
Federal Deposit Insurance Corporation. The Bank's deposits have been federally-
insured by the FDIC since 1961 and are currently insured by the FDIC under the
Savings Association Insurance Fund. The Bank is a member of the Federal Home
Loan Bank 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 $6.3 million, or 8.1%, were consumer loans. The Bank originates all
loans for retention in its portfolio.
2
<PAGE>
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 Employee Stock Ownership Plan ("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.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
The MHC's Board of Directors has fixed the close of business on October
31, 1998 as the record date for the determination of members entitled to notice
of and to vote at the Special Meeting. All holders of savings or other
authorized accounts of the Bank, and borrowers of the Bank with loans
outstanding as of February 1, 1993 and for as long as such loans remain
outstanding, are members of the Bank under its current charter. All members of
record as of the close of business on the Voting Record Date who continue to be
members on the date of the Special Meeting or any adjournment thereof will be
entitled to vote at the Special Meeting or such adjournment.
Each eligible depositor member will be entitled at the Special Meeting
to cast one vote for each $100, or fraction thereof, of the aggregate withdrawal
value of all of the depositor's savings accounts in the Bank as of the Voting
Record Date. Borrowers with loans outstanding as of February 1, 1993, which
continue to be outstanding as of the Voting Record Date will be entitled to cast
one vote for the period of time such borrowings remain in existence. No member
is entitled to cast more than 1,000 votes. Any number of members present and
voting, represented in person or by proxy, at the Special Meeting will
constitute a quorum.
Approval of the Plan of Conversion will require the affirmative vote of
a majority of the total outstanding votes of the MHC's members eligible to be
cast at the Special Meeting. As of the Voting Record Date for the Special
Meeting, there were approximately _________ votes eligible to be cast, of which
_________ votes may be cast by depositor members and _______ votes may be cast
by borrower members.
PROXIES
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. Enclosed is a proxy which may be used by any eligible member
to vote on the Plan of Conversion. All properly executed and dated proxies
received by management will be voted in accordance with the instructions
indicated thereon by the members giving such proxies. If no instructions are
given, properly executed and dated proxies will be voted in favor of the Plan of
Conversion. If any other matters are properly presented at the Special Meeting
and may properly be voted on, all properly executed and dated proxies will be
voted on such matters in accordance with the best judgment of the proxy holders
named therein. If the enclosed proxy is returned properly executed and dated, it
may be revoked at any time before it is voted by written notice to the Secretary
of the MHC, by submitting a properly executed and later dated proxy, or by
attending and voting in person at the Special Meeting. The proxies being
solicited are only for use at the Special Meeting and at any and all
adjournments thereof and will not be used for any other meeting. Management is
not aware of any other business to be presented at the Special Meeting.
3
<PAGE>
The trustees for individual retirement accounts at the Bank, will vote
in favor of the Plan of Conversion, unless the beneficial owner executes and
returns the enclosed proxy for the Special Meeting or attends the Special
Meeting and votes in person.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the MHC,
in person, by telephone or through other forms of communication. Such persons
will be reimbursed by the MHC for their reasonable out-of-pocket expenses
incurred in connection with such solicitation. In addition, the MHC has retained
Charles Webb & Company to assist in the solicitation of proxies, account
consolidation, proxy tabulation and inspection. The fees for such services is
included in the fees to be received by Charles Webb & Company in connection with
the conversion. If necessary, the Special Meeting may be adjourned to an
alternative date to allow for additional time to solicit proxies.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE
ANY VOTER TO PURCHASE ANY COMMON STOCK.
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 THIS PROXY STATEMENT. 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, (b) the payment of
cash to stockholders of the Bank who exercise and perfect their rights of
dissent and appraisal, and (c) 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);
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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 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
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in the future. In addition, the Bank considered the financial services
modernization legislation currently under consideration by Congress and its
potential effect on 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. 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.
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.
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.
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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.
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.
Upon consummation of the conversion, the public stockholders of the Bank
will become stockholders of the Holding Company.
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;
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(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;
(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 Internal Revenue Service
("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.
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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 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.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of conversion pursuant to 12 C.F.R.
Part 563b may obtain review of such action by filing in the court of appeals
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of the United States for the circuit in which the principal office or residence
of such person is located, or in the United States Court of Appeals for the
District of Columbia, a written petition praying that the final action of the
OTS be modified, terminated or set aside. Such petition must be filed within 30
days after the publication of notice of such final action in the Federal
Register, or 30 days after the mailing by the applicant of the notice to members
as provided for in 12 C.F.R. Section 563b.6(c), whichever is later. The further
procedure for review is as follows: A copy of the petition is forthwith
transmitted to the OTS by the clerk of the court and thereupon the OTS files in
the court the record in the proceeding, as provided in Section 2112 of Title 28
of the United States Code. Upon the filing of the petition, the court has
jurisdiction, which upon the filing of the record is exclusive, to affirm,
modify, terminate, or set aside in whole or in part, the final action of the
OTS. Review of such proceedings is as provided in Chapter 7 of Title 5 of the
United States Code. The judgment and decree of the court is final, except that
they are subject to review by the United States Supreme Court upon certiorari as
provided in Section 1254 of Title 28 of the United States Code.
