-----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, WvY/pj2p9+F4xLqxKMezON660CUKlP1NjooLJR2235218EpTm2A1ZYR0zc9YhNQ3 jO7ufJxP4my5pu4zupQXtQ== 0000908834-96-000235.txt : 19961106 0000908834-96-000235.hdr.sgml : 19961106 ACCESSION NUMBER: 0000908834-96-000235 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19961101 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER VALLEY BANCORP CENTRAL INDEX KEY: 0001015593 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351984567 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05121 FILM NUMBER: 96653270 BUSINESS ADDRESS: STREET 1: 303 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 BUSINESS PHONE: 8122734949 MAIL ADDRESS: STREET 1: 303 CLIFTY DR CITY: MADISON STATE: IN ZIP: 47250 S-1/A 1 AMENDMENT NO. TO PRE-EFFECTIVE FORM S-1 Filed with the Securities and Exchange Commission on November 1, 1996 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 RIVER VALLEY BANCORP (Exact name of registrant as specified in its charter) Indiana 6712 35-1984567 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code No.) Identification No.) incorporation or organization) 303 Clifty Drive James E. Fritz P.O. Box 626 Madison First Federal Madison, Indiana 47250 Savings and Loan Association (812) 273-4949 303 Clifty Drive P.O. Box 626 (Address, including zip code, Madison, Indiana 47250 and telephone number, including (812) 273-4949 area code, of registrant's principal executive offices) (Address, including zip code, and telephone number, including area code, of agent for service) Copy to: Claudia S. Swhier, Esq. Barnes & Thornburg 1313 Merchants Bank Building 11 South Meridian Street Indianapolis, Indiana 46204 Approximate date of commencement of proposed sale to the public: As promptly as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: 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 ===================================================================================================================== Proposed Proposed Maximum Amount of Title of each Class of Amount to be Maximum Offering Aggregate Offering Registration Securities to be Registered Registered Price Per Unit Price (1) Fee - --------------------------------------------------------------------------------------------------------------------- Common Stock, without par value 1,190,250 $10.00 $11,902,500 $4,104.31 (2) =====================================================================================================================
(1) Estimated solely for the purpose of computing the registration fee. (2) Previously filed with Form S-1 Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. CROSS-REFERENCE SHEET
Item in Form S-1 Caption in Prospectus - ------------------------------------------------------ ---------------------------------------------- 1. Forepart of Registration Statement and Outside Forepart of Registration Statement and Outside Front Cover Page of Prospectus Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus Prospectus 3. Summary Information, Risk Factors, and Ratio of "PROSPECTUS SUMMARY"; "RISK Earnings to Fixed Charges FACTORS" 4. Use of Proceeds "USE OF PROCEEDS" 5. Determination of Offering Price "THE CONVERSION - Stock Pricing" 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution "PROSPECTUS SUMMARY"; "THE CONVERSION - Subscription Offering," "- Direct Community Offering," "-Agent," "Selected Dealers" 9. Description of Securities to be Registered "DESCRIPTION OF CAPITAL STOCK" 10. Interests of Named Experts and Counsel Not Applicable 11. Information with Respect to Registrant (a) Description of Business "RIVER VALLEY BANCORP"; "MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION"; "CITIZENS NATIONAL BANK OF MADISON"; "BUSINESS OF FIRST FEDERAL"; "BUSINESS OF CITIZENS" (b) Description of Property "BUSINESS OF FIRST FEDERAL - Properties"; "BUSINESS OF CITIZENS - Properties" (c) Legal Proceedings "BUSINESS OF FIRST FEDERAL - Legal Proceedings"; "BUSINESS OF CITIZENS - Legal Proceedings" (d) Market Price of and Dividends on the "MARKET FOR THE COMMON STOCK;" Registrant's Common Equity and Related "DIVIDEND POLICY;" "ANTICIPATED Stockholder Matters MANAGEMENT PURCHASES"; "DESCRIPTION OF CAPITAL STOCK" (e) Financial Statements "FINANCIAL STATEMENTS"; "SELECTED PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL DATA OF THE HOLDING COMPANY"; "UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL STATEMENTS"; "PRO FORMA DATA" (f) Selected Financial Data "SELECTED CONSOLIDATED FINANCIAL DATA OF MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARIES"; "SELECTED CONSOLIDATED FINANCIAL DATA OF CITIZENS NATIONAL BANK OF MADISON" (g) Supplementary Financial Information Not Applicable (h) Management's Discussion and Analysis of "MANAGEMENT'S DISCUSSION AND Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION"; "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CITIZENS NATIONAL BANK OF MADISON"
(i) Changes in and Disagreements with Accountants Not Applicable on Accounting and Financial Disclosure (j) Directors and Executive Officers "MANAGEMENT OF THE HOLDING COMPANY"; "MANAGEMENT OF FIRST FEDERAL"; "MANAGEMENT OF CITIZENS" (k) Executive Compensation "EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF FIRST FEDERAL"; "EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF CITIZENS" (l) Security Ownership of Certain Beneficial "ANTICIPATED MANAGEMENT Owners and Management PURCHASES" (m) Certain Relationships and Related Transactions "EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF FIRST FEDERAL - Transactions with Certain Related Persons"; "EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF CITIZENS - - Transactions with Certain Related Persons" 12. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities
SUBSCRIPTION AND DIRECT COMMUNITY OFFERING PROSPECTUS River Valley Bancorp Madison, Indiana (Proposed Holding Company for Madison First Federal Savings and Loan Association and Citizens National Bank of Madison) Up to 1,035,000 (Anticipated Maximum) Shares of Common Stock River Valley Bancorp, an Indiana corporation (the "Holding Company"), is offering for sale, as described below, up to 1,035,000 shares of its common stock, without par value (the "Common Stock"), in connection with (i) its acquisition of the common stock of Madison First Federal Savings and Loan Association ("Madison First") to be issued upon the conversion of Madison First from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion") and (ii) its acquisition (the "Acquisition") of 120,429 shares of common stock, $8.00 par value per share (the "Citizens Shares"), of Citizens National Bank of Madison ("Citizens"), constituting 95.6 % of the issued and outstanding shares of Citizens' common stock. Madison First and Citizens are together hereinafter referred to as the "Institutions." The purchase price for the Common Stock (the "Purchase Price") is $10.00 per share. As part of the Conversion, Madison First will adopt a Federal Stock Charter and amended and restated By-Laws. For a description of the Conversion transaction, see "The Conversion." For a description of the Acquisition, see "The Acquisition." Pursuant to the Conversion, the Common Stock is first being offered in a subscription offering (the "Subscription Offering"), in order of priority and subject to availability, to: (i) certain holders of deposit accounts at Madison First with an aggregate balance of $50.00 or more as of December 31, 1994 ("Eligible Account Holders"); (ii) the Holding Company's tax-qualified Employee Stock Ownership Plan and Trust (the "ESOP"); (iii) certain holders of deposit accounts at Madison First with an aggregate balance of $50.00 or more as of September 30, 1996 ("Supplemental Eligible Account Holders"); and (iv) other deposit account holders and borrowers of Madison First as of November 1, 1996 ("Other Members"), subject to the limitations described herein. (continued on next page.) SEE "RISK FACTORS" FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), ANY STATE SECURITIES COMMISSION, THE OTS OR THE FDIC, NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION, THE OTS OR THE FDIC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==================================================================================================================================== Estimated Estimated Underwriting Fees and Net Conversion Purchase Price (1) Other Expenses (2) Proceeds (3) - ------------------------------------------------------------------------------------------------------------------------------------ Minimum Per Share.................................... $10.00 $0.83 $9.17 Midpoint Per Share................................... $10.00 $0.74 $9.26 Maximum Per Share.................................... $10.00 $0.67 $9.33 Maximum Per Share, as adjusted (4)................... $10.00 $0.62 $9.38 Total Minimum........................................ $7,650,000 $636,000 $7,014,000 Total Midpoint....................................... $9,000,000 $667,000 $8,333,000 Total Maximum........................................ $10,350,000 $698,000 $9,652,000 Total Maximum, as adjusted (4)....................... $11,902,500 $735,000 $11,167,500 - ------------------------------------------------------------------------------------------------------------------------------------
(1) The current aggregate value of the Common Stock is based upon an independent appraisal of the Common Stock by Keller & Company, Inc. ("Keller") as of May 3, 1996. See "The Conversion -- Stock Pricing." The total offering will be within a range of $7,650,000 to $10,350,000 (the "Estimated Valuation Range"), unless market and financial conditions necessitate a change in this range, which change would be supported by a change in the appraisal. Changes in the size of the offering will have an effect on the estimated net proceeds of the offering and pro forma capitalization and book value per share of the Holding Company. If the final valuation is not within a range between the minimum of the Estimated Valuation Range to 15% above the maximum of the Estimated Valuation Range, subscribers will be given notice of such change, which notice will set a date by which subscribers must elect whether to continue their subscriptions during any offering at a revised Estimated Valuation Range. In such event, subscribers will be given the right to have their subscriptions returned promptly after they inform the Holding Company of their decision not to continue their subscriptions. Subscriptions as to which the Holding Company receives no affirmative or negative election by the date specified in the notice will be returned promptly after such date. See "Use of Proceeds," "Capitalization," and "Pro Forma Data." (2) Consists of estimated costs to Madison First and the Holding Company arising from the Conversion, including estimated management fees, commissions and reimbursable out-of-pocket expenses to be paid to Trident Securities, Inc. (the "Agent") in connection with the Agent's engagement as exclusive sales agent and financial advisor to the Holding Company and Madison First. Madison First and the Holding Company will pay the Agent a management fee equal to 0.5% of the aggregate number of shares of Common Stock sold in the Conversion. Commissions are estimated based on the total number of shares of Common Stock sold, assuming a 2.0% commission paid to the Agent with respect to all shares sold in the Subscription Offering and the Direct Community Offering (except for purchases by the ESOP, officers and directors of the Institutions and their Associates, as hereinafter defined), and assuming no sales have been made through selected dealers. See "Use of Proceeds." Total estimated management fees and commissions, not including reimbursable expenses, to be paid to the Agent will be approximately $170,290 and $276,602 based on sales at the minimum and the adjusted maximum, respectively, assuming no sales through selected dealers and assuming purchases of 104,800 shares by officers and directors of the Institutions and the ESOP. Offers and sales in the Direct Community Offering will be on a best efforts basis. The Holding Company and Madison First have agreed to indemnify the Agent against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended (the "1933 Act"). See "The Conversion -- Agent." (3) Net Conversion proceeds may vary from the estimated amounts. The Holding Company will initially receive 50% of the net Conversion proceeds after providing for the loan to the ESOP to allow the ESOP to purchase shares of Common Stock in the Conversion. The Holding Company will use $3,010,715 of the proceeds to acquire the Citizens Shares in the Acquisition. The Holding Company will also use a portion of the proceeds remaining after acquisition of the Citizens Shares to make a capital contribution to Citizens of up to $1.5 million. See "Pro Forma Data" and "Use of Proceeds." (4) Gives effect to an increase in the number of shares which could occur due to an increase of up to 15% above the maximum number of shares which may be offered in the Conversion to reflect changes in market and financial conditions following commencement of the Subscription and Direct Community Offerings. No resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions unless the gross proceeds from the sale of Common Stock in the Conversion are less than the minimum or more than 15% above the maximum of the Estimated Valuation Range. See "The Conversion -- Number of Shares to be Issued." TRIDENT SECURITIES, INC. The date of this Prospectus is November ___ 1996. Pursuant to Office of Thrift Supervision ("OTS") regulations, subscription rights granted to the above persons are non-transferable; persons violating such provisions may lose their right to purchase Common Stock in the Conversion and be subject to other possible sanctions and penalties imposed by the OTS. Shareholders, depositors and borrowers of Citizens do not have subscription rights under Madison First's Plan of Conversion (the "Plan" or the "Plan of Conversion") unless such persons are otherwise Eligible Account Holders, Supplemental Eligible Account Holders or Other Members of Madison First. See "The Conversion -- Subscription Offering." Commencing concurrently with the Subscription Offering, and subject to the prior rights of holders of subscription rights, the Common Stock is also being offered to members of the general public, with preference given to residents of Jefferson County, Indiana, pursuant to a direct community offering (the "Direct Community Offering"). Madison First has the right to terminate the Direct Community Offering as soon as it has received orders for at least the minimum number of shares available for purchase in the Conversion. See "The Conversion--Direct Community Offering." The Subscription Offering will expire at 4:00 p.m., Madison time, on December 11, 1996, unless extended by Madison First and the Holding Company. The Direct Community Offering may expire as early as December 11, 1996, or at any time thereafter (until January 25, 1997, unless extended by Madison First and the Holding Company) when orders for at least 765,000 shares of Common Stock have been received in both the Subscription Offering and the Direct Community Offering, if any. Neither the Subscription Offering nor the Direct Community Offering may be extended beyond January 25, 1997, without regulatory approval. See "The Conversion--Subscription Offering" and "--Direct Community Offering." All purchases will be subject to maximum and minimum purchase limitations, and to certain other terms and conditions described below. Under the Plan, no Eligible Account Holder, Supplemental Eligible Account Holder or Other Member may purchase more than 10,000 shares per deposit account held or loan owed to Madison. No subscribing member, alone or with an Associate or group of persons acting in concert, may purchase more than 20,000 shares of Common Stock in the Conversion. No person, alone or with an Associate or group of persons acting in concert, may purchase more than 10,000 shares of Common Stock in the Direct Community Offering. A member who, together with his Associates and persons acting in concert, has subscribed for shares in the Subscription Offering may subscribe for a number of additional shares in the Direct Community Offering that does not exceed the lesser of (i) 10,000 shares or (ii) the number of shares which, when added to the number of shares subscribed for by the member (and his Associates and persons acting in concert) in the Subscription Offering, would not exceed 20,000. Notwithstanding the foregoing, the ESOP may purchase up to 10% of the Common Stock sold in the Conversion. The ESOP currently intends to acquire 8% of the shares sold in the Conversion. The ESOP may purchase Common Stock if shares remain available after satisfying the subscriptions of Eligible Account Holders up to $10,350,000, the maximum of the Estimated Valuation Range. The ESOP reserves the right to have all or part of its order filled by purchases in the open market following the Conversion. See "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." The minimum number of shares of Common Stock that may be purchased by any person or entity is 25 shares. Madison First and the Holding Company, in their sole discretion, may increase or decrease subscription rights and the purchase limitations. See "The Conversion -- Limitations on Common Stock Purchases." Shares of Common Stock may be ordered at the Purchase Price directly from the Holding Company by returning the appropriate stock order form and certification (the "Order Form"), together with full payment, or appropriate instructions authorizing withdrawals from accounts at Madison First, for the shares to be purchased. Orders must be received at Madison First's Stock Information Center, by 4:00 p.m., Madison time, on December 11, 1996. All amounts subscribed for by check will be placed in a special savings account at Madison First and will earn interest at the then-current passbook rate, which is currently 3.00% per annum (for an annual percentage yield ("APY") of 3.04%), from the date of receipt until completion or termination of the Conversion. Subscriptions are irrevocable until 45 days after the expiration of the Subscription Offering (January 25, 1997). Funds authorized for withdrawal from accounts will continue to earn interest at the rate specified on the account until completion of the Conversion and will not be subject to early withdrawal penalties. If the Conversion is not completed by January 25, 1997, and Madison First and the Holding Company elect to extend the time required to complete the Conversion, subscribers will be given the right to increase, decrease or rescind their subscriptions as set forth in the Plan of Conversion. If Madison First and the Holding Company decide to extend the Subscription Offering, subscribers will be given the right to have their subscriptions promptly refunded following the conclusion of the current offering (which will end no later than January 25, 1997), and Madison First will return subscriptions with interest unless subscribers affirmatively elect to continue their subscriptions during the period of extension. If the offering period is not extended and the Conversion is not completed, all subscription funds will be promptly returned, together with accrued interest from the date of receipt, and all withdrawal authorizations will be terminated. Any delay in completing the Conversion may result in a delay in shareholders of the Holding Company receiving their stock certificates, increased Conversion costs and expenses or a change in the Estimated Valuation Range. See "Risk Factors -- Risk of Delayed Offering." The offering may be extended, subject to OTS approval, until 24 months following the members' approval, or until December 18, 1998. Under the Plan of Conversion, the Conversion will not become effective until such time as all conditions precedent to the Acquisition are satisfied. See "The Acquisition." Therefore, a delay in the satisfaction of any conditions precedent to the Acquisition would result in a delay in completing the Conversion. See "Risk Factors -- Risk of Delayed Offering." If at any time it becomes clear that any condition precedent to the Acquisition will not be satisfied, the Conversion and the Plan will terminate, and Madison First will promptly refund all subscription funds with accrued interest and cancel all withdrawal authorizations. See "The Conversion -- Conditions and Termination." The maximum number of 1,035,000 shares of Common Stock offered hereby represents the high end of a range from 765,000 shares to 1,035,000 shares at an offering price of $10.00 per share, based upon an independent appraisal of the aggregate pro forma market value of the Common Stock as of May 3, 1996, in accordance with applicable regulations. The number of shares to be sold in the Conversion must fall within this range unless market and financial conditions necessitate a change in the range, which change would be supported by a change in the appraisal. The Holding Company and Madison First reserve the right to reject any orders received in the Direct Community Offering in whole or in part. Funds received pursuant to rejected orders will be refunded promptly with any interest due thereon. The Holding Company and Madison First have engaged the Agent as exclusive sales agent to assist on a best efforts basis in the sale of Common Stock in both the Subscription Offering and the Direct Community Offering, if any. In addition to assisting in the marketing of the Common Stock, the Agent will assist the Holding Company and Madison First by, among other things, training Madison First's employees regarding the mechanics and regulatory requirements of the conversion process, conducting informational meetings for subscribers and other potential purchasers and keeping records of all stock subscriptions. The Agent will only be assisting the Holding Company on a best efforts basis in effecting the sale of Common Stock directly. The Agent will have no obligation to take or purchase any Common Stock. The Agent intends to make a market in the Common Stock following the Conversion, although it is under no obligation to do so. See "The Conversion -- Agent." Upon a determination by the Holding Company, Madison First and the Agent, the Agent may enter into agreements to use the services of dealers selected by the Holding Company, Madison First and the Agent in the Direct Community Offering, if any. If used, any selected dealers will solicit indications of interest on a best efforts basis from their customers to place orders for Common Stock, which orders will be placed only when and if the Agent, the Holding Company and Madison First believe that enough indications of interest and orders have been received in the Subscription Offering and the Direct Community Offering to consummate the Conversion. See "The Conversion -- Selected Dealers." The Holding Company has received approval to have its Common Stock quoted on the National Association of Securities Dealers Automated Quotation ("NASDAQ") Small Cap Market under the symbol "RIVR," subject to certain conditions which the Holding Company and Madison First believe will be met. Prior to this offering, there was no public market for the Common Stock and there can be no assurance that an established and liquid market for the Common Stock will develop or, if such a market does develop, that it will continue. In addition, there can be no assurance that resales of the Common Stock after completion of the Conversion can be made at or above the Purchase Price. See "Market for the Common Stock." The number of shares of Common Stock directors and executive officers of Madison First may purchase is limited under the Plan. Directors and executive officers of the Institutions expect to purchase 104,800 shares, or 11.6% of the total shares offered in the Conversion (at the midpoint of the Estimated Valuation Range). See "Anticipated Management Purchases." Purchases made by directors and executive officers of the Institutions will apply toward the minimum required number of shares (765,000) to be sold in the Conversion and will be made for investment purposes only. CONSUMMATION OF THE CONVERSION IS SUBJECT TO THE SATISFACTION OF ALL CONDITIONS PRECEDENT TO THE ACQUISITION AND THE APPROVAL OF THE PLAN OF CONVERSION BY A MAJORITY OF THE TOTAL VOTES OF MADISON FIRST'S MEMBERS ELIGIBLE TO BE CAST AT A SPECIAL MEETING CALLED FOR DECEMBER 18, 1996. Madison First Federal Savings and Loan Association and Citizens National Bank of Madison Madison, Indiana [MAP OF INDIANA WITH JEFFERSON COUNTY PULLED OUT AND THE LOCATIONS OF HANOVER AND MADISON ARE INDICATED] PROSPECTUS SUMMARY This summary and the selected financial data which follow this summary do not purport to be complete and are qualified in their entirety by the more detailed information and financial statements appearing elsewhere herein. Risk Factors There are certain risk factors relating to an investment in the Common Stock which should be carefully examined by prospective purchasers of the Common Stock, including risks inherent in the potential impact of changes in interest rates, risks associated with the Holding Company's commitment to cause Madison First to divest its Hanover, Indiana branch as a condition to obtaining the requisite approval for the Acquisition from the Board of Governors of the Federal Reserve System (the "FRB"), risks associated with the Acquisition, risks associated with Citizens' commercial lending, risks associated with the Institutions' nonresidential real estate and multi-family lending, the impact of Madison First's decreasing earnings and the effect on return on equity, the existence of the Minority Shares (as defined below), the possible dilutive effect of stock-based benefit plans expected to be adopted by the Holding Company following the Conversion, the potential benefits to management of the Holding Company and the Institutions upon and subsequent to the Conversion, the potential impact of ESOP compensation expenses, the absence of an established trading market for the Common Stock, competition in the Institutions' local market area, the Institutions' geographic concentration of loans, the risk of a delayed offering, anti-takeover provisions, the possible effects of regulatory oversight and recent legislation, and the potential income tax consequences of subscription rights. See "Risk Factors." The Holding Company The Holding Company is an Indiana corporation organized in May, 1996, to acquire all of the common stock of Madison First in the Conversion and the Citizens Shares in the Acquisition, and thereafter to act as the savings and loan holding company for Madison First and as the bank holding company for Citizens. Pursuant to the Plan of Conversion, the Holding Company will offer the Common Stock to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, Other Members, and to the general public. The holding company structure will provide increased flexibility in conducting future business activities related to the Institutions. The Holding Company currently intends to maintain the independence of the Institutions, but may in the future evaluate a possible merger or combination of the Institutions. The Holding Company has received the approval of the OTS to become a savings and loan holding company through the acquisition of the common stock of Madison First in the Conversion. The Holding Company has also received the approval of the FRB to become a bank holding company through the acquisition of the Citizens Shares in the Acquisition; however, the FRB's approval was conditioned on the Holding Company's commitment to cause Madison First to (i) enter into a definitive agreement to sell Madison First's Hanover, Indiana branch, including the physical facilities and at least $7.5 million of deposits originated at that branch, prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch within 180 days of consummation of the Acquisition. See "Risk Factors -- Divestiture of Hanover Branch." Prior to the Conversion and the Acquisition, the Holding Company will not engage in any material operations. Upon consummation of the Acquisition, the Holding Company will be a savings and loan holding company and a bank holding company, the activities of which will be restricted generally by federal law and FRB regulations to activities considered related to banking. See "Regulation -- Bank Holding Company Regulation" and "-- Savings and Loan Holding Company Regulation." Upon consummation of the Conversion and the Acquisition, the Holding Company will have no significant assets other than the common stock of Madison First, the Citizens Shares, the ESOP loan and that portion of the net Conversion proceeds retained by the Holding Company and not used by the Holding Company to purchase the Citizens Shares, some of which will be used to make a capital contribution to Citizens of up to $1.5 million. The Holding Company may also use a portion of such remaining funds, if any, to pay dividends and, subject to applicable regulatory restrictions, to repurchase shares of its Common Stock, although it has no present plans to do so. See "Use of Proceeds." Other than in connection with the Acquisition, the Holding Company has no current arrangements, negotiations or agreements, written or oral, with respect to any future acquisition. The Holding Company's executive office is located at 303 Clifty Drive, Post Office Box 626, Madison, Indiana 47250, and its telephone number is (812) 273-4949. See "River Valley Bancorp." Madison First Madison First, organized as a federally chartered savings and loan association in 1875, currently conducts its business from three full-service offices and one stand-alone drive-through branch, all located in Jefferson County, Indiana. However, as a condition to the Holding Company obtaining the requisite approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to (i) enter into a definitive agreement to sell Madison First's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and at least $7.5 million of deposits originated at that branch, within 180 days of consummation of the Acquisition. In the event Madison First does not complete the divestiture of its Hanover branch within 180 days of the consummation of the Acquisition, the Hanover branch will be placed in trust, and an independent trustee will proceed with an immediate disposition of the Hanover branch without regard to price. See "Risk Factors -- Divestiture of Hanover Branch." Madison First's principal business historically has been attracting deposits from the general public and originating fixed-rate and adjustable-rate loans secured by first mortgage liens on one- to four-family real estate within Jefferson County, Madison First's principal market area. See "Business of Madison First." Jefferson County is located in southern Indiana, approximately 95 miles south of Indianapolis, 55 miles northeast of Louisville, Kentucky and 75 miles west of Cincinnati, Ohio. According to the U.S. Bureau of Census, the city of Madison, the county seat of Jefferson County, had a population of 12,006, and Jefferson County had a population of 29,797, at the time of the 1990 census. See "Market Area." Madison First's deposits are insured up to applicable limits by the FDIC through the Savings Association Insurance Fund ("SAIF"). At June 30, 1996, Madison First had total assets of $81.9 million, deposits of $74.7 million and net equity capital of $6.7 million, an amount equal to 8.2% of total assets. Madison First's net income for the year ended December 31, 1995 and the six months ended June 30, 1996 was $258,000 and $181,000, respectively. Madison First's net yield on weighted average interest-earning assets for the year ended December 31, 1995 and the six months ended June 30, 1996 was 2.61% and 2.94%, respectively. Madison First's capital ratios are now, and on a pro forma basis will be, in excess of all regulatory capital requirements, as prescribed by law. See "Pro Forma Data -- Regulatory Capital Compliance." Madison First has no current arrangements, negotiations, or agreements, written or oral, with respect to any future acquisition. Madison First is the oldest independent financial institution headquartered in Jefferson County. Management believes Madison First has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. By focusing primarily on residential real estate mortgage lending in Jefferson County, Madison First has achieved the following: o Asset Quality and Emphasis on Residential Mortgage Lending. Since its inception, Madison First has emphasized the financing of single-family, owner-occupied residences in its market area. Madison First anticipates a continued commitment to financing the purchase or improvement of such residences. By emphasizing one- to four-family residential mortgage loans, Madison First's strategy previously minimized the credit risk of its asset base in exchange for lower yields than would typically be available on riskier investments, such as commercial loans. At June 30, 1996, 76.5% of Madison First's total loan portfolio consisted of one- to four-family residential mortgage loans. At that date, non-performing assets totaled $223,000, or .27% of total assets, and Madison First's ratio of allowance for loan losses to total loans outstanding was .72%. See "Business of Madison First -- Non-Performing and Problem Assets." o Community Orientation. Madison First is committed to meeting the financial needs of the community in which it operates. Madison First believes it is large enough to provide a wide range of personal and business financial services, and yet is small enough to be able to provide such services on a personalized and efficient basis. Management believes that Madison First can be more effective in servicing its customers than many of its non-local competitors because of Madison First's ability to quickly and effectively provide senior management responses to customer needs and inquiries. Citizens Citizens was organized as a national bank in 1981. Citizens conducts its business from four full-service offices, all located in Jefferson County, Indiana. Citizens offers a broad array of lending, deposit and other financial services to its retail and commercial customers. See "Business of Citizens." Citizens' principal market area is also Jefferson County in southern Indiana. See "Market Area." Citizens' deposits are insured up to applicable limits by the FDIC through the Bank Insurance Fund ("BIF"). At June 30, 1996, Citizens had total assets of $56.2 million, deposits of $51.8 million and net shareholders' equity capital of $3.4 million, an amount equal to 6.1% of total assets. See "Business of Citizens." Citizens' capital ratios are currently in excess of all regulatory capital requirements, as prescribed by law. Citizens has no current arrangements, negotiations, or agreements, written or oral, with respect to any future acquisition. By providing its individual and commercial customers a broad array of services and products, Citizens has achieved the following: o Profitability. Citizens has reported positive net income in every year since 1990. Citizens' net income increased from $120,000 for the year ended December 31, 1991 to $342,000 for the year ended December 31, 1995. Citizens had net income of $134,000 for the six months ended June 30, 1996, a decrease of $62,000 from the six-month period ended June 30, 1995, due primarily to a $150,000 provision for loan losses in the quarter ended March 31, 1996. Citizens' net interest income for the six months ended June 30, 1996 totaled $1.0 million, an increase of $118,000, or 13.1%, from the $904,000 for the six months ended June 30, 1995. Citizens' net yield on weighted average interest-earning assets for the year ended December 31, 1995 and the six months ended June 30, 1996 was 4.25% and 3.74%, respectively. o Asset Growth and Asset Quality. Citizens' total assets have increased from $30.1 million at December 31, 1991 to $56.2 million at June 30, 1996. Citizens' growth in total assets is attributable to a sustained growth in virtually all areas of lending, including one- to four-family residential mortgage lending, consumer lending and commercial lending. Despite its aggressive growth, Citizens has thus far been successful in maintaining the quality of its loan and investment portfolios. At June 30, 1996, non-performing assets totaled $593,000, or 1.06% of total assets. See "Business of Citizens -- Non-Performing and Problem Assets." o Low Interest Rate Risk. At June 30, 1996, Citizens' NPV (as defined below) would increase 10.2% in the event of a 2% increase in market interest rates and would decrease 11.2% in the event of a 2% decrease in market interest rates. These calculations indicate that Citizens' net portfolio value is more sensitive to decreases in market interest rates but that Citizens' interest rate risk would be well within the OTS' definition of normal level of exposure described below in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Madison First Federal Savings and Loan Association -- Asset/Liability Management." Although these regulations have not been implemented by the OTS, and Citizens, as a national bank, would not be subject to the regulations if implemented by the OTS, the methodology set forth in the OTS' regulations provides an informational basis on which Citizens' interest rate risk can be evaluated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Citizens National Bank of Madison -- Asset/ Liability Management." Citizens has achieved this asset/liability posture by emphasizing adjustable-rate loans and investments and by selling its fixed-rate one- to four-family residential mortgage loans to the Federal Home Loan Mortgage Corporation (the "FHLMC") on the secondary market. See "Business of Citizens." o Community Orientation. Citizens has developed a solid reputation in its market by offering a wide variety of lending, deposit and other financial services to its retail and commercial customers on a personalized and efficient basis. By building on its reputation as a responsive lender, Citizens plans to strengthen its position as a leading financial institution in Jefferson County. The Acquisition On March 4, 1996, Madison First and Eloise A. Durocher ("Ms. Durocher") entered into an Amended and Restated Stock Purchase Agreement (the "Agreement") pursuant to which Madison First agreed to purchase through the Holding Company, and Ms. Durocher agreed to sell to the Holding Company, the Citizens Shares, which constitute 95.6% of the issued and outstanding capital stock of Citizens. As consideration for the Citizens Shares, the Holding Company will pay to Ms. Durocher cash in the amount of $3,010,725, or $25.00 per Citizens Share. The Holding Company and Madison First estimate that the total cost of the Acquisition, including all professional fees and expenses, will be $3,075,725. Consummation of the Acquisition is conditioned upon the satisfaction of certain conditions, including the Holding Company's (i) completing a satisfactory due diligence review of Citizens and (ii) obtaining all necessary regulatory approvals to acquire the Citizens Shares in the Acquisition. The Holding Company's due diligence review of Citizens may continue through the date of the Acquisition. The Holding Company has obtained the approval of the FRB to become a bank holding company upon the acquisition of the Citizens Shares in the Acquisition, subject to certain conditions. See "The Acquisition -- Regulatory Approvals" and "Regulation -- Bank Holding Company Regulation." The Agreement may be terminated by Madison First and the Holding Company if, among other things, it is determined that the audited financial statements of Citizens as of and for the year ended December 31, 1995, do not fairly present the financial position and results of operations for Citizens as of and for the year then ended or that there has been a material adverse change in the operations, prospects or financial condition of Citizens since December 31, 1995. The Agreement further provides that Ms. Durocher may terminate the Agreement if it becomes clear that any condition precedent to her obligations under the Agreement cannot be satisfied on or prior to December 31, 1996. Either party may terminate the Agreement at any time if there is a final determination that any material provision of the Agreement is illegal, invalid or unenforceable or if it becomes clear that any condition precedent to such party's obligations under the Agreement cannot be satisfied on or prior to June 30, 1997. The Conversion will not become effective until such time as all conditions precedent to the Acquisition are satisfied. If at any time it becomes clear that any condition precedent to the Acquisition will not be satisfied, the Conversion and the Plan of Conversion will terminate. See "The Conversion -- Conditions and Termination." The Acquisition will enable Madison First to expand its banking services. In addition, the Acquisition will enable Madison First to expand efficiently its lending emphasis to include installment, commercial and agricultural loan products through Citizens' established experience in such lending areas. Moreover, the Acquisition in combination with the Conversion will permit the Holding Company to put to use a significant portion of the capital raised in the Conversion to acquire the Citizens Shares, loan money to the ESOP and increase the capital of Citizens. Each of the Institutions will continue to qualify as a "well capitalized" institution for regulatory purposes. The Acquisition is also expected to reduce the pressure to leverage the Holding Company's consolidated balance sheet that typically exists when a "well capitalized" institution engages in a standard conversion transaction. See "Unaudited Pro Forma Condensed Combined Financial Statements" and "Pro Forma Data -- Regulatory Capital Compliance." The Holding Company and Madison First currently intend to maintain Citizens as an independent entity but may in the future consider a merger or consolidation of the Institutions. The Holding Company may also evaluate alternatives to purchase the 4.4% of Citizens' issued and outstanding common stock not being acquired by the Holding Company in the Acquisition (the "Minority Shares") through a transaction in which holders of the Minority Shares would receive fair consideration, most likely in the form of cash, shares of Common Stock or a combination thereof. In the meantime, the Holding Company and the Institutions will explore opportunities to integrate certain aspects of the Institutions' operations in a manner designed to achieve operating efficiencies, including the possible combination or integration of the Institutions' data processing, marketing, financial reporting, collections and human resources functions, compliance functions, their deposit and loan operations, and their insurance and employee benefit programs. The Holding Company and the Institutions may also explore opportunities to utilize their offices and physical locations in a more efficient manner. See "The Acquisition -- Operations After the Acquisition and the Conversion." As a condition to the Holding Company obtaining approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to divest its Hanover, Indiana branch. The Holding Company's commitment requires that (i) Madison First enter into a definitive agreement to divest the Hanover branch, including the physical facilities and at least $7.5 million of deposits originated at that branch (consisting of 10% of Madison First's deposits at June 30, 1996), prior to consummation of the Acquisition and (ii) the Hanover branch be divested by Madison First within 180 days of the Acquisition. In the event Madison First does not complete the divestiture of its Hanover branch within 180 days of the consummation of the Acquisition, the Hanover branch will be placed in trust, and an independent trustee will proceed with an immediate disposition of the Hanover branch without regard to price. See "Risk Factors -- Divestiture of Hanover Branch." For further information regarding the Acquisition, see "The Acquisition." For further information regarding Citizens, see "Citizens National Bank of Madison," "Business of Citizens" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Citizens National Bank of Madison." The Conversion General. The Board of Directors of Madison First unanimously adopted a Plan of Conversion pursuant to which Madison First will convert from a federal mutual savings and loan association to a federal stock savings and loan association, subject to certain conditions set forth therein, including consummation of the Acquisition. The Plan of Conversion and the Federal Stock Charter (the "Charter") will be submitted for the approval of the members of Madison First at a special meeting currently scheduled for December 18, 1996 (the "Special Meeting"). The Conversion will not become effective until such time as all conditions precedent to the Acquisition are satisfied. If at any time it becomes clear that any condition precedent to the Acquisition will not be satisfied, the Conversion and the Plan will terminate and Madison First will refund all payments and cancel all withdrawal authorizations, as applicable, for subscriptions received in the Conversion. See "The Conversion -- Conditions and Termination." The proceeds from the sale of the Common Stock made as a part of the Conversion will strengthen the Institutions' capital positions and will allow Madison First to be structured in a corporate form similar to that of most business entities. The Conversion will not affect Madison First's normal business or its existing services to depositors and borrowers other than the divestiture of its Hanover branch required in connection with the FRB's approval of the Acquisition. See "Risk Factors -- Divestiture of Hanover Branch." Deposits at Madison First will continue to be insured by the FDIC up to the applicable limits. After the Conversion, the Holding Company will have exclusive voting rights with respect to Madison First and no account holder or borrower will have any voting rights with respect to, or be a member or a shareholder of, Madison First. Holders of shares of Common Stock will have voting rights only with respect to the Holding Company. Stock Pricing and Independent Appraisal. The aggregate purchase price of the Common Stock being sold in the Conversion will be based upon the aggregate pro forma market value of the Common Stock, as determined by an independent valuation. Keller, a financial advisory firm experienced in the valuation of financial institutions, was retained by Madison First to prepare an appraisal of the estimated pro forma market value of the Common Stock. Keller's appraisal concluded that as of May 3, 1996, the Estimated Valuation Range was from a minimum of $7,650,000 to a maximum of $10,350,000, with a midpoint of $9,000,000. The aggregate number of shares of the Common Stock to be sold at $10.00 per share will be within the range of 765,000 to 1,035,000, unless market and financial conditions necessitate a change in the range. The appraisal will be updated shortly before the completion of the Conversion and the Acquisition. The Board of Directors reviewed with management Keller's methods and assumptions and accepted Keller's appraisal as reasonable and adequate. Madison First has agreed to pay Keller a fee of $17,000 for its appraisal services, plus out-of-pocket expenses not to exceed $500. Keller has also prepared a business plan for Madison First, which includes three-year pro forma financial statements for the Holding Company for a fee of $5,000. See "The Conversion -- Stock Pricing" and "-- Number of Shares to be Issued." The independent valuation is not intended and must not be construed as a recommendation of any kind as to the advisability of voting to approve the Conversion or of purchasing the shares of the Common Stock. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters (including certain assumptions as to the Acquisition, the amount of net proceeds and the earnings thereon), all of which are subject to change from time to time, no assurance can be given that persons purchasing shares in the Conversion will thereafter be able to sell shares of Common Stock at prices related to the valuation of the pro forma market value. Members Meeting. The sale of shares of Common Stock in the Conversion is conditioned upon, among other things, approval of the Plan and the adoption of the Charter by a majority of the votes eligible to be cast by the members of Madison First at the Special Meeting. If the Conversion is not approved by the members at the Special Meeting, no shares will be issued, the Conversion will not take place, all subscription funds received will be promptly returned together with interest at the passbook rate, which is currently 3.00% per annum, or 3.04% APY, and all withdrawal authorizations will be canceled. Subscription Offering. Pursuant to the Plan of Conversion, up to 1,035,000 shares of Common Stock are being offered by the Holding Company at the price of $10.00 per share in the Subscription Offering to the following persons in the following order of priority: (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account Holders who are not Eligible Account Holders and (iv) Other Members who are not Eligible Account Holders or Supplemental Eligible Account Holders. Shareholders, depositors and borrowers of Citizens do not have subscription rights under the Plan unless such persons are otherwise Eligible Account Holders, Supplemental Eligible Account Holders or Other Members of Madison First. The Subscription Offering expires at 4:00 p.m., Madison time, on December 11, 1996, unless extended by Madison First and the Holding Company. The Subscription Offering may be extended, subject to OTS approval, until 24 months after the Special Meeting, or until December 18, 1998. See "The Conversion -- Subscription Offering." Subscriptions may be paid by check or by withdrawal from accounts at Madison First. Funds authorized for withdrawal from deposit accounts will continue to earn interest at the rate specified for the account until completion of the Conversion. All amounts paid will be placed in a savings account at Madison First and will earn interest at Madison First's passbook rate from the date of receipt until completion of the Conversion. That rate is currently 3.00%, for an APY of 3.04%. Amounts may be withdrawn from certificate accounts at Madison First to purchase Common Stock in the Conversion without the payment of early withdrawal penalties. However, if the amount withdrawn reduces the balance of the certificate account to less than the applicable required minimum balance, such account after completion of the Conversion will earn interest at the then-current passbook rate. Refunds. In the event that a subscriber's order cannot be filled in full as a result of an oversubscription or the Conversion is not consummated, refunds (including interest at the passbook rate of interest for payments made other than through authorization of withdrawal from deposit accounts) will be made upon closing of the Conversion by check or, if payment was made through authorization of withdrawal from a deposit account, through cancellation of an appropriate portion of such withdrawal authorization. If the Conversion is not completed by January 25, 1997, and Madison First and the Holding Company elect to extend the time required to complete the Conversion, with the OTS' approval, subscribers will be given the right to increase, decrease or rescind their subscriptions pursuant to procedures approved by the OTS and as set forth in the Plan of Conversion. If Madison First and the Holding Company decide to extend the Subscription Offering, subscribers will be given the right to have their subscriptions promptly refunded following the conclusion of the current offering (which will end no later than January 25, 1997), and Madison First will return subscriptions with interest unless subscribers affirmatively elect to continue their subscriptions during the period of extension. Under the Plan of Conversion, the Conversion will not become effective until such time as all conditions precedent to the Acquisition are satisfied. Therefore, a delay in the satisfaction of any condition precedent to the Acquisition would result in a delay in completing the Conversion, possibly delaying the Holding Company's ability to issue certificates and commence trading following receipt of subscription orders. See "Risk Factors -- Risk of Delayed Offering." If at any time it becomes clear that any condition precedent to the Acquisition will not be satisfied, the Conversion and the Plan will terminate, and Madison First will promptly refund all subscription funds with accrued interest and cancel all withdrawal authorizations. See "The Conversion - -- Conditions and Termination." Direct Community Offering. Commencing concurrently with the Subscription Offering and subject to availability, shares of Common Stock are being offered to the general public, giving preference to residents of Jefferson County, in a Direct Community Offering. The purchase price in the Direct Community Offering will also be $10.00 per share. The Direct Community Offering may, subject to OTS approval, be extended until 24 months after the Special Meeting, or until December 18, 1998. The Holding Company and Madison First reserve the absolute right to reject or accept any orders received in the Direct Community Offering, in whole or in part, either at the time of receipt of an order, or as soon as practicable following the expiration of the Direct Community Offering. The Direct Community Offering may expire as early as December 11, 1996, or at any time thereafter (until January 25, 1997, unless extended by Madison First and the Holding Company) when orders and indications of interest for at least 765,000 shares have been received in the Subscription Offering and the Direct Community Offering, if any. Accordingly, persons wishing to purchase Common Stock in the Direct Community Offering directly from the Holding Company should return the Order Form to Madison First on or before December 11, 1996. If a person waits until after that date, the Direct Community Offering may be terminated prior to the time the Order Form is submitted, and that person may be precluded from purchasing shares of Common Stock in the Direct Community Offering. See "The Conversion -- Direct Community Offering." In the event that the Holding Company, Madison First and the Agent determine and agree to use selected dealers to assist with the Direct Community Offering, each such selected dealer will receive commissions at an agreed upon rate, not to exceed 4.5%, for all shares sold by the selected dealer. See "The Conversion -- Selected Dealers." Purchase Limitations. The minimum purchase by any person or entity in the Conversion is 25 shares. No subscribing member may purchase more than 10,000 shares with respect to each deposit account held and each loan owed to Madison First as of November 1, 1996. For this purpose, joint account holders collectively may not exceed the 10,000 share limit. Notwithstanding the foregoing, the maximum number of shares of Common Stock which may be purchased in the Subscription Offering by any member (including such person's Associates) or group acting in concert shall be 20,000 shares in the aggregate, except that the ESOP may purchase in the aggregate not more than 10% of the total number of shares offered in the Conversion. The maximum number of shares of Common Stock which may be purchased in the Direct Community Offering by any person (including such person's Associates) or persons acting in concert is 10,000 in the aggregate. A member who, together with his Associates and persons acting in concert, has subscribed for shares in the Subscription Offering may subscribe for a number of additional shares in the Direct Community Offering that does not exceed the lesser of (i) 10,000 shares or (ii) the number of shares which, when added to the number of shares subscribed for by the member (and his Associates and persons acting in concert) in the Subscription Offering, would not exceed 20,000. The ESOP expects to purchase a number of shares equal to 8% of the total number of shares sold in the Conversion. These purchase limitations are subject to increase or decrease under certain circumstances by the Boards of Directors of Madison First and the Holding Company. See "The Conversion -- Limitations on Common Stock Purchases." Participation of the Agent in the Offerings. In consideration for acting as exclusive sales agent in the Subscription Offering and the Direct Community Offering, if any, and for providing consulting and financial advisory services to the Holding Company and Madison First, the Agent will receive a management fee equal to 0.5% of the aggregate dollar amount of shares of Common Stock sold in the Conversion and commissions in an amount equal to 2.0% of the aggregate dollar amount of shares of Common Stock sold in the Conversion (other than through broker-dealers) except for shares sold to the ESOP, or to officers and directors of the Institutions and their Associates. The Agent will also be reimbursed for out-of-pocket expenses which are not to exceed $12,000 without the Holding Company's and Madison First's consent and for legal fees and expenses which are not to exceed $35,000 without the Holding Company's and Madison First's consent. See "The Conversion -- Agent." Shares to be Purchased by Management and the ESOP. Directors and executive officers of the Institutions expect to purchase 104,800 shares at $10.00 per share, or 13.7% and 10.1% of the shares of Common Stock offered in the Conversion based upon the minimum and maximum, respectively, of the Estimated Valuation Range. See "Anticipated Management Purchases." Employees of the Institutions, including executive officers, will also participate in the ESOP and be able to vote shares allocated to their accounts under the ESOP, which is expected to purchase a number of shares equal to 8% of the shares of Common Stock issued in the Conversion with the proceeds of a loan made to the ESOP by the Holding Company. The ESOP may purchase Common Stock if shares remain available after satisfying the subscriptions of Eligible Account Holders up to $10,350,000, the maximum of the Estimated Valuation Range. Use of Proceeds The net proceeds from the sale of Common Stock offered hereby are estimated at $8.3 million, based upon the sale of 900,000 shares at $10.00 per share. The Holding Company will initially receive 50% of the net Conversion proceeds after providing for the loan to the ESOP to allow the ESOP to purchase shares of Common Stock in the Conversion. See "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." The Holding Company will use $3.0 million of the proceeds to acquire the Citizens Shares in the Acquisition. See "The Acquisition." The Holding Company will also use a portion of the proceeds remaining after acquiring the Citizens Shares to make a capital contribution to Citizens of up to $1.5 million. The remaining proceeds retained by the Holding Company, if any, will be used for general corporate purposes, including the possible payment of dividends and future repurchases of the Holding Company's Common Stock as permitted by the OTS and applicable regulations. However, the Holding Company has no present plans to pay dividends or effect repurchases of the Common Stock. The remaining Conversion proceeds will be received by Madison First and will be used primarily to support Madison First's lending and investment activities. The proceeds received by Citizens from the Holding Company will be used primarily to support Citizens' lending and investment activities. Any remaining proceeds may be used by the Institutions for general corporate purposes, including contributions to the proposed management recognition and retention plan and trust (the "RRP"). In the interim, the net proceeds will be invested in U.S. government securities, other U.S. agency securities and mortgage-backed securities. See "Use of Proceeds." Market for the Common Stock The Holding Company will use its best efforts to develop a public trading market for the Common Stock. The Holding Company has received approval to have its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "RIVR" upon successful closing of the Subscription and Direct Community Offerings, subject to certain conditions which the Holding Company and Madison First believe will be met. It is anticipated that upon the completion of the Conversion at least two market makers will make a market in the Common Stock, although the Holding Company has not yet obtained any market makers and will not do so until the offering is completed. The Agent intends to make a market in the Common Stock, although it is under no obligation to do so. There can be no assurance that an active and liquid market for the Common Stock will develop in the foreseeable future or, if such a market does develop, that it will continue. In addition, there can be no assurance that shareholders will be able to sell their shares at or above the Purchase Price after the completion of the Conversion. Accordingly, purchasers of Common Stock should have a long-term investment intent and recognize that the absence of an active and liquid trading market may make it difficult to sell the Common Stock, and may have an adverse effect on the price. See "Risk Factors -- No Prior Market for Common Stock" and "Market for the Common Stock." Dividend Policy Although no decision has been made yet regarding the payment of dividends, the Holding Company may consider a policy of paying cash dividends on the Common Stock following the Conversion. Dividends, when and if paid, will be subject to determination and declaration by the Board of Directors in its discretion, which will take into account the Holding Company's consolidated financial condition and results of operations, tax considerations, industry standards, economic conditions, capital levels, regulatory restrictions on dividend payments by the Institutions to the Holding Company, general business practices and other factors. Citizens does not anticipate paying dividends on its common stock in the foreseeable future. Moreover, following the Acquisition, Citizens may decide not to pay dividends on its shares of common stock until the Holding Company acquires the Minority Shares. See "Dividend Policy," "Regulation -- Regulatory Capital," and "-- Dividend Limitations." Executive Compensation and Related Transactions Employment Contracts. Effective January 1, 1996, Madison First entered into a three-year Employment Agreement with James E. Fritz, Madison First's President and Chief Executive Officer (the "Fritz Agreement"). The Fritz Agreement provides, among other things, for: (i) the payment to Mr. Fritz of his current base salary subject to annual review and adjustment by Madison First's Board of Directors; (ii) Mr. Fritz's participation in other bonus and fringe benefit plans available to Madison First's employees; (iii) the lump-sum payment to Mr. Fritz of an amount equal to the difference between (A) the product of 2.99 times his "base amount" (as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) and (B) the sum of any other parachute payments, as determined under Section 280G(b)(2) of the Code in certain circumstances involving the termination of Mr. Fritz's employment by Madison First for other than cause or by Mr. Fritz for reasons specified in the Fritz Agreement within twelve months following a change in control (as defined therein) of Madison First or the Holding Company; and (iv) the lump-sum or periodic payment to Mr. Fritz of an amount equal to the sum of (A) Mr. Fritz's base salary through the end of the then-current term, plus (B) Mr. Fritz's base salary for an additional twelve-month period, plus (C) in Mr. Fritz's sole discretion and in lieu of continued participation in Madison First's fringe benefit plans, cash in an amount equal to the cost of obtaining all health, life, disability and other benefits to which Mr. Fritz would otherwise be entitled, in certain circumstances involving the constructive termination of Mr. Fritz (as described therein) or the termination of Mr. Fritz without just cause (as defined therein) other than during a period which is within twelve months after a change in control of Madison First or the Holding Company. As of the date hereof, the cash compensation that would be paid to Mr. Fritz under the Fritz Agreement if such agreement were terminated within twelve months after a change in control of Madison First or the Holding Company would be $194,000. See "Executive Compensation and Related Transactions of Madison First -- Employment Contract." Upon completion of the Conversion, the Holding Company intends to guarantee Madison First's obligations under the Fritz Agreement. Citizens and Robert D. Hoban, Citizens' President and Chief Executive Officer, entered into an Employment Agreement effective as of January 1, 1995 (the "1995 Agreement"). The 1995 Agreement is a one-year agreement that automatically renews for an additional one-year term unless terminated by Citizens or Mr. Hoban in accordance with the terms of the 1995 Agreement. The 1995 Agreement provides, among other things, for (i) the payment to Mr. Hoban of a base salary subject to annual review and adjustment by Citizens' Board of Directors; (ii) Mr. Hoban's participation in other fringe benefit plans in the same manner and on the same basis as may be furnished to other executive management personnel of Citizens; (iii) Mr. Hoban's use of an automobile to be provided by Citizens; and (iv) Mr. Hoban's participation in a performance-based bonus program to be established and maintained by Citizens' Board of Directors. If Citizens gives notice of its intention not to renew the 1995 Agreement at any time not following a change in control (as defined therein) of Citizens, the 1995 Agreement provides for (i) a severance payment to Mr. Hoban in an amount equal to his then-current annual salary, and (ii) continued health care coverage at Citizens' sole expense for Mr. Hoban and his eligible family members for a period of one year. The 1995 Agreement further provides that in the event that Mr. Hoban's duties and responsibilities are changed or the Board of Directors elects not to renew the 1995 Agreement following a change in control of Citizens, such events may, at Mr. Hoban's election and upon written notice to Citizens, be deemed a termination of the 1995 Agreement entitling Mr. Hoban to (i) payment of a lump-sum amount equal to three times Mr. Hoban's then-current salary, subject to reduction to the extent necessary to prevent it from constituting a parachute payment under Section 280G of the Code, and (ii) continued health care coverage at Citizens' sole expense for Mr. Hoban and his eligible family members for a period of three years. As of the date hereof, the cash compensation that would be paid to Mr. Hoban under the 1995 Agreement if such agreement were terminated after a change in control of Citizens (which would include the Acquisition) would be $300,000. Effective upon consummation of the Acquisition, Citizens expects to enter into a three-year Employment Agreement with Mr. Hoban (the "Hoban Agreement"). If entered into, the Hoban Agreement would supercede the 1995 Agreement. The Hoban Agreement will provide, among other things, for: (i) the payment to Mr. Hoban of his current base salary subject to annual review and adjustment by Citizens' Board of Directors; (ii) Mr. Hoban's participation in other bonus and fringe benefit plans available to Citizens' employees; (iii) the lump-sum payment to Mr. Hoban of an amount equal to the difference between (A) the product of 2.99 times his "base amount" (as defined in Section 280G(b)(3) of the Code) and (B) the sum of any other parachute payments, as determined under Section 280G(b)(2) of the Code in certain circumstances involving the termination of Mr. Hoban's employment by Citizens for other than cause or by Mr. Hoban for reasons specified in the Hoban Agreement within twelve months following a change in control (as defined therein) of Citizens or the Holding Company; and (iv) the lump-sum or periodic payment to Mr. Hoban of an amount equal to the sum of (A) Mr. Hoban's base salary through the end of the then-current term, plus (B) Mr. Hoban's base salary for an additional twelve-month period, plus (C) in Mr. Hoban's sole discretion and in lieu of continued participation in Citizens' fringe benefit plans, cash in an amount equal to the cost of obtaining all health, life, disability and other benefits to which Mr. Hoban would otherwise be entitled, in certain circumstances involving the constructive termination of Mr. Hoban (as described therein) or the termination of Mr. Hoban without just cause (as defined therein) other than during a period which is within twelve months after a change in control of Citizens or the Holding Company. See "Executive Compensation and Related Transactions of Citizens -- Employment Contracts." Upon completion of the Acquisition, the Holding Company intends to guarantee Citizens' obligations under the Hoban Agreement. Special Termination Agreements. Each of the Institutions expect to enter into Special Termination Agreements effective as of the date of the Conversion, in the case of Madison First, and as of the date of consummation of the Acquisition, in the case of Citizens (collectively, the "Termination Agreements"), with all executive officers of the Institutions other than Messrs. Fritz and Hoban (collectively, the "Covered Employees"). The Termination Agreements have terms of one year, subject to annual extensions by the Board of Directors of the employing Institution, and provide that upon the termination of a Covered Employee's employment by the employer for other than cause or by the Covered Employee for reasons specified in the Termination Agreements during the 18-month period following the effective date of the Termination Agreements or within a 12-month period following a "change in control" (as defined in the Termination Agreements) of the employing Institution or the Holding Company which occurs during the term of the applicable Termination Agreements, such Covered Employee shall be entitled to a lump sum payment of 100% of his or her base amount of compensation, as determined pursuant to the Code (the "Termination Benefit"). Covered Employees may elect to receive the Termination Benefit in semi-monthly payments over a twelve-month period. The Termination Agreements also provide for continued life, health and disability coverage for Covered Employees until the expiration of twelve months following the termination of employment or until the Covered Employee obtains coverage from another employer, whichever occurs first. If a Covered Employee obtains coverage from another employer and does not have substantially identical life, health and disability coverage, the employing Institution shall maintain substantially identical coverage on behalf of the Covered Employee for a period of twelve months. Severance Programs. Each of the Institutions expect to implement a severance program as of the date of the Conversion, in the case of Madison First, and as of the date of the Acquisition, in the case of Citizens, for the benefit of all employees of the Institutions who are not covered by Termination Agreements or by employment contracts. Pursuant to the severance programs, any employee of the Institutions who is terminated within twelve months following a change in control of the Holding Company or the employing Institution or within 18 months following the effective date of the program will be entitled to receive a lump-sum payment in an amount equal to three weeks compensation for every year of service with the employing Institution, up to a maximum of twelve months compensation. See "Executive Compensation and Related Transactions of Madison First -- Severance Program" and "Executive Compensation and Related Transactions of Citizens -- Severance Program." Employee Stock Ownership Plan and Trust. In connection with the Conversion, the Holding Company has established the ESOP effective January 1, 1996, for eligible employees of the Institutions, including executive officers. The ESOP intends to purchase a number of shares equal to 8% of the Common Stock issued in the Conversion for the benefit of its participants. The ESOP intends to borrow the funds necessary to purchase the Common Stock from the Holding Company. See "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." RRP. At a meeting of the Holding Company's shareholders to be held at least six months after the completion of the Conversion, the Board of Directors intends to submit for shareholder approval the RRP, and at that time to make certain awards pursuant to the RRP, as a means of providing the directors, officers and employees of the Institutions and the Holding Company with an ownership interest in the Holding Company in a manner designed to encourage such persons to remain with the Holding Company and the Institutions. If the RRP is approved by the Holding Company's shareholders, the Institutions will contribute funds to the RRP to enable it to acquire an aggregate amount of Common Stock equal to up to 4% of the shares issued in the Conversion, either directly from the Holding Company or on the open market. Shares awarded under the RRP will vest at a rate of 20% at the end of each full twelve months of service with the Holding Company or the Institutions after the date of grant, subject to earlier vesting in the event of death or disability. Assuming the shares purchased by the RRP have a market value on the date of grant of $10.00 per share, the shares available for distribution under the RRP would have an aggregate market value of between $306,000 and $414,000, based upon the minimum and maximum of the Estimated Valuation Range, respectively. It is anticipated that on the date of the Holding Company's first shareholder meeting following the Conversion, the following awards will be made under the RRP:
Shares Awarded Under RRP -------------------------------------------------------------- % of Shares Minimum of Estimated Maximum of Estimated Issued in Valuation Range Valuation Range Conversion Number Value (1) Number Value (1) ---------- ------ --------- ------ --------- James E. Fritz President, Chief Executive Officer and Director (2)................... 0.595% 4,552 $ 45,520 6,158 $ 61,580 Robert D. Hoban President, Chief Executive Officer and Director (3)................... 0.500 3,825 38,250 5,175 51,750 John Wayne Deveary Vice President and Treasurer (2)... 0.300 2,295 22,950 3,105 31,050 Larry C. Fouse Chief Financial Officer and Controller (3)................. 0.250 1,912 19,120 2,588 25,880 Carolyn B. Flowers Vice President -- Compliance/Operations (3).......... 0.250 1,912 19,120 2,588 25,880 Mark A. Goley Vice President and Senior Loan Officer (3)............ 0.250 1,912 19,120 2,588 25,880 Fred W. Koehler Chairman (2)....................... 0.200 1,530 15,300 2,070 20,700 Robert W. Anger Vice President -- Lending and Director (2)................... 0.220 1,683 16,830 2,277 22,770 Michael J. Hensley Director (2)....................... 0.200 1,530 15,300 2,070 20,700 Cecil L. Dorten Vice Chairman (2).................. 0.200 1,530 15,300 2,070 20,700 Earl W. Johann Director (2)....................... 0.200 1,530 15,300 2,070 20,700 Lonnie D. Collins Secretary (2)...................... 0.200 1,530 15,300 2,070 20,700 Traci A. Bridgford Vice President -- Compliance/Operations (2).......... 0.150 1,148 11,480 1,552 15,520 Jonnie L. Davis Director (3)....................... 0.150 1,148 11,480 1,552 15,520 Burton P. Chambers Chairman (3)....................... 0.075 574 5,740 776 7,760 Van E. Shelton Director (3)....................... 0.075 574 5,740 776 7,760 Ralph E. Storm Director (3)....................... 0.075 574 5,740 776 7,760 Other Employees....................... 0.110 841 8,410 1,139 11,390 ----- ------ -------- ------ -------- Total............................ 4.000% 30,600 $306,000 41,400 $414,000 ===== ====== ======== ====== ========
- ---------- (1) Assumes value of shares on date of award of $10.00 per share. (2) Of Madison First. (3) Of Citizens. See "Executive Compensation and Related Transactions of Madison First -- RRP" and "Executive Compensation and Related Transactions of Citizens -- RRP." Stock Option Plan. At a meeting of the Holding Company's shareholders to be held at least six months after completion of the Conversion, the Board of Directors intends to submit for shareholder approval a stock option plan (the "Stock Option Plan"), and at that time to make certain awards pursuant to the Stock Option Plan. Options will become exercisable at a rate of 20% at the end of each full twelve months of service with the Holding Company or the Institutions after the date of award, subject to early vesting in the event of death or disability. If approved by the Holding Company's shareholders, Common Stock in an aggregate amount of 10.0% of the shares issued in the Conversion (or between 76,500 and 103,500 shares, based upon the Estimated Valuation Range) will be reserved for issuance upon the exercise of options granted under the Stock Option Plan. It is anticipated that on the date of the Holding Company's first shareholder meeting following the Conversion, the following grants will be made under the Stock Option Plan:
Options Granted Under Option Plan -------------------------------------------------------------------- % of Shares Number at Minimum of Number at Maximum Issued in of Estimated Valuation of Estimated Valuation Conversion Range Range ----------- ---------------------- ----------------------- James E. Fritz President, Chief Executive Officer and Director (1).............................. 1.20% 9,180 12,420 Robert D. Hoban President, Chief Executive Officer and Director (2).............................. 1.00 7,650 10,350 John Wayne Deveary Vice President and Treasurer (1).............. 0.60 4,590 6,210 Larry C. Fouse Chief Financial Officer and Controller (2).... 0.50 3,825 5,175 Carolyn B. Flowers Vice President -- Compliance/Operations (2)..................... 0.50 3,825 5,175 Mark A. Goley Vice President and Senior Loan Officer (2)....................... 0.50 3,825 5,175 Fred W. Koehler Chairman (1).................................. 0.50 3,825 5,175 Robert W. Anger Vice President-- Lending and Director (1)..... 0.45 3,443 4,658 Michael J. Hensley Director (1).................................. 0.45 3,443 4,658 Cecil L. Dorten Vice Chairman (1)............................. 0.45 3,443 4,658 Earl W. Johann Director (1).................................. 0.45 3,443 4,658 Lonnie D. Collins Secretary (1)................................. 0.40 3,060 4,140 Traci A. Bridgford Vice President -- Compliance/Operations (1)..................... 0.30 2,295 3,105 Jonnie L. Davis Director (2).................................. 0.30 2,295 3,105 Burton P. Chambers Chairman (2).................................. 0.15 1,147 1,552 Van E. Shelton Director (2).................................. 0.15 1,147 1,552 Ralph E. Storm Director (2).................................. 0.15 1,147 1,552 Other Employees................................... 1.95 14,917 20,182 ----- ------ ------- Total......................................... 10.00% 76,500 103,500 ===== ====== =======
- ---------- (1) Of Madison First. (2) Of Citizens. See "Executive Compensation and Related Transactions of Madison First -- Stock Option Plan" and "Executive Compensation and Related Transactions of Citizens -- Stock Option Plan." SELECTED CONSOLIDATED FINANCIAL DATA OF MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARIES The following selected consolidated financial data of Madison First and its subsidiaries is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes thereto, included elsewhere in this Prospectus. Information at June 30, 1996 and for the six months ended June 30, 1996 and 1995 is unaudited but, in the opinion of management, includes all adjustments necessary for a fair presentation of the financial position and results of operations as of and for such dates.
