<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1998
REGISTRATION NO. 333-68793
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
FIRST BANCORP OF INDIANA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS ARTICLES OF INCORPORATION)
<TABLE>
<S> <C> <C>
INDIANA 6035 35-2061832
(state or other jurisdiction of incorporation (Primary Standard (IRS Employer Identification No.)
or organization) Classification Code Number)
</TABLE>
2200 WEST FRANKLIN STREET
EVANSVILLE, INDIANA 47712
(812) 423-3196
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
HAROLD DUNCAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST FEDERAL SAVINGS BANK
2200 WEST FRANKLIN STREET, EVANSVILLE, INDIANA 47712
(812) 423-3196
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
PAUL M. AGUGGIA, ESQUIRE
AARON M. KASLOW, ESQUIRE
BRIAN K. LEE, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
----
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<CAPTION>
========================================================================================================
Title of each Class of Amount to Purchase Price Aggregate Offering Registration
Securities to be Registered be Registered Per Share Price (1) Fee
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<S> <C> <C> <C> <C>
Common Stock 2,512,750 $10.00 $25,127,500 $6,986 (2)
$.01 par Value Shares
========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid
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 SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE>
PROSPECTUS
FIRST BANCORP OF INDIANA, INC.
(HOLDING COMPANY FOR FIRST FEDERAL SAVINGS BANK)
BETWEEN 1,615,000 AND 2,512,750 SHARES OF COMMON STOCK
First Federal Savings Bank of Evansville, Indiana is converting from the mutual
form to the stock form of organization. As part of the conversion, First
Federal will become a wholly-owned subsidiary of First Bancorp of Indiana, Inc.,
which was formed in November 1998. First Bancorp is offering its common stock
to the public under the terms of First Federal's Plan of Conversion which must
be approved by a majority of the votes eligible to be cast by the members of
First Federal. The conversion will not go forward if First Federal does not
receive this approval or if First Bancorp does not sell at least the minimum
number of shares.
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OFFERING SUMMARY
Price Per Share: $10.00
Proposed trading symbol: Nasdaq - FBEI
<TABLE>
<CAPTION>
Minimum Midpoint Maximum Maximum, as adjusted
----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
Number of shares: 1,615,000 1,900,000 2,185,000 2,512,750
Gross offering proceeds: $16,150,000 $19,000,000 $21,850,000 $25,127,500
Estimated offering expenses: $ 671,000 $ 703,000 $ 736,000 $ 774,000
Estimated net proceeds: $15,479,000 $18,297,000 $21,114,000 $24,353,500
Estimated net proceeds per share: $ 9.58 $ 9.63 $ 9.66 $ 9.69
</TABLE>
Capital Resources, Inc. will use its best efforts to assist First Bancorp in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. Capital Resources is not obligated to purchase any shares
in this offering. First Bancorp will hold all funds received from subscribers
in an interest-bearing savings account at First Federal Savings Bank until the
completion or termination of the conversion.
The subscription offering will end at 12:00 Noon, local time, on ______________,
1999. If the conversion is not completed by ___________, 1999 and the Office of
Thrift Supervision gives First Federal additional time to complete the
conversion, First Bancorp will give all subscribers the opportunity to modify
or cancel their orders. No single extension of time may exceed 90 days and
extensions may not go beyond ____________, 2001. Funds will be returned
promptly if the conversion is canceled.
- --------------------------------------------------------------------------------
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
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
For additional information about the conversion and the stock offering, please
refer to the more detailed information in this prospectus. For assistance,
please contact First Federal's stock information center at (___)___________.
CAPITAL RESOURCES, INC.
The date of this prospectus is ___________, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Summary ....................................................
Risk Factors................................................
Selected Financial Information..............................
Recent Developments.........................................
Use of Proceeds.............................................
Dividend Policy.............................................
Market for Common Stock.....................................
Capitalization..............................................
Historical and Pro Forma
Regulatory Capital Compliance..............................
Pro Forma Data..............................................
Subscriptions by Executive Officers and
Directors..................................................
First Federal Savings Bank and
Subsidiary Consolidated Statements
of Income..................................................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations..................................
Business of the Holding Company.............................
Business of the Bank........................................
Management of the Holding Company...........................
Management of the Bank......................................
Regulation..................................................
Taxation....................................................
The Conversion..............................................
Restrictions on Acquisition
of the Holding Company.....................................
Description of Capital Stock
of the Holding Company.....................................
Registration Requirements...................................
Legal and Tax Opinions......................................
Experts.....................................................
Where You Can Find More Information.........................
Index to Consolidated
Financial Statements.......................................
<PAGE>
SUMMARY
The following summary explains the significant aspects of the
conversion. Because this is a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus carefully
before you decide to invest. For assistance, please contact First Federal's
stock information center at (812) ____________.
THE COMPANIES
FIRST BANCORP OF INDIANA, INC. First Federal formed First Bancorp for the
2200 West Franklin Street purpose of becoming the holding company for First
Evansville, Indiana 47712 Federal. To date, First Bancorp has only
(812) 423-3196 conducted organizational activities. After the
conversion, First Bancorp will own all of First
Federal's capital stock and will direct, plan and
coordinate First Federal's business activities.
In the future, First Bancorp 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.
FIRST FEDERAL SAVINGS BANK First Federal is a community oriented financial
2200 West Franklin Street institution that operates out of four offices in
Evansville, Indiana 47712 Evansville, Indiana. First Federal's principal
(812) 423-3196 business is attracting deposits from the general
public and using those funds to originate
residential mortgage loans. First Federal also
maintains a significant portfolio of investment
and mortgage-backed securities. At September 30,
1998, First Federal had assets of $111.6 million,
deposits of $91.0 million and equity of $15.1
million. For a discussion of First Federal'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 First Federal's
business activities, see "BUSINESS OF FIRST
FEDERAL."
THE CONVERSION
WHAT IS THE CONVERSION The conversion is a change in First Federal's
(PAGE ___) legal form of organization. As a mutual savings
bank, First Federal currently has no stock or
stockholders. Instead, First Federal operates for
the mutual benefit of its depositors, who elect
the board of directors and vote on other
important matters. Through the conversion, First
Federal will become a stock savings bank and will
be owned and controlled by the holder of its
stock, which will be First Bancorp. Voting rights
in First Bancorp will belong to its stockholders.
First Federal is conducting the conversion under
the terms of its Plan of Conversion. The OTS has
approved the conversion with the condition that
First Federal's members approve the Plan of
Conversion. First Federal has called a special
meeting for _________, 1999 for the purpose of
voting on the Plan of Conversion.
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<PAGE>
REASONS FOR THE CONVERSION By converting to the stock form of organization,
(PAGE ___) First Federal will be structured in the form used
by commercial banks, most business entities and a
large number of savings institutions. The
conversion will be important to First Federal's
future growth and performance by:
. providing a larger capital base from
which First Federal can operate;
. enhancing First Federal's ability to
attract and retain qualified management
through stock-based compensation plans;
. enhancing First Federal's ability to
diversify into other financial services
related activities; and
. expanding First Federal's ability to
provide services to the public.
At this time, First Federal does not have any
specific plans or arrangements for diversification
or expansion.
BENEFITS OF THE CONVERSION TO In connection with the conversion, First Bancorp
MANAGEMENT (PAGE ___) and First Federal intend to adopt the following
benefit plans and employment agreements:
. EMPLOYEE STOCK OWNERSHIP PLAN. This plan
intends to purchase 8% of the shares issued
in the conversion. The shares will be
allocated to employees over a period of
years in proportion to their compensation.
. STOCK OPTION PLAN. Under this plan, First
Bancorp may award stock options to key
employees and directors. The number of
options available under this plan will be
equal to 10% of the number shares sold in
the conversion. This plan will require
shareholder approval.
. MANAGEMENT RECOGNITION AND DEVELOPMENT
PLAN. Under this plan, First Bancorp may
award shares of restricted stock to key
employees and directors at no cost to the
recipient. The number of shares available
under this plan will equal 4% of the number
of shares sold in the conversion. This plan
will require shareholder approval.
. EMPLOYMENT AGREEMENTS with First Federal's
President and Executive Vice President.
These agreements will provide for severance
benefits in the event the executive is
terminated following a
2
<PAGE>
change in control of First Bancorp or First
Federal.
. EMPLOYEE SEVERANCE COMPENSATION PLAN. This
plan will provide severance benefits to
eligible employees in the event of a change
in control of First Bancorp or First
Federal.
For a discussion of certain risks associated with
these plans and agreements, see "RISK FACTORS --
The Implementation of Benefit Plans will Increase
Future Compensation Expense" and "-- Possible
Anti-Takeover Effect of Employment Agreements and
Severance Plan."
THE OFFERING
SUBSCRIPTION OFFERING First Federal has granted subscription rights in
(PAGE ___) the following order of priority to:
1. Persons with $50 or more on deposit
IMPORTANT: Subscription at First Federal as of June 30, 1997.
rights are not transferable,
and persons with subscription 2. The First Federal Savings Bank Employee
rights may not subscribe for Stock Ownership Plan.
shares for the benefit of any
other person. If you violate 3. Persons with $50 or more on deposit at
this prohibition you may lose First Federal as of December 31, 1998.
your right to purchase shares
in the conversion and may be 4. First Federal's depositors as of ______,
subject to criminal 1999 and borrowers of First Federal as of
prosecution and/or other March 16, 1988 whose loans continue to
sanctions. be outstanding as of __________, 1999.
To ensure that First Federal properly identifies
your subscription rights, you must list all your
savings accounts and loans as of the eligibility
dates on the stock order form. If you do not list
all your accounts and loans your subscription may
be reduced or rejected if the offering is
oversubscribed.
The subscription offering will expire at 12:00
Noon, local time, on ________, 1999. If the
offering is oversubscribed, shares will be
allocated in order of the priorities described
above under a formula contained in the Plan of
Conversion.
COMMUNITY OFFERING (PAGE __) First Bancorp may offer shares not sold in the
subscription offering to the general public.
People and trusts of people who are residents of
Vanderburgh, Warrick, Posey, Gibson and Spencer
Counties, Indiana will have first preference to
purchase these shares. If shares are available,
First Bancorp expects to offer shares to the
general public immediately after the conclusion of
the subscription offering, but may begin a
3
<PAGE>
community offering at any time during the
subscription offering.
First Bancorp and First Federal may reject orders
received from the general public either in whole
or in part. If your order is rejected in part,
you will not have the right to cancel the
remainder of the order.
PURCHASE PRICE The purchase price is $10.00 per share. The
purchase price was determined by the Boards of
Directors of First Bancorp and First Federal in
consultation with Capital Resources. You will not
pay a commission to buy any shares in the
conversion.
NUMBER OF SHARES TO BE ISSUED First Bancorp will sell between 1,615,000 and
(PAGE ___) 2,185,000 shares of its common stock in this
offering. With the approval of the OTS, First
Bancorp may increase the number of shares to
2,512,750.
The amount of common stock being offered in the
conversion is based on an independent appraisal of
the estimated pro forma market value of First
Bancorp and First Federal. Capital Resources
Group, Inc., the independent appraiser, has
estimated that, in its opinion, as of December 4,
1998, the aggregate pro forma market value of
First Bancorp and First Federal ranged between
$16,150,000 and $21,850,000, with a midpoint of
$19,000,000. Capital Resources Group is the
parent company of Capital Resources. The
appraisal was based in part on First Federal's
financial condition and operations and the effect
of the additional capital raised by the sale of
common stock in this offering. The independent
appraisal will be updated prior to the completion
of the conversion.
PURCHASE LIMITATIONS The minimum purchase is 25 shares.
(PAGE __)
The maximum purchase for any person or group of
persons through a single deposit account is
$150,000 of common stock, which equals 15,000
shares.
The maximum purchase for any person in the
community offering is $150,000 of common stock,
which equals 15,000 shares.
The maximum purchase in the conversion by any
person, related persons or persons acting together
is $220,000 of common stock, which equals 22,000
shares.
HOW TO PURCHASE COMMON STOCK If you want to subscribe for shares of common
(PAGE ___) stock, complete an original stock order form and
send it together with full payment to First
Federal in the postage-paid envelope provided. You
must sign the certification that is part
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<PAGE>
of the stock order form. First Federal must
receive your stock order form before the end of
the subscription offering.
IMPORTANT: After First You may pay for shares in any of the following
Federal receives your order, ways:
you cannot withdraw or change
your order without the consent . IN CASH if delivered in person.
of First Federal. If First
Bancorp intends to sell fewer . BY CHECK OR MONEY ORDER made payable to
than 1,615,000 shares or more First Bancorp of Indiana, Inc.
than 2,512,750 shares, all
subscribers will be notified . BY WITHDRAWAL from an account at First
and provided with the Federal. To use funds in an IRA at First
opportunity to modify or Federal you must transfer your account to
cancel their orders. an unaffiliated institution or broker.
Please contact First Federal's stock
information center at least one week
before the expiration of the subscription
offering for assistance.
PLEASE NOTE: Payment for subscriptions of $25,000
or more must be by certified or cashier's check,
money order or account withdrawal.
First Federal will pay interest on subscription
funds at the rate it pays on passbook accounts
from the date it receives your funds until
completion or termination of the conversion. All
funds authorized for withdrawal from deposit
accounts with First Federal will earn interest at
the applicable account rate until completion of
the conversion. There will be no early withdrawal
penalty for subscriptions paid for by withdrawal
from certificates of deposit.
USE OF PROCEEDS (PAGE ___) First Bancorp will use 50% of the net proceeds of
the offering to buy all of the common stock of
First Federal. First Federal will use these funds
to expand its residential and consumer loan
portfolios and to purchase investments similar to
the kinds it currently holds. First Bancorp will
loan an amount equal to 8% of the gross proceeds
of the offering to First Federal's employee stock
ownership plan to fund its purchase of common
stock and will keep the remainder of the net
proceeds for general corporate purposes. These
purposes may include, for example, paying
dividends or buying back shares of common stock.
First Bancorp and First Federal may also use the
proceeds of the offering for expansion and
diversification of their business, although they
have no specific plans for such activity at this
time.
PURCHASES BY OFFICERS AND First Federal's directors and executive officers
DIRECTORS (PAGE ___) intend to subscribe for 91,100 shares, which
equals 4.2% of the shares issued at the maximum of
the offering range. Directors and executive
officers will pay the same $10.00 per share price
as all other persons who purchase shares in the
conversion.
5
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MARKET FOR COMMON STOCK (PAGE ___) First Bancorp has obtained preliminary
approval for its common stock to be
quoted on the Nasdaq National Market
under the symbol FBEI. After shares of
First Bancorp common stock commence
trading, you may contact a stock broker
to buy or sell shares. First Bancorp
cannot assure you that there will be an
active trading market for its common
stock. See "RISK FACTORS -- Possible
Limited Market for First Bancorp's Common
Stock May Negatively Effect the Market
Price."
DIVIDEND POLICY (PAGE ___) First Bancorp intends to adopt a policy
of paying regular cash dividends, but has
not yet made a decision as to how much or
how often.
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6
<PAGE>
RISK FACTORS
Before investing in the common stock please carefully consider the matters
discussed below. The common stock is not a savings account or deposit and is not
insured by the FDIC or any other government agency.
COMPETITION HAS HURT FIRST FEDERAL'S NET INTEREST INCOME
First Federal faces intense competition both in making loans and attracting
deposits. Competition has limited First Federal's ability to make new loans and
has led First Federal to maintain a large investment in debt and mortgage-backed
securities, which generally have lower yields than loans. In recent years, in
order to compete for deposits with larger financial institutions that provide a
wider range of products and services, First Federal has offered amongst the
highest deposit rates in its market area. This competition for loans and
deposits has contributed to a narrow interest rate spread, which hurts net
interest income. For more information about the market in which First Federal
operates and the competition it faces, see "BUSINESS OF THE BANK -- Market Area"
and "-- Competition."
INCREASING INTEREST RATES MAY HURT FIRST FEDERAL'S PROFITS
Like most financial institutions, First Federal's ability to make a profit
depends largely on its net interest income, which is the difference between
interest income it receives from its loans and investment securities and
interest it pays on deposits and borrowings. If interest rates rise, First
Federal anticipates that its net interest income could be negatively affected as
interest paid on deposits would increase more quickly than the interest received
on loans and investment securities. In addition, rising interest rates may
adversely affect First Federal's earnings because they may cause a decrease in
customer demand for loans and a reduction in value of First Federal's securities
available for sale. For further discussion of how changes in interest rates
could impact First Federal, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
7
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HIGH CAPITAL LEVELS WILL CAUSE FIRST BANCORP TO HAVE A 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. In recent years, First Federal's return on equity has been below the
average return on equity for publicly held savings associations and banks of
comparable size. As a result of the additional capital to be raised in this
offering, First Bancorp expects that after the conversion its return on equity
will continue to be below average. In addition, compensation expense will
increase as a result of the expenses associated with new benefit plans. Over
time, First Bancorp intends to use the proceeds from this offering 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
financial institutions. This goal could take a number of years to achieve, and
First Bancorp cannot assure you that this goal can be attained. Consequently,
you should not expect a competitive return on equity in the near future. See
"PRO FORMA DATA" for an illustration of the effects of this stock offering.
THE IMPLEMENTATION OF BENEFIT PLANS WILL INCREASE FUTURE COMPENSATION
EXPENSE
First Federal will recognize additional material employee compensation and
benefit expenses that stem from the shares purchased or granted to employees and
executives under new benefit plans. First Federal 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 at
specific points in the future. First Federal would recognize expenses for its
Employee Stock Ownership Plan when shares are committed to be released to
participants' accounts and would recognize expenses for the Management
Recognition and Development Plan 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, may be higher or lower.
Recently proposed accounting rules would also require First Bancorp to recognize
compensation expense for stock options awarded to non-employee directors. For
further discussion of these plans, see "MANAGEMENT OF THE BANK -- Benefits --
Employee Stock Ownership Plan" and "-- Benefits -- Management Recognition and
Development Plan."
ISSUANCE OF SHARES FOR BENEFIT PROGRAMS MAY REDUCE YOUR OWNERSHIP INTEREST
If the conversion is completed and stockholders approve the new stock-based
benefit plans, First Bancorp intends to issue shares to its officers and
directors through these plans. If the shares for the Management Recognition and
Development Plan are issued from authorized but unissued stock, your ownership
interest could be reduced by up to approximately 3.85%. If the shares for the
Stock Option Plan are issued from authorized but unissued stock, your ownership
interest could be reduced by up to approximately 9.09%. See "PRO FORMA
DATA."
POSSIBLE VOTING CONTROL BY MANAGEMENT AND EMPLOYEES MAY DISCOURAGE TAKEOVER
ATTEMPTS
The shares that First Federal's directors and executive officers intend to
purchase in the conversion, when combined with the shares that may be awarded or
sold to participants under First Federal's Employee Stock Ownership Plan and
First Bancorp's stock-based benefit plans, could ultimately result in management
and employees controlling a significant percentage of First Bancorp's common
stock. If these individuals were to coordinated their actions they could have
significant influence over the outcome of any stockholder vote. This voting
power may discourage takeover attempts that you would like to see happen. In
addition, the total voting power of management and employees could reach in
8
<PAGE>
excess of 20% of First Bancorp's outstanding stock. That level would enable
management and employees as a group to defeat any stockholder matter that
requires an 80% vote. For information about management's intended purchases and
shares that may be awarded under new benefit plans, see "SUBSCRIPTIONS BY
EXECUTIVE OFFICERS AND DIRECTORS," "MANAGEMENT OF THE BANK -- Benefits."
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS THAT COULD DISCOURAGE
TAKEOVER ATTEMPTS
Provisions in First Bancorp's Articles of Incorporation and Bylaws, the
corporation law of the state of Indiana, and certain federal regulations may
make it difficult and expensive to pursue a tender offer, change in control or
takeover attempt that management opposes. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. These provisions will also make the removal of the current board of
directors or management of First Bancorp, or the appointment of new directors,
more difficult. These provisions include: limitations on voting rights of
beneficial owners of more than 10% of First Bancorp'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; the removal of directors without cause only
upon the vote of holders of two thirds of the outstanding voting shares; and
limitations on calling special meetings of shareholders. The Bylaws of First
Bancorp also contains provisions regarding the timing and content of stockholder
proposals. For further information about these provisions, see "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY."
POSSIBLE ANTI-TAKEOVER EFFECT OF EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN
The proposed employment agreements with the President and Executive Vice
President of First Federal provide for cash severance payments in the event of
their termination of employment following a change in control of First Bancorp
or First Federal. If a change in control had occurred at September 30, 1998 the
aggregate amount of the severance payment to these executive officers under
the agreements would have been approximately $486,000. In addition, if a change
in control had occurred at September 30, 1998 and all eligible employees had
been terminated, the aggregate payment due under First Federal's severance plan
would have been approximately $381,000. These arrangements may have the effect
of increasing the costs of acquiring First Bancorp, thereby discouraging future
attempts to take over First Bancorp or First Federal. For information about the
proposed employment agreements and the severance plan, see "MANAGEMENT OF THE
BANK -- Executive Compensation."
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<PAGE>
RISK OF LOSS AND BUSINESS INTERRUPTION FROM YEAR 2000 DATA PROCESSING PROBLEMS
First Federal is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be affected by the year 2000 issue.
As the century date change occurs, date-sensitive systems that use a two-digit
date field to designate a year may recognize the year 2000 as 1900, or not at
all. This inability to recognize or properly treat the year 2000 may cause
erroneous results, ranging from system malfunctions to incorrect or incomplete
processing. Because First Federal is substantially dependent on its computer
systems and the computer systems of third parties, the failure of these systems
to be year 2000 compliant could cause substantial disruption of First Federal's
business and could have a material adverse financial impact on First Federal.
Failure to resolve year 2000 issues presents the following risks to First
Federal: (1) First Federal could lose customers to other financial institutions,
resulting in a loss of revenue, if First Federal's third party service bureau is
unable to process properly customer transactions; (2) governmental agencies,
such as the Federal Home Loan Bank, and correspondent banks could fail to
provide funds to First Federal, which could materially impair First Federal's
liquidity and affect First Federal's ability to fund loans and deposit
withdrawals; (3) concern on the part of depositors that year 2000 issues could
impair access to their deposit account balances could result in First Federal
experiencing deposit outflows prior to December 31, 1999; and (4) First Federal
could incur increased personnel costs if additional staff is required to perform
functions that inoperative systems would have otherwise performed. First
Federal has developed a plan and created a committee to analyze how the year
2000 will impact its operations and to monitor the status of its vendors. For
further information on First Federal's year 2000 compliance efforts, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS --Year 2000 Issues."
POSSIBLE LIMITED MARKET FOR FIRST BANCORP'S COMMON STOCK MAY NEGATIVELY EFFECT
THE MARKET PRICE
Although First Bancorp has received preliminary approval to list its common
stock on the Nasdaq National Market, First Bancorp does not know whether an
active trading market will develop. Because of the relatively small size of this
offering, you may not be able to sell all of your shares of First Bancorp on
short notice and the sale of a large number of shares at one time could
temporarily depress the market price. Furthermore, First Bancorp 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. For further information about
the trading market for First Bancorp's common stock, see "MARKET FOR COMMON
STOCK."
POSSIBLE INCREASE IN NUMBER OF SHARES ISSUED WOULD RESULT IN LESS FAVORABLE
PRICING RATIOS
Capital Resources Group may increase its appraisal up to 15% to reflect
changes in the financial condition or results of operations of First Federal or
changes in market conditions or general financial, economic or regulatory
conditions after the offering begins without any further notice to you. If
this happens, First Bancorp anticipates that it would issue, without any
additional notice, up to 2,512,750 shares of common stock for an aggregate price
of up to $25,127,500. This increase in the number of shares would decrease pro
forma net earnings per share and stockholders' equity per share, which means
that the purchase price would represent a larger percentage of pro forma
stockholders' equity per share and net earnings per share. Because many
investors favor purchasing shares of financial institutions at lower price-to-
book and price-to-earnings ratios, an increase in the number of shares sold
could negatively effect the market price of First Bancorp's common stock. For
further information regarding pro forma information, see "PRO FORMA DATA."
10
<PAGE>
YOUR SUBSCRIPTION FUNDS COULD BE HELD FOR AN EXTENDED PERIOD IF COMPLETION OF
THE CONVERSION IS DELAYED
If the conversion is not completed by __________, 1999 as a result of
changes that lead to a material revision in the appraisal of First Federal and
the Office of Thrift Supervision consents to an extension of time to complete
the conversion, there would be a resolicitation offering. Federal regulations
permit the Office of Thrift Supervision to grant one or more time extensions,
none of which may exceed 90 days. Extensions may not go beyond __________,
2001. In the resolicitation offering, all subscribers would be mailed a
supplement to this prospectus and given the opportunity to confirm, modify or
cancel their subscriptions. Failure to confirm affirmatively or modify would be
deemed a cancellation and all subscription funds, together with accrued
interest, would be returned to the subscriber, or if the subscriber authorized
payment by withdrawal of funds on deposit at First Federal, that authorization
would terminate. If a subscriber affirmatively confirms his subscription order
during the resolicitation offering, First Bancorp and First Federal would
continue to hold the subscriber's subscription funds until the end of the
resolicitation offering. All subscriptions held by First Bancorp and First
Federal when the resolicitation offering expires would be irrevocable without
the consent of First Bancorp and First Federal until the completion or
termination of the conversion.
REGULATORY REFORM LEGISLATION MAY REDUCE POWERS OF FIRST BANCORP AND FIRST
FEDERAL
In 1998 the U.S. Congress considered legislation that was intended to
modernize the financial services industry. Under the proposed legislation,
newly formed unitary savings and loan holding companies would not be permitted
to exercise the expanded powers otherwise available to these 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 final
legislation that was considered. First Federal is a federal savings association
and First Bancorp, upon completion of the conversion, will be a unitary savings
and loan holding company. First Bancorp does not know 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
First Federal and First Bancorp cannot predict what effect, if any, such
legislation would have on the activities and operations of First Federal and
First Bancorp.
