-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JJJBtMZ3viOSXffzx+pO5GugJMRDxjbJcDyCI9HzEsDjNeK7zb/x26NfyF/JZGrc xAyjBPW+gDc5hvsZKhojhw== 0000950109-98-004536.txt : 19980917 0000950109-98-004536.hdr.sgml : 19980917 ACCESSION NUMBER: 0000950109-98-004536 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19980916 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CAPITAL INC CENTRAL INDEX KEY: 0001070296 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-63515 FILM NUMBER: 98710556 BUSINESS ADDRESS: STREET 1: 220 FEDERAL DRIVE N W CITY: CORYDON STATE: IN ZIP: 47112 BUSINESS PHONE: 8127382198 MAIL ADDRESS: STREET 1: 220 FEDERAL DRIVE N W CITY: CORYDON STATE: IN ZIP: 47112 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on September 16, 1998 Registration No. 333- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (INCLUDING EXHIBITS) FIRST CAPITAL, INC. ---------------------------------------- (Exact name of registrant in its charter) Indiana 6035 [applied for] --------------- ---------- ---------------- (State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer incorporation or organization) Identification No.) 220 FEDERAL DRIVE, N.W. CORYDON, INDIANA 47112 (812) 738-2198 ----------------------------------------------------------- (Address and telephone number of principal executive offices and place of business) Paul M. Aguggia, Esquire Victor L. Cangelosi, Esquire BREYER & AGUGGIA LLP 1300 I Street, N.W. Suite 470 East Washington, D.C. 20005 (202) 737-7900 ----------------------------------------------------------- (Name, address and telephone number of agent for service) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]
==================================================================================================================================== Calculation of Registration Fee ==================================================================================================================================== Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of Being Registered Amount Being Price(1) Aggregate Offerin Registration Fee Registered(1) Price(1) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $0.01 Par Value 1,938,750 $10.00 $19,387,500 $5,853 Participation interests 13,000 -- -- (2) ====================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee. As described in the Prospectus, the actual number of shares to be issued and sold are subject to adjustment based upon the estimated pro forma market value of the registrant and market and financial conditions. (2) The securities of the Registrant to be purchased by the First Federal Bank, Federal Savings Bank 401(k) Salary Reduction Plan are included in the amount shown for Common Stock. Accordingly, pursuant to Rule 457(h) of the Securities Act of 1933, as amended, no separate fee is required for the participation interests. Pursuant to such rule, the amount being registered has been calculated on the basis of the number of shares of Common Stock that may be purchased with the current assets of such Plan. The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Cross Reference Sheet showing the location in the Prospectus of the Items of Form SB-2 1. Front of Registration Front of Registration Statement; Outside Front Cover Page Statement and Outside Front Cover of Prospectus 2. Inside Front and Outside Back Inside Front Cover Page; Outside Back Cover Pages of Prospectus Cover Page 3. Summary Information and Risk Factors Prospectus Summary; Risk Factors 4. Use of Proceeds Use of Proceeds; Capitalization 5. Determination of Offering Price Market for Common Stock; The Conversion -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued 6. Dilution * 7. Selling Security-Holders * 8. Plan of Distribution The Conversion 9. Legal Proceedings Business of the Bank -- Legal Proceedings 10. Directors, Executive Officers, Management of the Holding Company; Management of Promoters and Control Persons the Bank 11. Security Ownership of Certain * Beneficial Owners and Management 12. Description of Securities Description of Capital Stock of the Holding Company 13. Interest of Named Experts and Legal and Tax Opinions; Experts Counsel 14. Disclosure of Commission Position Part II - Item 17 on Indemnification for Securities Act Liabilities 15. Organization Within Last Business of the Bank Five Years 16. Description of Business Business of the Holding Company; Business of the Bank 17. Management's Discussion and Management's Discussion and Analysis of Analysis or Plan of Operation Financial Condition and Results of Operations 18. Description of Property Business of the Bank -- Properties
II-1 19. Certain Relationships and Management of the Bank -- Transactions with the Bank Related Transactions 20. Market Price for Common Equity Outside Front Cover Page; Market for Common Stock; and Related Stockholder Matters Dividend Policy 21. Executive Compensation Management of the Bank -- Executive Compensation; and -- Benefits 22. Financial Statements Financial Statements; Pro Forma Data 23. Changes in and Disagreements * with Accountants on Accounting and Financial Disclosure
____________________ *Item is omitted because answer is negative or item inapplicable. II-2 PROSPECTUS SUPPLEMENT FIRST CAPITAL, INC. FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK 401(K) SALARY REDUCTION PLAN This Prospectus Supplement relates to the offer and sale to participants ("Participants") in the First Federal Bank, A Federal Savings Bank 401(k) Salary Reduction Plan ("Plan" or "401(k) Plan") of participation interests and shares of First Capital, Inc. common stock, par value $.01 per share ("Common Stock"), as set forth herein. In connection with the proposed reorganization of First Federal Bank, A Federal Savings Bank ("Savings Bank" or "Employer") from the mutual holding company form of organization to a wholly owned subsidiary of a stock savings and loan holding company, First Capital, Inc. ("Holding Company") has been formed. The reorganization of the Savings Bank as a wholly-owned subsidiary of the Holding Company, the exchange of shares of Savings Bank common stock ("Savings Bank Common Stock") by public stockholders of the Savings Bank ("Public Stockholders") for Common Stock and the sale of Common Stock to the public ("Conversion Offerings") are herein referred to as the "Conversion." Applicable provisions of the 401(k) Plan permit the investment of the Plan assets in Common Stock at the direction of a Plan Participant. This Prospectus Supplement relates to the election of a Participant to direct the purchase of Common Stock in connection with the Conversion. The Prospectus, dated ___________, 1998, of the Holding Company ("Prospectus"), which is attached to this Prospectus Supplement includes detailed information with respect to the Conversion, the Conversion Offerings, the Common Stock and the financial condition, results of operation and business of the Savings Bank and the Holding Company. This Prospectus Supplement, which provides detailed information with respect to the Plan, should be read only in conjunction with the Prospectus. Terms not otherwise defined in this Prospectus Supplement are defined in the Plan or the Prospectus. A PARTICIPANT WHO ELECTS TO PURCHASE COMMON STOCK IN THE CONVERSION THROUGH THE 401(K) PLAN WILL RECEIVE THE SAME SUBSCRIPTION PRIORITY AND BE SUBJECT TO THE SAME INDIVIDUAL PURCHASE LIMITATIONS AS IF THE PARTICIPANT HAD ELECTED TO MAKE SUCH PURCHASE USING OTHER FUNDS. SEE "THE CONVERSION" AND "-- LIMITATIONS ON PURCHASES OF SHARES" IN THE PROSPECTUS. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PARTICIPANT, SEE "RISK FACTORS" IN THE PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus Supplement is ___________, 1998. No person has been authorized to give any information or to make any representations other than those contained in the Prospectus or this Prospectus Supplement in connection with the offering made hereby, and, if given or made, such information and representations must not be relied upon as having been authorized by the Holding Company, the Savings Bank or the Plan. This Prospectus Supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus Supplement and the Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Holding Company, the Savings Bank or the Plan since the date hereof, or that the information herein contained or incorporated by reference is correct as of any time subsequent to the date hereof. This Prospectus Supplement should be read only in conjunction with the Prospectus that is attached herein and should be retained for future reference. TABLE OF CONTENTS
PAGE The Offering Securities Offered................................................. S-1 Election to Purchase Common Stock in the Conversion................ S-1 Value of Participation Interests................................... S-1 Method of Directing Transfer....................................... S-1 Time for Directing Transfer........................................ S-2 Irrevocability of Transfer Direction............................... S-2 Direction to Purchase Common Stock After the Conversion............ S-2 Purchase Price of Common Stock..................................... S-2 Nature of a Participant's Interest in the Common Stock............. S-2 Voting and Tender Rights of Common Stock........................... S-3 Description of the Plan Introduction....................................................... S-3 Eligibility and Participation...................................... S-4 Contributions Under the Plan....................................... S-4 Limitations on Contributions....................................... S-4 Investment of Contributions........................................ S-6 The Employer Stock Fund............................................ S-7 Benefits Under the Plan............................................ S-8 Withdrawals and Distributions from the Plan........................ S-8 Administration of the Plan......................................... S-9 Reports to Plan Participants....................................... S-9 Plan Administrator................................................. S-10 Amendment and Termination.......................................... S-10 Merger, Consolidation or Transfer.................................. S-10 Federal Income Tax Consequences.................................... S-10 Restrictions on Resale............................................. S-13 Legal Opinions.......................................................... S-14
Investment Form i THE OFFERING SECURITIES OFFERED The securities offered hereby are participation interests in the Plan and up to ______ shares, at the actual purchase price of $10.00 per share, of Common Stock which may be acquired by the Plan for the accounts of employees participating in the Plan. The Holding Company is the issuer of the Common Stock. Only employees and former employees of the Savings Bank and their beneficiaries may participate in the Plan. Information regarding the Plan is contained in this Prospectus Supplement and information regarding the Conversion and the financial condition, results of operation and business of the Savings Bank and the Holding Company is contained in the attached Prospectus. The address of the principal executive office of the Savings Bank is 220 Federal Drive, N.W., Corydon, Indiana 47112-0130. The Savings Bank's telephone number is (812) 738-2198. ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION In connection with the Conversion, each Participant in the 401(k) Plan may direct the trustees of the Plan ("Trustees") to transfer up to ___% of a Participant's beneficial interest in the assets of the Plan to the Employer Stock Fund and to use such funds to purchase Common Stock issued in connection with the Conversion. Amounts transferred may include salary deferral, Employer matching and profit sharing contributions. The Employer Stock Fund consists of investments in the Common Stock. Funds not transferred to the Employer Stock Fund may be invested at the Participant's discretion in the other investment options available under the Plan. See "DESCRIPTION OF THE PLAN -- INVESTMENT OF CONTRIBUTIONS" below. A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE EMPLOYER STOCK FUND IN THE CONVERSION OFFERINGS IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION OFFERINGS. FOR GENERAL INFORMATION AS TO THE ABILITY OF THE PARTICIPANTS TO PURCHASE SHARES IN THE CONVERSION OFFERINGS, SEE "THE CONVERSION -- THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS" IN THE ATTACHED PROSPECTUS. VALUE OF PARTICIPATION INTERESTS The assets of the Plan are valued on an ongoing basis and each Participant is informed of the value of his or her beneficial interest in the Plan on a periodic basis. This value represents the market value of past contributions to the Plan by the Savings Bank and by the Participants and earnings thereon, less previous withdrawals, and transfers from other Plans. METHOD OF DIRECTING TRANSFER The last page of this Prospectus Supplement is an investment form to direct a transfer to the Employer Stock Fund ("Investment Form"). If a Participant wishes to transfer funds to the Employer Stock Fund to purchase Common Stock issued in connection with the Conversion Offerings, the S-1 Participant should indicate that decision in Part 2 of the Investment Form. If a Participant does not wish to make such an election, he or she does not need to take any action. TIME FOR DIRECTING TRANSFER THE DEADLINE FOR SUBMITTING A DIRECTION TO TRANSFER AMOUNTS TO THE EMPLOYER STOCK FUND IN ORDER TO PURCHASE COMMON STOCK ISSUED IN CONNECTION WITH THE CONVERSION OFFERINGS IS _______, 1998. The Investment Form should be returned to ______________________________ at the Savings Bank no later than the close of business on such date. IRREVOCABILITY OF TRANSFER DIRECTION A Participant's direction to transfer amounts credited to such Participant's account in the Plan to the Employer Stock Fund in order to purchase shares of Common Stock in connection with the Conversion Offerings shall be irrevocable. Participants, however, will be able to direct the sale of Common Stock, as explained below. DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION After the Conversion, it is anticipated that a Participant will be able to direct that a certain percentage of such Participant's interests in the Plan trust assets ("Trust") be transferred to the Employer Stock Fund and invested in Common Stock or to the other investment funds available under the Plan. Alternatively, a Participant may direct that a certain percentage of such Participant's interest in the Employer Stock Fund be transferred from the Employer Stock Fund to other investment funds available under the Plan. Participants will be permitted to direct that future contributions made to the Plan by or on their behalf be invested in Common Stock. Following the initial election, the allocation of a Participant's interest in the Employer Stock Fund may be changed by the Participant on a periodic basis in accordance with rules established by the Employer. Special restrictions may apply to transfers directed by those Participants who are executive officers, directors and principal stockholders of the Holding Company who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). PURCHASE PRICE OF COMMON STOCK The funds transferred to the Employer Stock Fund for the purchase of Common Stock in connection with the Conversion will be used by the Trustees to purchase shares of Common Stock. The price paid for such shares of Common Stock will be the same price as is paid by all other persons who purchase shares of Common Stock in the Conversion Offerings. NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK The Holding Company Stock purchased for an account of a Participant will be held in the Employer Stock Fund. Any earnings, losses or expenses with respect to the Common Stock, S-2 including dividends and appreciation or depreciation in value, will be credited or debited to the account and will not be credited to or borne by any other accounts. VOTING AND TENDER RIGHTS OF COMMON STOCK The Trustees generally will exercise voting and tender rights attributable to all Common Stock held by the Trust as directed by Participants with an interest in the Employer Stock Fund. With respect to each matter as to which holders of Common Stock have the right to vote, each Participant will be allocated a number of voting instruction rights reflecting such Participant's proportionate interest in the Employer Stock Fund. The percentage of shares of Common Stock held in the Employer Stock Fund that are voted in the affirmative or negative on each matter shall be the same percentage of the total number of voting instruction rights that are exercised in either the affirmative or negative, respectively. DESCRIPTION OF THE PLAN INTRODUCTION The Savings Bank adopted the Plan in 1993. The Plan is a cash or deferred arrangement established in accordance with the requirement under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended ("Code"). The Savings Bank intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. The Savings Bank will adopt any amendments to the Plan that may be necessary to ensure the qualified status of the Plan under the Code and applicable U.S. Treasury Regulations. The Savings Bank has received a determination from the Internal Revenue Service ("IRS") that the Plan is qualified under Section 401(a) of the Code and that it satisfies the requirements for a qualified cash or deferred arrangement under Section 401(k) of the Code. EMPLOYEE RETIREMENT INCOME SECURITY ACT. The Plan is an "individual account plan" other than a "money purchase pension plan" within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of ERISA, except the funding requirements contained in Part 3 of Title I of ERISA, which by their terms do not apply to an individual account plan (other than a money purchase pension plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the funding requirements contained in Title IV of ERISA nor the plan termination insurance provisions contained in Title IV will be extended to Participants or beneficiaries under the Plan. REFERENCE TO FULL TEXT OF PLAN. THE FOLLOWING STATEMENTS ARE SUMMARIES OF THE MATERIAL PROVISIONS OF THE PLAN. THEY ARE NOT COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY THE FULL TEXT S-3 OF THE PLAN, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT FILED WITH THE SEC. COPIES OF THE PLAN ARE AVAILABLE TO ALL EMPLOYEES BY FILING A REQUEST WITH THE PLAN ADMINISTRATOR. EACH EMPLOYEE IS URGED TO READ CAREFULLY THE FULL TEXT OF THE PLAN. ELIGIBILITY AND PARTICIPATION Any employee of the Savings Bank is eligible to participate and will become a Participant in the Plan following completion of 1,000 hours of service with the Savings Bank within a consecutive 12 month period of employment and the attainment of age 21. The Plan fiscal year is the period October 1 to September 30 ("Plan Year"). Directors who are not employees of the Savings Bank are not eligible to participate in the Plan. During 1997, approximately __ employees participated in the Plan. CONTRIBUTIONS UNDER THE PLAN PARTICIPANT CONTRIBUTIONS. Each Participant in the Plan is permitted to elect to reduce such Participant's Compensation (as defined below) pursuant to a salary reduction agreement and have that amount contributed to the Plan on such Participant's behalf. Such amounts are credited to the Participant's deferral contributions account. For purposes of the Plan, "Compensation" means a Participant's total amount of earnings reportable W-2 wages for federal income tax withholding purposes plus a Participant's elective deferrals pursuant to a salary reduction agreement under the Plan or any elective deferrals to a Section 125 plan. Due to recent statutory changes, the annual Compensation of each Participant taken into account under the Plan is limited to $160,000 (as adjusted under applicable Code provisions). A Participant may elect to modify the amount contributed to the Plan under the participant's salary reduction agreement during the Plan Year. Deferral contributions are generally transferred by the Savings Bank to the Trustees of the Plan on a periodic basis. EMPLOYER CONTRIBUTIONS. The Savings Bank currently matches a Participant's deferral contributions or a discretionary basis in an amount determined annually to a maximum of 6% of Compensation. In addition, the Employer may make a discretionary contribution in proportion to a Participant's Compensation. LIMITATIONS ON CONTRIBUTIONS LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the requirements of the Code, the Plan provides that the amount of contributions allocated to each Participant's Account during any Plan Year may not exceed the lesser of 25% of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as adjusted periodically under applicable Code provisions). A Participant's "Section 415 Compensation" is a Participant's Compensation, excluding any amount contributed to the Plan under a salary reduction agreement or any employer contribution to the Plan or to any other plan or deferred compensation or any distributions from a plan of deferred compensation. In S-4 addition, annual additions are limited to the extent necessary to prevent the limitations for the combined plans of the Savings Bank from being exceeded. To the extent that these limitations would be exceeded by reason of excess annual additions to the Plan with respect to a Participant, the excess must be reallocated to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year. LIMITATION ON 401(K) PLAN CONTRIBUTIONS. The annual amount of deferred compensation of a Participant (when aggregated with any elective deferrals of the Participant under any other employer plan, a simplified employee pension plan or a tax-deferred annuity) may not exceed $10,000 (as adjusted periodically under applicable Code provisions). Contributions in excess of this limitation ("excess deferrals") will be included in the Participant's gross federal income tax purposes in the year they are made. In addition, any such excess deferral will again be subject to federal income tax when distributed by the Plan to the Participant, unless the excess deferral (together with any income allocable thereto) is distributed to the Participant not later than the first April 15th following the close of the taxable year in which the excess deferral is made. Any income on the excess deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the Participant in the taxable year in which the excess deferral is made. LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES. Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation contributed to the Plan in any Plan Year on behalf of Highly Compensated Employees (defined below) in relation to the amount of deferred compensation contributed by or on behalf of all other employees eligible to participate in the Plan. Specifically, the actual deferral percentage for a Plan Year (i.e., --- the average of the ratios, calculated separately for each eligible employee in each group, by dividing the amount of salary reduction contributions credited to the salary reduction contribution account of such eligible employee by such employee's compensation for the Plan Year) of the Highly Compensated Employees may not exceed the greater of (a) 125% of the actual deferred percentage of all other eligible employees, or (b) the lesser of (i) 200% of the actual deferred percentage of all other eligible employees, or (ii) the actual deferral percentage of all other eligible employees plus two percentage points. In addition, the actual contribution percentage for a Plan Year (i.e., the average --- of the ratios calculated separately for each eligible employee in each group, by dividing the amount of employer contributions credited to the Matching contributions account of such eligible employee by each eligible employee's compensation for the Plan Year) of the Highly Compensated Employees may not exceed the greater of (a) 125% of the actual contribution percentage of all other eligible employees, or (b) the lesser of (i) 200% of the actual contributions percentage of all other eligible employees, or (ii) the actual contribution percentage of all other eligible employees plus two percentage points. In general, a Highly Compensated Employee includes any employee who, during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e., --- owns directly or indirectly more than 5% of the stock of the Employer, or stock possessing more than 5% of the total combines voting power of all stock of the Employer) or, (2) during the preceding Plan Year, received Section S-5 415 Compensation in excess of $80,000 (as adjusted periodically under applicable Code provisions) and, if elected by the Savings Bank, was in the top paid group of employees for such Plan Year. In order to prevent disqualification of the Plan, any amounts contributed by Highly Compensated Employees that exceed the average deferral limitation in any Plan Year ("excess contributions"), together with any income allocable thereto, must be distributed to such Highly Compensated Employees before the close of the following Plan Year. However, the Savings Bank will be subject to a 10% excise tax on any excess contributions unless such excess contributions, together with any income allocable thereto, either are recharacterized or are distributed before the close of the first 2 1/2 months following the Plan Year to which such excess contributions relate. In addition, in order to avoid disqualification of the Plan, any contributions by Highly Compensated Employees that exceed the average contribution limitation in any Plan Year ("excess aggregate contributions") together with any income allocable thereto, must be distributed to such Highly Compensated Employees before the close of the following Plan Year. However, the 10% excise tax will be imposed on the Savings Bank with respect to any excess aggregate contributions, unless such amounts, plus any income allocable thereto, are distributed within 2 1/2 months following the close of the Plan Year in which they arose. TOP-HEAVY PLAN REQUIREMENTS. If, for any Plan Year, the Plan is a Top- Heavy Plan (as defined below), then (i) the Savings Bank may be required to make certain minimum contributions to the Plan on behalf of non-key employees (as defined below), and (ii) certain additional restrictions would apply with respect to the combination of annual additions to the Plan and projected annual benefits under any defined plan maintained by the Savings Bank. In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan Year, if as of the last day of the preceding Plan Year, the aggregate balance of the accounts of all Participants who are key Employees exceeds 60% of the aggregate balance of the Accounts of the Participants. "Key Employees" generally include any employee, who at any time during the Plan Year or any other the four preceding Plan Years, is (1) an officer of the Savings Bank having annual compensation in excess of $60,000 who is in an administrative or policy-making capacity, (2) one of the ten employees having annual compensation in excess of $30,000 and owing, directly or indirectly, the largest interest in the employer, (3) a 5% owner of the employer (i.e., owns directly or indirectly --- more than 5% of the stock of the employer, or stock possessing more than 5% of the total combined voting power of all stock of the employer), or (4) a 1% of owner of the employer having compensation in excess of $150,000. INVESTMENT OF CONTRIBUTIONS All amounts credited to Participant's Accounts under the Plan are held in the Trust which is administered by the Trustees. The Trustees are appointed by the Savings Bank's Board of Directors. The Plan provides that a Participant may direct the Trustees to invest all or a portion of his or her Accounts in various managed investment portfolios, as described below. A Participant may S-6 periodically elect to change his or her investment directions with respect to both past contributions and for more additions to the Participant's accounts invested in these investment alternatives. Under the Plan, the Accounts of Participant held in the Trust will be invested by the Trustees at the direction of the Participant in the following investment funds: [TO BE COMPLETED] For additional information concerning these investment funds, other than the Employer Stock Fund, please contact ______________________________. The net gain (or loss) in the Accounts from investments (including interest payments, dividends, realized and unrealized gains and losses on securities, and expenses paid from the Trust) are determined on a periodic basis. For purposes of such allocation, all assets of the Trust are valued at their fair market value. THE EMPLOYER STOCK FUND The Employer Stock Fund consists of investments in Common Stock. In connection with the Conversion Offerings, pursuant to the attached Investment Form, Participants will be able to change their investments at a time other than the normal election intervals. Any cash dividends paid on Common Stock held in the Employer Stock Fund will be credited to a cash dividend subaccount for each Participant investing in the Employer Stock Fund. To the extent practicable, all amounts held in the Employer Stock Fund (except the amounts credited to cash dividend subaccounts) will be used to purchase shares of Common Stock. It is expected that all purchases will be made at prevailing market prices. Pending investment in Common Stock, assets held in the Employer Stock Fund will be placed in bank deposits and other short-term investments. When Common Stock is purchased or sold, the cost or net proceeds are charged or credited to the Accounts of Participants affected by the purchase or sale. A Participant's Account will be adjusted to reflect changes in the value of shares of Common Stock resulting from stock dividends, stock splits and similar changes. To the extent dividends are not paid on Common Stock held in the Employer Stock Fund, the return on any investment in the Employer Stock Fund will consist only of the market value appreciation of the Common Stock subsequent to its purchase. INVESTMENTS IN THE EMPLOYER STOCK FUND INVOLVE CERTAIN RISK FACTORS ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE HOLDING COMPANY. FOR A DISCUSSION OF THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS. S-7 BENEFITS UNDER THE PLAN VESTING. A Participant has at all times a fully vested, nonforfeitable interest in all of his or her deferred and employer contributions and the earnings thereon under the Plan. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER TERMINATION OF EMPLOYMENT. DISTRIBUTION UPON RETIREMENT, DEATH, DISABILITY OR TERMINATION OF EMPLOYMENT. The distribution of benefits under the 401(k) Plan to a Participant who retires may be made in the form of a lump-sum payment, installment payments or an annuity payable over a specified period. Distributions generally commence as soon as practicable following the Participant's termination of employment. At the request of the Participant, the distribution may include an in-kind distribution of Common Stock of the Holding Company credited to the Participant's Account. Benefits payments ordinarily must begin not later than 60 days following the end of the Plan Year in which occurs later of the Participant's: (i) termination of employment; (ii) attainment of age 65; or (iii) tenth anniversary of commencement of participation in the Plan; but in no event later than April 1 following the calendar year in which the Participant attains age 70 1/2 (if the Participant is retired). However, if the vested portion of the Participant's Account balances exceeds $3,500, no distribution will be made from the Plan prior to the Participant's attaining age 65 unless the Participant consents to an earlier distribution. Special rules may apply to the distribution of Common Stock of the Holding Company to those Participants who are executive officers, directors and principal shareholders of the Holding Company who are subject to the provisions of Section 16(b) of the Exchange Act. DISTRIBUTION UPON DEATH. A Participant who dies prior to the benefit commencement date for retirement, disability or termination of employment, and who has a surviving spouse, shall have his or her benefits paid to the surviving spouse in a lump sum, or if the payment of his or her benefits had commenced before his or her death, in accordance with the distribution method in effect at his or her death. With respect to an unmarried Participant, and in the case of a married Participant with spousal consent to the designation of another beneficiary, payment of benefits to the beneficiary, payments of benefits to the beneficiary of a deceased Participant shall be made in the form of a lump S-8 sum payment in cash or in Common Stock, or if the payment of his or her benefit had commenced before his or her death, in accordance with the distribution method if effect at death. NONALIENATION OF BENEFITS. Except with respect to federal income tax withholding and as provided with respect to a qualified domestic relations order (as defined in the Code), benefits payable under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the Plan shall be void. ADMINISTRATION OF THE PLAN TRUSTEES. The Trustees with respect to Plan assets are currently ____________________. Pursuant to the terms of the Plan, the Trustees receive and hold contributions to the Plan in trust and have exclusive authority and discretion to manage and control the assets of the Plan pursuant to the terms of the Plan and to manage, invest and reinvest the Trust and income therefrom. The Trustees have the authority to invest and reinvest the Trust and may sell or otherwise dispose of Trust investments at any time and may hold trust funds uninvested. The Trustees have authority to invest the assets of the Trust in "any type of property, investment or security" as defined under ERISA. The Trustees have full power to vote any corporate securities in the Trust in person or by proxy; provided, however, that the Participants will direct the Trustees as to voting and tendering of all Common Stock held in the Employer Stock Fund. The Trustees receive no compensation for their services. The expenses of the Trustees are paid out of the Trust except to the extent such expenses and compensation are paid by the Association. The Trustees must render at least annual reports to the Association and to the Participants in such form and containing such information that the Trustees deem necessary. REPORTS TO PLAN PARTICIPANTS The administrator will furnish to each Participant a statement at least semiannually showing (i) the balance in the Participant's Account as of the end of that period, (ii) the amount of contributions allocated to such Participant's Account for that period, and (iii) the adjustments to such Participant's Account to reflect earnings or losses (if any). S-9 PLAN ADMINISTRATOR The Savings Bank serves as the Plan Administrator. The Plan Administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of plan records, books of account and all other data necessary for the proper administration of the Plan, and preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the IRS, and for all disclosures required to be made to Participants, beneficiaries and others under Sections 104 and 105 of ERISA. AMENDMENT AND TERMINATION The Savings Bank may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, each employee who ceases to be a Participant shall have a fully vested interest in his or her Account. The Savings Bank reserves the right to make, from time to time, any amendment or amendments to the Plan which do not cause any part of the Trust to be used for, or diverted to, any purpose other than the exclusive benefit of the Participants or their beneficiaries. MERGER, CONSOLIDATION OR TRANSFER In the event of the merger or consolidation of the Plan with another plan, or the transfer of the Trust to another plan, the Plan requires that each Participant (if either the Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he or she would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). FEDERAL INCOME TAX CONSEQUENCES THE FOLLOWING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN. THE SUMMARY IS NECESSARILY GENERAL IN NATURE AND DOES NOT PURPORT TO BE COMPLETE. MOREOVER, STATUTORY PROVISIONS ARE SUBJECT TO CHANGE, AS ARE THEIR INTERPRETATIONS, AND THEIR APPLICATION MAY VARY IN INDIVIDUAL CIRCUMSTANCES. FINALLY, THE CONSEQUENCES UNDER APPLICABLE STATE AND LOCAL INCOME TAX LAWS MAY NOT BE THE SAME AS UNDER THE FEDERAL INCOME TAX LAWS. PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN. S-10 The Plan has received a determination from the IRS that it is qualified under Section 401(a) and 401(k) of the Code, and that the related Trust is exempt from tax under Section 501(a) of the Code. A plan that is "qualified" under these sections of the Code is afforded special tax treatment which include the following: (1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan of each year; (2) Participants pay no current income tax on amounts contributed by the employer on their behalf; and (3) earnings of the Plan are tax-exempt thereby permitting the tax-free accumulation of income and gains on investments. The Plan will be administered to comply in operation with the requirements of the Code as of the applicable effective date of any change in the law. The Savings Bank expects to timely adopt any amendments to the Plan that may be necessary to maintain the qualified status of the Plan under the Code. Following such an amendment, the Plan will be submitted to the IRS for a determination that the Plan, as amended, continues to qualify under Sections 401(a) and 501(a) of the Code and that it continues to satisfy the requirements for a qualified cash or deferred arrangement under Section 401(k) of the Code. Assuming that the Plan is administered in accordance with the requirements of the Code, participation in the Plan under existing federal income tax laws will have the following effects: (a) Amounts contributed to a Participant's 401(k) account and the investment earnings are actually distributed or withdrawn from the Plan. Special tax treatment may apply to the taxable portion of any distribution that includes Common Stock or qualified as a "Lump Sum Distribution" (as described below). (b) Income earned on assets held by the Trust will not be taxable to the Trust. LUMP SUM DISTRIBUTION. A distribution from the Plan to a Participant or the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is made: (i) within a single taxable year of the Participant or beneficiary; (ii) on account of the Participant's death or separation from service, or after the Participant attains age 59 1/2; and (iii) consists of the balance to the credits of the Participant under the Plan and all other profit sharing plans, if any, maintained by the Savings Bank. The portion of any Lump Sum Distribution that is required to be included in the Participant's or beneficiary's taxable income for federal income tax purposes ("total taxable amount") consists of the entire amount of such Lump Sum Distribution less the amount of after-tax contributions, if any, made by the Participant to any other profit sharing plans maintained by the Savings Bank which is included in such distribution. AVERAGING RULES. The portion of the total taxable amount of a Lump Sum Distribution ("ordinary income portion") will be taxable generally as ordinary income for federal income tax purposes. However, for distributions occurring prior to January 1, 2000, a Participant who has completed at least five years of participation in the Plan before the taxable year in which the distribution is made, or a beneficiary who receives a Lump Sum Distribution on account of the Participant's death (regardless of the period of the Participant's participation in the Plan or any other profit sharing plan maintained by the Employer), may elect to have the ordinary income portion of S-11 such Lump Sum Distribution taxed according to a special averaging rule ("five- year averaging"). The election of the special averaging rules may apply only to one Lump Sum Distribution received by the Participant or beneficiary, provided such amount is received on or after the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum Distribution from a qualified plan received in the same taxable year taxed under the special averaging rule. The special five-year averaging rule has been repealed for distributions occurring after December 31, 1999. Under a special grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under either the five-year averaging rule (if available) or the prior law ten-year averaging rule. Such individuals also may elect to have that portion of the Lump Sum Distribution attributable to the Participant's pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the sale of a capital asset. COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum Distribution includes Common Stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount will be reduced by the amount of any net unrealized appreciation with respect to such Common Stock, i.e., the excess of the value of such Common Stock at the time of the - --- distribution over its cost to the Plan. The tax basis of such Common Stock to the Participant or beneficiary for purposes of computing gain or loss on its subsequent sale will be the value of the Common Stock at the time of distribution less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of such Common Stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain regardless of the holding period of such Common Stock. Any gain on a subsequent sale or other taxable disposition of the Common Stock in excess of the amount of net unrealized appreciation at the time of distribution will be considered either short-term capital gain or long-term capital gain depending upon the length of the holding period of the Common Stock. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of such distribution to the extent allowed by the regulations by the IRS. DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN OR TO AN IRA. Pursuant to a change in the law, effective January 1, 1993, virtually all distributions from the Plan may be rolled over to another qualified Plan or to an individual retirement account ("IRA") without regard to whether the distribution is a Lump Sum Distribution or Partial Distribution. Effective January 1, 1993, Participants have the right to elect to have the Trustees transfer all or any portion of an "eligible rollover distribution" directly to another plan qualified under Section 401(a) of the Code or to an IRA. If the Participant does not elect to have an "eligible rollover distribution" transferred directly to another qualified plan of to an IRA, the distribution will be subject to a mandatory federal withholding tax equal to 20% of the taxable distribution. An "eligible rollover distribution" means any amount distributed from the Plan except: (1) a distribution that is (a) one of a series of substantially equal periodic payments made (not less frequently than annually) over the Participant's life of the joint life of the Participant and the Participant's designated beneficiary, or (b) for a specified period of ten years or more; (2) any amount that is required to be distributed under the minimum distribution rules; and (3) any other distributions excepted under applicable federal law. The tax law change described above did not modify the special tax treatment of Lump S-12 Sum Distributions, that are not rolled over or transferred, i.e., forward --- averaging, capital gains tax treatment and the nonrecognition of net unrealized appreciation, discussed earlier. ADDITIONAL TAX ON EARLY DISTRIBUTIONS. A Participant who receives a distribution from the Plan prior to attaining age 59 1/2 will be subject to an additional income tax equal to 10% of the taxable amount of the distribution. The 10% additional income tax will not apply, however, to the extent the distribution is rolled over into an IRA or another qualified plan or the distribution is (i) made to a beneficiary (or to the estate of a Participant) on or after the death of the Participant, (ii) attributable to the Participant's being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and his or her beneficiary, (iv) made to the Participant after separation from service on account of early retirement under the Plan after attainment of age 55, (v) made to pay medical expenses to the extent deductible for federal income tax purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made to effect the distribution of excess contributions or excess deferrals. THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN. ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING DISTRIBUTIONS FROM THE PLAN. RESTRICTIONS ON RESALE Any person receiving shares of the Common Stock under the Plan who is an "affiliate" of the Savings Bank or the Holding Company as the term "affiliate" is used in Rules 144 and 405 under the Securities Act of 1933, as amended ("Securities Act") (e.g., directors, officers and substantial shareholders of the Savings Bank) may reoffer or resell such shares only pursuant to a registration statement filed under the Securities Act (the Holding Company and the Savings Bank having no obligation to file such registration statement) or, assuming the availability thereof, pursuant to Rule 144 or some other exemption from the registration requirements of the Securities Act. Any person who may be an "affiliate" of the Savings Bank or the Holding Company may wish to consult with counsel before transferring any Common Stock owned by him or her. In addition, Participants are advised to consult with counsel as to the applicability of the reporting and short-swing profit liability rules of Section 16 of the Exchange Act which may affect the purchase and sale of the Common Stock where acquired or sold under the Plan or otherwise. S-13 LEGAL OPINIONS The validity of the issuance of the Common Stock will be passed upon by Breyer & Aguggia LLP, Washington, D.C., which firm is acting as special counsel for the Holding Company and the Savings Bank in connection with the Conversion. S-14 Investment Form (Employer Stock Fund) FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK 401(K) PLAN Name of Participant:__________________________ Social Security Number:_______________________ 1. Instructions. In connection with the proposed reorganization of First Federal Bank, A Federal Savings Bank ("Savings Bank") from the mutual holding form of organization to a wholly-owned subsidiary of a savings and loan holding company ("Conversion"), participants in the First Federal Bank, A Federal Savings Bank Employees' Savings and Profit Sharing Plan ("Plan") may elect to direct the investment of up to ___% of their account balances into the Employer Stock Fund ("Employer Stock Fund"). Amounts transferred at the direction of Participants into the Employer Stock Fund will be used to purchase shares of the common stock of First Capital, Inc. ("Common Stock"), the proposed holding company for the Savings Bank. A PARTICIPANT'S ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION OFFERINGS AND THE MAXIMUM AND MINIMUM LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. SEE THE PROSPECTUS FOR ADDITIONAL INFORMATION. You may use this form to direct a transfer of funds credited to your account to the Employer Stock Fund, to purchase Common Stock in the Conversion Offerings. To direct such a transfer to the Employer Stock Fund, you should complete this form and return it to ______________________________ at the Savings Bank, NO LATER THAN THE CLOSE OF BUSINESS ON _______, 1998. The Savings Bank will keep a copy of this form and return a copy to you. (If you need assistance in completing this form, please contact the Human Resources Department.) 2. Transfer Direction. I hereby elect to transfer $__________ (in increments of $20) to the Employer Stock Fund to be applied to the purchase of Common Stock in the Conversion Offerings. Please transfer this amount from the following investments as indicated:____________________________________________. 3. Effectiveness of Direction. I understand that this Investment Form shall be subject to all of the terms and conditions of the Plan and the terms and conditions of the Conversion. I acknowledge that I have received a copy of the Prospectus and the Prospectus Supplement. __________________________ ____________________________ Signature Date * * * * * 4. Acknowledgment of Receipt. This Investment Form was received by the Plan Administrator and will become effective on the date noted below. __________________________ ____________________________ Plan Administrator Date PROSPECTUS FIRST CAPITAL, INC. (PROPOSED HOLDING COMPANY FOR FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK) BETWEEN 758,625 AND 1,180,331 SHARES OF COMMON STOCK First Federal Bank, A Federal Savings Bank is converting from the mutual holding company form of organization to the stock holding company form of organization. First Capital, Inc., M.H.C., which is a federally-chartered mutual holding company, currently owns 59.5% of the outstanding common stock of First Federal Bank. As a result of the conversion, First Capital, Inc., M.H.C. will cease to exist and First Federal Bank will become a wholly-owned subsidiary of First Capital, Inc., an Indiana corporation that was formed in September 1998. First Capital, Inc. is offering its common stock to the public under the terms of a Plan of Conversion which must be approved by the members of First Capital, Inc., M.H.C. and by the stockholders of First Federal Bank. The conversion will not go forward if First Capital, Inc., M.H.C. and First Federal Bank do not receive these approvals or if First Capital, Inc. does not sell at least the minimum number of shares. Pursuant to the Plan of Conversion, First Capital, Inc. will issue shares of its common stock in this offering that will represent a 59.5% ownership interest in First Capital, Inc., which is based on the percentage ownership that First Capital, Inc., M.H.C. currently maintains in First Federal Bank. First Capital, Inc. will also issue shares of its common stock to the public stockholders of First Federal Bank in exchange for their shares of First Federal Bank's common stock pursuant to an exchange ratio that will result in the public stockholders of First Federal Bank owning in the aggregate approximately 40.5% of First Capital, Inc. - -------------------------------------------------------------------------------- OFFERING SUMMARY Price Per Share: $10.00
Minimum Midpoint Maximum Maximum, as adjusted ------- -------- ------- -------------------- Number of shares: 758,625 892,500 1,026,375 1,180,331 Gross offering proceeds: $7,586,250 $8,925,000 $10,263,750 $11,803,313 Estimated offering expenses: $ 373,000 $ 392,000 $ 410,000 $ 432,000 Estimated net proceeds: $7,213,250 $8,533,000 $ 9,853,750 $11,371,313 Estimated net proceeds per share: $ 9.51 $ 9.56 $ 9.60 $ 9.63
The amount of common stock being offered in the conversion is based on an independent appraisal of the market value of First Federal Bank and First Capital, Inc., M.H.C. after giving effect to the conversion. The independent appraiser has stated that as of August 14, 1998, the market value of the converted First Federal Bank and First Capital, Inc., M.H.C. ranged from $12,750,000 to $17,250,000. Based on this valuation and the 59.5% ownership interest being sold in this offering, the minimum of the offering range was set at $7,586,250 and the maximum was set at $10,263,750. Subject to approval of the Office of Thrift Supervision, an additional 15% above the maximum number of shares may be sold. Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc. will use its best efforts to assist First Capital, Inc. in selling at least the minimum number of shares but does not guarantee that this number will be sold. All funds received from subscribers will be held in an interest-bearing savings account at First Federal Bank until the completion or termination of the conversion. First Capital, Inc. has received preliminary approval to have its common stock quoted on the Nasdaq SmallCap Market under the symbol FCAP. The subscription offering will terminate at 12:00 Noon, Eastern Standard Time, on ______________, 1998, unless extended for up to ___ days. - -------------------------------------------------------------------------------- THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS" BEGINNING ON PAGE __. NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- For additional information about the conversion, refer to the more detailed information in this prospectus. For assistance, contact the stock information center at (812)___________. CHARLES WEBB & COMPANY, a Division of Keefe, Bruyette & Woods, Inc. The date of this prospectus is November ___, 1998 FORWARD-LOOKING STATEMENTS Certain of the statements contained herein that are not historical facts are forward-looking statements. These forward-looking statements include statements of goals, intentions and expectations and involve risks and uncertainties including, but not limited to, the following: changes in general economic conditions; the performance of financial markets; interest rates; and competitive, regulatory, legislative or tax changes that affect the cost of or demand for the Bank's products. Because of these uncertainties, actual future results may differ materially from those contemplated by such statements. TABLE OF CONTENTS
Page ---- Summary................................................................. Risk Factors............................................................ Selected Financial Information......................................... Use of Proceeds......................................................... Dividend Policy......................................................... Market for Common Stock................................................. Capitalization.......................................................... Historical and Pro Forma Regulatory Capital Compliance.......................................... Pro Forma Data.......................................................... Effect of the Conversion on the Bank's Stockholders........................................................... Subscriptions by Executive Officers and Directors.............................................................. First Federal Bank, A Federal Savings Bank 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.......................................................... Comparison of Stockholders' Rights...................................... Restrictions on Acquisition of the Holding Company................................................. Description of Capital Stock of the Holding Company................................................. Registration Requirements............................................... Legal and Tax Opinions.................................................. Experts................................................................. Additional Information.................................................. Index to Financial Statements.......................................... Glossary................................................................ G-1
[Map of Corydon area showing branch and main office locations] SUMMARY The following summary explains the significant aspects of the conversion. For additional information about the conversion and the stock offering refer to the more detailed information in this prospectus. Throughout this prospectus, First Federal Bank, A Federal Savings Bank is referred to as the "Bank," First Capital, Inc., M.H.C. is referred to as the "MHC" and First Capital, Inc. is referred to as the "Holding Company." See the glossary at the back of this prospectus for the definitions of certain terms that are printed in boldface type the first time they appear in this prospectus. FIRST CAPITAL, INC. The Bank formed the Holding Company under Indiana law in September 1998 for the purpose of owning all of the Bank's capital stock following completion of the conversion. The Holding Company has received conditional approval of the OTS to become a savings and loan holding company by acquiring the capital stock of the Bank in the conversion. Before the completion of the conversion, the Holding Company will not have any material assets or liabilities and it will not conduct any business other than business related to the conversion. After the conversion, the Holding Company's primary assets will be all of the capital stock of the Bank, the loan that the Holding Company intends to make to the Bank's ESOP and the net proceeds remaining from the sale of its common stock after contributing 50% of the net proceeds to the Bank and funding the ESOP loan. Initially, the primary activity of the Holding Company will be to direct, plan and coordinate the Bank's business activities. In the future, the Holding Company might become an operating company or acquire or organize other operating subsidiaries, including other financial institutions, although it currently has no specific plans or agreements to do so. The Holding Company's main office is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198. FIRST CAPITAL, INC., M.H.C. The MHC is the federally-chartered mutual holding company of the Bank. The MHC was formed in February 1993 as a result of the reorganization of the Bank into a federally chartered mutual holding company. The members of the MHC consist of depositors of the Bank and those current borrowers of the Bank who had loans outstanding as of the consummation date of the MHC reorganization (February 1, 1993). The MHC's sole business activity is holding 300,000 shares of the Bank's common stock, which represents 59.5% of the outstanding shares as of the date of this prospectus. As part of the conversion, the MHC will merge into the Bank, with the Bank as the surviving entity. As a result of this merger, the MHC will cease to exist. The MHC's main office is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198. FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK The Bank was founded in 1891 as an Indiana-chartered mutual savings and loan association. In 1934, the Bank converted to a federally-chartered savings and loan association under the name "First Federal Savings and Loan Association of Corydon." In February 1993, the Bank converted to a federally-chartered capital stock savings bank and adopted its current name. The Bank's main office, which was opened in July 1997, is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198. The Bank is regulated by the OTS and the FDIC. The Bank's deposits have been federally-insured by the FDIC since 1961 and are currently insured by the FDIC under the SAIF. The Bank is a member of the FHLB-System. The Bank's strategy is to operate as an independent, retail financial institution dedicated to financing home ownership and other consumer needs in Harrison County, its primary market area, and, to a lesser extent, in surrounding counties. At June 30, 1998, the Bank operated from its main office and a branch office in Corydon and had total assets of $94.0 million, deposits of $77.5 million and stockholders' equity of $10.3 million. At that date, $57.8 million, or 74.6%, of the Bank's loans were residential mortgage loans, $4.4 million, or 5.6%, were commercial real estate loans, $3.8 million, or 4.9%, were residential construction loans, $5.0 million, or 6.5%, were commercial business loans and 1 $6.3 million, or 8.1%, were consumer loans. The Bank originates all loans for retention in its portfolio. For a discussion of the Bank's business strategy and recent results of operations, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." For a discussion of the Bank's business activities, see "BUSINESS OF THE BANK." THE CONVERSION The conversion is being undertaken pursuant to the PLAN OF CONVERSION that was adopted by the Boards of Directors of the Bank and the MHC on June 18, 1998. Pursuant to the Plan of Conversion, (i) the MHC will merge into the Bank, at which time the MHC will cease to exist and the outstanding shares of the Bank's common stock held by the MHC will be canceled, and (ii) the Bank will become a wholly-owned subsidiary of the Holding Company. As part of the conversion, the Holding Company will sell shares of its common stock in this offering that will represent an ownership interest in the Holding Company that is based on the percentage ownership that the MHC currently maintains in the Bank. The Holding Company will also issue shares of its common stock to the public stockholders of the Bank (i.e. stockholders other than the MHC) in exchange for their shares of ---- Bank common stock pursuant to an exchange ratio that will result in the public stockholders of the Bank owning in the aggregate approximately 40.5% of the Holding Company, before giving effect to any (i) payment of cash to the Bank's public stockholders who exercise and perfect their rights of dissent and appraisal, (ii) payment of cash in lieu of issuing fractional shares and (iii) shares purchased by the stockholders of the Bank in the offering. The following diagram illustrates the current organizational structure and ownership of the Bank: ------------------------------- ----------------------- First Capital, Inc., M.H.C. Public Stockholders 59.5% 40.5% ------------------------------- ----------------------- ---------------------- First Federal Bank ---------------------- The following diagram reflects the post-conversion organizational structure and ownership of the Holding Company and the Bank. The ownership interests presented assume no fractional shares of the Holding Company's common stock are issued and does not give effect to purchases of any shares in this offering by the Bank's public stockholders or to the exercise of outstanding stock options. As required by the OTS, the aggregate ownership interest of the Bank's public stockholders has been adjusted downward to reflect assets held by the MHC and the waiver by the MHC of certain dividends paid by the Bank. 2 -------------------------- ---------------------------- Purchasers in Offering Former Bank Stockholders 59.5% 40.5% -------------------------- ---------------------------- --------------------- First Capital, Inc. 100% --------------------- --------------------- First FederalBank --------------------- Completion of the conversion requires the following member and shareholder approvals: 1. Approval by the holders of at least a majority of the total number of votes eligible to be cast by the members of the MHC. 2. Approval by the holders of at least two-thirds of the outstanding shares of the Bank's common stock (including those shares held by the MHC). 3. Approval by the holders of at least a majority of the shares of the Bank's common stock (not including those shares held by the MHC) present in person or by proxy at a meeting of stockholders called for the purpose of considering the Plan of Conversion. The MHC has called a special meeting of its members to be held on __________, 1998 for the purpose of considering the Plan of Conversion. The Bank's stockholders will consider the Plan of Conversion at the Bank's 1998 Annual Meeting of Stockholders which has been delayed until ____________, 1998 (the Annual Meeting is typically held in October of each year). The MHC intends to vote its shares of Bank common stock, which amounts to 59.5% of the outstanding shares, in favor of the Plan of Conversion at the special meeting of stockholders. As of June 30, 1998, directors and executive officers of the Bank and their associates beneficially owned 37,110 shares (not including shares that may be acquired through the exercise of stock options), or 18.2%, of the outstanding shares of Bank common stock held by the Bank's public shareholders (i.e. shareholders other than the MHC), which they intend to vote in favor of --- the Plan of Conversion. REASONS FOR THE CONVERSION The Boards of Directors of the Holding Company, the MHC and the Bank believe that the conversion is in the best interests of the MHC and its members, the Bank and its stockholders, and the communities served by the MHC and the Bank. In their decision to pursue the conversion, the Boards of Directors considered the various regulatory uncertainties associated with the mutual holding company structure, including the MHC's future ability to waive any dividends from the Bank. In addition, the Boards of Directors considered the various advantages of the stock holding company form of organization, including: (i) the potential increased liquidity in the Holding Company common stock relative to the Bank common stock because of the larger number of shares to be outstanding upon consummation of the conversion and the receipt by the Holding Company of conditional approval to list its shares on the Nasdaq SmallCap Market; (ii) the Holding Company's ability to repurchase shares of its common stock without adverse tax consequences; (iii) the Holding Company's greater flexibility under current law and regulations relative to the MHC to acquire other financial institutions and diversify operations; and (iv) the larger capital base of the Holding Company that will result from the sale of common stock in this offering. Currently, the Boards of Directors of the Holding Company and the Bank have no specific plans, arrangements or understandings, written or oral, regarding any stock repurchases, acquisitions or diversification of operations. See "THE CONVERSION -- Purposes of Conversion." 3 THE SUBSCRIPTION OFFERING AND THE DIRECT COMMUNITY OFFERING The Holding Company is offering shares of its common stock in a SUBSCRIPTION OFFERING to certain current and former depositor and borrower customers of the Bank and to the Bank's ESOP. Pursuant to its Plan of Conversion, the Bank has granted subscription rights in the following order of priority in accordance with applicable regulatory requirements to: 1. "ELIGIBLE ACCOUNT HOLDERS" -- the Bank's depositors with $50 or more on deposit as of March 31, 1997. 2. The Bank's ESOP. 3. "SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS" -- the Bank's depositors with $50 or more on deposit as of September 30, 1998. 4. "OTHER MEMBERS" -- the Bank's depositors as of __________, 1998 and borrowers of the Bank as of February 1, 1993 whose loans continue to be outstanding as of __________, 1998. If the number of shares sold in the conversion is increased above the maximum of the offering range the ESOP will have first priority to purchase any such shares over the maximum of the offering range, up to a total of 8% of the common stock sold in this offering. IMPORTANT: Subscription rights are not transferable, and persons with subscription rights may not subscribe for shares for the benefit of any other person. Persons violating this prohibition may lose their right to purchase shares in the conversion and may be subject to criminal prosecution and/or other sanctions. The Subscription Offering will expire at 12:00 Noon, Eastern Standard Time, on the EXPIRATION DATE of ________, 1998, unless extended by the Bank and the Holding Company for up to __ days. In the event of an oversubscription, shares will be allocated in accordance with the Plan of Conversion. Concurrently with the Subscription Offering, shares will be offered to the general public in a DIRECT COMMUNITY OFFERING. Public stockholders of the Bank will have first preference to purchase shares in the Direct Community Offering and natural persons and trusts of natural persons who are residents of the Bank's LOCAL COMMUNITY will have second preference. The Direct Community Offering will terminate on the Expiration Date unless extended with approval of the OTS, if necessary. The Subscription Offering and the Direct Community Offering are being managed by WEBB. Webb is a registered broker-dealer and a member of the NASD. Webb is not obligated to purchase any shares of common stock in this offering. Shares not sold in the Subscription Offering or Direct Community Offering may be offered for sale in a SYNDICATED COMMUNITY OFFERING, which would be an offering to the general public on a best efforts basis by a selling group of broker-dealers managed by Webb. See "THE CONVERSION -- The Subscription, Direct Community and Syndicated Community Offerings." EXCHANGE OF THE BANK'S COMMON STOCK As part of the conversion, each share of Bank common stock held by the MHC will be canceled and each share of Bank common stock held by the Bank's public stockholders will be exchanged for shares of Holding Company common stock. The number of shares of Holding Company common stock to be issued to the Bank's public stockholders will be based on an EXCHANGE RATIO that will result in the Bank's public stockholders owning in the aggregate approximately 40.5% of the outstanding shares of Holding Company common stock before giving effect to any (i) payment of cash to the Bank's public stockholders who exercise and perfect their rights of dissent and appraisal, (ii) payment of cash in lieu of issuing fractional shares of Holding Company common stock and (iii) shares purchased by the Bank's public stockholders in the offering. Bank. THE FINAL EXCHANGE RATIO WILL BE BASED ON THE PERCENTAGE OWNERSHIP INTEREST OF THE BANK'S PUBLIC STOCKHOLDERS IN THE BANK AND THE NUMBER OF SHARES SOLD IN THIS OFFERING 4 AND NOT ON THE MARKET VALUE OF BANK COMMON STOCK. ACCORDINGLY, THE VALUE OF THE SHARES OF HOLDING COMPANY COMMON STOCK TO BE RECEIVED FOR EACH SHARE OF BANK COMMON STOCK MAY BE MORE OR LESS THAN THE MARKET VALUE OF BANK COMMON STOCK AT THE TIME OF EXCHANGE. See "-- Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the Conversion." Pursuant to OTS regulations, stockholders of the Bank will have dissent and appraisal rights with respect to the conversion because the Bank's common stock is not listed on a national securities exchange or quoted on the Nasdaq Stock Market. Accordingly, even if the conversion is approved, stockholders of the Bank who exercise and perfect their rights of dissent and appraisal under OTS regulations will have the right to receive cash equal to the fair market value of their shares of Bank common stock as determined by regulation, rather than exchanging them for shares of Holding Company common stock. DO NOT SEND YOUR BANK STOCK CERTIFICATES AT THIS TIME REGARDLESS OF WHETHER OR NOT YOU INTEND TO EXERCISE AND PERFECT YOUR RIGHTS OF DISSENT AND APPRAISAL. The Bank will send to each Bank stockholder a proxy statement for the Bank's 1998 Annual Meeting of Stockholders at which the Plan of Conversion will be considered, which will include detailed instructions on how to exercise and perfect dissent and appraisal rights. See "THE CONVERSION -- Dissent and Appraisal Rights." For Bank stockholders who do not wish to exercise their dissent and appraisal rights but want to exchange their shares of Bank common stock for shares of Holding Company common stock, the Holding Company will mail to each such stockholder exchange instructions and a transmittal letter after the consummation of the conversion. See "THE CONVERSION -- Delivery and Exchange of Stock Certificates." STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION Between 758,625 and 1,026,375 shares of the common stock will be sold in this offering, all at a price of $10.00 per share. With the approval of the OTS, the number of shares may be increased to 1,180,331. There are no commissions to pay in order to buy any shares in the conversion. The amount of common stock being offered in the conversion is based on an independent appraisal of the estimated pro forma market value of the Bank and the MHC after giving effect to the conversion. KELLER & COMPANY, INC., the independent appraiser, has estimated that, in its opinion, as of August 14, 1998, the aggregate pro forma market value of the Bank and the MHC was in an ESTIMATED VALUATION RANGE of between $12,750,000 and $17,250,000 (with a midpoint of $15,000,000). The pro forma market value is the market value of the Bank and the MHC after taking into account the sale of shares in this offering and the formation of the Holding Company. The appraisal was based in part on the Bank's financial condition and operations and the effect of the additional capital raised by the sale of common stock in this offering. Based on this valuation and the approximate 59.5% ownership interest being sold in this offering, the Board of Directors of the Holding Company and the Bank established an offering range of $7,586,250 to $10,263,750. The independent appraisal will be updated prior to the completion of the conversion. If the pro forma market value of the Bank and the MHC changes to either below $12,750,000 or above $19,837,500 (the adjusted maximum of the Estimated Valuation Range), subscribers will be notified and provided with the opportunity to modify or cancel their orders. The $10.00 per share purchase price was determined by the Boards of Directors of the Holding Company and the Bank. See "THE CONVERSION -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued." Based on the 202,470 shares of Bank common stock outstanding at the date of this prospectus, and assuming a minimum of 758,625 and a maximum of 1,026,375 shares of Holding Company common stock are sold in the offering, the Exchange Ratio is expected to range from approximately 2.5504 to 3.4505 as set forth in the following table. If 1,180,331 shares of common stock are sold, the Exchange Ratio will be 3.9681. The final Exchange Ratio will be adjusted if any options to purchase shares of Bank common stock are exercised after the date of this prospectus and before the consummation of the conversion. 5
Shares to be Sold Shares to be Exchanged Total Shares in this for Bank of Common Offering(1) Common Stock(1) Stock to be Exchange ---------------------- ---------------------- Amount Percent Amount Percent Outstanding(1) Ratio(1) ------ ------- ------ ------- -------------- -------- Minimum............... 758,625 59.5 516,375 40.5 1,275,000 2.5504 Midpoint.............. 892,500 59.5 607,500 40.5 1,500,000 3.0004 Maximum............... 1,026,375 59.5 698,625 40.5 1,725,000 3.4505 15% above Maximum............. 1,180,331 59.5 803,419 40.5 1,983,750 3.9881
- ------------------------ (1) Assumes that outstanding options to purchase 7,245 shares of Bank common stock are not exercised before consummation of the conversion. PURCHASE LIMITATIONS The minimum number of shares that may be purchased is 25. The Bank has established the following additional purchase limitations: 1. No person may purchase more than 25,000 shares in the offering. 2. No person, either alone or together with associates or persons acting in concert, may purchase shares in an amount that, when combined with shares received in exchange for Bank common stock, exceeds 62,500 shares. Persons owning shares of Bank common stock may be limited in their ability to subscribe for and purchase shares in this offering because OTS policy requires that the maximum purchase limitation include shares to be received in exchange for shares of Bank common stock. For further discussion of the purchase limits and definitions of "associate" and "acting in concert," see "THE CONVERSION -- Limitations on Purchases of Shares of Common Stock." PROCEDURE FOR PURCHASING COMMON STOCK To subscribe for shares of common stock in the Subscription Offering, send or deliver an original, signed stock order form together with full payment (or appropriate instructions for withdrawal of full payment from permitted deposit accounts, as described below) to the Bank in the postage-paid envelope provided so that the stock order form is received before the end of the Subscription Offering. The certification that is part of the stock order form must also be signed. Payment for shares may be made in cash (if made in person) or by check or money order. The Bank will pay interest at the rate it pays on passbook accounts from the date funds are received until completion or termination of the conversion. Subscribers who have deposit accounts with the Bank may include instructions on the stock order form requesting withdrawal from such deposit account(s) to purchase shares. Withdrawals from certificates of deposit may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with the Bank will earn interest at the applicable account rate, but a hold will be placed on such funds making them unavailable until the completion of the conversion. After the Bank receives an order, the order cannot be withdrawn or changed, except with the consent of the Bank. IMPORTANT: To ensure the proper identification of subscription rights, list all qualifying savings accounts and loans, as of the respective qualifying dates, on the stock order form. Persons who do not list all qualifying savings accounts and loans may be subject to reduction or rejection of their subscription. 6 The Holding Company and the Bank have the discretion to accept or reject orders received either through the Direct Community Offering or the Syndicated Community Offering. If an order is rejected in part, there is no right to cancel the remainder of the order. Owners of self-directed IRAS who are eligible to purchase common stock may use the assets of their IRAs to purchase shares of common stock in the conversion, provided that their IRAs are not maintained on deposit with the Bank. If you want to use funds in a self-directed IRA maintained by the Bank to purchase shares of common stock, you must transfer your account to an unaffiliated institution or broker. If you are interested in doing so, you should contact the stock information center at least one week before the Expiration Date. For further information on how to purchase stock, see "THE CONVERSION -- Procedure for Purchasing Shares in the Subscription and Direct Community Offerings." USE OF PROCEEDS The Holding Company will use the proceeds of the offering as follows: . 50% of the net proceeds will be contributed to the Bank. The Bank will use these funds to make loans and purchase investments similar to the kinds it currently holds. Up to $700,000 of these funds will also contribute to the construction of a new full-service branch office. The Bank may also use these funds to expand its banking operations through the acquisition of additional branches or other financial institutions. . The remaining net proceeds will be kept for general corporate purposes. These purposes may include, for example, paying dividends or buying back shares of common stock. Funds may also be used for future diversification or acquisition activities or may be contributed to the Bank to support its growth. . An amount equal to 8% of the gross proceeds will be loaned to the ESOP to fund its purchase of common stock. For further discussion, see "USE OF PROCEEDS." PURCHASES BY OFFICERS AND DIRECTORS The Bank expects its directors and executive officers (together with their associates) to subscribe for 44,500 shares, which equals approximately 4.0% of the shares issued at the midpoint of the offering range. The purchase price paid by them will be the same $10.00 per share price as that paid by all other persons who purchase shares in the conversion. See "SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS." BENEFITS OF THE CONVERSION TO MANAGEMENT ESOP. The Bank's ESOP intends to purchase 8% of the shares of common stock sold in this offering. If the ESOP's subscription is not filled in its entirety, the ESOP may purchase shares in the open market or may purchase shares directly from the Holding Company. If the number of shares sold in the conversion is increased above the maximum of the offering range, the ESOP will have a first priority to purchase any such shares over the maximum of the offering range, up to a total of 8% of the common stock sold in the offering. The Holding Company will recognize additional compensation expense as a result of the adoption of the ESOP. For information about the ESOP, see "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership Plan." See also "RISK FACTORS - -- Expenses Associated with ESOP and 1999 MRDP" and "PRO FORMA DATA." MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN. After the conversion, the Holding Company expects to adopt the First Capital, Inc. 1999 Management Recognition and Development Plan ("1999 MRDP"). If the 1999 MRDP 7 is implemented within one year after the conversion, under current OTS regulations the plan will be subject to approval by stockholders at a meeting which may be held no earlier than six months after completion of the conversion. The 1999 MRDP will reserve a number of shares equal to 4% of the number of shares sold in this offering (41,055 shares at the maximum of the Estimated Valuation Range). Pursuant to the 1999 MRDP, the Holding Company would be able to make awards of shares of common stock to key employees and directors of the Holding Company and the Bank at no cost to the recipient. All awards would be subject to vesting over a period of years. The size of individual awards will be determined prior to submitting the 1999 MRDP for stockholder approval, and disclosure of anticipated awards will be included in the proxy materials for such meeting. The Holding Company will recognize additional compensation expense as a result of the adoption of the 1999 MRDP. For additional information about the 1999 MRDP, see "MANAGEMENT OF THE BANK -- Benefits -- Management Recognition and Development Plans." See also "RISK FACTORS -- Expenses Associated With ESOP and 1999 MRDP" and "PRO FORMA DATA." STOCK OPTION PLAN. After the conversion, the Holding Company expects to adopt the First Capital, Inc. 1999 Stock Option Plan ("1999 Option Plan"). If the 1999 Option Plan is implemented within one year after the conversion, under current OTS regulations the plan will be subject to approval by stockholders at a meeting which may be held no earlier than six months after completion of the conversion. The 1999 Option Plan will reserve a number of shares equal to 10% of the number of shares sold in this offering (102,637 shares at the maximum of the Estimated Valuation Range). Pursuant to the 1999 Option Plan, the Holding Company would be able to award options to acquire shares of common stock to key employees and directors of the Holding Company and the Bank at no cost to the recipient. The exercise price of such options would be 100% of the fair market value of the common stock on the date the option is granted. All awards would be subject to vesting over a period of years. Disclosure of anticipated awards, including the size of such awards, will be included in the proxy materials for the stockholder meeting. For additional information about the 1999 Option Plan, see "MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plans." EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN. The Holding Company and the Bank plan to enter into employment agreements with J. Gordon Pendleton, the Holding Company's and the Bank's Chairman and Chief Executive Officer, Samuel E. Uhl, the Holding Company's and the Bank's President and Chief Operating Officer, M. Chris Frederick, the Holding Company's and the Bank's Senior Vice President, Chief Financial Officer and Treasurer, and Joel E. Voyles, the Holding Company's and the Bank's Secretary. The employment agreements will provide certain benefits to the executives if they are terminated following a change in control of the Holding Company or the Bank. If there is a change in control of the Holding Company or the Bank, each executive will be entitled to a package of cash and/or benefits with a maximum value equal to 2.99 times his average annual compensation during the five-year period preceding the change in control. If a change in control had occurred as of June 30, 1998, the aggregate value of the severance benefits payable to the executives under the proposed employment agreements would have been approximately $646,000. See "RISK FACTORS -- Possible Anti-takeover Effect of Employment and Severance Agreements" and "MANAGEMENT OF THE BANK -- Executive Compensation -- Employment Agreements." The Holding Company and the Bank plan to adopt an employee severance compensation plan to provide benefits to eligible employees in the event of a change in control of the Holding Company or the Bank. Officers who enter into separate employment agreements with the Holding Company and the Bank will not be eligible to participate in the severance plan. The severance plan will provide that, in the event of a change in control of the Holding Company or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control will be entitled to a payment based on years of service with the Bank, subject to certain limits. Assuming that a change in control had occurred at June 30, 1998 and the termination of all eligible employees, the maximum aggregate payment due under the severance plan would have been approximately $219,000. See "RISK FACTORS -- Possible Anti- takeover Effect of Employment Agreements and Severance Plan" and "MANAGEMENT OF THE BANK -- Executive Compensation -- Employee Severance Compensation Plan." ASSUMPTION OF EXISTING BENEFIT PLANS. Upon consummation of the conversion, the Holding Company will assume the Bank's 1994 Stock Option Plan ("1994 Option Plan"). All stock options awarded pursuant to the 1994 8 Option Plan that are outstanding at the consummation of the conversion will be converted into options to purchase shares of Holding Company common stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the Exchange Ratio so that the aggregate exercise price remains unchanged. The duration of the options will also be unchanged. At June 30, 1998, there were outstanding options to purchase 7,245 shares of Bank common stock at a weighted-average exercise price of $15.75 per share. See "MANAGEMENT OF THE BANK -- Benefits." MARKET FOR COMMON STOCK The Holding Company has obtained preliminary approval for its common stock to be listed on the Nasdaq SmallCap Market under the symbol FCAP. The Bank's common stock does not trade on an established market but rather in privately negotiated transactions. After shares of the Holding Company's common stock commence trading, interested investors may contact a stock broker to buy or sell shares. The Holding Company cannot assure you that there will be an active trading market for the common stock. See "RISK FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK." DIVIDEND POLICY Following consummation of the conversion, the Holding Company's Board of Directors intends to pay cash dividends on the common stock at an initial quarterly rate equal to $0.175 per share divided by the final Exchange Ratio. This formula will result in an initial quarterly dividend rate of $0.069, $0.058, $0.051 and $0.044 per share at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively. Dividends will be subject to determination and declaration by the Board of Directors, which will take into account a number of factors, including the Holding Company's consolidated operating results and financial condition, net worth and capital requirements, as well as regulatory restrictions on the payment of dividends from the Bank to the Holding Company (which would be a primary source of funds for the Holding Company). The Holding Company cannot guarantee you that dividends will in fact be paid or that if paid such dividends will not be reduced or eliminated in the future. For further information about the payment of dividends, see "DIVIDEND POLICY." COMPARISON OF STOCKHOLDERS' RIGHTS The Holding Company is an Indiana corporation subject to the provisions of the Indiana Business Corporation Law, and the Bank is a federally-chartered savings bank subject to federal laws and OTS regulations. Upon consummation of the conversion, the stockholders of the Bank (who do not exercise and perfect their rights of dissent and appraisal) will become stockholders of the Holding Company and their rights as stockholders will be governed by the Holding Company's Articles of Incorporation and Bylaws and Indiana law, rather than the Bank's Federal Stock Charter and Bylaws, federal law and OTS regulations. For a discussion of certain material differences in the rights of stockholders of the Holding Company and the Bank and an explanation of possible antitakeover effects of certain provisions of the Holding Company's Articles of Incorporation and Bylaws, see "COMPARISON OF STOCKHOLDERS' RIGHTS" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY." RISK FACTORS Before investing in the common stock please carefully consider the matters discussed below. The common stock is not a savings account or deposit and is not insured by the FDIC or any other government agency. ABOVE AVERAGE INTEREST RATE RISK ASSOCIATED WITH FIXED-RATE LOANS At June 30, 1998, approximately 61.5% of the Bank's assets consisted of residential mortgage loans held for investment. Such loans represented 74.6% of the total loan portfolio at that date. While generally considered to involve less risk than other types of lending, such as commercial mortgage loans, commercial business loans and consumer loans, residential mortgage loans provide relatively lower yields. The Bank's loan portfolio also includes a significant 9 amount of loans with fixed rates of interest. At June 30, 1998, $17.4 million, or 22.5%, of the Bank's total loans receivable had fixed interest rates all of which were held for investment. Although the Bank offers ARM LOANS, customer demand for them is generally low in times of low market interest rates, as currently exists. Unlike ARM loans, fixed-rate loans carry the risk that, because they do not reprice to market interest rates, their yield may be insufficient to offset increases in the Bank's cost of funds during a rising interest rate environment. This risk is even greater in the case of the Bank because it holds all loans for investment rather than originating fixed-rate loans for sale in the secondary market. Accordingly, a material and prolonged increase in market interest rates could be expected to have a greater adverse effect on the Bank's net interest income compared to other institutions that hold a materially larger portion of their assets in ARM loans or in fixed-rate loans that are originated for committed sale in the secondary market, or in a combination thereof. For a discussion of the Bank's loan portfolio, see "BUSINESS OF THE BANK --Lending Activities." CERTAIN LENDING RISKS CONSUMER LENDING RISKS. At June 30, 1998, the Bank's consumer loan portfolio amounted to $6.3 million, or 8.1% of total loans. Subject to market conditions and other factors, the Bank intends to expand its consumer lending activities within its primary market area. Consumer lending is inherently riskier than one- to four-family mortgage lending. Collateral such as automobiles, boats and other personal property depreciate rapidly and are often an inadequate repayment source if a borrower defaults. In addition, consumer loan repayments depend on the borrower's continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness, personal bankruptcy and other financial hardship. See "BUSINESS OF THE BANK -- Lending Activities -- Consumer Loans." COMMERCIAL BUSINESS LENDING RISKS. At June 30, 1998, the Bank's commercial business loan portfolio amounted to $5.0 million, or 6.5% of total loans. Subject to market conditions and other factors, the Bank intends to expand its commercial business lending activities within its primary market area. Commercial business lending is inherently riskier than one- to four-family mortgage lending. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation value of these assets in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Commercial Business Loans." COMMERCIAL REAL ESTATE LENDING RISKS. At June 30, 1998, the Bank's commercial real estate loan portfolio amounted to $4.4 million, or 5.6% of total loans. Commercial real estate lending is inherently riskier than one- to four- family mortgage lending. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy, among other things. See "BUSINESS OF THE BANK -- Lending Activities --Commercial Real Estate Loans." CONSTRUCTION LENDING RISKS. At June 30, 1998, the Bank's residential construction loan portfolio amounted to $3.8 million, or 4.9% of total loans, of which $832,000 consisted of speculative construction loans for which there is not a commitment for permanent financing in place at the time the construction loan is originated. Construction lending is inherently riskier than one- to four-family mortgage lending. Construction loans generally have higher loan balances than one- to four-family mortgage loans. In addition, the potential for cost overruns because of the inherent difficulties in estimating construction costs and, therefore, collateral values and the difficulties and costs associated with monitoring construction progress, among other things, are major contributing factors to this greater credit risk. Speculative construction loans have the added risk that there is not an identified buyer for the completed home when the loan is originated, with the risk that the builder will have to service the construction loan debt and finance the other carrying costs of the completed home for an extended time period until a buyer is identified. Furthermore, the demand for construction loans and the ability of construction loan borrowers to service their debt depends highly on the state of the general economy, including market interest rate levels, as well as the state of the economy of the Bank's primary market area. A material downturn in economic conditions would be expected to have a material adverse effect on the 10 credit quality of the construction loan portfolio. See "BUSINESS OF THE BANK -- Lending Activities -- Construction Loans." DEPENDENCE ON LOCAL ECONOMY The Bank focuses on serving customers in Harrison County, Indiana, which has a population of approximately 34,000 according to 1997 statistics. The unemployment rate in Harrison County in June 1998 was 2.6%, which compared to 2.8% and 4.7% for Indiana and the U.S., respectively. Substantially all of the Bank's loan portfolio consists of loans made to borrowers and collateralized by properties located in Harrison County. Furthermore, substantially all of the Bank's depositors reside in Harrison County. As a result of this concentration, a downturn in the economy of Harrison County or the surrounding area could increase the risk of loss associated with the Bank's loan portfolio. See "BUSINESS OF THE BANK -- Market Area." INTEREST RATE RISK Changes in interest rates can have significant effects on the Bank's profitability. The Bank's ability to make a profit, like that of most financial institutions, depends largely on its net interest income, which is the difference between the interest income received from its interest-earning assets (such as loans and investment securities) and the interest expense incurred in connection with its interest-bearing liabilities (such as deposits and borrowings). The Bank's net interest income and the market value of its assets and liabilities could be significantly affected by changes in interest rates. In a rising interest rate environment, the Bank anticipates that its net interest income could be adversely affected because its large percentage of fixed-rate loans would not reprice to market interest rates at the same rate as its interest-bearing liabilities. In addition, rising interest rates may adversely affect the Bank's earnings because they may cause a decrease in customer demand for loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability Management." Changes in interest rates also can affect the average life of loans and mortgage-backed securities. During periods of declining interest rates, loans and mortgage-backed securities prepay faster as loans are prepaid and refinanced at lower interest rates. During such periods, the Bank generally will not be able to reinvest the proceeds of any such prepayments at comparable yields. Conversely, during periods of rising interest rates, the rate of prepayments generally slows. Moreover, volatility in interest rates also can result in disintermediation, or the flow of funds away from savings institutions into direct investments, such as U.S. Government and corporate securities and other investment vehicles which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than savings institutions. BELOW AVERAGE RETURN ON EQUITY AFTER CONVERSION Return on equity (net income divided by average equity) is a ratio used by many investors to compare the performance of a particular company with other companies. The Holding Company's post-conversion return on equity will be below the average return on equity for many publicly held savings associations and banks. In addition, the expenses associated with the ESOP and 1999 MRDP, along with other post-conversion expenses, will limit earnings growth levels. Over time, the Holding Company intends to deploy the net proceeds from the conversion to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity competitive with other publicly traded savings associations. This goal could take a number of years to achieve, and the Holding Company cannot assure you that this goal can be attained. Consequently, you should not expect a competitive return on equity in the near future. See "SELECTED FINANCIAL INFORMATION," "CAPITALIZATION" and "PRO FORMA DATA." EXPENSES ASSOCIATED WITH ESOP AND 1999 MRDP If the ESOP and 1999 MRDP are implemented, the Bank will recognize additional material employee compensation and benefit expenses that stem from the shares purchased or granted to employees and executives under 11 those plans. The Bank cannot predict the actual amount of these new expenses because applicable accounting practices require that they be based on the fair market value of the shares of common stock when the expenses are recognized. Expenses for the ESOP would be recognized when shares are committed to be released to participants' accounts, and expenses for the 1999 MRDP would be recognized over the vesting period of awards made to recipients. These expenses have been reflected in the pro forma financial information under "PRO FORMA DATA" assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, will be based on the fair market value of the common stock at the time of recognition, which may be higher or lower than $10.00. For further discussion of these plans, see "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership Plan" and "-- Benefits --Management Recognition and Development Plan." POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS If the conversion is completed and stockholders approve the 1999 MRDP and 1999 Option Plan, the Holding Company intends to issue shares to its officers and directors through these plans. If the shares for the 1999 MRDP are issued from authorized but unissued stock, your ownership interest could be diluted by up to approximately 3.8%. If the shares for the 1999 Option Plan are issued from authorized but unissued stock, your ownership interest could be diluted by up to approximately 8.5%. In either case, the issuance of additional shares would decrease net income per share and stockholders' equity per share. Furthermore, the issuance of shares under the 1994 Option Plan from authorized but unissued stock would also dilute your ownership interest and decrease net income per share and stockholders' equity per share. If the ESOP is not able to purchase 8% of the shares of common stock issued in the conversion, the ESOP may purchase newly issued shares from the Holding Company. If this occurs, your ownership interest would be diluted and net income per share and stockholders' equity per share may be decreased. See "PRO FORMA DATA." POSSIBLE VOTING CONTROL BY MANAGEMENT AND EMPLOYEES The 44,500 shares of common stock expected to be purchased by the Bank's directors and executive officers and their associates in the conversion, combined with shares such persons will receive in exchange for their shares of Bank common stock and the shares expected to be awarded or sold to plan participants under the ESOP, the 1999 MRDP, the 1999 Option Plan and the 1994 Option Plan, could ultimately result in management and employees and their associates controlling up to approximately 22.7% of the outstanding shares of the common stock (assuming the sale of 892,500 shares in the conversion and that the shares issued under the 1999 MRDP, the 1999 Option Plan and the 1994 Option Plan are repurchased treasury shares) and could permit management to benefit from certain statutory and regulatory provisions, as well as certain provisions in the Holding Company's Articles of Incorporation and Bylaws, that tend to promote the continuity of existing management. If these individuals were to act as a group or in concert with each other they could have significant influence over the outcome of any stockholder vote requiring a majority vote and in the election of directors and could effectively exercise veto power in matters requiring the approval of stockholders, such as certain business combinations. Management might thus have the power to authorize actions that might be viewed as contrary to the best interests of non-affiliated holders of the common stock and might have veto power over actions that such holders might deem to be in their best interests. See "SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS," "MANAGEMENT OF THE BANK -- Executive Compensation" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY." ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS THAT COULD DISCOURAGE HOSTILE ACQUISITIONS OF CONTROL Provisions in the Holding Company's Articles of Incorporation and Bylaws, the corporation law of the State of Indiana, and certain federal regulations might make it difficult and expensive to pursue a tender offer, change in control or takeover attempt that management opposes. As a result, stockholders who might desire to participate in such a transaction might not have an opportunity to do so. Such provisions will also make the removal of the current board of directors or management of the Holding Company, or the appointment of new directors, more difficult. These provisions include: limitations on voting rights of beneficial owners of more than 10% of the Holding Company's common stock; supermajority voting requirements for certain business combinations; the election of directors to 12 staggered terms of three years; the elimination of cumulative voting for directors; and the removal of directors without cause only upon the vote of holders of two-thirds of the outstanding voting shares. The Articles of Incorporation and/or Bylaws of the Holding Company also contain provisions regarding the timing and content of stockholder proposals and nominations and limiting the calling of special meetings. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY." POSSIBLE ANTI-TAKEOVER EFFECT OF EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN The employment agreements of senior officers of the Holding Company and the Bank and the severance plan for the benefits of other Bank employees provide for cash severance payments and/or the continuation of health, life and disability benefits in the event of their termination of employment following a change in control of the Holding Company or the Bank. If a change in control had occurred at June 30, 1998, the aggregate value of the severance benefits available to these executive officers under the employment and agreements and to employees under the severance plan would have been approximately $865,000. These arrangements may have the effect of increasing the costs of acquiring the Holding Company, thereby discouraging future attempts to take over the Holding Company or the Bank. For information about the proposed employment and severance agreements, see "MANAGEMENT OF THE BANK -- Executive Compensation." COMPETITION The Bank faces intense competition both in making loans and attracting deposits. Competition for loans principally comes from commercial banks, savings associations, credit unions, mortgage banking companies and insurance companies. Historically, commercial banks, savings associations and credit unions have been the Bank's most direct competition for deposits. The Bank also competes with short-term money market funds and with other financial institutions, such as brokerage firms and insurance companies, for deposits. In competing for loans, the Bank may be forced periodically to offer lower loan interest rates. Conversely, in competing for deposits, the Bank may be forced periodically to offer higher deposit interest rates. Either case or both cases could adversely affect net interest income. See "BUSINESS OF THE BANK -- Competition." ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK The Holding Company has never issued capital stock and, consequently, there is no existing market for the common stock. Although the Holding Company has received preliminary approval to list its common stock on the Nasdaq SmallCap Market under the symbol FCAP, the Holding Company cannot guarantee that an active and liquid trading market for its common stock will develop, or if it does develop, that it will continue. Furthermore, the Holding Company cannot guarantee that if you purchase shares in the conversion you will be able to sell your shares at or above the $10.00 purchase price. See "MARKET FOR COMMON STOCK." POSSIBLE INCREASE IN ESTIMATED VALUATION RANGE AND NUMBER OF SHARES ISSUED Keller & Company may increase the Estimated Valuation Range up to 15% to reflect material changes in the financial condition or results of operations of the Bank or changes in market conditions or general financial, economic or regulatory conditions following the commencement of the offering. If the Estimated Valuation Range is increased, the Holding Company anticipates that it would sell, without any additional notice, up to 1,180,331 shares of common stock for an aggregate price of up to $11,803,313. This increase in the number of shares would decrease pro forma net earnings per share and stockholders' equity per share, increase the Holding Company's pro forma consolidated stockholders' equity and net earnings, and increase the purchase price as a percentage of pro forma stockholders' equity per share and net earnings per share. See "PRO FORMA DATA." RISK OF YEAR 2000 DATA PROCESSING PROBLEMS Computer programs that use only two digits to identify a year could fail or create erroneous results by or at the year 2000. All of the material data processing of the Bank is performed in-house . If the Bank is unable to complete 13 its Year 2000 adjustments in a timely fashion, or if the Bank does not successfully make all the necessary Year 2000 adjustments, resulting computer malfunctions could interrupt the operations of the Bank and have a significant adverse impact on the Bank's financial condition and results of operations. The Bank has developed a Year 2000 Action Plan to analyze how the Year 2000 will impact its operations and to monitor the status of its vendors. This plan is administered by senior Bank management who report monthly to the Bank's Board of Directors. Currently, the total pre-tax costs associated with required modifications and conversions is not expected to exceed $75,000. Such estimate is based on assumptions regarding the continued availability of various resources, third-party modification plans and other factors. Accordingly, actual expenses may be different from estimates. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Year 2000 Issues." FINANCIAL INSTITUTION REGULATION AND THE FUTURE OF THE THRIFT INDUSTRY The Bank is subject to extensive regulation, supervision and examination by the OTS and the FDIC. The U.S. Congress is considering legislative proposals that would modernize the financial services industry. Many of these proposals would eliminate the federal savings association charter by requiring that all federal thrifts convert to national banks or other banking charters. Likewise, the unitary savings and loan holding company would be eliminated and all thrift holding companies would become bank holding companies regulated by the Federal Reserve Board. The Bank is a federal savings association and the Holding Company, upon completion of the conversion, will be a unitary savings and loan holding company. If federal legislation is enacted that eliminates the federal savings association charter, the Bank would likely be required to change its charter. No assurance can be given whether federal legislation will be enacted that affects the federal savings association charter or unitary savings and loan holding companies, or if such legislation is enacted, what form this legislation might take. Accordingly, management of the Bank and the Holding Company cannot predict what effect, if any, such legislation would have on the activities and operations of the Bank and the Holding Company. RISK OF DELAYED OFFERING The Holding Company and the Bank expect to complete the Conversion within the time periods indicated in this Prospectus. Nevertheless, it is possible that there could be a significant delay in the completion of the conversion as a result of delays in receiving required regulatory approvals, volatile stock market conditions or otherwise. If the Conversion is not completed by __________, 1999 (45 days after the last day of the fully extended Subscription Offering) and the OTS consents to an extension of time to complete the conversion, subscribers will be given the right to modify or rescind their subscriptions. In such event, unless an affirmative indication is received from subscribers that they wish to continue to subscribe for shares, their funds will be returned promptly, together with interest at the Bank's passbook rate, or their withdrawal authorizations will be terminated. 14 SELECTED FINANCIAL INFORMATION The following tables set forth certain information concerning the financial position and results of operations of the Bank at the dates and for the periods indicated. This information should be read in conjunction with the Financial Statements and Notes thereto presented elsewhere in this prospectus.
At June 30, ------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) SELECTED BALANCE SHEET DATA: Total assets......................................... $93,958 $89,372 $81,317 $72,989 $69,551 Loans receivable, net................................ 74,887 69,909 63,365 59,174 55,351 Mortgage-backed securities, held to maturity......... 1,473 2,045 2,547 3,023 3,976 Other debt securities, held to maturity.............. 1,580 4,023 5,267 4,403 4,984 Securities available for sale........................ 4,849 3,684 2,135 603 547 Cash and interest-bearing deposits(1)................ 6,135 5,039 5,385 3,485 2,868 Deposits............................................. 77,462 70,756 68,232 61,722 61,121 Advances from FHLB................................... 5,250 8,250 3,750 2,750 750 Stockholders' equity, substantially restricted....... 10,341 9,493 8,805 8,087 7,315 At June 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share data) SELECTED OPERATING DATA: Interest income...................................... $ 6,860 $ 6,500 $ 5,997 $ 5,637 $ 5,402 Interest expense..................................... 4,112 3,885 3,605 3,176 2,902 ------- ------- ------- ------- ------- Net interest income.................................. 2,748 2,615 2,392 2,461 2,500 Provision for loan losses............................ -- -- -- 17 25 ------- ------- ------- ------- ------- Net interest income after provision for loan losses.. 2,748 2,615 2,392 2,444 2,475 Non-interest income(2)............................... 411 176 159 125 155 Non-interest expense(3).............................. 1,612 1,854 1,200 1,140 1,044 ------- ------- ------- ------- ------- Income before income taxes and cumulative effect of a change in accounting principle................. 1,547 937 1,351 1,429 1,586 Income tax expense................................... 589 131 501 526 685 ------- ------- ------- ------- ------- Net income........................................... $ 958 $ 806 $ 850 $ 903 $ 901 ======= ======= ======= ======= ======= PER SHARE DATA: Net income - basic................................... $1.90 $1.61 $1.70 $1.81 $1.80 Net income - diluted................................. 1.88 1.58 1.68 1.79 1.80 Dividends............................................ 0.70 0.70 0.70 0.70 0.70
- --------------------------- (1) Includes interest-bearing deposits in other depository institutions. (2) Includes one-time gain on sale of old main office building of $169,000 in 1998. (3) Includes one-time SAIF assessment of $403,000 in 1997. 15
At June 30, ----------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED OTHER DATA: Number of: Real estate loans outstanding........................ 1,242 1,270 1,229 1,241 1,193 Deposit accounts..................................... 7,783 7,181 6,744 6,968 6,745 Full-service offices................................. 2 2 1 1 1 At or For the Year Ended June 30, ----------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED FINANCIAL RATIOS: Performance Ratios: Return on average assets(1)........................... 1.08% 0.96% 1.10% 1.25% 1.33% Return on average equity(2)........................... 9.56 8.81 10.00 11.64 12.98 Dividend payout ratio(3).............................. 36.74 43.77 41.19 38.78 38.84 Average equity to average assets...................... 11.30 10.94 11.02 10.72 10.24 Interest rate spread(4)............................... 2.72 2.70 2.59 2.97 3.43 Net interest margin(5)................................ 3.27 3.27 3.22 3.51 3.85 Non-interest expense to average assets................ 1.82 2.22 1.56 1.58 1.54 Average interest-earning assets to average interest-bearing liabilities................. 111.29 111.74 113.10 111.91 109.46 Capital Ratios: Tangible.............................................. 11.00 10.60 10.80 11.09 10.52 Core.................................................. 11.00 10.60 10.80 11.09 10.52 Risk-based............................................ 19.10 18.60 20.70 18.65 17.24 Asset Quality Ratios: Allowance for loan losses to total loans outstanding at end of period..................................... 0.67 0.71 0.79 0.88 0.94 Net charge-offs (recoveries) to average outstanding loans during the period.................. -- -- 0.02 0.04 -- Ratio of nonperforming assets to total assets(6)...................................... 0.35 0.14 0.31 0.14 0.26
- --------------------- (1) Net income divided by average assets. (2) Net income divided by average equity. (3) Computed for minority stockholders of Bank only, considering only their proportionate share of net income. The MHC has, with the approval of the OTS, waived receipt of all dividends declared and paid by the Bank. (4) Difference between average yield on interest-earning assets and average cost of interest-bearing liabilities. (5) Net interest income as a percentage of average interest-earning assets. (6) Nonaccrual loans and foreclosed real estate. The Bank does not accrue interest on loans over 90 days past due. 16 USE OF PROCEEDS The net proceeds from the sale of the common stock offered hereby are estimated to range from $7.2 million to $9.9 million. If the Estimated Valuation Range is increased by 15%, net proceeds are estimated to be $11.4 million. See "PRO FORMA DATA" for the assumptions used to arrive at such amounts. The Holding Company has received conditional OTS approval to contribute 50% of the net proceeds of the offering to the Bank. The following table presents the estimated net proceeds of the offering based on the number of shares set forth below together with the amount to be retained by the Holding Company and the amount to be contributed to the Bank.