AT DECEMBER 31, AT JUNE 30, --------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- (Unaudited) (In thousands) Summary of Financial Condition Data: Total assets................................ $81,904 $86,604 $87,072 $84,086 $82,157 $75,397 Loans receivable, net....................... 57,449 57,945 56,287 51,970 53,685 57,735 Mortgage-backed and related securities...... 8,690 9,917 11,328 13,925 13,548 7,968 Cash and cash equivalents (1)............... 2,442 2,689 2,416 5,803 7,070 2,938 Investment securities (2)................... 9,940 13,018 14,097 9,491 5,485 4,329 FHLB advances............................... --- 4,471 4,986 --- --- --- Deposits.................................... 74,727 75,233 75,458 78,081 76,688 70,813 Equity capital, net, substantially restricted.................................. 6,703 6,574 6,304 5,668 4,950 4,165
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (Unaudited) (In thousands) Summary of Operating Data: Total interest income....................... $2,942 $2,869 $5,794 $5,419 $5,684 $6,174 $6,785 Total interest expense...................... 1,735 1,691 3,594 2,854 3,042 3,645 4,678 ------ -------- -------- -------- -------- ------ ------ Net interest income...................... 1,207 1,178 2,200 2,565 2,642 2,529 2,107 Provision for loan losses................... 12 3 150 29 55 37 143 ------ -------- -------- -------- -------- ------ ------ Net interest income after provision for loan losses........................ 1,195 1,175 2,050 2,536 2,587 2,492 1,964 Other income: Insurance commissions.................... 104 92 175 181 182 180 158 Service fees, charges, and other operating income................. 97 94 187 189 182 129 117 ------ -------- -------- -------- -------- ------ ------ Total other income..................... 201 186 362 370 364 309 275 Other expenses: Employee compensation and benefits....... 592 484 998 888 869 811 821 Data processing.......................... 141 118 237 243 234 157 126 Federal deposit insurance premiums....... 88 88 177 178 117 149 141 Other.................................... 286 284 554 549 582 748 611 ------ -------- -------- -------- -------- ------ ------ Total other expenses.................. 1,107 974 1,966 1,858 1,802 1,865 1,699 ------ -------- -------- -------- -------- ------ ------ Income before income tax expense and cumulative effect of change in accounting method.... 289 387 446 1,048 1,149 936 540 Income tax expense.......................... 108 151 188 412 456 305 250 Cumulative effect of change in accounting for income tax expense................... --- --- --- --- 25 --- --- ------ -------- -------- -------- -------- ------ ------ Net income............................... $181 $ 236 $ 258 $ 636 $ 718 $ 631 $ 290 ====== ======== ======== ======== ======== ====== ====== Supplemental Data: Interest rate spread during period.......... 2.76% 2.63% 2.36% 3.00% 3.24% 3.23% 2.66% Net yield on interest-earning assets (3) (4)......................... 2.94 2.82 2.61 3.15 3.32 3.35 2.89 Return on assets (4) (5).................... 0.42 0.56 0.30 0.74 0.86 0.80 0.39 Return on equity (4) (6).................... 5.39 7.26 4.01 10.62 13.52 13.84 7.21 Equity to assets (7)........................ 8.18 7.40 7.59 7.24 6.74 6.03 5.52 Average interest-earning assets to average interest-bearing liabilities............. 104.17 104.82 105.62 104.43 101.96 102.39 103.83 Non-performing assets to total assets (7)... 0.27 --- 0.01 0.01 0.01 0.18 0.17 Allowance for loan losses to total loans outstanding (7).......................... 0.72 0.43 0.70 0.45 0.44 0.49 0.39 Allowance for loan losses to non-performing loans (7)................. 186.55 4,183.33 5,087.50 1,938.46 3,242.86 166.88 150.33 Net charge-offs to average total loans outstanding ................. .01 .01 (0.01) 0.01 0.17 --- 0.02 Other expenses to average assets (8)....................... 2.57 2.33 2.26 2.20 2.15 2.36 2.09 Number of full service offices (7).......... 3 3 3 3 3 3 3
- ---------- (1) Includes certificates of deposit in other financial institutions. (2) Includes investment securities designated as available for sale. (3) Net interest income divided by average interest-earning assets. (4) Information for six months ended June 30, 1996 and 1995, has been annualized. Interim results are not necessarily indicative of the results of operations for an entire year. (5) Net income divided by average total assets. (6) Net income divided by average total equity. (7) At end of period. (8) Other expenses divided by average total assets. SELECTED FINANCIAL DATA OF CITIZENS NATIONAL BANK OF MADISON The following selected financial data of Citizens is qualified in its entirety by, and should be read in conjunction with, the financial statements, including notes thereto, included elsewhere in this Prospectus. Information at June 30, 1996 and for the six months ended June 30, 1996 and 1995 is unaudited but, in the opinion of management, includes all adjustments necessary for a fair presentation of the financial position and results of operations as of and for such dates.
AT DECEMBER 31, AT JUNE 30, --------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- (Unaudited) (In thousands) Summary of Financial Condition Data: Total assets................................ $56,185 $54,503 $41,252 $33,123 $31,496 $30,092 Loans receivable, net....................... 43,003 40,432 29,834 19,898 18,673 17,344 Mortgage-backed and related securities (1).. 3,137 3,562 5,049 6,008 2,407 2,864 Cash and cash equivalents (2)............... 2,598 6,826 2,191 3,512 4,578 5,811 Investment securities (1)................... 4,631 1,657 2,769 2,399 4,601 2,782 Deposits.................................... 51,770 49,227 38,011 30,089 28,828 27,586 Shareholders' equity, net................... 3,448 3,396 3,000 2,749 2,479 2,270
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (Unaudited) (In thousands, except per share data) Summary of Operating Data: Total interest income....................... $2,156 $1,680 $3,695 $2,525 $2,100 $2,185 $2,220 Total interest expense...................... 1,134 776 1,820 1,025 880 1,081 1,277 ------ ------ ------ ------ ------ ------ ------ Net interest income...................... 1,022 904 1,875 1,500 1,220 1,104 943 Provision for loan losses................... 180 24 104 17 50 54 60 ------ ------ ------ ------ ------ ------ ------ Net interest income after provision for loan losses........................ 842 880 1,771 1,483 1,170 1,050 883 Other income: Service charges on deposits accounts..... 108 79 293 219 215 149 127 Other service charges and fees........... 176 127 157 143 309 159 19 Realized gain (loss) on investments, net. (16) 4 4 (71) --- --- --- Other.................................... 27 69 109 53 24 --- 45 ------ ------ ------ ------ ------ ------ ------ Total other income..................... 295 279 563 344 548 308 191 Other expenses: Employment compensation and benefits..... 452 380 831 677 612 509 458 Premises and equipment expenses.......... 156 125 292 279 226 195 170 Other.................................... 328 350 646 504 518 408 326 ------ ------ ------ ------ ------ ------ ------ Total other expenses................... 936 855 1,769 1,460 1,356 1,112 954 ------ ------ ------ ------ ------ ------ ------ Income before income tax expense and cumulative effect of change in accounting method........................... 201 304 565 367 362 246 120 Income tax expense.......................... 67 108 223 129 92 37 --- ------ ------ ------ ------ ------ ------ ------ Net income before cumulative effect of change in accounting method.................... 134 196 342 238 270 209 120 Cumulative effect of change in accounting method...................... --- --- --- 86 --- --- --- ------ ------ ------ ------ ------ ------ ------ Net income .............................. $ 134 $ 196 $ 342 $ 324 $ 270 $ 209 $ 120 ====== ====== ====== ====== ====== ====== ====== Earnings per share....................... $ 1.06 $ 1.56 $ 2.71 $ 2.57 $ 2.14 $ 1.66 $ 0.96 ====== ====== ====== ====== ====== ====== ====== Supplemental Data: Interest rate spread during period.......... 3.56% 4.24% 3.78% 4.04% 3.53% 3.60% 3.90% Net yield on interest-earning assets (3) (4) 3.74 4.36 4.25 4.49 4.19 3.99 3.41 Return on assets (4) (5).................... 0.23 0.45 0.71 0.87 0.84 0.68 0.40 Return on equity (4) (6).................... 3.92 6.26 10.69 11.27 10.33 8.80 5.40 Equity to assets (7)........................ 6.14 6.86 6.23 7.27 8.30 7.87 7.55 Average interest-earning assets to average interest-bearing liabilities............. 104.18 103.14 111.50 114.79 121.74 109.92 109.78 Non-performing assets to total assets (7)... 1.06 1.02 0.54 0.23 0.11 0.05 0.05 Allowance for loan losses to total loans outstanding (7).......................... 1.16 0.89 0.86 1.13 1.80 1.69 1.85 Allowance for loan losses to non-performing loans (7)................. 84.15 66.74 117.17 361.29 997.22 1,504.76 1,436.36 Net charge-offs to average total loans outstanding ................. .07 .11 0.25 0.17 0.04 0.30 --- Other expenses to average assets (8)....... 3.17 3.91 3.89 4.24 4.56 3.69 3.64 Number of full service offices (7).......... 4 4 4 2 2 2 2
- ---------- (1) Includes securities designated as available for sale. (2) Includes certificates of deposit in other financial institutions. (3) Net interest income divided by average interest-earning assets. (4) Information for six months ended June 30, 1996 and 1995, has been annualized. Interim results are not necessarily indicative of the results of operations for an entire year. (5) Net income divided by average total assets. (6) Net income divided by average total equity. (7) At end of period. (8) Other expenses divided by average total assets. SELECTED PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL DATA OF THE HOLDING COMPANY The selected pro forma consolidated financial data of the Holding Company set forth below is derived in part from and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Financial Statements (the "Pro Forma") of Madison First Federal and notes thereto presented elsewhere in this Prospectus. In deriving the amounts in the tables below, the Acquisition reflected in the "Acquisition Adjustments" to the Pro Forma and the issuance of Common Stock, reflected in the "Conversion Adjustments" to the Pro Forma, are assumed to have occurred. In deriving the amounts for Selected Financial Condition Data, the Acquisition and the Conversion were assumed to have been consummated at June 30, 1996. In deriving the amounts for the Select Operating Data, the Acquisition and the Conversion were assumed to have been consummated on January 1, 1996 and January 1, 1995, respectively, for the six months ended June 30, 1996, and the year ended December 31, 1995. Except as noted below, all amounts presented below are determined on a basis consistent with the Select Consolidated Financial Data of Madison First presented previously. See "Unaudited Pro Forma Consolidated Condensed Combined Financial Statements." Pro Forma Consolidated Condensed Combined At June 30, 1996 (In Thousands) ---------------------- Selected Financial Condition Data: Assets: Cash and cash equivalents................................. $ 6,218 Investment securities..................................... 14,923 Mortgage-backed and related securities.................... 11,826 Loans receivable, net..................................... 100,452 Goodwill, net of accumulated amortization................. 719 Liabilities: Total deposits............................................ 123,497 FHLB advances............................................. 500 Total shareholders' equity .............................. 13,940 For the For the Six Months Ended Year Ended June 30, 1996 December 31, 1995 ------------- ----------------- (In Thousands) Selected Operating Data: Total interest income............... $5,130 $9,552 Total interest expense.............. 2,791 5,258 ------ ------ Net interest income............ 2,339 4,294 Provision for loan losses........... 192 254 ------ ------ Net interest income after provision for loan losses...... 2,147 4,040 Other income........................ 469 816 Other expense....................... 2,039 3,729 Income tax expense.................. 210 457 ------ ------ Net income.......................... $ 367 $ 670 ====== ====== RECENT DEVELOPMENTS OF MADISON FIRST The following table sets forth selected financial data for Madison First at September 30, 1996, and December 31, 1995, and selected earnings data for Madison First for the three months and nine months ended September 30, 1996 and 1995. The selected financial and other data of Madison First set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes thereto, appearing elsewhere herein:
At September 30, At December 31, Selected consolidated financial condition data: 1996 1995 ---------------- --------------- (Unaudited) (In Thousands) Total amount of: Assets $84,100 $86,604 Cash and cash equivalents(1) 4,293 2,689 Investment securities - at cost 5,600 8,000 Investment securities available for sale - at market 3,956 5,018 Mortgage-backed securities - at cost 8,233 9,941 Loans receivable - net 58,725 57,945 Deposits 76,829 75,458 Advances from the FHLB --- 4,471 Unrealized gain (loss) on securities designated as available for sale, net of related tax effects (29) 12 Retained earnings, net, substantially restricted 6,509 6,574
- ---------- (1) Includes cash due from banks and interest-bearing deposits in other financial institutions.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ Selected consolidated operating data: 1996 1995 1996 1995 (Unaudited) (In thousands) Interest income $1,424 $1,483 $4,366 $4,352 Interest expense 804 956 2,539 2,647 ------- ------- ---- ------- Net interest income 620 527 1,827 1,705 Provision for loan losses 6 --- 18 3 ------- ------- ---- ------- Net interest income after provision for loan losses 614 527 1,809 1,702 Other income 111 120 312 306 Other expenses 1,041 521 2,148 1,495 ------- ------- ---- ------- Income (loss) before income taxes (316) 126 (27) 513 Income taxes (credits) (103) 54 5 205 ------- ------- ---- ------- Net income (loss) $ (213) $ 72 $(32) $ 308 ======= ======= ==== =======
At or for the three months At or for the nine months ended September 30, ended September 30, -------------------------- -------------------------- Selected consolidated financial 1996 1995 1996 1995 ratios and other data(1): Return (loss) on average assets(2) (1.03%) .33% (0.05%) 0.47% Average interest rate spread during period 3.01 2.29 2.92 12.54 Net interest margin 3.16 2.49 3.01 2.72 Return on average equity(2) (12.92) 4.38 (0.65) 6.36 Equity to total assets at end of period 7.71 7.52 7.71 7.52 Average interest-earning assets to average interest-bearing liabilities 103.61 103.80 103.45 103.71 Net interest income to other expenses 59.56 101.15 85.06 114.05 Other expenses to average total assets(2) 5.02 2.36 3.36 2.28 Number of full-service offices 3 3 3 3 Capital Ratios at September 30, 1996 Tangible capital 7.74% Core capital 7.74 Risk-based capital 16.66
- ---------- (1) Ratios for three months and nine months ended September 30, 1996 and 1995, have been annualized. (2) Based on the arithmetic average of beginning and ending balances. Management's Discussion and Analysis Financial Condition. Madison First's total assets at September 30, 1996 amounted to $84.1 million representing a decline of $2.5 million, or 2.9%, from December 31, 1995 levels. The reduction in assets resulted from a $4.5 million reduction in FHLB advances which was partially offset by a $1.4 million, or 1.8%, increase in deposits. Cash and cash equivalents increased $1.6 million, or 59.7%, over the amount recorded at December 31, 1995. The increase in cash and cash equivalents is due to deposits increasing during the period with funds accumulated in order to originate outstanding loan commitments. Loans increased by $780,000, or 1.3%, due to net loan disbursements during the six month period ended September 30, 1996. Madison First had nonperforming loans of $81,000 and no real estate acquired through foreclosure at September 30, 1996. Management is of the opinion that the allowance for loan losses of $422,000 at September 30, 1996 is adequate to cover any inherent losses in the portfolio. See "Business of Madison First - Lending Activities." Mortgage-backed and related securities decreased by $1.7 million, or 17.2%, during the nine month period ended September 30, 1996. This decrease is primarily attributable to principal repayments as Madison First did not purchase any mortgage-backed and related securities during the nine month period ended September 30, 1996. Investment securities decreased by $3.5 million, or 26.6%, during the period as investment maturities were used to repay maturing FHLB advances. Retained earnings totaled $6.5 million at September 30, 1996, a decrease of $65,000 from the amount recorded at December 31, 1995. The decline is primarily attributable to the realized loss recognized for the period due to the SAIF recapitalization and an increase in the unrealized loss on securities designated as available for sale. Results of Operations. The net loss for the three months ended September 30, 1996, totaled $213,000 compared to net income of $72,000 for the same period in 1995. The primary reason for the net loss was an increase in other expenses due to the pre-tax SAIF recapitalization expense of $503,000, which was recorded in the quarter ended September 30, 1996. See "Recent Developments -- Regulatory Oversight and Recent Legislation." Without the SAIF assessment, net income would have been approximately $112,000, representing a $93,000 increase over the amount recorded during the same period in 1995. The net loss for the nine months ended September 30, 1996 totaled $32,000 compared to net income of $308,000 for the nine months ended September 30, 1995. Without the pre-tax effects of the SAIF assessment, Madison First's net income would have been approximately $286,000. Net interest income increased by $122,000, or 7.2%, which was partially offset by a $15,000 increase in the provision for loan losses and an increase of $150,000, or 10.0%, in other expenses, net of the SAIF recapitalization assessment. Other income increased by $6,000, or 2.0%, from $306,000 for the nine months ended September 30, 1995, to $312,000 for the nine months ended September 30, 1996. This increase was primarily attributable to an increase in insurance commissions received period to period. The increase in other expense was primarily attributable to a $165,000, or 12.4%, increase in employee compensation which was partially offset by a $20,000 reduction in the provisions for valuation decline in mortgage related securities. The increase in employee compensation was primarily attributable to increased staffing levels and normal merit increases. Income tax expense decreased by $200,000, or 97.6%, from $205,000 for the period ended September 30, 1995 to $5,000 for the period ended September 30, 1996. The decline in income tax expense is primarily attributable to the $540,000 reduction in pre-tax earnings. For the three month period ended September 30, 1996, income tax credits of $103,000 as compared to income tax expense of $54,000 is again due to the SAIF recapitalization assessment which resulted in a net loss. RECENT DEVELOPMENTS OF CITIZENS The following table sets forth selected financial data for Citizens at September 30, 1996, and December 31, 1995, and selected earnings data for Citizens for the three months and nine months ended September 30, 1996 and 1995. The selected financial and other data of Citizens set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes thereto, appearing elsewhere herein:
At September 30, At December 31, Selected consolidated financial condition data: 1996 1995 ---------------- --------------- (Unaudited) (In Thousands) Total amount of: Assets $59,545 $54,503 Cash and cash equivalents(1) 446 5,124 Investment securities available for sale - at market 3,429 1,657 Mortgage-backed securities available for sale - at market 3,739 3,562 Loans receivable - net 47,494 40,432 Deposits 52,081 49,227 Advances from the FHLB and other borrowings 3,250 1,500 Unrealized gain (loss) on securities designated as available for sale, net of related tax effects (89) (18) Stockholders equity 3,678 3,396
- ---------- (1) Includes cash due from banks and interest-bearing deposits in other financial institutions.
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------ Selected consolidated operating data: 1996 1995 1996 1995 (Unaudited) (In thousands) Interest income $1,160 $961 $3,316 $2,641 Interest expense 553 506 1,687 1,282 ------ ------ ------ ------- Net interest income 607 455 1,629 1,359 Provision for loan losses 30 62 210 86 ------ ------ ------ ------- Net interest income after provision for loan losses 577 393 1,419 1,273 Other income 168 146 463 425 Other expenses 550 491 1,486 1,346 ------ ------ ------ ------- Income before income taxes 195 48 396 352 Income taxes 65 18 132 126 ------ ------ ------ ------- Net income $ 130 $ 30 $ 264 $ 226 ====== ====== ====== =======
[/R] Changes in Financial Condition Total assets at September 30, 1996, amounted to $59.5 million, representing growth over December 31, 1995 levels of $5.0 million, or 9.3%. Citizens' asset growth was primarily funded by a $2.9 million, or 5.8%, increase in deposits and a $1.8 million increase in FHLB advances and other borrowings. The growth in deposits during the 1996 nine month period reflects a continuation of management's competitive deposit pricing, as well as an increase in advertising expense. Cash and investment securities declined during the 1996 nine month period by $2.9 million, or 42.8%, as liquidity was utilized to increase the loan portfolio by $7.1 million, or 17.5%. The increase in the portfolio reflects managements's desire to invest in higher yielding loans. At September 30, 1996, Citizens' nonperforming loans totaled $554,000 or 1.2% of the loan portfolio. On that date, Citizens' allowance for loan losses totaled $501,000 or 90.4% of nonperforming loans. Comparison of Results of Operations for the Nine and Three Month Periods Ended September 30, 1996 and 1995. Net income for the nine months ended September 30, 1996, totaled $264,000, an increase of $38,000, or 16.8%, over the comparable 1995 period. The increased earnings were primarily attributable to a $270,000, or 19.9%, increase in net interest income, generally reflecting asset growth year-to-year. The enhanced net interest income during the 1996 period was partially offset by a $124,000 increase in the provision for loan losses and a $140,000 or 10.4%, increase in other expenses. The increase in other expenses was primarily attributable to a $110,000, or 19.0% increase in employee compensation, generally reflecting the addition of new personnel and normal merit increases. Net income for the three months ended September 30, 1996, totaled $130,000, representing an increase of $100,000 over the comparable 1995 period. The increase was primarily attributable to a $152,000, or 33.4% increase in net interest income, which was partially offset by a $59,000 increase in other expense and a $47,000 increase in the provision for income taxes. The increases in net interest income and other expense are generally reflective of Citizens' growth year-to-year, while increased income taxes is primarily a result of of the $147,000 increase in pre-tax earnings. RISK FACTORS Before investing in shares of the Common Stock offered hereby, prospective investors should consider carefully the matters presented below. Potential Impact of Changes in Interest Rates Madison First's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and other borrowings. At June 30, 1996, a substantial portion of the adjustable-rate mortgage loans in Madison First's portfolio were one-year adjustable-rate mortgage loans which provide for maximum rate adjustments of 1% per year and 5% over the terms of the loans, although Madison First began offering one-year adjustable-rate mortgage loans with maximum rate adjustments of 1.5% per year and 6% over the terms of the loans in late 1995. In a period of rising interest rates, these restrictions on rate adjustments may prevent Madison First's adjustable-rate loans from repricing upward as quickly or by as much as market rates. In addition, a substantial portion of Madison First's adjustable-rate mortgage loans are indexed to the 11th District Cost of Funds which is considered a "lagging" index; i.e., the index is tied to variables that may not reprice on a basis as quickly as market rates (e.g, the One-Year Treasury). In a period of rising interest rates, Madison First's adjustable-rate mortgage loans tied to this lagging index may not adjust upward as quickly as market rates. See "Business of Madison First." As a result of the foregoing, Madison First's net interest income could be adversely affected in periods of rising interest rates. At June 30, 1996, based on financial modeling information provided by the OTS, it was estimated that Madison First's NPV (the present value of cash flows from assets, liabilities, and off-balance sheet items) would increase 4%, 4%, 7% and 13% in the event of 1%, 2%, 3% and 4% decreases in market interest rates, respectively. Madison First's NPV at the same date would decrease 8%, 18%, 30% and 43% in the event of 1%, 2%, 3% and 4% increases in market rates, respectively. These calculations indicate that Madison First's net portfolio value could be adversely affected by increases in interest rates but that Madison First's interest rate risk is within the definition of "normal" level of exposure under the net market value methodology proposed by the OTS, which is 2% of the present value of its assets. As a result, if the OTS' NPV methodology had been effective and if Madison First had been subject to the OTS' reporting requirements under this methodology, it would not have been required to take a deduction from capital available to calculate its risk-based capital requirement at June 30, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Madison First Federal Savings and Loan Association -- Asset/Liability Management." Like Madison First, Citizens' profitability is to a large extent dependent upon its net interest income. Citizens' one-year adjustable-rate mortgage loans provide for maximum rate adjustments of 1% per year and 5% over the terms of the loans. In a period of rising interest rates, these restrictions on rate adjustments may prevent Citizens' adjustable-rate loans from repricing upward as quickly or by as much as market rates. This could negatively affect Citizens' net interest income. See "Business of Citizens." Although Citizens' NPV is not as sensitive to fluctuations in market rates as Madison First's at June 30, 1996, Citizens' net portfolio value may be negatively impacted by changes in market rates. At June 30, 1996, based on financial modeling information provided by Baxter Capital Management, Inc., Madison First's financial advisor, it was estimated that Citizens' NPV would increase 10.2% in the event of a 2% increase in market interest rates and would decrease 11.2% in the event of a 2% decrease in market interest rates. These calculations indicate that Citizens' net portfolio value is more sensitive to decreases in market interest rates but that Citizens' interest rate risk would be within the definition of normal level of exposure if the OTS methodology described above was effective and applicable to Citizens. As a result, Citizens would not have been required to take a deduction from capital at June 30, 1996 under such methodology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Citizens National Bank of Madison -- Asset/Liability Management." Madison First and Citizens, like most financial institutions, will continue to be affected by general changes in levels of interest rates and other economic factors beyond its control. Divestiture of Hanover Branch As a condition to the Holding Company obtaining approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to divest its Hanover, Indiana branch. The Holding Company's commitment requires that (i) Madison First enter into a definitive agreement to divest the Hanover branch, including the physical facilities and at least $7.5 million of deposits originated at that branch (consisting of 10% of Madison First's deposits at June 30, 1996), prior to consummation of the Acquisition and (ii) the Hanover branch be divested by Madison First within 180 days of the Acquisition. If Madison First is unable to sell the physical facilities associated with its Hanover branch but completes the sale of the branch deposits as required by the Holding Company's commitment to the FRB, the Holding Company has undertaken not to reopen the Hanover facilities for a period of two years following the Acquisition. In the event Madison First does not complete the divestiture of its Hanover branch within 180 days of the consummation of the Acquisition, the Hanover branch will be placed in trust, and an independent trustee will proceed with an immediate disposition of the Hanover branch without regard to price. Delays in Madison First's divestiture of its Hanover branch may cause significant delays in the completion of the Conversion and the Acquisition, and could force the Holding Company and Madison First to abandon both the Conversion and the Acquisition. See " -- Risks of Delayed Offering." The Holding Company cannot consummate the Acquisition until Madison First has entered into a definitive agreement providing for the sale of the Hanover branch. Unless Madison First has entered into such a definitive agreement and the Holding Company has completed the Acquisition by December 31, 1996, Mrs. Durocher may terminate the Agreement. See "The Acquisition -- Termination of the Agreement -- Termination by Mrs. Durocher." Although Mrs. Durocher could extend the date by which the Acquisition must be completed, she is under no obligation to do so, and no assurance can be given that she would do so if requested by the Holding Company and Madison First. If Madison First has not entered into a definitive sale agreement by December 31, 1996 and Mrs. Durocher terminates the Agreement, the Plan of Conversion will terminate and neither the Acquisition nor the Conversion will be completed. See "The Acquisition -- Acquisition as Condition to Conversion." Moreover, if Madison First does enter into a definitive agreement for the sale of the Hanover branch but does not complete the sale within 180 days of consummation of the Acquisition, the Hanover branch will be placed in trust and will be sold by an independent trustee without regard to price. A forced sale of the Hanover branch by an independent trustee would likely result in Madison First receiving less for the Hanover branch than that which it considers a fair market value. Risks Relating to the Acquisition In connection with the Conversion, the Holding Company will acquire the Citizens Shares in the Acquisition. The Holding Company and Madison First have never acquired another financial institution, and the future success of the Holding Company will, in part, depend on the success of Citizens and the Acquisition. The success of the Acquisition will, in turn, depend on a number of factors, including the ability of the Holding Company to integrate the operations of the Institutions, where appropriate, in a manner that allows the Institutions to benefit from overall operating efficiencies and the Holding Company's ability to control incremental non-operating expense from the Acquisition. There can be no assurance that Citizens' business will be successfully integrated into Madison First's operations or result in improved profits. A material delay in consummating the Acquisition may result in a significant increase in the costs of completing the Conversion and the Acquisition. See "-- Risk of Delayed Offering." Commercial Lending Citizens is an active nonmortgage commercial lender in its market area. Citizens' nonmortgage commercial loans are usually adjustable-rate loans and have varying terms depending on the nature of the collateral, if any. As of June 30, 1996, approximately 75.8% of Citizens' nonmortgage commercial loans were secured by some type of collateral. While such lending assists Citizens in its asset/liability management and provides a greater yield than one- to four-family residential mortgage lending, this type of lending involves a higher degree of credit risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the projects involved. In addition, the nature of these loans makes them more difficult to monitor and evaluate. As of June 30, 1996, $3.9 million, or 9.1% of Citizens' total loan portfolio, was comprised of nonmortgage commercial loans. On the same date, $305,000, or 51.4%, of Citizens' non-performing loans consisted of nonmortgage commercial loans or participations therein. See "Business of Citizens -- Lending Activities -- Commercial Loans" and "-- Non-Performing and Problem Assets." Nonresidential Real Estate and Multi-Family Lending In an effort to generate loan growth, Citizens has been, and after the Acquisition will continue to be, active in the origination of nonresidential real estate and multi-family loans. As of June 30, 1996, Citizens' total portfolio of nonresidential real estate and multi-family loans amounted to $8.4 million and $1.1 million, respectively, or 19.5% and 2.6%, respectively, of Citizens' total loan portfolio. Madison First, while less active than Citizens in these lending areas, had nonresidential real estate and multi-family loans of $6.6 million and $1.5 million, respectively, or 11.5% and 2.6%, respectively, of Madison First's total loan portfolio at June 30, 1996. Although nonresidential real estate and multi-family loans provide higher interest rates and shorter terms, these loans have higher credit risk than one- to four-family residential loans. Nonresidential real estate and multi-family loans often involve large loan balances to single borrowers or groups of related borrowers. In addition, payment experience on loans secured by such properties is typically dependent on the successful operation of the properties and thus may be subject to a greater extent to adverse conditions in the real estate market or in the general economy. Accordingly, the nature of the loans make them more difficult for management to monitor and evaluate. Moreover, to the extent that the properties constitute new ventures, predictions about their operating results are inherently speculative, and cash flow and other financial problems may take some time to develop. If these borrowers develop problems, because of the relatively large size of the loans, such problems may require significant increases in allowances for loan losses, and may result in significant reductions in net income. Such reductions could have an adverse effect on the shares of Common Stock offered hereby. Madison First's largest nonresidential real estate and multi-family loans had outstanding balances of $825,000 and $729,000, respectively, as of June 30, 1996. Citizens' largest nonresidential real estate and multi-family loans had outstanding balances of $339,000 and $397,000, respectively, as of June 30, 1996. None of Madison First's nonresidential real estate and multi-family loans was non-performing as of June 30, 1996. As of the same date, none of Citizens' multi-family loans was included in non-performing assets, and nonresidential real estate loans totalling $114,000 were non-performing, constituting 19.2% of all non-performing loans. See "Business of Madison First -- Lending Activities" and "Business of Citizens - -- Lending Activities." Decreasing Earnings and Impact on Return on Equity Due to the strong competition in the Institutions' market area, Madison First has been aggressively pricing its deposit products to assist it in maintaining its deposit base. Similarly, Madison First has attempted to competitively price its loan products within its market area. These pricing strategies, together with Madison First's emphasis on residential mortgage loans which have lower yields than other loan products with higher credit risk, have negatively affected Madison First's net interest income and its interest rate spread. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Madison First Federal Savings and Loan Association." While Madison First has strategies to increase its earnings, there can be no guarantee that it will be successful in doing so. Moreover, it is not expecting immediate reductions in expenses following the Conversion and the Acquisition, and the Holding Company is expected to incur additional expenses as a result of the Conversion and the Acquisition, including expenses that may be incurred in connection with any acquisition by it of the Minority Shares. Moreover, while Madison First is not converting primarily as a capital raising tool, Madison First will have a substantially increased capital position following the Conversion. Based on the Holding Company's pro forma capital at June 30, 1996 of $13.9 million and 1995 pro forma net income of $670,000 (based on the midpoint of the Estimated Valuation Range), the Holding Company would have pro forma return on shareholders' equity of less than 7%, which in the opinion of management is not an acceptable long-term return. See "Pro Forma Data." Unacceptable returns likely will continue for the foreseeable future. In pursuing the Conversion and the Acquisition, the Holding Company and the Institutions are committed to building profitable, independent community-based financial institutions. As a result, following consummation of the Conversion and the Acquisition, the Holding Company expects to pursue a long-term strategy to enhance shareholder value. Existence of Minority Shares The Holding Company will be acquiring only 95.6% of the outstanding shares of Citizens. Following the Acquisition, the Holding Company may consider the acquisition of the remaining 4.4% interest in a transaction in which fair consideration would be provided to the holders of the Minority Shares, most likely in the form of cash or Common Stock, or a combination thereof. Unless and until the Minority Shares are acquired, Citizens may decide not to declare cash dividends, as the holders of the Minority Shares would have to participate in those dividends on a pro rata basis. A transaction in which the Holding Company acquires the Minority Shares could result in increased costs and expenses to the Holding Company and, to the extent that Common Stock is issued in such a transaction, could dilute the interests of the Holding Company's existing shareholders. Possible Dilutive Effect of Future Stock Benefit Plans Following the Conversion, it is likely that the Holding Company will adopt, subject to shareholder approval, employee and management benefit plans which may involve the issuance of additional shares of Common Stock. In particular, the Holding Company anticipates adopting the RRP and the Stock Option Plan following the Conversion, subject to receiving shareholder approval of such plans at a shareholders' meeting to be held at least six months after the completion of the Conversion. Under the RRP, directors, officers, and employees of the Holding Company and the Institutions could be awarded an aggregate amount of Common Stock equal to 4% of the shares issued in the Conversion. Under the Stock Option Plan, directors, officers, and employees of the Holding Company and the Institutions could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion at exercise prices equal to the fair market value of the shares on the date of grant. It is currently anticipated that the shares issued to directors, officers, and employees of the Holding Company and the Institutions under the RRP will be shares purchased on the open market. However, to the extent shares are not available on the open market or the Holding Company decides not to purchase such shares on the open market, authorized but unissued shares of Common Stock may be issued to recipients of awards under the RRP. If newly issued shares are used, the interests of existing shareholders will be diluted. Assuming that 900,000 shares of Common Stock are issued in the Conversion and that all awards under the RRP are from authorized but unissued shares, the Holding Company estimates that the per share book value for the Common Stock would be diluted $0.60 per share, or 3.8%, on a pro forma basis as of June 30, 1996. See "Pro Forma Data." It is also expected that options to purchase a number of shares of Common Stock equal to 10.0% of the shares sold in the Conversion will be granted pursuant to the Stock Option Plan. The grant of these stock options may also be considered dilutive of the interests of shareholders. Potential Benefits to Management Upon and Subsequent to Conversion ESOP. The Holding Company has adopted the ESOP effective January 1, 1996 for eligible employees of the Holding Company and the Institutions, including executive officers. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and use such funds to purchase a number of shares of Common Stock equal to 8% of the shares issued in the Conversion. Collateral for the loan will be the Common Stock purchased by the ESOP in the Conversion. The loan will be repaid principally from the Institutions' discretionary contributions to the ESOP over a period of 10 years. Shares purchased by the ESOP will be held in a suspense account for allocation among participants as the loan is repaid. Assuming shares of Common Stock appreciate in value over time, compensation expense relating to the ESOP will also incease over time. See "-- ESOP Compensation Expense," "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." Stock Options. The Board of Directors of the Holding Company intends to implement the Stock Option Plan, contingent upon receipt of shareholder approval at a meeting to be held at least six months following completion of the Conversion. Assuming 900,000 shares of Common Stock are issued in the Conversion and receipt of the required approval, it is expected that stock options for 90,000 shares of Common Stock will be granted under the Stock Option Plan. The exercise price of the options, which would be granted at no cost to the recipient thereof, would be the fair market value of the Common Stock subject to the option on the date the option is granted, which is expected to be the date of the shareholder meeting. RRP. The Board of Directors of the Holding Company intends to implement the RRP contingent upon receipt of approval from the Holding Company's shareholders at a meeting to be held at least six months following completion of the Conversion. Subject to such approval, the RRP will purchase an amount of shares after the Conversion equal to up to 4% of the shares issued in the Conversion (36,000 shares at the midpoint of the Estimated Valuation Range). Awards under the RRP would be granted at no cost to the recipient thereof. ESOP Compensation Expense In November, 1993, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires an employer to record compensation expense in an amount equal to the fair value of shares committed to be released to employees from an employee stock ownership plan. If shares of Common Stock appreciate in value over time, the adoption of SOP 93-6 may increase compensation expense relating to the ESOP to be established in connection with the Conversion as compared with prior guidance which required the recognition of compensation expense based on the cost of shares acquired by the ESOP. It is impossible to determine at this time the extent of such impact on future net income. No Prior Market for Common Stock The Holding Company has never issued Common Stock to the public; consequently, there is no established market for the Common Stock. However, the Holding Company will use its best efforts to develop a public market for the Common Stock. The Holding Company has received approval to have its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "RIVR" upon successful completion of the offering, subject to certain conditions which the Holding Company and Madison First believe will be met. The Holding Company anticipates that there will be at least two market makers for the Common Stock upon the completion of the Conversion, depending upon the volume of trading activity in the Common Stock and subject to compliance with applicable provisions for federal and state securities laws and other regulatory requirements. The Agent intends to make a market in the Common Stock, although it is under no obligation to do so. An active and liquid public trading market for the securities of any issuer, including the Holding Company, depends upon the presence in the marketplace of both willing buyers and willing sellers of the securities at any given time. Although the Holding Company has received approval to have its shares quoted on the NASDAQ Small Cap Market, no assurance can be given that an active and liquid trading market will develop or that the trading price per share of the Common Stock will equal or exceed the Purchase Price. Purchasers of Common Stock should consider, therefore, the potentially illiquid and long-term nature of their investment in the shares of Common Stock being offered hereby. Even if a market develops, there can be no assurance that shareholders will be able to sell their shares at or above the Purchase Price after the completion of the Conversion. See "Market for the Common Stock." Competition The Institutions experience strong competition in their local market area in both originating loans and attracting deposits. This competition arises principally from commercial banks, thrifts and credit unions. The recent enactment of federal and Indiana interstate branching legislation may also increase the Institutions' competition in their market. Such competition may limit the Institutions' growth in the future. See "Competition." Geographic Concentration of Loans At December 31, 1995, 95.2% of Madison First's real estate mortgage loans and 90.3% of Citizens' real estate mortgage loans were secured by properties located in Indiana. A substantial portion of such loans is located in the Institutions' primary market area. While each of the Institutions currently believes that its loans reflect sufficient collateral coverage and its loss allowances are adequate, in the event that real estate prices in Jefferson County substantially weaken or economic conditions in the Institutions' primary market area deteriorate, reducing the value of properties securing such loans, it is possible both that some borrowers may default and that the value of the real estate collateral may be insufficient to fully secure the loan. In either event, the Institutions may experience increased levels of delinquencies and related losses having an adverse impact on net income. Risk of Delayed Offering The Holding Company and Madison First expect to complete the Conversion within the time periods indicated in this Prospectus. Nevertheless, it is possible, although not anticipated, that adverse market, economic or other factors could significantly delay the completion of the Conversion and result in a delay in shareholders of the Holding Company receiving their stock certificates, increased Conversion costs and expenses or a change in the Estimated Valuation Range. Moreover, consummation of the Conversion is conditioned on the satisfaction of all conditions precedent to the Acquisition. Therefore, a delay in the satisfaction of any condition precedent to the Acquisition would result in a delay in completing the Conversion, and the inability of Madison First to enter into a definitive agreement for the sale of its Hanover branch prior to December 31, 1996 could result in the termination of the Agreement and the Plan of Conversion. See "-- Divestiture of Hanover Branch. The Subscription Offering could be extended to January 25, 1997 and the Direct Community Offering extended to as late as January 25, 1997, before subscribers would have the right to modify or rescind their subscriptions. If the Subscription Offering or the Direct Community Offering is extended beyond such dates, all subscribers will have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly, with interest, or to have their withdrawal authorizations terminated. See "The Conversion." Anti-Takeover Provisions Provisions in the Holding Company's Governing Instruments. The Articles of Incorporation of the Holding Company contain certain provisions which could impede a non-negotiated, unsolicited change in control of the Holding Company, even if desired by a majority of the shareholders. The Articles of Incorporation provide that: (i) no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company (provided that such limitations shall not apply to the acquisition of equity securities by any one or more tax-qualified employee stock benefit plans maintained by the Holding Company, if the plan or plans beneficially own no more than 25% of any class of such equity security of the Holding Company); and that (ii) shares beneficially owned in violation of the stock ownership restriction described above shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to a vote of the shareholders. For these purposes, a person (including management) who has obtained the right to vote shares of the Common Stock pursuant to revocable proxies shall not be deemed to be the "beneficial owner" of those shares if that person is not otherwise deemed to be the beneficial owner of those shares. See "Restrictions on Acquisition of the Holding Company -- Provisions of the Holding Company's Articles and By-Laws." In addition, the Articles of Incorporation provide for the issuance of serial preferred stock with such designations and preferences as may be determined by the Holding Company's Board of Directors, without obtaining shareholder approval. Such preferred stock could be used by the Holding Company to impede a non-negotiated change of control, even if the change in control might result in shareholders receiving a substantial premium for their shares over then-current market prices. Moreover, federal and Indiana laws contain provisions that restrict the acquisition of control of the Holding Company and the Institutions. Indiana law specifically authorizes directors, in considering the best interest of the corporation, to consider the effects of any action on shareholders, employees, suppliers, and customers of the corporation, and communities in which offices or other facilities of the corporation are located, and any other factors the directors consider pertinent. Indiana law also provides that directors are not required to approve a business combination or other corporate action if the directors determine in good faith that such approval is not in the best interest of the corporation. See "Restrictions on Acquisition of the Holding Company -- Other Restrictions on Acquisition of the Holding Company and the Institutions." Although the Holding Company's Board of Directors believes that the restrictions on acquisition are beneficial to shareholders, the provisions may have the effect of rendering the Holding Company less attractive to potential acquirors thereby discouraging future takeover attempts which would not be approved by the Board of Directors but which certain shareholders might deem to be in their best interest or pursuant to which shareholders might receive a substantial premium for their shares over then current market prices. These provisions will also render the removal of the incumbent Board of Directors and of management more difficult. The Board of Directors has, however, concluded that the potential benefits of these restrictive provisions outweigh the possible disadvantages. Voting Control of Directors and Executive Officers. Directors and executive officers of the Holding Company and the Institutions and their Associates expect to purchase 104,800 shares at $10.00 per share, or 13.7% and 10.1% of the shares of Common Stock offered in the Conversion based upon the minimum and maximum, respectively, of the Estimated Valuation Range. Employees of the Institutions, including their executive officers, will also be eligible to participate in the ESOP and be able to vote shares allocated to their accounts under the ESOP. See "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." Moreover, the Holding Company intends to adopt, after the Conversion, stock benefit plans for employees and management of the Holding Company and the Institutions. See "Executive Compensation and Related Transactions of Madison First -- RRP," "-- Stock Option Plan," "Executive Compensation and Related Transactions of Citizens - -- RRP" and "-- Stock Option Plan." Accordingly, directors and executive officers of the Holding Company and the Institutions as a group may have effective control over an even greater amount of stock in the future. Assuming the sale of 900,000 shares of Common Stock in the Conversion and that all shares awarded under the RRP are purchased on the open market and upon (i) the full vesting of the restricted stock awards to directors and executive officers contemplated under the RRP and (ii) the exercise in full of all options expected to be granted to directors and executive officers under the Stock Option Plan, the Institutions' and the Holding Company's directors and executive officers would receive an additional 107,460 shares of Common Stock and would exercise effective control of 21.8% of the outstanding shares of Common Stock. Regulatory Oversight and Recent Legislation Madison First is subject to extensive regulation, supervision and examination by the OTS as its primary federal regulator and by the FDIC, which insures its deposits up to applicable limits. Madison First is a member of the FHLB of Indianapolis and is subject to certain limited regulation by the FRB. Citizens is subject to extensive regulation, supervision and examination by the Office of Comptroller of Currency (the "OCC") as its primary federal regulator and by the FDIC, which insures its deposits up to applicable limits. Citizens is also a member of the FHLB of Indianapolis and the Federal Reserve System. As a savings and loan holding company, the Holding Company will be subject to regulation and oversight by the OTS. As a bank holding company, the Holding Company will also be subject to regulation and oversight by the FRB. See "Regulation." Such regulation and supervision govern the activities in which an institution can engage and are intended primarily for the protection of the insurance fund and deposits. With a view to strengthening the banking industry, regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant, and increases in such costs may have an adverse effect on the Holding Company's results of operations. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, Madison First will be charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. This one-time assessment will be recognized as a non-recurring operating expense during the three-month period ending September 30, 1996, will be due November 29, 1996 and will be fully deductible for both federal and state income tax purposes. For a description of the impact of this assessment on Madison First, see "Recent Developments." Beginning January 1, 1997, the annual deposit insurance premium for Madison First will be reduced from .23% to .0644% of total assessable deposits. The law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits are precluded from switching deposits into the BIF. See "Regulation -- Insurance of Deposits." A recently enacted law also effected significant changes in the available methods of computing bad debt deductions for savings associations, like Madison First. Historically, savings associations have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, Madison First will no longer be able to use the percentage of taxable income method of computing its allowable tax bad debt deduction. Madison First will be required to compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) Madison First no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by Madison First. See "Taxation." Congress is considering legislation that would consolidate the supervision and regulation of all U.S. financial institutions into one administrative body, would expand the powers of financial institutions, and would provide regulatory relief to financial institutions (the "Legislation"). It cannot be predicted with certainty whether or when the Legislation will be enacted or the extent to which the Holding Company, would be affected thereby. Income Tax Consequences of Subscription Rights If the subscription rights granted in connection with the Conversion are deemed to have an ascertainable value, receipt of such rights will be taxable to recipients, either as ordinary income or capital gain, in an amount not in excess of such value. In the opinion of Keller, the subscription rights have no ascertainable fair market value. See "The Conversion -- Principal Effects of Conversion -- Tax Effects." RIVER VALLEY BANCORP The Holding Company was incorporated under the laws of the State of Indiana on May 22, 1996, for the purpose of acquiring all of the common stock of Madison First in the Conversion and the Citizens Shares in the Acquisition and acting as the Institutions' holding company. As the Holding Company was not incorporated until recently and is currently a shell corporation, no Holding Company financial statements are included herein. The holding company structure will provide increased flexibility in conducting future business activities related to the Institutions. The Holding Company has received approval of the OTS to become a savings and loan holding company through the acquisition of all of the common stock of Madison First to be issued upon completion of the Conversion. The Holding Company has also received the approval of the FRB to become a bank holding company through the acquisition of the Citizens Shares upon consummation of the Acquisition; however, the FRB's approval was conditioned on the Holding Company's commitment to cause Madison First to (i) enter into a definitive agreement to sell Madison First's Hanover, Indiana branch, including the physical facilities and at least $7.5 million of deposits originated at that branch, prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch within 180 days of consummation of the Acquisition. See "Risk Factors -- Divestiture of Hanover Branch." As an Indiana corporation, the Holding Company is authorized to engage in any activity that is permitted by the Indiana Business Corporation Law, as amended (the "IBCL"). The Board of Directors of the Holding Company anticipates that, after completion of the Conversion, the Holding Company will conduct its business as a bank holding company in respect of Citizens and as a savings and loan holding company in respect of Madison First. As a bank holding company for Citizens, the Holding Company's activities will be limited to those permitted by FRB regulations. See "Regulation -- Bank Holding Company Regulation." The holding company structure will provide the Holding Company with greater flexibility than the Institutions to diversify their business activities, either through newly-formed subsidiaries or through acquisitions. The Holding Company has no current arrangements, discussions or agreements, written or oral, regarding any such business activities or acquisitions other than in connection with the Acquisition at this time. However, after the Conversion the Holding Company will be able to take advantage of favorable business or acquisition opportunities that may arise. The Holding Company currently intends to maintain the independence of the Institutions, but may in the future evaluate a possible merger or consolidation of the Institutions. Upon consummation of the Conversion and the Acquisition, the Holding Company will have no significant assets other than the common stock of Madison First to be issued in connection with the Conversion, the Citizens Shares, the ESOP loan and that portion of the net Conversion proceeds retained by the Holding Company and not used by the Holding Company to purchase the Citizens Shares. The Holding Company will initially receive 50% of the net Conversion proceeds after providing for the Holding Company's loan to the ESOP which will permit the ESOP to purchase Common Stock in the Conversion. The Holding Company will use $3.0 million of the proceeds to purchase the Citizens Shares in the Acquisition and a portion of the proceeds to make a capital contribution to Citizens of up to $1.5 million. The Holding Company may use any remaining funds for general corporate purposes, including the payment of dividends and, subject to OTS approval, repurchases of shares of its Common Stock in the future. However, the Holding Company has no present plans to pay dividends or effect repurchases of the Common Stock. Any activities of the Holding Company will initially be funded from such net proceeds, repayments on the ESOP loan and through future dividends from the Institutions, which are subject to certain limitations. Citizens does not anticipate paying dividends on its common stock in the foreseeable future and may be effectively precluded from paying dividends until the Holding Company acquires the Minority Shares. See "Dividend Policy," "Regulation -- Dividend Limitations," and "Use of Proceeds." Assuming net Conversion proceeds at the midpoint of the Estimated Valuation Range and assuming (i) the Holding Company's purchase of the Citizens Shares for $3.0 million and (ii) the Holding Company's $1.5 million capital contribution to Citizens, the Holding Company's pro forma total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio would be 17.2%, 16.1% and 9.6%, respectively. The executive offices of the Holding Company are located at 303 Clifty Drive, Post Office Box 626, Madison, Indiana 47250 and its telephone number is (812) 273-4949. MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION Madison First was organized as a federally chartered savings and loan association in 1875 and currently conducts its business from three full-service offices and one stand-alone drive-through branch all located in Jefferson County, Indiana. However, as a condition to the Holding Company obtaining the requisite approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to (i) enter into a definitive agreement to sell Madison First's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and at least $7.5 million of deposits originated at that branch, within 180 days of consummation of the Acquisition. In the event Madison First does not complete the divestiture of its Hanover branch within 180 days of the consummation of the Acquisition, the Hanover branch will be placed in trust, and an independent trustee will proceed with an immediate disposition of the Hanover branch without regard to price. See "Risk Factors -- Divestiture of Hanover Branch." Management believes Madison First has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. Madison First offers a variety of lending, deposit and other financial services to its retail and commercial customers. Madison First attracts deposits from the general public and originates mortgage loans, most of which are secured by one- to four-family residential real property in Jefferson County, Indiana. Madison First also offers second mortgage loans, indemnification mortgage loans, construction loans, multi-family loans, nonresidential real estate loans, land loans and consumer loans, including automobile loans, loans secured by deposits, home equity loans and installment loans. Madison First derives most of the funds for its lending from deposits of its customers consisting primarily of certificates of deposit, demand accounts and savings accounts. Madison First has maintained a relatively strong capital position by focusing on residential real estate mortgage lending in Jefferson County, Indiana. At June 30, 1996, Madison First had total assets of $81.9 million, deposits of $74.7 million and net equity capital of $6.7 million. For the fiscal year ended December 31, 1995, Madison First had net income of $258,000, a return on assets of 0.30% and a return on equity of 4.01%. Madison First has experienced very few asset quality problems in its total loan portfolio, and at June 30, 1996, its ratio of non-performing assets to total assets was .27%. During the year ended December 31, 1995, Madison First recovered $5,000 of loans previously charged off. Madison First made no charge offs during the same period. At June 30, 1996, Madison First's equity capital equaled 8.2% of total assets. Assuming net proceeds at the midpoint of the Estimated Valuation Range, Madison First's pro forma equity to assets ratio at June 30, 1996, after adjustments, would have been 12.3%. Assuming net proceeds are allocated to Madison First at the midpoint of the Estimated Valuation Range (except for 50% of the net Conversion proceeds after providing for the Holding Company's loan to the ESOP retained by the Holding Company), Madison First's pro forma tangible capital, core capital and risk-based capital ratios would have been 12.2%, 12.2% and 23.4%, respectively, at June 30, 1996. Madison First's capital ratios are now, and on a pro forma basis will be, in excess of the capital requirements imposed by applicable law. See "Pro Forma Data -- Regulatory Capital Compliance." Madison First has no current arrangements, negotiations, or agreements, written or oral, with respect to any future acquisition. CITIZENS NATIONAL BANK OF MADISON Citizens was organized as a national bank in 1981. Citizens conducts its business from four full-service offices, all located in Jefferson County, Indiana. Citizens has cultivated a solid reputation in its market area as a responsive full-service community bank through its offering of a wide variety of lending, deposit and other financial services to its retail and commercial customers. Citizens attracts deposits from the general public and originates residential, multi-family, land, nonresidential mortgage, construction and home equity loans, most of which are secured by real property located in Jefferson County, Indiana, nonmortgage commercial loans, mobile home loans, and consumer loans, including automobile loans, loans secured by deposits, and installment loans. Citizens derives most of the funds for its lending activities from deposits of its customers consisting primarily of certificates of deposits, demand accounts and savings accounts. See "Business of Citizens -- Lending Activities -- Origination, Purchase and Sale of Loans." By offering a wide variety of lending, deposit and other financial services to its retail and commercial customers, Citizens has benefited from consistent and sustained growth. At June 30, 1996, Citizens had total assets of $56.2 million, deposits of $51.8 million and net shareholders' equity of $3.4 million. Citizens has no accounting goodwill or other intangible assets on its balance sheet. For the fiscal year ended December 31, 1995, Citizens had net income of $342,000, or $2.71 per share, a return on assets of 0.7% and a return on equity of 10.7%. Despite its commitment to achieving aggressive growth in its loan portfolio, Citizens has been relatively successful in maintaining its asset quality. At June 30, 1996, Citizens' ratio of non-performing loans to total assets was 1.06%. For the year ended December 31, 1995, Citizens charged off $92,000 of loans, net of recoveries. At June 30, 1996, Citizens' net shareholders' equity capital totaled $3.4 million, or 6.1% of total assets. Assuming consummation of the Conversion and the Acquisition and assuming Citizens' receipt of a $1.5 million capital contribution from the Holding Company, Citizens' pro forma net shareholders' equity capital to total assets ratio at June 30, 1996 would have been 8.8%. Assuming Citizens' receipt of the $1.5 million capital contribution from the Holding Company anticipated upon completion of the Conversion and consummation of the Acquisition, Citizens' pro forma total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio would have been 13.9%, 12.7% and 8.8%, respectively. Citizens' capital ratios are now, and on a pro forma basis will be, in excess of its regulatory capital requirements, imposed by applicable law. See "Pro Forma Data -- Regulatory Capital Compliance." THE ACQUISITION General On March 4, 1996, Madison First and Ms. Durocher entered into the Agreement pursuant to which Madison First agreed to purchase through the Holding Company, and Ms. Durocher agreed to sell to the Holding Company, the Citizens Shares, which constitute 95.6% of the issued and outstanding capital stock of Citizens. In consideration of the Citizens Shares, the Agreement provides that the Holding Company will pay to Ms. Durocher cash in the amount of $3,010,725, or $25.00 per Citizens Share. For further information regarding Citizens, see "Citizens National Bank of Madison," "Business of Citizens" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Citizens National Bank of Madison." Reasons for the Acquisition The Acquisition will enable Madison First to expand its banking services. In addition, the Acquisition will enable Madison First to efficiently expand its lending emphasis to include installment, commercial and agricultural loan products through Citizens' established experience in such lending areas. Moreover, the Acquisition in combination with the Conversion will permit the Holding Company to put to use a significant portion of its capital, with the Institutions continuing to qualify as "well capitalized" institutions for regulatory purposes. The Acquisition is also expected to reduce the pressure to leverage the Holding Company's consolidated balance sheet that typically exists when a "well capitalized" institution engages in a standard conversion transaction. See "Unaudited Pro Forma Condensed Combined Financial Statements" and "Pro Forma Data -- Regulatory Capital Compliance." The Acquisition will also create an affiliation between the Institutions which is expected to enable the Holding Company and the Institutions to explore opportunities to integrate certain aspects of the Institutions' operations in a manner designed to achieve operating efficiencies, including the possible combination or integration of the Institutions' data processing, marketing, financial reporting, collections and human resources functions, compliance functions, their deposit and loan operations, and their insurance and employee benefit programs. The Holding Company and the Institutions will also be able to explore opportunities to utilize their offices and physical locations in a more efficient manner following the Acquisition. Closing The Agreement provides that the Acquisition will be consummated on such date as all conditions precedent to the Acquisition are satisfied, or at such later time as the parties may agree (the "Closing Date"). Conditions to the Acquisition Conditions to Each Party's Obligations. The respective obligations of each party to effect the Acquisition are subject to the condition that the Conversion shall have been consummated and any necessary regulatory approvals for the Acquisition shall have been obtained. The Holding Company has obtained the approval of the FRB to become a bank holding company upon the acquisition of the Citizens Shares in the Acquisition, subject to certain conditions. See "-- Regulatory Approvals" and "Regulation -- Bank Holding Company Regulation." Conditions to the Obligations of Madison First and the Holding Company. The obligations of Madison First and the Holding Company to effect the Acquisition are further subject to the satisfaction at or prior to the Closing Date of the following conditions: (i) the representations and warranties of Ms. Durocher contained in the Agreement shall be true and correct on the Closing Date; and (ii) Madison First and the Holding Company shall have completed a due diligence review of Citizens and the results of such review shall be satisfactory to Madison First and the Holding Company. The due diligence review of Citizens may continue until consummation of the Acquisition. Conditions to the Obligations of Ms. Durocher. The obligations of Ms. Durocher to effect the Acquisition are further subject to the satisfaction at or prior to the Closing Date of the conditions that the representations and warranties of Madison First contained in the Agreement shall be true and correct on the Closing Date. Regulatory Approvals Consummation of the Acquisition is conditioned on the Holding Company's obtaining all necessary regulatory approvals to acquire the Citizens Shares in the Acquisition. The Holding Company has obtained the approval of the FRB to become a bank holding company upon the acquisition of the Citizens Shares in the Acquisition. However, as a condition to the Holding Company obtaining the requisite approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to (i) enter into a definitive agreement to sell Madison's First's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and at least $7.5 million of deposits originated at that branch, within 180 days of consummation of the Acquisition. In the event Madison First does not complete the divestiture of its Hanover branch within 180 days of the consummation of the Acquisition, the Hanover branch will be placed in trust, and an independent trustee will proceed with an immediate disposition of the Hanover branch without regard to price. See "Risk Factors -- Divestiture of Hanover Branch" and "Regulation -- Bank Holding Company Regulation." Termination of the Agreement Termination by Either Party. The Agreement may be terminated by either party if: (i) at any time there shall have been a final determination that any material provision of the Agreement is illegal, invalid or unenforceable; or (ii) if it becomes clear that any condition precedent to such party's obligations under the Agreement cannot be satisfied on or prior to June 30, 1997. Termination by Madison First and the Holding Company. The Agreement may be terminated by Madison First and the Holding Company if: (i) Madison First and the Holding Company determine that the audited balance sheet of Citizens as of December 31, 1995 does not fairly present the financial position of Citizens as of such date; (ii) Madison First and the Holding Company determine that the audited income statement of Citizens for the year ended December 31, 1995 does not fairly present the financial results of operations of Citizens for such period; or (iii) Madison First and the Holding Company determine that there has been a material adverse change in the operations, prospects or financial condition of Citizens since December 31, 1995. Termination by Ms. Durocher. The Agreement may be terminated by Ms. Durocher if it becomes clear that any condition precedent to her obligations under the Agreement cannot be satisfied on or prior to December 31, 1996. Acquisition as Condition to Conversion The Conversion will not become effective until such time as all conditions precedent to the Acquisition are satisfied. If at any time it becomes clear that any condition precedent to the Acquisition will not be satisfied, the Conversion and the Plan of Conversion will terminate. See "The Conversion -- Conditions and Termination." Accounting and Tax Treatment The Holding Company will treat the Acquisition as a purchase for accounting purposes. For income tax purposes, the Acquisition will be treated as a purchase by the Holding Company of the Citizens Shares owned by Ms. Durocher. Accordingly, Ms. Durocher will realize a gain or loss equal to the difference between the purchase price and tax basis in the shares sold by her. None of the Holding Company, Madison First, Citizens, or the members of Madison First will realize a gain or loss by reason of the Acquisition. Operations After the Acquisition and the Conversion The Holding Company and Madison First currently intend to maintain Citizens as an independent entity but may in the future consider a merger or consolidation of the Institutions. The Holding Company may also evaluate alternatives to purchase the Minority Shares through a transaction in which holders of the Minority Shares would receive fair consideration, most likely in the form of cash, shares of Common Stock or a combination thereof. In the meantime, the Holding Company and the Institutions will explore opportunities to integrate certain aspects of the Institutions' operations in a manner designed to achieve operating efficiencies, including the possible combination or integration of the Institutions' data processing, marketing, financial reporting, collections and human resources functions, their deposit and loan operations, and their insurance and employee benefit programs. The Holding Company and the Institutions may also explore opportunities to utilize their offices and physical locations in a more efficient manner. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited consolidated financial statements reflect the acquisition of the Citizens Shares by the Holding Company in the Acquisition and the Conversion of Madison First from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association. Pro forma adjustments related to the consolidated condensed combined pro forma statements of operations for the fiscal year ended December 31, 1995, and the six months ended June 30, 1996, have been prepared using the midpoint of the Estimated Valuation Range, and assuming both the Acquisition and the Conversion were consummated as of January 1, 1995 and January 1, 1996, respectively. The consolidated condensed combined pro forma statement of financial condition was prepared assuming both the Acquisition and the Conversion were consummated on June 30, 1996. The historical financial information has been derived from the historical financial statements of Madison First and Citizens. The consolidated condensed combined pro forma financial statements should be read in conjunction with the historical combined financial statements of Madison First and Citizens and the notes thereto and the other financial information pertaining to Madison First and Citizens included elsewhere in this Prospectus. The consolidated condensed combined pro forma financial statements have been prepared under the purchase method of accounting. Under purchase accounting, the acquired assets and liabilities of Citizens are recorded at fair value as of the date of consummation of the Acquisition. The pro forma consolidated condensed combined financial statements do not purport to be indicative of the financial position or operating results which would have been achieved had the Acquisition and the Conversion been consummated as of the dates or for the periods indicated and should not be construed as representative of future financial position or operating results. The pro forma adjustments are based on available information and assumptions Madison First believes are reasonable under the circumstances.