11
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
financial position and results of operations of First Federal Savings Bank (the
"Bank") at the dates and for the periods indicated. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
presented elsewhere in this prospectus. Information at September 30, 1998 and
for the three months ended September 30, 1998 and 1997 is unaudited, but, in the
opinion of management, reflects all adjustments (none of which are other than
normal recurring entries) necessary for a fair presentation. Results for the
three months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1999.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
--------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets.................................... $111,627 $108,964 $110,747 $110,905 $105,846 $105,803
Other investment securities..................... 15,168 18,195 18,940 17,246 8,788 6,455
Mortgage-backed securities...................... 36,835 35,545 41,394 41,607 47,936 51,118
Loans receivable, net........................... 38,183 35,655 32,164 32,441 32,492 32,396
Deposits accounts............................... 90,961 89,229 88,560 88,844 86,886 87,615
Borrowings...................................... 3,645 3,645 7,050 7,500 5,000 5,000
Equity capital.................................. 15,117 14,949 14,053 13,575 13,002 12,363
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR
THE THREE MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEARS ENDED JUNE 30,
------------------- ------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................................. $ 1,831 $ 1,887 $ 7,715 $ 7,474 $ 7,295 $ 6,658 $ 6,069
Interest expense................................ 1,185 1,192 4,977 4,763 4,645 4,062 3,656
-------- -------- -------- -------- -------- -------- --------
Net interest income............................. 646 695 2,738 2,711 2,650 2,596 2,413
Provision for loan losses....................... -- -- -- -- 100 -- --
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses........................... 646 695 2,738 2,711 2,550 2,596 2,413
Other income.................................... 76 43 601 (1) 179 169 219 214
Other expense................................... 506 415 2,044 2,391 (2) 1,900 1,901 1,863
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of a change in
accounting principle......................... 216 323 1,295 499 819 914 764
Income taxes.................................... 61 108 415 112 199 264 301
Cumulative effect of change in
accounting principle(3)..................... -- -- -- -- -- -- 11
-------- -------- -------- -------- -------- -------- --------
Net income................................... $ 155 $ 215 $ 880 $ 387 $ 620 $ 650 $ 474
======== ======== ======== ======== ======== ======== ========
</TABLE>
________________________________
(1) Includes gains of $400,000 on the sale of a branch office and related
deposits.
(2) Includes one-time assessment of $561,000 to recapitalize the Savings
Association Insurance Fund ("SAIF").
(3) Reflects adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
12
<PAGE>
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
-------------------------------------------------
1998 1998 1997 1996 1995 1994
------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding............................ 773 747 759 789 811 855
Deposit accounts......................................... 8,799 8,852 9,226 9,515 9,890 9,716
Full-service offices..................................... 4 4 4 4 4 4
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEARS ENDED JUNE 30,
------------------- -------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
PERFORMANCE RATIOS(1):
Return on average assets(2)......................... 0.56% 0.78% 0.77% 0.35% 0.57% 0.62% 0.47%
Return on average equity(3)......................... 4.13 6.08 6.04 2.83 4.66 5.14 3.91
Average equity as a percent of average
total assets...................................... 13.58 12.82 12.79 12.35 12.33 12.01 11.91
Interest rate spread(4)............................. 1.97 2.15 2.03 2.08 2.09 2.01 1.98
Net interest margin(5).............................. 2.47 2.64 2.53 2.56 2.57 2.53 2.44
Average interest-earning assets to
average interest-bearing liabilities.............. 110.98 110.88 110.75 110.71 110.68 113.18 112.51
Other expenses as a percent of average
total assets...................................... 1.83 1.50 1.79 2.16 1.76 1.80 1.83
CAPITAL RATIOS:
Tangible............................................ 13.47 12.96 13.60 12.62 12.28 12.29 11.69
Core................................................ 13.47 12.96 13.60 12.62 12.28 12.29 11.69
Risk-based.......................................... 34.88 39.01 34.75 37.35 36.95 36.42 35.13
ASSET QUALITY RATIOS:
Nonperforming loans as a percent
of total loans(6)................................ 0.00 0.09 0.00 0.08 0.00 0.12 0.22
Nonperforming assets as a percent
of total assets(7)............................... 0.00 0.02 0.00 0.02 0.00 0.04 0.07
Allowance for loan losses as a percent
of total loans................................... 0.65 0.79 0.70 0.77 0.76 0.46 0.46
Allowance for loan losses as a percent
of nonperforming loans........................... N/A 925.93 N/A 925.93 N/A 263.16 138.89
Net charge-offs as a percent of
average outstanding loans........................ N/A N/A N/A N/A N/A N/A N/A
</TABLE>
_________________________________
(1) Ratios for the three-month periods are annualized where appropriate.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(7) Nonperforming assets consist of nonperforming loans, real estate acquired
in settlement of loans, and restructured loans. See "BUSINESS OF THE
BANK -- Lending Activities -- Nonperforming Assets and Delinquencies."
13
<PAGE>
USE OF PROCEEDS
The amount of common stock being offered in the conversion is based on
Capital Resources Group's estimate that, as of December 4, 1998, the market
value of the Holding Company and the Bank ranged from $16,150,000 to $21,850,000
("Estimated Valuation Range"). The net proceeds from the sale of the common
stock in this offering will range from approximately $15.5 million to $21.1
million (or up to $24.4 million if the Estimated Valuation Range is increased by
15%). See "PRO FORMA DATA" for the assumptions used to arrive at such amounts.
First Bancorp, Inc. ("the Holding Company") will purchase all of the capital
stock of the Bank to be issued in the conversion in exchange for 50% of the net
proceeds of the offering. This will result in the Holding Company retaining
approximately $7.7 million to $10.6 million of net proceeds (or up to $12.2
million if the Estimated Valuation Range is increased by 15%) and the Bank
receiving an equal amount.
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. The Bank intends to increase
its residential loan portfolio and, to a lesser extent, its consumer loan
portfolio. Depending on loan demand, the Bank may consider using a portion of
the conversion proceeds for additional investment in mortgage-backed securities.
In connection with the conversion and the establishment of the Bank's
Employee Stock Ownership Plan ("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
$1,292,000 to $1,748,000 based on the sale of 129,200 shares to the ESOP (at the
minimum of the Estimated Valuation Range) and 174,800 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 2,512,750 shares, are sold in
the conversion, the Holding Company's loan to the ESOP would be $2,010,200
(based on the sale of 201,020 shares to the ESOP). It is anticipated that the
ESOP loan will have a 12-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 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: (1) 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; (2) 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 (3) 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
14
<PAGE>
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
"THE CONVERSION -- Restrictions on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
The Holding Company's Board of Directors anticipates declaring and paying
cash dividends on the common stock. However, the Board of Directors has not
made a decision as to the amount or timing of such dividends. 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
the Holding Company is able to pay its debts as they come due in the usual
course of business and the Holding Company's 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.
CURRENT RESTRICTIONS
Dividends from the Holding Company may 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. Office of Thrift Supervision ("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. Based
on its current capital levels, the Bank 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's 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 10 of the Notes to Consolidated 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.
15
<PAGE>
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 Consolidated 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 National
Market under the symbol FBEI, there can be no assurance that the Holding Company
will meet the Nasdaq National Market listing requirements, which include a
minimum market capitalization, at least three market makers and a minimum number
of shareholders. Capital Resources 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.
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 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 National
Market as contemplated.
16
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 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 1,615,000 1,900,000 2,185,000 2,512,750
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
September 30, 1998 Per Share(1) Per Share(1) Per Share(1) Per Share(1)
-------------------- ---------------- -------------- -------------- -------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Deposits(3)............................... $ 90,961 $ 90,961 $ 90,961 $ 90,961 $ 90,961
Borrowings................................ 3,645 3,645 3,645 3,645 3,645
----------- ---------- ---------- ---------- ----------
Total deposits and
borrowed funds......................... $ 94,606 $ 94,606 $ 94,606 $ 94,606 $ 94,606
=========== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value
per share, authorized; none issued
or outstanding..................... $ -- $ -- $ -- $ -- $ --
Common stock:
9,000,000 shares, $.01 par value
per share, authorized; specified
number of shares assumed to be
issued and outstanding(4).......... -- 16 19 22 25
Additional paid-in capital................ -- 15,463 18,278 21,092 24,329
Retained earnings(5)...................... 15,055 15,055 15,055 15,055 15,055
Accumulated other
comprehensive income................... 62 62 62 62 62
Less:
Common stock acquired
by ESOP(6)........................ -- (1,292) (1,520) (1,748) (2,010)
Common stock to be acquired
by MRDP(7)........................ -- (646) (760) (874) (1,005)
----------- ---------- ---------- ---------- ----------
Total stockholders' equity................ $ 15,117 $ 28,658 $ 31,134 $ 33,609 $ 36,456
=========== ========== ========== ========== ==========
</TABLE>
____________________________
(1) Does not reflect the possible increase or decrease 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 Stock 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 1,000 shares of common
stock, par value $1.00 per share, 1,000 shares of which will be issued to
the Holding Company, and 9,000 shares of preferred stock, no 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 depositors as of June 30, 1997 and December 31, 1998 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."
17
<PAGE>
(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 generally accepted accounting principles, 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 Management Recognition and Development Plan ("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. See "RISK FACTORS -- Issuance of Shares for Benefit Programs May
Reduce Your Ownership Interest," "PRO FORMA DATA" and "MANAGEMENT OF THE
BANK -- Benefits -- Management Recognition and Development Plan." The MRDP
is subject to stockholder approval at a meeting following consummation of
the conversion.
18
<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 September 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 SEPTEMBER 30, 1998
--------------------------------------------------------------------------
MINIMUM OF ESTIMATED MIDPOINT OF ESTIMATED MAXIMUM OF ESTIMATED
VALUATION RANGE VALUATION RANGE VALUATION RANGE
------------------------- ---------------------- ----------------------
1,615,000 SHARES 1,900,000 SHARES 2,185,000 SHARES
SEPTEMBER 30, 1998 AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE
---------------------- ------------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED ADJUSTED
TOTAL TOTAL TOTAL TOTAL
AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1)
---------- ------------ ------------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Equity(2)............. $15,117 13.54% $20,918 17.62% $21,985 18.32% $23,052 19.00%
======= ===== ======= ===== ======= ===== ======= =====
Tangible capital(2)........ $15,056 13.47% $20,857 17.55% $21,924 18.25% $22,991 18.93%
Tangible capital
requirement............. 1,676 1.50 1,783 1.50 1,802 1.50 1,822 1.50
------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $13,380 11.97% $19,074 16.05% $20,122 16.75% $21,169 17.43%
======= ===== ======= ===== ======= ===== ======= =====
Core capital(2)............ $15,056 13.47% $20,857 17.55% $21,924 18.25% $22,991 18.93%
Core capital requirement... 3,353 3.00 3,565 3.00 3,604 3.00 3,643 3.00
------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $11,703 10.47% $17,292 14.55% $18,320 15.25% $19,348 15.93%
======= ===== ======= ===== ======= ===== ======= =====
Total risk-based capital(3) $15,306 34.88% $21,107 46.59% $22,174 48.66% $23,241 50.72%
Total risk-based capital
requirement............. 3,511 8.00 3,625 8.00 3,645 8.00 3,666 8.00
------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $11,795 26.88% $17,482 38.59% $18,529 40.66% $19,575 42.72%
======= ===== ======= ===== ======= ===== ======= =====
<CAPTION>
--------------------------
15% Above
Maximum of Estimated
Valuation Range
--------------------------
2,512,750 Shares
at $10.00 Per Share
--------------------------
Percent of
Adjusted
Total
Amount Assets(1)
--------------------------
<S> <C> <C>
GAAP Equity(2)............... $24,279 19.77%
======= =====
Tangible capital(2).......... $24,218 19.70%
Tangible capital
requirement............... 1,844 1.50
------- -----
Excess....................... $22,374 18.20%
======= =====
Core capital(2).............. $24,218 19.70%
Core capital requirement..... 3,688 3.00
------- -----
Excess....................... $20,530 16.70%
======= =====
Total risk-based capital(3).. $24,468 53.05%
Total risk-based capital
requirement............... 3,690 8.00
------- -----
Excess....................... $20,778 45.05%
======= =====
</TABLE>
- ----------------------
(1) Tangible capital levels and core capital levels are shown as a percentage of
adjusted total assets. Risk-based capital levels are shown as a percentage
of risk-weighted assets.
(2) Unrealized gains on investment securities account for the difference between
GAAP capital and each of tangible capital and core capital.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
19
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the common stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Bank as converted, based upon an independent valuation. The Estimated Valuation
Range as of December 4, 1998 is from a minimum of $16,150,000 to a maximum of
$21,850,000 with a midpoint of $19,000,000. At a price per share of $10.00, this
results in a minimum number of shares of 1,615,000, a maximum number of shares
of 2,185,000 and a midpoint number of shares of 1,900,000. 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: (1) Capital Resources will receive
fees of approximately $175,000, $207,000, $240,000 and $278,000 at the minimum,
midpoint, maximum and 15% above the Estimated Valuation Range, respectively (see
"THE CONVERSION -- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings); (2) all of the common stock will be sold
pursuant to subscription rights; and (3) conversion expenses, excluding the fees
paid to Capital Resources, will total approximately $496,000 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 whether
a syndicate of broker-dealers or other means is necessary to sell the shares,
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 at and for 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 three months ended September 30,
1998 and the year ended June 30, 1998 has been calculated as if the conversion
had been consummated at the beginning of each period and the estimated net
proceeds received by the Holding Company and the Bank had been invested at 4.41%
at the beginning of each period, which represents the one-year U.S. Treasury
Bill yield as of September 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 2.65% is used for both the Holding Company and the
Bank for the three months ended September 30, 1998 and the year ended June 30,
1998, respectively, after giving effect to an incremental combined federal and
state income tax rate of 40.0%. 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: (1) the shares to be reserved for issuance
under the Holding Company's Stock Option Plan, which is subject to stockholder
approval at a meeting following consummation of the conversion; (2) withdrawals
from deposit accounts for the purpose of purchasing common stock in the
conversion; (3) the issuance of shares from authorized but unissued shares to
the MRDP, which is subject to stockholder approval at a meeting following
consummation of the conversion; or (4) the establishment of a liquidation
account for the benefit of eligible depositors as of June 30, 1997 and December
31, 1998. See "MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plan" and "THE
CONVERSION -- Stock Pricing 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 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. 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.
20
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------
15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
VALUATION VALUATION VALUATION VALUATION
PRICE PRICE PRICE PRICE
-----------------------------------------------------------------
1,615,000 1,900,000 2,185,000 2,512,750(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
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $ 16,150 $ 19,000 $ 21,850 $ 25,128
Less: estimated expenses..................................... (671) (703) (736) (774)
---------- ---------- ---------- ----------
Estimated net proceeds........................................ 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP.......................... (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP.................... (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Net investable proceeds..................................... $ 13,541 $ 16,017 $ 18,492 $ 21,339
========== ========== ========== ==========
Consolidated net income:
Historical.................................................. $ 155 $ 155 $ 155 $ 155
Pro forma income on net proceeds(2)......................... 90 106 123 141
Pro forma ESOP adjustments(3)............................... (16) (19) (22) (25)
Pro forma MRDP adjustments(4)............................... (19) (23) (26) (30)
---------- ---------- ---------- ----------
Pro forma net income....................................... $ 210 $ 219 $ 230 $ 241
========== ========== ========== ==========
Consolidated net income per share(5)(6):
Historical.................................................. $ 0.10 $ 0.09 $ 0.07 $ 0.06
Pro forma income on net proceeds(2)......................... 0.06 0.06 0.06 0.06
Pro forma ESOP adjustments(3)............................... (0.01) (0.01) (0.01) (0.01)
Pro forma MRDP adjustments(4)............................... (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net income per share............................. $ 0.14 $ 0.13 $ 0.11 $ 0.10
========== ========== ========== ==========
Consolidated stockholders' equity (book value):
Historical.................................................. $ 15,117 $ 15,117 $ 15,117 $ 15,117
Estimated net proceeds...................................... 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP........................ (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP(4)............... (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(7).......................... $ 28,658 $ 31,134 $ 33,609 $ 36,456
========== ========== ========== ==========
Consolidated stockholders' equity per share(6)(8):
Historical(6)............................................... $ 9.36 $ 7.96 $ 6.92 $ 6.02
Estimated net proceeds...................................... 9.58 9.63 9.66 9.69
Less: common stock acquired by ESOP........................ (0.80) (0.80) (0.80) (0.80)
Less: common stock to be acquired by MRDP(4)............... (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share(7)................ $ 17.74 $ 16.39 $ 15.38 $ 14.51
========== ========== ========== ==========
Purchase price as a percentage of pro forma
stockholders' equity per share............................... 56.37% 61.01% 65.02% 68.92%
Purchase price as a multiple of pro forma
net income per share(10)..................................... 17.86x 19.23x 22.73x 25.00x
</TABLE>
(Footnotes on page __)
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1998
--------------------------------------------------------
15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
VALUATION VALUATION VALUATION VALUATION
PRICE PRICE PRICE PRICE
-------------- ----------- ----------- --------------
1,615,000 1,900,000 2,185,000 2,512,750(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
-------------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 16,150 $ 19,000 $ 21,850 $ 25,128
Less: estimated expenses........................... (671) (703) (736) (774)
---------- ---------- ---------- ----------
Estimated net proceeds.............................. 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP................ (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP.......... (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Net investable proceeds............................ $ 13,541 $ 16,017 $ 18,492 $ 21,339
========== ========== ========== ==========
Consolidated net income:
Historical......................................... $ 880 $ 880 $ 880 $ 880
Pro forma income on net proceeds(2)................ 359 424 490 565
Pro forma ESOP adjustments(3)...................... (65) (76) (87) (101)
Pro forma MRDP adjustments(4)...................... (78) (91) (105) (121)
---------- ---------- ---------- ----------
Pro forma net income............................. $ 1,096 $ 1,137 $ 1,178 $ 1,223
========== ========== ========== ==========
Consolidated net income per share(5)(6):
Historical......................................... $ 0.58 $ 0.50 $ 0.43 $ 0.38
Pro forma income on net proceeds(2)................ 0.24 0.24 0.24 0.24
Pro forma ESOP adjustments(3)...................... (0.04) (0.04) (0.04) (0.04)
Pro forma MRDP adjustments(4)...................... (0.05) (0.05) (0.05) (0.05)
----------- ---------- ---------- ------------
Pro forma net income per share................... $ 0.73 $ 0.65 $ 0.58 $ 0.53
========== ========== ========== ==========
Consolidated stockholders' equity (book value):
Historical......................................... $ 14,949 $ 14,949 $ 14,949 $ 14,949
Estimated net proceeds............................. 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP............... (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP(4)...... (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(7)................ $ 28,490 $ 30,966 $ 33,441 $ 36,288
========== ========== ========== ==========
Consolidated stockholders' equity per share(6)(8):
Historical(6)...................................... $ 9.26 $ 7.87 $ 6.84 $ 5.95
Estimated net proceeds............................. 9.58 9.63 9.66 9.69
Less: common stock acquired by ESOP............... (0.80) (0.80) (0.80) (0.80)
Less: common stock to be acquired by MRDP(4)...... (0.40) (0.40) (0.40) (0.40)
----------- ---------- ----------- ----------
Pro forma stockholders' equity per share(7)...... $ 17.64 $ 16.30 $ 15.30 $ 14.44
=========== ========== =========== ==========
Purchase price as a percentage of pro forma
stockholders' equity per share................... 56.69% 61.35% 65.36% 69.25%
Purchase price as a multiple of pro forma
net income per share(10)......................... 13.70x 15.38x 17.24x 18.87x
</TABLE>
(Footnotes on following page)
22
<PAGE>
- ----------------------
(1) Gives effect to the sale of an additional 327,750 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 Capital
Resources Group that such issuance is compatible with its determination of
the estimated pro forma market value of the Holding Company and the Bank as
converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued."
(2) No effect has been given to withdrawals from deposit 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) Assumes that the ESOP will purchase 8% of the shares of common stock
offered in the conversion. 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 7.75%) from the net proceeds from the conversion
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 12-year period, assuming a combined federal and state
income tax rate of 40.0%. 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 MRDP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the 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 40.0%. 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 3.85% and pro forma net income per share would be $0.14,
$0.12, $0.11 and $0.10 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the three months ended
September 30, 1998, respectively, and $0.72, $0.63, $0.57 and $0.52 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the year ended June 30, 1998, respectively, and pro
forma stockholders' equity per share would be $17.45, $16.14, $15.17 and
$14.33 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range at September 30, 1998, respectively $17.35,
$16.06, $15.10 and $14.27 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range at June 30, 1998,
respectively. For purposes of this table, shares issued under the MRDP vest
20% per year and 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 MRDP, total MRDP expense would increase. The total estimated MRDP
expense was multiplied by 20% (the total percent of shares for which
expense is recognized in the first year) resulting in pre-tax MRDP expense
of $32,300, $38,000, $43,700 and $50,300 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range for the three
months ended September 30, 1998, respectively and $129,200, $152,000,
$175,000 and $201,000 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended June 30, 1998,
respectively. No effect has been given to the shares reserved for issuance
under the proposed Stock Option Plan. Recently proposed accounting rules
would require the Holding Company to recognize compensation expense for
stock options awarded to non-employee directors.
(5) Per share amounts are based upon shares outstanding of 1,487,146,
1,749,583, 2,012,021 and 2,313,824 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the three months
ended September 30, 1998, respectively 1,491,183, 1,754,333, 2,017,483 and
2,320,106 at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range for the year ended June 30, 1998,
respectively, which includes the shares of common stock sold 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 MRDP expense, as
described above.
(7) "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
depositors as of June 30, 1997 and December 31, 1998, 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
to Stock Form 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.
(8) Per share amounts are based upon shares outstanding of 1,615,000,
1,900,000, 2,185,000 and 2,512,750 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the common stock.
(10) Annualized
23
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as to the approximate
purchases of common stock by each director and executive officer of the Bank,
including their associates, as defined by applicable regulations. 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 officers of the Bank and their associates may not purchase in
excess of 33% of the shares sold in the conversion. For purposes of the
following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers, their associates
and employees will pay the same price as all other subscribers for the shares
for which they subscribe.
<TABLE>
<CAPTION>
PERCENT OF
SHARES AT
MAXIMUM OF
ANTICIPATED NUMBER OF ANTICIPATED DOLLAR ESTIMATED
NAME AND POSITION SHARES PURCHASED(1) AMOUNT PURCHASED VALUATION RANGE
- ----------------- --------------------- ------------------ ---------------------
<S> <C> <C> <C>
Robert L. Clayton, Sr. 5,000 $ 50,000 0.2%
Director
Herbert V. Dassel 20,000 200,000 0.9
Director
Frank E. Kern 4,000 40,000 0.2
Director
James L. Will, Jr. 10,000 100,000 0.5
Director
Jerry Ziemer 15,000 150,000 0.7
Director
Harold Duncan 15,000 150,000 0.7
President, Chief Executive
Officer and Director
Michael H. Head 20,000 200,000 0.9
Executive Vice President and
Chief Operating Officer
Monica L. Stinchfield 1,000 10,000 0.0
Senior Vice President
Christopher A. Bengert 600 6,000 0.0
Senior Vice President and
Treasurer
Richard L. Witte 500 5,000 0.0
Vice President ------ -------- ---
91,000 $911,000 4.2%
====== ======== ===
</TABLE>
_____________________________
(1) Does not include any shares to be awarded pursuant to the ESOP and MRDP or
options to acquire shares awarded pursuant to the Stock Option Plan.
24
<PAGE>
FIRST FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
The following Consolidated Statement of Income of First Federal Savings
Bank for the fiscal years ended June 30, 1998, 1997 and 1996 has been audited by
Olive LLP, independent auditors, whose report thereon appears elsewhere in this
prospectus. The Consolidated Statement of Income for the three months ended
September 30, 1998 and 1997 was not audited by Olive LLP, but, in the opinion of
management, reflect all adjustments (none of which are other than normal
recurring entries) necessary for a fair presentation. The results of operations
for the three months ended September 30, 1998 are not necessarily indicative of
the results of operations that may be expected for the entire fiscal year. This
statement should be read in conjunction with the Consolidated Financial
Statements and related Notes included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED JUNE 30,
----------------------- ------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, including fees..................... $ 744,657 $ 660,287 $2,694,771 $2,580,620 $2,602,248
Investment securities:
Mortgage-backed securities.......................... 579,840 687,485 2,664,326 2,771,610 2,974,734
Other investment securities......................... 249,833 350,283 1,443,477 1,313,347 873,474
Deposits with financial institutions................. 231,809 164,250 818,200 719,044 713,306
Federal funds sold................................... 10,302 9,436 35,277 30,592 32,532
Other interest and dividend income................... 14,722 15,126 58,650 58,550 98,658
---------- ---------- ---------- ---------- ----------
Total interest income......................... 1,831,163 1,886,867 7,714,701 7,473,763 7,294,952
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits............................................. 1,119,852 1,078,314 4,584,001 4,301,758 4,292,375
Borrowings........................................... 52,865 105,027 354,630 432,896 334,477
Other................................................ 11,892 8,315 37,993 27,893 17,717
---------- ---------- ---------- ---------- ----------
Total interest expense........................ 1,184,609 1,191,656 4,976,624 4,762,547 4,644,569
---------- ---------- ---------- ---------- ----------
Net interest income................................... 646,554 695,211 2,738,077 2,711,216 2,650,383
Provision for loan losses............................. -- -- -- -- 100,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses... 646,554 695,211 2,738,077 2,711,216 2,550,383
---------- ---------- ---------- ---------- ----------
Other income:
Gain on disposal of branch office.................... -- -- 261,024 -- --
Gain on disposal of deposits......................... -- -- 138,528 -- --
Increase in cash surrender values of life insurance.. 23,334 19,704 87,234 81,975 83,364
Other income......................................... 51,398 22,898 114,601 97,971 85,808
---------- ---------- ---------- ---------- ----------
Total other income............................ 74,732 42,602 601,387 179,946 169,172
---------- ---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits....................... 280,869 225,658 1,134,397 972,717 947,422
Net occupancy expense................................ 43,627 30,836 181,065 141,808 161,937
Equipment expense.................................... 28,233 17,623 103,749 65,660 62,273
Deposit insurance expense............................ 14,699 14,103 56,468 118,678 199,162
SAIF special assessment.............................. -- -- -- 561,290 --
Data processing fees................................. 25,672 21,622 99,478 86,588 88,621
Other expenses....................................... 112,843 104,912 469,117 444,622 441,242
---------- ---------- ---------- ---------- ----------
Total other expense........................... 505,943 414,754 2,044,274 2,391,363 1,900,657
---------- ---------- ---------- ---------- ----------
Income before income tax.............................. 215,343 323,059 1,295,190 499,799 818,898
Income tax expense................................... 60,776 107,729 415,486 112,439 198,852
---------- ---------- ---------- ---------- ----------
Net income............................................ $ 154,567 $ 215,330 $ 879,704 $ 387,360 $ 620,046
========== ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
25
<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 consolidated financial statements and
accompanying notes thereto contained in this prospectus.