ADDITIONAL INFORMATION
The Holding Company has filed with the Securities and Exchange
Commission ("SEC") a Registration Statement on Form SB-2 (File No. 333-63515)
under the Securities Act of 1933, as amended with respect to the common stock
offered in the conversion. The 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. The accompanying Prospectus omits certain information contained in
such Application. The Application, including 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.
Copies of the Holding Company's Articles of Incorporation and Bylaws may
be obtained without charge by written request to the Bank.
All persons eligible to vote at the Special Meeting should review both
this Proxy Statement and the accompanying Prospectus carefully. However, no
person is obligated to purchase any Common Stock. For additional information,
you may call the Stock Information Center at (812) _____-___________.
BY ORDER OF THE BOARD OF DIRECTORS
JOEL E. VOYLES
SECRETARY
Corydon, Indiana
November ___, 1998
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YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND THE PROSPECTUS AND, WHETHER OR NOT YOU
PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND
RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES
WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND
THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED
TO THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR
BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS IN
THOSE JURISDICTIONS IN WHICH IT IS LAWFUL TO MAKE SUCH OFFER.
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EXHIBIT 99.6
November ___, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of First Federal Bank, A Federal Savings Bank ("Bank"), which will be held at
the main office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana, on
_________, December ___, 1998, at __:__ _.m., Eastern Standard Time.
The Notice of Annual Meeting of Stockholders and Proxy Statement
appearing on the following pages describe the formal business to be transacted
at the meeting. At the meeting, in addition to the routine matters of electing
directors and ratifying the appointment of independent auditors, you will be
asked to approve a Plan of Conversion and Agreement and Plan of Reorganization
("Plan of Conversion"). The Plan of Conversion provides for the conversion of
First Capital, Inc., M.H.C. from a mutual holding company to a stock holding
company, to be known as First Capital, Inc. ("Holding Company"), and the
reorganization of the Bank as a wholly-owned subsidiary of the Holding Company.
During the meeting, we will also report on the operations of the Bank.
Directors and Officers of the Bank, as well as a representative of Monroe Shine
& Co., Inc., the Bank's independent auditors, will be present to respond to
appropriate questions from stockholders.
Detailed information regarding the Bank's activities and operating
performance during the fiscal year ended June 30, 1998, is contained in the
Holding Company's Prospectus dated November ___, 1998, which is also enclosed.
The Prospectus is provided in lieu of the Bank's traditional Annual Report to
Stockholders.
Your vote is important, regardless of the number of shares you own. THE
BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE ANNUAL MEETING. This
will not prevent you from voting in person at the Annual Meeting, but will
assure that your vote is counted if you are unable to attend.
Sincerely,
James G. Pendleton
Chairman of the Board and Chief Executive Officer
<PAGE>
FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER____, 1998
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NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting") of First Federal Bank, A Federal Savings Bank ("Bank") will be held at
the main office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana, on
_________, December ___, 1998, at __:__ _.m., Eastern Standard Time, for the
following purposes:
1. To consider and vote upon a proposal to approve a Plan of Conversion
from Mutual Holding Company to Stock Holding Company and Agreement
and Plan of Reorganization ("Plan of Conversion") adopted by First
Capital, Inc., M.H.C. ("MHC") and the Bank, pursuant to which (i)
the MHC will convert to a federally chartered interim stock savings
bank and merge into the Bank, with the Bank being the surviving
institution, (ii) the Bank and a newly formed federally chartered
interim stock savings bank will merge, with the Bank being the
surviving institution and becoming a wholly-owned subsidiary of a
newly formed stock corporation named First Capital, Inc. ("Holding
Company") and (iii) the Holding Company will sell shares of its
common stock to the public and issue shares of its common stock in
exchange for shares of the Bank's common stock, all on and subject
to the terms and conditions contained therein;
2. The election of three directors of the Bank;
3. The approval of the appointment of Monroe Shine & Co., Inc. as
independent auditors for the Bank for the fiscal year ending June
30, 1999; and
4. To consider and act upon such other matters as may properly come
before the Annual Meeting or any adjournments thereof.
NOTE: The Board of Directors is not aware of any other business to come
before the Annual Meeting.
Any action may be taken on any one of the foregoing proposals at the
Annual Meeting on the date specified above, or on any date or dates to which, by
original or later adjournment, the Annual Meeting may be adjourned. Pursuant to
the Bank's Bylaws, the Board of Directors has fixed the close of business on
October 31, 1998 as the record date for the determination of the stockholders
entitled to notice of and to vote at the Annual Meeting and any adjournments
thereof.