Unaudited Pro Forma Consolidated Condensed Combined Statements of Financial Condition ------------------------------------------------------------------------------------- June 30, 1996 Pro-Forma Conversion Acquisition Consolidated Adjustments (1) Adjustments (2) Condensed Footnote Madison First Citizens Dr. (Cr.) Dr. (Cr.) Combined References ------------- -------- --------- --------- -------- ---------- (In Thousands) Assets: Cash and cash equivalents $ 2,442 $ 2,598 $8,333 $(3,075) $ 6,218 (1)(2) (720) (360) (3,000) Investment securities............... 9,940 4,983 14,923 (2) Mortgage-backed and related securities........................ 8,690 3,136 11,826 Loans receivable, net............... 57,449 43,003 100,452 (2) Goodwill, net of accumulated amortization.................... 144 --- 575 719 (1)(2)(7) Other assets........................ 3,151 2,357 (85) 5,423 (3)(6) ------- ------- ------- ------- -------- Total assets...................... $81,816 $56,077 $4,253 $(2,585) $139,561 ======= ======= ====== ======= ======== Liabilities: Total deposits...................... $74,727 $51,770 $3,000 $123,497 (1)(2) FHLB advances....................... --- 500 500 Other liabilities................... 402 367 (683) 1,452 (5) Minority interest in consolidated subsidiary........... --- --- (172) 172 (4) ------- ------- ------- ------- -------- Total liabilities................. 75,129 52,637 3,000 (855) 125,621 Shareholders' Equity: Preferred stock..................... --- --- (1)(2) Common stock........................ --- 1,008 1,008 --- (1)(2) Additional paid in capital.......... --- 1,657 (8,333) 1,657 8,333 (1)(2) Employee stock ownership plan....... --- --- 720 (720) (1)(2) Recognition and retention plan...... --- --- 360 (360) (1)(2) Retained earnings, substantially restricted.......... 6,727 875 875 6,727 (1)(2) Net unrealized losses on securities available for sale, net of related tax effects........ (40) (100) (100) (40) (2) ------- ------- ------- ------- -------- Total shareholders' equity..... 6,687 3,440 (7,253) 3,440 13,940 ------- ------- ------- ------- -------- Total liabilities and shareholders' equity ..... $81,816 $56,077 $(4,253) $ 2,585 $139,561 ======= ======= ======= ======= ========
(Footnotes on following page) (1) The pro forma financial statements reflect the sale of the Holding Company's Common Stock in the Conversion at the midpoint of the Estimated Valuation Range. The pro forma financial statements contemplate that $3.0 million of such Common Stock sales are effected via withdrawals from existing savings deposits. The pro forma Conversion adjustments also reflect the ESOP's and RRP's purchases of 8% and 4% of the shares offered in the Conversion, respectively, at the initial $10.00 Purchase Price. The RRP will be subject to approval by the shareholders at the Holding Company's first meeting of shareholders. (2) The pro forma financial statements depict the acquisition of 95.6% of Citizens' outstanding common stock for $3.0 million plus capitalized Acquisition costs totaling approximately $65,000. The Acquisition will be accounted for using the purchase method of accounting which requires that assets acquired and liabilities assumed are recorded at fair value at the Acquisition date. In the Acquisition, pro forma fair value adjustments have been effected to provide for exit costs related to data processing contracts and duplicative equipment, lease agreements and severance packages for personnel with overlapping responsibilities and estimated pension termination costs. Additionally, such pro forma adjustments take into consideration the costs of liquidating overlapping branch facilities. Fair value adjustments were not required for cash, investments and mortgage-backed securities due to fact that such instruments were carried at fair value. A fair value adjustment was not applied to the loan portfolio at June 30, 1996, based on an immaterial difference (less than $75,000) between the historic cost carrying value and fair value. The fair value adjustments described above were derived from analysis developed by management of Madison First and its investment banking firm. The following table sets forth the purchase price adjustments:
(In Thousands) Dr. (Cr.) Goodwill arising from the Acquisition 575 Write down of duplicative special purpose office premises and equipment (550) Tax benefits attendant to write down of office premises and equipment, as well as tax benefits attendant to termination of data processing contracts, pension liability and personnel severance packages 465 Pre-tax costs of servicing certain data processing contract, pension termination, and personnel severance packages (683) Residual 4.4% minority interest in Citizens after the Acquisition (172) ----- Total purchase price adjustments $(365) =====
(3) This pro forma adjustment reflects the write-down of duplicative special purpose premises and equipment to estimated net realizable value upon disposal ($550,000) net of the tax benefits resulting from the Acquisition totaling $465,000. (4) This adjustment represents the residual 4.4% minority interest in Citizens after the Acquisition. Based on materiality, no effect has been given as to the ultimate cost of such shares, if any. (5) This pro forma adjustment reflects the pre-tax costs of severing certain data processing contract, pension termination and personnel severance packages. (6) Tax benefits attendant to write down of office premises and equipment, as well as tax benefits attendant to termination of data processing contracts, pension liability and personnel severance packages. (7) Goodwill arising from Acquisition. (8) No consideration has been given to the financial statement effects attendant to the proposed sale of Madison First's Hanover branch. Unaudited Pro Forma Consolidated Condensed Combined Statements of Operations
For the Six Months Ended June 30, 1996 --------------------------------------------------------------------------------------- Conversion Purchase Pro Forma Combined Adjustments Adjustments After Conversion Footnote Madison First Citizens Dr. (Cr.) Dr. (Cr.) and Acquisition References ------------- -------- --------- --------- --------------- ---------- (In thousands) Interest Income: Loans.................................... $2,251 $1,824 $ --- $ --- $4,075 Investment securities.................... 291 96 (32) --- 419 (8) Mortgage-backed and related securities..................... 291 109 --- --- 400 Interest-bearing deposits and other...... 109 127 --- --- 236 ----- ----- ------ ------ ------- Total interest income................ 2,942 2,156 (32) --- 5,130 ----- ----- ------ ------ ------- Interest Expense: Deposits................................. 1,691 1,100 (78) --- 2,713 (8) Borrowed funds........................... 44 34 --- --- 78 ----- ----- ------ ------ ------- Total interest expense................. 1,735 1,134 (78) --- 2,791 ----- ----- ------ ------ ------- Net interest income.................... 1,207 1,022 (110) --- 2,339 Provision for loan losses................... 12 180 --- --- 192 ----- ----- ------ ------ ------- Net interest income after provision for loan losses................ 1,195 842 (110) --- 2,147 Other Income: Insurance commissions.................... 104 --- --- --- 104 Service fees, charges and other operating........................ 97 284 --- --- 381 Loss on sale of investment............... (16) --- --- (16) Other.................................... --- 27 --- 27 --- ----- ----- ------ ------ ------- Total other income.................... 201 295 --- 27 469 Other Expense: Employee compensation and benefits....... 592 452 --- (90) 954 (9) ESOP and RRP benefits.................... --- --- 72 --- 72 (10) Occupancy and equipment..................... 98 156 --- (10) 244 (11) Federal deposit insurance premiums.......... 88 20 --- --- 108 Data processing.......................... 141 --- --- --- 141 Amortization of goodwill and other intangibles.................. 4 --- --- 24 28 (12) Other ..................................... 184 308 --- --- 492 ----- ----- ------ ------ ------- Total other expense................... 1,107 936 72 (76) 2,039 ----- ----- ------ ------ ------- Income before income tax expense............ 289 201 (38) (49) 577 Income tax expense.......................... 108 67 15 20 210 ----- ----- ------ ------ ------- Net income.................................. $ 181 $ 134 $ (23) $ (29) $ 367 ===== ===== ====== ====== ======= Earnings per share (based on 900,000 weighted average shares outstanding)..... $ 0.41 ======
(8) Represents six month earnings of 5.25% (one-year Treasury rate) on $1,208,000 of the net proceeds retained after the Acquisition, as well as a reduction in the cost of savings on $3.0 million of deposit withdrawals at an assumed weighted average cost of 5.2%. (9) Represents the reduction in employee compensation due to severance packages. (10) Reflects six month amortization expense related to RRP (5-year term) and ESOP (10-year term). (11) Represents six month reduction in depreciation expense due to disposal of branch facilities and equipment. (12) Amortization of goodwill and other intangible assets over an estimated 12-year life. (13) Tax effects of pro forma adjustments. Unaudited Pro Forma Consolidated Condensed Combined Statements of Operations
For the Year Ended December 31, 1995 ------------------------------------------------------------------------------------------- Pro Forma Conversion Purchase Combined After Adjustments Adjustments Conversion and Footnote Madison First Citizens Dr. (Cr.) Dr. (Cr.) Acquisition References (In thousands) Interest Income: Loans ............................... $4,240 $3,194 $ --- $ --- $7,434 Investment securities................ 777 270 (63) --- 1,110 (8) Mortgage-backed and related securities................. 670 231 --- --- 901 Interest-bearing deposits and other.. 107 --- --- --- 107 ------- ------- ------- ------- -------- Total interest income.............. 5,794 3,695 (63) --- 9,552 ------- ------- ------- ------- -------- Interest Expense: Deposits........................... 3,419 1,750 (156) --- 5,013 (8) Borrowed funds..................... 175 70 --- --- 245 ------- ------- ------- ------- -------- Total interest expense............. 3,594 1,820 (156) --- 5,258 ------- ------- ------- ------- -------- Net interest income............ 2,200 1,875 (219) --- 4,294 Provision for loan losses............ 150 104 --- --- 254 ------- ------- ------- ------- -------- Net interest income after provision for loan losses.......... 2,050 1,771 (219) --- 4,040 Other Income: Insurance commissions................ 175 --- --- --- 175 Service fees, charges and other operating................ 187 450 --- --- 637 Gain on sales of investment securities.............. --- 4 --- --- 4 Other ............................... --- 109 --- 109 --- ------- ------- ------- ------- -------- Total other income................. 362 563 --- 109 816 ------- ------- ------- ------- -------- Other Expenses: Employee compensation and benefits....................... 998 831 --- (180) 1,649 (9) ESOP and RRP benefits................ --- --- 144 144 (10) Occupancy and equipment.............. 212 293 --- (18) 487 (11) Federal deposit insurance premiums........................... 177 60 --- --- 237 Data processing...................... 237 87 --- --- 324 Amortization of goodwill and other intangibles.............. 7 --- --- 48 55 (12) Other ............................... 335 498 --- --- 833 ------- ------- ------- ------- -------- Total other expense................ 1,966 1,769 144 (150) 3,729 ------- ------- ------- ------- -------- Income before income tax expense........ 446 565 (75) (41) 1,127 Income tax expense...................... 188 223 30 16 457 (13) ------- ------- ------- ------- -------- Net income.............................. $ 258 $ 342 $ (45) $ (25) $ 670 ======= ======= ======= ======= ======== Earnings per share (based on 900,000 weighted average shares outstanding)................ $ 0.74 =======
- ------------ (8) Represents earnings of 5.25% (one-year Treasury rate) on $1,208,000 of the net proceeds retained after the Acquisition, as well as a reduction in the cost of savings on $3.0 million of deposit withdrawals at an assumed weighted average cost of 5.2%. (9) Represents the reduction in employee compensation due to termination of pension liability and severance packages. (10) Reflects amortization expense related to RRP (5-year term) and ESOP (10-year term). (11) Represents reduction in depreciation expense due to disposal of branch facilities. (12) Amortization of goodwill and other intangible assets over an estimated 12-year life. (13) Tax effects of pro forma adjustments. MARKET AREA The Institutions' primary market area is Jefferson County, Indiana. Madison, the county seat of Jefferson County, is located in southern Indiana, approximately 95 miles south of Indianapolis, 55 miles northeast of Louisville, Kentucky and 75 miles west of Cincinnati, Ohio. According to the U.S. Bureau of Census, the city of Madison, the county seat of Jefferson County, had a population of 12,006, and Jefferson County had a population of 29,797, at the time of the 1990 census. According to the Indiana Department of Employment and Training Services, the total work force in Jefferson County was 14,830 as of January, 1996. As of the same date, 13,940 persons were employed, resulting in an unemployment rate for Jefferson County of approximately 6.0%. As of the same date, the unemployment for Indiana was 5.0%, and the nationwide unemployment rate was 6.3%. According to the Madison-Jefferson County Industrial Development Corporation, Jefferson County's largest employer with approximately 1,144 employees is Grote Industries, Inc., which manufactures truck, bus and trailer safety equipment. Jefferson County's second largest employer is Rotary Lift, a division of Dover Industries, which employs approximately 500 persons and manufactures automotive vehicle lift equipment. According to the Data Users Center and the CACI Sourcebook, average per capita income for residents of Jefferson County totaled $15,558 for 1995, compared to $16,405 for the United States and $16,671 for Indiana. The 1995 average per capita income for Jefferson County residents, however, increased 33.8% from the average per capita income of $11,631 for 1990. Average per capita income for residents of Madison, Indiana totaled $16,359 for 1995, an increase of 68.0% from $9,737 for 1990. Median household income for residents of Jefferson County totaled $34,597 for 1995, compared to $21,280 for 1990. Median household income for the United States and Indiana totaled $33,610 and $36,137, respectively, for 1995. Median household income for Madison totaled $34,456 for 1995. According to the United State Department of Commerce and the CACI Sourcebook, median housing values for Jefferson County and Madison in 1990 was $44,899 and $46,432, respectively. This compares to the national and state medians of $79,098 and $53,909, respectively. According to the United States Bureau of Census, new single-family housing starts in 1994 for Jefferson County and Madison increased 8.9% and 7.9%, respectively. New housing starts in 1994 for the United States and Indiana increased 8.8% and 10.2%, respectively. USE OF PROCEEDS The Holding Company will initially receive 50% of the net Conversion proceeds after providing for the loan to the ESOP to allow the ESOP to purchase shares of Common Stock in the Conversion. See "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." The Holding Company will use $3.0 million of the proceeds to acquire the Citizens Shares in the Acquisition. See "The Acquisition." The Holding Company will use a portion of the proceeds remaining after acquisition of the Citizens Shares to make a capital contribution to Citizens of up to $1.5 million. The Holding Company may use a portion of any remaining proceeds for the payment of dividends and future repurchases of its Common Stock as permitted by the OTS and applicable regulations, although it has no current plans to do so. See "The Conversion -- Restrictions on Repurchase of Stock." The funds received by the Institutions will be used primarily to make adjustable-rate mortgage loans, nonresidential real estate loans and consumer loans to the extent there is demand for such loans and subject to market conditions. On an interim basis, the net proceeds will be invested in U.S. government securities, other U.S. agency securities and mortgage-backed securities. See "Business of Madison First -- Investments and Mortgage-Backed Securities" and "Business of Citizens -- Investments and Mortgage-Backed Securities." Any remaining net proceeds may be used for general corporate purposes, including contributions to the proposed RRP. Neither the Holding Company nor Madison First has any current plans to acquire any other financial institutions, other than in connection with the Acquisition. The following table shows estimated gross and net proceeds based upon shares of Common Stock being sold in the Conversion at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range.
15% Above Minimum, Midpoint, Maximum, Maximum, 765,000 900,000 1,035,000 1,190,250 Shares Shares Shares Shares Sold at Price Sold at Price Sold at Price Sold at Price of $10.00 of $10.00 of $10.00 of $10.00(3) --------- --------- --------- ------------ (In thousands) Gross Proceeds.......................... $7,650 $9,000 $10,350 $11,903 Less: Estimated Underwriting Fees and Other Expenses(1) (2)............ (636) (667) (698) (735) ---- ---- ---- ---- Estimated net Conversion proceeds(1).......................... $7,014 $8,333 $ 9,652 $11,168 ====== ====== ======== =======
- ---------- (1) In calculating estimated net Conversion proceeds, it has been assumed that no sales will be made through selected dealers, that all shares are sold in the Subscription Offering, and that executive officers and directors of Citizens and Madison First and their Associates purchase 104,800 shares of Common Stock in the Conversion. (2) Does not include expenses related to the Acquisition estimated to be $65,000. For a disclosure regarding the impact of the Acquisition on tangible capital, see "Pro Forma Data." (3) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following the commencement of the Subscription and Direct Community Offerings. The actual net proceeds may differ from the estimated net proceeds calculated above for various reasons, including variances in the actual amount of legal and accounting expenses incurred in connection with the Conversion, commissions paid for sales made through other dealers, and the actual number of shares of Common Stock sold in the Conversion. Any variance in the actual net proceeds from the estimates provided in the table above is not expected to be material. DIVIDEND POLICY Upon Conversion, the Board of Directors of the Holding Company will have the authority to declare dividends on the Common Stock, subject to statutory and regulatory requirements. The Board of Directors may consider a policy of paying cash dividends on the Common Stock in the future. However, no decision has been made as to the amount or timing of any such dividends. The declaration and payment of dividends, if any, will depend upon a number of factors including the Holding Company's then-current and projected consolidated operating results and financial condition, regulatory restrictions, future growth plans and such other factors as the Board of Directors deems relevant. After the Conversion, the Institutions will be direct subsidiaries of the Holding Company. Initially, the Holding Company will have no independent operations or other subsidiaries to generate income. Consequently, other than the net proceeds of the Conversion that the Holding Company will receive (after funding the loan to the ESOP, purchasing the Citizens Shares in the Acquisition and making up to a $1.5 million capital contribution to Citizens) and repayments of the ESOP loan, the ability of the Holding Company to accumulate earnings for the payment of cash dividends to its shareholders or possible repurchases of shares of Common Stock will depend upon the ability of the Institutions to pay dividends to the Holding Company. Under OTS regulations, a converted savings association may not declare or pay a cash dividend if the effect would be to reduce its net worth below the amount required for the liquidation account. See "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." The liquidation account will initially equal approximately $6.6 million. In addition, under OTS regulations, the extent to which a savings association may make a "capital distribution," which includes, among other things, cash dividends, will depend upon in which one of three categories, based upon levels of capital, that savings association is classified. Madison First is now, and expects to be after the Conversion, a "tier one institution" and therefore would be able to pay cash dividends to the Holding Company during any calendar year of up to 100% of its net income during that calendar year plus the amount that would reduce by one half its "surplus capital ratio" (the excess over its Capital Requirements) at the beginning of the calendar year. See "Regulation -- Capital Distributions Regulation." Prior notice of any dividend to be paid by Madison First to the Holding Company will have to be given to the OTS. Income of Madison First appropriated to bad debt reserves and deducted from gross income for federal income tax purposes is not available for payment of cash dividends or other distributions to the Holding Company without the payment of federal income taxes by Madison First on the amount of such income. At December 31, 1995, approximately $2.4 million of Madison First's retained earnings represented bad debt deductions for which no federal income tax provision had been made. See "Taxation -- Federal Taxation." Madison First's unrecorded deferred income tax liability on such accumulated bad debt deduction at December 31, 1995 was approximately $700,000. See Note H to the Notes to Consolidated Financial Statements for additional information. For a description of a recently enacted law concerning deductions for bad debt reserves, see "Taxation -- Federal Taxation." Citizens is subject to OCC limits on its dividends. The approval of the OCC is required for any dividend by a national bank subsidiary if the total of all dividends, including any proposed dividends by the national bank in any calendar year, exceeds the total of its net profits (as defined by the OCC) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. Moreover, a national bank may not pay a dividend on its common stock if the dividend would exceed net undivided profits then on hand. In certain cases, even if prior approval of the OCC is not required, the OCC may find a dividend payment to be an unsafe and unsound practice. Following the Acquisition, Citizens may decide not to pay dividends to the Holding Company until the Holding Company purchases the Minority Shares through a transaction in which holders of the Minority Shares receive fair value, most likely in the form of cash, Common Stock or a combination thereof. In the event Citizens paid a dividend on its shares of common stock before such time, holders of the Minority Shares would receive the same per share amount as the Holding Company. Citizens does not anticipate paying dividends on its common stock in the foreseeable future. Generally, there is no OTS regulatory restriction on the payment of dividends by the Holding Company unless there is a determination by the Director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of Madison First. Under FRB supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FDIC also has authority under current law to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Institutions. Indiana law, however, would prohibit the Holding Company from paying a dividend, if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. See "Regulation -- Regulatory Capital" and "-- Dividend Limitations." MARKET FOR THE COMMON STOCK The Holding Company has never issued Common Stock to the public. Consequently, there is no established market for the Common Stock. The Holding Company has received approval to have its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "RIVR" upon successful closing of the offering. The Holding Company anticipates that there will be at least two market makers for its shares upon the completion of the Conversion, depending upon the volume of trading activity in the Common Stock and subject to compliance with applicable provisions of federal and state securities laws and other regulatory requirements. The Holding Company has not yet obtained any market makers and will not do so until the offering is completed. The Agent intends to make a market in the Common Stock, although it is under no obligation to do so. An active and liquid public trading market for the securities of any issuer, including the Holding Company, depends upon the presence in the marketplace of both willing buyers and willing sellers of the securities at any given time. The Holding Company has received approval to have its shares quoted on the NASDAQ Small Cap Market, subject to certain conditions which the Holding Company and Madison First believe will be met, including having at least 300 holders of Common Stock, at least 100,000 publicly held shares of Common Stock, and two market makers for the Common Stock. However, no assurance can be given that an active and liquid trading market will develop or that the trading price per share of the Common Stock will equal or exceed the Purchase Price. Purchasers of Common Stock should consider the potentially illiquid and long-term nature of their investment in the shares being offered hereby. The aggregate price of the Common Stock is based upon an independent appraisal of the pro forma market value of the Common Stock. However, there can be no assurance that an investor will be able to sell the Common Stock purchased in the Conversion at or above the Purchase Price. COMPETITION The Institutions originate most of their loans to and accept most of their deposits from residents of Jefferson County, Indiana. The Institutions are subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions, and certain nonbanking consumer lenders that provide similar services in Jefferson County with significantly larger resources than the Institutions. In total, there are 11 financial institutions located in Jefferson County, Indiana, including the Institutions. The Institutions also compete with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of savings associations and savings association acquisitions of banks in Indiana have been completed. Affiliations between banks and savings associations based in Indiana may also increase the competition faced by the Holding Company and the Institutions. In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana recently passed a law establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion and authorizes out-of-state banks meeting certain requirements to branch into Indiana by merger or de novo expansion. The Indiana Branching Law became effective March 15, 1996, provided that prior to June 1, 1997 interstate mergers and de novo branches are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo branches on a reciprocal basis. This new legislation may also result in increased competition for the Holding Company and the Institutions. Because of recent changes in federal law, interstate acquisitions of banks are less restricted than they were under prior law. Savings and loan associations have certain powers to acquire savings associations based in other states, and Indiana law expressly permits reciprocal acquisitions of Indiana savings assocations. In addition, federal savings associations are permitted to branch on an interstate basis. See "Regulation -- Acquisitions or Dispositions and Branching." The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Institutions compete for loan originations primarily through the efficiency and quality of services they provide borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that are not readily predictable. ANTICIPATED MANAGEMENT PURCHASES The following table sets forth information as to subscription rights to Common Stock intended at this time to be exercised by each director of Madison First and Citizens and the executive officers who are not directors of Madison First and Citizens (including shares to be purchased by their Associates) and all directors and executive officers of the Institutions as a group. For purposes of the following table, it has been assumed that sufficient shares will be available to satisfy subscriptions in all categories and that shares will be sold for $10.00 per share.
Aggregate Amount of Shares Percent of Shares Percent of Shares Percent of Shares Percent of Shares Purchase Proposed to be Assuming Assuming Assuming Assuming Price of Subscribed 765,000 Shares 900,000 Shares 1,035,000 Shares 1,190,250 Shares Name and Intended for all in are Sold in the are Sold in the are Sold in the are Sold in the Position Purchases(1) Categories Conversion Conversion Conversion Conversion - -------- ------------ ---------- ---------- ---------- ---------- ---------- All directors and Madison First Robert W. Anger, $ 50,000 5,000 0.65% 0.56% 0.48% 0.42% Vice President Lending and Director Traci A. Bridgford, 25,000 2,500 0.33 0.28 0.24 0.21 Vice President Compliance/ Operations (2) Lonnie D. Collins, 150,000 15,000 1.96 1.67 1.45 1.26 Secretary John Wayne Deveary, 100,000 10,000 1.31 1.11 0.97 0.84 Vice President and Treasurer Cecil L. Dorten, 150,000 15,000 1.96 1.67 1.45 1.26 Vice Chairman James E. Fritz, 150,000 15,000 1.96 1.67 1.45 1.26 President, Chief Executive Officer and Director (2) Michael J. Hensley, 100,000 10,000 1.31 1.11 0.97 0.84 Director Earl W. Johann, 50,000 5,000 0.65 0.56 0.48 0.42 Director Fred W. Koehler, 150,000 15,000 1.96 1.67 1.45 1.26 Chairman Citizens Burton P. Chambers, 1,000 100 0.01 0.01 0.01 0.01 Chairman (2) Jonnie L. Davis, 5,000 500 0.07 0.06 0.05 0.04 Director (2) Carolyn B. Flowers, 10,000 1,000 0.13 0.11 0.10 0.08 Vice President Compliance/ Operations (2) Larry C. Fouse, 2,000 200 0.03 0.02 0.02 0.02 Chief Financial Officer and Controller (2) Mark A. Goley, 1,000 100 0.01 0.01 0.01 0.01 Vice President and Senior Loan Officer (2) Robert D. Hoban, 100,000 10,000 1.31 1.11 0.97 0.84 President, Chief Executive Officer and Director (2) Van E. Shelton, 3,000 300 0.04 0.03 0.03 0.03 Director (2) Ralph E. Storm, 1,000 100 0.01 0.01 0.01 0.01 ---------- ------- ----- ----- ----- ---- Director (2) All directors and $1,048,000 104,800 13.70% 11.66% 10.14% 8.81% ========== ======= ===== ===== ===== ==== executive officers as a group (17 persons)(3)
Footnotes on following page (1) Does not include shares subject to stock options which may be granted under the Stock Option Plan, shares which may be awarded under the RRP, or any shares which may be allocated to officers under the ESOP. (2) Although all of the persons in the table above have subscription rights, this footnote identifies those individuals who are not Eligible Account Holders. (3) Assuming that all shares awarded under the RRP are purchased on the open market and upon (i) the full vesting of the restricted stock awards to directors and executive officers contemplated under the RRP and (ii) the exercise in full of all options expected to be granted to directors and executive officers under the Stock Option Plan, all directors and executive officers as a group would beneficially own 196,141 shares (23.7%), 212,260 shares (21.8%), 228,380 shares (20.4%), and 246,916 shares (19.2%) upon sales at the minimum, midpoint, maximum, and 15% above the maximum of the Estimated Valuation Range, respectively. See "Executive Compensation and Related Transactions of Madison First -- RRP," "-- Stock Option Plan," "Executive Compensation and Related Transactions of Citizens -- RRP" and "-- Stock Option Plan." CAPITALIZATION The following table presents the historical capitalization of Madison First at June 30, 1996, and the pro forma consolidated capitalization of the Holding Company as of that date, giving effect to the Acquisition and the sale of Common Stock offered by this Prospectus based on the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, and subject to the other assumptions set forth below. The pro forma data set forth below may change significantly at the time the Holding Company completes the Conversion due to, among other factors, a change in the Estimated Valuation Range or a change in the current estimated expenses of the Conversion. If the Estimated Valuation Range changes so that between 765,000 and 1,190,250 shares are not sold in the Conversion, subscriptions will be returned to subscribers who do not affirmatively elect to continue their subscriptions during the offering at the revised Estimated Valuation Range.
At June 30, 1996 Pro Forma Holding Company Capitalization Based on Sale of ---------------------------------------------------------------------------------- 765,000 900,000 1,035,000 1,190,250 Shares Shares Shares Shares Sold at Sold at Sold at Sold at Madison First Price of Price of Price of Price of Historical $10.00 $10.00 $10.00 $10.00(6) ---------- ------ ------ ------ --------- (In thousands) Goodwill......................................... $ 144 $ 836 $ 836 $ 836 $ 836 Deposits (1)..................................... 74,727 123,497 123,497 123,497 123,497 Federal Home Loan Bank advances.................. --- 500 500 500 500 Capital and retained earnings: Preferred stock, without par value, 2,000,000 shares authorized, none issued....................... --- --- --- --- --- Common Stock, without par value, 5,000,000 shares authorized; indicated number of shares assumed outstanding (2)............. --- --- --- --- --- Additional paid in capital..................... --- 7,014 8,333 9,652 11,168 Retained earnings and net unrealized losses on securities available for sale (3).......... 6,703 6,703 6,703 6,703 6,703 Less: Common Stock acquired by RRP (4).............. --- (306) (360) (414) (476) Common Stock acquired by the ESOP (5)......... --- (612) (720) (828) (952) -------- --------- --------- --------- --------- Total capital and retained earnings.............. $ 6,703 $ 12,799 $ 13,956 $ 15,113 $ 16,443 ======== ========= ========= ========= =========
Footnotes on following page (1) Excludes accrued interest. The pro forma capitalization assumes $3.0 million of withdrawals from deposit accounts to purchase the Common Stock. (2) The number of shares to be issued in the Conversion may be increased or decreased based on market and financial conditions prior to the completion of the Conversion. Assumes estimated expenses of $636,000, $667,000, $698,000 and $735,000 at the minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation Range, respectively. See "Use of Proceeds." (3) Retained earnings are substantially restricted. See Notes H and K to Madison First's Consolidated Financial Statements. See also "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." Retained earnings do not reflect the federal income tax consequences of the restoration to income of Madison First's special bad debt reserve for income tax purposes which would be required in the unlikely event of a liquidation or if a substantial portion of retained earnings were otherwise used for a purpose other than absorption of bad debt losses and will be required under a recently enacted law. See "Taxation -- Federal Taxation." Equity capital includes retained earnings decreased by net unrealized losses on securities available for sale. (4) Assuming the receipt of shareholder approval at the Holding Company's first meeting of shareholders, the Holding Company intends to implement the RRP. Assuming such implementation, the RRP will purchase an amount of shares equal to 4.0% of the Common Stock sold in the Conversion for issuance to directors, officers and employees of the Holding Company and the Institutions. Such shares may be purchased from authorized but unissued shares or on the open market. The Holding Company currently intends that the RRP will purchase the shares on the open market. Under the terms of the RRP, shares will vest at the rate of 20% per year. The Common Stock to be purchased by the RRP represents unearned compensation and is, accordingly, reflected as a reduction to pro forma shareholders' equity. As shares of the Common Stock granted pursuant to the RRP vest, a corresponding reduction in the charge against capital will occur. In the event that authorized but unissued shares are acquired, the interests of existing shareholders will be diluted. Assuming that 900,000 shares of Common Stock are issued in the Conversion and that all awards under the RRP are from authorized but unissued shares, the Holding Company estimates that the per share book value for the Common Stock would be diluted $0.60 per share, or 3.8% on a pro forma basis as of June 30, 1996. (5) Assumes purchases by the ESOP of a number of shares equal to 8% of the shares issued in the Conversion. The funds used to acquire the ESOP shares will be borrowed from the Holding Company. See "Use of Proceeds." The Institutions intend to make contributions to the ESOP sufficient to service and ultimately retire its debt. The Common Stock acquired by the ESOP is reflected as a reduction of shareholders' equity. See "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust" and "Executive Compensation and Related Transactions of Citizens -- Employee Stock Ownership Plan and Trust." (6) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following the commencement of the Subscription and Direct Community Offerings. PRO FORMA DATA Pro forma combined consolidated net income of the Holding Company for the six months ended June 30, 1996 and for the year ended December 31, 1995 have been calculated based upon (i) Madison First's historic net income for the respective periods, (ii) Citizens' historic net income for the respective periods, (iii) the interest earned on residual net cash proceeds, and (iv) foregone interest expense on $3.0 million of assumed deposit withdrawals to purchase the Common Stock. Pro forma income has been calculated assuming the Common Stock had been sold in the Conversion and the Acquisition had been consummated at the beginning of the periods and the net proceeds had been invested at 5.65% (the yield of a one-year U.S. Treasury bill on May 15, 1996). The pro forma after-tax return for the Holding Company on a consolidated basis is assumed to be 3.27% for the reported periods after giving effect to (i) the yield on net proceeds, (ii) foregone interest expense on deposit withdrawals at a weighted average cost of 5.2%, and (iii) adjusting for taxes using a federal statutory tax rate of 34% and a net state statutory income tax rate of 6%. Historical and per share amounts have been calculated by dividing historical amounts and pro forma amounts by the indicated number of shares of Common Stock assuming that such number of shares had been outstanding during each of the entire periods. Book value represents the difference between the stated amount of consolidated assets and consolidated liabilities of the Holding Company computed in accordance with generally accepted accounting principles. Book value does not necessarily reflect current market value of assets and liabilities, and does not reflect the effect of the liquidation account to be established in the Conversion, see "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights," or the federal income tax consequences of the restoration to income of Madison First's pre-1987 special bad debt reserves for income tax purposes which would be required in the unlikely event of liquidation and will be required under a recently enacted law. See "Taxation -- Federal Taxation." Pro forma net earnings assume amortization of the goodwill arising from the Acquisition over a twelve-year period. Tangible book value represents the difference between consolidated tangible assets (all assets less goodwill) and consolidated liabilities of the Holding Company computed in accordance with generally acepted accounting principles. Pro forma book value and pro forma tangible book value includes only net proceeds as of the indicated dates and does not include earnings on the proceeds for the periods then ended. The pro forma net earnings derived from the assumptions set forth above should not be considered indicative of the actual results of operations of the Holding Company that would have been attained for any period if the Conversion had been actually consummated at the beginning of such periods and the assumptions regarding investment yields should not be considered indicative of the actual yield expected to be achieved during any future period. Further, the pro forma net earnings totals that follow do not take into account any known cost reductions contemplated in connection with the Acquisition. See "Pro Forma Consolidated Condensed Combined Statements of Operations" for additional information regarding such expenses. The pro forma book values or tangible book values at the dates indicated should not be considered as reflecting the potential trading value of the Holding Company's stock. There can be no assurance that an investor will be able to sell the Common Stock purchased in the Conversion at prices within the range of the pro forma book values of the Common Stock or at or above the Purchase Price.
765,000 Shares 900,000 Shares 1,035,000 Shares Sold at Sold at Sold at $10.00 Per Share $10.00 Per Share $10.00 Per Share Six Months Year Six Months Year Six Months Year ended ended ended ended ended ended 6/30/96 12/31/95 6/30/96 12/31/95 6/30/96 12/31/95 ------- -------- ------- -------- ------- -------- (In thousands, except share data) Gross proceeds .................. $ 7,650 $ 7,650 $ 9,000 $ 9,000 $ 10,350 $ 10,350 Less offering expenses .......... 636 636 667 667 698 698 Less employee benefit plans ..... (918) (918) (1,080) (1,080) (1,242) (1,242) Investable net proceeds ......... $ 6,096 $ 6,096 $ 7,253 $ 7,253 $ 8,410 $ 8,410 ======== ======== ======== ======== ========== ========== Consolidated net income: Historical (3) ................ $ 315 $ 600 $ 315 $ 600 $ 315 $ 600 Pro forma income (4) .......... 65 110 83 176 113 212 Pro forma ESOP adjustment (7).. (31) (61) (36) (72) (25) (50) Pro forma RRP adjustment (5) .. (31) (61) (36) (72) (41) (83) -------- -------- -------- -------- ---------- ---------- Pro forma net income .......... $ 318 $ 588 $ 326 $ 632 $ 362 $ 679 ======== ======== ======== ======== ========== ========== Consolidated earnings per share (7): Historical .................... $ 0.45 $ 0.85 $ 0.38 $ 0.72 $ 0.33 $ 0.63 Pro forma income (4) .......... 0.09 0.16 0.10 0.21 0.12 0.22 Pro forma ESOP adjustment (7) ............. (0.05) (0.09) (0.04) (0.09) (0.03) (0.05) Pro forma RRP adjustment (5) .. (0.04) (0.09) (0.04) (0.09) (0.04) (0.09) -------- -------- -------- -------- ---------- ---------- Pro forma earnings per share .. $ 0.45 $ 0.83 $ 0.39 $ 0.76 $ 0.38 $ 0.71 ======== ======== ======== ======== ========== ========== Consolidated book value (6): Historical .................... $ 6,703 $ 6,574 $ 6,703 $ 6,574 $ 6,703 $ 6,574 Estimated net conversion proceeds (2) ................. 7,014 7,014 8,333 8,333 9,652 9,652 Less: Common Stock acquired by RRP (5) ................. (306) (306) (360) (360) (414) (414) Common Stock acquired by ESOP (7) ................ (612) (612) (720) (720) (828) (828) -------- -------- -------- -------- ---------- ---------- Pro forma book value .......... $ 12,799 $ 12,670 $ 13,956 $ 13,827 $ 15,113 $ 14,984 ======== ======== ======== ======== ========== ========== Consolidated book value per share (6)(8): Historical .................... $ 8.76 $ 8.59 $ 7.45 $ 7.30 $ 6.48 $ 6.35 Estimated nets conversion proceed per share ................... 9.92 9.92 10.02 10.02 10.09 10.09 Less: Common Stock acquired by RRP (5).................. (0.43) (0.43) (0.43) (0.43) (0.43) (0.43) Common Stock acquired by ESOP (7)................. (0.87) (0.87) (0.87) (0.87) (0.87) (0.87) -------- -------- -------- -------- ---------- ---------- Pro forma book value per share ............ $ 17.39 $ 17.22 $ 16.17 $ 16.03 $ 15.27 $ 15.15 ======== ======== ======== ======== ========== ========== Offering price as a percentage of pro forma book value per share .... 57.52% 58.08% 61.84% 62.40% 65.49% 66.03% ======== ======== ======== ======== ========== ========== Offering price to pro forma earnings per share ..................... 11.12% 6.01% 12.74% 6.58% 13.16% 7.04% ======== ======== ======== ======== ========== ========== Tangible book value per share ............... $ 15.79 $ 15.62 $ 14.71 $ 14.56 $ 13.91 $ 13.78 ======== ======== ======== ======== ========== ========== Number of shares used in calculating EPS ............... 706,860 706,860 831,800 831,800 956,340 956,340 ======== ======== ======== ======== ========== ========== Number of shares used in calculating book value and tangible book value ........... 765,000 765,000 900,000 900,000 1,035,000 1,035,000 ======== ======== ======== ======== ========== ==========
1,190,250 Shares(1) Sold at $10.00 Per Share Six Months Year ended ended 6/30/96 12/31/95 ------- -------- Gross proceeds .................. $ 11,903 $ 11,903 Less offering expenses .......... 735 735 Less employee benefit plans ..... (1,428) (1,428) Investable net proceeds ......... $ 9,740 $ 9,740 ========== =========== Consolidated net income: Historical (3) ................ $ 315 $ 600 Pro forma income (4) .......... 133 277 Pro forma ESOP adjustment (7).. (29) (57) Pro forma RRP adjustment (5) .. (48) (95) ---------- ----------- Pro forma net income .......... $ 371 $ 725 ========== =========== Consolidated earnings per share (7): Historical .................... $ 0.33 $ 0.63 Pro forma income (4) .......... 0.12 0.25 Pro forma ESOP adjustment (7) ............. (0.03) (0.05) Pro forma RRP adjustment (5) .. (0.04) (0.09) ---------- ----------- Pro forma earnings per share .. $ 0.38 $ 0.74 ========== =========== Consolidated book value (6): Historical .................... $ 6,703 $ 6,574 Estimated net conversion proceeds (2) ................. 11,168 11,168 Less: Common Stock acquired by RRP (5) ................. (476) (476) Common Stock acquired by ESOP (7) ................ (952) (952) ---------- ----------- Pro forma book value .......... $ 16,443 $ 16,314 ========== =========== Consolidated book value per share (6)(8): Historical .................... $ 5.63 $ 6.35 Estimated nets conversion proceed per share ................... 10.15 11.68 Less: Common Stock acquired by RRP (5).................. (0.43) (0.43) Common Stock acquired by ESOP (7)................. (0.87) (0.87) ---------- ----------- Pro forma book value per share ............ $ 14.49 $ 16.73 ========== =========== Offering price as a percentage of pro forma book value per share .... 69.02% 59.77% ========== =========== Offering price to pro forma earnings per share ..................... 13.14% 6.75% ========== =========== Tangible book value per share ............... $ 13.22 $ 13.13 ========== =========== Number of shares used in calculating EPS ............... 1,099,791 1,099,791 ========== =========== Number of shares used in calculating book value and tangible book value ........... 1,190,250 1,190,250 ========== =========== (Footnotes on following page.) (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following commencement of the Subscription and Direct Community Offerings. (2) See "Use of Proceeds" for assumptions utilized to determine the estimated net proceeds of the sale of Common Stock. (3) Historic net income for the six months ended June 30, 1996 and the year ended December 31, 1995 is computed as follows: 6 months ended Year ended June 30, 1996 December 31, 1995 (In thousands) Madison First $181 $258 Citizens 134 342 --- --- Pro forma combined - historic $315 $ 600 ==== ===== (4) Pro forma net income for the six months ended June 30, 1996, and the year ended December 31, 1995 has been computed as follows:
6 months ended Year ended June 30, 1996 December 31, 1995 ------------- ----------------- (In thousands) Sale of 765,000 shares Yield on residual cash proceeds of $.051 million ($6.096 million - $3.051 million Acquisition Price - $3.0 million of deposit withdrawals) at 5.25% $ 1 $ 3 Reduced interest expense on $3.0 million of deposit withdrawals at 5.20% 78 156 Purchase price adjustments 29 25 --- --- Subtotal 108 184 Less tax effects at 40% 43 74 ----- ---- Pro forma net income $ 65 $ 110 ===== ==== Sale of 900,000 shares Yield on residual net cash proceeds of $1.208 million ($7.253 million - $3.075 million Acquisition Price - $3.0 million of deposit withdrawals) at 5.25% $ 32 $ 83 Reduced interest expense on $3.0 million of deposit withdrawals at 5.20% 78 156 Purchase price adjustments 29 74 --- --- Subtotal 139 293 Less tax effects at 40% 56 117 --- --- Pro forma net income $ 83 $176 ===== ==== Sale of 1,035,000 shares Yield on residual net cash proceeds of $2.355 million ($8.410 million - $3.075 million Acquisition Price - $3.0 million of deposit withdrawals) at 5.25% $ 82 $124 Reduced interest expense on $3.0 million of deposit withdrawals at 5.20% 78 156 Purchase price adjustments 29 74 ----- ---- Subtotal 169 354 Less tax effects at 40% 88 142 ----- ---- Pro forma net income $101 $212 ===== ==== Sale of 1,190,250 shares Yield on residual net cash proceeds of $3.740 million ($9.740 million - $3.075 million Acquisition Price - $3.0 million of deposit withdrawals) at 5.25% $ 115 $ 231 Reduced interest expense on $3.0 million of deposit withdrawals at 5.20% 78 156 Purchase price adjustments 29 74 ----- ---- Subtotal 222 461 Less tax effects at 40% 89 184 ----- ---- Pro forma net income $133 $277 ===== ====
(5) Assuming the receipt of shareholder approval at the Holding Company's first meeting of shareholders, the Holding Company intends to implement the RRP. Assuming such implementation, the RRP will purchase an amount of shares equal to 4.0% of the Common Stock sold in the Conversion for issuance to directors, officers and employees of the Holding Company and the Institutions. Such shares may be purchased from authorized but unissued shares or on the open market. The Holding Company currently intends that the RRP will purchase the shares on the open market, and the estimated net Conversion proceeds have been reduced for the purchase of the shares in determining estimated proceeds available for investment. Under the terms of the RRP, shares will vest at the rate of 20% per year. A tax benefit of 40% has been assumed. The Common Stock to be purchased by the RRP represents unearned compensation and is, accordingly, reflected as a reduction to pro forma shareholders' equity. As shares of the Common Stock granted pursuant to the RRP vest, a corresponding reduction in the charge against capital will occur. In the event that authorized but unissued shares are acquired, the interests of existing shareholders will be diluted. Assuming that 900,000 shares of Common Stock are issued in the Conversion and that all awards under the RRP are from authorized but unissued shares, the Holding Company estimates that the per share book value for the Common Stock would be diluted $.60 per share, or 3.8% on a pro forma basis as of June 30, 1996. (6) Book value represents the excess of assets over liabilities. The effect of the liquidation account is not reflected in these computations. (For additional information regarding the liquidation account, see "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights.") Tangible book value equals tangible assets (all assets less goodwill) less liabilities. (7) It is assumed that 8% of the shares of Common Stock issued in the Conversion will be purchased by the ESOP. The funds used to acquire the ESOP shares will be borrowed by the ESOP from the Holding Company (see "Use of Proceeds"). The Institutions intend to make annual contributions to the ESOP in an amount at least equal to the principal and interest requirements on the debt. The Institutions' total annual expense in payment of the ESOP debt is based upon 10 equal annual installments of principal and interest, with an assumed tax benefit of 40%. The pro forma net income assumes: (i) The Institutions' total contributions are equivalent to the debt service requirement for the year, and (ii) the effective tax rate applicable to the debt was 40%. Expense for the ESOP beginning in December, 1996 and thereafter will be based on the number of shares committed to be released to participants for the year at the average market value of the shares during the year. Accordingly, the Institutions' total annual expense in payment of the ESOP for such years may be higher than that discussed above. The amount borrowed is reflected as a reduction of shareholders' equity. (8) Assuming the receipt of shareholder approval at the Holding Company's first meeting of shareholders, the Holding Company intends to implement the Stock Option Plan. Assuming such implementation, Common Stock in an aggregate amount equal to 10.0% of the shares issued in the Conversion will be reserved for issuance by the Holding Company upon the exercise of the stock options granted under the Stock Option Plan. No effect has been given to the shares of Common Stock reserved for issuance under the Stock Option Plan. Upon the exercise of stock options granted under the Stock Option Plan, the interests of existing shareholders will be diluted. Assuming the issuance of 900,000 shares in the Conversion and the exercise of 90,000 options at an exercise price of $10.00 per share, the Holding Company estimates that the per share book value for the Common Stock would be diluted $0.50 per share, or 3.2% on a pro forma basis as of June 30, 1996. (9) Management believes that the Conversion and Acquisition are interdependent. Therefore, additional pro forma statements showing the other variations of the transaction have not been provided. Regulatory Capital Compliance The following table compares Madison First's historical and pro forma regulatory capital levels as of June 30, 1996 to Madison First's capital requirements after giving effect to the Conversion.
At June 30, 1996 Pro Forma Capital Based on Sale of 765,000 Shares 900,000 Shares 1,035,000 Shares 1,190,250 Shares Madison First Sold at Price of Sold at Price of Sold at Price of Sold at Price of Historical $10.00 $10.00 $10.00 $10.00 (1) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) ------ -------- ------ -------- ------- ------- ------- -------- ------- -------- (Dollars in thousands) Equity capital based upon generally accepted accounting principles (3)......... $6,703 8.2% $9,904 11.7% $10.510 12.3% $11,115 12.9% $11,811 13.6% ====== === ====== ==== ======= ==== ======= ==== ======= ==== Tangible capital (3): Historical or pro forma....................... $6,599 8.0% $9,800 11.5% $10.406 12.2% $11,011 12.8% $11,707 13.5% Required.......................... 1,229 1.5 1,274 1.5 1,284 1.5 1,293 1.5 1,303 1.5 ------ --- ------ ---- -------- ---- -------- ---- ------- ---- Excess.......................... $5,370 6.5% $8,526 10.0% $ 9,122 10.7% $ 9,718 11.3% $10,404 12.0% ====== === ====== ==== ======== ==== ======== ==== ======= ==== Core capital (3): Historical or pro forma (4)................... $6,599 8.0% $9,800 11.5% $10,406 12.2% $11,011 12.6% $11,707 13.5% Required.......................... 2,457 3.0 2,549 3.0 2,567 3.0 2,585 3.0 2,606 3.0 ------ --- ------ ---- -------- ---- -------- ---- ------- ---- Excess.......................... $4,142 5.0% $7,251 8.5% $ 7,839 9.2% $ 8,426 9.6% $ 9,101 10.5% ====== === ====== ==== ======== ==== ======== ==== ======= ==== Risk-based capital (3): Historical or pro forma ...................... $7,011 16.9% $10,212 23.7% $10,818 23.4% $11,423 24.6% $12,119 26.0% Required.......................... 3,322 8.0 3,453 8.0 3,703 8.0 3,713 8.0 3,724 8.0 ------ --- ------ ---- -------- ---- -------- ---- ------- ---- Excess.......................... $3,689 8.9% $ 6,759 15.7% $ 7,115 15.4% $ 7,710 16.6% $ 8,395 18.0% ====== === ====== ==== ======== ==== ======== ==== ======= ====
- ---------------------- (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following commencement of the Subscription and Direct Community Offerings. (2) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (3) Pro forma capital levels assume receipt by Madison First of $3.2 million, $3.8 million, $4.4 million and $5.1 million at the minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation Range, respectively. Assumes net proceeds have been invested in 20% risk-weighted assets. (4) Pro forma tangible and core capital requirements are based on total assets of $85.0 million, $85.6 million, $86.2 million and $86.9 million at the minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation Range, respectively. Risk-based assets are based on pro forma totals of $43.2 million, $43.3 million, $43.4 million and $43.5 million at the minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation Range, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION General The Holding Company was recently formed as an Indiana corporation on May 22, 1996, for the purpose of issuing the Common Stock and (i) owning all of the outstanding common stock of Madison First to be issued in the Conversion and (ii) acquiring the Citizens Shares in the Acquisition. As a newly formed corporation, the Holding Company has no operating history. The principal business of savings associations, including Madison First, has historically consisted of attracting deposits from the general public and making loans secured by residential real estate. Madison First's earnings are primarily dependent upon its net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on such deposits and borrowings. Madison First's earnings are also affected by provisions for loan losses, service charges, operating expenses and income taxes. Madison First is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. See "Regulation." Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings within the Institutions' market. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds and various other items. Sources of funds for lending activities of Madison First include deposits, payments on loans, borrowings and income provided from operations. Current Business Strategy Madison First's business strategy is to operate a well-capitalized, profitable and independent financial institution dedicated primarily to residential lending with an emphasis on personal service. Madison First has sought to implement this strategy by (i) emphasizing the origination of one- to four-family residential mortgage loans in its market area, (ii) maintaining asset quality through diligent collection efforts and (iii) managing and controlling Madison First's level of operating expenses. Management of Madison First believes the Conversion and the Acquisition, as well as Madison First's development of additional products and services, will assist it in furthering this strategy as follows: o Improving Interest Rate Risk. Historically, Madison First originated one-year adjustable-rate residential mortgage loans indexed to the 11th District Cost of Funds, which is considered a lagging index, with maximum rate adjustments of 1% per year and 5% over the terms of the loans. In a period of rising interest rates, these loans may not reprice upward as quickly or by as much as market rates, thereby increasing Madison First's interest rate risk. See " -- Asset/Liability Management." However, in late 1995 Madison First began originating its one-year adjustable-rate residential mortgage loans tied to the U.S. Treasury securities yields (adjusted to a constant maturity) with maximum rate adjustments of 1.5% per year and 6% over the terms of the loans. In addition, Madison First expects to begin originating its fixed-rate residential mortgage loans with terms of 15 years and greater for sale to the FHLMC on the secondary market. See "Business of Madison First." The change in the index used and the increase in the maximum rate adjustments for Madison First's adjustable-rate residential mortgage loans as well as the implementation of a secondary market program for Madison First's longer term, fixed-rate residential mortgage loans should assist Madison First in improving its interest rate risk. o Pursuing Operating Efficiencies After the Acquisition. The consummation of the Acquisition will enable the Holding Company and the Institutions to explore opportunities to integrate certain aspects of the Institutions' operations in a manner designed to result in more efficient operations. Among those opportunities that may be targeted are (i) data processing, (ii) marketing, (iii) collections, (iv) financial reporting, (v) human resources, (vi) deposit and loan operations, (vii) compliance, and (viii) insurance and employee benefits programs. The Institutions will also be able to explore opportunities to utilize their offices and physical locations in a more efficient manner following the Acquisition. See "The Acquisition -- Reasons for the Acquisition." o Emphasis on New Home Equity Loan Product. In May, 1996, Madison First began offering a new home equity line of credit. This line of credit is an adjustable-rate line of credit tied to the prime rate and has an initial rate equal to 1% less than the prime rate for the first year. Thereafter, the applicable interest rate is equal to the prime rate plus 1%. See "Business of Madison First -- Lending Activities." Madison First expects to actively market this new home equity line within its market area. o Emphasis on Nonresidential Real Estate Lending. In addition to continuing its emphasis on originating adjustable-rate one- to four-family residential mortgage loans and its implementation of the FHLMC secondary market program, Madison First anticipates that following the Conversion it will begin to place more emphasis on the origination of mortgage loans secured by nonresidential real estate in its market area. Management of Madison First believes that the higher interest rates and shorter terms associated with nonresidential real estate loans will assist Madison First in its asset/liability management and improve Madison First's interest rate spread. Although such loans typically involve more credit risk than one- to four-family residential mortgage loans, management also believes that Madison First's diligent collection efforts will assist Madison First in maintaining its asset quality. See "Business of Madison First." Asset/Liability Management Madison First, like other savings associations, is subject to interest rate risk to the degree that its interest-bearing liabilities, primarily deposits with short- and medium-term maturities, mature or reprice at different rates than its interest-earning assets. Management of Madison First believes it is critical to manage the relationship between interest rates and the effect on Madison First's net portfolio value ("NPV"). This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. Management of Madison First's assets and liabilities is done within the context of the marketplace, regulatory limitations and within limits established by the Board of Directors on the amount of change in NPV which is acceptable given certain interest rate changes. The OTS issued a regulation, which has not yet been implemented, which uses a net market value methodology to measure the interest rate risk exposure of thrift institutions. Under this OTS regulation, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Thrift institutions with over $300 million in assets or less than a 12% risk-based capital ratio would be required to file OTS Schedule CMR. Data from Schedule CMR would be used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Institutions which do not meet either of the filing requirements would not be required to file OTS Schedule CMR, but could do so voluntarily. As Madison First does not currently meet either of these requirements, it would not be required to file Schedule CMR. Under the proposed regulation, institutions which would be required to file would be required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal." The amount of that deduction would be one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Presented below, as of June 30, 1996, is an analysis performed by the OTS of Madison First's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 400 basis points and in accordance with the proposed regulations. At June 30, 1996, 2% of the present value of Madison First's assets was approximately $1.7 million. Because the interest rate risk of a 200 basis point increase in market rates (which was greater than the interest rate risk of a 200 basis point decrease ) was $6.8 million at June 30, 1996, Madison First would not have been required to deduct any dollar amount from its capital if the OTS' NPV methodology had been effective and if Madison First had been subject to the OTS' reporting requirements under this methodology.
Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change -------- -------- -------- -------- --------- ------ (Dollars in thousands) + 400 bp * $4,779 $(3,579) (43)% 6.06% (394)bp + 300 bp 5,820 (2,538) (30)% 7.26% (274)bp + 200 bp 6,814 (1,544) (18)% 8.37% (164)bp + 100 bp 7,700 (659) (8)% 9.32% (68)bp 0 bp 8,359 --- ---% 10.00% --- bp - 100 bp 8,662 303 4% 10.29% 29bp - 200 bp 8,656 298 4% 10.25% 24bp - 300 bp 8,915 556 7% 10.48% 48bp - 400 bp 9,436 1,078 13% 10.98% 98bp
* Basis points. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Average Balances and Interest Rates and Yields The following tables present at June 30, 1996, and for the six-month periods ended June 30, 1996, and 1995, and the years ended December 31, 1995, 1994 and 1993, the average daily balances, of each category of Madison First's interest-earning assets and interest-bearing liabilities, and the interest earned or paid on such amounts.
At June 30, Six Months Ended June 30, 1996 1996 1995 ------------------- ------------------------------- ----------------------------- Average Average Average Average Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost ------- ---------- ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Interest-earning assets: Interest-earning deposits and other........................ $ 2,671 5.69% $ 4,708 $ 109 4.63% $ 1,944 $ 24 2.47% Investment securities (1).......... 9,940 5.23 10,660 291 5.46 14,010 403 5.75 Mortgage-backed and related securities............... 8,690 6.33 9,515 291 6.12 11,307 342 6.05 Loans receivable, net (2).......... 57,449 7.45 57,259 2,251 7.86 56,184 2,100 7.48 ------- ------- ------ ------- ------ Total interest-earning assets.... $ 78,750 6.99 $82,142 $2,942 7.16 $83,445 $2,869 6.88 ======= ======= ====== ======= ====== Interest-bearing liabilities: Deposits........................... $74,727 4.32 $77,740 $1,691 4.35 $75,930 $1,595 4.20 FHLB advances...................... --- --- 1,111 44 7.92 3,678 96 5.22 ------- ------- ------ ------- ------ Total interest-bearing liabilities................. $74,727 4.32 $78,851 $1,735 4.40 $79,608 $1,691 4.25 ======= ======= ====== ======= ====== Net interest-earning assets........... $ 4,023 $ 3,291 $ 3,837 ======== ======== ======== Net interest income................... $1,207 $1,178 Interest rate spread (3).............. 2.67% 2.76% 2.63% ==== ==== ==== Net yield on weighted average interest-earning assets (4)........ ---% 2.94% 2.82% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities........................ 105.38% 104.17% 104.82% ====== ====== ======
Year Ended December 31, 1995 1994 1993 ----------------------------- ------------------------------- -------------------------- Average Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Interest-earning assets: Interest-earning deposits and other..$ 2,610 $ 107 4.10% $ 2,288 $ 112 4.90% $ 3,589 $ 175 4.88% Investment securities (1)............ 13,925 777 5.58 13,685 713 5.21 8,615 494 5.73 Mortgage-backed and related securities................. 10,989 670 6.10 12,702 743 5.85 14,681 866 5.90 Loans receivable, net (2)............ 56,916 4,240 7.45 52,708 3,851 7.31 52,719 4,149 7.87 ------- ------ ------- ------ ------- ------ Total interest-earning assets......$84,440 $5,794 6.86 $81,383 $5,419 6.66 $79,604 $5,684 7.14 ======= ====== ======= ====== ======= ====== Interest-bearing liabilities: Deposits.............................$76,983 $3,419 4.44 $77,703 $2,842 3.66 $78,053 $3,041 3.90 FHLB advances........................ 2,967 175 5.90 228 12 5.26 22 1 4.55 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities.$79,950 $3,594 4.50 $77,931 $2,854 3.66 $78,075 $3,042 3.90 ======= ====== ======= ====== ======= ====== Net interest-earning assets.............$ 4,490 $ 3,452 $ 1,529 ======= ======== ======== Net interest income..................... $2,200 $2,565 $2,642 ====== ====== ====== Interest rate spread (3)................ 2.36% 3.00% 3.24% ==== ==== ==== Net yield on weighted average interest-earning assets (4).......... 2.61% 3.15% 3.32% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities.......................... 105.62% 104.43% 101.96% ====== ====== ======
(1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Total loans less loans in process. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield amount is presented at June 30, 1996, because the computation of net yield is applicable only over a period rather than at a specific date. Interest Rate Spread Madison First's results of operations have been determined primarily by net interest income and, to a lesser extent, fee income, miscellaneous income and general and administrative expenses. Net interest income is determined by the interest rate spread between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities and by the relative amounts of interest-earning assets and interest-bearing liabilities. The following table sets forth the weighted average effective interest rate earned by Madison First on its loan and investment portfolios, the weighted average effective cost of Madison First's deposits and advances, the interest rate spread of Madison First, and the net yield on weighted average interest-earning assets for the periods and as of the dates shown. Average balances are based on average daily balances.