OPERATING STRATEGY
The principal business activity of the bank consists of attracting deposits
from the general public and originating loans secured by one-to-four family
residential real estate properties located in its market area. The Bank also
maintains a substantial investment portfolio of mortgage-backed and other
securities. Earnings depend primarily upon net interest income, which is the
difference between the interest income the Bank receives on its loan and
investment portfolios and the interest it pays on deposits and borrowings. The
Bank's profitability is also affected by the level of other income and expenses.
Other income includes service charges, fees and gains on sales of loans. Other
expenses include compensation and benefits, occupancy and equipment expenses,
deposit insurance premiums, and data processing. The Bank's profitability is
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 strategy is to operate as an independent, retail financial
institution dedicated to financing home ownership and other consumer needs in
Evansville, Indiana. The Bank's operating philosophy has been to be
conservative with respect to its underwriting standards and maintain a high
level of asset quality, while generating profits, remaining well capitalized and
providing a high level of customer service. The Bank's current business
strategy includes an emphasis on increasing its mortgage loan, consumer loan and
loan servicing portfolios. It also includes continued maintenance of a
substantial investment portfolio of U.S. government and agency securities and
investment grade mortgage-backed securities and deposit growth to support the
growth in loans and investments.
The conversion will increase the consolidated capital of the Holding
Company by the amount of the net proceeds, after deduction for the shares to be
sold to the ESOP. Funds withdrawn from deposit accounts to purchase shares will
decrease interest-bearing liabilities, and new funds used to purchase shares
will increase interest-earning assets. While the Holding Company expects these
changes to increase its net interest income, the Holding Company also expects
that the adoption of the ESOP and the 1999 MRDP will increase its non-interest
expenses. See "RISK FACTORS -- The Implementation of Benefit Plans Will
Increase Future Compensation Expense." For additional information regarding the
effects of this offering, see "PRO FORMA DATA."
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
Total assets increased $2.7 million, or 2.4%, to $111.6 million at
September 30, 1998 compared to June 30, 1998. The largest increase was in
loans, which increased $2.5 million, or 7.09%. The increase in loans was
principally in real estate mortgage loans, and was a result of the Bank's
competitive mortgage interest rates in its target market, favorable nationwide
mortgage rates which spurred an increase in home purchases and refinancing, and
the results of hiring of a new loan originator in fiscal 1998. The growth in
loans was primarily funded by an increase in deposits of $1.7 million, or 1.9%.
The deposit increase can be attributed primarily to competitive interest rates
offered on certificates of deposit and money market accounts. Borrowings were
unchanged.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997
Total assets at June 30, 1998 were $109.0 million compared to $110.7
million at June 30, 1997. The decrease of $1.7 million, or 1.6%, was a result
of management's decision to use funds from maturing securities to fund loan
growth and debt maturities. In order to cover the liquidity needs of expected
loan growth, as investments matured, cash
26
<PAGE>
in excess of that needed for immediate loans was maintained in cash and cash
equivalents. Investment securities decreased by $6.6 million. This was offset by
a $3.5 million increase in loans. The growth in loans was primarily in mortgage
loans, which increased 12.2%, or $3.8 million. The growth in mortgage loans was
in part due to the Bank's competitive mortgage rates, nationally decreasing
rates, and the hiring of a loan originator. The Bank reduced its borrowings from
the Federal Home Loan Bank by $3.4 million. The majority of this decrease was
the payoff of $3.0 million in fixed rate advances from the FHLB in February
1998.
Equity capital increased $895,000 because of $880,000 in net income and a
$15,000 increase in the unrealized gain on securities available for sale due to
decreases in market rates of interest and a corresponding increase in the market
value of the Bank's investments.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL. Net income decreased by $60,000 to $155,000 for the three months
ended September 30, 1998 from $215,000 for the same period in 1997. The
decrease was primarily related to a decrease in net interest income caused by
the narrowing of the Bank's interest rate spread to 1.97% compared to 2.15% for
the first quarter last year and to increased other expenses. The decrease in
the interest rate spread is due to management's decision to offer competitive
mortgage interest rates in an effort to increase the Bank's loan portfolio, and
to offer certificates of deposit and money market accounts at rates slightly
higher than that of its competition to attract the funds to support loan growth.
NET INTEREST INCOME. Net interest income decreased $49,000, or 7.1%, to
$646,000 in the first quarter of fiscal 1999 compared to the first quarter last
year primarily as a result of the narrowing of the Bank's interest rate spread.
Total interest income decreased by 3.0% to $1.8 million for the three months
ended September 30, 1998, from $1.9 million for the same period ending in 1997.
This decrease was caused by both a reduced yield on investment securities and a
reallocation of the portfolio of interest earning assets from securities to
lower yielding deposits with financial institutions. Interest income on loans
increased as the result of the growth of the portfolio, while interest income on
investment securities decreased as a result of the reduction of the portfolio
and lower yield. The average yield on interest-earning assets decreased to
6.99% for the three months ended September 30, 1998 from 7.16% for the three
months ended September 30, 1997 primarily as a result of the maturity, repricing
and repayment of higher yielding securities.
Interest expense decreased by $7,000 for the three months ended September
30, 1998 in comparison to the same period in 1997. The average cost of total
interest bearing liabilities remained unchanged at 5.02%. The decrease in
interest expense resulted from a net decrease in average total interest bearing
liabilities of $659,000. The increase in average deposits included increases in
demand and savings accounts of $1.3 million and certificates of deposit of $1.3
million. These increases were offset by reduced borrowings.
The following table sets forth for the three months ended September 30,
1998 and 1997 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.
27
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS COST(1) BALANCE DIVIDENDS COST(1)
--------- ----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable, net(2).................... $ 36,169 $ 744 8.23% $ 32,052 $ 660 8.24%
Investment securities....................... 51,728 830 6.42 60,590 1,039 6.86
Deposits with financial institutions........ 15,377 232 6.03 11,339 164 5.79
Federal funds sold.......................... 737 10 5.43 671 9 5.37
Other....................................... 727 15 8.25 727 15 8.25
-------- ------ -------- ------
Total interest-earning assets............ 104,738 1,831 6.99 105,379 1,887 7.16
Non-interest-earning assets................... 5,869 5,031
-------- --------
Total assets............................. $110,607 $110,410
======== ========
Interest-bearing liabilities:
Demand and savings deposits................. $ 21,738 160 2.94 $ 20,376 135 2.65
Certificates of deposit..................... 68,520 960 5.60 67,254 944 5.61
-------- ------ -------- ------
Total deposits........................... 90,258 1,120 4.96 87,630 1,079 4.93
Borrowings.................................. 3,645 53 5.82 7,050 105 5.96
Other....................................... 475 12 10.11 357 8 8.96
-------- ------ -------- ------
Total interest-bearing liabilities....... 94,378 1,185 5.02 95,037 1,192 5.02
------ ------
Noninterest-bearing liabilities............... 1,209 1,220
Stockholders' equity.......................... 15,020 14,153
-------- --------
Total liabilities and stockholders'
equity.................................. $110,607 $110,410
======== ========
Net interest income........................... $ 646 $ 695
====== ======
Interest rate spread(3)....................... 1.97% 2.14%
Net interest margin(4)........................ 2.47% 2.64%
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 110.98% 110.88%
</TABLE>
____________________________
(1) Amounts are annualized.
(2) Average loans receivable includes nonperforming loans. Interest income
includes interest and fees on loans, but does not include interest on loans
90 days or more past due.
(3) Yield on interest-earning assets less cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
28
<PAGE>
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) and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED TO 1997
----------------------------------------
INCREASE (DECREASE)
DUE TO
--------------------------
RATE VOLUME NET
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest earning assets:
Loans receivable, net(2)............................................ $ (1) $ 85 $ 84
Investment securities............................................... (64) (145) (209)
Deposits with financial institutions................................ 7 61 68
Federal funds sold.................................................. -- 1 1
Other............................................................... -- -- --
---- ----- -----
Total net change in income on interest-earning assets............ (58) 2 (56)
Interest-bearing liabilities:
Demand and savings deposits......................................... 15 10 25
Certificates of deposit............................................. -- 16 16
---- ----- -----
Total deposits................................................... 15 26 41
Borrowings.......................................................... (3) (49) (52)
Other............................................................... 1 3 4
---- ----- -----
Total net change in expense on interest-bearing liabilities...... 13 (20) (7)
---- ----- -----
Net change in net interest income...................................... $(71) $ 22 $ (49)
==== ===== =====
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio. As a
result of the Bank's focus on residential mortgage loans and adherence to strict
underwriting and collection guidelines, the Bank's historical loan loss
experience has been low. No assurances, however, can be given as to future loss
experience. For the three months ended September 30, 1998 and 1997, the Bank
took no provision for loan losses.
OTHER INCOME. Other income increased $32,000 to $75,000 for the three
months ended September 30, 1998. This increase was primarily due to an increase
in ATM fees and increased gains on the sale of mortgage loans. Interest rates
declined during the three months ended September 30, 1998, which increased the
market value of loans originated by the Bank and then later sold.
OTHER EXPENSE. Other expenses increased 22% to $506,000 for the three
months ended September 30, 1998 from $415,000 for the same period in 1997. The
majority of this increase is attributable to a 24.5% increase in salaries and
employee benefits. At September 30, 1998 the Bank had 40 employees compared to
33 employees at September 30, 1997. With the Bank's increased focus on the
origination of mortgage loans, additional personnel were necessary in the
mortgage loan department in order to originate and service new loans. Additional
employees were also hired in the areas of technology and branch administration.
INCOME TAX EXPENSE. Total income tax expense was $61,000 for the three
months ended September 30, 1998, compared to $108,000 for the three months ended
September 30, 1997. This decrease is associated with the decrease
29
<PAGE>
in income before tax expense of $108,000. The effective tax rate was 28.2% for
the three months ending September 30, 1998, as compared to 33.3% for the same
period in 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
GENERAL. Net income increased by $493,000 to $880,000 for the year ended
June 30, 1998, from $387,000 for the fiscal year ended June 30, 1997. The
majority of the increase was due to a branch sale in fiscal 1998 and the one-
time SAIF assessment in fiscal 1997. Net interest income increased $27,000 or
less than 1%.
Net income decreased by 38%, to $387,000 for the year ended June 30, 1997,
compared to $620,000 for the year ended June 30, 1996. Net interest income
increased by $61,000 from fiscal 1996 to fiscal 1997, but the one-time SAIF
assessment negatively impacted June 30, 1997 pre-tax income by $561,000.
NET INTEREST INCOME. Net interest income increased less than 1% to $2.7
million in fiscal 1998. Interest income increased $241,000 to $7.7 million for
fiscal 1998 from $7.5 million for fiscal 1997. The increase was the result of
the Bank's increased focus on the origination of loans, which generated a
slightly higher rate of interest than investments, and to larger average
balances of investment securities and deposits with financial institutions. The
average yield on interest-earning assets increased to 7.12% for fiscal 1998 from
7.05% for fiscal 1997.
Interest expense increased by $214,000 to $5.0 million for fiscal 1998 from
$4.8 million for fiscal 1997. The increase in interest expense was due to an
increase in interest bearing deposits, primarily certificates of deposit, and a
12 basis point increase in the average cost of interest bearing liabilities.
Certificates of deposit were the Bank's largest type of interest-bearing
liability, comprising, on average, 73% of the total. The average balance of
certificates of deposit outstanding during the year increased $5.2 million, to
$71.8 million from $66.6 million for fiscal 1997. Additionally, the average
yield on certificates of deposit increased 8 basis points, to 5.68% from 5.60%
for fiscal 1997. Following the sale of a branch office and the opening of a new
office in October 1997 the Bank offered a short-term certificate of deposit at
an above-market rate in order to attract customers to its new branch. There was
also an increase in the average cost of borrowings, which was partially offset
by decreases in the average cost of demand and savings deposits and in other
interest bearing liabilities.
Net interest income increased $61,000, or 2.3%, from fiscal 1996 to fiscal
1997. Total interest income for fiscal 1997 increased by $179,000, or 2.5%,
over the prior year to $7.5 million. While the average yield on interest
earning assets decreased slightly to 7.05% for fiscal 1997 compared to 7.07% for
fiscal 1996, the average balance outstanding of interest-earning assets
increased by $2.9 million, to $106.1 million for fiscal 1997 from $103.2 million
for fiscal 1996. The largest increase was in investment securities.
Interest expense for fiscal 1997 increased $118,000, or 2.5%, over fiscal
1996 to $4.8 million. The average cost of interest-bearing liabilities was
essentially unchanged. However, the average balance of interest-bearing
liabilities increased 2.8% to $95.8 million for fiscal 1997 from $93.2 million
for fiscal 1996 as a result of increases in the average balances of certificates
of deposit and borrowings.
The following table sets forth for the years ended June 30, 1998, 1997 and
1996 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.
30
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
--------- --------- ------ --------- --------- ------ --------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)......................... $ 32,675 $2,695 8.25% $ 32,000 $2,581 8.07% $ 31,916 $2,602 8.15%
Investment securities....................... 60,379 4,108 6.80 60,034 4,085 6.80 57,782 3,848 6.66
Deposits with financial institutions........ 13,909 818 5.88 12,729 719 5.65 12,134 713 5.88
Federal funds sold.......................... 637 35 5.49 572 31 5.42 587 33 5.62
Other....................................... 727 59 8.12 727 58 7.98 762 99 12.99
-------- ------ -------- ------ -------- ------
Total interest-earning assets.............. 108,327 7,715 7.12 106,062 7,474 7.05 103,181 7,295 7.07
Non-interest-earning assets.................. 5,589 4,822 4,691
-------- -------- --------
Total assets............................... $113,916 $110,884 $107,872
======== ======== ========
Interest-bearing liabilities:
Demand and savings accounts................. $ 19,573 500 2.55 $ 21,379 571 2.67 $ 22,821 648 2.84
Certificates of deposit..................... 71,847 4,084 5.68 66,636 3,731 5.60 64,565 3,644 5.64
-------- ------ -------- ------ -------- ------
Total deposits............................. 91,420 4,584 5.01 88,015 4,302 4.89 87,386 4,292 4.91
Borrowings.................................. 5,991 355 5.93 7,498 433 5.77 5,655 335 5.92
Other....................................... 400 38 9.50 288 28 9.72 184 18 9.78
-------- ------ -------- ------ -------- ------
Total interest-bearing liabilities......... 97,811 4,977 5.09 95,801 4,763 4.97 93,225 4,645 4.98
Non-interest-bearing liabilities............. 1,536 1,386 1,341
Stockholders' equity......................... 14,569 13,697 13,306
-------- -------- --------
Total liabilities and stockholders'
equity.................................. $113,916 $110,884 $107,872
======== ======== ========
Net interest income.......................... $2,738 $2,711 $2,650
====== ====== ======
Interest rate spread(2)...................... 2.03% 2.08% 2.09%
Net interest margin(3)....................... 2.53% 2.56% 2.57%
Ratio of average interest-earning assets
to average interest-bearing liabilities... 110.75% 110.71% 110.68%
</TABLE>
_________________________________________
(1) Average loans receivable includes nonperforming loans. Interest income
includes interest and fees on loans, but does not include interest on loans
90 days or more past due.
(2) Yield on interest-earning assets less cost of interest-bearing liabilities.
(3) Net interest income as a percentage of average interest-earning assets.
31
<PAGE>
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank for the years ended June 30, 1998, 1997 and
1996. Information is provided with respect to (i) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate)
and (ii) effects on interest income attributable to changes in rate (changes in
rate multiplied by prior volume). Changes attributable to the combined input of
volume and rate have allocated proportionately to the changes due to volume and
the changes due to rate.
<TABLE>
<CAPTION>
1998 VS. 1997 1997 VS. 1996
-------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------------- ---------------------------
RATE VOLUME NET RATE VOLUME NET
------------ ---------- --------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................. $ 59 $ 55 $114 $(28) $ 7 $(21)
Investment securities................. (1) 24 23 84 153 237
Deposits with financial institutions.. 31 68 99 (24) 30 6
Federal funds sold.................... 1 3 4 (1) (1) (2)
Other................................. 1 -- 1 (37) (4) (41)
---- ---- ---- ---- ---- ----
Total net change in income on
interest-earning assets........... 91 150 241 (6) 185 179
Interest-bearing liabilities:
Demand and savings accounts........... (24) (47) (71) (38) (39) (77)
Certificates of deposit............... 57 296 353 (28) 115 87
---- ---- ---- ---- ---- ----
Total deposits....................... 33 249 282 (66) 76 10
Borrowings............................ 11 (89) (78) (8) 106 98
Other................................. (1) 11 10 -- 10 10
---- ---- ---- ---- ---- ----
Total net change in expense on
interest-bearing liabilities...... 43 171 214 (74) 192 118
---- ---- ---- ---- ---- ----
Net change in net interest income...... $ 48 $(21) $ 27 $ 68 $ (7) $ 61
==== ==== ==== ==== ==== ====
</TABLE>
PROVISION FOR LOAN LOSSES. The Bank took no provision for loan losses in
fiscal 1998 or fiscal 1997. The provision for loan losses was $100,000 in
fiscal 1996. The provision reflected management's concerns about possible
downturns in the economy.
OTHER INCOME. Other income increased by $422,000, to $601,000 for fiscal 1998
from $179,000 for fiscal 1997. Included in other income for fiscal 1998 are
gains on the sale of real estate, equipment and deposit accounts from the Bank's
sale of its Mt. Vernon, Indiana branch in October 1997. The Bank recognized
gains on the sale of real estate and equipment of $261,000 and gains on the sale
of deposits of $139,000. The primary components of other income are loan
servicing, deposit, ATM and other customer fees, increases in cash surrender
value of life insurance, and gains on sales of loans.
Other income increased by 6.4% to $179,000 for fiscal 1997 from $169,000 for
fiscal 1996.
OTHER EXPENSE. Other expenses decreased by 14.5%, to $2.0 million during
fiscal 1998 from $2.4 million for fiscal 1997. This decrease was principally
associated with the $561,000 one time SAIF assessment that was paid and expensed
during fiscal 1997. Pursuant to legislation enacted on September 30, 1996, the
Federal Deposit Insurance Corporation ("FDIC") imposed a one-time special
assessment on deposits held by financial institutions that are insured through
the SAIF. The special assessment was equal to $.657 per $100 of insured
deposits and was required to be applied against SAIF assessable deposits held as
of March 31, 1995. The assessment had the effect of reducing the Bank's
assessment per $1,000 of insured deposits, from $.23 to $0.648. Salaries and
employee benefits increased $162,000, or 16.6%, from fiscal 1997. The Bank, in
addition to normal increases, added personnel to the mortgage loan
32
<PAGE>
department, technology, and branch administration. In addition to selling the
Mt. Vernon, Indiana branch, as discussed above, the Bank also purchased a new
branch location from another financial institution and opened this location for
business. Additional personnel were added to operate this full-service branch.
Net occupancy and equipment expense also combined to reflect an increase of
$77,000 for fiscal 1998 over fiscal 1997. Reasons for this increase included
depreciation and related costs for the new branch, as well as for significant
improvements in the area of technology.
Other expense for fiscal 1997 increased by $491,000, or 26%, over fiscal 1996.
The biggest increase in other expense was the one-time SAIF assessment. This
was partially offset by a related decrease in federal deposit insurance expense
of $80,000. Without this one-time expense, other expenses would have increased
by less than 1% from fiscal 1996.
INCOME TAX EXPENSE. Income tax expense increased $303,000 to $415,000 for
fiscal 1998 from $112,000 for fiscal 1997 as a result of the increase in taxable
income. The effective tax rate increased to 32% for fiscal 1998 from 22% for
fiscal 1997 due principally to an increased amount of earnings relative to a
consistent amount of tax credits from the Bank's investment in a low-income
apartment complex. The Bank receives approximately $73,000 per year in low-
income housing tax credits through this investment. Such credits are expected
to be available through February 2004.
Income tax expense decreased in fiscal 1997 from fiscal 1996 due to the
decrease in net income. The effective tax rate decreased to 22% for fiscal 1997
from 24% for fiscal 1996.
ASSET AND LIABILITY MANAGEMENT
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 Portfolio
Analysis," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Deposit Accounts."
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 and shorten its effective maturities of
certain interest-earning assets. Management has sought to decrease the average
maturity of its assets by (1) offering a variety of adjustable-rate residential
mortgage loans and consumer loans, all of which are retained by the Bank for its
portfolio, (2) purchasing mortgage-backed and related securities with adjustable
rates or estimated lives of five to ten years or less, and (3) purchasing short-
to intermediate-term investment securities. In addition, the Bank sells a
portion of its long-term, fixed-rate single-family residential mortgage loans
for cash in the secondary market. The retention of ARM loans and adjustable-
rate mortgage-backed securities, which reprice at regular intervals, helps to
ensure that the yield on the Bank's loan portfolio will be sufficient to offset
increases in the Bank's cost of funds. However, periodic and lifetime interest
rate adjustment limits may prevent ARM loans from repricing to market interest
rates during periods of rapidly rising interest rates. The Bank does not use
any hedging techniques to manage the exposure of its assets to fluctuating
market interest rates. The Bank relies on retail deposits as its primary source
of funds and maintains a moderate proportion of lower-costing passbook, NOW and
money market accounts. The Bank has attempted to lengthen the term of deposits
by offering certificates of deposit with terms of up to ten years. 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.
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
33
<PAGE>
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 that 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 September 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>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
---------------------------------------------------------------------
NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
------------------------------------ ------------------------------
BASIS POINT ("BP")
CHANGE IN RATES $ AMOUNT $ CHANGE (1) % CHANGE NPV RATIO CHANGE
- ------------------ ------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
400bp 11,980 (5,057) (30.0)% 11.23% (364)bp
300 13,536 (3,502) (21.0) 12.43 (245)
200 15,030 (2,007) (12.0) 13.53 (135)
100 16,171 (867) (5.0) 14.32 (56)
0 17,037 14.87
(100) 17,564 526 3.0 15.16 29
(200) 18,133 1,095 6.0 15.47 60
(300) 18,862 1,825 11.0 15.89 101
(400) 19,625 2,588 15.0 16.31 144
</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.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations within the Bank's 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.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are proceeds from maturities of
investment securities, principal payments received on mortgage-backed and
related securities, loan repayments and deposits. While scheduled payments from
the amortization of loans, investment securities and interest-bearing time
deposits are relatively predictable sources of funds, deposit flows and loan or
investment security prepayments are greatly influenced by general interest
rates, economic conditions, and competition. The Bank has been able to generate
sufficient cash through its deposits and has been able to maintain its
borrowings from the FHLB at a relatively low level. Funds borrowed from the
FHLB are
34
<PAGE>
generally matched against higher yielding assets of like amounts with similar
maturities to provide a built in margin of interest to the Bank.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank invests excess funds in overnight deposits
and other short-term interest-earning assets to provide liquidity to meet these
needs. At September 30, 1998, cash and cash equivalents totaled $14.0 million,
or 12.5% of total assets. At September 30, 1998, the Bank had outstanding
commitments to originate loans of $3.1 million. At the same time, certificates
of deposit which are scheduled to mature in one year or less totaled $37.5
million. Based upon historical experience, management believes the majority of
maturing certificates of deposit will remain with the Bank. In addition,
management of the Bank believes that it can adjust the offering rates of
certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the Bank, the Bank would be able to utilize FHLB advances to fund
deposit withdrawals, which would result in an increase in interest expense to
the extent that the average rate paid on such advances exceeds the average rate
paid on deposits of similar duration.
Federal regulations require the Bank to maintain minimum levels of liquid
assets (i.e., cash and eligible investments). The required percentage has
varied from time to time based upon economic conditions and savings flows and is
currently 4% of the average daily balance of its net withdrawable savings
deposits and short-term borrowings. At September 30, 1998, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
short-term borrowings) was 24.1%.
The primary investing activities of the Bank are originating loans and
purchasing investments and mortgage-backed securities. Proceeds from maturities
of investment securities and principal payments received on mortgage-backed and
related securities, net of purchases, totaled $6.8 million for the year ended
June 30, 1998, while loan originations in excess of repayments totaled $3.4
million. For the three months ended September 30, 1998, proceeds from
maturities of investment securities and principal payments received on mortgage-
backed and related securities, net of purchases totaled $1.8 million and loan
originations in excess of repayments totaled $2.5 million.
The Bank's most significant financing activities are deposit accounts and
FHLB borrowings. The repayment of FHLB borrowings of $3.4 million was the
primary use of cash during 1998. This cash outflow was offset by net increases
in deposits totaling $3.4 million during 1998. During the three months ended
September 30, 1998, the Bank had no change in FHLB advances while the net
increase in deposits was $1.7 million.
Management believes its ability to generate funds internally will satisfy
its liquidity requirements. If the Bank requires funds beyond its ability to
generate them internally, it has the ability to borrow funds from the FHLB. At
September 30, 1998, the Bank had approximately $11.4 million available to it
under its borrowing arrangement with the FHLB. At September 30, 1998, the Bank
had $3.6 million in advances from the FHLB.