758,625 892,500 1,026,375 1,180,331 Shares at Shares at Shares at Shares at $10.00 $10.00 $10.00 $10.00 Per Share Per Share Per Share Per Share --------- --------- --------- ---------- (in thousands) Gross proceeds................... $ 7,586 $ 8,925 $ 10,264 $ 11,803 Less expenses.................... 373 392 410 432 -------- -------- ---------- ---------- Net proceeds..................... $ 7,213 $ 8,533 $ 9,854 $ 11,371 ======== ======== ========== ========== Amount to be retained by the Holding Company................. $ 3,607 $ 4,267 $ 4,927 $ 5,686 Amount to be contributed to the Bank............................ $ 3,606 $ 4,266 $ 4,927 $ 5,685
Receipt of 50% of the net proceeds of the sale of the common stock will increase the Bank's capital and will support the expansion of the Bank's existing business activities. The Bank will use the funds contributed to it for general corporate purposes, including, initially, lending and investment in short-term U.S. Government and agency obligations. Up to $700,000 of the funds received by the Bank will contribute to the construction of a new full-service branch office. See "BUSINESS OF THE BANK -- Properties." The Bank may also use these funds to expand its banking operations through the acquisition of additional branches or other financial institutions. In connection with the conversion and the establishment of the ESOP, the Holding Company intends to loan the ESOP the amount necessary to purchase 8% of the shares of common stock sold in the conversion. The Holding Company's loan to fund the ESOP may range from $606,900 to $821,100 based on the sale of 60,690 shares to the ESOP (at the minimum of the Estimated Valuation Range) and 82,110 shares (at the maximum of the Estimated Valuation Range), respectively, at $10.00 per share. If 15% above the maximum of the Estimated Valuation Range, or 1,180,331 shares, are sold in the conversion, the Holding Company's loan to the ESOP would be approximately $944,265 (based on the sale of 94,427 shares to the ESOP). It is anticipated that the ESOP loan will have a 15-year term with interest payable at the prime rate as published in The Wall Street Journal on the closing date of the conversion. The loan will be repaid principally from the Bank's contributions to the ESOP and from any dividends paid on shares of common stock held by the ESOP. The remaining net proceeds retained by the Holding Company initially will be invested primarily in short-term U.S. Government and agency obligations. Such proceeds will be available for additional contributions to the Bank in the form of debt or equity, to support future diversification or acquisition activities, as a source of dividends to the stockholders of the Holding Company and for future repurchases of common stock to the extent permitted under Indiana law and federal regulations. The Holding Company will consider exploring opportunities to use such funds to expand operations through acquiring or establishing additional branch offices or acquiring other financial institutions. 17 Currently, there are no specific plans, arrangements, agreements or understandings, written or oral, regarding any expansion activities. Following consummation of the conversion, the Board of Directors will have the authority to adopt plans for repurchases of common stock, subject to statutory and regulatory requirements. Since the Holding Company has not yet issued stock, there currently is insufficient information upon which an intention to repurchase stock could be based. The facts and circumstances upon which the Board of Directors may determine to repurchase stock in the future would include but are not limited to: (i) market and economic factors such as the price at which the stock is trading in the market, the volume of trading, the attractiveness of other investment alternatives in terms of the rate of return and risk involved in the investment, the ability to increase the book value and/or earnings per share of the remaining outstanding shares, and the ability to improve the Holding Company's return on equity; (ii) the avoidance of dilution to stockholders by not having to issue additional shares to cover the exercise of stock options or to fund employee stock benefit plans; and (iii) any other circumstances in which repurchases would be in the best interests of the Holding Company and its stockholders. Any stock repurchases will be subject to a determination by the Board of Directors that both the Holding Company and the Bank will be capitalized in excess of all applicable regulatory requirements after any such repurchases and that capital will be adequate, taking into account, among other things, the Bank's level of nonperforming and classified assets, the Holding Company's and the Bank's current and projected results of operations and asset/liability structure, the economic environment and tax and other regulatory considerations. For a discussion of the regulatory limitations applicable to stock repurchases, see "THE CONVERSION -- Restrictions on Repurchase of Stock." DIVIDEND POLICY GENERAL Since June 1993, the Bank has paid quarterly cash dividends on the Bank's common stock. The MHC has waived receipt of all cash dividends paid by the Bank. Upon completion of the conversion, the Holding Company's Board of Directors will have the authority to declare dividends on the common stock, subject to statutory and regulatory requirements. The Board of Directors of the Holding Company intends to pay cash dividends on the common stock at an initial quarterly rate equal to $0.175 per share divided by the final Exchange Ratio. This formula will result in an initial quarterly dividend rate of $0.069, $0.058, $0.051 and $0.044 per share at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively. By adjusting the quarterly dividend in this fashion, the Holding Company intends to achieve economic parity with the dividends currently paid on the Bank's common stock. The first dividend payment on the Holding Company's common stock is expected during the month following the end of the quarter in which the conversion is consummated. In addition, the Board of Directors may determine to pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends. Declarations or payments of any dividends (regular and special) will be subject to determination by the Holding Company's Board of Directors, which will take into account the amount of the net proceeds retained by the Holding Company, the Holding Company's financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions that affect the payment of dividends by the Bank to the Holding Company discussed below. Under Indiana law, the Holding Company will be permitted to pay cash dividends after the conversion so long as it is able to pay its debts as they become due in the usual course of business and its assets are greater than the sum of its total liabilities plus the amount that would be needed, if the Holding Company were to be dissolved at the time of the dividend, to satisfy any rights that are preferential to those of the persons receiving the dividend. In order to pay such cash dividends, however, the Holding Company must have available cash either from the net proceeds raised in the conversion and retained by the Holding Company, borrowings by the Holding Company, dividends received from the Bank or earnings on Holding Company assets. No assurances can be given that any dividends, either regular or special, will be declared or, if declared, what the amount of dividends will be or whether such dividends, if commenced, will continue. 18 CURRENT RESTRICTIONS Dividends from the Holding Company will depend, in part, upon receipt of dividends from the Bank because the Holding Company initially will have no source of income other than dividends from the Bank and earnings from the investment of the net proceeds from the offering retained by the Holding Company. OTS regulations require the Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends to the Holding Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Holding Company. The OTS imposes certain limitations on the payment of dividends from the Bank to the Holding Company which utilize a three- tiered approach that permits various levels of distributions based primarily upon a savings association's capital level. The Bank currently meets the criteria to be designated a Tier 1 association, as defined under "REGULATION -- Federal Regulation of Savings Associations -- Limitations on Capital Distributions," and consequently could at its option (after prior notice to and no objection made by the OTS) distribute up to 100% of its net income during the calendar year plus 50% of its surplus capital ratio at the beginning of the calendar year less any distributions previously paid during the year. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Bank below the amount required for the liquidation account to be established pursuant to the Bank Plan of Conversion. See "REGULATION -- Federal Regulation of Savings Associations -- Limitations on Capital Distributions," "THE CONVERSION - - - Effects of Conversion on Depositors and Borrowers of the Bank -- Liquidation Account" and Note 14 of the Notes to Financial Statements included elsewhere herein. Additionally, in connection with the conversion, the Holding Company and the Bank have committed to the OTS that during the one-year period following consummation of the conversion, the Holding Company will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes. TAX CONSIDERATIONS In addition to the foregoing, retained earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes cannot be used by the Bank to pay cash dividends to the Holding Company without the payment of federal income taxes by the Bank at the then current income tax rate on the amount deemed distributed, which would include the amounts of any federal income taxes attributable to the distribution. See "TAXATION --Federal Taxation" and Note 8 of the Notes to Financial Statements included elsewhere herein. The Holding Company does not contemplate any distribution by the Bank that would result in a recapture of the Bank's bad debt reserve or create the above- mentioned federal tax liabilities. MARKET FOR COMMON STOCK The Holding Company has never issued capital stock and, consequently, there is no existing market for the common stock. Although the Holding Company has received preliminary approval to list the common stock on the Nasdaq SmallCap Market under the symbol FCAP, there can be no assurance that the Holding Company will meet the Nasdaq SmallCap Market listing requirements, which include a minimum market capitalization, at least three market makers and a minimum number of record holders. Keefe, Bruyette & Woods, Inc. has agreed to make a market for the common stock following consummation of the conversion, although it has no obligation to do so, and will assist the Holding Company in seeking to encourage at least two additional market makers to establish and maintain a market in the common stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. Based on the level of market making in the Bank's common stock, the Holding Company anticipates that prior to the completion of the conversion it will be able to obtain the commitment from at least two additional broker-dealers to act as market maker for the common stock. Additionally, the development of a liquid public market depends on the existence of willing buyers and sellers, the presence of which is not within the control of the Holding Company, the Bank or any market maker. There can be no assurance that an active and liquid trading market for the common stock 19 will develop or that, if developed, it will continue. The number of active buyers and sellers of the common stock at any particular time may be limited. Under such circumstances, investors in the common stock could have difficulty disposing of their shares on short notice and should not view the common stock as a short-term investment. Furthermore, there can be no assurance that purchasers will be able to sell their shares at or above the $10.00 purchase price or that quotations will be available on the Nasdaq SmallCap Market as contemplated. The Bank's common stock does not trade on an established market but in privately negotiated transactions, and there are no regularly quoted bid or asked prices for the Bank's common stock. At June 30, 1998, there were 341 record holders (i.e., not holders in nominee or "street name") of the Bank's ---- common stock. The following table sets forth the high and low trading prices known to the Bank's management and cash dividends paid during the periods indicated. Other trades may have occurred during these periods, but at prices unknown to management
Cash Dividend High Low Declared ---- --- -------- Fiscal 1997 - ----------- Quarter Ended September 30, 1996 $20.00 $20.00 0.175 Quarter Ended December 31, 1996 $22.00 $20.00 0.175 Quarter Ended March 31, 1997 $20.00 $20.00 0.175 Quarter Ended June 30, 1997 20.00 20.00 0.175 Fiscal 1998 - ----------- Quarter Ended September 30, 1997 $20.00 20.00 0.175 Quarter Ended December 31, 1997 20.00 20.00 0.175 Quarter Ended March 31, 1998 20.00 20.00 0.175 Quarter Ended June 30, 1998 20.00 20.00 0.175 Fiscal 1999 - ----------- Quarter Ended September 30, 1998 (through _____________, 1998)
20 CAPITALIZATION The following table presents the historical capitalization of the Bank at June 30, 1998, and the pro forma consolidated capitalization of the Holding Company after giving effect to the assumptions set forth under "PRO FORMA DATA," based on the sale of the number of shares of common stock at the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Valuation Range. The shares that would be issued at the maximum, as adjusted, of the Estimated Valuation Range would be subject to receipt of OTS approval of an updated appraisal confirming such valuation. A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT PRO FORMA CONSOLIDATED CAPITALIZATION.
Holding Company Pro Forma Consolidated Capitalization Based Upon the Sale of --------------------------------------------------------- Bank 758,625 892,500 1,026,375 1,180,331 Capitalization Shares at Shares at Shares at Shares at as of $10.00 $10.00 $10.00 $10.00 June 30, 1998 Per Share(1) Per Share(1) Per Share(1) Per Share(2) --------------- ------------ ------------ ------------ ------------ (in thousands) Deposits(3)............................ $77,462 $ 77,462 $ 77,462 $ 77,462 $ 77,462 FHLB advances.......................... 5,250 5,250 5,250 5,250 5,250 ------- -------- -------- ---------- ---------- Total deposits and borrowed funds...... $82,712 $ 82,712 $ 82,712 $ 82,712 $ 82,712 ======= ======== ======== ========== ========== Stockholders' equity: Preferred stock: 5,000,000 shares, $.01 par value per share, authorized; none issued or outstanding...................... $ - - $ - - $ - - $ - - $ - - Common stock: 1,000,000 shares, $.01 par value per share, authorized; specified number of shares assumed to be issued and outstanding(4)........... 504 1,263 1,397 1,530 1,684 Additional paid-in capital........... 1,663 8,117 9,303 10,491 11,854 Retained earnings(5)................. 8,174 8,174 8,174 8,174 8,174 Less: Common stock acquired by ESOP(6)......................... - - 607 714 821 944 Common stock to be acquired by 1999 MRDP(7).................... - - 303 357 411 472 ------- -------- -------- ---------- ---------- Total stockholders' equity............ $10,341 $ 16,644 $ 17,803 $ 18,963 $ 20,296 ======= ======== ======== ========== ==========
(footnotes on following page) 21 ________________ (1) Does not reflect the possible increase in the Estimated Valuation Range to reflect material changes in the financial condition or results of operations of the Bank or changes in market conditions or general financial, economic and regulatory conditions, or the issuance of additional shares under the 1994 Option Plan or the 1999 Option Plan. (2) This column represents the pro forma capitalization of the Holding Company in the event the aggregate number of shares of common stock issued in the conversion is 15% above the maximum of the Estimated Valuation Range. See "PRO FORMA DATA" and Footnote 1 thereto. (3) Withdrawals from deposit accounts for the purchase of common stock are not reflected. Such withdrawals will reduce pro forma deposits by the amounts thereof. (4) The Bank's authorized capital consists solely of 4,000,000 shares of common stock, par value $1.00 per share, 1,000 shares of which will be issued to the Holding Company, and 1,000,000 shares of preferred stock, $1.00 par value per share, none of which will be issued in connection with the conversion. (5) Retained earnings are substantially restricted by applicable regulatory capital requirements. Additionally, the Bank will be prohibited from paying any dividend that would reduce its regulatory capital below the amount in the liquidation account, which will be established for the benefit of the Bank's Eligible Account Holders and Supplemental Eligible Account Holders at the time of the conversion and adjusted downward thereafter as such account holders reduce their balances or cease to be depositors. See "THE CONVERSION -- Effects of Conversion on Depositors and Borrowers of the Bank -- Liquidation Account." (6) Assumes that 8% of the common stock sold in the conversion will be acquired by the ESOP in the conversion with funds borrowed from the Holding Company. Under GAAP, the amount of common stock to be purchased by the ESOP represents unearned compensation and is, accordingly, reflected as a reduction of capital. As shares are released to ESOP participants' accounts, a corresponding reduction in the charge against capital will occur. Since the funds are borrowed from the Holding Company, the borrowing will be eliminated in consolidation and no liability or interest expense will be reflected in the consolidated financial statements of the Holding Company. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership Plan." (7) Assumes the purchase in the open market at $10.00 per share, pursuant to the proposed 1999 MRDP, of a number of shares equal to 4% of the shares of common stock issued in the conversion at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range. The shares are reflected as a reduction of stockholders' equity. See "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -- Benefits -- Management Recognition Plan." The 1999 MRDP is subject to stockholder approval at a meeting following consummation of the conversion. 22 HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE The following table presents the Bank's historical and pro forma capital position relative to its capital requirements at June 30, 1998. The amount of capital infused into the Bank for purposes of the following table is 50% of the net proceeds of the offering. For purpose of the table below, the amount expected to be borrowed by the ESOP and the cost of the shares expected to be acquired by the MRDP are deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see "USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used in the table are those provided in the capital regulations issued by the OTS. For a discussion of the capital standards applicable to the Bank, see "REGULATION -- Federal Regulation of Savings Associations -- Capital Requirements."
PRO FORMA AT JUNE 30, 1998 ---------------------------------------------------------------- MINIMUM OF ESTIMATED MIDPOINT OF ESTIMATED MAXIMUM OF ESTIMATED VALUATION RANGE VALUATION RANGE VALUATION RANGE -------------------- --------------------- -------------------- 758,625 SHARES 892,500 SHARES 1,026,375 SHARES JUNE 30, 1998 AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE -------------------- -------------------- --------------------- -------------------- PERSENT OF PERSENT OF PERSENT OF PERSENT OF ADJUSTED ADJUSTED ADJUSTED ADJUSTED TOTAL TOTAL TOTAL TOTAL AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1) ------ ---------- ------ ---------- ------ ---------- ------ ---------- (Dollars in thousands) GAAP capital............... $10,341 11.0% $12,418 12.9% $12,806 13.3% $13,198 13.6% ======= ==== ======= ==== ======= ==== ======= ==== Tangible capital........... $10,338 11.0% $12,415 12.9% $12,805 13.3% $13,195 13.6% Tangible capital requirement............... 1,409 1.5 1,440 1.5 1,446 1.5 1,452 1.5 ------- ---- ------- ---- ------- ---- ------- ---- Excess..................... $ 8,929 9.5% $10,974 11.4% $11,358 11.8% $11,743 12.1% ======= ==== ======= ==== ======= ==== ======= ==== Core capital............... $10,336 11.0% $12,415 12.9% $12,805 13.3% $13,195 13.6% Core capital requirement(2) 2,819 3.0 2,881 3.0 2,893 3.0 2,904 3.0 ------- ---- ------- ---- ------- ---- ------- ---- Excess..................... $ 7,519 8.0% $ 9,534 9.9% $ 9,912 10.3% $10,291 10.6% ======= ==== ======= ==== ======= ==== ======= ==== Total capital(3)........... $10,799 19.1% $12,876 22.3% $13,266 22.9% $13,656 23.5% Risk-based capital requirement....... 4,513 8.0 4,613 8.0 4,632 8.0 4,650 8.0 ------- ---- ------- ---- ------- ---- ------- ---- Excess..................... $ 6,286 11.1% $ 8,263 14.3% $ 8,634 14.9% $ 9,005 15.5% ======= ==== ======= ==== ======= ==== ======= ==== ------------------- 15% ABOVE MAXIMUM OF ESTIMATE VALUATION RANGE ------------------- 1,180,331 SHARES AT $10.00 PER SHARE ------------------- PERCENT ADJUSTED TOTAL AMOUNT ASSETS (1) ------ ---------- GAAP capital............... $13,646 14.0% ======= ==== Tangible capital........... $13,643 14.0% Tangible capital requirement............... 1,459 1.5 ------- ---- Excess..................... $12,184 12.5% ======= ==== Core capital............... $13,643 14.0% Core capital requirement(2) 2,918 3.0 ------- ---- Excess..................... $10,725 11.0% ======= ==== Total capital(3)........... $14,104 24.2% Risk-based capital requirement....... 4,672 8.0 ------- ---- Excess..................... $ 9,432 16.2% ======= ====
_______________ (1) Tangible capital levels and core capital levels are shown as a percentage of adjusted total assets of $94.0 million. Risk-based capital levels are shown as a percentage of risk-weighted assets of $56.4 million. (2) The current OTS core capital requirement for savings associations is 3% of total adjusted assets. The OTS has proposed core capital requirements which would require a core capital ratio of 3% of total adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness and a core capital ratio of 4% to 5% for all other thrifts. (3) Percentage represents total core and supplementary capital divided by total risk-weighted assets. Assumes net proceeds are invested in assets that carry a 20% risk-weighting. 23 PRO FORMA DATA Pursuant to the Plan of Conversion, the amount of common stock being offered in the conversion is based on an independent appraisal of the estimated pro forma market value of the Bank and the MHC after giving effect to the conversion. The Estimated Valuation Range as of August 14, 1998 is from a minimum of $12.8 million to a maximum of $17.3 million with a midpoint of $15.0 million. Based on this valuation and the approximate 59.5% ownership interest being sold in this offering, the Board of Directors of the Holding Company and the Bank established an offering range of $7.6 million to $10.3 million, with a midpoint of $8.9 million. At a price per share of $10.00, this results in a minimum number of shares of 758,625, a maximum number of shares of 1,026,375 and a midpoint number of shares of 892,500. The actual net proceeds from the sale of the common stock cannot be determined until the conversion is completed. However, net proceeds set forth on the following table are based upon the following assumptions: (i) Webb will receive fees of approximately $98,000, $117,000, $135,000 and $157,000 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively (see "THE CONVERSION - -- Plan of Distribution and Selling Commissions"); (ii) all of the common stock will be sold in the Subscription and Direct Community Offerings; and (iii) conversion expenses, excluding the fees paid to Webb, will total approximately $275,000 at each of the minimum, midpoint, maximum and 15% above the Estimated Valuation Range. Actual expenses may vary from this estimate, and the fees paid will depend upon the percentages and total number of shares sold in the Subscription Offering, Direct Community Offering and Syndicated Community Offering and other factors. The following table summarizes the historical net income and retained income of the Bank and the pro forma consolidated net income and stockholders' equity of the Holding Company for the periods and at the dates indicated based on the minimum, midpoint and maximum of the Estimated Valuation Range and based on a 15% increase in the maximum of the Estimated Valuation Range. The pro forma consolidated net income of the Bank for the year ended June 30, 1998 has been calculated as if the conversion had been consummated at the beginning of the period and the estimated net proceeds received by the Holding Company and the Bank had been invested at 5.29% at the beginning of the period, which represents the one-year U.S. Treasury Bill yield as of June 30, 1998. While OTS regulations provide for the use of a yield representing the arithmetic average of the weighted average yield earned by the Bank on its interest-earning assets and the rates paid on its deposits, the Holding Company believes that the U.S. Treasury Bill yield represents a more realistic yield on the investment of the conversion proceeds. As discussed under "USE OF PROCEEDS," the Holding Company expects to retain 50% of the net proceeds of the offering from which it will fund the ESOP loan. A pro forma after-tax return of 3.28% is used for both the Holding Company and the Bank for the year ended June 30, 1998, after giving effect to an incremental combined federal and state income tax rate of 38.0%. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the footnotes to the table. Per share amounts have been computed as if the common stock had been outstanding at the beginning of the respective periods, but without any adjustment of per share historical or pro forma stockholders' equity to reflect the earnings on the estimated net proceeds. No effect has been given to: (i) the shares to be reserved for issuance under the Holding Company's 1999 Stock Option Plan, which is expected to be voted upon by stockholders at a meeting following consummation of the conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing common stock in the conversion; or (iii) the establishment of a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders. See "MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plan" and "THE CONVERSION -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued." THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS. STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN ACCORDANCE WITH GAAP. STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. 24
At or For the Year Ended June 30, 1998 ----------------------------------------------------------- Minimum of Midpoint of Maximum of 15% Above Estimated Estimated Estimated Maximum of Valuation Valuation Valuation Estimated Range Range Range Valuation Range ----------- ------------ ----------- ---------------- 758,625 892,500 1,026,375 1,180,331(1) Shares Shares Shares Shares at $10.00 at $10.00 at $10.00 at $10.00 Per Share Per Share Per Share Per Share ----------- ------------ ----------- ---------------- (In thousands, except per share amounts) Gross proceeds...................................... $ 7,586 $ 8,925 $ 10,264 $ 11,803 Less: estimated expenses............................ (373) (392) (410) (432) -------- -------- ---------- ---------- Estimated net proceeds.............................. 7,213 8,533 9,854 11,371 Less: Common stock acquired by ESOP................. (607) (714) (821) (944) Less: Common stock to be acquired by 1999 MRDP.................................... (303) (357) (411) (472) -------- -------- ---------- ---------- Net investable proceeds......................... $ 6,303 $ 7,462 $ 8,622 $ 9,955 ======== ======== ========== ========== Consolidated net income: Historical......................................... $ 958 $ 958 $ 958 $ 958 Pro forma income on net proceeds(2)................ 207 245 283 327 Pro forma ESOP adjustments(3)...................... (25) (30) (34) (39) Pro forma 1999 MRDP adjustments(4)................. (38) (44) (51) (59) -------- -------- ---------- ---------- Pro forma net income............................. $ 1,102 $ 1,129 $ 1,156 $ 1,187 ======== ======== ========== ========== Consolidated net income per share (5)(6): Historical......................................... $ 0.79 $ 0.67 $ 0.58 $ 0.51 Pro forma income on net proceeds................... 0.17 0.17 0.17 0.17 Pro forma ESOP adjustments(3)...................... (0.02) (0.02) (0.02) (0.02) Pro forma 1999 MRDP adjustments(4)................. (0.03) (0.03) (0.03) (0.03) -------- -------- ---------- ---------- Pro forma net income per share(7)................ $ 0.91 $ 0.79 $ 0.70 $ 0.63 ======== ======== ========== ========== Consolidated stockholders' equity (book value): Historical......................................... $ 10,341 $ 10,341 $ 10,341 $ 10,341 Estimated net proceeds............................. 7,213 8,533 9,854 11,371 Less: Common stock acquired by ESOP................ (607) (714) (821) (944) Less: Common stock to be acquired by 1999 MRDP(4).................................. (303) (357) (411) (472) -------- -------- ---------- ---------- Pro forma stockholders' equity(8)................ $ 15,544 $ 17,803 $ 18,963 $ 20,296 ======== ======== ========== ========== Consolidated stockholders' equity per share(6)(9): Historical(6)...................................... $ 8.11 $ 6.89 $ 5.99 $ 5.21 Estimated net proceeds............................. 5.66 5.69 5.71 5.73 Less: Common stock acquired by ESOP................ (0.48) (0.48) (0.48) (0.48) Less: Common stock to be acquired by 1999 MRDP(3).................................. (0.24) (0.24) (0.24) (0.24) -------- -------- ---------- ---------- Pro forma stockholders' equity per share(7)...... $ 13.05 $ 11.86 $ 10.98 $ 10.22 ======== ======== ========== ========== Purchase price as a percentage of pro forma stockholders' equity per share..................... 76.63% 84.32% 91.07% 97.85% Purchase price as a multiple of pro forma net income per share............................... 10.99x 12.65x 14.29x 15.87x
(footnotes on following page) 25 ______________ (1) Gives effect to the sale of an additional 153,956 shares in the conversion, which may be issued to cover an increase in the pro forma market value of the Holding Company and the Bank as converted, without the resolicitation of subscribers or any right of cancellation. The issuance of such additional shares will be conditioned on a determination by Keller & Company that such issuance is compatible with its determination of the estimated pro forma market value of the Bank and the MHC as converted. See "THE CONVERSION -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued." (2) No effect has been given to withdrawals from savings accounts for the purpose of purchasing common stock in the conversion. Since funds on deposit at the Bank may be withdrawn to purchase shares of common stock (which will reduce deposits by the amount of such purchases), the net amount of funds available to the Bank for investment following receipt of the net proceeds of the conversion will be reduced by the amount of such withdrawals. (3) It is assumed that 8% of the shares of common stock sold in the offering will be purchased by the ESOP. The funds used to acquire such shares will be borrowed by the ESOP (at an interest rate equal to the prime rate as published in The Wall Street Journal on the closing date of the conversion, which rate is currently 8.50%) from the net proceeds from the offering retained by the Holding Company. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. The Bank intends to make contributions to the ESOP in amounts at least equal to the principal and interest requirement of the debt. As the debt is paid down, stockholders' equity will be increased. The Bank's payment of the ESOP debt is based upon equal installments of principal over a 15-year period, assuming a combined federal and state income tax rate of 38.0%. Interest income earned by the Holding Company on the ESOP debt offsets the interest paid by the Bank on the ESOP loan. No reinvestment is assumed on proceeds contributed to fund the ESOP. Applicable accounting practices require that compensation expense for the ESOP be based upon shares committed to be released and that unallocated shares be excluded from earnings per share computations. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share purchase price. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership Plan." (4) In calculating the pro forma effect of the 1999 MRDP, it is assumed that the required stockholder approval has been received, that the shares were acquired by the 1999 MRDP at the beginning of the period presented in open market purchases at the $10.00 per share purchase price, that 20% of the amount contributed was an amortized expense during such period, and that the combined federal and state income tax rate is 38.0%. The issuance of authorized but unissued shares of the common stock instead of open market purchases would dilute the voting interests of existing stockholders by approximately 2.8% and pro forma net income per share would be $0.90, $0.79, $0.71 and $0.63 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively, for the year ended June 30, 1998, and pro forma stockholders' equity per share would be $14.10, $12.97, $12.14 and $11.41 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively, at June 30, 1998. Shares issued under the 1999 MRDP vest 20% per year and for purposes of this table compensation expense is recognized on a straight- line basis over each vesting period. In the event the fair market value per share is greater than $10.00 per share on the date shares are awarded under the 1999 MRDP, total 1999 MRDP expense would increase. No effect has been given to the shares reserved for issuance under the proposed 1999 Option Plan. (5) Per share amounts are based upon shares outstanding of 1,218,3256, 1,433,360, 1,648,364 and 1,895,618 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively, for the year ended June 30, 1998, which includes the shares of common stock issued in the conversion less the number of shares assumed to be held by the ESOP not committed to be released within the first year following the conversion. (6) Historical per share amounts have been computed as if the shares of common stock expected to be issued in the conversion had been outstanding at the beginning of the period or on the date shown, but without any adjustment of historical net income or historical retained earnings to reflect the investment of the estimated net proceeds of 26 the sale of shares in the conversion, the additional ESOP expense or the proposed 1999 MRDP expense, as described above. (7) No effect has been given to the issuance of additional shares pursuant to options granted pursuant to the 1994 Option Plan or the 1999 Option Plan. Under the 1994 Option Plan, 20,000 shares were reserved for issuance and options for 7,245 shares were outstanding at June 30, 1998 at a weighted average exercise price of $15.75 per share. If stockholders approve the 1999 Option Plan following the conversion, the Holding Company will have reserved for issuance under the 1999 Option Plan authorized but unissued shares of common stock representing an amount of shares equal to 10% of the shares sold in this offering. If all of these options were to be exercised utilizing authorized but unissued shares rather than treasury shares which could be acquired, the voting interests of existing stockholders would be diluted by approximately 7.0%. Assuming stockholder approval of the 1999 Option Plan, and that all options under the 1994 Option Plan and the 1999 Option Plan were exercised at the end of the period at an exercise price of $15.75 per share (to be adjusted for the final Exchange Ratio) and $10.00 per share, respectively, pro forma net earnings per share would be $0.82, $0.71, $0.63 and $0.57 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively, for the year ended June 30, 1998, and pro forma stockholders' equity per share would be $13.27, $12.19, $11.39 and $10.70 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively, at June 30, 1998. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Stock Option Plans" and "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs." (8) "Book value" represents the difference between the stated amounts of the Bank's assets and liabilities. The amounts shown do not reflect the liquidation account which will be established for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in the conversion, or the federal income tax consequences of the restoration to income of the Bank's special bad debt reserves for income tax purposes which would be required in the unlikely event of liquidation. See "THE CONVERSION -- Effects of Conversion on Depositors and Borrowers of the Bank" and "TAXATION." The amounts shown for book value do not represent fair market values or amounts distributable to stockholders in the unlikely event of liquidation. (9) Per share amounts are based upon shares outstanding of 1,275,000, 1,500,000, 1,725,000 and 1,983,750 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively. 27 EFFECT OF THE CONVERSION ON THE BANK'S STOCKHOLDERS The following table illustrates the effect of the conversion on the public stockholders of the Bank by setting forth selected comparative per share data for the Bank on both an historical and a pro forma equivalent basis giving effect to the conversion, assuming that at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, one share of Bank common stock will be exchanged for 2.55, 3.00, 3.45 and 3.97 shares of Holding Company common stock, respectively. Pro forma equivalent book value per share and pro forma equivalent net income per share represent the pro forma amounts set forth in the tables under "PRO FORMA DATA" above multiplied by the foregoing Exchange Ratios. Pro forma equivalent dividends per share represent the intended dividend payment set forth under "DIVIDEND POLICY" above multiplied by the foregoing Exchange Ratios. This table should be read in conjunction with the consolidated financial statements of the Bank, including the notes thereto, appearing elsewhere in this prospectus. The following information is not necessarily indicative of the results of operations or the financial position that would have resulted had the conversion been consummated at the beginning of the periods indicated.
At or For the Year Ended June 30, 1998 ------------- Book value per share: Historical.......................................... $20.51 Pro forma equivalent: At minimum of Estimated Valuation Range............ 13.05 At midpoint of Estimated Valuation Range........... 11.86 At maximum of Estimated Valuation Range............ 10.98 At 15% above maximum of Estimated Valuation Range.. 10.22 Basic net income per share: Historical.......................................... 1.90 Pro forma equivalent: At minimum of Estimated Valuation Range............ 0.91 At midpoint of Estimated Valuation Range........... 0.79 At maximum of Estimated Valuation Range............ 0.70 At 15% above maximum of Estimated Valuation Range.. 0.63 Dividends per share: Historical.......................................... 0.70 Pro forma equivalent: At minimum of Estimated Valuation Range............ 0.28 At midpoint of Estimated Valuation Range........... 0.24 At maximum of Estimated Valuation Range............ 0.20 At 15% above maximum of Estimated Valuation Range.. 0.18
28 SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth, for each director and executive officer of the Bank (and their associates) and for all of the directors and executive officers as a group, (i) shares of Holding Company common stock to be received in exchange for shares of Bank common stock based upon the number of shares owned as of June 30, 1998, (ii) proposed purchases of common stock, assuming shares available to satisfy their subscriptions, and (iii) total shares of Holding Company common stock to be held upon consummation of the conversion, in each case assuming that 892,500 shares are sold at the midpoint of the Estimated Valuation Range. No individual has entered into a binding agreement with respect to such intended purchases and, therefore, actual purchases could be more or less than indicated below. Directors and executive officers and their associates may not purchase in excess of 34% of the shares sold in the conversion. Because OTS policy requires that the maximum purchase limitation include shares to be received in exchange for shares of Bank common stock, certain officers and directors of the Bank may be limited in their ability to purchase shares in this offering.
Number of Shares Received in Exchange Proposed Purchase of Total Common Stock for Bank Common Stock to be Held -------------------- ---------------------- Common Stock Number Number Percentage (1)(2) Amount of Shares of Shares of Total ------------ ------ --------- --------- -------- James G. Pendleton 21,900 $ 50,000 5,000 26,900 1.8 Samuel E. Uhl 16,320 50,000 5,000 21,320 1.4 M. Chris Frederick 660 30,000 3,000 3,660 * Joel E. Voyles - - 10,000 1,000 1,000 * Kenneth R. Saulman 4,800 80,000 8,000 12,800 * John W. Buschemeyer 21,900 20,000 2,000 23,900 1.6 Gerald L. Uhl 22,020 80,000 8,000 30,020 2.0 Mark D. Shireman 21,900 80,000 8,000 29,900 2.0 Dennis L. Huber 1,800 25,000 2,500 4,300 * Sheri L. McGill -- -- -- -- - - ------- -------- ------ ------- ------- Total 111,300 $445,000 44,500 155,800 10.4% ======= ======== ====== ======= =======
_________________ (*) Less than 1%. (1) Excludes shares which may be received upon the exercise of outstanding stock options granted under the 1994 Option Plan. Based upon the Exchange Ratio of 3.004 at the midpoint of the Estimated Valuation Range, the following persons named in the table would have options to purchase common stock as follows: Mr. Pendleton, no shares; Mr. S. Uhl, 6,000 shares; Mr. Frederick,4,200 shares; Mr.Voyles, 4,050 shares; Mr. Saulman, no shares; Mr. Buschemeyer, no shares; Mr. G. Uhl,180 shares (granted to his spouse); Mr. Shireman, no shares; Mr. Huber, no shares; and Ms. McGill, 3,604 shares. (2) Does not include stock options that may be granted under the 1999 Option Plan and shares that may be awarded under the 1999 MRDP if such plans are approved by stockholders. See "MANAGEMENT OF THE BANK -- Benefits." 29 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK STATEMENTS OF INCOME The following Statements of Income of First Federal Bank, A Federal Savings Bank for the fiscal years ended June 30, 1998 and 1997 have been audited by Monroe Shine & Co., Inc., independent auditors, whose report thereon appears elsewhere in this prospectus. These statements should be read in conjunction with the Financial Statements and related Notes included elsewhere herein.
Years Ended June 30, ---------------------- 1998 1997 ---------- ---------- INTEREST INCOME Loans receivable: Mortgage loans......................... $5,381,084 $4,864,498 Consumer and other loans................ 828,182 897,711 Mortgage-backed securities.............. 111,751 144,644 Other securities: Federal agency.......................... 264,847 367,140 Municipal............................... 9,363 23,573 Other................................... 46,245 44,589 Federal Home Loan Bank dividends........ 45,653 41,555 Interest bearing deposits with banks.... 173,192 116,320 ---------- ---------- Total interest income................. 6,860,317 6,500,030 ---------- ---------- INTEREST EXPENSE Deposits................................ 3,808,317 3,554,496 Advances from Federal Home Loan Bank.... 303,551 330,795 ---------- ---------- Total interest expense................ 4,111,868 3,885,291 Net interest income...................... 2,748,449 2,614,739 NON-INTEREST INCOME Loan fees and service charges........... 38,684 57,674 Gain on sale of premises and equipment.. 169,087 -- Net rental income....................... 1,212 9,195 Service charges on deposit accounts..... 123,806 78,998 Other income............................ 77,993 30,313 ---------- ---------- Total non-interest income............. 410,782 176,180 ---------- ---------- NON-INTEREST EXPENSE Compensation and benefits............... 858,303 803,045 Occupancy and equipment................. 309,943 190,440 Deposit insurance premiums.............. 44,198 493,068 Other expenses.......................... 399,120 367,182 ---------- ---------- Total non-interest expense............ 1,611,564 1,853,735 ---------- ---------- Income before income taxes............... 1,547,667 937,184 Income tax expense....................... 589,215 131,498 ---------- ---------- NET INCOME............................... $ 958,452 $ 805,686 ========== ========== NET INCOME PER COMMON SHARE, BASIC....... $1.90 $1.61 ========== ========== NET INCOME PER COMMON SHARE, DILUTED..... $1.88 $1.58 ========== ==========
30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Bank. The information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto contained in this prospectus. OPERATING STRATEGY The business of the Bank consists principally of attracting deposits from the general public and using such funds to originate for investment first mortgage loans secured by single-family homes in Harrison County, Indiana, its primary market area, and, to a lesser extent, in surrounding counties. The Bank's lending activity also involves the origination of consumer loans, commercial business loans, commercial real estate loans and residential construction loans. The Bank's profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolio and its cost of funds, which consists of interest paid on deposits and borrowings. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Bank's profitability is also affected by the level of non-interest income and non-interest expenses. Non- interest income includes service charges and fees and gain on sale of investments. Non-interest expenses primarily include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums and data processing expenses. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation and monetary and fiscal policies. The Bank's business strategy is to operate as a traditional, community- oriented savings association dedicated to serving the financial needs of individuals and small businesses in its primary market area and providing quality customer service. Historically, the Bank has emphasized the origination of loans secured by real estate and has retained for its portfolio almost all of the loans that it originates. To help increase the yield on its loan portfolio, decrease its interest rate risk profile associated with its high percentage of fixed-rate residential mortgage loans, and better serve its customers, the Bank has devoted attention in recent years to originating short-term consumer loans as well as commercial loans to small businesses in its primary market area and is seeking to hire a commercial loan officer to supervise its commercial lending activities. In addition, to complement its commercial lending activities, the Bank promotes checking accounts (which are lower cost than traditional time deposits) through free checking programs and offering special services such as debit cards, bank-by-phone services, and PC banking. Furthermore, to better serve customers in Harrison County, the Bank relocated to a newly constructed main office building during July 1997 and received OTS approval in July 1998 to construct a new full-service branch office in New Salisbury in north-central Harrison County. The Bank intends to open a temporary branch facility on the site during October 1998 until the construction of the new building is completed, which is estimated during April 1999. Management anticipates that the opening of the New Salisbury office will require the hiring of up to four new full-time employees, which will increase the Bank's future operating expenses. See "USE OF PROCEEDS," "PRO FORMA DATA" and "BUSINESS OF THE BANK -- Properties" for further information regarding the proposed New Salisbury office. The conversion will increase the consolidated capital of the Holding Company by the amount of the net proceeds after deducting the shares to be sold to the ESOP. Funds withdrawn from deposit accounts will decrease interest-bearing liabilities, and new funds used to purchase shares will increase interest- earning assets. While the Holding Company expects these changes to increase its net interest income, the Holding Company also expects that the adoption of the ESOP and the MRDP will increase its non-interest expenses. See "RISK FACTORS -- Expenses Associated With ESOP and 1999 MRDP." For additional information regarding the effects of this offering, see "PRO FORMA DATA." 31 COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997 At June 30, 1998, total assets were $94.0 million compared to $89.4 million at June 30, 1997. This increase was primarily the result of a $5.0 million increase in loans, a $1.4 million increase in interest-bearing deposits with banks and a $1.1 million increase in securities available for sale, which were partially offset by a $3.0 million decrease in securities held to maturity. The increase in loans primarily reflected residential mortgage loan refinancings in the current low interest rate environment, rather than new loan originations. Strong competition for loans also depressed new loan originations. The current low interest rate environment also contributed to the decline in securities held to maturity as a result of prepayments. The excess funds generated by the prepayment of securities held to maturity, together with an increase in deposits discussed below, were invested in interest-bearing deposits at banks and securities available for sale, and were also used to reduce FHLB advances. At June 30, 1998, deposits were $77.5 million compared to $70.8 million at June 30, 1997. The increase in deposits resulted primarily from growth in demand accounts and savings deposit accounts, which management attributes to its promotional efforts to attract such lower cost accounts. Time deposits remained virtually unchanged. Total stockholders' equity increased $800,000 to $10.3 million at June 30, 1998, primarily as a result of retained earnings of $958,000 offset by $143,000 in dividends paid to the Bank's minority stockholders. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 NET INCOME. Net income was $958,000 ($1.88 per share diluted) in 1998 compared to $806,000 ($1.58 per share diluted) in 1997. The results for 1998 included a one-time gain of $169,000 associated with the sale of the Bank's old main office property. Without this one-time gain, 1998 net income would have been $854,000 ($1.67 per share diluted). The results for 1997 included the payment of a one-time, industry-wide assessment to recapitalize the SAIF. Without the SAIF assessment, 1997 net income would have been $1.1 million. 1997 net income was also benefitted by a change in tax law which reduced income tax expense. See "- - Comparison of Operating Results for the Years Ended June 30, 1998 and 1997 - - Income Taxes" for further discussion. In 1998, the Bank's return on average assets was 1.08% and its return on average equity was 9.56%. NET INTEREST INCOME. Net interest income increased 3.8% to $2.7 million in 1998 from $2.6 million in 1997 as a result of a 2 basis point increase in the interest rate spread (from 2.70% in 1997 to 2.72% in 1998) and an increase in the average balance of interest-earning assets. Total interest income increased $400,000, or 6.2%, to $6.9 million in 1998 from $6.5 million in 1997, primarily as a result of a higher balance of interest-earning assets and a slight increase in the average yield earned thereon. Interest on loans receivable increased $500,000 primarily as a result of higher average balances of residential mortgage loans due to high refinancing activity in the low interest rate environment. Interest on mortgage-backed securities and other securities decreased $148,000 as a result of lower average balances and lower average rates earned on such assets. Interest on interest- bearing deposits at banks increased $57,000 as a result of higher average balances as available funds exceeded loan demand, and an increase in the average rate earned on such funds. Total interest expense increased $200,000, or 5.1%, to $4.1 million in 1998 from $3.9 million in 1997 as a result of an increase in interest on deposits due to higher average balances and a slight increase in the average cost of deposits. The average cost of regular savings deposits and interest-bearing demand accounts increased as a result of competitive pressures, while the average cost of time deposits declined as a result of maturities of higher rate time deposits. Interest on FHLB advances was essentially unchanged from 1997 to 1998. PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for estimated losses based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit 32 concentrations, trends in historical loss experience, specified impaired loans, and economic conditions. The Bank made no provision for loan losses in either 1998 or 1997. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank's control. While the Bank maintains its allowance for loan losses at a level which it considers to be adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts. At June 30, 1998, the Bank's allowance for loan losses was 0.67% of total loans and was deemed adequate by management at that date. NON-INTEREST INCOME. Non-interest income increased to $411,000 in 1998 from $176,000 in 1997. The increase was primarily the result of a one-time gain of $169,000 associated with the sale of the Bank's old main office property. Loan fees and service charges decreased $19,000 as a result of a decrease in construction loan fees. Service charges on deposit accounts increased $45,000 due to an increased number of demand deposit accounts. Other income increased $48,000 as a result of commissions earned on the sale of annuities and mutual funds. Net rental income from the lease of the old main office building decreased from $9,000 in 1997 to $1,000 in 1998 because of sale of the property during 1998. NON-INTEREST EXPENSES. Non-interest expenses were $1.6 million in 1998 compared to $1.9 million in 1997. Compensation and benefits expenses increased $55,000 due to normal compensation increases and increases in health and welfare insurance premiums. Occupancy and equipment expenses increased $220,000 as a result of the opening of the new main office. Compensation and benefits expenses and occupancy and equipment expenses are expected to increase in future periods with the opening of the proposed new full-service branch office as a result of the expected hiring of up to four new full-time employees and the cost of operating and equipping the office. Deposit insurance premiums decreased $449,000 as a result of the $403,000 one-time SAIF assessment incurred in 1997, as well as lower insurance premiums in effect after the SAIF recapitalization. Other expenses increased $32,000 as a result of normal increases. INCOME TAXES. Income tax expense was $589,000 in 1998 compared to $131,000 in 1997 primarily as a result of an increase in the effective tax rate from 14.0% in 1997 to 38.1% in 1998 due to the effect of a change in tax law related to the allowance for loan losses and bad debt deduction. See Note 8 to Notes to Financial Statements. 33 AVERAGE BALANCE SHEET The following table sets forth for the periods indicated information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Year Ended June 30 , ------------------------------------------------------------ 1998 1997 ----------------------------- ----------------------------- Interest Average Interest Average Average and Yield/ Average and Yield/ Balance Dividends Cost Balance Dividends Cost -------- ---------- ------- -------- ---------- ------- (Dollars in thousands) Interest-earning assets:(1) Mortgage loans.............................. $62,311 $5,214 8.37% $57,181 $4,864 8.51% Consumer loans.............................. 7,558 687 9.09 6,563 556 8.47 Commercial business loans................... 3,545 308 8.69 4,049 342 8.45 ------- ------ ------- ------ Total loans............................. 73,414 6,209 8.46 67,793 5,762 8.50 ------- ------ ------- ------ Mortgage-backed securities................... 1,816 112 6.15 2,275 145 6.35 Other securities(2).......................... 5,773 366 6.34 7,684 477 6.21 Interest-bearing deposits with banks......... 3,057 173 5.66 2,101 116 5.52 ------- ------ ------- ------ Total interest-earning assets........... 84,060 6,860 8.16 79,853 6,500 8.14 ------- ------ ------- ------ Non-interest earning assets.................. 4,621 3,774 ------- ------- Total assets............................ $88,681 $83,627 ======= ======= Interest-bearing liabilities: Regular savings............................. $ 4,678 $ 166 3.55 $ 3,749 $ 120 3.20 Interest-bearing demand deposits............ 18,078 778 4.30 17,396 726 4.17 Time deposits............................... 47,904 2,864 5.98 44,898 2,708 6.03 ------- ------ ------- ------ Total deposits.......................... 70,660 3,808 5.39 66,043 3,554 5.38 ------- ------ ------- ------ FHLB advances................................ 4,874 304 6.24 5,420 331 6.11 ------- ------ ------- ------ Total interest-bearing liabilities.......... 75,534 4,112 5.44 71,463 3,885 5.44 ------- ------ ------- ------ Non-interest bearing liabilities: Non-interest-bearing deposits............... 1,883 1,854 Other liabilities........................... 1,247 1,161 ------- ------- Total liabilities....................... 78,664 74,478 Stockholders' equity......................... 10,017 9,149 ------- ------- Total liabilities and stockholders' equity.................................. $88,681 $83,627 ======= ======= Net interest income (net interest income as a percentage of average interest-earning assets).................... $ 2,748 $ 2,615 ======= ======= Interest rate spread (spread between weighted average rate to total interest- earning assets and total interest- bearing liabilities)....................... 2.72% 2.70% ===== ===== Net interest margin.......................... 3.27% 3.27% ===== ===== Ratio of average interest-earning assets to average interest-bearing liabilities........ 111.29% 111.74% ====== ======
______________________ (1) The Bank does not accrue interest on loans 90 days or more past due. (2) Includes other debt securities, securities classified as available for sale and FHLB stock. 34 YIELDS EARNED AND RATES PAID The following table sets forth at the date and for the years indicated the weighted average yields earned on the Bank's assets and the weighted average rates paid on the Bank's liabilities, together with the Bank's interest rate spread and net interest margin.
At Years Ended June 30, June 30, ---------------- 1998 1998 1997 --------- ------ ------ Weighted average yield earned on: Loan portfolio......................... 8.31% 8.46% 8.50% Mortgage-backed securities............. 6.74 6.15 6.35 Other securities....................... 6.40 6.34 6.21 Interest-bearing deposits with banks.. 5.88 5.66 5.52 Total interest-earning assets........ 7.99 8.16 8.14 Weighted average rate paid on: Total interest-bearing deposits........ 5.15 5.39 5.38 FHLB advances.......................... 5.54 6.24 6.11 Total interest-bearing liabilities... 5.18 5.44 5.44 Interest rate spread..................... 2.81 2.72 2.70 Net interest margin...................... 3.38 3.27 3.27
RATE/VOLUME ANALYSIS The following table sets forth the effects of changing rates and volumes on net interest income of the Bank. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (iii) changes in rate/volume (change in rate multiplied by change in volume); and (iv) the net change (the sum of the prior columns). 35
Year Ended June 30, 1998 Compared to 1997 Increase (Decrease) Due to ------------------------------- Rate/ Rate Volume Volume Net ----- ------- ------- ------ (In thousands) Interest-earning assets: Mortgage loans(1).................... $(80) $ 437 $(7) $ 350 Consumer loans (1)................... 41 84 6 131 Commercial business loans(1)......... 10 (43) (1) (34) ---- ----- --- ----- Total loans...................... (29) 478 (2) 447 ---- ----- --- ----- Mortgage-backed securities............ (5) (29) 1 (33) Other securities(2)................... 10 (119) (2) (111) Interest-bearing deposits with banks.. 3 53 1 57 ---- ----- --- ----- Total net change in income on interest-earning assets.......... (21) 383 (2) 360 ---- ----- --- ----- Interest-bearing liabilities: Interest-bearing deposits............ 7 247 -- 254 FHLB advances........................ 7 (33) (1) (27) ---- ----- --- ----- Total net change in expense on interest-bearing liabilities... 14 214 (1) 227 ---- ----- --- ----- Net change in net interest income..... $(35) $ 169 $(1) $ 133 ==== ===== === =====
__________________ (1) The Bank does not accrue interest on loans 90 days or more past due. (2) Includes other debt securities, securities classified as available for sale and FHLB stock. 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 Maturity and Repricing," "-- Investment Activities" and "-- Deposit Activities and Other Sources of Funds -- Time Deposits by Maturities." QUALITATIVE ASPECTS OF MARKET RISK. The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Bank has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and increase the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term commercial and consumer loans, all of which are retained by the Bank for its portfolio. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. 36 The Bank uses interest rate sensitivity analysis to measure its interest rate risk by computing changes in NPV (net portfolio value) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. Using data compiled by the OTS, the Bank receives a report which measures interest rate risk by modeling the change in NPV (net portfolio value) over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the OTS to replace the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period). The following table is provided by the OTS and sets forth the change in the Bank's NPV at June 30, 1998, based on OTS assumptions, that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counteract that change.
At June 30, 1998 ----------------------------------------------------------------------- Net Portfolio Value Net Portfolio Value as a ------------------------------ --------------------------------------- Change Dollar Dollar Percent Percent of Present Value of Assets --------------------------------------- In Rates Amount Change Change NPV Ratio Change - -------- ------- ---------- --------- ----------------- -------------- (Dollars in thousands) 400bp $ 9,071 $(3,077) (25)% 10.23% (246)bp 300bp 10,056 (2,092) (17) 11.10 (159)bp 200bp 10,979 (1,169) (10) 11.87 (82)bp 100bp 11,746 (402) (3) 12.46 (23)bp --bp 12,148 -- -- 12.69 -- bp (100)bp 12,332 184 2 12.70 1 bp (200)bp 12,564 416 3 12.75 6 bp (300)bp 12,090 742 6 12.87 18 bp (400)bp 13,301 1,153 10 13.05 36 bp
The above table indicates that in the event of a sudden and sustained increase in prevailing market interest rates, the Bank's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Bank's NPV would be expected to increase. Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations within its region were utilized in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. 37 LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are deposits, amortization and prepayment of loan principal (including mortgage-backed securities) and, to a lesser extent, maturities of mortgage-backed securities, other debt securities and short-term investments and operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are more influenced by interest rates, general economic conditions, and competition. The Bank attempts to price its deposits to meet its asset/liability objectives discussed above, consistent with local market conditions. Excess balances are generally invested in interest-bearing deposits with banks. In addition, the Bank is eligible to borrow funds from the FHLB of Indianapolis. Liquidity management is both a short-term and long-term responsibility of Bank management. The Bank adjusts its investments in liquid assets based upon management's assessment of expected loan demand, projected loan repayments, expected deposit flows, yields available on interest-bearing deposits and liquidity of investments. Excess liquidity is invested generally in interest- bearing overnight deposits and other short-term government and agency obligations. The Bank adjusts the liquidity level in order to meet funding needs for deposit outflows and loan commitments, as well as its asset/liability management objectives. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and collateral eligible for repurchase agreements. OTS regulations require savings institutions to maintain an average daily balance of liquid assets (cash and eligible investments) equal to at least 4.0% of the average daily balance of its net withdrawable deposits and short-term borrowings. The Bank's actual liquidity ratio at June 30, 1998 was 10.9%. See "-- Comparison of Financial Condition at June 30, 1998 and 1997" and "BUSINESS OF THE BANK -- Investment Activities." The Bank anticipates that it will have sufficient funds available to meet current loan commitments and other credit commitments. At June 30, 1998, the Bank has outstanding commitments to originate loans (including undisbursed portion of construction loans in process) of approximately $5.4 million and outstanding standby letters of credit of $185,000. Certificates of deposit scheduled to mature in one year or less at June 30, 1998 totaled approximately $19.6 million. Based upon management's experience and familiarity with the customers involved and the Bank's pricing policy relevant to that of its perceived competitors, management believes that a significant portion of such deposits will remain with the Bank. The Bank has diversified its lending to include home equity, second mortgage and consumer loans. This diversification has been designed to increase earnings and reduce interest rate risk. The Bank has increased the origination of home equity and second mortgage loans secured by one- to- four family dwellings and intends to reduce the balance of its mortgage-backed securities by deploying funds into higher yielding whole loans. These changes in lending and investment strategy have reduced the Bank's liquidity as lower-yielding, or liquid assets are redeployed into higher-yielding, longer term assets. As required by federal law and OTS regulations, the Bank is required to maintain minimum levels of capital under three separate standards. The Bank is required to maintain regulatory capital sufficient to meet tangible, core and risk-based capital ratios of 1.50%, 3.00% and 8.00%, respectively. At June 30, 1998, the Bank exceeded each of its capital requirements, with tangible, core and risk-based capital ratios of 11.00%, 11.00% and 19.10%, respectively. YEAR 2000 ISSUES The Year 2000 issue exists because many computer systems and applications use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems may recognize the year 2000 as 1900, or 38 not at all. This inability to recognize or properly treat the year 2000 may cause systems to process financial and operational information incorrectly. The Bank performs all material data processing functions in-house with a software operating system provided by a third party. In November 1997 the Bank adopted a Year 2000 Action Plan to assess and monitor the state of readiness of its internal systems and to identify potential Year 2000 problems. The Bank has installed all new hardware that is Year 2000 compliant, except for its optical disk storage system. The vendor for the optical disk storage system has informed the Bank that its product will be Year 2000 compliant by January 1999. The vendor for the software operating system has informed the Bank that its software will be Year 2000 complaint by October 1998. The Bank has received letters from all of its other vendors stating that they are Year 2000 compliant. Management of the Bank continuously monitors the Bank's electronic delivery systems for Year 2000 compliance and makes progress reports to the Bank's Board of Directors each month. The Bank began testing its systems in August 1998 and the test results have indicated that the systems tested are compliant in all material respects. The Bank has budgeted $75,000 towards its Year 2000 compliance efforts, which generally would have been incurred in the normal course of business. The Bank does not believe that the ultimate costs associated with its Year 2000 compliance efforts will be material to the Bank. However, no assurances can be given that such costs will not be higher and have a material adverse effect on the Bank's financial condition and results of operations. In the event the Bank's Year 2000 Action Plan fails in any material respect, the Bank has formulated a contingency plan for its data processing functions. The contingency plan calls for the purchase of alternate systems that are compliant. IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income," issued in July 1997, establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 requires that companies (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial condition. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Comparative financial statements are required to be reclassified to reflect the provisions of this statement. SEGMENT INFORMATION. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" establishes standards for the way public business enterprises report information about operating segments and establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Information required to be disclosed includes segment profit or loss, certain specific revenue and expense items, segment assets and certain other information. This statement is effective for the Holding Company for financial statements issued for the fiscal year ending June 30, 1999. EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," issued in February 1998, standardizes disclosure requirements for pensions and other postretirement benefits and requires additional disclosure on changes in benefit obligations and fair values of plan assets in order to facilitate financial analysis. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. 39 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. Because the Bank does not invest in derivative instruments or enter into hedging transactions, adoption of this statement is not anticipated to have a significant effect on the Holding Company's financial position or results of operations. EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. BUSINESS OF THE HOLDING COMPANY GENERAL The Holding Company was organized as an Indiana business corporation at the direction of the Bank in September 1998 for the purpose of becoming the holding company for the Bank upon completion of the conversion. As a result of the conversion, the Bank will be a wholly-owned subsidiary of the Holding Company and all of the issued and outstanding capital stock of the Bank will be owned by the Holding Company. BUSINESS Prior to the conversion, the Holding Company has not and will not engage in any significant activities other than of an organizational nature. Upon completion of the conversion, the Holding Company's sole business activity will be the ownership of the outstanding capital stock of the Bank. The Holding Company also will hold a note receivable from the ESOP. In the future, the Holding Company may acquire or organize other operating subsidiaries, although there are no current plans, arrangements, agreements or understandings, written or oral, to do so. Initially, the Holding Company will neither own nor lease any property but will instead use the premises, equipment and furniture of the Bank with the payment of appropriate rental fees, as required by applicable law and regulations. Since the Holding Company will only hold the outstanding capital stock of the Bank upon consummation of the conversion, the competitive conditions applicable to the Holding Company will be the same as those confronting the Bank. See "BUSINESS OF THE BANK -- Competition." BUSINESS OF THE BANK MARKET AREA The Bank conducts its operations through its main office and one branch office, both in Corydon, Indiana. The Bank plans to open a second branch office in New Salisbury, Indiana. See "-- Properties." Corydon, the county 40 seat of Harrison County, is located approximately 35 miles west of Louisville, Kentucky. The Bank considers Harrison County as its primary market area because substantially all of the Bank's depositors live in the areas surrounding its main office and branch office and most of the Bank's loans are made to persons in Harrison County, Indiana. Harrison County has a population of approximately 34,000 according to 1997 statistics. The June 1998 unemployment rate for Harrison County was 2.6%, which was below both the state (2.8%) and national (4.7%) rates. Major employers in Harrison County include Keller Manufacturing Corporation, South Harrison County School District and the Harrison County Health Center. The Bank faces intense competition for deposits and loan originations from the many financial institutions conducting business within its market area. See "-- Competition" and "RISK FACTORS -- Competition." LENDING ACTIVITIES GENERAL. The principal lending activity of the Bank is the origination of residential mortgage loans. To a lesser extent, the Bank also originates consumer, commercial business, commercial real estate (including farm properties) and residential construction loans. LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated.
At June 30, ---------------------------------------------- 1998 1997 ----------------------- ------------------- Amount Percent Amount Percent ----------- -------- ------- -------- (Dollars in thousands) Mortgage Loans: Residential(1).......................... $57,825 74.57% $52,980 72.34% Land.................................... 218 0.28 270 0.37 Commercial real estate.................. 4,371 5.64 2,687 3.67 Residential construction................ 3,787 4.88 4,352 5.94 ------- ------ ------- ------ Total mortgage loans................... 66,201 85.37 60,289 82.32 ------- ------ ------- ------ Consumer Loans: Home equity and second mortgage loans.. 777 1.00 952 1.30 Automobile loans........................ 1,574 2.03 1,419 1.94 Loans secured by savings accounts....... 466 0.60 399 0.54 Mobile home loans....................... 223 0.29 320 0.44 Unsecured loans......................... 125 0.16 154 0.21 Other(2)................................ 1,110 1.43 1,796 2.45 ------- ------ ------- ------ Total consumer loans.................. 6,297 8.12 6,861 9.37 ------- ------ ------- ------ Commercial business loans............... 5,048 6.51 6,083 8.31 ------- ------ ------- ------ Total loans........................... 77,546 100.00% 73,233 100.00% ------- ====== ------- ====== Less: Due to borrowers on loans in process.... 1,932 2,594 Deferred loan fees net of direct costs.. 211 211 Allowance for loan losses............... 516 519 ------- ------- Total loans receivable, net............. $74,887 $69,909 ======= =======
- -------------------- (1) Includes conventional one- to four-family and multi-family residential loans. (2) Includes loans secured by lawn and farm equipment, unimproved land, and other personal property. 41 RESIDENTIAL LOANS. The Bank's lending activities have concentrated on the origination of residential mortgages, primarily for retention in the Bank's loan portfolio. At June 30, 1998, residential mortgages constituted $57.8 million, or 74.6% of total loans. Residential mortgages secured by multi-family properties are an immaterial portion of the residential loan portfolio. Substantially all residential mortgages are collateralized by properties within the Bank's market area. The Bank offers both fixed-rate mortgage loans and ARM loans typically with terms of 15 to 30 years. Although the Bank originates all residential mortgage loans for investment, the Bank uses loan documents approved by FANNIE MAE and the FREDDIE MAC. ARM loans originated have interest rates that adjust at regular intervals of one year, with 1.5% annual and 5% lifetime caps, and at intervals of five years with 2% per adjustment period and 6% lifetime caps, based upon changes in the prevailing interest rates on U.S. Treasury Bills. The Bank does not use below market interest rates and other marketing inducements to attract ARM loan borrowers. The majority of ARM loans provide that the amount of any increase or decrease in the interest rate is limited to two percentage points (upward or downward) per adjustment period and generally contain minimum and maximum interest rates. Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and interest rates and loan fees for ARM loans. The relative amount of fixed-rate and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The Bank's lending policies generally limit the maximum loan-to-value ratio on fixed-rate and ARM loans to 90% of the lesser of the appraised value or purchase price of the underlying residential property unless private mortgage insurance to cover the excess over 90% is obtained, in which case the mortgage is limited to 95% (or 97% under a new Freddie Mac program) of the lesser of appraised value or purchase price. The loan-to-value ratio, maturity and other provisions of the loans made by the Bank are generally reflected in the policy of making less than the maximum loan permissible under federal regulations, in accordance with established lending practices, market conditions and underwriting standards maintained by the Bank. The Bank requires title, fire and extended insurance coverage on all mortgage loans originated. All of the Bank's real estate loans contain due on sale clauses. The Bank obtains appraisals on all its real estate loans from outside appraisers. CONSTRUCTION LOANS. At June 30, 1998, the Bank had approximately $3.8 million, or 4.9% of total loans, of construction loans for single-family residences. Construction loans secured by multi-family or commercial properties are an immaterial portion of the construction loan portfolio. At June 30, 1998, speculative construction loans, for which there is not a commitment for permanent financing in place at the time the construction loan was originated, amounted to $832,000. Although the Bank originates construction loans that are repaid with the proceeds of a permanent mortgage loan obtained by the borrower from another lender, the majority of the construction loans that the Bank originates are construction/permanent loans, which are originated with one loan closing at either a fixed or variable rate of interest and for terms up to 30 years. Construction loans originated without a commitment by the Bank to provide permanent financing are generally originated for a term of six to 12 months and at a variable interest rate based on the prime rate. In the case of construction/permanent loans, the construction loan is also generally for a term of six to 12 months and the rate charged is the rate chosen by the borrower for the permanent loan. Accordingly, if the borrower chooses a fixed interest rate for the permanent loan, the construction loan rate is also fixed at the same rate. At June 30, 1998, the largest non-speculative construction loan was in the amount of $220,000 and with an outstanding balance of $166,000. This loan was performing according to its terms at June 30, 1998. The Bank originates speculative construction loans to approximately six builders operating and based in the Bank's primary market area and with whom the Bank has well-established business relationships. The Bank generally limits the number of speculative construction loans outstanding at any one time to any one builder to two loans. At June 30, 1998, the largest speculative construction loan relationship with a builder consisted of two loans in the committed 42 aggregate amount of $244,000 with an aggregate outstanding balance of $44,000. Such loans were performing according to their respective terms at that date. All construction loans are originated with a loan-to-value ratio not to exceed 90% of the appraised estimated value of the completed property. The construction loan documents require the disbursement of the loan proceeds in increments as construction progresses. Disbursements are based on periodic on- site inspections by an independent appraiser and/or Bank personnel approved by the Board of Directors. Construction lending is inherently riskier than one- to four-family mortgage lending. Construction loans, on average, generally have higher loan balances than one- to four-family mortgage loans. In addition, the potential for cost overruns because of the inherent difficulties in estimating construction costs and, therefore, collateral values and the difficulties and costs associated with monitoring construction progress, among other things, are major contributing factors to this greater credit risk. Speculative construction loans have the added risk that there is not an identified buyer for the completed home when the loan is originated, with the risk that the builder will have to service the construction loan debt and finance the other carrying costs of the completed home for an extended time period until a buyer is identified. Furthermore, the demand for construction loans and the ability of construction loan borrowers to service their debt depends highly on the state of the general economy, including market interest rate levels, and the state of the economy of the Bank's primary market area. A material downturn in economic conditions would be expected to have a material adverse effect on the credit quality of the construction loan portfolio. COMMERCIAL REAL ESTATE LOANS. The Bank had commercial real estate loans outstanding of approximately $4.4 million at June 30, 1998, or 5.6% of total loans. Commercial real estate loans are generally secured by small retail stores, professional office space and, in certain instances, farm properties. Commercial real estate loans are generally originated with a loan-to-value ratio not to exceed 80% of the appraised value of the property. Property appraisals are performed by independent appraisers approved by the Bank's Board of Directors. The Bank attempts to originate commercial real estate loans at variable interest rates based on the U.S. Treasury Bill rate for terms not to exceed five years. However, in the current low interest rate environment, borrower demand for variable rate loans is low and the Bank is generally originating commercial real estate loans with fixed interest rates for terms ranging between ten and 15 years over which principal and interest is fully amortized. At June 30, 1998, the largest commercial real estate loan had an outstanding balance of $571,000 and was secured by a church school building. This loan was performing according to its terms at that date. Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to- four family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one-to- four family residential mortgage loans. Because payments on loans secured by multi-family and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also obtains loan guarantees from financially capable parties based on a review of personal financial statements. COMMERCIAL BUSINESS LOANS. At June 30, 1998, the Bank's commercial business loan portfolio amounted to $5.0 million, or 6.5% of total loans. Unsecured commercial business loans are an immaterial amount of the portfolio. Commercial business loans are generally secured by inventory, accounts receivable, and business equipment such as trucks and tractors. Many commercial business loans also have real estate as collateral. The Bank generally requires a personal guaranty of payment by the principals of a corporate borrower, and reviews the personal financial statements and income tax returns of the guarantors. Commercial business loans are generally originated with loan-to-value ratios not exceeding 75%. 43 Aside from lines of credit, commercial business loans are generally originated for terms not to exceed seven years with variable interest rates based on the Bank's cost of funds. Most of the Bank's commercial business loan portfolio is composed of secured lines of credit. Approved credit lines totalled $2.1 million at June 30, 1998, of which $1.5 million was outstanding. Lines of credit are originated at fixed interest rates for one year renewable terms. A director of the Bank is a shareholder of a farm implement dealership that has contracted with the Bank to provide sales financing to the dealership's customers. The Bank does not grant preferential credit under this arrangement. All sales contracts are presented to the Bank on a 50% recourse basis, with the dealership responsible for the sale and disposition of any repossessed equipment. During the fiscal year ended June 30, 1998, the Bank granted approximately $612,000 of credit to customers of the dealership and such loans had an aggregate outstanding balance of $1.6 million at June 30, 1998. At June 30, 1998, $21,000 of such loans were delinquent 30 days or more. See "BUSINESS OF THE BANK -- Transactions With the Bank." At June 30, 1998, the largest commercial business loan had an outstanding balance of $496,000 and was secured by farm equipment. Such loan was performing according to its terms at that date. Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. In 1993, the Bank purchased, without recourse, lease obligations originated by Bennett Funding Group, Inc., Syracuse, New York ("Bennett Funding"). At June 30, 1998, these obligations had an aggregate outstanding balance of approximately $79,000 and were secured by office business equipment. During the fiscal year ended June 30, 1996, Bennett Funding filed for Chapter 11 bankruptcy protection after securities fraud and other violations were alleged against it by the U.S. Attorney's Office and the Securities and Exchange Commission. At June 30, 1998, the Bank's allowance for loan losses included an allowance of $55,000 related to these lease obligations, which were classified as impaired at that date. The Bank entered into a settlement agreement with Bennett Funding on March 18, 1997. The Bank chose an option which allows for a maximum recovery of approximately $158,000 (77.5%) of the aggregate outstanding balance. As of June 30, 1998, the Bank had recovered approximately $124,000, net of fees charged by the bankruptcy trustee. As an incident to its commercial business lending activities, the Bank issues standby letters of credit or performance bonds as an accommodation to its borrowers. See "-- Loan Commitments and Letters of Credit." CONSUMER LOANS. Consumer loans totalled $6.3 million at June 30, 1998, or 8.1% of the Bank's total loan portfolio. The Bank views consumer lending as an important component of its business because consumer loans generally have shorter terms and higher yields, thus reducing exposure to changes in interest rates. In addition, the Bank believes that offering consumer loans expands and creates stronger ties to its customer base. Subject to market conditions, the Bank intends to expand its consumer lending activities. The Bank offers a variety of secured or guaranteed consumer loans, including automobile and truck loans (both new and used), home equity loans, home improvement loans, student loans, boat loans, mobile home loans, and loans secured by savings deposits. In addition, the Bank offers unsecured consumer loans. Consumer loans are generally originated at fixed interest rates and for terms not to exceed seven years. The largest portion of the Bank's consumer 44 loan portfolio consists of automobile and truck loans ($1.6 million at June 30, 1998) followed by second mortgage and home equity loans ($777,000 at June 30, 1998). Automobile and truck loans are originated on both new and used vehicles. Such loans are generally originated at fixed interest rates for terms up to seven years and at loan-to-value ratios up to 90% of the blue book value in the case of used vehicles and 90% of the purchase price in the case of new vehicles. The Bank does not engage in indirect automobile and truck lending. Home equity and second mortgage loans are generally originated for terms not to exceed 15 years and at fixed rates of interest. The loan-to-value ratio on such loans is limited to 95%, taking into account the outstanding balance on the first mortgage loan. The Bank employs strict underwriting standards for consumer loans. These procedures include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. The Bank underwrites and originates the majority of its consumer loans internally, which management believes limits exposure to credit risks relating to loans underwritten or purchased from brokers or other outside sources. Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by assets that depreciate rapidly, such as automobiles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by the borrower against the Bank as the holder of the loan, and a borrower may be able to assert claims and defenses which it has against the seller of the underlying collateral. Of the Bank's consumer loan portfolio, $6,000 was delinquent 30 days or more at June 30, 1998. LOAN MATURITY AND REPRICING The following table sets forth certain information at June 30, 1998 regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity, but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned income and allowance for loan losses.
After After After After One Year 3 Years 5 Years 10 Years Within Through Through Through Through After One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total -------- ------- ------- -------- -------- -------- ------- (In thousands) Mortgage loans: Residential real estate... $ 2,962 $5,302 $5,470 $14,688 $11,166 $18,237 $57,825 Commercial real estate.... 1,132 636 518 1,176 816 309 4,587 Residential construction.. 3,787 -- -- -- -- -- 3,787 Consumer loans.............. 3,886 2,215 1,066 500 120 55 7,842 Commercial business......... 1,190 1,241 535 451 34 54 3,505 ------- ------ ------ ------- ------- ------- ------- Total gross loans...... $12,957 $9,394 $7,589 $16,815 $12,136 $18,655 $77,546 ======= ====== ====== ======= ======= ======= =======
45 The following table sets forth the dollar amount of all loans due after June 30, 1999, which have fixed interest rates and have floating or adjustable interest rates. Fixed- Floating- or Rates Adjustable-Rates ------- ---------------- (In thousands) Mortgage Loans: Residential............... $37,964 $16,899 Commercial real estate.... 2,530 926 Residential construction.. -- -- Consumer loans.............. 3,956 -- Commercial business......... 2,314 -- ------- ------- Total gross loans......... $46,764 $17,825 ======= ======= The following table sets forth total loans originated and repaid during the periods indicated. There were no loan sales during any of the periods indicated.
Year Ended June 30, --------------------- 1998 1997 ---------- --------- (In thousands) Total loans at beginning of period.................... $ 73,233 $ 61,901 -------- -------- Loans originated: One- to four-family residential...................... 9,225 11,034 Multi-family residential and commercial real estate.. 999 267 Residential construction loans....................... 7,143 5,998 Consumer loans....................................... 5,521 3,493 Commercial business.................................. 1,901 4,642 -------- -------- Total loans originated.............................. 17,367 17,326 -------- -------- Loans purchased: Commercial real estate(1)............................ 600 -- Loan principal repayments............................. (23,720) (18,861) Other (2)............................................. 2,644 4,732 -------- -------- Net loan activity..................................... 4,313 11,332 -------- -------- Total loans at end of period.......................... $ 77,546 $ 73,233 ======== ========
- --------------- (1) Represents participation interest in two loans: (i) a 17% interest in a loan secured by development property and (ii) a 7% interest in a loan secured by a professional office building. At June 30, 1998, the Bank's interests had an aggregate outstanding balance of $597,000. The loans are performing according to their terms at June 30, 1998. (2) Includes non-cash portion of refinancing transactions, foreclosures and principal add-ons. LOAN SOLICITATION AND PROCESSING. A majority of the loans originated by the Bank are made to existing customers. Walk-ins and customer referrals are also an important source of loans originations. Upon receipt of a loan application, a credit report is ordered to verify specific information relating to the loan applicant's employment, income 46 and credit standing. A loan applicant's income is verified through the applicant's employer or from the applicant's tax returns. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken, generally by an independent appraiser approved by the Bank. The mortgage loan documents used by the Bank conform to secondary market standards. Individual loan officers have individual lending limits commensurate with their experience. All loans in excess of $150,000 or that are an exception to lending policy are approved by the Loan Committee, consisting of the Bank's President, Vice President, Treasurer and Operations Officer. All loans in excess of $500,000 must be approved by the Bank's Board of Directors. The Bank's policy is to require borrowers to obtain certain types of insurance to protect its interest in the collateral securing the loan. The Bank requires either a title insurance policy insuring that the Bank has a valid first lien on the mortgaged real estate or an opinion by an attorney regarding the validity of title. Fire and casualty insurance is also required on collateral for loans. The Bank requires escrows for insurance on all loans with a loan-to-value exceeding 90%. The Bank's lending practices generally limit the maximum loan to value ratio on conventional residential mortgage loans to 90% (or 97% under a new Freddie Mac program) of the appraised value of the property as determined by an independent appraisal or the purchase price, whichever is less, and 80% for commercial real estate loans. LOAN COMMITMENTS AND LETTERS OF CREDIT. The Bank issues commitments for fixed- and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from the date of application, depending on the type of transaction. The Bank had outstanding net loan commitments of approximately $5.4 million at June 30, 1998. See Note 12 of Notes to Financial Statements. As an accommodation to its commercial business loan borrowers, the Bank issues standby letters of credit or performance bonds usually in favor of municipalities for whom its borrowers are performing services. At June 30, 1998, the Bank had outstanding letters of credit of $185,000. See Note 12 to Notes to Financial Statements. LOAN ORIGINATION AND OTHER FEES. The Bank, in most instances, receives loan origination fees and discount "points." Loan fees and points are a percentage of the principal amount of the mortgage loan that are charged to the borrower for funding the loan. The Bank usually charges origination fees of 0.5% to 3.0% on one- to four-family residential real estate loans, long-term commercial real estate loans and residential construction loans. Current accounting standards require loan origination fees and certain direct costs of underwriting and closing loans to be deferred and amortized into interest income over the contractual life of the loan. Deferred fees and costs associated with loans that are sold are recognized as income at the time of sale. The Bank had $211,000 of net deferred loan fees at June 30, 1998. DELINQUENCIES. The Bank's collection procedures provide for a series of contacts with delinquent borrowers. A late charge is assessed and a late charge notice is sent to the borrower after the 15/th/ day of delinquency. A delinquency notice is mailed to the borrower after the 30/th/ day of delinquency. When payment becomes 60 days past due, the Loan Collection Committee of the Board of Directors generally meets and issues a default letter to the borrower. If a loan continues in a delinquent status for 90 days or more, the Bank generally initiates foreclosure proceedings. In certain instances, however, the Loan Collection Committee may decide to modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs. NONPERFORMING ASSETS. Loans are reviewed regularly and when loans become 90 days delinquent, the loan is placed in nonaccrual status and the previously accrued interest income is reversed. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. 47 The following table sets forth information with respect to the Bank's nonperforming assets for the periods indicated. At the dates indicated, the Bank had no restructured loans within the meaning of SFAS No. 15 and no accruing loans which were past due 90 days or more. At June 30, -------------------- 1998 1997 -------- -------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Residential real estate.... $ 117 $ -- Residential construction... -- - Commercial real estate...... 25 -- Commercial business........ 80 109 Consumer................... -- 20 ----- ----- Total..................... 222 129 ----- ----- Foreclosed real estate, net.. 104 -- ----- ----- Total nonperforming assets... $ 326 $ 129 ===== ===== Total loans delinquent 90 days or more to net loans... 0.30% 0.18% Total loans delinquent 90 days or more to total assets................ 0.24% 0.14% Total nonperforming assets to total assets............. 0.35% 0.14% The Bank does not accrue interest on loans over 90 days past due. However, if interest on nonaccrual loans had been accrued, interest income of approximately $10,000 would have been recorded for the year ended June 30, 1998. No interest income was received and recorded on nonaccrual loans for the year ended June 30, 1998. CLASSIFIED ASSETS. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention" and monitored by the Bank. 48 On July 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or if expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. A loan is classified as impaired by management when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the terms of the loan agreement. If the fair value, as measured by one of these methods, is less than the recorded investment in the impaired loan, the Bank establishes a valuation allowance with a provision charged to expense. Management reviews the valuation of impaired loans on a quarterly basis to consider changes due to the passage of time or revised estimates. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by management. An insured institution is required to establish and maintain an allowance for loan losses at a level that is adequate to absorb estimated credit losses associated with the loan portfolio, including binding commitments to lend. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities. When an insured institution classifies problem assets as "loss," it is required either to establish an allowance for losses equal to 100% of the amount of the assets, or charge off the classified asset. The amount of its valuation allowance is subject to review by the OTS which can order the establishment of additional general loss allowances. The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations. At June 30, 1998 and 1997 the aggregate amounts of the Bank's classified assets, general loss allowances and charge-offs for the periods then ended, were as follows: At June 30, ------------- 1998 1997 ------ ----- (In thousands) Classified assets: Loss..................... $ -- $ -- Doubtful (impaired)...... 79 109 Substandard.............. 293 531 General loss allowances: Impaired loans........... 55 55 Other.................... 461 464 FORECLOSED REAL ESTATE. Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell, or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net income from operations of foreclosed real estate held for sale is reported in non-interest income. At June 30, 1998, the Bank had $104,000 in foreclosed real estate, which consisted of two single- family residences. ALLOWANCE FOR LOAN LOSSES. Management evaluates the adequacy of the allowance for losses on loans each year based on estimated losses on specific loans and other procedures, including a review of all loans for which full collectibility may not be reasonably assured and considers, among other matters, the estimated market value of the underlying collateral of problem loans, prior loss experience, economic conditions and overall portfolio quality. These provisions for losses are charged against earnings in the year they are established. The Bank did not establish a provision for loan losses for the years ended June 30, 1998 or 1997. At June 30, 1998, the Bank had an allowance for 49 loan losses of $516,000 which represented 0.67% of total loans. Based on past experience and future expectations, management believes the allowance for loan losses is adequate. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Bank's financial condition and results of operations. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated. Year Ended June 30, ------------------------ 1998 1997 ------------ ---------- (Dollars in thousands) Allowance at beginning of period...... $ 519 $ 522 Provision for loan losses............. -- -- ----- ----- 519 522 ----- ----- Recoveries: Residential real estate.............. -- -- Commercial business.................. -- -- Consumer............................. -- -- ----- ----- Total recoveries.................... -- -- ----- ----- Charge-offs: Residential real estate.............. 2 -- Commercial business.................. -- -- Consumer............................. 1 3 ----- ----- Total charge-offs................... 3 3 ----- ----- Net charge-offs....................... (3) (3) ----- ----- Allowance at end of period............ $ 516 $ 519 ===== ===== Ratio of allowance to total loans outstanding at the end of the period.................... 0.67% 0.71% Ratio of net charge-offs to average loans outstanding during the period.. --% --% 50 ALLOWANCE FOR LOAN LOSSES ANALYSIS The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
At June 30, ------------------------------------------ 1998 1997 -------------------- -------------------- Percent of Percent of Outstanding Outstanding Loans in Loans in Amount Category Amount Category ------ ------------ ------ ------------ (Dollars in thousands) Residential real estate(1)............. $215 82.44% $135 81.41% Commercial real estate and land loans.. 36 5.92 36 4.04 Commercial business.................... 117 4.52 113 6.48 Consumer............................... 32 7.12 56 8.07 Unallocated............................ 116 -- 179 -- ---- ------ ---- ------ Total allowance for loan losses...... $516 100.00% $519 100.00% ==== ====== ==== ======
- -------------------------- (1) Includes residential construction loans. INVESTMENT ACTIVITIES Federally chartered savings institutions have authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the applicable FHLB, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, such savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Savings institutions are also required to maintain minimum levels of liquid assets which vary from time to time. See "REGULATION -- Federal Regulation of Savings Associations -- Federal Home Loan Bank System." The Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans. The Bank is required under federal regulations to maintain a minimum amount of liquid assets and is also permitted to make certain other securities investments. The balance of the Bank's investments in short-term securities in excess of regulatory requirements reflects management's response to the significantly increasing percentage of deposits with short maturities. It is the intention of management to hold securities with short maturities in the Bank's investment portfolio in order to enable the Bank to match more closely the interest-rate sensitivities of its assets and liabilities. The Bank periodically invests in mortgage-backed securities, including mortgage-backed securities guaranteed or insured by either GINNIE MAE, Fannie Mae or Freddie Mac. Mortgage-backed securities generally increase the quality of the Bank's assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. Of the Bank's total mortgage-backed securities portfolio, securities with a book value of $440,000 have adjustable-rates as of June 30, 1998. See Note 2 of Notes to Financial Statements for additional information. Investment decisions are made by the Investment Committee, consisting of James G. Pendleton, Samuel E. Uhl and M. Chris Frederick. The Bank's investment objectives are: (i) to provide and maintain liquidity within regulatory guidelines; (ii) to maintain a balance of high quality, diversified investments to minimize risk; (iii) to provide collateral for pledging requirements; (iv) to serve as a balance to earnings; and (v) to maximize returns. At June 30, 1998, the Bank had no investment in securities (other than U.S. Government and agency securities and mutual funds that invest in such securities) which exceeded 10% of the Bank's stockholders' equity at that date. 51 The following table sets forth the securities portfolio at the dates indicated.
At June 30, ------------------------------------------------------ 1998 ------------------------------------------ Weighted Fair Amortized Percent of Average Value Cost Portfolio Yield(2) ------ --------- ---------- -------- (Dollars in Thousands) Securities Held to Maturity(1) Debt securities: U.S. agency: Due after one year through five years....... $1,493 $1,500 19.00% 4.53% Due after five years through ten years...... -- -- -- -- Due after ten years through fifteen years... -- -- -- -- Municipal: Due in one year or less..................... 80 80 1.01 3.90 Due after one year through five years....... -- -- -- -- Mortgage-backed securities(3)................. 1,463 1,473 18.65 6.74 ------ ------ ------ $3,036 $3,053 38.66% ====== ====== ====== Securities Available for Sale Debt securities: U.S. agency: Due after five years through ten years..... -- -- -- -- Due after ten years through fifteen years.. 4,002 4,000 50.65 7.01 Equity securities: Mutual fund(4)............................... 847 844 10.69 N/A ------ ------ ------ $4,849 $4,844 61.34% ====== ====== ====== ------------------------------------------ 1997 ------------------------------------------ Weighted Fair Amortized Percent of Average Value Cost Portfolio Yield(2) ------ --------- ---------- -------- Securities Held to Maturity(1) Debt securities: U.S. agency: Due after one year through five years....... $2,068 $2,100 21.50% 4.54% Due after five years through ten years...... 476 483 4.95 6.72 Due after ten years through fifteen years... 999 1,000 10.24 7.75 Municipal: Due in one year or less..................... 359 360 3.69 4.40 Due after one year through five years....... 79 80 0.82 3.90 Mortgage-backed securities(3)................. 2,025 2,045 20.94 6.48 ------ ------ ----- $6,068 62.14% ====== ====== Securities Available for Sale Debt securities: U.S. agency: Due after five years through ten years..... $ 992 $1,000 10.24% 7.50% Due after ten years through fifteen years.. 2,003 2,000 20.48% 8.32 Equity securities: Mutual fund(4)............................... 689 697 7.14% N/A ------ ------ ----- $3,684 $3,697 37.86% ====== ====== =====
________________________________ (1) Securities held to maturity are carried at amortized cost. (2) Yields are calculated on a fully taxable equivalent basis using a marginal federal income tax rate of 34%. (3) The expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty. (4) The mutual fund invests primarily in U.S. Government agency securities. 52 DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS GENERAL. Deposits and loan repayments are the major source of the Bank's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowing may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or may also be used on a longer term basis for general business purposes. DEPOSIT ACCOUNTS. Deposits are attracted from within the Bank's primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers the rates offered by its competition, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns. The Bank generally reviews its deposit mix and pricing weekly. The following table sets forth information concerning the Bank's time deposits and other interest-bearing deposits at June 30, 1998.
Weighted- Percentage Average of Interest Total Rate Term Category Balance Deposits - -------- ---- -------- ------- ---------- (In thousands) Savings and Demand Deposits --------------------------- 4.08% None NOW accounts $11,039 14.24% 3.41 None Regular savings 4,805 6.20 3.00 90 days 90-day passbook 218 0.28 3.60 None Money market accounts 10,447 13.49 -- None Non-interest checking 3,096 4.00 -- None Christmas clubs 50 0.06 4.88 None Cash management 84 0.11 Time Deposits ------------- 5.02 32-91 days Fixed term, fixed-rate 917 1.18 4.60 92-182 days Fixed term, fixed-rate 2,181 2.82 5.07 183-365 days Fixed term, fixed-rate 2,925 3.78 5.60 366-730 days Fixed term, fixed-rate 11,211 14.47 5.78 731-1095 days Fixed term, fixed-rate 8,023 10.36 5.44 1096-1460 days Fixed term, fixed-rate 3,647 4.71 6.26 1461-1825 days Fixed term, fixed-rate 4,552 5.88 6.70 1826-and up Fixed term, fixed-rate 14,267 18.42 ------ ------ $77,462 100.00% ======= ======
53 The following table presents the maturity distributions of time deposits of $100,000 or more as of June 30, 1998. Maturity Period Balance --------------- ------- (In thousands) Three months or less....... $ 1,863 Three through six months... 412 Six through twelve months.. 1,197 Over twelve months......... 7,530 ------- Total...................... $11,002 ======= The following table sets forth the balances of savings deposits in the various types of savings accounts offered by the Bank at the dates indicated.
At June 30, ---------------------------------------------------- 1998 1997 --------------------------------- ----------------- Percent Percent of Increase of Amount Total (Decrease) Amount Total ----------- -------- ---------- ------- -------- (Dollars in thousands) Non-interest-bearing demand................ $ 3,096 4.00% $ 1,161 $ 1,935 2.73% NOW accounts............................... 11,039 14.24 3,773 7,266 10.27 Cash management............................ 84 0.11 (175) 259 0.37 Regular savings accounts................... 4,805 6.20 455 4,350 6.15 Money market accounts...................... 10,447 13.49 1,547 8,900 12.58 90-day passbooks........................... 218 0.28 (27) 245 0.35 Fixed rate time deposits which mature: Within one year........................... 19,578 25.28 (4,463) 24,041 33.98 After one year, but within three years.... 20,510 26.48 2,530 17,980 25.41 After three years, but within five years.. 6,637 8.57 1,667 4,970 7.02 After five years.......................... 998 1.29 233 765 1.08 Club accounts.............................. 50 0.06 5 45 0.06 ------- ------ ------- ------- ------ Total.................................... $77,462 100.00% $ 6,706 $70,756 100.00% ======= ====== ======= ======= ======
54 TIME DEPOSITS BY RATES The following table sets forth the amount and maturities of time deposits by weighted average rates at June 30, 1998.
Amount Due ------------------------------------------------------ Percent to Total Less Than 1-3 3-5 After 5 Time One Year Years Years Years Total Deposits --------- ----- ----- ------- ----- -------- (In thousands) Below 5.00%.................. $ 5,624 $ 2,150 $ 52 $ -- $ 7,826 16.40% 5.00 - 5.99%................. 9,043 7,585 3,235 123 19,986 41.88 6.00 - 6.99%................. 3,341 7,421 2,987 527 14,276 29.91 7.00 - 7.99%................. 766 1,770 299 340 3,175 6.65 8.00 - 8.99%................. 77 889 31 8 1,005 2.11 9.00 - 9.99%................. 528 695 33 -- 1,256 2.63 10.00 - 10.99%............... 199 -- -- -- 199 0.42 ------- ------- ------- ------- ------- ------ Total...................... $19,578 $20,510 $ 6,637 $998 $47,723 100.00% ======= ======= ======= ======= ======= ======
The following table sets forth the deposit activity of the Bank for the periods indicated. Year Ended June 30, ------------------------- 1998 1997 ------- ------- (In thousands) Beginning balance..................... $70,756 $68,232 ------- ------- Net increase (decrease) before interest credited............. 3,622 (288) Interest credited..................... 3,084 2,812 ------- ------- Net increase in savings deposits............................. 6,706 2,524 ------- ------- Ending balance........................ $77,462 $70,756 ======= ======= In the unlikely event the Bank is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the stockholders of the Bank. Substantially all of the Bank's depositors are residents of the State of Indiana. BORROWINGS. Deposits are the primary source of funds for the Bank's lending and investment activities and for its general business purposes. The Bank has at times relied upon advances from the FHLB of Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB of Indianapolis are secured by certain first mortgage loans and investment and mortgage-backed securities. At June 30, 1998, the Bank had advances from the FHLB of Indianapolis of $5.3 million. See Note 6 of Notes to Financial Statements. The FHLB functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related 55 to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's net worth or on the FHLB's assessment of the institution's creditworthiness. Under its current credit policies, the FHLB generally limits advances to 20% of a member's assets, and short-term borrowing of less than one year may not exceed 10% of the institution's assets. The FHLB determines specific lines of credit for each member institution. The following table sets forth certain information regarding borrowings by the Bank at the end of and during the periods indicated: At or For the Year Ended June 30, -------------------------- 1998 1997 ------------ ------------ (Dollars in thousands) Maximum amount of FHLB advances outstanding at any month end.................. $6,250 $8,250 Approximate average FHLB advances outstanding.. 4,874 5,420 Year end balance of FHLB advances outstanding.. 5,250 8,250 Approximate weighted average rate paid on FHLB advances at end of year.................. 5.54% 6.16% Approximate weighted average rate paid on FHLB advances during year..................... 6.24% 6.11% COMPETITION The Bank faces intense competition in its primary market area for the attraction of deposits (its primary source of lendable funds) and in the origination of loans. Its most direct competition for deposits has historically come from the four commercial banks operating in Corydon and, to a lesser extent, from other financial institutions, such as brokerage firms and insurance companies. Three of the four commercial banks in Corydon are affiliated with large, multi-state bank holding companies and, therefore, have significantly greater resources than the Bank. Particularly in times of high interest rates, the Bank has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank's competition for loans comes primarily from the commercial banks operating in Corydon. When the Bank opens its new branch office in New Salisbury, Indiana (see "-- Properties"), it will face competition from two commercial banks in that town that are affiliated with large, multi-state bank holding companies. Such competition for deposits and the origination of loans may limit the Bank's growth in the future. See "RISK FACTORS -- Competition." PERSONNEL As of June 30, 1998, the Bank had 26 full-time employees and seven part- time employees. The employees are not represented by a collective bargaining unit. The Bank believes its relationship with its employees is good. 56 PROPERTIES The following table sets forth information relating to the Bank's main office and existing branch office as of June 30, 1998.