Six Months Ended At June 30, June 30, Year Ended December 31, 1996 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- ---- Weighted average interest rate earned on: Interest-earning deposits and other.......... 5.69% 4.63% 2.47% 4.10% 4.90% 4.88% Investment securities........................ 5.23 5.46 5.75 5.58 5.21 5.73 Mortgage-backed and related securities....... 6.33 6.12 6.05 6.10 5.85 5.90 Loans receivable, net........................ 7.45 7.86 7.48 7.45 7.31 7.87 Total interest-earning assets.............. 6.99 7.16 6.88 6.86 6.66 7.14 Weighted average interest rate cost of: Deposits..................................... 4.32 4.35 4.20 4.44 3.66 3.90 FHLB advances................................ --- 7.92 5.22 5.90 5.26 4.55 Total interest-bearing liabilities......... 4.32 4.40 4.25 4.50 3.66 3.90 Interest rate spread (1)........................ 2.67% 2.76% 2.63% 2.36% 3.00% 3.24% ==== ==== ==== ==== ==== ==== Net yield on weighted average interest-earning assets (2).................. ---% 2.94% 2.82% 2.61% 3.15% 3.32% ==== ==== ==== ==== ==== ====
(1) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. (2) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield figure is presented at June 30, 1996 because the computation of net yield is applicable only over a period rather than at a specific date. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Madison First's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume) and (2) changes in volume (changes in volume multiplied by old rate). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionally to the change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income Total Due to Due to Net Rate Volume Change ---- ------ ------ (In thousands) Six months ended June 30, 1996 compared to six months ended June 30, 1995 Interest-earning assets: Interest-earning deposits and other........................ $ 32 $ 53 $ 85 Investment securities...................................... (19) (93) (112) Mortgage-backed and related securities..................... 4 (55) (51) Loans receivable, net...................................... 110 41 151 ------ ------ ------- Total.................................................... 127 (54) 73 ------ ------ ------- Interest-bearing liabilities: Deposits................................................... 57 39 96 FHLB advances.............................................. (22) (30) (52) ------ ------ ------- Total.................................................... 35 9 44 ------ ------ ------- Net change in net interest income............................ $ 92 $ (63) $ 29 ====== ====== ====== Year ended December 31, 1995 compared to year ended December 31, 1994 Interest-earning assets: Interest-earning deposits and other........................ $ (16) $ 11 $ (5) Investment securities...................................... 52 12 64 Mortgage-backed and related securities..................... 32 (105) (73) Loans receivable, net...................................... 77 312 389 ------ ------ ------- Total.................................................... 145 230 375 ------ ------ ------- Interest-bearing liabilities: Deposits................................................... 614 (37) 577 FHLB advances.............................................. 16 147 163 ------ ------ ------- Total.................................................... 630 110 740 ------ ------ ------- Net change in net interest income............................ $(485) $ 120 $(365) ====== ====== ====== Year ended December 31, 1994 compared to year ended December 31, 1993 Interest-earning assets: Interest-earning deposits and other........................ $ 1 $ (64) $ (63) Investment securities...................................... (20) 239 219 Mortgage-backed and related securities..................... (7) (116) (123) Loans receivable, net...................................... (297) (1) (298) ------ ------ ------- Total.................................................... (323) 58 (265) ------ ------ ------- Interest-bearing liabilities: Deposits................................................... (186) (13) (199) FHLB advances.............................................. 0 11 11 ------ ------ ------- Total.................................................... (186) (2) (188) ------ ------ ------- Net change in net interest income............................ $(137) $ 60 $ (77) ====== ====== ======
Financial Condition at June 30, 1996 Compared to Financial Condition at December 31, 1995 Madison First's total assets at June 30, 1996, amounted to $81.9 million, a decrease of $4.7 million, or 5.4%, from December 31, 1995. This decrease was primarily attributable to Madison First's deployment of approximately $4.2 million in proceeds from securities maturities to retire advances from the FHLB. Liquid assets (cash and due from banks, certificates of deposit and investment securities) totaled $12.4 million at June 30, 1996, a decrease of $3.3 million, or 21.2%, over the total at December 31, 1995. This decrease resulted primarily from the maturity of investment securities. Loans receivable totaled $57.4 million at June 30, 1996, a decrease of $496,000, or 0.9%, from December 31, 1995. The decrease resulted primarily from principal repayments of $7.7 million, which exceeded loan disbursements of $7.3 million. Madison First's allowance for losses on loans totaled $416,000 at June 30, 1996, an increase of $9,000 over the balance at December 31, 1995. The allowance represented 0.7% of total loans at each of June 30, 1996 and December 31, 1995. Non-performing loans totaled $223,000 and $8,000, at June 30, 1996 and December 31, 1995, respectively. The increase in non-performing loans is exclusively due to an increase in residential real estate past due 90 days or more. Deposits totaled $74.7 million at June 30, 1996, a decrease of $506,000, or 0.7%, over the total at December 31, 1995. The decrease resulted primarily from withdrawals from passbook accounts. There were no advances from the FHLB outstanding at June 30, 1996, compared to $4.5 million at December 31, 1995. Advances were repaid with the aforementioned proceeds from maturities of investment securities. Financial Condition at December 31, 1995 Compared to Financial Condition at December 31, 1994 Madison First's total assets amounted to $86.6 million at December 31, 1995, a decrease of $468,000, or 0.5%, from December 31, 1994. The decline in assets resulted primarily from a reduction in deposits of $225,000, and a decline in advances from the FHLB of Indianapolis of $515,000, which were partially offset by an increase in retained earnings of $270,000. Liquid assets (cash and due from banks, certificates of deposit and investment securities) totaled $15.7 million at December 31, 1995, which represented a reduction of $806,000, or 4.9%, from 1994 levels. During 1995, management elected to fund net deposit outflows and repayments of advances from the FHLB of Indianapolis with excess liquidity. Mortgage-backed securities declined by $1.4 million, or 12.5%, to a total of $9.9 million in 1995, as a result of principal repayments during the year. Loans receivable totaled $57.9 million at December 31, 1995, an increase of $1.7 million, or 2.9%, over the 1994 total. The increase resulted primarily from loan disbursements of $15.6 million in excess of principal repayments of $13.7 million. Madison First's allowance for losses on loans amounted to $407,000 at December 31, 1995, an increase of $155,000, or 61.5%, over the $252,000 total maintained as of December 31, 1994. The allowance represented 0.7% and 0.5% of total loans as of December 31, 1995 and 1994, respectively. The 1995 provision was heavily influenced by $1.6 million of growth in nonresidential and multi-family loans during the period. Although management intends to place more emphasis on nonresidental real estate lending following the Conversion, it does not anticipate further significant increases in the nonresidential loan portfolio that would necessitate material additions to the allowance. Non-performing loans totaled $8,000 and $13,000 as of December 31, 1995 and 1994, respectively. Deposits totaled $75.2 million at December 31, 1995, a decrease of $225,000, or 0.3%, from the total in 1994. Certificates of deposit increased by $944,000 during 1995, while transaction and demand accounts declined by approximately $1.2 million. Advances from the FHLB of Indianapolis declined by $515,000, or 10.3%, during 1995 to a total of $4.5 million. Management elected to utilize excess liquidity to repay such advances in 1995. Comparison of Operating Results For Six Months Ended June 30, 1996 and 1995 Madison First's net income for the six months ended June 30, 1996 amounted to $181,000, a decline of $55,000, or 23.3%, from the $236,000 in net income recorded for the six-month period ended June 30, 1995. The decline in net income resulted primarily from an increase of $108,000 in employee compensation and benefits, an increase of $23,000 of data processing expense, and a $9,000 increase in the provision for loan losses, which were partially offset by an increase in net interest income of $29,000 and a decrease in provision for income taxes of $43,000. Total interest income amounted to $2.9 million for the six-month period ended June 30, 1996, an increase of $73,000, or 2.5%, from the amount recorded for the six-month period ended June 30, 1995. Interest income on loans totaled $2.3 million in 1996, an increase of $151,000, or 6.7%, over 1995. The increase resulted primarily from growth of $1.1 million in weighted average balances outstanding coupled with a 38 basis point increase in weighted average yield from 7.48% in 1995 to 7.86% in 1996. Interest income on mortgage-backed securities decreased by $51,000, or 14.9%, during the 1996 period, as compared to 1995, as a result of a decline of $1.8 million in the weighted average balance outstanding. Interest income on investment securities and interest-bearing deposits decreased by $27,000, or 6.3%, due primarily to an increase in the weighted average balance outstanding of approximately $748,000, offset by a 63 basis point decline in the weighted average yield year-to-year. Total interest expense amounted to $1.7 million for the six months ended June 30, 1996, an increase of $44,000, or 2.6%, over the amount recorded for the six-month period ended June 30, 1995. The increase resulted primarily from a 15 basis point increase in the cost of interest-bearing liabilities, partially offset by a $757,000 decrease in average interest-bearing liabilities outstanding period to period. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $29,000, or 2.5%, for the six-month period ended June 30, 1996, as compared to the comparable period in 1995. The interest rate spread increased by 13 basis points, from 2.63% in 1995 to 2.76% in 1996, while the net interest margin increased by 12 basis points, from 2.82% in 1995 to 2.94% in 1996. The provision for losses on loans increased by $9,000 for the six months ended June 30, 1996, compared to the same period in 1995. The increase was attributed to growth in Madison First's loan portfolio. While non-performing loans increased to $223,000 during the 1996 period, this level remains well below the peer group and industry averages as a percentage of loans outstanding. Other income totaled $201,000 for the six-month period ended June 30, 1996, an increase of $15,000, or 8.1%, over the 1995 period. The increase resulted primarily from an increase in non-recurring bonus insurance commissions recorded during the 1996 period. Other expenses totaled $1.1 million for the six months ended June 30, 1996, an increase of $133,000, or 13.7%, over the 1995 period. The increase resulted primarily from a $108,000, or 22.3%, increase in employee compensation and benefits and an increase of $23,000 in data processing. The increase in employee compensation and benefits was due primarily to increased staffing levels and normal merit increases. [/R] The provision for income taxes amount to $108,000 for the six-month period ended June 30, 1996, a decrease of $43,000, or 28.5%, from the provision recorded in the 1995 period. The decrease resulted primarily from a $98,000 decline in earnings before taxes. The effective tax rates were 37.4% and 39.0% for the six-month periods ended June 30, 1996 and 1995, respectively. Comparison of Operating Results For Fiscal Years Ended December 31, 1995 and 1994 Net income for the year ended December 31, 1995, amounted to $258,000, a decrease of $378,000, or 59.4%, from the $636,000 in net income recorded in 1994. The decline in net income resulted primarily from a $365,000 decline in net interest income, a $121,000 increase in the provision for losses on loans, an $8,000 decline in other income and a $108,000 increase in other expense, which were partially offset by a decrease of $224,000 in the provision for income taxes. The reduction in 1995 earnings is generally reflective of, and attributable to, the rise in the general level of interest rates in the economy over the year, as well as additional provisions for loan losses brought on by increased nonresidential lending. Management does not anticipate either trend to have a continuing material adverse impact on operations due to (i) the beneficial effects of favorable rate adjustments in the adjustable-rate segment of Madison First's portfolio and (ii) management's decision to forego further material increases in the nonresidential portfolio. Total interest income amounted to $5.8 million for the year ended December 31, 1995, an increase of $375,000, or 6.9%, over 1994. Interest income on loans totaled $4.2 million, an increase of $389,000 over the 1994 total. This increase resulted primarily from growth of $4.2 million in the weighted average balance outstanding, coupled with an increase in the weighted average yield of 14 basis points to 7.45% in 1995. Interest income on mortgage-backed securities declined by $73,000, or 9.8%, from the 1994 amount, due to a $1.7 million decline in the weighted average balance outstanding, which was partially offset by a 25 basis point increase in yield to 6.10% in 1995. Interest income on investment securities and interest-bearing deposits increased by $59,000, or 7.2%, over 1994 due to an increase in yield and an increase in the weighted average balance outstanding. Interest expense on deposits increased for the year ended December 31, 1995, by $577,000, or 20.3%, to a total of $3.4 million, compared to $2.8 million in 1994. The increase resulted primarily from a 78 basis point increase in the weighted average cost of deposits from 3.66% in 1994 to 4.44% in 1995. The increase in cost of deposits was partially offset by a $720,000 decline in the weighted average balance outstanding year-to-year. Interest expense on borrowings increased by $163,000 during 1995 to a total of $175,000. This increase was due primarily to a $2.7 million increase in borrowings outstanding during 1995, coupled with a 64 basis point increase in the weighted average cost of borrowings to 5.90% in 1995. The increases in rates paid on Madison First's deposit and borrowing portfolios generally reflect the increase in interest rates in the overall economy during 1995. As a result of the foregoing changes in interest income and interest expense, net interest income declined during 1995 by $365,000, or 14.2%, to a total of $2.2 million. The interest rate spread declined by 64 basis points during 1995 from 3.00% in 1994 to 2.36% in 1995, while the net interest margin declined by 54 basis points, from 3.15% in 1994 to 2.61% in 1995. Other income amounted to $362,000 during the year ended December 31, 1995, a decrease of $8,000, or 2.2%, from 1994 due primarily to a decline in insurance commissions year-to-year. Other expense totaled approximately $2.0 million for the year ended December 31, 1995, an increase of $108,000, or 5.8%, over the amount recorded for 1994. The increase resulted primarily from a $110,000, or 12.4%, increase in employee compensation and benefits, a $19,000, or 9.8%, increase in occupancy and equipment and a $6,000, or 1.8%, increase in other operating expense, which were partially offset by a $20,000 decrease in the provision for valuation decline in mortgage-related securities. The increase in employee compensation and benefits resulted primarily from an increase in staffing levels and normal merit salary increases, coupled with a reduction in deferred loan origination costs, as loan origination volume declined by $3.8 million year-to-year. The increase in occupancy and equipment expense resulted generally from increases in the cost of equipment maintenance contracts, while the increase in other operating expense was due to pro-rata increases in various operating costs year-to-year. The provision for income taxes totaled $188,000 for the year ended December 31, 1995, a decline of $224,000, or 54.4%, from the 1994 amount. The decline resulted primarily from a $602,000, or 57.4%, decrease in earnings before taxes. Madison First's effective tax rates were 42.2% and 39.3% for the years ended December 31, 1995 and 1994, respectively. Comparison of Operating Results For Fiscal Years Ended December 31, 1994 and 1993 Net income for the year ended December 31, 1994, totaled $636,000, a decrease of $82,000, or 11.4%, from the $718,000 in net earnings recorded in 1993. The decline in net income resulted primarily from a $77,000 decrease in net interest income and a $56,000 increase in general, administrative and other expense, which were partially offset by a $26,000 decrease in the provision for losses on loans and a $44,000 decrease in the provision for income taxes. The reduction in 1994 earnings was primarily attributable to the increase in the general level of interest rates in the economy during 1994. Such increase had a dual detrimental effect on Madison First's net income as both net interest income and deferred loan origination costs declined. Total interest income amounted to $5.4 million for the year ended December 31, 1994, a decrease of $265,000, or 4.7%, from 1993. Interest income on loans totaled $3.9 million, a decline of $298,000, or 7.2%, from the 1993 total. The decrease resulted from a decline in the average yield of 56 basis points, to 7.31% in 1994 from 7.87% in 1993, as the weighted average outstanding balance remained constant year-to-year at $52.7 million. Interest income on mortgage-backed securities decreased by $123,000, or 14.2%, due primarily to a decline in the average balance outstanding of approximately $2.0 million, as the weighted average yield remained relatively unchanged over the period. Interest income on investment securities and interest-bearing deposits increased by $156,000, or 23.3%, due to a $3.8 million increase in the weighted average balance outstanding year-to-year. Interest expense on deposits declined by $199,000, or 6.5%, during the year ended December 31, 1994, to a total of $2.8 million, compared to $3.0 million for 1993. The decrease resulted primarily from a 24 basis point decline in the weighted average cost of deposits, from 3.90% in 1993, to 3.66% in 1994. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $77,000, or 2.9%, to a total of $2.6 million for the year ended December 31, 1994. The interest rate spread decreased by 24 basis points, to 3.00% in 1994 from 3.24% in 1993. The net interest margin decreased by 17 basis points during the period, from 3.32% in 1993 to 3.15% in 1994. The provision for losses on loans totaled $29,000 for the year ended December 31, 1994, a decrease of $26,000, or 47.3%, from 1993. The decline in the provision for 1994 resulted primarily from the decline in net charge-offs, which totaled $90,000 in 1993 compared to $4,000 in 1994. Other income totaled $370,000 for the year ended December 31, 1994, an increase of $6,000, or 1.6%, over the amount recorded for 1993. The increase resulted primarily from an increase in service fees and other charges on loans and deposits. Other expense totaled $1.9 million for the year ended December 31, 1994, an increase of $56,000, or 3.1%, over the 1993 total. The increase resulted primarily from a $19,000, or 2.2%, increase in employee compensation and benefits and a $61,000, or 52.1%, increase in federal deposit insurance premiums, which were partially offset by a $19,000, or 9.0%, decrease in occupancy and equipment expense and a $10,000 decline in the provision for valuation decline on mortgage-related securities. The increase in employee compensation and benefits was due primarily to normal merit increases and a decline in deferred loan origination costs attendant to a $4.7 million decline in loan origination volume. The increase in federal deposit insurance premiums resulted primarily from the recognition of a credit of $58,000 related to the FSLIC Secondary Reserve deposit taken in the prior year. The provision for income taxes totaled $412,000 for the year ended December 31, 1994, a decrease of $19,000, or 4.4%, from the amount recorded in 1993, after giving effect to the $25,000 cumulative effect recognized in 1993 for adoption of SFAS No. 109. The decline resulted primarily from a $101,000, or 8.8%, decline in earnings before taxes. Madison First's effective tax rates were 39.3% and 39.7% for the years ended December 31, 1994 and 1993, respectively. Liquidity and Capital Resources Madison First's primary sources of funds are deposits, borrowings, proceeds from principal and interest payments on loans and proceeds from maturing securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The primary investing activity of Madison First is the origination of loans. During the years ended December 31, 1995, 1994 and 1993, Madison First originated total loans in the amounts of $15.6 million, $19.4 million and $24.1 million, respectively. Loan principal repayments totaled $13.7 million, $15.0 million and $25.7 million during the respective periods. During the six-month periods ended June 30, 1996 and 1995, Madison First originated loans of $7.3 million and $7.8 million, respectively. Loan principal repayments totaled $7.7 million and $7.1 million, respectively, during these periods. During the years ended December 31, 1994 and 1993, Madison First purchased securities (including mortgage-backed securities) in the amounts of $4.6 and $12.4 million, respectively. Maturities and repayments of securities were $2.4 million in 1995, $2.6 million in 1994 and $7.9 million in 1993. Madison First had outstanding loan commitments of $1.0 million and unused lines of credit of $207,000 at June 30, 1996. Madison First anticipates that it will have sufficient funds from loan repayments to meet its current commitments without having to borrow additional funds from the FHLB of Indianapolis. Certificates of deposit scheduled to mature in one year or less at June 30, 1996 totaled $30.7 million. Management believes that a significant portion of such deposits will remain with Madison First based upon historical deposit flow data and Madison First's competitive pricing in its market area. Liquidity management is both a daily and long-term function of Madison First's management strategy. In the event that Madison First should require funds beyond its ability to generate them internally, additional funds are available through the use of FHLB advances and through sales of securities. Madison First had no outstanding FHLB advances at June 30, 1996. The following is a summary of cash flows for Madison First, which are of three major types. Cash flows from operating activities consist primarily of net income generated by cash. Investing activities generate cash flows through the origination and principal collection on loans as well as purchases and sales of securities. Investing activities will generally result in negative cash flows when Madison First is experiencing loan growth. Cash flows from financing activities include savings deposits, withdrawals and maturities and changes in borrowings. The following table summarizes cash flows for each of the six-month periods ended June 30, 1996 and 1995 and each of the three years in the three-year period ended December 31, 1995.
Six Months Ended June 30, Year Ended December 31, 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Operating activities.................... $ 218 $ 162 $ 459 $ 774 $ 862 Investing activities: Investment purchases................. --- --- --- (4,592) (8,499) Investment maturities/sales.......... 3,000 101 1,101 --- 4,500 Mortgage-backed securities purchases............... --- --- --- --- (3,918) Mortgage-backed securities repayments.............. 1,228 533 1,417 2,576 3,399 Changes in loans..................... 475 (745) (1,892) (4,446) 1,562 Other................................ (100) 36 (22) (108) (400) Financing activities: Deposit increase/(decrease).......... (506) 4,053 (224) (2,624) 1,393 Borrowings increase/(decrease)....... (4,471) (2,986) (515) 4,986 --- Other................................ 9 3 (1) (3) 2 ------ ------- -------- ------- ------- Net increase/(decrease) in cash and cash equivalents................. $ (147) $ 1,157 $ 323 $(3,437) $(1,099) ====== ======= ======== ======= =======
Federal regulations require FHLB-member savings associations to maintain an average daily balance of liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable savings deposits plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first lien residential mortgage loans. This liquidity requirement may be changed from time-to-time by the OTS to any amount within the range of 4% to 10%, and is currently 5%. Also, a savings association currently must maintain short-term liquid assets constituting at least 1% of its average daily balance of net withdrawable deposit accounts and current borrowings. Monetary penalties may be imposed for failure to meet these liquidity requirements. As of June 30, 1996, Madison First had liquid assets of $21 million, and a regulatory liquidity ratio of 26.7%, of which 5.4% constituted short-term investments. Pursuant to OTS capital regulations, savings associations must currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital) requirement, and a total risk-based capital to risk-weighted assets ratio of 8%. At June 30, 1996, Madison First's tangible capital ratio was 8.1%, its core capital ratio was 8.1%, and its risk-based capital to risk-weighted assets ratio was 16.9%. Therefore, at June 30, 1996, Madison First's capital exceeded all of its capital requirements currently in effect. The following table provides the minimum regulatory capital requirements and Madison First's capital ratios as of June 30, 1996:
At June 30, 1996 OTS Requirement Madison First's Capital Level --------------- ----------------------------- % of % of Amount Capital Standard Assets Amount Assets(1) Amount of Excess - ---------------- ------ ------ --------- ------ --------- (Dollars in thousands) Tangible capital............................ 1.5% $1,229 8.1% $6,599 $5,370 Core capital (2)............................ 3.0 2,457 8.1 6,599 4,142 Risk-based capital.......................... 8.0 3,322 16.9 7,011 3,689
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has proposed and is expected to adopt a core capital requirement for savings associations comparable to that recently adopted by the OCC for national banks. The new regulation, as proposed, would require at least 3% of total adjusted assets for savings associations that received the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. The final form of such new OTS core capital requirement may differ from that which has been proposed. Madison First expects to be in compliance with such new requirements. See "Regulation -- Regulatory Capital." (3) Madison First's risk-based capital includes $412,000 of general valuation allowances. For definitions of tangible capital, core capital and risk-based capital, see "Regulation -- Savings Association Regulatory Capital." As of June 30, 1996, management is not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on Madison First's liquidity, capital resources or results of operations. Current Accounting Issues In June, 1993, the Financial Accounting Standards Board (the "FASB") adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, which is effective for fiscal years beginning after December 15, 1994, 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, as a practical expedient, at the loan's observable market price or fair value of the collateral. Madison First's loans which might be affected are collateral-dependent, and Madison First's current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. Management adopted SFAS No. 114 on January 1, 1995, without a significant detrimental effect on Madison First's overall consolidated financial position or results of operations. In May, 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights," which requires that Madison First recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained would allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 122 requires that securitizations of mortgage loans be accounted for as sales of mortgage loans and acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights and capitalized excess servicing rights be assessed for impairment. Impairment is measured based on value. SFAS No. 122 was effective for years beginning after December 15, 1995, (January 1, 1996, as to Madison First) for transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights and capitalized excess servicing receivables whenever acquired. Retroactive application is prohibited, and earlier adoption is encouraged. Currently, Madison First does not sell any loans; therefore, the provisions of SFAS No. 122 were adopted without material effect. In October, 1995, the FASB issued SFAS No. 123 entitled "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of accounting and disclosing the amount of stock-based compensation paid to employees. SFAS No. 123 recognizes the fair value of an award of stock or stock options on the grant date and is required to be adopted by 1996, although earlier application is permitted. The disclosure provisions of SFAS No. 123 will be adopted by management upon completion of the Conversion. Management does not believe that adoption of SFAS No. 123 disclosure provisions will have a material adverse effect on Madison First's consolidated financial position or results of operations. Impact of Inflation The consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of financial institutions such as Madison First are monetary in nature. As a result, interest rates have a more significant impact on Madison First's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of Madison First's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by Madison First. Madison First is unable to determine the extent, if any, to which properties securing Madison First's loans have appreciated in dollar value due to inflation. BUSINESS OF MADISON FIRST General Madison First was organized as a federally chartered savings and loan association in 1875 and currently conducts its business from three full-service offices and one stand-alone drive-through branch all located in Jefferson County. However, as a condition to the Holding Company obtaining the requisite approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to (i) enter into a definitive agreement to sell Madison's First's Hanover, Indiana branch prior to consummation of the Acquisition and (ii) complete the sale of the Hanover, Indiana branch, including the physical facilities and at least $7.5 million of deposits originated at that branch, within 180 days of consummation of the Acquisition. In the event Madison First does not complete the divestiture of its Hanover branch within 180 days of the consummation of the Acquisition, the Hanover branch will be placed in trust, and an independent trustee will proceed with an immediate disposition of the Hanover branch without regard to price. See "Risk Factors -- Divestiture of Hanover Branch." Madison First's principal business consists of attracting deposits from the general public and originating fixed-rate and adjustable-rate loans secured primarily by first mortgage liens on one- to four-family real estate. Madison First's deposit accounts are insured up to applicable limits by the SAIF of the FDIC. Madison First is the oldest independent financial institution headquartered in Jefferson County, Indiana. Management believes Madison First has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. Madison First offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) indemnification mortgage loans; (iii) construction loans; (iv) loans secured by deposits; (v) nonresidential real estate loans; (vi) multi-family loans; (vii) land loans; (viii) installment loans; (ix) automobile loans; (x) home equity loans; (xi) second mortgage loans; (xii) NOW accounts; (xiii) money market demand accounts ("MMDAs") (xiv) passbook savings accounts; (xv) certificates of deposit and (xvi) individual retirement accounts. Lending Activities Madison First historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of Madison First's loan origination activities, representing 76.5% of Madison First's total loan portfolio at June 30, 1996. Madison First also offers multi-family mortgage loans, nonresidential real estate loans, land loans, construction loans and consumer loans. Mortgage loans secured by multi-family properties and nonresidential real estate totaled approximately 2.6% and 11.3%, respectively, of Madison First's total loan portfolio at June 30, 1996. Land loans totaled approximately 1.1% of Madison First's total loan portfolio at the same date. Construction loans totaled approximately 2.4% of Madison First's total loans as of June 30, 1996. Consumer loans constituted approximately 6.1% of Madison First's total loan portfolio at June 30, 1996. Loan Portfolio Data. The following table sets forth the composition of Madison First's loan portfolio by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses, deferred loan origination costs and loans in process.
At June 30, At December 31, 1996 1995 1994 1993 Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- TYPE OF LOAN (Unaudited) (Dollars in thousands) Residential real estate: One-to four-family..................... $44,517 76.5% $44,417 74.7% $46,378 81.5% $45,206 86.3% Multi-family........................... 1,529 2.6 1,613 2.7 1,242 2.2 912 1.7 Construction........................... 1,406 2.4 2,489 4.2 748 1.3 809 1.5 Nonresidential real estate................ 6,596 11.3 6,005 10.1 4,740 8.3 2,945 5.6 Land loans................................ 638 1.1 1,558 2.6 1,034 1.8 91 0.2 Consumer loans: Automobile loans....................... 1,451 2.5 1,392 2.3 1,022 1.8 978 1.9 Loans secured by deposits.............. 532 0.9 590 1.0 527 0.9 591 1.1 Home improvement loans................. 303 0.5 295 0.5 270 0.5 171 0.3 Other.................................. 1,271 2.2 1,129 1.9 977 1.7 717 1.4 ------ ----- ------ ----- ------ ----- ------ ----- Gross loans receivable.................... 58,243 100.0 59,488 100.0 56,938 100.0 52,420 100.0 Add/(Deduct): Deferred loan orgination costs......... 226 0.4 234 0.4 243 0.4 236 0.4 Undisbursed portions of loans in process.................. (604) (1.0) (1,370) (2.3) (642) (1.1) (459) (0.9) Allowance for loan losses.............. (416) (0.7) (407) (0.7) (252) (0.4) (227) (0.4) ------ ----- ------ ----- ------ ----- ------ ----- Net loans receivable...................... $57,449 98.7% $57,945 97.4% $56,287 98.9% $51,970 99.1% ======= ==== ======= ==== ======= ==== ======= ====
The following table sets forth certain information at December 31, 1995, regarding the dollar amount of loans maturing in Madison First's loan portfolio based on the contractual terms to maturity. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Balance Due During Years Ended December 31, Outstanding at 1999 2001 2006 2011 December 31, to to to and 1995 1996 1997 1998 2000 2005 2010 following ---- ---- ---- ---- ---- ---- ---- --------- (In thousands) Residential real estate loans: One-to four-family................. $44,417 $ 526 $144 $ 339 $ 725 $ 710 $18,536 $23,437 Multi-family.......................... 1,613 --- --- 3 11 146 668 785 Construction....................... 2,489 800 --- --- --- --- 919 770 Nonresidential real estate loans.................. 6,005 3 4 37 85 1,663 3,203 1,010 Land loans ......................... 1,558 800 7 9 546 98 98 --- Consumer loans: Loans secured by deposits.......... 590 482 25 29 20 32 2 --- Other loans........................ 2,816 267 336 501 1,670 42 --- --- ------- ------ ---- ----- ------- ------- -------- ------- Total............................ $59,488 $2,878 $516 $ 918 $ 3,057 $ 2,691 $ 23,426 $26,002 ======= ====== ==== ===== ======= ======= ======== =======
The following table sets forth, as of December 31, 1995, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates.
Due After December 31, 1996 Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Residential real estate loans: One-to four-family................................ $14,298 $29,592 $43,890 Multi-family...................................... --- 1,613 1,613 Construction...................................... 680 1,009 1,689 Non-residential real estate loans................................. 41 5,961 6,002 Land loans ........................................ 14 745 759 Consumer loans: Loans secured by deposits......................... --- 108 108 Other loans....................................... 2,549 --- 2,549 ------- ------- ------- Total........................................... $17,582 $39,028 $56,610 ======= ======= =======
Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $44.5 million, or 76.5% of Madison First's portfolio of loans at June 30, 1996, consisted of one- to four-family residential loans, of which approximately 70% had adjustable rates. Pursuant to federal regulations, such loans must require at least semi-annual payments and be for a term of not more than 40 years, and, if the interest rate is adjustable, it must be correlated with changes in a readily verifiable index. Madison First currently offers adjustable-rate one- to four-family residential mortgage loans ("ARMs") which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity, although until late 1995 Madison First's ARMs were indexed to the 11th District Cost of Funds. Madison First's residential ARMs are originated at a discount or "teaser" rate which is 150 to 175 basis points below the "fully indexed" rate. These ARMs then adjust annually to maintain a margin above the applicable index, subject to maximum rate adjustments discussed below. Madison First's ARMs have a current margin above such index of 2.5% for owner-occupied properties and 3.75% for non-owner-occupied properties. A substantial portion of the ARMs in Madison First's portfolio at June 30, 1996 provide for maximum rate adjustments per year and over the life of the loan of 1% and 5%, respectively, although Madison First recently began originating residential ARMs which provide for maximum rate adjustments per year and over the life of the loan of 1.5% and 6%, respectively. Madison First's residential ARMs are amortized for terms up to 30 years. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. Madison First also currently offers fixed-rate one- to four-family residential mortgage loans which provide for the payment of principal and interest over periods of 10 to 20 years. Historically, Madison First has retained all of its fixed-rate residential mortgage loans in its portfolio; however, Madison First anticipates beginning to originate its fixed-rate residential mortgage loans with terms of 15 years and greater for sale to the Federal Home Loan Mortgage Corporation (the "FHLMC") on a servicing-retained basis during the third quarter of 1996. See "-- Origination, Purchase and Sale of Loans." At June 30, 1996, 30% of Madison First's residential mortgage loans had fixed rates. Madison First does not currently originate residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (i.e., the "Loan-to-Value Ratio") exceeds 95%. Madison First generally requires private mortgage insurance on all conventional one- to four-family residential real estate mortgage loans with Loan-to-Value Ratios of in excess of 80%. The cost of such insurance is factored into the APY on such loans, and is not automatically eliminated when the principal balance is reduced over the term of the loan. Substantially all of the one- to four-family residential mortgage loans that Madison First originates include "due-on-sale" clauses, which give Madison First the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. However, Madison First does permit assumptions of existing residential mortgage loans on a case-by-case basis. Madison First's residential mortgage loans historically have not been originated on terms and conditions and using documentation that conform with the standard underwriting criteria required to sell such loans on the secondary market. However, Madison First has been approved to originate and sell its residential mortgage loans to the FHLMC, and anticipates beginning to originate its fixed-rate residential mortgage loans with terms of 15 years and greater for sale to the FHLMC on a servicing-retained basis during the third quarter of 1996. See "-- Origination, Purchase and Sale of Loans." Madison First also offers indemnification mortgage loans ("ID Mortgage Loans"), which are typically written as fixed-rate second mortgage loans. Madison First's ID Mortgage Loans are written for terms of 5 years and generally have maximum Loan-to-Value Ratios of 80%. Madison First also offers standard second mortgage loans. Madison First's second mortgage loans are adjustable-rate loans tied to the U.S. Treasury securities yields adjusted to a constant maturity and have a current margin above such index of 4.25%. If another institution holds the first mortgage, the initial interest rate on the second mortgage loan is set 50 basis points higher. Madison First's second mortgage loans have maximum rate adjustments per year and over the terms of the loans equal to 1.5% and 6%, respectively. Madison First's second mortgage loans have terms of 10 to 20 years. At June 30, 1996, one- to four-family residential mortgage loans amounting to $220,000, or .38% of total loans, were included in non-performing assets. See "-- Non-Performing and Problem Assets." Construction Loans. Madison First offers construction loans with respect to residential and nonresidential real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). At June 30, 1996, approximately $1.4 million, or 2.4% of Madison First's total loan portfolio, consisted of construction loans. The largest construction loan at June 30, 1996, totalling $800,000, constituted a loan to a church in Madison, Indiana. No construction loans were included in non-performing assets on that date. Generally, construction loans are written as 12 month fixed-rate loans with interest calculated on the amount disbursed under the loan and payable on a semi-annual basis. Madison First generally requires an 80% Loan-to-Value Ratio for its construction loans. Inspections are made prior to any disbursement under a construction loan, and Madison First does not charge commitment fees for its construction loans. While providing Madison First with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, Madison First may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be salable, resulting in the borrower defaulting and Madison First taking title to the project. Nonresidential Real Estate Loans. At June 30, 1996, approximately $6.6 million, or 11.3% of Madison First's total loan portfolio, consisted of nonresidential real estate loans. Of these loans, approximately $330,000 constituted participations in loans secured by nonresidential real estate which were purchased from other financial institutions. See "-- Origination, Purchase and Sale of Loans." The nonresidential real estate loans included in Madison First's portfolio are primarily secured by real estate such as churches and small business properties. Madison First generally originates nonresidential real estate loans as one-year adjustable-rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity and are written for maximum terms of 20 years and with maximum Loan-to-Value Ratios of 80%. Madison First's nonresidential real estate loans have a margin above such index of 4.25%, and maximum adjustments per year and over the life of the loan of 1.5% and 6%, respectively. Madison First underwrites these loans on a case-by-case basis and, in addition to its normal underwriting criteria, Madison First evaluates the borrower's ability to service the debt from the net operating income of the property. The largest nonresidential real estate loan as of June 30, 1996 was $825,000 and was secured by a storage facility in Clarksville, Indiana. On the same date, there were no nonresidential real estate loans included in non-performing assets. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-Family Loans. At June 30, 1996, approximately $1.5 million, or 2.6% of Madison First's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). Madison First's multi-family loans are written on terms and conditions similar to Madison First's nonresidential real estate loans. The largest multi-family loan as of June 30, 1996 was $729,000 and was secured by an apartment building in Lawrenceburg, Indiana. On the same date, there were no multi-family loans included in non-performing assets. Multi-family loans, like nonresidential real estate loans, involve a greater risk than do residential loans. See "-- Nonresidential Real Estate Loans" above. Also, the loans-to-one borrowers limitation limits the ability of Madison First to make loans to developers of apartment complexes and other multi-family units. Land Loans. At June 30, 1996, approximately $638,000, or 1.1% of Madison First's total loan portfolio, consisted of mortgage loans secured by undeveloped real estate. Madison First's land loans are generally written on terms and conditions similar to Madison First's nonresidential real estate loans. Some of Madison First's land loans are land development loans; i.e., the proceeds of the loans are used for improvements to the real estate such as streets and sewers. At June 30, 1996, Madison First's largest land loan totalled $432,000. While none of Madison First's land development loans were included in non-performing assets as of June 30, 1996, such loans are more risky than conventional loans since land development borrowers who are over budget may divert the loan funds to cover cost-overruns rather than direct them toward the purpose for which such loans were made. In addition, those loans are more difficult to monitor than conventional mortgage loans. As such, a defaulting borrower could cause Madison First to take title to partially improved land that is unmarketable without further capital investment. Consumer Loans. Federal laws and regulations permit federally chartered savings associations to make secured and unsecured consumer loans in an aggregate amount of up to 35% of the association's total assets. In addition, a federally chartered savings association has lending authority above the 35% limit for certain consumer loans, such as property improvement loans and deposit account loans. However, the Qualified Thrift Lender test places additional limitations on a savings association's ability to make consumer loans. See "Regulation -- Qualified Thrift Lender." Madison First's consumer loans, consisting primarily of auto loans, home improvement loans and loans secured by deposits, aggregated approximately $3.6 million at June 30, 1996, or 6.1% of Madison First's total loan portfolio. Madison First consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of Madison First's consumer loans, except loans secured by deposits, are fixed-rate loans with terms that vary from six months (for unsecured installment loans) to 60 months (for home improvement loans and loans secured by new automobiles). Madison First does not make indirect automobile loans. At June 30, 1996, 91% of Madison First's consumer loans were secured by collateral. Madison First's loans secured by deposits are made up to 90% of the original account balance and accrue at a rate of 2% over the underlying passbook or certificate of deposit rate. Interest on loans secured by deposits is paid semi-annually. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 1996, consumer loans amounting to $3,000 were included in non-performing assets. See "-- Non-Performing and Problem Assets." There can be no assurances, however, that additional delinquencies will not occur in the future. Home Equity Loans. In May, 1996, Madison First began offering a new home equity line of credit. This line of credit is written with a fixed rate of 1% below the prime rate for the first year. Thereafter, the line is an adjustable-rate line of credit tied to the prime rate with a margin of positive 1%. Madison First's home equity loans have interest rate minimums of 7.5% and interest rate maximums of 18%. Madison First's home equity loans are amortized based on a 20 year maturity and are generally not written in principal amounts of less than $5,000. Madison First generally requires an 80% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Madison First's previous home equity line of credit was an adjustable-rate line of credit tied to the prime rate with varying margins up to 3%, depending on the amount committed under the line of credit. These lines of credit had interest rate minimums of 8.5% and interest rate maximums of 18%. Madison First's previous home equity lines were not written in amounts less than $5,000. At June 30, 1996, Madison First had outstanding approximately $79,000 of home equity loans, with unused lines of credit totalling approximately $285,000. No home equity loans were included in non-performing assets on that date. Origination, Purchase and Sale of Loans. Madison First historically has originated its mortgage loans pursuant to its own underwriting standards which were not in conformity with the standard criteria of the FHLMC or Federal National Mortgage Association ("FNMA"). If it desired to sell its mortgage loans, Madison First might therefore experience some difficulty selling such loans quickly in the secondary market. Madison First's ARMs vary from secondary market criteria because, among other things, Madison First does not require current property surveys in most cases and does not permit the conversion of those loans to fixed rate loans in the first three years of their term. Madison First recently was approved to begin originating fixed-rate residential mortgage loans for sale to the FHLMC on a servicing-retained basis. Madison First anticipates beginning this fixed-rate program during the third quarter of 1996. Loans originated for sale to the FHLMC in the secondary market will be originated in accordance with the guidelines established by the FHLMC and will be sold promptly after they are originated. Madison First will receive a servicing fee of one-fourth of 1% of the principal balance of all loans serviced. Madison First confines its loan origination activities primarily to Jefferson County. At June 30, 1996, loans totalling approximately $2.4 million were secured by property located outside of Indiana. Madison First's loan originations are generated from referrals from existing customers, real estate brokers, and newspaper and periodical advertising. Loan applications are underwritten at any of Madison First's three full-service offices and are processed at Madison First's downtown office. Madison First's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, Madison First studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. All mortgage loans are approved by Madison First's Loan Committee. Consumer loans up to $15,000 may be approved by a Loan Officer. Consumer loans for more than $15,000 must be approved by the President. Madison First qualifies all residential ARM loan borrowers based upon a fully-indexed interest rate rather than the initial discounted or teaser rate. Madison First generally requires appraisals on all real property securing its loans and requires an attorney's opinion and a valid lien on its mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. Madison First requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing its interest if the property is in a flood plain. Madison First also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%. Madison First does not require escrow accounts for insurance premiums or taxes. Madison First's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. Madison First occasionally purchases participations in commercial loans, nonresidential real estate and multi-family loans from other financial institutions. At June 30, 1996, Madison First held in its loan portfolio participations in nonresidential real estate mortgage loans aggregating approximately $330,000 that it had purchased, all of which were serviced by others. Madison First generally does not sell participations in any loans that it originates. The following table shows loan origination and repayment activity for Madison First during the periods indicated:
Six Months Ended June 30, Year Ended December 31, 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Loans Originated: Residential real estate loans................. $5,147 $4,319 $ 8,023 $12,097 $20,284 Multi-family loans............................ --- --- --- 758 57 Construction loans............................ 626 2,017 3,027 2,415 1,046 Non-residential real estate loans............. 55 193 1,805 1,031 1,211 Land loans.................................... 98 --- 333 981 91 Consumer loans................................ 1,328 1,285 2,412 2,137 1,419 ----- ----- ----- ----- ----- Total originations........................ 7,254 7,814 15,600 19,419 24,108 Reductions: Principal loan repayments..................... 7,729 7,069 13,708 14,973 25,670 Transfers from loans to real estate owned..... --- --- --- 15 35 ----- ----- ----- ----- ----- Total reductions.......................... 7,729 7,069 13,708 14,988 25,705 Decrease in other items (1)................... (21) (4) (234) (114) (118) ----- ----- ----- ----- ----- Net increase (decrease) ...................... $ (496) $ 741 $ 1,658 $ 4,317 $ (1,715) ====== ======= ======== ======== ========
(1) Other items consist of amortization of deferred loan origination costs and the provision for losses on loans. Madison First's residential loan originations during the year ended December 31, 1995 totalled $8.0 million, compared to $12.1 million and $20.3 million in the years ended December 31, 1994 and 1993, respectively. The decrease in residential loan origination from 1993 to 1995 was primarily attributable to the substantial amount of refinancings during the lower interest rate environment in 1993 which are reflected as originations in such year. Refinancing activities decreased as a result of the less favorable interest rate environment during 1994 and 1995. Madison First also experienced some decline in its residential loan originations during 1994 and 1995 as a result of Madison First not offering long-term (i.e., 30 year) fixed-rate residential loans. During this time, demand for long-term fixed-rate loans increased, and because Madison First did not offer such loans, it was unable to benefit from the increased demand. Origination and Other Fees. Madison First realizes income from late charges, checking account service charges, and fees for other miscellaneous services. Madison First does not currently charge any origination fees or points on its loans. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets Mortgage loans are reviewed by Madison First on a regular basis and are placed on a non-accrual status when management determines that the collectability of the interest is less than probable or collection of any amount of principal is in doubt. Generally, when loans are placed on non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. Delinquency notices are sent with respect to all mortgage loans contractually past due 15 days. When loans are 45 days in default, additional delinquency notices are sent and personal contact is made with the borrowers to establish acceptable repayment schedules. When loans are 60 days in default, contact is again made with the borrowers to establish acceptable repayment schedules. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Consumer loans are treated similarly. Interest income on consumer and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case accrual of interest is discontinued. It is Madison First's policy to recognize losses on these loans as soon as they become apparent. Non-performing Assets. At June 30, 1996, $223,000, or .27% of Madison First's total assets, were non-performing assets (non-performing loans and non-accruing loans) compared to $8,000, or .01%, of Madison First's total assets at December 31, 1995. At June 30, 1996, residential loans and consumer loans accounted for $220,000 and $3,000, respectively, of non-performing assets. There were no REO or non-accruing investments at June 30, 1996. The table below sets forth the amounts and categories of Madison First's non-performing assets (non-performing loans, foreclosed real estate and troubled debt restructurings) for the last three years. It is the policy of Madison First that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days.
At June 30, At December 31, 1996 1995 1994 1993 ---- ---- ---- ---- (Unaudited) (Dollars in thousands) Non-performing assets: Non-performing loans................................ $223 $ 8 $ 13 $ 7 Troubled debt restructurings........................ --- --- --- --- ---- ---- ---- ---- Total non-performing loans........................ 223 8 13 7 Foreclosed real estate.............................. --- --- --- --- ---- ---- ---- ---- Total non-performing assets....................... $223 $ 8 $ 13 $ 7 ==== ==== ==== ==== Non-performing loans to total loans.................... 0.38% 0.01% 0.02% 0.01% ==== ==== ==== ==== Non-performing assets to total assets.................. 0.27% 0.01% 0.01% 0.01% ==== ==== ==== ====
At June 30, 1996, Madison First held loans delinquent from 30 to 89 days totalling $509,000. Madison First was not aware of any loans, the borrowers of which were experiencing financial difficulties. In addition there were no other assets that would need to be disclosed as non-performing assets. Delinquent Loans. The following table sets forth certain information at June 30, 1996, and at December 31, 1995, 1994, and 1993, relating to delinquencies in Madison First's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At June 30, 1996 At December 31, 1995 ------------------------------------------------- ------------------------------------------------ 60-89 Days 90 Days or More 60-89 Days 90 Days or More -------------------- ------------------------- ----------------------- ----------------------- Principal Principal Principal Principal Number Balance of Number Balance of Number Balance of Number Balance of of Loans Loans of Loans Loans of Loans Loans of Loans Loans of -------- ----- -------- ----- -------- ----- -------- ----- -- (Dollars in thousands) Residential real estate loans............ 22 $486 3 $220 5 $102 1 $ 1 Multi-family loans......... --- --- --- --- --- --- --- --- Construction loans......... --- --- --- --- --- --- --- --- Land loans................. --- --- --- --- --- --- --- --- Nonresidential real estate loans....... --- --- --- --- 1 23 --- --- Consumer loans............. 5 23 2 3 1 3 4 7 ---- ---- ---- ---- ---- ---- ---- ---- Total................... 27 $509 5 $223 7 $128 5 $ 8 ==== ==== ==== ==== ==== ==== ==== ==== Delinquent loans to total loans............. 1.26% 0.23% ==== ====
At December 31, 1994 At December 31, 1993 ------------------------------------------------- ------------------------------------------------ 60-89 Days 90 Days or More 60-89 Days 90 Days or More -------------------- ------------------------- ----------------------- ----------------------- Principal Principal Principal Principal Number Balance of Number Balance of Number Balance of Number Balance of of Loans Loans of Loans Loans of Loans Loans of Loans Loans of -------- ----- -------- ----- -------- ----- -------- ---------- (Dollars in thousands) Residential real estate loans............ 1 $ 4 2 $13 4 $ 94 --- $--- Multi-family loans......... --- --- --- --- 1 10 --- --- Construction loans......... --- --- --- --- --- --- --- --- Land loans................. --- --- --- --- --- --- --- --- Nonresidential real estate loans....... -- --- --- --- --- --- --- --- Consumer loans............. 6 13 --- --- 1 1 3 7 ---- ---- ---- ---- ---- ----- ---- ----- Total................... 7 $17 2 $13 6 $105 3 $7 === ==== ==== ==== ==== ===== ==== ===== Delinquent loans to total loans............. 0.05% 0.22% ==== ====
Classified assets. Federal regulations and Madison First's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. At June 30, 1996, the aggregate amount of Madison First's classified assets, and of Madison First's general and specific loss allowances were as follows: At June 30, 1996 ---------------- (Unaudited) (In thousands) Substandard assets........................................ $315 Doubtful assets........................................... --- Loss assets............................................... 4 ---- Total classified assets............................... $319 ==== General loss allowances................................... $412 Specific loss allowances.................................. 4 ---- Total allowances...................................... $416 ==== Madison First regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of Madison First's classifed assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of Madison First's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, Madison First's allowance for loan losses is adequate to absorb possible losses from loans at June 30, 1996. However, there can be no assurance that regulators, when reviewing Madison First's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect Madison First's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the past five fiscal years ended December 31, 1995, and the six-month periods ended June 30, 1996, and June 30, 1995.
Six Months Ended June 30, Year Ended December 31, 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (Unaudited) (Dollars in thousands) Balance at beginning of period.............. $ 407 $ 252 $ 252 $ 227 $ 262 $ 227 $ 102 Charge-offs: Single-family residential.............. --- --- --- --- (75) (3) (19) Consumer............................... (3) (4) --- (4) (25) --- --- --------- --------- -------- --------- --------- --------- --------- Total charge-offs.................... (3) (4) --- (4) (100) (3) (19) Recoveries.................................. --- --- 5 --- 10 1 2 --------- --------- -------- --------- --------- --------- --------- Net charge-offs.......................... (3) (4) 5 (4) (90) (2) (17) Provision for losses on loans............... 12 3 150 29 55 37 142 --------- --------- -------- --------- --------- --------- --------- Balance end of period.................... $ 416 $ 251 $ 407 $ 252 $ 227 $ 262 $ 227 ========= ========= ======== ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding.................. 0.72% 0.44% 0.70% 0.45% 0.44% 0.49% 0.39% Ratio of net charge-offs to average loans outstanding........................ 0.01 0.01 0.01 0.01 0.17 0.00 0.03
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of Madison First's allowance for loans losses at the dates indicated.
At June 30, At December 31, 1996 1995 1995 1994 1993 ------------------- ----------------- ----------------- ------------------ ---------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category to total total to total to total total Amount loans Amount loans Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) Balance at end of period applicable to: Residential real estate..... $163 81.5% $151 83.4% $157 81.6% $152 85.0% $127 89.5% Nonresidential real estate.. 102 12.4 --- 11.2 100 12.7 --- 10.1 --- 5.8 Consumer loans.............. 51 6.1 50 5.4 50 5.7 50 4.9 50 4.7 Unallocated................. 100 --- 50 --- 100 --- 50 --- 50 --- ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- Total....................... $416 100.0% $251 100.0% $407 100.0% $252 100.0% $227 100.0% ==== ===== ==== ===== ==== ===== ==== ===== ==== =====
Investments and Mortgage-Backed Securities Investments. Madison First's investment portfolio consists of U.S. government and agency obligations, asset management funds, and FHLB stock. At June 30, 1996, approximately $10.6 million, or 12.1%, of Madison First's total assets consisted of such investments. The following table sets forth the amortized cost and the market value of Madison First's investment portfolio at the dates indicated.
At June 30, At December 31, 1996 1995 1994 1993 ------------------ ------------------- ---------------------- -------------------- Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- ---- ----- (Unaudited) (In thousands) Held to Maturity: U.S. Government and agency obligations............... $ 6,000 $ 5,886 $ 8,000 $ 7,930 $13,996 $13,120 $ 9,491 $ 9,574 Available for Sale: U.S. Government and agency obligations............... 4,000 3,940 5,000 5,018 --- --- --- --- Asset management funds............. --- --- --- --- 101 101 --- --- FHLB stock............................ 610 610 610 610 610 610 610 610 ------- ------- ------- ------- ------- ------- ------- ------- Total investments................ $10,610 $10,436 $13,610 $13,558 $14,707 $13,831 $10,101 $10,101 ======= ======= ======= ======= ======= ======= ======= =======
The following table sets forth the amount of investment securities (excluding FHLB stock) which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1996.
Amount at June 30, 1996 which matures in ----------------------------------------------------------------------------------- One Year One Year Five Years After or Less to Five Years to Ten Years Ten Years Amortized Average Amoritzed Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- ---- ----- (Dollars in thousands) U.S. Government and agency obligations........ $2,500 4.47% $7,500 5.48% $--- ---% $--- ---% ====== ==== ====== ==== ==== === ==== ====
Mortgage-Backed Securities. Madison First maintains a significant portfolio of mortgage-backed pass-through securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed pass-through securities generally entitle Madison First to receive a portion of the cash flows from an identified pool of mortgages and gives Madison First an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by their respective agencies as to principal and interest. Except for a $64,000 investment in FHLMC interest only strips, Madison First does not invest in any derivative products. Although mortgage-backed securities generally yield less than individual loans originated by Madison First, they present less credit risk. Because mortgage-backed securities have a lower yield relative to current market rates, retention of such investments could adversely affect Madison First's earnings, particularly in a rising interest rate environment. The mortgage-backed securities portfolio is generally considered to have very low credit risk because they are guaranteed as to principal repayment by the issuing agency. In addition, Madison First has purchased adjustable-rate mortgage-backed securities as part of its effort to reduce its interest rate risk. In a period of declining interest rates, Madison First is subject to prepayment risk on such adjustable rate mortgage-backed securities. Madison First attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par. If interest rates rise in general, the interest rates on the loans backing the mortgage-backed securities will also adjust upward, subject to the interest rate caps in the underlying mortgage loans. However, Madison First is still subject to interest rate risk on such securities if interest rates rise faster than 1% to 2% maximum annual interest rate adjustments on the underlying loans. At June 30, 1996, Madison First had $8.7 million of mortgage-backed securities outstanding, all of which were classified as held to maturity. These mortgage-backed securities may be used as collateral for borrowings and through repayments, as a source of liquidity. The following table sets forth the carrying value and market value of Madison First's mortgage-backed securities at the dates indicated.
At June 30, At December 31, 1996 1995 1994 1993 ------------------ -------------------- ------------------ ------------------- Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- ---- ----- (Unaudited) (In thousands) Mortgage-backed securities............................... $8,690 $8,607 $9,917 $9,941 $11,328 $10,715 $13,925 $14,195 ====== ====== ====== ====== ======= ======= ======= =======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1995.
Amount at December 31, 1995 which matures in One Year One Year to After or Less Five Years Five Years ------------------------ ------------------------ ---------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield (Dollars in thousands) Mortgage-backed securities...................... $139 8.00% $6,830 5.96% $2,948 6.54% ==== ==== ====== ==== ====== ====
The following table sets forth the changes in the Madison First's mortgage-backed securities portfolio for the six-month periods ended June 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993.
For the Six Months For the Year Ended Ended June 30, December 31, ------------------------- --------------------------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Beginning balance........................... $9,917 $11,328 $11,328 $13,925 $13,548 Purchases................................... --- --- --- --- 3,918 Repayments/sales............................ 1,228 533 (1,417) (2,576) (3,399) Premium and discount amortization, net........................ 1 2 6 (1) (37) Unrealized loss on securities available for sale....................... --- --- --- --- --- Provision for other than temporary decline.................................. --- --- --- (20) (105) ------ ------- ------- ------- ------- Ending balance.............................. $8,690 $10,797 $ 9,917 $11,328 $13,925 ====== ======= ======= ======= =======
Management intends to temporarily hold the proceeds from the Conversion in U.S. government securities, other U.S. agency securities and mortgage-backed securities. See "Use of Proceeds." Sources of Funds General. Deposits have traditionally been Madison First's primary source of funds for use in lending and investment activities. In addition to deposits, Madison First derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Deposits are attracted, principally from within Jefferson County, through the offering of a broad selection of deposit instruments including fixed-rate certificates of deposit, NOW, MMDAs and other transaction accounts, individual retirement accounts and savings accounts. Madison First does not actively solicit or advertise for deposits outside of Jefferson County. Substantially all of Madison First's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. Madison First does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by Madison First on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and applicable regulations. Madison First relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by Madison First has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. Madison First has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. Madison First manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, Madison First believes that its passbook, NOW and MMDAs are relatively stable sources of deposits. However, the ability of Madison First to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. An analysis of deposit accounts by type, maturity, and rate at Madison First at June 30, 1996, is as follows:
Minimum Balance at Weighted Opening June 30, % of Average Type of Account Balance 1996 Deposits Rate - --------------- ------- ---- -------- ---- (Unaudited) (Dollars in thousands) Withdrawable: Passbook accounts.......................................... $ 10 $17,011 22.7% 3.05% MMDA....................................................... 1,000 6,794 9.1 3.00 NOW accounts............................................... 100 8,525 11.4 2.63 Super NOW accounts......................................... 1,000 1,033 1.4 2.67 Total withdrawable....................................... 33,363 44.6 2.92 Certificates (original terms): I.R.A...................................................... 100 5,990 8.0 5.20 3 months................................................... 2,500 229 0.3 4.16 6 months................................................... 2,500 5,117 6.8 4.80 12 months.................................................. 500 7,770 10.4 5.51 15 months.................................................. 500 5,465 7.3 6.16 18 months.................................................. 500 3,398 4.5 5.94 30 months ................................................. 500 5,150 6.9 5.60 48 months.................................................. 500 56 0.1 7.50 60 months.................................................. 500 2,855 3.9 5.76 72 months ................................................. 500 10 0.0 7.75 96 months.................................................. 500 155 0.2 8.00 120 months................................................. 500 4 0.0 4.00 Jumbo certificates............................................ 99,000 5,165 7.0 5.88 ------ ---- ---- Total certificates......................................... 41,364 55.4 5.58 ------ ---- ---- Total deposits................................................ $74,727 100.0% 4.37% ======= ===== ====
The following table sets forth by various interest rate categories the composition of time deposits of Madison First at the dates indicated:
At June 30, At December 31, 1996 1995 1994 1993 ---- ---- ---- ---- (Unaudited) (In thousands) 3.00 to 3.99%............................... $ --- $ --- $ 443 $25,420 4.00 to 4.99%............................... 5,657 98 30,882 9,900 5.00 to 5.99%............................... 25,564 30,116 5,276 3,578 6.00 to 6.99%............................... 9,728 10,731 3,365 303 7.00 to 7.99%............................... 415 232 267 --- ------- ------- ------- ------- Total.................................... $41,364 $41,177 $40,233 $39,201 ======= ======= ======= =======
The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following June 30, 1996. Matured certificates, which have not been renewed as of June 30, 1996, have been allocated based upon certain rollover assumptions.
Amounts at June 30, 1996 One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 3.00 to 3.99%............................... $ --- $ --- $ --- $ --- 4.00 to 4.99%............................... 5,654 --- 3 --- 5.00 to 5.99%............................... 17,585 5,146 1,824 1,009 6.00 to 6.99%............................... 7,288 2,440 --- --- 7.00 to 7.99%............................... 210 4 40 161 ------- ------ ------ ------ Total.................................... $30,737 $7,590 $1,867 $1,170 ======= ====== ====== ======
The following table indicates the amount of Madison First's jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of June 30, 1996. At June 30, 1996 ---------------- Maturity Period (In thousands) Three months or less....................................... $2,561 Greater than three months through six months............... 1,109 Greater than six months through twelve months.............. 781 Over twelve months......................................... 602 ------ Total................................................. $5,053 ====== The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by Madison First at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
DEPOSIT ACTIVITY Balance Increase Balance Increase at (Decrease) at (Decrease) June 30, % of from December 31, % of from 1996 Deposits 1995 1995 Deposits 1994 ---- -------- ---- ---- -------- ---- (Dollars in thousands) Withdrawable: Passbook accounts............................. $17,011 22.7% $(900) $17,911 23.8% $(1,519) MMDA ........................................ 6,794 9.1 (347) 7,141 9.5 (511) NOW accounts.................................. 8,525 11.4 584 7,941 10.6 529 Super NOW accounts............................ 1,033 1.4 (30) 1,063 1.4 332 ------- ----- ------ ------- ----- -------- Total withdrawable.......................... 33,363 44.6 (693) 34,056 45.3 (1,169) Certificates (original terms): I.R.A......................................... 5,990 8.0 207 5,783 7.7 (293) 3 months...................................... 229 0.3 134 95 0.1 (348) 6 months...................................... 5,117 6.8 (271) 5,388 7.1 (2,086) 12 months..................................... 7,770 10.4 424 7,346 9.8 (1,473) 15 months..................................... 5,465 7.3 (505) 5,970 7.9 5,970 18 months..................................... 3,398 4.5 113 3,285 4.4 840 30 months .................................... 5,150 6.9 (116) 5,266 7.0 (802) 48 months..................................... 56 0.1 --- 56 0.1 --- 60 months..................................... 2,855 3.9 (194) 3,049 4.1 (305) 72 months .................................... 10 --- --- 10 --- --- 96 months..................................... 155 0.2 (10) 165 0.2 (35) 120 months.................................... 4 --- --- 4 --- (7) Jumbo certificates............................... 5,165 7.0 405 4,760 6.3 (517) ------- ----- ------ ------- ----- -------- Total certificates............................ 41,364 55.4 187 41,177 54.7 944 ------- ----- ------ ------- ----- -------- Total deposits................................... $74,727 100.0% $ (506) $75,233 100.0% $ (225) ======= ===== ====== ======= ===== ========
DEPOSIT ACTIVITY Balance Increase Balance at (Decrease) at December 31, % of from December 31, % of 1994 Deposits 1993 1993 Deposits ---- -------- ---- ---- -------- (Dollars in thousands) Withdrawable: Passbook accounts............................. $19,430 25.8% $(3,713) $23,143 29.6% MMDA ........................................ 7,652 10.1 (635) 8,287 10.6 NOW accounts.................................. 7,412 9.8 821 6,591 8.5 Super NOW accounts............................ 731 1.0 (128) 859 1.1 ------- ----- ------- ------- ----- Total withdrawable.......................... 35,225 46.7 (3,655) 38,880 49.8 Certificates (original terms): I.R.A......................................... 6,076 8.1 (207) 6,283 8.0 3 months...................................... 443 0.6 (25) 468 0.6 6 months...................................... 7,474 9.9 (828) 8,302 10.6 12 months..................................... 8,819 11.7 2,288 6,531 8.4 15 months..................................... --- --- --- --- --- 18 months..................................... 2,445 3.2 (707) 3,152 4.0 30 months .................................... 6,068 8.0 (662) 6,730 8.6 48 months..................................... 56 0.1 --- 56 0.1 60 months..................................... 3,354 4.4 (196) 3,550 4.6 72 months .................................... 10 --- --- 10 --- 96 months..................................... 200 0.3 (36) 236 0.3 120 months.................................... 11 --- (4) 15 -- Jumbo certificates............................... 5,277 7.0 1,409 3,868 5.0 ------- ----- ------- ------- ----- Total certificates............................ 40,233 53.3 1,032 39,201 50.2 ------- ----- ------- ------- ----- Total deposits................................... $75,458 100.0% $(2,623) $78,081 100.0% ======= ===== ======= ======= =====
Total deposits at June 30, 1996 totaled $74.7 million, compared to $78.1 million at December 31, 1993. This decline in deposits was primarily attributable to a $6.1 million decrease in passbook accounts, offset by a $2.2 million increase in certificates. The decrease in passbook deposits since 1993 resulted from increased competition from local financial institutions, mutual funds and other alternative investment vehicles with more attractive interest rates as customers became more rate conscious. Madison First's deposit base is somewhat dependent upon the manufacturing sector of Jefferson County's economy. Although Jefferson County's manufacturing sector is relatively diversified and not significantly dependent upon any industry, a loss of a material portion of the manufacturing workforce could adversely affect Madison First's ability to attract deposits due to the loss of personal income attributable to the lost manufacturing jobs and the attendant loss in service industry jobs. In the unlikely event of liquidation of Madison First after the Conversion, all claims of creditors (including those of deposit account holders, to the extent of their deposit balances) would be paid first followed by distribution of the liquidation account to certain deposit account holders, with any assets remaining thereafter distributed to the Holding Company as the sole shareholder of Madison First. See "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." Borrowings. Madison First focuses on generating high quality loans and then seeks the best source of funding from deposits, investments or borrowings. At June 30, 1996, Madison First had no borrowings from the FHLB of Indianapolis. Madison First does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The following table presents certain information relating to the Madison First's borrowings at or for the six months ended June 30, 1996 and 1995 and at or for the years ended December 31, 1995, 1994 and 1993.
At or for the Six Months At or for the Year Ended June 30, Ended December 31, -------------- ------------------ 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) FHLB Advances: Outstanding at end of period.................... $ --- $2,000 $4,471 $4,986 $ --- Average balance outstanding for period.......... 1,111 3,678 2,967 228 22 Maximum amount outstanding at any month-end during the period................... 3,404 6,218 4,471 4,986 --- Weighted average interest rate during the period............................. 7.92 % 5.22% 5.90 % 5.26% 4.55% Weighted average interest rate at end of period.............................. --- 5.60 5.76 6.26. ---
Properties The following table provides certain information with respect of Madison First's offices as of June 30, 1996.
Net Book Value of Property Year Furniture, Approximate Opened or Fixtures and Square Description and Address Acquired Equipment Footage - ----------------------- -------- --------- ------- (Dollars in thousands) Locations in Madison, Indiana Downtown Office: 233 E. Main Street............... 1952 $303 9,110 Drive-Through Branch: 401 E. Main Street............... 1984 62 375 Hilltop Location: 303 Clifty Drive................. 1973 204 3,250 Location in Hanover, Indiana (1) 136 Thornton Road................ 1980 286 2,584
(1) As a condition to obtaining regulatory approval for the Acquisition from the FRB, the Holding Company committed to cause Madison First to divest its Hanover branch, including the physical facilities and at least $7.5 million of deposits originated at that branch. In the event Madison First is unable to sell the physical facilities but does complete the sale of the branch deposits, the Holding Company has undertaken not to reopen the Hanover facilities for a period of two years following the Acquisition. See "Risk Factors -- Divestiture of Hanover Branch." The following table provides certain information with respect to real estate owned by Madison First and rented to other entities as of June 30, 1996. All real estate listed in the table below is rented on a month-to-month basis, and none of the parcels is subject to any written lease agreement. This property was acquired by Madison First for future expansion of its banking operations. Address Tenant ------- ------ 223 E. Main Street Madison, Indiana 47250 Vicarious of Madison (became tenant in July, 1996) 225 E. Main Street Madison, Indiana 47250 Madison Gallery of Fine Art 227 E. Main Street Madison, Indiana 47250 Heitz Photo 407 E. Jefferson Madison, Indiana 47250 MIDCOR Community Foundation Madison First owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The net book value of electronic data processing equipment owned by Madison First was approximately $17,000 at June 30, 1996. Madison First operates three automated teller machines ("ATMs"), one at each office location other than its downtown branch. Madison First's ATMs participate in the PLUS(R) and MagicLine(R) networks. Madison First has also contracted for the data processing and reporting services of BISYS, Inc. in Houston, Texas. The cost of these data processing services is approximately $13,000 per month. Service Corporation Subsidiaries OTS regulations permit federal savings associations to invest in the capital stock, obligations or other specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries and joint ventures in which such subsidiaries are participants in an aggregate amount not exceeding 2% of an association's assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit associations to make specified types of loans to such subsidiaries (other than special purpose finance subsidiaries), in which the association owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the association's regulatory capital if the association's regulatory capital is in compliance with applicable regulations. A savings association that acquires a non-savings association subsidiary, or that elects to conduct a new activity within a subsidiary, must give the FDIC and the OTS at least 30 days advance written notice. The FDIC may, after consultation with the OTS, prohibit specified activities if it determines such activities pose a serious threat to SAIF. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, their entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). Madison First currently has two subsidiaries, Madison First Service Corporation ("First Service") and McCauley Insurance Agency, Inc. ("McCauley"). First Service was incorporated under the laws of the State of Indiana on July 3, 1973 and currently owns all of the outstanding capital stock of McCauley. First Service has no other operations. McCauley was organized under the laws of the State of Indiana under the name Builders Insurance Agency, Inc. on August 2, 1957 and changed its name to McCauley Insurance Agency, Inc. on August 29, 1957. McCauley currently is engaged in the sale of general fire and accident, car, home and life insurance to the general public. During the year ended December 31, 1995, McCauley received approximately $175,000 in commissions. Upon consummation of the Acquisition, the Holding Company will become a bank holding company and will be subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"). At such time, the insurance operations of McCauley will not be permitted under the BHCA, and Madison First will be required to divest its ownership of McCauley within two years. At June 30, 1996, Madison First's aggregate investment in First Service was approximately $708,000, and First Service's aggregate investment in McCauley was approximately $495,000. The consolidated statements of income of Madison First and its subsidiaries included elsewhere herein include the operations of First Service and McCauley. All intercompany balances and transactions have been eliminated in the consolidation. Employees As of June 30, 1996, Madison First employed 28 persons on a full-time basis and 3 persons on a part-time basis. None of Madison First's employees is represented by a collective bargaining group. Management considers its employee relations to be good. Madison First's employee benefits for full-time employees include, among other things, a Pentegra (formerly known as Financial Institutions Retirement Fund) defined benefit pension plan ("Pension Plan"), and major medical, dental, and long-term disability insurance. Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in Madison First's area. See "Executive Compensation and Related Transactions of Madison First." Legal Proceedings Although Madison First, from time to time, is involved in various legal proceedings in the normal course of business, there are no material legal proceedings to which Madison First is a party or to which any of its property is subject. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CITIZENS NATIONAL BANK OF MADISON General The principal business of national banks, including Citizens, consists of providing a full complement of financial services through a broad array of deposit and loan products to the small businesses, professionals and other individuals located within its market area. Citizens' earnings are primarily dependent upon its net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on such deposits and borrowings. Citizens' earnings are also affected by provisions for loan losses, service charges, operating expenses and income taxes. Citizens is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. See "Regulation." Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings within the Institutions' market. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of other lenders, the availability and cost of funds and various other items. Sources of funds for lending activities of Citizens include deposits, payments on loans, borrowings and income provided from operations. Current Business Strategy Citizens' business strategy is to operate a well-capitalized and profitable community bank dedicated to meeting the financial needs of the small businesses, professionals and other individuals located in its market area by offering a full complement of deposit and loan products and other financial services with an emphasis on personal service. Citizens has sought to implement this strategy by (i) expanding the products and services offered to its customers and achieving consistent and sustained growth and (ii) managing its interest rate risk by emphasizing adjustable-rate loan products and selling its fixed-rate mortgage loans to the FHLMC on the secondary market. The highlights of Citizens' business strategy are as follows: o Profitability. Citizens has reported positive net income in every year since 1990. Citizens' net income increased from $120,000 for the year ended December 31, 1991 to $342,000 for the year ended December 31, 1995. Citizens had net income of $134,000 for the six months ended June 30, 1996, a decrease of $62,000 from the six-month period ended June 30, 1995, due primarily to a $150,000 provision for loan losses in the quarter ended March 31, 1996. Citizens' net interest income for the six months ended June 30, 1996 totaled $1.0 million, an increase of $118,000, or 13.1%, from the $904,000 for the six months ended June 30, 1995. Citizens' net yield on weighted average interest-earning assets for the year ended December 31, 1995 and the six months ended June 30, 1996 was 4.25% and 3.74%, respectively. o Asset Growth and Asset Quality. Citizens' total assets have increased from $30.1 million at December 31, 1991 to $56.2 million at June 30, 1996. Citizens' growth in total assets is attributable to a sustained growth in virtually all areas of lending, including one- to four-family residential mortgage lending, consumer lending and commercial lending. Despite its aggressive growth, Citizens has thus far been successful in maintaining the quality of its loan and investment portfolios. At June 30, 1996, Citizens' non-performing loans totaled $593,000, or 1.06% of total assets. o Low Interest Rate Risk. Management of Citizens believes that the maturities and repricings of Citizens' interest rate-sensitive assets and interest rate-sensitive liabilities are prudently positioned. At June 30, 1996, Citizens' NPV would increase 10.2% in the event of a 2% increase in market interest rates and would decrease 11.2% in the event of a 2% decrease in market interest rates. This indicates that Citizens' net portfolio value is more sensitive to decreases in market interest rates but that Citizens' interest rate risk would be within the definition of normal level of exposure contained in regulations recently issued by the OTS. Although these regulations have not been implemented by the OTS, and Citizens, as a national bank, would not be subject to the regulations if implemented by the OTS, the methodology set forth in the OTS' regulations provides an informational basis on which Citizens' interest rate risk can be evaluated. Citizens has achieved this asset/liability posture by emphasizing adjustable-rate loans and investments and by selling its fixed-rate one- to four-family residential mortgage loans to the FHLMC on the secondary market. o Community Orientation. Citizens has developed a solid reputation in its market by offering a wide variety of lending, deposit and other financial services to its retail and commercial customers on a personalized and efficient basis. By building on its reputation as a responsive lender, Citizens plans to strengthen its position as a leading financial institution in Jefferson County. Asset/Liability Management Citizens, like other financial institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities, primarily deposits with short- and medium-term maturities, mature or reprice at different rates than its interest-earning assets. Management of Citizens believes it is critical to manage the relationship between interest rates and the effect on Citizens' NPV. Management of Citizens' assets and liabilities is done within the context of the marketplace, regulatory limitations and within limits established by the Board of Directors. Presented below, as of June 30, 1996, is an analysis performed by Baxter Capital Management, Inc. of Citizens' interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, up and down 200 basis points. At June 30, 1996, 2% of the present value of Citizens' assets was approximately $1.1 million. Because the interest rate risk of a 200 basis point decrease in market rates (which was greater than the interest rate risk of a 200 basis point increase ) was $562,000 at June 30, 1996, Citizens would not have been required to deduct any dollar amount from its capital under the NPV methodology adopted by the OTS if such methodology was applied to Citizens.
Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change -------- -------- -------- -------- --------- ------ + 200 bp $55,027 $(1,163) (11.2)% 7.76% (1.16) bp 0 bp $56,190 --- ---.% 8.92% .--- - 200 bp $57,362 $1,172 10.2% 10.03% 1.11 bp
In evaluating Citizens' exposure to interest rate movements, certain shortcomings are inherent in the method of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgages, 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, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Citizens considers all of these factors in monitoring its exposure to interest rate risk. Average Balances and Interest The following tables present at June 30, 1996 the balance of each category of Citizens' interest-earning assets and interest-bearing liabilities, and their yield/cost at that date and presents for the six months ended June 30, 1996 and 1995 and for the years ended December 31, 1995, 1994, and 1993, the average daily balances of each category of Citizens' interest-earning assets and interest-bearing liabilities, and the interest earned or paid on such amounts.
At June 30, Six Months Ended June 30, 1996 1996 1995 ------------------- -------------------------------- ------------------------------- Average Interest Average Average Interest Average Balance Yield/Cost Balance Earned/Paid Yield/Cost Balance Earned/Paid Yield/Cost ------- ---------- ------- ----------- ---------- ------- ----------- ---------- (Dollars in thousands) Interest-earning assets: Interest-earning deposits and other... $ 2,368 6.91% $ 5,595 $ 127 4.54% $ 1,853 $ 24 2.59% Investment securities (1)................ 4,631 6.34 4,345 96 4.42 1,897 47 4.96 Mortgage-backed and related securities.................. 3,137 6.88 3,495 109 6.24 4,913 172 7.00 Loans receivable, net (2)............. 43,003 8.75 41,253 1,824 8.84 32,808 1,437 8.76 ------- ------- ------ ------- ---- Total interest-earning assets....... $53,139 88.35 $54,688 $2,156 7.88 $41,471 $1,680 8.10 ======= ======= ====== ======= ==== Interest-bearing liabilities: Deposits.............................. $51,770 4.32 $51,661 $1,100 4.26 $39,445 $756 3.83 FHLB advances......................... 500 5.68 832 34 8.17 762 21 5.51 ------- ------- ------ ------- ---- Total interest-bearing liabilities....................... $52,270 4.33 $52,493 $1,134 4.32 $40,207 $777 3.86 ======= ======= ====== ======= ==== Net interest-earning assets..............$ 869 $ 2,195 $ 1,264 ======== ======= ======== Net interest income...................... $1,022 $904 Interest rate spread (3)................. 4.02% 3.56% 4.24% ==== ==== ==== Net yield on weighted average interest-earning assets (4)........... ---% 3.74% 4.36% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities........................... 101.66% 104.18% 103.14% ====== ====== ======
Year Ended December 31, 1995 1994 1993 ----------------------------- ---------------------------- --------------------------- Average Interest Average Average Interest Average Average Interest Average Balance Earned/PaidYield/Cost Balance Earned/Paid Yield/Cost BalanceEarned/PaidYield/Cost ------- ----------- --------- ------- ----------- ---------- ------- ---------- --------- (Dollars in thousands) Interest-earning assets: Interest-earning deposits........ $ 1,425 $ 78 5.47% $ 1,085 $ 40 3.69% $ 2,701 $ 81 3.00% Investment securities (1)........ 3,379 192 5.68 6,005 193 3.21 7,167 340 4.74 Mortgage-backed securities....... 3,380 231 6.83 2,074 256 12.34 --- --- --- Loans (2)........................ 35,890 3,194 8.90 24,221 2,036 8.41 19,257 1,679 8.72 ------- ------ ------- ------ ------- ------- Total interest-earning assets.. $44,074 $3,695 8.38 $33,385 $2,525 7.56 $29,125 $2,100 7.21 ======= ====== ======= ====== ======= ======= Interest-bearing liabilities: Deposits......................... $38,393 $1,750 4.56 $29,054 $1,024 3.52 $23,924 $ 880 3.68 FHLB advances.................... 1,134 70 6.17 16 1 6.25 --- --- --- Other borrowings................. --- --- --- 13 --- --- --- --- --- Total interest-bearing liabilities.................. $39,527 $1,820 4.60 $29,083 $1,025 3.52 $23,924 $ 880 3.68 ======= ====== ======= ====== ======= ======= Net interest-earning assets......... $ 4,547 $ 4,302 $ 5,201 ======== ======== ======== Net interest income................. $1,875 $1,500 $1,220 ====== ====== ====== Interest rate spread (3)............ 3.78% 4.04% 3.53% ==== ==== ==== Net yield on weighted average interest-earning assets (4)...... 4.25% 4.49% 4.19% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities..................... 111.50% 114.79% 121.74% ====== ====== ======
(1) Includes securities available for sale at amortized cost prior to SFAS No. 115 adjustments. (2) Total loans less loans in process. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield amount is presented at June 30, 1996, because the computation of net yield is applicable only over a period rather than at a specific date. Interest Rate Spread Citizens' results of operations have been determined primarily by net interest income and, to a lesser extent, fee income, miscellaneous income, general and administrative expenses, taxes and the provision for loan losses. Net interest income is determined by the interest rate spread between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities and by the relative amounts of interest-earning assets and interest-bearing liabilities. The following table sets forth the weighted average effective interest rate earned by Citizens on its loan and investment portfolios, the weighted average effective cost of Citizens' deposits, the interest rate spread of Citizens, and the net yield on weighted average interest-earning assets for the periods and as for the dates shown. Average balances for the six months ended June 30, 1996 and 1995, and the years ended December 31, 1995, 1994 and 1993, are based on average daily balances.
Six Months Ended At June 30, June 30, Year Ended December 31, 1996 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- ---- Weighted average interest rate earned on: Interest-earning deposits and other...... 6.91% 4.54% 2.59% 5.47% 3.69% 3.00% Investment securities.................... 6.34 4.42 4.96 5.68 3.21 4.74 Mortgage-backed and related securities..................... 6.88 6.24 7.00 6.83 12.34 .--- Loans receivable, net.................... 8.75 8.84 8.76 8.90 8.41 8.72 Total interest-earning assets.......... 7.88 8.10 8.38 7.56 7.21 Weighted average interest rate cost of: Deposits................................. 4.32 4.26 3.83 4.56 3.52 3.68 FHLB advances............................ 5.68 8.17 5.51 6.17 6.25 .--- Total interest-bearing liabilities..... 4.33 4.32 3.86 4.60 3.52 3.68 Interest rate spread (1).................... 4.02% 3.56% 4.24% 3.78% 4.04% 3.53% ==== ==== ==== ==== ==== ==== Net yield on weighted average interest-earning assets (2).............. ---% 3.74% 4.36% 4.25% 4.49% 4.19% ==== ==== ==== ==== ==== ====
- ------------------------- (1) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. (2) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield figure is presented at June 30, 1996 because the computation of net yield is applicable only over a period rather than at a specific date. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Citizens' interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume) and (2) changes in volume (changes in volume multiplied by old rate). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionally to the change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income Total Due to Due to Net Rate Volume Change ---- ------ ------ (In thousands) Six months ended June 30, 1996 compared to six months ended June 30, 1995 Interest-earning assets: Interest-earning deposits and other.................. $ 28 $ 75 $ 103 Investment securities................................ (16) 65 49 Mortgage-backed and related securities............... (16) (47) (63) Loans receivable, net................................ 13 374 387 ------ ------- ------- Total.............................................. 9 467 476 ------ ------- ------- Interest-bearing liabilities: Deposits............................................. 92 253 345 FHLB advances........................................ 11 2 13 Other borrowings..................................... --- --- --- ------ ------- ------- Total.............................................. 103 255 358 ------ ------- ------- Net change in net interest income...................... $ (94) $ 212 $ 118 ====== ======= ======= Year ended December 31, 1995 compared to year ended December 31, 1994 Interest-earning assets: Interest-earning deposits and other.................. $ 23 $ 15 $ 38 Investment securities................................ 198 (199) (1) Mortgage-backed and related securities............... (78) 53 (25) Loans receivable, net................................ 127 1,031 1,158 Total.............................................. 270 900 1,170 Interest-bearing liabilities: Deposits............................................. 330 396 726 FHLB advances........................................ 16 53 69 Other borrowings..................................... --- --- --- ------ ------- ------- Total.............................................. 346 449 795 ------ ------- ------- Net change in net interest income...................... $ (76) $ 451 $ 375 ====== ======= ======= Year ended December 31, 1994 compared to year ended December 31, 1993 Interest-earning assets: Interest-earning deposits and other.................. $ 24 $ (65) $ (41) Investment securities................................ (98) (49) (147) Mortgage-backed and related securities............... --- 256 256 Loans receivable, net................................ (58) 415 357 ------ ------- ------- Total.............................................. (132) 557 425 ------ ------- ------- Interest-bearing liabilities: Deposits............................................. (35) 179 144 FHLB advances........................................ --- 1 1 Other borrowings..................................... --- --- --- ------ ------- ------- Total.............................................. (35) 180 145 ------ ------- ------- Net change in net interest income...................... $ (97) $ 377 $ 280 ====== ======= =======
Financial Condition at June 30, 1996 Compared to Financial Condition at December 31, 1995 Citizens' total assets at June 30, 1996 amounted to $56.2 million, an increase of $1.7 million, or 3.1%, over the total at December 31, 1995. The increase in assets was funded primarily through growth in deposits of $2.5 million. Liquid assets (cash, federal funds sold, certificates of deposit and investment securities) totaled $7.2 million at June 30, 1996, a decrease of $904,000, or 11.1%, over the balance at December 31, 1995. The proceeds were used to retire $1.0 million in FHLB advances. Loans receivable totaled $43.0 million at June 30, 1996, an increase of $2.6 million, or 6.4% over the total at December 31, 1995. Deposits increased by $2.5 million, or 5.2%, to a total of $51.8 million at June 30, 1996. This increase resulted primarily from a continuation of management's goal to maintain deposit growth through advertising and pricing strategies. Financial Condition at December 31, 1995 Compared to Financial Condition at December, 1994 Citizens' total assets amounted to $54.5 million at December 31, 1995, an increase of $13.3 million, or 32.1%, over 1994. The increase was funded primarily through growth in savings deposits of $11.2 million, an increase in advances from the Federal Home Loan Bank of $1.5 million and a $396,000 increase in shareholders' equity. Liquid assets (cash, federal funds sold, certificates of deposit and investment securities) totaled $8.5 million at December 31, 1995, an increase of $3.8 million, or 71.0%, over 1994 levels. The increase was funded by growth in savings deposits. Loans receivable totaled $40.4 million at December 31, 1995, an increase of $10.6 million, or 35.5%, over the 1994 amount. Growth in the loan portfolio was funded through redeployment of deposit inflows as well as through use of principal repayments on mortgage-backed securities, which declined by approximately $1.5 million. The allowance for losses on loans totaled $348,000 at December 31, 1995, an increase of $12,000, or 3.6%, over 1994. The allowance represented 0.9% and 1.1% of total loans at December 31, 1995 and 1994, respectively. Non-performing loans totaled $297,000 and $93,000 at December 31, 1995 and 1994, which represented 0.7% and 0.3% of total loans and 85.3% and 27.7% of the allowance for losses on loans at those respective dates. Deposits totaled $49.2 million at December 31, 1995, an increase of $11.2 million, or 29.5%, over the 1994 total. Citizens was able to achieve such a level of growth as a result of several things, including changes in the product line, very competitive rates, and a high level of advertising. Training and an emphasis on improved personal service also contributed to the growth. Comparison of Operating Results For Six Months Ended June 30, 1996 and 1995 Citizens recorded net income from operations for the six-month period ended June 30, 1996 of $134,000, which represented a decrease of $62,000 from the $196,000 in net income recorded for the comparable 1995 period. The decline in net income resulted primarily from a $156,000 increase in the provision for losses on loans and an increase in other expenses of $81,000, which were partially offset by an increase in other income of $16,000 and a decrease in the provision for income taxes of $41,000. Total interest income amounted to $2.2 million for the six months ended June 30, 1996, an increase of $476,000, or 28.3%, from the 1995 period. Interest income on loans increased $387,000, or 26.9%, to a total of $1.8 million. This increase resulted primarily from a $8.4 million increase in the average balance outstanding, coupled with an 8 basis point increase in the weighted average yield to 8.84% in 1996. Interest income on investment and mortgage-backed securities and other interest bearing deposits totaled $332,000 for the six- month period ended June 30, 1996, an increase of $89,000, or 36.6%. The increase was due to a $4.8 million increase in the average outstanding balance, which was partially offset by a 67 basis point decline in the weighted average yield year-to-year to 4.94% in 1996. Interest expense on deposits totaled $1.1 million for the six months ended June 30, 1996, an increase of $345,000, or 45.7%, over the comparable period in 1995. This increase resulted primarily from a $12.2 million increase in the average balance outstanding, coupled with an increase in the weighted average cost of deposits, which amounted to 4.26% in 1996, compared to 3.83% in 1995. Interest expense on borrowings increased by $13,000, due to an increase in average borrowings outstanding of $70,000 coupled with an increase in the weighted average rate of 266 basis points. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $118,000, or 13.1%, to a total of $1.0 million for the six months ended June 30, 1996. The interest rate spread declined from 4.24% in 1995 to 3.56% in 1996, while the net interest margin declined from 4.36% in 1995 to 3.74% in 1996. The provision for loan losses increased by $156,000, to a total of $180,000 for the six months ended June 30, 1996, as compared to the same period in 1996. This increase resulted primarily from growth in the loan portfolio from period to period and refinements in internal loss experience factors, as well as an increase in non-performing loans from $297,000 at December 31, 1995 to $593,000 at June 30, 1996. An increase of loans for 1995 of 35.5% and a similar increase in 1994 prompted Citizens to make a large increase in its loan loss reserve. Other expenses totaled $936,000 for the six months ended June 30, 1996, an increase of $81,000, or 9.5%, over the comparable 1995 period. The increase resulted primarily from a $72,000, or 18.9%, increase in employee compensation and benefits and a $31,000, or 24.8%, increase in premises and equipment expense. The increase in employee compensation and benefits resulted from normal merit increases and increased staffing levels attendant to Citizens' growth over the period. The increase in occupancy and equipment was due to the fact that Citizens' Walmart branch opened in January, 1995, and Citizens was incurring some expense for its Hanover branch, which opened in May, 1995. Citizens recorded a provision for income taxes for the six months ended June 30, 1996, of $67,000, which represented a decrease of $41,000 from the $108,000 in income tax expense recorded for the same period in 1995. The decrease resulted from the $103,000 decline in earnings before taxes. The effective tax rates were 33.3% and 35.5% for the six months ended June 30, 1996 and 1995, respectively.199 Comparison of Operating Results For Fiscal Years Ended December 31, 1995 and 1994 Net income for the year ended December 31, 1995 amounted to $342,000, an increase of $18,000, or 5.6%, over the $324,000 in net income recorded in 1994. The increase in net income resulted primarily from a $375,000 increase in net interest income and a $219,000 increase in other income, which were partially offset by an $87,000 increase in the provision for losses on loans, a $309,000 increase in other expenses and a $180,000 increase in the provision for income taxes, including the recognition of an $86,000 cumulative effect of change in accounting principle in 1994. Total interest income amounted to $3.7 million for the year ended December 31, 1995, an increase of $1.2 million, or 46.3%, over 1994. Interest income on loans totaled $3.2 million, an increase of $1.2 million, or 56.9%, over the $2.0 million recorded in 1994. The increase resulted primarily from an $11.7 million increase in average loans outstanding year-to-year, coupled with a 49 basis point increase in yield to 8.90% in 1995. The increase in the yield is due to the increasing rate environment during the year. Interest income on investment and mortgage-backed securities and other interest-bearing deposits totaled $501,000 in 1995, an increase of $12,000, or 2.5%. The decrease was due primarily to a $980,000 decrease in the average balance outstanding, which was partially offset by an 78 basis point increase in yield to 6.12% in 1995. Interest expense on deposits increased by $726,000, or 70.9%, to a total of $1.8 million for the year ended December 31, 1995. This increase resulted primarily from a $9.3 million increase in the average balance outstanding, coupled with a 104 basis point increase in the weighted average cost of deposits year-to-year. The cost of funds increased throughout the year causing the increase in the average weighted cost. Interest on borrowings increased by $69,000 for the year ended December 31, 1995, due to an increase in borrowings during the year. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $375,000, or 25.0%, to a total of $1.9 million for the year ended December 31, 1995. The interest rate spread declined from 4.04% in 1994, to 3.78% in 1995, while the net interest margin declined to 4.25% in 1995 from 4.49% in 1994. Citizens recorded a provision for losses on loans totaling $104,000 for the year ended December 31, 1995, an increase of $87,000 over the $17,000 provision recorded in 1994. The increase was attributable to the $10.6 million increase in the loan portfolio over the period, which increased the inherent loss contained within the loan portfolio. Also non-performing loans increased from $36,000 at the end of 1993 to $297,000 at December 31, 1995. Other income totaled $563,000 for the year ended December 31, 1995, an increase of $219,000, or 63.7%, over 1994. The increase resulted primarily from an $88,000, or 24.3%, increase in service fees and charges on deposits and other services, an increase on the gain on sale of investment securities of $75,000, and an increase of $56,000, or 105.7% in other income. Other expense totaled $1.8 million for the year ended December 31, 1995, an increase of $308,000, or 21.2%, over the $1.5 million recorded in 1994. The increase in other expense resulted primarily from a $154,000, or 22.7%, increase in employee compensation and benefits, a $24,000, or 40.6%, increase in advertising, a $34,000, or 56.6%, increase in office supplies and postage and a $55,000, or 26.4%, increase in other operating expenses. The increase in employee compensation and benefits resulted primarily from normal merit increases and additional staffing levels due to growth. The increase in office supplies and postage and other operating expenses resulted primarily from pro-rata increases in all expenses due to Citizens' growth year-to-year. The increase in advertising was mainly due to the opening of two branches, the introduction of new products and managements' emphasis on changing Citizens' image. Citizens' provision for income taxes totaled $223,000 for the year ended December 31, 1995, an increase of $181,000 over the provision recorded in 1994. The 1994 provision, totaling $43,000, was net of a cumulative effect of adoption of SFAS No. 109, totaling $86,000. The increase in the provision also resulted from an increase in earnings before taxes of $198,000, or 54.0%. The effective tax rates were 39.5% and 35.1% for the years ended December 31, 1995 and 1994, respectively. Comparison of Operating Results For Fiscal Years Ended December 31, 1994 and 1993 Citizens' net income for the year ended December 31, 1994 totaled $324,000, an increase of $54,000, or 20.0%, over the $270,000 in net income recorded in 1993. The increase in net income resulted primarily from an increase of $280,000 in net interest income, a decrease of $33,000 in the provision for losses on loans and an $86,000 cumulative effect of a change in accounting principle in 1994, which were partially offset by a decrease in other income of $204,000, an increase in the provision for income taxes of $36,000, and an increase in other expenses of $104,000. Total interest income amounted to $2.5 million for the year ended December 31, 1994, an increase of $425,000, or 20.2%, over 1993. Interest income on loans totaled $2.0 million, an increase of $357,000, or 21.3%, over 1993. This increase resulted primarily from a $5.0 million increase in the weighted average portfolio balance outstanding, which was partially offset by a decline in the weighted average yield, from 8.72% in 1993 to 8.41% in 1994. Interest income on investment and mortgage-backed securities and interest-bearing deposits totaled $489,000 in 1994, an increase of $68,000, or 16.2%, over 1993. The increase resulted primarily from an increase in the weighted average yield of 107 basis points to 5.34% in 1994. Interest expense on deposits totaled $1.0 million for the year ended December 31, 1994, an increase of $144,000, or 16.4%, over 1993. The increase was due primarily to a $5.1 million increase in the weighted average outstanding balance, which was partially offset by a decline of 16 basis points in the weighted average cost of deposits to 3.52% in 1994. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $280,000, or 23.0%, to a total of $1.5 million for the year ended December 31, 1994, as compared to 1993. The interest rate spread increased to 4.04% in 1994 from 3.53% in 1993, while the net interest margin increased to 4.49% in 1994, compared to 4.19% in 1993. Citizens recorded a $17,000 provision for losses on loans for the year ended December 31, 1994, a decrease of $33,000, or 66.0%, from the $50,000 provision recorded in 1993. Non-performing loans totaled $93,000 at December 31, 1994 and $36,000 at December 31, 1993, respectively, which represented 0.3 % and 0.2% of total loans on such dates. Other income totaled $344,000 for the year ended December 31, 1994, a decrease of $204,000, or 37.2%, from the $548,000 in other income recorded in 1993. The decrease resulted primarily from a decline in other service charges and fees of $162,000, or 30.9% and a $71,000 loss on sale of investment securities recorded during 1994, which were partially offset by a $28,000 increase in other operating income. The decline in service charges and fees resulted primarily from the decrease in FHLMC service charges. Fees decreased from $524,000 to $367,000 as a result of the increase in mortgage rates. Other expense totaled $1.5 million for the year ended December 31, 1994, an increase of $104,000, or 7.7%, over the $1.4 million total recorded in 1993. The increase resulted primarily from a $65,000, or 10.6%, increase in employee compensation and benefits and a $53,000, or 23.5%, increase in occupancy and equipment. The increase in employee compensation and benefits resulted primarily from normal merit increases, coupled with additional staffing levels attendant to Citizens' 25% growth in assets year-to-year. The increase in occupancy and equipment resulted from expenses for Citizens' Walmart branch. Costs of $60,000 were expensed at the end of the year relating to the Walmart branch. The provision for income taxes totaled $129,000 for the year ended December 31, 1994, before consideration of an $86,000 cumulative effect credit for a change in method of accounting for income taxes. The 1994 provision represented an increase of $37,000, or 40.2%, over 1993. Citizens' effective tax rates were 35.1% and 25.4% for the years ended December 31, 1994 and 1993, respectively. Liquidity and Capital Resources Citizens' primary sources of funds are deposits, proceeds from principal and interest payments on loans and proceeds from maturing securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and the restructuring of the thrift industry. The primary investing activity of Citizens is the origination of mortgage, commercial and consumer loans. During the years ended December 31, 1995, 1994 and 1993, Citizens originated mortgage loans in the amounts of $32.7 million, $17.3 million and $28.2 million, respectively. Citizens originated commercial loans in the amounts of $9.2 million, $6.2 and $4.8 million, respectively, during these periods. Citizens originated consumer loans of $7.4 million, $6.6 million and $4.7 million, respectively, during these periods. Loan repayments, sales, and other deductions were $39.0 million, $20.2 million and $36.3 million during the respective three one-year periods. During the six-month periods ended June 30, 1996 and 1995, Citizens originated mortgage loans of $5.4 million and $4.1 million, respectively. Citizens originated commercial loans in the amount of $1.5 million and $892,000, respectively, during these periods. During the same periods, Citizens originated consumer loans of $3.5 million and $4.3 million, respectively. Loan repayments, sales, and other deductions were $9.1 million and $4.0 million, respectively, during these periods. During the years ended December 31, 1995, 1994, and 1993, Citizens purchased securities (including mortgage-backed securities) in the amounts of $2.1 million, $3.6, and $6.7 million, respectively. Maturities, sales, and repayments of securities were $4.7 million in 1995, $4.0 million in 1994 and $5.1 million in 1993. For the six months ended June 30, 1996 and 1995, Citizens purchased $5.9 million and $1.3 million of securities (including mortgage-backed securities), respectively. Maturities, sales and repayments of securities were $2.8 million and $4.6 million for the six months ended June 30, 1996 and 1995, respectively. Citizens had outstanding loan commitments of $2.2 million and unused lines of credit of $3.8 million at June 30, 1996. Citizens anticipates that it will have sufficient funds from loan repayments to meet its current commitments without having to borrow additional funds from the FHLB of Indianapolis. Certificates of deposit scheduled to mature in one year or less at June 30, 1996 totaled $19.8 million. Management believes that a significant portion of such deposits will remain with Citizens based upon historical deposit flow data and Citizens' competitive pricing in its market area. Liquidity management is both a daily and long-term function of Citizens' management strategy. In the event that Citizens should require funds beyond its ability to generate them internally, additional funds are available through the use of FHLB advances and through sales of securities. FHLB advances totalled $500,000 at June 30, 1996. The following is a summary of cash flows for Citizens, which are of three major types. Cash flows from operating activities consist primarily of net income generated by cash. Investing activities generate cash flows through the origination and principal collection on loans as well as purchases and sales of securities. Investing activities will generally result in negative cash flows when Citizens is experiencing loan growth. Cash flows from financing activities include savings deposits, withdrawals and maturities and changes in borrowings. The following table summarizes cash flows for the six months ended June 30, 1996 and 1995 and each of the three years in the period ended December 31, 1995.
Six Months Ended June 30, Year Ended December 31, 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Operating activities........................... $ 49 $ 126 $ 639 $ 514 $ 640 Investing activities: Investment purchases........................ (5,902) (1,326) (2,072) (3,596) --- Investment maturities/sales................. 2,849 4,559 4,748 3,967 --- Net change in investment securities................................ --- --- --- --- (1,562) Changes in loans............................ (2,767) (6,591) (10,760) (9,977) (1,267) Other....................................... --- (729) (2,339) 449 (438) Financing activities: Deposit increases........................... 2,543 4,349 11,216 7,922 1,261 Borrowings.................................. (1,000) 1,500 1,500 --- --- ------- ------ --------- -------- ------- Net change in cash and cash equivalents............................ $(4,228) $1,888 $ 2,932 $ (721) $(1,366) ======= ====== ========= ======== =======
At June 30, 1996, Citizens had Tier I leverage capital of $3.4 million and total risk-based capital of $3.9 million, and therefore exceeded all capital requirements imposed by applicable law. See "Regulation -- Bank Regulatory Capital." Current Accounting Issues In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure," which amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on impaired loans. SFAS No.114, as amended by SFAS No. 118 as to certain income recognition provisions and financial statement disclosure requirements, is applicable to all creditors and to all loans that are individually and specifically evaluated for impairment, uncollateralized as well as collateralized, except those loans that are accounted for at fair value or at the lower of cost or fair value. This Statement requires that the expected loss of interest income on nonperforming loans be taken into account when calculating loans loss reserves and that specified impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral if the loan is collateral dependent. Citizens' loans which may be affected are collateral dependent, and Citizens' current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. Management adopted SFAS No. 114 on January 1, 1995, without significant detrimental effect on Citizens' overall consolidated financial position or results of operations. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which requires that Citizens recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained would allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 122 requires that securitizations of mortgage loans be accounted for as sales of mortgage loans and acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment is measured based on fair value. SFAS No. 122 was effective for years beginning after December 15, 1995 (January 1, 1996, as to Citizens) with respect to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights and capitalized excess servicing receivables whenever acquired. Retroactive application is prohibited, and earlier adoption is encouraged. Management adopted SFAS No. 122 as of January 1, 1996 without adverse material effect on Citizens' financial position or results of operations. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing Rights and Extinguishment of Liabilities," that provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an approach to accounting for transfers of financial assets that provides a means of dealing with more complex transactions in which the seller disposes of only a partial interest in the assets, retains rights or obligations, makes use of special purpose entities in the transaction, or otherwise has continuing involvement with the transferred assets. The new accounting method, the financial components approach, provides that the carrying amount of the financial assets transferred be allocated to components of the transaction based on their relative fair values. SFAS No. 125 provides criteria for determining whether control of assets has been relinquished and whether a sale has occurred. If the transfer does not qualify as a sale, it is accounted for as a secured borrowing. Transactions subject to the provisions of SFAS No. 125 include, among others, transfers involving repurchase agreements, securitizations of financial assets, loans participations, factoring arrangements, and transfers of receivables with recourse. An entity that undertakes an obligation to service financial assets recognizes either a servicing asset or liability for the servicing contract (unless related to a securitization of assets, and all the securitized assets are retained and classified as held-to-maturity). A servicing asset or liability that is purchased or assumed is initially recognized at its fair value. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are subject to subsequent assessments for impairment based on fair value. SFAS No. 125 provides that a liability is removed from the balance sheet only if the debtor either pays the creditor and is relieved of its obligation for the liability or is legally released from being the primary obligor. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management does not believe that adoption of SFAS No. 125 will have a material adverse effect on Citizens' financial position or results of operations. Impact of Inflation The financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of financial institutions such as Citizens are monetary in nature. As a result, interest rates have a more significant impact on Citizens' performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of Citizens' assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by Citizens. Citizens is unable to determine the extent, if any, to which properties securing Citizens' loans have appreciated in dollar value due to inflation. BUSINESS OF CITIZENS General Citizens was organized as a national bank in 1981 and conducts its business from four full-service offices all located in Jefferson County, Indiana. Citizens' business consists of attracting deposits from the general public and originating residential and nonresidential real estate mortgage loans, commercial loans and consumer loans. Citizens specially tailors loans to achieve the structure and flexibility required by its borrowers. The small to medium sized businesses, professionals and individuals who borrow from Citizens receive the benefit of individual attention, review and oversight offered by Citizens and its staff. Citizens' deposits are insured up to applicable limits by the BIF of the FDIC. Citizens offers a number of consumer and commercial financial services, including: (i) residential mortgage loans; (ii) nonresidential real estate loans; (iii) nonmortgage commercial loans; (iv) multi-family loans; (v) agricultural loans; (vi) construction loans; (vii) home equity loans; (viii) loans secured by deposits; (ix) home equity loans; (x) installment loans; (xi) mobile home loans; (xii) NOW accounts; (xiii) money market accounts; (xiv) savings accounts; (xv) certificates of deposit; (xvi) annuities and (xvii) individual retirement accounts. Lending Activities Citizens historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of Citizens' loan origination activities, representing 37.8% of Citizens' total loan portfolio at June 30, 1996. Citizens also offers multi-family mortgage loans, nonresidential real estate loans, nonmortgage commercial loans and consumer loans. Mortgage loans secured by multi-family properties and nonresidential real estate totaled approximately 2.6% and 19.2%, respectively, of Citizens' total loan portfolio at June 30, 1996. Nonmortgage commercial loans constituted approximately 13.4% of Citizens' total loan portfolio at June 30, 1996. Consumer loans constituted approximately 20.7% of Citizens' total loan portfolio at June 30, 1996. Loan Portfolio Data. The following table sets forth the composition of Citizens' loan portfolio by loan type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses.
At June 30, At December 31, 1996 1995 1994 1993 ------------------ -------------------- ------------------ ------------------ Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- TYPE OF LOAN (Dollars in thousands) Mortgage loans: One-to four-family................... $16,422 37.8% $15,386 37.7% $ 9,465 31.4% $ 6,603 32.6% Multi-family......................... 1,136 2.6 881 2.2 710 2.4 130 0.6 Construction......................... 2,729 6.3 2,484 6.1 1,821 6.0 971 4.8 Nonresidential real estate........... 8,363 19.2 7,698 18.9 5,370 17.8 3,368 16.6 Consumer loans.......................... 9,019 20.7 9,135 22.4 7,673 25.4 4,904 24.2 Commercial loans........................ 5,833 13.4 5,196 12.7 5,131 17.0 4,281 21.1 ------- ---- ------- ---- ------- ---- ------- ---- Gross loans receivable.................. 43,502 100.0 40,780 100.0 30,170 100.0 20,257 100.0 Deduct: Allowance for loan losses............... (499) (1.2) (348) (0.9) (336) (1.1) (359) (1.8) ------- ---- ------- ---- ------- ---- ------- ---- Net loans receivable.................... $43,003 98.8% $40,432 99.1% $29,834 98.9% $19,898 98.2% ======= ==== ======= ==== ======= ==== ======= ====
The following table sets forth certain information at December 31, 1995, regarding the dollar amount of loans maturing in Citizens' loan portfolio based on the date that final payment is due. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter.
Due During Years Ended December 31, Outstanding 1999 2001 2006 2011 December 31, to to to and 1995 1996 1997 1998 2000 2005 2010 following ---- ---- ---- ---- ---- ---- ---- --------- (In thousands) Mortgage loans: One-to four-family............ $15,386 $ 931 $1,235 $1,226 $1,219 $1,704 $4,080 $4,991 Multi-family.................. 881 587 294 --- --- --- --- --- Construction loans............ 2,484 2,484 --- --- --- --- --- --- Nonresidential................ 7,698 6,786 912 --- --- --- --- --- Consumer loans................... 9,135 2,913 2,331 1,741 889 985 276 --- Commercial loans................. 5,196 2,897 864 398 419 208 410 --- ------- ------- ------ ------ ------ ------ ------ ------ Total......................... $40,780 $16,598 $5,636 $3,365 $2,527 $2,897 $4,766 $4,991 ======= ======= ====== ====== ====== ====== ====== ======
The following table sets forth, as of December 31, 1996, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates.
Due After December 31, 1996 Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Mortgage loans: One-to four-family................. $1,090 $13,365 $14,455 Multi-family....................... --- 294 294 Construction loans................. --- --- --- Nonresidential..................... --- 912 912 Consumer loans........................ 6,222 --- 6,222 Commercial loans...................... 690 1,609 2,299 ------ ------- ------- Total.............................. $8,002 $16,180 $24,182 ====== ======= =======
Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $16.4 million, or 37.8% of Citizens' portfolio of loans at June 30, 1996, consisted of one- to four-family residential loans, of which approximately 96% had adjustable rates. Citizens currently offers adjustable-rate one- to four-family residential ARMs which adjust annually and are indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity. When an initial interest rate is determined for a residential ARM loan, a margin is calculated by subtracting the then-current index rate from the initial interest rate. Interest rate adjustments are thereafter determined based upon fluctuations in the index rate with a specific loan's margin remaining constant. Citizens' ARMs provide for maximum rate adjustments per year and over the life of the loan of 1% and 5%, respectively, and interest rate minimums of 1% below the origination rate. Citizens' residential ARMs are amortized for terms up to 20 years. The average margin on Citizens' ARM portfolio as of June 30, 1996, was approximately 2.5%. Citizens generally does not originate one- to four-family residential ARMs if the Loan-to-Value Ratio exceeds 80%. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payments by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. Citizens also currently offers fixed-rate one- to four-family residential mortgage loans in accordance with the guidelines established by the FHLMC to facilitate the sale of such loans to the FHLMC in the secondary market. These loans amortize on a monthly basis with principal and interest due each month and are written with terms of 15, 20 and 30 years. Citizens' fixed-rate residential mortgage loans have a maximum Loan-to-Value Ratio of 80%. Citizens retains the servicing on all loans sold to the FHLMC. At June 30, 1996, Citizens had approximately $26.2 million of fixed-rate residential mortgage loans which were sold to the FHLMC and for which Citizens provides servicing. At the same date, Citizens had $901,000 of fixed-rate residential mortgage loans which were maintained in Citizens' portfolio. See "-- Origination, Purchase and Sale of Loans." At June 30, 1996, approximately 4% of Citizens' residential mortgage loans had fixed rates. Citizens' home equity lines of credit are adjustable-rate lines of credit tied to the prime rate and are amortized based on a 10 year maturity. Citizens generally allows a maximum 90% Loan-to-Value Ratio for its home equity loans (taking into account any other mortgages on the property). Payments on such home equity loans equal 1.5% of the outstanding principal balance per month. At June 30, 1996, Citizens had approved $2.7 million of home equity loans, of which $1.5 million were outstanding. No home equity loans were included in non-performing assets on that date. Substantially all of the one- to four-family residential mortgage loans that Citizens originates include "due-on-sale" clauses, which give Citizens the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. At June 30, 1996, one- to four-family residential mortgage loans amounting to $127,000, or 0.3% of total loans, were included in non-performing assets. See "-- Non-Performing and Problem Assets." Construction Loans. Citizens offers construction loans with respect to owner-occupied residential real estate and multi-family and nonresidential real estate and to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). At June 30, 1996, $2.7 million, or 6.3% of Citizens' total loan portfolio, consisted of construction loans. The largest construction loan at June 30, 1996, totalled $213,000. No construction loans were included in non-performing assets on that date. Generally, construction loans are written as 12 month fixed-rate loans with interest calculated on the amount disbursed under the loan and payable on a monthly basis. Citizens generally requires an 80% Loan-to-Value Ratio for its multi-family and nonresidential real estate construction loans and an 85% Loan-to-Value Ratio for its one- to four-family residential construction loans. Inspections are made prior to any disbursement under a construction loan, and Citizens does not charge commitment fees for its construction loans. While providing Citizens with a comparable, and in some cases higher, yield than a conventional mortgage loan, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, Citizens may have to hire another contractor to complete the premises at a higher cost. Also, a house may be completed, but may not be salable, resulting in the borrower defaulting and Citizens taking title to the premises. Nonresidential Real Estate Loans. At June 30, 1996, $8.4 million, or 19.2% of Citizens' total loan portfolio, consisted of nonresidential real estate loans. The nonresidential real estate loans included in Citizens' portfolio are primarily secured by real estate such as churches, farms and small business properties. Citizens currently originates nonresidential real estate loans as one-year adjustable-rate loans indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity and are written for maximum terms of 15 years. When an initial interest rate is determined for an adjustable-rate nonresidential real estate loan, a margin is calculated by subtracting the then-current index rate from the initial interest rate. Interest rate adjustments are thereafter determined based upon fluctuations in the index rate with a specific loan's margin remaining constant. Citizens' adjustable-rate nonresidential real estate loans have maximum adjustments per year and over the life of the loan of 1.0% and 5%, respectively, and interest rate minimums of 1% below the origination rate. Citizens generally requires Loan-to-Value Ratios of 65% to 85% for its nonresidential real estate loans, depending on the nature of the real estate securing such loans. Citizens underwrites its nonresidential real estate loans on a case-by-case basis and, in addition to its normal underwriting criteria, Citizens evaluates the borrower's ability to service the debt from the net operating income of the property. The largest nonresidential real estate loan as of June 30, 1996 was $339,000. On the same date, nonresidential real estate loans totalling $114,000 were included in non-performing assets. Loans secured by nonresidential real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-Family Loans. At June 30, 1996, $1.1 million, or 2.6% of Citizens' total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). Citizens' multi-family loans are generally written on the same terms and conditions as Citizens' nonresidential real estate loans. The largest multi-family loan as of June 30, 1996 was $397,000. On the same date, there were no multi-family loans included in non-performing assets. Multi-family loans, like nonresidential real estate loans, involve a greater risk than do residential loans. See "-- Nonresidential Real Estate Loans" above. Also, the loans-to-one borrowers limitation limits the ability of Citizens to make loans to developers of apartment complexes and other multi-family units. Commercial Loans. At June 30, 1996, $5.8 million, or 13.4% of Citizens' total loan portfolio, consisted of nonmortgage commercial loans. Citizens' commercial loans are written on either a fixed-rate or an adjustable-rate basis with terms that vary depending on the type of security, if any. At June 30, 1996, approximately 75.8% of Citizens' commercial loans were secured by collateral, such as equipment, inventory and crops. Citizens' adjustable-rate commercial loans are generally indexed to the prime rate with varying margins and terms depending on the type of collateral securing the loans and the credit quality of the borrowers. At June 30, 1996, the largest commercial loan was $397,000. As of the same date, commercial loans totalling $305,000 were included in non-performing assets. Commercial loans tend to bear somewhat greater risk than residential mortgage loans, depending on the ability of the underlying enterprise to repay the loan. Further, they are frequently larger in amount than Citizens' average residential mortgage loans. See "Risk Factors." Consumer Loans. Citizens' consumer loans, consisting primarily of auto, mobile home, home improvement and unsecured installment loans, aggregated $9.0 million at June 30, 1996, or 20.7% of Citizens' total loan portfolio. Citizens consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of Citizens' consumer loans, except loans secured by deposits, are fixed-rate loans with terms that vary depending on the collateral. At June 30, 1996, 74.7% of Citizens' consumer loans were secured by collateral. Citizens offers both direct and indirect automobile loans. Under Citizens' indirect automobile program, participating automobile dealers receive loan applications from prospective purchasers of automobiles at the point of sale and deliver them to Citizens for immediate processing. The dealer receives a portion of the interest payable on approved loans. Citizens' loans secured by deposits are made up to 100% of the original account balance and accrue at a rate of 2% over the underlying certificate of deposit rate. Interest on loans secured by deposits is paid semi-annually. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles and mobile homes. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 1996, consumer loans amounting to $47,000 were included in non-performing assets. See "-- Non-Performing and Problem Assets." There can be no assurances, however, that additional delinquencies will not occur in the future. Origination, Purchase and Sale of Loans. Citizens historically has originated its ARM loans pursuant to its own underwriting standards which were not in conformity with the standard criteria of the FHLMC or FNMA. If it desired to sell its adjustable-rate mortgage loans, Citizens might therefore experience some difficulty selling such loans quickly in the secondary market. Citizens' ARMs vary from secondary market criteria because, among other things, Citizens does not require current property surveys in most cases and does not permit the conversion of those loans to fixed rate loans in the first three years of their term. Citizens participates in the secondary market as a seller of its fixed-rate residential mortgage loans to the FHLMC, as described above. The loans sold by Citizens to the FHLMC are designated for sale when originated. During the six months ended June 30, 1996, Citizens sold $6.7 million in fixed-rate residential mortgage loans to FHLMC, and at June 30, 1996 held no such loans for sale. When it sells residential mortgage loans, Citizens generally retains the responsibility for collecting and remitting loan payments, inspecting the properties that secure the loans, making sure that monthly principal and interest payments and real estate tax and insurance payments are made, and otherwise servicing the loan. Citizens receives a servicing fee in the amount of one-fourth of 1% per annum on the outstanding principal amount of the loans serviced. The servicing fee is recognized as income over the life of the loan. At June 30, 1996, Citizens serviced $26.2 million in loans sold to the FHLMC. Citizens confines its loan origination activities primarily to Jefferson County. At June 30, 1996, loans totalling $1.2 million were secured by property located outside of Indiana. Citizens' loan originations are generated from referrals from real estate dealers and existing customers, and newspaper and periodical advertising. Loan applications are processed and underwritten at any of Citizens' four full-service offices. Citizens' loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, Citizens studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. Mortgage loans up to $100,000 may be approved by Citizens' Senior Loan Officer, and mortgage loans up to $200,000 may be approved by the President. All other mortgage loans are approved by at least three members of the Board of Directors. Loans secured by collateral other than real estate up to $300,000 may be approved by Citizens' President and loans secured by collateral other than real estate up to $100,000 may be approved by the Senior Loan Officer. All other loans secured by collateral other than real estate are approved by the Board of Directors. Citizens' President and Senior Loan Officer have lending authority of up to $50,000 and $25,000, respectively, for unsecured loans. Citizens generally requires appraisals on all property securing its loans and requires title insurance and a valid lien on its mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by an independent appraiser who is a state-licensed appraiser. Citizens requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing its interest if the property is in a flood plain. Citizens does not currently require that accounts be established by its borrowers to escrow insurance premiums and taxes for its portfolio loans. Citizens' underwriting standards for consumer and commercial loans are intended to protect against some of the risks inherent in making such loans. Borrower character, paying habits and financial strengths are important considerations. Citizens occasionally purchases participations in nonresidential real estate and multi-family loans from other financial institutions. At June 30, 1996, Citizens held in its loan portfolio participations in mortgage loans aggregating $408,000 that it had purchased, all of which were serviced by others. The table below shows loan origination, purchase and repayment activities of Citizens for the periods indicated.
Six Months Ended June 30, Year Ended December 31, 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Loan Originations: Single family residential....................... $5,430 $4,105 $24,992 $11,814 $25,219 Multi-family residential........................ 183 448 1,117 200 --- Nonresidential real estate...................... 1,082 775 2,578 1,925 1,704 Construction.................................... 4,050 3,389 1,240 Commercial...................................... 1,528 892 9,213 6,150 4,787 Consumer and other.............................. 3,477 4,333 7,433 6,571 4,664 ------ ------ ------- ------- ------- Total loans originated........................ 11,700 10,553 49,383 30,049 37,614 Purchases.......................................... 397 --- 200 7 --- ------ ------ ------- ------- ------- Total loans originated and purchased.......... 12,097 10,553 49,583 30,056 37,614 Sales and Loan Principal Reductions: Loans sold...................................... (6,706) (327) 8,689 3,177 16,567 Loan principal reductions....................... (2,428) (3,637) 30,296 16,972 19,781 ------ ------ ------- ------- ------- Total loans sold and principal reductions..... (9,134) (3,964) 38,985 20,149 36,348 Increase (decrease) due to other items, net........ (196) 2 --- 29 (41) ------ ------ ------- ------- ------- Net increase in loan portfolio..................... $2,767 $6,591 $10,598 $ 9,936 $ 1,225 ====== ====== ======= ======= =======
Origination and Other Fees. Citizens realizes income from loan origination fees, loan servicing fees, late charges, checking account service charges, and fees for other miscellaneous services. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets All loans are written off to the extent and at such time as management determines the loans are unsecured and uncollectible. Delinquency notices are sent with respect to all mortgage loans contractually past due 5 to 10 days. When loans are 30 days in default, personal contact is made with the borrower to establish an acceptable repayment schedule. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. All loans for which foreclosure proceedings have been commenced are written-off with recoveries taken upon the sale of the property securing the loan. Commercial and consumer loans are treated similarly. Interest income on consumer and other nonmortgage loans is accrued over the term of the loan except when serious doubt exists as to the collectibility of a loan, in which case the loan is written-off or written down to the fair value of the collateral securing the loan. It is Citizens' policy to recognize losses on these loans as soon as they become apparent. Loan Write-Offs. For the year ended December 31, 1995, Citizens wrote off loans totaling $92,000, net of recoveries, compared to $40,000 for the year ended December 31, 1994. For the six months ended June 30, 1996, Citizens wrote off loans totaling $33,000, net of recoveries. Citizens held no REO as of June 30, 1996. The following table sets forth information regarding Citizens' non-performing loans, troubled debt restructuring, and real estate acquired through foreclosure at the dates indicated. At June 30, 1996, residential real estate loans, nonresidential real estate loans, consumer loans and commercial loans accounted for $127,000, $114,000, $47,000 and $305,000, respectively, of non-performing assets. Management attributes the growth in non-performing loans since December 31, 1994 to the growth in its loan portfolio and to problems with one significant commercial loan with a balance of approximately $114,000 at June 30, 1996.
At June 30, At December 31, 1996 1995 1994 1993 ---- ----- ----- ----- (Dollars in thousands) Non-performing assets: Non-performing loans (1).......................... $593 $ 297 $ 93 $ 36 Troubled debt restructurings...................... --- --- --- --- ---- ----- ----- ----- Total non-performing loans...................... 593 297 93 36 Foreclosed real estate............................ --- --- --- --- ---- ----- ----- ----- Total non-performing assets..................... $593 $ 297 $ 93 $ 36 ==== ==== ==== ==== Non-performing loans to total loans.................. 1.38% 0.73% 0.31% 0.18% ==== ==== ==== ==== Non-performing assets to total assets................ 1.06% 0.54% 0.23% 0.11% ==== ==== ==== ====
(1) Loans continue to accrue interest until such time as they are deemed uncollectible. At that time, loans are written off, in the case of unsecured loans, and written down to fair value of the collateral, in the case of secured loans. At June 30, 1996, Citizens held loans delinquent from 30 to 89 days aggregating $1.5 million, or 2.7% of total assets. Citizens was not aware of any other loans, the borrowers of which were experiencing financial difficulties. In addition there were no other assets that would need to be disclosed as non-performing assets. Delinquent Loans. The following table sets forth certain information at June 30, 1996, and at December 31, 1995, 1994 and 1993, relating to delinquencies in Citizens' portfolio.
At June 30, 1996 At December 31, 1995 ------------------------------------------------- ------------------------------------------------ 60-89 Days 90 Days or More 60-89 Days 90 Days or More -------------------- ------------------------- ----------------------- ----------------------- Principal Principal Principal Principal Number Balance of Number Balance of Number Balance of Number Balance of of Loans Loans of Loans Loans of Loans Loans of Loans Loans of -------- ----- -------- ----- -------- ----- -------- ----- -- (Dollars in thousands) Residential real estate loans............ 10 $226 6 $ 127 3 $ 61 5 $118 Multi-family loans......... --- --- --- --- --- --- --- --- Construction loans......... --- --- --- --- 1 390 --- --- Non-residential real estate loans....... --- --- 1 114 --- --- 1 114 Consumer loans............. 22 109 11 47 20 65 6 35 Commercial loans........... 5 80 1 305 1 6 1 30 -- ---- -- ---- -- ---- -- ---- Total................... 37 $415 19 $593 25 $522 13 $297 == ==== == ==== == ==== == ==== Delinquent loans to total gross loans....... 2.32% 2.01% ==== ====
At December 31, 1994 At December 31, 1993 ------------------------------------------------- ------------------------------------------------ 60-89 Days 90 Days or More 60-89 Days 90 Days or More -------------------- ------------------------- ----------------------- ----------------------- Principal Principal Principal Principal Number Balance of Number Balance of Number Balance of Number Balance of of Loans Loans of Loans Loans of Loans Loans of Loans Loans of -------- ----- -------- ----- -------- ----- -------- ------------ (Dollars in thousands) Residential real 1 $ 39 2 $47 3 $ 96 1 $18 estate loans............ --- --- --- --- --- --- --- --- Multi-family loans......... --- --- --- --- --- --- --- --- Construction loans......... Non-residential 1 121 --- --- --- --- --- --- real estate loans....... 9 37 9 46 17 96 4 13 Consumer loans............. 3 34 --- --- --- --- 1 5 -- ---- -- --- -- ---- - --- Commercial loans........... 14 $231 11 $93 20 $192 6 $36 == ==== == === == ==== == === Total................... Delinquent loans to 1.07% 1.13% total gross loans....... ==== ====
Classified assets. Citizens' Asset Classification Policy provides for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. At June 30, 1996, the aggregate amount of Citizens' classified assets, and of Citizens' general and specific loss allowances were as follows: At June 30, 1996 ---------------- (In thousands) Substandard assets................................ $356 Doubtful assets................................... --- Loss assets....................................... --- ---- Total classified assets....................... $356 ==== General loss allowances........................... $499 Specific loss allowances.......................... --- ---- Total allowances.............................. $499 ==== Citizens regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of Citizens' classified assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of Citizens' lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. Citizens has not allocated specific amounts of the allowance to various loans types at any of the dates indicated, with the amount of allowance heavily influenced by the amount of Citizens' commercial and consumer loan portfolio. In management's opinion, Citizens allowance for loan losses is adequate to absorb anticipated future losses from loans at June 30, 1996. However, there can be no assurance that regulators, when reviewing Citizens' loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect Citizens' loan portfolio. The following is a summary of activity in Citizens' allowance for loan losses for the periods indicated. The allowance for loan losses is not allocated to any specific loan type.
Six months Year Ended ended June 30, December 31, 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) Balance of allowance at beginning of period................................ $348 $336 $336 $359 $316 Charge-offs: Single-family residential................ --- --- --- --- --- Consumer and other....................... 53 57 147 83 70 ---- ---- ---- ---- ---- Total charge-offs.................... 53 57 147 83 70 Recoveries.................................. 24 20 55 43 63 ---- ---- ---- ---- ---- Net charge-offs............................. 29 37 92 40 7 Provision for losses on loans............... 180 24 104 17 50 ---- ---- ---- ---- ---- Balance at end of period.................... $499 $323 $348 $336 $359 ==== ==== ==== ==== ==== Allowance for loan losses as a percent of total loans outstanding............... 1.16% 0.89% 0.86% 1.13% 1.80% ==== ==== ==== ==== ==== Ratio of net charge-offs to average loans outstanding........................ 0.07% 0.11% 0.25% 0.17% 0.04% ==== ==== ==== ==== ====
Investments and Mortgage-Backed Securities Investments. Citizens' investment portfolio consists of U.S. government and agency obligations, municipal securities, FHLB stock and FRB Stock. At June 30, 1996, approximately $3.5 million, or 6.3%, of Citizens' total assets consisted of such investments, all of which was classified as available for sale. The following table sets forth the composition of Citizens' investment portfolio (excluding interest-bearing deposits) at the dates indicated.
At June 30, At December 31, 1996 1995 1994 1993 --------------------- ------------------ ------------------- ------------------ Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- ---- ----- (In thousands) Held to Maturity: U.S. Government agency obligations.....$ --- $ --- $ ---$ --- $1,465 $1,453 $ 500 $ 505 Municipal securities................... --- --- --- --- 674 604 559 562 ------ ------ ------ ------ ------ ------ ------ ------ Total held to maturity............... --- --- --- --- 2,139 2,057 1,059 1,067 Available for Sale and Equity Securities: U. S. Treasury notes................... 484 484 --- --- --- --- --- --- U. S. Government agency obligations.... 3,071 3,028 151 151 --- --- 500 513 Municipal securities................... 1,131 1,119 1,132 1,155 425 433 653 673 FRB stock................................. 80 80 80 80 80 80 80 80 FHLB stock................................ 271 271 271 271 118 118 107 107 ------ ------ ------ ------ ------ ------ ------ ------ Total available for sale and equity securities.............. 5,037 4,982 1,634 1,657 623 631 1,340 1,373 ------ ------ ------ ------ ------ ------ ------ ------ Total.............................. $5,037 $4,982 $1,634 $1,657 $2,762 $2,688 $2,397 $2,440 ====== ====== ====== ====== ====== ====== ====== ======
The following table sets forth the amount of investment securities (excluding FHLB stock and FRB stock) which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1996.
Amount at June 30, 1996 which matures in Less than One Year Five Years More Than One Year to Five Years to Ten Years Ten Years Total Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- (In thousands) U.S. Government agency obligations.... $ --- $ --- $1,740 $1,700 $1,331 $1,328 $ --- $ --- $3,071 $3,028 U.S. Treasury notes...... --- --- 484 484 --- --- --- --- 484 484 Municipal securities..... --- --- --- --- 1,131 1,119 --- --- 1,131 1,119 ----- ----- ------ ------ ------ ------ --------- ------ ------ ------ Total............... $ --- $ --- $2,224 $2,184 $2,462 $2,447 $ --- $ --- $4,686 $4,631 ===== ==== ====== ====== ====== ====== ========== ====== ====== ======
Mortgage-Backed Securities. At June 30, 1996, Citizens had approximately $3.1 million of mortgage-backed securities outstanding, all of which were classified as available for sale. These mortgage-backed securities may be used as collateral for borrowings and through repayments, as a source of liquidity. The following table sets forth the carrying value and market value of Citizens' mortgage-backed securities at the dates indicated.
At June 30, At December 31, 1996 1995 1994 1993 ------------------ ------------------- ------------------- ------------------- Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- ---- ----- (In thousands) Held to maturity: FHLMC Participation certificates............. $ --- $ --- $ --- $ --- $ 462 $ 430 $ 701 $ 718 FNMA Participation certificates............. --- --- --- --- 2,256 2,093 2,833 2,848 ----- ----- ----- ----- ----- ----- ----- ----- Total mortgage backed securities designated as held to maturity....... --- --- --- --- 2,718 2,523 3,534 3,566 ----- ----- ----- ----- ----- ----- ----- ----- Available for sale: Government agency securities............... 2,377 2,296 2,728 2,699 1,579 1,459 1,575 1,595 Collaterialized mortgage obligations.............. 879 841 879 863 879 872 899 886 ----- ----- ----- ----- ----- ----- ----- ----- Total mortgage backed securities designated as available for sale..... 3,256 3,137 3,607 3,562 2,458 2,331 2,474 2,481 ----- ----- ----- ----- ----- ----- ----- ----- Total mortgage-backed securities........... $3,256 $3,137 $3,607 $3,562 $5,176 $4,854 $6,008 $6,047 ====== ====== ====== ====== ====== ====== ====== ======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1995.
Amount at December 31, 1995 which matures in One Year One Year to After or Less Five Years Five Years ----------------------- ------------------------ ---------------------- Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- (Dollars in thousands) Mortgage-backed securities Available for sale........................... $--- ---% $2,609 6.99% $998 6.42% ==== === ====== ==== ==== ====
The following table sets forth the changes in Citizens' mortgage-backed securities portfolio for the six-month periods ended June 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993.
For the Six Months For the Year Ended Ended June 30, December 31, ------------------------ ------------------------------------------ 1996 1995 1995 1994 1993 (In thousands) Beginning balance........................... $3,562 $5,049 $5,049 $6,008 $5,929 Purchases................................... --- 448 887 1,495 5,553 Sales....................................... --- (1,925) (1,925) (916) (2,589) Monthly repayments.......................... (367) (300) (494) (1,372) (2,758) Premium and discount amortization, net........................ (1) 6 (28) (39) (127) Unrealized gains (losses) on securities available for sale....................... (57) 88 73 (127) --- ------ ------ ------ ------ ------ Ending balance.............................. $3,137 $3,366 $3,562 $5,049 $6,008 ====== ====== ====== ====== ======
Sources of Funds General. Deposits have traditionally been Citizens' primary source of funds for use in lending and investment activities. In addition to deposits, Citizens derives funds from scheduled loan payments, loan prepayments, investment maturities, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Citizens rarely borrows on a longer-term basis, for example, to support expanded activities or to assist in its asset/liability management. Deposits. Deposits are attracted, principally from within Jefferson County, through the offering of a broad selection of deposit instruments including fixed-rate certificates of deposit, NOW and other transaction accounts, individual retirement accounts and savings accounts. Citizens does not actively solicit or advertise for deposits outside of Jefferson County. Substantially all of Citizens' depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. Citizens does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by Citizens on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and applicable regulations. Citizens relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by Citizens has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. Citizens has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. Citizens manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, Citizens believes that its passbook, NOW and non-interest-bearing checking accounts are relatively stable sources of deposits. However, the ability of Citizens to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. Citizens has experienced sustained growth in its deposit portfolio over the past three years as a result of Citizens' emphasis on cross-selling techniques. Management expects to continue to emphasize cross-selling techniques in an effort to maintain growth in its deposit portfolio, but no assurances can be given that such growth will continue in the future. Deposit Accounts. The following table sets forth the deposit activities of Citizens in dollar amounts and as percentages of total deposits at June 30, 1996.
Minimum Balance at Weighted Opening June 30, % of Average Type of Account Balance 1996 Deposits Rate - --------------- ------- ---- -------- ---- (Dollars in thousands) Withdrawable: Demand deposits........................................ $ 100 $ 4,976 9.6% 2.15% Savings and NOW accounts............................... 100 18,800 36.3 3.08 ------ ---- Total withdrawable................................... 23,776 45.9 2.86 ------ ---- Certificates (original terms): 6 months............................................... 500 902 1.7 9 months............................................... 500 312 0.6 12 months.............................................. 500 10,939 21.2 24 months.............................................. 500 942 1.8 30 months ............................................. 500 2,603 5.0 36 months.............................................. 500 2,807 5.4 48 months.............................................. 500 771 1.5 60 months.............................................. 500 711 1.4 IRAs: 12 months.............................................. 500 432 0.8 24 months.............................................. 500 393 0.8 30 months ............................................. 500 54 0.1 36 months.............................................. 500 578 1.1 48 months.............................................. 500 109 0.2 60 months.............................................. 500 700 1.4 Jumbo certificates........................................ 100,000 5,741 11.1 ------ ---- Total certificates..................................... 27,994 54.1 5.89 ------ ---- ---- Total deposits............................................ $51,770 100.0% 4.50% ======= ===== ====
The following table presents the distribution of Citizens' time deposits by various interest rate categories as of the dates indicated:
At June 30, At December 31, 1996 1995 1994 1993 Amount Amount Amount Amount ------ ------ ------ ------ (In thousands) 3.00 to 4.00%....................... $1,347 $ 141 $ 2,573 $ 6,651 4.01 to 6.00%....................... 17,009 12,610 10,502 4,545 6.01 to 8.00%....................... 9,637 14,718 4,118 951 8.01 to 10.00%...................... 1 1 66 409 ------- ------- ------- ------- Total.......................... $27,994 $27,470 $17,259 $12,556 ======= ======= ======= =======
The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following June 30, 1996. Matured certificates, which have not been renewed as of June 30, 1996, have been allocated based upon certain rollover assumptions.
Amounts at June 30, 1996 -------------------------------------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years (In thousands) 3.00 to 3.99%............................... $ 302 $ --- $ --- $ --- 4.00 to 4.99%............................... 2,147 --- --- --- 5.00 to 5.99%............................... 14,999 1,976 213 447 6.00 to 6.99%............................... 2,254 1,195 807 729 7.00 to 7.99%............................... 108 2,486 331 --- 8.00 to 8.99%............................... --- --- --- --- ------- ------ ------ ------ Total.................................... $19,810 $5,657 $1,351 $1,176 ======= ====== ====== ======
The following table indicates the amount of Citizens' jumbo and other certificates of deposit of $100,000 or more by time remaining until maturity as of June 30, 1996. At June 30, 1996 ---------------- Maturity Period (In thousands) Three months or less.................................. $3,134 Greater than three months through six months.......... 605 Greater than six months through twelve months......... 1,000 Over twelve months.................................... 1,002 ----- Total............................................ $5,741 ====== The following table sets forth the dollar amount of savings deposits in the various types of deposits offered by Citizens at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
DEPOSIT ACTIVITY Balance Increase Balance Increase at (Decrease) at (Decrease) June 30, % of from December 31, % of from 1996 Deposits 1995 1995 Deposits 1994 ---- -------- ---- ---- -------- ---- (Dollars in thousands) Withdrawable: Demand Deposits............................... $ 4,976 9.6% $(3,975) $ 8,951 18.2% $ 108 Savings and NOW accounts...................... 18,800 36.3 5,994 12,806 26.0 895 ------ ---- ----- ------ ---- --- Total withdrawable.......................... 23,776 45.9 2,019 21,757 44.2 1,003 Certificates (original terms): 6 months...................................... 902 1.7 (218) 1,120 2.2 (636) 9 months...................................... 312 0.6 (1,126) 1,438 2.9 1,019 12 months..................................... 10,939 21.2 800 10,139 20.6 5,833 24 months..................................... 942 1.8 153 789 1.6 250 30 months .................................... 2,603 5.0 81 2,522 5.1 319 36 months..................................... 2,807 5.4 93 2,714 5.5 2,511 48 months..................................... 771 1.5 33 738 1.5 58 60 months..................................... 711 1.4 88 623 1.3 94 IRAs: 12 months..................................... 432 0.8 (66) 498 1.0 205 24 months..................................... 393 0.8 104 289 0.6 147 30 months .................................... 54 0.1 1 53 0.1 (3) 36 months..................................... 578 1.1 144 434 1.0 346 48 months..................................... 109 0.2 (75) 184 0.4 (20) 60 months..................................... 700 1.4 67 633 1.3 7 Jumbo certificates............................... 5,741 11.1 445 5,296 10.7 83 ------- ----- ------ ------- ----- ------- Total certificates............................ 27,994 54.1 524 27,470 55.8 10,213 ------- ----- ------ ------- ----- ------- Total deposits................................... $51,770 100.0% $2,543 $49,227 100.0% $11,216 ======= ===== ====== ======= ===== =======
DEPOSIT ACTIVITY Balance Increase Balance at (Decrease) at December 31, % of from December 31, % of 1994 Deposits 1993 1993 Deposits ---- -------- ---- ---- -------- (Dollars in thousands) Withdrawable: Demand Deposits............................... $ 8,843 23.3% $ 181 $ 8,662 28.8% Savings and NOW accounts...................... 11,911 31.3 3,039 8,872 29.5 ------ ---- ----- ----- ---- Total withdrawable.......................... 20,754 54.6 3,220 17,534 58.3 Certificates (original terms): 6 months...................................... 1,756 4.6 (371) 2,127 7.2 9 months...................................... 419 1.1 (936) 1,355 4.5 12 months..................................... 4,306 11.4 2,013 2,293 7.6 24 months..................................... 539 1.4 (211) 750 2.5 30 months .................................... 2,203 5.9 2,198 5 * 36 months..................................... 203 0.5 (49) 252 0.8 48 months..................................... 680 1.8 132 548 1.8 60 months..................................... 529 1.4 (167) 696 2.3 IRAs: 12 months..................................... 293 0.8 9 284 0.9 24 months..................................... 142 0.4 7 135 0.4 30 months .................................... 56 (4) 60 0.2 36 months..................................... 88 0.2 5 83 0.3 48 months..................................... 204 0.5 (9) 213 0.7 60 months..................................... 626 1.6 150 476 1.6 Jumbo certificates............................... 5,213 13.7 1,935 3,278 10.9 ------- ----- ------- ------- ----- Total certificates............................ 17,257 45.4 4,702 12,555 41.7 ------- ----- ------- ------- ----- Total deposits................................... $38,011 100.0% $ 7,922 $30,089 100.0% ======= ===== ======= ======= =====
Borrowings. Citizens focuses on generating high quality loans and then seeks the best source of funding from deposits, investments or borrowings. At June 30, 1996, Citizens had no borrowings from the FHLB of Indianapolis. Citizens does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The following table presents certain information relating to the Citizens borrowings at or for the six months ended June 30, 1996 and 1995 and at or for the years ended December 31, 1995, 1994 and 1993.