The Bank is required to maintain specific amounts of capital pursuant to
OTS regulations on minimal capital standards. As of September 30, 1998, the
Bank complied with all regulatory capital requirements as of that date with
tangible, core and risk-based capital ratios of 13.5%, 13.5% and 34.9%,
respectively. For a detailed discussion of regulatory capital requirements, see
"REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements." See also "HISTORICAL AND PRO FORMA REGULATORY CAPITAL
COMPLIANCE."
YEAR 2000 ISSUES
The Bank is a user of computers, computer software and equipment
utilizing embedded microprocessors that will be affected by the year 2000
issue. 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
not at all. This inability to recognize or properly treat the year 2000 may
cause erroneous results, ranging from system malfunctions to incorrect or
incomplete processing.
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<PAGE>
The Bank established a year 2000 committee in 1997 which is headed by the
Chief Operating Officer and includes all department heads. The committee has
developed and is currently implementing a comprehensive plan to make all
information and non-information technology assets year 2000 compliant. The
committee provides periodic reports to the Board of Directors in order to assist
the directors in their year 2000 readiness oversight role. The plan is
comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and
concerns. This phase is ongoing, especially as it relates to
informing customers of the Bank's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and
identification of third-party vendors and service providers. This
phase has been completed.
3. Renovation - Review of vendor and service providers responses to
the Bank's year 2000 inquiries and development of a follow-up
plan and timeline. This phase has been completed.
4. Validation - Testing all systems and third-party vendors for year
2000 compliance. The Bank is currently in this phase of its plan.
A third-party service bureau processes all customer transactions
and has indicated to the Bank that it has completed upgrades to
its systems to be year 2000 compliant. The Bank will test the
third party systems by reviewing the results of transactions at
six different test dates before and after the year 2000 date
change covering all of the applications used by the Bank. Testing
is scheduled to be completed by March 31, 1999. In the event that
testing reveals that the third party systems are not year 2000
compliant, the Bank's service bureau intends to either transfer
the Bank to other systems that are year 2000 compliant or provide
additional resources to resolve the year 2000 issues. Other
parties whose year 2000 compliance may effect the Bank include
Fannie Mae, the FHLB-Indianapolis, brokerage firms, the operator
of the Bank's ATM network and the Bank's pension plan
administrator. These third parties have indicated their
compliance or intended compliance. Where it is possible to do so,
the Bank has scheduled testing with these third parties. Where
testing is not possible, the Bank will rely on certifications
from vendors and service providers.
5. Implementation - Replacement or repair of non-compliant
technology. As the Bank progresses through the validation phase,
the Bank expects to determine necessary remedial actions and
provide for their implementation. The Bank has already
implemented a new year 2000 compliant computerized teller system
and mortgage loan processing system and has verified the year
2000 compliance of its computer hardware and other equipment
containing embedded microprocessors. The Bank's plan provides for
year 2000 readiness to be completed by mid-1999.
The Bank estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be approximately $161,500. As of September 30, 1998,
approximately $155,000 of this amount has been incurred. System maintenance or
modification costs are being expensed as incurred, while the cost of new
hardware, software or other equipment is capitalized and amortized over their
estimated useful lives. The Bank does not separately track the internal costs
and time that its own employees spend on year 2000 issues. Such costs are
principally payroll costs.
Because the Bank is substantially dependent on its computer systems and
the computer systems of third parties, the failure of these systems to be year
2000 compliant could cause substantial disruption of the Bank's business and
could have a material adverse financial impact on the Bank. Failure to resolve
year 2000 issues presents the following risks to the Bank: (1) the Bank could
lose customers to other financial institutions, resulting in a loss of revenue,
if the Bank's third party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide funds to the Bank, which could
materially impair the Bank's liquidity and affect the Bank's ability to fund
loans and deposit withdrawals; (3) concern on the part of depositors that year
2000 issues could impair access to their deposit account balances could result
in the Bank experiencing deposit outflows prior to December 31, 1999; and (4)
the Bank could incur increased personnel costs if additional staff is required
to perform functions that inoperative systems would have otherwise performed.
Management believes that it is not possible to estimate the potential lost
revenue due to the year 2000 issue, as the extent
36
<PAGE>
and longevity of any potential problem cannot be predicted. Because
substantially all of the Bank's loan portfolio consists of residential mortgage
and consumer loans, management believes that year 2000 issues will not impair
the ability of the Bank's borrowers to repay their debt.
There can be no assurances that the Bank's year 2000 plan will
effectively address the year 2000 issue, that the Bank's estimates of the timing
and costs of completing the plan will ultimately be accurate or that the impact
of any failure of the Bank or its third-party vendors and service providers to
be year 2000 compliant will not have a material adverse effect on the Bank's
business, financial condition or results of operations.
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. The Bank adopted SFAS No. 130 in the quarter ended
September 30, 1998.
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 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.
Adoption of SFAS No. 131 is not anticipated to have a significant effect upon
the presentation of the Holding Company's financial statements.
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. This statement is effective for the Holding
Company for financial statements issued for the fiscal year ending June 30,
1999. Adoption of SFAS No. 132 is not anticipated to have a significant effect
upon the presentation of the Holding Company's financial statements.
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. The Holding
Company intends to adopt this standard effective July 1, 1999, although early
adoption is permitted. Because the Bank does not hold off-balance sheet
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.
37
<PAGE>
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, 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 November 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.
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
GENERAL
The Bank was chartered in 1904 as an Indiana building and loan
association named "West Side Building, Loan and Savings Association." In 1934,
the Bank became a federal savings and loan association and adopted the name
"First Federal Savings and Loan Association of Evansville." In 1988, the Bank
became a federal savings bank and changed its name to "First Federal Savings
Bank."
The Bank is regulated by the OTS and the FDIC. The Bank's deposits have
been federally-insured by the FDIC since 1934 and are currently insured by the
FDIC under the Savings Association Insurance Fund. The Bank has been a member
of the Federal Home Loan Bank System since 1934.
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<PAGE>
MARKET AREA
The Bank conducts its operations through four offices located in
Evansville, Indiana. Most of the Bank's depositors live in the areas surrounding
its branches and most of the Bank's loans are made to persons in Evansville and
the surrounding counties.
Evansville, which is in the southwest corner of Indiana, had a population
of approximately 168,000 persons as of 1997. At May 1998, unemployment in
Vanderburgh County was 3.1%, compared with 2.8% for the State of Indiana and
4.3% for the United States. The service sector (primarily medical services) is
the largest source of employment. However, manufacturing has played an
increasingly larger role in recent years with the addition or reopening of
several plants. The area's largest manufacturers produce pharmaceuticals, home
appliances, aluminum and plastic products, and automobiles. Employers include
Whirlpool Corporation, Bristol-Myers Squibb, Alcoa, AK Steel, General Electric
and Toyota Motor Corp. Unemployment is currently low and the Bank believes the
outlook for the area's economy is positive.
The Bank faces intense competition for deposits and loan originations
from the many financial institutions conducting business within its market area.
Four commercial banks and three other savings banks have retail banking offices
in Vanderburgh County. Most of these financial institutions are larger than the
Bank. See "-- Competition" and "RISK FACTORS -- Competition Has Hurt First
Federal's Net Interest Income."
LENDING ACTIVITIES
GENERAL. At September 30, 1998, loans receivable totaled $38.2 million,
which was 34.2% of total assets. The principal lending activity of the Bank is
the origination of mortgage loans for the purpose of purchasing or refinancing
one- to four-family residential property. To a significantly lesser extent, the
Bank also originates construction loans, mortgage loans secured by commercial
and multi-family real estate and consumer loans. Most of the Bank's borrowers
and the properties securing its loans are located in Evansville, Indiana and the
surrounding counties.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of the Bank's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
----------------------------------------------------------------
1998 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $36,745 92.73% $33,493 90.95% $31,106 94.44% $31,240 93.70%
Construction....................... 1,090 2.75 1,551 4.21 77 0.23 372 1.12
Commercial and multi-family........ 107 0.27 117 0.32 153 0.46 193 0.58
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans............ 37,942 95.75 35,161 95.48 31,336 95.13 31,805 95.40
Credit line equity................... 997 2.52 937 2.55 1,047 3.18 997 2.99
Savings account loans................ 146 0.37 226 0.61 131 0.40 156 0.47
Consumer loans....................... 542 1.36 501 1.36 424 1.29 381 1.14
------- ------ ------- ------ ------- ------ ------- ------
Total loans..................... 39,627 100.00% 36,825 100.00% 32,938 100.00% 33,339 100.00%
------- ====== ------- ====== ------- ====== ------- ======
Less:
Undisbursed loan funds............. 958 700 349 463
Deferred loan fees................. 236 220 175 185
Allowance for loan losses.......... 250 250 250 250
------- ------- ------- -------
Net loans............................ $38,183 $35,655 $32,164 $32,441
======= ======= ======= =======
</TABLE>
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<PAGE>
The following table sets forth certain information at September 30, 1998
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their scheduled contractual principal repayments. 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 funds, deferred loan fees and allowance for loan losses.
<TABLE>
<CAPTION>
AMOUNT DUE
---------------------------------------------------------------------
AFTER ONE AFTER AFTER
YEAR 3 YEARS 5 YEARS
WITHIN THROUGH THROUGH THROUGH BEYOND
ONE YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
---------- ----------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $2,252 $4,061 $4,130 $10,290 $16,012 $36,745
Construction....................... 20 43 50 158 819 1,090
Commercial and multi-family........ 19 34 31 23 -- 107
Credit line equity loans............ 207 484 306 -- -- 997
Savings account loans............... 146 -- -- -- -- 146
Consumer loans...................... 156 268 118 -- -- 542
------ ------ ------ ------- ------- -------
Total.......................... $2,800 $4,890 $4,635 $10,471 $16,831 $39,627
====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of September 30, 1998, the dollar amount
of all loans due or repricing after September 30, 1999, based on their scheduled
contractual principal payments, which have fixed interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
ADJUSTABLE
FIXED-RATE RATE
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
One- to four-family............. $30,630 $3,863
Construction.................... 1,070 --
Commercial and multi-family..... 7 81
Credit line equity loans......... -- 790
Savings account loans............ -- --
Consumer loans................... 386 --
------- ------
Total $32,093 $4,734
======= ======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Bank the right to declare loans immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan market
rates are substantially higher than rates on existing mortgage loans and,
conversely, decreases when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
RESIDENTIAL REAL ESTATE LOANS. The primary lending activity of the Bank
is the origination of mortgage loans to enable borrowers to purchase existing
homes or to refinance existing mortgage loans. At September 30, 1998, $36.7
million, or 92.7%, of the Bank's total loan portfolio consisted of loans secured
by residential real estate. At September
40
<PAGE>
30, 1998, 10.7% of the Bank's residential real estate loans were subject to
periodic interest rate adjustments and 89.3% were fixed-rate loans.
The Bank offers a variety of fixed and adjustable-rate mortgage loan
products. The loan fees charged, interest rates and other provisions of the
Bank's mortgage loans are determined by the Bank on the basis of its own pricing
criteria and market conditions. Generally, all loans originated by the Bank
conform to Fannie Mae underwriting standards. The Bank's fixed-rate loans
typically have maturities of 15 to 30 years, although 30-year loans constitute
the largest percentage of originations. The Bank also offers five and seven year
balloon mortgages based on a 30-year amortization schedule. The Bank's ARM loans
are typically based on a 30-year amortization schedule. Interest rates and
payments on the Bank's ARM loans generally are adjusted annually after a
specified period ranging from one to ten years to a rate typically equal to
2.75% above the one-year constant maturity U.S. Treasury index. The Bank
currently offers ARM loans with initial rates below those which would prevail
under the foregoing computation, determined by the Bank based on market factors
and competitive rates for loans having similar features offered by other lenders
for such initial periods. The periodic interest rate cap (the maximum amount by
which the interest rate may be increased or decreased in a given period) on the
Bank's ARM loans is generally 2% per adjustment period and the lifetime interest
rate cap is generally 6% over the initial interest rate of the loan. The Bank
qualifies the borrower based on the borrower's ability to repay the ARM loan
based on the maximum interest rate at the first adjustment, in the case of one-
year ARM loans, and based on the initial interest rate in the case of ARM loans
that adjust after three or more years. The Bank does not originate negative
amortization loans. The terms and conditions of the ARM loans offered by the
Bank, including the index for interest rates, may vary from time to time. The
Bank believes that the annual adjustment feature of its ARM loans also provides
flexibility to meet competitive conditions as to initial rate concessions while
preserving the Bank's return on equity objectives by limiting the duration of
the initial rate concession.
Borrower demand for ARM loans 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 initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. As a result of
the low interest rate environment in recent years, the Bank has experienced a
strong customer preference for fixed-rate loans.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in the interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising interest rates, the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower. Furthermore,
because the ARM loans originated by the Bank generally provide, as a marketing
incentive, for initial rates of interest below the rates which would apply were
the adjustment index used for pricing initially (discounting), these loans are
subject to increased risks of default or delinquency. Another consideration is
that although ARM loans allow the Bank to increase the sensitivity of its asset
base to changes in interest rates, the extent of this interest sensitivity is
limited by the periodic and lifetime interest rate adjustment limits. Because of
these considerations, the Bank has no assurance that yields on ARM loans will be
sufficient to offset increases in the Bank's cost of funds.
While fixed-rate single-family residential real estate loans are normally
originated with 15- to 30-year terms, and the Bank permits its ARM loans to be
assumed by qualified borrowers, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Bank's
loan portfolio contain due-on-sale clauses providing that the Bank may declare
the unpaid amount due and payable upon the sale of the property securing the
loan. The Bank enforces these due-on-sale clauses to the extent permitted by law
and as business judgment dictates. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates and the interest rates payable on outstanding
loans.
The Bank requires title insurance insuring the status of its first lien
on real estate secured loans and also requires that the fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least equal to the outstanding loan balance.
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<PAGE>
The Bank's residential mortgage loans typically do not exceed 80% of the
appraised value of the property. Pursuant to the Bank's lending policies, the
Bank can lend up to 97% of the appraised value of the property; however, the
Bank generally requires private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the property. The
Bank obtains appraisals on all first mortgage real estate loans from outside
appraisers.
CONSTRUCTION LOANS. The Bank originates loans to individuals for the
construction of their personal residence. Recently, the Bank began originating
loans to local home builders. Construction loans to individuals are made on the
same terms as the Bank's residential mortgage loans, but provide for the payment
of interest only during the construction phase, which is usually six months. At
the end of the construction phase, the loan converts to a permanent mortgage
loan. The Bank's construction loans to builders generally have fixed interest
rates and are for a term of up to 18 months. Loans to builders are usually made
on a speculative basis, which means that the builder has not identified a
purchaser for the home at the time the loan is made. Builders are evaluated on a
case-by-case basis to establish a maximum credit limit, however the maximum
amount that the Bank will loan to any one builder is $750,000. At September 30,
1998, the Bank had no outstanding construction loans to builders. The Bank
occasionally originates loans for the purchase of residential building lots.
Most of these loans have terms of five years or less and may have fixed or
adjustable rates. At September 30, 1998, the Bank did not have any land loans
outstanding.
Construction lending is generally considered to involve a higher degree
of risk than single-family permanent mortgage lending because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost of the project. The nature of these loans is such that
they are generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Bank may be required to advance
funds beyond the amount originally committed to permit completion of the
project. If the estimate of value upon completion proves to be inaccurate, the
Company may be confronted with a project whose value is insufficient to assure
full repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been identified
carry more risk because the payoff for the loan is dependent on the builder's
ability to sell the property prior to the time that the construction loan is
due.
The Bank has attempted to minimize the foregoing risks by, among other
things, monitoring the project and controlling the disbursement of funds. Prior
to making a commitment to fund a construction loan, the Bank requires an
appraisal of the property. The Bank also reviews and inspects each project prior
to disbursement of funds during the term of the construction loan. In most
cases, loan proceeds are disbursed after inspection of the project based on
percentage of completion.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. The Bank engages in a
limited amount of commercial and multi-family real estate lending. At September
30, 1998, commercial and multi-family real estate loans in the Bank's portfolio
totaled $107,000 and consisted of three loans. The maximum loan-to-value ratio
for a commercial or multi-family real estate loan is 75%. The maximum term for a
commercial or multi-family real estate loan is 15 years and the maximum loan
amount is $1,000,000. The majority of the Bank's commercial real estate loans
have been secured by small office buildings, motels and retail establishments in
Indiana.
Loans secured by commercial and multi-family real estate generally are
larger and involve greater risks than one- to four-family residential mortgage
loans. Payments on loans secured by such properties are often dependent on
successful operation or management of the properties. Repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The properties securing the Bank's
commercial and multi-family real estate loans are inspected by the Bank's
lending personnel before the loan is made. The Bank also obtains appraisals on
each property in accordance with applicable regulations.
42
<PAGE>
CONSUMER AND OTHER LOANS. At September 30, 1998, the Bank's consumer and
other loans totaled approximately $1.7 million, or 4.3% of the Bank's total
loans. The Bank's consumer and other loans consist primarily of credit line
equity loans, savings account loans and automobile loans. The Bank is currently
exploring the possibility of hiring additional personnel with expertise in
consumer lending in order to increase its consumer loan portfolio.
The Bank originates home equity loans in the form of lines of credit. At
September 30, 1998, the Bank had $997,000 of credit line equity loans and unused
commitments to extend credit under credit line equity loans of $2.2 million.
Most of these loans are made to existing customers. The Bank's home equity loans
have variable interest rates tied to the prime lending rate. The Bank imposes a
maximum loan-to-value ratio of 80% after considering both the first and second
mortgage loans. The Bank's home equity loans may have greater credit risk than
one- to four-family residential mortgage loans because they are secured by
mortgages subordinated to an existing first mortgage on the property, which, in
most cases, is held by the Bank.
The Bank makes savings account loans for up to 90% of the depositor's
account balance. The interest rate is normally 2.0% or 3.0% above the rate paid
on the deposit account, depending on the type of account, and the account must
be pledged as collateral to secure the loan. Savings account loans are payable
on demand, although interest must be paid every six months.
The Bank originates consumer loans secured by automobiles and,
occasionally, boats and other recreational vehicles. Automobile loans are
secured by both new and used cars and light trucks. Both new and used cars are
financed for a period of up to 60 months and the rate on such loans is fixed for
the term of the loan.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. 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 a consumer loan borrower against an assignee of such loans such as the Bank,
and a borrower may be able to assert against such assignee claims and defenses
that it has against the seller of the underlying collateral.
LOAN SOLICITATION AND PROCESSING. Loan applicants come through direct
solicitation by the Bank's branch managers and commissioned loan originators, as
well as through referrals by realtors and past and present customers. The Bank
does not advertise extensively. All types of loans may be originated and closed
in any of the Bank's offices. Loans are serviced from the Bank's main office.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of the
real estate offered as collateral generally is undertaken by a fee appraiser
approved by the Bank and licensed or certified by the State of Indiana.
Loans in the amount of less than $200,000 must be approved by two members
of the Bank's Executive Committee, one of which must be the Bank's President.
The Executive Committee consists of the Bank's President, Executive Vice
President and members of the Board of Directors. Loans of $200,000 or more must
be approved by a majority of the Bank's Executive Committee.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment, which usually is 45 days.
43
<PAGE>
LOAN ORIGINATIONS, SALES AND PURCHASES. In an effort to manage its
interest rate risk position, the Bank generally sells the fixed-rate mortgage
loans with terms in excess of 15 years that it originates. However, since the
beginning of 1998, the Bank has retained selected 30-year, fixed-rate loans in
order to build its loan portfolio and increase the yield on its interest-earning
assets. The sale of loans in the secondary mortgage market reduces the Bank's
risk that the interest rates paid to depositors will increase while the Bank
holds long-term, fixed-rate loans in its portfolio. It also allows the Bank to
continue to fund loans when savings flows decline or funds are not otherwise
available. The Bank generally sells loans without recourse to Fannie Mae with
servicing retained. Gains, net of origination expense, from the sale of such
loans are recorded at the time of sale. Generally a loan is committed to be sold
and a price for the loan is fixed after the loan is approved by the Executive
Committee and the interest rate is approved by the customer. This eliminates the
risk to the Bank that a rise in market interest rates will reduce the value of a
mortgage before it can be sold.
In the past the Bank has supplemented its loan originations through the
purchase of whole loans and loan participations. However, the Bank has not
purchased any loans or loan participations in many years.
At September 30, 1998, the Bank was servicing loans for others (Fannie
Mae) amounting to approximately $9.1 million. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees from
investors.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan originated:
Mortgage loans:
One- to four-family................................ $5,471 $ 971 $11,557 $3,974 $ 6,057
Construction....................................... 406 433 1,767 571 850
Commercial and multi-family........................ -- -- -- -- --
Credit line equity loans............................ 277 185 848 818 907
Savings account loans............................... 32 33 249 85 242
Consumer loans...................................... 87 44 398 290 151
------ ------ ------- ------ -------
Total loans originated......................... 6,273 1,666 14,819 5,738 8,207
Loans purchased..................................... -- -- -- -- --
Loans sold.......................................... 1,361 203 1,844 627 543
Mortgage loan principal repayments.................. 1,998 2,069 8,379 5,289 6,633
Increase (decrease) in other items, net............. (386) (174) (1,105) (99) (1,082)
------ ------ ------- ------ -------
Net increase (decrease) in loans receivable......... $2,528 $ (780) $ 3,491 $ (277) $ (51)
====== ====== ======= ====== =======
</TABLE>
LOAN COMMITMENTS. The Bank issues commitments for fixed- and adjustable-
rate one- to four-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made on specified terms and
conditions and are honored for up to 45 days from the date of loan approval.
The Bank had outstanding loan commitments of approximately $876,000 at September
30, 1998, $793,000 and $83,000 of which were at fixed and adjustable rates,
respectively. At September 30, 1998, the Bank also had commitments to fund $2.2
million of credit line equity loans. See Note 9 of Notes to Consolidated
Financial Statements.
44
<PAGE>
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 which are charged to the
borrower for funding the loan. The amount of points charged by the Bank
generally is 1%. Current accounting standards require fees received (net of
certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or charges associated with loans that are prepaid are recognized
as income adjustments at the time of prepayment. The Bank had $236,000 of net
deferred mortgage loan fees at September 30, 1998.
NONPERFORMING ASSETS AND DELINQUENCIES. The Bank generates reports
regarding delinquent loans at regular intervals each month to enable management
to track their status. The Bank also generates a series of notices at regular
intervals to inform mortgage loan borrowers when a required payment is past due.
When a payment becomes 30 days past due, the Bank contacts the borrower by
letter. If a satisfactory response is not obtained, continuous follow-up
contacts, including contact by telephone, are attempted until the loan has been
brought current. Before the 90th day of delinquency, attempts to interview the
borrower, preferably in person, are made to establish (i) the cause of the
delinquency, (ii) whether the cause is temporary, (iii) the attitude of the
borrower toward the debt, and (iv) a mutually satisfactory arrangement for
curing the default. In most cases, delinquencies are cured promptly; however,
if by the 91st day of delinquency, or sooner if the borrower is chronically
delinquent and all reasonable means of obtaining payment on time have been
exhausted, foreclosure, according to the terms of the security instrument and
applicable law, is approved by the Board of Directors.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Bank institutes collection
procedures. The first notice is mailed to the borrower 15 days following the
payment due date. A computer-generated collection report is received by the
Bank daily. The customer is contacted by telephone to ascertain the nature of
the delinquency. In most cases, delinquencies are cured promptly; however, if,
by the 45th day following the grace period of delinquency no progress has been
made, a written notice is mailed informing the borrowers of their right to cure
the delinquency within 20 days and of the Bank's intent to begin legal action if
the delinquency is not corrected. Depending on the type of property held as
collateral, the Bank either obtains a judgment in small claims court or takes
action to repossess the collateral.
Loans are placed on nonaccrual status when they become 90 days past due.
Nonaccrual loans are returned to accrual status when they become less than 90
days past due.
The Bank's Board of Directors is informed on a monthly basis as to the
status of all mortgage and consumer loans that are delinquent 60 days or more,
the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Bank.
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of SFAS No. 15 at
the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
------------------------------------
1998 1998 1997 1996
--------------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis.................... $ -- $ -- $ 27 $ --
Accruing loans pas due 90 days or more....................... -- -- -- --
----- ----- ----- -----
Nonperforming loans.......................................... -- -- 27 --
Real estate owned (net....................................... -- -- -- --
----- ----- ----- -----
Total nonperforming assets.............................. $ -- $ -- $ 27 $ --
===== ===== ===== =====
Restructured loans........................................... -- -- -- --
Total loans delinquent 90 days or more to net loans.......... N/A N/A 0.08% N/A
Total loans delinquent 90 days or more to total assets....... N/A N/A 0.02% N/A
Total nonperforming assets to total assets................... N/A N/A 0.02% N/A
</TABLE>
45
<PAGE>
REAL ESTATE OWNED. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of its
cost, which is the unpaid principal balance of the related loan plus foreclosure
costs, or fair market value. Subsequent to foreclosure, the property is carried
at the lower of the foreclosed amount or fair value. Upon receipt of a new
appraisal and market analysis, the carrying value is written down through a
charge to income, if appropriate. At September 30, 1998, the Bank had no real
estate owned.
ASSET CLASSIFICATION. 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 must 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 loss
is considered uncollectible and of such little value that continuance as an
asset of the institution without establishment of a specific reserve is not
warranted. If an asset or portion thereof is classified loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified loss. A portion of general loan loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. OTS regulations also require
that assets that do not currently expose an institution to a sufficient degree
of risk to warrant classification as loss, doubtful or substandard but do
possess credit deficiencies or potential weakness deserving management's close
attention shall be designated "special mention" by either the institution or its
examiners.