Year Approximate Location Opened Net Book Value (1) Owned/Leased Square Footage - -------- ------ ------------------ ------------ -------------- (In thousands) Main Office - ----------- 220 Federal Drive, N.W. 1997 $2,503 Owned 12,000 Corydon, Indiana 47112 Branch Office - ------------- 391 Old Capitol Plaza, N.W. 1997 98 Leased 425 Corydon, Indiana 47112
__________________________________ (1) Represents the net book value of land, buildings, furniture, fixtures and equipment owned by the Bank. In July 1998, the Bank received approval from the OTS to construct a full- service branch office on a four acre plot located at 8095 State Highway 135, N.E. in New Salisbury, Indiana, in northern Harrison County. The Bank has paid a deposit toward the purchase price of the land and is currently investigating the real estate for compliance with sewer and other land use regulations. The Bank intends to build a one-story, 3,200 square foot building, with a drive-up facility, which is under design. The Bank estimates the total cost of acquiring the land and constructing and equipping the facility at approximately $700,000. See "USE OF PROCEEDS" and "PRO FORMA DATA." The Bank intends to open a temporary branch facility on the site during October 1998 until the construction of the new building is completed, which is estimated during April 1999. LEGAL PROCEEDINGS Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or results of operations of the Bank. 57 MANAGEMENT OF THE HOLDING COMPANY Directors are elected by the stockholders of the Holding Company for staggered three-year terms, or until their successors are elected and qualified. The Holding Company's Board of Directors consists of seven persons divided into three classes, each of which contains approximately one third of the Board. One class, consisting of John W. Buschemeyer and Kenneth R. Saulman, has a term of office expiring at the first annual meeting of stockholders after their initial election by stockholders; a second class, consisting of Samuel E. Uhl and Mark D. Shireman, has a term of office expiring at the second annual meeting of stockholders after their initial election by stockholders; and a third class, consisting of James G. Pendleton, Gerald L. Uhl and Dennis L. Huber, has a term of office expiring at the third annual meeting of stockholders after their initial election by stockholders. The Holding Company anticipates holding its first annual meeting of stockholders in October 1999. If the Holding Company decides to implement the 1999 Option Plan and the 1999 MRDP prior to the first anniversary of the conversion, the Holding Company will not hold its first annual meeting of stockholders until at least six months following consummation of the conversion so that it may obtain approval of such plans in accordance with OTS regulations. The executive officers of the Holding Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. The executive officers of the Holding Company are: Name Position ---- -------- James G. Pendleton Chairman of the Board and Chief Executive Officer Samuel E. Uhl President and Chief Operating Officer M. Chris Frederick Senior Vice President, Chief Financial Officer and Treasurer Joel E. Voyles Secretary Since the formation of the Holding Company, none of the executive officers, directors or other personnel has received remuneration from the Holding Company. Initially, no separate compensation will be paid for service as an executive officer of the Holding Company. For information concerning the principal occupations, employment and compensation of the directors and executive officers of the Holding Company during the past five years, see "MANAGEMENT OF THE BANK - -- Biographical Information." MANAGEMENT OF THE BANK DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors of the Bank is presently composed of seven members who are elected for terms of three years, approximately one-third of whom are elected annually in accordance with the Bylaws of the Bank. The executive officers of the Bank are elected annually by the Board of Directors and serve at the Board's discretion. The following table sets forth information with respect to the directors and executive officers of the Bank, all of whom will continue to serve as directors and executive officers of the Bank and the Holding Company. 58 DIRECTORS
Current Director Term Name Age (1) Position Since Expires - ---- ------- --------- -------- ------- James G. Pendleton 64 Chairman of the Board, Chief 1963 2000 Executive Officer of the Bank and Director Mark D. Shireman 46 Director 1989 2000 Dennis L. Huber 58 Director 1997 2000 Samuel E. Uhl(2) 52 President, Chief Operating 1995 1999 Officer and Director Kenneth R. Saulman 57 Director 1997 1998 John W. Buschemeyer 58 Vice Chairman of the Board 1973 1998 and Director Gerald L. Uhl(2) 57 Director 1973 1998
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Name Age (1) Position - ---- ------- -------- M. Chris Frederick 31 Senior Vice President, Chief Financial Officer and Treasurer Joel E. Voyles 46 Vice President - Operations and Secretary C. Howard Egger 29 Vice President - Lending Sheri L. McGill 35 Vice President - Retail Banking
______________________ (1) As of June 30, 1998. (2) Samuel E. Uhl and Gerald L. Uhl are brothers. BIOGRAPHICAL INFORMATION Set forth below is certain information regarding the directors and executive officers of the Bank. Unless otherwise stated, each director and executive officer has held his or her current occupation for the last five years. James G. Pendleton has been affiliated with the Bank since 1961 and served as President from 1961 to 1996. He is past President of Corydon Rotary Club, a Board member of the South Harrison 1998 School Building Corporation, Vice President of the Harrison County Chamber of Commerce, a member of the Harrison County Education Council and a member of the Board of Directors of the Capitol Courts Senior Housing Council. Mark D. Shireman is the President of James L. Shireman Construction Co., Inc. in Corydon, Indiana. He is a director of the Harrison County Chamber of Commerce and the Southern Indiana Economic Development Council. Mr. Shireman is also a member of the Corydon Rotary Club, the Lanesville Lions Club and the Community Foundation of Southern Indiana. Dennis L. Huber is the President and Publisher of O'Bannon Publishing Company, Inc. in Corydon, Indiana. He is a member of the Corydon Rotary Club, the Harrison County Chamber of Commerce and the Downtown Corydon Merchants Association. Samuel E. Uhl has been affiliated with the Bank since 1994 and succeeded Mr. Pendleton as the Bank's President in 1996. Before joining the Bank, Mr. Uhl was a First Vice President with First Nationwide Bank from 1988 59 to 1994. He is a director of the United Way, a director of the Corydon Rotary Club and a committee member of the Harrison County Chamber of Commerce. Kenneth R. Saulman has been employed as a right-of-way supervisor for Clark County REMC, an electrical service company in Sellersburg, Indiana, since March 1995. From July 1991 to March 1995 he was an area supervisor for Asplundhi Tree Trimming in Ramsey, Indiana. He served as Harrison County Commissioner from 1992 to 1996. Mr. Saulman is a member of the South Harrison Water Co. and the Pleasant Ridge United Methodist Church. John W. Buschemeyer is the President and sole owner of Hurst Lumber Co. in Corydon, Indiana. He is a member of the Corydon Rotary Club and the Downtown Corydon Merchants Association. Gerald L. Uhl is the Business Manager for Jacobi Sales, Inc., a farm implement dealership in Palmyra, Indiana. M. Chris Frederick has been affiliated with the Bank since 1990 and has served in his present position since 1997. He is a member of Leadership Harrison County and the Parish Relations Board of the Corydon United Methodist Church. Joel E. Voyles has been affiliated with the Bank since December 1996 and has served in his present position since 1997. From November 1975 to December 1996, he served as Vice President - Deposit Operations Manager of Cumberland Savings Bank in Louisville, Kentucky. C. Howard Egger has been affiliated with the Bank since July 1991 and has served in his present position since 1994. He is the Harrison County President of the American Heart Association, the Treasurer of the Downtown Corydon Merchants Association and a member of the Dollars for Scholars Committee. Sheri L. McGill has been affiliated with the Bank since January 1988 and has held her present position since 1992. She is a member of Leadership Harrison County. BENEFICIAL OWNERSHIP OF BANK COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS Persons and groups who beneficially own in excess of 5% of the Bank's common stock are required to file certain reports disclosing such ownership pursuant to the EXCHANGE ACT. Based on such reports, the following table sets forth, as of June 30, 1998, certain information as to those persons who were beneficial owners of more than 5% of the outstanding shares of Bank common stock. To the Bank's knowledge, no other person or entity beneficially owned more than 5% of the Bank's outstanding common stock at June 30, 1998. The following table also sets forth, as of June 30, 1998, information as to the shares of Bank common stock beneficially owned by (a) each director and (b) all executive officers and directors of the Bank as a group. For information regarding proposed non-binding purchases of Holding Company common stock by the directors and officers and their anticipated stock ownership upon consummation of the conversion, see "SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS." 60
Number of Shares Percent of Shares Name Beneficially Owned (1)(2) Outstanding - ---- ------------------------- ------------------ Beneficial Owners of More Than 5% First Capital, Inc., M.H.C. 300,000 59.52% Directors and Executive Officers James G. Pendleton 7,300 1.4 Mark D. Shireman 7,300 1.4 Dennis L. Huber 600 * Samuel E. Uhl 7,440 1.5 Kenneth R. Saulman 1,600 * John W. Buschemeyer 7,300 1.4 Gerald L. Uhl 7,400 1.5 M. Chris Frederick 1,620 * Joel E. Voyles 1,350 * C. Howard Egger 1,250 * Sheri L. McGill 1,200 * All executive officers and directors as a group (11 persons) 44,320 8.7
__________________________ * Less than 1%. (1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Bank common stock if he or she has voting and/or investment power with respect to such security. The table includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, and other forms of ownership, over which shares the persons named in the table may possess voting and/or investment power. (2) Includes stock options as follows: Samuel E. Uhl, 2,000 shares; Gerald L. Uhl, 60 shares (granted to his spouse); M. Chris Frederick, 1,400 shares; Joel E. Voyles, 1,350 shares; C. Howard Egger, 1,200 shares; Sheri L. McGill, 1,200 shares; and all executive officers and directors as a group, 7,210 shares. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors conducts its business through meetings and committees of the Board. The Board of Directors held 12 meetings during the fiscal year ended June 30, 1998. No director attended fewer than 75% of the total meetings of the Board of Directors and committee meetings on which he served during the fiscal year ended June 30, 1998. The Executive Committee, which consists of Directors Buschemeyer, Saulman, Shireman and Pendleton, meets as necessary between meetings of the full Board of Directors. All actions of the Executive Committee must be ratified by the full Board of Directors. The Executive Committee reviews directors' and officers' compensation and makes recommendations to the full Board of Directors in this regard. The Executive Committee met two times during the fiscal year ended June 30, 1998. The Audit Committee, consisting of Directors Pendleton, G. Uhl and Shireman, is responsible for developing and monitoring the Bank's audit program. The Audit Committee selects the outside auditor and meets with them to discuss the results of the annual audit and any related matters. The Audit Committee also receives and reviews all the 61 reports and findings and other information presented to them by officers regarding financial reporting policies and practices. The Audit Committee meets as necessary and met once during the fiscal year ended June 30, 1998. The Compensation Committee, consisting of Directors S. Uhl, Buschemeyer and Shireman, is responsible for establishing and recommending employee and executive compensation policy to the full Board of Directors. The Compensation Committee met once during the fiscal year ended June 30, 1998. The full Board of Directors serves as a nominating committee. The Board of Directors met once in its capacity as the nominating committee during the 1998 fiscal year. DIRECTORS' COMPENSATION FEES. Members of the Bank's Board of Directors receive $400 per month. Members of committees of the Board of Directors also receive $50 per committee meeting attended. The Bank paid total Board and committee fees of approximately $33,000 for the fiscal year ended June 30, 1998. DIRECTORS' DEFERRED COMPENSATION PLAN. Directors may elect to defer their monthly directors' fees until retirement with no income tax payable by the director until retirement benefits are received. Upon the director's termination of service on or after attaining age 70, the retired director receives between $217 and $676 per month for 180 months. Benefits are also payable upon disability, early retirement, other termination of service or death. All directors participate in the plan other than Directors S. Uhl, Huber and Saulman, who have elected not to participate. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following information is furnished for the Chief Executive Officer of the Bank and for each executive officer of the Bank who received salary and bonus in excess of $100,000 during the year ended June 30, 1998.
Long-Term Compensation ------------------------ Annual Compensation Awards ----------------------------------------- ------------------------ Restricted Securities Name and Fiscal Other Annual Stock Underlying All Other Position Year Salary Bonus Compensation Award Options(#) Compensation(1) - ------------------------ ---------- ------- ------------ ------------------- ------ ----------- --------------- James G. Pendleton 1998 $82,409 615 2,262 -- -- 8,810 Chairman of the 1997 77,484 650 2,792 -- -- 7,159 Board and Chief 1996 72,480 600 539 -- -- 7,557 Executive Officer
- ----------------------------- (1) Includes directors' fees from the Bank. EMPLOYMENT AGREEMENTS. In connection with the conversion, the Holding Company and the Bank (collectively, the "Employers") will enter into three-year employment agreements with James G. Pendleton, Samuel E. Uhl, M. Chris Frederick and Joel E. Voyles. Under the employment agreement, the initial salary levels for Messrs. Pendleton, Uhl, Frederick and Voyles will be $90,000, $85,000, $45,000 and $40,000, respectively, which amounts will be paid by the Bank and may be increased at the discretion of the Board of Directors. On each anniversary of the commencement date of the employment agreements, the term of each agreement may be extended for an additional year at the discretion of the Board. The agreements are terminable by the Employers at any time, by the executive if the executive is assigned duties inconsistent with his initial position, duties, responsibilities and status, or upon the occurrence of certain events specified by federal regulations. In the event that an executive's employment is terminated without cause or upon the executive's voluntary termination in certain circumstances, the Bank would be required to honor the terms of the agreement through 62 the expiration of the then current term, including payment of current cash compensation and continuation of employee benefits. The employment agreements also provide for severance payments and other benefits in the event of involuntary termination of employment in connection with any change in control of the Employers. Severance payments also will be provided on a similar basis in connection with a voluntary termination of employment where, subsequent to a change in control, an executive is assigned duties inconsistent with his position, duties, responsibilities and status immediately prior to such change in control. The term "change in control" is defined in the agreement as having occurred when, among other things, (a) a person other than the Holding Company purchases shares of the Holding Company's common stock pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Holding Company representing 25% or more of the combined voting power of the Holding Company's then outstanding securities, (c) the membership of the Board of Directors changes as the result of a contested election, or (d) stockholders of the Holding Company approve a merger, consolidation, sale or disposition of all or substantially all of the Holding Company's assets, or a plan of partial or complete liquidation. The maximum value of the severance benefits under the employment agreements is 2.99 times the executive's average annual compensation during the five-year period preceding the effective date of the change in control (the "base amount"). The employment agreements provide that the value of the maximum benefit may be distributed, at the executive's election, (i) in the form of a lump sum cash payment equal to 2.99 times the executive's base amount or (ii) a combination of a cash payment and continued coverage under the Employers' health, life and disability programs for a 36-month period following the change in control, the total present value of which does not exceed 2.99 times the executive's base amount. Assuming that a change in control had occurred at June 30, 1998 and that said executives elected to receive a lump sum cash payment, Messrs. Pendleton, Uhl, Frederick and Voyles would be entitled to payments of approximately $224,000, $209,000, $108,000 and $105,000, respectively. Section 280G of the Internal Revenue Code provides that severance payments that equal or exceed three times the individual's base amount are deemed to be "excess parachute payments" if they are contingent upon a change in control. Individuals receiving excess parachute payments are subject to a 20% excise tax on the amount of such excess payments, and the Employers would not be entitled to deduct the amount of such excess payments. The employment agreement restricts the executive's right to compete against the Employers for a period of one year from the date of termination of the agreement if an executive's employment is terminated without cause, except if such termination occurs after a change in control. EXECUTIVE RETIREMENT INCOME AGREEMENTS. The Bank has entered into an agreement with James G. Pendleton to provide him with additional retirement income. The agreement provides for an annual benefit of $24,500 upon Mr. Pendleton's retirement at or after attaining age 65, payable for 15 years following retirement. Benefits are also payable upon disability, early retirement, other termination of service or death. The Bank has purchased a life insurance policy with Mr. Pendleton as insured to assist in funding the Bank's obligation under the agreement. During the fiscal year ended June 30, 1998, the Bank accrued compensation expense of $19,700 with respect to its obligation under the agreement. EMPLOYEE SEVERANCE COMPENSATION PLAN. The Board of Directors of the Bank plans to adopt an Employee Severance Compensation Plan to provide benefits to eligible employees in the event of a change in control of the Holding Company or the Bank (as defined in the plan). Eligible employees are employees with a minimum of one year of service with the Bank. In general, all employees (except for officers who enter into separate employment or severance agreements with the Holding Company and the Bank) will be eligible to participate in the plan. Under the plan, in the event of a change in control of the Holding Company or the Bank, eligible employees, other than officers of the Bank, who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control will be entitled to a payment based on years of service with the Bank with a minimum payment equal to four weeks of then current base salary and a maximum payment equal to 26 weeks of then current base salary. However, the maximum payment for any eligible employee would be equal 63 to 26 weeks of their then current base salary. In addition, certain officers of the Bank would be eligible to receive a severance payment in an amount up to the maximum payment without regard to their length of service. Assuming that a change in control had occurred at June 30, 1998 and the termination of all eligible employees, the maximum aggregate payment due under the severance plan would be approximately $219,000. BENEFITS INSURANCE. Full-time employees are provided, with minimal contribution or expense to them, with group plan insurance that covers hospitalization, dependent coverage, long-term disability and life insurance. This insurance is available generally and on the same basis to all full-time employees. 401(K) PLAN. The Bank maintains the First Federal Bank, FSB Profit Sharing with 401(k) Option Plan (the "401(k) Plan") for the benefit of eligible employees of the Bank. The 401(k) Plan is intended to be a tax-qualified plan under Sections 401(a) and 401(k) of the Code. Employees of the Bank who have completed 1,000 hours of service during 12 consecutive months and who are employed with the Bank at the end of such period are eligible to participate in the 401(k) Plan. Participants may contribute up to 20% of their annual compensation to the 401(k) Plan through a salary reduction election. The Bank matches participant contributions on a discretionary basis to a maximum of 6% of the participant's annual compensation. Additional employer profit sharing contributions of 3% are also made . Participants are at all times 100% vested in their 401(k) Plan accounts. For the year ended June 30, 1998, the Bank incurred total contribution-related expenses of approximately $25,000 in connection with the 401(k) Plan. Generally, the investment of 401(k) Plan assets is directed by plan participants. In connection with the conversion the participants will be able to direct the investment of their 401(k) Plan account balance to purchase shares of common stock of the Holding Company. A participant in the 401(k) Plan who elects to purchase common stock in the conversion through the 401(k) Plan will receive the same subscription priority and will be subject to the same individual purchase limitations as if the participant had elected to make such purchase using other funds. See "THE CONVERSION -- Limitations on Purchases of Common Stock." EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized the adoption by the Bank of an ESOP for employees of the Bank to become effective upon the completion of the conversion. The ESOP is intended to satisfy the requirements for an employee stock ownership plan under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Full-time employees of the Holding Company and the Bank who have been credited with at least 1,000 hours of service during a 12-month period and who have attained age 21 will be eligible to participate in the ESOP. In order to fund the purchase of up to 8% of the common stock to be sold in the conversion, it is anticipated that the ESOP will borrow funds from the Holding Company. Such loan will equal 100% of the aggregate purchase price of the common stock. The loan to the ESOP will be repaid principally from the Bank's contributions to the ESOP and dividends payable on common stock held by the ESOP over the anticipated 15-year term of the loan. The interest rate for the ESOP loan is expected to be the prime rate as published in The Wall Street Journal on the closing date of the conversion. See "PRO FORMA DATA." To the extent that the ESOP is unable to acquire 8% of the common stock sold in the offering, it is anticipated that such additional shares may be acquired following the conversion through open market purchases. In any plan year, the Bank may make additional discretionary contributions to the ESOP for the benefit of plan participants in either cash or shares of common stock, which may be acquired through the purchase of outstanding shares in the market or from individual stockholders or which constitute authorized but unissued shares or shares held in treasury by the Holding Company. The timing, amount, and manner of such discretionary contributions will be affected by several factors, including applicable regulatory policies, the requirements of applicable laws and regulations, and market conditions. 64 Shares purchased by the ESOP with the proceeds of the loan will be held in a suspense account and released on a pro rata basis as the loan is repaid. Discretionary contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of each participant's proportional share of total compensation. Forfeitures will be reallocated among the remaining plan participants. Participants will vest in their accrued benefits under the ESOP at the rate of 20% per year, beginning upon the completion of two years of service. A participant is fully vested at retirement, in the event of disability or upon termination of the ESOP. Benefits are distributable upon a participant's retirement, early retirement, death, disability, or termination of employment. The Bank's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. It is anticipated that members of the Bank's Board of Directors will serve as trustees of the ESOP. Under the ESOP, the trustees must vote all allocated shares held in the ESOP in accordance with the instructions of plan participants and unallocated shares and allocated shares for which no instructions are received must be voted in the same ratio on any matter as those shares for which instructions are given. Pursuant to Statement of Position 93-6, compensation expense for a leveraged ESOP is recorded at the fair market value of the ESOP shares when committed to be released to participants' accounts. See "PRO FORMA DATA." The ESOP will be subject to the requirements of ERISA and the regulations of the IRS and the Department of Labor issued thereunder. The Bank intends to request a determination letter from the IRS regarding the tax-qualified status of the ESOP. Although no assurance can be given that a favorable determination letter will be issued, the Bank expects that a favorable determination letter will be received by the ESOP. STOCK OPTION PLANS. Following its conversion to stock form, the Bank adopted the 1994 Option Plan for the benefit of key employees and nonemployee directors, pursuant to which 20,000 shares of Bank common stock were reserved for issuance upon the exercise of stock options awarded thereunder. As of June 30, 1998, stock options with respect to 7,245 shares reserved under the 1994 Option Plan were outstanding. The Holding Company will assume the 1994 Option Plan in connection with the conversion, and appropriate adjustments to the exercise price and the number of shares subject to stock options outstanding under the plan will be made in accordance with the final Exchange Ratio. Following the conversion, the Holding Company's Board of Director intends to adopt the 1999 Option Plan in order to attract and retain qualified management personnel and nonemployee directors, to provide such key employees and nonemployee directors with a proprietary interest in the Holding Company as an incentive to contribute to the success of the Holding Company and the Bank, and to reward officers and key employees for outstanding performance. The 1999 Option Plan will provide for the grant of incentive stock options ("ISOs") intended to comply with the requirements of Section 422 of the Code and for nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the 1999 Option Plan, stock options may be granted to nonemployee directors and key employees of the Holding Company and its subsidiaries. Unless sooner terminated, the 1999 Option Plan will continue in effect for a period of ten years from the date the 1999 Option Plan is approved by stockholders. Under current OTS regulations, the approval of a majority vote of the Holding Company's outstanding shares is required prior to the implementation of the 1999 Option Plan within one year of the consummation of the conversion. A number of authorized shares of common stock equal to 10% of the number of shares sold in connection with the conversion will be reserved for future issuance under the 1999 Option Plan (102,637 shares based on the issuance of 1,026,375 shares at the maximum of the Estimated Valuation Range). Shares acquired upon exercise of options will be authorized but unissued shares or treasury shares. In the event of a stock split, reverse stock split, stock dividend, or similar event, the number of shares of common stock under the 1999 Option Plan, the number of shares to which any award relates and the exercise price per share under any option may be adjusted by the Committee (as defined below) to reflect the increase or decrease in the total number of shares of common stock outstanding. 65 The 1999 Option Plan will be administered and interpreted by the Board of Directors. Subject to applicable OTS regulations, the Board will determine which nonemployee directors and key employees will be granted options, whether, in the case of officers and employees, such options will be ISOs or NQOs, the number of shares subject to each option, and the exercisability of such options. All options granted to nonemployee directors will be NQOs. The per share exercise price of all options will equal at least 100% of the fair market value of a share of common stock on the date the option is granted. It is anticipated that all options granted under the 1999 Option Plan will be granted subject to a vesting schedule whereby the options become exercisable over a specified period following the date of grant. Under OTS regulations, if the 1999 Option Plan is implemented within the first year following consummation of the conversion the minimum vesting period will be five years. All unvested options will be immediately exercisable in the event of the recipient's death or disability. Unvested options also will be exercisable following a change in control (as defined in the 1999 Option Plan) of the Holding Company or the Bank to the extent authorized or not prohibited by applicable law or regulations. OTS regulations currently provide that, if the 1999 Option Plan is implemented prior to the first anniversary of the conversion, vesting may not be accelerated upon a change in control of the Holding Company or the Bank. Each stock option that is awarded to an officer or key employee will remain exercisable at any time on or after the date it vests through the earlier to occur of the tenth anniversary of the date of grant or three months after the date on which the optionee terminates employment (one year in the event of the optionee's termination by reason of death or disability), unless such period is extended by the Board. Each stock option that is awarded to a nonemployee director will remain exercisable through the earlier to occur of the tenth anniversary of the date of grant or one year (two years in the event of a nonemployee director's death or disability) following the termination of a nonemployee director's service on the Board. Except as authorized by the Board, all stock options are nontransferable except by will or the laws of descent or distribution. Under current provisions of the Internal Revenue Code, the federal tax treatment of ISOs and NQOs is different. With respect to ISOs, an optionee who satisfies certain holding period requirements will not recognize income at the time the option is granted or at the time the option is exercised. If the holding period requirements are satisfied, the optionee will generally recognize capital gain or loss upon a subsequent disposition of the shares of common stock received upon the exercise of a stock option. If the holding period requirements are not satisfied, the difference between the fair market value of the common stock on the date of grant and the option exercise price, if any, will be taxable to the optionee at ordinary income tax rates. A federal income tax deduction generally will not be available to the Holding Company as a result of the grant or exercise of an ISO, unless the optionee fails to satisfy the holding period requirements. With respect to NQOs, the grant of an NQO generally is not a taxable event for the optionee and no tax deduction will be available to the Holding Company. However, upon the exercise of an NQO, the difference between the fair market value of the common stock on the date of exercise and the option exercise price generally will be treated as compensation to the optionee upon exercise, and the Holding Company will be entitled to a compensation expense deduction in the amount of income realized by the optionee. Although no specific award determinations have been made at this time, the Holding Company and the Bank anticipate that if stockholder approval is obtained, the Holding Company and the Bank would provide awards to its directors and key employees to the extent and under terms and conditions permitted by applicable regulations. Under current OTS regulations, if the 1999 Option Plan is implemented within one year of the consummation of the conversion, (i) no officer or employee may receive an award of options covering in excess of 25%, (ii) no nonemployee director could receive in excess of 5% and (iii) nonemployee directors, as a group, may not receive in excess of 30% of the number of shares reserved for issuance under the 1999 Option Plan. MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN. Following the conversion, the Holding Company's Board of Directors intends to adopt the 1999 MRDP for non- employee directors, officers and employees of the Holding Company and the Bank. The Board of Directors believes that adoption of the 1999 MRDP is important to the Bank's overall compensation strategy, which emphasizes providing appropriate incentives to attract and retain capable 66 employees. Specifically, the adoption of the 1999 MRDP will enable the Holding Company to provide participants with a proprietary interest in the Holding Company as an incentive to contribute to the success of the Holding Company. The 1999 MRDP will be submitted to stockholders for approval at a meeting following consummation of the conversion. The approval of a majority vote of the Holding Company's stockholders is required prior to implementation of the 1999 MRDP within one year of the consummation of the conversion. The 1999 MRDP expects to acquire a number of shares of common stock equal to 4% of the shares sold in the offering (41,055 shares based on the sale of 1,026,375 shares at the maximum of the Estimated Valuation Range). Such shares will be acquired on the open market, if available, with funds contributed by the Bank to a trust which the Holding Company may establish in conjunction with the 1999 MRDP ("1999 MRDP Trust") or from authorized but unissued shares or treasury shares of the Holding Company. The Board of Directors will administer the 1999 MRDP, members of which will also serve as trustees of the 1999 MRDP Trust, if formed. The trustees will be responsible for the investment of all funds contributed by the Bank to the 1999 MRDP Trust. It is anticipated that shares of common stock granted pursuant to the 1999 MRDP will be in the form of restricted stock payable ratably over a five-year period following the date of grant. During the period of restriction, all shares will be held in escrow by the Holding Company or by the 1999 MRDP Trust. If a recipient terminates employment for reasons other than death or disability, the recipient will forfeit all rights to allocated shares that are then subject to restriction. In the event of the recipient's death or disability, all restrictions will expire and all allocated shares will become unrestricted. In addition, all allocated shares will become unrestricted in the event of a change in control (as defined in the 1999 MRDP) of the Holding Company to the extent authorized or not prohibited by applicable law or regulations. Current OTS regulations, however, do not permit accelerated vesting of 1999 MRDP awards in the event of a change in control. Compensation expense in the amount of the fair market value of the common stock at the date of the grant to the recipient will be recognized during the years in which the shares vest. The Board of Directors may terminate the 1999 MRDP at any time and, upon termination, all unallocated shares of common stock will revert to the Holding Company. A recipient of a 1999 MRDP award in the form of restricted stock generally will not recognize income upon an award of shares of common stock, and the Holding Company will not be entitled to a federal income tax deduction, until the termination of the restrictions. Upon such termination, the recipient will recognize ordinary income in an amount equal to the fair market value of the common stock at the time and the Holding Company will be entitled to a deduction in the same amount after satisfying federal income tax withholding requirements. However, the recipient may elect to recognize ordinary income in the year the restricted stock is granted in an amount equal to the fair market value of the shares at that time, determined without regard to the restrictions. In that event, the Holding Company will be entitled to a deduction in such year and in the same amount. Any gain or loss recognized by the recipient upon subsequent disposition of the stock will be either a capital gain or capital loss. Although no specific award determinations have been made, the Bank anticipates that if stockholder approval is obtained it would provide awards to its key employees to the extent permitted by applicable regulations. OTS regulations currently provide that no individual officer or employee may receive more than 25% and no individual non-employee director may receive more than 5% (30% in the aggregate) of the shares reserved for issuance under any stock compensation plan. TRANSACTIONS WITH THE BANK Director Gerald L. Uhl is a shareholder and the Business Manager of Jacobi Sales, Inc. ("JSI"), a farm implement dealership that has contracted with the Bank to provide sales financing to customers of JSI. The Bank does not grant preferential credit under this arrangement. All sales contracts are presented to the Bank on a 50% recourse 67 basis, with JSI responsible for the sale and disposition of any repossessed equipment. During the fiscal year ended June 30, 1998, the Bank granted approximately $612,000 of credit to JSI customers. Federal regulations require that all loans or extensions of credit by the Bank to executive officers and directors must generally be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons (unless the loan or extension of credit is made under a benefit program generally available to all other employees and does not give preference to any insider over any other employee) and must not involve more than the normal risk of repayment or present other unfavorable features. The Bank's policy is not to make any new loans or extensions of credit to the Bank's executive officers and directors at different rates or terms than those offered to the general public. In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, are in excess of the greater of $25,000, or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. See "REGULATION -- Federal Regulation of Savings Associations -- Transactions with Affiliates." The aggregate amount of loans by the Bank to its executive officers and directors and their associates was approximately $960,000 at June 30, 1998, or approximately 5.1% of the Holding Company's pro forma stockholders' equity (based on the issuance of shares at the maximum 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 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., 68 borrowings) from the FHLB-Indianapolis. The Bank complied with this requirement with an investment in FHLB-Indianapolis stock of $589,000 at June 30, 1998. Among other benefits, the FHLB-Indianapolis provides a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB-Indianapolis. FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of depository institutions. The FDIC currently maintains two separate insurance funds: the BIF and the SAIF. As insurer of the Bank's deposits, the FDIC has examination, supervisory and enforcement authority over the Bank. The Bank's accounts are insured by the SAIF to the maximum extent permitted by law. The Bank pays deposit insurance premiums based on a risk-based assessment system established by the FDIC. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital -- "well capitalized," "adequately capitalized," and "undercapitalized" -- which are defined in the same manner as the regulations establishing the prompt corrective action system, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates that until September 30, 1996 ranged from 0.23% for well capitalized, financially sound institutions with only a few minor weaknesses to 0.31% for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted on September 30, 1996, the FDIC imposed a special assessment on each depository institution with SAIF-assessable deposits which resulted in the SAIF achieving its designated reserve ratio. In connection therewith, the FDIC reduced the assessment schedule for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most institutions, including the Bank, paying 0%. This assessment schedule is the same as that for the BIF, which reached its designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF members are charged an assessment of .065% of SAIF-assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be charged an assessment to help pay interest on the FICO bonds at a rate of approximately .013% until the earlier of December 31, 1999 or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. The DIF Act provides for the merger of the BIF and the SAIF into the Deposit Insurance Fund on January 1, 1999, but only if no insured depository institution is a savings association on that date. The DIF Act contemplates the development of a common charter for all federally chartered depository institutions and the abolition of separate charters for national banks and federal savings associations. It is not known what form the common charter may take and what effect, if any, the adoption of a new charter would have on the operation of the Bank. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the deposit insurance of the Bank. LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is required to maintain an average daily balance of liquid assets (cash, certain time deposits and savings accounts, bankers' acceptances, and specified U.S. Government, state or federal agency obligations and certain other investments) equal to a monthly average of not less than a specified percentage (currently 4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary 69 penalties may be imposed for failure to meet liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk- based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or has a leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A federal banking agency may, after notice and an opportunity for a hearing, reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or has received in its most recent examination, and has not corrected, a less than satisfactory rating for asset quality, management, earnings or liquidity. (The OTS may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.) An institution generally must file a written capital restoration plan that meets specified requirements, as well as a performance guaranty by each company that controls the institution, with the appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Immediately upon becoming undercapitalized, an institution shall become subject to various mandatory and discretionary restrictions on its operations. At June 30, 1998, the Bank was categorized as "well capitalized" under the prompt corrective action regulations of the OTS. STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard. OTS regulations establish deadlines for the submission and review of such safety and soundness compliance plans. QUALIFIED THRIFT LENDER TEST. All savings associations are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. A savings institution that fails to become or remain a QTL shall either convert to a national bank charter or be subject to the following restrictions on its operations: (i) the Bank may not make any new investment or engage in activities that would not be permissible for national banks; (ii) the Bank may not establish any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; (iii) the Bank shall be ineligible to obtain new advances from any FHLB; and (iv) the payment of dividends by the Bank shall be subject to the rules regarding the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a QTL, the savings institution would be prohibited from retaining any investment or engaging in any 70 activity not permissible for a national bank and would be required to repay any outstanding advances to any FHLB. In addition, within one year of the date on which a savings association controlled by a company ceases to be a QTL, the company must register as a bank holding company and become subject to the rules applicable to such companies. A savings institution may requalify as a QTL if it thereafter complies with the QTL test. Currently, the QTL test requires that either an institution qualify as a domestic building and loan association under the Internal Revenue Code or that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); FHLB stock; direct or indirect obligations of the FDIC; and loans for educational purposes, loans to small businesses and loans made through credit cards. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At June 30, 1998, the Bank was in compliance with the QTL test. CAPITAL REQUIREMENTS. Under OTS regulations a savings association must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. OTS capital regulations establish a 3% core capital or leverage ratio (defined as the ratio of core capital to adjusted total assets). Core capital is defined to include common stockholders' equity, noncumulative perpetual preferred stock and any related surplus, and minority interests in equity accounts of consolidated subsidiaries, less (i) any intangible assets, except for certain qualifying intangible assets; (ii) certain mortgage servicing rights; and (iii) equity and debt investments in subsidiaries that are not "includable subsidiaries," which is defined as subsidiaries engaged solely in activities not impermissible for a national bank, engaged in activities impermissible for a national bank but only as an agent for its customers, or engaged solely in mortgage-banking activities. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to account appropriately for the investments in and assets of both includable and non-includable subsidiaries. Institutions that fail to meet the core capital requirement would be required to file with the OTS a capital plan that details the steps they will take to reach compliance. In addition, the OTS's prompt corrective action regulation provides that a savings institution that has a leverage ratio of less than 4% (3% for institutions receiving the highest 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 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 71 purposes of calculating capital are not included in calculating risk-weighted assets. The categories range from 0% for cash and securities that are backed by the full faith and credit of the U.S. Government to 100% for repossessed assets or assets more than 90 days past due. Qualifying residential mortgage loans (including multi-family mortgage loans) are assigned a 50% risk weight. Consumer, commercial, home equity and residential construction loans are assigned a 100% risk weight, as are nonqualifying residential mortgage loans and that portion of land loans and nonresidential construction loans that do not exceed an 80% loan-to-value ratio. The book value of assets in each category is multiplied by the weighing factor (from 0% to 100%) assigned to that category. These products are then totaled to arrive at total risk-weighted assets. Off- balance sheet items are included in risk-weighted assets by converting them to an approximate balance sheet "credit equivalent amount" based on a conversion schedule. These credit equivalent amounts are then assigned to risk categories in the same manner as balance sheet assets and included risk-weighted assets. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and ---- outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the Bank's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate risk component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the Bank's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. Under certain circumstances, a savings association may request an adjustment to its interest rate risk component if it believes that the OTS-calculated interest rate risk component overstates its interest rate risk exposure. In addition, certain "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to calculate their interest rate risk component in lieu of the OTS-calculated amount. The OTS has postponed the date that the component will first be deducted from an institution's total capital. See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a table that sets forth in terms of dollars and percentages the OTS tangible, core and risk-based capital requirements, the Bank's historical amounts and percentages at June 30, 1998 and pro forma amounts and percentages based upon the assumptions stated therein. LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform limitations on the ability of all savings associations to engage in various distributions of capital such as dividends, stock repurchases and cash-out mergers. In addition, OTS regulations require the Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends. The regulation utilizes a three-tiered approach which permits various levels of distributions based primarily upon a savings association's capital level. A Tier 1 savings association has capital in excess of its capital requirement (both before and after the proposed capital distribution). A Tier 1 savings association may make (without application but upon prior notice to, and no objection made by, the OTS) capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus one-half its surplus capital ratio (i.e., the amount of capital in excess of its requirement) ---- at the beginning of the calendar year or the amount authorized for a Tier 2 association. Capital distributions in excess of such amount require advance notice to the OTS. A Tier 2 savings association has capital equal to or in excess of its minimum capital requirement but below its requirement (both before and after the proposed capital distribution). Such an association may make (without application) capital distributions up to an amount equal to 75% of its net income during 72 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 June 30, 1998, the Bank's regulatory limit on loans to one borrower was $2.6 million. At June 30, 1998, the Bank's largest aggregate amount of loans to one borrower was $707,000. ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association may establish operating subsidiaries to engage in any activity that the savings association may conduct directly and may establish service corporation subsidiaries to engage in certain preapproved activities or, with approval of the OTS, other activities reasonably related to the activities of financial institutions. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the Bank controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the Bank or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. TRANSACTIONS WITH AFFILIATES. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus and place an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, the purchase of assets, the issuance of a guarantee and similar types of transactions. Any loan or extension of credit by the Bank to an affiliate must be secured by collateral in accordance with Section 23A. Three additional rules apply to savings associations: (i) a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies; (ii) a savings association may not purchase or invest in securities issued by an affiliate (other than securities of a subsidiary); and (iii) the OTS may, for reasons of safety and soundness, impose more stringent restrictions on savings associations but may not exempt transactions from or otherwise abridge Section 23A or 23B. Exemptions from 73 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. 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. 74 TAXATION FEDERAL TAXATION GENERAL. Upon consummation of the conversion, the Holding Company and the Bank will report their income on a fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Holding Company. For additional information regarding income taxes, see Note 8 of Notes to Consolidated Financial Statements. BAD DEBT RESERVE. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve. Due to the Bank's loss experience, the Bank generally recognized a bad debt deduction equal to 8% of taxable income. The thrift bad debt rules were revised by Congress in 1996. The new rules eliminated the percentage of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also required that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). For taxable years beginning after December 31, 1995, the Bank's bad debt deduction must be determined under the experience method using a formula based on actual bad debt experience over a period of years or, if the Bank is a "large" association (assets in excess of $500 million) on the basis of net charge-offs during the taxable year. The new rules allowed an institution to suspend bad debt reserve recapture for the 1996 and 1997 tax years if the institution's lending activity for those years is equal to or greater than the institution's average mortgage lending activity for the six taxable years preceding 1996 adjusted for inflation. For this purpose, only home purchase or home improvement loans are included and the institution can elect to have the tax years with the highest and lowest lending activity removed from the average calculation. If an institution is permitted to postpone the reserve recapture, it must begin its six year recapture no later than the 1998 tax year. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continues to be subject to provisions of present law referred to below that require recapture of the pre-1988 bad debt reserve in the case of certain excess distributions to shareholders. DISTRIBUTIONS. To the extent that the Bank makes "nondividend distributions" to the Holding Company, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans ("Excess Distributions"), and an amount based on the Excess Distributions will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, after the conversion, the Bank makes a "nondividend distribution," then approximately one and one-half times the Excess Distribution would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See "REGULATION" and "DIVIDEND POLICY" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. 75 CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax is paid. DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. AUDITS. Neither the MHC's not the Bank's federal income tax returns have been audited within the last five years. INDIANA TAXATION Indiana imposes an 8.5% franchise tax based on a financial institution's adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, U.S. Government interest, the bad debt deduction computed using the reserve method and pre-1990 net operating losses are disallowed. The MHC's and the Bank's state income tax returns were audited for the years ended June 30, 1993, 1994 and 1995 without amendment and without additional tax liability. The MHC's and the Bank's state income tax returns have not been audited for any subsequent period. 76 THE CONVERSION THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE MEMBERS OF THE MHC AND THE STOCKHOLDERS OF THE BANK ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION. GENERAL On June 18, 1998, the Boards of Directors of the MHC and the Bank unanimously adopted the Plan of Conversion, pursuant to which the Bank will convert from the mutual holding company form of organization to the stock holding company form of organization. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS ATTACHED AS EXHIBIT A TO BOTH THE MHC'S PROXY STATEMENT AND THE BANK'S PROXY STATEMENT, AND WHICH IS AVAILABLE TO BOTH MEMBERS OF THE MHC AND STOCKHOLDERS OF THE BANK UPON REQUEST. The Plan of Conversion is also filed as an exhibit to the Registration Statement. See "ADDITIONAL INFORMATION." The OTS has approved the Plan of Conversion, subject to its approval by the members of the MHC and the stockholders of the Bank and to the satisfaction of certain other conditions. Pursuant to the Plan of Conversion, (i) the MHC will convert from a federally-chartered mutual holding company to a federally-chartered interim stock savings bank (Interim A) and simultaneously merge with and into the Bank and (ii) an interim federal stock savings bank (Interim B) will be formed as a wholly-owned subsidiary of the Holding Company and Interim B will merge with and into the Bank. As a result of the merger of Interim A with and into the Bank, the MHC will cease to exist and the shares of Bank common stock held by the MHC will be canceled. As a result of the merger of Interim B with and into the Bank, the Bank will become a wholly owned subsidiary of the Holding Company and the common stock of the Bank will be converted into common stock of the Holding Company pursuant to the Exchange Ratio, which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Holding Company common stock to be outstanding upon the completion of the conversion as the percentage of the Bank common stock owned by them in the aggregate immediately prior to consummation of the conversion, but before giving effect to (a) the payment of cash in lieu of issuing fractional shares and (b) any shares of common stock purchased by the Bank's stockholders in this offering. As part of the conversion, the Holding Company is offering shares of its common stock in the Subscription Offering to holders of subscription rights in the following order of priority: (i) Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on March 31, 1997); (ii) Supplemental Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on September 30, 1998); and (iii) Other Members (depositors of the Bank as of the close of business on ________________ and borrowers of the Bank with loans outstanding as of the close of business on February 1, 1993, which continue to be outstanding as of the close of business on ________________). Concurrently with the Subscription Offering, any shares of common stock not subscribed for in the Subscription Offering may be offered for sale in the Direct Community Offering to members of the general public, with priority being given first to stockholders of the Bank as of the close of business on the Voting Record Date (who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members) and then to natural persons and trusts of natural persons residing in the Local Community. Shares of common stock not sold in the Subscription Offering and the Direct Community Offering may be offered in the Syndicated Community Offering. Regulations require that the Direct Community Offering and the Syndicated Community Offering be completed within 45 days after completion of the fully extended Subscription Offering unless extended by the Bank or the Holding Company with the approval of the regulatory authorities. If the Syndicated Community Offering is determined not to be feasible because of market conditions or otherwise, the Board of Directors of the Bank will consult with the regulatory authorities to determine an appropriate alternative method for selling the unsubscribed shares of common stock. The Plan of 77 Conversion provides that the conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the MHC. No sales of common stock may be completed, either in the Subscription Offering, Direct Community Offering or Syndicated Community Offering unless the Plan of Conversion is approved by the members of the MHC and the stockholders of the Bank. The completion of this offering, however, is subject to market conditions and other factors beyond the Bank's control. No assurance can be given as to the length of time after approval of the Plan of Conversion by the members of the MHC and the stockholders of the Bank that will be required to complete the Direct Community Offering or Syndicated Community Offering or other sale of the shares of common stock. If delays are experienced, significant changes may occur in the estimated pro forma market value of the MHC and the Bank, as converted, together with corresponding changes in the net proceeds realized by the Holding Company from the sale of its common stock. Orders for shares of common stock will not be filled until at least $7,586,250 of common stock has been subscribed for or sold and the OTS approves the final valuation and the conversion closes. If the conversion is not completed within 45 days after the last day of the fully extended Subscription Offering and the OTS consents to an extension of time to complete the conversion, subscribers will be given the right to increase, decrease or rescind their subscriptions. Unless an affirmative indication is received from subscribers that they wish to continue to subscribe for shares, the funds will be returned promptly, together with accrued interest at the Bank's passbook rate from the date payment is received until the funds are returned to the subscriber. If such period is not extended, or, in any event, if the conversion is not completed, all withdrawal authorizations will be terminated and all funds received will be promptly returned together with accrued interest at the Bank's passbook rate from the date payment is received until the conversion is terminated. PURPOSES OF CONVERSION The MHC, as a federally chartered mutual holding company, does not have stockholders and has no authority to issue capital stock. As a result of the conversion, the Holding Company will be structured in the form used by holding companies of commercial banks, most business entities and a growing number of savings institutions. The holding company form of organization will provide the Holding Company with the ability to diversify the Holding Company's and the Bank's business activities through acquisition of or mergers with both stock savings institutions and commercial banks, as well as other companies. Although there are no current arrangements, understandings or agreements regarding any such opportunities, the Holding Company will be in a position after the conversion, subject to regulatory limitations and the Holding Company's financial position, to take advantage of any such opportunities that may arise. In their decision to pursue the conversion, the Boards of Directors of the MHC and the Bank considered various regulatory uncertainties associated with the mutual holding company structure including the ability to waive dividends in the future as well as the general uncertainty regarding a possible elimination of the federal savings association charter. The conversion will be important to the future growth and performance of the holding company organization by providing a larger capital base to support the operations of the Bank and Holding Company and by enhancing their future access to capital markets, their ability to diversify into other financial services related activities, and their ability to provide services to the public. The conversion also will result in a larger number of shares of Holding Company common stock to be outstanding as compared to the number of outstanding shares of Bank common stock, which will increase the likelihood of the development of an active and liquid trading market for the common stock. See "MARKET FOR COMMON STOCK." In addition, the conversion will permit the Holding Company to engage in stock repurchases without adverse federal income tax consequences. The Bank cannot repurchase its common stock without triggering adverse federal income tax consequences. Currently, the Holding Company has no specific plans regarding any stock repurchases. 78 An additional benefit of the conversion will be an increase in the accumulated earnings and profits of the Bank for federal income tax purposes. When the Bank (as a mutual institution) transferred substantially all of its assets and liabilities to its stock savings bank successor in the MHC reorganization, its accumulated earnings and profits tax attribute was not able to be transferred to the Bank because no tax-free reorganization was involved. Accordingly, this tax attribute was retained by the Bank when it converted its charter to that of the MHC, even though the underlying retained earnings were transferred to the Bank. The conversion has been structured to re-unite the accumulated earnings and profits tax attribute retained by the MHC in the MHC reorganization with the retained earnings of the Bank by merging the MHC with and into the Bank in a tax-free reorganization. This transaction will increase the Bank's ability to pay dividends to the Holding Company in the future. See "DIVIDEND POLICY." If the Bank had undertaken a standard conversion involving the formation of a stock holding company in 1993, applicable OTS regulations would have required a greater amount of common stock to be sold than the amount sold in the MHC reorganization. Management believed that it was advisable to invest profitably the proceeds raised in the MHC reorganization prior to raising the larger amount of capital that would have been raised at one time in a standard conversion. A standard conversion in 1993 also would have immediately eliminated all aspects of the mutual form of organization. In light of the foregoing, the Boards of Directors of the MHC and the Bank believe that the conversion is in the best interests of the MHC and the Bank, their respective members and stockholders, and the communities served by the Bank. EFFECTS OF CONVERSION ON DEPOSITORS AND BORROWERS OF THE BANK GENERAL. Prior to the conversion, each depositor in the Bank has both a deposit account in the institution and a pro rata ownership interest in the net worth of the MHC based upon the balance in his or her account, which interest may only be realized in the event of a liquidation of the MHC. However, this ownership interest is tied to the depositor's account and has no tangible market value separate from such deposit account. A depositor who reduces or closes his or her account receives a portion or all of the balance in the account but nothing for his or her ownership interest in the net worth of the MHC, which is lost to the extent that the balance in the account is reduced. Consequently, the depositors of the Bank normally have no way to realize the value of their ownership interest in the MHC, which has realizable value only in the unlikely event that the MHC is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of the MHC after other claims are paid. Upon consummation of the conversion, permanent nonwithdrawable capital stock will be created to represent the ownership of the net worth of the Holding Company. The common stock is separate and apart from deposit accounts and cannot be and is not insured by the FDIC or any other governmental agency. Certificates are issued to evidence ownership of the permanent stock. The stock certificates are transferable, and therefore the stock may be sold or traded if a purchaser is available with no effect on any deposit and/or loan account(s) the seller may hold in the Bank. CONTINUITY. The conversion will not interrupt the Bank's normal business of accepting deposits and making loans. The Bank will continue to be subject to regulation by the OTS and the FDIC. After the conversion, the Bank will continue to provide services for depositors and borrowers under current policies by its present management and staff. The directors and officers of the Bank at the time of the conversion will continue to serve as directors and officers of the Bank after the conversion. The directors and officers of the Holding Company consist of individuals currently serving as directors and officers of the MHC and the Bank, and they will retain their positions in the Holding Company after the conversion. 79 EFFECT ON THE BANK'S COMMON STOCK. Under the Plan of Conversion, upon consummation of the conversion, each share of the Bank's common stock held by the Bank's public stockholders (other than the Bank's public stockholders who exercise and perfect their rights of dissent and appraisal) will be converted into shares of Holding Company common stock based upon the Exchange Ratio without any further action on the part of the holder thereof. Upon surrender of certificates representing shares of Bank common stock, Holding Company common stock will be issued in exchange for such shares. See "-- Delivery and Exchange of Stock Certificates." Upon consummation of the conversion, the public stockholders of the Bank will become stockholders of the Holding Company. For a description of certain changes in the rights of stockholders as a result of the conversion, see "COMPARISON OF STOCKHOLDERS' RIGHTS." VOTING RIGHTS. Presently, depositors and borrowers of the Bank are members of, and have voting rights in, the MHC as to all matters requiring membership action. Upon completion of the conversion, the MHC will cease to exist and all voting rights in the Bank will be vested in the Holding Company as the sole stockholder of the Bank. Exclusive voting rights with respect to the Holding Company will be vested in the holders of the Holding Company's common stock. Depositors and borrowers of the Bank will not have voting rights in the Holding Company after the conversion, except to the extent that they become stockholders of the Holding Company. SAVINGS ACCOUNTS AND LOANS. The Bank's savings accounts, account balances and existing FDIC insurance coverage of savings accounts will not be affected by the conversion. Furthermore, the conversion will not affect the loan accounts, loan balances or obligations of borrowers under their individual contractual arrangements with the Bank. TAX EFFECTS. The Bank has received an opinion from Breyer & Aguggia LLP, Washington, D.C., that the conversion will constitute a nontaxable reorganization under Section 368(a)(1)(A) of the Internal Revenue Code. Among other things, the opinion provides that: (i) the conversion of the MHC from a mutual holding company to a federally-chartered interim stock savings bank (Interim A) and its simultaneous merger with and into the Bank, with the Bank as the surviving entity, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code; (ii) no gain or loss will be recognized by the Bank upon the receipt of the assets of the MHC in such merger; (iii) the merger of Interim B with and into the Bank, with the Bank as the surviving entity, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code; (iv) no gain or loss will be recognized by Interim B upon the transfer of its assets to the Bank; (v) no gain or loss will be recognized by the Bank upon the receipt of the assets of Interim B; (vi) no gain or loss will be recognized by the Holding Company upon the receipt of Bank common stock solely in exchange for Holding Company common stock; (vii) no gain or loss will be recognized by the Public Stockholders upon the receipt of shares of the Holding Company's common stock in exchange for their shares of Bank common stock; (viii) the basis of the shares of common stock of the Holding Company to be received by the Bank's public stockholders will be the same as the basis of the shares of common stock of the Bank surrendered in exchange therefor, before giving effect to any payment of cash in lieu of fractional shares; 80 (ix) the holding period of the shares of Holding Company common stock to be received by the Bank's public stockholders will include the holding period of the Bank common stock, provided that the shares of Bank common stock were held as a capital asset on the date of the exchange; (x) no gain or loss will be recognized by the Holding Company upon the sale of shares of its common stock in this offering; (xi) the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will recognize gain, if any, upon the issuance to them of withdrawable savings accounts in the Bank following the conversion, interests in the liquidation account and nontransferable subscription rights to purchase common stock, but only to the extent of the value, if any, of the subscription rights; and (xii) the tax basis to the holders of shares of common stock purchased in this offering will be the amount paid therefor, and the holding period for the shares of common stock will begin on the date of consummation of this offering, if purchased through the exercise of Subscription Rights, and on the day after the date of purchase, if purchased in the Direct Community Offering or the Syndicated Community Offering. Unlike a private letter ruling issued by the IRS, an opinion of counsel is not binding on the IRS and the IRS could disagree with the conclusions reached therein. In the event of such disagreement, no assurance can be given that the conclusions reached in an opinion of counsel would be sustained by a court if contested by the IRS. Based upon past rulings issued by the IRS, the opinion provides that the receipt of subscription rights by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members under the Plan of Conversion will be taxable to the extent, if any, that the subscription rights are deemed to have a fair market value. Keller & Company, a financial consulting firm retained by the Bank, whose findings are not binding on the IRS, has issued a letter indicating that the subscription rights do not have any value, based on the fact that such rights are acquired by the recipients without cost, are nontransferable and of short duration and afford the recipients the right only to purchase shares of the common stock at a price equal to its estimated fair market value, which will be the same price paid by purchasers in the Direct Community Offering for unsubscribed shares of common stock. If the subscription rights are deemed to have a fair market value, the receipt of such rights may only be taxable to those Eligible Account Holders, Supplemental Eligible Account Holders and Other Members who exercise their subscription rights. The Bank could also recognize a gain on the distribution of such subscription rights. Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are encouraged to consult with their own tax advisors as to the tax consequences in the event the subscription rights are deemed to have a fair market value. The Bank has also received an opinion from Monroe Shine & Co., Inc. that, assuming the conversion does not result in any federal income tax liability to the Bank, its account holders, or the Holding Company, implementation of the Plan of Conversion will not result in any Indiana tax liability to such entities or persons. The opinions of Breyer & Aguggia LLP and Monroe Shine & Co., Inc. and the letter from Keller & Company, are filed as exhibits to the Registration Statement. See "ADDITIONAL INFORMATION." THE PRECEDING DISCUSSION SUMMARIZES THE MATERIAL TAX CONSEQUENCES OF THE CONVERSION. PROSPECTIVE INVESTORS, HOWEVER, ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM. LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the MHC, each depositor of the Bank would receive his or her pro rata share of any assets of the MHC remaining after payment of claims of all creditors. Each depositor's pro rata share of such remaining assets would be in the same proportion as the value of his or her 81 deposit account was to the total value of all deposit accounts in the Bank at the time of liquidation. After the conversion, each depositor, in the event of a complete liquidation of the Bank, would have a claim as a creditor of the same general priority as the claims of all other general creditors of the Bank. However, except as described below, his or her claim would be solely in the amount of the balance in his or her deposit account plus accrued interest. Each stockholder would not have an interest in the value or assets of the Bank or the Holding Company above that amount. The Plan of Conversion provides for the establishment, upon the completion of the conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the amount of any dividends waived by the MHC plus the greater of (i) the Bank's retained earnings of $4.0 million at June 30, 1992, the date of the latest statement of financial condition contained in the final offering circular utilized in the MHC reorganization, or (ii) 59.5% of the Bank's total stockholders' equity as reflected in its latest statement of financial condition contained in the final prospectus utilized in this offering. As of the date of this prospectus, the initial balance of the liquidation account would be $7.3 million. Each Eligible Account Holder and Supplemental Eligible Account Holder, if he or she were to continue to maintain his or her deposit account at the Bank, would be entitled, upon a complete liquidation of the Bank after the conversion to an interest in the liquidation account prior to any payment to the Holding Company as the sole stockholder of the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in the Bank at the close of business on March 31, 1997 or September 30, 1998, as the case may be. Each Eligible Account Holder and Supplemental Eligible Account Holder will have a pro rata interest in the total liquidation account for each of his or her deposit accounts based on the proportion that the balance of each such deposit account on the Eligibility Record Date (March 31, 1997) or the Supplemental Eligibility Record Date (September 30, 1998), as the case may be, bore to the balance of all deposit accounts in the Bank on such date. If, however, on any June 30 annual closing date of the Bank, commencing June 30, 1998, the amount in any deposit account is less than the amount in such deposit account on June 30, 1998, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to the Holding Company as the sole stockholder of the Bank. EXCHANGE OF BANK COMMON STOCK As part of the conversion, each share of Bank common stock held by the MHC (300,000 shares, or 59.5% of the outstanding shares, as of the date of this prospectus) will be canceled and each share of Bank common stock held by the Bank's public stockholders (204,015 shares, or 40.5% of the outstanding shares, as of the date of this prospectus) will be exchanged for shares of Holding Company common stock. The number of shares of Holding Company common stock to be issued to the Bank's public stockholders will be based on an Exchange Ratio that will result in the Bank's public stockholders owning in the aggregate approximately 40.5% of the outstanding shares of Holding Company common stock before giving effect to any (i) payment of cash to the Bank's public stockholders who exercise and perfect their rights of dissent and appraisal, (ii) payment of cash in lieu of issuing fractional shares of Holding Company common stock and (iii) shares purchased by the Bank's public stockholders in the offering. As required by the OTS, the aggregate ownership interest of the Bank's public stockholders has been adjusted downward to reflect assets held by the MHC and the waiver of certain dividends by the MHC. The final Exchange Ratio will be based on the percentage ownership interest of the Bank's public stockholders in the Bank and the number of shares sold in this offering and not on the market value of Bank common stock. Accordingly, the value of the shares of Holding Company common stock to be received for each share of Bank common stock may be less than the market value of Bank common stock at the time of exchange. See "-- Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the Conversion." 82 Pursuant to OTS regulations, stockholders of the Bank will have dissent and appraisal rights with respect to the conversion because the Bank's common stock is not listed on the Nasdaq Stock Market. Accordingly, even if the conversion is approved, stockholders of the Bank who exercise and perfect their rights of dissent and appraisal under OTS regulations will have the right to receive cash equal to the fair market value of their shares of Bank common stock as determined by regulation, rather than exchanging them for shares of Holding Company common stock. DO NOT SEND YOUR BANK STOCK CERTIFICATES AT THIS TIME REGARDLESS OF WHETHER OR NOT YOU INTEND TO EXERCISE AND PERFECT YOUR RIGHTS OF DISSENT AND APPRAISAL. The Bank will send to each Bank stockholder a proxy statement for the Bank's 1998 Annual Meeting of Stockholders at which the Plan of Conversion will be considered, which will include detailed instructions on how to exercise and perfect dissent and appraisal rights. See "THE CONVERSION - - - Dissent and Appraisal Rights." For Bank stockholders who do not wish to exercise their dissent and appraisal rights but want to exchange their shares of Bank common stock for shares of Holding Company common stock, the Holding Company will mail to each such stockholder exchange instructions and a transmittal letter after the consummation of the conversion. See "-- Delivery and Exchange of Stock Certificates." THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion, nontransferable subscription rights to purchase shares of common stock have been issued to persons and entities entitled to purchase the common stock in the Subscription Offering. The amount of the common stock which these parties may purchase will be subject to the availability of the common stock for purchase under the categories set forth in the Plan of Conversion. Subscription priorities have been established for the allocation of stock to the extent that the common stock is available. These priorities are as follows: Category 1: Eligible Account Holders. Each depositor with $50.00 or more on deposit at the Bank as of the close of business on March 31, 1997 will receive nontransferable Subscription Rights to subscribe for up to the greater of 25,000 shares of common stock, one-tenth of one percent of the total offering of common stock or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction of which the numerator is the amount of qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders. If the exercise of subscription rights in this category results in an oversubscription, shares of common stock will be allocated among subscribing Eligible Account Holders so as to permit each Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make such person's total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. Thereafter, unallocated shares will be allocated among subscribing Eligible Account Holders proportionately, based on the amount of their respective qualifying deposits as compared to total qualifying deposits of all subscribing Eligible Account Holders. Subscription rights received by officers and directors in this category based on their increased deposits in the Bank in the one year period preceding March 31, 1997 are subordinated to the subscription rights of other Eligible Account Holders. Category 2: ESOP. The Plan of Conversion provides that the ESOP shall receive nontransferable subscription rights to purchase up to 8% of the shares of common stock sold in the conversion. The ESOP intends to purchase 8% of the shares of common stock sold in the conversion. In the event the number of shares offered in the conversion is increased above the maximum of the Estimated Valuation Range, the ESOP shall have a priority right to purchase any such shares exceeding the maximum of the Estimated Valuation Range up to an aggregate of 8% of the common stock sold in the conversion. If the ESOP's subscription is not filled in its entirety, the ESOP may purchase shares in the open market. Category 3: Supplemental Eligible Account Holders. Each depositor with $50.00 or more on deposit as of the close of business on September 30, 1998 will receive nontransferable subscription rights to subscribe for up to the greater of 25,000 shares of common stock, one-tenth of one percent of the total offering of common stock or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction of which the numerator is the amount of qualifying deposits of the Supplemental Eligible 83 Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders. If the exercise of Subscription Rights in this category results in an oversubscription, shares of common stock will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. Thereafter, unallocated shares will be allocated among subscribing Supplemental Eligible Account Holders proportionately, based on the amount of their respective qualifying deposits as compared to total qualifying deposits of all subscribing Supplemental Eligible Account Holders. Category 4: Other Members. Each depositor of the Bank as of the close of business on the Voting Record Date (__________, 1998) and each borrower with a loan outstanding as of the close of business on February 1, 1993, which continues to be outstanding as of the close of business on the Voting Record Date, will receive nontransferable subscription rights to purchase up 25,000 shares of common stock or one-tenth of one percent of the total offering of common stock to the extent shares are available following subscriptions by Eligible Account Holders and Supplemental Eligible Account Holders. In the event of an oversubscription in this category, the available shares will be allocated proportionately based on the amount of the respective subscriptions. SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE IS PURCHASING SUCH SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE BANK AND THE HOLDING COMPANY. The Holding Company and the Bank will make reasonable attempts to provide a prospectus and related offering materials to holders of subscription rights. However, the Subscription Offering and all subscription rights under the Plan of Conversion will expire at 12:00 Noon, Eastern Standard Time, on the Expiration Date, whether or not the Bank has been able to locate each person entitled to such subscription rights. ORDERS FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING RECEIVED IN HAND BY THE BANK AFTER THE EXPIRATION DATE WILL NOT BE ACCEPTED. The Subscription Offering may be extended by the Holding Company and the Bank up to _________, 1998 without the OTS's approval. OTS regulations require that the Holding Company complete the sale of common stock within 45 days after the close of the Subscription Offering, unless extended by the OTS. If the Direct Community Offering and the Syndicated Community Offerings are not completed within such period all funds received will be promptly returned with interest at the Bank's passbook rate and all withdrawal authorizations will be canceled. If regulatory approval of an extension of the time period has been granted, all subscribers will be notified of such extension and of the duration of any extension that has been granted, and will be given the right to increase, decrease or rescind their orders. If an affirmative response to any resolicitation is not received by the Holding Company from a subscriber, the subscriber's order will be rescinded and all funds received will be promptly returned with interest (or withdrawal authorizations will be canceled). No single extension can exceed 90 days. DIRECT COMMUNITY OFFERING. Concurrently with the Subscription Offering, the common stock will be offered by the Holding Company to certain members of the general public in a Direct Community Offering, with preference given first to the Bank's public stockholders as of the close of business on the Voting Record Date (who are not eligible to subscribe for shares of common stock in the Subscription Offering) and then to natural persons and trusts of natural persons residing in the Local Community. Purchasers in the Direct Community Offering are eligible to purchase up to 25,000 shares of common stock. In the event an insufficient number of shares are available to fill orders in the Direct Community Offering, the available shares will be allocated on a pro rata basis determined by the amount of the respective orders. The Direct Community Offering will terminate at 12:00 Noon, Eastern Standard Time, on the Expiration Date, unless extended by the Holding Company and the Bank, with approval of the OTS if necessary. If 84 regulatory approval of an extension beyond 45 days after the close of the Subscription Offering has been granted, all subscribers will be notified of such extension and of the duration of any extension that has been granted, and will be given the right to increase, decrease or rescind their orders. If an affirmative response to any resolicitation is not received by the Holding Company from a subscriber, the subscriber's order will be rescinded and all funds received will be promptly returned with interest. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE DIRECT COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE HOLDING COMPANY AND THE BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. IF AN ORDER IS REJECTED IN PART, THE PURCHASER DOES NOT HAVE THE RIGHT TO CANCEL THE REMAINDER OF THE ORDER. THE HOLDING COMPANY PRESENTLY INTENDS TO TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR ALL SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION. If all of the common stock offered in the Subscription Offering is subscribed for, no common stock will be available for purchase in the Direct Community Offering and all funds submitted pursuant to the Direct Community Offering will be promptly refunded with interest. SYNDICATED COMMUNITY OFFERING. The Plan of Conversion provides that, if necessary, all shares of common stock not purchased in the Subscription Offering and Direct Community Offering, if any, may be offered for sale to certain members of the general public in a Syndicated Community Offering through a syndicate of registered broker-dealers to be formed and managed by Webb acting as agent of the Holding Company. THE HOLDING COMPANY AND THE BANK HAVE THE RIGHT TO REJECT ORDERS, IN WHOLE OR IN PART, IN THEIR SOLE DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Webb nor any registered broker-dealer shall have any obligation to take or purchase any shares of the common stock in the Syndicated Community Offering; however, Webb has agreed to use its best efforts in the sale of shares in the Syndicated Community Offering. Shares of common stock sold in the Syndicated Community Offering also will be sold at the $10.00 purchase price. See "-- Stock Pricing, Exchange Ratio and Number of Shares to be Issued." No person will be permitted to subscribe for more than 25,000 shares of common stock in the Syndicated Community Offering. See "-- Plan of Distribution and Selling Commissions" for a description of the commission to be paid to the selected dealers and to Webb. Webb may enter into agreements with selected dealers to assist in the sale of shares in the Syndicated Community Offering. During the Syndicated Community Offering, selected dealers may only solicit indications of interest from their customers to place orders with the Holding Company as of a certain date ("Order Date") for the purchase of shares of common stock. When and if Webb and the Holding Company believe that enough indications of interest and orders have been received in the Subscription Offering, the Direct Community Offering and the Syndicated Community Offering to consummate the conversion, Webb will request, as of the Order Date, selected dealers to submit orders to purchase shares for which they have received indications of interest from their customers. Selected dealers will send confirmations to such customers on the next business day after the Order Date. Selected dealers may debit the accounts of their customers on a date which will be three business days from the Order Date ("Settlement Date"). Customers who authorize selected dealers to debit their brokerage accounts are required to have the funds for payment in their account on but not before the Settlement Date. On the Settlement Date, selected dealers will remit funds to the account that the Holding Company established for each selected dealer. Each customer's funds so forwarded to the Holding Company, along with all other accounts held in the same title, will be insured by the FDIC up to the applicable $100,000 legal limit. After payment has been received by the Holding Company from selected dealers, funds will earn interest at the Bank's passbook rate until the completion of this offering. At the completion of the conversion, the funds received in this offering will be used to purchase the shares of common stock ordered. The shares issued in the conversion cannot and will not be insured by the FDIC or any other government agency. In the event the conversion is not consummated as described above, funds with interest will be returned promptly to the selected dealers, who, in turn, will promptly credit their customers' brokerage accounts. The Syndicated Community Offering may terminate no more than 45 days after the close of the Subscription Offering, unless extended by the Holding Company and the Bank, with approval of the OTS. 85 In the event the Bank is unable to find purchasers from the general public for all unsubscribed shares, other purchase arrangements will be made by the Board of Directors of the Bank, if feasible. Such other arrangements will be subject to the approval of the OTS. The OTS may grant one or more extensions of this offering period, provided that (i) no single extension exceeds 90 days, (ii) subscribers are given the right to increase, decrease or rescind their subscriptions during the extension period, and (iii) the extensions do not go more than two years beyond the date on which the members of the MHC approved the Plan of Conversion. If the conversion is not completed within 45 days after the close of the Subscription Offering, either all funds received will be returned with interest (and withdrawal authorizations canceled) or, if the OTS has granted an extension of time, all subscribers will be given the right to increase, decrease or rescind their subscriptions at any time prior to 20 days before the end of the extension period. If an extension of time is obtained, all subscribers will be notified of such extension and of their rights to modify their orders. If an affirmative response to any resolicitation is not received by the Holding Company from a subscriber, the subscriber's order will be rescinded and all funds received will be promptly returned with interest (or withdrawal authorizations will be canceled). If purchasers cannot be found for an insignificant residue of unsubscribed shares from the general public, other purchase arrangements will be made by the Boards of Directors of the Bank and the Holding Company, if possible. Such other purchase arrangements will be subject to the approval of the OTS and may provide for purchases for investment purposes by directors, officers, their associates and other persons in excess of the limitations provided in the Plan of Conversion and in excess of the proposed director purchases set forth herein, although no such purchases are currently intended. If such other purchase arrangements cannot be made, the Plan of Conversion will terminate. PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Bank will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the Plan of Conversion reside. However, the Holding Company and the Bank are not required to offer stock in the Subscription Offering to any person who resides in a foreign country or resides in a state of the United States if (i) a small number of persons otherwise eligible to subscribe for shares of common stock reside in such state or (ii) the Holding Company or the Bank determines that compliance with the securities laws of such state would be impracticable for reasons of cost or otherwise, including but not limited to a request or requirement that the Holding Company and the Bank or their officers, directors or trustees register as a broker, dealer, salesman or selling agent, under the securities laws of such state, or a request or requirement to register or otherwise qualify the subscription rights or common stock for sale or submit any filing with respect thereto in such state. Where the number of persons eligible to subscribe for shares in one state is small, the Holding Company and the Bank will base their decision as to whether or not to offer the common stock in such state on a number of factors, including the size of accounts held by account holders in the state, the cost of reviewing the registration and qualification requirements of the state (and of actually registering or qualifying the shares) or the need to register the Holding Company, its officers, directors or employees as brokers, dealers or salesmen. PLAN OF DISTRIBUTION AND SELLING COMMISSIONS The Holding Company and the Bank have retained Webb to consult with and to advise the Bank and the Holding Company, and to assist the Holding Company on a best efforts basis, in the distribution of the common stock in the Subscription Offering and Direct Community Offering. The services that Webb will provide include, but are not limited to (i) training the employees of the Bank who will perform certain ministerial functions in the Subscription Offering and the Direct Community Offering regarding the mechanics and regulatory requirements of the stock offering process, (ii) managing the Bank's stock information center by assisting interested stock subscribers and by keeping records of all stock orders, (iii) preparing marketing materials, and (iv) assisting in the solicitation of proxies from the MHC's members and the stockholders of the Bank. For its services, Webb will receive a management fee of $25,000 and a success fee of 1.5% of the aggregate purchase price of the shares sold in the Subscription Offering and the Direct Community Offering, excluding shares purchased by the ESOP and officers, directors and employees of the Bank, or members of their immediate families. The management fee will be applied to the success fee. If selected broker-dealers are used to assist in the sale of the common stock in the Syndicated Community Offering, Webb will be paid a fee of 86 up to 5.5% of the aggregate purchase price of the shares sold by such broker- dealers and Webb will pay to such broker-dealers an amount competitive with gross underwriting commissions then charged for comparable amounts of stock sold at a comparable price per share in a similar market environment. The Holding Company and the Bank have agreed to reimburse Webb for its out-of-pocket expenses up to $5,000 and its legal fees and expenses up to $30,000. The Holding Company and the Bank have also agreed to indemnify Webb against certain claims and liabilities under the federal securities laws, including those in connection with material misstatements in or omissions from this prospectus or otherwise arising from the use of this prospectus (except for claims and liabilities arising out of Webb's bad faith or gross negligence), and will contribute to payments Webb may be required to make in connection with any such claims or liabilities. DESCRIPTION OF SALES ACTIVITIES The Common Stock will be offered in the Subscription Offering and Direct Community Offering principally by the distribution of this prospectus and through activities conducted at the Bank's stock information center at its main office facility. The stock information center is expected to operate during normal business hours throughout the Subscription Offering and Direct Community Offering. It is expected that at any particular time one or more Webb employees will be working at the stock information center. Stock information center personnel will be responsible for mailing materials relating to the offering, responding to questions regarding the conversion and the offering and processing stock orders. The management and employees of the Holding Company and the Bank may participate in this offering in clerical capacities, providing administrative support in effecting sales transactions or answering questions of a mechanical nature relating to the proper execution of the order form. Management of the Holding Company and the Bank may answer questions regarding the respective businesses of the Holding Company and the Bank. Other questions of prospective purchasers, including questions as to the advisability or nature of the investment, will be directed to registered representatives. The management and employees of the Holding Company and the Bank have been instructed not to solicit offers to purchase common stock or to provide advice regarding the purchase of common stock. None of the employees or directors who participate in this offering will receive any special compensation or other remuneration for such activities. None of the Holding Company and Bank personnel participating in the Subscription and Direct Community Offering are registered or licensed as a broker or dealer or an agent of a broker or dealer. Holding Company and Bank personnel will assist in the above-described sales activities pursuant to an exemption from registration as a broker or dealer provided by Rule 3a4-1 promulgated under the Exchange Act. Rule 3a4-1 generally provides that an "associated person of an issuer" of securities shall not be deemed a broker solely by reason of participation in the sale of securities of such issuer if the associated person meets certain conditions. Such conditions include, but are not limited to, that the associated person participating in the sale of an issuer's securities not be compensated in connection therewith at the time of participation, that such person not be associated with a broker or dealer and that such person observe certain limitations on his participation in the sale of securities. For purposes of this exemption, "associated person of an issuer" is defined to include any person who is a director, officer or employee of the issuer or a company that controls, is controlled by or is under common control with the issuer. PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY OFFERINGS To ensure that each purchaser receives a prospectus at least 48 hours prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the order form will confirm receipt or delivery in accordance with Rule 15c2-8. Order forms will only be distributed with a prospectus. The Bank will accept for processing only orders submitted on original order forms. The Bank will not accept orders submitted on photocopied or telecopied order forms. ORDERS CANNOT AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM. 87 To purchase shares in the Subscription Offering, an executed order form with the required full payment for each share subscribed for, or with appropriate authorization for withdrawal of full payment from the subscriber's deposit account with the Bank (which may be given by completing the appropriate blanks in the order form), must be received by the Bank by 12:00 Noon, Eastern Standard Time, on the Expiration Date. Order forms which are not received by such time or are executed defectively or are received without full payment (or without appropriate withdrawal instructions) are not required to be accepted. The Holding Company and the Bank have the right to waive or permit the correction of incomplete or improperly executed order forms, but do not represent that they will do so. Pursuant to the Plan of Conversion, the interpretation by the Holding Company and the Bank of the terms and conditions of the Plan of Conversion and of the order form will be final. In order to purchase shares in the Direct Community Offering, the order form, accompanied by the required payment for each share subscribed for, must be received by the Bank prior to the time the Direct Community Offering terminates, which is expected to be at 12:00 Noon on the Expiration Date. Once received, an executed order form may not be modified, amended or rescinded without the consent of the Bank unless the conversion has not been completed within 45 days after the end of the Subscription Offering, unless such period has been extended. In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priorities, depositors as of the close of business on the Eligibility Record Date (March 31, 1997) and/or the Supplemental Eligibility Record Date (September 30, 1998) and/or the Voting Record Date (__________, 1998) must list all accounts on the order form giving all names in each account, the account number and the approximate account balance as of such date. Failure to list an account could result in fewer shares being allocated in the event of an oversubscription than if all accounts had been disclosed. Full payment for subscriptions may be made (i) in cash if delivered in person at the Bank's stock information center, (ii) by check, bank draft, or money order, or (iii) by authorization of withdrawal from deposit accounts maintained with the Bank. Appropriate means by which such withdrawals may be authorized are provided on the order form. No wire transfers will be accepted. Interest will be paid on payments made by cash, check, bank draft or money order at the Bank's passbook rate from the date payment is received until the completion or termination of the conversion. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will continue to accrue interest at the contractual rates until completion or termination of the conversion (unless the certificate matures after the date of receipt of the order form but prior to closing, in which case funds will earn interest at the passbook rate from the date of maturity until consummation of the conversion), but a hold will be placed on such funds, thereby making them unavailable to the depositor until completion or termination of the conversion. At the completion of the conversion, the funds received in this offering will be used to purchase the shares of common stock ordered. THE SHARES OF COMMON STOCK ISSUED IN THE CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. If the conversion is not consummated for any reason, all funds submitted will be promptly refunded with interest as described above. If a subscriber authorizes the Bank to withdraw the amount of the aggregate purchase price from his or her deposit account, the Bank will do so as of the effective date of the conversion, though the account must contain the full amount necessary for payment at the time the subscription order is received. The Bank will waive any applicable penalties for early withdrawal from certificate accounts. If the remaining balance in a certificate account is reduced below the applicable minimum balance requirement at the time that the funds actually are transferred under the authorization the certificate will be canceled at the time of the withdrawal, without penalty, and the remaining balance will earn interest at the Bank's passbook rate. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes, but rather may pay for such shares of common stock subscribed for at the $10.00 purchase price upon consummation of the conversion, provided that there is in force from the time of its subscription until such time, a loan commitment from an unrelated financial institution or the Holding Company to lend to the ESOP, at such time, the aggregate purchase price of the shares for which it subscribed. 88 IRAs maintained in the Bank do not permit investment in the common stock. A depositor interested in using his or her IRA funds to purchase common stock must do so through a self-directed IRA. Since the Bank does not offer such accounts, it will allow such a depositor to make a trustee-to-trustee transfer of the IRA funds to a trustee offering a self-directed IRA program with the agreement that such funds will be used to purchase the Holding Company's common stock in the offering. There will be no early withdrawal or IRS interest penalties for such transfers. The new trustee would hold the common stock in a self-directed account in the same manner as the Bank now holds the depositor's IRA funds. An annual administrative fee may be payable to the new trustee. Depositors interested in using funds in a Bank IRA to purchase common stock should contact the stock information center as soon as possible so that the necessary forms may be forwarded for execution and returned prior to the Expiration Date. In addition, the provisions of ERISA and IRS regulations require that officers, directors and 10% shareholders who use self-directed IRA funds to purchase shares of common stock in the Subscription Offering, make such purchases for the exclusive benefit of IRAs. STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED Federal regulations and the Plan of Conversion require that the purchase price of the common stock be based on the appraised pro forma market value of the MHC and the Bank, as converted (i.e., taking into account the expected ---- receipt of proceeds from the sale of securities in the conversion), as determined on the basis of an independent valuation. The Bank has retained Keller & Company to make such valuation. For its services in making such appraisal and any expenses incurred in connection therewith, Keller & Company will receive a fee of $18,000 plus out-of-pocket expenses, together with a fee of $6,000 plus out-of-pocket expenses for the preparation of a business plan and other services performed in connection with the Holding Company's holding company application to the OTS. The Bank has agreed to indemnify Keller & Company and its employees and affiliates against certain losses (including any losses in connection with claims under the federal securities laws) arising out of its services as appraiser, except where Keller & Company's liability results from its negligence or bad faith. The appraisal has been prepared by Keller & Company in reliance upon the information contained in this prospectus, including the Consolidated Financial Statements. Keller & Company also considered the following factors, among others: the present and projected operating results and financial condition of the Holding Company, the Bank and the MHC and the economic and demographic conditions in the Bank's existing market area; certain historical, financial and other information relating to the Bank; a comparative evaluation of the operating and financial statistics of the Bank with those of other similarly situated publicly-traded companies located in Indiana and other regions of the United States; the aggregate size of this offering of the Holding Company's common stock; the impact of the conversion on the Bank's capital and earnings potential; the proposed dividend policy of the Holding Company and the Bank; and the trading market for the Bank common stock and securities of comparable companies and general conditions in the market for such securities. On the basis of the foregoing, Keller & Company has advised the Holding Company, the Bank and the MHC that, in its opinion, as of August 14, 1998 the estimated pro forma market value of the MHC and the Bank, as converted, ranged from $12,750,000 to $17,250,000. Because the Bank's public stockholders will continue to hold approximately the same aggregate percentage ownership interest in the Holding Company as they currently hold in the Bank (before giving effect to the payment of cash to the Bank's public stockholders who exercise and perfect their rights of dissent and appraisal, the payment of cash in lieu of issuing fractional shares, and any shares of common stock purchased in this offering by the Bank's stockholders), the appraisal was multiplied by 50.5%, which represents the MHC's percentage interest in the Bank adjusted upward for assets held by the MHC . The resulting amount represents an offering range of $ to $7,586,250 to $10,263,750. Based on such valuation, the Boards of Directors of the Holding Company and the Bank determined that the shares of common stock would be sold at $10.00 per share, resulting in a range of 758,625 to 1,026,375 shares of common stock being offered and a range of 516,375 to 698,625 shares being issued in exchange for the shares of the Bank's common stock. Upon consummation of the conversion, the shares sold in this offering and the shares issued in exchange for Bank common stock will represent approximately 59.5% and 40.5%, respectively, of the Holding Company's total outstanding shares. The aggregate ownership interest of the Bank's 89 public stockholders was adjusted downward because the OTS determined that a portion of the dividends waived by the MHC are excess and should dilute the public stockholders' ownership interest. The Boards of Directors of the Holding Company, the Bank and the MHC reviewed Keller & Company's appraisal report, including the methodology and the assumptions used by Keller & Company, and determined that the Estimated Valuation Range was reasonable and adequate. The Boards of Directors of the Holding Company, the Bank and the MHC also established the formula for determining the Exchange Ratio. Based upon such formula and the Estimated Valuation Range, the Exchange Ratio will range from a minimum of 2.5504 to a maximum of 3.4505, with a midpoint of 3.0004. Based upon these Exchange Ratios, the Holding Company expects to issue between 516,375 and 698,625 shares of Holding Company common stock to the holders of Bank common stock at the consummation of the conversion. The Estimated Valuation Range and the Exchange Ratio may be amended with the approval of the OTS, if required, or if necessitated by subsequent developments in the financial condition of any of the Holding Company, the Bank and the MHC or market conditions generally. If the appraisal is updated to below $12,750,000 or above $19,837,500 (the maximum of the Estimated Valuation Range, as adjusted by 15%), such appraisal will be filed with the SEC by post-effective amendment. If, upon completion of the Subscription and Direct Community Offerings, at least the minimum number of shares are subscribed for, Keller & Company, after taking into account factors similar to those involved in its prior appraisal, will determine its estimate of the pro forma market value of the Bank and the MHC as converted, as of the close of the Subscription Offering and Direct Community Offering. No sale of the shares will take place unless prior thereto Keller & Company confirms to the OTS that, to the best of Keller & Company's knowledge and judgment, nothing of a material nature has occurred that would cause it to conclude that the actual total purchase price on an aggregate basis was incompatible with its estimate of the total pro forma market value of the Bank and the MHC as converted at the time of the sale. If, however, the facts do not justify such a statement, the offering or other sale may be canceled, a new Estimated Valuation Range and price per share set and new Subscription, Direct Community and Syndicated Community Offerings held. Under such circumstances, subscribers would have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest and holds on funds authorized for withdrawal from deposit accounts would be released or reduced. Depending upon market and financial conditions, the number of shares sold may be more or less than the range in number of shares discussed herein. In the event the total amount of shares sold is less than 758,625 or more than 1,180,331 (15% above the maximum of the Estimated Valuation Range), for aggregate gross proceeds of less than $7,586,250 or more than $11,803,313, subscription funds will be returned promptly with interest to each subscriber unless he indicates otherwise. In the event a new valuation range is established by Keller & Company, such new range will be subject to approval by the OTS. In formulating its appraisal, Keller & Company relied upon the truthfulness, accuracy and completeness of all documents the Bank furnished to it. Keller & Company also considered financial and other information from regulatory agencies, other financial institutions, and other public sources, as appropriate. While Keller & Company believes this information to be reliable, Keller & Company does not guarantee the accuracy or completeness of such information and did not independently verify the financial statements and other data provided by the Bank and the Holding Company or independently value the assets or liabilities of the Bank and the Holding Company. THE APPRAISAL BY KELLER & COMPANY IS NOT INTENDED TO BE, AND MUST NOT BE INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE PLAN OF CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH CHANGE FROM TIME TO TIME, THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH SHARES IN THE CONVERSION WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE PRICE. 90 The appraisal report of Keller & Company has been filed as an exhibit to the Registration Statement and Application for Conversion of which this prospectus is a part and is available for inspection in the manner set forth under "ADDITIONAL INFORMATION." LIMITATIONS ON PURCHASES OF SHARES OF COMMON STOCK The Plan of Conversion provides for certain limitations to be placed upon the purchase of common stock by eligible subscribers and others in the conversion. Each subscriber must subscribe for a minimum of 25 shares of common stock. The Plan of Conversion provides for the following purchase limitations: (i) No person may purchase in either the Subscription Offering, Direct Community Offering or Syndicated Community Offering more than 25,000 shares of common stock; and (ii) The maximum number of shares of common stock which may be subscribed for or purchased in all categories in the conversion by any person, together with any associate or any group of persons acting in concert, when combined with any shares received in exchange for Bank common stock, shall not exceed 62,500 shares. For purposes of the Plan of Conversion, the directors are not deemed to be acting in concert solely by reason of their Board membership. Pro rata reductions within each subscription rights category will be made in allocating shares to the extent that the maximum purchase limitations are exceeded. BECAUSE OTS POLICY REQUIRES THE MAXIMUM PURCHASE LIMITATION TO INCLUDE SHARES TO BE ISSUED TO THE BANK'S PUBLIC STOCKHOLDERS IN EXCHANGE FOR THEIR BANK COMMON STOCK, CERTAIN OF THE BANK'S STOCKHOLDERS MAY BE LIMITED IN THEIR ABILITY TO PURCHASE SHARES IN THIS OFFERING, OR MAY EVEN BE PREVENTED FROM PURCHASING SHARES OF COMMON STOCK. The Boards of Directors of the Bank and the MHC may, in their sole discretion, increase the maximum purchase limitation set forth above up to 9.99% of the shares of common stock sold in the conversion, provided that orders for shares which exceed 5% of the shares of common stock sold in the conversion may not exceed, in the aggregate, 10% of the shares sold in the conversion. The Bank and the MHC do not intend to increase the maximum purchase limitation unless market conditions are such that an increase in the maximum purchase limitation is necessary to sell a number of shares in excess of the minimum of the Estimated Valuation Range. If the Boards of Directors decide to increase the purchase limitation above, persons who subscribed for the maximum number of shares of common stock will be, and other large subscribers in the discretion of the Holding Company and the Bank may be, given the opportunity to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights. The term "acting in concert" is defined in the Plan of Conversion to mean (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. In general, a person who acts in concert with another party shall also be deemed to be acting in concert with any person who is also acting in concert with that other party. The term "associate" of a person is defined in the Plan of Conversion to mean (i) any corporation or organization (other than the Bank or a majority- owned subsidiary of the Bank) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity (excluding tax-qualified employee plans); and (iii) any relative or spouse of such person, 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 91 or any of its parents or subsidiaries. For example, a corporation of which a person serves as an officer would be an associate of such person and, therefore, all shares purchased by such corporation would be included with the number of shares which such person could purchase individually under the above limitations. The term "officer" is defined in the Plan of Conversion to mean an executive officer of the Holding Company, the Bank or the MHC, including its Chief Executive Officer, President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in charge of principal business functions, Secretary and Controller. Shares purchased in the conversion will be freely transferable, except for shares purchased by directors and officers of the Bank and the Holding Company and by NASD members. See "-- Restrictions on Transferability by Directors and Officers and NASD Members." DISSENT AND APPRAISAL RIGHTS The exchange of Bank common stock for Holding Company common stock in the conversion is not mandatory because of dissent and appraisal rights granted to Bank stockholders under OTS regulations. Stockholders of the Bank have dissent and appraisal rights because the Bank's common stock is not listed on the Nasdaq Stock Market. Accordingly, even if the conversion is approved, a Bank stockholder who exercises and perfects his or her dissent and appraisal rights will receive cash for the fair market value of his shares of Bank common stock as determined by regulation, rather than receive shares of Holding Company common stock in exchange therefor as discussed below under "-- Delivery and Exchange of Stock Certificates." A detailed discussion of dissent and appraisal rights and the procedures that must be followed in order to exercise and perfect them is contained in the proxy statement for the Bank's 1998 Annual Meeting of Stockholders at which the Plan of Conversion will be considered. IF YOU INTEND TO EXERCISE AND PERFECT YOUR DISSENT AND APPRAISAL RIGHTS, YOU SHOULD NOT FORWARD CERTIFICATES FOR BANK COMMON STOCK TO THE BANK UNTIL YOU RECEIVE THE BANK'S PROXY STATEMENT AND FOLLOW THE INSTRUCTIONS THEREIN FOR EXERCISING AND PERFECTING YOUR DISSENT AND APPRAISAL RIGHTS. DELIVERY AND EXCHANGE OF STOCK CERTIFICATES SHARES PURCHASED IN THIS OFFERING. Certificates representing shares of Holding Company common stock will be mailed by the Holding Company's transfer agent to the persons entitled thereto at the addresses of such persons appearing on the order form as soon as practicable following the consummation of the conversion. Any undeliverable certificates will be held by the Holding Company until claimed by persons legally entitled thereto or otherwise disposed of according to applicable law. Purchasers of shares of Holding Company common stock may be unable to sell such shares until certificates are available and delivered to them. SHARES ISSUED TO NON-DISSENTING BANK STOCKHOLDERS IN EXCHANGE FOR BANK COMMON STOCK. After the consummation of the conversion, each holder of a certificate(s) theretofore evidencing issued and outstanding shares of Bank common stock (other than the MHC and stockholders who have exercised and perfected dissent and appraisal rights), upon surrender of the same to an agent, duly appointed by the Holding Company, which is anticipated to be the transfer agent for the common stock ("Exchange Agent"), shall be entitled to receive in exchange therefor a certificate(s) representing the number of full shares of Holding Company common stock into which such shares have been converted based on the Exchange Ratio, and cash in lieu of any fractional shares. The Exchange Agent shall mail a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the Exchange Agent) advising such holder of the terms of the exchange offering and the procedure for surrendering to the Exchange Agent such certificates in exchange for a certificate(s) evidencing Holding Company common stock and cash in lieu of any fractional shares. YOU SHOULD NOT FORWARD CERTIFICATES FOR BANK COMMON STOCK TO THE BANK OR THE EXCHANGE AGENT UNTIL YOU HAVE RECEIVED THE TRANSMITTAL LETTER. No holder of a certificate theretofore representing shares of the Bank common stock shall be entitled to receive any dividends on the Holding Company common stock until the certificate representing such shares is surrendered in 92 exchange for certificates representing shares of Holding Company common stock. In the event that dividends are declared and paid by the Holding Company in respect of common stock after the consummation of the conversion, but before surrender of certificates representing shares of Bank common stock, dividends payable in respect of shares of common stock not then issued shall accrue (without interest). Any such dividends shall be paid (without interest) upon surrender of the certificates representing such shares of Bank common stock. After the consummation of the conversion, the Holding Company shall be entitled to treat certificates representing shares of Bank common stock as evidencing ownership of the number of full shares of common stock into which the shares of Bank common stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates. The Holding Company shall not be obligated to deliver a certificate(s) representing shares of common stock to which a holder of Bank common stock would otherwise be entitled as a result of the conversion until such holder surrenders the certificate(s) representing the shares of Bank common stock for exchange as provided above, or, in default thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond as may be required in each case by the Holding Company. If any certificate evidencing shares of common stock is to be issued in a name other than that in which the certificate evidencing Bank common stock surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange pay to the Exchange Agent any transfer or other tax required by reason of the issuance of a certificate for shares of common stock in any name other than that of the registered holder of the certificate surrendered or otherwise establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. RESTRICTIONS ON 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 association's regulatory capital to be reduced below (a) the amount required for the liquidation account or (b) the regulatory capital requirements imposed by the OTS. Repurchases are generally prohibited during the first year following conversion. Upon ten days' written notice to the OTS, and if the OTS does not object, an institution may make open market repurchases of its outstanding common stock during years two and three following the conversion, provided that certain regulatory conditions are met and that the repurchase would not adversely affect the financial condition of the association. Any repurchases of common stock by the Holding Company, therefore, would be subject to these regulatory restrictions unless the OTS would provide otherwise. RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS Shares of common stock purchased in this offering by directors and officers of the Holding Company may not be sold for a period of one year following consummation of the conversion, except in the event of the death of the stockholder or in any exchange of the common stock in connection with a merger or acquisition of the Holding Company. Shares of common stock received by directors or officers through the ESOP or the 1999 MRDP or upon exercise of options issued pursuant to the exercise of stock options or purchased subsequent to the conversion are not subject to this restriction. Accordingly, shares of common stock issued by the Holding Company to directors and officers shall bear a legend giving appropriate notice of the restriction and, in addition, the Holding Company will give appropriate instructions to the transfer agent for the Holding Company's common stock with respect to the restriction on transfers. Any shares issued to directors and officers as a stock dividend, stock split or otherwise with respect to restricted common stock shall be subject to the same restrictions. 93 Purchases of outstanding shares of common stock of the Holding Company by directors, executive officers (or any person who was an executive officer or director of the Bank after adoption of the Plan of Conversion ) and their associates during the three-year period following the conversion may be made only through a broker or dealer registered with the SEC, except with the prior written approval of the OTS. This restriction does not apply, however, to negotiated transactions involving more than 1% of the Holding Company's outstanding common stock or to the purchase of stock pursuant to the exercise of stock options. The Holding Company has filed with the SEC a registration statement under the SECURITIES ACT for the registration of the common stock to be issued pursuant to the conversion. This registration does not cover the resale of such shares. Shares of common stock purchased by persons who are not affiliates of the Holding Company may be resold without registration. Shares purchased by an affiliate of the Holding Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Holding Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Holding Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. Under guidelines of the NASD, members of the NASD and their associates are subject to certain restrictions on the transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of such securities. COMPARISON OF STOCKHOLDERS' RIGHTS As a result of the conversion, stockholders of the Bank will become stockholders of the Holding Company, an Indiana corporation. There are certain differences in stockholder rights arising from distinctions between the Bank's Federal Stock Charter and Bylaws and the Holding Company's Articles of Incorporation and Bylaws and from distinctions between laws with respect to federally chartered savings institutions and Indiana law. The discussion herein is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes the material differences affecting the rights of stockholders. The discussion herein is qualified in its entirety by reference to the Articles of Incorporation and Bylaws of the Holding Company and Indiana law. See "ADDITIONAL INFORMATION" for procedures for obtaining a copy of the Holding Company's Articles of Incorporation and Bylaws. ISSUANCE OF CAPITAL STOCK. Pursuant to applicable laws and regulations, the MHC is required to own not less than a majority of the outstanding Bank common stock. There will be no such restriction applicable to the Holding Company following consummation of the conversion. The Holding Company's Articles of Incorporation do not contain restrictions on the issuance of shares of capital stock to directors, officers or controlling persons of the Holding Company, whereas the Bank's Federal Stock Charter restricts such issuance to general public offerings, or if qualifying shares, to directors, unless the share issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal stockholders' meeting. Therefore, stock-related compensation plans, such as stock option plans, could be adopted by the Holding Company without stockholder approval and shares of Holding Company capital stock could be issued directly to directors or officers without stockholder approval. The Bylaws of the NASD, however, generally require corporations with securities which are quoted on the Nasdaq SmallCap Market to obtain stockholder approval of most stock compensation plans for directors, officers and key employees of the corporation. Moreover, although generally not required, stockholder approval of stock related compensation plans may be sought in certain instances in order to 94 qualify such plans for favorable federal income tax and securities law treatment under current laws and regulations. The Holding Company plans to submit the stock compensation plans discussed herein to its stockholders for approval. VOTING RIGHTS. Neither the Bank's Federal Stock Charter or Bylaws nor the Holding Company's Articles of Incorporation or Bylaws currently provide for cumulative voting in elections of directors. For additional information regarding voting rights, see "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY - -- Anti-takeover Provisions -- Limitation on Voting Rights" below. PAYMENT OF DIVIDENDS. The ability of the Bank to pay dividends on its capital stock is restricted by OTS regulations and by federal income tax considerations related to savings institutions such as the Bank. See "REGULATION -- Federal Regulation of Savings Associations -- Capital Requirements" and "TAXATION." Although the Holding Company is not subject to these restrictions as an Indiana corporation, such restrictions will indirectly affect the Holding Company because dividends from the Bank will be a primary source of funds of the Holding Company for the payment of dividends to stockholders of the Holding Company. Certain restrictions generally imposed on Indiana corporations may also have an impact on the Holding Company's ability to pay dividends. Indiana law generally provides that the Holding Company is permitted to pay cash dividends so long as it is able to pay its debts as they become due in the usual course of business and its assets are greater than the sum of its total liabilities plus the amount that would be needed, if the Holding Company were to be dissolved at the time of the dividend, to satisfy any rights that are preferential to those of the persons receiving the dividend. BOARD OF DIRECTORS. The Bank's Federal Stock Charter and Bylaws and the Holding Company's Articles of Incorporation and Bylaws each require the Board of Directors of the Bank and the Holding Company to be divided into three classes as nearly equal in number as possible and that the members of each class shall be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually. Under the Bank's Bylaws, any vacancies in the Board of Directors of the Bank may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. Persons elected by the directors of the Bank to fill vacancies may only serve until the next annual meeting of stockholders. Under the Holding Company's Articles of Incorporation, any vacancy occurring in the Board of Directors of the Holding Company, including any vacancy created by reason of an increase in the number of directors, may be filled by the remaining directors, and any director so chosen shall hold office for the remainder of the term to which the director has been elected and until his or her successor is elected and qualified. Under the Bank's Bylaws, any director may be removed for cause by the holders of a majority of the outstanding voting shares. The Holding Company's Articles of Incorporation provides that any director may be removed before the expiration of his her her term only for cause and only upon the vote of two- thirds of the outstanding shares of voting stock. In the absence of this provision, the vote of the holders of a majority of the shares could remove one or more directors with or without cause. LIMITATIONS ON LIABILITY. The Holding Company's Articles of Incorporation provides that the directors of the Holding Company shall not be personally liable for monetary damages to the Holding Company for actions as directors, except for liabilities that involve a breach of the director's duty of loyalty to the Holding Company or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or authorization of unlawful payment of dividends or unlawful stock purchase or redemption. This provision might, in certain instances, discourage or deter shareholders or management from bringing a lawsuit against directors for a breach of their duties even though such an action, if successful, might have benefitted the Holding Company. Currently, federal law does not permit federally chartered savings institutions such as the Bank to limit the personal liability of directors in the manner provided by Indiana law and the laws of many other states. 95 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The Bank's Federal Stock Charter and Bylaws do not contain any provision relating to indemnification of directors and officers of the Bank. Under current OTS regulations, however, the Bank will indemnify its directors, officers and employees for any costs incurred in connection with any litigation involving any such person's activities as a director, officer or employee if such person obtains a final judgment on the merits in his or her favor. In addition, indemnification is permitted in the case of a settlement, a final judgment against such person or final judgment other than on the merits, if a majority of disinterested directors determine that such person was acting in good faith within the scope of his or her employment as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interest of the Bank or its stockholders. The Bank also is permitted to pay ongoing expenses incurred by a director, officer or employee if a majority of disinterested directors concludes that such person may ultimately be entitled to indemnification. Before making any indemnification payment, the Bank is required to notify the OTS of its intention and such payment cannot be made if the OTS objects thereto. The officers, directors, agents and employees of the Holding Company are indemnified with respect to certain actions pursuant to the Holding Company's Articles of Incorporation, which complies with Indiana law regarding indemnification. Indiana law allows the Holding Company to indemnify the aforementioned persons for expenses, settlements, judgments and fines in suits in which such person has made a party by reason of the fact that he or she is or was an agent of the Holding Company; provided, however, that such persons acted in good faith and in a manner he reasonably believed, in the case of conduct in his official capacity, was in the best interests of the Holding Company, and in all other cases, was not opposed to the best interests of the Holding Company, and with respect to any criminal action or proceeding, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful. SPECIAL MEETINGS OF STOCKHOLDERS. The Holding Company's Articles of Incorporation provides that special meetings of the stockholders of the Holding Company may be called only by the chairman of the board of directors or by the board of directors pursuant to a resolution adopted by a majority of the total number of directors which the Holding Company would have if there were no vacancies on the board of directors. The Bank's Federal Stock Charter provides that special meetings may be called by the Chairman, President, a majority of the Board of Directors or the holders of not less than a majority of the outstanding capital stock of the Bank entitled to vote at the meeting. STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bank's Bylaws generally provide that stockholders may submit nominations for election as director at an annual meeting of stockholders and any new business to be taken up at such a meeting by filing such in writing with the Bank at least thirty days before the date of any such meeting. The Holding Company's Bylaws generally provide that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must submit written notice to the Holding Company at least 60 days and not more than 90 days in advance of the meeting, together with certain information relating to the nomination or new business. However, if less than 70 days' notice or prior public disclosure of the date of the meeting is given, stockholders must submit such written notice no later than the tenth day following the date on which notice of the meeting is mailed to stockholders or such public disclosure was made. Failure to comply with these advance notice requirements will preclude such nominations or new business from being considered at the meeting. STOCKHOLDER ACTION WITHOUT A MEETING. The Bank's Bylaws provide that any action to be taken or which may be taken at any annual or special meeting of stockholders may be taken if a consent in writing, setting forth the actions so taken, is given by the holders of all outstanding shares entitled to vote. Indiana law also permits stockholders to act without a meeting by unanimous written consent. STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS. A federal regulation which is applicable to the Bank provides that stockholders may inspect and copy specified books and records of a federally chartered savings institution after proper written notice for a proper purpose. Indiana law similarly provides that a stockholder may inspect books 96 and records upon written demand stating the purpose of the inspection, if such demand is made in good faith and for a proper purpose. LIMITATIONS ON ACQUISITIONS OF VOTING STOCK AND VOTING RIGHTS. Neither the Bank's Federal Stock Charter nor Bylaws contains any provision limiting a person's right to directly or indirectly acquire shares of the Bank's capital stock. The Holding Company's Articles of Incorporation provides certain limitations on the ability of a person who owns in excess of 10% of the Holding Company's outstanding shares of common stock to vote shares in excess of such limit. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY -- Anti-takeover Provisions --Limitation on Voting Rights." MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. A federal regulation requires the approval of two-thirds of the Board of Directors of the Bank and the holders of two-thirds of the outstanding stock of the Bank entitled to vote thereon for mergers, consolidations and sales of all or substantially all of the Bank's assets. Such regulation permits the Bank to merge with another corporation without obtaining the approval of its stockholders if: (i) it does not involve an interim savings institution; (ii) the Bank's Federal Stock Charter is not changed; (iii) each share of the Bank's stock outstanding immediately prior to the effective date of the transaction is to be an identical outstanding share or a treasury share of the Bank after such effective date; and (iv) either: (A) no shares of voting stock of the Bank and no securities convertible into such stock are to be issued or delivered under the plan of combination or (B) the authorized unissued shares or the treasury shares of voting stock of the Bank to be issued or delivered under the plan of combination, plus those initially issuable upon conversion of any securities to be issued or delivered under such plan, do not exceed 15% of the total shares of voting stock of the Bank outstanding immediately prior to the effective date of the transaction. The Holding Company's Articles of Incorporation requires the approval of the holders of at least 80% of the Holding Company's outstanding shares of voting stock to approve certain "Business Combinations" (as defined therein) involving a "Related Person" (as defined therein) except in cases where the proposed transaction has been approved in advance by a majority of those members of the Holding Company's Board of Directors who are unaffiliated with the Related Person and were directors prior to the time when the Related Person became a Related Person. Under Indiana law, absent this provision, business combinations, including mergers, consolidations and sales of substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of a majority of the outstanding shares of common stock of the Holding Company and any other affected class of stock. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY -- Anti-takeover Provisions - -- Stockholder Vote Required to Approve Certain Business Combinations." The Holding Company's Articles of Incorporation requires the Holding Company's Board of Directors to consider certain factors in addition to the amount of consideration to be paid when evaluating certain business combinations or a tender or exchange offer. These additional factors include: (i) the social and economic effects of the transaction; (ii) the business and financial condition and earnings prospects of the acquiring person or entity; and (iii) the competence, experience, and integrity of the acquiring person or entity and its management. DISSENTERS' RIGHTS OF APPRAISAL. OTS regulations generally provide that a stockholder of a federally chartered savings institution that engages in a merger, consolidation or sale of all or substantially all of its assets shall have the right to demand from such institution payment of the fair or appraised value of his or her stock in the institution, subject to specified procedural requirements. This regulation also provides, however, that the stockholders of a federally chartered savings institution with stock which is listed on a national securities exchange or quoted on the Nasdaq Stock Market are not entitled to dissenters' rights in connection with a merger involving such savings institution if the stockholder is required to accept only "qualified consideration" for his or her stock, which is defined to include cash, shares of stock of any institution or corporation which at the effective date of the merger will be listed on a national securities exchange or quoted on the Nasdaq National Market or any combination of such shares of stock and cash. Under Indiana law, appraisal rights are available for the shares of any class or series of stock of a corporation that is a party to a merger, consolidation, sale of assets or dissolution. However, stockholders generally will not have 97 appraisal rights if the corporation's stock is listed on a national securities exchange or the Nasdaq National Market or similar market, or if stockholder approval is not required by Indiana law for the corporate action. AMENDMENT OF GOVERNING INSTRUMENTS. No amendment of the Bank's Federal Stock Charter may be made unless it is first proposed by the Board of Directors of the Bank, then preliminarily approved by the OTS, and thereafter approved by the holders of a majority of the total votes eligible to be cast at a legal meeting. The Holding Company's Articles of Incorporation may be amended by the vote of the holders of a majority of the outstanding shares of Holding Company Common stock, except that the provisions of the Articles of Incorporation governing certain matters may not be repealed, altered, amended or rescinded except by the vote of the holders of at least two-thirds of the outstanding shares of the Holding Company. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY -- Anti-takeover Provisions -- Amendment of Articles of Incorporation and Bylaws." The Bylaws of the Bank may be amended by a majority vote of the full Board of Directors of the Bank or by a majority vote of the votes cast by the stockholders of the Bank at any legal meeting. The Holding Company's Bylaws may only be amended by a resolution adopted by a two-thirds majority of the directors then in office. RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY The following discussion is a summary of certain provisions of federal law and regulations and Indiana corporate law, as well as the Articles of Incorporation and Bylaws of the Holding Company, relating to stock ownership and transfers, the Board of Directors and business combinations, all of which may be deemed to have "anti-takeover" effects. The description of these provisions is necessarily general and reference should be made to the actual law and regulations and to the Articles of Incorporation and Bylaws of the Holding Company contained in the Registration Statement filed with the SEC. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these documents. CONVERSION REGULATIONS OTS regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other arrangement to purchase stock or acquiring stock or subscription rights in a converting institution (or its holding company) from another person prior to completion of its conversion. Further, without the prior written approval of the OTS, no person may make such an offer or announcement of an offer to purchase shares or actually acquire shares in the converting institution (or its holding company) for a period of three years from the date of the completion of the conversion if, upon the completion of such offer, announcement or acquisition, that person would become the beneficial owner of more than 10% of the outstanding stock of the institution (or its holding company). The OTS has defined "person" to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to an association (or its holding company) or an underwriter or member of a selling group acting on the converting institution's (or its holding company's) behalf for resale to the general public are excepted. The regulation also provides civil penalties for willful violation or assistance in any such violation of the regulation by any person connected with the management of the converting institution (or its holding company) or who controls more than 10% of the outstanding shares or voting rights of a converting or converted institution (or its holding company). 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. 98 Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the savings association's directors, or a determination by the OTS that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings association's voting stock, if the acquiror also is subject to any one of eight "control factors," constitutes a rebuttable determination of control under the regulations. Such control factors include the acquiror being one of the two largest stockholders. The determination of control may be rebutted by submission to the OTS, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings. The regulations provide that persons or companies which acquire beneficial ownership exceeding 10% or more of any class of a savings association's stock must file with the OTS a certification form that the holder is not in control of such institution, is not subject to a rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the OTS, as applicable. There are also rebuttable presumptions in the regulations concerning whether a group "acting in concert" exists, including presumed action in concert among members of an "immediate family." The OTS may prohibit an acquisition of control if it finds, among other things, that (i) the acquisition would result in a monopoly or substantially lessen competition, (ii) the financial condition of the acquiring person might jeopardize the financial stability of the institution, or (iii) the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. ANTI-TAKEOVER PROVISIONS IN THE HOLDING COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND IN INDIANA LAW A number of provisions of the Holding Company's Articles of Incorporation and Bylaws deal with matters of corporate governance and certain rights of stockholders. The following discussion is a general summary of certain provisions of the Holding Company's Articles of Incorporation and Bylaws and regulatory provisions relating to stock ownership and transfers, the Board of Directors and business combinations, which might be deemed to have a potential "anti-takeover" effect. These provisions may have the effect of discouraging a future takeover attempt which is not approved by the Board of Directors but which individual Holding Company stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the incumbent Board of Directors or management of the Holding Company more difficult. The following description of certain of the provisions of the Articles of Incorporation and Bylaws of the Holding Company is necessarily general and reference should be made in each case to such Articles of Incorporation and Bylaws, which are incorporated herein by reference. See "ADDITIONAL INFORMATION" as to where to obtain a copy of these documents. LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the Holding Company provide that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of common stock ("Limit") be entitled or permitted to any vote in respect of the shares held in excess of the Limit, unless permitted by a resolution adopted by a majority of the board of directors. Beneficial ownership is determined pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act and includes shares beneficially owned by such person or any of his or her affiliates (as defined in the Articles of Incorporation), shares which such person or his or her affiliates have the right to acquire upon the exercise of conversion rights or options and shares as to which such person and his or her affiliates have or share investment or voting power, but shall not include shares beneficially owned by directors, officers and employees of the Bank or Holding Company or shares that are subject to a revocable proxy and that are not otherwise beneficially, or deemed by the Holding Company to be beneficially, owned by such person and his or her affiliates. 99 BOARD OF DIRECTORS. The Board of Directors of the Holding Company is divided into three classes, each of which shall contain approximately one-third of the whole number of the members of the Board. The members of each class shall be elected for a term of three years, with the terms of office of all members of one class expiring each year so that approximately one-third of the total number of directors are elected each year. The Articles of Incorporation provide that any vacancy occurring in the Board, including a vacancy created by an increase in the number of directors, may be filled by a vote of a majority of the directors then in office and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires. The classified Board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the Board of Directors without the consent of the incumbent Board of Directors of the Holding Company. The Articles of Incorporation of the Holding Company provide that a director may be removed from the Board of Directors prior to the expiration of his or her term only for cause and only upon the vote of two-thirds of the outstanding shares of voting stock. In the absence of this provision, the vote of the holders of a majority of the shares could remove one or more directors with or without cause. CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The Articles of Incorporation do not provide for cumulative voting for any purpose. Moreover, the Articles of Incorporation provide that special meetings of stockholders of the Holding Company may be called only by the Chairman of the Board of Directors or by the Board of Directors of the Holding Company. Under Indiana law, action may be taken by shareholders without a meeting only if evidenced by a written consent signed by all shareholders entitled to vote. AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance of 5,000,000 shares of common stock and 1,000,000 shares of preferred stock. The shares of common stock and preferred stock were authorized in an amount greater than that to be issued in the conversion to provide the Holding Company's Board of Directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits, restricted stock grants and the exercise of stock options. However, these additional authorized shares may also be used by the Board of Directors, consistent with fiduciary duties, to deter future attempts to gain control of the Holding Company. The Board of Directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the Board has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a tender offer, merger or other transaction by which a third party seeks control of the Holding Company, and thereby assist members of management to retain their positions. The Holding Company's Board currently has no plans for the issuance of additional shares, other than the issuance of shares of common stock upon exercise of stock options and in connection with the MRDP. STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL STOCKHOLDERS. The Articles of Incorporation require the approval of the holders of at least 80% of the Holding Company's outstanding shares of voting stock to approve certain "Business Combinations" (as defined therein) involving a "Related Person" (as defined therein) except in cases where the proposed transaction has been approved in advance by a majority of those members of the Holding Company's Board of Directors who are unaffiliated with the Related Person and were directors prior to the time when the Related Person became a Related Person. The term "Related Person" is defined to include any individual, corporation, partnership or other entity (other than the Holding Company or its subsidiary) which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Holding Company or an affiliate of such person or entity. This provision of the Articles of Incorporation applies to any "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 100 or a subsidiary of the Holding Company of any securities of a Related Person; (vii) any reclassification of common stock of the Holding Company or any recapitalization involving the common stock of the Holding Company; or (viii) any agreement or other arrangement providing for any of the foregoing. Under Indiana law, absent this provision, business combinations, including mergers, share exchanges and sales of substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of a majority of the outstanding shares of common stock of the Holding Company and any other affected class of stock. The increased stockholder vote required to approve a business combination may have the effect of foreclosing mergers and other business combinations which a majority of stockholders deem desirable and placing the power to prevent such a merger or combination in the hands of a minority of stockholders. AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the Holding Company's Articles of Incorporation must be approved by a two-thirds vote of its Board of Directors and also by a majority of the outstanding shares of its voting stock, provided, however, that an affirmative vote of at least two-thirds of the outstanding voting stock entitled to vote (after giving effect to the provision limiting voting rights) is required to amend or repeal certain provisions of the Articles of Incorporation, including the provision limiting voting rights, the provisions relating to approval of certain business combinations, calling special meetings, the number and classification of directors, director and officer indemnification by the Holding Company and amendment of the Holding Company's Bylaws and Articles of Incorporation. The Holding Company's Bylaws may be amended by a two-thirds vote of its Board of Directors. STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of the Holding Company require a stockholder who intends to nominate a candidate for election to the Board of Directors, or to raise new business at a stockholder meeting to give not less than 60 nor more than 90 days' advance notice to the Secretary of the Holding Company. The notice provision requires a stockholder who desires to raise new business to provide certain information to the Holding Company concerning the nature of the new business, the stockholder and the stockholder's interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide the Holding Company with certain information concerning the nominee and the proposing stockholder. PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS. The Boards of Directors of the Holding Company and the Bank believes that the provisions described above are prudent and will reduce the Holding Company's vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by its Board of Directors. These provisions will also assist the Holding Company and the Bank in the orderly deployment of the conversion proceeds into productive assets during the initial period after the conversion. The Board of Directors believes these provisions are in the best interest of the Bank and Holding Company and its stockholders. In the judgment of the Board of Directors, the Holding Company's Board will be in the best position to determine the true value of the Holding Company and to negotiate more effectively for what may be in the best interests of its stockholders. Accordingly, the Board of Directors believes that it is in the best interest of the Holding Company and its stockholders to encourage potential acquirors to negotiate directly with the Board of Directors of the Holding Company and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of the Holding Company and that is in the best interest of all stockholders. 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. 101 An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Although a tender offer or other takeover attempt may be made at a price substantially above the current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining stockholders. The concentration of control, which could result from a tender offer or other takeover attempt, could also deprive the Holding Company's remaining stockholders of benefits of certain protective provisions of the Exchange Act, if the number of beneficial owners became less than 300, thereby allowing for deregistration under the Exchange Act. Despite the belief of the Bank and the Holding Company as to the benefits to stockholders of these provisions of the Holding Company's Articles of Incorporation and Bylaws, these provisions may also have the effect of discouraging a future takeover attempt that would not be approved by the Holding Company's Board of Directors, but pursuant to which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also render the removal of the Holding Company's Board of Directors and of management more difficult. The Boards of Directors of the Bank and the Holding Company, however, have concluded that the potential benefits outweigh the possible disadvantages. Following the conversion, pursuant to applicable law and, if required, following the approval by stockholders, the Holding Company may adopt additional anti-takeover charter provisions or other devices regarding the acquisition of its equity securities that would be permitted for an Indiana business corporation. The cumulative effect of the restrictions on acquisition of the Holding Company contained in the Articles of Incorporation and Bylaws of the Holding Company and in Federal and Indiana law may be to discourage potential takeover attempts and perpetuate incumbent management, even though certain stockholders of the Holding Company may deem a potential acquisition to be in their best interests, or deem existing management not to be acting in their best interests. DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY GENERAL The Holding Company is authorized to issue 5,000,000 shares of common stock having a par value of $.01 per share and 1,000,000 shares of preferred stock having a par value of $.01 per share. Each share of the Holding Company's common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock, in accordance with the Plan of Conversion, all such stock will be duly authorized, fully paid and nonassessable. THE COMMON STOCK OF THE HOLDING COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. COMMON STOCK DIVIDENDS. The Holding Company can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its Board of Directors. The payment of dividends by the Holding Company is subject to limitations which are imposed by law and applicable regulation. See "DIVIDEND POLICY" and "REGULATION." The holders of common stock of the Holding Company will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors of the Holding Company out of funds legally available therefor. If the Holding Company issues preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends. 102 STOCK REPURCHASES. The Plan of Conversion and OTS regulations place certain limitations on the repurchase of the Holding Company's capital stock. See "THE CONVERSION -- Restrictions on Repurchase of Stock" and "USE OF PROCEEDS." VOTING RIGHTS. The holders of common stock of the Holding Company will possess exclusive voting rights in the Holding Company. They will elect the Holding Company's Board of Directors and act on such other matters as are required to be presented to them under Federal law or as are otherwise presented to them by the Board of Directors. Except as discussed in "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If the Holding Company issues preferred stock, holders of preferred stock may also possess voting rights. Certain matters require a vote of 80% of the outstanding shares entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY." As a federal stock savings bank, corporate powers and control of the Bank are vested in the Board of Directors, who elect the officers of the Bank and who fill any vacancies on the Board of Directors as it exists upon conversion. Subsequent to conversion, voting rights will be vested exclusively in the owners of the shares of capital stock of the Bank, all of which will be owned by the Holding Company, and voted at the direction of the Holding Company's Board of Directors. Consequently, the holders of the Holding Company's common stock will not have direct control of the Bank. LIQUIDATION. In the event of any liquidation, dissolution or winding up of the Bank, the Holding Company, as holder of the Bank's capital stock would be entitled to receive, after payment or provision for payment of all debts and liabilities of the Bank (including all deposit accounts and accrued interest thereon) and after distribution of the balance in the special liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders (see "THE CONVERSION"), all assets of the Bank available for distribution. In the event of liquidation, dissolution or winding up of the Holding Company, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of the Holding Company available for distribution. If the Holding Company issues preferred stock, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution. PREEMPTIVE RIGHTS. Holders of the common stock of the Holding Company will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock is not subject to redemption. PREFERRED STOCK Preferred stock may be issued with such designations, powers, preferences and rights as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. None of the shares of the authorized preferred stock will be issued in the conversion and there are no plans to issue preferred stock. RESTRICTIONS ON ACQUISITION Acquisitions of the Holding Company are restricted by provisions in its Articles of Incorporation and Bylaws and by the rules and regulations of various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY." EFFECT OF RECEIVERSHIP ON THE COMMON STOCK In the event of the receivership of the Bank, the FDIC, as receiver, shall, by operation of law, succeed to, among other things, all the rights, titles, powers and privileges of the Bank and its stockholder, the Holding Company. 103 As provided by the procedures and priorities applicable to receiverships of savings institutions, the holders of the common stock would be entitled to receive any funds remaining after all depositors, creditors, other claimants (other than holders of stock ranking junior to or on a parity with the common stock) and administrative expenses are paid. TRANSFER AGENT AND REGISTRAR Registrar and Transfer Company, Cranford, New Jersey is the transfer agent and registrar for shares of the common stock. REGISTRATION REQUIREMENTS The Holding Company has registered the common stock with the SEC pursuant to Section 12(g) of the Exchange Act and will not deregister its common stock for a period of at least three years following the completion of the conversion. As a result of such registration, the proxy solicitation and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of the Exchange Act will apply. LEGAL AND TAX OPINIONS The legality of the common stock has been passed upon for the Holding Company by Breyer & Aguggia LLP, Washington, D.C. The federal and Indiana tax consequences of the conversion have been opined upon by Breyer & Aguggia LLP and Monroe, Shine & Co., Inc., respectively. Breyer & Aguggia LLP and Monroe Shine & Co., Inc. have consented to the references herein to its opinions. Certain legal matters will be passed upon for Webb by Bose McKinney & Evans, Indianapolis, Indiana. EXPERTS The financial statements of the Bank as of June 30, 1998 and 1997 and for the years then ended have been included herein and in the Registration Statement in reliance upon the report of Monroe Shine & Co., Inc., independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Keller & Company has consented to the publication herein of the summary of its report to the Bank setting forth its opinion as to the estimated pro forma market value of the MHC and the Bank, as converted, and its letter with respect to subscription rights and to the use of its name and statements with respect to it appearing herein. ADDITIONAL INFORMATION The Holding Company has filed with the SEC a Registration Statement on Form SB-2 (File No. 333-_____) under the Securities Act with respect to the common stock offered in the conversion. This prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. You may read and copy such information at the SEC's public reference room in Washington, D.C. You can request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The Registration Statement also is available through the SEC's World Wide Web site on the Internet (http://www.sec.gov). The MHC has filed with the OTS an Application for Approval of Conversion, which includes proxy materials for the special meetings of the members of the MHC and the stockholders of the Bank. This prospectus omits certain information contained in such Application. The Application, including the proxy materials, exhibits and certain other information that are a part thereof, may be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W., 104 Washington, D.C. 20552 and at the office of the Regional Director of the OTS at the OTS Central Regional Office, Madison Plaza, 200 West Madison Street, Suite 1300, Chicago, Illinois 60606. 105 INDEX TO FINANCIAL STATEMENTS FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK
Page ---- Independent Auditors' Report................................................... F-1 Balance Sheets as of June 30, 1998 and 1997.................................... F-2 Statements of Income for the Years Ended June 30, 1998 and 1997................ 30 Statements of Stockholders' Equity for the Years Ended June 30, 1998 and 1997.. F-3 Statements of Cash Flows for the Years Ended June 30, 1998 and 1997............ F-4 Notes to Financial Statements.................................................. F-6
* * * All schedules are omitted as the required information either is not applicable or is included in the Financial Statements or related Notes. Separate financial statements for the MHC have not been included herein because the MHC has no material assets other than shares of Bank common stock (which will be canceled as part of the conversion) and no significant liabilities (contingent or otherwise), revenues or expenses, and has not engaged in any significant activities to date. Separate financial statements for the Holding Company have not been included herein because the Holding Company, which has engaged in only organizational activities to date, has no significant assets, liabilities (contingent or otherwise), revenues or expenses. 106 [LETTERHEAD OF MONROE SHINE & CO., INC. APPEARS HERE] INDEPENDENT AUDITOR'S REPORT The Board of Directors FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK Corydon, Indiana We have audited the accompanying balance sheets of FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK as of June 30, 1998 and 1997, and the related statements of income, stockholders' equity and cash flows for years then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK as of June 30, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Monroe Shine & Co., Inc. July 22, 1998 F-1 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK BALANCE SHEETS JUNE 30, 1998 AND 1997
1998 1997 ---- ---- ASSETS Cash and due from banks $ 894,657 $ 1,244,687 Interest bearing deposits with banks 5,239,904 3,794,547 Securities available for sale, at fair value 4,848,534 3,684,479 Securities held to maturity: Mortgage-backed securities (fair value $1,462,917; 1997 $2,024,833) 1,472,972 2,044,598 Other debt securities (fair value $1,573,450; 1997 $3,981,996) 1,580,000 4,023,176 Loans receivable, net of allowance for loan losses of $515,959 in 1998 and $518,645 in 1997 74,887,358 69,908,541 Federal Home Loan Bank stock, at cost 588,800 559,100 Foreclosed real estate 103,874 - Premises and equipment 2,600,772 2,440,792 Accrued interest receivable: Loans 432,274 412,296 Mortgage-backed securities 11,681 17,272 Other debt securities 88,244 110,137 Cash value of life insurance 1,038,340 992,196 Other assets 170,653 140,133 ----------- ----------- TOTAL ASSETS $93,958,063 $89,371,954 =========== =========== LIABILITIES Deposits: Non-interest bearing demand deposits $ 3,146,552 $ 1,979,937 Savings and interest bearing demand deposits 26,593,058 21,020,171 Time deposits 47,722,424 47,756,201 ----------- ----------- Total deposits 77,462,034 70,756,309 Advances from Federal Home Loan Bank 5,250,000 8,250,000 Advance payments by borrowers for taxes and insurance 33,722 35,173 Accrued interest payable on deposits 372,845 207,493 Accrued expenses and other liabilities 498,527 630,467 ----------- ----------- Total Liabilities 83,617,128 79,879,442 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock of $1 par value per share Authorized 1,000,000 shares; none issued - - Common stock of $1 par value per share Authorized 4,000,000 shares; issued 504,015 shares (1997; 502,490 shares) 504,015 502,490 Additional paid-in capital 1,663,281 1,643,046 Retained earnings-substantially restricted 8,170,645 7,354,737 Unrealized gain (loss) on securities available for sale, net of tax of $1,964; 1997 ($5,090) 2,994 (7,761) ----------- ----------- Total Stockholders' Equity 10,340,935 9,492,512 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $93,958,063 $89,371,954 =========== ===========
See notes to financial statements. F-2 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1998 AND 1997
NET UNREALIZED GAIN (LOSS) ON ADDITIONAL SECURITIES COMMON PAID-IN RETAINED AVAILABLE STOCK CAPITAL EARNINGS FOR SALE TOTAL Balances at July 1, 1996 $501,000 $1,623,696 $6,690,533 $(10,459) $ 8,804,770 Net income - - 805,686 - 805,686 Exercise of stock options 1,490 19,350 - - 20,840 Dividends to minority stockholders ($.70 per share) - - (141,482) - (141,482) Net change in unrealized loss on securities available for sale - - - 2,698 2,698 --------- ----------- ---------- --------- ----------- Balances at June 30, 1997 502,490 1,643,046 7,354,737 (7,761) 9,492,512 Net income - - 958,452 - 958,452 Exercise of stock options 1,525 20,235 - - 21,760 Dividends to minority stockholders ($.70 per share) - - (142,544) - (142,544) Net change in unrealized loss on securities available for sale - - - 10,755 10,755 --------- ----------- ---------- --------- ----------- Balances at June 30, 1998 $504,015 $1,663,281 $8,170,645 $ 2,994 $10,340,935 ========= =========== ========== ========= ===========
See notes to financial statements. F-3 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 958,452 $ 805,686 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of premises and equipment (169,087) - Amortization of premium on securities 12,228 12,297 Depreciation expense 174,935 102,494 Deferred income taxes (9,321) (187,647) (Increase) decrease in accrued interest receivable 7,506 (77,768) Increase in accrued interest payable 165,352 130,851 Net change in other assets/liabilities (162,280) 343,371 ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 977,785 1,129,284 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits in banks (1,445,357) 194,221 Purchase of securities available for sale (4,146,245) (3,044,589) Proceeds from maturities of securities available for sale 3,000,000 1,500,000 Proceeds from maturities of securities held to maturity 2,440,000 1,240,000 Principal collected on mortgage-backed securities 562,574 492,762 Net increase in loans receivable (5,082,056) (6,492,913) Purchase of Federal Home Loan Bank stock (29,700) (38,100) Proceeds from sale of premises and equipment 425,000 - Purchase of premises and equipment (590,828) (1,989,294) Increase in cash value of life insurance (46,144) (45,849) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (4,912,756) (8,183,762) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand and savings deposits 6,739,502 (756,029) Net increase (decrease) in time deposits (33,777) 3,280,299 Advances from Federal Home Loan Bank 8,500,000 10,000,000 Repayment of advances from Federal Home Loan Bank (11,500,000) (5,500,000) Exercise of stock options 21,760 20,840 Dividends paid (142,544) (141,482) ------------ ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 3,584,941 6,903,628 ------------ ----------- NET DECREASE IN CASH AND DUE FROM BANKS (350,030) (150,850) Cash and due from banks at beginning of year 1,244,687 1,395,537 ------------ ----------- CASH AND DUE FROM BANKS AT END OF YEAR $ 894,657 $ 1,244,687 ============ ===========
F-4 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS First Federal Bank, a Federal Savings Bank (the Bank) is a federal savings bank which provides a variety of banking services to individuals and business customers through two offices in Corydon, Indiana. The Bank's primary source of revenue is single-family residential loans. BASIS OF PRESENTATION The Bank is a majority owned subsidiary of First Capital, Inc., M.H.C., a federally chartered mutual holding company. The financial statements include only the accounts of the Bank. The financial statements have been prepared in accordance with generally accepted accounting principles and conform to general practices within the banking industry. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet caption "Cash and due from banks." RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate. In connection with the determination of estimated losses on loan and foreclosed real estate, management obtains appraisals for significant properties. SECURITIES AVAILABLE FOR SALE Securities available for sale consist of debt and equity securities and are stated at fair value. Amortization of premium and accretion of discount are recognized in interest income using the interest method over the remaining period to maturity, adjusted for anticipated prepayments. Unrealized gains and losses, net of tax, on securities available for sale are reported as a separate component of stockholders' equity until realized. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method. F-5 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (1 - continued) SECURITIES HELD TO MATURITY Debt securities for which the Bank has the positive intent and ability to hold to maturity are carried at cost, adjusted for amortization of premium and accretion of discount using the interest method over the remaining period to maturity, adjusted for anticipated prepayments. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. LOANS Loans receivable are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Bank's real estate loan portfolio consists primarily of long-term loans, collateralized by first mortgages on single-family residences and multi-family residential properties located in the southern Indiana area and commercial real estate loans. In addition to real estate loans, the Bank makes commercial loans and consumer loans. Loan origination fees and certain direct costs of underwriting and closing loans are deferred and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans using the interest method. The accrual of interest is discontinued on a loan when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. The Bank does not accrue interest on loans past due 90 days or more except when the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. Subsequent receipts on nonaccrual loans, including specific impaired loans are recorded as a reduction of principal, and interest income is only recorded once principal recovery is reasonably assured. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. F-6 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (1 - continued) FORECLOSED REAL ESTATE Foreclosed real estate is carried at the lower of fair value minus estimated costs to sell or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non- interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net expense from operations of foreclosed real estate held for sale is reported in non-interest expense. PREMISES AND EQUIPMENT The Bank uses the straight line and accelerated methods of computing depreciation at rates adequate to amortize the cost of the applicable assets over their useful lives. Items capitalized as part of premises and equipment are valued at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings. INCOME TAXES Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available for sale securities, allowance for loan losses, accumulated depreciation and accrued income and expenses for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. STOCK-BASED COMPENSATION The Bank applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation plan. Accordingly, no compensation costs are charged to earnings for the incentive stock options granted under the Bank's stock- based compensation plan. ADVERTISING Advertising costs are charged to operations when incurred. NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings based on a control-oriented "financial-components" approach. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The provisions of SFAS No. 125 are effective for transactions occurring after December 31, 1996, except those provisions relating to repurchase agreements, securities lending, and other similar transactions and pledged collateral, which have been delayed until after December 31, 1997 by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125. The adoption of these statements has no material impact on financial position or results of operations. F-7 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (1 - continued) Effective June 30, 1998, the Bank adopted SFAS No. 128, Earnings Per Share. The Statement specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. All reported prior period earnings per share information has been restated in accordance with SFAS No. 128. (2) DEBT AND EQUITY SECURITIES Debt and equity securities have been classified in the balance sheets according to management's intent. The Bank's investment in securities at June 30, 1998 and 1997 is summarized as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE JUNE 30, 1998: Securities available for sale: Mutual fund $ 843,576 $3,395 $ - $ 846,971 Federal agency debt securities 4,000,000 1,563 - 4,001,563 ---------- ------ ------- ---------- Total securities available for sale $4,843,576 $4,958 $ - $4,848,534 ========== ====== ======= ========== Securities held to maturity: Mortgage-backed securities: FHLMC certificates $ 683,762 $6,378 $ 2,012 $ 688,128 GNMA certificates 371,297 - 7,068 364,229 FNMA certificates 417,913 2,273 9,626 410,560 ---------- ------ ------- ---------- 1,472,972 8,651 18,706 1,462,917 ---------- ------ ------- ---------- Other debt securities: Federal agency 1,500,000 - 6,562 1,493,438 Municipal 80,000 12 - 80,012 ---------- ------ ------- ---------- 1,580,000 12 6,562 1,573,450 ---------- ------ ------- ---------- Total securities held to maturity $3,052,972 $8,663 $25,268 $3,036,367 ========== ====== ======= ==========
F-8 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (2 - continued)
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE JUNE 30, 1997: Securities available for sale: Mutual fund $ 697,331 $ - $ 8,164 $ 689,167 Federal agency debt securities 3,000,000 3,125 7,813 2,995,312 ---------- ------- ------- ---------- Total securities available for sale $3,697,331 $ 3,125 $15,977 $3,684,479 ========== ======= ======= ========== Securities held to maturity: Mortgage-backed securities: FHLMC certificates $1,124,979 $14,067 $ 9,542 $1,129,504 GNMA certificates 459,570 - 15,641 443,929 FNMA certificates 460,049 1,964 10,613 451,400 ---------- ------- ------- ---------- 2,044,598 16,031 35,796 2,024,833 ---------- ------- ------- ---------- Other debt securities: Federal agency 3,582,880 - 39,707 3,543,173 Municipal 440,296 - 1,473 438,823 ---------- ------- ------- ---------- 4,023,176 - 41,180 3,981,996 ---------- ------- ------- ---------- Total securities held to maturity $6,067,774 $16,031 $76,976 $6,006,829 ========== ======= ======= ==========
The amortized cost and fair value of debt securities as of June 30, 1998, by contractual maturity, are shown below. Expected maturities of mortgage- backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.
SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE Due in one year or less $ - $ - $1,580,000 $1,573,450 Due after ten years 4,000,000 4,001,563 - - ---------- ---------- ---------- ------------ 4,000,000 4,001,563 1,580,000 1,573,450 Mortgage-backed securities - - 1,472,972 1,462,917 ---------- ---------- ---------- ------------ $4,000,000 $4,001,563 $3,052,972 $3,036,367 ========== ========== ========== ============
Certain debt securities were pledged to secure advances from the Federal Home Loan Bank at June 30, 1998. (See Note 6) F-9 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (3) LOANS Loans receivable at June 30, 1998 and 1997 consisted of the following:
1998 1997 ---- ---- Real estate mortgage loans: Residential $57,825,501 $52,980,499 Land 217,720 269,642 Residential construction 3,786,787 4,351,835 Commercial real estate 4,370,446 2,687,234 Commercial business loans 5,048,291 6,083,187 Consumer loans: Home equity and second mortgage loans 777,649 951,619 Automobile loans 1,574,208 1,418,620 Loans secured by savings accounts 465,613 399,421 Other consumer loans 3,479,984 4,090,810 ----------- ----------- Gross loans receivable 77,546,199 73,232,867 ----------- ----------- Less: Deferred loan origination fees, net 210,572 211,383 Undisbursed portion of loans in process 1,932,310 2,594,298 Allowance for loan losses 515,959 518,645 ----------- ----------- 2,658,841 3,324,326 ----------- ----------- Loans receivable, net $74,887,358 $69,908,541 =========== ===========
An analysis of the allowance for loan losses is as follows:
1998 1997 ---- ---- Beginning balances $ 518,645 $ 522,000 Provision - - Loans charged-off (2,686) (3,355) ----------- ----------- Ending balances $ 515,959 $ 518,645 =========== ===========
At June 30, 1998 and 1997, the Bank had loans amounting to $79,343 and $109,132, respectively, that were specifically classified as impaired. The average recorded investment in impaired loans amounted to $92,291 and $180,627 for 1998 and 1997, respectively. The allowance for loan losses related to impaired loans amounted to $54,566 at June 30, 1998 and 1997. There was no interest income recognized on impaired loans during 1998 and 1997, respectively. F-10 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (3 - continued) The Bank has entered into loan transactions with certain directors, officers and their affiliates (related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than normal risk of collectibility or present other unfavorable features. The following table represents the aggregate activity for related party loans which exceeded $60,000 in total: Balance-July 1, 1997 $2,475,934 Adjustments 341,710 New loans 724,507 Payments (307,955) ---------- Balance-June 30, 1998 $3,234,196 ==========
The Bank has purchased commercial paper from a corporation where a director is considered a related party. In the opinion of management, these transactions were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties. (4) PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
1998 1997 ---- ---- Land and land improvements $ 379,547 $ 418,799 Leasehold improvements 46,847 46,847 Office building 1,729,512 408,135 Furniture, fixtures and equipment 941,544 758,241 Automobile 18,894 18,894 Construction in progress - 1,364,759 ---------- ---------- 3,116,344 3,015,675 Less accumulated depreciation 515,572 574,883 ---------- ---------- Totals $2,600,772 $2,440,792 ========== ==========
Gross rental income and expense were as follows:
1998 1997 ---- ---- Gross rental income $ 1,440 $ 11,698 Gross rental expenses 228 2,503 ---------- ---------- Net $ 1,212 $ 9,195 ========== ==========
F-11 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (5) DEPOSITS The aggregate amount of time deposit accounts with balances of $100,000 or more was approximately $11,002,000 and $11,050,000 at June 30, 1998 and 1997, respectively. At June 30, 1998, scheduled maturities of time deposits were as follows:
Year ending June 30: 1999 $19,578,731 2000 12,964,385 2001 7,562,008 2002 2,645,401 2003 and thereafter 4,971,899 ----------- Total $47,722,424 ===========
The Bank held deposits of approximately $1,469,000 and $1,067,000 for related parties at June 30, 1998 and 1997, respectively. Deposit account balances in excess of $100,000 are not federally insured. Interest expense on deposits is summarized as follows:
1998 1997 ----------- ----------- Savings and demand deposits $ 944,007 $ 846,453 Time deposits 2,864,310 2,708,043 ---------- ---------- $3,808,317 $3,554,496 ========== ==========
(6) ADVANCES FROM FEDERAL HOME LOAN BANK At June 30, 1998 and 1997, advances from the Federal Home Loan Bank were as follows:
1998 1997 ---- ---- Weighted Weighted Average Average Rate Amount Rate Amount Fixed rate advances maturing during the year ending June 30: 1998 - $ - 5.58% $7,500,000 1999 5.17% 4,500,000 - - 2002 7.75% 750,000 7.75% 750,000 ------------- ----------- $5,250,000 $8,250,000 ============= ===========
The advances are secured under a blanket collateral agreement. At June 30, 1998, eligible collateral included conventional mortgage loans with a carrying value of $53,059,703 and debt securities with a carrying value of $6,948,082 which were pledged as security for the advances. F-12 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (7) LEASE COMMITMENT On April 1, 1997, the Bank entered into a noncancellable sub-lease agreement for a branch office for an initial lease term of eight years. The future minimum annual rental payments required under this operating lease total $12,690. The sub-lessor has a fixed term lease with the owner with an initial term expiring November 30, 2003. (8) INCOME TAXES The components of income tax expense were as follows:
1998 1997 ------------ ------------ Current $ 598,536 $ 319,145 Deferred (9,321) (187,647) --------- --------- Totals $ 589,215 $ 131,498 ========= =========
Significant components of the Bank's deferred tax assets and liabilities as of June 30, 1998 and 1997 was as follows:
1998 1997 --------- --------- Deferred tax (assets) liabilities: Depreciation $ 65,634 $ 65,436 Deferred loan fees 26,446 20,134 Deferred compensation plans (127,170) (110,274) Allowance for loan losses (204,371) (205,436) Post-1987 bad debt deduction 171,797 171,797 Unrealized loss on securities available for sale 1,964 (5,090) --------- --------- Net deferred tax asset $ (65,700) $ (63,433) ========= =========
The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34 percent follows:
1998 1997 ---------- ---------- Provision at federal statutory tax rate $526,207 $ 318,643 State income tax-net of federal tax benefit 83,515 22,109 Tax exempt interest income (8,813) (16,230) Tax effect of change in tax law related to the allowance for loan losses and bad debt deduction - (177,480) Increase in cash value of life insurance (15,689) (15,589) Other 3,995 45 -------- --------- Totals $589,215 $ 131,498 ======== ========= EFFECTIVE TAX RATE 38.1% 14.0% ======== =========
F-13 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (8 - continued) Prior to July 1, 1996, the Bank was permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a statutory bad debt reserve subject to certain limitations. Retained earnings at June 30, 1998 includes approximately $909,000 of cumulative deductions for which no deferred federal income tax liability has been recorded. Reduction of these reserves for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes subject to the then current corporate income tax rate. The unrecorded deferred liability on these amounts was approximately $309,000 at June 30, 1998. Recently enacted federal legislation repealed the reserve method of accounting for bad debts by qualified thrift institutions for tax years beginning after December 31, 1995. As a result, the Bank will no longer be able to calculate the annual addition to the statutory bad debt reserve using the percentage-of-taxable-income method. Instead, the Bank will be required to compute its federal tax bad debt deduction based on actual loss experience over a period of years. The legislation requires the Bank to recapture into taxable income over a six-year period its post-1987 additions to the statutory bad debt reserve, thereby generating additional tax liability. At June 30, 1998, the remaining balance of the post-1987 reserves totaled $505,284 for which a deferred tax liability of $171,797 has been recorded. The legislation also provides that the Bank will not be required to recapture its pre-1988 statutory bad debt reserves if it ceases to meet the qualifying thrift definitional tests and if the Bank continues to qualify as a "bank" under existing provisions of the Internal Revenue Code. (9) RETIREMENT PLAN The Bank has a qualified contributory defined contribution plan available to all eligible employees. The plan allows participating employees to make tax-deferred contributions under Internal Revenue Code Section 401(k). The Bank contributed $24,991 and $22,989 to the plan for 1998 and 1997, respectively. (10) DEFERRED COMPENSATION PLANS The Bank has a deferred compensation plan whereby certain officers will be provided specific amounts of income for a period of fifteen years following normal retirement. The benefits under the agreements become fully vested after four years of service beginning with the effective date of the agreements. The Bank accrues the present value of the benefits so the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 1997 and 2022. The Bank is the owner and beneficiary of insurance policies on the lives of these officers which may provide funds for a portion of the required payments. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of employment or death. At June 30, 1998 and 1997, the accrued deferred compensation liability amounted to $206,209 and $177,171, respectively. The Bank also has a directors' deferred compensation plan whereby a director defers into a retirement account a portion of his monthly director fees for a specified period to provide a specified amount of income for a period of fifteen years following normal retirement. The Bank also accrues the interest cost on the deferred obligation so the amounts required will be provided at the normal retirement dates and thereafter. F-14 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (10 - continued) Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 1995 and 2037. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of service or death. At June 30, 1998 and 1997, the accrued deferred compensation liability for this plan amounted to $94,845 and $82,552, respectively. (11) STOCK-BASED COMPENSATION PLAN The Bank has an incentive stock option plan that provides for issuance of up to 20,000 shares of the Bank's authorized but unissued common stock to all employees, including any officer or employee-director of the Bank. Under the plan, the Bank may grant both non-qualified stock options and incentive stock options. In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall not exceed $100,000. Option prices may not be less than the fair market value at the date of the grant. Options granted vest ratably over five years and are exercisable in whole or in part for a period up to ten years from the date of the grant. As of June 30, 1998, only incentive stock options have been granted under the plan. The following summarizes the Bank's stock options as of June 30, 1998 and 1997, and the changes for the years then ended:
1998 ---------------------------- NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE Outstanding beginning of year 7,710 $14.83 Granted 1,900 19.00 Exercised (1,525) 14.27 Forfeited (840) 16.00 ------ Outstanding at end of year 7,245 15.75 ====== Exercisable at end of year 610 $16.00 ====== 1997 ---------------------------- NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE Outstanding at beginning of year 4,000 $13.00 Granted 5,200 16.00 Exercised (1,490) 13.99 Forfeited - - ------ Outstanding at end of year 7,710 14.83 ====== Exercisable at end of year - $ - ======
The calculated compensation cost based on the fair value method at the grant date under SFAS No. 123 is immaterial in relation to net income and earnings per share for the years ended June 30, 1998 and 1997. In accordance with SFAS No. 123, the Bank elected to continue to apply the provisions of APB No. 25 and related interpretations in accounting for its stock-based compensation plan. F-15 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (12) COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding various commitments and contingent liabilities, such as commitments to extend credit and legal claims, which are not reflected in the financial statements. Commitments under outstanding standby letters of credit totaled $185,000 at June 30, 1998. The following is a summary of the commitments to extend credit at June 30, 1998:
WEIGHTED AVERAGE RATE AMOUNT Fixed rate loans: Residential mortgage loans with 12 to 30 year terms 7.65% $ 1,422,750 Consumer and commercial loans with 1 to 10 year terms 8.86% 162,847 Undisbursed commercial and personal lines of credit 1,628,128 Undisbursed portion of construction loans in process 1,932,310 Other loans in process 249,893 ----------- Total commitments to extend credit $ 5,395,928 ===========
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments (see Note 12). The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, varies and is based on management's credit evaluation of the counterparty. F-16 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (13 - continued) Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank's policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred any losses on its commitments in either 1998 or 1997. (14) STOCKHOLDERS' EQUITY DIVIDENDS The payment of dividends by the Bank is subject to regulation by the Office of Thrift Supervision (OTS). The Bank may not declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would cause retained earnings of the Bank to be reduced below regulatory capital requirements imposed by the OTS. First Capital Inc., M.H.C., with the approval of the OTS, waived all dividends applicable to its shares in the Bank for the years ended June 30, 1998 and 1997, respectively. The cumulative amount of dividends waived by First Capital, Inc., M.H.C. is $1,137,000 at June 30, 1998 and is considered a restriction of retained earnings of the Bank. CAPITAL STOCK The Bank has the power to issue shares of capital stock (including common and preferred stock) to persons other than the mutual holding company. So long as the mutual holding company is in existence, the aggregate amount of voting stock that may be issued to persons other than the mutual holding company must be less than 50 percent of the issued and outstanding voting stock of the Bank. The Bank may issue any amount of non-voting stock to persons other than the mutual holding company. PLAN OF CONVERSION AND REORGANIZATION On June 18, 1998, the Boards of Directors of First Capital, Inc., M.H.C. ("MHC") and the Bank adopted a plan of conversion and reorganization whereby the MHC will convert from mutual to stock form of organization and the Bank will reorganize as a wholly-owned subsidiary of the newly formed stock holding company ("Holding Company"). Pursuant to this plan, shares of Holding Company common stock will be offered as part of the conversion in a subscription offering pursuant to nontransferable subscription rights at a predetermined and uniform price first to the Bank's eligible account holders, second to the tax-qualified employee stock benefit plans, third to the Bank's supplemental eligible account holders and fourth to other members of the MHC. Shares not subscribed for in the subscription offering will be offered to the general public in a direct community offering. Shares still remaining may then be offered to the general public in a syndicated community offering. Each minority stockholder of the Bank will receive common stock of the Holding Company in exchange for their shares of common stock of the Bank. F-17 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (14 - continued) At the time of the conversion and reorganization, the Bank will establish a liquidation account in an amount equal to the amount of the cumulative dividends with respect to the Bank's common stock waived by the MHC plus the greater of the Bank's total retained earnings as of the date of the latest balance sheet contained in the final offering circular used in connection with the Bank's reorganization as a majority owned subsidiary of the MHC, or 59.5% of the Bank's total stockholders' equity as of the date of the latest balance sheet contained in the final prospectus used in connection with the conversion and reorganization. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible or supplemental eligible account holders interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. Consummation of the conversion and reorganization is subject to the approval of the plan by the OTS and by the members of the MHC at a special meeting of the members to be called to consider the conversion and reorganization. Upon completion of the conversion stock offering, the costs related to the conversion and offering will be charged against the proceeds from the stock sold in the conversion. If the transactions are not consummated, all costs will be charged to expense. At June 30, 1998, the amount of deferred costs related to the conversion and offering totaled approximately $13,000. (15) REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the OTS. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to quantitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible capital to adjust total assets (as defined) Tier I (core) capital (as defined) to adjusted total assets, Tier I capital to risk-weighted assets (as defined), and of total risk-based capital (as defined) to risk-weighted assets. Management believes, as of June 30, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 1998, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. F-18 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (15 - continued) The Bank's actual capital amounts and ratios are also presented in the table. No amount was deducted from capital for interest-rate risk in either year.
MINIMUM TO BE WELL CAPITALIZED UNDER MINIMUM FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO (Dollars in thousands) AS OF JUNE 30, 1998: Total equity capital and ratio to total assets $10,341 11.0% Adjustments to equity capital (3) ------- Tangible capital and ratio to adjusted total assets $10,338 11.0% $1,409 1.5 % ======= ========== Tier I (core) capital and ratio to adjusted total assets $10,338 11.0% $2,819 3.09% $4,698 5.0% ======= ========== ========== Tier I capital and ratio to risk-weighted assets $10,338 18.3% $3,385 6.0% ========== Allowance for loan losses 461 ------- Total risk-based capital and ratio to risk-weighted assets $10,799 19.1% $4,513 8.0% $5,642 10.0% ======= ========== ========== Total assets $93,958 ======= Adjusted total assets $93,955 ======= Risk-weighted assets $56,415 ======= AS OF JUNE 30, 1997: Total equity capital and ratio to total assets $ 9,493 10.6% Adjustments to equity capital 8 ------- Tangible capital and ratio to adjusted total assets $ 9,501 10.6% $1,341 1.5% ======= ========== Tier I (core) capital and ratio to adjusted total assets $ 9,501 10.6% $2,681 3.0% $4,469 5.0% ======= ========== ========== Tier I capital and ratio to risk-weighted assets $ 9,501 17.8% $3,212 6.0% ========== Allowance for loan losses 464 ------- Total risk-based capital and ratio to risk-weighted assets $ 9,965 18.6% $4,282 8.0% $5,353 10.0% ======= ========== ========== Total assets $89,372 ======= Adjusted total assets $89,380 ======= Risk-weighted assets $53,525 =======
F-19 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and estimated fair value of financial instruments at June 30 are as follows:
1998 1997 -------- ------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (In thousands) Financial assets: Cash and due from banks $ 895 $ 895 $ 1,245 $ 1,245 Interest bearing deposits in banks 5,240 5,240 3,795 3,795 Securities available for sale 4,849 4,849 3,684 3,684 Securities held to maturity 3,053 3,036 6,068 6,007 Loans receivable 75,403 75,789 70,427 69,704 Less: allowance for loan losses 516 516 518 518 ------- ------- ------- ------- Loans receivable, net 74,887 75,273 69,909 69,186 ------- ------- ------- ------- Federal Home Loan Bank stock 589 589 559 559 Financial liabilities: Deposits 77,462 77,798 70,756 70,697 Advances from Federal Home Loan Bank 5,250 4,960 8,250 8,273 Unrecognized financial instruments: Commitments to extend credit - 24 - 32
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: CASH AND SHORT-TERM INVESTMENTS For short-term investments, including cash and due from banks and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value. DEBT AND EQUITY SECURITIES For debt securities, including mortgage-backed securities, the fair values are based on quoted market prices. For restricted equity securities held for investment, the carrying amount is a reasonable estimate of fair value. MORTGAGE LOANS HELD FOR SALE For mortgage loans held for sale, the fair values are based on market price quotations from dealers. LOANS RECEIVABLE The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. F-20 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (16 - continued) DEPOSITS The fair value of demand deposits, savings accounts, money market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. BORROWED FUNDS The fair value of advances from Federal Home Loan Bank is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities could be obtained. COMMITMENTS TO EXTEND CREDIT The majority of commitments to extend credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged to customers to enter into similar agreements. For fixed rate loan commitments, the fair value also considers the difference between current levels of interest rates and the committed rates. (17) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
1998 1997 --------- --------- BASIC: Earnings: Net income $958,452 $805,686 ======== ======== Shares: Weighted average common shares outstanding 503,358 501,899 ======== ======== Net income per common share, basic $ 1.90 $ 1.61 ======== ======== DILUTED: Earnings: Net income $958,452 $805,686 ======== ======== Shares: Weighted average common shares outstanding 503,358 501,899 Add: Dilutive effect of outstanding options 7,507 8,309 -------- -------- Weighted average common shares outstanding, as adjusted 510,865 510,208 ======== ======== Net income per common share, diluted $ 1.88 $ 1.58 ======== ========
F-21 FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS - CONTINUED JUNE 30, 1998 AND 1997 (18) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1998 1997 ----------- ----------- CASH PAYMENTS FOR: Interest $3,946,516 $3,740,753 Income taxes 486,206 350,699 NONCASH INVESTING ACTIVITIES: Transfers from loans to real estate acquired through foreclosure $ 105,734 $ - Proceeds from sales of foreclosed real estate financed through loans - 51,300
F-22 GLOSSARY ARM loans Adjustable-rate mortgage loans. Direct Community Offering The offering of shares of the common stock to the general public with preference given first to the public stockholders of the Bank and second to natural persons and trusts of natural persons who are residents of the Bank's Local Community. Eligible Account Holders Holders of savings accounts at the Bank with balances of at least $50 as of March 31, 1997. ESOP Employee Stock Ownership Plan to be implemented by the Bank in the conversion. Estimated Valuation Range The range of the aggregate pro forma market value of the Bank and the MHC as of August 14, 1998, ranging between $12,750,000 and $17,250,000 (with a midpoint of $15,000,000). Exchange Act The Securities Exchange Act of 1934, as amended. Exchange Ratio The ratio at which shares of Bank common stock will be exchanged for shares of Holding Company common stock. Expiration Date _________, 1998, the date on which the Subscription Offering ends. FASB Financial Accounting Standards Board. FDIC Federal Deposit Insurance Corporation. FHLB Federal Home Loan Bank. Fannie Mae Federal National Mortgage Association. Freddie Mac Federal Home Loan Mortgage Corporation. GAAP Generally accepted accounting principles. Ginnie Mae Government National Mortgage Association. IRA Individual Retirement Account. IRS Internal Revenue Service. Keller & Company Keller & Company, Inc., the firm the Bank engaged to prepare the appraisal of its estimated pro forma market value in the conversion and to advise the Bank about its business plan.
G-1 Local Community Crawford, Clark, Floyd, Harrison and Washington Counties, Indiana. NASD National Association of Securities Dealers, Inc. Depositors of Other Members the Bank as of _____________, 1998 and borrowers of the Bank as of February 1, 1993 whose loans continue to be outstanding as of ____________, 1998. OTS Office of Thrift Supervision of the United States Department of the Treasury. Plan of Conversion The plan of conversion adopted by the Bank and the MHC, pursuant to which the conversion is being undertaken. SAIF Savings Association Insurance Fund. SEC Securities and Exchange Commission. Securities Act The Securities Act of 1933, as amended. SFAS Statement of Financial Accounting Standards. Subscription Offering The offering of shares of the common stock, in order of priority, to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and Other Members. Supplemental Eligible Account Holders Holders of accounts at the Bank with balances of at least $50 as of September 30, 1998. Syndicated Community Offering The offering of shares of the common stock to the general public by a group of selected dealers. Webb Charles Webb & Company, a Division of Keefe Bruyette & Woods, Inc.