Please complete and sign the enclosed form of Proxy, which is solicited
by the Board of Directors, and mail it promptly in the enclosed envelope. The
Proxy will not be used if you attend the Annual Meeting and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
JOEL E. VOYLES
Secretary
Corydon, Indiana
November ___, 1998
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IMPORTANT: The prompt return of proxies will save your Bank the expense of
further requests for proxies in order to insure a quorum. A self-addressed
envelope is enclosed for your convenience. No postage is required if mailed in
the United States.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROXY STATEMENT
OF
FIRST FEDERAL BANK, FEDERAL SAVINGS BANK
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS
DECEMBER____, 1998
- --------------------------------------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of First Federal Bank, A Federal Savings Bank
("Bank") to be used at the Annual Meeting of Stockholders (as may be adjourned
or postponed, the "Annual Meeting") of the Bank. The Annual Meeting will be held
at the Bank's main office, 220 Federal Drive, N.W., Corydon, Indiana, on
_________, December ___, 1998, at __:__ _.m., Eastern Standard Time. The
accompanying Notice of Annual Meeting of Stockholders and this Proxy Statement
are being first mailed to stockholders on or about November ____, 1998.
- --------------------------------------------------------------------------------
VOTING AND PROXY PROCEDURE
- --------------------------------------------------------------------------------
Stockholders Entitled to Vote. Stockholders of record as of the close of
business on October 31, 1998 ("Voting Record Date") are entitled to one vote for
each share of common stock ("Common Stock") of the Bank then held. As of the
close of business on the Voting Record Date, the Bank had ____________ shares of
Common Stock issued and outstanding of which 300,000 were owned by First
Capital, Inc., M.H.C. ("MHC"), the Bank's mutual holding company.
Quorum. The presence, in person or by proxy, of at least a majority of
the total number of outstanding shares of Common Stock entitled to vote is
necessary to constitute a quorum at the Annual Meeting. Abstentions will be
counted as shares present and entitled to vote at the Annual Meeting for
purposes of determining the existence of a quorum. Broker non-votes (i.e.,
shares held by brokers or nominees as to which instructions have not been
received and the broker or nominee does not have discretionary voting power)
will be considered shares present and will be included in determining whether a
quorum is present. Since the MHC owns more than 50% of the outstanding shares of
Common Stock, the Bank is guaranteed to achieve a quorum.
Voting. The Board of Directors solicits proxies so that each stockholder
has the opportunity to vote on the proposals to be considered at the Annual
Meeting. When a proxy card is returned properly signed and dated the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder of record attends the Annual Meeting, he or she may
vote by ballot. Where no instructions are indicated, proxies will be voted in
accordance with the recommendations of the Board of Directors. The Board
recommends a vote FOR approval of all proposals submitted to stockholders at the
Annual Meeting.
The nominees for directors who receive a plurality of the votes cast by
the holders of the outstanding Common Stock entitled to vote at the Annual
Meeting will be elected. Votes may be cast for or withheld from each nominee.
Votes that are withheld will have no effect on the outcome of the election
because directors will be elected by a plurality of votes cast.
With respect to the ratification of the appointment of independent
auditors and the adoption of the Plan of Conversion, stockholders may vote for
the proposal, against the proposal or may abstain from voting. The affirmative
majority of the votes cast is required to ratify the appointment of independent
auditors. Adoption of the Plan of Conversion will require the affirmative vote
of (i) the holders of at least two-thirds of the outstanding shares of Common
Stock, and (ii) the holders of at least a majority of the outstanding shares of
Common Stock present in
<PAGE>
person or by proxy at the Special Meeting (other than those held by the MHC) and
entitled to vote. SINCE THE MHC OWNS MORE THAN TWO-THIRDS OF THE OUTSTANDING
SHARES OF COMMON STOCK, THE BANK IS GUARANTEED TO RECEIVE THE FIRST REQUIRED
APPROVAL. Abstentions will have the same effect as a vote "against" approval of
the Plan of Conversion. Broker non-votes will have the same effect as a vote
"against" adoption of the Plan of Conversion with respect to the approval of the
conversion by the holders of at least two-thirds of the outstanding shares of
Common Stock and will have no effect on the voting with respect to the adoption
of the Plan of Conversion by a majority of the shares (other than those held by
the MHC) present and entitled to vote.
Revocation of a Proxy. Stockholders who execute proxies retain the right
to revoke them at any time before they are voted. Proxies may be revoked by
written notice delivered in person or mailed to the Secretary of the Bank or by
filing a later proxy prior to a vote being taken on a particular proposal at the
Annual Meeting. Attendance at the Annual Meeting will not automatically revoke a
proxy, but a stockholder of record in attendance may request a ballot and vote
in person, thereby revoking a prior granted proxy.