At or for the Six Months At or for the Year Ended June 30, Ended December 31, 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) FHLB Advances: Outstanding at end of period......................... $500 $1,500 $1,500 $--- $--- Average balance outstanding for period............... 832 762 1,134 16 --- Maximum amount outstanding at any month-end during the period..................... 1,500 1,500 1,500 --- --- Weighted average interest rate during the period............................... 8.17% 5.51% 6.17% 6.25% ---% Weighted average interest rate at end of period................................ 5.49% 6.62% 6.62% ---% ---%
Properties The following table provides certain information with respect to Citizens' offices as of June 30, 1996.
Net Book Value of Property Year Furniture, Approximate Opened or Fixtures and Square Description and Address Acquired Equipment Footage - ----------------------- -------- --------- ------- (Dollars in thousands) Offices in Madison, Indiana Main Office: 430 Clifty Drive.................. 1983 $707 6,084 Downtown Office: 307 West Main Street............. 1986 14 1,500 Wal-Mart Banking Center: 567 Ivy Tech Drive................ 1995 141 517 Office in Hanover, Indiana Hanover Banking Center: 10 Medical Plaza Drive............ 1995 511 656
Citizens owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The net book value of electronic data processing equipment owned by Citizens was approximately $85,000 at June 30, 1996. Citizens operates four ATMs, one at each office location. Citizens' ATMs participate in the PLUS(R) and MAC(R) networks. Employees As of June 30, 1996, Citizens employed 29 persons on a full-time basis and 4 persons on a part-time basis. None of Citizens' employees is represented by a collective bargaining group. Management considers its employee relations to be excellent. Citizens' employee benefits for full-time employees include, among other things, a 401(k) plan, major medical and long-term disability insurance. Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in Citizens' area. See "Executive Compensation and Related Transactions of Citizens." Legal Proceedings Although Citizens, from time to time, is involved in various legal proceedings in the normal course of business, there are no material legal proceedings to which Citizens is a party or to which any of its property is subject. MANAGEMENT OF THE HOLDING COMPANY Directors and Executive Officers of the Holding Company The Board of Directors of the Holding Company currently consists of six directors, each of whom is also a director of Madison First. The directors of the Holding Company are divided into three classes, and one-third of the Board is to be elected at each annual meeting of the shareholders of the Holding Company. Upon consummation of the Acquisition it is anticipated that Jonnie L. Davis, who currently serves as a director of Citizens, will be appointed to the Board of Directors of the Holding Company. The initial terms of the directors expire at the Holding Company's first shareholders' meeting, which is anticipated to be held in April, 1997. At that meeting, it is anticipated that the directors will be nominated to serve for the following terms: the terms of Messrs. Dorten and Johann and of Ms. Davis will expire in 1998, the terms of Messrs. Hensley and Koehler will expire in 1999, and the terms of Messrs. Anger and Fritz will expire in 2000. The executive officers of the Holding Company are identified below. The executive officers of the Holding Company are elected annually by the Holding Company's Board of Directors. Name Position with Holding Company James E. Fritz Director, President and Chief Executive Officer Lonnie D. Collins Secretary John Wayne Deveary Treasurer MANAGEMENT OF MADISON FIRST Directors of Madison First The Board of Directors of Madison First currently consists of six persons. Each director holds office for a term of three years, and one-third of the Board is elected at each annual meeting of the members of Madison First. Upon consummation of the Acquisition it is anticipated that Jonnie L. Davis, who currently serves as a director of Citizens, will be appointed to the Board of Directors of Madison First. The Board of Directors of Madison First met 13 times during the fiscal year ended December 31, 1995. No director attended fewer than 75% of the meetings of the Board of Directors held while he served as a director and the meetings of committees on which he served. Listed below are the current directors of Madison First: Director of Position Madison First Expiration with Director Since of Term Madison First - -------- ----- ------- ------------- Robert W. Anger 1981 1997 Director and Vice President--Lending Cecil L. Dorten 1990 1998 Vice Chairman James E. Fritz 1995 1997 Director, President and Chief Executive Officer Michael J. Hensley 1995 1999 Director Earl W. Johann 1987 1998 Director Fred W. Koehler 1988 1999 Chairman Presented below is certain information concerning the directors of Madison First: Robert W. Anger (age 58) has served as Madison First's Vice President -- Lending since May, 1995. Prior to that, Mr. Anger served as Madison First's President and Chief Executive Officer. Mr. Anger also serves as a director of First Service and McCauley. Cecil L. Dorten (age 51) has served as the President of Ohio Valley Contractors, Inc., a highway and utility contracting firm, since 1983, and is a Brigadier General in the Indiana National Guard. Mr. Dorten also serves a director of First Service and McCauley. James E. Fritz (age 33) has served as Madison First's President and Chief Executive Officer since August, 1995. Prior to that Mr. Fritz served as the Chief Financial Officer of First Federal Savings Bank of Kokomo until January, 1995, and as a consultant to National City Corporation from January, 1995 to August, 1995. Mr. Fritz also serves as a director and the Secretary-Treasurer of First Service and a director of McCauley. Michael J. Hensley (age 40) has practiced law since January, 1989. Prior to that, Mr. Hensley served as a Compliance Officer, Assistant Trust Officer and the General Counsel to The Madison Bank & Trust Company from 1980 to January, 1989. Mr. Hensley also serves as a director of First Service and McCauley. Earl W. Johann (age 64) has served as the President and Chairman of the Board of Madison Distributing Co. since 1979. Mr. Johann also serves as a director of First Service and McCauley. Fred W. Koehler (age 55) is the former owner of Koehler Tire Co., a tire and automotive parts store in Madison, Indiana, and is the Auditor for Jefferson County. Mr. Koehler also serves as President of First Service and as a director of First Service and McCauley. Madison First also has a Director Emeritus program pursuant to which former directors of Madison First may continue to serve Madison First as an advisor to the Board of Directors upon their retirement or resignation from the Board. Currently, Jerry D. Allen, Madison First's Vice President -- Commercial Lending, and Joseph Hensley serve as Directors Emeritus of Madison First. Mr. Allen is paid fees of $600 per month for his service as a Director Emeritus, and Mr. Hensley receives no fees in connection with service as a Director Emeritus. See "-- Compensation of Directors." Executive Officers of Madison First Who Are Not Directors Presented below is certain information regarding the executive officers of Madison First who are not directors: Name Position Traci A. Bridgford Vice President -- Compliance/Operations Lonnie D. Collins Secretary John Wayne Deveary Vice President and Treasurer Traci A. Bridgford (age 27) has served as the Vice President -- Compliance/Operations of Madison First since January, 1996. Prior to that, Ms. Bridgford served as Compliance Officer of Madison First from May, 1995 to January, 1996. Ms. Bridgford served as the Senior Auditor, Controller and Compliance Officer for Union County National Bank ("Union County") from June, 1992 to April, 1995, and as Auditor and Controller of Union County from January, 1991 to June, 1992. Lonnie D. Collins (age 48) has served as Secretary of Madison First since September, 1994. Mr. Collins has also practiced law since October, 1975 and has served as Madison First's outside counsel since 1980. John Wayne Deveary (age 42) has served as a Vice President of Madison First since January, 1996 and as Treasurer since January, 1978. Mr. Deveary has been employed with Madison First since 1976. Committees of the Boards of Directors of Madison First and the Holding Company The Loan Committee is the only committee of Madison First's Board of Directors that meets regularly and is comprised of all members of the Board. It meets weekly and is responsible for approving all mortgage loans. Madison First's Audit Committee, which is comprised of all outside directors, met one time during the fiscal year ended December 31, 1995. The Audit Committee recommends appointment of Madison First's independent accountants and meets with them to outline the scope, and review the results, of each audit. The Chairman of the Board of Directors of Madison First is required by Madison First's By-Laws to appoint a nominating committee consisting of three members of Madison First 30 days prior to each annual meeting. Such Committee is authorized to make nominations for directors in writing to Madison First's Secretary at least 15 days prior to the annual meeting which nominations are then posted at Madison First's office. Nominations for directors may also be made in writing by members and delivered to Madison First's Secretary at least 10 days prior to Madison First's annual meeting. EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF MADISON FIRST Remuneration of Named Executive Officer The following table sets forth information as to annual, long-term and other compensation for services in all capacities to the President and Chief Executive Officer of Madison First for the fiscal year ended December 31, 1995. There were no executive officers of Madison First, as of December 31, 1995, who earned over $100,000 in salary and bonuses during that fiscal year.
Summary Compensation Table Annual Compensation ------------------------------------------------------------------ Name and Principal Fiscal Other Annual All Other Position Year Salary Bonus Compensation(4) Compensation -------- ---- ------ ----- --------------- ------------ James E. Fritz, President and 1995(1) $28,388 (3) $2,539 -- -- Chief Executive Officer Robert W. Anger, President 1995(2) $65,045 (3) $5,784 -- -- and Chief Executive Officer
(1) Mr. Fritz joined Madison First as President and Chief Executive Officer in August, 1995. (2) Mr. Anger served as President and Chief Executive Officer of Madison First until August, 1995. (3) Includes fees received for service on Madison First's Board of Directors. Mr. Fritz's current annual salary is $65,000. (4) Each of Mr. Fritz and Mr. Anger received certain perquisites, but the incremental cost of providing such perquisites did not exceed the lesser of $50,000 or 10% of his salary and bonus. Employment Contract Effective January 1, 1996, Madison First entered into the Fritz Agreement with James E. Fritz, Madison First's President and Chief Executive Officer. The Fritz Agreement is a three-year agreement and extends annually for an additional one-year term to maintain its three-year term if Madison First's Board of Directors determines to so extend it. Under the Fritz Agreement, Mr. Fritz receives an initial annual salary equal to his current salary subject to increases approved by the Board of Directors. The Fritz Agreement also provides, among other things, for Mr. Fritz's participation in other bonus and fringe benefit and benefits plans available to Madison First's employees. Mr. Fritz may terminate his employment upon ninety (90) days' prior written notice to Madison First. Madison First may discharge Mr. Fritz for just cause (as defined in the Fritz Agreement) at any time or in certain events specified by applicable law or regulations. If Madison First terminates Mr. Fritz's employment for other than just cause or Mr. Fritz terminates the Fritz Agreement for reasons specified therein and such termination does not occur within twelve months after a change in control of Madison First or the Holding Company, the Fritz Agreement provides for Mr. Fritz's receipt of a lump-sum or periodic payment of an amount equal to the sum of (A) Mr. Fritz's base salary through the end of the then-current term, plus (B) Mr. Fritz's base salary for an additional twelve-month period, plus (C) in Mr. Fritz's sole discretion and in lieu of continued participation in Madison First's fringe benefit plans, cash in an amount equal to the cost of obtaining all health, life, disability and other benefits in which Mr. Fritz would otherwise be eligible to participate. In the event Madison First terminates Mr. Fritz's employment for other than just cause or Mr. Fritz terminates the Fritz Agreement for reasons permitted therein within twelve months following a change in control of Madison First or the Holding Company, the Fritz Agreement provides for Mr. Fritz's receipt of a lump-sum payment of an amount equal to the difference between (A) the product of 2.99 times his "base amount" (as defined in Section 280G(b)(3) of the Code) and (B) the sum of any other parachute payments, as determined under Section 280G(b)(2) of the Code. If the payments provided for under the Fritz Agreement, together with any other payments made to Mr. Fritz by Madison First, are determined to be payments in violation of the "golden parachute" rules of the Code, such payments will be reduced to the largest amount which would not cause Madison First to lose a tax deduction for such payments under those rules. As of the date hereof, the cash compensation that would be paid to Mr. Fritz under the Fritz Agreement if such agreement were terminated after a change in control of Madison First would be $194,000. Special Termination Agreements Effective as of the date of the Conversion, Madison First will enter into the Termination Agreements with its Covered Employees. The Termination Agreements have terms of one year, subject to annual extension by the Board of Directors of Madison First, and provide that upon the termination of a Covered Employee's employment by the employer for other than cause or by the Covered Employee for reasons specificied in the Termination Agreements, within 18 months after the Conversion or within 12 months following a "change in control" (as defined in the Termination Agreements) which occurs during the term of the applicable Termination Agreement, such Covered Employee shall be entitled to a lump sum payment of 100% of his or her base amount of compensation, as determined pursuant to Section 280G(b)(3) of the Code (the "Termination Benefit"). Covered Employees may elect to receive the Termination Benefit in semi-monthly payments over a twelve month period. The Termination Agreements also provide for continued life, health and disability coverage for Covered Employees until the expiration of twelve months following the termination of employment or until the Covered Employee obtains coverage from another employer, whichever occurs first. If a Covered Employee obtains coverage from another employer, and does not have substantially identical life, health and disability coverage, Madison First shall maintain substantially identical coverage on behalf of the Covered Employee for a period of twelve months. Compensation of Directors All directors of Madison First are entitled to receive monthly director fees in the amount of $600 for their services. Jerry Allen also receives $600 per month as a Director Emeritus of Madison First. Outside directors of Madison First also receive fees in the amount of $100 for each special meeting of the Board. Total fees paid to directors of Madison First and Mr. Allen for the year ended December 31, 1995 were approximately $56,000. Madison First's directors and directors emeritus may, pursuant to deferred compensation agreements, defer payment of some or all of such directors' fees or salary for a maximum period of five years. Upon reaching the retirement age specified in their respective joinder agreements, directors who participate in the deferred compensation plan receive fixed monthly payments for a specific period ranging from 60 to 180 months, depending on the specific director's election in his joinder agreement, but may also elect to receive their benefits in a lump sum in the event of financial hardship. The agreements also provide for death and disability benefits. Madison First has purchased paid-up life insurance on the lives of directors and directors emeritus participating in the deferred compensation plan to fund benefits payable thereunder. The insurance is provided by Pacific Mutual and Transamerica. At June 30, 1996, the cash surrender value of the policies was carried on the books of Madison First at an amount equal to $735,000. Madison First expensed $10,000 in connection with these agreements for the year ended December 31, 1995. Directors of the Holding Company, First Service and McCauley are not currently paid directors' fees. The Holding Company may, if it believes it is necessary to attract qualified directors or otherwise beneficial to the Holding Company, adopt a policy of paying directors' fees. Benefits Insurance Plans. Madison First's directors, officers and employees are provided with hospitalization, major medical, major dental, life insurance, short-term and long-term disability insurance, and other insurance benefits under group plans sponsored by the Indiana League of Savings Institutions Group Insurance Trust. Madison First pays all premiums for employees and their dependents. Pension Plan. Madison First's full-time employees are included in the Pentegra Group retirement plan, a noncontributory multiple employer comprehensive pension plan (the "Pension Plan"). Separate actuarial valuations are not made for individual employer members of the Pension Plan. Madison First's employees are eligible to participate in the plan once they have completed six months of service for Madison First, if they complete 1,000 hours of service in a calendar year. An employee's pension benefits are 100% vested after five years of service. The Pension Plan provides for monthly or lump sum retirement benefits determined as a percentage of the employee's average salary (for his highest five consecutive years of salary) times his years of service. Salary includes base annual salary as of each January 1, exclusive of overtime, bonuses, fees and other special payments. Early retirement, disability, and death benefits are also payable under the Pension Plan, depending upon the participant's age and years of service. Madison First expensed approximately $9,000 for the Pension Plan during the fiscal year ended December 31, 1995. The estimated base annual retirement benefits presented on a straight-line basis payable at normal retirement age (65) under the Pension Plan to persons in specified salary and years of service classifications are as follows (benefits noted in the table are not subject to any offset).
Years of Service Highest 5-Year Average ----------------------------------------------------------------------------------------------------- Compensation 15 20 25 30 35 40 50 ------- ------- ------- ------- -------- -------- -------- $ 40,000 $15,000 $20,000 $25,000 $30,000 $ 35,000 $ 40,000 $ 45,000 $ 60,000 $22,500 $30,000 $37,500 $45,000 $ 52,500 $ 60,000 $ 67,500 $ 80,000 $30,000 $40,000 $50,000 $69,000 $ 70,000 $ 80,000 $ 90,000 $100,000 $37,500 $50,000 $62,500 $75,000 $ 87,500 $100,000 $112,500 $120,000 $45,000 $60,000 $75,000 $90,000 $105,000 $120,000 $135,000
Benefits are currently subject to maximum Code limitations of $120,000 per year. The years of service credited to Mr. Fritz under the Pension Plan as of December 31, 1995 were eight. The years of service credited to Mr. Anger under the Pension Plan as of December 31, 1995 were 23. Severance Programs. Madison First expects to implement a severance program as of the date of the Conversion for the benefit of all employees of Madison First who are not covered by Termination Agreements or by employment contracts. Pursuant to the severance program, any employee of Madison First who is terminated within 18 months following the Conversion or within twelve months following a change in control of the Holding Company or Madison First will be entitled to receive a lump-sum payment in an amount equal to three weeks compensation for every year of service with Madison First, up to a maximum of twelve months compensation. Transactions With Certain Related Persons Madison First has followed a policy of offering to its directors, officers, and employees real estate mortgage loans secured by their principal residence and other loans. These loans are made in the ordinary course of business with the same collateral, interest rates and underwriting criteria as those of comparable transactions prevailing at the time and do not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors and executive officers totaled approximately $305,000, or 4.6% of consolidated retained earnings at June 30, 1996. Current law requires that all loans or extensions of credit to executive officers, directors, and principal shareholders be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a director or executive officer in excess of the greater of $25,000 or 5% of Madison First'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. Madison First's policy regarding loans to directors and all employees meets the requirements of current law. Lonnie D. Collins, Secretary of the Holding Company and Madison First, serves as counsel to and provides routine legal work for Madison First. In connection with his services in such capacity, Mr. Collins is paid an annual retainer of $3,000. In addition, Mr. Collins received $3,000 in fees for his legal work for Madison First for the year ended December 31, 1995. Mr. Collins also receives $600 per month for his service as Secretary to Madison First's Board of Directors. Madison First expects to continue using Mr. Collins' services for routine legal work following the Conversion and the Acquisition. Employee Stock Ownership Plan and Trust The Holding Company has established for eligible employees of the Institutions an ESOP effective January 1, 1996, subject to Madison First's conversion to stock form. Employees with at least one year of employment with the Institutions and who have attained age twenty-one are eligible to participate. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and use such funds to purchase a number of shares equal to 8% of the Common Stock to be issued in the Conversion. Collateral for the loan will be the Common Stock purchased by the ESOP. The loan will be repaid principally from the Institutions' discretionary contributions to the ESOP over a period of 10 years. It is anticipated that the initial interest rate for the loan will be approximately 8.25%. Shares purchased by the ESOP will be held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan will be allocated among ESOP participants on the basis of compensation in the year of allocation. No allocations will be made to any employee with respect to any compensation in excess of $50,000 per year, although the maximum is subject to cost-of-living increases. Benefits generally become 100% vested after three years of credited service. Prior to the completion of three years of credited service, a participant who terminates employment for reasons other than death, retirement, or disability will not receive any benefit under the ESOP. Forfeitures will be reallocated among remaining participating employees upon the earlier of the forfeiting participant's death or after the expiration of at least three years from the date on which such participant's employment was terminated. Benefits may be payable in the form of Common Stock or cash upon death, retirement, early retirement, disability or separation from service. The Institutions' contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. SOP 93-6 requires the Institutions to record compensation expense in an amount equal to the fair market value of the shares released from the suspense account. See "Risk Factors -- ESOP Compensation Expense." In connection with the establishment of the ESOP, the Holding Company will establish a committee of employees of the Institutions to administer the ESOP. First Bankers Trust Company will serve as corporate trustee of the ESOP. The ESOP Committee may instruct the trustee regarding investment of funds contributed to the ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of participating employees. Under the ESOP, nondirected shares, and shares held in the suspense account, will be voted in a manner calculated to most accurately reflect the instructions it has received from participants regarding the allocated stock so long as such vote is in accordance with the provisions of ERISA. Stock Option Plan At a meeting of the Holding Company's shareholders to be held at least six months after the completion of the Conversion, the Board of Directors intends to submit for shareholder approval the Stock Option Plan for directors, officers and employees of the Institutions and of the Holding Company. If approved by the shareholders, Common Stock in an aggregate amount equal to 10.0% of the shares issued in the Conversion would be reserved for issuance by the Holding Company upon the exercise of the stock options granted under the Stock Option Plan. Assuming the issuance of 900,000 shares in the Conversion, an aggregate of 90,000 shares would be reserved for issuance under the Stock Option Plan. No options would be granted under the Stock Option Plan until the date on which shareholder approval is received. At that time, it is anticipated that options for the following number of shares will be granted to the following directors and executive officers of the Institutions and the Holding Company: Percentage of Shares Optionee Issued in Conversion -------- -------------------- James E. Fritz President, Chief Executive Officer and Director (1).... 1.20% Robert D. Hoban President, Chief Executive Officer and Director (2).... 1.00 John Wayne Deveary Vice President and Treasurer (1)....................... 0.60 Larry C. Fouse Chief Financial Officer and Controller (2)............. 0.50 Carolyn B. Flowers Vice President-- Compliance/Operations (2)............ 0.50 Mark A. Goley Vice President and Senior Loan Officer (2)............. 0.50 Fred W. Koehler Chairman (1)........................................... 0.50 Robert W. Anger Vice President Lending and Director (1)................ 0.45 Michael J. Hensley Director (1)........................................... 0.45 Cecil L. Dorten Vice Chairman (1)...................................... 0.45 Earl W. Johann Director (1)........................................... 0.45 Lonnie D. Collins Secretary (1).......................................... 0.40 Traci A. Bridgford Vice President-- Compliance/Operations (1)............. 0.30 Jonnie L. Davis Director (2)........................................... 0.30 Burton P. Chambers Chairman (2)........................................... 0.15 Van E. Shelton Director (2)........................................... 0.15 Ralph E. Storm Director (2)........................................... 0.15 Other employees............................................ 1.95 ---- Total.................................................. 10.00% ===== (1) Of Madison First. (2) Of Citizens. It is anticipated that these options would be granted for terms of 10 years (in the case of incentive options) or 10 years and one day (in the case of non-qualified options), and at an option price per share equal to the fair market value of the shares on the date of grant of the stock options. Options will become exercisable at a rate of 20% at the end of each twelve (12) months of service with the Institutions after the date of grant, subject to early vesting in the event of death or disability. Options granted under the Stock Option Plan are adjusted for capital changes such as stock splits and stock dividends. Unless the Holding Company decides to call an earlier special meeting of shareholders, the date of grant of these options would be the date of the Holding Company's annual meeting of shareholders to be held at least six months after the Conversion. The Stock Option Plan would be administered by a Committee of disinterested directors of the Holding Company's Board of Directors. Options granted under the Stock Option Plan to employees could be "incentive" stock options designed to result in a beneficial tax treatment to the employee but no tax deduction to the Holding Company. Non-qualified stock options could also be granted under the Stock Option Plan, and will be granted to the non-employee directors listed in the chart above. In the event an option recipient terminated his or her employment for reasons other than retirement, disability, or death, the options would terminate during certain specified periods. RRP At a meeting of the Holding Company's shareholders to be held at least six months after the completion of the Conversion, the Board of Directors also intends to submit for shareholder approval the RRP as a means of providing the directors, officers and employees of the Institutions and of the Holding Company with an ownership interest in the Holding Company in a manner designed to encourage such persons to continue their service with the Institutions and the Holding Company. The Institutions will contribute funds to the RRP from time to time to enable it to acquire an aggregate amount of Common Stock equal to up to 4.0% of the shares of Common Stock issued in the Conversion, either directly from the Holding Company or on the open market. In the event that additional authorized but unissued shares would be acquired by the RRP after the Conversion, the interests of existing shareholders would be diluted. No awards under the RRP would be made until the date the RRP is approved by the Holding Company's shareholders. At that time, it is anticipated that awards of the following number of shares would be made to the following directors, officers and employees of the Holding Company and the Institutions: Percentage of Shares Recipient of Issued in Conversion to Awards be Awarded Under RRP ------ -------------------- James E. Fritz President, Chief Executive Officer and Director (1).... 0.595% Robert D. Hoban President, Chief Executive Officer and Director (2).... 0.500 John Wayne Deveary Vice President and Treasurer (1)....................... 0.300 Larry C. Fouse Chief Financial Officer and Controller (2)............. 0.250 Carolyn B. Flowers Vice President-- Compliance/Operations (2)............ 0.250 Mark A. Goley Vice President and Senior Loan Officer (2)............. 0.250 Fred W. Koehler Chairman (1)........................................... 0.200 Robert W. Anger Vice President Lending and Director (1)................ 0.220 Michael J. Hensley Director (1)........................................... 0.200 Cecil L. Dorten Vice Chairman (1)...................................... 0.200 Earl W. Johann Director (1)........................................... 0.200 Lonnie D. Collins Secretary (1).......................................... 0.200 Traci A. Bridgford Vice President-- Compliance/Operations (1)............. 0.150 Jonnie L. Davis Director (2)........................................... 0.150 Burton P. Chambers Chairman (2)........................................... 0.075 Van E. Shelton Director (2)........................................... 0.075 Ralph E. Storm Director (2)........................................... 0.075 Other employees............................................ 0.110 ----- Total.................................................. 4.000% ===== (1) Of Madison First. (2) Of Citizens. Awards would be nontransferable and nonassignable, and during the lifetime of the recipient could only be earned by and made to him or her. The shares which are subject to an award would vest and be earned by the recipient at a rate of 20% of the shares awarded at the end of each full twelve (12) months of service with the Institutions after the date of grant of the award. Awards are adjusted for capital changes such as stock dividends and stock splits. Notwithstanding the foregoing, awards would be 100% vested upon termination of employment or service due to death or disability. If employment or service were to terminate for other reasons, the grantee's nonvested awards will be forfeited. If employment or service is terminated for cause (as would be defined in the RRP), or if conduct would have justified termination or removal for cause, shares not already delivered under the RRP, whether or not vested, could be forfeited by resolution of the Board of Directors of the Holding Company. When shares become vested and could actually be distributed in accordance with the RRP, the participants would also receive amounts equal to accrued dividends and other earnings or distributions payable with respect thereto. When shares become vested under the RRP, the participant will recognize income equal to the fair market value of the Common Stock earned, determined as of the date of vesting. The amount of income recognized by the participant would be a deductible expense for tax purposes for the Holding Company. Shares not yet vested under the RRP will be voted by the Trustee of the RRP, taking into account the best interests of the recipients of the RRP awards. MANAGEMENT OF CITIZENS Directors of Citizens The Board of Directors of Citizens currently consists of five persons. Each director holds office for a term of one year. Upon consummation of the Acquisiton it is anticipated that James E. Fritz and Fred W. Koehler, who currently serve as directors of Madison First and the Holding Company, will be appointed to the Board of Directors of Citizens. The Board of Directors of Citizens met 13 times during the fiscal year ended December 31, 1995. No director attended fewer than 75% of the meetings of the Board of Directors held while he served as a director and the meetings of committees on which he served. Listed below are the directors of Citizens: Director of Position Citizens with Director Since Citizens - -------- ----- -------- Burton P. Chambers 1982 Chairman Jonnie L. Davis 1989 Director Robert D. Hoban 1989 Director, President and Chief Executive Officer Van E. Shelton 1981 Director Ralph E. Storm 1981 Director Presented below is certain information concerning the directors of Citizens: Burton P. Chambers (age 84) has served as Chairman of Citizens' Board of Directors since 1986. Until 1992, Mr. Chambers was also the owner and operator of C&R Parts Service, Inc. of Madison, Indiana. Jonnie L. Davis (age 61) is currently employed as an administrative assistant with Fewel, Pettitt and Bender, a surveying firm in Madison, Indiana. From July 1994 to July 1995, Ms. Davis served as an accounting clerk for Stockdale Motors, an automobile retailer in Madison, Indiana. From April 1984 to December 1994, Ms. Davis served as a bookkeeping clerk for D&B Enterprises, a partnership involved in owning and operating apartment complexes and other nonresidential real estate ventures. From September 1991 to June 1993, Ms. Davis served as a Vice President and Assistant to the President and performed all accounting and financial functions for the Gust. K. Newberg Company, a general construction contractor in Madison, Indiana. Robert D. Hoban (age 54) has served as Citizens' President and Chief Executive Officer since October 1989. Prior to that, Mr. Hoban served as Executive Vice President of Union National Bank in New Albany, Indiana. Van E. Shelton (age 70) has served as the President of Shelton Farms, Inc. since 1976. Mr. Shelton also served as the Auditor for Jefferson County, Indiana from 1986 to 1994. Ralph E. Storm (age 65) has served as the President of the Charters & Tours Division of White Star Lines, Inc. since prior to January, 1991. Mr. Storm also served as President of Zingo, Inc., a refuse disposal company in Madison, Indiana, until October 1992. Executive Officers of Citizens Who Are Not Directors Presented below is certain information regarding executive officers of Citizens who are not directors: Name Position ---- -------- Carolyn B. Flowers Vice President -- Compliance/Operations Larry C. Fouse Chief Financial Officer and Controller Mark A. Goley Vice President and Senior Loan Officer Carolyn B. Flowers (age 31) has served as Citizens' Vice President -- Compliance and Operations since December 1994. Ms. Flowers joined Citizens in February 1988 and served as Citizens' Operations and Compliance Officer from August 1993 to December 1994. Ms. Flowers also served as Citizens' internal auditor from January 1991 to August 1993. Larry C. Fouse (age 51) has served as Citizens' Chief Financial Officer and Controller since 1993. From 1989 to 1993, Mr. Fouse served as Citizens' Vice President and Operations Officer. Mr. Fouse joined Citizens in October 1988 and was formerly employed by the First Bank of Charlestown, Indiana. Mark A. Goley (age 40) has served as Citizens' Vice President and Senior Loan Officer since February 1992. Mr. Goley joined Citizens in March 1989 and served as a loan officer for Citizens from 1991 to February 1992. Prior to joining Citizens, Mr. Goley performed appraisal services as an independent contractor for the Federal Housing Administration and the Farm Credit Capital Corporation from 1987 to 1989 and served as a loan review officer with the Federal Land Bank from 1978 to 1986. Committees of the Boards of Directors of Citizens The full Board of Directors acts on all matters in lieu of action by committees of the Board. EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF CITIZENS Remuneration of Named Executive Officer The following table sets forth information as to annual, long-term and other compensation for services in all capacities to the President and Chief Executive Officer of Citizens for the fiscal year ended December 31, 1995. There were no other executive officers of Citizens, as of December 31, 1995, who earned over $100,000 in salary and bonuses during that fiscal year.
Summary Compensation Table Annual Compensation -------------------------------------------------------------------- Name and Principal Fiscal Other Annual All Other Position Year Salary Bonus Compensation(2) Compensation Robert D. Hoban, President and 1995 $100,000 ____ -- $6,000 (1)
Chief Executive Officer (1) Constitutes matching contributions made by Citizens to the 401(k) Plan (as defined below). (2) Mr. Hoban received certain perquisites, but the incremental cost of providing such perquisites did not exceed the lesser of $50,000 or 10% of his salary and bonus. Employment Contracts Citizens and Mr. Hoban entered into the 1995 Agreement which is a one-year agreement that automatically renews for an additional one-year term unless terminated by Citizens or Mr. Hoban in accordance with the terms of the 1995 Agreement. The 1995 Agreement provides, among other things, for (i) the payment to Mr. Hoban of a base salary subject to annual review and adjustment by Citizens' Board of Directors; (ii) Mr. Hoban's participation in other fringe benefit plans in the same manner and on the same basis as may be furnished to other executive management personnel of Citizens; (iii) Mr. Hoban's use of an automobile to be provided by Citizens; and (iv) Mr. Hoban's participation in a performance-based bonus program to be established and maintained by Citizens' Board of Directors. If the 1995 Agreement is terminated by Citizens or Citizens gives notice of its intention not to renew the 1995 Agreement at any time not following a change in control (as defined therein) of Citizens, the 1995 Agreement provides for (i) a severance payment to Mr. Hoban in an amount equal to his then-current salary, and (ii) continued health care coverage at Citizens' sole expense for Mr. Hoban and his eligible family members for a period of one year. The 1995 Agreement further provides that in the event that Mr. Hoban's duties and responsibilities are changed or the Board of Directors elects not to renew the 1995 Agreement following a change in control of Citizens, such may, at Mr. Hoban's election and upon written notice to Citizens, be deemed a termination of the 1995 Agreement entitling Mr. Hoban to (i) payment of a lump-sum amount equal to three times Mr. Hoban's then-current salary, subject to reduction to the extent necessary to prevent it from constituting a parachute payment under Section 280G of the Code, and (ii) continued health care coverage at Citizens' sole expense for Mr. Hoban and his eligible family members for a period of three years. The 1995 Agreement also contains a non-competition provision precluding Mr. Hoban from competing with Citizens for a period of one year after termination of the 1995 Agreement and provides for the payment of Mr. Hoban's then-current salary in the event of Mr. Hoban's disability up to a maximum of twelve months. As of the date hereof, the cash compensation that would be paid to Mr. Hoban under the 1995 Agreement if such agreement were terminated after a change in control of Citizens would be $300,000. Effective upon consummation of the Acquisition, Citizens expects to enter into the Hoban Agreement with Mr. Hoban. The Hoban Agreement is a three-year agreement and extends annually for an additional one-year term to maintain its three-year term if Citizens' Board of Directors determines to so extend it. Under the Hoban Agreement, Mr. Hoban receives an initial annual salary equal to his current salary subject to increases approved by the Board of Directors. The Hoban Agreement also provides, among other things, for Mr. Hoban's participation in other bonus and fringe benefit plans available to Citizens' employees. Mr. Hoban may terminate his employment upon ninety (90) days' prior written notice to Citizens. Citizens may discharge Mr. Hoban for just cause (as defined in the Hoban Agreement) at any time or in certain events specified by applicable law or regulations. If Citizens terminates Mr. Hoban's employment for other than just cause and not within twelve months after a change in control of Citizens or Holding Company, the Hoban Agreement provides for Mr. Hoban's receipt of a lump-sum or periodic payment of an amount equal to the sum of (A) Mr. Hoban's base salary through the end of the then-current term, plus (B) Mr. Hoban's base salary for an additional twelve-month period, plus (C) in Mr. Hoban's sole discretion and in lieu of continued participation in Citizens' fringe benefit plans, cash in an amount equal to the cost of obtaining all health, life, disability and other benefits in which Mr. Hoban would otherwise be eligible to participate. In the event Citizens terminates Mr. Hoban's employment for other than just cause or Mr. Hoban terminates the Hoban Agreement for reasons specified therein within twelve months following a change in control of Citizens or the Holding Company, the Hoban Agreement provides for Mr. Hoban's receipt of a lump-sum payment of an amount equal to the difference between (A) the product of 2.99 times his "base amount" (as defined in Section 280G(b)(3) of the Code) and (B) the sum of any other parachute payments, as determined under Section 280G(b)(2) of the Code. If the payments provided for under the Hoban Agreement, together with any other payments made to Mr. Hoban by Citizens, are determined to be payments in violation of the "golden parachute" rules of the Code, such payments will be reduced to the largest amount which would not cause Citizens to lose a tax deduction for such payments under those rules. Special Termination Agreements Effective as of the date of consummation of the Acquisition, Citizens will enter into the Termination Agreements with its Covered Employees. The Termination Agreements have terms of one year, subject to annual extension by the Board of Directors of Citizens, and provide that upon the termination of a Covered Employee's employment by the employer for other than cause or by the Covered Employee for reasons specified in the Termination Agreements, within 18 months following the Acquisition or within 12 months following a "change in control" (as defined in the Termination Agreements) which occurs during the term of the applicable Termination Agreement, such Covered Employee shall be entitled to a lump sum payment of 100% of his or her base amount of compensation, as determined pursuant to Section 280G(b)(3) of the Code (the "Termination Benefit"). Covered Employees may elect to receive the Termination Benefit in semi-monthly payments over a twelve-month period. The Termination Agreements also provide for continued life, health and disability coverage for Covered Employees until the expiration of twelve months following the termination of employment or until the Covered Employee obtains coverage from another employer, whichever occurs first. If a Covered Employee obtains other employment and does not have substantially identical life, health and disability coverage, Citizens shall maintain substantially identical coverage on behalf of the Covered Employee for a period of twelve months. Compensation of Directors All outside directors of Citizens are entitled to receive monthly director fees in the amount of $125 for their services. Total fees paid to directors of Citizens for the year ended December 31, 1995 were $4,925. Benefits Insurance Plans. Citizens' officers and employees are provided with hospitalization, major medical, and other insurance benefits under group plans with Blue Cross Blue Shield of Indiana. Employees pay $5 per month for employee coverage and are responsible for all premiums for dependent coverage. Citizens' officers and employees are also provided with long-term disability coverage through UNUM Life Insurance Company of America at no cost to employees. Non-officer employees and officers of Citizens are provided with life insurance coverage in the amount of $20,000 and $50,000, respectively, through Accordia at no cost to employees. 401(k) Plan. Citizens' employees also participate in the Citizens National Bank of Madison 401(k) Plan (the "401(k) Plan"), a contributory tax-exempt trust and savings plan. Participants may elect to make monthly contributions up to 15% of their salary. Citizens may make a discretionary matching contribution up to 6% of an employee's salary. Citizens may also make elective non-matching contributions under the 401(k) Plan. Contributions may be invested in a variety of investment vehicles at the sole discretion of participants. Benefits under the 401(k) Plan vest at a rate of 20% per year beginning after an employee's second year of service. Participants may take benefits in a lump-sum distribution or in installments. Participants also have an early withdrawal option in the event employment is terminated prior to retirement. During the fiscal year ended December 31, 1995, Citizens made contributions aggregating approximately $26,000 to the 401(k) Plan, $6,000 of which was allocable to Mr. Hoban. Performance Incentives. Citizens routinely offers its non-officer employees performance incentives which are based upon targeted goals established by management. Citizens' executive officers other than Mr. Hoban also participate in the 1996 Management Incentive Program adopted by Citizens' Board of Directors (the "Management Bonus Plan"). Pursuant to the Management Bonus Plan, up to $20,000 is available for bonuses to Mr. Fouse, Ms. Flowers and Mr. Goley if certain performance goals for the year are met or exceeded. If some, but less than all, of the performance goals are met, the participants are eligible to receive a portion of the bonus pool based on the percentage of goals met for the year. Severance Programs. Citizens expects to implement a severance program as of the date of the Acquisition for the benefit of all employees of Citizens who are not covered by Termination Agreements or by employment contracts. Pursuant to the severance program, any such employee of Citizens who is terminated within 18 months following the Acquisition or within twelve months following a change in control of the Holding Company or Citizens will be entitled to receive a lump-sum payment in an amount equal to three weeks compensation for every year of service with Citizens, up to a maximum of twelve months compensation. Transactions With Certain Related Persons Citizens has followed a policy of offering to its directors, officers, and employees real estate mortgage loans secured by their principal residence and other loans. These loans are made in the ordinary course of business with the same collateral, interest rates and underwriting criteria as those of comparable transactions prevailing at the time and do not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors and executive officers totaled approximately $228,000, or 6.6% of shareholders' equity at June 30, 1996. Current law requires that all loans or extensions of credit to executive officers, directors, and principal shareholders be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a director or executive officer in excess of the greater of $25,000 or 5% of Citizens' 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. Citizens' policy regarding loans to directors and all employees meets the requirements of current law. Employee Stock Ownership Plan and Trust Eligible employees of Citizens will be permitted to participate in the ESOP established by the Holding Company. For a description of the ESOP, see "Executive Compensation and Related Transactions of Madison First -- Employee Stock Ownership Plan and Trust." Stock Option Plan Directors, officers and employees of Citizens will be eligible to participate in the Stock Option Plan which will be submitted to the shareholders of the Holding Company for approval at a meeting of such shareholders at least six months after completion of the Conversion. For a description of the Stock Option Plan, including anticipated grants thereunder, see "Executive Compensation and Related Transactions of Madison First -- Stock Option Plan." RRP Directors and employees of Citizens will be eligible to participate in the RRP which will be submitted to the shareholders of the Holding Company for approval at a meeting of such shareholders at least six months after completion of the Conversion. For a description of the RRP, including anticipated awards thereunder, see "Executive Compensation and Related Transactions of Madison First -- RRP." REGULATION General Madison First, as a federally chartered savings and loan association, is a member of the Federal Home Loan Bank System ("FHLB System"), its deposits are insured by the FDIC through the SAIF. Madison First is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval, and the associations must file reports with the OTS about their activities and their financial condition. Periodic examinations of Madison First are conducted by the OTS which has, in conjunction with the FDIC in certain situations, examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and federal deposit insurance funds. Madison First is also subject to certain reserve requirements under regulations of the FRB. An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule establishing fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semiannual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. Currently, the assessment rates range from .0172761% of assets for associations with assets of $67 million or less to .0045864% for associations with assets in excess of $35 billion. Madison First's semiannual assessment under this method of assessment, based upon assets at March 31, 1996, is approximately $14,000. Citizens, as a national bank, is regulated by the OCC and its deposits are insured by the FDIC through the BIF. Periodic examinations of Citizens are conducted by the OCC which has, in conjunction with the FDIC in certain situations, examination and enforcement powers with respect to Citizens. Each of Madison First and Citizens is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of their own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of Madison First and Citizens are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. Congress is considering legislation that would consolidate the supervision and regulation of all U.S. financial institutions in one administrative body, would expand the powers of financial institutions, and would provide regulatory relief to financial institutions (the "Legislation"). It cannot be predicted with certainty whether or when the Legislation will be enacted or the extent to which Madison First, Citizens, or the Holding Company would be affected thereby. Savings and Loan Holding Company Regulation As the Holding Company for Madison First, the Holding Company will be regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, Madison First is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. HOLA generally prohibits a savings and loan company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. Additionally, under certain circumstances a savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of previously unissued voting shares of an under-capitalized savings association for cash without that savings association being deemed controlled by the holding company. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. The Director of the OTS may approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits acquisitions of certain federal and state SAIF-insured savings associations and their holding companies ("Savings Associations") located in Indiana, Ohio, Kentucky, Illinois, and Michigan (the "Region") by other Savings Associations located in the Region. Savings Associations with their principal place of business in one of the states in the Region (other than Indiana) may acquire Savings Associations with their principal place of business in Indiana if, subject to certain other conditions, the state of the acquiring association has reciprocal legislation permitting the acquisition of Savings Associations and their holding companies in that state by Indiana Savings Associations. Each of the states in the Region has, at least to a certain degree, reciprocal legislation. The Indiana statute also authorizes Indiana Savings Associations to acquire other Savings Associations in the Region. Following the acquisition, an acquired Indiana Savings Association and any other Indiana Savings Association subsidiary owned by the acquiror must hold no more than 15% of the total Savings Association deposits in Indiana. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Bank Holding Company Regulation As the holding company for Citizens, the Holding Company will be registered as a bank holding company, and will be subject to the regulations of the FRB under the BHCA. Bank holding companies are required to file periodic reports with, and are subject to periodic examination by, the FRB. The FRB has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the FRB that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. Prior to September 29, 1995, the BHCA prohibited the FRB from approving any direct or indirect acquisition by a bank holding company of more than 5% of the voting shares, or of all or substantially all of the assets, of a bank located outside of the state in which the operations of the bank holding company's banking subsidiaries are principally located unless the laws of the state in which the bank to be acquired is located specifically authorize such an acquisition. Pursuant to amendments to the BHCA which took effect September 29, 1995, the FRB may now allow a bank holding company to acquire banks located in any state of the United States without regard to geographic restriction or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates and state law provisions requiring the target bank to have existed for some period of time (not exceeding five years) prior to the date of acquisition. The BHCA also prohibits the Holding Company, with certain exceptions noted below, from acquiring direct of indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries, except that bank holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be "so closely related to banking . . . as to be a proper incident thereto." Under current regulations of the FRB, the Holding Company and any non-bank subsidiaries it may control are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, the operation of a trust company, sales, and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, and mortgage banking and brokerage. The BHCA does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. Capital Adequacy Guidelines for Bank Holding Companies The FRB is the federal regulatory and examining authority for bank holding companies. The FRB has adopted capital adequacy guidelines for bank holding companies. Bank holding companies are required to comply with the FRB's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be "Tier I capital," consisting principally of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which the bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum. The Holding Company is expected to satisfy these requirements following the Conversion and the Acquisition. Federal Home Loan Bank System Madison First and Citizens are members of the FHLB System, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings and loan associations and savings banks and other member financial institutions. Each of Madison First and Citizens are required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, 0.3% of its assets or 1/20 (or such greater fraction established by the FHLB) of outstanding FHLB advances, commitments, lines of credit and letters of credit. Madison First and Citizens are currently in compliance with this requirement. At December 31, 1995, Madison First's investment in stock of the FHLB of Indianapolis was $610,000. At June 30, 1996, Citizens' investment in stock of the FHLB of Indianapolis was $271,000. In past years, Madison First and Citizens have received dividends on their FHLB stock. All 12 FHLBs are required by law to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the FHLBs' ability to pay dividends and the value of FHLB stock in the future. For the year ended December 31, 1995, dividends paid to Madison First and Citizens by the FHLB of Indianapolis totaled $48,000 and $19,000, respectively, for an annual rate of 7.88% and 7.01% respectively. The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. 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 of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as over collateralization or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks such as Citizens and state savings banks and the SAIF for savings associations such as Madison First and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1995. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF were signed into law. See "-- Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, Madison First will be charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. This one-time assessment will be recognized as a non-recurring operating expense during the three-month period ending September 30, 1996, will be due November 29, 1996 and will be fully deductible for both federal and state income tax purposes. For the impact on Madison First of this assessment, see "Recent Developments." Beginning January 1, 1997, the annual deposit insurance premium for Madison First will be reduced from .23% to .0644% of total assessable deposits. The law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits are precluded from switching deposits into the BIF. Bank Regulatory Capital The OCC has adopted risk-based capital ratio guidelines to which Citizens generally is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Like the capital guidelines established by the FRB for the Holding Company, these guidelines divide a bank's capital into two tiers. The first tier ("Tier I") includes common shareholders' equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The OCC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. In addition, the OCC established guidelines prescribing a minimum Tier I leverage ratio (Tier I capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. Citizens currently exceeds the regulatory capital requirements imposed by the OCC regulatory capital scheme. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common stockholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights (which may be included in an amount up to 50% of core capital, but which are to be reported on an association's balance sheet at the lesser of 90% of their fair market value, 90% of their original purchase price, or 100% of their unamortized book value), and purchased credit card relationships (which may be included in an amount up to 25% of core capital) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%) with a credit risk-free asset such as cash requiring no risk-based capital and an asset with a significant credit risk such as a non-accrual loan being assigned a factor of 100%. At June 30, 1996, Madison First was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be incorporated into the OTS regulatory capital rule, although it has delayed the implementation of this rule. Under the new rule, only savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) will be required to maintain additional capital for interest rate risk under the risk-based capital framework. In addition, most institutions with less than $300 million in assets and a risk-based capital ratio in excess of 12%, such as Madison First, are subject to less stringent reporting requirements and are exempt from the interest rate component of the new rule. If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements, which actions may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. Prompt Corrective Regulatory Action FedICIA requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At June 30, 1996, Madison First and Citizens were categorized as "well capitalized." An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%; and (d) "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by any company that controls the undercapitalized institution as described above. See "-- Bank Holding Company Regulation." If an "undercapitalized" institution fails to submit, or fails to implement in a material respect, an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" institutions are subject to one or more of a number of requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized," make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator. Dividend Limitations Under FRB supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FDIC also has authority under the Financial Institutions Supervisory Act to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank. Under Indiana law, the Holding Company is precluded from paying cash dividends if, after giving effect to such dividends, the Holding Company would be unable to pay its debts as they become due or the Holding Company's total assets would be less than its liabilities and obligations to preferential shareholders. An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by an institution to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized institutions. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An institution that has total capital at least equal to its minimum capital requirements, but less than its capital requirements, would be a Tier 2 institution ("Tier 2 Institution"). An institution having total capital that is less than its minimum capital requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an institution which otherwise qualifies as a Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3 Institution if the OTS determines that the institution is "in need of more than normal supervision." Madison First is currently a Tier 1 Institution. A Tier 1 Institution could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the greater of 100% of its net income to date during the calendar year or 75% of its net income over the most recent four-quarter period plus an amount that would reduce by one-half its "surplus capital ratio" (the smallest excess over its capital requirements) at the beginning of the calendar year. Any additional amount of capital distributions would require prior regulatory approval. Accordingly, at June 30, 1996, Madison First had available approximately $1.9 million for distribution, without consideration of any capital infusion from the Conversion. The OTS has proposed revisions to these regulations which would permit savings associations to declare dividends in amounts which would assure that they remain adequately capitalized following the dividend declaration. Savings associations in a holding company system which are rated Camel 1 or 2 and which are not in troubled condition would need to file a prior notice with the OTS concerning such dividend declaration. Pursuant to the Plan of Conversion, Madison First will establish a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders. See "The Conversion -- Principal Effects of Conversion." Madison First will not be permitted to pay dividends to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Citizens is subject to OCC limits on its dividends. The approval of the OCC is required for any dividend by a national bank if the total of all dividends, including any proposed dividend declared by the national bank in any calendar year, exceeds the total of its net profits (as defined by the OCC) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. Moreover, a national bank may not pay a dividend on its common stock if the dividend would exceed net undivided profits then on hand. In certain cases, even if prior approval of the OCC is not required, the OCC may find a dividend payment to be an unsafe and unsound practice. Limitations on Repurchase of Common Stock of Holding Company Regulations promulgated by the FRB provide that a bank holding company must file written notice with the FRB prior to any repurchase of its equity securities if the gross consideration for the purchase, when aggregated with the net consideration paid by the bank holding company for all repurchases during the preceding 12 months, is equal to 10% or more of the bank holding company's consolidated net worth. This notice requirement is not applicable, however, to a bank holding company that exceeds the thresholds established for a well capitalized bank and that satisfies certain other regulatory requirements. OTS regulations currently provide that the Holding Company is prohibited from repurchasing any of its shares within one year of the Conversion. So long as Madison First continues to meet certain capitalization requirements, the Holding Company may repurchase shares in an open-market repurchase program (which cannot exceed 5% of its outstanding shares in a twelve-month period) during the second and third years following the Conversion by giving appropriate prior notice to the OTS. The OTS has the authority to waive these restrictions under certain circumstances. Unless repurchases are permitted under the foregoing regulations, the Holding Company may not, for a period of three years from the date of the Conversion, repurchase any of its capital stock from any person, except in the event of an offer to purchase by the Holding Company on a pro rata basis from all of its shareholders which is approved in advance by the OTS or except in exceptional circumstances established to the satisfaction of the OTS. Under Indiana law, the Holding Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Holding Company would be unable to pay its debts as they become due or the Holding Company's assets would be less than its liabilities and obligations to preferential shareholders. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Madison First and Citizens do not believe that these regulations will have a materially adverse effect on their current operations. Federal Reserve System FRB regulations require member institutions to maintain reserves against their transaction accounts (primarily NOW accounts) and certain nonpersonal time deposits. The reserve requirements are subject to adjustment by the FRB. As of June 30, 1996, Madison First and Citizens were in compliance with the applicable reserve requirements of the FRB. Liquidity For each calendar month, Madison First is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 5%. OTS regulations also require each member savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and short-term borrowings during the preceding calendar month. Monetary penalties may be imposed for failure to meet these liquidity requirements. The monthly average liquidity of Madison First for June, 1996 was 26.7% which exceeded the then applicable 5% liquidity requirement. Its average short-term liquidity for June, 1996 was 12.0%. Madison First has never been subject to monetary penalties for failure to meet its liquidity requirements. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. The federal banking agencies have also published for comment proposed asset quality and earning standards which, if adopted, would be added to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Similar standards apply to national banks under OCC regulations. Loans to One Borrower Under OTS regulations, a federally-chartered savings association, including Madison First, may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily-marketable collateral, including certain debt and equity securities but not including real estate. Similar loans-to-one borrower limits apply to national banks, including Citizens. At June 30, 1996, neither of the Institutions had loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Qualified Thrift Lender Under current OTS regulations, the QTL test requires that a savings association have at least 65% of its portfolio assets invested in "qualified thrift investments" on a monthly average basis in 9 out of every 12 months. Qualified thrift investments under the QTL test include: (i) loans made to purchase, refinance, construct, improve or repair domestic residential housing or manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities; (iv) direct or indirect existing obligations of either the FDIC or the Federal Savings and Loan Insurance Corporation ("FSLIC") for ten years from the date of issuance, if issued prior to July 1, 1989; (v) obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the Resolution Trust Corporation (the "RTC") entered into on or after July 1, 1989, for the five-year period beginning on the date such obligations were issued; (vi) FHLB stock; (vii) 50% of the dollar amount of residential mortgage loans originated and sold within 90 days of origination; (viii) investments in service corporations that derive at least 80% of their gross revenues from activities directly related to purchasing, refinancing, constructing, improving or repairing domestic residential real estate or manufactured housing; (ix) 200% of the dollar amount of loans and investments made to acquire, develop and construct one to four-family residences that are valued at no more than 60% of the median value of homes constructed in the area; (x) 200% of the dollar amount of loans for the acquisition or improvement of residential real property, churches, schools, and nursing homes located within, and loans for any purpose to any small business located within, an area where credit needs of its low and moderate income residents are determined not to have been adequately met; (xi) loans for the purchase, construction, improvement or upkeep of churches, schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of portfolio assets held in consumer loans or loans for educational purposes; and (xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in categories (vii)-(xiii) which may be taken into account for the purpose of whether an institution meets the QTL test cannot exceed 20% of portfolio assets. Portfolio assets under the QTL test include all of an association's assets less (i) goodwill and other intangibles, (ii) the value of property used by the association to conduct its business, and (iii) its liquid assets as required to be maintained under law up to 20% of total assets. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period. At June 30, 1996, approximately 89.0% of Madison First's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and Madison First met this standard in each of the prior twelve months. Therefore Madison First's asset composition was in excess of the amount required to qualify Madison First as a QTL. Madison First does not expect to significantly change its lending or investment activities in the near future, and therefore expects to continue to qualify as a QTL, although there can be no such assurance. Acquisitions or Dispositions and Branching The BHCA specifically authorizes a bank holding company, upon receipt of appropriate approvals from the FRB and the Director of the OTS, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may now acquire control of a bank. Moreover, subject to the moratorium provisions concerning conversions of SAIF to BIF members and vice versa, federal savings associations may acquire or be acquired by any insured depository institution. Pursuant to rules promulgated by the FRB, a savings association acquired by a bank holding company (i) may, so long as the savings association continues to meet the QTL test, continue to branch to the same extent as permitted to other non-affiliated savings associations similarly chartered in the state, and (ii) cannot continue any non-banking activities not authorized for bank holding companies. Saving associations acquired by a bank holding company may, if located in a state where the bank holding company is legally authorized to acquire a bank, be converted to the status of a bank but deposit insurance assessments and payments continue to be paid by the association to the SAIF. A savings association so converted to a bank becomes subject to the branching restrictions applicable to banks. Also any insured depository institution may merge with, acquire the assets of, or assume the liabilities of any other insured depository institution with the appropriate regularity approvals if (i) continued payments of deposit insurance are made on the acquired depository institution's deposits (including an assumed rate of growth in such deposits) to SAIF (if the acquired institution was a SAIF member) or to BIF (if the acquired institution was a BIF member), and (ii) the acquiring institution and any holding company in control thereof meet all applicable capital requirements at the time of the transaction. A bank or savings association may sell branches and transfer deposit liabilities to a savings association or bank that is a member of an insurance fund which differs from the fund of the transferor without violating the moratorium on switching insurance funds that is described above in "--Insurance of Deposits." To be permitted, the transfer must be approved by the FDIC and the amount for deposits transferred must not exceed 35% of the lesser of (a) the transferor's deposits as of May 1, 1989 (plus net interest on those accounts) or (b) the transferor's total deposits on the date of transfer. Exit and entrance fees are payable in connection with such dispositions. There are also special entrance and exit fees for insured deposits transfers in failed savings association resolutions. The resulting to acquiring institution is liable for the fees. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinates debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana recently passed a law establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion. The Indiana Branching Law became effective March 15, 1996, provided that prior to June 1, 1997 interstate mergers and de novo branches are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo branches on a reciprocal basis. Transactions with Affiliates Madison First and Citizens are subject to Sections 22(h), 23A and 23B of the Federal Reserve Acts, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company will be registered with the SEC under the 1934 Act. The Holding Company will be subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following Madison First's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933, as amended (the "1933 Act"). If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including the two-year holding period and those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The examiners have determined that Madison First and Citizens have a satisfactory record of meeting community credit needs. TAXATION Federal Taxation Historically, savings associations, such as Madison First, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, Madison First will no longer be able to use the percentage of taxable income method of computing its allowable tax bad debt deduction. Madison First will be required to compute its allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) Madison First no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by Madison First. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, Madison First has been reporting its income and expenses on the accrual method of accounting. Madison First's federal income tax returns have not been audited in recent years. Citizens, as a national banking association, is ineligible to use the percentage of taxable income method of accounting for its bad debts, and instead must use the method described above. The bank experience method is not available to "large" banks, as defined by the Code. Large banks are not permitted to deduct a reserve for bad debts, and instead must use the specific charge-off method. Citizens does not expect to be classified as a large bank in the foreseeable future. Citizens could also be subject to the AMTI described above. For federal income tax purposes, Citizens has been reporting its income and expenses on the accrual method of accounting. Citizens' federal income tax returns have not been audited in recent years. The Holding Company, Madison First and Citizens do not anticipate electing to file a consolidated federal income tax return for 1996 or 1997. State Taxation Madison First and Citizens are subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Madison First's state income tax returns have not been audited in recent years. For further information relating to the tax consequences of the Conversion, see "The Conversion -- Principal Effects of Conversion -- Tax Effects." THE CONVERSION THE BOARDS OF DIRECTORS OF MADISON FIRST AND THE HOLDING COMPANY AND THE OTS HAVE APPROVED THE PLAN OF CONVERSION SUBJECT TO APPROVAL BY THE MEMBERS OF MADISON FIRST AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. OTS APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS. General On March 5, 1996, the Board of Directors of Madison First adopted a Plan of Conversion pursuant to which Madison First will convert from a federal mutual savings and loan association to a federal stock savings and loan association, all the outstanding shares of which will be held by the Holding Company formed under Indiana law. The Plan has also been approved by the Board of Directors of the Holding Company and by the OTS, subject to approval of the Plan by Madison First's members. A Special Meeting of Members has been scheduled for that purpose on December 18, 1996. Such approval by the OTS does not constitute a recommendation or endorsement of the Plan by the OTS. In connection with the Special Meeting, Madison First has mailed to each person eligible to vote at the Special Meeting a proxy statement (the "Proxy Statement"). The Proxy Statement contains information concerning the business purposes of the Conversion and the effects of the Plan and the Conversion with respect to voting rights, liquidation rights, continuation of Madison First's business and of existing savings accounts, FDIC insurance and loans. The Proxy Statement also describes the manner in which the Plan may be amended or terminated. The following is a summary of all of the pertinent aspects of the Plan, the Subscription Offering, and the Direct Community Offering. The Plan should be consulted for a more detailed description of its terms. Reasons for Conversion As a stock institution, Madison First will be structured in the form used by commercial banks, most business entities, and a growing number of savings associations. Converting to the stock form is intended to have a positive effect on the future growth and performance of Madison First by: (i) affording depositors, other customers and employees of Madison First the opportunity to become shareholders of the Holding Company and thereby participate more directly in both Madison First's and the Holding Company's future; (ii) providing the Holding Company with the flexibility through mergers and acquisitions by permitting the offering of equity participations to the shareholders of acquired companies; (iii) providing substantially increased net worth and equity capital for investment in its business, thus enabling management to pursue new and additional lending and investment opportunities and to expand operations; (iv) providing future access to capital markets through the sale of stock of the Holding Company in order to generate additional capital to accommodate or promote future growth; and (v) providing the capital necessary to acquire the Citizens Shares in the Acquisition. Madison First believes that the increased capital and operating flexibility will enhance its competitiveness with other types of financial services organizations. Although Madison First's current members will, upon Conversion, lose the voting and liquidation rights they presently have as members (except to the limited extent of their rights in the liquidation account established in the Conversion), they are being offered a priority right to purchase shares in the Conversion and thereby obtain voting and liquidation rights in the Holding Company. The net proceeds to Madison First from the sale of Common Stock offered hereby, after retention by the Holding Company of 50% of the net proceeds after accounting for the loan to the ESOP, estimated at $3.8 million, based upon the sale of 900,000 shares at $10.00 per share, will increase Madison First's existing net worth and thus provide an even stronger capital base to support Madison First's lending and investment activities. Although Madison First's regulatory capital at June 30, 1996, exceeded its capital requirements, Madison First's Board of Directors believes that it is desirable to increase regulatory capital for the foregoing purposes in view of the competitive and changing financial conditions in which Madison First operates and the new opportunities created and higher levels of regulatory capital required by the OTS and regulations applicable to Madison First. The Holding Company will also contribute up to $1.5 million to the capital of Citizens, thereby increasing its regulatory capital, which will also exceed all of Citizens' capital requirements. In addition, the Conversion will provide Madison First with new opportunities to attract and retain talented and experienced personnel through offering stock incentive programs. The Board of Directors of Madison First believes that the Conversion to a holding company structure is the best way to enable Madison First to diversify its business activities should it choose to do so. The Holding Company will be able to engage in banking-related activities permitted under the BHCA. Currently, there are no plans, written or oral, for the Holding Company to engage in any material activities apart from holding the shares of Madison First to be acquired in connection with the Conversion, holding the Citizens Shares to be acquired in connection with the Acquisition and loaning funds to the ESOP to purchase shares of Common Stock in the Conversion, although the Board may determine to further expand the Holding Company's activities after the Conversion. The preferred stock and additional Common Stock of the Holding Company being authorized in the Conversion will be available for future acquisitions (although the Holding Company has no current discussions, arrangements or agreements with respect to any acquisition other than in connection with the Acquisition) and for issuance and sale to raise additional equity capital, subject to market conditions and generally without shareholder approval. The Holding Company's ability to raise additional funds through the sale of debt securities to the public or institutional investors should also be enhanced by the increase in its equity capital base provided by the Conversion. Although the Holding Company currently has no plans with respect to future issuances of equity or debt securities, the more flexible operating structure provided by the Holding Company and the stock form of ownership is expected to assist Madison First in competing aggressively with other financial institutions in its market area. The Conversion will also permit Madison First's members who subscribe for shares of Common Stock to become shareholders of the Holding Company, thereby allowing members to indirectly own stock in the financial organization in which they maintain deposit accounts. Such ownership may encourage shareholders to promote Madison First to others, thereby further contributing to Madison First's growth. Principal Effects of Conversion General. Each savings depositor in a mutual savings and loan association such as Madison First has both a savings account and a pro rata ownership in the net worth of that institution, based upon the balance in his or her savings account, which has no tangible market value separate from the savings account. Any other depositor who opens a savings account obtains a pro rata interest in the net worth of the association without any additional payment beyond the amount of the deposit. 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, which is lost to the extent that the balance in the account is reduced. As a result, depositors normally can only realize the value of their ownership in the unlikely event that the mutual association is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual retained earnings (any remaining net worth) after other claims are paid. Upon conversion to stock form, the ownership of Madison First's net worth will be represented by the outstanding shares of stock to be owned by the Holding Company. Certificates are issued to evidence ownership of the capital stock. The stock certificates are transferable and, therefore, the shares may be transferred with no effect on any account the seller may hold in the savings association. Continuity. While the Conversion is being accomplished, the normal business of Madison First in accepting deposits and making loans will be continued without interruption; provided, however, that Madison First will be negotiating with third parties for the sale of its Hanover branch as required by the Holding Company's commitment to the FRB. See "Risk Factors -- Divestiture of Hanover Branch." After the Conversion, Madison First will continue to provide services for account holders and borrowers under current policies carried on by its present management and staff. The directors serving Madison First at the time of Conversion will continue to serve in such capacity after the Conversion until the expiration of their current terms, and thereafter, if reelected. Following the Conversion and the Acquisition, Jonnie L. Davis, a director of Citizens, will be added to the Board of Directors of Madison First. See "Management -- Directors of Madison First." All executive officers of Madison First at the time of Conversion will retain their positions after the Conversion. Effect on Deposit Accounts. Under the Plan, each holder of a deposit account in Madison First at the time of the Conversion will automatically continue as a deposit account holder in Madison First after the Conversion to stock form, and each such deposit account will remain the same with respect to deposit balance, interest rate and other terms. Each such account will be insured by the FDIC in exactly the same way as before. Depositors will continue to hold their existing certificates, passbooks and other evidence of their accounts. Effect on Loans of Borrowers. No loan from Madison First will be affected by the Conversion. The amount, interest rate, maturity and security for each loan will be unchanged. Effect on Voting Rights of Members. Currently, all depositors and borrowers of Madison First are members of, and have voting rights in, Madison First as to all matters requiring membership action. Each depositor has one vote for each $100, or fraction thereof, of the withdrawal value (deposit balance) of accounts held by such member. Each borrower has one vote. However, no member may cast more than 1,000 votes. Following the Conversion, Madison First's members will cease to be members and will no longer have voting rights in Madison First, and therefore will not be able to elect directors of Madison First or control its affairs. All voting rights in Madison First will be vested in the Holding Company as the sole shareholder of Madison First. Voting rights in the Holding Company will be vested exclusively in its shareholders, with one vote for each share of Common Stock. Neither the Common Stock to be sold in the Conversion nor the capital stock of Madison First will be insured by the FDIC or any other government entity. Effect on Liquidation Rights. If Madison First were to liquidate as a mutual savings association, all claims of creditors (including those of deposit account holders, to the extent of their deposit balances) would be paid first and, if there were any assets remaining, account holders would then receive such remaining assets, pro rata, based upon the deposit balances in their deposit accounts just prior to liquidation. If Madison First were to liquidate after the Conversion, all claims of creditors (including those of deposit account holders, to the extent of their deposit balances) would also be paid first, followed by distribution of the "liquidation account" to certain deposit account holders (as described below), with any assets remaining thereafter distributed to the Holding Company as the sole shareholder of Madison First. Current federal regulations and the Plan of Conversion provide for the establishment of a "liquidation account" by Madison First for the benefit of its deposit account holders with balances of no less than $50.00 on December 31, 1994 ("Eligible Account Holders"), and its deposit account holders with balances of no less than $50.00 on September 30, 1996 ("Supplemental Eligible Account Holders"), who continue to maintain their accounts in Madison First after Conversion. The liquidation account will be credited with the net worth of Madison First as reflected in the latest statement of financial condition in the final prospectus used in the Conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder will, with respect to each deposit account held, have a related inchoate interest in a portion of the balance of the liquidation account. This inchoate interest is referred to in the Plan as a "subaccount balance." In the event of a complete liquidation of Madison First after the Conversion (and only in such event), Eligible Account Holders and Supplemental Eligible Account Holders of Madison First would be entitled to a distribution from the liquidation account in an amount equal to the then current adjusted subaccount balance then held, before any liquidation distribution would be made to the Holding Company as sole shareholder of Madison First. Management believes that a liquidation of Madison First is unlikely. Each Eligible Account Holder will have a subaccount balance in the liquidation account for each deposit account held as of December 31, 1994 (the "Eligibility Record Date"). Each Supplemental Eligible Account Holder will have a subaccount balance in the liquidation account for each deposit account held as of September 30, 1996 (the "Supplemental Eligibility Record Date"). Each initial subaccount balance will be the amount determined by multiplying the total opening balance in the liquidation account by a fraction, the numerator of which is the amount of the qualifying deposit (a deposit of at least $50 as of December 31, 1994, or September 30, 1996, respectively) of such deposit account, and the denominator of which is the total of all qualifying deposits on that date. If the amount in the deposit account on any subsequent annual closing date of Madison First is less than the balance in such deposit account on any other annual closing date, or the balance in such account on the Eligibility Record Date or the Supplemental Eligibility Record Date, as the case may be, this interest in the liquidation account will be reduced by an amount proportionate to any such reduction, and will not thereafter be increased despite any subsequent increase in the related deposit account. An Eligible Account Holder's, as well as a Supplemental Eligible Account Holder's, interest in the liquidation account will cease to exist if the deposit account is closed. The liquidation account will never increase and will be correspondingly reduced as the interests in the liquidation account are reduced or cease to exist. In the event of liquidation, any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied will be distributed to the Holding Company as the sole shareholder of Madison First. A merger, consolidation, sale of bulk assets, or similar combination or transaction in which Madison First is not the surviving entity would not be considered to be a "liquidation" under which distribution of the liquidation account could be made, provided the surviving institution is an FDIC-insured institution. In such a transaction, the liquidation account would be assumed by the surviving institution. The OTS has stated that the consummation of a transaction of the type described in the preceding sentence in which the surviving entity is not an FDIC-insured institution would be reviewed on a case-by-case basis to determine whether the transaction should constitute a "complete liquidation" requiring distribution of any then-remaining balance in the liquidation account. The creation and maintenance of the liquidation account will not restrict the use of or application of any of the net worth accounts of Madison First, except that Madison First may not declare or pay a cash dividend on or repurchase its capital stock if the effect of such dividend or repurchase would be to cause its net worth to be reduced below the aggregate amount then required for the liquidation account. Tax Effects. Madison First intends to proceed with the Conversion on the basis of an opinion from its special counsel, Barnes & Thornburg, Indianapolis, Indiana, as to certain tax matters. The opinion is based, among other things, on certain representations made by Madison First, including the representation that the exercise price of the subscription rights to purchase Holding Company Common Stock will be approximately equal to the fair market value of the stock at the time of the completion of the Conversion. With respect to the subscription rights, Madison First has received an opinion of Keller which, based on certain assumptions, concludes that the subscription rights to be received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members do not have any economic value at the time of distribution or the time the subscription rights are exercised, whether or not a Direct Community Offering takes place, and Barnes & Thornburg's opinion is given in reliance thereon. Barnes & Thornburg's opinion provides substantially as follows: 1. The change in form of Madison First from a mutual savings and loan association to a stock savings and loan association will qualify as a reorganization under Section 368(a)(1)(F) of the Code and no gain or loss will be recognized to Madison First in either its mutual form or its stock form by reason of the Conversion. 