G-2 No dealer, salesman or any other person has been authorized to give any information or to make any representation other than as contained in this prospectus in connection with the offering made hereby, and, if given or made, such other information or representation must not be relied upon as having been authorized by First Capital, Inc. or First Federal Bank, A Federal Savings Bank. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person or in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of First Capital, Inc. or First Federal Bank, A Federal Savings Bank since any of the dates as of which information is furnished herein or since the date hereof. [Logo for First Capital, Inc.] (Proposed Holding Company for First Federal Bank, A Federal Savings Bank) 758,625 to 1,180,331 Shares of Common Stock ________________ PROSPECTUS ________________ CHARLES WEBB & COMPANY, a Division of Keefe, Bruyette & Woods, Inc. November ___, 1998 UNTIL THE LATER OF _______, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS THAT BUY, SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PART II: INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution* Legal fees and expenses................ $ 95,000 Securities marketing firm legal fees(1) 30,000 Securities marketing firm expenses(2).. 117,000 EDGAR, printing, copying, postage, mailing 75,000 Appraisal/business plan fees and expenses 24,000 Accounting fees........................ 25,000 Data processing fees and expenses...... 5,000 SEC filing fee......................... 5,900 OTS filing fee......................... 8,400 Other.................................. 6,700 -------- Total............................. $392,000 ========
*Estimated based on the midpoint of the Estimated Valuation Range. (1) Includes blue sky legal fees and expenses. (2) Webb & Company will receive a management fee of $25,000 plus a success fee of 1.5% of the aggregate purchase price of the shares of common stock sold in the Subscription Offering and the Direct Community Offering, excluding shares purchased by the ESOP and by officers and directors of the Bank and their associates. The success fee is reduced by the management fee. See "THE CONVERSION AND REORGANIZATION -- Plan of Distribution and Selling Commissions." Item 14. Indemnification of Officers and Directors Article VII of the Articles of Incorporation of First Capital, Inc. requires indemnification of officers and directors as follows: ARTICLE VII INDEMNIFICATION SECTION 7.01. GENERAL PROVISIONS. The corporation shall, to the fullest extent to which it is empowered to do so by the Indiana Business Corporation Act or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that he is or was a director, officer or employee of the corporation, or who, while serving as such director, officer or employee of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, whether for profit or not, against expenses (including attorneys' fees), judgments, settlements, penalties and fines (including excise taxes assessed with respect to employee benefit plans) actually or reasonably incurred by him in accordance with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, in the case of conduct in his official capacity, was in the best interest of the corporation, and in all other cases, was not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the prescribed standard of conduct. II-1 SECTION 7.02. INDEMNIFICATION AUTHORIZED. To the extent that a director, officer or employee of the corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Section 7.01 of this Article, or in the defense of any claim, issue or matter therein, the corporation shall indemnify such person against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Any other indemnification under Section 7.01 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case, upon a determination that indemnification of the director, officer or employee is permissible in the circumstances because he has met the applicable standard of conduct. Such determination shall be made (a) by the board of directors by a majority vote of a quorum consisting of directors who were not at the time parties to such action, suit or proceeding; or (b) if a quorum cannot be obtained under subdivision (a), by a majority vote of a committee duly designated by the board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to such action, suit or proceeding; or (c) by special legal counsel: (i) selected by the board of directors or its committee in the manner prescribed in subdivision (a) or (b), or (ii) if a quorum of the board of directors cannot be obtained under subdivision (a) and a committee cannot be designated under subdivision (b), selected by a majority vote of the full board of directors (in which selection directors who are parties may participate); or (d) by stockholders, but shares owned by or voted under the control of directors who are at the time parties to such action, suit or proceeding may not be voted on the determination. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subsection (c) to select counsel. SECTION 7.03. DEFINITION OF GOOD FAITH. For purposes of any determination under Section 7.01 of this Article, a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 7.01 if his action is based on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (a) one or more officers or employees of the corporation or other enterprise whom he reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (c) a committee of the board of directors of the corporation or another enterprise of which the person is not a member if he reasonably believes the committee merits confidence. The term "another enterprise" as used in this Section 7.03 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent. The provisions of this Section 7.03 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in Section 7.01 of this Article. SECTION 7.04. ADVANCEMENT OF EXPENSES. Expenses incurred in connection with any civil or criminal action, suit or proceeding may be paid for or reimbursed by the corporation in advance of the final disposition of such action, suit or proceeding, as authorized in the specific case in the same manner described in Section 7.02 of this Article, upon receipt of a written affirmation of the director, officer or employee's good faith belief that he has met the standard of conduct described in Section 7.01 of this Article and upon receipt of a written undertaking on behalf of the director, officer or employee to repay such amount if it shall ultimately be determined that he did not meet the standard of conduct set forth in this Article, and a determination is made that the facts then known to those making the determination would not preclude indemnification under this Article. SECTION 7.05. NON-EXCLUSIVITY. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under these Articles of Incorporation, the corporation's Bylaws, any resolution of the board of directors or stockholders, any other authorization, whenever adopted, after notice, by a majority vote of all voting stock then outstanding, or any contract, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who II-2 has ceased to be a director, officer or employee, and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.06. VESTMENT OF RIGHTS. The right of any individual to indemnification under this Article shall vest at the time of occurrence or performance of any event, act or omission giving rise to any action, suit or proceeding of the nature referred to in Section 7.01 of this Article and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions. Notwithstanding the foregoing, the indemnification afforded under this Article shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of this Article. To the extent such prior acts or omissions cannot be deemed to be covered by this Article, the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. SECTION 7.07. INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee or agent, whether or not the corporation would have power to indemnify the individual against the same liability under this Article. SECTION 7.08. OTHER DEFINITIONS. For purposes of this Article, serving an employee benefit plan at the request of the corporation shall include any service as a director, officer or employee of the corporation which imposes duties on, or involves services by such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" referred to in this Article. For purposes of this Article, "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding. For purposes of this Article, "official capacity," when used with respect to a director, shall mean the office of director of the corporation; and when used with respect to an individual other than a director, shall mean the office in the corporation held by the officer or the employment or agency relationship undertaking by the employee or agent on behalf of the corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, except as set forth in Section 7.01 of this Article. SECTION 7.09. BUSINESS EXPENSES. Any payments made to any indemnified party under this Article under any other right of indemnification shall be deemed to be an ordinary and necessary business expense of the corporation, and payment thereof shall not subject any person responsible for the payment, or the board of directors, to any action for corporate waste or to any similar action. Item 15. Recent Sales of Unregistered Securities. Not Applicable II-3 Item 16. Exhibits and Financial Statement Schedules The exhibits filed as part of this Registration Statement are as follows: (a) List of Exhibits 1.1 -- Form of proposed Agency Agreement among First Capital, Inc., First Federal Bank, Federal Savings Bank, First Capital, Inc., M.H.C. and Charles Webb & Company (a) 1.2 -- Engagement Letter with First Federal Bank, Federal Savings Bank and Charles Webb & Company 2 -- Plan of Conversion and Agreement and Plan of Reorganization of First Capital, Inc., M.H.C. and First Federal Bank, Federal Savings Bank 3.1 -- Articles of Incorporation of First Capital, Inc. 3.2 -- Bylaws of First Capital, Inc. 4 -- Form of Certificate for Common Stock 5 -- Opinion of Breyer & Aguggia LLP regarding legality of securities registered 8.1 -- Form of Federal Income Tax Opinion of Breyer & Aguggia LLP 8.2 -- Indiana Income Tax Opinion of Monroe Shine & Co., Inc.(a) 8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription rights 10.1 -- Proposed Form of Employment Agreement for Executive Officers 10.2 -- Proposed Form of Employee Severance Compensation Plan 10.3 -- First Federal Bank, A Federal Savings Bank 401(k) Salary Reduction Plan (a) 10.4 -- Proposed Form of Employee Stock Ownership Plan 21 -- Subsidiaries of First Capital, Inc. 23.1 -- Consent of Monroe Shine & Co., Inc. 23.2 -- Consent of Breyer & Aguggia LLP as to its Form of Federal Income Tax Opinion 23.3 -- Consent of Keller & Company, Inc. 24 -- Power of Attorney (included on signature page) 99.1 -- Order Form 99.2 -- Solicitation and Marketing Materials II-4 99.3 -- Appraisal Agreement with Keller & Company, Inc. 99.4 -- Proxy Statement for Special Meeting of Members of First Capital, Inc., M.H.C. 99.5 -- Proxy Statement for Special Meeting of Stockholders of First Federal Bank, A Federal Savings Bank - ------------------------- (a) To be filed by amendment. Item 17. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended ("Securities Act"); (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time shall be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (4) The undersigned registrant hereby undertakes to provide the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. In the event that a claim for indemnification against liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Corydon, Indiana on the 16th day of September 1998. FIRST CAPITAL, INC. By: /s/ James G. Pendleton ------------------------------------------------- James G. Pendleton Chairman of the Board and Chief Executive Officer We, the undersigned directors and officers of First Capital, Inc., do hereby severally constitute and appoint James G. Pendleton or Samuel E. Uhl, our true and lawful attorney and agent, to do any and all things and acts in our names in the capacities indicated below and to execute all instruments for us and in our names in the capacities indicated below which said James G. Pendleton or Samuel E. Uhl may deem necessary or advisable to enable First Capital, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the Registration Statement on Form SB-2 relating to the offering of First Capital Inc.'s Common Stock, including specifically but not limited to, power and authority to sign for us or any of us in our names in the capacities indicated below the Registration Statement and any and all amendments (including post- effective amendments) thereto; and we hereby ratify and confirm all that James G. Pendleton or Samuel E. Uhl shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- /s/ James G. Pendleton Chairman of the Board, Chief Executive September 16, 1998 - ------------------------ James G. Pendleton Officer and Director (Principal Executive Officer) /s/ Samuel E. Uhl President, Chief Operating Officer September 16, 1998 - ------------------------ Samuel E. Uhl and Director /s/ M. Chris Frederick Senior Vice President, Chief Financial September 16, 1998 - ------------------------ M. Chris Frederick Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Mark D. Shireman Director September 16, 1998 - ------------------------ Mark D. Shireman /s/ Dennis L. Huber Director September 16, 1998 - ------------------------ Dennis L. Huber /s/ Kenneth R. Saulman Director September 16, 1998 - ------------------------ Kenneth R. Saulman /s/ John W. Buschemeyer Director September 16, 1998 - ------------------------ John W. Buschemeyer /s/ Gerald L. Uhl Director September 16, 1998 - ------------------------ Gerald L. Uhl
As filed with the Securities and Exchange Commission on September 16, 1998 Registration No. 333-_____ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FIRST CAPITAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in charter) Indiana 6035 [to be applied for] ------------------------ --------------------- --------------------- (State or other jurisdiction (Primary SICC No.) (I.R.S. of Employer incorporation or Identification No.) organization) 220 FEDERAL DRIVE, N.W. CORDYON, INDIANA 47112 (812) 738-2198 ----------------------------------------------- (Address and telephone number of principal executive offices) Paul M. Aguggia, Esquire Victor L. Cangelosi, Esquire BREYER & AGUGGIA LLP Suite 470 East 1300 I Street, N.W. Washington, D.C. 20005 ---------------------------------------------- (Name and address of agent for service) INDEX TO EXHIBITS 1.1 -- Form of proposed Agency Agreement among First Capital, Inc., First Federal Bank, A Federal Savings Bank, First Capital, Inc., M.H.C. and Charles Webb & Company(a) 1.2 -- Engagement Letter between First Federal Bank, A Federal Savings Bank and Charles Webb & Company 2 -- Plan of Conversion and Agreement and Plan of Reorganization of First Federal Bank, A Federal Savings Bank and First Capital, Inc., M.H.C. 3.1 -- Articles of Incorporation of First Capital, Inc. 3.2 -- Bylaws of First Capital, Inc. 4 -- Form of Certificate for Common Stock 5 -- Opinion of Breyer & Aguggia LLP regarding legality of securities registered 8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia LLP 8.2 -- Indiana Income Tax Opinion of Monroe Shine & Co., Inc.(a) 8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription rights 10.1 -- Proposed Form of Employment Agreement for Executive Officers 10.2 -- Proposed Form of Employee Severance Compensation Plan 10.3 -- First Federal Bank, A Federal Savings Bank 401(k) Salary Reduction Plan(a) 10.4 -- Proposed Form of Employee Stock Ownership Plan 21 -- Subsidiaries of First Capital, Inc. 23.1 -- Consent of Monroe Shine & Co., Inc. 23.2 -- Consent of Breyer & Aguggia LLP as to its Form of Federal Income Tax Opinion 23.3 -- Consent of Keller & Company, Inc. 24 -- Power of Attorney (included on signature page) 99.1 -- Order Form 99.2 -- Solicitation and Marketing Materials 99.3 -- Appraisal Agreement with Keller & Company, Inc. 99.4 -- Proxy Statement for Special Meeting of Members of First Capital, Inc., M.H.C. 99.5 -- Proxy Statement for Annual Meeting of Stockholders of First Federal Bank, A Federal Savings Bank _____________________ (a) To be filed by amendment. EX-1.2 2 EXHIBIT 1.2 EXHIBIT 1.2 ENGAGEMENT LETTER BETWEEN FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK AND CHARLES WEBB & COMPANY [LOGO OF CHARLES WEBB & COMPANY APPEARS HERE] April 27, 1998 Mr. James G. Pendleton Chairman of the Board First Federal Bank, F.S.B. 220 Federal Dr. NW Corydon, IN 47112 Dear Mr. Pendleton: This proposal is in connection with First Federal Bank, a F.S.B., (the "Bank") intention to have its parent mutual holding company convert from a mutual to a capital stock form of organization (the "Conversion"). In order to effect the Conversion, it is contemplated that all of the Bank's common stock to be outstanding pursuant to the Conversion will be issued to a holding company (the "Company") to be formed by the Bank, and that the Company will offer and sell shares of its common stock first to eligible persons (pursuant to the Bank's Plan of Conversion) in a Subscription and Community Offering. Charles Webb & Company ("Webb"), a Division of Keefe, Bruyette & Woods, Inc. ("KBW") will act as the Bank's and the Company's exclusive financial advisor and marketing agent in connection with the Conversion. This letter sets forth selected terms and conditions of our engagement. 1. Advisory/Conversion Services. As the Bank's and Company's financial advisor ---------------------------- and marketing agent, Webb will provide the Bank and the Company with a comprehensive program of conversion services designed to promote an orderly, efficient, cost-effective and long-term stock distribution. Webb will provide financial and logistical advice to the Bank and the Company concerning the offering and related issues. Webb will assist in providing conversion enhancement services intended to meet the directors' objectives in the Subscription Offering and to residents of the Bank's market area, if necessary, in the Community Offering. Webb shall provide financial advisory services to the Bank which are typical in connection with an equity offering and include, but are not limited to, overall financial analysis of the client with a focus on identifying factors which impact the valuation of the common stock and provide the appropriate recommendations for the betterment of the equity valuation. Mr. James G. Pendleton April 27, 1998 Page 2 of 6 Additionally, post conversion financial advisory services will include advice on shareholder relations, NASDAQ listing, dividend policy (for both regular and special dividends), stock repurchase strategy and communication with market makers. Prior to the closing of the offering, Webb shall furnish to client a Post-Conversion reference manual, which will include specifics relative to these items. (The nature of the services to be provided by Webb as the Bank's and the Company's financial advisor and marketing agent are further described in Exhibit A attached hereto.) 2. Preparation of Offering Documents. The Bank, the Company and their counsel --------------------------------- will draft the Registration Statement, Application for Conversion, Prospectus and other documents to be used in connection with the Conversion. Webb will attend meetings to review these documents and advise you on their form and content. Webb and its counsel will draft appropriate agency agreement and related documents as well as marketing materials other than the Prospectus. 3. Due Diligence Review. Prior to filing the Registration Statement, -------------------- Application for Conversion or any offering or other documents naming Webb as the Bank's and the Company's financial advisor and marketing agent, Webb and their representatives will undertake substantial investigations to learn about the Bank's business and operations ("due diligence review") in order to confirm information provided to us and to evaluate information to be contained in the Bank's and/or the Company's offering documents. The Bank agrees that it will make available to Webb all relevant information, whether or not publicly available, which Webb reasonably requests, and will permit Webb to discuss with management the operations and prospects of the Bank. Webb will treat all material non-public information as confidential. The Bank acknowledges that Webb will rely upon the accuracy and completeness of all information received from the Bank, its officers, directors, employees, agents and representatives, accountants and counsel including this letter to serve as the Bank's and the Company's financial advisor and marketing agent. 4. Regulatory Filings. The Bank and/or the Company will cause appropriate ------------------ offering documents to be filed with all regulatory agencies including, the Securities and Exchange Commission ("SEC""), the National Association of Securities Dealers ("NASD"), Office of Thrift Supervision ("OTS") and such state securities commissioners as may be determined by the Bank. 5. Agency Agreement. The specific terms of the conversion services, conversion ---------------- offering enhancement and syndicated offering services contemplated in this letter shall be set forth in an Agency Agreement between Webb and the Bank and the Company to be executed prior to commencement of the offering, and dated the date that the Company's Prospectus is declared effective and/or authorized to be disseminated by the appropriate regulatory agencies, the SEC, Mr. James G. Pendleton April 27, 1998 Page 3 of 6 the NASD, the OTS and such state securities commissioners and other regulatory agencies as required by applicable law. 6. Representations, Warranties and Covenants. The Agency Agreement will ----------------------------------------- provide for customary representations, warranties and covenants by the Bank and Webb, and for the Company to indemnify Webb and their controlling persons (and, if applicable, the members of the selling group and their controlling persons), and for Webb to indemnify the Bank and the Company against certain liabilities, including, without limitation, liabilities under the Securities Act of 1933. 7. Fees. For the services hereunder, the Bank and/or Company shall pay the ---- following fees to Webb at closing unless stated otherwise: (a) A Management Fee of $25,000 payable in four consecutive monthly installments of $6,250 commencing with the signing of this letter. Such fees shall be deemed to have been earned when due. Should the Conversion be terminated for any reason not attributable to the action or inaction of Webb, Webb shall have earned and be entitled to be paid fees accruing through the stage at which point the termination occurred. This Management Fee shall be applied against the Success Fee described below. (b) A Success Fee of 1.5% of the aggregate Purchase Price of Common Stock sold in the Subscription Offering and Community Offering excluding shares purchased by the Bank's officers, directors, or employees (or members of their immediate families) plus any ESOP, tax-qualified or stock based compensation plans (except IRA's) or similar plan created by the Bank for some or all of its directors or employees. The Success Fee shall be reduced by the Management Fee described in (a) above. (c) If any shares of the Company's stock remain available after the subscription offering, at the request of the Bank, Webb will seek to form a syndicate of registered broker-dealers to assist in the sale of such common stock on a best efforts basis, subject to the terms and conditions set forth in the selected dealers agreement. Webb will endeavor to distribute the common stock among dealers in a fashion which best meets the distribution objectives of the Bank and the Plan of Conversion. Webb will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the shares of common stock sold by them. Webb will pass onto selected broker-dealers, who assist in the syndicated community, an amount competitive with gross underwriting discounts charged at such time for comparable amounts of stock sold at a comparable price per share in a similar Mr. James G. Pendleton April 27, 1998 Page 4 of 6 market environment. Fees with respect to purchases affected with the assistance of a broker/dealer other than Webb shall be transmitted by Webb to such broker/dealer. THE DECISION TO UTILIZE SELECTED BROKER- DEALERS WILL BE MADE BY THE BANK upon consultation with Webb. In the event, with respect to any stock purchases, fees are paid pursuant to this subparagraph 7(c), such fees shall be in lieu of, and not in addition to, payment pursuant to subparagraph 7(a) and 7(b). 8. Additional Services. WEBB FURTHER AGREES TO PROVIDE FINANCIAL ADVISORY ------------------- ASSISTANCE TO THE COMPANY AND THE BANK FOR A PERIOD OF ONE YEAR FOLLOWING COMPLETION OF THE CONVERSION, INCLUDING FORMATION OF A DIVIDEND POLICY AND SHARE REPURCHASE PROGRAM, ASSISTANCE WITH SHAREHOLDER REPORTING AND SHAREHOLDER RELATIONS MATTERS, GENERAL ADVICE ON MERGERS AND ACQUISITIONS AND OTHER RELATED FINANCIAL MATTERS, WITHOUT THE PAYMENT BY THE COMPANY AND THE BANK OF ANY FEES IN ADDITION TO THOSE SET FORTH IN SECTION 7 HEREOF. Nothing in this Agreement shall require the Company and the Bank to obtain such services from Webb. Following this initial one year term, if both parties wish to continue the relationship, a fee will be negotiated and an agreement entered into at that time. 9. Expenses. The Bank will bear those expenses of the proposed offering -------- customarily borne by issuers, including, without limitation, regulatory filing fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the Bank's accountants, attorneys, appraiser, transfer agent and registrar, printing, mailing and marketing and syndicate expenses associated with the Conversion; the fees set forth in Section 7; and fees for "Blue Sky" legal work. If Webb incurs expenses on behalf of Client, Client will reimburse Webb for such expenses. Webb's reasonable out-of-pocket expenses, including costs of travel, meals and lodging, photocopying, telephone, facsimile and couriers, not to exceed $5,000, and reasonable fees and expenses of counsel (such fees of counsel will not be incurred without the prior approval of Client). The selection of such counsel will be done by Webb, with the approval of the Bank. Such reimbursement of legal fees will not exceed $30,000. 10. Conditions. Webb's willingness and obligation to proceed hereunder shall ---------- be subject to, among other things, satisfaction of the following conditions in Webb's opinion, which opinion shall have been formed in good faith by Webb after reasonable determination and consideration of all relevant factors: (a) full and satisfactory disclosure of all relevant material, financial and other information in the disclosure documents and a determination by Webb, in its sole discretion, that the sale of stock on the terms proposed is reasonable given such disclosures; (b) no material adverse change in the condition or operations of the Bank subsequent to the execution of the agreement; and (c) no adverse market conditions at the time of offering which in Webb's opinion make the sale of the shares by the Company inadvisable. Mr. James G. Pendleton April 27, 1998 Page 5 of 6 11. Benefit. This Agreement shall inure to the benefit of the parties hereto ------- and their respective successors and to the parties indemnified pursuant to the terms and conditions of the Agency Agreement and their successors, and the obligations and liabilities assumed hereunder by the parties hereto shall be binding upon their respective successors provided, however, that this Agreement shall not be assignable by Webb. 12. Definitive Agreement. This letter reflects Webb's present intention of -------------------- proceeding to work with the Bank on its proposed conversion. It does not create a binding obligation on the part of the Bank, the Company or Webb except as to the agreement to maintain the confidentiality of non-public information set forth in Section 3, the payment of certain fees as set forth in Section 7(a) and 7(b) and the assumption of expenses as set forth in Section 9, all of which shall constitute the binding obligations of the parties hereto and which shall survive the termination of this Agreement or the completion of the services furnished hereunder and shall remain operative and in full force and effect. You further acknowledge that any report or analysis rendered by Webb pursuant to this engagement is rendered for use solely by the management of the Bank and its agents in connection with the Conversion. Accordingly, you agree that you will not provide any such information to any other person without our prior written consent. Webb acknowledges that in offering the Company's stock no person will be authorized to give any information or to make any representation not contained in the offering prospectus and related offering materials filed as part of a registration statement to be declared effective in connection with the offering. Accordingly, Webb agrees that in connection with the offering it will not give any unauthorized information or make any unauthorized representation. We will be pleased to elaborate on any of the matters discussed in this letter at your convenience. It is further agreed that Webb will have enough personnel on hand at the Bank to handle all transactions without the use of the Bank Personnel. It is further agreed that if by cause of the federal regulators the process is delayed or extended the cost of this delay will be the cost of Webb and not an Additional cost to the Bank. This means as to the costs listed in sections 7, 8 and 9 above. Mr. James G. Pendleton April 27, 1998 Page 6 of 6 If the foregoing correctly sets forth our mutual understanding, please so indicate by signing and returning the original copy of this letter to the undersigned. Very truly yours, CHARLES WEBB & COMPANY a Division of KEEFE, BRUYETTE & WOODS, INC. By: /s/ Harold T. Hanley III ------------------------ Harold T. Hanley III Senior Vice President FIRST FEDERAL BANK, F.S.B. By: /s/ James G. Pendleton 5/14/98 ---------------------- ------------ James G. Pendleton Date Chairman & Chief Executive Officer EXHIBIT A --------- CONVERSION SERVICES PROPOSAL TO FIRST FEDERAL BANK, F.S.B. Charles Webb & Company provides thrift institutions converting from mutual to stock form of ownership with a comprehensive program of conversion services designed to promote an orderly, efficient, cost-effective and long-term stock distribution. The following list is representative of the conversion services, if appropriate, we propose to perform on behalf of the Bank. General Services - ---------------- Assist management and legal counsel with the design of the transaction structure. Analyze and make recommendations on bids from printing, transfer agent, and appraisal firms. Assist officers and directors in obtaining Bank loans to purchase stock, if requested. Assist in drafting and distribution of press releases as required or appropriate. Conversion Offering Enhancement Services - ---------------------------------------- Establish and manage Stock Information Center at the Bank. Stock Information Center personnel will track prospective investors; record stock orders; mail order confirmations; provide the Bank's senior management with daily reports; answer customer inquiries; and handle special situations as they arise. Assign Webb's personnel to be at the Bank through completion of the Subscription and Community Offerings to manage the Stock Information Center, meet with prospective shareholders at individual and community information meetings, solicit local investor interest through a tele-marketing campaign, answer inquiries, and otherwise assist in the sale of stock in the Subscription and Community Offerings. This effort will be lead by a Principal of Webb/KBW. Create target investor list based upon review of the Bank's depositor base. Provide intensive financial and marketing input for drafting of the prospectus. Conversion Offering Enhancement Services- Continued - --------------------------------------------------- Prepare other marketing materials, including prospecting letters and brochures, and media advertisements. Arrange logistics of community information meeting(s) as required. Prepare audio-visual presentation by senior management for community information meeting(s). Prepare management for question-and-answer period at community information meeting(s). Attend and address community information meeting(s) and be available to answer questions. Broker-Assisted Sales Services. - ------------------------------ Arrange for broker information meeting(s) as required. Prepare audio-visual presentation for broker information meeting(s). Prepare script for presentation by senior management at broker information meeting(s). Prepare management for question-and-answer period at broker information meeting(s). Attend and address broker information meeting(s) and be available to answer questions. Produce confidential broker memorandum to assist participating brokers in selling the Bank's common stock. EX-2 3 EXHIBIT 2 EXHIBIT 2 PLAN OF CONVERSION AND AGREEMENT AND PLAN OF REORGANIZATION OF FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK AND FIRST CAPITAL, INC, M.H.C. FIRST CAPITAL INC., M.H.C. FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK PLAN OF CONVERSION FROM MUTUAL HOLDING COMPANY TO STOCK HOLDING COMPANY AND AGREEMENT AND PLAN OF REORGANIZATION I. General ------- For purposes of this section, all capitalized terms have the meanings ascribed to them in Section II unless otherwise defined herein. First Capital Inc., M.H.C., Corydon, Indiana ("MHC") was formed on February 1, 1993 to act as the federally chartered mutual holding company for First Federal Bank, A Federal Savings Bank, Corydon, Indiana ("Savings Bank"), a federally chartered stock savings bank. As of the date hereof, the MHC beneficially and of record owns 300,000 shares of common stock, par value $1.00 per share, of the Savings Bank ("Savings Bank Common Stock"), representing approximately 59.5% of the outstanding voting stock of the Savings Bank, and the remaining 204,015 shares of Savings Bank Common Stock, or 40.5%, are owned by persons other than the MHC ("Public Stockholders"). This Plan of Conversion from Mutual Holding Company to Stock Holding Company and Agreement and Plan of Reorganization ("Plan") provides for the conversion of the MHC to the stock form of organization and the reorganization of the Savings Bank as a wholly owned subsidiary of a newly formed stock holding company (collectively, "Conversion and Reorganization"). The Boards of Directors of the MHC and the Savings Bank believe that the Conversion and Reorganization is in the best interests of the MHC, the members of the MHC, the Savings Bank and its stockholders. As a result of the Conversion and Reorganization, the Savings Bank will be wholly owned by a stock holding company, which is a more common structure and form of ownership than a mutual holding company. The Board of Directors determined that the Plan equitably provides for the interests of Members through the granting of subscription rights and the establishment of a liquidation account and that consummation of the Conversion and Reorganization would not adversely impact the stockholders' equity of the Savings Bank. The Conversion and Reorganization will provide the Savings Bank with a larger capital base which will enhance its ability to pursue lending and investment opportunities, as well as opportunities for growth and expansion. The Conversion and Reorganization also will provide a more flexible operating structure, which will enable the Savings Bank to compete more effectively with other financial institutions. In addition, the Conversion and Reorganization will raise additional equity capital for the Savings Bank. Finally, the Conversion and Reorganization has been structured to reunite the accumulated earnings and profits retained by the MHC with the retained earnings of the Savings Bank through a tax-free reorganization. Pursuant to the Plan, the Savings Bank will form a new first-tier subsidiary which will be incorporated under state law as a stock corporation ("Holding Company"). The Holding Company will then form an interim federal stock savings bank ("Interim B") as a wholly owned subsidiary. As described in greater detail herein, simultaneously with the conversion of the MHC to an interim federal stock savings bank ("Interim A"), the Savings Bank, MHC and Holding Company will undergo a reorganization in which Interim A will merge with and into the Savings Bank, Interim B will merge with and into the Savings Bank, the Holding Company will become the parent company of the Savings Bank, and the Holding Company will issue and sell its Conversion Stock pursuant to this Plan. On June 18, 1998, after careful study and consideration, the Boards of Directors of the MHC and the Savings Bank adopted this Plan. The Plan must be approved by the affirmative vote of a majority of the total number of votes eligible to be cast by Members of the MHC at a special meeting to be called for that purpose and by the holders of at least two-thirds of the shares of outstanding Savings Bank Common Stock eligible to vote at an annual meeting of the Savings Bank Stockholders, or at a special meeting of the Savings Bank Stockholders called for the purpose of 1 submitting the Plan for approval. Prior to the submission of the Plan to the Members and the Public Stockholders for consideration, the Plan must be approved by the Office of Thrift Supervision ("OTS"). II. Definitions ----------- For the purposes of this Plan, the following terms have the following meanings: A. Acting in Concert: (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. A Person (as defined herein) who acts in concert with another Person ("other party") shall also be deemed to be acting in concert with any Person who is also acting in concert with that other party, except that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert with its trustee or a Person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the Tax-Qualified Employee Benefit Plan will be aggregated. B. Associate: When used to indicate a relationship with any Person, --------- means (i) any corporation or organization (other than the Primary Parties or a majority-owned subsidiary of either thereof) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent 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, except that it does not include a Tax-Qualified Employee Stock Benefit Plan and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of any of the MHC, Savings Bank or Holding Company or any of their subsidiaries. C. Capital Stock: Any and all authorized capital stock of the Savings ------------- Bank. D. Common Stock: Collectively, Conversion Stock and Exchange Stock. ------------ E. Conversion and Reorganization: Collectively, (i) the conversion of ----------------------------- the MHC into an interim federal stock savings bank ("Interim A") and the simultaneous merger of Interim A with and into the Savings Bank, with the Savings Bank being the surviving institution; (ii) the merger of an interim federal stock savings bank subsidiary of the Holding Company ("Interim B") with and into the Savings Bank, with the Savings Bank being the surviving institution and becoming a wholly owned subsidiary of the Holding Company; (iii) the exchange of shares of Savings Bank Common Stock (other than those held by the MHC which shall be canceled) for shares of Holding Company Common Stock; and (iv) the issuance of Conversion Stock by the Holding Company as provided for in this Plan. F. Conversion Stock: Holding Company Common Stock offered and issued by ---------------- the Holding Company in the Offerings pursuant to this Plan. G. Direct Community Offering: The offering of Conversion Stock for ------------------------- sale to the public. H. Eligibility Record Date: March 31, 1997. ----------------------- I. Eligible Account Holder: Holder of a Qualifying Deposit on the ----------------------- Eligibility Record Date. J. Exchange Ratio: The ratio (rounded to the nearest ten-thousandth) at -------------- which shares of Holding Company Common Stock will be exchanged for shares of Savings Bank Common Stock held by the Public Stockholders upon consummation of the Conversion and Reorganization. The exact rate shall be determined by the MHC and the Savings Bank at the time the Purchase Price (as defined in Section XI.B.) is determined and shall equal the rate that will result in the Public Stockholders owning in the aggregate approximately the same percentage of shares of common stock 2 of the Holding Company to be outstanding upon completion of the Conversion and Reorganization as the percentage of Savings Bank Common Stock owned by them in the aggregate immediately prior to consummation of the Conversion and Reorganization, subject to any adjustments required by the OTS and before giving effect to (i) the payment of cash in lieu of issuing fractional shares of Holding Company Common Stock, and (ii) any shares of Conversion Stock purchased by Public Stockholders or any Tax-Qualified Employee Stock Benefit Plans. K. Exchange Stock: Holding Company Common Stock issued to the Public -------------- Stockholders in exchange for Savings Bank Common Stock. L. FDIC: Federal Deposit Insurance Corporation. ---- M. Form AC Application: The application submitted by the MHC to the OTS ------------------- on OTS Form AC for approval of the Conversion and Reorganization. N. H-(e)1 Application: The application submitted to the OTS on OTS Form ------------------ H-(e)1 or, if applicable, OTS Form H-(e)1-S, for approval of the Holding Company acquisition of all of the Capital Stock. O. Holding Company: The corporation to be formed by the Savings Bank --------------- under state law initially as a first tier, wholly owned subsidiary of the Savings Bank. Upon completion of the Conversion, the Holding Company shall hold all of the outstanding capital stock of the Savings Bank. P. Holding Company Common Stock: The common stock, $0.01 par value per ---------------------------- share, of the Holding Company. Q. Interim A: "First Federal Interim "A" Bank, A Federal Savings Bank," --------- which will be the interim federal stock savings bank resulting from the conversion of the MHC to stock form immediately prior to the merger of Interim B into the Savings Bank. R. Interim B: "First Federal Interim "B" Bank, A Federal Savings Bank," --------- which will be formed as a wholly owned interim federal stock savings bank subsidiary of the Holding Company, which will merge with and into the Savings Bank immediately after the merger of Interim A into the Savings Bank. S. Local Community: Crawford, Clark, Floyd, Harrison and Washington --------------- Counties, Indiana. T. Market Maker: A dealer (i.e., any Person who engages directly or ------------ indirectly as agent, broker, or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system or furnishes bona fide competitive bid and offer quotations on request and (ii) is ready, willing and able to effect transactions in reasonable quantities at its quoted prices with other brokers or dealers. U. Member: Any Person qualifying as a member of the MHC pursuant to its ------ charter and bylaws. V. MHC: First Capital Inc., M.H.C., Corydon, Indiana. --- W. Offerings: Collectively, the Subscription Offering, Direct Community --------- Offering and Syndicated Community Offering. X. Officer: An executive officer of any or all of the Primary Parties, ------- which includes the Chief Executive Officer, President, Executive Vice President, Senior Vice Presidents, Vice Presidents in charge of principal business 3 functions, Secretary, Controller, and any Person performing functions similar to those performed by the foregoing persons. Y. Order Form(s): Form(s) to be used to purchase Conversion Stock sent ------------- to Eligible Account Holders and other parties eligible to purchase Conversion Stock in the Subscription Offering. Z. Other Member: A Member (other than an Eligible Account Holder or ------------ Supplemental Eligible Account Holder) at the close of business on the Voting Record Date. AA. Person: An individual, a corporation, a partnership, an association ------ a joint-stock company, a trust (including Individual Retirement Accounts and KEOGH Accounts), any unincorporated organization, a government or political subdivision thereof or any other entity. BB. Plan: This Plan of Conversion from Mutual Holding Company to Stock ---- Holding Company and Agreement and Plan of Reorganization, as originally adopted by the Boards of Directors of the MHC and the Savings Bank, or as amended in accordance with its terms. CC. Primary Parties: Collectively, the MHC, the Savings Bank and the --------------- Holding Company. DD. Public Stockholder: Any Person who owns Savings Bank Common Stock, ------------------ other than the MHC, as of the Voting Record Date. EE. Qualifying Deposit: The deposit balance in any Savings Account as ------------------ of the close of business on the Eligibility Record Date or the Supplemental Eligibility Record Date, as applicable; provided, however, that no Savings Account with a deposit balance of less than $50.00 shall constitute a Qualifying Deposit. FF. Registration Statement: The registration statement on SEC Form S-1, ---------------------- or similar form, filed by the Holding Company with the SEC for the purpose of registering the Conversion Stock under the Securities Act of 1933, as amended. GG. Savings Account(s): Withdrawable deposit(s) in the Savings Bank, ------------------ including certificates of deposit, demand deposit accounts and non-interest- bearing deposit accounts. HH. Savings Bank: First Federal Bank, A Federal Savings Bank, Corydon, ------------ Indiana. II. Savings Bank Common Stock: The common stock of the Savings Bank, par ------------------------- value $1.00 per share. JJ. SEC: Securities and Exchange Commission. --- KK. Special Meeting of Members: The special meeting of the Members, and -------------------------- any adjournments thereof, held to consider and vote upon the Plan. LL. Meeting of Stockholders: The meeting of the stockholders of the ----------------------- Savings Bank, and any adjournments thereof, to be called and held for the purpose of submitting the Plan for their approval. Such meeting may either be an annual or a special meeting. MM. Subscription Offering: The offering of Conversion Stock to Eligible --------------------- Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members under the Plan. 4 NN. Subscription Rights: Nontransferable, non-negotiable, personal ------------------- rights of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members to purchase Conversion Stock. OO. Supplemental Eligibility Record Date: The last day of the calendar ------------------------------------ quarter preceding the approval of the Plan by the OTS. PP. Supplemental Eligible Account Holder: Holder of a Qualifying ------------------------------------ Deposit in the Savings Bank (other than an Officer or director of the Savings Bank or their Associates) on the Supplemental Eligibility Record Date. QQ. Syndicated Community Offering: The offering for sale by a syndicate ----------------------------- of broker-dealers to the general public of shares of Conversion Stock not purchased in the Subscription Offering and the Direct Community Offering. RR. Tax-Qualified Employee Stock Benefit Plan: Any defined benefit plan ----------------------------------------- or defined contribution plan of the Savings Bank or Holding Company, such as an employee stock ownership plan, bonus plan, profit-sharing plan or other plan, which, with its related trust, meets the requirements to be "qualified" under section 401 of the Internal Revenue Code. A "non-tax-qualified employee stock benefit plan" is any defined benefit plan or defined contribution plan that is not so qualified. SS. Voting Record Date(s): The date(s) fixed by the Boards of Directors --------------------- of the MHC and the Savings Bank according to OTS regulations for determining eligibility to vote at the Special Meeting of Members and at the Meeting of Stockholders. III. General Procedure for Conversion and Reorganization --------------------------------------------------- A. Conversion of MHC to an Interim Federal Stock Savings Bank and -------------------------------------------------------------- Merger of Such Interim Into the Savings Bank. The MHC will convert into First - -------------------------------------------- Federal Interim "A" Bank, A Federal Savings Bank (i.e.,"Interim A") and Interim ---- A will simultaneously merge with and into the Savings Bank, with the Savings Bank as the surviving entity ("MHC Merger") pursuant to the Plan of Merger attached hereto as Annex A. As a result of the MHC Merger, the Savings Bank Common Stock held by the MHC will be canceled and Eligible Account Holders and Supplemental Eligible Account Holders will be granted ratable interests in a liquidation account, to be established in accordance with the procedures set forth in Section XIV hereof. B. Merger of a Second Interim Federal Stock Savings Bank into Savings ------------------------------------------------------------------ Bank and Exchange of Shares. Immediately after the MHC Merger, First Federal - --------------------------- Interim "B" Bank, A Federal Savings Bank (i.e., Interim B) will merge with and ---- into the Savings Bank pursuant to the Plan of Reorganization attached hereto as Annex B, and the separate existence of Interim B will cease ("Savings Bank Merger"). The shares of the Holding Company Common Stock held by the Bank will be canceled. The shares of common stock of Interim B held by the Holding Company will be converted, on a one-to-one basis, into shares of Savings Bank Common Stock, which will result in the Savings Bank becoming a wholly-owned subsidiary of the Holding Company. The Public Stockholders will exchange their shares of Savings Bank Common Stock for shares of Holding Company Common Stock based upon the Exchange Ratio. In addition, all options to purchase shares of Savings Bank Common Stock which are outstanding immediately prior to consummation of the Conversion and Reorganization shall be converted to options to purchase shares of Holding Company Common Stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the Exchange Ratio so that the aggregate exercise price remains unchanged, and with the duration of the option remaining unchanged. Upon consummation of the Conversion and Reorganization, all of the Savings Bank Common Stock will be owned by the Holding Company and the Public Stockholders will own the same percentage of the Holding Company Common Stock as the percentage of the Savings Bank Common Stock owned by them prior to the Conversion and Reorganization, before giving effect to cash paid in lieu of any fractional interests of Savings Bank Common Stock and any shares of Conversion Stock purchased by the Public Stockholders in the Offering or by the 5 Tax-Qualified Employee Stock Benefit Plans thereafter. The Holding Company will then sell the Conversion Stock in the Offerings in accordance with this Plan. Following consummation of the Conversion and Reorganization, voting rights with respect to the Savings Bank shall be held and exercised exclusively by the Holding Company as holder of the outstanding Savings Bank Common Stock. Voting rights with respect to the Holding Company shall be held and exercised exclusively by holders of the Holding Company Common Stock. As a result of the MHC Merger, the separate existence of the MHC and the voting rights of Members will cease. IV. Steps Prior to Submission of the Plan to the Members and the Savings Bank ------------------------------------------------------------------------- Stockholders for Approval - ------------------------- Prior to submission of the Plan to the Members and to the stockholders of the Savings Bank for approval, the Plan must be approved by the OTS. Prior to such regulatory approval: A. The Boards of Directors of the MHC and the Savings Bank each shall adopt the Plan by a vote of not less than two-thirds of their entire membership. B. The MHC shall publish legal notice of the adoption of the Plan in a newspaper having a general circulation in each community in which the MHC and the Savings Bank maintains an office. C. A press release relating to the proposed Conversion and Reorganization may be submitted to the local media. D. Copies of the Plan as adopted by the Boards of Directors of the MHC and the Savings Bank shall be made available for inspection at each office of the MHC and the Savings Bank. E. The Savings Bank shall cause the Holding Company to be incorporated under state law and the Board of Directors of the Holding Company shall concur in the Plan by at least a two-thirds vote. F. As soon as practicable following the adoption of this Plan, the MHC shall file the Form AC Application, and the Holding Company shall file the Registration Statement and the H-(e)1 Application. In addition, an application to merge the MHC (following its conversion into an interim federal stock savings bank) and the Savings Bank and an application to merge Interim B and the Savings Bank shall both be filed with the OTS, either as exhibits to the H-(e)1 Application, or separately. Upon filing the Form AC Application, the MHC shall publish legal notice thereof in a newspaper having a general circulation in each community in which the MHC and the Savings Bank maintains an office and/or by mailing a letter to each Member, and also shall publish such other notices of the Conversion and Reorganization as may be required in connection with the H- (e)1 Application and by the regulations and policies of the OTS. G. The MHC and the Savings Bank shall obtain an opinion of their tax advisors or a favorable ruling from the U.S. Internal Revenue Service which shall state that the Conversion and Reorganization shall not result in any gain or loss for federal income tax purposes to the Primary Parties or to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members. Receipt of a favorable opinion or ruling is a condition precedent to completion of the Conversion and Reorganization. V. Special Meeting of Members -------------------------- Subsequent to the approval of the Plan by the OTS, the Special Meeting shall be scheduled in accordance with the MHC's Bylaws. Promptly after receipt of approval and at least 20 days but not more than 45 days prior to the Special Meeting, the MHC shall distribute proxy solicitation materials to all Members and beneficial owners of accounts held in fiduciary capacities where the beneficial owners possess voting rights, as of the Voting Record Date. The proxy 6 solicitation materials shall include a copy of the proxy statement to be used in connection with such solicitation and other documents authorized for use by the regulatory authorities and may also include a copy of the Plan and/or a prospectus ("Prospectus") as provided in Section VIII below. The MHC shall also advise each Eligible Account Holder and Supplemental Eligible Account Holder not entitled to vote at the Special Meeting of the proposed Conversion and Reorganization and the scheduled Special Meeting, and provide a postage prepaid card on which to indicate whether he wishes to receive a Prospectus, if the Subscription Offering is not held concurrently with the proxy solicitation. Pursuant to OTS regulations, an affirmative vote of not less than a majority of the total outstanding votes of the Members is required for approval of the Plan. Voting may be in person or by proxy at the Special Meeting of Members. The OTS shall be notified promptly of the actions of the Members at the Special Meeting of Members. VI. Meeting of Stockholders ----------------------- Subsequent to the approval of the Plan by the OTS, the Meeting of Stockholders shall be scheduled in accordance with the Savings Bank's Bylaws at which the Plan will be considered for approval. Promptly after receipt of approval and at least 20 days but not more than 45 days prior to such meeting, the Savings Bank shall distribute proxy solicitation materials to Savings Bank stockholders and beneficial owners of Savings Bank Common Stock held in fiduciary capacities where the beneficial owners possess voting rights, as of the Voting Record Date. The proxy solicitation materials shall include a copy of the proxy statement to be used in connection with such solicitation and other documents authorized for use by the regulatory authorities and may also include a copy of the Plan and/or a Prospectus as provided in Paragraph VIII below. The Savings Bank shall also advise each holder of Savings Bank Common Stock entitled to vote at the meeting of the proposed Conversion and Reorganization and the scheduled meeting, and provide a postage prepaid card on which to indicate whether he wishes to receive the Prospectus, if the Subscription Offering is not held concurrently with the proxy solicitation. Pursuant to OTS regulations, an affirmative vote of not less than two- thirds of the total outstanding votes of the stockholders of the Savings Bank is required for approval of the Plan. Furthermore, pursuant to OTS policy, the affirmative vote of not less than a majority of the total outstanding votes of the stockholders of the Savings Bank (except the MHC) present in person or by proxy is required for approval of the Plan. Voting may be in person or by proxy at the Meeting of Stockholders. The OTS shall be notified promptly of the actions of the stockholders of the Savings Bank at the Meeting of Stockholders. VII. Summary Proxy Statements ------------------------ The Proxy Statements furnished to Members and to stockholders of the Savings Bank may be in summary form; provided that a statement is made in bold- face type that a more detailed description of the proposed transaction may be obtained by returning an enclosed postage prepaid card or other written communication requesting supplemental information. Without prior approval of the OTS, the Special Meeting and the meeting of the stockholders of the Savings Bank shall not be held less than 20 days after the last day on which the supplemental information statement is mailed to requesting Members or requesting stockholder of the Savings Bank. The supplemental information statement may be combined with the Prospectus if the Subscription Offering is commenced concurrently with or during the proxy solicitation of Members for the Special Meeting or of the stockholders of the Savings Bank for the Meeting of Stockholders. VIII. Offering Documents ------------------ The Holding Company may commence the Subscription Offering and, provided that the Subscription Offering has commenced, may commence the Direct Community Offering concurrently with or during the proxy solicitation relating to the Special Meeting of Members and the Meeting of Stockholders. The Holding Company may close the Subscription Offering before such meetings, provided that the offer and sale of the Conversion Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting and by the stockholders of the Savings 7 Bank at the Meeting of Stockholders. The MHC's and the Savings Bank's proxy solicitation materials may require Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and the Savings Bank Stockholders to return to the Savings Bank by a reasonable certain date a postage prepaid card or other written communication requesting receipt of a Prospectus with respect to the Subscription Offering, provided that if the Prospectus is not mailed concurrently with the proxy solicitation materials, the Subscription Offering shall not be closed until the expiration of 30 days after the mailing of the proxy solicitation materials. If the Subscription Offering is not commenced within 45 days after the Special Meeting, the Savings Bank may transmit, not more than 30 days prior to the commencement of the Subscription Offering, to each Eligible Account Holder, Supplemental Eligible Account Holder and other eligible subscribers who had been furnished with proxy solicitation materials a notice which shall state that the Savings Bank is not required to furnish a Prospectus to them unless they return by a reasonable date certain a postage prepaid card or other written communication requesting the receipt of the Prospectus. Prior to commencement of the Subscription Offering, the Direct Community Offering and the Syndicated Community Offering, the Holding Company shall file the Registration Statement. The Holding Company shall not distribute the final Prospectus until the Registration Statement containing same has been declared effective by the SEC and the Prospectus has been declared effective by the OTS. IX. Combined Subscription and Direct Community Offering --------------------------------------------------- Instead of a separate Subscription Offering, all Subscription Rights may be exercised by delivery of properly completed and executed Order Forms to the Savings Bank or selling group utilized in connection with the Direct Community Offering and the Syndicated Community Offering. If a separate Subscription Offering is not held, orders for Conversion Stock in the Direct Community Offering shall first be filled pursuant to the priorities and limitations stated in Paragraph XI.C. below. X. Consummation of the Conversion and Reorganization ------------------------------------------------- The effective date of the Conversion and Reorganization shall be the date upon which the last of the following actions occurs: (i) the filing of Articles of Combination with the OTS with respect to the MHC Merger, (ii) the filing of Articles of Combination with the OTS with respect to the Savings Bank Merger and (iii) the closing of the issuance of the shares of Conversion Stock in the Offerings. The filing of Articles of Combination relating to the MHC Merger and the Savings Bank Merger and the closing of the issuance of shares of Conversion Stock in the Offerings shall not occur until all requisite regulatory, Member approval and approval of the stockholders of the Savings Bank have been obtained, all applicable waiting periods have expired and sufficient subscriptions and orders for the Conversion Stock have been received. It is intended that the closing of the MHC Merger, the Savings Bank Merger and the sale of shares of Conversion Stock in the Offerings shall occur consecutively and substantially simultaneously. After the Conversion and Reorganization, the Savings Bank will succeed to all the rights, interests, duties and obligations of the Savings Bank before the Conversion and Reorganization, including but not limited to all rights and interests of the Savings Bank in and to its assets and properties, whether real, personal or mixed. The Savings Bank will continue to be a member of the Federal Home Loan Bank System and all its insured savings deposits will continue to be insured by the FDIC to the extent provided by applicable law. XI. Conversion Stock Offering ------------------------- A. Number of Shares ---------------- The number of shares of Conversion Stock to be offered pursuant to the Plan shall be determined initially by the Boards of Directors of the Primary Parties in conjunction with the determination of the Purchase Price (as defined in Section XI.B. below). The number of shares to be offered may be subsequently adjusted by the Board of Directors prior to completion of the Offerings. 8 B. Independent Evaluation and Purchase Price of Conversion Stock ------------------------------------------------------------- All shares of Conversion Stock sold in the Conversion and Reorganization, including shares sold in any Direct Community Offering, shall be sold at a uniform price per share, and referred to herein as the "Purchase Price." The Purchase Price shall be determined by the Board of Directors of the Primary Parties immediately prior to the simultaneous completion of all such sales contemplated by this Plan on the basis of the estimated pro forma market value of the MHC, as converted, and the Savings Bank at such time. Such estimated pro forma market value shall be determined for such purpose by an independent appraiser on the basis of such appropriate factors not inconsistent with the regulations of the OTS. Immediately prior to the Subscription Offering, a subscription price range shall be established which shall vary from 15% above to 15% below the average of the minimum and maximum of the estimated price range. The maximum subscription price (i.e., the per share amount to be remitted when ---- subscribing for shares of Conversion Stock) shall then be determined within the subscription price range by the Board of Directors of the Primary Parties. The subscription price range and the number of shares to be offered may be revised after the completion of the Subscription Offering with OTS approval without a resolicitation of proxies or Order Forms or both. C. Method of Offering Shares ------------------------- Subscription Rights shall be issued at no cost to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members pursuant to priorities established by this Plan and the regulations of the OTS. In order to effect the Conversion and Reorganization, all shares of Conversion Stock proposed to be issued in connection with the Conversion and Reorganization must be sold and, to the extent that shares are available, no subscriber shall be allowed to purchase less than 25 shares; provided, however, that if the purchase price is greater than $10.00 per share, the minimum number of shares which must be subscribed for shall be adjusted so that the aggregate actual purchase price required to be paid for such minimum number of shares does not exceed $500.00. The priorities established for the purchase of shares are as follows: 1. Category 1: Eligible Account Holders ------------------------------------- a. Each Eligible Account Holder shall receive, without payment, Subscription Rights entitling such Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of the maximum purchase limitation established for the Direct Community Offering, one-tenth of one percent of the total offering or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders. If the allocation made in this paragraph results in an oversubscription, shares of Conversion Stock shall be allocated among subscribing Eligible Account Holders so as to permit each such account holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less. Any shares of Conversion Stock not so allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all subscribing Eligible Account Holders. b. Subscription Rights received by Officers and directors of the Primary Parties and their Associates, as Eligible Account Holders, based on their increased deposits in the Savings Bank in the one-year period preceding the Eligibility Record Date shall be subordinated to all other subscriptions involving the exercise of Subscription Rights pursuant to this Category. 9 2. Category 2: Tax-Qualified Employee Stock Benefit Plans ------------------------------------------------------ a. Tax-Qualified Employee Stock Benefit Plans shall receive, without payment, nontransferable Subscription Rights to purchase in the aggregate up to 8% of the Conversion Stock, including shares of Conversion Stock to be issued in the Conversion as result of an increase in the estimated price range after commencement of the Subscription Offering and prior to the completion of the Conversion. The Subscription Rights granted to Tax-Qualified Stock Benefit Plans shall be subject to the availability of shares of Conversion Stock after taking into account the shares of Conversion Stock purchased by Eligible Account Holders; provided, however, that in the event the number of shares offered in the Conversion is increased to an amount greater than the maximum of the estimated price range as set forth in the Prospectus ("Maximum Shares"), the Tax-Qualified Employee Stock Benefit Plans shall have a priority right to purchase any such shares exceeding the Maximum Shares up to an aggregate of 8% of the Conversion Stock. Tax-Qualified Employee Stock Benefit Plans may use funds contributed or borrowed by the Holding Company or the Association and/or borrowed from an independent financial institution to exercise such Subscription Rights, and the Holding Company and the Association may make scheduled discretionary contributions thereto, provided that such contributions do not cause the Holding Company or the Association to fail to meet any applicable capital requirements. 3. Category 3: Supplemental Eligible Account Holders -------------------------------------------------- a. In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Form AC Application filed prior to OTS approval, then, and only in that event, each Supplemental Eligible Account Holder shall receive, without payment, Subscription Rights entitling such Supplemental Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of the maximum purchase limitation established for the Direct Community Offering, one-tenth of one percent of the total offering or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders. b. Subscription Rights received pursuant to this category shall be subordinated to Subscription Rights granted to Eligible Account Holders and Tax-Qualified Employee Stock Benefit Plans. c. Any Subscription Rights to purchase shares of Conversion Stock received by an Eligible Account Holder in accordance with Category 1 shall reduce to the extent thereof the Subscription Rights to be distributed pursuant to this Category. d. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, shares of Conversion Stock shall be allocated among the subscribing Supplemental Eligible Account Holders as follows: (1) Shares of Conversion Stock shall be allocated so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation (including the number of shares of Conversion Stock, if any, allocated in accordance with Category Number 1) equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less. 10 (2) Any shares of Conversion Stock not allocated in accordance with subparagraph (1) above shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders. 4. Category 4: Other Members -------------------------- a. Other Members shall receive, without payment, Subscription Rights to purchase shares of Conversion Stock, after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders pursuant to Category Nos. l, 2 and 3 above, subject to the following conditions: (1) Each such Other Member shall be entitled to subscribe for the greater of the maximum purchase limitation established for the Direct Community Offering or one-tenth of one percent of the total offering. (2) In the event of an oversubscription for shares of Conversion Stock pursuant to Category 4, the shares of Conversion Stock available shall be allocated among the subscribing Other Members pro rata on the basis of the amounts of their respective subscriptions. D. Direct Community Offering and Syndicated Community Offering ----------------------------------------------------------- 1. Any shares of Conversion Stock not purchased through the exercise of Subscription Rights set forth in Category Nos. 1 through 4 above may be sold by the Holding Company to Persons under such terms and conditions as may be established by the Savings Bank's Board of Directors with the concurrence of the OTS. The Direct Community Offering may commence concurrently with or as soon as possible after the completion of the Subscription Offering and must be completed within 45 days after completion of the Subscription Offering, unless extended with the approval of the OTS. No Person may purchase in the Direct Community Offering more than 25,000 shares of Conversion Stock. The right to purchase shares of Conversion Stock under this Category is subject to the right of the Savings Bank or the Holding Company to accept or reject such orders in whole or in part. In the event of an oversubscription for shares in this Category, the shares available shall be allocated among prospective purchasers pro rata on the basis of the amounts of their respective orders. The offering price for which such shares are sold to the general public in the Direct Community Offering shall be the Purchase Price. 2. Orders received in the Direct Community Offering first shall be filled up to a maximum of 2% of the Conversion Stock and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled. 3. The Conversion Stock offered in the Direct Community Offering shall be offered and sold in a manner that will achieve the widest distribution thereof. Preference shall be given in the Direct Community Offering first to the Public Stockholders (who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members) and then to natural Persons and trusts of natural Persons residing in the Local Community. 4. Subject to such terms, conditions and procedures as may be determined by the Savings Bank and the Holding Company, all shares of Conversion Stock not subscribed for in the Subscription Offering or ordered in the Direct Community Offering may be sold by a syndicate of broker-dealers to the general public in a Syndicated Community Offering. No Person may purchase in the Syndicated Community Offering more 11 than 25,000 shares of Conversion Stock. Each order for Conversion Stock in the Syndicated Community Offering shall be subject to the absolute right of the Savings Bank and the Holding Company to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable after completion of the Syndicated Community Offering. The Savings Bank and the Holding Company may commence the Syndicated Community Offering concurrently with, at any time during, or as soon as practicable after the end of the Subscription Offering and/or Direct Community Offering, provided that the Syndicated Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by the Savings Bank and the Holding Company with the approval of the OTS. 5. If for any reason a Syndicated Community Offering of shares of Conversion Stock not sold in the Subscription Offering and the Direct Community Offering cannot be effected, or in the event that any insignificant residue of shares of Conversion Stock is not sold in the Subscription Offering, Direct Community Offering or Syndicated Community Offering, the Savings Bank and the Holding Company shall use their best efforts to obtain other purchasers for such shares in such manner and upon such conditions as may be satisfactory to the OTS. 6. In the event a Direct Community Offering or Syndicated Community Offering do not appear feasible, the Savings Bank will immediately consult with the OTS to determine the most viable alternative available to effect the completion of the Conversion. Should no viable alternative exist, the Savings Bank may terminate the Conversion with the concurrence of the OTS. E. Limitations Upon Purchases -------------------------- The following additional limitations and exceptions shall be imposed upon purchases of shares of Conversion Stock: 1. No Person may purchase more than 25,000 shares of Conversion Stock in the Conversion and Reorganization, including purchases in the Direct Community Offering and the Syndicated Community Offering, except that Tax-Qualified Employee Stock Benefit Plans may purchase up to 8% of the total Conversion Stock issued in the Conversion and Reorganization and shares to be held by the Tax-Qualified Employee Stock Benefit Plans and attributable to a Person shall not be aggregated with other shares purchased directly by or otherwise attributable to such Person. 2. The maximum number of shares of Conversion Stock which may be subscribed for or purchased in all categories in the Conversion and Reorganization by any Person together with any Associate or any group or Persons Acting in Concert, when combined with any Exchange Stock received, shall not exceed 62,500 shares of Common Stock, except that Tax-Qualified Employee Stock Benefit Plans may purchase up to 8% of the total Conversion Stock issued in the Conversion and Reorganization and shares held or to be held by the Tax-Qualified Employee Stock Benefit Plans and attributable to a Person shall not be aggregated with other shares purchased directly by or otherwise attributable to such Person. 3. Officers and directors of the Primary Parties and Associates thereof may not purchase in the aggregate more than 34% of the shares issued in the Conversion and Reorganization, including any Exchange Stock received. 4. The Boards of Directors of the Primary Parties will not be deemed to be Associates or a group of Persons Acting in Concert with other directors or trustees solely as a result of membership on the Board of Directors. 5. The Boards of Directors of the Primary Parties, with the approval of the OTS and without further approval of Members or stockholders of the Savings Bank, may, as a result of market conditions and 12 other factors, increase or decrease the purchase limitation described herein or the number of shares of Conversion Stock to be sold in the Conversion and Reorganization. The Boards of Directors of the Primary Parties may, in their sole discretion, increase the maximum purchase limitation set forth above up to 9.99% of the Conversion Shares sold in the Conversion and Reorganization, provided that orders for shares which exceed 5% of the Conversion Shares sold in the Conversion and Reorganization may not exceed, in the aggregate, 10% of the shares sold in the Conversion and Reorganization. If the Primary Parties increase the maximum purchase limitations or the number of shares of Conversion Stock to be sold in the Conversion and Reorganization, the Primary Parties are only required to resolicit Persons who subscribed for the maximum purchase amount and may, in the sole discretion of the Primary Parties, resolicit certain other large subscribers. If the Primary Parties decrease the maximum purchase limitations or the number of shares of Conversion Stock to be sold in the Conversion and Reorganization, the orders of any Person who subscribed for the maximum purchase amount shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such Person. Notwithstanding anything to the contrary contained in this Plan, and except as may be required by the OTS, Public Stockholders will not be required to sell or divest any Holding Company Common Stock or be limited in receiving Exchange Stock even if their percentage ownership of the Savings Bank Common Stock when converted into Exchange Stock would exceed an applicable purchase limitation. Each Person purchasing Conversion Stock in the Conversion and Reorganization shall be deemed to confirm that such purchase does not conflict with the purchase limitations under the Plan or otherwise imposed by law, rule or regulation. In the event that such purchase limitations are violated by any Person (including any Associate or group of Persons affiliated or otherwise Acting in Concert with such Person), the Holding Company shall have the right to purchase from such Person at the actual Purchase Price per share all shares acquired by such Person in excess of such purchase limitations or, if such excess shares have been sold by such Person, to receive from such Person the difference between the actual Purchase Price per share paid for such excess shares and the price at which such excess shares were sold by such Person. This right of the Holding Company to purchase such excess shares shall be assignable by the Holding Company. F. Restrictions On and Other Characteristics of the Conversion Stock ----------------------------------------------------------------- 1. Transferability. Conversion Stock purchased by Officers and --------------- directors of the Primary Parties shall not be sold or otherwise disposed of for value for a period of one year from the effective date of Conversion and Reorganization, except for any disposition (i) following the death of the original purchaser or (ii) resulting from an exchange of securities in a merger or acquisition approved by the regulatory authorities having jurisdiction. The Conversion Stock issued by the Holding Company to such Officers and directors shall bear a legend giving appropriate notice of the one- year holding period restriction. Said legend shall state as follows: "The shares evidenced by this certificate are restricted as to transfer for a period of one year from the date of this certificate pursuant to Parts 563b and 575 of the Rules and Regulations of the Office of Thrift Supervision. These shares may not be transferred prior thereto without a legal opinion of counsel that said transfer is permissible under the provisions of applicable laws and regulations." In addition, the Holding Company shall give appropriate instructions to the transfer agent of the Holding Company Common Stock with respect to the foregoing restrictions. Any shares of Holding Company Common Stock subsequently issued as a stock dividend, stock split or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for such Persons as may be then applicable to such restricted stock. 13 2. Subsequent Purchases by Officers and Directors. Without prior ---------------------------------------------- approval of the OTS, if applicable, Officers and directors of the Savings Bank and officers and directors of the Holding Company, and their Associates, shall be prohibited for a period of three years following completion of the Conversion and Reorganization from purchasing outstanding shares of Holding Company Common Stock, except from a broker or dealer registered with the SEC. Notwithstanding this restriction, purchases involving more than 1% of the total outstanding shares of Holding Company Stock and purchases made and shares held by a Tax- Qualified or non-Tax-Qualified Employee Stock Benefit Plan which may be attributable to such directors and Officers may be made in negotiated transactions without OTS permission or the use of a broker or dealer. 3. Repurchase and Dividend Rights. For a period of three years ------------------------------ following the consummation of the Conversion and Reorganization, any repurchases of Holding Company Stock by the Holding Company from any Person shall be subject to the then applicable rules and regulations and policies of the OTS. The Savings Bank may not declare or pay a cash dividend on or repurchase any of its Capital Stock if the result thereof would be to reduce the regulatory capital of the Savings Bank below the amount required for the liquidation account described in Paragraph XIV. Further, any dividend declared or paid on the Capital Stock shall comply with the then applicable rules and regulations of the OTS. 4. Voting Rights. After the Conversion and Reorganization, ------------- holders of Savings Accounts in and obligors on loans of the Savings Bank will not have voting rights in the MHC. Exclusive voting rights with respect to the Holding Company shall be vested in the holders of Holding Company Stock; holders of Savings Accounts in and obligors on loans of the Savings Bank will not have any voting rights in the Holding Company except and to the extent that such Persons become stockholders of the Holding Company, and the Holding Company will have exclusive voting rights with respect to the Savings Bank's Capital Stock. G. Mailing of Offering Materials and Collation of Subscriptions ------------------------------------------------------------ The sale of all shares of Conversion Stock offered pursuant to the Plan must be completed within 24 months after approval of the Plan at the Special Meeting. After approval of the Plan by the OTS and the declaration of the effectiveness of the Prospectus, the Holding Company shall distribute Prospectuses and Order Forms for the purchase of shares of Conversion Stock in accordance with the terms of the Plan. The recipient of an Order Form shall be provided not less than 20 days nor more than 45 days from the date of mailing, unless extended, properly to complete, execute and return the Order Form to the Holding Company or the Savings Bank. Self-addressed, postage prepaid, return envelopes shall accompany all Order Forms when they are mailed. Failure of any eligible subscriber to return a properly completed and executed Order Form within the prescribed time limits shall be deemed a waiver and a release by such eligible subscriber of any rights to purchase shares of Conversion Stock under the Plan. The sale of all shares of Conversion Stock proposed to be issued in connection with the Conversion and Reorganization must be completed within 45 days after the last day of the Subscription Offering, unless extended by the Holding Company with the approval of the OTS. H. Method of Payment ----------------- Payment for all shares of Conversion Stock may be made in cash, by check or by money order, or if a subscriber has a Savings Account(s), such subscriber may authorize the Savings Bank to charge the subscriber's Savings Account(s). The Savings Bank shall pay interest at not less than the passbook rate on all amounts paid in cash or by check or money order to purchase shares of Conversion Stock in the Subscription Offering from the date payment is received until the Conversion and Reorganization is completed or terminated. The Savings Bank is not permitted knowingly to loan funds or otherwise extend any credit to any Person for the purpose of purchasing Conversion Stock. 14 If a subscriber authorizes the Savings Bank to charge the subscriber's Savings Account(s), the funds shall remain in the subscriber's Savings Account(s) and shall continue to earn interest, but may not be used by such subscriber until the Conversion and Reorganization is completed or terminated, whichever is earlier. The withdrawal shall be given effect only concurrently with the sale of all shares of Conversion Stock proposed to be sold in the Conversion and Reorganization and only to the extent necessary to satisfy the subscription at a price equal to the aggregate Purchase Price. The Savings Bank shall allow subscribers to purchase shares of Conversion Stock by withdrawing funds from certificate accounts held with the Savings Bank without the assessment of early withdrawal penalties. In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if the remaining balance of the account is less than the applicable minimum balance requirement. In that event, the remaining balance shall earn interest at the passbook rate. I. Undelivered, Defective or Late Order Forms; Insufficient Payment ---------------------------------------------------------------- If an Order Form (i) is not delivered and is returned to the Holding Company or the Savings Bank by the United States Postal Service (or the Holding Company or Savings Bank is unable to locate the addressee); (ii) is not returned to the Holding Company or Savings Bank, or is returned to the Holding Company or Savings Bank after expiration of the date specified thereon; (iii) is defectively completed or executed; or (iv) is not accompanied by the total required payment for the shares of Conversion Stock subscribed for (including cases in which the subscribers' Savings Accounts are insufficient to cover the authorized withdrawal for the required payment), the Subscription Rights of the Person to whom such rights have been granted shall not be honored and shall be treated as though such Person failed to return the completed Order Form within the time period specified therein. Alternatively, the Holding Company or Savings Bank may, but shall not be required to, waive any irregularity relating to any Order Form or require the submission of a corrected Order Form or the remittance of full payment for the shares of Conversion Stock subscribed for by such date as the Holding Company or Savings Bank may specify. Subscription orders, once tendered, shall not be revocable. The Holding Company's and Savings Bank's interpretation of the terms and conditions of the Plan and of the Order Forms shall be final. J. Members in Non-Qualified States or in Foreign Countries ------------------------------------------------------- The Primary Parties 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 reside. However, the Primary Parties are not required to offer stock in the Subscription Offering to any person who resides in a foreign country or resides in a state of the United States with respect to which (i) a small number of persons otherwise eligible to subscribe for shares of Common Stock reside in such state; or (ii) the Primary Parties determine 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 Primary Parties 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 relative to other states, the Primary Parties 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. XII. Post Conversion and Reorganization Filing and Market Making ----------------------------------------------------------- In connection with the Conversion and Reorganization, the Holding Company shall register the Common Stock with the SEC pursuant to the Securities Exchange Act of 1934, as amended, and shall undertake not to deregister such Conversion Stock for a period of three years thereafter. 15 The Holding Company shall use its best efforts to encourage and assist Market Makers to establish and maintain a market for the shares of its stock. The Holding Company shall also use its best efforts to list its stock on The Nasdaq Stock Market or on a national or regional securities exchange. XIII. Status of Savings Accounts and Loans Subsequent to Conversion and ----------------------------------------------------------------- Reorganization - -------------- All Savings Accounts shall retain the same status after Conversion and Reorganization as these accounts had prior to Conversion and Reorganization. Each Savings Account holder shall retain, without payment, a withdrawable Savings Account(s) after the Conversion and Reorganization, equal in amount to the withdrawable value of such holder's Savings Account(s) prior to Conversion and Reorganization. All Savings Accounts will continue to be insured by the Savings Association Insurance Fund of the FDIC up to the applicable limits of insurance coverage. All loans granted by the Savings Bank shall retain the same status after the Conversion and Reorganization as they had prior to the Conversion and Reorganization. See Paragraph III.B. with respect to the termination of voting rights of Members. XIV. Liquidation Account ------------------- After the Conversion and Reorganization, holders of Savings Accounts shall not be entitled to share in any residual assets in the event of liquidation of the Savings Bank. However, the Savings Bank shall, at the time of the Conversion and Reorganization, establish a liquidation account in an amount equal to the amount of dividends with respect to the Savings Bank Common Stock waived by the MHC plus the greater of (i) the Savings Bank's total retained earnings as of the date of the latest statement of financial condition contained in the final offering circular used in connection with the Savings Bank's reorganization as a majority owned subsidiary of the MHC, or (ii) 59.5% of the Savings Bank's total stockholders' equity as of the date of the latest statement of financial condition contained in the final Prospectus used in connection with the Conversion and Reorganization. The function of the liquidation account shall be to establish a priority on liquidation and, except as provided in Section XI.F.3. above, the existence of the liquidation account shall not operate to restrict the use or application of any of the net worth accounts of the Savings Bank. The liquidation account shall be maintained by the Savings Bank subsequent to the Conversion and reorganization for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who retain their Savings Accounts in the Savings 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 and/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 Eligible Account Holders and Supplemental Eligible Account 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 date subsequent to the Eligibility Record Date 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 the Eligibility Record Date or the Supplemental Eligibility Record Date or (ii) the amount of the Qualifying Deposit in such Savings Account on the Eligibility Record Date or the Supplemental Eligibility Record Date, 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. 16 In the event of a complete liquidation of the Savings Bank, 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 Savings 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. XV. Regulatory Restrictions on Acquisition of Holding Company --------------------------------------------------------- A. OTS regulations provide that for a period of three years following completion of the Conversion and Reorganization, no Person (i.e, individual, a group Acting in Concert, a corporation, a partnership, an association, a joint stock company, a trust, or any 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 or its holding company) shall directly, or indirectly, offer to purchase or actually acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company without the prior approval of the OTS. However, approval is not required for purchases directly from the Holding Company or the underwriters or selling group acting on its behalf with a view towards public resale, or for purchases not exceeding 1% per annum of the shares outstanding. Civil penalties may be imposed by the OTS for willful violation or assistance of any violation. Where any Person, directly or indirectly, acquires beneficial ownership of more than 10% of any class of equity security of the Holding Company within such three- year period, without the prior approval of the OTS, stock of the Holding Company beneficially owned by such Person in excess of 10% shall not be counted as shares entitled to vote and shall not be voted by any Person or counted as voting shares in connection with any matter submitted to the stockholders for a vote. The provisions of this regulation shall not apply to the acquisition of securities by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not have beneficial ownership of more than 25% of any class of equity security of the Holding Company. B. The Holding Company may provide in its articles of incorporation, or similar document, a provision that, for a specified period of up to five years following the date of the completion of the Conversion and Reorganization, no Person shall directly or indirectly offer to acquire or actually acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company. Such provisions would not apply to acquisition of securities by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not have beneficial ownership of more than 25% of any class of equity security of the Holding Company. The Holding Company may provide in its articles of incorporation, or similar document, for such other provisions affecting the acquisition of its stock as shall be determined by its Board of Directors. XVI. Directors and Officers of the Savings Bank ------------------------------------------ The Conversion and Reorganization is not intended to result in any change in the directors or Officers of the Savings Bank. Each Person serving as a director of the Savings Bank at the time of Conversion and Reorganization shall continue to serve as a member of the Savings Bank's Board of Directors, subject to the Savings Bank's Federal Stock Charter and Bylaws. The Persons serving as Officers immediately prior to the Conversion and Reorganization will continue to serve at the discretion of the Board of Directors in their respective capacities as Officers of the Savings Bank. In connection with the Conversion and Reorganization, the Savings Bank and the Holding Company may enter into employment agreements on such terms and with such officers as shall be determined by the Boards of Directors of the Savings Bank and the Holding Company. XVII. Executive Compensation ---------------------- The Savings Bank and the Holding Company may adopt, subject to any required approvals, executive compensation or other benefit programs, including but not limited to compensation plans involving stock options, stock appreciation rights, restricted stock grants, employee recognition programs and the like. 17 XVIII. Amendment or Termination of Plan -------------------------------- If necessary or desirable, the Plan may be amended by a two-thirds vote of the Savings Bank's Board of Directors or the MHC's Board of Directors, at any time prior to the Special Meeting of Members and the Meeting of Stockholders. At any time thereafter, the Plan may be amended by a two-thirds vote of the respective Boards of Directors only with the concurrence of the OTS. The Plan may be terminated by a two-thirds vote of the Board of Directors at any time prior to the Special Meeting of Members or the Meeting of Stockholders, and at any time following such meetings with the concurrence of the OTS. In its discretion, the Boards of Directors of the MHC and the Savings Bank may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another Special Meeting of Members or Meeting of Stockholders. In the event that mandatory new regulations pertaining to conversions are adopted by the OTS prior to the completion of the Conversion and Reorganization, the Plan shall be amended to conform to the new mandatory regulations without a resolicitation of proxies or another Special Meeting of Members or another Meeting of Stockholders. In the event that new conversion regulations adopted by the OTS prior to completion of the Conversion and Reorganization contain optional provisions, the Plan may be amended to utilize such optional provisions at the discretion of the Board of Directors without a resolicitation of proxies or another Special Meeting of Members or another Meeting of Stockholders. By adoption of the Plan, the Members and the Savings Bank stockholders authorize the Boards of Directors of the MHC and the Savings Bank to amend and/or terminate the Plan under the circumstances set forth above. XIX. Expenses of the Conversion and Reorganization --------------------------------------------- The Primary Parties shall use their best efforts to assure that expenses incurred in connection with the Conversion and Reorganization are reasonable. XX. Contributions to Tax-Qualified Plans ------------------------------------ The Holding Company and/or the Savings Bank may make discretionary contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such contributions do not cause the Savings Bank to fail to meet its regulatory capital requirements. * * * 18 ANNEX A ------- PLAN OF MERGER This Plan of Merger, dated as of __________ ___, 1998, is made by and between First Capital Inc., M.H.C. ("MHC"), a federally chartered mutual holding company, and First Federal Bank, A Federal Savings Bank ("Savings Bank" or "Surviving Corporation"), a federally chartered savings bank (collectively, the "Constituent Corporations"). WITNESSETH: WHEREAS, the MHC and the Savings Bank have adopted a Plan of Conversion from Mutual Holding Company to Stock Holding Company and Agreement and Plan of Reorganization ("Plan of Conversion") pursuant to which (i) the MHC will convert to a federally-chartered interim stock savings bank and simultaneously merge with and into the Savings Bank, with the Savings Bank as the surviving entity ("MHC Merger"), (ii) the Savings Bank and a newly-formed interim federal savings bank will merge, pursuant to which the Savings Bank will become a wholly-owned subsidiary of a newly formed stock corporation ("Holding Company") ("Savings Bank Merger"), and (iii) the Holding Company will offer shares of its common stock in the manner set forth in the Plan of Conversion (collectively, the "Conversion and Reorganization"); and WHEREAS, the MHC and the Savings Bank desire to provide for the terms and conditions of the MHC Merger; NOW, THEREFORE, the MHC and the Savings Bank hereby agree as follows: 1. EFFECTIVE DATE. The MHC Merger shall become effective on the date specified in the endorsement of the Articles of Combination relating to the MHC Merger by the Secretary of the Office of Thrift Supervision ("OTS") pursuant to 12 C.F.R. 552.13(k), or any successor thereto ("Effective Date"). 2. THE MHC MERGER AND EFFECT THEREOF. Subject to the terms and conditions set forth herein and the prior approval of the OTS of the Conversion and Reorganization, as defined in the Plan of Conversion, and the expiration of all applicable waiting periods, the MHC shall convert from the mutual form to a federal interim stock savings bank and simultaneously merge with and into the Savings Bank, which shall be the Surviving Corporation. Upon consummation of the MHC Merger, the Surviving Corporation shall be considered the same business and corporate entity as each of the Constituent Corporations and the Surviving Corporation shall be subject to and be deemed to have assumed all of the property, rights, privileges, powers, franchises, debts, liabilities, obligations, duties and relationships of each of the Constituent Corporations and shall have succeeded to all of each of their relationships, fiduciary or otherwise, as fully and to the same extent as if such property, rights, privileges, powers, franchises, debts, obligations, duties and relationships had been originally acquired, incurred or entered into by the Surviving Corporation. In addition, any reference to either of the Constituent Corporations in any contract or document, whether executed or taking effect before or after the Effective Date, shall be considered a reference to the Surviving Corporation if not inconsistent with the other provisions of the contract or document; and any pending action or other judicial proceeding to which either of the Constituent Corporations is a party shall not be deemed to have abated or to have been discontinued by reason of the MHC Merger, but may be prosecuted to final judgment, order or decree in the same manner as if the MHC Merger had not occurred or the Surviving Corporation may be substituted as a party to such action or proceeding, and any judgment, order or decree may be rendered for or against it that might have been rendered for or against either of the Constituent Corporations if the MHC Merger had not occurred. Annex A-1 3. CANCELLATION OF SAVINGS BANK COMMON STOCK HELD BY THE MUTUAL HOLDING COMPANY AND MEMBER INTERESTS; LIQUIDATION ACCOUNT. (a) On the Effective Date: (i) each share of common stock, $1.00 par value per share, of the Savings Bank ("Savings Bank Common Stock") issued and outstanding immediately prior to the Effective Date and held by the MHC shall, by virtue of the MHC Merger and without any action on the part of the holder thereof, be canceled, (ii) the interests in the MHC of any person, firm or entity who or which qualified as a member of the MHC in accordance with its mutual charter and bylaws and the laws of the United States prior to the MHC's conversion from mutual to stock form ("Members") shall, by virtue of the MHC Merger and without any action on the part of any Member, be canceled, and (iii) the Savings Bank shall establish a liquidation account on behalf of each depositor member of the MHC as provided for in the Plan of Conversion. (b) At or after the Effective Date and prior to the Savings Bank Merger, each certificate or certificates theretofore, evidencing issued and outstanding shares of Savings Bank Common Stock, other than any such certificate or certificates held by the MHC, which shall be canceled, shall continue to represent issued and outstanding shares of Savings Bank Common Stock. 4. RIGHTS OF DISSENT AND APPRAISAL ABSENT. The holders of Savings Bank Common Stock shall have dissenter and appraisal rights in connection with the MHC Merger pursuant to 12 C.F.R. 552.14. 5. NAME OF SURVIVING CORPORATION. The name of the Surviving Corporation shall be "First Federal Bank, A Federal Savings Bank." 6. DIRECTORS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Charter and Bylaws of the Surviving Corporation and applicable law, the number of directors of the Surviving Corporation shall be seven. The names of those persons who, upon and after the Effective Date, shall be directors of the Surviving Corporation are set forth below. Each such director shall serve for the term which expires at the annual meeting of stockholders of the Surviving Corporation in the year set forth after his respective name, and until a successor is elected and qualified. Name Term Expires ---- ------------ John W. Buschemeyer 1998 Gerald L. Uhl 1998 Kenneth I. Saulman 1998 Samuel E. Uhl 1999 James G. Pendleton 2000 Mark D. Shireman 2000 Dennis L. Huber 2000 The address of each director is 220 Federal Drive, N.W., Corydon, Indiana 47112. 7. OFFICERS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Federal Stock Charter and Bylaws of the Surviving Corporation and applicable law, the officers of the Savings Bank immediately prior to the Effective Date shall be the officers of the Surviving Corporation. 8. OFFICES. Upon the Effective Date, all offices of the Savings Bank shall be offices of the Surviving Corporation. As of the Effective Date, the home office of the Surviving Corporation shall remain at 220 Federal Drive, N.W., Corydon, Indiana. Annex A-2 9. CHARTER AND BYLAWS. On and after the Effective Date, the Charter of the Savings Bank as in effect immediately prior to the Effective Date shall be the Federal Stock Charter of the Surviving Corporation until amended in accordance with the terms thereof and applicable law, except that the Federal Stock Charter shall be amended to provide for the establishment of a liquidation account in accordance with applicable the Plan of Conversion. On and after the Effective Date, the Bylaws of the Savings Bank as in effect immediately prior to the Effective Date shall be the Bylaws of the Surviving Corporation until amended in accordance with the terms thereof and applicable law. 10. STOCKHOLDER AND MEMBER APPROVALS. The affirmative votes of the holders of Savings Bank Common Stock and of the Members as set forth in the Plan of Conversion shall be required to approve the Plan of Conversion, of which this Plan of Merger is a part, on behalf of the Savings Bank and the MHC, respectively. 11. ABANDONMENT OF PLAN. This Plan of Merger may be abandoned by either the MHC or the Savings Bank at any time before the Effective Date in the manner set forth in the Plan of Conversion. 12. AMENDMENTS. This Plan of Merger may be amended in the manner set forth in the Plan of Conversion by a subsequent writing signed by the parties hereto upon the approval of the Boards of Directors of the Constituent Corporations. 13. SUCCESSORS. This Agreement shall be binding on the successors of the Constituent Corporations. 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana, except to the extent superseded by the laws of the United States. IN WITNESS WHEREOF, the MHC and the Savings Bank have caused this Plan of Merger to be executed by their duly authorized officers as of the day and year first above written. Attest: FIRST CAPITAL INC., M.H.C. __________________________ By: _________________________ Corporate Secretary Chief Executive Officer Attest: FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK __________________________ By: _________________________ Corporate Secretary Chief Executive Officer Annex A-3 ANNEX B ------- PLAN OF REORGANIZATION This Plan of Reorganization, dated as of _____________ ___, 1998, is made by and among First Federal Bank, A Federal Savings Bank ("Savings Bank" or the "Surviving Corporation"), a federally chartered savings bank and majority owned subsidiary of First Capital Inc., M.H.C. ("MHC"), a federally chartered mutual holding company; First Capital, Inc. ("Holding Company"), an Indiana corporation organized by the Savings Bank; and First Federal Interim "B" Bank, A Federal Savings Bank ("Interim B"); a to-be formed interim federal stock savings bank. WITNESSETH: WHEREAS, the Savings Bank has organized the Holding Company as a first- tier, wholly owned subsidiary for the purpose of becoming the stock holding company of the Savings Bank upon completion of the Conversion and Reorganization as defined in the Plan of Conversion from Mutual Holding Company to Stock Holding Company and Agreement and Plan of Reorganization ("Plan of Conversion") adopted by the Boards of Directors of the MHC and the Savings Bank; and WHEREAS, the MHC owns as of the date hereof 59.5% of the outstanding common stock of the Savings Bank, par value $1.00 per share ("Savings Bank Common Stock), will convert to a federally-chartered interim stock savings bank and simultaneously merge with and into the Savings Bank pursuant to the Plan of Conversion and the Plan of Merger included as Annex A thereto ("MHC Merger"), pursuant to which all shares of Savings Bank Common Stock held by the MHC will be canceled; and WHEREAS, the formation of a stock holding company by the Savings Bank will be facilitated by causing the Holding Company to become the sole stockholder of a newly-formed interim stock savings bank ("Interim B") and then merge Interim B with and into the Savings Bank, pursuant to which the Savings Bank will reorganize as a wholly-owned subsidiary of the Holding Company ("Reorganization") and, in connection therewith, all outstanding shares of Savings Bank Common Stock will be converted automatically into and become shares of common stock of the Holding Company, par value $0.01 per share ("Holding Company Common Stock"); and WHEREAS, Interim B is being organized by the officers of the Savings Bank as an interim Federal stock savings bank with the Holding Company as its sole stockholder in order to effect the Reorganization; and WHEREAS, the Savings Bank and Interim B ("Constituent Corporations") and the Holding Company desire to provide for the terms and conditions of the Reorganization. NOW, THEREFORE, the Savings Bank, Interim B and the Holding Company hereby agree as follows: 1. EFFECTIVE DATE. The Reorganization shall become effective on the date specified in the endorsement of the articles of combination relating to the Reorganization by the Office of Thrift Supervision ("OTS") pursuant to 12 C.F.R. (S)552.13(k), or any successor thereto ("Effective Date"). 2. THE MERGER AND EFFECT THEREOF. Subject to the terms and conditions set forth herein and the prior approval of the OTS of the Conversion and the Reorganization, as defined in the Plan of Conversion, and the expiration of all applicable waiting periods, Interim B shall merge with and into the Savings Bank, with the Savings Bank as the Surviving Corporation. Upon consummation of the Reorganization, the Surviving Corporation shall be considered the same business and corporate entity as each of the Constituent Corporations and thereupon and thereafter all the property, rights, powers and franchises of each of the Constituent Corporations shall vest in the Surviving Corporation and the Surviving Corporation shall be subject to and be deemed to have assumed all of the property, rights, privileges, powers, franchises, debts, liabilities, obligations and duties of each of the Constituent Corporations and shall Annex B-1 have succeeded to all of each of their relationships, fiduciary or otherwise, fully and to the same extent as if such property, rights, privileges, powers, franchises, debts, obligations, duties and relationships had been (originally acquired, incurred or entered into by the Surviving Corporation. In addition any reference to either of the Constituent Corporations in any contract or document, whether executed or taking effect before or after the Effective Date, shall be considered a reference to the Savings Bank if not inconsistent with the other provisions of the contract or document; and any pending action or other judicial proceeding of which either of the Constituent Corporations is a party shall not be deemed to have abated or to have been discontinued by reason of the Reorganization, but may be prosecuted to final judgment, order or decree in the same manner as if the Reorganization had not occurred or the Surviving Corporation may be substituted as a party to such action or proceeding, and any judgment, order or decree may be rendered for or against it that might have been rendered for or against either of the Constituent Corporations if the Reorganization had not occurred. 3. CONVERSION OF STOCK. (a) On the Effective Date, (i) each share of Savings Bank Common Stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be converted into the right to receive Holding Company Common Stock based on the Exchange Ratio, as defined in the Plan of Conversion, plus the right to receive cash in lieu of any fractional share interest, as determined in accordance with Section 3(c) hereof, (ii) each share of common stock, par value $1.00 per share, of Interim B ("Interim B Common Stock") issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be converted into one share of Savings Bank Common Stock, and (ii) each share of Holding Company Common Stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be canceled. By voting in favor of this Plan of Reorganization, the Holding Company, as the sole stockholder of Interim B, shall have agreed (i) to issue shares of Holding Company Common Stock in accordance with the terms hereof and (ii) to cancel all previously issued and outstanding shares of Holding Company Common Stock upon the effectiveness of the Reorganization. (b) On and after the Effective Date, there shall be no registrations of transfers on the stock transfer books of Interim B or the Savings Bank of shares of Interim B Common Stock or Savings Bank Common Stock which were outstanding immediately prior to the Effective Date. (c) Notwithstanding any other provision hereof, no fractional shares of Holding Company Common Stock shall be issued to holders of Savings Bank Common Stock. In lieu thereof, the holder of shares of Savings Bank Common Stock entitled to a fraction of a share of Holding Company Common Stock shall, at the time of surrender of the certificate or certificates representing such holder shares, receive an amount of cash equal to the product arrived at by multiplying such fraction of a share of Holding Company Common Stock by the Purchase Price, as defined in the Plan of Conversion. No such holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share. 4. EXCHANGE OF SHARES. (a) At or after the Effective Date, each holder of a certificate or certificates theretofore evidencing issued and outstanding shares of Savings Bank Common Stock, upon surrender of the same to an agent, duly appointed by the Holding Company ("Exchange Agent"), shall be entitled to receive in exchange therefor certificate(s) representing the number full shares of Holding Company Common Stock for which the shares of Savings Bank Common Stock theretofore represented by the certificate or certificates so surrendered shall have been converted as provided in Section 3(a) hereof. The Exchange Agent shall mail to each holder of record of an outstanding certificate which immediately prior to the Effective Date evidenced shares of Savings Bank Common Stock, and which is to be exchanged for Holding Company Common Stock as provided in Section 3(a) hereof, a form of letter of transmittal which shall specify that Annex B-2 delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the Exchange Agent advising such holder of the terms of the exchange effected by the Reorganization and of the procedure for surrendering to the Exchange Agent such certificate in exchange for certificate or certificates evidencing Holding Company Common Stock. (b) No holder of a certificate theretofore represent shares of Savings Bank Common Stock shall be entitled to receive any dividends in respect of the Holding Company Common Stock into which such shares shall have been converted by virtue of the Bank Merger until the certificate representing such shares of Savings Bank Common Stock is surrendered in exchange for certificates representing shares of Holding Company Common Stock. In the event that dividends are declared and paid by the Holding Company in respect of Holding Company Common Stock after the Effective Date but prior to surrender of certificates representing shares of Savings Bank Common Stock, dividends payable in respect of shares of Holding Company Common Stock not then issued shall accrue (without interest). Any such dividends shall be paid (without interest) upon surrender of the certificates representing such shares of Savings Bank Common Stock. The Holding Company shall be entitled, after the Effective Date, to treat certificates representing shares of Savings Bank Common Stock as evidencing ownership of the number of full shares of Holding Company Common Stock into which the shares of Savings Bank Common Stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates. (c) The Holding Company shall not be obligated to deliver a certificate or certificates representing shares of Holding Company Common Stock to which a holder of Savings Bank Common Stock would otherwise be entitled as a result of the Reorganization until such holder surrenders the certificate or certificates representing the shares of Savings Bank Common Stock for exchange as provided in this Section 4, or, in default thereof, an appropriate Affidavit of Loss and Indemnification Agreement and/or an indemnity bond as may be required in each case by the Holding Company. If any certificate evidencing shares of Holding Company Common Stock is to be issued in a name other than that in which the Certificate evidencing Savings Bank Common Stock surrendered in exchanged therefor is registered, it shall be a condition of the issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange pay to the Exchange Agent any transfer or other tax required by reason of the issuance of a certificate for shares of Holding Company Common Stock in any name other than that of the registered holder of the certificate surrendered or otherwise establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) If, between the date hereof and the Effective Date, the shares of Savings Bank Common Stock shall be changed into a different number or class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment or a stock dividend thereon shall be declared with a record date within said period, the Exchange Ratio specified in Section 3(a) hereof shall be adjusted accordingly. 5. RIGHTS OF DISSENT AND APPRAISAL ABSENT. The holders of Savings Bank Common Stock shall have dissenter and appraisal rights in connection with the Reorganization pursuant to 12 C.F.R. 552.14. 6. NAME OF SURVIVING CORPORATION. The name of the Surviving Corporation shall be "First Federal Bank, A Federal Savings Bank." 7. DIRECTORS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Charter and Bylaws of the Surviving Corporation and applicable law, the number of directors of the Surviving Corporation shall be seven. The names of those persons who, upon and after the Effective Date, shall be directors of the Surviving Corporation are set forth below. Each such director shall serve for the term which expires at the annual meeting of stockholders of the Surviving Corporation in the year set forth after his respective name, and until a successor is elected and qualified. Annex B-3 Name Term Expires ---- ------------ John W. Buschemeyer 1998 Gerald L. Uhl 1998 Kenneth I. Saulman 1998 Samuel E. Uhl 1999 James G. Pendleton 2000 Mark D. Shireman 2000 Dennis L. Huber 2000 The address of each director is 220 Federal Drive, N.W., Corydon, Indiana 47112. 8. OFFICERS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Charter and Bylaws of the Surviving Corporation and applicable law, the officers of the Savings Bank immediately prior to the Effective Date shall be the officers of the Surviving Corporation. 9. OFFICES. Upon the Effective Date, all offices of the Savings Bank shall be offices of the Surviving Corporation. As of the Effective Date, the home office of the Surviving Corporation shall remain at 220 Federal Drive, N.W., Corydon, Indiana 47112. 10. CHARTER AND BYLAWS. On and after the Effective Date, the Charter and Bylaws of the Savings Bank as in effect immediately prior to the Effective Date shall be the Charter and Bylaws of the Surviving Corporation until amended in accordance with the terms thereof and applicable law. 11. SAVINGS ACCOUNTS. Upon the Effective Date, any savings accounts of Interim, without reissue, shall be and become savings accounts of the Surviving Corporation without change in their respective terms, including, without limitation, maturity minimum required balances or withdrawal value. 12. STOCK COMPENSATION PLANS. By voting in favor of this Agreement, the Holding Company shall have approved adoption of all stock benefit plans of the Savings Bank (collectively, the "Plans") as plans of the Holding Company and shall have agreed to issue Holding Company Common Stock in lieu of Savings Bank Common Stock pursuant to the terms of such Plans. As of the Effective Date, rights outstanding under the Plans shall be assumed by the Holding Company and thereafter shall be rights only for shares of Holding Company Common Stock, with each such right being for a number of shares of Holding Company Common Stock equal to the number of shares of Savings Bank Common Stack that were available thereunder immediately prior to the Effective Date times the Exchange Ratio, as defined in the plan of conversion, and the price of each such right shall be adjusted to reflect the Exchange Ratio and so that the aggregate purchase price of the right is unaffected, but with no change in any other term or condition of such right. The Holding Company shall make appropriate amendments to the Plans to reflect the adoption of the Plans by the Holding Company without adverse effect upon the rights outstanding thereunder. 13. STOCKHOLDER APPROVAL. The affirmative votes of the holders of Savings Bank Common Stock set forth in the Plan of Conversion shall be required to approve the Plan of Conversion and Agreement and Plan of Reorganization, of which this Plan of Reorganization is a part, on behalf of the Savings Bank. The approval of the Holding Company, as the sole holder of the Interim B Common Stock, shall be required to approve the Plan of Conversion, of which this Plan of Reorganization is a part, on behalf of Interim B. 14. REGISTRATION; OTHER APPROVALS. In addition to the approvals set forth in Sections 1 and 13 hereof and in the Plan of Conversion, the obligations of the parties hereto to consummate the Reorganization shall be subject to the Holding Company Common Stock to be issued hereunder in exchange for Savings Bank Common Stock being registered under the Securities Act of 1933, as amended, and registered or qualified under applicable state Annex B-4 securities laws, as well as the receipt of all other approvals, consents or waivers as the parties may deem necessary or advisable. 15. ABANDONMENT OF PLAN. This Plan of Reorganization may be abandoned by either the Savings Bank or Interim B at any time before the Effective Date in the manner set forth in the Plan of Conversion. 16. AMENDMENTS. This Plan of Reorganization may be amended in the manner set forth in the Plan of Conversion by a subsequent writing signed by the parties hereto upon the approval of the Board of Directors of each of the parties hereto. 17. SUCCESSORS. This Plan of Reorganization shall be binding on the successors of the parties hereto. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana, except to the extent superseded by the laws of the United States. IN WITNESS WHEREOF, the Parties hereto have cause this Plan of Reorganization to be duly executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. Attest: FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK ____________________________ By: ______________________________ Corporate Secretary Chief Executive Officer Attest: FIRST CAPITAL, INC. ____________________________ By: ______________________________ Corporate Secretary Chief Executive Officer Attest: FIRST FEDERAL INTERIM "B" BANK, A FEDERAL SAVINGS BANK ____________________________ By: ______________________________ Corporate Secretary Chief Executive Officer Annex B-5 EX-3.1 4 EXHIBIT 3.1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF FIRST CAPITAL, INC. ARTICLES OF INCORPORATION OF FIRST CAPITAL, INC. ARTICLE I NAME The name of this corporation is First Capital, Inc. ARTICLE II PURPOSE The purpose of this corporation is the transaction of any and all lawful business for which corporations may be incorporated under the Indiana Business Corporation Law. ARTICLE III CAPITAL STOCK SECTION 3.01. AMOUNT. The total number of shares of all classes of stock which this corporation shall have authority to issue is six million (6,000,000), of which five million (5,000,000) shall be common stock, par value $.01 per share, and one million (1,000,000) shall be serial preferred stock, par value $.01 per share. SECTION 3.02. TERMS OF PREFERRED STOCK. The shares of preferred stock may be issued from time to time in one or more series. The board of directors of this corporation shall have authority to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, the voting rights, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of shares of preferred stock, to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution or resolutions originally fixing the number of shares of such series. SECTIONS 3.03. TERMS OF COMMON STOCK. The shares of common stock may be issued from time to time. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock. Except as provided in Section 3.04, every holder of common stock shall have the right, at every stockholders' meeting, to one vote for each share standing in his or her name on the books of the corporation. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the board of directors. In the event of any liquidation, dissolution or winding up of this corporation, after there shall have been paid to or set aside for the holders of any class having preferences over the common stock in the event of liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled, the holders of the 1 common stock, and any class or series of stock entitled to participate therewith, in whole or in part, as to the distribution of assets, shall be entitled after payment or provision for payment of all debts and liabilities of this corporation, to receive the remaining assets of this corporation available for distribution, in cash or in kind. SECTION 3.04 LIMITATION ON VOTING RIGHTS. 