Persons and groups beneficially owning in excess of 5% of the Common
Stock are required to file certain reports with the Office of Thrift Supervision
("OTS"), and furnish a copy to the Bank, disclosing such ownership pursuant to
the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based on such
reports, the following table sets forth as of the close of business on the
Voting Record Date, certain information as to those persons who were beneficial
owners of more than 5% of the Bank's outstanding shares of Common Stock and as
to the shares of Common Stock beneficially owned by each director and by all
directors and officers of the Bank as a group. Management knows of no persons
other than those set forth below who owned more than 5% of the Bank's
outstanding shares of Common Stock as of the close of business on the Voting
Record Date.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Shares of
Name and Address Beneficial Common Stock
of Beneficial Owner Ownership(1) Outstanding
- ------------------- ------------ -------------
<S> <C> <C>
First Capital, Inc., M.H.C. 300,000 59.52%
220 Federal Drive, N.W.
Corydon, Indiana 47112
Directors and Named Executive Officer(2):
James G. Pendleton 7,300 1.4
Mark D. Shireman 7,300 1.4
Dennis L. Huber 600 *
Samuel E. Uhl 7,440(3) 1.5
Kenneth R. Saulman 1,660 *
John W. Buschemeyer 7,300 1.4
Gerald L. Uhl 7,400(4) 1.5
All executive officers
and directors as a
group (11 persons) 40,430(5) 19.8
</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 the
Common Stock if he or she has shared 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
2
<PAGE>
forms of ownership, over which shares the persons named in the table may
possess voting and investment power. Also includes shares that may be
acquire through the exercise of stock options that are exercisable within
60 days after the Voting Record Date.
(2) Under OTS regulations the term "named executive officer(s)" is defined to
include the chief executive officer, regardless of compensation level, and
the four most highly compensated executive officers, other than the chief
executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. James G. Pendleton, the Bank's
Chairman of the Board and Chief Executive Officer, was the only "named
executive officer" during the fiscal year ended June 30, 1998.
(3) Includes 2,000 shares subject to outstanding stock options exercisable
within 60 days from the Voting Record Date.
(4) Includes 60 shares subject to outstanding stock options exercisable by
spouse within 60 days from the Voting Record Date.
(5) Includes 3,320 shares subject to outstanding stock options exercisable
within 60 days from the Voting Record Date.
- --------------------------------------------------------------------------------
INCORPORATION BY REFERENCE
- --------------------------------------------------------------------------------
Each person receiving this Proxy Statement is also receiving the
Prospectus of First Capital, Inc. dated November ___, 1998. Although such
Prospectus is incorporated herein by reference, this Proxy Statement does not
constitute an offer to sell or a solicitation of an offer to buy the common
stock of the Holding Company. Such offer and solicitation is made only by the
Prospectus in such jurisdictions where it is lawful to do so.
The Bank urges each recipient of this Proxy Statement to read carefully
the sections of the Prospectus that describe the following:
(i) the conversion (see "THE CONVERSION" in the Prospectus);
(ii) the business of the Holding Company and the Bank (see "BUSINESS OF
THE HOLDING COMPANY" and "BUSINESS OF THE BANK" in the Prospectus);
(iii) the reasons for the conversion and management's belief that the
conversion is in the best interests of the Bank and its stockholders
(see "THE CONVERSION -- Purposes of Conversion" in the Prospectus);
(iv) employment agreements, severance agreements, and stock benefit
plans that the Bank and/or the Holding Company intend to implement in
connection with the conversion (see "MANAGEMENT OF THE BANK" in the
Prospectus);
(v) the common stock of the Holding Company (see "DESCRIPTION OF CAPITAL
STOCK OF THE HOLDING COMPANY" in the Prospectus);
(vi) the historical capitalization of the Bank and the pro forma
capitalization of the Holding Company (see "CAPITALIZATION" in the
Prospectus);
(vii) the historical and pro forma capital compliance of the Bank (see
"HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" in the
Prospectus);
(viii) pro forma financial information with respect to the conversion
(see "PRO FORMA DATA" in the Prospectus);
(ix) the Holding Company and the Bank's respective intended use of
proceeds of the offering (see "USE OF PROCEEDS" in the Prospectus);
3
<PAGE>
(x) the Holding Company's proposed dividend policy (see "DIVIDEND
POLICY" in the Prospectus);
(xi) restrictions on the acquisition of the Holding Company, including
anti-takeover provisions in the Holding Company's Certificate of
Incorporation and Bylaws (see "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY" in the Prospectus);
(xii) a comparison of the rights of the holders of Common Stock and
rights of the holders of the Holding Company's common stock (see
"COMPARISON OF STOCKHOLDERS' RIGHTS" in the Prospectus); and
(xiii) the financial statements of the Bank appearing in the Prospectus.