2. No gain or loss will be recognized by the converted savings association upon receipt of money from the Holding Company for the converted savings association's capital stock, and no gain or loss will be recognized to the Holding Company upon the receipt of money for Common Stock of the Holding Company. 3. The basis of the assets of the converted savings association will be the same as the basis in Madison First's hands prior to the Conversion. 4. The holding period of the assets of the converted savings association will include the period during which the assets were held by Madison First in its mutual form prior to Conversion. 5. No gain or loss will be realized by the deposit account holders of Madison First, upon the constructive issuance to them of withdrawable deposit accounts of the converted savings association immediately after the Conversion, interests in the liquidation account, and/or on the distribution to them of nontransferable subscription rights to purchase Holding Company Common Stock. 6. The basis of an account holder's deposit accounts in the converted savings association after the Conversion will be the same as the basis of his or her deposit account in Madison First prior to the Conversion. 7. The basis of each account holder's interest in the liquidation account will be zero. The basis of the non-transferable subscription rights will be zero. 8. The basis of the Holding Company Common Stock to its shareholders will be the actual purchase price ($10.00) thereof, and a shareholder's holding period for Holding Company Common Stock acquired through the exercise of subscription rights will begin on the date on which the subscription rights are exercised. 9. No taxable income will be realized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Members as a result of the exercise of the nontransferable subscription rights. 10. The converted savings association in its stock form will succeed to and take into account the earnings and profits or deficit in earnings and profits of Madison First, in its mutual form, as of the date of Conversion. The opinion also concludes in effect that: 1. No taxable income will be realized by Madison First on the issuance of subscription rights to eligible subscribers to purchase shares of Holding Company Common Stock at fair market value. 2. The converted savings association will succeed to and take into account the dollar amounts of those accounts of Madison First in its mutual form which represent bad debt reserves in respect of which Madison First in its mutual form has taken a bad debt deduction for taxable years on or before the date of the transfer. 3. The creation of the liquidation account will have no effect on Madison First's taxable income, deductions, or additions to bad debt reserves or distributions to shareholders under Section 593 of the Code. Barnes & Thornburg has also issued an opinion stating in essence that the Conversion will not be a taxable transaction to the Holding Company or Madison First under any Indiana tax statute imposing a tax on income, and that Madison First's depositors and borrowers will be treated under such laws in a manner similar to the manner in which they will be treated under federal income tax law. The opinions of Barnes & Thornburg and Keller, unlike a letter ruling issued by the Internal Revenue Service, are not binding on the Service and the conclusions expressed herein may be challenged at a future date. The Service has issued favorable rulings for transactions substantially similar to the proposed Conversion, but any such ruling may not be cited as precedent by any taxpayer other than the taxpayer to whom the ruling is addressed. Madison First does not plan to apply for a letter ruling concerning the transactions described herein. Offering of Holding Company Common Stock Under the Plan of Conversion, up to 1,035,000 shares of Common Stock are being offered for sale, initially through the Subscription Offering (subject to a possible increase to 1,190,250 shares). See "-- Subscription Offering." The Plan of Conversion requires, with certain exceptions, that a number of shares equal to at least 765,000 be sold in order for the Conversion to be effective. Shares will also be offered to the public in a Direct Community Offering which will commence concurrently with the Subscription Offering. The Direct Community Offering may expire as early as December 11, 1996, or at any time thereafter (until January 25, 1997, unless extended by Madison First and the Holding Company) when orders for at least 765,000 shares have been received in the Subscription Offering and Direct Community Offering, if any. The offering may be extended, subject to OTS approval, until 24 months following the members' approval of the Plan of Conversion, or until December 18, 1998. The actual number of shares to be sold in the Conversion will depend upon market and financial conditions at the time of the Conversion, provided that no fewer than 765,000 shares or more than 1,190,250 shares will be sold in the Conversion. The per share price to be paid by purchasers in the Direct Community Offering for any remaining shares will be $10.00, the same price paid by subscribers in the Subscription Offering. See "-- Stock Pricing." The Subscription Offering expires at 4:00 p.m., Madison time, on December 11, 1996. OTS regulations and the Plan of Conversion require that Madison First complete the sale of Common Stock within 45 days after the close of the Subscription Offering. This 45-day period expires on January 25, 1997. In the event Madison First is unable to complete the sale of Common Stock within the 45-day period, an extension of this time period may be requested of the OTS. No single extension granted by the OTS, however, may exceed 90 days. No assurance can be given that an extension would be granted if requested. The OTS has, however, granted extensions due to the inability of mutual financial institutions to complete the sale as a result of the development of adverse conditions in the stock market. If an extension is granted, Madison First will promptly notify subscribers of the granting of the extension of time and will promptly return subscriptions unless subscribers affirmatively elect to continue their subscriptions during the period of extension. Such extensions may not be made beyond December 18, 1998. As permitted by OTS regulations, the Plan of Conversion provides that if, for any reason, purchasers cannot be found for an insignificant residue of unsubscribed shares of the Common Stock, the Board of Directors of Madison First will seek to make other arrangements for the sale of the remaining shares. Such other arrangements will be subject to the approval of the OTS. If such other purchase arrangements cannot be made, the Plan of Conversion will terminate. In the event that the Conversion is not effected, Madison First will remain a mutual savings and loan association, all subscription funds will be promptly returned to subscribers with interest earned thereon at the passbook rate, which is currently 3.00% per annum, or 3.04 APY (except for payments to have been made through withdrawal authorizations which will have continued to earn interest at the contractual account rates), and all withdrawal authorizations will be canceled. Subscription Offering In accordance with OTS regulations, nontransferable rights to subscribe for the purchase of the Holding Company's Common Stock have been granted under the Plan of Conversion to the following persons in the following order of priority: (1) depositors of Madison First with balances no less than $50.00 as of December 31, 1994 ("Eligible Account Holders"); (2) the ESOP; (3) depositors of Madison First with balances no less than $50.00 as of September 30, 1996 ("Supplemental Eligible Account Holders"); and (4) depositor and borrower members of Madison First other than Eligible Account Holders and Supplemental Eligible Account Holders, at the close of business on November 1, 1996, the voting record date for the Special Meeting ("Other Members"). All subscriptions received will be subject to the availability of Common Stock after satisfaction of all subscriptions of all persons having prior rights in the Subscription Offering, and to the maximum and minimum purchase limitations set forth in the Plan of Conversion (and described below). The December 31, 1994, date for determination of Eligible Account Holders and the September 30, 1996 date for determination of Supplemental Eligible Account Holders were selected in accordance with federal regulations applicable to the Conversion. Shareholders, depositors and borrowers of Citizens do not have subscription rights under the Plan unless such persons otherwise qualify for subscription rights as a member of Madison First. Category I: Eligible Account Holders. Each Eligible Account Holder will receive, without payment therefor, nontransferable subscription rights to subscribe for up to 10,000 shares of the Common Stock for each deposit account held on December 31, 1994; provided, however, that no Eligible Account Holder may purchase alone or with his or her Associates (as defined in the Plan, and including relatives living in the same household) and persons acting in concert, more than 20,000 shares of Common Stock. If sufficient shares are not available in this Category I, shares will be allocated in a manner that will allow each Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her allocation consist of the lesser of 100 shares or the amount subscribed for. Thereafter, unallocated shares will be allocated to subscribing Eligible Account Holders in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Eligible Account Holders. The "qualifying deposits" of an Eligible Account Holder is the amount of the deposit balances (provided such aggregate balance is not less than $50.00) in his or her deposit accounts as of the close of business on December 31, 1994. Subscription rights received by directors and officers in this category based upon their increased deposits in Madison First during the year preceding December 31, 1994, are subordinated to the subscription rights of other Eligible Account Holders. Notwithstanding the foregoing, shares of Common Stock with a value in excess of $10,350,000, the maximum of the Estimated Valuation Range, may be sold to the ESOP before fully satisfying the subscriptions of Eligible Account Holders. Category II: The ESOP. The ESOP will receive, without payment therefor, nontransferable subscription rights to purchase up to 10% of the total number of shares of Common Stock offered in the Conversion on behalf of participants, provided that shares remain available after satisfying the subscription rights of Eligible Account Holders up to the maximum of the Estimated Valuation Range as described above. The ESOP currently intends to purchase 8% of the shares sold in the Conversion. If the ESOP is unable to purchase all or part of the shares of Common Stock for which it subscribes, the ESOP may purchase such shares on the open market or may purchase authorized but unissued shares of the Holding Company. If the ESOP purchases authorized but unissued shares, such purchases could have a dilutive effect on the interests of the Holding Company's shareholders. Category III: Supplemental Eligible Account Holders. Each Supplemental Eligible Account Holder will receive, without payment therefor, nontransferable subscription rights to subscribe for up to 10,000 shares of the Common Stock for each deposit account held on September 30, 1996; provided, however, that no Supplemental Eligible Account Holder may purchase alone or with his or her Associates (as defined in the Plan, and including relatives living in the same household) and persons acting in concert, more than 20,000 shares of Common Stock. Such subscription rights will be applicable only to such shares as remain available after the subscriptions of the Eligible Account Holders and the ESOP have been satisfied. Any subscription rights received by a person as a result of his or her status as an Eligible Account Holder will reduce to the extent thereof the subscription rights granted to such person as a result of his or her status as a Supplemental Eligible Account Holder. If sufficient shares are not available in this Category III, shares will be allocated in a manner that will allow each Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her allocation consist of the lesser of 100 shares or the amount subscribed for. Thereafter, unallocated shares will be allocated to subscribing Supplemental Eligible Account Holders in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Supplemental Eligible Account Holders. The "qualifying deposits" of a Supplemental Eligible Account Holder is the amount of the deposit balances (provided such aggregate balance is not less than $50) in his or her deposit accounts as of the close of business on September 30, 1996. Category IV: Other Members. The Other Members of Madison First will receive, without payment therefor, nontransferable subscription rights to subscribe for up to 10,000 shares of the Common Stock for each deposit account held and each loan owed as of November 1, 1996; provided, however, that no Other Member may purchase alone or with his or her Associates (as defined in the Plan, and including relatives living in the same household) and persons acting in concert, more than 20,000 shares of Common Stock. Such subscription rights will be applicable only to such shares as remain available after the subscriptions of Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders have been satisfied. If sufficient shares are not available in this Category IV, shares will be allocated pro rata among subscribing Other Members in the same proportion that the number of shares subscribed for by each Other Member bears to the total number of shares subscribed for by all Other Members. Timing of Offering and Method of Payment. The Subscription Offering will expire at 4:00 p.m., Madison time, on December 11, 1996 (the "Expiration Date"). The Expiration Date may be extended by Madison First and the Holding Company for successive 90-day periods, subject to OTS approval, to December 18, 1998. Subscribers must, before the Expiration Date, or such date to which the Expiration Date may be extended, return Order Forms to Madison First, properly completed, together with checks or money orders in an amount equal to the Purchase Price ($10.00 per share) multiplied by the number of shares for which subscription is made. Payment for stock purchases can also be accomplished through authorization on the order form of withdrawals from accounts (including a certificate of deposit but excluding IRA accounts). Madison First has the right to reject any orders transmitted by facsimile and any payments made by wire transfer. The beneficiaries of IRA accounts are deemed to have the same subscription rights as other depositors. However, the IRA accounts maintained in Madison First do not permit investment in the Common Stock. A depositor interested in using his IRA funds to purchase Common Stock must do so through a self-directed IRA account. Since Madison First does not offer such accounts, it will allow such a depositor to make a trustee-to-trustee transfer of the IRA funds on deposit at Madison First that he wishes to invest. There will be no early withdrawal or IRS interest penalties for such transfers. The new trustee would hold the Common Stock in a self-directed account in the same manner as Madison First now holds the depositor's IRA funds. An annual administrative fee would be payable to the new trustee. Depositors interested in using funds in a Madison First IRA to purchase Common Stock should contact Madison First at (812) 273-2471, or (800) 273-7804 (out-of-area calls) as soon as possible so that the necessary forms may be forwarded for execution and returned prior to the Expiration Date of the Subscription Offering. Until completion or termination of the Conversion, subscribers who elect to make payment through authorization of withdrawal from accounts with Madison First will not be permitted to reduce the deposit balance in any such accounts below the amount required to purchase the shares for which they subscribed. In such cases interest will continue to be credited on deposits authorized for withdrawal until the completion of the Conversion. Interest at the passbook rate, which is currently 3.00% per annum, for an APY of 3.04%, will be paid on amounts submitted by check. Authorized withdrawals from certificate accounts for the purchase of Common Stock will be permitted without the imposition of early withdrawal penalties or loss of interest. However, withdrawals from certificate accounts that reduce the balance of such accounts below the required minimum for specific interest rate qualification will cause the cancellation of the certificate accounts at the effective date of the Conversion, and the remaining balance will earn interest at the passbook savings rate. Stock subscriptions received by Madison First may not be withdrawn by the subscriber before January 25, 1997, and, if accepted by Madison First, are final until that date. Members in Non-Qualified States or Foreign Countries. Madison First and the Holding Company 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, no person will be offered or sold or receive any stock pursuant to the Subscription Offering if such person resides in a foreign country or resides in a state in the United States with respect to which all of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares of Common Stock reside in such state; (ii) the granting of subscription rights or the offer or sale of Common Stock to such persons would require Madison First or the Holding Company or their respective officers and directors, under the securities laws of such state, to register as a broker, dealer, salesman or selling agent, or to register or otherwise qualify the Common Stock for sale in such state; and (iii) such registration, qualification or filing in the judgment of the Holding Company and Madison First would be impracticable or unduly burdensome for reasons of cost or otherwise. To assist in the Subscription and Direct Community Offerings, the Holding Company has established a Stock Information Center ((812) 273-2471, or (800) 273-7804, for out-of-area calls). Callers to the Stock Information Center will be able to request a Subscription and Direct Community Offering Prospectus and other information relating to the offering. Direct Community Offering Commencing concurrently with the Subscription Offering, Madison First is offering shares of Holding Company Common Stock in the Direct Community Offering to the general public, with preference given to residents of Jefferson County, to the extent such shares remain available after satisfaction of all orders received in the Subscription Offering. The right of any person to purchase shares in the Direct Community Offering is subject to the right of Madison First to accept or reject such purchase in whole or in part. Madison First has the right to terminate the Direct Community Offering as soon as it has received orders for at least the minimum number of shares available for purchase in the Conversion. The Direct Community Offering may expire as early as December 11, 1996, or at any time thereafter (until January 25, 1997, unless extended by Madison First and the Holding Company) when orders for at least 765,000 shares have been received in the Subscription Offering and Direct Community Offering. Accordingly, persons wishing to purchase stock in the Direct Community Offering directly from the Holding Company should return the Order Form on or before December 11, 1996, to Madison First, properly completed, together with check or money order in the amount equal to the Purchase Price ($10.00 per share) multiplied by the number of shares which that person desires to purchase. Order Forms will be accepted in the Direct Community Offering until its completion, which is expected to occur on or after December 11, 1996, and before January 25, 1997. However, as mentioned above, the Holding Company and Madison First may terminate the Direct Community Offering as soon as it has received orders for at least the minimum number of shares available for purchase in the Conversion. Therefore, persons who submit a Order Form after December 11, 1996, may be precluded from purchasing stock in the Direct Community Offering because the Direct Community Offering may have been terminated before the Order Form is submitted. Order Forms received during the Direct Community Offering will be filled up to a maximum of 10,000 shares of Common Stock offered in the Conversion, with any remaining unfilled purchase orders to be allocated on an equal number of shares basis. The maximum number of shares of Common Stock which may be purchased in the Direct Community Offering by any person (including such person's Associates) or persons acting in concert is 10,000 in the aggregate. A member who, together with his Associates and persons acting in concert, has subscribed for shares in the Subscription Offering may subscribe for a number of additional shares in the Direct Community Offering that does not exceed the lesser of (i) 10,000 shares or (ii) the number of shares which, when added to the number of shares subscribed for by the member (and his Associates and persons acting in concert) in the Subscription Offering, would not exceed 20,000. Madison First reserves the right to reject any orders received in the Direct Community Offering in whole or in part. If all the Holding Company Common Stock offered in the Subscription Offering is subscribed for, no Holding Company Common Stock will be available for purchase in the Direct Community Offering and all funds submitted pursuant to the Direct Community Offering will be promptly refunded, with interest, as hereafter described. Purchase orders received during the Direct Community Offering will be filled up to a maximum of 2% of the total number of shares of Common Stock issued in the Conversion, with any remaining unfilled purchase orders to be allocated on an equal number of shares basis. If the Direct Community Offering extends beyond 45 days following the expiration of the Subscription Offering, subscribers will have the right to increase, decrease or rescind subscriptions for stock previously submitted. All sales of Holding Company Common Stock in the Direct Community Offering will be at the same price per share as the sales of Holding Company Common Stock in the Subscription Offering. Cash and checks received in the Direct Community Offering will be placed in a special savings account at Madison First, and will earn interest at the passbook rate, which is currently 3.00% per annum, for an APY of 3.04%, from the date of deposit until completion or termination of the Conversion. In the event that the Conversion is not consummated for any reason, all funds submitted pursuant to the Direct Community Offering will be promptly refunded with interest as described above. Delivery of Certificates Certificates representing shares issued in the Subscription Offering and in the Direct Community Offering pursuant to Order Forms will be mailed to the persons entitled to them at the last addresses of such persons appearing on the books of Madison First or to such other addresses as may be specified in properly completed Order Forms as soon as practicable following consummation of the Conversion. Any certificates returned as undeliverable will be held by the Holding Company until claimed by the person legally entitled to them or otherwise disposed of in accordance with applicable law. Agent To assist Madison First and the Holding Company in marketing the Holding Company Common Stock offered hereby, the Holding Company and Madison First have retained the services of Trident Securities, Inc. as its exclusive agent (the "Agent"). The Agent is a broker-dealer registered with the SEC and a member of the National Association of Securities Dealers, Inc. (the "NASD"). The Agent will assist the Holding Company and Madison First in the Conversion as follows: (1) in training and educating Madison First's employees regarding the mechanics and regulatory requirements of the conversion process; (2) in conducting informational meetings for subscribers and other potential purchasers; (3) in keeping records of all stock subscriptions; and (4) in obtaining proxies from Madison First's members with respect to the Special Meeting. The Agent will also serve as an advisor to the Holding Company and Madison First in connection with the Acquisition. For providing these services, the Holding Company and Madison First have agreed to pay the Agent a management fee equal to 0.5% of the aggregate dollar amount of shares of Common Stock sold in the Conversion and commissions in an amount equal to 2.0% of the aggregate dollar amount of shares of Common Stock sold in the Conversion other than shares sold to the ESOP, officers and directors of the Institutions and their Associates. The Agent will also be reimbursed for out-of-pocket expenses which are not to exceed $12,000 without the Holding Company's and Madison First's consent and for legal fees and expenses which are not to exceed $35,000 without the Holding Company's and Madison First's consent. Offers and sales in the Direct Community Offering will be on a best efforts basis and, as a result, the Agent is not obligated to purchase any shares of the Common Stock. The Agent intends to make a market in the Common Stock, although it is under no obligation to do so. Madison First and the Holding Company have also agreed to indemnify the Agent, under certain circumstances, against liabilities and expenses (including legal fees) arising out of the Agent's engagement by the Holding Company and Madison First, including liabilities under the 1933 Act. The Holding Company and Madison First also engaged Trident Financial Corporation ("Trident Financial"), an affiliate of the Agent, to serve as financial advisor in connection with the Acquisition. The Holding Company and Madison First have agreed to pay Trident Financial fees based on Trident Financial's standard hourly rates and to reimburse Trident Financial for reasonable out-of-pocket expenses. Selected Dealers Upon a determination by the Holding Company, Madison First and the Agent, the Agent may enter into an agreement with certain dealers chosen by the Holding Company, Madison First and the Agent (together, the "Selected Dealers") to assist in the sale of shares in the Direct Community Offering. Selected Dealers will receive commissions at an agreed upon rate, not to exceed 4.5%, for all shares sold by such Selected Dealers. During the Direct Community Offering, Selected Dealers may only solicit indications of interest from their customers to place orders with Madison First as of a certain date (the "Order Date") for the purchase of shares of Common Stock. When and if the Holding Company, Madison First and the Agent believe that enough indications of interest and orders have been received in the Subscription Offering and Direct Community Offering to consummate the Conversion, the Agent will request, as of the Order Date, Selected Dealers to submit orders to purchase shares for which they have previously received indications of interest from the customers. Selected Dealers will send confirmations of the orders to such customers on the next business day after the Order Date. Selected Dealers will debit the accounts of their customers on the date which will be three business days from the Order Date (the "Settlement Date"). On the Settlement Date, funds received by Selected Dealers will be remitted to Madison First. It is anticipated that the Conversion will be consummated on the Settlement Date. However, if consummation is delayed after payment has been received by Madison First from Selected Dealers, funds will earn interest at the passbook rate, which is currently 3.00% per annum, for an APY of 3.04%, until the completion of the offering. Funds will be returned promptly in the event the Conversion is not consummated. Limitations on Common Stock Purchases The Plan includes a number of limitations on the number of shares of Common Stock which may be purchased during the Conversion. These are summarized below: (1) No fewer than 25 shares may be purchased by any person purchasing shares of Common Stock in the Conversion (provided that sufficient shares are available). (2) No subscribing member may purchase more than 10,000 shares of Common Stock with respect to each deposit account held as of December 31, 1994, September 30, 1996 or November 1, 1996, as applicable, and each loaned owed as of November 1, 1996. For this purpose, joint account holders or borrowers collectively may not exceed the 10,000 share limit. Notwithstanding the foregoing sentences, no Eligible Account Holder, Supplemental Eligible Account Holder or Other Member, by himself or herself, or with an Associate or group of persons acting in concert, may purchase more than 20,000 shares of Common Stock in the Conversion (except for the ESOP which may purchase up to 10% of the total number of shares of Common Stock offered in the Conversion). The maximum number of shares of Common Stock which may be purchased in the Direct Community Offering by any person (including such person's Associates) or persons acting in concert is 10,000 in the aggregate. A member who, together with his Associates and persons acting in concert, has subscribed for shares in the Subscription Offering may subscribe for a number of additional shares in the Direct Community Offering that does not exceed the lesser of (i) 10,000 shares or (ii) the number of shares which, when added to the number of shares subscribed for by the member (and his Associates and persons acting in concert) in the Subscription Offering, would not exceed 20,000. Madison First's and the Holding Company's Boards of Directors may, however, in their sole discretion, increase the maximum purchase limitation set forth above up to 9.99% of the shares of Common Stock sold in the Conversion, provided that orders for shares exceeding 5% of the shares of Common Stock sold in the Conversion may not exceed, in the aggregate, 10% of the shares sold in the Conversion, except that the ESOP may purchase in the aggregate up to 10% of the shares of Common Stock sold in the Conversion and not be included in the order limit. If the Boards of Directors decide to increase the purchase limitation, all persons who subscribe for the maximum number of shares of Common Stock offered in the Conversion will be, and certain other large subscribers in the sole discretion of the Holding Company and Madison First may be, given the opportunity to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights. The overall purchase limitation may be reduced in the sole discretion of the Boards of Directors of the Holding Company and Madison First. (3) No more than 34% of the shares of Common Stock may be purchased in the Conversion by directors and officers of Madison First and the Holding Company and their Associates (excluding shares allocable to such persons under the ESOP). OTS regulations define "acting in concert" as (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. The term "Associate" of a person is defined to mean (i) any corporation or organization (other than Madison First or its subsidiaries or the Holding Company) of which such person is a director, officer, partner or 10% stockholder; (ii) any trust or other estate in which such person has a substantial beneficial interest or serves as trustee or in a similar fiduciary capacity; provided, however that such term shall not include any employee stock benefit plan of the Holding Company or Madison First in which such a person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or relative of such spouse, who either has the same home as such person or who is a director or officer of Madison First or its subsidiaries or the Holding Company. Directors are not treated as Associates of one another solely because of their board membership. Compliance with the foregoing limitations does not necessarily constitute compliance with other regulatory restrictions on acquisitions of the Common Stock. For a further discussion of limitations on purchases of the Holding Company Common Stock during and subsequent to Conversion, see "-- Restrictions on Sale of Stock by Directors and Officers," "-- Restrictions on Purchase of Stock by Directors and Officers Following Conversion," and "Restrictions on Acquisition of the Holding Company." Restrictions on Repurchase of Stock by Holding Company Repurchases of its shares by the Holding Company will be restricted for a period of three years from the date of the Conversion. OTS regulations currently provide that the Holding Company is prohibited from repurchasing any of its shares within one (1) year following the Conversion except in exceptional circumstances. So long as Madison First continues to meet certain capitalization requirements, the Holding Company may repurchase shares in an open-market repurchase program (which cannot exceed 5% of its outstanding shares in a twelve-month period except in exceptional circumstances) during the second and third year following the Conversion by giving appropriate prior notice to the OTS. The OTS has authority to waive these restrictions under certain circumstances. Unless repurchases are permitted under the foregoing regulations, the Holding Company may not, for a period of three years from the date of the Conversion, repurchase any of its capital stock from any person, except in the event of an offer to purchase by the Holding Company on a pro rata basis from all of its shareholders which is approved in advance by the OTS, except in exceptional circumstances established to the satisfaction of the OTS, or except for purchases of shares required to fund the ESOP or the RRP. Further, the Holding Company may not repurchase any of its capital stock if the effect of such purchase would be to cause Madison First's net worth to be reduced below the amount required for the liquidation account. The Holding Company may use some of the net proceeds received from the sale of the Common Stock offered by this Prospectus to repurchase such Common Stock, subject to OTS requirements. Regulations promulgated by the FRB provide that a bank holding company must file written notice with the FRB prior to any repurchase of its equity securities if the gross consideration for the purchase, when aggregated with the net consideration paid by the bank holding company for all repurchases during the preceding 12 months, is equal to 10% or more of the bank holding company's consolidated net worth. This notice requirement is not applicable, however, to a bank holding company that exceeds the thresholds established for a well capitalized bank and that satisfies certain other regulatory requirements. Under Indiana law, the Holding Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Holding Company would be unable to pay its debts as they become due or the Holding Company's assets would be less than its liabilities and obligations to preferential shareholders. Restrictions on Sale of Stock by Directors and Officers All shares of the Common Stock purchased by directors and officers of Madison First or the Holding Company in the Conversion will be subject to the restriction that such shares may not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares (i) following the death of the original purchaser or (ii) by reason of an exchange of securities in connection with a merger or acquisition approved by the applicable regulatory authorities. Sales of shares of the Common Stock by the Holding Company's directors and officers will also be subject to certain insider trading and other transfer restrictions under the federal securities laws. See "Regulation -- Federal Securities Laws" and "Description of Capital Stock." Each certificate for such restricted shares will bear a legend prominently stamped on its face giving notice of the restrictions on transfer, and instructions will be issued to the Holding Company's transfer agent to the effect that any transfer within such time period of any certificate or record ownership of such shares other than as provided above is a violation of the restriction. Any shares of Common Stock issued pursuant to a stock dividend, stock split or otherwise with respect to restricted shares will be subject to the same restrictions on sale. Restrictions on Purchase of Stock by Directors and Officers Following Conversion OTS regulations provide that for a period of three years following the Conversion, without prior written approval of the OTS, neither directors nor officers of Madison First or the Holding Company nor their Associates may purchase shares of the Common Stock of the Holding Company, except from a dealer registered with the SEC. This restriction does not, however, apply to negotiated transactions involving more than one percent of the Holding Company's outstanding Common Stock, to shares purchased pursuant to stock option or other incentive stock plans approved by the Holding Company's shareholders, or to shares purchased by employee benefit plans maintained by the Holding Company which may be attributable to individual officers or directors. Restrictions on Transfer of Subscription Rights and Common Stock Prior to the completion of the Conversion, OTS regulations and the Plan of Conversion prohibit any person with subscription rights, including Eligible Account Holders, Supplemental Eligible Account Holders and Other Members of Madison First, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are guaranteed and only for his/her account. Each person exercising such subscription rights will be required to certify that he/she is purchasing shares solely for his/her own account and that he/she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase such subscription rights or shares of Common Stock prior to the completion of the Conversion. Madison First and the Holding Company will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. In addition, persons who violate the purchase limitations may be subject to sanctions and penalties imposed by the OTS. Stock Pricing The aggregate purchase price of the Holding Company Common Stock being sold in the Conversion will be based on the appraised aggregate pro forma market value of the Common Stock, as determined by an independent valuation. Keller & Company, Inc. ("Keller"), which is experienced in the valuation and appraisal of financial institutions, including savings institutions involved in the conversion process, was retained by Madison First to prepare an appraisal. Keller will receive a fee of $17,000 for its appraisal, plus expenses not to exceed $500. Keller has also prepared a business plan for Madison First for a fee of $5,000. Madison First has agreed to indemnify Keller, under certain circumstances, against liabilities and expenses (including legal fees) arising out of Keller's engagement by Madison First. Keller has prepared an appraisal of the estimated pro forma market value of the Common Stock. Keller's appraisal concluded that as of May 3, 1996, the appropriate valuation range (the "Estimated Valuation Range") for the estimated pro forma market value of the Common Stock was from a minimum of $7,650,000 to a maximum of $10,350,000, with a midpoint of $9,000,000. A copy of the appraisal is on file and available for inspection at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and the Central Regional Office of the OTS, 111 East Wacker Drive, Suite 800, Chicago, Illinois 60601. The appraisal has also been filed as an exhibit to the Holding Company's Registration Statement with the SEC, and may be reviewed at the SEC's public reference facilities. See "Additional Information." The appraisal involved a comparative evaluation of the operating and financial statistics of the Institutions with those of other financial institutions. The appraisal also took into account such other factors as the market for savings institutions generally, prevailing economic conditions, both nationally and in Indiana, which affect the operations of savings institutions, the competitive environment within which the Institutions operate, and the effect of the Institutions becoming subsidiaries of the Holding Company. No detailed individual analysis of the separate components of the Institutions' and the Holding Company's assets and liabilities was performed in connection with the evaluation. The Board of Directors reviewed with management Keller's methods and assumptions and accepted Keller's appraisal as reasonable and adequate. The Holding Company, in consultation with the Agent, has determined to offer the Common Stock in the Conversion at a price of $10.00 per share. The Holding Company's decision regarding the Purchase Price was based solely on its determination that $10.00 per share is a customary purchase price in conversion transactions. The Estimated Valuation Range may be increased or decreased to reflect market and financial conditions prior to the completion of the Conversion. Promptly after the completion of the Subscription Offering and the Direct Community Offering, if any, Keller will confirm to Madison First that, to the best of Keller's knowledge and judgment, nothing of a material nature has occurred which would cause Keller to conclude that the amount of the aggregate proceeds received from the sale of the Common Stock in the Conversion was incompatible with its estimate of the total pro forma market value of Madison First at the time of the sale. If, however, the facts do not justify such a statement, a new Estimated Valuation Range and price per share may be set. Under such circumstances, the Holding Company will be required to resolicit subscriptions. In that event, subscribers would have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest and holds on funds authorized for withdrawal from deposit accounts would be released or reduced; provided that if the pro forma market value of Madison First upon Conversion has increased to an amount which does not exceed $11,902,500 (15% above the maximum of the Estimated Valuation Range), the Holding Company and Madison First do not intend to resolicit subscriptions unless it is determined after consolation with the OTS that a resolicitation is required. Depending upon market and financial conditions, the number of shares issued may be more or less than the range in number of shares shown above. A change in the number of shares to be issued in the Conversion will not affect subscription rights, which are based on the1,035,000 shares being offered in the Subscription Offering. In the event of an increase in the maximum number of shares being offered, persons who exercise their maximum subscription rights will be notified of such increase and of their right to purchase additional shares. Conversely, in the event of a decrease in the maximum number of shares being offered, persons who exercise their maximum subscription rights will be notified of such decrease and of the concomitant reduction in the number of shares for which subscriptions may be made. In the event of a resolicitation, subscribers will be afforded the opportunity to increase, decrease or maintain their previously submitted order. The Holding Company will be required to resolicit if the price per share is changed such that the total aggregate purchase price is not within the minimum and 15% above the maximum of the Estimated Valuation Range. THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE. Number of Shares to be Issued It is anticipated that the total offering of Common Stock (the number of shares of Common Stock issued in the Conversion multiplied by the Purchase Price of $10.00 per share) will be within the current minimum and 15% above the maximum of the Estimated Valuation Range. Unless otherwise required by the OTS, no resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions so long as the change in the number of shares to be issued in the Conversion, in combination with the Purchase Price, results in an offering within the minimum and 15% above the maximum of the Estimated Valuation Range. An increase in the total number of shares of Common Stock to be issued in the Conversion would decrease both a subscriber's ownership interest and the Holding Company's pro forma net worth and net income on a per share basis while increasing (assuming no change in the per share price) pro forma net income and net worth on an aggregate basis. A decrease in the number of shares to be issued in the Conversion would increase both a subscriber's ownership interest and the Holding Company's pro forma net worth and net income on a per share basis while decreasing (assuming no change in the per share price) pro forma net income and net worth on an aggregate basis. For a presentation of the effects of such changes, see "Pro Forma Data." Interpretation and Amendment of the Plan To the extent permitted by law, all interpretations of the Plan by Madison First and the Holding Company will be final. The Plan provides that, if deemed necessary or desirable by the Boards of Directors of the Holding Company and Madison First, the Plan may be substantively amended by the Boards of Directors, as a result of comments from regulatory authorities or otherwise, with the concurrence of the OTS. Moreover, if the Plan of Conversion is so amended, subscriptions which have been received prior to such amendment will not be refunded unless otherwise required by the OTS. Conditions and Termination Completion of the Conversion requires the approval of the Plan by the affirmative vote of not less than a majority of the total number of votes of the members of Madison First eligible to be cast at the Special Meeting and the sale of all shares of the Common Stock within 24 months following approval of the Plan by the members. If these conditions are not satisfied, the Plan will be terminated and Madison First will continue its business in the mutual form of organization. The Plan may be terminated by the Boards of Directors of Madison First and the Holding Company at any time prior to the Special Meeting and, with the approval of the OTS, by such Boards of Directors at any time thereafter. Furthermore, OTS regulations and the Plan of Conversion require that the Holding Company complete the sale of Common Stock within 45 days after the close of the Subscription Offering. The OTS may grant an extension of this time period if necessary, but no assurance can be given that an extension would be granted. See "-- Offering of Holding Company Common Stock." Completion of the Conversion is also conditioned upon the Acquisition. The Conversion will not become effective until such time as all conditions precedent to the Acquisition are satisfied, including the divestiture of Madison First's Hanover, Indiana branch as required pursuant to the Holding Company's commitments to the FRB in connection with the FRB's approval of the Acquisition. See "Risk Factors -- Divestiture of Hanover Branch." If at any time it becomes clear that any condition precedent to the Acquisition will not be satisfied, the Conversion and the Plan of Conversion will terminate. See "The Acquisition." RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY General Although the Boards of Directors of Madison First and the Holding Company are not aware of any effort that might be made to obtain control of the Holding Company after the Conversion, the Boards of Directors believe that it is appropriate to include certain provisions in the Holding Company's Articles of Incorporation (the "Articles") to protect the interests of the Holding Company and its shareholders from unsolicited changes in the control of the Holding Company in circumstances under which the Board of Directors of the Holding Company concludes will not be in the best interests of Madison First, the Holding Company or the Holding Company's shareholders. Although the Holding Company's Board of Directors believes that the restrictions on acquisition described below are beneficial to shareholders, the provisions may have the effect of rendering the Holding Company less attractive to potential acquirors thereby discouraging future takeover attempts which would not be approved by the Board of Directors but which certain shareholders might deem to be in their best interest or pursuant to which shareholders might receive a substantial premium for their shares over then current market prices. These provisions will also render the removal of the incumbent Board of Directors and of management more difficult. The Board of Directors has, however, concluded that the potential benefits of these restrictive provisions outweigh the possible disadvantages. The following general discussion contains a summary of the material provisions of the Articles, the Holding Company's Code of By-Laws (the "By-Laws"), and certain other regulatory provisions, that may be deemed to have an effect of delaying, deferring or preventing a change in the control of the Holding Company. The following description of certain of these provisions is general and not necessarily complete, and with respect to provisions contained in the Articles and By-Laws, reference should be made in each case to the document in question, each of which is part of Madison First's application for approval of the Conversion or the Holding Company's Registration Statement filed with the SEC. See "Additional Information." Provisions of the Holding Company's Articles and By-Laws Directors. Certain provisions in the Articles and By-Laws will impede changes in majority control of the Board of Directors of the Holding Company. The Articles provide that the Board of Directors of the Holding Company will be divided into three classes, with directors in each class elected for three-year staggered terms. Therefore, it would take two annual elections to replace a majority of the Holding Company's Board. Moreover, the Holding Company's articles provide that directors of the Holding Company must be residents of Jefferson County, Indiana or Trimble County, Kentucky must have had a loan or deposit relationship with Madison First which they have maintained for twelve (12) months prior to their nomination to the Board, and, if nonemployee directors, must have served as a member of a civic or community organization based in Jefferson County, Indiana or Trimble County, Kentucky for at least twelve (12) months during the five years prior to their nomination to the Board. Therefore, the ability of a shareholder to attract qualified nominees to oppose persons nominated by the Board of Directors may be limited. The Articles also provide that the size of the Board of Directors shall range between five and fifteen directors, with the exact number of directors to be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors of the Holding Company. The Articles provide that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term only by a majority vote of the directors then in office. Finally, the By-Laws impose certain notice and information requirements in connection with the nomination by shareholders of candidates for election to the Board of Directors or the proposal by shareholders of business to be acted upon at an annual meeting of shareholders. The Articles provide that a director or the entire Board of Directors may be removed only for cause and only by the affirmative vote of at least 80% of the shares eligible to vote generally in the election of directors. Removal for "cause" is limited to the grounds for termination in the OTS regulation relating to employment contracts of federally-insured savings associations. Restrictions on Call of Special Meetings. The Articles provide that a special meeting of shareholders may be called only by the Chairman of the Board of the Holding Company or pursuant to a resolution adopted by a majority of the total number of directors of the Holding Company. Shareholders are not authorized to call a special meeting. No Cumulative Voting. The Articles provide that there shall be no cumulative voting rights in the election of directors. Authorization of Preferred Stock. The Articles authorize 2,000,000 shares of preferred stock, without par value. The Holding Company is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, powers, preferences and relative participating, optional and other special rights of such shares, including voting rights (if any and which could be as a separate class) and conversion rights. In the event of a proposed merger, tender offer or other attempt to gain control of the Holding Company not approved by the Board of Directors, it might be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of such a transaction. An effect of the possible issuance of preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans or understandings for the issuance of any preferred stock and does not intend to issue any preferred stock except on terms which the Board of Directors deems to be in the best interests of the Holding Company and its shareholders. Limitations on 10% Shareholders. The Articles provide that: (i) no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company (provided that such limitation shall not apply to the acquisition of equity securities by any one or more tax-qualified employee stock benefit plans maintained by the Holding Company, if the plan or plans beneficially own no more than 25% of any class of such equity security of the Holding Company); and that (ii) shares beneficially owned in violation of the stock ownership restriction described above shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to a vote of shareholders. For these purposes, a person (including management) who has obtained the right to vote shares of the Common Stock pursuant to revocable proxies shall not be deemed to be the "beneficial owner" of those shares if that person is not otherwise deemed to be a beneficial owner of those shares. Evaluation of Offers. The Articles of the Holding Company provide that the Board of Directors of the Holding Company, when determining to take or refrain from taking corporate action on any matter, including making or declining to make any recommendation to the Holding Company's shareholders, may, in connection with the exercise of its judgment in determining what is in the best interest of the Holding Company, the Institutions and the shareholders of the Holding Company, give due consideration to all relevant factors, including, without limitation, the social and economic effects of acceptance of such offer on the Holding Company's customers and the Institutions' present and future account holders, borrowers, employees and suppliers; the effect on the communities in which the Holding Company and the Institution operate or are located; and the effect on the ability of the Holding Company to fulfill the objectives of a holding company and of the Institutions or future financial institution subsidiaries to fulfill the objectives of a stock savings association under applicable statutes and regulations. The Articles of the Holding Company also authorize the Board of Directors to take certain actions to encourage a person to negotiate for a change of control of the Holding Company or to oppose such a transaction deemed undesirable by the Board of Directors including the adoption of so-called shareholder rights plans. By having these standards and provisions in the Articles of the Holding Company, the Board of Directors may be in a stronger position to oppose such a transaction if the Board concludes that the transaction would not be in the best interest of the Holding Company, even if the price offered is significantly greater than the then market price of any equity security of the Holding Company. Procedures for Certain Business Combinations. The Articles require that certain business combinations between the Holding Company (or any majority-owned subsidiary thereof) and a 10% or greater shareholder either be approved (i) by at least 80% of the total number of outstanding voting shares of the Holding Company or (ii) by a majority of certain directors unaffiliated with such 10% or greater shareholder or involve consideration per share generally equal to the higher of (A) the highest amount paid by such 10% shareholder or its affiliates in acquiring any shares of the Common Stock or (B) the "Fair Market Value" (generally, the highest closing bid paid for the Common Stock during the thirty days preceding the date of the announcement of the proposed business combination or on the date the 10% or greater shareholder became such, whichever is higher). Amendments to Articles and Bylaws. Amendments to the Articles must be approved by a majority vote of the Holding Company's Board of Directors and also by a majority of the outstanding shares of the Holding Company's voting shares; provided, however, that approval by at least 80% of the outstanding voting shares is required for certain provisions (i.e., provisions relating to number, classification, and removal of directors; amendment of the By-Laws; call of special shareholder meetings; criteria for evaluating certain offers; certain business combinations; and amendments to provisions relating to the foregoing). The provisions concerning limitations on the acquisition of shares may be amended only by an 80% vote of the Holding Company's outstanding shares unless at least two-thirds of the Holding Company's Continuing Directors (directors of the Holding Company on May 24, 1996, or directors recommended for appointment or election by a majority of such directors) approve such amendments in advance of their submission to a vote of shareholders (in which case only a majority vote of shareholders is required). The By-Laws may be amended only by a majority vote of the total number of directors of the Holding Company. Purpose and Effects of the Anti-Takeover Provisions of the Holding Company Articles and By-Laws. The Holding Company's Board of Directors believes that the provisions described above are prudent and will reduce the Holding Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by its Board of Directors. These provisions will also assist in the orderly deployment of the Conversion proceeds into productive assets during the initial period after the Conversion. The Board of Directors believes these provisions are in the best interest of the Institutions and the Holding Company and its shareholders. In the judgment of the Board of Directors, the Holding Company's Board of Directors will be in the best position to determine the true value of the Holding Company and to negotiate more effectively for what may be in the best interests of the Holding Company and its shareholders. The Board of Directors believes that these provisions will encourage potential acquirors to negotiate directly with the Board of Directors of the Holding Company and discourage hostile takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at prices reflecting the true value of the Holding Company and which is in the best interests of all shareholders. Attempts to take over financial institutions and their holding companies have recently increased. Takeover attempts that have not been negotiated with and approved by the Board of Directors present to shareholders the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by the Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time to obtain maximum value for the Holding Company and its shareholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of the Holding Company's assets. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it to undertake defensive measures at a great expense. Although a tender offer or other takeover attempt may be made at a price substantially above then current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, shareholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise which is under different management and whose objective may not be similar to that of the remaining shareholders. The concentration of control, which could result from a tender offer or other takeover attempt, could also deprive the Holding Company's remaining shareholders of the benefits of certain protective provisions of the 1934 Act, if the number of beneficial owners becomes less than the 300 required for continued registration under the 1934 Act. Despite the belief of the Holding Company's Board of Directors in the benefits to shareholders of the foregoing provisions, the provisions may also have the effect of discouraging future takeover attempts which would not be approved by the Board of Directors, but which certain shareholders might deem to be in their best interest or pursuant to which shareholders might receive a substantial premium for their shares over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so. These provisions will also render the removal of the incumbent Board of Directors and of management more difficult. The Board of Directors has, however, concluded that the potential benefits of these restrictive provisions outweigh the possible disadvantages. Other Restrictions on Acquisition of the Holding Company and the Institutions State Law. Several provisions of the Indiana Business Corporation Law, as amended (the "IBCL"), could affect the acquisition of shares of the Common Stock or otherwise affect the control of the Holding Company. Chapter 43 of the IBCL prohibits certain business combinations, including mergers, sales of assets, recapitalizations, and reverse stock splits, between corporations such as the Holding Company (assuming that it has over 100 shareholders) and an interested shareholder, defined as the beneficial owner of 10% or more of the voting power of the outstanding voting shares, for five years following the date on which the shareholder obtained 10% ownership unless the acquisition was approved in advance of that date by the board of directors. If prior approval is not obtained, several price and procedural requirements must be met before the business combination can be completed. These requirements are similar to those contained in the Holding Company Articles and described in " -- Provisions of the Holding Company's Articles and By-Laws -- Procedures for Certain Business Combinations". In general, the price requirements contained in the IBCL may be more stringent than those imposed in the Holding Company Articles. However, the procedural restraints imposed by the Holding Company Articles are somewhat broader than those imposed by the IBCL. Also, the provisions of the IBCL may change at some future date, but the relevant provisions of the Holding Company Articles may only be amended by an 80% vote of the shareholders of the Holding Company. In addition, the IBCL contains provisions designed to assure that minority shareholders have some say in their future relationship with Indiana corporations in the event that a person made a tender offer for, or otherwise acquired, shares giving that person more than 20%, 33 1/3%, and 50% of the outstanding voting securities of corporations having 100 or more shareholders (the "Control Share Acquisitions Statute"). Under the Control Share Acquisitions Statute, if an acquiror purchases those shares at a time that the corporation is subject to the Control Share Acquisitions Statute, then until each class or series of shares entitled to vote separately on the proposal, by a majority of all votes entitled to be cast by that group (excluding shares held by officers of the corporation, by employees of the corporation who are directors thereof and by the acquiror), approves in a special or annual meeting the rights of the acquiror to vote the shares which take the acquiror over each level of ownership as stated in the statute, the acquiror cannot vote these shares. An Indiana corporation otherwise subject to the Control Share Acquisitions Statute may elect not to be covered by the statute by so providing in its Articles of Incorporation or By-Laws. The Holding Company, however, will be subject to this statute following the Conversion because of its desire to discourage non-negotiated hostile takeovers by third parties. The IBCL specifically authorizes Indiana corporations to issue options, warrants or rights for the purchase of shares or other securities of the corporation or any successor in interest of the corporation. These options, warrants or rights may, but need not be, issued to shareholders on a pro rata basis. The IBCL specifically authorizes directors, in considering the best interest of a corporation, to consider the effects of any action on shareholders, employees, suppliers, and customers of the corporation, and communities in which offices or other facilities of the corporation are located, and any other factors the directors consider pertinent. As described above, the Holding Company Articles contain a provision having a similar effect. Under the IBCL, directors are not required to approve a proposed business combination or other corporate action if the directors determine in good faith that such approval is not in the best interest of the corporation. In addition, the IBCL states that directors are not required to redeem any rights under or render inapplicable a shareholder rights plan or to take or decline to take any other action solely because of the effect such action might have on a proposed change of control of the corporation or the amounts to be paid to shareholders upon such a change of control. The IBCL explicitly provides that the different or higher degree of scrutiny imposed in Delaware and certain other jurisdictions upon director actions taken in response to potential changes in control will not apply. The Delaware Supreme Court has held that defensive measures in response to a potential takeover must be "reasonable in relation to the threat posed". In taking or declining to take any action or in making any recommendation to a corporation's shareholders with respect to any matter, directors are authorized under the IBCL to consider both the short-term and long-term interests of the corporation as well as interests of other constituencies and other relevant factors. Any determination made with respect to the foregoing by a majority of the disinterested directors shall conclusively be presumed to be valid unless it can be demonstrated that such determination was not made in good faith. Because of the foregoing provisions of the IBCL, the Board will have flexibility in responding to unsolicited proposals to acquire the Holding Company, and accordingly it may be more difficult for an acquiror to gain control of the Holding Company in a transaction not approved by the Board. Federal Limitations. For three years following the Conversion, OTS regulations prohibit any person (including entities), without the prior approval of the OTS, from offering to acquire or acquiring more than 10% of any class of equity security, directly or indirectly, of a converted savings association or its holding company. This restriction does not apply to the acquisition by any one or more tax-qualified employee stock benefit plans maintained by Madison First or the Holding Company, provided that the plan or plans do not have beneficial ownership in the aggregate of more than 25% of any class of equity security of the Holding Company. For these purposes, a person (including management) who has obtained the right to vote shares of the Common Stock pursuant to revocable proxies shall not be deemed to be the "beneficial owner" of those shares if that person is not otherwise deemed to be a beneficial owner of those shares. The Change in Bank Control Act provides that no "person," acting directly or indirectly, or through or in concert with one or more persons, other than a company, may acquire control of a savings association, a savings and loan holding company or a bank holding company unless at least 60 days prior written notice is given to the OTS or FRB (as appropriate) and the OTS or FRB (as appropriate) has not objected to the proposed acquisition. The Savings and Loan Holding Company Act also prohibits any "company," directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries or transactions, from acquiring control of an insured savings institution without the prior approval of, the OTS. In addition, any company that acquires such control becomes a "savings and loan holding company" subject to registration, examination and regulation as a savings and loan holding company by the OTS. The Bank Holding Company Act also prohibits any "company," directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries or transactions, from acquiring control of an insured bank without the prior approval of the FRB. In addition, any company that acquires such control becomes a "bank holding company" subject to registration, examination and regulation as a bank holding company by the FRB. The term "control" for purposes of the Change in Bank Control Act, Bank Holding Company Act and the Savings and Loan Holding Company Act includes the power, directly or indirectly, to vote more than 25% of any class of voting stock of the savings association or to control, in any manner, the election of a majority of the directors of the savings association. It also includes a determination by the FRB or the OTS, as appropriate, that such company or person has the power, directly or indirectly, to exercise a controlling influence over or to direct the management or policies of the savings association. OTS regulations also set forth certain "rebuttable control determinations" which arise (i) upon an acquisition of more than 10% of any class of voting stock of a savings association; or (ii) upon an acquisition of more than 25% of any class of voting or nonvoting stock of a savings association; provided that, in either case, the acquiror is subject to any of eight enumerated "control factors," which are: (1) the acquiror would be one of the two largest holders of any class of voting stock of the association; (2) the acquiror would hold more than 25% of the association's total stockholders' equity of the association; (3) the acquiror would hold more than 35% of the combined debt securities and stockholders' equity of the savings association; (4) the acquiror is a party to any agreement pursuant to which the acquiror possesses a material economic stake in the savings association or which enables the acquiror to influence a material aspect of the management or policies of the association; or (5) the acquiror would have the ability, other than through the holding of revocable proxies, to direct the votes of more than 25% of a class of the voting stock or to vote in the future more than 25% of such voting stock upon the occurrence of a future event; (6) the acquiror would have the power to direct the disposition of more than 25% of the association's voting stock in a manner other than a widely dispersed or public offering; (7) the acquiror and/or his representative would constitute more than one member of the association's board of directors; or (8) the acquiror would serve as an executive officer or in a similar policy-making position with the association. For purposes of determining percentage share ownership, a person is presumed to be acting in concert with certain specified persons and entities, including members of the person's immediate family, whether or not those family members share the same household with the person. The regulations also specify the criteria which the OTS uses to evaluate control applications. The OTS is empowered to disapprove an acquisition of control if it finds, among other things, that (i) the acquisition would substantially lessen competition, (ii) the financial condition of the acquiring person might jeopardize the institution or its depositors, or (iii) the competency, experience, or integrity of the acquiring person indicates that it would not be in the interest of the depositors, the institution, or the public to permit the acquisition of control by such person. FRB regulations also set forth certain "rebuttable control determinations" which arise upon (a) the acquisition of any voting securities of a state member bank or bank holding company if, after the transaction, the acquiring person (or persons acting in concert) owns, controls, or holds with power to vote 25 percent or more of any class of voting securities of the institution; or (b) the acquisition of any voting securities of a state member bank or bank holding company if, after the transaction, the acquiring person (or persons acting in concert) owns, controls, or holds with power to vote 10 percent or more (but less than 25 percent) of any class of voting securities of the institution, and if (i) the institution has registered securities under Section 12 of the 1934 Act or (ii) no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations also specify the criteria which the FRB uses to evaluate control applications. The FRB is empowered to disapprove an acquisition of control if it finds, among other things, that (i) the acquisition would substantially lessen competition, (ii) the financial condition of the acquiring person might jeopardize the institution or its depositors, or (iii) the competency, experience, or integrity of the acquiring person indicates that it would not be in the interest of the depositors, the institution, or the public to permit the acquisition of control by such person. DESCRIPTION OF CAPITAL STOCK The Holding Company is authorized to issue 5,000,000 shares of Holding Company Common Stock, without par value, all of which have identical rights and preferences, and 2,000,000 shares of preferred stock, without par value. The Holding Company expects to issue up to 1,190,250 shares of Common Stock and no shares of preferred stock in the Conversion. The Holding Company has received an opinion of its counsel that the shares of Common Stock issued in the Conversion will be validly issued, fully paid, and not liable for further call or assessment. This opinion was filed with the SEC as an exhibit to the Holding Company's Registration Statement under the 1933 Act. Shareholders of the Holding Company will have no preemptive rights to acquire additional shares of Holding Company Common Stock which may be subsequently issued. The Common Stock will represent nonwithdrawable capital, will not be of an insurable type and will not be federally insured by the FDIC or any government entity. Under Indiana law, the holders of the Common Stock will possess exclusive voting power in the Holding Company, unless preferred stock is issued and voting rights are granted to the holders thereof. Each shareholder will be entitled to one vote for each share held on all matters voted upon by shareholders, subject to the limitations discussed under the caption "Restrictions on Acquisition of the Holding Company." In the unlikely event of the liquidation or dissolution of the Holding Company, the holders of the Common Stock will be entitled to receive after payment or provision for payment of all debts and liabilities of the Holding Company, all assets of the Holding Company available for distribution, in cash or in kind. See "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." If preferred stock is issued subsequent to the Conversion, the holders thereof may have a priority over the holders of Common Stock in the event of liquidation or dissolution. The Board of Directors of the Holding Company will be authorized to issue preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to the Common Stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. The holders of preferred stock will be entitled to vote as a separate class or series under certain circumstances, regardless of any other voting rights which such holders may have. Except as discussed elsewhere herein, the Holding Company has no specific plans for the issuance of the additional authorized shares of Common Stock or for the issuance of any shares of preferred stock. In the future, the authorized but unissued and unreserved shares of Common Stock will be available for general corporate purposes including, but not limited to, possible issuance as stock dividends or stock splits, in future mergers or acquisitions, under a cash dividend reinvestment and stock purchase plan, or in future underwritten or other public or private offerings. The authorized but unissued shares of preferred stock will similarly be available for issuance in future mergers or acquisitions, in future underwritten public offerings or private placements or for other general corporate purposes. Except as described above or as otherwise required to approve the transaction in which the additional authorized shares of Common Stock or authorized shares of preferred stock would be issued, no shareholder approval will be required for the issuance of these shares. Accordingly, the Holding Company's Board of Directors without shareholder approval can issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The offering and sale of Common Stock in the Conversion will be registered under the 1933 Act. The subsequent sale or transfer of Common Stock is governed by the 1933 Act, which requires that sales or exchanges of subject securities be made pursuant to an effective registration statement or qualified for an exemption from registration requirements of the 1933 Act. Similarly, the securities laws of the various states also require generally the registration of shares offered for sale unless there is an applicable exemption from registration. The Holding Company, as a newly organized corporation, has never issued capital stock, and, accordingly, there is no market for the Common Stock. See "Market for the Common Stock." See "Restrictions on Acquisition of the Holding Company -- Provisions of the Holding Company's Articles and By-Laws" for a description of certain provisions of the Holding Company's Articles and By-Laws which may affect the ability of the Holding Company's shareholders to participate in certain transactions relating to acquisitions of control of the Holding Company. Also, see "Dividend Policy" for a description of certain matters relating to the possible future payment of dividends on the Common Stock. TRANSFER AGENT Firth Third Bank will act as transfer agent and registrar for the Common Stock. Fifth Third Bank's phone number is (513) 579-5320 or (800) 837-2755. REGISTRATION REQUIREMENTS Upon the Conversion, the Holding Company's Common Stock will be registered pursuant to Section 12(g) of the 1934 Act and will not be deregistered for a period of at least three years following the Conversion. As a result of the registration under the 1934 Act, certain holders of Common Stock will be subject to certain reporting and other requirements imposed by the 1934 Act. For example, beneficial owners of more than 5% of the outstanding Common Stock will be required to file reports pursuant to Section 13(d) or Section 13(g) of the 1934 Act, and officers, directors and 10% shareholders of the Holding Company will generally be subject to reporting requirements of Section 16(a) and to the liability provisions for profits derived from purchases and sales of Holding Company Common Stock occurring within a six-month period pursuant to Section 16(b) of the 1934 Act. In addition, certain transactions in Common Stock, such as proxy solicitations and tender offers, will be subject to the disclosure and filing requirements imposed by Section 14 of the 1934 Act and the regulations promulgated thereunder. LEGAL AND TAX MATTERS Barnes & Thornburg, 1313 Merchants Bank Building, 11 South Meridian Street, Indianapolis, Indiana 46204, special counsel to Madison First, will pass upon the legality and validity of the shares of Common Stock being issued in the Conversion. Barnes & Thornburg has issued an opinion concerning certain federal and state income tax aspects of the Conversion and that the Conversion, as proposed, constitutes a tax-free reorganization under federal and Indiana law. Barnes & Thornburg have consented to the references herein to their opinions. Certain legal matters related to this offering will be passed upon for the Agent by Thacher Proffitt & Wood, 1500 K Street, N.W., Washington, D.C. 20005. EXPERTS The consolidated financial statements of Madison First as of and for the years ended December 31, 1995, 1994, and 1993, included herein and elsewhere in the registration statement, have been audited by Grant Thornton LLP, independent certified public accountants, and included herein and in the registration statement in reliance upon the report of Grant Thornton LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. The financial statements of Citizens as of and for the years ended December 31, 1995 and 1994, included herein and elsewhere in the registration statement, have been audited by Sherman, Barber & Mullikin, independent certified public accountants, and included herein and in the registration statement in reliance upon the report of Sherman, Barber & Mullikin, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. The financial statements of Citizens as of and for the year ended December 31, 1993, included herein and elsewhere in the registration statement, have been audited by Alexander H. Kuhn & Co., independent certified public accountants, and included herein and in the registration statement in reliance upon the report of Alexander H. Kuhn & Co., independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. Keller has consented to the publication of the summary herein of its appraisal report as to the estimated pro forma market value of the Common Stock of the Holding Company to be issued in the Conversion, to the reference to its opinion relating to the value of the subscription rights, and to the filing of the appraisal report as an exhibit to the registration statement filed by the Holding Company under the 1933 Act. ADDITIONAL INFORMATION The Holding Company has filed with the SEC a registration statement under the 1933 Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information set forth in the registration statement. Such information can be inspected and copied at the Commission's public reference facilities located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices in New York (Seven World Trade Center, 13th Floor, New York, New York 00048) and Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511) and copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Madison First has filed with the OTS an Application for Conversion from a federal mutual savings and loan association to a federal stock savings and loan association, and the Holding Company has filed with the OTS an Application to become a savings and loan holding company. This Prospectus omits certain information contained in such Applications. The Applications may be inspected at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Central Regional Office of the OTS, 111 East Wacker Drive, Suite 800, Chicago, Illinois 60601. The Holding Company has also filed with the FRB of Chicago an Application to Form a Holding Company on Form FR Y-3 in connection with its aquisition of the Citizens Shares in the Acquisition. This Prospectus omits certain information contained in such Application. The Application may be inspected at the offices at the FRB of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413. CONTENTS
MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (As of June 30, 1996 (unaudited) and December 31, 1995 and 1994) F-3 CONSOLIDATED STATEMENTS OF INCOME (For the six months ended June 30, 1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993) F-4 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (For the six months ended June 30, 1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993) F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS (For the six months ended June 30, 1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993) F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the six months ended June 30, 1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993) F-8 Financial statements of River Valley Bancorp are not presented as the Corporation was inactive during all of the periods presented. SCHEDULES: All schedules are omitted as the required information is either inapplicable or is included in the consolidated financial statements. CITIZENS NATIONAL BANK OF MADISON REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-32 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-33 FINANCIAL STATEMENTS STATEMENTS OF FINANCIAL CONDITION (As of December 31, 1995 and 1994)F-34 STATEMENTS OF INCOME (For the years ended December 31, 1995, 1994 and 1993) F-36 STATEMENTS OF RETAINED EARNINGS (For the years ended December 31, 1995, 1994 and 1993) F-38 STATEMENTS OF CASH FLOWS (For the years ended December 31, 1995, 1994 and 1993) F-39 NOTES TO FINANCIAL STATEMENTS (For the years ended December 31, 1995, 1994 and 1993) F-41 STATEMENT OF FINANCIAL CONDITION (As of June 30, 1996 (unaudited)) F-56 STATEMENTS OF INCOME (For the six months ended June 30, 1996 and 1995 (unaudited)) F-58 STATEMENTS OF CASH FLOWS (For the six months ended June 30, 1996 and 1995 (unaudited)) F-59 NOTES TO FINANCIAL STATEMENTS (For the six months ended June 30, 1996 and 1995 (unaudited)) F-60
SCHEDULES: All schedules are omitted as the required information is not applicable or is included in the financial statements. Report of Independent Certified Public Accountants Board of Directors Madison First Federal Savings and Loan Association We have audited the accompanying consolidated statements of financial condition of Madison First Federal Savings and Loan Association and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Madison First Federal Savings and Loan Association and Subsidiary as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes A-2 and B to the consolidated financial statements, the Association changed its method of accounting for investments in certain debt and equity securities in 1994. Additionally, as more fully explained in Notes A-9 and H to the consolidated financial statements, the Association changed its method of accounting for Federal income taxes in 1993. Cincinnati, Ohio January 19, 1996 (except for Note K as to which the date is September 30, 1996) Madison First Federal Savings and Loan Association and Subsidiary CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands)
June 30, December 31, ------------------ ASSETS 1996 1995 1994 ---- ---- ---- (Unaudited) Cash and due from banks $ 2,242 $ 2,389 $ 2,066 Certificates of deposit in other financial institutions 200 300 350 Investment securities designated as available for sale - at market value 3,940 5,018 101 Investment securities - at amortized cost, approximate market value of $5,886, $7,930 and $13,120 as of June 30, 1996, and December 31, 1995 and 1994 6,000 8,000 13,996 Mortgage-backed and related securities - at cost, approximate market value of $8,607, $9,941 and $10,715 as of June 30, 1996, and December 31, 1995 and 1994 8,690 9,917 11,328 Loans receivable - net 57,449 57,945 56,287 Office premises and equipment - at depreciated cost 939 966 988 Federal Home Loan Bank stock - at cost 610 610 610 Accrued interest receivable on loans 306 313 246 Accrued interest receivable on mortgage-backed and related securities 46 51 58 Accrued interest receivable on investments and interest-bearing deposits 173 241 237 Goodwill, net of accumulated amortization of $143, $139 and $132 as of June 30, 1996, and December 31, 1995 and 1994 144 148 156 Cash surrender value of life insurance 735 535 510 Prepaid expenses and other assets 343 124 118 Prepaid income taxes --- 26 21 Deferred tax asset 87 21 --- ------- ------- ------- TOTAL ASSETS $81,904 $86,604 $87,072 ======= ======= ======= LIABILITIES AND RETAINED EARNINGS Deposits $74,727 $75,233 $75,458 Advances from the Federal Home Loan Bank - 4,471 4,986 Advances by borrowers for taxes and insurance 72 63 63 Accrued interest payable 69 68 62 Other liabilities 270 195 169 Accrued income taxes 63 - - Deferred income taxes - - 30 ------- ------- ------- TOTAL LIABILITIES 75,201 80,030 80,768 COMMITMENTS - - - Retained earnings - substantially restricted 6,743 6,562 6,304 Unrealized gain (loss) on securities designated as available for sale, net of related tax effects (40) 12 - ------- ------- ------- Total retained earnings 6,703 6,574 6,304 ------- ------- ------- TOTAL LIABILITIES AND RETAINED EARNINGS $81,904 $86,604 $87,072 ======= ======= ======= The accompanying notes are an integral part of these statements.