1. Notwithstanding any other provision of these Articles, in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, 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 a majority of the Whole Board (as hereinafter defined) shall have by resolution granted in advance such entitlement or permission. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of common stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all common stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of common stock beneficially owned by such person owning shares in excess of the Limit. 2. The following definitions shall apply to this Section 3.04 of this Article III. (a) "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of these Articles. (b) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of these Articles; provided, however, that a person shall, in any event, also be deemed ----------------- the "beneficial owner" of any common stock: (i) which such person or any of its affiliates beneficially owns, directly or indirectly; or (ii) which such person or any of its affiliates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this corporation to effect any transaction which is described in any one or more of subparagraphs (1)(a) through (h) of Section 5.01 of Article V or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (B) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or (iii) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of this corporation; and provided further, however, that (i) no director or officer of ------------------------- this corporation (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors of officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any common stock beneficially owned by any other such director or officer (or any Affiliate thereof), and (ii) neither any employee stock ownership or similar plan of this corporation or any subsidiary of this corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes 2 hereof, to beneficially own any common stock held under any such plan. For purposes of computing the percentage beneficial ownership of common stock of a person, the outstanding common stock shall include shares deemed owned by such person through application of this subsection but shall not include any other common stock which may be issuable by this corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding common stock shall include only common stock then outstanding and shall not include any common stock which may be issuable by this corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. (c) A "person" shall mean any individual, firm, corporation, or other entity. (d) "Whole Board" shall mean the total number of directors which the corporation would have if there were no vacancies on the board of directors. 3. The board of directors shall have the power to construe and apply the provisions of this Section and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of common stock beneficially owned by any person, (ii) whether a person is an affiliate of another, (iii) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this Section to the given facts, or (v) any other matter relating to the applicability or effect of this Section. 4. The board of directors shall have the right to demand that any person who is reasonably believed to beneficially own common stock in excess of the Limit (or holds of record common stock beneficially owned by any person in excess of the Limit) supply the corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such person who is reasonably believed to own shares in excess of the Limit, and (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be required of such person. 5. Except as otherwise provided by law or expressly provided in this Section 3.04, the presence, in person or by proxy, of the holders of record of shares of capital stock of the corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Section 3.04) entitled to be cast by the holders of shares of capital stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in these Articles to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock. 6. Any constructions, applications, or determinations made by the board of directors pursuant to this Section in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the corporation and its stockholders. 7. In the event any provision (or portion thereof) of this Section 3.04 shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken here from or otherwise rendered inapplicable, it being the intent of this corporation and its stockholders that each such remaining provision (or portion thereof) of this Section 3.04 remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding. 3 ARTICLE IV BOARD OF DIRECTORS SECTION 4.01. GENERAL. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, a board of directors except as may be otherwise provided by law or these Articles of Incorporation. SECTION 4.02. NUMBER AND TERMS. The authorized number of directors shall in no case be fewer than five (5) nor more than fifteen (15). The exact number of directors shall be fixed in or in accordance with the Bylaws. The directors shall be divided into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the conclusion of the first annual meeting of the stockholders after their election, the term of office of the second class to expire at the conclusion of the second annual meeting of stockholders after their election, and the term of office of the third class to expire at the conclusion of the third annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders following the initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. Directors need not be stockholders of the corporation. There shall be no cumulative voting by stockholders of any class or series in the election of directors of the corporation. SECTION 4.03. INITIAL DIRECTORS. The names and addresses of the initial board of directors of the corporation are as follows: Class 1 Directors (initial term to expire at the conclusion of the first annual - ----------------- meeting of stockholders after their election) John W. Buschemeyer 220 Federal Drive, N.W., Corydon, Indiana 47112 Kenneth R. Saulman 220 Federal Drive, N.W., Corydon Indiana 47112 Class 2 Directors (initial term to expire at the conclusion of the second annual - ----------------- meeting of stockholders after their election) Samuel E. Uhl 220 Federal Drive, N.W., Corydon, Indiana 47112 Mark D. Shireman 220 Federal Drive, N.W., Corydon, Indiana 47112 Class 3 Directors (initial term to expire at the conclusion of the third annual - ----------------- meeting of stockholders after their election) James G. Pendleton 220 Federal Drive, N.W., Corydon, Indiana 47112 Gerald L. Uhl 220 Federal Drive, N.W., Corydon, Indiana 47112 Dennis L. Huber 220 Federal Drive, N.W., Corydon, Indiana 47112 SECTION 4.04. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Any vacancies on the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of directors then in office, although less than a quorum, or by the sole remaining director, or, in the event of the failure of the directors or sole remaining director so to act, by the stockholders at the next election of directors. Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires. A director elected to fill a vacancy by reason of an increase in the number of directorships shall be elected by a majority vote of the directors then in office, although less than a quorum of the board of directors, to serve until the next election of the class for which such director shall have been chosen. If the number of directors is changed, any increase or decrease shall be apportioned among the three (3) classes so as to make all classes as nearly equal in number as possible. If, consistent with the preceding requirement, 4 the increase or decrease may be allocated to more than one (1) class, the increase or decrease may be allocated to any such class the board of directors selects in its discretion. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. SECTION 4.05. REMOVAL. A director, or the entire board of directors, may be removed only for cause as determined by the affirmative vote of the holders of at least a two-thirds (2/3) majority of the shares then entitled to vote in an election of directors, which vote may only be taken at a meeting of stockholders called expressly for that purpose. Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to the corporation, in a matter of substantial importance to the corporation and such conviction or adjudication is no longer subject to direct appeal. SECTION 4.06. SPECIAL STOCKHOLDER MEETINGS. Special meetings of the stockholders of the corporation may only be called by the chairman of the board of directors or by the board of directors pursuant to a resolution adopted by a majority of the total number of directors which the corporation would have if there were no vacancies on the board of directors. ARTICLE V APPROVAL OF CERTAIN BUSINESS COMBINATIONS The stockholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this section. SECTION 5.01. TRANSACTIONS WITH RELATED PERSONS. 1. Except as otherwise expressly provided in this Article, the affirmative vote of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series), and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person (as hereinafter defined), shall be required in order to authorize any of the following: (a) any merger or consolidation of the corporation with or into a Related Person (as hereinafter defined); (b) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage, or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets of the corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person; (c) any merger or consolidation of a Related Person with or into the corporation or a subsidiary of the corporation; (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the corporation or a subsidiary of the corporation; (e) the issuance of any securities of the corporation or a subsidiary of the corporation to a Related Person; (f) the acquisition by the corporation or a subsidiary of the corporation of any securities of a Related Person; 5 (g) any reclassification of the common stock of the corporation, or any recapitalization involving the common stock of the corporation; and (h) any agreement, contract or other arrangement providing for any of the transactions described in this Article. 2. Such affirmative vote shall be required notwithstanding any other provision of these Articles, any provision of law, or any agreement with any regulatory agency or national securities exchange which might otherwise permit a lesser vote or no vote. 3. The term "Business Combination" as used in this Article shall mean any transaction which is referred to in any one or more of subparagraphs (1)(a) through (h) above. SECTION 5.02. EXCEPTION FOR PRIOR APPROVED TRANSACTIONS. The provisions of Section 5.01 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by any other provision of these Articles, any provision of law, or any agreement with any regulatory agency or national securities exchange, if the Business Combination shall have been approved by a two-thirds vote of the Continuing Directors (as hereinafter defined); provided, however, that such approval shall only be effective if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) is present. SECTION 5.03. DEFINITIONS. For the purposes of this Article the following definitions apply: 1. The term "Related Person" shall mean and include (a) any individual, corporation, partnership or other person or entity which together with its "affiliates" (as that term is defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended), "beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended) in the aggregate 10% or more of the outstanding shares of the common stock of the corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any such individual, corporation, partnership or other person or entity. Without limitation, any shares of the common stock of the corporation which any Related Person has the right to acquire pursuant to any agreement, or upon exercise or conversion rights, warrants or options, or otherwise, shall be deemed "beneficially owned" by such Related Person. 2. The term "Substantial Part" shall mean more than 25% of the total assets of the corporation, as of the end of its most recent fiscal year ending prior to the time the determination is made. 3. The term "Continuing Director" shall mean any member of the board of directors of the corporation who is unaffiliated with the Related Person and was a member of the board prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the board. 4. The term "Continuing Director Quorum" shall mean two-thirds of the Continuing Directors capable of exercising the powers conferred on them. ARTICLE VI EVALUATION OF BUSINESS COMBINATIONS In addition to any other considerations which the board of directors may lawfully take into account in determining whether to take or to refrain from taking any corporate action on any matter, including making or declining to make any recommendation to the stockholders of the corporation, the board of directors may in its discretion consider both the short-term and long-term best interests of the corporation (including the possibility that these interests may be 6 best served by the continued independence of the corporation), taking into account, and weighing as the directors deem appropriate, the social and economic effects of such action on present and future employees, suppliers, customers of the corporation and its subsidiaries (including account holders and borrowers of any of the corporation's subsidiaries), the effect upon communities in which offices or other facilities of the corporation are located and any other factors the directors consider pertinent. ARTICLE VII INDEMNIFICATION SECTION 7.01. GENERAL PROVISIONS. The corporation shall, to the fullest extent to which it is empowered to do so by the Indiana Business Corporation Law 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 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. 7 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 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. 8 SECTION 7.08. OTHER DEFINITIONS. For purposes of this Article, serving an employee benefit plan at the request of the corporation shall include any service as a director, officer or employee of the corporation which imposes duties on, or involves services by such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" referred to in this Article. For purposes of this Article, "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding. For purposes of this Article, "official capacity," when used with respect to a director, shall mean the office of director of the corporation; and when used with respect to an individual other than a director, shall mean the office in the corporation held by the officer or the employment or agency relationship undertaking by the employee or agent on behalf of the corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, except as set forth in Section 7.01 of this Article. SECTION 7.09. BUSINESS EXPENSES. Any payments made to any indemnified party under this Article under any other right of indemnification shall be deemed to be an ordinary and necessary business expense of the corporation, and payment thereof shall not subject any person responsible for the payment, or the board of directors, to any action for corporate waste or to any similar action. ARTICLE VIII REGISTERED AGENT The address of this corporation's principal office in the State of Indiana is 220 Federal Drive, N.W., Corydon, Indiana 47112. The name of its registered agent at such address is James G. Pendleton. ARTICLE IX CONDUCT OF AFFAIRS OF CORPORATION The corporation elects not to be subject to or be governed by the provisions of the Business Combinations Chapter of the Indiana Business Corporations Law, codified at Indiana Code '23-1-43, as amended from time to time. ARTICLE X AMENDMENT AND REPEAL OF ARTICLES OF INCORPORATION This corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or hereafter prescribed by statute. Notwithstanding the foregoing, (i) the approval of at least a two-thirds (2/3) majority of the directors then in office (or such greater proportion of directors and stockholders as may otherwise be required pursuant to any specific provision of these Articles of Incorporation) shall be required to amend, alter, repeal or change any provision of these Articles of Incorporation and (ii) the provisions set forth in Section 3.04 of Article III, Sections 4.02, 4.05 and 4.06 of Article IV, and in Articles V, VI, VII, IX and this Article X may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than two-thirds of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) cast at a meeting of 9 the stockholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting). ARTICLE XI AMENDMENT AND REPEAL OF BYLAWS Bylaws may be adopted, amended or repealed by a resolution adopted by a two-thirds (2/3) majority of the directors then in office. ARTICLE XII INCORPORATOR The name and address of the incorporator of the corporation is as follows: James G. Pendleton 220 Federal Drive, N.W. Corydon, Indiana 47112 * * * [signature page follows] 10 IN WITNESS WHEREOF, the undersigned, being the incorporator named above, executes these Articles of Incorporation and affirms under penalties of perjury that the statements contained herein are true, this 9th day of September, 1998. /s/James G. Pendleton ------------------------------------- James G. Pendleton, Incorporator 11 EX-3.2 5 EX3_2 EXHIBIT 3.2 Bylaws of First Capital, Inc. BYLAWS OF FIRST CAPITAL, INC. ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. First Capital, Inc. (hereinafter referred to as the "Corporation") shall at all times maintain a principal office in the State of Indiana, which, except as otherwise determined by the Board of Directors of the Corporation (hereinafter referred to as the "Board"), shall be in the City of Corydon, County of Harrison. SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other places within or without the State of Indiana as the Board shall from time to time designate or the business of the Corporation shall require. ARTICLE II STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All annual and special meetings of stockholders shall be held at such places within or without the State of Indiana as may from time to time be designated by the Board and specified in the notice of meeting. SECTION 2. ANNUAL MEETING. A meeting of the stockholders of the Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at 2:00 p.m. on the third Wednesday of October, if not a legal holiday, and if a legal holiday, then on the next day following such day which is not a legal holiday, or at such other date and time as the Board may determine and specify in the notice of the meeting. SECTION 3. SPECIAL MEETINGS. A special meeting of the stockholders may only be called by those persons authorized to do so in the Corporation's Articles of Incorporation. Business transacted at any special meeting of the stockholders shall be confined to the purpose or purposes stated in the notice of such meeting. SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings of the stockholders shall be conducted in accordance with Indiana law unless otherwise prescribed by these Bylaws. The Chairman, or in the absence of the Chairman, the highest ranking officer of the Corporation who is present, or such other person as the Board shall have designated, shall call to order any meeting of the stockholders and act as chairman of the meeting. The Secretary of the Corporation, if present at the meeting, shall be the secretary of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman of the meeting shall appoint. The chairman of any meeting of the stockholders, unless otherwise prescribed by law or regulation or unless the Chairman has otherwise determined, shall determine the order of business and the procedure at the meeting. SECTION 5. NOTICE OF MEETINGS. Written notice stating the date, time and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting of the stockholders is called shall be delivered no fewer than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman, the Secretary or the directors requesting the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II. When any meeting of the stockholders, either 1 annual or special, is adjourned for more than thirty (30) days or if, after adjournment, a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the date, time and place of any other adjourned meeting of the stockholders, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. FIXING OF RECORD DATE. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose under Indiana law, the Board may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be less than ten (10) days and not more than the seventy (70) days before the meeting or action requiring a determination of stockholders. SECTION 7. VOTING LISTS. The Secretary of the Corporation, or other officer or agent of the Corporation having charge of the stock transfer books for shares of the capital stock of the Corporation, shall prepare and make, at least five (5) business days before each meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each stockholder. Such list shall be open to the examination of any stockholder entitled to vote at the meeting, for any purpose germane to the meeting, during ordinary business hours, for a period of at least five (5) business days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or at the Corporation's principal office. Such list shall also be produced and kept open at the time and place of the meeting during the whole time thereof and shall be subject to the inspection of any stockholder present at the meeting. The stock transfer books shall be the only evidence as to who are the stockholders entitled to examine the stock transfer books, or to vote in person or by proxy at any meeting of stockholders. SECTION 8. QUORUM. A majority of the outstanding shares of the Corporation entitled to vote at a meeting of the stockholders, represented in person or by proxy, shall constitute a quorum at a meeting. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice except as otherwise provided in Section 5 of this Article II. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted at the meeting as originally called. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 9. PROXIES. At any meeting of the stockholders, every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing and complying with the requirements of Indiana law. SECTION 10. VOTING BY THE CORPORATION. Neither treasury shares of its own capital stock held by the Corporation, nor shares held by another corporation, a majority of the shares of which entitled to vote for the election of directors are held by the Corporation, shall be entitled to vote or be counted for quorum purposes at any meeting of the stockholders; provided, however, that the Corporation may vote shares of its capital stock held by it, or by any such other corporation, if such shares of capital stock are held by the Corporation or such other corporation in a fiduciary capacity. SECTION 11. INSPECTORS OF ELECTION. The Board shall, in advance of any meeting of stockholders, appoint one or three persons as inspectors of election, to act at the meeting or any adjournment thereof and make a written report thereof. SECTION 12. NOTICE OF NOMINATIONS AND PROPOSALS. Nominations for the election of directors and proposals for any new business to be taken up at any annual or special meeting of stockholders may be made by the board of directors of the corporation or by any stockholder of the corporation entitled to vote generally in the election of directors. In order for a stockholder of the corporation to make any such nominations and/or proposals, he or she shall 2 give notice thereof in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the corporation not less than thirty (30) days nor more than sixty (60) days prior to any such meeting; provided, however, that if less than thirty-one (31) days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the corporation not later than the close of the tenth day following the day on which notice of the meeting was mailed to stockholders. Each such notice given by a stockholder with respect to nominations for election of directors shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominees, (iii) the number of shares of stock of the corporation which are beneficially owned by each such nominee, (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, and (v) as to the stockholder giving such notice (a) his name and address as they appear on the corporation's books and (b) the class and number of shares of the corporation which are beneficially owned by such stockholder. In addition, the stockholder making such nomination shall promptly provide any other information reasonably requested by the corporation. Each such notice given by a stockholder to the Secretary with respect to business proposals to bring before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business; (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder; and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these Articles to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Section. The Chairman of the annual or special meeting of stockholders may, if the facts warrant, determine and declare to the meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if the Chairman should so determine, the Chairman shall so declare to the meeting and the defective nomination or proposal shall be disregarded and laid over for action at the next succeeding adjourned, special or annual meeting of the stockholders taking place thirty (30) days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of stockholders for the purpose of considering such defective nomination or proposal. ARTICLE III BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board except as may be otherwise provided by law or the Articles of Incorporation. The Board shall elect from among its members a Chairman, and may elect one (1) or more Vice Chairmen of the Board. The Chairman, or in his absence the Vice Chairman, shall preside at all meetings of the Board. SECTION 2. NUMBER. The number of directors of the Corporation shall be fixed from time to time exclusively by the Board by resolution adopted by a majority of the total number of the Corporation's directors. SECTION 3. REGULAR MEETINGS. A regular meeting of the Board shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of the stockholders or at such other place as may be designated by the Board. Additional meetings shall be held at such time as the Board shall fix at such places within or without the State of Indiana as shall be fixed by the Board. No call shall be required for regular meetings for which the time and place has been fixed. 3 SECTION 4. SPECIAL MEETINGS. Special meetings of the Board may be called by or at the request of the Chairman or the Vice Chairman, or in the absence or disability of both of them, a majority of the remaining directors. The persons authorized to call special meetings of the Board may fix any place as the place for holding any special meeting of the Board called by such persons. SECTION 5. PARTICIPATION IN MEETINGS. Members of the Board may participate in regular or special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can communicate with each other. A director participating in a meeting by this means is deemed to be present in person at the meeting. SECTION 6. NOTICE. The persons authorized to call special meetings of the Board shall cause the Secretary of the Corporation to give written or oral notice of the meeting, specifying the time and place of the meeting, to each director, either personally, by mailing, or by telegram, at least two (2) days in advance of the meeting. Any director may waive notice of any meeting by a writing filed with the Secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except in the event a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board need be specified in the notice or waiver of notice of such meeting. SECTION 7. QUORUM. A majority of the number of directors fixed pursuant to Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 7 of this Article III. SECTION 8. MANNER OF ACTING. Unless otherwise prescribed in the Articles of Incorporation or these Bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 10. RESIGNATION. Any director may resign at any time by sending a written notice of such resignation to the Corporation addressed to the Chairman or the Vice Chairman. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof. SECTION 11. VACANCIES. Any vacancy occurring in the Board may be filled in accordance with the Articles of Incorporation. SECTION 12. COMPENSATION. Directors, as such, may receive pursuant to resolution of the Board, fixed fees and other compensation for their services as directors, including their services as members of committees of the Board. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SECTION 1. APPOINTMENT. The Board, by resolution adopted by a majority of the Board, may designate the Chairman, the President and one (1) or more of the other directors to constitute an Executive Committee. The designation of any committee pursuant to this Article IV and the delegation of authority thereto shall not operate to relieve the Board, or any director, of any responsibility imposed by law or regulation. 4 SECTION 2. AUTHORITY. The Executive Committee, when the Board is not in session, shall have and may exercise all of the authority of the Board except to the extent, if any, that such authority shall be limited by the resolution appointing the Executive Committee, or as otherwise expressly provided by law, the Articles of Incorporation or these Bylaws. SECTION 3. TENURE. Subject to the provisions of Section 8 of this Article IV, each member of the Executive Committee shall hold office until the next regular annual meeting of the Board following his designation and until a successor is designated as a member of the Executive Committee. SECTION 4. MEETINGS. Regular meetings of the Executive Committee may be held without notice at such times and places as the Executive Committee may fix from time to time. Special meetings of the Executive Committee may be called by the Chairman or the President, or in the absence or disability of both of them, by a majority of the remaining members of the Executive Committee upon not less than one (1) day's notice stating the place, date and hour of the meeting, which notice may be written or oral. Any member of the Executive Committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the Executive Committee need not state the business proposed to be transacted at the meetings. Regular or special meetings may be held my means of conference telephone or similar communications equipment by which all persons participating in the meeting can communicate with each other. SECTION 5. QUORUM. A majority of the members of the Executive Committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the Executive Committee must be authorized by the affirmative vote of a majority of the members present as a meeting at which a quorum is present. SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Executive Committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the Executive Committee. SECTION 7. VACANCIES. Any vacancy in the Executive Committee may be filled by a resolution adopted by a majority of the Board. SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the Executive Committee may be removed at any time with or without cause by resolution adopted by a majority of the Board. Any member of the Executive Committee may resign from the Executive Committee at any time by giving written notice to the Chairman or the President. Unless otherwise specified thereon, such resignation shall take effect upon receipt. The acceptance of such resignation shall not be necessary to make it effective. SECTION 9. PROCEDURE. The Chairman shall be presiding officer of the Executive Committee, or, in his absence or disability, the President, or in the absence or disability of both of them, such other persons as may be elected by a majority of the members present. The Executive Committee may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the Board for its information at the meeting thereof held next after the proceedings shall have been taken. SECTION 10. OTHER COMMITTEES. The Board may by resolution establish an audit committee or other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Corporation and may prescribe the duties, constitution and procedures thereof. 5 ARTICLE V OFFICERS SECTION 1. POSITIONS. The officers of the Corporation shall consist of a President, one (1) or more Vice Presidents, a Secretary and a Treasurer, each of whom shall be elected by the Board. The same individual may simultaneously hold more than one office in the corporation. The Board may designate one (1) or more Vice Presidents as Executive Vice President or Senior Vice President. The Board may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the Board may from time to time authorize or determine. In the absence of action by the Board, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected annually at the first meeting of the Board held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not by itself create any contractual rights. The Board may authorize the Corporation to enter into an employment contact with any officer, but no contract shall impair the right of the Board to remove any officer at any time in accordance with Section 8 of this Article V. SECTION 3. PRESIDENT. The President shall have the authority and the duty to manage the affairs of the Corporation and shall have such other powers and perform such other duties as are delegated to him by the Board of Directors or as are incidental to his office. The President shall be a director. SECTION 4. VICE PRESIDENT. The Vice President or Vice Presidents, if any, shall perform the duties of the President in his absence or during his disability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them from time to time by the Board of Directors or the President. SECTION 5. SECRETARY. The Secretary shall have custody of the minutes and records of the Corporation. He shall keep the minutes of all meetings of the stockholders and of the Board of Directors, shall give such notice as may be required for all such meetings and shall have such other powers and perform such other duties as are delegated to him by the Board of Directors or the President or as are incidental to his office. SECTION 6. TREASURER. The Treasurer shall keep correct and complete books of account in accordance with the accounting methods adopted by the Board of Directors, showing the financial condition of the Corporation and the results of its operations. He shall have custody of all monies, securities, and other certificates evidencing intangible personal property belonging to the Corporation. He shall upon request furnish statements of the current financial condition and the current results of operations of the Corporation and he shall have such other powers and perform such other duties as are delegated to him by the Board of Directors or the President or as are incidental to his office. SECTION 7. OTHER OFFICES. All other officers shall have such powers and perform such duties as are delegated to them by the Board of Directors or the President. SECTION 8. REMOVAL. Any officer may be removed by the Board whenever in its judgment the best interests of the Corporation will be served thereby. SECTION 9. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by a majority vote of the Board for the unexpired portion of the term. SECTION 10. REMUNERATION. The remuneration of the officers shall be fixed from time to time by the Board. 6 ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. To the extent permitted by applicable law, the Articles of Incorporation or these Bylaws, the Board may authorize any officer, employee or agent of the Corporation to enter into any contract or execute any deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Board. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one (1) or more officers, employees or agents of the Corporation in such manner as shall from time to time be determined by the Board. SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in any duty authorized depositories as the Board may select. ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of capital stock of the Corporation shall be in such form as shall be determined by the Board. Such certificates shall be signed by the President or any other officer of the Corporation authorized by the Board, attested by the Secretary or an Assistant Secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Corporation itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares issued and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost, stolen or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the Corporation as the Board may prescribe as sufficient to indemnify the Corporation against any claim that may be made against it on account of such loss, theft or destruction. SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney thereunto duly authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. ARTICLE IX DIVIDENDS Subject to applicable law, the Articles of Incorporation or these Bylaws, the Board may, from time to time, declare, and the Corporation may pay, dividends on the outstanding shares of capital stock of the Corporation. 7 ARTICLE X SECURITIES OF OTHER CORPORATIONS Unless otherwise ordered by the Board, the President shall have full power and authority on behalf of the Corporation to purchase, sell, transfer, encumber or vote any and all securities of any other corporation owned by the Corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer, encumbrance or vote. The Board may, from time to time, confer like powers upon any other person or persons. ARTICLE XI FISCAL YEAR, ANNUAL AUDIT The fiscal year of the Corporation shall end on the 30th day of June of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the Board. ARTICLE XII CORPORATE SEAL The corporate seal of the Corporation, if any, shall be in such form as the Board shall prescribe. ARTICLE XIII CONDUCT OF AFFAIRS OF CORPORATION The provisions of the Control Share Acquisitions Chapter of the Indiana Business Corporation Law, as codified at Indiana Code Section 23-1-42, as amended from time to time, shall not apply to Control Share Acquisitions of shares of the Corporation. ARTICLE IV AMENDMENTS These Bylaws may be adopted, amended or repealed by a resolution adopted by a two-thirds (2/3) majority of the directors then in office. * * * Adopted by the Board of Directors this 16th day of September 1998. 8 EX-4 6 EXHIBIT 4 EXHIBIT 4 FORM OF CERTIFICATE FOR COMMON STOCK FIRST CAPITAL, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF INDIANA COMMON STOCK CUSIP See Reverse For Certain Definitions THIS CERTIFIES THAT is the owner of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE The shares represented by this Certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof or by his duly authorized attorney or legal representative upon the surrender of this Certificate properly endorsed. Such shares are non-withdrawable and not insurable. Such shares are not insured by the Federal government. The Certificate and shares represented hereby are issued and shall be held subject to all provisions of the Articles of Incorporation and Bylaws of the Corporation and any amendments thereto (copies of which are on file with the Transfer Agent), to all of which provisions the holder by acceptance hereof, assents. IN WITNESS WHEREOF, First Capital, Inc. has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. CORPORATE SECRETARY PRESIDENT TRANSFER AGENT [SEAL] First Capital, Inc. The shares represented by this Certificate are issued subject to all the provisions of the Articles of Incorporation and Bylaws of First Capital, Inc. ("Corporation") as from time to time amended (copies of which are on file with the Transfer Agent and at the principal executive offices of the Corporation). The shares represented by this Certificate are subject to a limitation contained in the Articles of Incorporation to the effect 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 outstanding shares of common stock (the "Limit") be entitled or permitted to vote in respect of the shares held in excess of the Limit, unless a majority of the whole Board of Directors, as defined, shall have by resolution granted in advance such entitlement or permission. The Board of Directors of the Corporation is authorized by resolution(s), from time to time adopted, to provide for the issuance of preferred stock in series and to fix and state the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The Corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof. The shares represented by this Certificate may not be cumulatively voted on any matter. The affirmative vote of the holders of at least 80% of the voting stock of the Corporation, voting together as a single class, shall be required to approve certain business combinations and other transactions, pursuant to the Articles of Incorporation, or to amend certain provisions of the Articles of Incorporation. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as through they were written out in full according to applicable laws or regulations. TEN COM -as tenants in common TEN ENT -as tenants by the entireties JT TEN -as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -_______Custodian_______ under Uniform Gifts (Cust) (Minor) to Minors Act _________ (State) Additional abbreviations may also be used though not in the above list For value received, ___________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------- ________________________________________________________________________________ ________________________________________________________________________________ Please print or typewrite name and address, including postal zip code, of assignee ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ shares of the Common Stock evidenced by this Certificate, and do hereby irrevocably constitute and appoint ________________________________________________ Attorney, to transfer the said shares on the books of the within named Corporation, with full power of substitution. Dated _________________ ____________________________________ Signature ____________________________________ Signature NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular, without alteration or enlargement or any change whatever. EX-5 7 EXHIBIT 5 EXHIBIT 5 OPINION OF BREYER & AGUGGIA LLP REGARDING LEGALITY OF SECURITIES REGISTERED Exhibit 5 1300 I Street, N.W. Suite 470 East Washington, D.C. 20005 Telephone (202) 737-7900 Breyer & Aguggia Facsimile (202) 737-7979 ================================================================================ September 16, 1998 Board of Directors First Capital, Inc. 220 Federal Drive, N.W. Corydon, Indiana 47112 RE: First Capital, Inc. Registration Statement on Form SB-2 To the Board of Directors: You have requested our opinion as special counsel for First Capital, Inc., an Indiana corporation, in connection with the above-referenced registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. In rendering this opinion, we understand that the common stock of First Capital, Inc. will be offered and sold in the manner described in the Prospectus, which is part of the Registration Statement. We have examined such records and documents and made such examination as we have deemed relevant in connection with this opinion. Based upon the foregoing, it is our opinion that the shares of common stock of First Capital, Inc. will upon issuance be legally issued, fully paid and nonassessable. This opinion is furnished for use as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading "LEGAL AND TAX OPINIONS." Sincerely, /s/ Breyer & Aguggia LLP BREYER & AGUGGIA LLP Washington, D.C. EX-8.1 8 EXHIBIT 8.1 EXHIBIT 8.1 FORM OF FEDERAL INCOME TAX OPINION OF BREYER & AGUGGIA LLP FORM OF FEDERAL INCOME TAX OPINION _______, 1998 Boards of Directors First Federal Bank, A Federal Savings Bank First Capital, Inc., M.H.C. First Capital, Inc. 220 Federal Drive, N.W. Corydon, Indiana 47112-0130 Gentlemen: In accordance with your request, set forth herein is our opinion relating to the federal income tax consequences of the two integrated transactions described herein. Capitalized terms used herein which are not expressly defined herein shall have the meaning ascribed to them in the Plan of Conversion from Mutual Holding Company to Stock Holding Company and Agreement and Plan of Reorganization dated June 18, 1998, between First Federal Bank, A Federal Savings Bank (the "Savings Bank") and First Capital, Inc. (the "MHC") (the "Plan"). The Proposed Transactions - ------------------------- Based upon our review of the Plan, we understand that the relevant facts are as follows: In February 1993, the Savings Bank, a federally-chartered mutual savings bank, reorganized into the mutual holding company form of organization. In connection with the foregoing transaction, which resulted in the conversion of the Savings Bank to a stock institution, the Savings Bank simultaneously sold 200,000 shares of the common stock (the "Savings Bank Common Stock") to depositors of the Savings Bank, including directors, officers and employees of the Savings Bank, and members of the general public. As of the date hereof, the MHC and the other stockholders ("Public Stockholders") own an aggregate of 59.5% and 40.5%, respectively, of the outstanding Savings Bank Common Stock. At the present time, two transactions are being undertaken. The first transaction, which is sometimes referred to herein as "Merger 1," is the conversion of the MHC from the mutual form of organization to a federal interim stock savings bank ("Interim") and the simultaneous merger of Interim with and into the Savings Bank. The second transaction, which is sometimes referred to herein as "Merger 2," is the acquisition of the Savings Bank by First Capital, Inc. (the "Holding Boards of Directors First Fereral Bank, A Federal Savings Bank First Capital, Inc., M.H.C. First Capital, Inc. __________, 1998 Page 2 Company"), a newly organized Indiana corporation, by means of the merger of the Savings Bank with a federal interim stock savings institution (the "Interim Savings Bank"), which will be organized as a wholly-owned subsidiary of the Holding Company. Merger 1 and Merger 2 are sometimes collectively referred to herein as the "Conversion and Reorganization." Merger 1 and Merger 2 are being accomplished pursuant to the Plan. The Plan complies in all material respects with the provisions of Subpart A of 12 C.F.R. Part 563b, the Office of Thrift Supervision ("OTS") regulations governing the conversion of mutual institutions to stock form. The Plan also complies in all material respects with the provisions of 12 C.F.R. Section 575.12(a), governing the conversion of mutual holding companies to stock form. Because the proposed transaction involves two mergers, the Plan also includes two related plans of merger with language that complies in all material respects with 12 C.F.R. Section 552.13, governing mergers involving federal stock associations. In Merger 1, a liquidation account is being established by the Savings Bank for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders. Pursuant to Section XIV of the Plan, the initial balance of the liquidation account will equal the amount of any dividends waived by the MHC plus the greater of (1) $4.0 million, which is equal to 100% of the retained earnings of Savings Bank as of June 30, 1992, the date of the latest statement of financial condition contained in the final offering circular utilized in the formation of the MHC, or (2) 59.5% of the Savings Bank's total stockholders' equity as reflected in its latest statement of financial condition contained in the final Prospectus to be utilized in the Conversion and Reorganization. The $7.3 million is the amount that the liquidation account would have been if the MHC formation had been a standard conversion not involving a mutual holding company. Upon consummation of Merger 1, the shares of Savings Bank Common Stock held by the MHC will be canceled. Upon consummation of Merger 2 (the "Effective Date"), all of the then outstanding shares of Savings Bank Common Stock held by the Public Stockholders will be converted into and become shares of common stock of the Holding Company ("Holding Company Common Stock") at the Exchange Ratio (the "Exchange Stock"). The common stock of the Interim Savings Bank owned by the Holding Company prior to Merger 2 will be converted into and become shares of common stock of the Savings Bank on the Effective Date. The Holding Company Common Stock held by the Savings Bank immediately prior to Merger 2 will be canceled on the Effective Date. Boards of Directors First Fereral Bank, A Federal Savings Bank First Capital, Inc., M.H.C. First Capital, Inc. __________, 1998 Page 3 Immediately following Merger 2, Holding Company Common Stock will be sold pursuant to the Offerings. The stockholders of the Holding Company will be the Public Stockholders, plus those persons who purchase Holding Company Common Stock in the Offerings. Nontransferable rights to subscribe for Holding Company Common Stock will be granted to eligible depositors and other persons in the priorities set forth in the Plan (the "Subscription Rights"). Upon the Effective Date, Interim Savings Bank will be merged with and into the Savings Bank and Interim Savings Bank will cease to exist as a legal entity. As a result, the Holding Company will be a publicly held corporation, will register the Holding Company Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended, and will become subject to the rules and regulations thereunder and file periodic reports and proxy statements with the Securities and Exchange Commission ("SEC"). The Savings Bank will become a wholly owned subsidiary of the Holding Company and will continue to carry on its business and activities as conducted immediately prior to Merger 2. Federal Tax Opinion - ------------------- In connection with the opinion expressed herein below, we have relied upon the assumption that the representations required for advance rulings outlined in Rev. Proc. 86-42, 1986-2 C.B. 722, are true and correct as it applies to the Conversion and Reorganization. Based on the foregoing assumptions and the description of Merger 1 and Merger 2, the representations which have been made to us by management of the Savings Bank, the MHC and the Holding Company in an affidavit dated ________, 1998 and subject to the qualifications and limitations set forth in this letter, we are of the opinion that, if Merger 1 were to be consummated as described above as of the date hereof, then: 1. Merger 1 qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. 2. No gain or loss will be recognized by the Savings Bank upon the receipt of the assets of the MHC in Merger 1. In addition, we are of the opinion that, if Merger 2 were to be consummated as described above as of the date hereof, then: Boards of Directors First Fereral Bank, A Federal Savings Bank First Capital, Inc., M.H.C. First Capital, Inc. __________, 1998 Page 4 1. Merger 2 qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code, Merger 2 is not disqualified from qualifying as a reorganization within the meaning of Section 368(a)(1)(A) because Holding Company Common Stock will be conveyed to the Savings Bank's stockholders in exchange for their Savings Bank Common Stock. 2. No gain or loss will be recognized by the Interim Savings Bank upon the transfer of its assets to the Savings Bank. 3. No gain or loss will be recognized by the Savings Bank upon the receipt of the assets of Interim Savings Bank. 4. No gain or loss will be recognized by the Holding Company or Savings Bank upon the exchange of Exchange Stock for Savings Bank Common Stock. 5. No gain or loss will be recognized by the Public Stockholders upon the receipt of the Exchange Stock solely in exchange for their shares of Savings Bank Common Stock. 6. The basis of the Exchange Stock to be received by the Public Stockholders will be the same as the basis of the Savings Bank Common Stock surrendered in exchange therefor, before giving effect to any payment of cash in lieu of fractional shares. 7. The holding period of the Exchange Stock to be received by the Public Stockholders will include the holding period of the Savings Bank Common Stock, provided that the Savings Bank Common Stock was held as a capital asset on the date of the exchange. 8. No gain or loss will be recognized by the Holding Company upon the sale of Holding Company Common Stock in the Offerings. 9. Eligible Account Holders and Supplemental Eligible Accounts Holders will realize gain, if any, upon the constructive issuance to them of Subscription Rights and/or interest in the liquidation account of Savings Bank. Any gain resulting therefrom will be recognized, but only in an amount not in excess of the fair market value of the liquidation accounts and/or Subscription Rights received. The liquidation account will have normal, if any, fair market value. Based solely on the accuracy of the conclusion reached by Keller & Company, Inc. in its written opinion to Savings Bank Boards of Directors First Fereral Bank, A Federal Savings Bank First Capital, Inc., M.H.C. First Capital, Inc. __________, 1998 Page 5 (the "Appraiser's Opinion") that the Subscription Rights have no value at the time of distribution or exercise and our reliance thereon, no gain or loss will be required to be recognized by depositors upon receipt or distribution of Subscription Rights. (Section 1001 of the Code.) See Paulsen v. Commissioner, 469 U.S. 131,139 (1985). --------------------------- Based solely on the accuracy of the conclusions reached in the Appraiser's Opinion, and our reliance thereon, we are of the opinion that: (a) no taxable income will be recognized by the borrowers, directors, officers and employees of Savings Bank upon the distribution to them of Subscription Rights or upon the exercise or lapse of the Subscription Rights to acquire Holding Company Common Stock at fair market value; (b) no taxable income will be realized by the depositors of Savings Bank as result of the exercise of lapse of the Subscription Rights to purchase Holding Company Common Stock at fair market value. Rev. Rul. 56-572, 1956-2 C.B. 182; and (c) no taxable income will be realized by Savings Bank, or Holding Company upon the issuance or distribution of Subscription Rights to depositors of Savings Bank to purchase shares of Holding Company Common Stock at fair market value. (Section 311 of the Code.) Notwithstanding the Appraiser's Opinion, if the Subscription Rights are subsequently found to have a fair market value, income may be recognized by various recipients of the Subscription Rights (in certain cases, whether or not the rights are exercised) and Holding Company and/or Savings Bank may be taxable on the distribution of the Subscription Rights. (Section 311 of the Code.) In this regard, the Subscription Rights may be taxed partially or entirely at ordinary income tax rates. 10. The tax basis to the holders of the Holding Company Common Stock purchased in the Offerings will be the amount paid therefor, and the holding period for such shares will begin on the date of consummation of the Offerings if purchased through the exercise of Subscription Rights. If purchased in the Direct Community Offering or Syndicated Community Offering, the holding period for such stock will begin on the day after the date of purchase. * * * * * Our opinion is limited to the federal income tax matters described above and does not address any other federal income tax considerations or any local, foreign or other tax considerations. However, we believe our opinion addresses all the material federal tax consequences of the Boards of Directors First Fereral Bank, A Federal Savings Bank First Capital, Inc., M.H.C. First Capital, Inc. __________, 1998 Page 6 Conversion and Reorganization. If any of the information upon which we have relied is incorrect, or if changes in the relevant facts occur after the date hereof, our opinion could be affected thereby. Moreover, our opinion is based on the case law, Code, Treasury Regulations thereunder, Internal Revenue Service rulings as they now exist. These authorities are all subject to change, and such change may be made with retroactive effect. We can give no assurance that, after such change, our opinion would not be different. We undertake no responsibility to update or supplement our opinion. This opinion is not binding on the Internal Revenue Service and there can be no assurance, and none is hereby given, that the Internal Revenue Service will not take a position contrary to one or more of the positions reflected in the foregoing opinion, or that our opinion will be upheld by the courts if challenged by the Internal Revenue Service. We hereby consent to the filing of this opinion with the OTS as an exhibit to the Application H-(e)1-S filed by the Holding Company with the OTS in connection with the Conversion and Reorganization and the reference to our firm in the Application H-(e)1-S under Item 110.55 therein. We also hereby consent to the filing of this opinion with the SEC and the OTS as exhibits to the Registration Statement and the Savings Bank's Application for Conversion on Form AC ("Form AC"), respectively, and the reference on our firm in the Prospectus, which is a part of both the Registration Statement and the Form AC, under the headings "THE CONVERSION -- Effects of Conversion on Depositors and Borrowers of the Bank -- Tax Effects" and "LEGAL AND TAX OPINIONS." Very truly yours, BREYER & AGUGGIA LLP EX-8.3 9 EXHIBIT 8.3 EXHIBIT 8.3 OPINION OF KELLER & COMPANY, INC. AS TO THE VALUE OF SUBSCRIPTION RIGHTS [LETTERHEAD OF KELLER & COMPANY INC. APPEARS HERE] September 16, 1998 The Board of Directors First Federal Bank, a FSB 220 Federal Drive, N.W. Corydon, Indiana 47112 Re: Subscription Rights - Conversion of First Federal Bank, a FSB Gentlemen: The purpose of this letter is to provide an opinion of the value of the subscription rights of the "to be issued" common stock of First Capital, Inc. (the "Corporation"), Corydon, Indiana, in regard to the conversion of the Corporation from a majority owned mutual holding company to a regular stock holding company. Because the Subscription Rights to purchase shares of Common Stock in the Corporation, which are to be issued to the depositors of First Federal Bank, and the other members of the Bank and will be acquired by such recipients without cost, will be nontransferable and of short duration and will afford the recipients the right only to purchase shares of Common Stock at the same price as will be paid by members of the general public in a Direct Community Offering, we are of the opinion that: (1) The Subscription Rights will have no ascertainable fair market value, and; (2) The price at which the Subscription Rights are exercisable will not be more or less than the fair market value of the shares on the date of the exercise. Further, it is our opinion that the Subscription Rights will have no economic value on the date of distribution or at the time of exercise, whether or not a community offering takes place. Sincerely, KELLER & COMPANY, INC. /s/ Michael R. Keller Michael R. Keller President EX-10.1 10 EXHIBIT 10.1 EXHIBIT 10.1 PROPOSED FORM OF EMPLOYMENT AGREEMENT FOR EXECUTIVE OFFICERS FORM OF EMPLOYMENT AGREEMENT FOR SENIOR EXECUTIVE OFFICERS THIS AGREEMENT is made effective as of ________________, 1998, by and between FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK (the "BANK"), FIRST CAPITAL, INC. (the "COMPANY"), an Indiana corporation; and _____________ ("EXECUTIVE"). WHEREAS, EXECUTIVE serves in a position of substantial responsibility; WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE for the period provided in this Agreement; and WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a full- time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, EXECUTIVE agrees to serve as ___________________ of the BANK. During said period, EXECUTIVE also agrees to serve, if elected, as an officer and director of the COMPANY or any subsidiary or affiliate of the COMPANY or the BANK. Executive shall render administrative and management duties to the BANK such as are customarily performed by persons situated in a similar executive capacity. [FOR CEO] Specifically, EXECUTIVE shall perform all duties which are commonly incident to the office of Chairman and Chief Executive Officer of the BANK, including, but not limited to, (i) managing the day-to-day operations of the BANK, (ii) oversight of the BANK=s compliance with applicable laws and regulations, (iii) marketing of the BANK and its services, (iv) supervising the BANK=s employees, (v) reporting to the Board on the activities and condition of the BANK, and (vi) making recommendations to the Board concerning the strategies, capital structure, tactics and general operations of the BANK. [FOR PRESIDENT] Specifically, EXECUTIVE shall perform all duties which are commonly incident to the officer of President of the BANK including the direction of the BANK=s retail and lending operations, oversight and direction of branch operations and property, oversight and direction of human resources and such other tasks related to the operations of the BANK as may be assigned to EXECUTIVE by the Chief Executive Officer of the Bank. 2. TERMS AND DUTIES. (a) The term of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date, and continuing at each anniversary date thereafter, the Board of Directors of the BANK (the "Board") may extend the Agreement for an additional year. Prior to the extension of the Agreement as provided herein, the Board of Directors of the BANK will conduct a formal performance evaluation of EXECUTIVE for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, EXECUTIVE shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the BANK; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, EXECUTIVE may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in such Board's judgment, will not present any conflict of interest with the BANK, or materially affect the performance of EXECUTIVE's duties pursuant to this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Sections 1 and 2. The BANK shall pay EXECUTIVE as compensation a salary of $______ per year ("Base Salary"). Such Base Salary shall be payable in accordance with the customary payroll practices of the BANK. During the period of this Agreement, EXECUTIVE's Base Salary shall be reviewed at least annually; the first such review will be made no later than one year from the date of this Agreement. Such review shall be conducted by a Committee designated by the Board, and the Board may increase EXECUTIVE's Base Salary. In addition to the Base Salary provided in this Section 3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with all such other benefits as are provided uniformly to permanent full-time employees of the BANK. (b) The BANK will provide EXECUTIVE with employee benefit plans, arrangements and perquisites substantially equivalent to those in which EXECUTIVE was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the BANK will not, without EXECUTIVE's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect EXECUTIVE's rights or benefits thereunder. Without limiting the generality of the foregoing provisions of this Subsection (b), EXECUTIVE will be entitled to participate in or receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plan, medical coverage or any other employee benefit plan or 2 arrangement made available by the BANK in the future to its senior executives and key management employees, subject to, and on a basis consistent with, the terms, conditions and overall administration of such plans and arrangements. EXECUTIVE will be entitled to incentive compensation and bonuses as provided in any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is eligible to participate. Nothing paid to EXECUTIVE under any such plan or arrangement will be deemed to be in lieu of other compensation to which EXECUTIVE is entitled under this Agreement, except as provided under Section 5(e). (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel and other obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during EXECUTIVE's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the BANK of EXECUTIVE's full-time employment hereunder for any reason other than a Change in Control, as defined in Section 5(a) hereof; disability, as defined in Section 6(a) hereof; death; retirement, as defined in Section 7 hereof; or Termination for Cause, as defined in Section 8 hereof; (ii) EXECUTIVE's resignation from the BANK's employ, upon (A) unless consented to by EXECUTIVE, a material change in EXECUTIVE's function, duties, or responsibilities, which change would cause EXECUTIVE's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Sections 1 and 2, above (any such material change shall be deemed a continuing breach of this Agreement), (B) a relocation of EXECUTIVE's principal place of employment by more than 35 miles from its location at the effective date of this Agreement, or a material reduction in the benefits and perquisites to EXECUTIVE from those being provided as of the effective date of this Agreement, (C) the liquidation or dissolution of the BANK, or (D) any material breach of this Agreement by the BANK. Upon the occurrence of any event described in clauses (A), (B), (C) or (D), above, EXECUTIVE shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within a reasonable period of time not to exceed, except in case of a continuing breach, four (4) calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, the BANK shall pay EXECUTIVE, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining term of the Agreement, including Base Salary, bonuses, and any other cash or deferred compensation paid or to be paid (including the value of employer contributions that would have been made on EXECUTIVE's behalf over the remaining term of the agreement to any tax-qualified retirement plan sponsored by the BANK as of the Date of 3 Termination), to EXECUTIVE for the term of the Agreement provided, however, that if the BANK is not in compliance with its minimum capital requirements or if such payments would cause the BANK's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the BANK is in capital compliance. All payments made pursuant to this Section 4(b) shall be paid in substantially equal monthly installments over the remaining term of this Agreement following EXECUTIVE's termination; provided, however, that if the remaining term of the Agreement is less than one (1) year (determined as of EXECUTIVE's Date of Termination), such payments and benefits shall be paid to EXECUTIVE in a lump sum within thirty (30) days of the Date of Termination. (c) Upon the occurrence of an Event of Termination, the BANK will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the BANK for EXECUTIVE prior to his termination. Such coverage shall cease upon the expiration of the remaining term of this Agreement. 5. CHANGE IN CONTROL. (a) No benefit shall be paid under this Section 5 unless there shall have occurred a Change in Control of the COMPANY or the BANK. For purposes of this Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to occur if and when (a) there occurs a change in control of the BANK or the COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R. Part 574, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the COMPANY or the BANK representing twenty-five percent (25%) or more of the combined voting power of the COMPANY's or the BANK's then outstanding securities, (c) the membership of the board of directors of the COMPANY or the BANK changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four (24) month period (whether commencing before or after the date of adoption of this Agreement) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the COMPANY or the BANK approve a merger, consolidation, sale or disposition of all or substantially all of the COMPANY's or the BANK's assets, or a plan of partial or complete liquidation. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred or the Board of the BANK or the COMPANY has reasonably determined that a Change in Control (as defined herein) has occurred, EXECUTIVE shall be entitled to the benefits provided in paragraphs (c), (d) and (e) of this Section 5 upon his subsequent involuntary termination following the effective date of a Change in Control (or voluntary termination within twelve (12) months of the effective date of a Change in Control following any material demotion, loss of title, office or significant authority, material reduction in his annual compensation or benefits (other than a reduction affecting the BANK's personnel generally), or the relocation of his principal place of employment by more than 35 miles from its location immediately prior to the Change in Control), unless such termination is because of his death, retirement as provided in Section 7, termination for Cause, or termination for Disability. 4 (c) Upon the occurrence of a Change in Control followed by EXECUTIVE's termination of employment, the BANK shall pay EXECUTIVE, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to 2.99 times EXECUTIVE's "base amount," within the meaning of '280G(b)(3) of the Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination. (d) Upon the occurrence of a Change in Control followed by EXECUTIVE's termination of employment, the BANK will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the BANK for EXECUTIVE prior to his severance. Such coverage shall cease upon the expiration of thirty-six (36) months. In addition, EXECUTIVE shall be entitled to receive the value of employer contributions that would have been made on EXECUTIVE's behalf over the remaining term of the agreement to any tax-qualified retirement plan sponsored by the BANK as of the Date of Termination. (e) Notwithstanding the preceding paragraphs of this Section 5, in the event that the aggregate payments or benefits to be made or afforded to EXECUTIVE under this Section, together with any other payments or benefits received or to be received by EXECUTIVE in connection with a Change in Control, would be deemed to include an "excess parachute payment" under '280G of the Code, then, at the election of EXECUTIVE, (i) such payments or benefits shall be payable or provided to EXECUTIVE over the minimum period necessary to reduce the present value of such payments or benefits to an amount which is one dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under '280G(b)(3) of the Code or (ii) the payments or benefits to be provided under this Section 5 shall be reduced to the extent necessary to avoid treatment as an excess parachute payment with the allocation of the reduction among such payments and benefits to be determined by EXECUTIVE. 6. TERMINATION FOR DISABILITY. (a) If EXECUTIVE shall become disabled as defined in the BANK's then current disability plan (or, if no such plan is then in effect, if EXECUTIVE is permanently and totally disabled within the meaning of Section 22(e)(3) of the Code as determined by a physician designated by the Board), the BANK may terminate EXECUTIVE's employment for "Disability." (b) Upon EXECUTIVE's termination of employment for Disability, the BANK will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three- quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of EXECUTIVE's termination and will end on the earlier of (i) the date EXECUTIVE returns to the full-time employment of the BANK in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another employer; (iii) EXECUTIVE attaining the age of sixty-five (65); or (iv) EXECUTIVE's death; or 5 (v) the expiration of the term of this Agreement. The disability pay shall be reduced by the amount, if any, paid to EXECUTIVE under any plan of the BANK providing disability benefits to EXECUTIVE. (c) The BANK will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the BANK for EXECUTIVE prior to his termination for Disability. This coverage and payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the full-time employment of the BANK, in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another employer; (iii) EXECUTIVE's attaining the age of sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of this Agreement. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to EXECUTIVE during any period during which EXECUTIVE is incapable of performing his duties hereunder by reason of temporary disability. 7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION Termination by the BANK of EXECUTIVE based on "Retirement" shall mean retirement at or after attaining age sixty-five (65) or in accordance with any retirement arrangement established with EXECUTIVE's consent with respect to him. Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled to all benefits under any retirement plan of the BANK or the COMPANY and other plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during the term of this Agreement, the BANK shall pay to EXECUTIVE's estate the compensation due to EXECUTIVE through the last day of the calendar month in which his death occurred. Upon the voluntary resignation of EXECUTIVE during the term of this Agreement, other than in connection with an Event of Termination, the BANK shall pay to EXECUTIVE the compensation due to EXECUTIVE through his Date of Termination. 8. TERMINATION FOR CAUSE. For purposes of this Agreement, "Termination for Cause" shall include termination because of EXECUTIVE's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar infractions) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to EXECUTIVE and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying termination for Cause and specifying the reasons 6 thereof. EXECUTIVE shall not have the right to receive compensation or other benefits for any period after termination for Cause. Any stock options granted to EXECUTIVE under any stock option plan or any unvested awards granted under any other stock benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof, shall become null and void effective upon EXECUTIVE's receipt of Notice of Termination for Cause pursuant to Section 10 hereof, and shall not be exercisable by EXECUTIVE at any time subsequent to such Termination for Cause. 9. REQUIRED PROVISIONS. (a) The BOARD may terminate EXECUTIVE's employment at any time, but any termination by the BOARD, other than Termination for Cause, shall not prejudice EXECUTIVE's right to compensation or other benefits under this Agreement. EXECUTIVE shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 herein. (b) If EXECUTIVE is suspended and/or temporarily prohibited from participating in the conduct of the BANK's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the BANK may, in its discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations that were suspended. (c) If EXECUTIVE is removed and/or permanently prohibited from participating in the conduct of the BANK's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the BANK under the Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the parties. (e) All obligations under this Agreement shall be terminated (except to the extent determined that continuation of the Agreement is necessary for the continued operation of the BANK): (i) by the Director of the Office of Thrift Supervision (the "Director") or his designee at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the BANK under the authority contained in Section 13(c) of the FDIA or (ii) by the Director, or his designee at the time the Director or such designee approves a supervisory merger to resolve problems related to operation of the BANK or when the BANK is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action 7 (f) Any payments made to EXECUTIVE pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. '1828(k) and any regulations promulgated thereunder. 10. NOTICE. (a) Any purported termination by the BANK or by EXECUTIVE shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of EXECUTIVE's employment under the provision so indicated. (b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that he shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), and (B) if his employment is terminated for any other reason, other than Termination for Cause, the date specified in the Notice of Termination . In the event of EXECUTIVE's Termination for Cause, the Date of Termination shall be the same as the date of the Notice of Termination. (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the occurrence of a Change in Control and voluntary termination by EXECUTIVE in which case the Date of Termination shall be the date specified in the Notice, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 11. NON-COMPETITION. (a) Upon any termination of EXECUTIVE's employment hereunder pursuant to an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to compete with the BANK and/or the COMPANY for a period of one (1) year following such termination in _________ _________________________. EXECUTIVE agrees that during such period and within said counties, EXECUTIVE shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the BANK and/or the COMPANY. The parties hereto, recognizing that irreparable injury will result to the BANK and/or the COMPANY, its business and property in the event of EXECUTIVE's breach of this Subsection 11(a) agree that in the event of any such breach by EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition to any other 8 remedies and damages available, to an injunction to restrain the violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants, employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such that EXECUTIVE can obtain employment in a business engaged in other lines and/or of a different nature than the BANK and/or the COMPANY, and that the enforcement of a remedy by way of injunction will not prevent EXECUTIVE from earning a livelihood. Nothing herein will be construed as prohibiting the BANK and/or the COMPANY from pursuing any other remedies available to the BANK and/or the COMPANY for such breach or threatened breach, including the recovery of damages from EXECUTIVE. (b) EXECUTIVE recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the BANK and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the BANK. EXECUTIVE will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the BANK or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the BANK. In the event of a breach or threatened breach by EXECUTIVE of the provisions of this Section, the BANK will be entitled to an injunction restraining EXECUTIVE from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the BANK or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the BANK from pursuing any other remedies available to the BANK for such breach or threatened breach, including the recovery of damages from EXECUTIVE. 12. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the BANK. The COMPANY, however, guarantees all payments and the provision of all amounts and benefits due hereunder to EXECUTIVE and, if such payments are not timely paid or provided by the BANK, such amounts and benefits shall be paid or provided by the COMPANY. 13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the BANK or any predecessor of the BANK and EXECUTIVE, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that EXECUTIVE is subject to receiving fewer benefits than those available to him without reference to this Agreement. 9 14. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns. 15. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there by any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 16. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 17. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Indiana, unless otherwise specified herein; provided, however, that in the event of a conflict between the terms of this Agreement and any applicable federal or state law or regulation, including , specifically, 12 C.F.R. Section 563.39(b), the provisions of such law or regulation shall prevail. 10 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the BANK, if EXECUTIVE is successful pursuant to a legal judgment, arbitration or settlement. 20. INDEMNIFICATION. The BANK shall provide EXECUTIVE (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, or in lieu thereof, shall indemnify EXECUTIVE (and his heirs, executors and administrators) to the fullest extent permitted under ___________ law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the BANK (whether or not he continues to be a directors or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgment, court costs and attorneys' fees and the cost of reasonable settlements. The provisions of 12 C.F.R. 545.121 shall apply to the BANK's obligations under this Section 20. 21. SUCCESSOR TO THE BANK OR THE COMPANY. The BANK and the COMPANY shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the BANK or the COMPANY, expressly and unconditionally to assume and agree to perform the BANK's or the COMPANY's obligations under this Agreement, in the same manner and to the same extent that the BANK or the COMPANY would be required to perform if no such succession or assignment had taken place. 11 IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to be executed and their seal to be affixed hereunto by a duly authorized officer, and EXECUTIVE has signed this Agreement, all on the ____ day of _____________, 1998. ATTEST: FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK _______________________________ BY:_________________________________ ATTEST: FIRST CAPITAL, INC. _______________________________ BY:________________________________ WITNESS: ______________________________ _____________________________________ Executive 12 EX-10.2 11 EXHIBIT 10.2 EXHIBIT 10.2 PROPOSED FORM OF EMPLOYEE SEVERANCE COMPENSATION PLAN FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK EMPLOYEE SEVERANCE COMPENSATION PLAN PLAN PURPOSE The purpose of this First Federal Bank, A Federal Savings Bank Employee Severance Compensation Plan is to assure the services of employees of the Bank in the event of a Change in Control. The benefits contemplated by the Plan recognize the value to the Bank of the services and contributions of the employees of the Bank and the effect upon the Bank resulting from the uncertainties of continued employment, reduced employee benefits, management changes and relocations that may arise in the event of a Change in Control. The Board believes that the Plan will also aid the Bank in attracting and retaining the highly qualified individuals who are essential to its success and that the Plan's assurance of fair treatment of the Bank's employees will reduce the distractions and other adverse effects on employees' performance in the event of a Change in Control. ARTICLE I ESTABLISHMENT OF PLAN 1.1 Establishment of Plan --------------------- As of the Effective Date of the Plan as defined herein, the Bank hereby establishes an employee severance compensation plan to be known as the First Federal Bank, FSB Employee Severance Compensation Plan." The purposes of the Plan are as set forth above. 1.2 Application of Plan ------------------- The benefits provided by this Plan shall be available to all employees of the Bank, who, at or after the Effective Date, meet the eligibility requirements of Article III, except for those officers of the Bank who have entered into, or who enter into in the future, and continue to be subject to, an employment or change in control agreement with the Employer. 1.3 Contractual Right to Benefits ----------------------------- This plan establishes and vests in each Participant a contractual right to the benefits to which each Participant is entitled hereunder in the event of a Change in Control, enforceable by the Participant against the Employer, the Bank, or both. The Plan does not provide, and should not be construed as providing, benefits of any kind to any employee except in the event of a Change in Control and, in the event of a Change in Control, only upon the involuntary or voluntary termination of an employee in the manner contemplated herein. ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 Definitions ----------- Whenever used in the Plan, the following terms shall have the meanings set forth below. "Annual Compensation" of a Participant means and includes all wage and salary paid (including accrued amounts) by an Employer as consideration for the Participant's service during the 12-month period ending on the last day of the month preceding the date of a Participant's termination pursuant to Section 4.2. For purposes of this Plan, a Participant's "Monthly Compensation" shall equal one-twelfth of a Participant's Annual Compensation as determined in accordance with this paragraph. "Bank" means First Federal Bank, A Federal Savings Bank or any successor as provided for in Article VII hereof. "Board" means the Board of Directors of the Bank. "Change in Control" shall mean an event deemed to occur if and when (a) an offeror other than the Corporation purchases shares of the stock of the Corporation or the Bank pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation or the Bank representing twenty-five percent (25%) or more of the combined voting power of the Corporation's or the Bank's then outstanding securities, (c) the membership of the board of directors of the Corporation or the Bank changes as the result of a contested election, such that individuals who were directors at the beginning of any twenty-four (24) month period (whether commencing before or after the date of adoption of this Plan) do not constitute a majority of the Board at the end of such period, or (d) shareholders of the Corporation or the Bank approve a merger, consolidation, sale or disposition of all or substantially all of the Corporation's or the Bank's assets, or a plan of partial or complete liquidation. If any of the events enumerated in clauses (a) - (d) occur, the Board shall determine the effective date of the change in control resulting therefrom, for purposes of the Plan. "Company" means First Capital, Inc.., an Indiana corporation, the holding company of the Bank. "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of an employee to perform the work customarily assigned to him. Additionally, a medical doctor selected or approved by the Board must advise the Board that it is either not possible to determine if or when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said employees lifetime. "Effective Date" means the date the Plan is approved by the Board of the Bank, or such other date as the Board shall designate in its resolution approving the Plan. "Employer" means (i) the Bank or (ii) a subsidiary of the Bank or a parent company of the Bank which has adopted the plan pursuant to Article VI hereof. "Expiration Date" means a date ten (10) years from the Effective Date unless earlier terminated pursuant to Section 8.2 or extended pursuant to Section 8.1. "Just Cause" shall means termination because of Participant's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or other similar offenses) or any final cease-and desist order. "Payment" means the payment of severance compensation as provided in Article IV hereof. "Participant" means an employee of an Employer who meets the eligibility requirements of Article III. "Plan" means this First Federal Bank, A Federal Savings Bank Employee Severance Compensation Plan. 2.2 Applicable Law -------------- The laws of the State of Indiana shall be controlling law in all matters relating to the Plan to the extent not preempted by Federal law. 2.3 Severability ------------ If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE III ELIGIBILITY 3.1 Participation ------------- The term "Participant" shall include all employees of an Employer who have completed at least one (1) year of service with the Employer at the time of any termination pursuant to Section 4.2 herein. For purposes of this Plan, "years of service" shall include all years of employment with Bank in which an employee was credited with at least 500 actual hours of service and "years of service" shall be determined without regard to any break in service. In addition, the term "Participant" shall, without regard to years of service, include each employee who is a vice president or assistant vice president of the Bank. Notwithstanding the foregoing, an employee who has entered into and continues to be covered by an individual employment contract or change in control agreement with an Employer shall not be entitled to participate in this Plan. 3.2 Duration of Participation ------------------------- A Participant shall cease to be a Participant in the Plan when the Participant ceases to be an employee of an Employer, unless such Participant is entitled to a Payment as provided in the Plan. A Participant entitled to receipt of a Payment shall remain a Participant in this Plan until the full amount of such Payment has been paid to the Participant. ARTICLE IV PAYMENTS 4.1 Right to Payment ---------------- A Participant shall be entitled to receive from his or her Employer a Payment in the amount provided in Section 4.3 if a Change in Control occurs and if, within one (1) year thereafter, the Participant's employment by an Employer shall terminate for any reason specified in Section 4.2. A Participant shall not be entitled to a Payment if termination occurs by reason of death, voluntary retirement, voluntary termination other than for the reasons specified in Section 4.2, Disability or for Just Cause. 4.2 Reasons for Termination ----------------------- Following a Change in Control, a Participant shall be entitled to a Payment in accordance with Section 4.3 if employment by an Employer is terminated, voluntary or involuntary, for any one or more of the following reasons: (a) The Employer reduces the Participant's base salary or rate of compensation as in effect immediately prior to the Change in Control, or as the same may have been increased thereafter. (b) The Employer materially changes Participant's function, duties or responsibilities which would cause the Participant's position to be one of lesser responsibility, importance or scope with the Employer than immediately prior to the Change in Control. (c) The Employer requires the Participant to change the location of the Participant's job or office, so that such Participant will be based at a location more than thirty-five (35) miles from the location of the Participant's job or office immediately prior to the Change in Control provided that such new location is not closer to Participant's home. (d) The Employer materially reduces the benefits and perquisites available to the Participant immediately prior to the Change in Control; provided, however, that a material reduction in benefits and perquisites generally provided to all employees of the Bank on a nondiscriminatory basis shall not trigger a Payment pursuant to this Plan. (e) A successor to the Employer fails or refuses to assume the Employer's obligations under this Plan, as required by Article VII. (f) The Employer, or any successor to the Employer, breaches any other provisions of this Plan. (g) The Employer terminates the employment of a Participant at or after a Change in Control other than for Just Cause. 4.3 Amount of Payment ----------------- (a) Each Participant who was a vice president of the Bank immediately prior to the effective date of the Change in Control and entitled to a Payment under this Plan shall receive from the Bank a lump sum cash payment equal to the Participant's Annual Compensation. (b) Each Participant who was an assistant vice president of the Bank or a manager immediately prior to the effective date of the Change in Control and entitled to a Payment under this Plan shall receive from the Bank a lump sum cash payment equal to seventy-five (75) percent of the Participant's Annual Compensation. (c) Each Participant (other than a Participant entitled to a benefit under Sections 4.3(a) and (b) of the Plan) entitled to a Payment under this Plan shall receive from the Employer a lump sum cash payment equal to the product of fifty percent (50%) of the Participant's Monthly Compensation and the Participant's years of service (including partial years rounded up to the nearest full month) from the Participant's date of hire through the date of termination. Notwithstanding anything herein to the contrary, (i) the maximum payment under this Section 4.3(c) to a Participant shall not exceed fifty percent (50%) of the Participant's Annual Compensation and the (ii) minimum payment under this Section 4.3(c) shall be the Participant's Monthly Compensation (determined without regard to the Participant's period of service). (d) The Participant shall not be required to mitigate damages on the amount of the Payment by seeking other employment or otherwise, nor shall the amount of such Payment be reduced by any compensation earned by the Participant as a result of employment after termination of employment hereunder. 4.4 Time of Payment --------------- The Payment to which a Participant is entitled shall be paid to the Participant by the Employer or the successor to the Employer, in cash and in full, not later than thirty (30) business days after the termination of the Participant's employment. If any Participant should die after termination of the employment but before all amounts have been paid, such unpaid amounts shall be paid to the Participant's named beneficiary, if living, otherwise to the personal representative of behalf of or for the benefit of the Participant's estate. 4.5 Suspension of Payment --------------------- Notwithstanding the foregoing, no payments or portions thereof shall be made under this Plan, if such payment or portion would result in the Bank failing to meet its minimum regulatory capital requirements as required by 12 C.F.R. '567.2. Any payments or portions thereof not paid shall be suspended until such time as their payment would not result in a failure to meet the Bank's minimum regulatory capital requirements. Any portion of benefit payments which have not been suspended will be paid on an equitable basis, pro rata based upon amounts due each Participant, among all eligible Participants. ARTICLE V OTHER RIGHTS AND BENEFITS NOT AFFECTED 5.1 Other Benefits -------------- Neither the provisions of this Plan nor the Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant's rights as an employee of an Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock ownership or any employment agreement or other plan or arrangement. 5.2 Employment Status ----------------- This Plan does not constitute a contract of employment or impose on the Participant's Employer any obligation to retain the Participant, to maintain the status of the Participant's employment, or to change the Employer's policies regarding termination of employment. ARTICLE VI PARTICIPATING EMPLOYERS 6.1 Upon approval by the Board of the Bank, this Plan may be adopted by any subsidiary of the Bank or by the Company. Upon such adoption, the subsidiary or the Company shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the employees of that subsidiary or the Company. The term "subsidiary" means any corporation in which the Bank, directly or indirectly, holds a majority of the voting power of its outstanding shares of capital stock. ARTICLE VII SUCCESSOR TO THE BANK 7.1 The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank's obligations under this plan, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. ARTICLE VIII DURATION, AMENDMENT AND TERMINATION 8.1 Duration -------- If a Change in Control has not occurred, this Plan shall expire as of the Expiration Date, unless sooner terminated as provided in Section 8.2, or unless extended for an additional period or periods by resolution adopted by the Board of the Bank. Notwithstanding the foregoing, if a Change in Control occurs this Plan shall continue in full force and effect, and shall not terminate or expire until such date as all Participants who become entitled to Payments hereunder shall have received such Payments in full. 8.2 Amendment and Termination ------------------------- The Plan may be terminated or amended in any respect by resolution adopted by a majority of the Board of the Bank, unless a Change in Control has previously occurred. If a Change in Control occurs, the Plan no longer shall be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever. 8.3 Form of Amendment ----------------- The form of any proper amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Bank, certifying that the amendment or termination has been approved by the Board. A proper termination of the Plan automatically shall effect a termination of all Participants' rights and benefits hereunder. 8.4 No Attachment ------------- (a) Except as required by law, no right to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect such action shall be null, void, and of no effect. (b) This Plan shall be binding upon, and inure to the benefit of, each employee, the Employer and their respective successors and assigns. ARTICLE IX LEGAL FEES AND EXPENSES 9.1 All reasonable legal fees and other expenses paid or incurred by a party hereto pursuant to any dispute or question of interpretation relating to this Plan shall be paid or reimbursed by the prevailing party in any legal judgment, arbitration or settlement. ARTICLE X REQUIRED PROVISIONS 10.1 The Bank may terminate the employee's employment at any time, but any termination by the Bank, other than Termination for Cause, shall not prejudice employee's right to compensation or other benefits under this Agreement if the employee is otherwise entitled to a benefit. employee shall not have the right to receive compensation or other benefits for any period after termination for Just Cause as defined in Section 2.1 hereinabove. 10.2 If the employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. (S) 1818(e)(3) or (g)(1), the Bank's obligations under this Plan to such employee shall be suspended as of the date of service, unless stated by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the employee all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligation which were suspended. 10.3 If the employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. (S) 18(e)(4) or (g)(1), all obligations of the Bank under this Plan to the employee shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. 10.4 If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. (S) 1818(x)(1), all obligations of the Bank under this Plan shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. 10.5 All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director of the OTS (or his designee) or (ii) the Federal Deposit Insurance Corporation ("FDIC") at the time FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposits Insurance Act, 12 U.S.C. (S) 1823(c); or (ii) by the Director of the OTS (or his designee) at the time the Director (or his designee) approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 10.6 Any payments made to an employee pursuant to this Plan or otherwise shall be conditioned upon compliance under 12 U.S.C. (S) 1828(k) and any regulations promulgated thereunder. ARTICLE XI ADMINISTRATION OF THE PLAN 11.1 The Plan shall be administered by the Board (or, by a committee of non-employee directors designated by the Board). Subject to the other provisions of the Plan, the Board shall have authority to adopt, amend, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable, to interpret the provisions of the Plan and to decide all disputes arising in connection with the Plan. The Board may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent it shall deem appropriate to carry the Plan into effect, in its sole and absolute discretion. The Board's decision and interpretations shall be final and binding. Any action of the Board with respect to the administration of the Plan shall be taken pursuant to a majority vote or by the unanimous written consent of its members. Having been adopted by its Board on ______________, 1998, this Plan is executed by duly authorized officer of the Bank this ___ day of _______________, 1998. Attest _____________________ ________________________ Secretary President EX-10.4 12 EXHIBIT 10.4 EXHIBIT 10.4 PROPOSED FORM OF EMPLOYEE STOCK OWNERSHIP PLAN FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN (EFFECTIVE AS OF JANUARY 1, 1998) FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS
Page PREAMBLE....................................................................................... 1 ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION 1.1 Definitions............................................................................... 2 1.2 Plurals and Gender........................................................................ 7 1.3 Incorporation of Trust Agreement.......................................................... 7 1.4 Headings.................................................................................. 7 1.5 Severability.............................................................................. 7 1.6 References to Governmental Regulations.................................................... 8 ARTICLE II PARTICIPATION 2.1 Commencement of Participation............................................................. 9 2.2 Termination of Participation.............................................................. 9 2.3 Resumption of Participation............................................................... 9 2.4 Determination of Eligibility.............................................................. 10 ARTICLE III CREDITED SERVICE 3.1 Service Counted for Eligibility Purposes.................................................. 11 3.2 Service Counted for Vesting Purposes...................................................... 11 3.3 Credit for Pre-Break Service.............................................................. 11 3.4 Service Credit During Authorized Leaves................................................... 11 3.5 Service Credit During Maternity or Paternity Leave........................................ 12 3.6 Ineligible Employees...................................................................... 12 ARTICLE IV CONTRIBUTIONS 4.1 Employee Stock Ownership Contributions.................................................... 13 4.2 Time and Manner of Employee Stock Ownership Contributions................................. 13
i 4.3 Records of Contributions................................................................. 14 4.4 Erroneous Contributions.................................................................. 14 ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS 5.1 Establishment of Separate Participant Accounts........................................... 16 5.2 Establishment of Suspense Account........................................................ 16 5.3 Allocation of Earnings, Losses and Expenses.............................................. 17 5.4 Allocation of Forfeitures................................................................ 17 5.5 Allocation of Annual Employee Stock Ownership Contributions.............................. 17 5.6 Limitation on Annual Additions........................................................... 18 5.7 Erroneous Allocations.................................................................... 21 5.8 Value of Participant's Interest in Fund.................................................. 22 5.9 Investment of Account Balances........................................................... 22 ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY 6.1 Normal Retirement........................................................................ 23 6.2 Early Retirement......................................................................... 23 6.3 Disability Retirement.................................................................... 23 6.4 Death Benefits........................................................................... 23 6.5 Designation of Death Beneficiary and Manner of Payment................................... 24 ARTICLE VII VESTING AND FORFEITURES 7.1 Vesting on Death, Disability, Retirement, Change in Control.............................. 25 7.2 Vesting on Termination of Participation.................................................. 25 7.3 Disposition of Forfeitures............................................................... 26 ARTICLE VIII EMPLOYEE STOCK OWNERSHIP RULES 8.1 Right to Demand Employer Securities...................................................... 27 8.2 Voting Rights............................................................................ 27 8.3 Nondiscrimination in Employee Stock Ownership Contributions.............................. 27 8.4 Dividends................................................................................ 28 8.5 Exempt Loans............................................................................. 28 8.6 Exempt Loan Payments..................................................................... 29 8.7 Put Option............................................................................... 30 8.8 Diversification Requirements............................................................. 31
ii 8.9 Independent Appraiser.................................................................... 31 8.10 Limitation on Allocation................................................................. 31 ARTICLE IX PAYMENTS AND DISTRIBUTIONS 9.1 Payments on Termination of Service -- In General......................................... 33 9.2 Commencement of Payments................................................................. 33 9.3 Mandatory Commencement of Benefits....................................................... 33 9.4 Required Beginning Date.................................................................. 36 9.5 Form of Payment.......................................................................... 36 9.6 Payments Upon Termination of Plan........................................................ 36 9.7 Distribution Pursuant to Qualified Domestic Relations Orders............................. 37 9.8 Cash-Out Distributions................................................................... 37 9.9 ESOP Distribution Rule................................................................... 38 9.10 Withholding.............................................................................. 38 9.11 Waiver of 30-day Notice.................................................................. 39 ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS 10.1 Top-Heavy Rules to Control............................................................... 40 10.2 Top-Heavy Plan Definitions............................................................... 40 10.3 Calculation of Accrued Benefits.......................................................... 42 10.4 Determination of Top-Heavy Status........................................................ 43 10.5 Determination of Super Top-Heavy Status.................................................. 44 10.6 Minimum Contribution..................................................................... 44 10.7 Maximum Benefit Limitation............................................................... 45 ARTICLE XI ADMINISTRATION 11.1 Appointment of Administrator............................................................ 46 11.2 Resignation or Removal of Administrator................................................. 46 11.3 Appointment of Successors: Terms of Office, Etc......................................... 46 11.4 Powers and Duties of Administrator...................................................... 46 11.5 Action by Administrator................................................................. 47 11.6 Participation by Administrators......................................................... 48 11.7 Agents.................................................................................. 48 11.8 Allocation of Duties.................................................................... 48 11.9 Delegation of Duties.................................................................... 48 11.10 Administrator's Action Conclusive....................................................... 48 11.11 Compensation and Expenses of Administrator.............................................. 49
iii 11.12 Records and Reports.................................................................... 49 11.13 Reports of Fund Open to Participants................................................... 49 11.14 Named Fiduciary........................................................................ 49 11.15 Information from Employer.............................................................. 49 11.16 Reservation of Rights by Employer...................................................... 50 11.17 Liability and Indemnification.......................................................... 50 11.18 Service as Trustee and Administrator................................................... 50 ARTICLE XII CLAIMS PROCEDURE 12.1 Notice of Denial........................................................................ 51 12.2 Right to Reconsideration................................................................ 51 12.3 Review of Documents..................................................................... 51 12.4 Decision by Administrator............................................................... 51 12.5 Notice by Administrator................................................................. 51 ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER 13.1 Amendments.............................................................................. 52 13.2 Consolidation, Merger or Other Transactions of Employer................................. 52 13.3 Consolidation or Merger of Trust........................................................ 53 13.4 Bankruptcy or Insolvency of Employer.................................................... 53 13.5 Voluntary Termination................................................................... 53 13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions................ 54 ARTICLE XIV MISCELLANEOUS 14.1 No Diversion of Funds................................................................... 55 14.2 Liability Limited....................................................................... 55 14.3 Incapacity.............................................................................. 55 14.4 Spendthrift Clause...................................................................... 55 14.5 Benefits Limited to Fund................................................................ 56 14.6 Cooperation of Parties.................................................................. 56 14.7 Payments Due Missing Persons............................................................ 56 14.8 Governing Law........................................................................... 56 14.9 Nonguarantee of Employment.............................................................. 57 14.10 Counsel................................................................................ 58