- --------------------------------------------------------------------------------
PROPOSAL I -- APPROVAL OF PLAN OF CONVERSION
- --------------------------------------------------------------------------------
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 THIS PROXY STATEMENT. 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 a 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) ("Subscription Offering").
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
4
<PAGE>
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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF PLAN OF
CONVERSION.
STOCKHOLDERS OF THE BANK SHOULD NOT SEND THEIR STOCK CERTIFICATES TO THE
BANK FOR EXCHANGE AT THIS TIME.
- --------------------------------------------------------------------------------
RIGHTS OF DISSENTING STOCKHOLDERS
- --------------------------------------------------------------------------------
Under regulations of the OTS, any public stockholder of the Bank who
does not wish to accept shares of common stock of the Holding Company in the
conversion has the right to dissent from the conversion and to demand appraisal
of, and payment for, his or her shares of common stock of the Bank, provided
that he or she complies with all provisions of 12 C.F.R. Section 552.14
("Section 552.14"). If holders of common stock of the Bank have exercised
dissenters' rights in connection with the Plan of Conversion under Section
552.14, the holders of any dissenting shares will not participate in the
conversion, but will receive such consideration as may be determined to be due
with respect to such dissenting shares pursuant to Section 552.14 as described
below. Section 552.14 contains detailed information as to a dissenting
stockholder's right to payment and the procedural steps to be followed by a
dissenting stockholder. THE FOLLOWING DESCRIPTION IS ONLY A SUMMARY OF THESE
PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 552.14, A
COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT B AND IS
INCORPORATED HEREIN BY REFERENCE. A DISSENTING STOCKHOLDER NEED NOT VOTE AGAINST
THE PLAN OF CONVERSION IN ORDER TO PRESERVE HIS DISSENTER'S RIGHTS AFTER FILING
HIS NOTICE OF DISSENT, BUT WILL LOSE HIS DISSENTER'S RIGHTS IF HE OR SHE VOTES
FOR OR CONSENTS IN WRITING TO THE PLAN OF CONVERSION.
If the Plan of Conversion is approved by the required vote of
stockholders of the Bank and is not abandoned or terminated, each holder of
shares of common stock of the Bank who votes against the Plan of Conversion or
who fails to vote and who follows the procedures set forth in Section 552.14
will be entitled to demand appraisal of and payment for his or her shares. A
stockholder's vote in favor of the Plan of Conversion constitutes a waiver of
such stockholder's dissenters' rights.
A stockholder electing to exercise his or her rights to dissent from the
conversion is required to file with the Bank, prior to the vote on the Plan of
Conversion at the Special Meeting, a written statement identifying himself or
herself and stating his or her intention to demand appraisal of and payment for
his or her shares if the conversion is completed. A stockholder may not dissent
to less than all of the shares beneficially owned by him or her.
If the conversion is completed, within ten days after the effective date
of the conversion ("effective date"), the Holding Company must (i) give notice
of the effective date by mail to any dissenting stockholders who have given the
Bank the required notice and have not voted in favor of the conversion (ii) make
a written offer to each stockholder to pay for dissenting shares at a specified
price deemed by the Bank to be the fair value thereof; and (iii) inform such
stockholders that, within 60 days of the effective date, they must satisfy
certain conditions in order to perfect their demand for payment.
If, within 60 days of the effective date, the fair value is agreed upon
between the Bank and the dissenting stockholder, payment for those shares must
be made within 90 days of the effective date. If, within 60 days of the
effective date, the Bank and the dissenting stockholder do not agree on the fair
value of the shares, then such stockholder may file a petition with the OTS
(with a copy to the Bank) demanding a determination of the fair market value of
the stock of such stockholder. A stockholder entitled to file such a petition
and who fails to file such a petition is deemed to have accepted the terms of
the conversion.
5
<PAGE>
Within 60 days of the effective date, each stockholder demanding
appraisal and payment must submit to the stock transfer agent his or her
certificates of stock for notation thereon that an appraisal and payment for his
or her shares have been demanded and that appraisal proceedings are pending. Any
stockholder who fails to submit his or her stock certificates for such notation
shall no longer be entitled to appraisal rights and shall be deemed to have
accepted the terms of the conversion. At any time within 60 days after the
effective date, any stockholder has the right to withdraw his or her demand for
appraisal and to accept the terms of the conversion.
Pursuant to Section 552.14, the OTS may either appoint one or more
independent persons or direct an appropriate office of the OTS to appraise the
shares to determine their fair market value, as of the effective date, exclusive
of any element of value arising from the accomplishment or expectation of the
conversion. The OTS shall review and provide an opinion on appraisals prepared
by independent persons as to the suitability of the appraisal methodology and
the adequacy of the analysis and supportive data. If it concurs in the valuation
of the shares, the OTS shall direct payment by the Bank of the appraised fair
market value of the shares upon surrender of the stock certificates. Payment is
to be made, with interest from the effective date, at a rate deemed equitable by
the OTS.