The Bank reviews and classifies its assets on a monthly basis. At
September 30, 1998 the Bank had no loans classified as loss, doubtful or
substandard. At such date the Bank had two one- to four-family mortgage loans
aggregating $153,000 classified as special mention. The Bank had no impaired
loans at September 30, 1998 or at June 30, 1998, 1997 and 1996.
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Bank recognizes that
losses will be experienced and that the risk of loss will vary with, among other
things, the type of loan being made, the creditworthiness of the borrower over
the term of the loan, general economic conditions and, in the case of a secured
loan, the quality of the security for the loan. The allowance method is used in
providing for loan losses: all loan losses are charged to the allowance and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to the Bank's income. The provision
for loan losses is based on management's periodic evaluation of the Bank's past
loan loss experience, changes in the composition of the portfolio, the current
condition and amount of loans outstanding and the probability of collecting all
amounts due.
At September 30, 1998, the Bank had an allowance for loan losses of
$250,000, which represented 0.65% of total loans. Management believes that the
amount maintained in the allowances will be adequate to absorb losses inherent
in the portfolio. 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. While the Bank believes it
has established its existing allowance for loan losses in accordance with
generally accepted accounting principles, there can be no assurance that the
Bank's 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.
46
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
---------------------- ----------------------------------
1998 1997 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period..................... $250 $250 $250 $250 $150
Provision for loan losses............................ -- -- -- -- 100
Charge-offs.......................................... -- -- -- -- --
Recoveries........................................... -- -- -- -- --
---- ---- ---- ---- ----
Net charge-offs...................................... -- -- -- -- --
---- ---- ---- ---- ----
Allowance at end of period...................... $250 $250 $250 $250 $250
==== ==== ==== ==== ====
Ratio of allowance to total loans
outstanding at the end of the period............... 0.65% 0.79% 0.70% 0.77% 0.76%
Ratio of net charge-offs to average loans
outstanding during the period...................... N/A N/A N/A N/A N/A
Allowance for loan losses to
nonperforming loans................................ N/A 925.93% N/A 925.93% N/A
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
----------------------------------------------------------------
1998 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
% OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans.............. $225 95.75% $225 95.48% $250 95.13% $250 95.40%
Consumer and
other loans................ 25 4.25 25 4.52 -- 4.87 -- 4.60
Unallocated................. -- N/A -- N/A -- N/A -- N/A
---- ------ ---- ------ ---- ------ ---- ------
Total allowance for
loan losses.......... $250 100.00% $250 100.00% $250 100.00% $250 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
47
<PAGE>
INVESTMENT ACTIVITIES
The Bank is permitted under applicable law 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 FHLB-
Indianapolis, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions,
savings institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and mutual funds. Savings institutions like
the Bank are also required to maintain an investment in FHLB stock and a minimum
level of liquid assets. See "REGULATION" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
The Bank must categorize its investments as "held to maturity," "trading"
or "available for sale," based on management's intent as to the ultimate
disposition of each security. Debt securities may be classified as "held to
maturity" and reported in financial statements at amortized cost only if the
Bank has the positive intent and ability to hold those securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity." Debt and equity
securities held for current resale are classified as "trading." Such securities
are reported at fair value, and unrealized gains and losses on such securities
would be included in earnings. The Bank does not currently use or maintain a
trading account. Debt and equity securities not classified as either "held to
maturity" or "trading" are classified as "available for sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of equity.
The Bank's President determines appropriate investments in accordance with
the Board of Directors' approved investment policies and procedures. Investments
are made following certain considerations, which include the Bank's liquidity
position and anticipated cash needs and sources (which in turn include
outstanding commitments, upcoming maturities, estimated deposits and anticipated
loan amortization and repayments). Further, the effect that the proposed
investment would have on the Bank's credit and interest rate risk, and risk-
based capital is given consideration during the evaluation. The interest rate,
yield, settlement date and maturity are also reviewed. The Board of Directors
must ratify all investments up to $3 million and must provide its prior approval
for any investments above such amount.
The Bank purchases investments to provide necessary liquidity for day-to-
day operations and to manage the Bank's interest rate risk and overall credit
risk profile. In recent years the Bank has purchased mortgage-backed and related
securities when investable funds exceed loan demand.
The Bank maintains a significant portfolio of mortgage-backed and related
securities. Almost all of these securities were issued by Fannie Mae, Freddie
Mac or Ginnie Mae. Mortgage-backed securities generally entitle the Bank to
receive a pro rata portion of the cash flows from an identified pool of
mortgages. Ginnie Mae certificates are guaranteed as to principal and interest
by the full faith and credit of the United States, while Fannie Mae and Freddie
Mac certificates are guaranteed by Fannie Mae and Freddie Mac. Approximately
41.7% of the Bank's mortgage-backed securities are real estate mortgage
investment conduits ("REMICs"), which are created by redirecting the cash flows
from a pool of mortgages or mortgage-backed securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes these
securities represent attractive alternatives relative to other investments due
to the wide variety of maturity, repayment and interest rate options available.
Current investment practices of the Bank prohibit the purchase of high risk
REMICs. At September 30, 1998, 53.2% of the Bank's mortgage-backed securities
were adjustable rate and 46.8% were fixed rate.
Of the Bank's $36.8 million mortgage-backed securities portfolio at
September 30, 1998, $6.5 million had contractual maturities within ten years and
$30.3 million had contractual maturities over ten years. However, the actual
maturity of a mortgage-backed security may be less than its stated maturity due
to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages
48
<PAGE>
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of declining mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because,
to the extent that the Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate. In contrast to mortgage-
backed securities in which cash flow is received (and hence, prepayment risk is
shared) pro rata by all securities holders, the cash flow from the mortgages or
mortgage-backed securities underlying REMICs are segmented and paid in
accordance with a predetermined priority to investors holding various tranches
of such securities or obligations. A particular tranche of REMICs may therefore
carry prepayment risk that differs from that of both the underlying collateral
and other tranches.
A portion of the Bank's investment portfolio consists of corporate
securities and commercial paper. The Bank's investment policy requires that such
investments have one of the two highest ratings by a nationally recognized
rating agency such as Standard & Poor's or Moody's. A high credit rating
indicates only that the rating agency believes there is a low risk of default.
However, all of the Bank's investment securities, including those that have high
credit ratings, are subject to market risk insofar as increases in market rates
of interest may cause a decrease in their market value. Corporate securities are
also subject to credit risk insofar as the payment obligations on such
securities are dependent on the successful operation of issuer's business.
The Bank also maintains a small investment in collateralized auto
obligations. These asset-backed securities are similar to mortgage-backed
securities in that they generally entitle the Bank to receive a pro rata portion
of the cash flows from an identified pool of auto loans. As with corporate
securities, the Bank's investment policy requires that such investments have one
of the two highest ratings by a nationally recognized rating agency.
The following table sets forth the Bank's investment securities portfolio
at carrying value at the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
------------------------------------------
1998 1998 1997 1996
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities..................................... $ 4,016 $ 4,376 $ 7,864 $11,862
HELD TO MATURITY:
U.S. Government Agency obligations............................. 8,235 10,232 16,201 15,688
Collateralized auto obligations................................ 1,008 1,009 249 570
Corporate obligations.......................................... 2,944 2,956 -- --
Mortgage-backed securities..................................... 32,819 31,169 33,530 29,745
Commercial paper............................................... 2,981 3,998 2,490 988
------- ------- ------- -------
Total held to maturity........................................ 47,987 49,364 52,470 46,991
------- ------- ------- -------
Total..................................................... $52,003 $53,740 $60,334 $58,853
======= ======= ======= =======
</TABLE>
49
<PAGE>
At September 30, 1998, the Bank held a mortgage-backed security issued by
First Alliance Mortgage Loan Trust that had a book value of $2.0 million and a
market value of $2.0 million. The security has been rated AAA by Standard &
Poor's and Aaa by Moody's and is insured by MBIA Insurance Corporation. The
Bank held no other securities by an issuer where the aggregate book value of the
securities exceeded 10% of the equity capital of the Bank at September 30, 1998,
except for securities issued by the U.S. Government or U.S. Government agencies
and corporations.
The following table sets forth the maturities and weighted average yields
of the securities in the Bank's investment securities portfolio at September 30,
1998. Expected maturities of mortgage-backed securities will differ from
contractual maturities due to scheduled repayments and because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
LESS THAN ONE TO FIVE TO OVER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS
-------------------- --------------------- --------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ------- --------- ------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities.......... $ -- --% $ 704 7.72% $ 546 7.70 $ 2,766 7.32%
HELD TO MATURITY:
U.S. Government Agency
obligations ..................... 1,197 7.16 3,000 6.09 3,040 7.11 998 7.00
Collateralized auto obligations..... -- -- 1,008 5.65 -- -- -- --
Corporate obligations............... 1,001 5.55 1,943 5.99 -- -- -- --
Mortgage-backed securities.......... -- -- 1,183 7.43 4,087 6.61 27,549 6.60
Commercial paper.................... 2,981 5.61 -- -- -- -- -- --
------ ------ ------ -------
Total held to maturity............ 5,179 5.95 7,134 6.22 7,127 6.82 28,547 6.61
------ ------ ------ -------
Total......................... $5,179 5.95 $7,838 5.36 $7,673 6.89 $31,313 6.68
====== ====== ====== =======
</TABLE>
50
<PAGE>
The following table sets forth the carrying value of investment securities
which have fixed interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1998
--------------------------------------------
FLOATING OR
FIXED ADJUSTABLE
RATES RATES
-------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities......................... $ 2,086 $ 1,930
HELD TO MATURITY:
U.S. Government Agency
obligations...................................... 8,235 --
Collateralized auto obligations.................... 1,008 --
Corporate obligations.............................. 2,944 --
Mortgage-backed securities......................... 15,165 17,654
Commercial paper................................... 2,981 --
------- -------
Total held to maturity........................ 30,333 17,654
------- -------
Total investment securities................... $32,419 $19,584
======= =======
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major sources of the Bank's
funds for lending and other investment purposes. Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and money
market conditions. Borrowings from FHLB-Indianapolis may be used to compensate
for reductions in the availability of funds from other sources. The Bank had no
other borrowing arrangements at September 30, 1998.
DEPOSIT ACCOUNTS. Substantially all of the Bank's depositors are residents
of the State of Indiana. Deposits are attracted from within the Bank's market
area through the offering of a broad selection of deposit instruments, including
NOW checking accounts, money market deposit 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 current market interest rates,
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. In recent years the Bank has offered amongst the highest deposit rates
in its market area in order to complete with larger financial institutions that
provide a wider range of products and services. The Bank is evaluating the
possibility of expanding its checking account program as a means of attracting
lower cost funding.
In the unlikely event the Bank is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Bank.
51
<PAGE>
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1998. Jumbo
certificates of deposit represent minimum deposits of $100,000.
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- ---------------- -------------------
(In Thousands)
<S> <C>
Three months or less.................................. $ 447
Over three through six months......................... 1,164
Over six through twelve months........................ 2,304
Over twelve months.................................... 3,363
------
Total............................................... $7,278
======
</TABLE>
The following table sets forth the certificates of deposits in the Bank
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
---------------------------------------------
1998 1998 1997 1996
---------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
4.00 - 4.99%.................................... $ 8,200 $ 7,771 $11,657 $14,555
5.00 - 5.99%.................................... 36,753 35,999 36,503 31,104
6.00 - 6.99%.................................... 22,174 22,803 17,482 17,028
7.00 - 7.99%.................................... 1,286 1,299 1,506 2,814
8.00 - 8.99%.................................... 120 144 464 484
9.00 - 9.99%.................................... 183 183 307 285
------- ------- ------- -------
Total................................... $68,736 $68,199 $67,919 $66,270
======= ======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at September 30, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------------------------------
LESS THAN 1 - 2 2 - 3 3 - 4 AFTER
ONE YEAR YEARS YEARS YEARS 4 YEARS
------------ ------------- ------------- ----------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4.00 - 4.99%.................................... $ 7,985 $ 235 $ -- $ -- $ --
5.00 - 5.99%.................................... 21,842 9,985 3,615 781 530
6.00 - 6.99%.................................... 7,468 14,010 59 237 400
7.00 - 7.99%.................................... -- 690 48 435 113
8.00 - 8.99%.................................... 69 19 32 -- --
9.00 - 9.99%.................................... 183 -- -- -- --
------- ------- ------ ------ ------
Total.................................. $37,547 $24,939 $3,754 $1,453 $1,043
======= ======= ====== ====== ======
</TABLE>
52
<PAGE>
The following table sets forth the balances and changes in dollar amounts
of deposits in the various types of accounts offered by the Bank between the
dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
--------------------------------------------------------------
1998 1998 1997
------------------------------ ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF INCREASE/ OF INCREASE/ OF INCREASE/
AMOUNT TOTAL DECREASE AMOUNT TOTAL DECREASE AMOUNT TOTAL DECREASE
--------- -------- ---------- ------- -------- ----------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits............... $11,866 13.04% $1,242 $10,624 11.91% $ 1,714 $ 8,910 10.06% $(1,131)
Savings deposits.............. 10,359 11.39 (47) 10,406 11.66 (1,325) 11,731 13.25 (802)
Certificates which
mature:
Within 1 year............... 37,547 41.28 1,845 35,702 40.01 (7,287) 42,989 48.54 7,388
After 1 year, but
within 2 years............. 24,939 27.42 (430) 25,369 28.43 8,771 16,598 18.74 (3,580)
After 2 years, but
within 5 years............. 5,790 6.36 (785) 6,575 7.37 (836) 7,411 8.37 (1,449)
Certificates
maturing there after....... 460 0.51 (93) 553 0.62 (368) 921 1.04 (710)
------- ------ ------ ------- ------ ------- ------- ------ -------
Total....................... $90,961 100.00% $1,732 $89,229 100.00% $ 669 $88,560 100.00% $ (284)
======= ====== ====== ======= ====== ======= ======= ====== =======
<CAPTION>
------------------
1996
------------------
PERCENT
OF
AMOUNT TOTAL
-------- --------
<S> <C> <C>
Demand deposits............... $10,041 11.30%
Savings deposits.............. 12,533 14.11
Certificates which
mature :
With in 1 year................ 35,601 40.07
After 1 year, but
within 2 years............... 20,178 22.71
After 2 years, but
within 5 years............... 8,860 9.97
Certificates
maturing there after......... 1,631 1.84
------- ------
Total....................... $88,844 100.00%
======= ======
</TABLE>
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
----------------- -------------------------------
1998 1997 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance.................... $89,229 $88,560 $88,560 $88,844 $86,886
Net increase (decrease) before
interest credited................. 1,410 (2,279) (2,582) (3,140) (836)
Interest credited.................... 322 404 3,251 2,856 2,794
------- ------- ------- ------- -------
Net increase (decrease) in deposits.. 1,732 (1,875) 669 (284) 1,958
------- ------- ------- ------- -------
Ending balance....................... $90,961 $86,685 $89,229 $88,560 $88,844
======= ======= ======= ======= =======
</TABLE>
53
<PAGE>
BORROWINGS. The Bank has the ability to use advances from the FHLB-
Indianapolis to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB-Indianapolis 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-Indianapolis 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 U.S. Government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit 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 on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. At
September 30, 1998, the Bank had a borrowing capacity of $33.4 million based on
available collateral.
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
--------------------- ---------------------------------
1998 1997 1998 1997 1996
------ ------ -------- ------ -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Maximum balance at any month end.. $ 3,645 $ 7,050 $ 7,050 $ 7,500 $ 8,000
Average balance................... 3,645 7,050 5,991 7,498 5,655
Period end balance................ 3,645 7,050 3,645 7,050 7,500
Weighted average interest rate:
At end of period................ 5.58% 5.88% 5.77% 5.91% 5.78%
During the period............... 5.75 5.91 5.93 5.77 5.92
</TABLE>
COMPETITION
The Bank faces intense competition in the attraction of savings deposits (its
primary source of lendable funds) and in the origination of loans. Its most
direct competition for savings deposits has historically come from other thrift
institutions, credit unions and from commercial banks located in its market
area. 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 principally from other
thrift institutions, commercial banks, credit unions, mortgage banking companies
and mortgage brokers.
PERSONNEL
As of September 30, 1998, the Bank had 39 full-time employees and 1 part-time
employee. The employees are not represented by a collective bargaining unit and
the Bank believes its relationship with its employees is good.
SUBSIDIARY ACTIVITIES
The Bank has one subsidiary, FFSL Service Corporation, Inc. Federal savings
associations generally may invest up to 3% of their assets in service
corporations, provided that any amount in excess of 2% is used primarily for
community, inner-city and community development projects. At September 30, 1998,
the Bank's equity investment in its subsidiary was $268,000, or 0.2% of total
assets. The Bank used the service corporation in 1994 to purchase a $500,000
equity interest in a limited partnership organized to build, own and operate a
44-unit low-income apartment complex. The limited partnership generates low-
income housing credits of approximately $73,000 per year.
54
<PAGE>
PROPERTIES
The following table sets forth the Bank's offices, as well as certain
additional information relating to these offices, as of September 30, 1998. The
Bank owns all of its offices.
<TABLE>
<CAPTION>
YEAR APPROXIMATE
LOCATION OPENED NET BOOK VALUE (1) SQUARE FOOTAGE
- -------- ---------- -------------------- ----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Main Office
- -----------
2200 West Franklin Street 1904 $313 17,507
Evansville, Indiana
Branch Offices
- --------------
2028 Division Street 1956 95 5,276
Evansville, Indiana
1001 N. Green River Road 1981 514 2,603
Evansville, Indiana
4451 N. First Avenue 1997 581 7,300
Evansville, Indiana
</TABLE>
- ----------------------------------
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by the Bank.
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. In the opinion of management, after consultation with the Bank's legal
counsel, no significant loss is expected from any of such pending claims or
lawsuits. Aside from such pending claims and lawsuits which are incident to the
conduct of the Bank's ordinary business, the Bank is not a party to any material
pending legal proceedings.
55
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be 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 six persons divided into
three classes, each of which contains one third of the Board. One class,
consisting of Messrs. Robert L. Clayton, Sr. and James L. Will, Jr., has a term
of office expiring at the first annual meeting of stockholders after their
initial election by stockholders; a second class, consisting of Messrs. Herbert
V. Dassel and Jerry Ziemer, 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 Messrs. Frank E. Kern and Harold Duncan, has a term
of office expiring at the third annual meeting of stockholders after their
initial election by stockholders. The Holding Company anticipates that its
first annual meeting of stockholders will be held in October 1999.
The Board of Directors has established an Audit Committee consisting of
Directors Kern, Dassel and Ziemer and a Compensation Committee consisting of
Directors Dassel, Kern and Will.
The executive officers of the Holding Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are:
Name Position
---- --------
Harold Duncan President, Chief Executive Officer and
Chairman of the Board
Michael H. Head Vice President
Christopher A. Bengert Treasurer
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 six members who
are elected for terms of three years, 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.
DIRECTORS
<TABLE>
<CAPTION>
CURRENT
DIRECTOR TERM
NAME AGE(1) POSITION SINCE EXPIRES
- ---------------------- ------ ----------------------------------- -------- -------
<S> <C> <C> <C> <C>
Robert L. Clayton, Sr. 69 Chairman of the Board 1974 2000
Herbert V. Dassel 67 Director 1988 2001
Frank E. Kern 69 Director 1979 1999
James L. Will, Jr. 40 Director 1987 2000
Jerry Ziemer 60 Director 1979 2001
Harold Duncan 57 President, Chief Executive Officer 1978 1999
and Director
</TABLE>
56
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
- ---------------------- -------- ----------------------------------------------------
<S> <C> <C>
Michael H. Head 40 Executive Vice President and Chief Operating Officer
Monica L. Stinchfiled 42 Senior Vice President
Christopher A. Bengert 41 Senior Vice President and Treasurer
Richard L. Witte 45 Vice President
</TABLE>
______________________________
(1) As of September 30, 1998
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. There are no family relationships among the directors or executive
officers.
Robert L. Clayton, Sr. was employed by the Bank from 1952 until his
retirement in 1992. From 1974 to 1990 he served as President of the Bank. Mr.
Clayton has been Chairman of the Board since 1976.
Herbert V. Dassel is a retired businessman. Prior to his retirement, he
was the President and co-owner of Adroit Mold & Tool Corp., a tooling
manufacturer located in Evansville, Indiana.
Frank E. Kern is the Executive Director of the Evansville Association for
the Blind, a not-for-profit enterprise engaged in rehabilitation and
manufacturing.
James L. Will, Jr. is the owner of an insurance agency in Evansville,
Indiana.
Jerry Ziemer is the President and majority shareholder of Ziemer Funeral
Homes in Evansville, Indiana.
Harold Duncan joined the Bank in 1964 and served as a loan officer,
Assistant Vice President, Vice President, and Executive Vice President before
becoming President in 1990. Mr. Duncan added the title of Chief Executive
Officer in 1991.
Michael H. Head joined the Bank in 1980. From 1984 to 1994, he served as
Vice President and manager of the loan department. In 1994, he became Senior
Vice President. In 1996, Mr. Head became Executive Vice President and in
September 1998 added the title of Chief Operating Officer.
Monica L. Stinchfield joined the Bank in 1980. From 1985 to 1993 she
served as Assistant Vice President and from 1993 to September 1998, she served
as Vice President. In 1996, Ms. Stinchfield became the manager of the loan
department and secondary market activity. In September 1998, Ms. Stinchfield
became Senior Vice President.
Christopher A. Bengert joined the Bank in 1986. From 1991 to 1994, Mr.
Bengert served as Vice President and Treasurer. In 1994, he became Senior Vice
President.
Richard L. Witte joined the Bank in 1997 and in October 1998 became Vice
President. Mr. Witte is responsible for the savings department and deposit
services. Prior to joining the Bank, Mr. Witte was employed by Evansville
Federal Savings Bank for 21 years.
57
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Bank is conducted through meetings and activities of
its Board of Directors and its committees. During the fiscal year ended June
30, 1998, the Board of Directors held 12 regular meetings and no director
attended fewer than 75% of the total meetings of the Board of Directors of the
Bank and committees on which such director served.
The Audit Committee, consisting of Frank E. Kern, Herbert V. Dassel and
Jerry Ziemer, receives and reviews all reports prepared by the Bank's
independent auditors. The Audit Committee met one time during the fiscal year
ended June 30, 1998.
The Salary Committee, consisting of Herbert V. Dassel, Frank E. Kern and
James L. Will, Jr., is responsible for setting the salaries of all employees.
The Salary Committee met once during the fiscal year ended June 30, 1998.
DIRECTORS' COMPENSATION
Directors receive a fee of $900 per month. Following consummation of the
conversion, directors' fees will continue to be paid by the Bank and, initially,
no separate fees are expected to be paid for service on the Holding Company's
Board of Directors.
The Bank maintains a deferred compensation arrangement for directors who
may elect on an annual basis to defer up to 100 percent of their monthly Board
and committee meeting fees and retainers. Upon the director's attainment of an
age specified in his individual deferral agreement, the Bank will pay the
balance of the director's deferral account in monthly installments over a period
set forth in the director's individual agreement. Over the deferral period, a
director's account is credited with 10 percent annual interest with monthly
compounding. In the event of a change in control of the Bank (as defined in the
program) followed by a director's termination of service, each director will be
entitled to receive a benefit increased to reflect three additional years of
deferrals. The Bank has acquired life insurance on members of the Board to
provide informal funding for its obligations under the program. During the
fiscal year ended June 30, 1998, all directors participated in the director
deferral program. As of September 30, 1998, the Bank had accrued a liability of
$370,000 with respect to its obligations under the director deferral program.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for Mr.
Duncan for the year ended June 30, 1998. No other executive officer of the Bank
received salary and bonus of $100,000 or more during the year ended June 30,
1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION/(1)/
---------------------------------------------------
OTHER
NAME AND ANNUAL ALL OTHER
POSITIONS YEAR SALARY BONUS COMPENSATION/(2)/ COMPENSATION/(3)/
- ----------- ------ --------- ------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Harold Duncan 1998 $ 125,086 $ 8,642 $10,800 $4,150
President and Chief Executive
Officer
</TABLE>
_________________________
(1) Compensation information for the years ended June 30, 1997 and 1996 has
been omitted as the Bank was not a public company nor a subsidiary thereof
at such time.
(2) Consists of directors fees. Does not include the aggregate amount of
perquisites and other personal benefits, which was less than 10% of the
total annual salary and bonus reported.
(3) Consists of employer contributions to the Bank's 401(k) plan.
58
<PAGE>
EMPLOYMENT AGREEMENTS. In connection with the conversion, the Holding
Company and the Bank (collectively, the "Employers") plan to enter into three-
year employment agreements with Messrs. Duncan and Head. Under the employment
agreements, the initial salary levels for Mr. Duncan and Mr. Head will be
$136,000 and $72,000, respectively, which amount will be paid by the Bank and
may be increased at the discretion of the Board of Directors or an authorized
committee of the Board. On each anniversary of the commencement date of the
employment agreement, 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 he 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 the executive's employment is terminated without cause or upon the
executive's voluntary termination following the occurrence of an event described
in the preceding sentence, the Bank would be required to honor the terms of the
agreement through the expiration of the current term, including payment of
current cash compensation and continuation of employee benefits.
The employment agreements also provide for a severance payment and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. A severance payment also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, the 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 or entity 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 or entity 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) shareholders 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 present 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 value of which does not exceed 2.99 times the executive's
base amount. Assuming that a change in control had occurred at September 30,
1998 and that Mr. Duncan and Mr. Head elected to receive a lump sum cash
payment, they would have been entitled to payments of approximately $332,000 and
$154,000, 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 agreements restrict the executive's right to compete against
the Employers for a period of one year from the date of termination of the
agreement if he voluntarily terminates employment, except in the event of a
change in control.
SUPPLEMENTAL RETIREMENT AGREEMENT. The Bank maintains a supplemental
executive retirement program for key personnel in order to encourage continued
employment and to provide an additional source of retirement income. The
program provides that, upon the attainment of a specified retirement age, a
participating officer will receive a benefit equal to the product of the
officer's highest annual base compensation and the officer's "wage replacement
percentage" reduced by the annual benefits derived by the officer from any other
tax-qualified or non-qualified retirement arrangements sponsored by the Bank.