iv FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN PREAMBLE Effective as of January 1, 1998, First Federal Bank, A Federal Savings Bank (the "Sponsor"), a federally chartered stock savings bank, has adopted the First Federal Bank, A Federal Savings Bank Employee Stock Ownership Plan in order to enable Participants to share in the growth and prosperity of the Sponsor, and to provide Participants with an opportunity to accumulate capital for their future economic security by accumulating funds to provide retirement, death and disability benefits. The Plan is a stock bonus plan designed to meet the requirements of an employee stock ownership plan as described at Section 4975(e)(7) of the Code and Section 407(d)(6) of ERISA. The primary purpose of the employee stock ownership plan is to invest in employer securities. The Sponsor intends that the Plan will qualify under Sections 401(a) and 501(a) of the Code and will comply with the provisions of ERISA. The terms of this Plan shall apply only with respect to Employees of the Employer on and after January 1, 1998. ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION 1.1 Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in this Plan shall have the following meanings: (a) "Act" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute. (b) "Administrator" shall mean the administrative committee provided for in Article XI. (c) "Annual Additions" shall mean, with respect to each Participant, the sum of those amounts allocated to the Participant's accounts under this Plan and under any other qualified defined contribution plan to which the Employer contributes for any Limitation Year, consisting of the following: (1) Employer contributions; (2) Forfeitures; and (3) Voluntary contributions (if any). (d) "Authorized Leave of Absence" shall mean an absence from Service with respect to which the Employee may or may not be entitled to Compensation and which meets any one of the following requirements: (1) Service in any of the armed forces of the United States for up to 36 months, provided that the Employee resumes Service within 90 days after discharge, or such longer period of time during which such Employee's employment rights are protected by law; or (2) Any other absence or leave expressly approved and granted by the Employer which does not exceed 24 months, provided that the Employee resumes Service at or before the end of such approved leave period. In approving such leaves of absence, the Employer shall treat all Employees on a uniform and nondiscriminatory basis. (e) "Beneficiary" shall mean such persons as may be designated by the Participant to receive benefits after the death of the Participant, or such persons designated by the Administrator to receive benefits after the death of the Participant, all as provided in Section 6.5. 2 (f) "Board of Directors" shall mean the Board of Directors of the Sponsor. (g) "Break" shall mean a Plan Year during which an Employee fails to complete more than 500 Hours of Service. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. (i) "Compensation" shall mean the amount of remuneration paid to an Employee by the Employer, after the date on which the Employee becomes a Participant, for services rendered to the Employer during a Plan Year, including base salary, bonuses, overtime and commissions, and any amount of compensation contributed pursuant to a salary reduction election under Code Section 401(k) and any amount of compensation contributed to a cafeteria plan described at Section 125 of the Code, but excluding amounts paid by the Employer or accrued with respect to this Plan or any other qualified or non-qualified unfunded plan of deferred compensation or other employee welfare plan to which the Employer contributes, payments for group insurance, medical benefits, reimbursement for expenses, and other forms of extraordinary pay, and excluding amounts accrued for a prior year. Notwithstanding anything herein to the contrary, the annual Compensation of each Participant taken into account under the Plan (including for purposes of Section 5.6(b)) for any Plan Year shall not exceed $160,000, as adjusted from time to time in accordance with Section 401(a)(17) of the Code. If a determination period consists of fewer than 12 months, the limitation referred to in the preceding sentence shall be prorated accordingly. (j) "Date of Hire" shall mean the date on which a person shall perform his first Hour of Service. Notwithstanding the foregoing, in the event a person incurs one or more consecutive Breaks after his initial Date of Hire which results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his "Date of Hire" shall thereafter be the date on which he completes his first Hour of Service after such Break or Breaks. (k) "Disability" shall mean a physical or mental impairment which prohibits a Participant from engaging in any occupation for wages or profit and which has caused the Social Security Administration to classify the individual as "disabled" for purposes of Social Security. (l) "Disability Retirement Date" shall mean the first day of the month after which a Participant incurs a Disability. (m) "Early Retirement Date" shall mean the first day of the month coincident with or next following the date on which a Participant attains age 55 and completes ten Years of Service. (n) "Effective Date" shall mean January 1, 1998. (o) "Eligibility Period" shall mean the period of 12 consecutive months commencing on an Employee's Date of Hire. Succeeding eligibility computation periods after the initial eligibility 3 computation period shall be based on Plan Years which include the first anniversary of an Employee's Date of Hire. (p) "Employee" shall mean any person employed by the Employer, including officers but excluding directors in their capacity as such; provided, however, that the term "Employee" shall not include leased employees, employees regularly employed outside the employer's own offices in connection with the operation and maintenance of buildings or other properties acquired through foreclosure or deed, and any employee included in a unit of employees covered by a collective- bargaining agreement with the Employer that does not expressly provide for participation of such employees in this Plan, where there has been good-faith bargaining between the Employer and employees' representatives on the subject of retirement benefits. (q) "Employer" shall mean First Federal Bank, A Federal Savings Bank, a federally chartered stock savings bank, or any successors to the aforesaid by merger, consolidation or otherwise, which may agree to continue this Plan, or any affiliated or subsidiary corporation or business organization of any Employer which, with the consent of the Sponsor, shall agree to become a party to this Plan. (r) "Employer Securities" shall mean the common stock issued by First Capital Inc., an Indiana corporation, or any employer security within the meaning of Section 4975(c)(8) of the Code and Section 407(d)(1) of ERISA. (s) "Entry Date" shall mean the first day of the month following the date on which an Employee satisfies the requirement of Section 2.1. (t) "Exempt Loan" shall mean a loan described at Section 4975(d)(1) of the Code to the Trustee to purchase Employer Securities for the Plan, made or guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the Code, including, but not limited to, a direct loan of cash, a purchase money transaction, an assumption of an obligation of the Trustee, an unsecured guarantee or the use of assets of such disqualified person as collateral for such a loan. (u) "Former Participant" shall mean any previous Participant whose participation has terminated but who has a vested interest in the Plan which has not been distributed in full. (v) "Fund" shall mean the Fund maintained by the Trustee pursuant to the Trust Agreement in order to provide for the payment of the benefits specified in the Plan. (w) "Hour of Service" shall mean each hour for which an Employee is directly or indirectly paid or entitled to payment by an Employer for the performance of duties or for reasons other than the performance of duties (such as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and similar periods of paid nonworking time). To the extent not otherwise included, Hours of Service shall also include each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. Hours of working time shall be credited on the basis of actual hours worked, even though compensated at a premium rate for overtime or other reasons. 4 In computing and crediting Hours of Service for an Employee under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations shall apply, said Sections being herein incorporated by reference. Hours of Service shall be credited to the Plan Year or other relevant period during which the services were performed or the nonworking time occurred, regardless of the time when Compensation therefor may be paid. Any Employee for whom no hourly employment records are kept by the Employer shall be credited with 45 Hours of Service for each calendar week in which he would have been credited with a least one Hour or Service under the foregoing provisions, if hourly records were available. Solely for purposes of determining whether a Break for participation and vesting purposes has occurred in an Eligibility Period or Plan Year, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight Hours of Service per day of such absence. For purposes of this Section 1.1(w), an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this provision shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Break in that period, or (2) in all other cases, in the following computation period. (x) "Investment Adjustments" shall mean the increases and/or decreases in the value of a Participant's accounts attributable to earnings, gains, losses and expenses of the Fund, as set forth in Section 5.3. (y) "Limitation Year" shall mean the Plan Year. (z) "Normal Retirement Date" shall mean the first day of the month coincident with or during which a Participant attains age 65. (aa) "Participant" shall mean an Employee who has met all of the eligibility requirements of the Plan and who is currently included in the Plan as provided in Article II hereof. (bb) "Plan" shall mean the First Federal Bank, A Federal Savings Bank Employee Stock Ownership Plan, as described herein or as hereafter amended from time to time. (cc) "Plan Year" shall mean any 12 consecutive month period commencing on January 1 and ending on December 31. (dd) "Qualified Domestic Relations Order" shall mean any judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony, marital property rights to a spouse, former spouse, child or other dependent of the Participant (all such persons hereinafter termed "alternate payee") and is made pursuant to a State 5 domestic relations law (including community property law) and, further, that creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to receive all or a portion of the benefits payable with respect to a Participant and that clearly specifies the following: (1) the name and last known mailing address (if available) of the Participant and the name and mailing address of each alternate payee to which the order relates; (2) the amount or percentage of the Participant's benefits to be paid to an alternate payee or the manner in which the amount is to be determined; and (3) the number of payments or period for which payments are required. A domestic relations order is not a Qualified Domestic Relations Order if it: (1) requires the Plan to provide any type or form of benefit or any option not otherwise provided under the Plan; or, (2) requires the Plan to provide increased benefits; or (3) requires payment of benefits to an alternate payee that is required to be paid to another alternate payee under a previously existing Qualified Domestic Relations Order. (ee) "Retirement" shall mean termination of employment which qualifies as early, normal or Disability retirement as described in Article VI. (ff) "Service" shall mean employment with the Employer. (gg) "Sponsor" shall mean First Federal Bank, A Federal Savings Bank, a federally chartered stock savings bank. (hh) "Trust Agreement" shall mean the agreement, the Sponsor and the Trustee (or any successor Trustee governing the administration of the Trust as it may be amended from time to time. (ii) "Trustee" shall mean the Trustee or Trustees by whom the assets of the Plan are held, as provided in the Trust Agreement, or his or their successors. (jj) "Valuation Date" shall mean the last day of each Plan Year. The Trustee may make additional valuations, at the instruction of the Administrator, but in no event may the Administrator request additional valuations by the Trustee more frequently than quarterly. Whenever such date falls on a Saturday, Sunday or holiday, the preceding business day shall be the Valuation Date. 6 (kk) "Year of Service" shall mean any Plan Year during which an Employee has completed at least 1,000 Hours of Service. Except as otherwise specified in Article III, in the determination of Years of Service for eligibility and vesting purposes under this Plan, the term "Year of Service" shall also mean any Plan Year during which an Employee has completed at least 1,000 Hours of Service with an entity that is: (1) a member of a controlled group including the Employer, while it is a member of such controlled group (within the meaning of Section 414(b) of the Code); (2) in a group of trades or businesses under common control with the Employer, while it is under common control (within the meaning of Section 414(c) of the Code); (3) a member of an affiliated service group including the Employer, while it is a member of such affiliated service group (within the meaning of Section 414(m) of the Code); or (4) a leasing organization, under the circumstances described in Section 414(n) of the Code. 1.2 Plurals and Gender. Where appearing in the Plan and the Trust Agreement, the masculine gender shall include the feminine and neuter genders, and the singular shall include the plural, and vice versa, unless the context clearly indicates a different meaning. 1.3 Incorporation of Trust Agreement. The Trust Agreement, as the same may be amended from time to time, is intended to be and hereby is incorporated by reference into this Plan and for all purposes shall be deemed a part of the Plan. 1.4 Headings. The headings and sub-headings in this Plan are inserted for the convenience of reference only and are to be ignored in any construction of the provisions hereof. 1.5 Severability. In case any provision of this Plan shall be held illegal or void, such illegality or invalidity shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provisions had never been inserted herein. 7 1.6 References to Governmental Regulations. References in this Plan to regulations issued by the Internal Revenue Service, the Department of Labor, or other governmental agencies shall include all regulations, rulings, procedures, releases and other position statements issued by any such agency. 8 ARTICLE II PARTICIPATION 2.1 Commencement of Participation. (a) Any Employee who completes at least 1,000 Hours of Service during his Eligibility Period or during any Plan Year beginning after his Date of Hire shall initially become a Participant on the Entry Date coincident next following the later of the following dates, provided he is employed by the Employer on that Entry Date: (1) The date which is 12 months after his Date of Hire; and (2) The date on which he attains age 21. (b) Any Employee who had satisfied the requirements set forth in Section 2.1(a) during the 12-month period prior to the Effective Date shall become a Participant on the Effective Date, provided he was still employed by the Employer on the Effective Date. 2.2 Termination of Participation. After commencement or resumption of his participation, an Employee shall remain a Participant during each consecutive Plan Year thereafter until the earliest of the following dates: (a) His actual Retirement date; (b) His date of death; or (c) The last day of a Plan Year during which he incurs a Break. 2.3 Resumption of Participation (a) Any Participant whose employment terminates and who resumes Service before he incurs a Break shall resume participation immediately on the date he is reemployed. (b) Except as otherwise provided in Section 2.3(c), any Participant who incurs one or more Breaks and resumes Service shall resume participation retroactively as of the first day of the first Plan Year in which he completes a Year of Service after such Break(s). (c) Any Participant who incurs one or more Breaks and resumes Service, but whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3, shall be treated as a new Employee and shall again be required to satisfy the eligibility requirements contained in Section 2.1 before resuming participation on the appropriate Entry Date, as specified in Section 2.1. 9 2.4 Determination of Eligibility. The Administrator shall determine the eligibility of Employees in accordance with the provisions of this Article. For each Plan Year, the Employer shall furnish the Administrator a list of all Employees, indicating the original date of their reemployment with the Employer and any Breaks they may have incurred. 10 ARTICLE III CREDITED SERVICE 3.1 Service Counted for Eligibility Purposes. Except as provided in Section 3.3, all Years of Service completed by an Employee shall be counted in determining his eligibility to become a Participant on and after the Effective Date, whether such Service was completed before or after the Effective Date. 3.2 Service Counted for Vesting Purposes. All Years of Service completed by an Employee (including Years of Service completed prior to the Effective Date) shall be counted in determining his vested interest in this Plan, except the following: (a) Service which is disregarded under the provisions of Section 3.3; and (b) Service prior to the Effective Date of this Plan if such Service would have been disregarded under the "break in service" rules (within the meaning of Section 1.411(a)-5(b)(6) of the Treasury Regulations). 3.3 Credit for Pre-Break Service. Upon his resumption of participation following one or a series of consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his credit for all purposes of this Plan only if either: (a) He was vested in any portion of his accrued benefit at the time the Break(s) began; or (b) The number of his consecutive Breaks does not equal or exceed the greater of five or the number of his Years of Service credited to him before the Breaks began. Except as provided in the foregoing, none of an Employee's Service prior to one or a series of consecutive Breaks shall be counted for any purpose in connection with his participation in this Plan thereafter. 3.4 Service Credit During Authorized Leaves. An Employee shall receive no Service credit under Section 3.1 or 3.2 during any Authorized Leave of Absence. However, solely for the purpose of determining whether he has incurred a Break during any Plan Year in which he is absent from Service for one or more Authorized Leaves of Absence, he shall be credited with 45 Hours of Service for each week during any such leave period. 11 Notwithstanding the foregoing, if an Employee fails to return to Service on or before the end of a leave period, he shall be deemed to have terminated Service as of the first day of such leave period and his credit for Hours of Service, determined under this Section 3.4, shall be revoked. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. 3.5 Service Credit During Maternity or Paternity Leave. For purposes of determining whether a Break has occurred for participation and vesting purposes, an individual who is on maternity or paternity leave as described in Section 1.1(w), shall be deemed to have completed Hours of Service during such period of absence, all in accordance with Section 1.1(w). Notwithstanding the foregoing, no credit shall be given for such Hours of Service unless the individual furnishes to the Administrator such timely information as the Administrator may reasonably require to determine: (a) that the absence from Service was attributable to one of the maternity or paternity reasons enumerated in Section 1.1(w); and (b) the number of days for which such absence lasted. In no event, however, shall any credit be given for such leave other than for determining whether a Break has occurred. 3.6 Ineligible Employees. Notwithstanding any provisions of this Plan to the contrary, any person who is employed by the Employer, but who is ineligible to participate in this Plan, either because of his failure: (a) To meet the eligibility requirements contained in Article II; or (b) To be an Employee, as defined in Section 1.1(p), shall, nevertheless, earn Years of Service for eligibility and vesting purposes pursuant to the rules contained in this Article III. However, such a person shall not be entitled to receive any contributions hereunder unless and until he becomes a Participant in this Plan, and then, only during his period of participation. 12 ARTICLE IV CONTRIBUTIONS 4.1 Employee Stock Ownership Contributions. (a) Subject to all of the provisions of this Article IV, for each Plan Year commencing on or after the Effective Date, the Employer shall make an Employee Stock Ownership contribution to the Fund, in such amount as may be determined by the Board of Directors in its discretion. Such contribution shall be in the form of cash or Employer Securities. In determining the value of Employer Securities transferred to the Fund as an Employee Stock Ownership contribution, the Administrator may determine the average of closing prices of such securities for a period of up to 90 consecutive days immediately preceding the date on which the securities are contributed to the Fund. In the event that the Employer Securities are not readily tradable on an established securities market, the value of the Employer Securities transferred to the Fund shall be determined by an independent appraiser in accordance with Section 8.9. (b) In no event shall such contribution by the Employer exceed for any Plan Year the maximum amount that may be deducted by the Employer under Section 404 of the Code, nor shall such contribution cause the Employer to violate its regulatory capital requirements. Each Employee Stock Ownership contribution by the Employer shall be deemed to be made on the express condition that the Plan, as then in effect, shall be qualified under Sections 401 and 501 of the Code and that the amount of such contribution shall be deductible from the Employer's income under Section 404 of the Code. 4.2 Time and Manner of Employee Stock Ownership Contributions. (a) The Employee Stock Ownership contribution (if any) for each Plan Year shall be paid to the Trustee in one lump sum or installments at any time on or before the expiration of the time prescribed by law (including any extensions) for filing of the Employer's federal income tax return for its fiscal year ending concurrent with or during such Plan Year. Any portion of the Employee Stock Ownership contribution for each Plan Year that may be made prior to the last day of the Plan Year shall be maintained by the Trustee in the Employee Stock Ownership suspense account described in Section 5.2 until the last day of such Plan Year. (b) If an Employee Stock Ownership contribution for a Plan Year is paid after the close of the Employer's fiscal year which ends concurrent with or during such Plan Year but on or prior to the due date (including any extensions) for filing of the Employer's federal income tax return for such fiscal year, it shall be considered, for allocation purposes, as an Employee Stock Ownership contribution to the Fund for the Plan Year for which it was computed and accrued, unless such contribution is accompanied by a statement to the Trustee, signed by a representative of the Employer, which specifies that the Employee Stock Ownership contribution is made with respect to the Plan Year in which it is received by the Trustee. Any Employee Stock Ownership 13 contribution paid by the Employer during any Plan Year but after the due date (including any extensions) for filing of its federal income tax return for the fiscal year of the Employer ending on or before the last day of the preceding Plan Year shall be treated, for allocation purposes, as an Employee Stock Ownership contribution to the Fund for the Plan Year in which the contribution is paid to the Trustee. (c) Notwithstanding anything contained herein to the contrary, no Employee Stock Ownership contribution shall be made for any year during which a "limitations account" created pursuant to Section 5.6(c)(2) is in existence until the balance of such limitations account has been reallocated in accordance with Section 5.6(c)(2). 4.3 Records of Contributions. The Employer shall deliver at least annually to the Trustee, with respect to the contributions contemplated in Section 4.1, a certificate of the Administrator, in such form as the Trustee shall approve, setting forth: (a) The aggregate amount of contributions, if any, to the Fund for such Plan Year; (b) The names, Internal Revenue Service identifying numbers and current residential addresses of all Participants in the Plan; (c) The amount and category of contributions to be allocated to each such Participant; and (d) Any other information reasonably required for the proper operation of the Plan. 4.4 Erroneous Contributions. (a) Notwithstanding anything herein to the contrary, upon the Employer's request, a contribution which was made by a mistake of fact, or conditioned upon the initial qualification of the Plan, under Code Section 401, or upon the deductibility of the contribution under Section 404 of the Code, shall be returned to the Employer by the Trustee within one year after the payment of the contribution, the denial of the qualification or the disallowance of the deduction (to the extent disallowed), whichever is applicable; provided, however, that in the case of denial of the initial qualification of the Plan, a contribution shall not be returned unless an Application for Determination has been timely filed with the Internal Revenue Service. Any portion of a contribution returned pursuant to this Section 4.4 shall be adjusted to reflect its proportionate share of the losses of the fund, but shall not be adjusted to reflect any earnings or gains. Notwithstanding any provisions of this Plan to the contrary, the right or claim of any Participant or Beneficiary to any asset of the Fund or any benefit under this Plan shall be subject to and limited by this Section 4.4. 14 (b) In no event shall voluntary Employee contributions be accepted. Any such voluntary Employee contributions (and any earnings attributable thereto) mistakenly received by the Trustee shall promptly be returned to the Participant. 15 ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS 5.1 Establishment of Separate Participant Accounts. The Administrator shall establish and maintain separate individual accounts for Participants in the Plan and for each Former Participant in accordance with the provisions of this Article V. Such separate accounts shall be for accounting purposes only and shall not require a segregation of the Fund, and no Participant, Former Participant or Beneficiary shall acquire any right to or interest in any specific assets of the Fund as a result of the allocations provided for under this Plan, except where segregation is expressly provided for in this Plan. (a) Employee Stock Ownership Accounts. The Administrator shall establish a separate Employee Stock Ownership Account in the Fund for each Participant. The account shall be credited as of the last day of each Plan Year with the amounts allocated to the Participant under Sections 5.4 and 5.5. The Administrator may establish subaccounts hereunder, including an Employer Stock Account reflecting a Participant's interest in Employer Securities held by the Trust and an Other Investments Account reflecting the Participant's interest in his Employee Stock Ownership Account other than Employer Securities. (b) Distribution Accounts. In any case where distribution of a terminated Participant's vested interest in the Plan is to be deferred, the Administrator shall establish a separate, nonforfeitable account in the Fund to which the balance in his Employee Stock Ownership Account in the Plan shall be transferred after such Participant incurs a Break. Unless the Former Participant's distribution accounts are segregated for investment purposes pursuant to section 9.4, they shall share in Investment Adjustments. (c) Other Accounts. The Administrator shall establish such other separate accounts for each Participant as may be necessary or desirable for the convenient administration of the Fund. 5.2 Establishment of Suspense Accounts. The Administrator shall establish separate accounts to be known as "suspense accounts." There shall be credited to such appropriate suspense accounts any Employee Stock Ownership contributions that may be made prior to the last day of the Plan Year, as provided in Section 4.2. The suspense accounts shall share proportionately as to time and amount in any Investment Adjustments. As of the last day of each Plan Year, the balance of the Employee Stock Ownership suspense account shall be added to the Employee Stock Ownership contribution and allocated to the Employee Stock 16 Ownership Accounts of Participants as provided in Section 5.5, except as provided herein. In the event that the Plan takes an Exempt Loan, the Employer Securities purchased thereby shall be allocated to a separate Exempt Loan Suspense Account, from which allocations shall be made in accordance with Section 8.5. 5.3 Allocation of Earnings, Losses and Expenses. As of each Valuation Date, any increase or decrease in the net worth of the aggregate Employee Stock Ownership Accounts held in the Fund attributable to earnings, losses, expenses and unrealized appreciation or depreciation in each such aggregate Account, as determined by the Trustee pursuant to the Trust Agreement, shall be credited to or deducted from the appropriate suspense accounts and all Participants' Employee Stock Ownership Accounts (except segregated distribution accounts described in Section 5.1(b) and the "limitations account" described in Section 5.6(c)(4)) in the proportion that the value of each such Account (determined immediately prior to such allocation and before crediting any Employee Stock Ownership contributions and forfeitures for the current Plan Year but after adjustment for any transfer to or from such Accounts and for the time such funds were in such Accounts) bears to the value of all Employee Stock Ownership Accounts. 5.4 Allocation of Forfeitures. As of the last day of each Plan Year, all forfeitures attributable to the Employee Stock Ownership Accounts which are then available for reallocation shall be, as appropriate, added to the Employee Stock Ownership contribution (if any) for such year and allocated among the Participants' Employee Stock Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and 5.6. 5.5 Allocation of Annual Employee Stock Ownership Contributions. As of the last day of each Plan Year for which the Employer shall make an Employee Stock Ownership contribution, the Administrator shall allocate the Employee Stock Ownership contribution (including reallocable forfeitures) for such Plan Year to the Employee Stock Ownership account of each Participant who completed at least 1,000 Hours of Service during that Plan Year, provided that he is still employed by the Employer on the last day of the Plan Year. Such allocation shall be made in the same proportion that each such Participant's Compensation for such Plan Year bears to the total Compensation of all such Participants for such Plan Year, subject to Section 5.6; provided, however, that, for purposes of this Section 5.5, a Participant's Compensation shall not be considered for any part of a Plan Year prior to the date the Participant commenced participation in the Plan. Notwithstanding the foregoing, if a Participant attains his Normal or Early Retirement Date and terminates Service prior to the last day of the Plan Year but after completing 1,000 Hours of Service, or terminates service by reason of death or Disability, he shall be entitled to an allocation based on his Compensation earned prior to his termination and during the Plan Year. Furthermore, if a Participant completes 1,000 Hours of Service and is on a Leave of Absence on the last day of 17 the Plan Year because of pregnancy or other medical reason, such a Participant shall be entitled to an allocation based on his Compensation earned during such Plan Year. 5.6 Limitation on Annual Additions. (a) Notwithstanding any provisions of this Plan to the contrary, the total Annual Additions credited to a Participant's accounts under this Plan (and under any other defined contribution plan to which the Employer contributes) for any Limitation Year shall not exceed the lesser of: (1) 25% of the Participant's compensation for such Limitation Year; or (2) $30,000. Whenever otherwise allowed by law, the maximum amount of $30,000 shall be automatically adjusted annually for cost-of-living increases in accordance with Section 415(d) of the Code and the highest such increase effective at any time during the Limitation Year shall be effective for the entire Limitation Year, without any amendment to this Plan. (b) Solely for the purpose of this Section 5.6, the term "compensation" is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Treas. Regs. Section 1.62-2(c)), and excluding the following: (1) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (2) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (3) Other amounts which received special tax benefits, or contributions made by the employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). Notwithstanding anything in this Section 5.6(b) to the contrary, for Plan Years beginning after December 31, 1997, "compensation" for purposes of Section 5.6(b) shall include any elective deferrals under Code Sections 402(g)(3), 457 or 125. 18 (c) In the event that the limitations on Annual Additions described in this Section 5.6(a) above are exceeded with respect to any Participant in any Limitation Year, then the contributions allocable to the Participant for such year shall be reduced to the minimum extent required by such limitations in the following order of priority: (1) The Administrator shall determine to what extent the Annual Additions to any Participant's Employee Stock Ownership Account must be reduced in each Limitation Year. The Administrator shall reduce the Annual Additions to all other tax-qualified retirement plans maintained by the Employer in accordance with the terms contained therein for required reductions or reallocations mandated by Section 415 of the Code before reducing any Annual Additions in this Plan. (2) If any further reductions in Annual Additions are necessary, then the Employee Stock Ownership contributions and forfeitures allocated during such Limitation Year to the Participant's Employee Stock Ownership Account shall be reduced. The amount of any such reductions in the Employee Stock Ownership contributions and forfeitures shall be reallocated to all other Participants in the same manner as set forth under Sections 5.4 and 5.5. (3) Any amounts which cannot be reallocated to other Participants in a current Limitation Year in accordance with Section 5.6(c)(2) above because of the limitations contained in Sections 5.6(a) and (d) shall be credited to an account designated as the "limitations account" and carried forward to the next and subsequent Limitation Years until it can be reallocated to all Participants as set forth in Sections 5.4, and 5.5, as appropriate. No Investment Adjustments shall be allocated to this limitations account. In the next and subsequent Limitation Years, all amounts in the limitations account must be allocated in the manner described in Sections 5.4 and 5.5, as appropriate, before any Employee Stock Ownership contributions may be made to this Plan for that Limitation Year. (4) In the event this Plan is voluntarily terminated by the Employer under Section 13.5, any amounts credited to the limitations account described in Section 5.6(c)(2) above which have not be reallocated as set forth herein shall be distributed to the Participants who are still employed by the Employer on the date of termination, in the proportion that each Participant's Compensation bears to the Compensation of all Participants. (d) The Annual Additions credited to a Participant's accounts for each Limitation Year beginning before January 1, 2000 are further limited so that in the case of an Employee who is a 19 Participant in both this Plan and any qualified defined benefit plan (hereinafter referred to as a "pension plan") of the Employer, the sum of (1) and (2) below will not exceed 1.0: (1) (A) The projected annual normal retirement benefit of a Participant under the pension plan, divided by (B) The lesser of: (i) The product of 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Limitation Year; or (ii) The product of 1.4 multiplied by the amount of compensation which may be taken into account under Section 415(b)(1)(B) of the Code for the Participant for such Limitation Year; plus (2) (A) The sum of Annual Additions credited to the Participant under this Plan for all Limitation Years, divided by: (B) The sum of the lesser of the following amounts determined for such Limitation Year and for each prior year of service with the Employer: (i) The product of 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Limitation Year, or (ii) The product of 1.4 multiplied by the amount of compensation which may be taken into account under Section 415(b)(1)(B) of the Code for the Participant for such Limitation Year. The Administrator may, in calculating the defined contribution plan fraction described in Section 5.6(d)(2), elect to use the transitional rule pursuant to Section 415(e)(6) of the Code, if applicable. If the sum of the fractions produced above will exceed 1.0, even after the use of the "fresh start" rule contained in Section 235 of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), if applicable, then the same 20 provisions as stated in Section 5.6(c) above shall apply. If, even after the reductions provided for in Section 5.6(c), the sum of the fractions still exceed 1.0, then the benefits of the Participant provided under the pension plan shall be reduced to the extent necessary, in accordance with Treasury Regulations issued under the Code. Solely for the purposes of this Section 5.6(d), the term "years of service" shall mean all years of service defined by Treasury Regulations issued under Section 415 of the Code. (e) In the event that the Employer is a member of (1) a controlled group of corporations or a group of trades or businesses under common control (as described in Section 414(b) or (c) of the Code, as modified by Section 415(h) thereof), or (2) an affiliated service group (as described in Section 414(m) of the Code), the Annual Additions credited to any Participant's accounts in any such Limitation Year shall be further limited by reason of the existence of all other qualified retirement plans maintained by such affiliated corporations, other entities under common control or other members of the affiliated service group, to the extent such reduction is required by Section 415 of the Code and the regulations promulgated thereunder. The Administrator shall determine if any such reduction in the Annual Additions to a Participant's accounts is required for this reason, and if so, the same provisions as stated in 5.6(c) and (d) above shall apply. (f) Annual Additions shall not include any Employer contributions which are used by the Trust to pay interest on an Exempt Loan nor any forfeitures of Employer Securities purchased with the proceeds of an Exempt Loan, provided that not more than one-third of the Employer contributions are allocated to Participants who are among the group of employees deemed "highly compensated employees" within the meaning of Code Section 414(q). 5.7 Erroneous Allocations. No Participant shall be entitled to any Annual Additions or other allocations to his accounts in excess of those permitted under Sections 5.3, 5.4, 5.5, and 5.6. If it is determined at anytime that the Administrator and/or Trustees have erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating Investment Adjustments, or in excluding or including any person as a Participant, then the Administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The accounts of any or all Participants may be revised, if necessary, in order to correct such error. 21 5.8 Value of Participant's Interest in Fund At any time, the value of a Participant's interest in the Fund shall consist of the aggregate value of his Employee Stock Ownership Account and his distribution account, if any, determined as of the next-preceding Valuation Date. The Administrator shall maintain adequate records of the cost basis of Employer Securities allocated to each Participant's Employer Stock Ownership Account. 5.9 Investment of Account Balances. The Employee Stock Ownership Accounts shall be invested primarily in Employer Securities. All sales of Employer Securities by the Trustee attributable to the Employee Stock Ownership Accounts of all Participants shall be charged pro rata to the Employee Stock Ownership Accounts of all Participants. 22 ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY 6.1 Normal Retirement. A Participant who reaches his Normal Retirement Date and who shall retire at that time shall thereupon be entitled to retirement benefits based on the value of his interest in the Fund, payable pursuant to the provisions of Section 9.1. A Participant who remains in Service after his Normal Retirement Date shall not be entitled to any retirement benefits until his actual termination of Service thereafter (except as provided in Section 9.3(g)) and he shall meanwhile continue to participate in this Plan. 6.2 Early Retirement. A Participant who reaches his Early Retirement Date may retire at such time (or, at his election, as of the first day of any month thereafter prior to his Normal Retirement Date) and shall thereupon be entitled to retirement benefits based on the value of his interest in the Fund, payable pursuant to the provisions of Section 9.1. 6.3 Disability Retirement. In the event a Participant incurs a Disability, he may retire on his Disability Retirement Date and shall thereupon be entitled to retirement benefits based on the value of his interest in the Fund, payable pursuant to the provisions of Section 9.1. 6.4 Death Benefits. (a) Upon the death of a Participant before his Retirement or other termination of Service, the value of his interest in the Fund shall be payable pursuant to the provisions of Section 9.1. The Administrator shall direct the Trustee to distribute his interest in the Fund to any surviving Beneficiary designated by the Participant or, if none, to such persons designated by the Administrator pursuant to Section 6.5. (b) Upon the death of a Former Participant, the Administrator shall direct the Trustee to distribute any undistributed balance of his interest in the Fund to any surviving Beneficiary designated by him or, if none, to such persons designated by the Administrator pursuant to Section 6.5. (c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive the interest in the Fund of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. 23 6.5 Designation of Death Beneficiary and Manner of Payment. (a) Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive the sum or sums to which he may be entitled upon his death. The Participant may also designate the manner in which any death benefits under this Plan shall be payable to his Beneficiary, provided that such designation is in accordance with Section 9.4. Such designation of Beneficiary and manner of payment shall be in writing and delivered to the Administrator, and shall be effective when received by the Administrator. The Participant shall have the right to change such designation by notice in writing to the Administrator. Such change of Beneficiary or the manner of payment shall become effective upon its receipt by the Administrator. Any such change shall be deemed to revoke all prior designations. (b) If a Participant shall fail to designate validly a Beneficiary or if no designated Beneficiary survives the Participant, his interest in the Fund shall be paid to the person or persons in the first of the following classes of successive preference Beneficiaries surviving at the death of the Participant: the Participant's (1) widow or widower, (2) children, (3) parents, and (4) estate. The Administrator shall decide what Beneficiaries, if any, shall have been validly designated, and its decision shall be binding and conclusive on all persons. (c) Notwithstanding the foregoing, if a Participant has been married throughout the 12 month period preceding the date of his death, the sum or sums to which he may be entitled under this Plan upon his death shall be paid to his spouse, unless the Participant's spouse shall have consented to the election of another Beneficiary. Such a spousal consent shall be in writing and shall be witnessed either by a representative of the Plan or a notary public. If it is established to the satisfaction of the Administrator that such spousal consent cannot be obtained because there is no spouse, because the spouse cannot be located, or other reasons prescribed by governmental regulations, the consent of the spouse may be waived, and the Participant may designate a Beneficiary or Beneficiaries other than his spouse. 24 ARTICLE VII VESTING AND FORFEITURES 7.1 Vesting on Death, Disability, Retirement and Change in Control. Unless his participation in this Plan shall have terminated prior thereto, upon a Participant's death, Disability, Early Retirement, or upon his attainment of Normal Retirement Date (whether or not he actually retires at that time) while he is still employed by the Employer, the Participant's entire interest in the Fund shall be fully vested and nonforfeitable. In addition, a Participant's interest shall be fully vested and nonforfeitable upon a Change in Control. For purposes of this Plan, a "Change in Control" shall mean an event deemed to occur if and when (1) an offeror other than the First Capital Inc. purchases shares of the stock of First Capital Inc. or the Sponsor pursuant to a tender or exchange offer for such shares, (2) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of First Capital Inc. or the Sponsor representing 25% or more of the combined voting power of First Capital Inc.'s or the Sponsor's then outstanding securities, (3) the membership of the board of directors of First Capital Inc. or the Sponsor changes as the result of a contested election, such that individuals who were directors at the beginning of any 24 month period (whether commencing before or after the date of adoption of this Plan) do not constitute a majority of the Board at the end of such period, or (4) shareholders of First Capital Inc. or the Sponsor approve a merger, consolidation, sale or disposition of all or substantially all of First Capital Inc.'s or the Sponsor's assets, or a plan of partial or complete liquidation. 7.2 Vesting on Termination of Participation. Upon termination of his participation in this Plan for any reason other than death, Disability, or Normal or Early Retirement, a Participant shall be vested in a percentage of his Employee Stock Ownership Account, such vested percentages to be determined under the following table, based on the Years of Service (including Years of Service prior to the Effective Date) credited to him for vesting purposes at the time of his termination of participation: Years of Service Completed Percentage Vested Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100% Any portion of the Participant's Employee Stock Ownership Account which is not vested at the time he incurs a Break shall thereupon be forfeited and disposed of pursuant to Section 7.3. 25 Distribution of the vested portion of a terminated Participant's interest in the Plan may be authorized by the Administrator in any manner permitted under Section 9.1. 7.3 Disposition of Forfeitures. (a) In the event a Participant incurs a Break and subsequently resumes both his Service and his participation in the Plan prior to incurring at least five Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be reinstated to the credit of the Participant as of the date he resumes participation. (b) In the event a Participant terminates Service and subsequently incurs a Break and receives a distribution, or in the event a Participant does not terminate Service, but incurs at least five Breaks, or in the event that a Participant terminates Service and incurs at least five Breaks but has not received a distribution, then the forfeitable portion of his Employer Account, including Investment Adjustments, shall be reallocated to other Participants, pursuant to Section 5.4 as of the date the Participant incurs such Break or Breaks, as the case may be. (c) In the event a former Participant who had received a distribution from the Plan is rehired, he shall repay the amount of his distribution before the earlier of five years after the date of his rehire by the Employer, or the close of the first period of five consecutive Breaks commencing after the withdrawal in order for any forfeited amounts to be restored to him. 26 ARTICLE VIII EMPLOYEE STOCK OWNERSHIP PROVISIONS 8.1 Right to Demand Employer Securities. A Participant entitled to a distribution from his Employee Stock Ownership Account shall be entitled to demand that his interest in the Account be distributed to him in the form of Employer Securities, all subject to Section 9.9. In the event that the Employer Securities are not readily tradable on an established market, the Participant shall be entitled to require that the Employer repurchase the Employer Securities under a fair valuation formula, as provided by governmental regulations. The Participant or Beneficiary shall be entitled to exercise the put option described in the preceding sentence for a period of not more than 60 days following the date of distribution of Employer Securities to him. If the put option is not exercised within such 60-day period, the Participant or Beneficiary may exercise the put option during an additional period of not more than 60 days after the beginning of the first day of the first Plan Year following the Plan Year in which the first put option period occurred, all as provided in regulations promulgated by the Secretary of the Treasury. 8.2 Voting Rights. Each Participant with an Employee Stock Ownership Account shall be entitled to direct the Trustee as to the manner in which the Employer Securities in such Account are to be voted. Employer Securities held in the Employee Stock Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by the Trustee on each issue with respect to which shareholders are entitled to vote in the manner directed by the majority of the Participants who directed the Trustee as to the manner of voting their shares in the Employee Stock Ownership Accounts with respect to such issue. Prior to the initial allocation of shares, the Trustee shall be entitled to vote the shares in the Suspense Account without prior direction from the Participants or the Administrator. In the event that a Participant fails to give timely voting instructions to the Trustee with respect to the voting of his allocated Employer Securities, the Trustee shall be entitled to vote such shares in its discretion. 8.3 Nondiscrimination in Employee Stock Ownership Contributions. In the event that the amount of the Employee Stock Ownership contributions that would be required in any Plan Year to make the scheduled payments on an Exempt Loan would exceed the amount that would otherwise be deductible by the Employer for such Plan Year under Code Section 404, then no more than one-third of the Employee Stock Ownership contributions for the Plan Year, which is also the Employer's taxable year, shall be allocated to the group of Employees who: (a) During the Plan Year or the preceding Plan Year was at any time a more than 5% owner of the Employer; or 27 (b) During the preceding Plan Year, received compensation from the Employer in excess of $80,000, as adjusted under Code Section 414(q) and, if elected by the Employer, was in the top paid group of Employees for such Plan Year. 8.4 Dividends. Any cash dividends or other cash contributions received by the Trustee of Employer Securities allocated to the Employee Stock Account of Participants shall be credited to the applicable Participants' Ownership Accounts unless the Sponsor, in its sole discretion, elects to pay the cash dividends directly to the applicable Participants or directs the Trustee to pay the cash dividends to the Participants (or, if applicable, their Beneficiaries) within 90 calendar days of the close of the Plan Year in which the cash dividend were paid to the Fund. Notwithstanding anything contained in this Section to the contrary, the Sponsor may direct cash dividends, including dividends on non-allocated shares, be applied to repay an Exempt Loan, but only to the extent shares of Employer Securities with an aggregate fair market value equal to the amount of dividends so applied are allocated to the Employee Stock Ownership Account of the applicable Participants and to the extent the cash dividends are deductible under Section 404(k) of the Code. To the extent cash dividends on allocated shares are applied to repay an Exempt Loan, shares released from encumbrance the value equal to the amount of the dividends which, but for the repayment of the Exempt Loan, would have been allocated to Participants' Employee Stock Ownership Accounts shall be allocated to the Employee Stock Ownership Accounts of the affected Participants, and the remaining shares to be allocated shall be allocated among the Participants in accordance with Section 5.5. Dividends on Employer Securities obtained pursuant to an Exempt Loan and not yet allocated may be used to make payments on an Exempt Loan, as described in Section 8.5. 8.5 Exempt Loans. (a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt Loan may take the form of (i) a loan from a bank or other commercial lender to purchase Employer Securities (ii) a loan from the Employer or affiliated corporation, to the Plan; or (iii) an installment sale of Employer Securities to the Plan. The proceeds of any such Exempt Loan shall be used, within a reasonable time after the Exempt Loan is obtained, only to purchase Employer Securities, repay the Exempt Loan, or repay any prior Exempt Loan. Any such Exempt Loan shall provide for no more than a reasonable rate of interest and shall be without recourse against the Plan. The number of years to maturity under the Exempt Loan must be definitely ascertainable at all times. The only assets of the Plan that may be given as collateral for an Exempt Loan are Employer Securities acquired with the proceeds of the Exempt Loan and Employer Securities that were used as collateral for a prior Exempt Loan repaid with the proceeds of the current Exempt Loan. Such Employer Securities so pledged shall be placed in an Exempt Loan Suspense Account. No person or institution entitled to payment under an Exempt Loan shall have recourse against Trust assets other than the aforesaid collateral, Employer Stock Ownership contributions (other than contributions of Employer Securities) that are available under the Plan to meet obligations under the Exempt Loan and earnings attributable to such collateral and the investment of such contributions. All Employee Stock 28 Ownership contributions paid during the Plan Year in which an Exempt Loan is made (whether before or after the date the proceeds of the Exempt Loan are received), all Employee Stock Ownership contributions paid thereafter until the Exempt Loan has been repaid in full, and all earnings from investment of such Employee Stock Ownership contributions, without regard to whether any such Employee Stock Ownership contributions and earnings have been allocated to Participants' Employee Stock Ownership Accounts, shall be available to meet obligations under the Exempt Loan as such obligations accrue, or prior to the time such obligations accrue, unless otherwise provided by the Employer at the time any such contribution is made. Any pledge of Employer Securities shall provide for the release of shares so pledged upon the payment of any portion of the Exempt Loan. (b) For each Plan Year during the duration of the Exempt Loan, the number of shares of Employer Securities released from such pledge shall equal the number of encumbered shares held immediately before release for the current Plan Year multiplied by a fraction. The numerator of the fraction is the sum of principal and interest paid in such Plan Year. The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years. Such years will be determined without taking into account any possible extension or renewal periods. If interest on any Exempt Loan is variable, the interest to be paid in future years under the Exempt Loan shall be computed by using the interest rate applicable as of the end of the Plan Year. (c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan pursuant to the terms of which the number of Employer Securities to be released from encumbrance may, at the election of the Sponsor or otherwise, be determined solely with reference to principal payments. In the event that such an Exempt Loan is obtained, annual payments of principal and interest shall be at a cumulative rate that is not less rapid at any time than level payments of such amounts for not more than 10 years. The amount of interest in any such annual loan repayment shall be disregarded only to the extent that it would be determined to be interest under standard loan amortization tables. The requirement set forth in the preceding sentence shall not be applicable from the time that, by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of a new Exempt Loan exceeds 10 years. 8.6 Exempt Loan Payments. (a) Payments of principal and interest on any Exempt Loan during a Plan Year shall be made by the Trustee (as directed by the Administrator) only from (1) Employee Stock Ownership contributions to the Trust made to meet the Plan's obligation under an Exempt Loan (other than contributions of Employer Securities) and from any earnings attributable to Employer Securities held as collateral for an Exempt Loan and investments of such contributions (both received during or prior to the Plan Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale of any Employer Securities held as collateral for an Exempt Loan. Such contribution and earnings shall be accounted for separately by the Plan until the Exempt Loan is repaid. 29 (b) Employer Securities released by reason of the payment of principal or interest on an Exempt Loan from amounts allocated to Participants' Employee Stock Ownership Accounts shall be allocated as set forth in Section 5.5. (c) The Employer shall contribute to the Trust sufficient amounts to enable the Trust to pay principal and interest on any such Exempt Loans as they are due, provided however that no such contribution shall exceed the limitations in Section 5.6. In the event that such contributions by reason of the limitations in Section 5.6 are insufficient to enable the Trust to pay principal and interest on such Exempt Loan as it is due, then upon the Trustee's request the Employer or an affiliated corporation shall: (1) Make an Exempt Loan to the Trust in sufficient amounts to meet such principal and interest payments. Such new Exempt Loan shall be subordinated to the prior Exempt Loan. Securities released from the pledge of the prior Exempt Loan shall be pledged as collateral to secure the new Exempt Loan. Such Employer Securities will be released from this new pledge and allocated to the Employee Stock Ownership Accounts of the Participants in accordance with applicable provisions of the Plan; (2) Purchase any Employer Securities pledged as collateral in an amount necessary to provide the Trustee with sufficient funds to meet the principal and interest repayments. Any such sale by the Plan shall meet the requirements of Section 408(e) of ERISA; or (3) Any combination of the foregoing. However, the Employer shall not, pursuant to the provisions of this subsection, do, fail to do or cause to be done any act or thing which would result in a disqualification of the Plan as an Employee Stock Ownership Plan under the Code. (d) Except as provided in Section 8.1 above and notwithstanding any amendment to or termination of the Plan which causes it to cease to qualify as an Employee Stock Ownership plan within the meaning of Section 4975(e)(7) of the Code, or any repayment of an Exempt Loan, no shares of Employer Securities acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase Employer Securities may be subject to a put, call or other option, or buy-sell or similar arrangement while such shares are held by the Plan or when such Shares are distributed from the Plan. 8.7 Put Option. If a Participant exercises a put option (as set forth in Section 8.1) with respect to Employer Securities that were distributed as part of a total distribution pursuant to which a Participant's Employee Stock Ownership Account is distributed to him in a single taxable year, the Employer or the Plan may elect to pay the purchase price of the Employer Securities over a period not to exceed 30 five years. Such payments shall be made in substantially equal installments not less frequently than annually over a period beginning not later than 30 days after the exercise of the put option. Reasonable interest shall be paid to the Participant with respect to the unpaid balance of the purchase price and adequate security shall be provided with respect thereto. In the event that a Participant exercises a put option with respect to Employer Securities that are distributed as part of an installment distribution, the amount to be paid for such securities shall be paid not later than 30 days after the exercise of the put option. 8.8 Diversification Requirements Each Participant who has completed at least 10 years of participation in the Plan and has attained age 55 may elect within 90 days after the close of each Plan Year during his "qualified election period" to direct the Plan as to the investment of at least 25% of his Employee Stock Ownership Account (to the extent such percentage exceeds the amount to which a prior election under this Section 8.8 had been made). For purposes of this Section 8.8, the term "qualified election period" shall mean the six-Plan Year period beginning with the Plan Year after the Plan Year in which the Participant attains age 55 (or, if later, beginning with the Plan Year after the first Plan Year in which the Employee first completes at least 10 years of participation in the Plan). In the case of the Employee who has attained age 60 and completed 10 years of participation in the prior Plan Year and in the case of the election year in which any other Participant who has met the minimum age and service requirements for diversification can make his last election hereunder, he shall be entitled to direct the Plan as to the investment of at least 50% of his Employee Stock Ownership Account (to the extent such percentage exceeds the amount to which a prior election under this Section 8.8 had been made). The Plan shall make available at least three investment options (not inconsistent with regulations prescribed by the Department of Treasury) to each Participant making an election hereunder. The Plan shall be deemed to have met the requirements of this Section if the portion of the Participant's Employee Stock Ownership Account covered by the election hereunder is distributed to the Participant or his designated Beneficiary within 90 days after the period during which the election may be made. In the absence of such a distribution, the Trustee shall implement the Participant's election within 90 days following the expiration of the qualified election period. 8.9 Independent Appraiser. An independent appraiser meeting the requirements of Code 170(a)(1) shall value the Employer Securities in those Plan Years when such securities are not readily tradable on an established securities market. 8.10 Limitation on Allocations. In the event that the Trustee acquires shares of Employer Securities in a transaction to which section 1042 of the Code applies, such Shares shall not be allocated, directly or indirectly, to any Participant described in Section 409(n)(1) of the Code for the duration of the "nonallocation period" (as defined in Section 409(n)(3)(C) of the Code). Where any shares of Employer Securities are 31 prevented from being allocated due to the prohibition contained in this section the allocation of contributions otherwise provided under Section 5.5 shall be adjusted to reflect such result. 32 ARTICLE IX PAYMENTS AND DISTRIBUTIONS 9.1 Payments on Termination of Service -- In General. All benefits provided under this Plan shall be funded by the value of a Participant's vested interest in the Fund. As soon as practicable after a Participant's Retirement, death or termination of Service, the Administrator shall ascertain the value of his vested interest in the Fund, as provided in Article V, and the Administrator shall hold or dispose of the same in accordance with the following provisions of this Article IX. 9.2 Commencement of Payments. (a) Distributions upon Retirement or Death. Upon a Participant's Retirement or Death, payment of benefits under this Plan shall, unless the Participant otherwise elects (in accordance with Section 9.3), commence no later than six months after the close of the Plan Year in which occurs the date of the Participant's Retirement or death. (b) Distribution following Termination of Service. Unless a Participant elects otherwise, if a Participant terminates Service prior to Retirement or death, he shall be accorded an opportunity to commence receipt of distributions from his Accounts within six months after the Valuation Date next following the date of his termination of service. A Participant who terminates Service with a deferred vested benefit shall be entitled to receive from the Administrator a statement of his benefits. In the event that a Participant elects not to commence receipt of distributions from his Accounts in accordance with this Section 9.2(b), after the Participant incurs a Break, the Administrator shall transfer his deferred vested interest to a distribution account. If a Participant's vested Employer Account does not exceed (or at the time of any prior distribution did not exceed) $5,000, the Plan Administrator may distribute the vested portion of his Employer Account as soon as administratively feasible without the consent of the Participant or his spouse. (c) Distribution of Accounts Greater Than $5,000. If the value of a Participant's vested Account balance exceeds (or at the time of any prior distribution exceeded) $5,000, and the Account balance is immediately distributable, the Participant must consent to any distribution of such Account balance. The Plan Administrator shall notify the Participant of the right to defer any distribution until the Participant's Account balance is no longer immediately distributable. The consent of the Participant shall not be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415. 9.3 Mandatory Commencement of Benefits. (a) Unless a Participant elects otherwise, in writing, distribution of benefits will begin no later than the 60th day after the latest of the close of the Plan Year in which (i) the Participant attains 33 age 65, (ii) occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan Year, or (iii) the Participant terminates Service with the Employer. (b) In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, as of the first distribution calendar year, distributions, if not made in a lump sum, may be made only over one of the following periods (or a combination thereof): (i) the life of the Participant, (ii) the life of the Participant and the designated beneficiary, (iii) a period certain not extending beyond the life expectancy of the Participant, or (iv) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated beneficiary. (c) In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, if the participant's interest is to be distributed in other than a lump sum, the following minimum distribution rules shall apply on or after the required beginning date: (i) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated beneficiary or (2) a period not extending beyond the life expectancy of the designated beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (ii) The amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the applicable life expectancy or (2) if the Participant's spouse is not the designated beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of section 1.401(a)(9)-2 of the Proposed Regulations. Distributions after the death of the participant shall be distributed using the applicable life expectancy in sub-section (iii) above as the relevant divisor without regard to Proposed Regulations 1.401(a)(9)-2. 34 (iii) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the employee's required beginning date occurs, must be made on or before December 31 of the distribution calendar year. (d) If a Participant dies after a distribution has commenced in accordance with Section 8.3(b) but before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed to his Beneficiary at least as rapidly as under the method of distribution in effect as of the date of his death. (e) If a Participant shall die before the distribution of his interest in the Plan has begun, the entire interest of the Participant shall be distributed by December 31 of the calendar year containing the fifth anniversary of the death of the Participant, except in the following events: (i) If any portion of the Participant's interest is payable to (or for the benefit of) a designated beneficiary over a period not extending beyond the life expectancy of such beneficiary and such distributions begin not later than December 31 of the calendar year immediately following the calendar year in which the Participant died. (ii) If any portion of the Participant's interest is payable to (or for the benefit of) the Participant's spouse over a period not extending beyond the life expectancy of such spouse and such distributions begin no later than December 31 of the calendar year in which the Participant would have attained age 70-1/2. If the Participant has not made a distribution election by the time of his death, the Participant's designated beneficiary shall elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Article or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated beneficiary, or if the designated beneficiary does not elect a method of distribution, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (f) For purposes of this Article, the life expectancy of a Participant and his spouse may be redetermined but not more frequently than annually. The life expectancy (or joint and last survivor expectancy) shall be calculated using the attained age of the Participant (or designated beneficiary) as of the Participant's (or designated beneficiary's) birthday in the applicable calendar year reduced 35 by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated, such succeeding calendar year. Unless otherwise elected by the Participant (or his spouse, if applicable) by the time distributions are required to begin, life expectancies shall be recalculated annually. Any such election not to recalculate shall be irrevocable and shall apply to all subsequent years. The life expectancy of a nonspouse beneficiary may not be recalculated. (g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child shall be treated as if it had been paid to a surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations). (h) For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to this Article. 9.4 Required Beginning Dates. The required beginning date of a Participant is the first day of April of the calendar year following the later of (1) calendar year in which the participant attains age 70-1/2 or (2) the calendar year in which the Participant terminated his employment, unless he is a 5% owner (as defined in Section 416) with respect to the Plan Year ending in the calendar year in which he attains age 70-1/2, in which case clause (2) shall not apply. 9.5 Form of Payment. Each Participant's vested interest shall be distributed in a lump sum payment. Notwithstanding the preceding sentence, but subject to Section 9.3, the Administrator may not distribute a lump sum when the present value of a Participant's total Account balances is in excess of $5,000 without the Participant's consent. This form of payment shall be the normal form of distribution provided, however, that in the event that the Administrator must commence distributions with respect to an Employee who has attained age 70-1/2 and is still employed by the Employer, if the Employee does not elect a lump sum distribution, payments shall be made in installments in such amounts as shall satisfy the minimum distribution rules of Section 9.3. 9.6 Payments Upon Termination of Plan. Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or 13.6, the Administrator shall continue to perform its duties and the Trustee shall make all payments upon the following terms, conditions and provisions: All interests of Participants shall immediately become fully vested; 36 the value of the interests of all Participants shall be determined as soon as administratively practicable after such termination, and the Administrator shall have the same powers to direct the Trustee in making payments as contained in Sections 9.1 and 13.5. 9.7 Distributions Pursuant to Qualified Domestic Relations Orders. Upon receipt of a domestic relations order, the Administrator shall notify promptly the Participant and any alternate payee of receipt of the order and the Plan's procedure for determining whether the order is a Qualified Domestic Relations Order. While the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined, if the benefits would otherwise be paid, the Administrator shall segregate in a separate account in the Plan the amounts that would be payable to the alternate payee during such period if the order were a Qualified Domestic Relations Order. If within 18 months the order is determined to be a Qualified Domestic Relations Order, the amounts so segregated, along with the interest or investment earnings attributable thereto shall be paid to the alternate payee. Alternatively, if within 18 months, it is determined that the order is not a Qualified Domestic Relations Order or if the issue is still unresolved, the amounts segregated under this Section 9.6, with the earnings attributable thereto, shall be paid to the Participant or Beneficiary who would have been entitled to such amounts if there had been no order. The determination as to whether the order is qualified shall be applied prospectively. Thus, if the Administrator determines that the order is a Qualified Domestic Relations Order after the 18-month period, the Plan shall not be liable for payments to the alternative payee for the period before the order is determined to be a Qualified Domestic Relations Order. 9.8 Cash-Out Distributions If a Participant receives a distribution of the entire present value of his vested Account balances under this Plan because of the termination of his participation in the Plan, the Plan shall disregard a Participant's Service with respect to which such cash-out distribution shall have been made, in computing his accrued benefit under the Plan in the event that a Former Participant shall again become an Employee and become eligible to participate in the Plan. Such a distribution shall be deemed to be made on termination of participation in the Plan if it is made not later than the close of the second Plan Year following the Plan Year in which such termination occurs. The forfeitable portion of a Participant's accrued benefit shall be restored upon repayment to the Plan by such former Participant of the full amount of the cash-out distribution, provided that the former Participant again becomes an Employee. Such repayment must be made by the Employee not later than the end of the five-year period beginning with the date of the distribution. Forfeitures required to be restored by virtue of such repayment shall be restored from the following sources in the following order of preference: (i) current forfeitures; (ii) additional employee stock ownership contributions, as appropriate and as subject to Section 5.6; and (iii) investment earnings of the Fund. In the event that a Participant's interest in the Plan is totally forfeitable, a Participant shall be deemed to have received a distribution of zero upon his termination of Service. In the event of a return to Service within five years of the date of his deemed distribution, the Participant shall be deemed to have repaid his distribution in accordance with the rules of this Section 9.8. 37 9.9 ESOP Distribution Rules. Notwithstanding any provision of this Article IX to the contrary, the distribution of a Participant's Employee Stock Ownership Account (unless the Participant elects otherwise in writing), shall commence as soon as administratively feasible as of the first Valuation Date coincident with or next following his death, disability or termination of Service, but not later than one year after the close of the Plan Year in which the Participant separates from Service by reason of the attainment of his Normal Retirement Date, disability, death or separation from Service. In addition, all distributions hereunder shall, to the extent that the Participant's Account is invested in Employer Securities, be made in the form of Employer Securities. Fractional shares, however, may be distributed in the form of cash. 9.10 Withholding. (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article IX, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an "eligible rollover distribution" paid directly to an "eligible retirement plan" specified by the distributee in a "direct rollover." (b) For purposes of this Section 9.10, an "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an "eligible rollover distribution" does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of 10 years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer Securities). (c) For purposes of this Section 9.10, an "eligible retirement plan" is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an "eligible rollover distribution" to the surviving spouse, an "eligible retirement plan" is an individual retirement account or individual retirement annuity. (d) For purposes of this Section 9.10, a distributee includes a Participant or former Participant. In addition, the Participant's or former Participant's surviving spouse and the Participant's or former Participant's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are "distributees" with regard to the interest of the spouse or former spouse. 38 (e) For purposes of this Section 9.10, a "direct rollover" is a payment by the Plan to the "eligible retirement plan" specified by the distributee. 9.11 Waiver of 30-day Notice. If a distribution is one to which sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 39 ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS 10.1 Top-Heavy Rules to Control. Anything contained in this Plan to the contrary notwithstanding, if for any Plan Year the Plan is a top-heavy plan, as determined pursuant to Section 416 of the Code, then the Plan must meet the requirements of this Article X for such Plan Year. 10.2 Top-Heavy Plan Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in this Article X shall have the following meanings: (a) "Accrued Benefit" shall mean the account balances or accrued benefits of an Employee, calculated pursuant to Section 10.3. (b) "Determination Date" shall mean, with respect to any particular Plan Year of this Plan, the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of the first Plan Year). In addition, the term "Determination Date" shall mean, with respect to any particular plan year of any plan (other than this Plan) in a Required Aggregation Group or a Permissive Aggregation Group, the last day of the plan year of such plan which falls within the same calendar year as the Determination Date for this Plan. (c) "Employer" shall mean the Employer (as defined in Section 1.1(q)) and any entity which is (1) a member of a controlled group including such Employer, while it is a member of such controlled group (within the meaning of Section 414(b) of the Code), (2) in a group of trades or businesses under common control with such Employer, while it is under common control (within the meaning of Section 414(c) of the Code), and (3) a member of an affiliated service group including such Employer, while it is a member of such affiliated service group (within the meaning of Section 414(m) of the Code). (d) "Key Employee" shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who, at any time during the Plan Year or during the four immediately preceding Plan Years is one of the following: (1) An officer of the Employer who has compensation greater than 50% of the amount in effect under Code 415(b)(1)(A) for the Plan Year; provided, however, that no more than 50 Employees (or, if lesser, the greater of three or 10% of the Employees) shall be deemed officers; 40 (2) One of the 10 Employees having annual compensation (as defined in Section 415 of the Code) in excess of the limitation in effect under Section 415(c)(1)(A) of the Code, and owning (or considered as owning, within the meaning of Section 318 of the Code) the largest interests in the Employer; (3) Any Employee owning (or considered as owning, within the meaning of Section 318 of the Code) more than 5% of the outstanding stock of the Employer or stock possessing more than 5% of the total combined voting power of all stock of the Employer; or (4) Any Employee having annual compensation (as defined in Section 415 of the Code) of more than $150,000 and who would be described in Section 10.2(d)(3) if "1%" were substituted for "5%" wherever the latter percentage appears. For purposes of applying Section 318 of the Code to the provisions of this Section 10.2(d), Section 318(a)(2)(C) of the Code shall be applied by substituting "5%" for "50%" wherever the latter percentage appears. In addition, for purposes of this Section 10.2(d), the provisions of Section 414(b), (c) and (m) shall not apply in determining ownership interests in the Employer. However, for purposes of determining whether an individual has compensation in excess of $150,000, or whether an individual is a Key Employee under Section 10.2(d)(1) and (2), compensation from each entity required to be aggregated under Sections 414(b), (c) and (m) of the Code shall be taken into account. Notwithstanding anything contained herein to the contrary, all determinations as to whether a person is or is not a Key Employee shall be resolved by reference to Section 416 of the Code and any rules and regulations promulgated thereunder. (e) "Non-Key Employee" shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who is not considered to be a Key Employee with respect to this Plan. (f) "Permissive Aggregation Group" shall mean all plans in the Required Aggregation Group and any other plans maintained by the Employer which satisfy Sections 401(a)(4) and 410 of the Code when considered together with the Required Aggregation Group. (g) "Required Aggregation Group" shall mean each plan (including any terminated plan) of the Employer in which a Key Employee is (or in the case of a terminated plan, had been) a Participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Employer which enables any plan of the Employer in which a Key Employee is a Participant to meet the requirement of Sections 401(a)(4) and 410 of the Code. 41 10.3 Calculation of Accrued Benefits. (a) An Employee's Accrued Benefit shall be equal to: (1) With respect to this Plan or any other defined contribution plan (other than a defined contribution pension plan) in a Required Aggregation Group or a Permissive Aggregation Group, the Employee's account balances under the respective plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions actually made after the valuation date but before the Determination Date (and, in the first plan year of a plan, also including any contributions made after the Determination Date which are allocated as of a date in the first plan year). (2) With respect to any defined contribution pension plan in a Required Aggregation Group or a Permissive Aggregation Group, the Employee's account balances under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions which have not actually been made, but which are due to be made as of the Determination Date. (3) With respect to any defined benefit plan in a Required Aggregation Group or a Permissive Aggregation Group, the present value of the Employee's accrued benefits under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, pursuant to the actuarial assumptions used by such plan, and calculated as if the Employee terminated Service under such plan as of the valuation date (except that, in the first plan year of a plan, a current Participant's estimated Accrued Benefit Plan as of the Determination Date shall be taken into account). (4) If any individual has not performed services for the Employer maintaining the Plan at any time during the five-year period ending on the Determination Date, any Accrued Benefit for such individual shall not be taken into account. (b) The Accrued Benefit of any Employee shall be further adjusted as follows: (1) The Accrued Benefit shall be calculated to include all amounts attributable to both Employer and Employee contributions, but shall exclude amounts attributable to voluntary deductible Employee contributions, if any. (2) The Accrued Benefit shall be increased by the aggregate distributions made with respect to an Employee under the plan or plans, as the case may be, during the five-year period ending on the Determination Date. 42 (3) Rollover and direct plan-to-plan transfers shall be taken into account as follows: (A) If the transfer is initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another unrelated employer, the transferring plan shall continue to count the amount transferred; the receiving plan shall not count the amount transferred. (B) If the transfer is not initiated by the Employee or is made between plans maintained by related employers, the transferring plan shall no longer count the amount transferred; the receiving plan shall count the amount transferred. (c) If any individual has not performed services for the Employer at any time during the five-year period ending on the Determination Date, any accrued benefit for such individual (and the account of such individual) shall not be taken into account. 10.4 Determination of Top-Heavy Status. This Plan shall be considered to be a top-heavy plan for any Plan Year if, as of the Determination Date, the value of the Accrued Benefits of Key Employees exceeds 60% of the value of the Accrued Benefits of all eligible Employees under the Plan. Notwithstanding the foregoing, if the Employer maintains any other qualified plan, the determination of whether this Plan is top-heavy shall be made after aggregating all other plans of the Employer in the Required Aggregation Group and, if desired by the Employer as a means of avoiding top- heavy status, after aggregating any other plan of the Employer in the Permissive Aggregation Group. If the required Aggregation Group is top-heavy, then each plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would not otherwise be deemed to be top- heavy. Conversely, if the Permissive Aggregation Group is not top-heavy, then no plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would otherwise be deemed to be top- heavy. In no event shall a plan included in a top-heavy Permissive Aggregation Group be deemed a top-heavy plan unless such plan is also included in a top- heavy Required Aggregation Group. 43 10.5 Determination of Super Top-Heavy Status. The Plan shall be considered to be a super top-heavy plan if, as of the Determination Date, the Plan would meet the test specified in Section 10.4 above for classification as a top-heavy plan, except that "90%" shall be substituted for "60%" whenever the latter percentage appears. 10.6 Minimum Contribution. (a) For any year in which the Plan is top-heavy, each Non-Key Employee who has met the age and service requirements, if any, contained in the Plan, shall be entitled to a minimum contribution (which may include forfeitures otherwise allocable) equal to a percentage of such Non-Key Employee's compensation (as defined in Section 415 of the Code) as follows: (1) If the Non-Key Employee is not covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 3% of such Non-Key Employee's compensation. (2) If the Non-Key Employee is covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 5% of such Non-Key Employee's compensation. (b) Notwithstanding the foregoing, the minimum contribution otherwise allocable to a Non-Key Employee under this Plan shall be reduced in the following circumstances: (1) The percentage minimum contribution required under this Plan shall in no event exceed the percentage contribution made for the Key Employee for whom such percentage is the highest for the Plan Year after taking into account contributions under other defined contribution plans in this Plan's Required Aggregation Group; provided, however, that this Section 10.7(b)(1) shall not apply if this Plan is included in a Required Aggregation Group and this Plan enables a defined benefit plan in such Required Aggregation Group to meet the requirements of Section 401(a)(4) or 410 of the Code. (2) No minimum contribution shall be required (or the minimum contribution shall be reduced, as the case may be) for a Non-Key Employee under this Plan for any Plan Year if the Employer maintains another qualified plan under which a minimum benefit or contribution is being accrued or made on account of such Plan Year, in whole or in part, on behalf of the Non-Key Employee, in accordance with Section 416(c) of the Code. (c) For purposes of this Section 10.6, there shall be disregarded (1) any Employer contributions attributable to a salary reduction or similar arrangement, or (2) any Employer 44 contributions to or any benefits under Chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other federal or state law. (d) For purposes of this Section 10.6, minimum contributions shall be required to be made on behalf of only those Non-Key Employees, as described in Section 10.7(a), who have not terminated Service as of the last day of the Plan Year. If a Non-Key Employee is otherwise entitled to receive a minimum contribution pursuant to this Section 10.6(d), the fact that such Non-Key Employee failed to complete 1,000 Hours of Service or failed to make any mandatory or elective contributions under this Plan, if any are so required, shall not preclude him from receiving such minimum contribution. 10.7 Maximum Benefit Limitation. For any Plan Year in which the Plan is a top-heavy plan, Section 5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i)shall be read by substituting "1.0" for "1.25" wherever the latter figure appears; provided, however, that such substitution shall not have the effect of reducing any benefit accrued under a defined benefit plan prior to the first day of the plan year in which this Section 10.8 becomes applicable. 45 ARTICLE XI ADMINISTRATION 11.1 Appointment of Administrator. This Plan shall be administered by a committee consisting of up to five persons, whether or not Employees or Participants, who shall be appointed from time to time by the Board of Directors to serve at its pleasure. The Sponsor may require that each person appointed as an Administrator shall signify his acceptance by filing an acceptance with the Sponsor. The term "Administrator" as used in this Plan shall refer to the members of the committee, either individually or collectively, as appropriate. In the event that the Sponsor shall elect not to appoint any individuals to constitute a committee to administer the Plan, the Sponsor shall serve as the Administrator hereunder. 11.2 Resignation or Removal of Administrator. An Administrator shall have the right to resign at any time by giving notice in writing, mailed or delivered to the Employer and to the Trustee. Any Administrator who was an employee of the Employer at the time of his appointment shall be deemed to have resigned as an Administrator upon his termination of Service. The Board of Directors may, in its discretion, remove any Administrator with or without cause, by giving notice in writing, mailed or delivered to the Administrator and to the Trustee. 11.3 Appointment of Successors: Terms of Office, Etc. Upon the death, resignation or removal of an Administrator, the Employer may appoint, by Board of Directors' resolution, a successor or successors. Notice of termination of an Administrator and notice of appointment of a successor shall be made by the Employer in writing, with copies mailed or delivered to the Trustee, and the successor shall have all the rights and privileges and all of the duties and obligations of the predecessor. 11.4 Powers and Duties of Administrator. The Administrator shall have the following duties and responsibilities in connection with the administration of this Plan: (a) To promulgate and enforce such rules, regulations and procedures as shall be proper for the efficient administration of the Plan, such rules, regulations and procedures to apply uniformly to all Employees, Participants and Beneficiaries; (b) To determine all questions arising in the administration, interpretation and application of the Plan, including questions of eligibility and of the status and rights of Participants, Beneficiaries and any other persons hereunder; 46 (c) To decide any dispute arising hereunder strictly in accordance with the terms of the Plan; provided, however, that no Administrator shall participate in any matter involving any questions relating solely to his own participation or benefits under this Plan; (d) To advise the Employer and the Trustee regarding the known future needs for funds to be available for distribution in order that the Trustee may establish investments accordingly; (e) To correct defects, supply omissions and reconcile inconsistencies to the extent necessary to effectuate the Plan; (f) To advise the Employer of the maximum deductible contribution to the Plan for each fiscal year; (g) To direct the Trustee concerning all payments which shall be made out of the Fund pursuant to the provisions of this Plan; (h) To advise the Trustee on all terminations of Service by Participants, unless the Employer has so notified the Trustee; (i) To confer with the Trustee on the settling of any claims against the Fund; (j) To make recommendations to the Board of Directors with respect to proposed amendments to the Plan and the Trust Agreement; (k) To file all reports with government agencies, Employees and other parties as may be required by law, whether such reports are initially the obligation of the Employer, the Plan or the Trustee; and (l) To have all such other powers as may be necessary to discharge its duties hereunder. Reasonable discretion is granted to the Administrator to affect the benefits, rights and privileges of Participants, Beneficiaries or other persons affected by this Plan. The Administrator shall exercise reasonable discretion under the terms of this Plan and shall administer the Plan strictly in accordance with its terms, such administration to be exercised uniformly so that all persons similarly situated shall be similarly treated. 11.5 Action by Administrator. The Administrator may elect a Chairman and Secretary from among its members and may adopt rules for the conduct of its business. A majority of the members then serving shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Administrator shall be by vote of a majority of those present at such meeting and entitled to vote. Resolutions may be adopted or other action taken without a meeting upon written consent signed by at least a majority 47 of the members. All documents, instruments, orders, requests, directions, instructions and other papers shall be executed on behalf of the Administrator by either the Chairman or the Secretary of the Administrator, if any, or by any member or agent of the Administrator duly authorized to act on the Administrator's behalf. 11.6 Participation by Administrators. No Administrator shall be precluded from becoming a Participant in the Plan if he would be otherwise eligible, but he shall not be entitled to vote or act upon matters or to sign any documents relating specifically to his own participation under the Plan, except when such matters or documents relate to benefits generally. If this disqualification results in the lack of a quorum, then the Board of Directors shall appoint a sufficient number of temporary Administrators who shall serve for the sole purpose of determining such a question. 11.7 Agents. The Administrator may employ agents and provide for such clerical, legal, actuarial, accounting, medical, advisory or other services as it deems necessary to perform its duties under this Plan. The cost of such services and all other expenses incurred by the Administrator in connection with the administration of the Plan shall be paid from the Fund, unless paid by the Employer. 11.8 Allocation of Duties. The duties, powers and responsibilities reserved to the Administrator may be allocated among its members so long as such allocation is pursuant to written procedures adopted by the Administrator, in which case, except as may be required by the Act, no Administrator shall have any liability, with respect to any duties, powers or responsibilities not allocated to him, for the acts of omissions of any other Administrator. 11.9 Delegation of Duties. The Administrator may delegate any of its duties to other employees of the Employer, to the Trustee with its consent, or to any other person or firm, provided that the Administrator shall prudently choose such agents and rely in good faith on their actions. 11.10 Administrator's Action Conclusive. Any action on matters within the authority of the Administrator shall be final and conclusive except as provided in Article XII. 48 11.11 Compensation and Expenses of Administrator. No Administrator who is receiving compensation from the Employer as a full- time employee, as a director or agent, shall be entitled to receive any compensation or fee for his services hereunder. Any other Administrator shall be entitled to receive such reasonable compensation for his services as an Administrator hereunder as may be mutually agreed upon between the Employer and such Administrator. Any such compensation shall be paid from the Fund, unless paid by the Employer. Each Administrator shall be entitled to reimbursement by the Employer for any reasonable and necessary expenditures incurred in the discharge of his duties. 11.12 Records and Reports. The Administrator shall maintain adequate records of its actions and proceedings in administering this Plan and shall file all reports and take all other actions as it deems appropriate in order to comply with the Act, the Code and governmental regulations issued thereunder. 11.13 Reports of Fund Open to Participants. The Administrator shall keep on file, in such form as it shall deem convenient and proper, all annual reports of the Fund received by the Administrator from the Trustee, and a statement of each Participant's interest in the Fund as from time to time determined. The annual reports of the Fund and the statement of his own interest in the Fund, as well as a complete copy of the Plan and the Trust Agreement and copies of annual reports to the Internal Revenue Service, shall be made available by the Administrator to the Employer for examination by each Participant during reasonable hours at the office of the Employer, provided, however, that the statement of a Participant's interest shall not be made available for examination by any other Participant. 11.14 Named Fiduciary. The Administrator is the named fiduciary for purposes of the Act and shall be the designated agent for receipt of service of process on behalf of the Plan. It shall use ordinary care and diligence in the performance of its duties under this Plan. Nothing in this Plan shall preclude the Employer from indemnifying the Administrator for all actions under this Plan, or from purchasing liability insurance to protect it with respect to its duties under this Plan. 11.15 Information from Employer. The Employer shall promptly furnish all necessary information to the Administrator to permit it to perform its duties under this Plan. The Administrator shall be entitled to rely upon the accuracy and completeness of all information furnished to it by the Employer, unless it knows or should have known that such information is erroneous. 49 11.16 Reservation of Rights by Employer. Where rights are reserved in this Plan to the Employer, such rights shall be exercised only by action of the Board of Directors, except where the Board of Directors, by written resolution, delegates any such rights to one or more officers of the Employer or to the Administrator. Subject to the rights reserved to the Board of Directors acting on behalf of the Employer as set forth in this Plan, no member of the Board of Directors shall have any duties or responsibilities under this Plan, except to the extent he shall be acting in the capacity of an Administrator or Trustee. 11.17 Liability and Indemnification. (a) The Administrator shall perform all duties required of it under this Plan in a prudent manner. To the extent not prohibited by the Act, the Administrator shall not be responsible in any way for any action or omission of the Employer, the Trustee or any other fiduciaries in the performance of their duties and obligations set forth in this Plan and in the Trust Agreement. To the extent not prohibited by the Act, the Administrator shall also not be responsible for any act or omission of any of its agents, or with respect to reliance upon advice of its counsel (whether or not such counsel is also counsel to the Employer or the Trustee), provided that such agents or counsel were prudently chosen by the Administrator and that the Administrator relied in good faith upon the action of such agent or the advice of such counsel. (b) The Administrator shall not be relieved from responsibility or liability for any responsibility, obligation or duty imposed upon it under this Plan or under the Act. Except for its own gross negligence, willful misconduct or willful breach of the terms of this Plan, the Administrator shall be indemnified and held harmless by the Employer against liability or losses occurring by reason of any act or omission of the Administrator to the extent that such indemnification does not violate the Act or any other federal or state laws. 11.18 Service as Trustee and Administrator. Nothing in this Plan shall prevent one or more Trustees from serving as Administrator under this Plan. 50 ARTICLE XII CLAIMS PROCEDURE 12.1 Notice of Denial. If a Participant or his Beneficiary is denied any benefits under this Plan, either in whole or in part, the Administrator shall advise the claimant in writing of the amount of his benefit, if any, and the specific reasons for the denial. The Administrator shall also furnish the claimant at that time with a written notice containing: (a) A specific reference to pertinent Plan provisions; (b) A description of any additional material or information necessary for the claimant to perfect his claim, if possible, and an explanation of why such material or information is needed; and (c) An explanation of the Plan's claim review procedure. 12.2 Right to Reconsideration. Within 60 days of receipt of the information described in 12.1 above, the claimant shall, if he desires further review, file a written request for reconsideration with the Administrator. 12.3 Review of Documents. So long as the claimant's request for review is pending (including the 60- day period described in Section 12.2 above), the claimant or his duly authorized representative may review pertinent Plan documents and the Trust Agreement (and any pertinent related documents) and may submit issues and comments in writing to the Administrator. 12.4 Decision by Administrator. A final and binding decision shall be made by the Administrator within 60 days of the filing by the claimant of his request for reconsideration; provided, however, that if the Administrator feels that a hearing with the claimant or his representative present is necessary or desirable, this period shall be extended an additional 60 days. 12.5 Notice by Administrator. The Administrator's decision shall be conveyed to the claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, with specific references to the pertinent Plan provisions on which the decision is based. 51 ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER 13.1 Amendments. The Employer reserves the right at any time and from time to time, and retroactively if deemed necessary or appropriate by it, to the extent permissible under law, to conform with governmental regulations or other policies, to amend in whole or in part any or all of the provisions of this Plan, provided that: (a) No amendment shall make it possible for any part of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries under the Trust Agreement, except to the extent provided in Section 4.4; (b) No amendment may, directly or indirectly, reduce the vested portion of any Participant's interest as of the effective date of the amendment or change the vesting schedule with respect to the future accrual of Employer contributions for any Participants unless each Participant with three or more Years of Service with the Employer is permitted to elect to have the vesting schedule in effect before the amendment used to determine his vested benefit; (c) No amendment may eliminate an optional form of benefit; (d) No amendment may increase the duties of the Trustee without its consent; and Amendments may be made in the form of Board of Directors' resolutions or separate written document. Copies of all amendments shall be delivered to the Trustee. 13.2 Consolidation, Merger or Other Transactions of Employer. Nothing in this Plan shall prevent the consolidation, merger, reorganization or liquidation of the Employer, or prevent the sale by Employer of any or all of its property. Any successor corporation or other entity formed and resulting from any such transaction shall have the right to become a party to this Plan by adopting the same by resolution and by appointing a new Trustee as though the Trustee had resigned in accordance with the Trust Agreement, and by executing a proper supplemental agreement with the Trustee. If, within 180 days from the effective date of such transaction, such new entity does not become a party to this Plan as above provided, this Plan shall automatically be terminated and the Trustee shall make payments to the persons entitled thereto in accordance with Section 9.5. 52 13.3 Consolidation or Merger of Trust. In the event of any merger or consolidation of the Fund with, or transfer in whole or in part of the assets and liabilities of the Fund to, another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of this Plan, the assets of the Fund applicable to such Participants shall be transferred to the other trust fund only if: (a) Each Participant would receive a benefit under such successor trust fund immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (determined as if this Plan and such transferee trust fund had then terminated); (b) Resolutions of the Board of Directors under this Plan, or of any new or successor employer of the affected Participants, shall authorize such transfer of assets, and, in the case of the new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' inclusion in the new employer's plan; and (c) Such other plan and trust are qualified under Sections 401(a) and 501(a) of the Code. 13.4 Bankruptcy or Insolvency of Employer. In the event of (a) the Employer's legal dissolution or liquidation by any procedure other than a consolidation or merger, (b) the Employer's receivership, insolvency, or cessation of its business as a going concern, or (c) the commencement of any proceeding by or against the Employer under the federal bankruptcy laws, and similar federal or state statute, or any federal or state statute or rule providing for the relief of debtors, compensation of creditors, arrangement, receivership, liquidation or any similar event which is not dismissed within 30 days, this Plan shall terminate automatically on such date (provided, however, that if a proceeding is brought against the Employer for reorganization under Chapter 11 of the United States Bankruptcy Code or any similar federal or state statute, then this Plan shall terminate automatically if and when said proceeding results in a liquidation of the Employer, or the approval of any Plan providing therefor, or the proceeding is converted to a case under Chapter 7 of the Bankruptcy Code or any similar conversion to a liquidation proceeding under federal or state law including, but not limited to, a receivership proceeding). In the event of any such termination as provided in the foregoing sentence, the Trustee shall make payments to the persons entitled thereto in accordance with Section 9.5 hereof. 13.5 Voluntary Termination. The Board of Directors reserves the right to terminate this Plan at any time by giving to the Trustee and the Administrator notice in writing of such desire to terminate. The Plan shall terminate upon the date of receipt of such notice, the interests of all Participants shall become fully vested, and the Trustee shall make payments to each Participant or Beneficiary in accordance with Section 9.5. 53 Alternatively, the Employer, in its discretion, may determine to continue the Trust Agreement and to continue the maintenance of the Fund, in which event distributions shall be made upon the contingencies and in all the circumstances which would have been entitled such distributions on a fully vested basis, had there been no termination of the Plan. 13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions. In the event that a partial termination of the Plan shall be deemed to have occurred, or if the Employer shall discontinue completely its contributions hereunder, the right of each affected Participant to his interest in the Fund shall be fully vested. The Employer, in its discretion, shall decide whether to direct the Trustee to make immediate distribution of such portion of the Fund assets to the persons entitled thereto or to make distribution in the circumstances and contingencies which would have controlled such distributions if there had been no partial termination or discontinuance of contributions. 54 ARTICLE XIV MISCELLANEOUS 14.1 No Diversion of Funds. It is the intention of the Employer that it shall be impossible for any part of the corpus or income of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries, except to extent that a return of the Employer's contribution is permitted under Section 4.4. 14.2 Liability Limited. Neither the Employer nor the Administrator, nor any agents, employees, officers, directors or shareholders of any of them, nor the Trustee, nor any other person shall have any liability or responsibility with respect to this Plan, except as expressly provided herein. 14.3 Incapacity. If the Administrator shall receive evidence satisfactory to it that a Participant or Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of such Participant or Beneficiary, and that no guardian, committee or other representative of the estate of such Participant or Beneficiary shall have been duly appointed, the Administrator may direct the Trustee to make payment of such benefit otherwise payable to such Participant or Beneficiary, to such other person or institution, including a custodian under a Uniform Gifts to Minor Act, or corresponding legislation (who shall be an adult, a guardian of the minor or a trust company), and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit. 14.4 Spendthrift Clause. Except as permitted by the Act or the Code, no benefits or other amounts payable under the Plan shall be subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, charge or alienation. If the Administrator determines that any person entitled to any payments under the Plan has become insolvent or bankrupt or has attempted to anticipate, sell, transfer, assign, pledge, encumber, charge or otherwise in any manner alienate any benefit or other amount payable to him under the Plan or that there is any danger of any levy or attachment or other court process or encumbrance on the part of any creditor of such person entitled to payments under the Plan against any benefit or other accounts payable to such person, the Administrator may, at any time, in its discretion, direct the Trustee to withhold any or all payments to such person under the Plan and apply the same for the benefit of such person, in such manner and in such proportion as the 55 Administrator may deem proper. Notwithstanding anything in this Section 14.4 to the contrary, distributions pursuant to a Qualified Domestic Relations Order may be made without regard to the age or employment status of the Participant. 14.5 Benefits Limited to Fund. All contributions by the Employer to the Fund shall be voluntary, and the Employer shall be under no legal liability to make any such contributions. The benefits of this Plan shall be only as can be provided by the assets of the Fund, and no liability for the payment of benefits under the Plan or for any loss of assets due to any action or inaction of the Trustee shall be imposed upon the Employer. 14.6 Cooperation of Parties. All parties to this Plan and any party claiming interest hereunder agree to perform any and all acts and execute any and all documents and papers which are necessary and desirable for carrying out this Plan or any of its provisions. 14.7 Payments Due Missing Persons. The Administrator shall direct the Trustee to make a reasonable effort to locate all persons entitled to benefits under the Plan; however, notwithstanding any provision in the Plan to the contrary, if, after a period of five years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Trustee shall send a certified letter to all such persons at their last known address advising them that their interest in benefits under the Plan shall be suspended. Any such suspended amounts shall be held by the Trustee for a period of three additional years (or a total of eight years from the time the benefits first became payable), and thereafter such amounts shall be reallocated among current Participants in the same manner that a current contribution would be allocated. However, if a person subsequently makes a valid claim with respect to such reallocated amounts and any earnings thereon, the Plan earnings or the Employer's contribution to be allocated for the year in which the claim shall be paid shall be reduced by the amount of such payment. Any such suspended amounts shall be handled in a manner not inconsistent with regulations issued by the Internal Revenue Service and Department of Labor. 14.8 Governing Law. This Plan has been executed in the State of Indiana and all questions pertaining to its validity, construction and administration shall be determined in accordance with the laws of that State, except to the extent superseded by the Act. 56 14.9 Nonguarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause. 14.10 Counsel. The Trustee and the Administrator may consult with legal counsel, who may be counsel for the Employer and for the Administrator or the Trustee (as the case may be), with respect to the meaning or construction of this Plan and the Trust Agreement, their respective obligations or duties hereunder or with respect to any action or proceeding or any question of law, and they shall be fully protected with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel. IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by its duly authorized officers and its corporate seal to be affixed on this ____ day of ________, 1998. Attest: FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK __________________ Secretary By:_____________________________ ________________ President 57 EX-21 13 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF FIRST CAPITAL, INC. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent - ------ First Capital, Inc. Percentage Jurisdiction or Subsidiaries (a) of Ownership State of Incorporation - ---------------- ------------ ---------------------- First Federal Bank, 100% United States A Federal Savings Bank (1) ____________________ (1) Upon consummation of the conversion, First Federal Bank, A Federal Savings Bank will become a wholly-owned subsidiary of the Registrant. EX-23.1 14 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF MONROE SHINE & CO., INC. [LETTERHEAD OF MONROE SHINE & CO., INC. APPEARS HERE] CONSENT OF INDEPENDENT AUDITORS Board of Directors First Capital, Inc. First Federal Bank, a Federal Savings Bank Corydon, Indiana We consent to the use in this Registration Statement on Form SB-2 on behalf of First Capital, Inc. of our report dated July 22, 1998, relating to the financial statements of First Federal Bank, a Federal Savings Bank which appear in the Prospectus contained in such Registration Statement. We also consent to the reference to us under the heading "Experts" contained in the Prospectus. Monroe Shine & Co., Inc. /s/ MONROE SHINE & COMPANY., INC. New Albany, Indiana 47150 September 16, 1998 EX-23.2 15 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF BREYER & AGUGGIA LLP AS TO ITS FORM OF FEDERAL INCOME TAX OPINION Exhibit 23.2 1300 I Street, N.W. Suite 470 East Washington, D.C. 20005 Telephone (202) 737-7900 Breyer & Aguggia Facsimile (202) 737-7979 ================================================================================ September 16, 1998 Board of Directors First Capital, Inc. 220 Federal Drive, N.W. Corydon, Indiana 47112 RE: First Capital, Inc. Registration Statement on Form SB-2 To the Board of Directors: We hereby consent to the filing of the form of our federal income tax opinion as an exhibit to the Registration Statement and to the reference to us in the Prospectus included therein under the headings "THE CONVERSION -- Effects of Conversion on Depositors and Borrowers of the Bank" and "LEGAL AND TAX OPINIONS." Sincerely, /s/ Breyer & Aguggia LLP BREYER & AGUGGIA LLP Washington, D.C. EX-23.3 16 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF KELLER & COMPANY, INC. KELLER & COMPANY, INC. 555 Metro Place North Suite 524 Dublin, Ohio 43017 (614) 766-1426 (614) 766-1459 FAX September 16, 1998 Re: Valuation Appraisal of First Capital, Inc. First Federal Bank, a FSB Corydon, Indiana We hereby consent to the use of our firm's name, Keller & Company, Inc. ("Keller"), and the reference to our firm as experts in the Application for Conversion on Form AC to be filed by First Federal Bank, Corydon, Indiana and any amendments thereto and references to our opinion regarding subscription rights filed as an exhibit to the applications referred to hereafter. We also consent to the use of our firm's name in the Form SB-2 to be filed by First Capital, Inc. with the Securities and Exchange Commission and any amendments thereto, and to the statements with respect to us and the references to our Valuation Appraisal Report and in the said Form AC and any amendments thereto and in the notice and Application for Conversion filed by First Federal Bank. Very truly yours, KELLER & COMPANY, INC. by: /s/ Michael R. Keller ----------------------- Michael R. Keller President EX-99.1 17 EXHIBIT 99.1 EXHIBIT 99.1 Order Form - -------------------------------------------------------------------------------- FIRST CAPITAL, INC. Proposed Holding Company for First Federal Bank Stock Information Center 220 Federal Drive NW Corydon, Indiana 47112 812) 738-XXXX STOCK ORDER FORM ________________________________________________________________________________ DEADLINE: The Subscription Offering ends at 12:00 Noon, Eastern Daylight Time, on December XX, 1998. Your original Stock Order and Certification Form, properly executed and with the correct payment, must be received (not postmarked) at the address on the top of this form or at any branch by this deadline, or it will be considered void. FAXES AND COPIES WILL NOT BE ACCEPTED. ________________________________________________________________________________ (1)Number of Shares. Price Per Share (2) Total Amount Due - --------------------------- --------------------------- X $10.00 = $ - --------------------------- --------------------------- ________________________________________________________________________________ The minimum number of shares that may be subscribed for is 25. In each of the Subscription Offering, the Direct Community Offering or any Syndicated Community Offering, the maximum purchase for any person is 25,000 shares; provided, however, that no person, either alone or together with associates or persons acting in concert, may purchase shares in an amount that, when combined with shares received in exchange for Bank common stock, exceeds 62,500 shares. METHOD OF PAYMENT (3) [_] Enclosed is a check, bank draft or money order payable to First Capital, Inc. for $_________________ (4) [_] I authorize First Federal Bank to make withdrawals from my First Federal Bank certificate or savings account(s) shown below, and understand that the amounts will not otherwise be available for withdrawal: ACCOUNT NUMBER (S) AMOUNT(S) ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ TOTAL WITHDRAWAL _________________ ________________________________________________________________________________ (5) [_] Check here if you are a director, officer, or employee of First Federal Bank or a member of such person's immeidate family (same residence). ________________________________________________________________________________ (6) PURCHASER INFORMATION (check one) a [_] Eligible Account Holder - Check here if you were a depositor with $50.00 or more on deposit as of March 31, 1997. Enter information below for all deposit accounts that you had at First Federal Bank on March 31, 1997. b [_] Supplemental Eligible Account Holder - Check here if you were a depositor with $ 50.00 or more on deposit as of September 30, 1998, but are not an eligible account holder. Enter information below for all deposit accounts that had at First Federal Bank on September 30, 1998. c [_] Other Member - Check here if you were a depositor as of Xxxxxxxxx XX, 1998; or a borrower as of February 1, 1993 whose loan continued to be outstanding as of Xxxxxxxxx XX, 1998. d [_] Shareholder - Check here if you are a shareholder of First Federal bank, as of Xxxxxxxxx XX, 1998, and indicate the number of shares owned by you or persons associated with you. --------------------- Shares --------------------- e [_] Local Community - Check if you are a permanent resident of Clark, Crawford, Floyd, Harrison, or Washington Counties. f [_] General Community ACCONT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ ________________________________________________________________________________ (7) STOCK REGISTRATION / FORM OF OWNERSHIP [_] Individual [_] Uniform Transfer to Minors [_] Partnership [_] Joint Tenants [_] Uniform Gift to Minors [_] Individual Retirement Account [_] Tenants in Common [_]Corporation [_] Fiduciary/Trust (Under Agreement Dated _________________)