Costs and expenses of any proceeding under these provisions may be
apportioned and assessed by the OTS as it may deem equitable against all or some
of the parties. In making its determination, the OTS is to consider whether any
party acted arbitrarily, vexatiously, or not in good faith.
Any stockholder who has demanded appraisal rights will thereafter
neither be entitled to vote such shares for any purpose nor be entitled to the
payment of dividends or other distributions on the stock except for dividends or
other distributions payable to, or a vote to be taken by stockholders of record
at a date which is on or prior to the effective date. However, if any
stockholder becomes unentitled to appraisal and payment of appraised value with
respect to such stock and accepts or is deemed to have accepted the terms
offered upon the Reorganization, such stockholder shall thereupon be entitled to
vote and receive the distributions.
BECAUSE OF THE DETAILED PROVISIONS AND REQUIREMENTS OF SECTION 552.14,
EACH DISSENTING STOCKHOLDER SHOULD CONSULT WITH HIS OR HER OWN LEGAL COUNSEL
CONCERNING THE PROCEDURES AND REMEDIES AVAILABLE TO HIM OR HER. FAILURE TO
FOLLOW THE DETAILED PROCEDURES SET FORTH IN SECTION 552.14 MAY RESULT IN A
STOCKHOLDER LOSING HIS OR HER RIGHT TO CLAIM FAIR VALUE AS DESCRIBED HEREIN. IF
ANY HOLDER OF SHARES OF COMMON STOCK OF THE BANK WHO DEMANDS APPRAISAL OF AND
PAYMENT FOR HIS OR HER SHARES UNDER SECTION 552.14 FAILS TO PERFECT, OR
EFFECTIVELY WITHDRAWS OR LOSES, HIS OR HER RIGHT TO SUCH PAYMENT, SUCH HOLDER
WILL PARTICIPATE IN THE CONVERSION PURSUANT TO THE PLAN OF CONVERSION.
DISSENTING STOCKHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES TO THE
BANK AT THIS TIME.
- --------------------------------------------------------------------------------
PROPOSAL II -- ELECTION OF DIRECTORS
- --------------------------------------------------------------------------------
The Bank's Board of Directors consists of seven members, divided into
three classes as nearly equal in number as possible. The term of office of only
one class expires each year, and their successors will be elected for terms of
three years and until their successors are elected and qualified.
The Bank Board of Directors, acting as the Nominating Committee, has
nominated Kenneth R. Saulman, John W. Buschemeyer and Gerald L. Uhl each for
their respective term set forth in the following table or until their respective
successors shall have been elected and qualified. Unless otherwise specified in
the proxy, it is intended that the persons named in the proxies solicited by the
Board of Directors will vote for the election of the nominees.
The Bank's Bylaws permit stockholders to cumulate their votes for the
election of directors. In accordance with the Bylaws, every stockholder who is
entitled to vote at an election of directors shall have the right to vote, in
6
<PAGE>
person or by proxy, the number of shares owned by the shareholder for as many
persons as there are directors to be elected and for whose election the
shareholder has a right to vote. However, your shares have cumulative voting
rights (i.e., a stockholder may cast votes for any one nominee equal to the
product of your eligible shares multiplied by the number of nominees named
herein or distribute such cumulative votes among any number of the nominees).
Should a stockholder decide to exercise his or her cumulative voting rights,
mark the enclosed revocable proxy accordingly by writing the number of votes to
cast for each nominee beside the nominee's name. Unless a proxy is so marked,
the Bank does not reserve the authority to cumulate votes cast as a result of
the proxies it receives.
If any nominee is unable to serve, the shares represented by all valid
proxies will be voted for the election of such substitute nominee as the Board
of Directors may recommend, or the Board of Directors may amend the Bylaws and
reduce the size of the Board. At this time, the Board of Directors knows of no
reason why any nominee might be unable to serve.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ALL OF
THE NOMINEES NAMED BELOW.
7
<PAGE>
The following table sets forth certain information as to each nominee
and director continuing in office. Gerald L. Uhl and Samuel E. Uhl are brothers.
<TABLE>
<CAPTION>
Year First Year
Principal Occupation Elected or Term
Name Age(1) During Last Five Years Appointed Expires
- ---- ------ ---------------------- ---------- -------
<S> <C> <C> <C> <C>
BOARD NOMINEES
Kenneth R. Saulman(2) 57 Right-of-way supervisor for Clark 1997 1999(3)
County REMC, an electrical service
company in Sellersburg, Indiana, since
March 1995; Area supervisor for
Asplundhi Tree Trimming in Ramsey,
Indiana, from July 1991 to March 1995.