The officer's retirement age and "wage replacement factor" are set forth in
individual agreements entered into between the Bank and the officer. If the
officer dies prior to attaining the normal retirement age, a survivor benefit is
payable to the officer's surviving spouse or other designated beneficiary. In
the event of an officer's termination without cause prior to attaining the
normal retirement age, payment of the
59
<PAGE>
officer's accrued benefit as of the date of termination is deferred until the
officer attains normal retirement age. In the event of disability, the officer
may elect to begin receipt of his accrued benefit immediately in lieu of a
deferred retirement benefit. In the event of a change in control of the Bank (as
defined in the program) followed by the officer's termination of employment, the
officer would be entitled to receive his full normal retirement benefit upon
attaining his specified retirement age. All benefits are payable in the form of
a monthly annuity over a period set forth in the officer's individual agreement.
As a condition of Mr. Duncan's receipt of benefits, he must, during the five-
year period after benefits commence, provide certain consulting and advisory
services to the Bank at the request of the Board of Directors. At present, Mr.
Duncan, four other officers and one former employee participate in the
supplemental retirement program. As of September 30, 1998, the Bank had accrued
$140,000 as a liability with respect to its obligations under the supplemental
retirement program.
EMPLOYEE SEVERANCE COMPENSATION PLAN. In connection with the Conversion,
the Board of Directors of the Bank intends to adopt the First Federal Savings
Bank 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. Eligible employees are employees with a minimum of two years of service
with the Bank. In general, all employees with at least two years of service
(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
severance plan. Under the severance 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 severance 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 maximum payment equal to 26 weeks of
compensation. In addition, officers of the Bank (four persons) and branch
managers (three persons) would be eligible to receive a severance payment equal
to 24 and 12 months, respectively, of their current compensation. Assuming that
a change in control had occurred at September 30, 1998 and the termination of
all eligible employees, the maximum aggregate payment due under the severance
plan would be approximately $381,000.
BENEFITS
INSURANCE. The Bank provides full-time employees, with minimal
contribution or expense to them, with group plan insurance that covers
hospitalization, dependent coverage, long-term disability and accidental death
and dismemberment. This insurance is available generally and on the same basis
to all full-time employees.
RETIREMENT PLAN. The Bank is a participant in the Financial Institutions
Retirement Fund, a multi-employer, non-contributory defined benefit retirement
plan ("Plan"). The following table indicates the annual retirement benefits
that would be payable under the Plan upon retirement at age 65 to a participant
electing to receive his retirement benefit in the standard form of benefit,
assuming various specified levels of plan compensation and various specified
years of credited service. Under the Internal Revenue Code, maximum annual
benefits under the Plan are limited to $130,000 per year for the 1999 calendar
year.
<TABLE>
<CAPTION>
Highest Five-Year
Average Annual Years of Service
---------------------------------------------------------------------
Compensation 5 10 15 25 35 40 45
- ---------------- ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10,000........ 1,000 2,000 3,000 5,000 7,000 8,000 9,000
20,000........ 2,000 4,000 6,000 10,000 14,000 16,000 18,000
30,000........ 3,000 6,000 9,000 15,000 21,000 24,000 27,000
40,000........ 4,000 8,000 12,000 20,000 28,000 32,000 36,000
60,000........ 6,000 12,000 18,000 30,000 42,000 48,000 54,000
80,000........ 8,000 16,000 24,000 40,000 56,000 64,000 72,000
100,000........ 10,000 20,000 30,000 50,000 70,000 80,000 90,000
120,000........ 12,000 24,000 36,000 60,000 84,000 96,000 99,000
130,000........ 13,000 26,000 38,000 65,000 91,000 104,000 117,000
</TABLE>
60
<PAGE>
The Plan is a non-contributory, defined benefit plan which provides for
monthly payments to, or on behalf of, each covered employee. All full-time
employees are eligible to participate in the Plan after completion of one year
of service to the Bank (at least 1,000 hours of service in 12 consecutive
months) and the attainment of age 21. Benefits are based upon years of service
and salary excluding bonuses, fees, etc. Employees become vested following five
years of service. As of June 30, 1998, Mr. Duncan had 33 years of credited
service under the Plan.
The normal retirement age is 65 and the early retirement age is before age
65, but after age 45. Normal retirement benefits are equal to 2% multiplied by
the years of service to the Bank and by the employees's average base salary
above the covered compensation level for the five highest consecutive years
preceding retirement. If an employee elects early retirement, but defers the
receipt of benefits until age 65, the formula for computation of early
retirement benefits is the same as if the employee had retired at the normal
retirement age. However, if the employee elects early retirement benefits
payable under the Plan the benefits are equal to the benefits payable assuming
retirement at age 65 reduced by applying an early retirement factor based on age
and vesting service when payments begin. Payment may also be deferred to any
time up to age 70, in which case the retirement allowance payable at age 65 will
be increased by .8% for each month of deferment after age 65 (to a maximum
increase of 48%). Under the Plan, the Bank makes annual contributions to fund
the benefits computed on an actuarial basis.
Upon retirement, the regular form of benefit under the Plan is an annuity
payable in equal monthly installments for the life of the employee. Optional
annuity or lump sum benefit forms may also be elected by the employee. Benefits
under the Plan are not integrated with social security.
At June 30, 1998 (the date of the most recent Plan statement), the Plan's
assets exceeded current liabilities by approximately $160,000.
401(K) PLAN. The Bank maintains a 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 Internal Revenue Code. Employees of the
Bank who have completed 1,000 hours of service during 12 consecutive months and
who have attained age 21 are eligible to participate in the 401(k) Plan.
Participants may contribute up to 15% of their annual compensation to the 401(k)
Plan through a salary reduction election. The Bank matches 50% of participant
contributions to a maximum of 6% of the participant's salary. In addition to
employer matching contributions, the Bank may contribute a discretionary amount
to the 401(k) Plan in any plan year which is allocated to individual
participants in the proportion that their annual compensation bears to the total
compensation of all participants during the plan year. To be eligible to
receive a discretionary employer contribution, the participant must complete
1,000 hours of service during the plan year and remain employed by the Bank on
the last day of the plan year. 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 $22,000 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 12-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.
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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 Holding Company. The timing,
amount, and manner of such discretionary contributions will be affected by
several factors, including applicable regulatory policies, the requirements of
applicable laws and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of two years of service. A
participant is fully vested at retirement, in the event of disability or upon
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 Internal Revenue Service 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 PLAN. The Board of Directors of the Holding Company intends
to adopt the Stock Option Plan and to submit the Stock Option Plan to
stockholders for approval at a meeting held no earlier than six months following
consummation of the conversion. Under current OTS regulations, the approval of
a majority vote of the Holding Company's outstanding shares is required for
implementation of the Stock Option Plan within one year of the consummation of
the conversion. The Stock Option Plan will comply with all applicable
regulatory requirements. However, the Stock Option Plan will not be approved or
endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, 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 Stock Option Plan will provide for the grant of incentive stock options
("ISOs") intended to comply with the requirements of Section 422 of the Internal
Revenue Code and for nonqualified stock options ("NQOs"). Under the Stock
Option Plan, stock options may be granted to key employees of the Holding
Company and its subsidiaries, including the Bank. Unless sooner terminated, the
Stock Option Plan will continue in effect for a period of ten years from the
date the Stock Option Plan is approved by stockholders.
The Holding Company will reserve a number of authorized shares of common
stock equal to 10% of the number of shares of common stock issued in connection
with the conversion for future issuance under the Stock Option Plan (218,500
shares based on the issuance of 2,185,000 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 Stock
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Option Plan, the number of shares to which any award relates and the exercise
price per share under any option may be adjusted to reflect the increase or
decrease in the total number of shares of common stock outstanding.
A committee of the Board of Directors will administer and interpret the
Stock Option Plan. Subject to applicable OTS regulations, the committee will
determine which nonemployee directors, officers 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 Stock 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 Stock 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 Stock 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
Stock 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. 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. 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.
Under generally accepted accounting principles, compensation expense is
generally not recognized with respect to the award of options to officers and
employees of the Holding Company and its subsidiaries. However, the Financial
Accounting Standards Board recently indicated that it would propose rules during
1999 that would generally require recognition of compensation expense with
respect to awards made to non-employees, including non-employee directors of the
Holding Company, and that the proposed changes would apply to awards made after
December 15, 1998.
Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations. Under
current OTS regulations, if the Stock Option Plan is implemented within one year
of the consummation of the conversion, (i) no officer or employees
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could receive an award of options covering in excess of 25% of the number of
shares reserved for issuance under the Stock Option Plan, (ii) no nonemployee
director could receive in excess of 5% of the number of shares reserved for
issuance under the Stock Option Plan and (iii) nonemployee directors, as a
group, could not receive in excess of 30% of the number of shares reserved for
issuance under the Stock Option Plan.
MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN. Following the conversion, the
Board of Directors of the Holding Company intends to adopt an MRDP for officers,
employees, and nonemployee directors of the Holding Company and the Bank, and to
submit the MRDP to stockholders for approval at a meeting held no earlier than
six months following consummation of the conversion. The MRDP will enable the
Holding Company and the Bank to provide participants with a proprietary interest
in the Holding Company as an incentive to contribute to the success of the
Holding Company and the Bank. The MRDP will comply with all applicable
regulatory requirements. However, the MRDP will not be approved or endorsed by
the OTS. Under current OTS regulations, the approval of a majority vote of the
Holding Company's outstanding shares is required for implementation of the MRDP
within one year of the consummation of the conversion.
The MRDP expects to acquire a number of shares of the Holding Company's
common stock equal to 4% of the common stock issued in connection with the
conversion (87,400 shares based on the issuance of 2,185,000 shares in the
conversion at the maximum of the Estimated Valuation Range). Such shares will
be acquired on the open market, if available, with funds contributed by the
Holding Company or the Bank to a trust which the Holding Company may establish
in conjunction with the MRDP ("MRDP Trust") or from authorized but unissued
shares or treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRDP, the members of which will also serve as trustees of the
MRDP Trust, if formed. The trustees will be responsible for the investment of
all funds contributed by the Holding Company or the Bank to the MRDP Trust. The
Board of Directors of the Holding Company may terminate the MRDP at any time
and, upon termination, all unallocated shares of common stock will revert to the
Holding Company.
Shares of common stock granted pursuant to the MRDP will be in the form of
restricted stock payable ratably over a specified vesting 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 MRDP Trust. Under OTS regulations, if
the MRDP is implemented within the first year following consummation of the
conversion, the minimum vesting period will be five years. All unvested MRDP
awards will vest in the event of the recipient's death or disability. Unvested
MRDP awards will also vest following a change in control (as defined in the
MRDP) 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 MRDP 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.
A recipient of an 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 at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations. Under
current OTS regulations, if the MRDP is implemented within one year of the
consummation of the conversion, (i) no officer or employees could receive
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an award covering in excess of 25% of the number of shares reserved for issuance
under the MRDP, (ii) no nonemployee director could receive in excess of 5% of
the number of shares reserved for issuance under the MRDP and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the MRDP.
TRANSACTIONS WITH THE BANK
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 to offer consumer loans,
savings account loans and fixed-rate mortgage loans to directors, officers and
employees at rates lower 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 $302,000 at September 30, 1998,
or approximately 1.0% of the Holding Company's pro forma stockholders' equity
(based on the issuance of shares at the midpoint of the Estimated Valuation
Range).
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
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able to raise funds in the capital markets, and to ensure that the FHLBs operate
in a safe and sound manner. The Bank, as a member of the FHLB-Indianapolis, is
required to acquire and hold shares of capital stock in the FHLB-Indianapolis in
an amount equal to the greater of (i) 1.0% of the aggregate outstanding
principal amount of residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or (ii) 1/20 of its advances
(i.e., borrowings) from the FHLB-Indianapolis. The Bank is in compliance with
this requirement with an investment in FHLB-Indianapolis stock of $727,000 at
September 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.
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LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated 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 September 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
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able to establish a branch office; (iii) the Bank shall be ineligible to obtain
new advances from any FHLB; and (iv) the payment of dividends by the Bank shall
be subject to the rules regarding the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after the
date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
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
September 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 CAMEL 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
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subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
subject to an amortization schedule, and (iii) general valuation loan and lease
loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned 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 September 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
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the calendar year plus one-half its surplus capital ratio (i.e., the amount of
capital in excess of its requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in excess
of such amount require advance notice to the OTS. A Tier 2 savings association
has capital equal to or in excess of its minimum capital requirement but below
its requirement (both before and after the proposed capital distribution). Such
an association may make (without application) capital distributions up to an
amount equal to 75% of its net income during the previous four quarters
depending on how close the Bank is to meeting its capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the 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.
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 September 30, 1998, the Bank's regulatory limit on loans to
one borrower was $2.3 million. At September 30, 1998, the Bank's largest
aggregate amount of loans to one borrower was $649,000.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and may establish service corporation
subsidiaries to engage in certain preapproved activities or, with approval of
the OTS, other activities reasonably related to the activities of financial
institutions. When a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the Bank
controls, the savings association must notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the Bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
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.
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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 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.
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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 calendar 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 high equity
in relation to deposits, the Bank generally recognized a bad debt deduction
equal to net charge-offs.
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 institutions 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, 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
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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. The Bank's federal income tax returns have not been audited for
the last five years.
STATE 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 Bank's state franchise tax returns have not been
audited for the past five tax years.
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THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE
MEMBERS 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 September 16, 1998, the Board of Directors of the Bank unanimously
adopted the Plan of Conversion, pursuant to which the Bank will be converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank to be held as a wholly-owned subsidiary of the Holding Company, a
newly formed Indiana corporation. THE FOLLOWING DISCUSSION OF THE PLAN OF
CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION,
WHICH IS AVAILABLE TO MEMBERS OF THE BANK UPON REQUEST. The Plan of Conversion
is also filed as an exhibit to the Registration Statement. See "WHERE YOU CAN
FIND MORE INFORMATION." The OTS has approved the Plan of Conversion subject to
its approval by the members of the Bank entitled to vote on the matter at a
Special Meeting called for that purpose to be held on ___________, 1999, and
subject to the satisfaction of certain other conditions imposed by the OTS in
its approval.
The conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the Bank. As
part of the conversion, the Bank will issue all of its newly issued common stock
(1,000 shares) to the Holding Company in exchange for 50% of the net proceeds
from the sale of common stock by the Holding Company.
The Plan of Conversion provides generally that: (i) the Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank; (ii) the Holding Company will offer its common stock to persons
having subscription rights; (iii) if necessary, shares of common stock not
subscribed for pursuant to subscription rights will be offered to certain
members of the general public, with preference given to natural persons and
trusts of natural persons residing in Vanderburgh, Warrick, Posey, Gibson and
Spencer Counties, Indiana, and then to certain members of the general public
through a syndicate of registered broker-dealers pursuant to selected dealers
agreements; and (iv) the Holding Company will purchase all of the capital stock
of the Bank to be issued in connection with the conversion.
As part of the conversion, the Holding Company is offering its common stock
to holders of subscription rights in the following order of priority: (i)
"Eligible Account Holders" (depositors with $50.00 or more on deposit as of June
30, 1997); (ii) the Bank's ESOP; (iii) "Supplemental Eligible Account Holders"
(depositors with $50.00 or more on deposit as of December 31, 1998); and (iv)
"Other Members" (depositors of the Bank as of ______, 1999 and borrowers of the
Bank with loans outstanding as of March 16, 1988 which continue to be
outstanding as of _______, 1999). This offering is referred to in this
prospectus as the "Subscription Offering."
Shares of common stock not subscribed for in the Subscription Offering may
be offered for sale to members of the general public through a direct community
offering ("Direct Community Offering"). The Direct Community Offering, if one
is held, is expected to begin immediately after the expiration of the
Subscription Offering, but may begin at any time during the Subscription
Offering. Shares of common stock not sold in the Subscription Offering and the
Direct Community Offering may be offered to members of the general public on a
best efforts basis by a selling group of broker-dealers managed by Capital
Resources ("Syndicated Community Offering"). Regulations require that the
Direct Community Offering and the Syndicated Community Offering be completed
within 45 days after completion of the 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, 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 Bank.
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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 Bank.
The completion of the 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 at the Special
Meeting that will be required to complete the Direct Community Offering or the
Syndicated Community Offering or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Bank as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the common stock. In the event the conversion is terminated, the
Bank would be required to charge all conversion expenses against current income.
Orders for shares of common stock will not be filled until at least
$16,150,000 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
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
held 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.
REASONS FOR THE CONVERSION
The Board of Directors and management believe that the conversion is in the
best interests of the Bank, its members and the communities it serves. The
Bank's Board of Directors has formed the Holding Company to serve as a holding
company, with the Bank as its subsidiary, upon the consummation of the
conversion. By converting to the stock form of organization, the Holding
Company and the Bank will be structured in the form used by holding companies of
commercial banks, most business entities and by a large number of savings
institutions. Management of the Bank believes that the conversion offers a
number of advantages which will be important to the future growth and
performance of the Bank. The capital raised in the conversion is intended to
support the Bank's current lending and investment activities and may also
support possible future expansion and diversification of operations, although
there are no current specific plans, arrangements or understandings, written or
oral, regarding any such expansion or diversification. The conversion is also
expected to afford the Bank's management, members and others the opportunity to
become stockholders of the Holding Company and participate more directly in, and
contribute to, any future growth of the Holding Company and the Bank. The
conversion will also enable the Holding Company and the Bank to raise additional
capital in the public equity or debt markets should the need arise, although
there are no current specific plans, arrangements or understandings, written or
oral, regarding any such financing activities. The Bank, as a mutual savings
bank, does not have the authority to issue capital stock or debt instruments,
other than by accepting deposits.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
VOTING RIGHTS. Depositors and borrowers will have no voting rights in the
converted Bank or the Holding Company and therefore will not be able to elect
directors of the Bank or the Holding Company or to control their affairs.
Currently, these rights are accorded to members of the Bank. Subsequent to the
conversion, voting rights will be vested exclusively in the Holding Company with
respect to the Bank and the holders of the common stock as to matters pertaining
to the Holding Company. Each holder of common stock shall be entitled to vote
on any matter to be considered by the stockholders of the Holding Company. A
stockholder will be entitled to one vote for each share of common stock owned.
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.
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TAX EFFECTS. The Bank has received an opinion from Muldoon, Murphy &
Faucette, Washington, D.C., that the conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code. Among
other things, the opinion states that:
(1) no gain or loss will be recognized to the Bank in its mutual or stock
form by reason of the conversion;
(2) no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in the Bank immediately after the conversion,
in the same dollar amounts and on the same terms and conditions as their
accounts at the Bank in its mutual form plus interest in the liquidation
account;
(3) the tax basis of account holders' accounts in the Bank immediately
after the conversion will be the same as the tax basis of their accounts
immediately prior to conversion;
(4) the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
(5) the tax basis of the common stock purchased in the conversion will be
the amount paid and the holding period for such stock will commence at the
date of purchase; and
(6) no gain or loss will be recognized to account holders upon the receipt
or exercise of subscription rights in the conversion, except to the extent
subscription rights are deemed to have value as discussed below.
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. Capital Resources Group, 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 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 Olive LLP 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 income tax liability to such entities
or persons.
The opinions of Muldoon, Murphy & Faucette and Olive LLP and the letter
from Capital Resources Group are filed as exhibits to the Registration
Statement. See "WHERE YOU CAN FIND MORE INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
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LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors up to the withdrawal value
of their accounts). 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 to
the total value of all deposit accounts in the Bank at the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in the Bank,
including certificates of deposit ("Savings Account(s)"), shall not be entitled
to share in any residual assets in the event of liquidation of the Bank.
However, pursuant to OTS regulations, the Bank shall, at the time of the
conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
herein.
The liquidation account shall be maintained by the Bank subsequent to the
conversion for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who retain their Savings Accounts in the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder shall, with respect to
each Savings Account held, have a related inchoate interest in a portion of the
liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Bank subsequent to June 30, 1997, or December 31, 1998 is
less than the lesser of (i) the deposit balance in such Savings Account at the
close of business on any other annual closing date subsequent to June 30, 1997
or December 31, 1998 or (ii) the amount of the "qualifying deposit" in such
Savings Account on June 30, 1997 or December 31, 1998, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related Savings Account. If any such Savings Account is closed, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Bank (and only in such event)
each Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally insured institution in which the Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction the liquidation account shall be assumed by the surviving
institution.
In the unlikely event the Bank is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Bank.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion,
nontransferable subscription rights to purchase the 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:
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Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Bank as of June 30, 1997 will receive nontransferable
subscription rights to subscribe for up to the greater of $150,000 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 whose subscriptions remain unsatisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the one year period preceding June 30, 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 December 31, 1998 will receive nontransferable
subscription rights to subscribe for up to the greater of $150,000 of common
stock, one-tenth of one percent of the total offering of common stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock 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 whose subscriptions remain unsatisfied.
Category 4: Other Members. Each depositor of the Bank as of _________, 1999
(the "Voting Record Date") and each borrower with a loan outstanding on March
16, 1988 which continues to be outstanding as of the Voting Record Date will
receive nontransferable subscription rights to purchase up to $150,000 of common
stock in the conversion 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.
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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, local time, on ____________, 1999, 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.
DIRECT COMMUNITY OFFERING. Any shares of common stock which remain
unsubscribed for in the Subscription Offering may be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given to natural persons and trusts of natural persons residing
in Vanderburgh, Warrick, Posey, Gibson and Spencer Counties, Indiana. Purchasers
in the Direct Community Offering are eligible to purchase up to $150,000 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, if one is held, is expected to begin immediately
after the expiration of the Subscription Offering, but may begin at any time
during the Subscription Offering. The Direct Community Offering may terminate at
the same time as the Subscription Offering or at any time subsequent thereto,
but no later than 45 days after the close of the Subscription Offering, unless
extended by the Holding Company and the Bank, with approval of the OTS.
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.
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 Capital
Resources 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 Capital Resources 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,
Capital Resources has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering also will be sold at the
$10.00 purchase price. See "-- Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the Syndicated Community Offering
for shares of common stock with an aggregate purchase price of more than
$150,000. See "-- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings" for a description of the commission to be
paid to the selected dealers and to Capital Resources.
Capital Resources may enter into agreements with selected dealers to assist
in the sale of shares in the Syndicated Community Offering. If a syndicate of
broker-dealers ("selected dealers") is formed to assist in the Syndicated
Community Offering, a purchaser may pay for his or her shares with funds held by
or deposited with a selected dealer. If an order form is executed and forwarded
to the selected dealer or if the selected dealer is authorized to execute the
order form on behalf of a purchaser, the selected dealer is required to forward
the order form and funds to the Bank for deposit in a segregated account on or
before noon of the business day following receipt of the order form or execution
of the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for shares.
Such selected dealers shall subsequently contact their customers who indicated
an interest and seek their confirmation as to their intent to purchase. Those
indicating an intent to purchase shall execute order forms and forward them to
their selected dealer or authorize the selected dealer to execute such
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forms. The selected dealer will acknowledge receipt of the order to its customer
in writing on the following business day and will debit such customer's account
on the third business day after the customer has confirmed his intent to
purchase (the "debit date") and on or before noon of the next business day
following the debit date will send order forms and funds to the Bank for deposit
in a segregated account. Although purchasers' funds are not required to be in
their accounts with selected dealers until the debit date in the event that such
alternative procedure is employed, once a confirmation of an intent to purchase
has been received by the selected dealer, the purchaser has no right to rescind
his or her order.
The Syndicated Community Offering may terminate no more than 45 days after
the expiration of the Subscription Offering, unless extended by the Holding
Company and the Bank, with approval of the OTS. 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.
TIME TO COMPLETE THE OFFERING. OTS regulations require that the Holding
Company complete the sale of common stock within 45 days after the close of the
Subscription Offering. If the offering is 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. The OTS may grant one
or more extensions of the 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
approved the Plan of Conversion. If the OTS grants approval of an extension
offering period, 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).
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 (i) who
resides in a foreign country or in a state of the United States in which a small
number of persons otherwise eligible to subscribe for shares of common stock
reside in such state or (ii) who resides in a state with respect to which 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 FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
The Holding Company and the Bank have retained Capital Resources, a broker-
dealer registered with the SEC and a member of the NASD, to consult with and
advise the Holding Company and the Bank and to assist, on a best efforts basis,
in the distribution of the common stock in the conversion. The services Capital
Resources will perform include: (i) training and educating the Company's and the
Bank's employees regarding the mechanics and regulatory requirements of the
stock conversion process; (ii) conducting information meetings for potential
subscribers, if necessary; (iii) managing the sales efforts in the offering;
(iv) assisting in the collection of proxies from depositors for use at the
Special Meeting; and (v) keeping records of subscriptions and orders for common
stock. Capital Resources will receive for its services a fee equal to 1.25% of
the total dollar amount of stock sold, excluding shares purchased
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by the ESOP and by officers, directors and employees and their immediate
household family members. If selected dealers are utilized in connection with
the offering, the Holding Company will pay a fee (negotiated at such time) to
such selected dealers and a management fee to Capital Resources pursuant to a
selected dealer's agreement. The fee to be negotiated with the selected dealers
is expected to be up to 4.0% of the total dollar amount sold through selected
dealers. Capital Resources will also be reimbursed for its legal fees and for
reasonable out-of-pocket expenses in an amount not to exceed $40,000. Capital
Resources has received fees totaling $60,000 for consulting and advisory
services relating to the conversion, which fees will be credited against
marketing fees payable to Capital Resources. Capital Resources is affiliated
with Capital Resources Group.
Subject to certain limitations, the Holding Company and the Bank have also
agreed to indemnify Capital Resources against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation,
including claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock.
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 center at its main office
facility. The stock 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 Capital Resources employees
will be working at the stock center. Such employees of Capital Resources will be
responsible for mailing materials relating to the offering, responding to
questions regarding the conversion and the offering and processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Capital Resources or by the selected dealers managed by Capital Resources.