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT LEGIBLY AND FULL OUT COMPLETELY) ________________________________________________________________________________ Name 1 Social Security or Tax I.D. - -------------------------------------------------------------------------------- Name 2 Social Security or Tax I.D. - -------------------------------------------------------------------------------- Street Daytime Address Telephone - -------------------------------------------------------------------------------- Zip Evening City State Code County Telephone - -------------------------------------------------------------------------------- ________________________________________________________________________________ [_] NASD AFFILIATION (This section only applies to those individuals who meet the delineated criteria) Check here if you are a member of the National Association of Securities Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the immediate family of any such person to whose support such person contributes, directly or indirectly, or the holder of an account in which an NASD member or person associated with an NASD member has a beneficial interest. To comply with conditions under which an exemption from the NASD's Interpretation With Respect to Free-Riding and Withholding is available, you agree, if you have checked the NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a period of three months following the issuance and (2) to report this subscription in writing to the applicable NASD member within one day of the payment therefor. ________________________________________________________________________________ ACKNOWLEDGMENT By signing below, I acknowledge receipt of the Prospectus dated November XX, 1998 and understand I may not change or revoke my order once it is received by First Capital, Inc. I also certify that this stock order is for my account and there is no agreement or understanding regarding any further sale or transfer of these shares. Federal regulations prohibit any persons from transferring, or entering into any agreement directly or indirectly to transfer, the legal or beneficial ownership of conversion subscription rights or the underlying securities to the account of another person. First Federal Bank will pursue any and all legal and equitable remedies in the event it becomes aware of the transfer of subscription rights and will not honor orders known by it to involve such transfer. Under penalties of perjury, I further certify that: (1) the social security number or taxpayer identification number given above is correct; and (2) I am not subject to backup withholding. You must cross out this item, (2) above, if you have been notified by the Internal Revenue Service that you are subject to backup withholding because of under-reporting interest or dividends on your tax return. By signing below, I also acknowledge that I have not waived any rights under the Securities Act of 1933 and the Securities Exchange Act of 1934. THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. SIGNATURE THIS FORM MUST BE SIGNED AND DATED TWICE: HERE AND ON THE --------------------------------------------------------- CERTIFICATION FORM ON THE REVERSE SIDE. THIS ORDER IS NOT VALID IF THE STOCK - --------------------------------------- ORDER FORM AND CERTIFICATION FORM ARE NOT BOTH SIGNED. YOUR ORDER WILL BE FILLED --- ---- IN ACCORDANCE WITH THE PROVISIONS OF THE PROSPECTUS. An additional signature is required only if payment is by withdrawal from an account that requires more than one signature to withdraw funds. __________________________________________________ Signature Date __________________________________________________ Signature Date __________________________________________________ __________________________________________________ FOR OFFICE Date Rec'd ___/___/___ Order#________ USE Check # ___________ Category______ Batch #____ Amount$ ___________ Deposit$______ __________________________________________________ FIRST CAPITAL, INC. Proposed Holding Company for First Federal Bank ________________________________________________________________________________ Item (6) continued; Purchaser Information Account Title (Names on Accounts) Account Number - --------------------------------------------------------- _________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________ Definition of Associate - ----------------------- The term "associate" of a person is defined to mean: (i) any corporation or other organization (other than First Capital, Inc. (the "Holding Company"), First Capital, Inc., M.H.C. (the "MHC"), First Federal Bank, (the "Bank"), or a majority owned subsidiary of any of them) of which such person is a director, officer or Definition of Associate (con't) - ------------------------------- 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, provided, however, that such term shall not include any tax-qualified employee stock benefit plan of the Holding Company or the Bank in which such person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such person, who either has the same home as such person or who is a director or officer of the Holding Company, M HC, or the Bank or any of their subsidiaries. CERTIFICATION FORM (This Certification Must Be Signed In Addition to the Stock Order Form On Reverse Side) I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF FIRST CAPITAL, INC., ARE NOT A DEPOSIT OR AN ACCOUNT AND ARE NOT FEDERALLY INSURED, AND ARE NOT GUARANTEED BY FIRST FEDERAL BANK OR BY THE FEDERAL GOVERNMENT. If anyone asserts that the shares of common stock are federally insured or guaranteed, or are as safe as an insured deposit, I should call the Office of Thrift Supervision. I further certify that, before purchasing the shares of common stock of First Capital, Inc., I received a copy of the Prospectus dated November XX, 1998 which discloses the nature of the shares of common stock being offered thereby and describes the following risks involved in an investment in the common stock under the heading "Risk Factors" beginning on page 10 of the Prospectus: 1. Above Average Interest Rate Risk Associated with Fixed Rate Loans 2. Certain Lending Risks 3. Dependence on Local Economy 4. Interest Rate Risk 5. Below Average Return on Equity After Conversion 6. Expenses Associated with the ESOP and 1999 MRDP 7. Possible Dilutive Effect of Benefit Programs 8. Possible Voting Control by Management and Employees 9. Anti-Takeover Provisions and Statutory Provisions that Could Discourage Hostile Acquisitions of Control 10. Possible Anti-Takeover Effect of Employment and Severance Agreements 11. Competition 12. Absence of Prior Market for the Common Stock 13. Possible Increase in Estimated Valuation Range and Number of Shares Issued 14. Risk of Year 2000 Data Processing Problems 15. Financial Institution Regulation and the Future of the Thrift Industry ______________________________ ______________________________ Signature Signature Date Date ______________________________ ______________________________ (Note: If stock is to be held jointly, both parties must sign) ---- FIRST CAPITAL, INC. Stock Ownership Guide and Stock Order Form Instructions STOCK ORDER FORM INSTRUCTIONS ITEMS 1 AND 2 - Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying the number of shares ordered by the subscription price of $10.00 per share. The minimum purchase is 25 shares. The maximum purchase for any person is 25,000 shares. In addition, no person, either alone or together with associates or persons acting in concert, may purchase shares in an amount that when combined with shares received in exchange for Bank common stock, exceeds 62,500 shares. First Capital, Inc. reserves the right to reject the subscription of any order received in the Direct Community Offering, if any, in whole or in part. ITEM 3 - Payment for shares may be made by check, bank draft, or money order payable to First Capital, Inc. Your funds will earn interest at First Federal Bank's current passbook rate. ITEM 4 - To pay by withdrawal from a savings account or certificate at First Federal Bank, insert the account number(s) and the amount(s) you wish to withdraw from each account. If more than one signature is required to withdraw, each must sign in the signature box on the front of this form. To withdraw from an account with checking privileges, please write a check. First Federal Bank will waive any applicable penalties for early withdrawal from certificate accounts. A hold will be placed on the account(s) for the amount(s) you show. Payments will remain in account(s) until the stock offering closes. If a partial withdrawal reduces the balance of a certificate account to less than the applicable minimum, the remaining balance will thereafter earn interest at the passbook rate. ITEM 5 - Please check this box to indicate whether you are a director, officer or employee of First Federal Bank or a member of such person's immediate family ITEM 6 - Please check this box if you or any associate (as defined on the reverse side of the Stock Order Form) or person acting in concert with you has submitted another order for shares and complete the reverse side of the Stock Order Form. ITEM 7 - Please check the appropriate box if you were: a) A depositor with $50.00 or more on deposit at First Federal Bank as of March 31, 1997. Enter information below for all deposit accounts that you had at First Federal Bank on March 31, 1997. b) A depositor with $50.00 or more on deposit at First Federal Bank as of September 30, 1998, but are not an Eligible Account Holder. Enter information below for all deposit accounts that you had at First Federal Bank on September 30, 1998. c) A depositor at First Federal Bank as of Xxxxxxx XX, 1998, but are not an Eligible Account Holder or Supplemental Eligible Account Holder or a borrower of First Federal Bank as of February 1, 1993 whose loan continues to be outstanding as of Xxxxxxxxx XX, 1998, but are not an Eligible Account Holder or Supplemental Eligible Account Holder. d) A shareholder of First Federal Bank as of Xxxxxxxxx XX, 1998. e) A permanent resident of Clark, Crawford, Floyd, Harrison, or Washington Counties, Indiana. f) A member of the General Community ITEM 8 - The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of First Capital, Inc. common stock. Please complete this section as fully and accurately as possible, and be certain to supply your social security or Tax I.D. number(s) and your daytime and evening phone numbers. We will need to call you if we can not execute you order as given. If you have any questions regarding the registration of your stock, please consult your legal advisor. Subscription rights are not transferable. If you are a qualified member, to protect your priority over other purchasers as described in the Prospectus, you must take ownership in at least one of the account holder's names. STOCK OWNERSHIP GUIDE INDIVIDUAL - The stock is to be registered in an individual's name only. You may not list beneficiaries for this ownership JOINT TENANTS - Joint tenants with rights of survivorship identifies two or more owners. When stock is held by joint tenants with rights of survivorship, ownership automatically passes to the surviving joint tenant(s) upon the death of any joint tenant. You may not list beneficiaries for this ownership. TENANTS IN COMMON - Tenants in common may also identify two or more owners. When stock is to be held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All parties must agree to the transfer or sale of shares held by tenants in common. You may not list beneficiaries for this ownership. UNIFORM GIFT TO MINORS - For residents of many states, stock may by held in the name of a custodian for the benefit of a minor under the Uniform Gift to Minors Act. For residents in other states, stock may be held in a similar type of ownership under the Uniform Transfer to Minors Act of the individual state. For either ownership, the minor is the actual owner of the stock with the adult custodian being responsible for the investment until the child reaches legal age. Only one custodian and one minor may be designated. Instructions: On the first name line, print the first name, middle initial and last name of the custodian, with the abbreviation "CUST" after the name. Print the first name, middle initial and last name of the minor on the second name line. USE THE MINOR'S SOCIAL SECURITY NUMBER. CORPORATION/PARTNERSHIP - Corporation/Partnerships may purchase stock. Please provide the Corporation/Partnership's legal name and Tax I.D. To have depositor rights, the Corporation/Partnership must have an account in the legal name. Please contact the Stock Information Center to verify depositor rights and purchase limitations. INDIVIDUAL RETIREMENT ACCOUNT - Individual Retirement Account ("IRA") holders may make stock purchases from their deposits through a prearranged "trustee-to- trustee" transfer. Stock may only be held in a self-directed IRA. First Federal Bank does not offer a self-directed IRA. Please contact the Stock Information Center if you have any questions about your IRA account. FIDUCIARY/TRUST - Generally, fiduciary relationships (such as Trusts, Estates, Guardianships, etc.) are established under a form of trust agreement or pursuant to a court order. Without a legal document establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity. Instructions: On the first name line, print the first name, middle initial and last name of the fiduciary if the fiduciary is an individual. If the fiduciary is a corporation, list the corporate title on the first name line. Following the name, print the fiduciary title such as trustee, executor, personal representative, etc. On the second name line, print the name of the maker , donor or testator or the name of the beneficiary. Following the name, indicate the type of legal document establishing the fiduciary relationship (agreement, court order, etc.). In the blank after "Under Agreement Dated", fill in the date of the document governing the relationship. The date of the document need not be provided for a trust created by a will. EX-99.2 18 EXHIBIT 99.2 EXHIBIT 99.2 SOLICITATION AND MARKETING MATERIALS ADDENDUM TO 401K CHANGE OF INVESTMENT ALLOCATION FORM (1) SOCIAL SECURITY NUMBER - - ---- -- ---- (2) NAME ______________________________________________ LAST FIRST MI (3) PURCHASER INFORMATION (check one) A [_] Eligible Account Holder - Check here if you were a depositor with $50.00 or more on deposit with First Federal Bank as of March 31, 1997. Enter information below for all deposit accounts that you had at First Federal Bank on March 31, 1997. B [_] Supplemental Eligible Account Holder - Check here if you were a depositor with $50.00 or more on deposit with First Federal Bank as of September 30, 1998, but are not an Eligible Account Holder. Enter information below for all deposit accounts that you had at First Federal Bank on September 30, 1998. C [_] Other Eligible Members - Check here if you were a depositor with First Federal Bank as of Xxxxxxxxx XX, 1998, or a borrower of First Federal Bank as of February 1, 1993 whose loan continues to be outstanding as of Xxxxxxxx XX, 1998. ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ________________________________________ SIGNATURE DATE [LETTERHEAD OF CHARLES WEBB & COMPANY APPEARS HERE] TO MEMBERS AND FRIENDS OF FIRST FEDERAL BANK AND FIRST CAPITAL, INC., M.H.C. - -------------------------------------------------------------------------------- Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc., a member of the National Association of Securities Dealers, Inc. ("NASD"), is pleased to announce that First Capital, Inc., M.H.C. is converting to stock form and First Federal Bank (the "Bank") is reorganizing as a wholly-owned subsidiary of a newly-formed stock holding company named First Capital, Inc. (the "Holding Company"). In conjunction with the conversion, the Holding Company for the Bank is offering shares of common stock in a subscription offering and direct community offering to certain depositors and borrowers of the Bank, the Bank's Employee Stock Ownership Plan, and members of the general public pursuant to a Plan of Conversion and Agreement and Plan of Reorganization. At the request of the Holding Company, we are enclosing materials explaining the conversion and your opportunity to invest in shares of the Holding Company's common stock. Please read the enclosed Prospectus carefully. The Holding Company has asked us to forward these documents to you in view of certain requirements of the securities laws in your state. If you have any questions, please visit our Stock Information Center at 220 Federal Drive NW, Corydon, Indiana or feel free to call the Stock Information Center at (812) 738-XXXX. Very truly yours, Charles Webb & Company a Division of Keefe, Bruyette & Woods, Inc. THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. - ------------------- Investment Bankers and Financial Advisors ------------------ ================================================================================ YOU ARE CORDIALLY INVITED TO A COMMUNITY INVESTORS MEETING TO LEARN MORE ABOUT THE CONVERSION AND REORGANIZATION OF FIRST FEDERAL BANK AND THE STOCK OFFERING OF FIRST CAPITAL, INC. Senior executives of First Federal Bank and its investment bankers will present information and answer your questions about the Plan of Conversion and Agreement and Plan of Reorganization, as well as about the business and operations of First Federal Bank. ========================================================================= Xxxxday, Xxxember XX, 1998 Xxxxday, Xxxember XX, 1998 100 Any Street 200 Anywhere Rd. Corydon, Indiana Corydon, Indiana Both Community Investor Meetings will begin at X:00 p.m. ========================================================================== PLEASE RSVP TO THE FIRST CAPITAL, INC. STOCK INFORMATION CENTER, AT (812) 738-XXXX, IF YOU PLAN TO ATTEND. The shares of common stock offered in the Conversion and Reorganization are not savings accounts or deposits and are not insured by the Federal Deposit Insurance Corporation, the Bank Insurance Fund, the Savings Association Insurance Fund, or any other government agency. This is not an offer to sell or a solicitation of an offer to buy stock. The offer is made only by the Prospectus. ================================================================================ (RECEIPT OF ORDER LETTER - FIRST CAPITAL, INC. LETTERHEAD) DATE NAME ADDRESS TAX I.D. NUMBER XXX-XX-XXX CITY, STATE, ZIP RECEIPT OF ORDER This letter is to acknowledge receipt of your order to purchase common stock offered by First Capital, Inc. Please check the following information carefully to ensure that we have entered your order correctly. Your order has been assigned a prioritized category described below. Acceptance of your order and the shares of stock you actually receive will be subject to the allocation provisions of the Plan of Conversion, as well as other conditions and limitations described in the Prospectus. Our records indicate the following: Number of Shares Ordered: _________ Purchase Price Per Share: $10.00 Total Order Amount: $________ Date Order Received: / / --------- Order Number: _________ Category Assigned: _________ Category Description -------------------- 1. Eligible Account Holders - Depositors as of March 31, 1997 with $50.00 or more on deposit 2. Employee Stock Ownership Plan (ESOP) 3. Supplemental Eligible Account Holders - Depositors as of September 30, 1998 with $50.00 or more on deposit 4. Other Eligible Members Depositors as of Xxxxxx XX, 1998 and borrowers of the Bank as of February 1, 1993 whose loans continue to be outstanding as of Xxxxxxxx XX, 1998. 5. Public Stockholder of the Bank 6. Local Community Permanent resident of Clark, Crawford, Floyd, Harrison, and Washington Counties, Indiana. 7. General Community If this does not agree with your records or if you have any questions, please call our Stock Information Center at (812) 738-XXXX. Thank you for your order. Sincerely, James G. Pendleton Chairman Date Dear Member: We are pleased to announce that First Capital, Inc., M.H.C. is converting to stock form and First Federal Bank (the "Bank") is reorganizing as a wholly-owned subsidiary of a newly-formed stock holding company (the "Conversion and Reorganization"). In conjunction with the Conversion and Reorganization, First Financial, Inc. (the "Holding Company"), the newly-formed corporation that will serve as a holding company for the Bank, is offering shares of common stock in a subscription offering and direct community offering to certain depositors and borrowers of the Bank, to the Bank Employee Stock Ownership Plan, and members of the general public, pursuant to a Plan of Conversion and Agreement and Plan of Reorganization (the "Plan of Conversion"). Unfortunately, the Holding Company is unable to either offer or sell its common stock to you because the small number of eligible subscribers in your jurisdiction makes registration or qualification of the common stock under the securities laws of your jurisdiction impractical, for reasons of cost or otherwise. Accordingly, this letter should not be considered an offer to sell or a solicitation of an offer to buy the common stock of the Holding Company. However, you have the right to vote on the Plan of Conversion at the Special Meeting of Members on Xxxxxxxx XX, 1998. Therefore, enclosed is a proxy card, a Proxy Statement (which includes the Notice of the Special Meeting), a Prospectus (which is provided solely as an accompaniment to the Proxy Statement) and a return envelope for your proxy card. I invite you to attend the Special Meeting on Xxxxxxxx XX, 1998. However, whether or not you are able to attend, please complete the enclosed proxy card and return it in the enclosed envelope. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. Dear Friend: We are pleased to announce that First Capital, Inc., M.H.C. is converting to stock form and First Federal Bank (the "Bank") is reorganizing as a wholly-owned subsidiary of a newly-formed stock holding company named First Capital, Inc. (the "Holding Company"). In conjunction with the conversion, the Holding Company is offering shares of common stock in a subscription offering and direct community offering to certain depositors and borrowers of the Bank, the Bank's Employee Stock Ownership Plan, and members of the general public pursuant to a Plan of Conversion and Agreement and Plan of Reorganization (the "Plan of Conversion"). Because we believe you may be interested in learning more about the Holding Company's common stock as a potential investment, we are sending you the following materials that describe the stock offering. Please read these materials carefully before you submit a Stock Order and Certification Form. . PROSPECTUS: This document provides detailed information about the operations of the Holding Company, the Bank and the proposed stock offering. . QUESTIONS AND ANSWERS: Key questions and answers about the stock offering are found in this pamphlet. . STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 12:00 Noon, Eastern Daylight Time, on Xxxxxxxx XX, 1998. You have the opportunity to buy stock directly from the Holding Company without commission or fee. If you have additional questions regarding the Plan of Conversion and stock offering, please call us at (812) 738-XXXX Monday through Friday X:XX a.m. to X:XX p.m., or stop by the Stock Information Center at 220 Federal Drive NW, Corydon, Indiana. We are pleased to offer you this opportunity to become a charter shareholder of First Capital, Inc. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. Dear Member: We are pleased to announce that First Capital Inc., M.H.C. (the "MHC") is converting to stock form and First Federal Bank (the "Bank") is reorganizing as a wholly-owned subsidiary of a newly-formed stock holding company named First Financial, Inc. (the "Holding Company"). In conjunction with the conversion, the holding company is offering shares of common stock in a subscription offering and direct community offering to certain depositors and borrowers of the Bank, the Bank's Employee Stock Ownership Plan, and members of the general public pursuant to a Plan of Conversion and Agreement and Plan of Reorganization (the "Plan of Conversion"). To accomplish the Conversion and Reorganization, we need your participation in an important vote. Enclosed is a proxy statement describing the Plan of Conversion and your voting and subscription rights. The Plan of Conversion has been approved by the Office of Thrift Supervision and now must be approved by you. YOUR VOTE IS VERY IMPORTANT. Enclosed, as part of the proxy material, is your proxy card. This proxy card should be signed and returned to us prior to the Special Meeting of Members on Xxxxxxxx XX, 1998. Please take a moment to sign the enclosed proxy card and return it to us in the postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE PLAN OF CONVERSION. The Boards of Directors of the MHC and the Bank believe that the conversion is in the best interests of the MHC and its members and the Bank and its stockholders. Please remember: . Your deposit accounts at the Bank will continue to be insured up to the maximum legal limit by the Federal Deposit Insurance Corporation ("FDIC"). . There will be no change in the balance, interest rate, or maturity of any deposit or loan accounts because of the conversion. . You have a right, but no obligation, to buy stock before it is offered to the public. . Like all stock, stock issued in this offering will not be insured by the FDIC. Enclosed are materials describing the stock offering, including a Prospectus. We urge you to read the Prospectus carefully before submitting your Stock Order and Certification Form. If you are interested in purchasing common stock, you must submit your Stock Order and Certification Form and payment prior to 12:00 Noon, Eastern Daylight Time, on Xxxxxxxx XX, 1998. If you have additional questions regarding the stock offering, please call us at (812) 738-XXXX, Monday through Friday X:XX a.m. to X:XX p.m., or stop by the Stock Information Center located at 220 Federal Drive NW, Corydon, Indiana. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. (Stockholder Letter Street holders - 2nd mailing - First Federal Bank Letterhead) Dear Stockholder: Under separate cover, we forwarded to you information regarding the Plan of Conversion and Agreement and Plan of Reorganization of First Federal Bank (the "Bank") and First Capital, Inc., M.H.C. (the "MHC") and the concurrent offering of common stock by First Capital, Inc. (the "Holding Company"). As a result of certain requirements, we could not forward a Stock Order and Certification Form with the other packet of materials. They are enclosed herein. The deadline for ordering the Holding Company's common stock is at 12:00 Noon, Eastern Daylight Time, on Xxxxxxxx XX, 1998. Should you have additional questions regarding the conversion and stock offering, please call the Stock Information Center at (812) 738-XXXX, Monday through Friday from X:XX a.m. to X:XX p.m., or stop by the Stock Information Center at 220 Federal Drive NW, Corydon, Indiana. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. (Stockholder Letter STREET HOLDERS- First Federal Bank letterhead) Dear Stockholder: We are pleased to inform you that the Boards of Directors of First Federal Bank (the "Bank") and First Capital, Inc., M.H.C. (the "MHC") have adopted a Plan of Conversion and Agreement and Plan of Reorganization (the "Plan of Conversion") whereby the MHC will convert to stock form and the Bank will be reorganized as a wholly-owned subsidiary of a newly-formed stock holding company named First Capital, Inc. (the "Holding Company"). Pursuant to the Plan of Conversion, stockholders of the Bank (other than the MHC) will be issued shares of common stock of the Holding Company in exchange for their shares of Bank common stock (the "Exchange"). In addition to the shares of common stock to be issued in the Exchange, the Holding Company is also offering shares of common stock to the MHC's members, the Bank's stockholders and members of the public. Consummation of the Plan of Conversion is subject to (i) the approval of the members of the MHC, (ii) the approval of the stockholders of the Bank and (iii) regulatory approval. We are asking stockholders of the Bank as of Xxxxxxxx XX, 1998, the voting record date, to vote FOR the Plan of Conversion. If you and/or members of your family hold stock in different names, you may receive more than one proxy mailing. Please vote all proxy cards received and return them today in the enclosed postage-paid envelope. Your vote FOR the Plan of Conversion will not obligate you to buy any stock in the conversion. A Proxy Statement relating to the conversion is enclosed. We have enclosed the following materials which will help you learn more about investing in the Holding Company's common stock. Please read and review the materials carefully before making an investment decision. . PROSPECTUS: This document provides detailed information about the operations of the Holding Company, the Bank and the proposed stock offering. . QUESTIONS AND ANSWERS BROCHURE: Key questions and answers about the stock offering are found in this pamphlet. . STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase stock by signing and returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 12:00 Noon, Eastern Daylight Time, on Xxxxxxxx XX, 1998. YOU MAY OBTAIN A STOCK ORDER AND CERTIFICATION FORM FROM YOUR BROKER OR BY CONTACTING THE STOCK INFORMATION CENTER. We are inviting our loyal depositors, existing stockholders, and local community members to become stockholders of the Holding Company. Through this offering you have the opportunity to buy stock directly from the Holding Company without commission or fee. Should you have additional questions regarding the conversion and stock offering, please call the Stock Information Center at (812) 738-XXXX, Monday through Friday X:XX a.m. to X:XX p.m. or stop by the Stock Information Center at 220 Federal Drive NW, Corydon, Indiana Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. (Stockholder Letter REGISTERED HOLDERS- First Federal Bank letterhead) Dear Stockholder: We are pleased to inform you that the Boards of Directors of First Federal Bank (the "Bank") and First Capital, Inc., M.H.C. (the "MHC") have adopted a Plan of Conversion and Agreement and Plan of Reorganization (the "Plan of Conversion") whereby the MHC will convert to stock form and the Bank will be reorganized as a wholly-owned subsidiary of a newly-formed stock holding company named First Capital, Inc. (the "Holding Company"). Pursuant to the Plan of Conversion, stockholders of Bank (other than the MHC) will be issued shares of common stock of the Holding Company in exchange for their shares of the Bank common stock (the "Exchange"). In addition to the shares of common stock to be issued in the Exchange, the Holding Company is also offering shares of common stock to the MHC's members, the Bank's stockholders and members of the public. Consummation of the Plan of Conversion is subject to (i) the approval of the members of the MHC, (ii) the approval of the stockholders of the Bank and (iii) regulatory approval. We are asking stockholders of the Bank as of Xxxxxxxx XX, 1998, the voting record date, to vote FOR the Plan of Conversion. If you and/or members of your family hold stock in different names, you may receive more than one proxy mailing. Please vote all proxy cards received and return them today in the enclosed postage-paid envelope. This will not prevent you from voting in person at the meeting, but will assure that your vote is counted if you are unable to attend. Your vote FOR the Plan of Conversion will not obligate you to buy any stock in the conversion. A Proxy Statement relating to the conversion is enclosed. We have enclosed the following materials which will help you learn more about investing in the Holding Company's common stock. Please read and review the materials carefully before making an investment decision. . PROSPECTUS: This document provides detailed information about the operations of the Holding Company, the Bank and the proposed stock offering. . QUESTIONS AND ANSWERS BROCHURE: Key questions and answers about the stock offering are found in this pamphlet. . STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase stock by signing and returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 12:00 Noon, Eastern Daylight Time, on Xxxxxxxx XX, 1998. We invite our loyal customers, existing stockholders and local community members to become charter stockholders of the Holding Company. Through this offering you have the opportunity to buy stock directly from the Holding Company without commission or fee. Should you have additional questions regarding the conversion and stock offering, please call the Stock Information Center at (812) 738-XXXX, Monday through Friday X:XX a.m. to X:XX p.m., or stop by the Stock Information Center at 220 Federal Drive NW, Corydon, Indiana. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. Dear Prospective Investor: We are pleased to announce that First Capital, Inc., M.H.C. is converting to stock form and First Federal Bank (the "Bank") is reorganizing as a wholly-owned subsidiary of a newly-formed stock holding company named First Capital, Inc. (the "Holding Company"). In conjunction with the conversion, the Holding Company is offering shares of common stock in a subscription offering and direct community offering. The sale of stock in connection with the conversion will enable the Bank to raise additional capital to support and enhance its current operations. We have enclosed the following materials that will help you learn more about the stock offering of the Holding Company. Please read and review the materials carefully before you submit a Stock Order and Certification Form. . PROSPECTUS: This document provides detailed information about the operations of the Holding Company, the Bank and the proposed stock offering. . QUESTIONS AND ANSWERS: Key questions and answers about the stock offering are found in this pamphlet. . STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 12:00 Noon, Eastern Daylight Time, on Xxxxxxxx XX, 1998. We invite our loyal customers and local community members to become charter shareholders of the Holding Company. Through this offering you have the opportunity to buy stock directly from the Holding Company, without commission or fee. The board of directors and management of the Bank and the MHC fully support the stock offering. If you have additional questions regarding the Conversion and Reorganization and stock offering, please call us at (812) 738-XXXX, Monday through Friday X:XX a.m. to X:XX p.m., or stop by the Stock Information Center located at 220 Federal Drive NW, Corydon, Indiana. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. PROXY GRAM We recently forwarded to you a proxy statement and letter advising that First Capital, Inc., M.H.C. had received conditional approval to convert from a mutual holding company to a stock holding company. Your vote on our Plan of Conversion and Agreement and Plan of Reorganization has - -------------------------------------------------------------------------------- not yet been received. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST - --------------------- THE PLAN OF CONVERSION AND AGREEMENT AND PLAN OF REORGANIZATION. Your vote is important to us. Therefore, we are requesting that you sign the enclosed proxy card and return it promptly in the enclosed postage-paid envelope. VOTING FOR THE PLAN OF CONVERSION AND AGREEMENT AND PLAN OF REORGANIZATION DOES NOT OBLIGATE YOU TO PURCHASE STOCK OR AFFECT THE TERMS OR INSURANCE ON YOUR ACCOUNTS. The Boards of Directors of First Capital Inc., M.H.C. and First Federal Bank unanimously recommend that you vote "FOR" the Plan of Conversion and Agreement and Plan of Reorganization. First Capital, Inc., M.H.C. First Federal Bank Corydon, Indiana James G. Pendleton Chairman If you mailed the proxy, please accept our thanks and disregard this request. For further information call (812) 738-XXXX. The shares of common stock being offered are not savings accounts or deposits and are not insured by the Federal Deposit Insurance Corporation, the Bank Insurance Fund or any other governmental agency. This is not an offer to sell or a solicitation of an offer to buy stock. The offer is made only by the Prospectus. FACTS ABOUT CONVERSION AND REORGANIZATION The Boards of Directors of First Federal Bank, ("First Federal Bank" or the "Bank") and First Capital, Inc. M.H.C. (the "MHC") unanimously adopted a Plan of Conversion and Agreement and Plan of Reorganization (the "Plan") to convert the MHC to stock form and reorganize First Federal Bank as a wholly-owned subsidiary of a newly formed stock company (the "Conversion"). This brochure answers some of the most frequently asked questions about the Plan and about your opportunity to invest in First Capital, Inc. (the "Holding Company" or "First Capital"), the newly formed company that will serve as the holding company for First Federal Bank following the Conversion. Investment in the stock of the Holding Company involves certain risks. For a discussion of these risks, other factors, and a complete description of the stock offering, investors are urged to read the accompanying Prospectus, especially the discussion under the heading "Risk Factors". WHY IS FIRST FEDERAL BANK CONVERTING TO THE STOCK HOLDING COMPANY STRUCTURE? The stock holding company structure is a more common form of ownership than the mutual holding company structure and offers the ability to diversify the Bank's business activities. The Conversion will increase both the capital base of the Bank and the number of outstanding shares, which will increase the likelihood of the development of an active and liquid market for the common stock of the Holding Company. WILL THE PLAN AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS? No. The Plan will not effect the balance or terms of any savings account or loan, and your deposits will continue to be federally insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. YOUR SAVINGS ACCOUNT IS NOT BEING CONVERTED TO STOCK. WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERING AND DIRECT COMMUNITY OFFERING? Depositors and borrowers of First Federal Bank as of certain dates, the Bank's Employee Stock Ownership Plan, First Federal Bank's public shareholders and certain members of the general public, subject to the priorities described in the Prospectus. HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE? Pulaski Financial is offering up to X,XXX,XXX shares of common stock, subject to adjustment up to X,XXX,XXX shares, at a price of $10.00 per share through the Prospectus. I AM AN EXISTING STOCKHOLDER. HOW WILL MY STOCK BE TREATED? The outstanding shares of common stock of the Bank will be exchanged for shares of common stock of the Holding Company. Depending upon where the offering closes in the Estimated Valuation Range, each share of Bank common stock will be converted into X.XXXX to X.XXXX shares of the Holding Company common stock. HOW MANY SHARES MAY I BUY? The minimum order is 25 shares. No person may purchase more than 25,000 shares. In addition, no person, either alone or with associates or persons acting in concert, may purchase shares in an amount that when combined with shares received in exchange for Bank common stock, exceeds 62,500 shares. DO MEMBERS HAVE TO BUY SHARES OF STOCK? No. However, if a member of the MHC is also a stockholder of the Bank, his or her shares of Bank stock will be converted automatically into shares of Holding Company common stock. HOW DO I ORDER SHARES? You must complete the enclosed Stock Order Form and Certification Form. Instructions for completing your Stock Order and Certification Form are contained in this packet. Your order must be received by 12:00 Noon, Eastern Daylight Time, on Xxxxxxxxx XX, 1998. HOW MAY I PAY FOR MY SHARES? First, you may pay by check or money order. Interest will be paid by First Federal Bank on these funds at the current passbook rate from the day the funds are received until the completion or termination of the Conversion. Second, you may authorize us to withdraw funds from your First Federal Bank account or certificate of deposit for the amount of funds you specify for payment. You will not have access to these funds from the day we receive your order until completion or termination of the Conversion. First Federal Bank will waive any early withdrawal penalties on certificate accounts used to purchase stock. CAN I PURCHASE SHARES USING FUNDS IN MY FIRST FEDERAL BANK IRA ACCOUNT? Yes, but special arrangements must be made before you may do so. Please call our Stock Information Center for additional information at least one week before the Expiration Date. The Bank will waive the early withdrawal penalty for IRAs. WILL THE STOCK BE INSURED? No. Like any other common stock, the Holding Company's common stock will not be insured. WILL DIVIDENDS BE PAID ON THE STOCK? The Board of Directors of the Holding Company intends to pay cash dividends on the common stock following consummation of the Conversion. However no assurances can be given that such dividends will be paid, or if paid, will continue. HOW WILL THE STOCK BE TRADED? The Company has received conditional approval to list the common stock on the Nasdaq Small Cap System under the symbol "XXXX". However, no assurance can be given that an active and liquid market will develop or, if developed, will be maintained. MUST I PAY A COMMISSION? No. You will not be charged a commission or fee on the purchase of common stock in the Conversion. SHOULD I VOTE? Yes. Your "YES" vote is very important! PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS! WHY DID I GET SEVERAL PROXY CARDS? If you have more than one account, you could receive more than one proxy card for the MHC's Special Meeting of Members, depending on the ownership structure of your accounts. If you own shares of common stock of the Bank in more than one account, you could receive more than one proxy card for the Bank's Special Meeting of Stockholders. HOW MANY VOTES DO I HAVE? Your proxy card(s) show(s) the number of votes you have. Every member of the MHC entitled to vote may cast one vote for each $100, or fraction thereof, on deposit at the Bank as of the voting record date, up to a maximum of 1,000 votes. Each stockholder of the Bank is entitled to cast one vote for each share held as of the voting record date. These voting rights are established by the respective charters of the MHC and the Bank. MAY I VOTE IN PERSON AT THE SPECIAL MEETING OF MEMBERS AND/OR THE MEETING OF STOCKHOLDERS? Yes, but we would still like you to sign and mail your proxy today. If you decide to revoke your proxy you may do so by giving notice at the appropriate meeting. FOR ADDITIONAL INFORMATION YOU MAY CALL OUR STOCK INFORMATION CENTER BETWEEN X:XX A.M. AND X:XX P.M. MONDAY THROUGH FRIDAY. \\STOCK INFORMATION CENTER\\ \\(812) 738-XXXX\\ FIRST CAPITAL, INC. 220 Federal Drive NW Corydon, Indiana 47112 STOCK OFFERING QUESTIONS AND ANSWERS FIRST CAPITAL, INC. THE STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. (Dear Stockholder Dark blue sky) Date Dear Shareholder: We are pleased to announce that First Capital, Inc. M.H.C. is converting to stock form and First Federal Bank (the "Bank") is reorganizing as a wholly-owned subsidiary of a newly-formed stock corporation (the "Conversion and Reorganization"). In conjunction with the Conversion and Reorganization, First Capital, Inc., (the "Holding Company"), the newly-formed corporation that will serve as the holding company for the Bank, is offering shares of common stock in a subscription offering and direct community offering. Unfortunately, the Holding Company is unable to either offer or sell its common stock to you because the small number of eligible subscribers in your jurisdiction makes registration or qualification of the common stock under the securities laws of your jurisdiction impractical, for reasons of cost or otherwise. Accordingly, this letter should not be considered an offer to sell or a solicitation of an offer to buy the common stock of the Holding Company. However, you have the right to vote on the Plan of Conversion and Agreement and Plan of Reorganization at the Special Meeting of Members on Xxxxxxxx XX, 1998. Therefore, enclosed is a proxy card, a Proxy Statement (which includes the Notice of the Special Meeting), a Prospectus (which is provided solely as an accompaniment to the Proxy Statement) and a return envelope for your proxy card. I invite you to attend the Special Meeting on Xxxxxxxx XX, 1998. However, whether or not you are able to attend, please complete the enclosed proxy card and return it in the enclosed envelope. Sincerely, James G. Pendleton Chairman THE SHARES OF COMMON STOCK BEING OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. =========================================================================== FIRST CAPITAL, INC. the holding company for FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK Become a Shareholder! =========================================================================== CAPITAL REQUIREMENTS [GRAPH APPEARS HERE] As of June 30, 1998, the Bank complied with all regulatory capital requirements. ================================================================================ LOAN PORTFOLIO COMPOSITION The principal lending activity of the Bank is the origination and sale of mortgage loans for the purpose of purchasing or refinancing, one- to four- [PIE CHART APPEARS HERE] family residential property. To a significantly lesser extent, the Bank also originates mortgage loans secured by commercial and multi- family real estate and consumer loans. ================================================================================ EXCHANGE RATIO
Shares Issued in Shares to Be Exchanged Shares to Be Exchange Offering for Bank Common Stock ---------------- --------------------- Amount Percent Amount Percent Outstanding Ratio ------ ------- --------- --------- ----------- -------- Minimum 0 #DIV/0! 0 #DIV/0! 0 0.0000 Midpoint 0 #DIV/0! 0 #DIV/0! 0 0.0000 Maximum 0 #DIV/0! 0 #DIV/0! 0 0.0000 15% above Maximum 0 #DIV/0! 0 #DIV/0! 0 0.0000
PRO FORMA DATA* At or For Six Months Ended June 30, 1998
- ------------------------------------------------------------------------------------------------ 15% ABOVE MINIMUM MIDPOINT MAXIMUM MAXIMUM OF RANGE OF RANGE OF RANGE OF RANGE ================================================================================================ Shares Issued in Offering 0 0 0 0 Exchange Shares to be Issued 0 0 0 0 -------- -------- -------- -------- Total Shares Outstanding 0 0 0 0 ======== ======== ======== ======== Purchase Price Per Share $10.00 $10.00 $10.00 $10.00 Pro Forma Stockholders' Equity $0 $0 $0 $0 Pro Forma Stockholders' Equity per Share (a) $0.00 $0.00 $0.00 $0.00 Price to Book Ratio 0.00% 0.00% 0.00% 0.00% Pro Forma Net Income Per Common Share 0.00 0.00 0.00 0.00 Price to Earnings Ratio 0.00x 0.00x 0.00x 0.00x - ------------------------------------------------------------------------------------------------
* Information based upon assumptions in the Prospectus under "Pro Forma Data". (a) This is not intended to represent potential price appreciation or depreciation. There are no assurances that the market price will be at or above the purchase price once the shares are issued. SELECTED Financial RATIOS
------------------------------------------------------------------------------------------------- At or For the Year Ended June 30, ------------------------------------------------ 1998 1997 1996 1995 1994 ================================================================================================== Return on average assets 1.08% 0.96% 1.10% 1.25% 1.33% Return on average equity 9.56% 8.81% 10.00% 11.64% 12.98% Interest rate spread 2.72% 2.70% 2.59% 2.97% 3.43% Net interest margin 3.27% 3.27% 3.22% 3.51% 3.85% Average equity to average total assets 11.30% 10.94% 11.02% 10.72% 10.24% Nonperforming assets to total assets 0.35% 0.14% 0.31% 0.14% 0.26% Allowance for loan losses to total loans 0.67% 0.71% 0.79% 0.87% 0.88% -------------------------------------------------------------------------------------------------
The shares of common stock offered in the conversion are not savings accounts or deposits and are not insured by the Federal Deposit Insurance Corporation, the Bank Insurance Fund, the Savings Association Insurance Fund, or any other government agency. This is not an offer to sell or a solicitation of an offer to buy the stock. The offer is made only by the Prospectus. YOU ARE CORDIALLY INVITED... to a community investor meeting to learn about the conversion of First Federal Bank and the stock offering of First Capital, Inc. Senior executives of First Federal Bank and its investment bankers will present information and answer your questions about the Plan of Conversion, as well as the business focus and operations of First Federal Bank. --------------------------------------------------------------------- Xxxxday, Xxxember XX, 1998 Xxxxday, Xxxember XX, 1998 Corydon, Indiana Corydon, Indiana All Community Investor Meetings will begin at X:00 p.m., Eastern Daylight Time --------------------------------------------------------------------- PLEASE RSVP TO THE FIRST CAPITAL, INC. STOCK CENTER AT (812) 738-XXXX IF YOU PLAN TO ATTEND. ================================================================================ STOCK INFORMATION CENTER 220 Federal Drive NW Corydon, Indiana 47112 (812) 738-XXXX ================================================================================ EX-99.3 19 EXHIBIT 99.3 EXHIBIT 99.3 AGREEMENT WITH KELLER & COMPANY, INC. KELLER & COMPANY 555 METRO PLACE NORTH SUITE 524 DUBLIN, OHIO 43017 (614) 766-1426 (614) 766-1459 FAX May 20, 1998 Board of Directors First Federal Bank, a FSB 220 Federal Drive, N.W. Corydon, Indiana 47112 Re: Conversion Valuation Agreement Attn: Mr. James G. Pendleton, President Keller & Company, Inc. (hereinafter referred to as KELLER) hereby proposes to prepare an independent conversion appraisal of First Federal Bank, a FSB, Corydon, Indiana, (hereinafter referred to as FIRST FEDERAL), relating to the second step conversion of FIRST FEDERAL from a mutual holding company to a stock institution. KELLER will provide a pro forma valuation of the market value of the shares to be sold in the proposed second step conversion of FIRST FEDERAL. KELLER is a financial consulting firm that primarily serves the financial institution industry. KELLER is experienced in evaluating and appraising thrift institutions and thrift institution holding companies. KELLER is an experienced conversion appraiser for filings with the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), and is also approved by the Internal Revenue Service as an expert in thrift stock valuations. KELLER agrees to prepare the conversion appraisal in the format required by the OTS in a timely manner for prompt filing with the OTS and the Securities and Exchange Commission. KELLER will provide any additional information as requested and will complete appraisal updates in accordance with regulatory requirements. KELLER will also be available to meet with any regulatory agency to review the appraisal. 1 The appraisal report will provide a detailed description of FIRST FEDERAL, including its financial condition, operating performance, asset quality, rate sensitivity position, liquidity level and management qualifications. The appraisal will include a description of FIRST FEDERAL's market area, including both economic and demographic characteristics and trends. An analysis of other publicly-traded thrift institutions will be performed to determine a comparable group and adjustments to the appraised value will be made based on a comparison of FIRST FEDERAL with the comparable group. In making its appraisal, KELLER will rely upon the information in the Subscription and Community Offering Circular (Prospectus), including the financial statements. Among other factors, KELLER will also consider the following: the present and projected operating results and financial condition of FIRST FEDERAL; the economic and demographic conditions in FIRST FEDERAL's existing marketing area; pertinent historical financial and other information relating to FIRST FEDERAL; a comparative evaluation of the operating and financial statistics of FIRST FEDERAL with those of other thrift institutions; the proposed price per share; the aggregate size of the offering of Common Stock; the impact of the Conversion on FIRST FEDERAL's capital position and earnings potential; FIRST FEDERAL's proposed dividend policy; and the trading market for securities of comparable institutions and general conditions in the market for such securities. In preparing the appraisal, KELLER will rely solely upon, and assume the accuracy and completeness of, financial and statistical information provided by FIRST FEDERAL, and will not independently value the assets or liabilities of FIRST FEDERAL in order to prepare the appraisal. Upon completion of the second step conversion appraisal, KELLER will make a presentation to the Board of Directors of FIRST FEDERAL to review the content of the appraisal, the format and the assumptions. A written presentation will be provided to each board member. For its services in making this appraisal, KELLER's fee will be $18,000. The appraisal fee will include the preparation of one valuation update. All additional valuation updates will be subject to an additional fee of $1,000 each. Upon the acceptance of this proposal, KELLER shall be paid a retainer of $3,000 to be applied to the total appraisal fee of $18,000, the balance of which will be payable at the time of the completion of the appraisal. 2 FIRST FEDERAL agrees, by the acceptance of this proposal, to indemnify KELLER and its employees and affiliates for certain costs and expenses, including reasonable legal fees, in connection with claims or litigation relating to the appraisal and arising out of any misstatement or untrue statement of a material fact in information supplied to KELLER by FIRST FEDERAL or by an intentional omission by FIRST FEDERAL to state a material fact in the information so provided, except where KELLER has been negligent or at fault. This proposal will be considered accepted upon the execution of the two enclosed copies of this agreement and the return of one executed copy to KELLER, accompanied by the specified retainer. KELLER & COMPANY, INC. By: /s/ Michael R. Keller ------------------------- Michael R. Keller President First Federal Bank, a FSB By: /s/ James G. Pendleton ------------------------- James G. Pendleton President Date: May 29, 1998 3 EX-99.4 20 EXHIBIT 99.4 EXHIBIT 99.4 PROXY STATEMENT FOR SPECIAL MEETING OF MEMBERS OF FIRST CAPITAL, INC, M.H.C. FIRST CAPITAL, INC., M.H.C. 220 FEDERAL DRIVE, N.W. CORYDON, INDIANA 47112 (812) 738-2198 NOTICE OF SPECIAL MEETING OF MEMBERS TO BE HELD ON DECEMBER ___, 1998 Notice is hereby given that a special meeting of members ("Special Meeting") of First Capital, Inc., M.H.C. ("MHC") will be held at the main office of First Federal Bank, A Federal Savings Bank ("Bank"), 220 Federal Drive, N.W., Corydon, Indiana, on _________, December __, 1998, at ___:____ __.m., Eastern Standard Time. Business to be taken up at the Special Meeting shall be: (1) To approve a Plan of Conversion from Mutual Holding Company to Stock Holding Company and Agreement and Plan of Reorganization ("Plan of Conversion") adopted by the MHC and the Bank, pursuant to which (i) the MHC will convert to a federally chartered interim stock savings bank and merge into the Bank, with the Bank being the surviving institution, (ii) the Bank and a newly formed federally chartered interim stock savings bank will merge, with the Bank being the surviving institution and becoming a wholly-owned subsidiary of a newly formed stock corporation named First Capital, Inc. ("Holding Company") and (iii) the Holding Company will sell shares of its common stock to the public and issue shares of its common stock in exchange for shares of the Banks common stock, all on and subject to the terms and conditions contained therein. (2) To consider and vote upon any other matters that may lawfully come before the Special Meeting. Note: As of the mailing date of this Notice, the Board of Directors is not aware of any other matters that may come before the Special Meeting. The members entitled to vote at the Special Meeting shall be those members of the MHC at the close of business on _____________, 1998, and who continue as members until the Special Meeting, and should the Special Meeting be, from time to time, adjourned to a later time, until the final adjournment thereof. BY ORDER OF THE BOARD OF DIRECTORS JOEL E. VOYLES SECRETARY Corydon, Indiana November ____, 1998 PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF) AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY BY WRITTEN INSTRUMENT DELIVERED TO JOEL E. VOYLES, SECRETARY, FIRST CAPITAL, INC., M.H.C., AT THE ABOVE ADDRESS AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON. FIRST CAPITAL, INC., M.H.C. 220 FEDERAL DRIVE, N.W. CORYDON, INDIANA 47112 (812) 738-2198 PROXY STATEMENT NOVEMBER ___, 1998 YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF FIRST CAPITAL, INC., M.H.C. FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE HELD ON _________, DECEMBER ____, 1998, AND ANY ADJOURNMENT OF THAT MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF DIRECTORS AND MANAGEMENT URGE YOU TO VOTE FOR THE PLAN OF CONVERSION. PURPOSE OF MEETING -- SUMMARY A special meeting of members ("Special Meeting") of First Capital, Inc., M.H.C. ("MHC") will be held at the main office of First Federal Bank, A Federal Savings Bank ("Bank"), 220 Federal Drive, N.W., Corydon, Indiana, on _________, December ___, 1998, at ___:____ __.m., Eastern Standard Time, for the purpose of considering and voting upon a Plan of Conversion and Agreement and Plan of Reorganization ("Plan of Conversion"), which, if approved by a majority of the total votes of the members eligible to be cast, will permit the Bank to become a subsidiary of the Holding Company, a newly organized Indiana corporation formed by the Bank. The reorganization of the Bank and the acquisition of control of the Bank by the Holding Company are collectively referred to herein as the "conversion." Pursuant to the MHC's Federal Mutual Holding Company Charter, depositors of the Bank and borrowers of the Bank with a loan outstanding as of February 1, 1993 and for as long as such loan remains outstanding are members of the MHC. Members entitled to vote on the Plan of Conversion are members of the MHC as of ____________, 1998 ("Voting Record Date") who continue as members until the Special Meeting, and should the Special Meeting be, from time to time, adjourned to a later time, until the final adjournment thereof. The conversion requires the approval of not less than a majority of the total votes eligible to be cast at the Special Meeting. Pursuant to the Plan of Conversion, (i) the MHC will convert from a federally-chartered mutual holding company to a federally-chartered interim stock savings bank (Interim A) and simultaneously merge with and into the Bank and (ii) an interim federal stock savings bank (Interim B) will be formed as a wholly-owned subsidiary of the Holding Company and Interim B will merge with and into the Bank. As a result of the merger of Interim A with and into the Bank, the MHC will cease to exist and the shares of Bank common stock held by the MHC will be canceled. As a result of the merger of Interim B with and into the Bank, the Bank will become a wholly owned subsidiary of the Holding Company and the common stock of the Bank will be converted into common stock of the Holding Company pursuant to the ratio at which shares of Bank common stock will be exchanged for shares of Holding Company common stock ("Exchange Ratio"), which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Holding Company common stock to be outstanding upon the completion of the conversion as the percentage of the Bank common stock owned by them in the aggregate immediately prior to consummation of the conversion, but before giving effect to (a) the payment of cash in lieu of issuing fractional shares, (b) the payment of cash to stockholders of the Bank who exercise and perfect their rights of dissent and appraisal, and (c) any shares of common stock purchased by the Bank's stockholders in this offering. As part of the conversion, the Holding Company is offering shares of its common stock in the subscription offering to holders of subscription rights in the following order of priority: (i) Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on March 31, 1997); (ii) Supplemental Eligible 1 Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on September 30, 1998); and (iii) Other Members (depositors of the Bank as of the close of business on ________________ and borrowers of the Bank with loans outstanding as of the close of business on February 1, 1993, which continue to be outstanding as of the close of business on ________________) ("Subscription Offering"). Concurrently with the Subscription Offering, any shares of common stock not subscribed for in the Subscription Offering may be offered for sale to members of the general public, with priority being given first to stockholders of the Bank as of the close of business on the Voting Record Date (who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members) and then to natural persons and trusts of natural persons residing in Crawford, Clark, Floyd, Harrison and Washington Counties, Indiana ("Local Community") ("Direct Community Offering"). Shares of common stock not sold in the Subscription Offering and the Direct Community Offering may be offered to the general public by a group of selected dealers ("Syndicated Community Offering"). Regulations require that the Direct Community Offering and the Syndicated Community Offering be completed within 45 days after completion of the fully extended Subscription Offering unless extended by the Bank or the Holding Company with the approval of the regulatory authorities. If the Syndicated Community Offering is determined not to be feasible because of market conditions or otherwise, the Board of Directors of the Bank will consult with the regulatory authorities to determine an appropriate alternative method for selling the unsubscribed shares of common stock. The Plan of Conversion provides that the conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the MHC. FIRST CAPITAL, INC., M.H.C. The MHC is the federally-chartered mutual holding company of the Bank. The MHC was formed in February 1993 as a result of the reorganization of the Bank into a federally chartered mutual holding company. The members of the MHC consist of depositors of the Bank and those current borrowers of the Bank who had loans outstanding as of the consummation date of the MHC reorganization (February 1, 1993). The MHC's sole business activity is holding 300,000 shares of the Bank's common stock, which represents 59.5% of the outstanding shares as of the date of this prospectus. As part of the conversion, the MHC will merge into the Bank, with the Bank as the surviving entity. As a result of this merger, the MHC will cease to exist. The MHC's main office is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198. FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK The Bank was organized in 1891 as an Indiana-chartered mutual savings and loan association. In 1934, the Bank converted to a federally-chartered savings and loan association under the name "First Federal Savings and Loan Association of Corydon." In February 1993, the Bank converted to a federally-chartered capital stock savings bank and adopted its current name. The Bank's main office, which was opened in July 1997, is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198. The Bank is regulated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Bank's deposits have been federally-insured by the FDIC since 1961 and are currently insured by the FDIC under the Savings Association Insurance Fund. The Bank is a member of the Federal Home Loan Bank System. The Bank's strategy is to operate as an independent, retail financial institution dedicated to financing home ownership and other consumer needs in Harrison County, its primary market area, and, to a lesser extent, in surrounding counties. At June 30, 1998, the Bank operated from its main office and a branch office in Corydon and had total assets of $94.0 million, deposits of $77.5 million and stockholders' equity of $10.3 million. At that date, $57.8 million, or 74.6%, of the Bank's loans were residential mortgage loans, $4.4 million, or 5.6%, were commercial real estate loans, $3.8 million, or 4.9%, were residential construction loans, $5.0 million, or 6.5%, were commercial business loans and $6.3 million, or 8.1%, were consumer loans. The Bank originates all loans for retention in its portfolio. 2 FIRST CAPITAL, INC. The Bank formed the Holding Company under Indiana law in September 1998 for the purpose of owning all of the Bank's capital stock following completion of the conversion. The Holding Company has received conditional approval of the OTS to become a savings and loan holding company by acquiring the capital stock of the Bank in the conversion. Before the completion of the conversion, the Holding Company will not have any material assets or liabilities and it will not conduct any business other than business related to the conversion. After the conversion, the Holding Company's primary assets will be all of the capital stock of the Bank, the loan that the Holding Company intends to make to the Bank's Employee Stock Ownership Plan ("ESOP") and the net proceeds remaining from the sale of its common stock after contributing 50% of the net proceeds to the Bank and funding the ESOP loan. Initially, the primary activity of the Holding Company will be to direct, plan and coordinate the Bank's business activities. In the future, the Holding Company might become an operating company or acquire or organize other operating subsidiaries, including other financial institutions, although it currently has no specific plans or agreements to do so. The Holding Company's main office is located at 220 Federal Drive, N.W., Corydon, Indiana 47112 and its telephone number is (812) 738-2198. VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL The MHC's Board of Directors has fixed the close of business on ____________, 1998 as the record date for the determination of members entitled to notice of and to vote at the Special Meeting. All holders of savings or other authorized accounts of the Bank, and borrowers of the Bank with loans outstanding as of February 1, 1993 and for as long as such loans remain outstanding, are members of the Bank under its current charter. All members of record as of the close of business on the Voting Record Date who continue to be members on the date of the Special Meeting or any adjournment thereof will be entitled to vote at the Special Meeting or such adjournment. Each eligible depositor member will be entitled at the Special Meeting to cast one vote for each $100, or fraction thereof, of the aggregate withdrawal value of all of the depositor's savings accounts in the Bank as of the Voting Record Date. Borrowers with loans outstanding as of February 1, 1993, which continue to be outstanding as of the Voting Record Date will be entitled to cast one vote for the period of time such borrowings remain in existence. No member is entitled to cast more than 1,000 votes. Any number of members present and voting, represented in person or by proxy, at the Special Meeting will constitute a quorum. Approval of the Plan of Conversion will require the affirmative vote of a majority of the total outstanding votes of the MHC's members eligible to be cast at the Special Meeting. As of the Voting Record Date for the Special Meeting, there were approximately _________ votes eligible to be cast, of which _________ votes may be cast by depositor members and _______ votes may be cast by borrower members. PROXIES Members may vote at the Special Meeting or any adjournment thereof in person or by proxy. Enclosed is a proxy which may be used by any eligible member to vote on the Plan of Conversion. All properly executed and dated proxies received by management will be voted in accordance with the instructions indicated thereon by the members giving such proxies. If no instructions are given, properly executed and dated proxies will be voted in favor of the Plan of Conversion. If any other matters are properly presented at the Special Meeting and may properly be voted on, all properly executed and dated proxies will be voted on such matters in accordance with the best judgment of the proxy holders named therein. If the enclosed proxy is returned properly executed and dated, it may be revoked at any time before it is voted by written notice to the Secretary of the MHC, by submitting a properly executed and later dated proxy, or by attending and voting in person at the Special Meeting. The proxies being solicited are only for use at the Special Meeting and at any and all adjournments thereof and will not be used for any other meeting. Management is not aware of any other business to be presented at the Special Meeting. 3 The trustees for individual retirement accounts at the Bank, will vote in favor of the Plan of Conversion, unless the beneficial owner executes and returns the enclosed proxy for the Special Meeting or attends the Special Meeting and votes in person. To the extent necessary to permit approval of the Plan of Conversion, proxies may be solicited by officers, directors or regular employees of the MHC, in person, by telephone or through other forms of communication. Such persons will be reimbursed by the MHC for their reasonable out-of-pocket expenses incurred in connection with such solicitation. In addition, the MHC has retained Charles Webb & Company to assist in the solicitation of proxies, account consolidation, proxy tabulation and inspection. The fees for such services is included in the fees to be received by Charles Webb & Company in connection with the conversion. If necessary, the Special Meeting may be adjourned to an alternative date to allow for additional time to solicit proxies. RECOMMENDATION OF THE BOARD OF DIRECTORS THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY VOTER TO PURCHASE ANY COMMON STOCK. THE CONVERSION THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE MEMBERS OF THE MHC AND THE STOCKHOLDERS OF THE BANK ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION. GENERAL On June 18, 1998, the Boards of Directors of the MHC and the Bank unanimously adopted the Plan of Conversion, pursuant to which the Bank will convert from the mutual holding company form of organization to the stock holding company form of organization. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS ATTACHED AS EXHIBIT A TO THIS PROXY STATEMENT. The OTS has approved the Plan of Conversion, subject to its approval by the members of the MHC and the stockholders of the Bank and to the satisfaction of certain other conditions. Pursuant to the Plan of Conversion, (i) the MHC will convert from a federally-chartered mutual holding company to a federally-chartered interim stock savings bank (Interim A) and simultaneously merge with and into the Bank and (ii) an interim federal stock savings bank (Interim B) will be formed as a wholly-owned subsidiary of the Holding Company and Interim B will merge with and into the Bank. As a result of the merger of Interim A with and into the Bank, the MHC will cease to exist and the shares of Bank common stock held by the MHC will be canceled. As a result of the merger of Interim B with and into the Bank, the Bank will become a wholly owned subsidiary of the Holding Company and the common stock of the Bank will be converted into common stock of the Holding Company pursuant to the Exchange Ratio, which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Holding Company common stock to be outstanding upon the completion of the conversion as the percentage of the Bank common stock owned by them in the aggregate immediately prior to consummation of the conversion, but before giving effect to (a) the payment of cash in lieu of issuing fractional shares, (b) the payment of cash to stockholders of the Bank who exercise and perfect their rights of dissent and appraisal, and (c) any shares of common stock purchased by the Bank's stockholders in this offering. As part of the conversion, the Holding Company is offering shares of its common stock in the Subscription Offering to holders of subscription rights in the following order of priority: (i) Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on March 31, 1997); (ii) Supplemental Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on September 30, 4 1998); and (iii) Other Members (depositors of the Bank as of the close of business on ________________ and borrowers of the Bank with loans outstanding as of the close of business on February 1, 1993, which continue to be outstanding as of the close of business on ________________). Concurrently with the Subscription Offering, any shares of common stock not subscribed for in the Subscription Offering may be offered for sale in the Direct Community Offering to members of the general public, with priority being given first to stockholders of the Bank as of the close of business on the Voting Record Date (who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members) and then to natural persons and trusts of natural persons residing in the Local Community. Shares of common stock not sold in the Subscription Offering and the Direct Community Offering may be offered in the Syndicated Community Offering. Regulations require that the Direct Community Offering and the Syndicated Community Offering be completed within 45 days after completion of the fully extended Subscription Offering unless extended by the Bank or the Holding Company with the approval of the regulatory authorities. If the Syndicated Community Offering is determined not to be feasible because of market conditions or otherwise, the Board of Directors of the Bank will consult with the regulatory authorities to determine an appropriate alternative method for selling the unsubscribed shares of common stock. The Plan of Conversion provides that the conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the MHC. No sales of common stock may be completed, either in the Subscription Offering, Direct Community Offering or Syndicated Community Offering unless the Plan of Conversion is approved by the members of the MHC and the stockholders of the Bank. The completion of this offering, however, is subject to market conditions and other factors beyond the Bank's control. No assurance can be given as to the length of time after approval of the Plan of Conversion by the members of the MHC and the stockholders of the Bank that will be required to complete the Direct Community Offering or Syndicated Community Offering or other sale of the shares of common stock. If delays are experienced, significant changes may occur in the estimated pro forma market value of the MHC and the Bank, as converted, together with corresponding changes in the net proceeds realized by the Holding Company from the sale of its common stock. Orders for shares of common stock will not be filled until at least $7,586,250 of common stock has been subscribed for or sold and the OTS approves the final valuation and the conversion closes. If the conversion is not completed within 45 days after the last day of the fully extended Subscription Offering and the OTS consents to an extension of time to complete the conversion, subscribers will be given the right to increase, decrease or rescind their subscriptions. Unless an affirmative indication is received from subscribers that they wish to continue to subscribe for shares, the funds will be returned promptly, together with accrued interest at the Bank's passbook rate from the date payment is received until the funds are returned to the subscriber. If such period is not extended, or, in any event, if the conversion is not completed, all withdrawal authorizations will be terminated and all funds received will be promptly returned together with accrued interest at the Bank's passbook rate from the date payment is received until the conversion is terminated. PURPOSES OF CONVERSION The MHC, as a federally chartered mutual holding company, does not have stockholders and has no authority to issue capital stock. As a result of the conversion, the Holding Company will be structured in the form used by holding companies of commercial banks, most business entities and a growing number of savings institutions. The holding company form of organization will provide the Holding Company with the ability to diversify the Holding Company's and the Bank's business activities through acquisition of or mergers with both stock savings institutions and commercial banks, as well as other companies. Although there are no current arrangements, understandings or agreements regarding any such opportunities, the Holding Company will be in a position after the conversion, subject to regulatory limitations and the Holding Company's financial position, to take advantage of any such opportunities that may arise. 5 In their decision to pursue the conversion, the Boards of Directors of the MHC and the Bank considered various regulatory uncertainties associated with the mutual holding company structure including the ability to waive dividends in the future as well as the general uncertainty regarding a possible elimination of the federal savings association charter. The conversion will be important to the future growth and performance of the holding company organization by providing a larger capital base to support the operations of the Bank and Holding Company and by enhancing their future access to capital markets, their ability to diversify into other financial services related activities, and their ability to provide services to the public. The conversion also will result in a larger number of shares of Holding Company common stock to be outstanding as compared to the number of outstanding shares of Bank common stock, which will increase the likelihood of the development of an active and liquid trading market for the common stock. In addition, the conversion will permit the Holding Company to engage in stock repurchases without adverse federal income tax consequences. The Bank cannot repurchase its common stock without triggering adverse federal income tax consequences. Currently, the Holding Company has no specific plans regarding any stock repurchases. An additional benefit of the conversion will be an increase in the accumulated earnings and profits of the Bank for federal income tax purposes. When the Bank (as a mutual institution) transferred substantially all of its assets and liabilities to its stock savings bank successor in the MHC reorganization, its accumulated earnings and profits tax attribute was not able to be transferred to the Bank because no tax-free reorganization was involved. Accordingly, this tax attribute was retained by the Bank when it converted its charter to that of the MHC, even though the underlying retained earnings were transferred to the Bank. The conversion has been structured to re-unite the accumulated earnings and profits tax attribute retained by the MHC in the MHC reorganization with the retained earnings of the Bank by merging the MHC with and into the Bank in a tax-free reorganization. This transaction will increase the Bank's ability to pay dividends to the Holding Company in the future. If the Bank had undertaken a standard conversion involving the formation of a stock holding company in 1993, applicable OTS regulations would have required a greater amount of common stock to be sold than the amount sold in the MHC reorganization. Management believed that it was advisable to invest profitably the proceeds raised in the MHC reorganization prior to raising the larger amount of capital that would have been raised at one time in a standard conversion. A standard conversion in 1993 also would have immediately eliminated all aspects of the mutual form of organization. In light of the foregoing, the Boards of Directors of the MHC and the Bank believe that the conversion is in the best interests of the MHC and the Bank, their respective members and stockholders, and the communities served by the Bank. EFFECTS OF CONVERSION ON DEPOSITORS AND BORROWERS OF THE BANK GENERAL. Prior to the conversion, each depositor in the Bank has both a deposit account in the institution and a pro rata ownership interest in the net worth of the MHC based upon the balance in his or her account, which interest may only be realized in the event of a liquidation of the MHC. However, this ownership interest is tied to the depositor's account and has no tangible market value separate from such deposit account. A depositor who reduces or closes his or her account receives a portion or all of the balance in the account but nothing for his or her ownership interest in the net worth of the MHC, which is lost to the extent that the balance in the account is reduced. Consequently, the depositors of the Bank normally have no way to realize the value of their ownership interest in the MHC, which has realizable value only in the unlikely event that the MHC is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of the MHC after other claims are paid. 6 Upon consummation of the conversion, permanent nonwithdrawable capital stock will be created to represent the ownership of the net worth of the Holding Company. The common stock is separate and apart from deposit accounts and cannot be and is not insured by the FDIC or any other governmental agency. Certificates are issued to evidence ownership of the permanent stock. The stock certificates are transferable, and therefore the stock may be sold or traded if a purchaser is available with no effect on any deposit and/or loan account(s) the seller may hold in the Bank. CONTINUITY. The conversion will not interrupt the Bank's normal business of accepting deposits and making loans. The Bank will continue to be subject to regulation by the OTS and the FDIC. After the conversion, the Bank will continue to provide services for depositors and borrowers under current policies by its present management and staff. The directors and officers of the Bank at the time of the conversion will continue to serve as directors and officers of the Bank after the conversion. The directors and officers of the Holding Company consist of individuals currently serving as directors and officers of the MHC and the Bank, and they will retain their positions in the Holding Company after the conversion. EFFECT ON THE BANK'S COMMON STOCK. Under the Plan of Conversion, upon consummation of the conversion, each share of the Bank's common stock held by the Bank's public stockholders (other than the Bank's public stockholders who exercise and perfect their rights of dissent and appraisal) will be converted into shares of Holding Company common stock based upon the Exchange Ratio without any further action on the part of the holder thereof. Upon surrender of certificates representing shares of Bank common stock, Holding Company common stock will be issued in exchange for such shares. Upon consummation of the conversion, the public stockholders of the Bank will become stockholders of the Holding Company. VOTING RIGHTS. Presently, depositors and borrowers of the Bank are members of, and have voting rights in, the MHC as to all matters requiring membership action. Upon completion of the conversion, the MHC will cease to exist and all voting rights in the Bank will be vested in the Holding Company as the sole stockholder of the Bank. Exclusive voting rights with respect to the Holding Company will be vested in the holders of the Holding Company's common stock. Depositors and borrowers of the Bank will not have voting rights in the Holding Company after the conversion, except to the extent that they become stockholders of the Holding Company. SAVINGS ACCOUNTS AND LOANS. The Bank's savings accounts, account balances and existing FDIC insurance coverage of savings accounts will not be affected by the conversion. Furthermore, the conversion will not affect the loan accounts, loan balances or obligations of borrowers under their individual contractual arrangements with the Bank. TAX EFFECTS. The Bank has received an opinion from Breyer & Aguggia LLP, Washington, D.C., that the conversion will constitute a nontaxable reorganization under Section 368(a)(1)(A) of the Internal Revenue Code. Among other things, the opinion provides that: (i) the conversion of the MHC from a mutual holding company to a federally-chartered interim stock savings bank (Interim A) and its simultaneous merger with and into the Bank, with the Bank as the surviving entity, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code; (ii) no gain or loss will be recognized by the Bank upon the receipt of the assets of the MHC in such merger; (iii) the merger of Interim B with and into the Bank, with the Bank as the surviving entity, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code; 7 (iv) no gain or loss will be recognized by Interim B upon the transfer of its assets to the Bank; (v) no gain or loss will be recognized by the Bank upon the receipt of the assets of Interim B; (vi) no gain or loss will be recognized by the Holding Company upon the receipt of Bank common stock solely in exchange for Holding Company common stock; (vii) no gain or loss will be recognized by the Public Stockholders upon the receipt of shares of the Holding Company's common stock in exchange for their shares of Bank common stock; (viii) the basis of the shares of common stock of the Holding Company to be received by the Bank's public stockholders will be the same as the basis of the shares of common stock of the Bank surrendered in exchange therefor, before giving effect to any payment of cash in lieu of fractional shares; (ix) the holding period of the shares of Holding Company common stock to be received by the Bank's public stockholders will include the holding period of the Bank common stock, provided that the shares of Bank common stock were held as a capital asset on the date of the exchange; (x) no gain or loss will be recognized by the Holding Company upon the sale of shares of its common stock in this offering; (xi) the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will recognize gain, if any, upon the issuance to them of withdrawable savings accounts in the Bank following the conversion, interests in the liquidation account and nontransferable subscription rights to purchase common stock, but only to the extent of the value, if any, of the subscription rights; and (xii) the tax basis to the holders of shares of common stock purchased in this offering will be the amount paid therefor, and the holding period for the shares of common stock will begin on the date of consummation of this offering, if purchased through the exercise of Subscription Rights, and on the day after the date of purchase, if purchased in the Direct Community Offering or the Syndicated Community Offering. Unlike a private letter ruling issued by the Internal Revenue Service ("IRS"), an opinion of counsel is not binding on the IRS and the IRS could disagree with the conclusions reached therein. In the event of such disagreement, no assurance can be given that the conclusions reached in an opinion of counsel would be sustained by a court if contested by the IRS. Based upon past rulings issued by the IRS, the opinion provides that the receipt of subscription rights by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members under the Plan of Conversion will be taxable to the extent, if any, that the subscription rights are deemed to have a fair market value. Keller & Company, a financial consulting firm retained by the Bank, whose findings are not binding on the IRS, has issued a letter indicating that the subscription rights do not have any value, based on the fact that such rights are acquired by the recipients without cost, are nontransferable and of short duration and afford the recipients the right only to purchase shares of the common stock at a price equal to its estimated fair market value, which will be the same price paid by purchasers in the Direct Community Offering for unsubscribed shares of common stock. If the subscription rights are deemed to have a fair market value, the receipt of such rights may only be taxable to those Eligible Account Holders, Supplemental Eligible Account Holders and Other Members who exercise their subscription rights. The Bank could also recognize a gain on the distribution of such subscription rights. Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are encouraged to consult with their own tax advisors as to the tax consequences in the event the subscription rights are deemed to have a fair market value. 8 The Bank has also received an opinion from Monroe Shine & Co., Inc. that, assuming the conversion does not result in any federal income tax liability to the Bank, its account holders, or the Holding Company, implementation of the Plan of Conversion will not result in any Indiana tax liability to such entities or persons. The opinions of Breyer & Aguggia LLP and Monroe Shine & Co., Inc. and the letter from Keller & Company, are filed as exhibits to the Registration Statement. See "ADDITIONAL INFORMATION." THE PRECEDING DISCUSSION SUMMARIZES THE MATERIAL TAX CONSEQUENCES OF THE CONVERSION. PROSPECTIVE INVESTORS, HOWEVER, ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM. LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the MHC, each depositor of the Bank would receive his or her pro rata share of any assets of the MHC remaining after payment of claims of all creditors. Each depositor's pro rata share of such remaining assets would be in the same proportion as the value of his or her deposit account was to the total value of all deposit accounts in the Bank at the time of liquidation. After the conversion, each depositor, in the event of a complete liquidation of the Bank, would have a claim as a creditor of the same general priority as the claims of all other general creditors of the Bank. However, except as described below, his or her claim would be solely in the amount of the balance in his or her deposit account plus accrued interest. Each stockholder would not have an interest in the value or assets of the Bank or the Holding Company above that amount. The Plan of Conversion provides for the establishment, upon the completion of the conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the amount of any dividends waived by the MHC plus the greater of (i) the Bank's retained earnings of $4.0 million at June 30, 1992, the date of the latest statement of financial condition contained in the final offering circular utilized in the MHC reorganization, or (ii) 59.5% of the Bank's total stockholders' equity as reflected in its latest statement of financial condition contained in the final prospectus utilized in this offering. As of the date of this prospectus, the initial balance of the liquidation account would be $7.3 million. Each Eligible Account Holder and Supplemental Eligible Account Holder, if he or she were to continue to maintain his or her deposit account at the Bank, would be entitled, upon a complete liquidation of the Bank after the conversion to an interest in the liquidation account prior to any payment to the Holding Company as the sole stockholder of the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in the Bank at the close of business on March 31, 1997 or September 30, 1998, as the case may be. Each Eligible Account Holder and Supplemental Eligible Account Holder will have a pro rata interest in the total liquidation account for each of his or her deposit accounts based on the proportion that the balance of each such deposit account on the Eligibility Record Date (March 31, 1997) or the Supplemental Eligibility Record Date (September 30, 1998), as the case may be, bore to the balance of all deposit accounts in the Bank on such date. If, however, on any June 30 annual closing date of the Bank, commencing June 30, 1998, the amount in any deposit account is less than the amount in such deposit account on June 30, 1998, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to the Holding Company as the sole stockholder of the Bank. REVIEW OF OTS ACTION Any person aggrieved by a final action of the OTS which approves, with or without conditions, or disapproves a plan of conversion pursuant to 12 C.F.R. Part 563b may obtain review of such action by filing in the court of appeals 9 of the United States for the circuit in which the principal office or residence of such person is located, or in the United States Court of Appeals for the District of Columbia, a written petition praying that the final action of the OTS be modified, terminated or set aside. Such petition must be filed within 30 days after the publication of notice of such final action in the Federal Register, or 30 days after the mailing by the applicant of the notice to members as provided for in 12 C.F.R. Section 563b.6(c), whichever is later. The further procedure for review is as follows: A copy of the petition is forthwith transmitted to the OTS by the clerk of the court and thereupon the OTS files in the court the record in the proceeding, as provided in Section 2112 of Title 28 of the United States Code. Upon the filing of the petition, the court has jurisdiction, which upon the filing of the record is exclusive, to affirm, modify, terminate, or set aside in whole or in part, the final action of the OTS. Review of such proceedings is as provided in Chapter 7 of Title 5 of the United States Code. The judgment and decree of the court is final, except that they are subject to review by the United States Supreme Court upon certiorari as provided in Section 1254 of Title 28 of the United States Code. ADDITIONAL INFORMATION The Holding Company has filed with the Securities and Exchange Commission ("SEC") a Registration Statement on Form SB-2 (File No. 333-_____) under the Securities Act of 1933, as amended with respect to the common stock offered in the conversion. The prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. You may read and copy such information at the SEC's public reference room in Washington, D.C. You can request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The Registration Statement also is available through the SEC's World Wide Web site on the Internet (http://www.sec.gov). The MHC has filed with the OTS an Application for Approval of Conversion. The accompanying Prospectus omits certain information contained in such Application. The Application, including exhibits and certain other information that are a part thereof, may be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the office of the Regional Director of the OTS at the OTS Central Regional Office, Madison Plaza, 200 West Madison Street, Suite 1300, Chicago, Illinois 60606. Copies of the Holding Company's Articles of Incorporation and Bylaws may be obtained without charge by written request to the Bank. All persons eligible to vote at the Special Meeting should review both this Proxy Statement and the accompanying Prospectus carefully. However, no person is obligated to purchase any Common Stock. For additional information, you may call the Stock Information Center at (812) _____-___________. BY ORDER OF THE BOARD OF DIRECTORS JOEL E. VOYLES SECRETARY Corydon, Indiana November ___, 1998 10 YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THE INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE PROSPECTUS AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON. THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS IN THOSE JURISDICTIONS IN WHICH IT IS LAWFUL TO MAKE SUCH OFFER. 11 EX-99.5 21 EXHIBIT 99.5 EXHIBIT 99.5 Proxy Statement for Annual Meeting of Stockholders of First Federal Bank, A Federal Savings Bank November __, 1998 Dear Stockholder: You are cordially invited to attend the Annual Meeting of Stockholders of First Federal Bank, A Federal Savings Bank ("Bank"), which will be held at the main office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana, on ________, December ___, 1998, at ____:____ _.m., Eastern Standard Time. The Notice of Annual Meeting of Stockholders and Proxy Statement appearing on the following pages describe the formal business to be transacted at the meeting. At the meeting, in addition to the routine matters of electing directors and ratifying the appointment of independent auditors, you will be asked to approve a Plan of Conversion and Agreement and Plan of Reorganization ("Plan of Conversion"). The Plan of Conversion provides for the conversion of First Capital, Inc., M.H.C. from a mutual holding company to a stock holding company, to be known as First Capital, Inc. ("Holding Company"), and the reorganization of the Bank as a wholly-owned subsidiary of the Holding Company. During the meeting, we will also report on the operations of the Bank. Directors and Officers of the Bank, as well as a representative of Monroe Shine & Co., Inc., the Bank's independent auditors, will be present to respond to appropriate questions from stockholders. Detailed information regarding the Bank's activities and operating performance during the fiscal year ended June 30, 1998, is contained in the Holding Company's Prospectus dated November ___, 1998, which is also enclosed. The Prospectus is provided in lieu of the Bank's traditional Annual Report to Stockholders. Your vote is important, regardless of the number of shares you own. THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE ANNUAL MEETING. This will not prevent you from voting in person at the Annual Meeting, but will assure that your vote is counted if you are unable to attend. Sincerely, James G. Pendleton Chairman of the Board and Chief Executive Officer FIRST FEDERAL BANK, A FEDERAL SAVINGS BANK 220 FEDERAL DRIVE, N.W. CORYDON, INDIANA 47112 (812) 738-2198 - -------------------------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER____, 1998 - -------------------------------------------------------------------------------- NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual Meeting") of First Federal Bank, A Federal Savings Bank ("Bank") will be held at the main office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana, on _________, December ___, 1998, at __:__ _.m., Eastern Standard Time, for the following purposes: 1. To consider and vote upon a proposal to approve a Plan of Conversion from Mutual Holding Company to Stock Holding Company and Agreement and Plan of Reorganization ("Plan of Conversion") adopted by First Capital, Inc., M.H.C. ("MHC") and the Bank, pursuant to which (i) the MHC will convert to a federally chartered interim stock savings bank and merge into the Bank, with the Bank being the surviving institution, (ii) the Bank and a newly formed federally chartered interim stock savings bank will merge, with the Bank being the surviving institution and becoming a wholly-owned subsidiary of a newly formed stock corporation named First Capital, Inc. ("Holding Company") and (iii) the Holding Company will sell shares of its common stock to the public and issue shares of its common stock in exchange for shares of the Bank's common stock, all on and subject to the terms and conditions contained therein; 2. The election of three directors of the Bank; 3. The approval of the appointment of Monroe Shine & Co., Inc. as independent auditors for the Bank for the fiscal year ending June 30, 1999; and 4. To consider and act upon such other matters as may properly come before the Annual Meeting or any adjournments thereof. NOTE: The Board of Directors is not aware of any other business to come before the Annual Meeting. Any action may be taken on any one of the foregoing proposals at the Annual Meeting on the date specified above, or on any date or dates to which, by original or later adjournment, the Annual Meeting may be adjourned. Pursuant to the Bank's Bylaws, the Board of Directors has fixed the close of business on _________, 1998 as the record date for the determination of the stockholders entitled to notice of and to vote at the Annual Meeting and any adjournments thereof. Please complete and sign the enclosed form of Proxy, which is solicited by the Board of Directors, and mail it promptly in the enclosed envelope. The Proxy will not be used if you attend the Annual Meeting and vote in person. BY ORDER OF THE BOARD OF DIRECTORS JOEL E. VOYLES Secretary Corydon, Indiana November ___, 1998 - -------------------------------------------------------------------------------- IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR BANK THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROXY STATEMENT OF FIRST FEDERAL BANK, FEDERAL SAVINGS BANK 220 FEDERAL DRIVE, N.W. CORYDON, INDIANA 47112 (812) 738-2198 - -------------------------------------------------------------------------------- ANNUAL MEETING OF STOCKHOLDERS DECEMBER____, 1998 - -------------------------------------------------------------------------------- This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of First Federal Bank, A Federal Savings Bank ("Bank") to be used at the Annual Meeting of Stockholders (as may be adjourned or postponed, the "Annual Meeting") of the Bank. The Annual Meeting will be held at the Bank's main office, 220 Federal Drive, N.W., Corydon, Indiana, on _________, December ___, 1998, at __:__ _.m., Eastern Standard Time. The accompanying Notice of Annual Meeting of Stockholders and this Proxy Statement are being first mailed to stockholders on or about November ____, 1998. - -------------------------------------------------------------------------------- VOTING AND PROXY PROCEDURE - -------------------------------------------------------------------------------- Stockholders Entitled to Vote. Stockholders of record as of the close of business on __________, 1998 ("Voting Record Date") are entitled to one vote for each share of common stock ("Common Stock") of the Bank then held. As of the close of business on the Voting Record Date, the Bank had ____________ shares of Common Stock issued and outstanding of which 300,000 were owned by First Capital, Inc., M.H.C. ("MHC"), the Bank's mutual holding company. Quorum. The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of Common Stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. Abstentions will be counted as shares present and entitled to vote at the Annual Meeting for purposes of determining the existence of a quorum. Broker non-votes (i.e., shares held by ---- brokers or nominees as to which instructions have not been received and the broker or nominee does not have discretionary voting power) will be considered shares present and will be included in determining whether a quorum is present. SINCE THE MHC OWNS MORE THAN 50% OF THE OUTSTANDING SHARES OF COMMON STOCK, THE BANK IS GUARANTEED TO ACHIEVE A QUORUM. Voting. The Board of Directors solicits proxies so that each stockholder has the opportunity to vote on the proposals to be considered at the Annual Meeting. When a proxy card is returned properly signed and dated the shares represented thereby will be voted in accordance with the instructions on the proxy card. If a stockholder of record attends the Annual Meeting, he or she may vote by ballot. Where no instructions are indicated, proxies will be voted in accordance with the recommendations of the Board of Directors. The Board recommends a vote FOR approval of all proposals submitted to stockholders at the Annual Meeting. The nominees for directors who receive a plurality of the votes cast by the holders of the outstanding Common Stock entitled to vote at the Annual Meeting will be elected. Votes may be cast for or withheld from each nominee. Votes that are withheld will have no effect on the outcome of the election because directors will be elected by a plurality of votes cast. With respect to the ratification of the appointment of independent auditors and the adoption of the Plan of Conversion, stockholders may vote for the proposal, against the proposal or may abstain from voting. The affirmative majority of the votes cast is required to ratify the appointment of independent auditors. Adoption of the Plan of Conversion will require the affirmative vote of (i) the holders of at least two-thirds of the outstanding shares of Common Stock, and (ii) the holders of at least a majority of the outstanding shares of Common Stock present in person or by proxy at the Special Meeting (other than those held by the MHC) and entitled to vote. SINCE THE MHC OWNS MORE THAN TWO-THIRDS OF THE OUTSTANDING SHARES OF COMMON STOCK, THE BANK IS GUARANTEED TO RECEIVE THE FIRST REQUIRED APPROVAL. Abstentions will have the same effect as a vote "against" approval of the Plan of Conversion. Broker non-votes will have the same effect as a vote "against" adoption of the Plan of Conversion with respect to the approval of the conversion by the holders of at least two-thirds of the outstanding shares of Common Stock and will have no effect on the voting with respect to the adoption of the Plan of Conversion by a majority of the shares (other than those held by the MHC) present and entitled to vote. Revocation of a Proxy. Stockholders who execute proxies retain the right to revoke them at any time before they are voted. Proxies may be revoked by written notice delivered in person or mailed to the Secretary of the Bank or by filing a later proxy prior to a vote being taken on a particular proposal at the Annual Meeting. Attendance at the Annual Meeting will not automatically revoke a proxy, but a stockholder of record in attendance may request a ballot and vote in person, thereby revoking a prior granted proxy. Persons and groups beneficially owning in excess of 5% of the Common Stock are required to file certain reports with the Office of Thrift Supervision ("OTS"), and furnish a copy to the Bank, disclosing such ownership pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based on such reports, the following table sets forth as of the close of business on the Voting Record Date, certain information as to those persons who were beneficial owners of more than 5% of the Bank's outstanding shares of Common Stock and as to the shares of Common Stock beneficially owned by each director and by all directors and officers of the Bank as a group. Management knows of no persons other than those set forth below who owned more than 5% of the Bank's outstanding shares of Common Stock as of the close of business on the Voting Record Date.
Amount and Percent of Nature of Shares of Name and Address Beneficial Common Stock of Beneficial Owner Ownership(1) Outstanding - ------------------- ------------ ------------ First Capital, Inc., M.H.C. 300,000 59.52% 220 Federal Drive, N.W. Corydon, Indiana 47112 Directors and Named Executive Officer(2): James G. Pendleton 7,300 1.4 Mark D. Shireman 7,300 1.4 Dennis L. Huber 600 * Samuel E. Uhl 7,440(3) 1.5 Kenneth R. Saulman 1,660 * John W. Buschemeyer 7,300 1.4 Gerald L. Uhl 7,400(4) 1.5 All executive officers and directors as a group (11 persons) 40,430(5) 19.8
__________________ (*) Less than 1%. (1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of the Common Stock if he or she has shared voting and/or investment power with respect to such security. The table includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, and other 2 forms of ownership, over which shares the persons named in the table may possess voting and investment power. Also includes shares that may be acquire through the exercise of stock options that are exercisable within 60 days after the Voting Record Date. (2) Under OTS regulations the term "named executive officer(s)" is defined to include the chief executive officer, regardless of compensation level, and the four most highly compensated executive officers, other than the chief executive officer, whose total annual salary and bonus for the last completed fiscal year exceeded $100,000. James G. Pendleton, the Bank's Chairman of the Board and Chief Executive Officer, was the only "named executive officer" during the fiscal year ended June 30, 1998. (3) Includes 2,000 shares subject to outstanding stock options exercisable within 60 days from the Voting Record Date. (4) Includes 60 shares subject to outstanding stock options exercisable by spouse within 60 days from the Voting Record Date. (5) Includes 3,320 shares subject to outstanding stock options exercisable within 60 days from the Voting Record Date. - -------------------------------------------------------------------------------- INCORPORATION BY REFERENCE - -------------------------------------------------------------------------------- Each person receiving this Proxy Statement is also receiving the Prospectus of First Capital, Inc. dated November ___, 1998. Although such Prospectus is incorporated herein by reference, this Proxy Statement does not constitute an offer to sell or a solicitation of an offer to buy the common stock of the Holding Company. Such offer and solicitation is made only by the Prospectus in such jurisdictions where it is lawful to do so. The Bank urges each recipient of this Proxy Statement to read carefully the sections of the Prospectus that describe the following: (i) the conversion (see "THE CONVERSION" in the Prospectus); (ii) the business of the Holding Company and the Bank (see "BUSINESS OF THE HOLDING COMPANY" and "BUSINESS OF THE BANK" in the Prospectus); (iii) the reasons for the conversion and management's belief that the conversion is in the best interests of the Bank and its stockholders (see "THE CONVERSION -- Purposes of Conversion" in the Prospectus); (iv) employment agreements, severance agreements, and stock benefit plans that the Bank and/or the Holding Company intend to implement in connection with the conversion (see "MANAGEMENT OF THE BANK" in the Prospectus); (v) the common stock of the Holding Company (see "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY" in the Prospectus); (vi) the historical capitalization of the Bank and the pro forma capitalization of the Holding Company (see "CAPITALIZATION" in the Prospectus); (vii) the historical and pro forma capital compliance of the Bank (see "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" in the Prospectus); (viii) pro forma financial information with respect to the conversion (see "PRO FORMA DATA" in the Prospectus); (ix) the Holding Company and the Bank's respective intended use of proceeds of the offering (see "USE OF PROCEEDS" in the Prospectus); 3 (x) the Holding Company's proposed dividend policy (see "DIVIDEND POLICY" in the Prospectus); (xi) restrictions on the acquisition of the Holding Company, including anti-takeover provisions in the Holding Company's Certificate of Incorporation and Bylaws (see "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY" in the Prospectus); (xii) a comparison of the rights of the holders of Common Stock and rights of the holders of the Holding Company's common stock (see "COMPARISON OF STOCKHOLDERS' RIGHTS" in the Prospectus); and (xiii) the financial statements of the Bank appearing in the Prospectus. - -------------------------------------------------------------------------------- PROPOSAL I -- APPROVAL OF PLAN OF CONVERSION - -------------------------------------------------------------------------------- On June 18, 1998, the Boards of Directors of the MHC and the Bank unanimously adopted the Plan of Conversion, pursuant to which the Bank will convert from the mutual holding company form of organization to the stock holding company form of organization. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS ATTACHED AS EXHIBIT A TO THIS PROXY STATEMENT. The OTS has approved the Plan of Conversion, subject to its approval by the members of the MHC and the stockholders of the Bank and to the satisfaction of certain other conditions. Pursuant to the Plan of Conversion, (i) the MHC will convert from a federally-chartered mutual holding company to a federally-chartered interim stock savings bank (Interim A) and simultaneously merge with and into the Bank and (ii) an interim federal stock savings bank (Interim B) will be formed as a wholly-owned subsidiary of the Holding Company and Interim B will merge with and into the Bank. As a result of the merger of Interim A with and into the Bank, the MHC will cease to exist and the shares of Bank common stock held by the MHC will be canceled. As a result of the merger of Interim B with and into the Bank, the Bank will become a wholly owned subsidiary of the Holding Company and the common stock of the Bank will be converted into common stock of the Holding Company pursuant to the Exchange Ratio, which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Holding Company common stock to be outstanding upon the completion of the conversion as the percentage of the Bank common stock owned by them in the aggregate immediately prior to consummation of the conversion, but before giving effect to (a) the payment of cash in lieu of issuing fractional shares and (b) any shares of common stock purchased by the Bank's stockholders in this offering. As part of the conversion, the Holding Company is offering shares of its common stock in a subscription offering to holders of subscription rights in the following order of priority: (i) Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on March 31, 1997); (ii) Supplemental Eligible Account Holders (depositors of the Bank with $50.00 or more on deposit as of the close of business on September 30, 1998); and (iii) Other Members (depositors of the Bank as of the close of business on ________________ and borrowers of the Bank with loans outstanding as of the close of business on February 1, 1993, which continue to be outstanding as of the close of business on ________________) ("Subscription Offering"). Concurrently with the Subscription Offering, any shares of common stock not subscribed for in the Subscription Offering may be offered for sale in the Direct Community Offering to members of the general public, with priority being given first to stockholders of the Bank as of the close of business on the Voting Record Date (who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members) and then to natural persons and trusts of natural persons residing in the Local Community. Shares of common stock not sold in the Subscription Offering and the Direct Community Offering may be offered in the Syndicated Community Offering. Regulations require that the Direct Community Offering and the Syndicated Community Offering be completed within 45 days after completion of the fully extended Subscription Offering unless extended by the Bank or the Holding Company with the approval of the regulatory authorities. If the Syndicated Community Offering is determined not to be feasible because of market conditions or otherwise, the Board of Directors of the Bank will consult with the regulatory authorities to determine an appropriate alternative method for selling the unsubscribed shares of common stock. The Plan of 4 Conversion provides that the conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the MHC. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF PLAN OF CONVERSION. STOCKHOLDERS OF THE BANK SHOULD NOT SEND THEIR STOCK CERTIFICATES TO THE BANK FOR EXCHANGE AT THIS TIME. - -------------------------------------------------------------------------------- RIGHTS OF DISSENTING STOCKHOLDERS - -------------------------------------------------------------------------------- Under regulations of the OTS, any public stockholder of the Bank who does not wish to accept shares of common stock of the Holding Company in the conversion has the right to dissent from the conversion and to demand appraisal of, and payment for, his or her shares of common stock of the Bank, provided that he or she complies with all provisions of 12 C.F.R. Section 552.14 ("Section 552.14"). If holders of common stock of the Bank have exercised dissenters' rights in connection with the Plan of Conversion under Section 552.14, the holders of any dissenting shares will not participate in the conversion, but will receive such consideration as may be determined to be due with respect to such dissenting shares pursuant to Section 552.14 as described below. Section 552.14 contains detailed information as to a dissenting stockholder's right to payment and the procedural steps to be followed by a dissenting stockholder. THE FOLLOWING DESCRIPTION IS ONLY A SUMMARY OF THESE PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 552.14, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT B AND IS INCORPORATED HEREIN BY REFERENCE. A DISSENTING STOCKHOLDER NEED NOT VOTE AGAINST THE PLAN OF CONVERSION IN ORDER TO PRESERVE HIS DISSENTER'S RIGHTS AFTER FILING HIS NOTICE OF DISSENT, BUT WILL LOSE HIS DISSENTER'S RIGHTS IF HE OR SHE VOTES FOR OR CONSENTS IN WRITING TO THE PLAN OF CONVERSION. If the Plan of Conversion is approved by the required vote of stockholders of the Bank and is not abandoned or terminated, each holder of shares of common stock of the Bank who votes against the Plan of Conversion or who fails to vote and who follows the procedures set forth in Section 552.14 will be entitled to demand appraisal of and payment for his or her shares. A stockholder's vote in favor of the Plan of Conversion constitutes a waiver of such stockholder's dissenters' rights. A stockholder electing to exercise his or her rights to dissent from the conversion is required to file with the Bank, prior to the vote on the Plan of Conversion at the Special Meeting, a written statement identifying himself or herself and stating his or her intention to demand appraisal of and payment for his or her shares if the conversion is completed. A stockholder may not dissent to less than all of the shares beneficially owned by him or her. If the conversion is completed, within ten days after the effective date of the conversion ("effective date"), the Holding Company must (i) give notice of the effective date by mail to any dissenting stockholders who have given the Bank the required notice and have not voted in favor of the conversion (ii) make a written offer to each stockholder to pay for dissenting shares at a specified price deemed by the Bank to be the fair value thereof; and (iii) inform such stockholders that, within 60 days of the effective date, they must satisfy certain conditions in order to perfect their demand for payment. If, within 60 days of the effective date, the fair value is agreed upon between the Bank and the dissenting stockholder, payment for those shares must be made within 90 days of the effective date. If, within 60 days of the effective date, the Bank and the dissenting stockholder do not agree on the fair value of the shares, then such stockholder may file a petition with the OTS (with a copy to the Bank) demanding a determination of the fair market value of the stock of such stockholder. A stockholder entitled to file such a petition and who fails to file such a petition is deemed to have accepted the terms of the conversion. 5 Within 60 days of the effective date, each stockholder demanding appraisal and payment must submit to the stock transfer agent his or her certificates of stock for notation thereon that an appraisal and payment for his or her shares have been demanded and that appraisal proceedings are pending. Any stockholder who fails to submit his or her stock certificates for such notation shall no longer be entitled to appraisal rights and shall be deemed to have accepted the terms of the conversion. At any time within 60 days after the effective date, any stockholder has the right to withdraw his or her demand for appraisal and to accept the terms of the conversion. Pursuant to Section 552.14, the OTS may either appoint one or more independent persons or direct an appropriate office of the OTS to appraise the shares to determine their fair market value, as of the effective date, exclusive of any element of value arising from the accomplishment or expectation of the conversion. The OTS shall review and provide an opinion on appraisals prepared by independent persons as to the suitability of the appraisal methodology and the adequacy of the analysis and supportive data. If it concurs in the valuation of the shares, the OTS shall direct payment by the Bank of the appraised fair market value of the shares upon surrender of the stock certificates. Payment is to be made, with interest from the effective date, at a rate deemed equitable by the OTS. Costs and expenses of any proceeding under these provisions may be apportioned and assessed by the OTS as it may deem equitable against all or some of the parties. In making its determination, the OTS is to consider whether any party acted arbitrarily, vexatiously, or not in good faith. Any stockholder who has demanded appraisal rights will thereafter neither be entitled to vote such shares for any purpose nor be entitled to the payment of dividends or other distributions on the stock except for dividends or other distributions payable to, or a vote to be taken by stockholders of record at a date which is on or prior to the effective date. However, if any stockholder becomes unentitled to appraisal and payment of appraised value with respect to such stock and accepts or is deemed to have accepted the terms offered upon the Reorganization, such stockholder shall thereupon be entitled to vote and receive the distributions. BECAUSE OF THE DETAILED PROVISIONS AND REQUIREMENTS OF SECTION 552.14, EACH DISSENTING STOCKHOLDER SHOULD CONSULT WITH HIS OR HER OWN LEGAL COUNSEL CONCERNING THE PROCEDURES AND REMEDIES AVAILABLE TO HIM OR HER. FAILURE TO FOLLOW THE DETAILED PROCEDURES SET FORTH IN SECTION 552.14 MAY RESULT IN A STOCKHOLDER LOSING HIS OR HER RIGHT TO CLAIM FAIR VALUE AS DESCRIBED HEREIN. IF ANY HOLDER OF SHARES OF COMMON STOCK OF THE BANK WHO DEMANDS APPRAISAL OF AND PAYMENT FOR HIS OR HER SHARES UNDER SECTION 552.14 FAILS TO PERFECT, OR EFFECTIVELY WITHDRAWS OR LOSES, HIS OR HER RIGHT TO SUCH PAYMENT, SUCH HOLDER WILL PARTICIPATE IN THE CONVERSION PURSUANT TO THE PLAN OF CONVERSION. DISSENTING STOCKHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES TO THE BANK AT THIS TIME. - -------------------------------------------------------------------------------- PROPOSAL II -- ELECTION OF DIRECTORS - -------------------------------------------------------------------------------- The Bank's Board of Directors consists of seven members, divided into three classes as nearly equal in number as possible. The term of office of only one class expires each year, and their successors will be elected for terms of three years and until their successors are elected and qualified. The Bank Board of Directors, acting as the Nominating Committee, has nominated Kenneth R. Saulman, John W. Buschemeyer and Gerald L. Uhl each for their respective term set forth in the following table or until their respective successors shall have been elected and qualified. Unless otherwise specified in the proxy, it is intended that the persons named in the proxies solicited by the Board of Directors will vote for the election of the nominees. The Bank's Bylaws permit stockholders to cumulate their votes for the election of directors. In accordance with the Bylaws, every stockholder who is entitled to vote at an election of directors shall have the right to vote, in 6 person or by proxy, the number of shares owned by the shareholder for as many persons as there are directors to be elected and for whose election the shareholder has a right to vote. However, your shares have cumulative voting rights (i.e., a stockholder may cast votes for any one nominee equal to the ---- product of your eligible shares multiplied by the number of nominees named herein or distribute such cumulative votes among any number of the nominees). Should a stockholder decide to exercise his or her cumulative voting rights, mark the enclosed revocable proxy accordingly by writing the number of votes to cast for each nominee beside the nominee's name. Unless a proxy is so marked, the Bank does not reserve the authority to cumulate votes cast as a result of the proxies it receives. If any nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such substitute nominee as the Board of Directors may recommend, or the Board of Directors may amend the Bylaws and reduce the size of the Board. At this time, the Board of Directors knows of no reason why any nominee might be unable to serve. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ALL OF THE NOMINEES NAMED BELOW. 7 The following table sets forth certain information as to each nominee and director continuing in office. Gerald L. Uhl and Samuel E. Uhl are brothers.
Year First Year Principal Occupation Elected or Term Name Age(1) During Last Five Years Appointed Expires ---- ------ ---------------------- ---------- ------- BOARD NOMINEES Kenneth R. Saulman(2) 57 Right-of-way supervisor for Clark 1997 1999(3) County REMC, an electrical service company in Sellersburg, Indiana, since March 1995; Area supervisor for Asplundhi Tree Trimming in Ramsey, Indiana, from July 1991 to March 1995. John W. Buschemeyer 58 Vice Chairman of the Board of the 1973 2001(3) Bank; President and sole owner of Hurst Lumber Co., Corydon, Indiana. Gerald L. Uhl 57 Business Manager for Jacobi Sales, 1973 2001(3) Inc., Palmyra, Indiana, a farm machinery and lawn and garden equipment retailer and servicer. DIRECTORS CONTINUING IN OFFICE AFTER ANNUAL MEETING Samuel E. Uhl 52 President of the Savings Bank 1995 1999 since October 1996; Senior Vice President of the Savings Bank from 1994 to 1996; former Vice President with First Nationwide Bank, St. Louis, Missouri. James G. Pendleton 64 Chairman of the Board (since 1963 2000 November 1996) and Chief Executive Officer of the Savings Bank; President of the Savings Bank from 1961 to October 1996. Mark D. Shireman 46 President and minority stockholder 1989 2000 of James L. Shireman Co. Inc., a general and commercial contractor in Corydon, Indiana. Dennis L. Huber(2) 52 President and minority stockholder 1997 2000 of O'Bannon Publishing Co., Inc., Corydon, Indiana, a newspaper publisher.
8 _________________ (1) As of June 30, 1997. (2) Mr. Saulman was appointed to the Board of Directors in October 1997 to replace Darrell Rothrock who retired. (3) Assuming election or re-election at the Meeting. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors conducts its business through meetings and committees of the Board. The Board of Directors held 12 meetings during the fiscal year ended June 30, 1998. No director attended fewer than 75% of the total meetings of the Board of Directors and committee meetings on which he served during the fiscal year ended June 30, 1998. The Executive Committee, which consists of Directors Buschemeyer, Saulman, Shireman and Pendleton, meets as necessary between meetings of the full Board of Directors. All actions of the Executive Committee must be ratified by the full Board of Directors. The Executive Committee reviews directors' and officers' compensation and makes recommendations to the full Board of Directors in this regard. The Executive Committee met two times during the fiscal year ended June 30, 1998. The Audit Committee, consisting of Directors Pendleton, G. Uhl and Shireman, is responsible for developing and monitoring the Bank's audit program. The Audit Committee selects the outside auditor and meets with them to discuss the results of the annual audit and any related matters. The Audit Committee also receives and reviews all the reports and findings and other information presented to them by officers regarding financial reporting policies and practices. The Audit Committee meets as necessary and met once during the fiscal year ended June 30, 1998. The Compensation Committee, consisting of Directors S. Uhl, Buschemeyer and Shireman, is responsible for establishing and recommending employee and executive compensation policy to the full Board of Directors. The Compensation Committee met once during the fiscal year ended June 30, 1998. The full Board of Directors serves as a nominating committee. The Board of Directors met once in its capacity as the nominating committee during the 1998 fiscal year. DIRECTORS' COMPENSATION FEES. Members of the Bank's Board of Directors receive $400 per month. Members of committees of the Board of Directors also receive $50 per committee meeting attended. The Bank paid total Board and committee fees of approximately $33,000 for the fiscal year ended June 30, 1998. DIRECTORS' DEFERRED COMPENSATION PLAN. Directors may elect to defer their monthly directors' fees until retirement with no income tax payable by the director until retirement benefits are received. Upon the director's termination of service on or after attaining age 70, the retired director receives between $217 and $676 per month for 180 months. Benefits are also payable upon disability, early retirement, other termination of service or death. All directors participate in the plan other than Directors S. Uhl, Huber and Saulman, who have elected not to participate. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following information is furnished for the Chief Executive Officer of the Bank and for each executive officer of the Bank who received salary and bonus in excess of $100,000 during the year ended June 30, 1998. 9
Long-Term Compensation ----------------------------- Annual Compensation Awards ------------------------------------- ----------------------------- Restricted Securities Name and Fiscal Other Annual Stock Underlying All Other Position Year Salary Bonus Compensation Award Options(#) Compensation(1) - -------- ------ ------- ----- ------------ ----- ---------- --------------- James G. Pendleton 1998 $82,409 615 2,262 -- -- 8,810 Chairman of the 1997 77,484 650 2,792 -- -- 7,159 Board and Chief 1996 72,480 600 539 -- -- 7,557 Executive Officer
______________________ (1) Includes directors' fees from the Bank. EXECUTIVE RETIREMENT INCOME AGREEMENTS. The Bank has entered into an agreement with James G. Pendleton to provide him with additional retirement income. The agreement provides for an annual benefit of $24,500 upon Mr. Pendleton's retirement at or after attaining age 65, payable for 15 years following retirement. Benefits are also payable upon disability, early retirement, other termination of service or death. The Bank has purchased a life insurance policy with Mr. Pendleton as insured to assist in funding the Bank's obligation under the agreement. During the fiscal year ended June 30, 1998, the Bank accrued compensation expense of $19,700 with respect to its obligation under the agreement. TRANSACTIONS WITH THE BANK Director Gerald L. Uhl is a shareholder and the Business Manager of Jacobi Sales, Inc. ("JSI"), a farm implement dealership that has contracted with the Bank to provide sales financing to customers of JSI. The Bank does not grant preferential credit under this arrangement. All sales contracts are presented to the Bank on a 50% recourse basis, with JSI responsible for the sale and disposition of any repossessed equipment. During the fiscal year ended June 30, 1998, the Bank granted approximately $612,000 of credit to JSI customers. Federal regulations require that all loans or extensions of credit by the Bank to executive officers and directors must generally be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons (unless the loan or extension of credit is made under a benefit program generally available to all other employees and does not give preference to any insider over any other employee) and must not involve more than the normal risk of repayment or present other unfavorable features. The Bank's policy is not to make any new loans or extensions of credit to the Bank's executive officers and directors at different rates or terms than those offered to the general public. In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, are in excess of the greater of $25,000, or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. The aggregate amount of loans by the Bank to its executive officers and directors and their associates was approximately $960,000 at June 30, 1998. - -------------------------------------------------------------------------------- PROPOSAL III -- APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- Monroe Shine & Co., Inc. was the Bank's independent auditors for the fiscal year ended June 30, 1998. The Board of Directors has appointed Monroe Shine & Co., Inc. as independent auditors for the fiscal year ending June 30, 1999, subject to approval by the Bank's stockholders. A representative of Monroe Shine & Co., Inc. is expected to be present at the Annual Meeting to respond to stockholders' questions and will have the opportunity to make a statement if he so desires. 10 - -------------------------------------------------------------------------------- COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT - -------------------------------------------------------------------------------- Section 16(a) of the Exchange Act requires the executive officers and directors of the Bank and persons who beneficially own more than 10% of any registered class of the Bank's capital stock to file reports of ownership and changes in ownership with the OTS. Based solely on a review of the reports and written representations provided to the Bank by the above referenced persons, the Bank believes that during fiscal 1998 all filing requirements applicable to its reporting officers, directors and greater than 10% beneficial owners were complied with properly and in a timely manner. - -------------------------------------------------------------------------------- OTHER MATTERS - -------------------------------------------------------------------------------- The Board of Directors of the Bank is not aware of any business to come before the Annual Meeting other than those matters described above in this Proxy Statement. However, if any other matters should properly come before the Annual Meeting, it is intended that executed proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies. The cost of solicitation of proxies will be borne by the Bank. In addition to solicitations by mail, directors, officers and regular employees of the Bank may solicit proxies personally or by telecopier or telephone without additional compensation. In addition, the Bank has retained Charles Webb & Company for the solicitation of proxies, account consolidation, proxy tabulation and inspection. The fees for such services is included in the fees to be received by Charles Webb & Company in connection with the conversion. See "THE CONVERSION -- Plan of Distribution and Selling Commissions" in the Prospectus for further information. - -------------------------------------------------------------------------------- STOCKHOLDER PROPOSALS - -------------------------------------------------------------------------------- Upon consummation of the conversion, the public stockholders of the Bank will become stockholders of the Holding Company. It is anticipated that the first annual meeting of stockholders of the Holding Company will be held in October 1999. In order to be eligible for inclusion in the Holding Company's proxy materials for its first annual meeting of stockholders, any stockholder proposal to take action at such meeting must be received at the Holding Company's main office at 220 Federal Drive, N.W., Corydon, Indiana, no later than _________, 1999. Any such proposals shall be subject to the requirements of the proxy solicitation rules adopted under the Exchange Act. BY ORDER OF THE BOARD OF DIRECTORS JOEL E. VOYLES Secretary Corydon, Indiana November ___, 1998 11 APPENDIX B TITLE 12 OF THE CODE OF FEDERAL REGULATIONS, SECTION 552.14 (S)552.14 DISSENTER AND APPRAISAL RIGHTS. (A) RIGHT TO DEMAND PAYMENT OF FAIR OR APPRAISED VALUE. Except as provided in paragraph (b) of this section, any stockholder of a Federal stock association combining in accordance with '552.13 of this part shall have the right to demand payment of the fair or appraised value of his stock: Provided, that such stockholder has not voted in favor of the combination and complies with the provisions of paragraph (c) of this section. (B) EXCEPTIONS. No Stockholder required to accept only qualified consideration for his or her stock shall have the right under this section to demand payment of the stock's fair or appraised value, if such stock was listed on a national securities exchange or quoted on the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the meeting at which the combination was acted upon or stockholder action is not required for a combination made pursuant to '552.13(h)(2) of this part. "Qualified consideration" means cash, shares of stock of any association or corporation which at the effective date of the combination will be listed on a national securities exchange or quoted on NASDAQ or any combination of such shares of stock and cash. (C) PROCEDURE. (1) NOTICE. Each constituent Federal stock association shall notify all stockholders entitled to rights under this section, not less than twenty days prior to the meeting at which the combination agreement is to be submitted for stockholder approval, of the right to demand payment of appraised value of shares, and shall include in such notice a copy of this section. Such written notice shall be mailed to stockholders of record and may be part of the management's proxy solicitation for such meeting. (2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to make a demand under this section shall deliver to the Federal stock association, before voting on the combination, a writing identifying himself or herself and stating his or her intention thereby to demand appraisal of and payment for his or her shares. Such demand must be in addition to and separate from any proxy or vote against the combination by the stockholder. (3) NOTIFICATION OF EFFECTIVE DATE AND WRITTEN OFFER. Within ten days after the effective date of the combination, the resulting association shall: (i) Give written notice by mail to stockholders of constituent Federal Stock associations who have complied with the provisions of paragraph (c)(2) of this section and have not voted in favor of the combination, of the effective date of the combination; (ii) Make a written offer to each stockholder to pay for dissenting shares at a specified price deemed by the resulting association to be the fair value thereof; and (iii) Inform them that, within sixty days of such date, the respective requirements of paragraphs (c)(5) and (6) of this section (set out in the notice) must be satisfied. The notice and offer shall be accompanied by a balance sheet and statement of income of the association the shares of which the dissenting stockholder holds, for a fiscal year ending not more than sixteen months before the date of notice and offer, together with the latest available interim financial statements. B-1 (4) ACCEPTANCE OF OFFER. If within sixty days of the effective date of the combination the fair value is agreed upon between the resulting association and any stockholder who has complied with the provisions of paragraph (c)(2) of this section, payment therefor shall be made within ninety days of the effective date of the combination. (5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty days of the effective date of the combination the resulting association and any stockholder who has complied with the provisions of paragraph (c)(2) of this section do not agree as to the fair value, then any such stockholder may file a petition with the Office, with a copy by registered or certified mail to the resulting association, demanding a determination of the fair market value of the stock of all such stockholders. A stockholder entitled to file a petition under this section who fails to file such petition within sixty days of the effective date of the combination shall be deemed to have accepted the terms offered under the combination. (6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the effective date of the combination, each stockholder demanding appraisal and payment under this section shall submit to the transfer agent his certificates of stock for notation thereon that an appraisal and payment have been demanded with respect to such stock and that appraisal proceedings are pending. Any stockholder who fails to submit his stock certificates for such notation shall no longer be entitled to appraisal rights under this section and shall be deemed to have accepted the terms offered under the combination. (7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any time within sixty days after the effective date of the combination, any stockholder shall have the right to withdraw his or her demand for appraisal and to accept the terms offered upon the combination. (8) VALUATION AND PAYMENT. The Director shall, as he or she may elect, either appoint one or more independent persons or direct appropriate Staff of the Office to appraise the shares to determine their fair market value, as of the effective date of the combination, exclusive of any element of value arising from the accomplishment or expectation of the combination. Appropriate Staff of the Office shall review and provide an opinion on appraisals prepared by independent persons as to the suitability of the appraisal methodology and the adequacy of the analysis and supportive data. The Director after consideration of the appraisal report and the advice of the appropriate staff shall, if he or she concurs in the valuation of the shares, direct payment by the resulting association of the appraised fair market value of the shares, upon surrender of the certificates representing such stock. Payment shall be made, together with interest from the effective date of the combination, at a rate deemed equitable by the Director. (9) COSTS AND EXPENSES. The costs and expenses of any proceeding under this section may be apportioned and assessed by the Director as he or she may deem equitable against all or some of the parties. In making this determination the Director shall consider whether any party has acted arbitrarily, vexatiously, or not in good faith in respect to the rights provided by this section. (10) VOTING AND DISTRIBUTION. Any stockholder who has demanded appraisal rights as provided in paragraph (c)(2) of this section shall thereafter neither be entitled to vote such stock for any purpose nor be entitled to the payment of dividends or other distributions on the stock (except dividends or other distribution payable to, or a vote to be taken by stockholders of record at a date which is on or prior to, the effective date of the combination): Provided, that if any stockholder becomes unentitled to appraisal and payment of appraised value with respect to such stock and accepts or is deemed to have accepted the terms offered upon the combination, such stockholder shall thereupon be entitled to vote and receive the distributions described above. B-2 (11) STATUS. Shares of the resulting association into which shares of the stockholders demanding appraisal rights would have been converted or exchanged, had they assented to the combination, shall have the status of authorized and unissued shares of the resulting association. * * * B-3 -----END PRIVACY-ENHANCED MESSAGE-----