John W. Buschemeyer 58 Vice Chairman of the Board of the 1973 2001(3)
Bank; President and sole owner of
Hurst Lumber Co., Corydon, Indiana.
Gerald L. Uhl 57 Business Manager for Jacobi Sales, 1973 2001(3)
Inc., Palmyra, Indiana, a farm machinery and
lawn and garden equipment retailer
and servicer.
DIRECTORS CONTINUING IN OFFICE AFTER ANNUAL MEETING
Samuel E. Uhl 52 President of the Savings Bank 1995 1999
since October 1996; Senior Vice
President of the Savings Bank
from 1994 to 1996; former Vice
President with First Nationwide Bank,
St. Louis, Missouri.
James G. Pendleton 64 Chairman of the Board (since 1963 2000
November 1996) and Chief
Executive Officer of the Savings
Bank; President of the Savings Bank
from 1961 to October 1996.
Mark D. Shireman 46 President and minority stockholder 1989 2000
of James L. Shireman Co. Inc., a
general and commercial contractor
in Corydon, Indiana.
Dennis L. Huber(2) 52 President and minority stockholder 1997 2000
of O'Bannon Publishing Co., Inc.,
Corydon, Indiana, a newspaper publisher.
</TABLE>
8
<PAGE>
- -----------
(1) As of June 30, 1997.
(2) Mr. Saulman was appointed to the Board of Directors in October 1997 to
replace Darrell Rothrock who retired.
(3) Assuming election or re-election at the Meeting.
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 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.
9
<PAGE>
<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.
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.
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.
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 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. 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.
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PROPOSAL III -- APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS
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Monroe Shine & Co., Inc. was the Bank's independent auditors for the
fiscal year ended June 30, 1998. The Board of Directors has appointed Monroe
Shine & Co., Inc. as independent auditors for the fiscal year ending June 30,
1999, subject to approval by the Bank's stockholders. A representative of Monroe
Shine & Co., Inc. is expected to be present at the Annual Meeting to respond to
stockholders' questions and will have the opportunity to make a statement if he
so desires.
10
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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Section 16(a) of the Exchange Act requires the executive officers and
directors of the Bank and persons who beneficially own more than 10% of any
registered class of the Bank's capital stock to file reports of ownership and
changes in ownership with the OTS. Based solely on a review of the reports and
written representations provided to the Bank by the above referenced persons,
the Bank believes that during fiscal 1998 all filing requirements applicable to
its reporting officers, directors and greater than 10% beneficial owners were
complied with properly and in a timely manner.
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OTHER MATTERS
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The Board of Directors of the Bank is not aware of any business to come
before the Annual Meeting other than those matters described above in this Proxy
Statement. However, if any other matters should properly come before the Annual
Meeting, it is intended that executed proxies in the accompanying form will be
voted in respect thereof in accordance with the judgment of the person or
persons voting the proxies.
The cost of solicitation of proxies will be borne by the Bank. In
addition to solicitations by mail, directors, officers and regular employees of
the Bank may solicit proxies personally or by telecopier or telephone without
additional compensation. In addition, the Bank has retained Charles Webb &
Company for the solicitation of proxies, account consolidation, proxy tabulation
and inspection. The fees for such services is included in the fees to be
received by Charles Webb & Company in connection with the conversion. See "THE
CONVERSION -- Plan of Distribution and Selling Commissions" in the Prospectus
for further information.
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STOCKHOLDER PROPOSALS
- --------------------------------------------------------------------------------
Upon consummation of the conversion, the public stockholders of the Bank
will become stockholders of the Holding Company. It is anticipated that the
first annual meeting of stockholders of the Holding Company will be held in
October 1999. In order to be eligible for inclusion in the Holding Company's
proxy materials for its first annual meeting of stockholders, any stockholder
proposal to take action at such meeting must be received at the Holding
Company's main office at 220 Federal Drive, N.W., Corydon, Indiana, no later
than _________, 1999. Any such proposals shall be subject to the requirements of
the proxy solicitation rules adopted under the Exchange Act.
BY ORDER OF THE BOARD OF DIRECTORS
JOEL E. VOYLES
Secretary
Corydon, Indiana
November ___, 1998
11
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APPENDIX B
TITLE 12 OF THE CODE OF FEDERAL REGULATIONS, SECTION 552.14
(S)552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) RIGHT TO DEMAND PAYMENT OF FAIR OR APPRAISED VALUE. Except as
provided in paragraph (b) of this section, any stockholder of a Federal
stock association combining in accordance with (S)552.13 of this part shall
have the right to demand payment of the fair or appraised value of his
stock: Provided, that such stockholder has not voted in favor of the
combination and complies with the provisions of paragraph (c) of this
section.