The management and employees of the Bank may participate in the offering in
clerical capacities, providing administrative support in effecting sales
transactions or, when permitted by state securities laws, answering questions of
a mechanical nature relating to the proper execution of the order form.
Management of the Bank may answer questions regarding the business of the Bank
when permitted by state securities laws. 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 provide advice regarding the purchase
of common stock.
No officer, director or employee of the Bank or the Holding Company will be
compensated, directly or indirectly, for any activities in connection with the
offer or sale of securities issued in the conversion.
None of the Bank's personnel participating in the offering is registered or
licensed as a broker or dealer or an agent of a broker or dealer. The Bank's
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 or her 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 of the Subscription Offering 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
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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 is not obligated to 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 ORDER
FORM.
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, local
time, on ___________, 1999. Order forms that 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 may be at the same time as
or subsequent to the expiration of the Subscription Offering. 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 Eligibility Record Date (June 30,
1997) and/or the Supplemental Eligibility Record Date (December 31, 1998) and/or
the Voting Record Date (________) 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 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. Payment for subscriptions
of $25,000 or more must be by account withdrawal or by certified or cashier's
check or money order. 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 the 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. In the event that 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 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.
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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 IRA funds at the Bank 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 of the
Subscription Offering. In addition, the provisions of the Employee Retirement
Income Security Act 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.
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.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed order forms or to the last address of such persons appearing
on the records of the Bank as soon as practicable following consummation of the
sale of all shares of common stock. Any certificates returned as undeliverable
will be disposed of in accordance with applicable law. PURCHASERS MAY NOT BE
ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY PURCHASED UNTIL CERTIFICATES
FOR THE COMMON STOCK ARE AVAILABLE AND DELIVERED TO THEM, EVEN THOUGH TRADING OF
THE COMMON STOCK MAY HAVE COMMENCED.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations promulgated by the OTS require that a converting
savings association issue and sell its capital stock at a total price equal to
the estimated pro forma market value of such stock in the converted savings
association, based on an independent valuation. These regulations require the
Holding Company and the Bank to retain an appraiser who is independent of the
Holding Company and the Bank, experienced and expert in the area of corporate
appraisal and acceptable to OTS. The term independent appraiser is defined by
the federal regulations. The Bank has retained Capital Resources Group to
prepare an appraisal of the pro forma market value of the Holding Company and
the Bank as converted and to assist in preparing a business plan. Capital
Resources Group is the parent company of and affiliated with Capital Resources,
the marketing agent for the Holding Company's conversion stock. Capital
Resources Group will receive a fee expected to total $35,000 for its appraisal
services and assistance in the preparation of a business plan, plus reasonable
out-of-pocket expenses incurred in connection with the appraisal and preparation
of the business plan, not to exceed $5,000 without prior approval by the Bank.
If an updated appraisal is required in connection with the conversion process,
Capital Resources Group will receive a fixed fee of $5,000 for preparation of an
updated appraisal. The Bank has agreed to indemnify Capital Resources Group
under certain circumstances against liabilities and expenses (including legal
fees) arising out of, related to, or based upon the conversion. Capital
Resources Group will also receive a fee of $20,000 for records management
services in connection with the conversion plus reimbursement of reasonable out-
of-pocket expenses incurred in connection with the records management services
not to exceed $5,000 without prior approval by the Bank.
OTS has issued Guidelines to appraisers in connection with the appraisal of
converting savings institutions which describe the methodology that OTS expects
the appraiser to utilize. OTS reviews the appraisal and any appraisal update
submitted to them, and the methodology employed therein. In the past, OTS has
required converting savings institutions to adjust their appraisals or appraisal
updates which has resulted in a change in the number of shares issued. Although
OTS has not objected to the appraisal of the Holding Company and the Bank in
connection with the conversion, there can be no assurance that the OTS may not
require the Bank to sell additional stock to consummate
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the conversion. There also can be no assurance that the common stock will
exhibit the post-conversion price and trading patterns experienced by other
converting mutual associations, or that the common stock will sell in the
aftermarket at $10.00 per share or in the aggregate at or above the estimated
pro form market value.
The appraisal contains an analysis of a number of factors including, but
not limited to, the Bank's financial condition and operating trends, the
competitive environment within which the Bank operates, operating trends of
certain thrift institutions and savings and loan holding companies, relevant
economic conditions both nationally and in the State of Indiana which affect the
operations of thrift institutions, stock market values of certain institutions,
and stock market conditions for publicly traded savings institutions and savings
and loan holding companies. In addition, Capital Resources Group has advised the
Bank that it has considered and will consider the effect of the additional
capital raised by the sale of the common stock on the estimated aggregate pro
forma market value of such shares. The Board of Directors has reviewed the
appraisal, including the stated methodology of Capital Resources Group and the
assumptions used in the preparation of the appraisal. The Board of Directors is
relying upon the expertise, experience and independence of Capital Resources
Group and is not qualified to determine the appropriateness of the assumptions
or the methodology. The appraisal has been filed as an exhibit to the
registration statement of which this prospectus is a part. See "WHERE YOU CAN
FIND MORE INFORMATION."
OTS regulations require that the appraiser establish an estimated valuation
range for the Holding Company's common stock to allow for fluctuations in the
aggregate value of the stock due to changing market conditions and other
factors. On the basis of the foregoing, Capital Resources Group has advised the
Holding Company and the Bank that, in its opinion, as of December 4, 1998, the
aggregate estimated pro forma market value of the Holding Company and the Bank
as converted and, therefore, the common stock, was within the valuation range of
$16,150,000 to $21,850,000 with a midpoint of $19,000,000. After reviewing the
methodology and the assumptions used by Capital Resources Group in the
preparation of the appraisal, the Board of Directors accepted the Estimated
Valuation Range. Assuming that the shares are sold at $10.00 per share in the
conversion, the estimated number of shares would be between 1,615,000 and
2,185,000 with a midpoint of 1,900,000. The purchase price of $10.00 was
determined by discussion among the Boards of Directors of the Bank and the
Holding Company and Capital Resources, taking into account, among other factors
(i) the requirement under OTS regulations that the common stock be offered in a
manner that will achieve the widest distribution of the stock and (ii) desired
liquidity in the common stock subsequent to the conversion. Since the outcome of
the offering relates in large measure to market conditions at the time of sale,
it is not possible to determine the exact number of shares that will be issued
by the Holding Company at this time. The Estimated Valuation Range may be
amended, with the approval of the OTS, if necessitated by developments following
the date of such appraisal in, among other things, the Bank's financial
condition and operating trends, the competitive environment within which the
Bank operates, operating trends of certain thrift institutions and savings and
loan holding companies, relevant economic conditions both nationally and in the
State of Indiana which affect the operations of thrift institutions, stock
market values of certain institutions, and stock market conditions for publicly
traded savings institutions and savings and loan holding companies.
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, Capital Resources Group, after taking into
account factors similar to those involved in its prior appraisal as well as the
results of the Subscription Offering, will determine its estimate of the pro
forma market value of the Holding Company and the Bank as converted based on
information available to Capital Resources Group at that time. This may result
in an increase or decrease of the Estimated Valuation Range. An increase or
decrease in the Estimated Valuation Range will result in a change in the number
of shares to be issued in the conversion.
No sale of the shares will take place unless prior thereto Capital
Resources Group confirms to the OTS that, to the best of Capital Resources
Group'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 Holding Company and the Bank 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
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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 issued
may be more or less than the range in number of shares discussed herein. Persons
ordering shares will not be permitted to modify or cancel their orders unless
the change in the number of shares to be issued in the conversion results in an
offering which is either less than 1,615,000 shares or more than 2,512,750
shares. In the event the total amount of shares issued is less than 1,615,000 or
more than 2,512,750 (15% above the maximum of the Estimated Valuation Range),
for aggregate gross proceeds of less than $16,150,000 or more than $25,127,500,
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 Capital Resources Group, such new range will be subject to approval by the
OTS. In the event of an increase in the valuation, the Holding Company may
increase the total number of shares to be issued in the conversion. An increase
in the total number of shares to be issued in the conversion would decrease a
subscriber's percentage ownership interest and pro forma net worth (book value)
per share and increase the pro forma net income and net worth (book value) on an
aggregate basis. In the event of a reduction in the valuation, the Holding
Company may decrease the number of shares to be issued to reflect the reduced
valuation. A decrease in the number of shares to be issued in the conversion
would increase a subscriber's percentage ownership interest and the pro forma
net worth (book value) per share and decrease the pro forma net income and net
worth on an aggregate basis. For a presentation of the possible effects of an
increase or decrease in the number of shares to be issued, see "PRO FORMA DATA."
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.
In formulating its appraisal, Capital Resources Group relied upon the
truthfulness, accuracy and completeness of all documents the Bank furnished to
it. Capital Resources Group also considered financial and other information from
regulatory agencies, other financial institutions, and other public sources, as
appropriate. While Capital Resources Group believes this information to be
reliable, Capital Resources Group 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 Holding Company and the
Bank. The appraisal considers the Holding Company and the Bank only as a going
concern and should not be considered to be a liquidation value. THE APPRAISAL BY
CAPITAL RESOURCES GROUP 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 IN THE OFFERING.
LIMITATIONS ON PURCHASES OF SHARES
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. The
Plan of Conversion provides the following purchase limitations: (1) no eligible
subscriber (including all persons on a joint account) may purchase more than
$150,000 of common stock in the Subscription Offering; (2) no person may
purchase more than $150,000 of common stock in the Direct Community Offering;
(3) no person may purchase more than $150,000 of common stock in the Syndicated
Community Offering; and (4) no person, either alone or together with associates
of or persons acting in concert with such person, may purchase in the aggregate
more than the overall maximum purchase limitation of $220,000 of common stock.
For purposes of the Plan of Conversion, the directors are not deemed to be
acting in concert solely
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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.
The Bank's and the Holding Company's Boards of Directors 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 if the
maximum purchase limitation is increased to more than 5% of the shares sold in
the conversion, 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 Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above, persons who
subscribed for the maximum number of shares of common stock will be, and other
large subscribers in the discretion of the Holding Company and the Bank may be,
given the opportunity to increase their subscriptions accordingly, subject to
the rights and preferences of any person who has priority subscription rights.
The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party. The Holding Company and the Bank may presume that
certain persons are acting in concert based upon, among other things, joint
account relationships and the fact that such persons have filed joint Schedules
13D with the SEC with respect to other companies.
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 Bank, including its Chairman of the Board, President,
Vice Presidents, Secretary and Treasurer.
Common stock purchased pursuant to 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."
RESTRICTIONS ON REPURCHASE OF STOCK
Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) 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 Bank'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
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repurchase would not adversely affect the financial condition of the
institution. Any repurchases of common stock by the Holding Company would be
subject to these regulatory restrictions unless the OTS would provide otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of common stock purchased in the 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 MRDP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the
conversion are not subject to this restriction. Accordingly, shares of common
stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's common stock with respect to the restriction on transfers. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted common stock shall be subject to the same
restrictions.
Purchases of outstanding shares of common stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following the conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding common stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act of 1933 for the registration of the common stock to be issued
pursuant to the conversion. The registration of shares of the common stock to be
issued in the conversion 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.
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 "WHERE
YOU CAN FIND MORE INFORMATION" as to how to obtain a copy of these documents.
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CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquirer 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 acquirer also
is subject to any one of specified "control factors," constitutes a rebuttal
determination of control under the regulations. Such control factors include the
acquirer 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 rebuttal determination of control and will take
no action which would result in a determination or rebuttal determination of
control without prior notice to or approval of the OTS, as applicable. There are
also rebuttal 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
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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 "WHERE YOU CAN FIND MORE 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 (the "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 the federal securities laws 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 the ESOP or 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. The Bylaws of the Holding Company
provide that each director must at all times be the beneficial owner of not less
than 100 shares of the Holding Company's common stock. The Bylaws also provide
that no person seventy years of age shall be eligible for election to the Board
of Directors and that any director who becomes seventy years of age may serve
until the completion of his term. Finally, the Bylaws provide that to be
eligible for election to the Board of Directors a person must reside within 50
miles of an office of the Holding Company or the Bank.
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 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
9,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an
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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, financing, 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 duties, to issue a series of preferred
stock to persons friendly to management in order to attempt to block a tender
offer, merger or other transaction by which a third party seeks control of the
Holding Company, and thereby assist members of management to retain their
positions. The Holding Company's Board currently has no plans for the issuance
of additional shares, other than the issuance of shares of common stock upon
exercise of stock options and in connection with the MRDP.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation require the approval of the holders
of at least 80% of the Holding Company's outstanding shares of voting stock to
approve certain "Business Combinations" (as defined therein) involving a
"Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became a
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Articles of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into any
Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into the Holding Company
or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Indiana law, absent this provision, business combinations, including
mergers, share exchanges and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. The increased stockholder vote
required to approve a business combination may have the effect of foreclosing
mergers and other business combinations which a majority of stockholders deem
desirable and placing the power to prevent such a merger or combination in the
hands of a minority of stockholders.
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 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
90
<PAGE>
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 Board of Directors of the Bank believes that the
provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Holding Company and the Bank in the orderly deployment of
the conversion proceeds into productive assets during the initial period after
the conversion. The Board of Directors believes these provisions are in the best
interest of the Bank and Holding Company and its stockholders. In the judgment
of the Board of Directors, the Holding Company's Board will be in the best
position to determine the true value of the Holding Company and to negotiate
more effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interest of
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at a price reflective of the true value of the Holding Company and
that is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
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, 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 Board
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 restriction 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
91
<PAGE>
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 9,000,000 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 NON WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The 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.
VOTING RIGHTS. Upon conversion, 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 Indiana 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 the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of more than 50% of the
outstanding shares entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its 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 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.
92
<PAGE>
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
None of the shares of the authorized Holding Company preferred stock will
be issued in the conversion and there are no plans to issue the preferred stock.
Such 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.
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."
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 result of such registration, the proxy and tender offer rules, insider
trading reporting and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for the Holding
Company by Muldoon, Murphy & Faucette, Washington, D.C. The federal tax
consequences of the offering have been opined upon by Muldoon, Murphy & Faucette
and the Indiana tax consequences of the offering have been opined upon by Olive
LLP. Muldoon, Murphy & Faucette and Olive LLP have consented to the references
herein to their opinions. Certain legal matters will be passed upon for Capital
Resources, Inc. by Steele, Silcox & Browning, P.C., Washington, D.C.
EXPERTS
The financial statements of the Bank as of June 30, 1998 and 1997 and for
the years ended June 30, 1998, 1997 and 1996 included in this prospectus have
been audited by Olive LLP independent auditors, as stated in its report
appearing herein, and have been so included in reliance upon the report of such
firm given upon its authority as experts in accounting and auditing.
Capital Resources Group 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 Holding Company 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.
93
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-________) under the Securities Act of 1933 with respect to the
common stock offered in the conversion. This prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. You may read
and copy such information at the SEC's public reference room in Washington, D.C.
You can request copies of those documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Registration
Statement, including this prospectus and the exhibits, also is available through
the SEC's World Wide Web site on the Internet (http://www.sec.gov).
The Bank has filed with the OTS an Application for Approval of Conversion,
which includes proxy materials for the Bank's Special Meeting and certain other
information. 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 Central Regional
Office of the OTS, 200 West Madison Street, Suite 1300, Chicago, IL 60606.
94
<PAGE>
INDEX TO FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Independent auditor's report--June 30, 1998 F-1
Consolidated balance sheet as of September 30, 1998 (unaudited)
and June 30, 1998 and 1997 F-2
Consolidated statement of income for the three-month periods ended
September 30, 1998 and 1997 (unaudited) and the years ended June 30,
1998, 1997 and 1996 24
Consolidated statement of equity capital for the three-month
period ended September 30, 1998 (unaudited) and the three years ended
June 30, 1998, 1997 and 1996 F-3
Consolidated statement of cash flows for the three-month periods ended
September 30, 1998 and 1997 (unaudited) and the years ended
June 30, 1998, 1997 and 1996 F-4
Notes to consolidated financial statements F-5
</TABLE>
All schedules are omitted because the required information is not applicable or
is included in the consolidated financial statements and related notes.
The Holding Company has not commenced operations as of September 30, 1998 and
will not commence operations prior to the conversion of First Federal Savings
Bank from a federal savings bank to a federal stock savings bank. Accordingly,
the financial statements of the Holding Company have been omitted and are not
required.
95
<PAGE>
[LOGO OF OLIVE APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
First Federal Savings Bank
Evansville, Indiana
We have audited the consolidated balance sheet of First Federal Savings Bank and
subsidiary as of June 30, 1998 and 1997, and the related consolidated statements
of income, changes in equity capital and cash flows for each of the three years
in the period ended June 30, 1998. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of First
Federal Savings Bank and subsidiary as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Olive LLP
Evansville, Indiana
August 12, 1998, except for note 16,
as to which the date is September 16,
1998
(F-1)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
-----------------------------
1998 1998 1997
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 888,262 $ 926,974 $ 940,736
Interest-bearing demand deposits 12,665,601 10,442,095 6,797,436
Federal funds sold 420,000 320,000 25,000
------------------------------------------
Total cash and cash equivalents 13,973,863 11,689,069 7,763,172
Interest-bearing deposits 1,882,000 2,279,000 5,546,000
Investment securities
Available for sale 4,015,967 4,375,672 7,864,682
Held to maturity (fair value of
$48,304,000 (unaudited), $49,463,000
and $52,118,000) 47,987,499 49,363,642 52,469,675
------------------------------------------
Total investment securities 52,003,466 53,739,314 60,334,357
Loans, net of allowance for loan
losses of $250,000 38,183,162 35,655,003 32,164,336
Premises and equipment 1,513,210 1,520,311 888,861
Federal Home Loan Bank stock 727,400 727,400 727,400
Other assets 3,344,239 3,353,715 3,322,798
------------------------------------------
Total assets $111,627,340 $108,963,812 $110,746,924
==========================================
LIABILITIES
Deposits
Non-interest bearing $ 216,530 $ 197,161 $ 205,586
Interest bearing 90,744,364 89,031,871 88,354,630
------------------------------------------
Total deposits 90,960,894 89,229,032 88,560,216
Borrowings 3,645,000 3,645,000 7,050,000
Advances by borrowers for taxes and
insurance 560,660 355,841 333,770
Other liabilities 1,344,144 785,282 749,565
------------------------------------------
Total liabilities 96,510,698 94,015,155 96,693,551
------------------------------------------
EQUITY CAPITAL
Retained earnings--substantially
restricted 15,055,306 14,900,739 14,021,035
Accumulated other comprehensive
income 61,336 47,918 32,338
------------------------------------------
Total equity capital 15,116,642 14,948,657 14,053,373
------------------------------------------
Total liabilities and equity
capital $111,627,340 $108,963,812 $110,746,924
==========================================
</TABLE>
See notes to consolidated financial statements.
(F-2)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EQUITY CAPITAL
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
--------------------------------------------------------
<S> <C> <C> <C>
BALANCES, JULY 1, 1995 $13,013,629 $(11,425) $13,002,204
Comprehensive income
Net income 620,046 620,046
Other comprehensive income, net of tax--
unrealized losses on securities (47,707) (47,707)
--------------------------------------------------------
Comprehensive income 620,046 (47,707) 572,339
--------------------------------------------------------
BALANCES, JUNE 30, 1996 13,633,675 (59,132) 13,574,543
Comprehensive income
Net income 387,360 387,360
Other comprehensive income, net of tax--
unrealized gains on securities 91,470 91,470
--------------------------------------------------------
Comprehensive income 387,360 91,470 478,830
--------------------------------------------------------
BALANCES, JUNE 30, 1997 14,021,035 32,338 14,053,373
Comprehensive income
Net income 879,704 879,704
Other comprehensive income, net of tax--
unrealized gains on securities 15,580 15,580
--------------------------------------------------------
Comprehensive income 879,704 15,580 895,284
--------------------------------------------------------
BALANCES, JUNE 30, 1998 14,900,739 47,918 14,948,657
Comprehensive income
Net income (unaudited) 154,567 154,567
Other comprehensive income, net of tax--
unrealized gains on securities (unaudited) 13,418 13,418
--------------------------------------------------------
Comprehensive income (unaudited) 154,567 13,418 167,985
--------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 (UNAUDITED) $15,055,306 $ 61,336 $15,116,642
========================================================
</TABLE>
See notes to consolidated financial statements.
(F-3)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
-------------------------------------------------------------------
1998 1997 1998 1997 1996
-------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 154,567 $ 215,330 $ 879,704 $ 387,360 $ 620,046
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 100,000
Depreciation and amortization 27,319 10,260 96,349 51,180 67,188
Amortization of net loan origination fees (14,836) (11,985) (47,940) (28,412) 34,612
Deferred income tax (5,487) (9,780) (41,607) (54,752) (80,561)
Increase in cash surrender value of life insurance
in excess of premiums paid (23,548) (19,782) (87,234) (81,975) (83,364)
Investment securities amortization (accretion), net 1,057 (30,365) (146,994) (164,730) (341,136)
Gain on disposal of branch office and deposits (399,552)
Net change in
Interest receivable 12,295 81,850 84,555 (5,750) (227,246)
Interest payable and other liabilities 558,862 402,554 35,717 234,808 154,469
Prepaid expense and other assets 15,634 74,352 1,853 1,500 86,850
-------------------------------------------------------------------
Net cash provided by operating activities 725,863 712,434 374,851 339,229 330,858
-------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits 397,000 (395,000) 3,267,000 2,477,000 (894,000)
Proceeds from maturities of securities available for sale 383,705 1,027,645 3,528,075 4,177,517 3,240,899
Purchases of securities held to maturity (8,000,000) (8,230,000) (38,641,921) (14,317,656) (21,987,259)
Proceeds from maturities of securities held to maturity 9,375,086 12,389,295 41,882,979 8,982,598 16,875,685
Net change in loans (2,513,323) 791,942 (3,442,727) 305,532 (84,413)
Purchases of premises and equipment (20,218) (608,260) (779,275) (4,066) (14,768)
Disposal of branch office and deposits (2,319,522)
-------------------------------------------------------------------
Net cash provided (used) by investing activities (377,750) 4,975,622 3,494,609 1,620,925 (2,863,856)
-------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Non-interest bearing, interest-bearing demand
and savings deposits 1,195,282 (687,698) 1,091,502 (1,932,818) (625,457)
Certificates of deposit 536,580 (1,187,852) 2,347,864 1,648,781 2,584,129
Advances by borrowers for taxes and insurance 204,819 189,128 22,071 (83,229) (8,652)
Repayment of long-term debt (3,405,000) (450,000) (500,000)
Proceeds from long-term debt 3,000,000
-------------------------------------------------------------------
Net cash provided (used) by financing activities 1,936,681 (1,686,422) 56,437 (817,266) 4,450,020
-------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,284,794 4,001,634 3,925,897 1,142,888 1,917,022
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,689,069 7,763,172 7,763,172 6,620.284 4,703,262
-------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $13,973,863 $11,764,806 $11,689,069 $ 7,763,172 $ 6,620,284
===================================================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 704,609 $ 841,656 $ 5,041,792 $ 4,586,705 $ 4,629,667
Income tax paid 16,298 85,200 492,900 247,200 234,574
</TABLE>
See notes to consolidated financial statements.
(F-4)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Federal Savings Bank (Bank) and
its wholly-owned subsidiary, FFSL Service Corporation, conform to generally
accepted accounting principles and reporting practices followed by the thrift
industry. The more significant of these policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Bank operates under a federal thrift charter and provides full banking
services. As a federally-chartered thrift, the Bank is subject to regulation by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in Vanderburgh County, Indiana, and surrounding
counties. The Bank's loans are generally secured by specific items of
collateral, including real property and consumer assets.
The accompanying consolidated balance sheet as of September 30, 1998 and the
consolidated statements of income, changes in equity capital and cash flows for
the three months ended September 30, 1998 and 1997 are unaudited and include the
accounts of the Bank and its subsidiary after elimination of all material
intercompany transactions. Management is of the opinion that all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results of the periods reported, have been included in the accompanying
financial statements. The results of operations for the three months ended
September 30, 1998 are not necessarily indicative of those expected for the
remainder of the year.
CONSOLIDATION -- The consolidated financial statements include the accounts of
the Bank and subsidiary after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES-- Debt securities are classified as held to maturity when
the Bank has the positive intent and ability to hold the securities to maturity.
Securities held to maturity are carried at amortized cost. Debt securities not
classified as held to maturity are classified as available for sale. Securities
available for sale are carried at fair value with unrealized gains and losses
reported separately in equity capital, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
(F-5)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. This is generally ninety days after the
loan becomes past due. When interest accrual is discontinued, all unpaid accrued
interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual life of those loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that, as of
September 30, 1998 (unaudited), the allowance for loan losses is adequate based
on information currently available. A worsening or protracted economic decline
in the area within which the Bank operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets, which range from 5 to 50 years. Maintenance and
repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
INVESTMENT IN LIMITED PARTNERSHIP is included in other assets and is recorded
using the equity method of accounting. Losses due to impairment are recorded
when it is determined that the investment no longer has the ability to recover
its carrying amount. The benefits of low-income housing tax credits associated
with the investment are accrued when earned.
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Bank
files consolidated income tax returns with its subsidiary.
(F-6)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 2 -- INVESTMENT SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1998 (UNAUDITED)
Available for sale
Mortgage-backed securities $ 3,908 $108 $ 4,016
--------------------------- ---------
Held to maturity
Federal agencies 8,235 66 8,301
Collateralized auto obligations 1,008 1 1,009
Corporate obligations 2,944 24 $ 1 2,967
Mortgage-backed securities 32,819 289 63 33,045
Commercial paper 2,981 1 2,982
------------------------------------------------------
Total held to maturity 47,987 381 64 48,304
------------------------------------------------------
Total investment securities $51,895 $489 $ 64 $52,320
======================================================
AT JUNE 30, 1998
Available for sale
Mortgage-backed securities $ 4,292 $ 84 $ 4,376
--------------------------- ---------
Held to maturity
Federal agencies 10,232 32 10,264
Collateralized auto obligations 1,009 $ 2 1,007
Corporate obligations 2,956 3 2 2,957
Mortgage-backed securities 31,169 220 151 31,238
Commercial paper 3,998 1 3,997
------------------------------------------------------
Total held to maturity 49,364 255 156 49,463
------------------------------------------------------
Total investment securities $53,656 $339 $156 $53,839
======================================================
AT JUNE 30, 1997
Available for sale
Mortgage-backed securities $ 7,808 $ 76 $ 20 $ 7,864
------------------------------------------------------
Held to maturity
Federal agencies 16,201 22 219 16,004
Collateralized auto obligations 249 249
Mortgage-backed securities 33,530 189 345 33,374
Commercial paper 2,490 1 2,491
------------------------------------------------------
Total held to maturity 52,470 212 564 52,118
------------------------------------------------------
Total investment securities $60,278 $288 $584 $59,982
======================================================
</TABLE>
(F-7)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The amortized cost and fair market value of securities held to maturity and
available for sale at September 30, 1998 (unaudited) and June 30, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998 (UNAUDITED)
Within one year $ 5,179 $ 5,186
One to five years 5,951 5,988
Five to ten years 3,040 3,078
After ten years 998 1,007
-------------------
15,168 15,259
Mortgage-backed securities 32,819 33,045 $3,908 $4,016
---------------------------------------------
Totals $47,987 $48,304 $3,908 $4,016
=============================================
JUNE 30,1998
Within one year $ 6,194 $ 6,203
One to five years 5,963 5,964
Five to ten years 4,040 4,059
After ten years 1,998 1,999
-------------------
18,195 18,225
Mortgage-backed securities 31,169 31,238 $4,292 $4,376
---------------------------------------------
Totals $49,364 $49,463 $4,292 $4,376
=============================================
</TABLE>
Securities with a carrying value of $6,787,000 and $7,322,000 were pledged at
September 30, 1998 (unaudited) and June 30, 1998 to secure FHLB advances and
certain other funds advanced to the Bank as part of the Community Reinvestment
Act.
In December 1995, the Bank transferred certain securities from held to maturity
to available for sale in accordance with a transition reclassification allowed
by the Financial Accounting Standards Board. Such securities had a carrying
value of $10,422,468 and a fair value of $10,469,217.
(F-8)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 -- LOANS AND ALLOWANCE
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
---------------------
1998 1998 1997
-------------------------------------
(Unaudited)
<S> <C> <C> <C>
Real estate loans $37,942 $35,161 $31,336
Credit line equity loans 997 937 1,047
Loans to depositors secured by savings 146 226 131
Consumer loans 542 501 424
-------------------------------------
39,627 36,825 32,938
-------------------------------------
Undisbursed portion of loans (958) (700) (349)
Deferred loan fees (236) (220) (175)
Allowance for loan losses (250) (250) (250)
-------------------------------------
(1,444) (1,170) (774)
-------------------------------------
$38,183 $35,655 $32,164
=====================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
---------------------------------------------------------------------
1998 1997 1998 1997 1996
---------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
Balances, beginning of period $250 $250 $250 $250 $150
Provision for losses 100
---------------------------------------------------------------------
Balances, end of period $250 $250 $250 $250 $250
=====================================================================
</TABLE>
The Bank has not had any impaired loans during the three years ended June 30,
1998, 1997 and 1996 or the three months ended September 30, 1998 (unaudited).
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid balances of these loans were $9,055,000
and $7,198,000 at September 30, 1998 and 1997 (unaudited) and $7,994,000,
$7,276,000 and $7,712,000 at June 30, 1998, 1997 and 1996.
(F-9)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 4 -- PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
-----------------------
1998 1998 1997
---------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $ 639 $ 639 $ 515
Buildings 1,840 1,840 1,669
Equipment 858 838 787
---------------------------------------
Total cost 3,337 3,317 2,971
Accumulated depreciation (1,824) (1,797) (2,082)
---------------------------------------
Net $ 1,513 $ 1,520 $ 889
=======================================
</TABLE>
In October 1997, the Bank sold the real estate, equipment and deposit accounts
of its Mr. Vernon, Indiana branch in exchange for cash. Gains on the disposal of
real estate and equipment of $261,000 and on the disposal of deposits of
$139,000 are included in other income for 1998. Approximately $2,800,000 of
deposits were sold at a 5% premium.
(F-10)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 5 -- OTHER ASSETS AND OTHER LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
----------------------
1998 1998 1997
-------------------------------------
(Unaudited)
<S> <C> <C> <C>
Other assets
Interest receivable
Investment securities $ 490 $ 502 $ 620
Loans 181 181 148
Cash value of insurance 2,084 2,061 1,973
Investment in limited partnership 268 277 330
Net deferred tax asset 142 148 117
Prepaid expenses and other 179 185 135
-------------------------------------
Total $3,344 $3,354 $3,323
=====================================
Other liabilities
Interest payable
Deposits $ 613 $ 144 $ 239
Other borrowings 114 103 73
Deferred directors' fees and officer compensation 405 382 296
Accrued expenses 212 156 142
-------------------------------------
Total $1,344 $ 785 $ 750
=====================================
</TABLE>
The investment in limited partnership of $268,000, $277,000 and $330,000 at
September 30, 1998 (unaudited) and June 30, 1998 and 1997 represents a 40
percent equity interest in Vann Park II, L.P., a limited partnership organized
to build, own and operate a 44-unit apartment complex. In addition to recording
its equity in the losses of $53,000, $32,000 and $82,000, the Bank has recorded
the benefit of low-income housing tax credits of $73,000 for each of the years
ended June 30, 1998, 1997 and 1996. For each of the three-month periods ended
September 30, 1998 and 1997 (unaudited), the Bank recorded equity in the losses
of the partnership of $9,000, as well as the benefit of low-income housing tax
credits of $18,250.
(F-11)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 6 -- DEPOSITS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
-----------------------
1998 1998 1997
--------------------------------------
(Unaudited)
<S> <C> <C> <C>
Demand deposits $11,866 $10,624 $ 8,910
Savings deposits 10,359 10,406 11,731
Certificates and other time deposits of $100,000 or more 7,278 6,782 6,865
Other certificates and time deposits 61,458 61,417 61,054
--------------------------------------
Total deposits $90,961 $89,229 $88,560
======================================
</TABLE>
Certificates maturing in years ending:
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
- -------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
1999 $37,547 $35,702
2000 24,939 25,369
2001 3,754 4,423
2002 1,453 1,141
2003 583 1,011
Thereafter 460 553
--------------------------
$68,736 $68,199
==========================
</TABLE>
Interest expense on deposits:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
------------------------------------------------------
1998 1997 1998 1997 1996
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest-bearing demand $ 19 $ 23 $ 85 $ 103 $ 113
Money market savings deposits 71 27 115 117 138
Savings deposits 70 84 295 352 398
Certificates 960 944 4,089 3,730 3,643
------------------------------------------------------
$ 1,120 $ 1,078 $ 4,584 $ 4,302 $ 4,292
======================================================
</TABLE>
Deposits in excess of $100,000 are not federally insured.
(F-12)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 7 -- BORROWINGS
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
---------------------------
1998 1998 1997
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Federal Home Loan Bank advances
Variable rate, 5.5% at September 30, 1998
(unaudited), due in March 1999 $3,645 $3,645 $4,050
Fixed rate, 5.9%, paid February 1998 3,000
-----------------------------------------------
$3,645 $3,645 $7,050
===============================================
</TABLE>
NOTE 8 -- INCOME TAX
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
-------------------------------------------------------------
1998 1997 1998 1997 1996
-------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income tax
Currently payable
Federal $45 $ 87 $ 332 $ 141 $ 179
State 21 31 125 25 101
Deferred
Federal (4) (7) (32) (45) (68)
State (1) (3) (10) (9) (13)
-------------------------------------------------------------
Total income tax expense $61 $108 $ 415 $ 112 $ 199
=============================================================
Reconciliation of federal statutory
to actual tax expense
Federal statutory income tax at 34% $73 $110 $ 440 $ 170 $ 278
State income taxes, net of federal benefit 13 19 76 11 58
Cash surrender value of life insurance (7) (7) (30) (28) (28)
Tax credits (18) (18) (73) (73) (73)
Other 4 2 32 (36)
-------------------------------------------------------------
Actual tax expense $61 $108 $ 415 $ 112 $ 199
=============================================================
</TABLE>
(F-13)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
----------------------------
1998 1998 1997
-------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Differences in accounting for loan losses $ 90 $ 91 $ 90
Differences in accounting for loan fees 35 37 48
Deferred compensation and directors fees 198 188 139
Other 5 5 2
-------------------------------------------
Total assets 328 321 279
-------------------------------------------
LIABILITIES
Differences in depreciation methods (83) (83) (79)
Federal Home Loan Bank dividends (55) (55) (55)
Accretion of investment discounts (4)
Other (2)
Accretion of investment discounts (4)
Unrealized gain on securities available for sale (46) (35) (24)
-------------------------------------------
Total liabilities (186) (173) (162)
-------------------------------------------
$ 142 $ 148 $ 117
-------------------------------------------
</TABLE>
A valuation allowance was not considered necessary at September 30, 1998
(unaudited) and June 30, 1998 and 1997.
Retained earnings at September 30, 1998 (unaudited) and June 30, 1998 include
approximately $4,102,000, for which no deferred income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income would
be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amount at September 30, 1998
(unaudited) and June 30, 1998 was approximately $1,395,000.
NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as guarantees and commitments to extend credit
which are not included in the accompanying consolidated financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The Bank
uses the same credit policies in making such commitments as it does for
instruments that are included in the consolidated balance sheet.
(F-14)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Commitments to extend credit, which represent financial instruments whose
contract amount represents credit risk, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
---------------------------------------
1998 1998 1997
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Loan commitments
At variable rates $2,308 $2,108 $1,855
At fixed rates ranging from
6.75% to 7.25% 793
6.75% to 7.25% 710
8.25% to 9.25% 176
--------------------------------------------------------
$3,101 $2,818 $2,031
========================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties or other assets of the borrower.
The Bank and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Bank.
NOTE 10 -- REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
(F-15)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At September 30, 1998 (unaudited)
and June 30, 1998 and 1997, the Bank is categorized as well capitalized and met
all subject capital adequacy requirements. There are no conditions or events
since September 30, 1998 (unaudited) that management believes have changed the
Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL* CAPITALIZED*
---------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
Total risk-based capital* (to risk-
weighted assets) $15,306 34.88% $3,511 8.00% $4,389 10.00%
Core capital* (to adjusted tangible
assets) 15,056 13.47 4,470 4.00 6,705 6.00
Core capital* (to adjusted total assets) 15,056 13.47 4,472 4.00 5,591 5.00
AS OF JUNE 30, 1998
Total risk-based capital* (to risk-
weighted assets) $15,151 34.7% $3,488 8.00% $4,361 10.00%
Core capital* (to adjusted tangible
assets) 14,901 13.6 4,383 4.00 6,575 6.00
Core capital* (to adjusted total assets) 14,901 13.6 4,385 4.00 5,482 5.00
AS OF JUNE 30, 1997
Total risk-based capital* (to risk-
weighted assets) $14,271 37.3% $3,057 8.00% $3,821 10.00%
Core capital* (to adjusted tangible
assets) 14,021 12.6 4,443 4.00 6,664 6.00
Core capital* (to adjusted total assets) 14,021 12.6 4,444 4.00 5,555 5.00
</TABLE>
*As defined by regulatory agencies
The Bank's tangible capital at September 30, 1998 (unaudited) and June 30, 1998
was $15,056,000 and $14,901,000, which amount was 13.5% and 13.6% of tangible
assets and exceeded the required ratio of 1.5%.
(F-16)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Reconciliation of capital for financial statement purposes to regulatory capital
was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 (UNAUDITED)
-----------------------------------------------------
CORE TANGIBLE RISK-BASED
CAPITAL CAPITAL CAPITAL
-----------------------------------------------------
<S> <C> <C> <C>
Capital for financial statement purposes $15,117 $15,117 $15,117
Unrealized gain on securities available for sale (61) (61) (61)
General loan valuation allowance 250
-----------------------------------------------------
Regulatory capital $15,056 $15,056 $15,306
=====================================================
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------------------------------------------------
RISK- RISK-
CORE TANGIBLE BASED CORE TANGIBLE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital for financial statement purposes $14,949 $14,949 $14,949 $14,053 $14,053 $14,053
Unrealized gain on securities available
for sale (48) (48) (48) (32) (32) (32)
General loan valuation allowance 250 250
--------------------------------------------------------------------------------
Regulatory capital $14,901 $14,901 $15,151 $14,021 $14,021 $14,271
================================================================================
</TABLE>
NOTE 11 -- PENSION AND EMPLOYEE BENEFIT PLANS
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund (FIRF). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1998, the date of the latest
actuarial valuation. Pension expense was $200 and $1,400 for the three months
ended September 30, 1998 and 1997 (unaudited) and $1,700, $8,500 and $35,300 for
the years ended June 30, 1998, 1997 and 1996. This plan provides pension
benefits for substantially all of the Bank's employees.
The Bank has a retirement savings Section 401(k) plan in which substantially all
employees may participate. The Bank matches employees' contributions at the rate
of 50% of the first 6% of base salary contributed by participants. The Bank's
expense for the plan was $4,900 for each of the quarters ended September 30,
1998 and 1997 (unaudited) and $30,000, $23,700 and $23,300 for the years ended
June 30, 1998, 1997 and 1996.
(F-17)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Bank also has a supplemental retirement plan and deferred compensation
arrangements for the benefit of certain officers. These arrangements are funded
by life insurance contracts which have been purchased by the Bank. The Bank's
expense for the plan was $9,700 and $8,600 for each of the quarters ended
September 30, 1998 and 1997 (unaudited) and $36,300, $32,100 and $27,700 for the
years ended June 30, 1998, 1997 and 1996. The Bank also established deferred
compensation arrangements with certain directors whereby, in lieu of currently
receiving fees, the directors or their beneficiaries will be paid benefits for
an established period following the director's retirement or death. These
arrangements are also funded by life insurance contracts which have been
purchased by the Bank.
NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.
INTEREST-BEARING DEPOSITS--The fair value of interest-bearing time deposits
approximates carrying value.
INVESTMENT SECURITIES--Fair values are based on quoted market prices.
LOANS--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans, including one-to-four family
residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans, are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable
approximate carrying values.
FHLB STOCK--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
CASH SURRENDER VALUE OF LIFE INSURANCE--The fair values of cash surrender values
of life insurance approximate carrying values.
DEPOSITS--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
LONG-TERM DEBT--The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt. Fair
value approximates carrying value.
(F-18)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
OFF-BALANCE SHEET COMMITMENTS--Commitments include commitments to purchase and
originate mortgage loans and commitments to sell mortgage loans and are
generally of a short-term nature. The fair value of such commitments are based
on fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit standing.
The carrying amounts of these commitments, which are immaterial, are reasonable
estimates of the fair value of these financial instruments.
The estimated fair values of the Bank's financial instruments are as follows;
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------
SEPTEMBER 30, 1998 1998 1997
-------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $13,974 $13,974 $11,689 $11,689 $ 7,763 $ 7,763
Interest-bearing deposits 1,882 1,882 2,279 2,279 5,546 5,546
Investment securities available for sale 4,016 4,016 4,376 4,376 7,864 7,864
Investment securities held to maturity 47,987 48,304 49,364 49,463 52,470 52,118
Loans, net 38,183 39,909 35,655 35,931 32,164 31,269
Interest receivable 671 671 683 683 768 768
FHLB stock 727 727 727 727 727 727
Cash surrender value of life insurance 2,084 2,084 2,061 2,061 1,973 1,973
LIABILITIES
Deposits 90,961 92,102 89,229 89,556 88,560 88,424
Long-term debt 3,645 3,645 3,645 3,645 7,050 7,050
Interest payable 727 727 247 247 312 312
</TABLE>
Note 13 -- OTHER COMPREHENSIVE INCOME--UNREALIZED GAINS (LOSSES) ON SECURITIES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30
---------------------------------------------------------
1998 1998 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Before tax amount $24 $27 $158 $(83)
Tax (expense) benefit (11) (11) (67) 35
-------------------------------------------------------------------------
Net-of-tax amount--other
comprehensive income $13 $16 $91 $(48)
=========================================================================
</TABLE>
(F-19)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 14--RELATED PARTY TRANSACTIONS
Deposits from related parties held by the Bank at September 30, 1998 (unaudited)
and June 30, 1998 and 1997, totaled $756,000, $855,900 and $767,500.
NOTE 15--YEAR 2000
Like all entities, the Bank and its subsidiary are exposed to risks associated
with the Year 2000 issue, which affects computer software and hardware;
transactions with customers, vendors and other entities, and equipment dependent
upon microchips. The Bank has begun, but has not yet completed, the process of
identifying and remediating potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of the Year 2000 issue on third parties with which
the Bank and its subsidiary do business. If remediation efforts of the Bank or
third parties with which the Bank and its subsidiary do business are not
successful, the Year 2000 issue could have negative effects on the Bank's
financial condition and results of operations in the near term.
NOTE 16--SUBSEQUENT EVENT--PLAN OF CONVERSION
On September 16, 1998, the Board of Directors adopted a plan of conversion
(Plan) whereby the Bank will convert from a federally chartered mutual
institution to a federally chartered stock savings bank. The Plan is subject to
approval of regulatory authorities and members at a special meeting. The stock
of the Bank will be issued to First Bancorp of Indiana, Inc. (First), a holding
company formed in connection with the conversion, and the Bank will become a
wholly-owned subsidiary of First. Pursuant to the Plan, shares of capital stock
of First are expected to be offered initially for subscription to eligible
members of the Bank and certain other persons as of specified dates subject to
various subscription priorities as provided in the Plan. The capital stock will
be offered at a price to be determined by the Board of Directors based upon an
appraisal to be made by an independent appraisal firm. The exact number of
shares to be offered will be determined by the Board of Directors in conjunction
with the determination of the subscription price. At least the minimum number of
shares offered in the conversion must be sold. Any stock not purchased in the
subscription offering may be sold in a community offering expected to be held
concurrently with the subscription offering.
(F-20)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the retained income of the Bank as of
the date of the most recent financial statements contained in the final
conversion prospectus. The liquidation account is established to provide a
limited priority claim to the assets of the Bank to qualifying depositors
(eligible account holders) at September 30, 1998 and other depositors
(supplemental eligible account holders) as of December 31, 1998 who continue to
maintain deposits in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, and only in such event, eligible account
holders would receive from the liquidation account a liquidation distribution
based on their proportionate share of the then total remaining qualifying
deposits.
Certain regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned liquidation account. Also, capital
distribution regulations limit the Bank's ability to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged to
the capital account based on its capital level and supervisory condition.
Costs of conversion will be netted from proceeds of sale of common stock and
recorded as a reduction of additional paid-in capital or common stock. If the
conversion is not completed, such costs, totaling $48,000 at September 30, 1998
(unaudited), would be charged to expense.
(F-21)
<PAGE>
You should rely only on the information contained in this document. Neither
First Bancorp of Indiana, Inc. nor First Federal Savings Bank have authorized
anyone to provide you with information that is different. 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
Bancorp of Indiana, Inc. or First Federal Savings Bank since any of the dates as
of which information is furnished herein or since the date hereof.
[Logo for First Bancorp of Indiana, Inc.]
(Proposed Holding Company for
First Federal Savings Bank)
__________to __________ Shares of
Common Stock
----------------
PROSPECTUS
----------------
Capital Resources, Inc.
______ __, 1999
UNTIL THE LATER OF _______, 1999, 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.(1)
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses..................... $160,000
Underwriter's legal fees.................... 35,000
EDGAR, printing, postage and mailing........ 95,000
Appraisal and business plan fees............ 35,000
Accounting fees and expenses................ 70,000
Securities marketing expenses............... 30,000
Data processing fees........................ 20,000
SEC fee..................................... 7,500
Blue Sky fees and expenses.................. 15,000
OTS fee..................................... 8,400
Other....................................... 20,100
--------
TOTAL....................................... $496,000
========
</TABLE>
______________________
(1) In addition to the above expenses, Capital Resources, Inc. will receive a
fee of 1.25% of the aggregate purchase price of the shares of common stock
sold in the Subscription Offering and Direct Community Offering, excluding
shares purchased by the ESOP and by officers and directors of the Bank and
their associates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Indiana Business Corporation Law of the State of Indiana
(being Section 7 of the Indiana Code), Article 7 of First Bancorp of Indiana,
Inc.'s Articles of Incorporation provides as follows:
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.
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
II-1
<PAGE>
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 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
II-2
<PAGE>
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 1 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
None.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between First Federal Savings Bank and Capital
Resources, Inc. **
1.2 Draft Form of Agency Agreement *
2.1 Plan of Conversion of First Federal Savings Bank **
3.1 Articles of Incorporation of First Bancorp of Indiana, Inc. **
3.2 Bylaws of First Bancorp of Indiana, Inc. **
4.1 Form of Stock Certificate of First Bancorp of Indiana, Inc. **
5.1 Draft Opinion of Muldoon, Murphy & Faucette re: legality **
5.2 Draft Opinion of Johnson, Carroll & Griffith re: legality *
8.1 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters **
8.2 Draft Opinion of Olive LLP re: State Tax Matters *
8.3 Opinion of Capital Resources Group, Inc. as to the value of subscription
rights **
10.1 Draft ESOP Loan Commitment Letter and ESOP Loan Documents **
10.2 Form of Proposed Employment Agreement between First Federal Savings Bank,
First Bancorp of Indiana, Inc. and certain executive officers **
10.3 Form of ESOP **
10.4 Form of Proposed First Federal Savings Bank Employee Severance
Compensation Plan **
10.5 Restated and Amended Executive Supplemental Retirement Income Master
Agreement **
10.6 Restated and Amended Director Deferred Compensation Master Agreement **
21.1 Subsidiaries of First Bancorp of Indiana, Inc. **
23.1 Consent of Olive LLP as independent auditors **
23.2 Consent of Muldoon, Murphy & Faucette **
23.3 Consent of Olive LLP *
23.4 Consent of Capital Resources Group, Inc. **
23.5 Consent of Johnson, Carroll & Griffith *
24.1 Power of Attorney
27.1 Financial Data Schedule **
99.1 Appraisal Report of Capital Resources Group, Inc. (P)
99.2 Additional solicitation materials **
99.3 Proxy Statement for Special Meeting of Members of First Federal Savings
Bank **
99.4 Agreement with Capital Resources Group, Inc. **
99.5 Stock Order Form **
______________________
* To be filed by amendment
** Previously filed
(P) This exhibit was filed in paper format pursuant to a continuing hardship
exemption.
II-4
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes to furnish stock certificates
to or in accordance with the instructions of the respective purchasers of the
Common Stock, so as to make delivery to each purchaser promptly following the
closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
CONFORMED
- ---------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Evansville, State of
Indiana, on December 24, 1998.
First Bancorp of Indiana, Inc.
By: /s/ Harold Duncan
----------------------------------
Harold Duncan
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Harold Duncan President, Chief Executive December 24, 1998
- -----------------------
Harold Duncan Officer and Chairman of the Board
(principal executive officer)
/s/ Christopher A. Bengert Treasurer December 24, 1998
- ------------------------------
Christopher A. Bengert (principle financial and
accounting officer)
/s/ Robert L. Clayton, Sr.* Director December 24, 1998
- ------------------------------
Robert L. Clayton, Sr.
/s/ Herbert V. Dassel* Director December 24, 1998
- ------------------------------
Herbert V. Dassel
/s/ Frank E. Kern* Director December 24, 1998
- ------------------------------
Frank E. Kern
/s/ James E. Will, Jr.* Director December 24, 1998
- ------------------------------
James E. Will, Jr.
/s/ Jerry Ziemer* Director December 24, 1998
- ------------------------------
Jerry Ziemer
</TABLE>
* Pursuant to Power of Attorney dated December 16, 1998.
II-6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Harold Duncan as the true and lawful attorney-in-
fact and agent with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities to sign any or all
amendments to the Application for Conversion on Form AC and the Form S-1
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Office of Thrift Supervision
and the U.S. Securities and Exchange Commission, respectively, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and things requisite and necessary to be done as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, the foregoing Power of
Attorney prepared in conjunction with the Application for Conversion on Form AC
and the Form S-1 Registration Statement have been duly signed by the following
persons in the capacities and on the dates indicated.
NAME DATE
---- ----
/s/ Harold Duncan December 16, 1998
- ----------------------------------
Harold Duncan
President, Chief Executive Officer
and Director
(principal executive officer)
First Bancorp of Indiana, Inc.
President and Chief Executive Officer
and Director
(principal executive officer)
First Federal Savings Bank
/s/ Christopher A. Bengert December 16, 1998
- ----------------------------------
Christopher A. Bengert
Treasurer
(principal financial and accounting officer)
First Bancorp of Indiana, Inc.
Senior Vice President and Treasurer
(principal financial and accounting officer)
First Federal Savings Bank
/s/ Robert L. Clayton, Sr. December 16, 1998
- ----------------------------------
Robert L. Clayton, Sr.
Director
First Bancorp of Indiana, Inc.
Chairman of the Board
First Federal Savings Bank
<PAGE>
/s/ Herbert V. Dassel December 16, 1998
- ----------------------------------
Herbert V. Dassel
Director
First Bancorp of Indiana, Inc.
Director
First Federal Savings Bank
/s/ Frank E. Kern December 16, 1998
- ----------------------------------
Frank E. Kern
Director
First Bancorp of Indiana, Inc.
Director
First Federal Savings Bank
/s/ James L. Will, Jr. December 16, 1998
- ----------------------------------
James L. Will, Jr.
Director
First Bancorp of Indiana, Inc.
Director
First Federal Savings Bank
/s/ Jerry Ziemer December 16, 1998
- ----------------------------------
Jerry Ziemer
Director
First Bancorp of Indiana, Inc.
Director
First Federal Savings Bank