(b) EXCEPTIONS. No Stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section
to demand payment of the stock's fair or appraised value, if such stock was
listed on a national securities exchange or quoted on the National
Association of Securities Dealers' Automated Quotation System ("NASDAQ") on
the date of the meeting at which the combination was acted upon or
stockholder action is not required for a combination made pursuant to
(S)552.13(h)(2) of this part. "Qualified consideration" means cash, shares
of stock of any association or corporation which at the effective date of
the combination will be listed on a national securities exchange or quoted
on NASDAQ or any combination of such shares of stock and cash.
(c) PROCEDURE.
(1) NOTICE. Each constituent Federal stock association shall
notify all stockholders entitled to rights under this section, not less
than twenty days prior to the meeting at which the combination agreement
is to be submitted for stockholder approval, of the right to demand
payment of appraised value of shares, and shall include in such notice a
copy of this section. Such written notice shall be mailed to
stockholders of record and may be part of the management's proxy
solicitation for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to
make a demand under this section shall deliver to the Federal stock
association, before voting on the combination, a writing identifying
himself or herself and stating his or her intention thereby to demand
appraisal of and payment for his or her shares. Such demand must be in
addition to and separate from any proxy or vote against the combination
by the stockholder.
(3) NOTIFICATION OF EFFECTIVE DATE AND WRITTEN OFFER. Within ten
days after the effective date of the combination, the resulting
association shall:
(i) Give written notice by mail to stockholders of constituent
Federal Stock associations who have complied with the provisions of
paragraph (c)(2) of this section and have not voted in favor of the
combination, of the effective date of the combination;
(ii) Make a written offer to each stockholder to pay for
dissenting shares at a specified price deemed by the resulting
association to be the fair value thereof; and
(iii) Inform them that, within sixty days of such date, the
respective requirements of paragraphs (c)(5) and (6) of this
section (set out in the notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
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<PAGE>
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective
date of the combination the fair value is agreed upon between the
resulting association and any stockholder who has complied with the
provisions of paragraph (c)(2) of this section, payment therefor shall
be made within ninety days of the effective date of the combination.
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty
days of the effective date of the combination the resulting association
and any stockholder who has complied with the provisions of paragraph
(c)(2) of this section do not agree as to the fair value, then any such
stockholder may file a petition with the Office, with a copy by
registered or certified mail to the resulting association, demanding a
determination of the fair market value of the stock of all such
stockholders. A stockholder entitled to file a petition under this
section who fails to file such petition within sixty days of the
effective date of the combination shall be deemed to have accepted the
terms offered under the combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the
effective date of the combination, each stockholder demanding appraisal
and payment under this section shall submit to the transfer agent his
certificates of stock for notation thereon that an appraisal and payment
have been demanded with respect to such stock and that appraisal
proceedings are pending. Any stockholder who fails to submit his stock
certificates for such notation shall no longer be entitled to appraisal
rights under this section and shall be deemed to have accepted the terms
offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any
time within sixty days after the effective date of the combination, any
stockholder shall have the right to withdraw his or her demand for
appraisal and to accept the terms offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may
elect, either appoint one or more independent persons or direct
appropriate Staff of the Office to appraise the shares to determine
their fair market value, as of the effective date of the combination,
exclusive of any element of value arising from the accomplishment or
expectation of the combination. Appropriate Staff of the Office shall
review and provide an opinion on appraisals prepared by independent
persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after
consideration of the appraisal report and the advice of the appropriate
staff shall, if he or she concurs in the valuation of the shares, direct
payment by the resulting association of the appraised fair market value
of the shares, upon surrender of the certificates representing such
stock. Payment shall be made, together with interest from the effective
date of the combination, at a rate deemed equitable by the Director.
(9) COSTS AND EXPENSES. The costs and expenses of any proceeding
under this section may be apportioned and assessed by the Director as he
or she may deem equitable against all or some of the parties. In making
this determination the Director shall consider whether any party has
acted arbitrarily, vexatiously, or not in good faith in respect to the
rights provided by this section.
(10) VOTING AND DISTRIBUTION. Any stockholder who has demanded
appraisal rights as provided in paragraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
entitled to the payment of dividends or other distributions on the stock
(except dividends or other distribution payable to, or a vote to be
taken by stockholders of record at a date which is on or prior to, the
effective date of the combination): Provided, that if any stockholder
becomes unentitled to appraisal and payment of appraised value with
respect to such stock and accepts or is deemed to have accepted the
terms offered upon the combination, such stockholder shall thereupon be
entitled to vote and receive the distributions described above.
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(11) STATUS. Shares of the resulting association into which shares
of the stockholders demanding appraisal rights would have been converted
or exchanged, had they assented to the combination, shall have the
status of authorized and unissued shares of the resulting association.
* * *
B-3