Madison First Federal Savings and Loan Association and Subsidiary CONSOLIDATED STATEMENTS OF INCOME (In thousands)
Six months ended June 30, Year ended December 31, ----------------- -------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) Interest income Loans $2,251 $2,100 $4,240 $3,851 $4,149 Mortgage-backed and related securities 291 342 670 743 866 Investment securities 291 403 777 713 494 Interest-bearing deposits and other 109 24 107 112 175 ------ ------ ------ ------ ------ Total interest income 2,942 2,869 5,794 5,419 5,684 Interest expense Deposits 1,691 1,595 3,419 2,842 3,041 Borrowings 44 96 175 12 1 ------ ------ ------ ------ ------ Total interest expense 1,735 1,691 3,594 2,854 3,042 ------ ------ ------ ------ ------ Net interest income 1,207 1,178 2,200 2,565 2,642 Provision for loan losses 12 3 150 29 55 ------ ------ ------ ------ ------ Net interest income after provision for loan losses 1,195 1,175 2,050 2,536 2,587 Other income Insurance commissions 104 92 175 181 182 Service fees, charges and other operating 97 94 187 189 182 ------ ------ ------ ------ ------ Total other income 201 186 362 370 364 Other expenses Employee compensation and benefits 592 484 998 888 869 Occupancy and equipment 98 100 212 193 212 Federal deposit insurance premiums 88 88 177 178 117 Data processing 141 118 237 243 234 Other operating 188 184 342 336 340 Provision for valuation decline on mortgage-related securities - - - 20 30 ------ ------ ------ ------ ------ Total other expenses 1,107 974 1,966 1,858 1,802 ------ ------ ------ ------ ------ Income before income taxes and cumulative effect of change in accounting method 289 387 446 1,048 1,149 Income taxes Current 148 154 245 411 468 Deferred (40) (3) (57) 1 (12) ------ ------ ------ ------ ------ 108 151 188 412 456 ------ ------ ------ ------ ------ Income before cumulative effect of change in accounting method 181 236 258 636 693 Cumulative effect of change in method of accounting for income taxes - - - - 25 ------ ------ ------ ------ ------ NET INCOME $ 181 $ 236 $ 258 $ 636 $ 718 ====== ====== ====== ====== ======
The accompanying notes are an integral part of these statements. Madison First Federal Savings and Loan Association and Subsidiary CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (In thousands)
Six months ended June 30, Year ended December 31, --------------------------------- 1996 1995 1994 1993 ---- ---- ---- ---- (Unaudited) Balance at beginning of period $6,574 $6,304 $5,668 $4,950 Net earnings for the period 181 258 636 718 Unrealized gain (loss) on securities designated as available for sale - net of related tax effects (52) 12 --- --- ------- ------ ------ ------ Balance at end of period $6,703 $6,574 $6,304 $5,668 ======= ====== ====== ======
The accompanying notes are an integral part of these statements. Madison First Federal Savings and Loan Association and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six months ended June 30, Year ended December 31, ---------------- ------------------------------ 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) Cash flows from operating activities: Net income $ 181 $ 236 $ 258 $ 636 $ 718 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization (accretion) of premiums and discounts on investments and mortgage-backed securities - net (1) (6) (9) (14) 28 Provision for valuation decline on mortgage-related securities - - - 20 30 Amortization of deferred loan origination costs 9 1 85 86 150 Provision for losses on loans 12 3 150 29 55 Depreciation and amortization 27 8 68 67 79 Amortization of goodwill 4 4 7 7 7 Increase (decrease) in cash due to changes in: Accrued interest receivable on loans 7 (43) (67) (4) 45 Accrued interest receivable on mortgage-backed securities 5 3 7 14 8 Accrued interest receivable on investments and interest- bearing deposits 68 (14) (4) (54) (70) Prepaid expenses and other assets (219) (77) (6) 19 (6) Accrued interest payable 1 (3) 6 1 (2) Other liabilities 75 41 26 17 (44) Income taxes Current 89 12 (5) (51) (99) Deferred (40) (3) (57) 1 (37) ------- ------- ------- ------- ------- Net cash provided by operating activities 218 162 459 774 862 Cash flows provided by (used in) investing activities: Proceeds from maturity of investment securities 3,000 - 1,000 - 4,500 Purchase of investment securities - - - (4,592) (8,499) Sale of investment securities designated as available for sale - 101 101 - - Purchase of mortgage-backed and related securities - - - - (3,918) Principal repayments on mortgage-backed and related securities 1,228 533 1,417 2,576 3,399 Loan principal repayments 7,729 7,069 13,708 14,973 25,670 Loan disbursements (7,254) (7,814) (15,600) (19,419) (24,108) Proceeds from sale of real estate acquired through foreclosure - - - 17 48 Capital expenditures on real estate acquired through foreclosure - - - - (9) Purchase of real estate held for investment - - - (10) (4) Purchase of office equipment - - (46) (40) (74) Purchase of Federal Home Loan Bank stock - - - - (44) (Increase) decrease in certificates of deposit in other financial institutions - net 100 50 50 (50) 168 Purchase of single premium life insurance policies (188) - - - (480) Increase in cash surrender value of life insurance policies (12) (14) (26) (25) (5) ------- ------- ------- ------- ------- Net cash provided by (used in) investing activities 4,609 (75) 604 (6,570) (3,356) ------- ------- ------- ------- ------- Net cash provided by (used in) operating and investing activities (subtotal carried forward) 4,821 87 1,063 (5,796) (2,494) ------- ------- ------- ------- -------
Madison First Federal Savings and Loan Association and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands)
Six months ended June 30, Year ended December 31, ---------------- ----------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) Net cash provided by (used in) operating and investing activities (subtotal brought forward) $ 4,821 $ 87 $ 1,063 $(5,796) $(2,494) Cash flows provided by (used in) financing activities: Increase (decrease) in deposit accounts (506) 4,053 (224) (2,624) 1,393 Proceeds from Federal Home Loan Bank advances - 2,000 2,000 4,986 - Repayment of Federal Home Loan Bank advances (4,471) (4,986) (2,515) - - Advances by borrowers for taxes and insurance 9 3 (1) (3) 2 ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities (4,968) 1,070 (740) 2,359 1,395 ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents (147) 1,157 323 (3,437) (1,099) Cash and cash equivalents at beginning of period 2,389 2,066 2,066 5,503 6,602 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period $ 2,242 $ 3,223 $ 2,389 $ 2,066 $ 5,503 ======= ======= ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Federal income taxes $ 84 $ 149 $ 191 $ 377 $ 468 ======= ======= ======= ======= ======= Interest on deposits and borrowings $ 1,734 $ 1,694 $ 3,588 $ 2,853 $ 3,045 ======= ======= ======= ======= ======= Supplemental disclosure of noncash investing activities: Transfers from loans to real estate acquired through foreclosure $ - $ - $ - $ 15 $ 35 ======= ======= ======= ======= ======= Transfer of investment securities to an available for sale classification in accordance with SFAS No. 115 $ - $ - $ 5,000 $ - $ - ======= ======= ======= ======= ======= Unrealized gain (loss) on securities designated as available for sale, net of related tax effects $ (52) $ - $ 12 $ - $ - ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Madison First Federal Savings and Loan Association (the Association) is a federally-chartered mutual financial institution with four offices located in Jefferson County, Indiana. The Association owns 100% of the outstanding capital stock of Madison First Service Corporation which owns 100% of the outstanding capital stock of McCauley Insurance Agency, Inc. (McCauley), which operates a consumer insurance agency. Condensed consolidated financial statements of Madison First Service Corporation (First Service) as of and for the periods ended December 31, 1995 and 1994 are presented in Note J. Future references are made to either the Association, First Service or McCauley, as applicable. The Association conducts a general banking business in southeastern Indiana which consists of attracting deposits from the general public and applying those funds to the origination of loans for consumer and residential purposes. The Association's profitability is significantly dependent on net interest income which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Association can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles (GAAP) and general accounting practices within the financial services industry. In preparing financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The accompanying unaudited consolidated financial statements as of June 30, 1996, and for the six months ended June 30, 1996 and 1995, were prepared in accordance with instructions for Form 10Q-SB and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. However, all adjustments (consisting of only normal recurring accruals) which in the opinion of management are necessary for a fair presentation of the consolidated financial statements have been included. The following is a summary of significant accounting policies which, with the exception of the policy described in Note A-2 and A-9, have been consistently applied in the preparation of the accompanying consolidated financial statements. 1. Principles of Consolidation The statements include the accounts of Madison First Federal Savings and Loan Association and its subsidiary, Madison First Service Corporation and its wholly-owned subsidiary, McCauley Insurance Agency, Inc. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2. Investments and Mortgage-Backed and Related Securities Prior to January 1, 1994, investments and mortgage-backed and related securities were stated at the unpaid principal balance (cost), adjusted for unamortized premiums and discounts. Premiums and discounts on investments and mortgage-backed and related securities are amortized and accreted to operations using the interest method over the estimated life of the investment security or of the underlying loans collateralizing the securities, respectively. Investments and mortgage-backed and related securities held for portfolio investments were carried at cost, rather than the lower of cost or market, as it was management's intent, and the Association had the ability to hold the securities until maturity. Investments and mortgage-backed and related securities which would be held for indefinite periods of time, or used as part of the Association's asset/liability management strategy, or that may be sold in response to changes in interest rates, prepayment risk or the perceived need to increase regulatory capital were classified as held for sale and were carried at the lower of aggregate cost or market. In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (the Statement). SFAS No. 115 requires that investments be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Association has the positive intent and ability to hold these securities to maturity. Trading securities and securities designated as available for sale are carried at market value with resulting unrealized gains or losses recorded to operations or retained earnings, respectively. The Association adopted the Statement as of January 1, 1994, without material effect on consolidated financial condition or results of operations. In November 1995, the FASB issued a "Special Report on the Implementation of SFAS No. 115", which permitted the reclassification of securities between held-to-maturity and available-for-sale without calling into question management's prior intent with respect to such securities. The Association transferred approximately $5.0 million of investment securities previously identified as held-to-maturity to an available for sale classification. At June 30, 1996, retained earnings included $40,000 of unrealized losses on securities designated as available for sale, net of related tax effects. Realized gains and losses on the sale of investment and mortgage-backed securities are recognized using the specific identification method. 3. Loans Receivable Loans held in portfolio are stated at the principal amount outstanding, adjusted for deferred loan origination costs and the allowance for loan losses. Interest is accrued as earned unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. If the ultimate collectibility of the loan is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. Loan Origination Fees and Costs The Association accounts for loan origination fees and costs in accordance with the provisions of Statement of Financial Accounting Standards No. 91 (SFAS No. 91) "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of direct origination costs, are deferred and amortized to interest income using the level-yield method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Association's experience with similar commitments, are deferred and amortized over the life of the related loan using the interest method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. 5. Allowance for Losses on Loans It is the Association's policy to provide valuation allowances for estimated losses on loans based on past loss experience, current trends in the level of delinquent and specific problem loans, loan concentrations to single borrowers, changes in the composition of the loan portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in its primary lending areas. When the collection of a loan becomes doubtful, or otherwise troubled, the Association records a loan loss provision equal to the difference between the fair value of the property securing the loan and the loan's carrying value. Major loans and major lending areas are reviewed periodically to determine potential problems at an early date. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". This Statement, which was amended by SFAS No. 118 as to certain income recognition and financial statement disclosure provisions, requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loans observable market price or fair value of the collateral if the loan is collateral dependent. The Association adopted the Statement effective January 1, 1995, without material effect on consolidated financial condition or results of operations. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Allowance for Losses on Loans (continued) A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Association considers its investment in one-to-four family residential loans and consumer installment loans to be homogeneous and, therefore, excluded from separate identification for evaluation of impairment. With respect to the Association's investment in impaired nonresidential and multifamily residential real estate loans, such loans are generally collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. It is the Association's policy to charge off unsecured credits that are more than ninety days delinquent. Additionally, collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time. At June 30, 1996 and December 31, 1995, the Association had no loans that would be defined as impaired under SFAS No. 114. 6. Office Premises and Equipment Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided primarily using the straight-line method over the useful lives of the assets, estimated to be thirty to forty-five years for buildings, three to ten years for furniture and equipment, and three years for automobiles. An accelerated depreciation method is used for tax reporting purposes. 7. Real Estate Acquired through Foreclosure Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. The loan loss allowance is charged for any writedown in the loan's carrying value to fair value at the date of acquisition. Loss provisions are recorded if the property's fair value subsequently declines below the value determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are considered. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 8. Intangible Assets The FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in March 1995. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Association is required to estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. This Statement is effective for financial statements for fiscal years beginning after December 31, 1995. Earlier application is encouraged. The Association adopted SFAS No. 121 effective January 1, 1996, without material effect on consolidated financial condition or results of operations. Amortization of goodwill arising from First Service's acquisition of McCauley is provided using the straight-line method over an estimated life of forty years. 9. Income Taxes Effective January 1, 1993, the Association changed its method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The cumulative effect of prior years of adopting SFAS No. 109, totaling $25,000, was reflected in the Association's 1993 consolidated statement of income. There was no material effect associated with adopting SFAS No. 109 in the 1993 consolidated statement of income. SFAS No. 109 established financial accounting and reporting standards for the effects of income taxes that result from the Association's activities within the current and previous years. Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the expected statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 9. Income Taxes (continued) Deferral of income taxes results primarily from different methods of accounting for deferred loan origination costs, the allowance for valuation decline on mortgage-related securities, the general loan loss allowance, the percentage of earnings bad debt deduction and certain components of retirement expense. Additionally, a temporary difference is recognized for depreciation utilizing accelerated methods for income tax purposes. 10. Retirement and Incentive Plans Qualified employees of the Association and McCauley are covered by noncontributory retirement plans. There were no unfunded past service liabilities at June 30, 1996 and December 31, 1995 and 1994. First Service has no qualified employees. Employees of the Association are covered by the Pentgra Group, previously the Financial Institutions Retirement Fund (the Fund), which is a defined benefit pension plan to which contributions are made for the benefit of the employees. Contributions are determined to cover the normal cost of pension benefits, the one-year cost of the pre-retirement death and disability benefits and the amortization of any unfunded accrued liabilities. The Fund had previously advised the Association that the pension plan meets the criteria of a multi-employer pension plan as defined in Financial Accounting Standards Board Statement No. 87, "Employers' Accounting for Pensions". In accordance with the Statement, net pension cost is recognized for any required contribution for the period. A liability is recognized for any contributions due and unpaid. During 1993, the Association acquired additional benefits for all qualified employees under the plan which were paid for by reducing the overfunded amount. Because of the overfunded status, no contributions were made to the pension plan during the six months ended June 30, 1996, or the years ended December 31, 1995, 1994 and 1993. The provision for pension expense was computed by the Fund's actuaries utilizing the projected unit credit cost method and assuming a 7.5% return on Fund assets. McCauley Insurance Agency, Inc. contributes to IRA accounts for its full-time employees on an annual basis. These employer contributions are discretionary and totaled approximately $3,000 for each of the years ended December 31, 1995, 1994 and 1993. No contributions have been made for the six month periods ending June 30, 1996 and 1995. In addition to providing employees with noncontributory retirement plans, the Association undertook a supplemental retirement plan in 1993, which provides retirement benefits to all directors. The Association's obligations under the plan have been funded via the purchase of $1.1 million face value key man life insurance policies, of which the Association is the beneficiary. Costs of the purchase of the single premium life insurance policies amounted to $676,000. Expense under the supplemental retirement plan totaled approximately $12,000, $20,000, $41,000, $42,000 and $6,000 for the six months ended June 30, 1996 and 1995, and the years ended December 31, 1995, 1994 and 1993, respectively. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 11. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks. 12. Reclassifications Certain prior year amounts have been reclassified to conform to the 1995 consolidated financial statement presentation. 13. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", (SFAS No. 107), requires disclosure of the fair value of financial instruments, both assets and liabilities whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods. The present value methods utilized are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. The following methods and assumptions were used by the Association in estimating its fair value disclosures for financial instruments at December 31, 1995: Cash and due from banks and certificates of deposit in other financial institutions: The carrying amounts presented in the consolidated statement of financial condition for cash and due from banks and certificates of deposit in other financial institutions are deemed to approximate fair value. Investments and mortgage-backed and related securities: For investments and mortgage-backed and related securities, fair value is deemed to equal the quoted market price. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics for underlying collateral, such as one-to-four family residential, multi-family residential and nonresidential real estate. These categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts, and consumer and other loans, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 14. Fair Value of Financial Instruments (continued) Federal Home Loan Bank stock: The carrying amount presented in the consolidated statement of financial condition is deemed to approximate fair value. Deposits: The fair value of NOW and super NOW accounts, passbook accounts, money market demand accounts and advances by borrowers for taxes and insurance are deemed to approximate the amount payable on demand at December 31, 1995. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities. Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank advances have been estimated using discounted cash flow analysis, based on the interest rates currently offered for advances of similar remaining maturities. Based on the foregoing methods and assumptions, the carrying value and fair value of the Association's financial instruments are as follows at December 31, 1995:
Carrying Fair value value -------- ----- (In thousands) Financial assets Cash and due from banks $ 2,389 $ 2,389 Certificates of deposit in other financial institutions 300 300 Investment securities designated as available for sale 5,018 5,018 Investment securities held to maturity 8,000 7,930 Mortgage-backed securities 9,917 9,941 Loans receivable 58,398 58,756 Federal Home Loan Bank stock 610 610 ------- ------- $84,632 $84,944 ======= ======= Financial liabilities Deposits $75,233 $72,375 Advances from Federal Home Loan Bank 4,471 4,483 Advances by borrowers for taxes and insurance 63 63 ------- ------- $79,767 $76,921 ======= =======
Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE B - INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES Amortized cost and approximate market values of investment securities are summarized as follows:
June 30, December 31, -------------------------------------------------- 1996 1995 1994 ------------------- ------------------ --------------------- Amortized Market Amortized Market Amortized Market cost value cost value cost value ---- ----- ---- ----- ---- ----- (Unaudited) (In thousands) Held to maturity: U.S. Government agency obligations $ 6,000 $5,886 $ 8,000 $ 7,930 $13,996 $13,120 Available for sale: U.S. Government agency obligations 4,000 3,940 5,000 5,018 - - Asset management funds - - - - 101 101 ------- ------ ------- ------- ------- ------- Total investments $10,000 $9,826 $13,000 $12,948 $14,097 $13,221 ======= ====== ======= ======= ======= =======
At June 30, 1996, the cost carrying value of the Association's investment securities held to maturity exceeded fair value (market value) by $114,000, consisting solely of gross unrealized losses. At December 31, 1995 and 1994, the cost carrying value of the Association's investment securities held to maturity exceeded fair value by $70,000 and $876,000, respectively, comprised solely of gross unrealized losses. The amortized cost and market value of U. S. Government and agency obligations designated as held-to-maturity by term to maturity are shown below. Maturity dates do not reflect the potential effects of call provisions in the bonds' contractual terms.
June 30, December 31, -------------------------------------------------- 1996 1995 1994 ------------------- ------------------ --------------------- Amortized Market Amortized Market Amortized Market cost value cost value cost value ---- ----- ---- ----- ---- ----- (Unaudited) (In thousands) Due in less than one year $ 2,500 $2,486 $ 500 $ 497 $ 2,999 $ 2,829 Due in one to three years 2,500 2,454 4,500 4,468 7,997 7,530 Due in three to five years 1,000 946 3,000 2,965 3,000 2,761 ------- ------ ------- ------- ------- ------- $ 6,000 $5,886 $ 8,000 $ 7,930 $13,996 $13,120 ======= ====== ======= ======= ======= =======
The amortized cost and market value of U.S. Government and agency obligations designated as available for sale at June 30, 1996, by term to maturity are shown below.
June 30, 1996 December 31, 1995 --------------------- --------------------- Amortized Market Amortized Market cost value cost value ---- ----- ---- ----- (Unaudited) (In thousands) Due in one to three years $1,500 $1,495 $2,500 $2,517 Due in three to five years 2,500 2,445 2,500 2,501 ------ ------ ------ ------ $4,000 $3,940 $5,000 $5,018 ====== ====== ====== ======
Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE B - INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES (continued) The amortized cost, gross unrealized gains, gross unrealized losses and market values of mortgage-backed and related securities designated as held to maturity at June 30, 1996, and December 31, 1995 and 1994 are shown below.
June 30, 1996 ----------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ---- ----- ------ ----- (Unaudited) (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 5,483 $ --- $ (91) $ 5,392 Government National Mortgage Association participation certificates 1,940 14 (1) 1,953 Federal National Mortgage Association participation certificates 1,203 3 (4) 1,202 Interest-only certificates 64 --- (4) 60 ------- ----- ------ ------- $ 8,690 $ 17 $(100) $ 8,607 ======= ===== ====== =======
December 31, 1995 ----------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ---- ----- ------ ----- (In thousands) Federal Home Loan Mortgage Corporation Participation certificates $ 6,330 $ 44 $ (49) $ 6,325 Government National Mortgage Association Participation certificates 2,121 43 (10) 2,154 Federal National Mortgage Association Participation certificates 1,426 9 (13) 1,422 Interest-only certificates 40 --- --- 40 ------- ----- ------ ------- $ 9,917 $ 96 $ (72) $ 9,941 ======= ===== ====== =======
December 31, 1994 ----------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ---- ----- ------ ----- (In thousands) Federal Home Loan Mortgage Corporation Participation certificates $ 7,330 $ --- $(484) $ 6,846 Government National Mortgage Association Participation certificates 2,381 --- (104) 2,277 Federal National Mortgage Association Participation certificates 1,567 2 (27) 1,542 Interest-only certificates 50 --- --- 50 ------- ----- ------ ------- $11,328 $ 2 $(615) $10,715 ======= ===== ====== =======
Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE B - INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES (continued) The amortized cost of mortgage-backed securities at June 30, 1996, and December 31, 1995, by contractual terms to maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. June 30, 1996 December 31, 1995 Amortized cost Amortized cost -------------- ------------------ (Unaudited) (In thousands) Due within one year $1,153 $ 139 Due after one to three years 1,901 3,906 Due after three to five years 2,226 2,924 Due after five to ten years 15 15 Due after ten to twenty years 382 50 Due after twenty years 3,013 2,883 ------ ------ $8,690 $9,917 ====== ====== The market value of the Association's investment in Federal National Mortgage Association interest-only certificates is adversely affected by the level of actual prepayments on the loans collateralizing such securities, as well as the market's perception as to the future level of such prepayments. During 1994 and 1993, these prepayment factors resulted in market value declines which management viewed as other than temporary. Accordingly, the Association charged operations in 1994 and 1993 for $20,000 and $30,000, respectively, representing management's estimate as to the amount of such declines deemed to be other than temporary. NOTE C - LOANS RECEIVABLE The composition of the loan portfolio is as follows: June 30, December 31, 1996 1995 1994 ---- ---- ---- (Unaudited) (In thousands) Residential real estate One-to-four family residential $44,517 $44,417 $46,378 Multi-family residential 1,529 1,613 1,242 Construction 1,406 2,489 748 Nonresidential real estate and land 7,234 7,563 5,774 Consumer and other 3,025 2,816 2,269 Deposit accounts 532 590 527 ------- ------- ------- 58,243 59,488 56,938 Add (deduct): Undisbursed portion of loans in process (604) (1,370) (642) Deferred loan origination costs 226 234 243 Allowance for loan losses (416) (407) (252) ------- ------- ------- $57,449 $57,945 $56,287 ======= ======= ======= Madison First Federal Savings and Loan Association and Subsidiary Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE C - LOANS RECEIVABLE (continued) As depicted above, the Association's lending efforts have historically focused on one-to-four family residential and multi-family residential real estate loans, which comprise approximately $52.5 million, or 91.4%, of the total loan portfolio at June 30, 1996, approximately $47.1 million, or 81%, of the total loan portfolio at December 31, 1995 and approximately $47.7 million, or 85%, of the total loan portfolio at December 31, 1994. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Association with adequate collateral coverage in the event of default. Nevertheless, the Association, as with any lending institution, is subject to the risk that residential real estate values could deteriorate in its primary lending areas of southeastern Indiana and northwestern Kentucky, thereby impairing collateral values. However, management is of the belief that residential real estate values in the Association's primary lending areas are presently stable. In the ordinary course of business, the Association has granted loans to some of the officers, directors and their related business interests. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of loans outstanding to related parties was approximately $305,000, $571,000 and $365,000 at June 30, 1996, December 31, 1995 and 1994. NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows:
Six months ended June 30, Year ended December 31, ------------------ ------------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) (In thousands) Balance at beginning of period $407 $252 $252 $227 $262 Provision for loan losses 12 3 150 29 55 Charge-offs of loans (3) (4) --- (4) (100) Recoveries of losses on loans --- --- 5 --- 10 ---- ---- ---- ---- ---- Balance at end of period $416 $251 $407 $252 $227 ==== ==== ==== ==== ====
As of June 30, 1996, and December 31, 1995, the Association's allowance for loan losses was comprised of a general loan loss allowance of approximately $412,000 and $399,000, which was includible as a component of regulatory risk-based capital, and specific loan loss allowances of approximately $4,000 and $8,000, respectively. At June 30, 1996 and December 31, 1995, 1994 and 1993, nonperforming loans totaled $223,000, $8,000, $13,000 and $7,000, respectively. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment is comprised of the following: June 30, December 31, ------------------------- 1996 1995 1994 ---- ---- ---- (Unaudited) (In thousands) Land and improvements $ 377 $ 377 $ 377 Office buildings and improvements 1,242 1,242 1,225 Leasehold improvements 6 6 6 Furniture, fixtures and equipment 623 623 593 Automobiles 4 4 4 ------- ------- ------- 2,252 2,252 2,205 Less accumulated depreciation (1,313) (1,286) (1,217) ------- ------- ------- $ 939 $ 966 $ 988 ======= ======= ======= Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE F - DEPOSITS Deposits consist of the following major classifications:
December 31, June 30, ------------------------------------------ 1996 1995 1994 ---- ---- ---- Amount % Amount % Amount % ------- --- ------ --- ------ --- (Unaudited) (In thousands) Deposit type and weighted-average interest rate NOW accounts 1996 - 2.63% $ 8,525 11.4 1995 - 2.24% $ 7,941 10.6 1994 - 2.28% $ 7,412 9.8 Super NOW accounts 1996 - 2.67% 1,033 1.4 1995 - 2.65% 1,063 1.4 1994 - 2.67% 731 1.0 Money market demand accounts 1996 - 3.00% 6,794 9.1 1995 - 3.00% 7,141 9.5 1994 - 2.90% 7,652 10.1 Passbook accounts 1996 - 3.05% 17,011 22.7 1995 - 3.04% 17,911 23.8 1994 - 3.03% 19,430 25.8 ------- ----- ------- ----- ------- ----- Total demand, transaction and passbook deposits 33,363 44.6 34,056 45.3 35,225 46.7 Certificates of deposit 3.00 - 3.99% 3.35% in 1994 --- --- --- --- 443 .6 4.00 - 4.99% 4.78% in 1996 5,657 7.6 4.21% in 1995 98 .1 4.70% in 1994 30,882 40.9 5.00 - 5.99% 5.64% in 1996 25,564 34.2 5.65% in 1995 30,116 40.0 5.44% in 1994 5,276 7.0 6.00 - 6.99% 6.60% in 1996 9,728 13.0 6.38% in 1995 10,731 14.3 6.40% in 1994 3,365 4.5 7.00 - 7.99% 7.57% in 1996 415 .6 7.86% in 1995 232 .3 7.88% in 1994 267 .3 ------- ----- ------- ----- ------- ----- Total certificates of deposit 41,364 55.4 41,177 54.7 40,233 53.3 ------- ----- ------- ----- ------- ----- Total deposit accounts $74,727 100.0 $75,233 100.0 $75,458 100.0 ======= ===== ======= ===== ======= =====
The aggregate amount of short-term certificates of deposit with minimum denominations of $100,000 totaled approximately $5.1 million, $4.8 million and $5.3 million at June 30, 1996, December 31, 1995 and 1994, respectively. Deposits with denominations greater than $100,000 are not federally insured. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE F - DEPOSITS (continued) Interest expense on deposits is summarized as follows:
June 30, December 31, ------------------- -------------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) (In thousands) Passbook $ 251 $ 268 $ 524 $ 634 $ 754 NOW accounts 95 88 176 170 135 Money market deposit accounts 120 121 243 259 269 Certificates of deposit 1,225 1,118 2,476 1,779 1,883 ------ ------ ------ ------ ------ $1,691 $1,595 $3,419 $2,842 $3,041 ====== ====== ====== ====== ======
Maturities of outstanding certificates of deposit are summarized as follows: June 30, December 31, ----------- -------------------- 1996 1995 1994 ---- ---- ---- (Unaudited) (In thousands) Less than one year $30,737 $29,578 $31,625 One year to three years 9,457 10,425 5,921 More than three years 1,170 1,174 2,687 ------- ------- ------- $41,364 $41,177 $40,233 ======= ======= ======= NOTE G - ADVANCES FROM FEDERAL HOME LOAN BANK At June 30, 1996, there were no Federal Home Loan Bank advances outstanding. At December 31, 1995, Federal Home Loan Bank advances consisted of 6.02% daily variable-rate cash management borrowing totaling approximately $2.5 million (of an available $7.0 million line of credit), and a $2.0 million 5.63% advance maturing on April 11, 1996. At December 31, 1995, the advances were collateralized by certain residential mortgage loans totaling $3.4 million and the Association's investment in Federal Home Loan Bank stock. NOTE H - INCOME TAXES The provision for income taxes on earnings differs from that computed at the expected statutory corporate tax rate as follows:
June 30, December 31, ------------------ ------------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) (In thousands) Income taxes computed at the 34% expected statutory rate $98 $132 $152 $356 $391 State taxes, net of federal benefits 15 21 39 56 65 Increase (decrease) in taxes resulting from: Amortization of goodwill 1 1 2 2 2 Other (6) (3) (5) (2) (2) ---- ---- ---- ---- ---- Income tax provision per consolidated financial statements $108 $151 $188 $412 $456 ==== ==== ==== ==== ==== Effective tax rate 37.4% 39.0% 42.2% 39.3% 39.7% ==== ==== ==== ==== ====
Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE H - INCOME TAXES (continued) The composition of the Association's net deferred tax asset (liability) is as follows:
December 31, June 30, ------------------------ 1996 1995 1994 ---- ---- ---- (Unaudited) (In thousands) Taxes (payable) refundable on temporary differences at statutory rate: Deferred tax liabilities: Deferred loan origination costs $ (77) $ (80) $ (83) Difference between book and tax depreciation (33) (32) (31) Percentage of earnings bad debt deduction (123) (116) (104) Unrealized gain on securities designated as available for sale - (6) - ----- ----- ----- Total deferred tax liabilities (233) (234) (218) Deferred tax assets: Deferred compensation 36 28 14 Allowance for valuation decline on mortgage-related securities 90 90 90 General loan loss allowance 140 135 84 Unrealized loss on securities designated as available for sale 21 - - Other 33 2 - ----- ----- ----- Total deferred tax assets 320 255 188 ----- ----- ----- Net deferred tax asset (liability) $ 87 $ 21 $ (30) ===== ===== =====
The Association is allowed a special bad debt deduction based on a percentage of earnings generally limited to 8% of otherwise taxable income, or the amount of qualifying and nonqualifying loans outstanding and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. Retained earnings at June 30, 1996 and December 31, 1995 includes approximately $2.4 million for which Federal income taxes have not been provided. If the amounts that qualify as deductions for Federal income tax purposes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to Federal income taxes at the then current corporate income tax rate. The approximate amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $710,000 at June 30, 1996 and December 31, 1995. In August 1996, legislation was enacted that will require the Association to recapture post-1987 percentage of earnings bad debt deductions to taxable income over a six year period. The Association has previously provided $123,000 in deferred taxes relative to post-1987 percentage of earnings deductions. The Association will no longer be able to utilize the percentage of earnings bad debt deduction in computing taxable income and, instead, will utilize the reserve method employed by commercial banks. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE I - COMMITMENTS AND CONTINGENCIES The Association is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of the commitments reflect the extent of the Association's involvement in such financial instruments. The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Association uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At June 30, 1996, and December 31, 1995 and 1994, the Association had outstanding commitments of approximately $1,000,000, $257,000 and $501,000 to originate residential one-to-four family real estate loans, of which $532,000, $185,000, and $211,000, respectively, were comprised of fixed-rate loans, and $468,000, $72,000, and $290,000, respectively, were comprised of variable rate loans. Additionally, the Association had unused lines of credit under home equity loans of approximately $207,000, $181,000, and $148,000 at June 30, 1996, December 31, 1995, and 1994, respectively. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of June 30, 1996 and December 31, 1995 and 1994, and such commitments have been underwritten on the same basis as that of the existing loan portfolio. Management believes that all loan commitments are able to be funded through cash flow from operations and existing excess liquidity. Fees received in connection with these commitments have not been recognized in earnings. 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 may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Association evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Association, upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral on loans may vary but the preponderance of loans granted generally include a mortgage interest in real estate as security. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE J - CONDENSED FINANCIAL STATEMENTS OF CONSOLIDATED SUBSIDIARY The following condensed consolidated financial statements summarize the financial position of Madison First Service Corporation and Subsidiary at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years ended December 31, 1995, 1994 and 1993. Madison First Service Corporation and Subsidiary CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, June 30, --------------- ASSETS 1996 1995 1994 ---- ---- ---- (Unaudited) (In thousands) Cash and interest-bearing deposits $403 $265 $156 Certificates of deposit 200 300 350 Office premises and equipment, net 19 21 26 Goodwill, net 144 148 156 Other assets 44 40 56 ---- ---- ---- Total assets $810 $774 $744 ==== ==== ==== LIABILITIES AND STOCKHOLDER'S EQUITY Other liabilities $ 75 $ 68 $ 69 Accrued income taxes 27 22 21 ---- ---- ---- 102 90 90 Stockholder's equity Common stock 350 350 350 Retained earnings 358 334 304 ---- ---- ---- Total stockholder's equity 708 684 654 ---- ---- ---- Total liabilities and stockholder's equity $810 $774 $744 ==== ==== ==== Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE J - CONDENSED FINANCIAL STATEMENTS OF CONSOLIDATED SUBSIDIARY (continued) Madison First Service Corporation and Subsidiary CONSOLIDATED STATEMENTS OF INCOME Six months ended Year ended June 30, December 31, ---------------- ---------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) (In thousands) Income Interest income $ 12 $ 13 $ 27 $ 16 $ 14 Insurance commissions 100 88 166 169 182 Other operating 29 19 3 4 3 ----- ----- ----- ----- ----- Total income 141 120 196 189 199 Other expenses Employee compensation and benefits 48 53 104 102 107 Occupancy and equipment 9 10 14 17 21 Franchise taxes 4 3 5 4 4 General and administrative 10 10 18 18 17 Amortization of goodwill 4 4 7 7 7 ----- ----- ----- ----- ----- Total other expenses 75 80 148 148 156 ----- ----- ----- ----- ----- Income before income taxes 66 40 48 41 43 Income taxes 15 9 18 16 17 ----- ----- ----- ----- ----- NET INCOME $ 51 $ 31 $ 30 $ 25 $ 26 ===== ===== ===== ===== ===== Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE J - CONDENSED FINANCIAL STATEMENTS OF CONSOLIDATED SUBSIDIARY (continued) Madison First Service Corporation and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Year ended June 30, December 31, ----------------- -------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (Unaudited) (In thousands) Cash flows from operating activities: Net income $ 51 $ 31 $ 30 $ 25 $ 26 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 3 3 5 5 6 Amortization of goodwill 4 4 7 7 7 Increases (decreases) in cash due to changes in: Other assets (3) (11) 17 9 (5) Other liabilities 7 3 - 3 - Income taxes: Current 5 (9) 1 17 1 Deferred (29) 49 - (1) (1) ---- ---- ---- ---- ---- Net cash provided by operating activities 38 70 60 65 34 Cash flows provided by (used in) investing activities: Purchase of office equipment - - (1) (4) - (Increase) decrease in certificates of deposits in other financial institutions - net 100 - 50 (50) (125) ---- ---- ---- ---- ---- Net cash provided by (used in) investing activities 100 - 49 (54) (125) ---- ---- ---- ---- ---- Net increase (decrease) in cash and cash equivalents 138 70 109 11 (91) Cash and interest-bearing deposits at beginning of period 265 156 156 145 236 ---- ---- ---- ---- ---- Cash and interest-bearing deposits at end of period $403 $226 $265 $156 $145 ==== ==== ==== ==== ====
Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE K - RETAINED EARNINGS AND REGULATORY CAPITAL The Association is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as retained earnings less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4.0% - 5.0% of adjusted total assets for substantially all savings associations. Management anticipates no material change to the Association's excess regulatory capital position as a result of this proposed change in the regulatory capital requirement. The risk-based capital requirement currently provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Association multiplies the value of each asset on its statement of financial condition by a defined risk-weighting factor, e.g., one-to-four family residential loans carry a risk-weighted factor of 50%. As of June 30, 1996 and December 31, 1995, the Association's regulatory capital exceeded all minimum capital requirements as shown in the following tables:
June 30, 1996 Regulatory capital ---------------------------------------------------------------------- Tangible Core Risk-based capital Percent capital Percent capital Percent ------- ------- ------- ------- ------- ------- (Unaudited) (In thousands) Capital under generally accepted accounting principles $6,703 $6,703 $6,703 Nonallowable assets: Goodwill (144) (144) (144) Unrealized losses on securities designated as available for sale, net 40 40 40 Additional capital items: General valuation allowances - limited --- --- 412 ------ ------ ------ Regulatory capital - computed 6,599 8.1 6,599 8.1 7,011 16.9 Minimum capital requirement 1,229 1.5 2,457 3.0 3,322 8.0 ------ --- ------ --- ------ ---- Regulatory capital - excess $5,370 6.6 $4,142 5.1 $3,689 8.9 ====== === ====== === ====== ====
Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE K - RETAINED EARNINGS AND REGULATORY CAPITAL (continued)
December 31, 1995 Regulatory capital ---------------------------------------------------------------------- Tangible Core Risk-based capital Percent capital Percent capital Percent ------- ------- ------- ------- ------- ------- (In thousands) Capital under generally accepted accounting principles $6,574 $6,574 $6,574 Nonallowable assets: Goodwill (148) (148) (148) Unrealized gains on securities designated as available for sale, net (12) (12) (12) Additional capital items: General valuation allowances - limited --- --- 399 ------ ------ ------ Regulatory capital - computed 6,414 7.4 6,414 7.4 6,826 16.1 Minimum capital requirement 1,299 1.5 2,598 3.0 3,402 8.0 ------ --- ------ --- ------ ---- Regulatory capital - excess $5,115 5.9% $3,816 4.4% $3,424 8.1% ====== === ====== === ====== ====
The deposit accounts of the Association and of other savings associations are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund ("SAIF"). Prior to September 30, 1996, the reserves of the SAIF were below the level required by law, because a significant portion of the assessments paid into the fund are used to pay interest on bonds issued to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF deposits. The reserves of the BIF met the level required by law in May 1995. As a result of the respective reserve levels of the funds, deposit insurance assessments paid by healthy savings associations exceeded those paid by healthy commercial banks during 1995 by approximately $.19 per $100 in deposits. In 1996, no BIF assessments will be required for healthy commercial banks except for a $2,000 minimum fee. On September 30, 1996, the President enacted into law legislation to recapitalize the SAIF and eliminate the significant premium disparity. The recapitalization plan provides for a special assessment of approximately $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. In addition, the cost of prior thrift failures would be shared by both the SAIF and the BIF. This would likely increase BIF assessments by $.02 to $.025 per $100 in deposits, while SAIF assessments will decline to $.064 per $100 in deposits. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE K - RETAINED EARNINGS AND REGULATORY CAPITAL (continued) A component of the recapitalization plan provides for the merger of the SAIF and BIF on January 1, 2000. The Association had $77.2 million in deposits at March 31, 1995. If the special assessment is finalized as projected at $.657 per $100 in deposits, the Association will pay an additional assessment of $507,000 in November, 1996. This assessment is tax deductible, but it will reduce earnings and capital for the three months ended September 30, 1996. NOTE L - BUSINESS COMBINATION AND CONVERSION TO STOCK FORM On March 5, 1996, the Association's Board of Directors adopted an overall plan of conversion and reorganization (the Plan) whereby the Association would convert to the stock form of ownership, followed by the issuance of all of the Association's outstanding stock to a newly formed holding company, River Valley Bancorp. Pursuant to the Plan, the Association will offer for sale common shares to its depositors and members of the community based on the appraised value on the offering date. The costs of issuing the common stock will be deferred and deducted from the sale proceeds of the offering. If the conversion is unsuccessful, all deferred costs will be charged to operations. At June 30, 1996, the Association had incurred approximately $2,000 in conversion costs. At the date of the conversion, the Association will establish a liquidation account in an amount equal to retained earnings reflected in the statement of financial condition used in the conversion offering circular. The liquidation accounts will be maintained for the benefit of eligible savings account holders who maintained deposit accounts in the Association after conversion. In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to the common shares. Except for the repurchase of stock and payment of dividends by the Association, the existence of the liquidation account will not restrict the use or further application of such retained earnings. Madison First Federal Savings and Loan Association and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Six months ended June 30, 1996 and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993 NOTE L - BUSINESS COMBINATION AND CONVERSION TO STOCK FORM (continued) The Association may not declare or pay a cash dividend on, or repurchase any of its common shares if the effect thereof would cause the Association's shareholders' equity to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for insured institutions. In December 1995, the Association had entered into a purchase agreement (the Agreement) with the majority shareholder of Citizens National Bank of Madison. The agreement, as subsequently amended, states that the Association's newly formed holding company will purchase approximately 120,000 shares, representing 95% of Citizen's outstanding common stock, for total cash consideration of approximately $3.0 million. The Association's performance under the Agreement will be funded via net cash proceeds from the conversion. The business combination will be accounted for as a purchase and is expected to be completed in the latter part of 1996. The purchase agreement is subject to regulatory approval. INDEPENDENT AUDITORS' REPORT To the Board of Directors of Citizens National Bank of Madison, Indiana We have audited the accompanying Statements of Financial Condition of Citizens National Bank of Madison as of December 31, 1995 and December 31, 1994 and the related Statements of Income, Stockholders' Equity and Cash Flows for the 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 audit. The financial statements of Citizens National Bank for the year ended December 31, 1993 were audited by other auditors whose report dated January 28, 1994 epxressed an unqualified opinion on those statements. We conducted our audit 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 audit provides 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 the Citizens National Bank of Madison at December 31, 1995 and December 31, 1994 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As described in Notes 1 and 5, the Bank changed its methods of accounting for investment securities and income taxes during 1994 and adopted new accounting standards during 1995 in accordance with Statements of Financial Accounting Standards Nos. 107 and 114. SHERMAN, BARBER & MULLIKIN Certified Public Accountants March 1, 1996 ALEXANDER X. KUHN & CO. CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Citizens National Bank of Madison Madison, Indiana We have audited the accompanying Statement of Financial Condition of Citizens National Bank of Madison as of December 31, 1993, and the related Statement of Income, Statement of Stockholders Equity and Cash Flow for the year 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 audit. We conducted our audit 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 from 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 audit provides a reasonable basis for our opinion. In our opinion the 1993 financial statements referred to above present fairly, in all material respects, the comparative financial statements of Citizens National Bank of Madison as of December 31, 1993 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Respectfully submitted, Alexander X. Kuhn & Co. Certified Public Accountants Dated: January 28, 1994 Oakbrook Terrace, Illinois CITIZENS NATIONAL BANK OF MADISON Statements of Financial Condition December 31, 1995 December 31, 1994 ----------------- ----------------- ASSETS Cash and Cash Equivalents: Cash and Due from Banks $ 2,348,509 $ 1,516,721 Federal Funds Sold 2,775,000 675,000 ------------ ------------ Total Cash and Cash Equivalents 5,123,509 2,191,721 Interest-Bearing Time Deposits 1,702,862 0 Investment Securities: Federal Agencies 150,891 1,465,002 Municipal Bonds 1,155,342 1,106,183 Mortgage-Backed Securities (primarily (government agency guaranteed) 3,562,364 5,048,907 Federal Reserve Stock 79,950 79,950 Federal Home Loan Bank Stock 270,800 118,400 ------------ ------------ Total Investment Securities 5,219,347 7,818,442 Loans: Loans, Net of Unearned Interest 40,779,738 30,169,863 Less: Allowance for Loan Losses (347,793) (335,738) ------------ ------------ Net Loans 40,431,945 29,834,125 Premises and Equipment, Net 1,403,601 890,056 Accrued Interest Receivable 451,917 352,337 Deferred Income Tax Asset 75,829 119,856 Other Assets 94,157 45,654 ------------ ------------ TOTAL ASSETS $ 54,503,167 $ 41,252,191 - ------------ ============ ============ See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Statements of Financial Condition (Continued) December 31, 1995 December 31, 1994 ----------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits: Demand Deposits $ 5,345,925 $ 4,200,596 Savings & NOW Accounts 16,411,201 16,551,092 Certificates of Deposit over $100,000 5,698,897 5,317,053 Other Time Deposits 21,771,068 11,942,011 ----------- ----------- Total Deposits 49,227,091 38,010,752 FHLB Advances 1,500,000 0 Accrued Interest Payable 204,645 109,610 Income Tax Payable 116,981 27,951 Other Liabilities 58,409 103,734 ----------- ----------- Total Liabilities 51,107,126 38,252,047 ----------- ----------- Commitments and Contingencies (See Notes 9 and 12) Stockholders' Equity Common Stock ($8 Par Value: 150,000 Shares Authorized; 126,037 Shares Issued & Outstanding) 1,008,296 1,008,296 Additional Paid-in-Capital 1,656,567 1,656,567 Retained Earnings 749,563 407,936 Unrealized Losses on Investment Securities Available-for-Sale (18,385) (72,655) ----------- ----------- Total Stockholders' Equity 3,396,041 3,000,144 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,503,167 $41,252,191 - -------------------- =========== =========== See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Statements of Income For the Years Ended,
12-31-95 12-31-94 12-31-93 -------- -------- -------- Interest Income Interest & Fees on Loans $3,194,437 $2,035,853 $1,679,455 Interest on Investment Securities: Investment Securities-Taxable 132,509 132,319 301,593 ---------- ---------- ---------- Investment Securities-Nontaxable 59,306 60,460 38,412 ---------- ---------- ---------- Total Interest on Investment Securities 191,815 192,779 340,005 Interest on Federal Funds Sold 78,190 30,319 77,445 Interest on Mortgage-Back Securities 230,315 256,235 0 ---------- ---------- ---------- Interest on Deposits with Banks 0 9,387 2,640 ---------- ---------- ---------- Total Interest Income 3,694,757 2,524,573 2,099,545 Interest Expense Interest on Deposits 1,750,429 1,023,679 879,952 Interest on Federal Funds Purchased 2,680 542 0 ---------- ---------- ---------- Interest on Other Borrowed Funds 67,318 847 0 ---------- ---------- ---------- Total Interest Expense 1,820,427 1,025,068 879,952 Net Interest Income 1,874,330 1,499,505 1,219,593 ---------- ---------- ---------- Less: Provision for Loan Losses (104,000) (17,000) (50,000) ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 1,770,330 1,482,505 1,169,593 Other Income Service Charges on Deposit Accounts 292,990 218,835 214,524 Other Service Charges & Fees 157,076 143,420 309,107 Gain on Disposal of Assets 4,555 0 0 Realized Gains (Losses) on Investments 3,946 (70,987) (396) Intangible Tax Refund 34,001 0 0 ---------- ---------- ---------- Other Operating Income 70,541 52,890 24,738 ---------- ---------- ---------- Total Other Income 563,109 344,158 547,973 Other Expenses Salaries & Employee Benefits 830,792 677,333 612,154 Premises & Equipment Expenses 292,460 279,431 225,597 Advertising 82,653 58,791 73,301 Business Services 87,436 67,367 54,636 Office Supplies & Postage 93,111 59,449 65,685 FDIC & Comptroller Assessment 60,360 85,754 87,634 Amortization-Dealer Reserve Cost 58,523 23,872 0 ---------- ---------- ---------- Other Operating Expenses 263,016 207,889 236,620 ---------- ---------- ---------- Total Other Expenses 1,768,351 1,459,886 1,355,627
See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Statements of Income (Continued) For the Years Ended,
12-31-95 12-31-94 12-31-93 -------- -------- -------- Net Income Before Income Tax 565,088 366,777 361,939 ---------- ---------- ---------- Income Tax Franchise Tax 57,175 34,019 33,612 Federal Income Tax 166,286 94,384 58,586 ---------- ---------- ---------- Total Income Tax 223,461 128,403 92,198 ---------- ---------- ---------- Net Income Before Cumulative Effect of Change in Accounting Principal 341,627 238,374 269,741 Cumulative Effect of Change in Accounting Principle 0 85,761 0 ---------- ---------- ---------- NET INCOME $ 341,627 $ 324,135 $ 269,741 ========== ========== ========== Earnings Per Share: Before Cumulative Change in Accounting Principle $ 2.71 $ 1.89 $ 2.14 ========== ========== ========== Net Income $ 2.71 $ 2.57 $ 2.14 ========== ========== ========== Average Shares Outstanding 126,037 126,037 126,037 ========== ========== ==========
See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1993, 1994 and 1995
Unrealized Losses on Additional Invest. Secur. Total Common Paid-in- Retained Available- Stockholders' Stock Capital Earnings For-Sale Equity ----- ------- -------- -------- ------ Balance, January 1, 1993 $1,008,296 $1,656,567 $(185,940) $2,478,923 Net Income for 1993 269,741 269,741 ---------- ---------- --------- --------- ---------- Balance, December 31, 1993 1,008,296 1,656,567 83,801 2,748,664 Net Income for 1994 324,135 324,135 Unrealized Losses on Investments $(72,655) (72,655) ---------- ---------- --------- --------- ---------- Balance, December 31, 1994 1,008,296 1,656,567 407,936 (72,655) 3,000,144 Net Income for 1995 341,627 341,627 Unrealized Gains on Investments 54,270 54,270 ---------- ---------- --------- --------- ---------- Balance, December 31, 1995 $1,008,296 $1,656,567 $ 749,563 $(18,385) $3,396,041 ========== ========== ========= ========= ==========
See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Statements of Cash Flows For the Years Ended,
12-31-95 12-31-94 12-31-93 -------- -------- -------- Cash Flows from Operating Activities Net Income $ 341,627 $ 324,135 $ 269,742 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 104,000 17,000 50,000 Depreciation 127,460 108,675 132,838 Amortization-Dealer Reserve 58,523 23,872 0 Premium Amortization on Investments (Net of Discount Accretion) 17,959 27,041 168,719 (Gain) Loss on Sale of Securities (3,946) 70,987 397 Gain on Sale of Fixed Assets (4,555) 0 0 Net Loans Charged Off (7,116) Changes in Assets & Liabilities Affecting Operating Activities: Interest Receivable (99,580) (92,924) 17,286 Interest Payable 95,035 28,029 1,594 Other Assets & Liabilities (4,801) 159,008 6,371 Deferred Tax Assets 7,496 (151,901) 0 ------------- ------------ ------------ Net Cash Provided by Operating Activities 639,218 513,922 639,831 ------------- ------------ ------------ Cash Flow from Investing Activities Net Change in Interest-Bearing Deposits (1,702,862) 600,000 (300,000) Net Change in Loans (10,760,343) (9,977,419) (1,267,065) Purchases of Premises & Equipment (641,004) (149,523) (137,576) Proceeds from Sale of Fixed Assets 4,555 0 0 Proceeds from Sale/Maturity of Securities Available-for-Sale 3,270,799 3,467,217 Proceeds from Maturity of Securities Held-to-Maturity 1,476,924 500,000 Purchase of Securities Available-for-Sale (1,919,438) (1,684,458) Purchase of Securities Held-to-Maturity 0 (1,900,950) Net Change in Security Investments-Net of Premium Amortization (1,562,462) Purchase of FHLB Stock (152,400) (11,000) ------------- ------------ ------------ Net Cash Used in Investing Activities (10,423,769) (9,156,133) (3,267,103) ------------- ------------ ------------ Cash Flows from Financing Activities Proceeds from FHLB Advances 1,500,000 0 0 Net Change in Noninterest-Bearing Deposits 1,145,329 558,801 17,953 Net Change in Interest-Bearing Deposits 10,071,010 7,362,786 1,243,222 ------------- ------------ ------------ Net Cash Provided by Financing Activities 12,716,339 7,921,587 1,261,175 ------------- ------------ ------------
See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Statements of Cash Flows (Continued) For the Years Ended,
12-31-95 12-31-94 12-31-93 -------- -------- -------- Net Increase (Decrease) in Cash & Cash Equivalents 2,931,788 (720,624) (1,366,097) Cash & Cash Equivalents, January 1 2,191,721 2,912,345 4,278,442 ------------- ------------ ------------ Cash & Cash Equivalents, December 31 $ 5,123,509 $ 2,191,721 $ 2,912,345 ============= ============ ============ Supplemental Information Interest Paid $ 1,725,391 $ 1,001,618 $ 879,952 ============= ============ ============ Taxes Paid $ 126,934 $ 190,054 $ 58,586 ============= ============ ============ Loans Charged Off $ 146,944 $ 89,263 ============= ============ ============
For 1995: Sale of Fixed Asset (fully depreciated) at original cost of $13,977 For 1994: Retirement of Fixed Assets (fully depreciated) at original cost of $153,218 See Notes to Financial Statements. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Citizens National Bank was organized under the laws of the state of Indiana in 1982. The Bank provides various financial services to both individual and corporate entities through its main location and branches in the Madison and Hanover, Indiana area. The Bank's primary deposits are interest-bearing time deposits and the primary lending products are mortgage and commercial loans. Investment Securities Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. As a result, the Bank classifies its marketable debt and equity securities as held-to-maturity if it has the positive intent and ability to hold the securities to maturity. All other marketable debt and equity securities are classified as available-for-sale. Securities classified as available-for-sale are carried in the financial statements at fair value. Unrealized holding gains and losses, net of tax effect, are reported as a separate component of stockholders' equity. Securities classified as held-tomaturity are carried at amortized cost. The effect on stockholders' equity of initially applying SFAS No. 115 has been reported as the effect of a change in accounting principle in the manner described in paragraph 20 of APB Opinion No. 20, Accounting Changes. The Financial Accounting Standards Board allowed a one-time transfer of securities from held-to-maturity to available-for-sale during 1995. On December 31, 1995, substantially all securities classified as held-to-maturity were reclassified as available-for-sale. These securities had a book value of $2,995,082 at the time of transfer. The market value of this group of securities was $2,964,225 at December 31, 1995. Discounts and premiums are recognized as adjustments to interest income over the lives of applicable securities using primarily the effective interest method. Gains and losses on disposition are based on the net proceeds and the adjusted carrying value of the securities sold using the specific identification method. The Federal Reserve and Federal Home Loan Bank stocks are nonmarketable equity securities, required to be held by the Bank as a member of the Federal Reserve Bank System and as a borrower of Federal Home Loan Bank advances, respectively. These securities are carried at par (cost). CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Premises and Equipment Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method for premises based on estimated useful lives of 15-40 years or 200% declining balance for equipment based on the estimated useful lives of 5-12 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Note 4 details current asset additions and depreciation provisions. Other Real Estate Other real estate is carried at the lower of cost (loan's principal balance) or estimated fair market value, less estimated selling expenses. When other real estate is acquired, any excess of the loan amount over the estimated fair market value of such property is charged to the allowance for loan losses. Any subsequent write downs and/or gains and losses on the sale of other real estate are included in current operations. Loans, Allowance for Loan Losses and Loan Fees Loans are stated at the amount of unpaid principal, reduced by unearned discount and a reserve for loan losses. Interest income is accrued on the principal balances of loans by use of the interest method. The reserve for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the reserve for loan losses when management believes that the collectibility of principal is unlikely. The reserve is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect borrowers' ability to pay. Accrual of interest is discontinued when various economic and business conditions indicate that the collection of interest is not likely. On January 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS 114) as amended by SFAS 118 which requires that impaired loans be measured at the present value of expected cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable. It amends previously issued statements to clarify that the collectibility of both contractual principal and interest should be evaluated when determining the need for a loss accrual. The Statement provides that a loan is impaired when it is probable that all amounts due under the loan agreement will not be collected. It also specifies that a delinquent loan is not impaired if the creditor expects to collect all amounts due including interest accrued at the contractual rate during the period of delinquency. Adoption of the Standard did not have a material effect on the Bank's financial position or results of operations. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Tax Income tax in the statement of income includes deferred income tax provisions or credits for all significant timing differences in recognizing income and expenses for financial reporting and income tax purposes, as summarized in Note 5. Cash and Cash Equivalents For purposes of the Statement of Cash Flows, all cash on hand, demand deposits and federal funds sold are included in cash and cash equivalents. Reclassifications Certain amounts in 1993 and 1994 have been reclassified to conform with the 1995 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 reserve for loan losses. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the reserves may be necessary based on changes in local economic conditions. Therefore, it is reasonably possible that the reserve for losses on loans may change materially in the near term. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Values of Financial Instruments Effective January 1, 1995, Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments (SFAS 107), requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Bank in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents and Interest-bearing Deposits: The carrying amounts reported in the statements of financial condition for cash and cash equivalents and interest-bearing deposits approximate those assets' fair values. Investment Securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of Federal Reserve stock and FHLB stock approximates the carrying value. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amount of accrued interest receivable approximates it fair value. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Values of Financial Instruments (Continued) Deposits: The fair values disclosed for demand deposits (for example, interest-bearing checking accounts and passbook accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value. Federal Funds Purchased, FHLB Advances and Other Short-term Borrowings: The carrying amounts of these borrowings approximate their fair values. CITIZENS NATIONAL BANK OF MADISON Notes To Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 2. INVESTMENT SECURITIES The amortized cost and approximate fair values of investment securities as shown in the Statement of Financial Condition of the Bank at December 31, 1995 and 1994 were as follows:
1995 -------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Securities Available- for-Sale: Federal Agencies $ 150,560 $ 331 $ 150,891 Municipal Bonds 1,132,213 23,129 1,155,342 Mortgage-Backed Secur. 3,615,332 $ (52,968) 3,562,364 ---------- ------- ----------- ---------- Total Available-for-Sale 4,898,105 23,460 (52,968) 4,868,597 Federal Reserve & FHLB Stock 350,750 350,750 ---------- ------- ----------- ---------- Total All Securities $5,248,855 $23,460 $ (52,968) $5,219,347 ========== ======= =========== ========== 1994 -------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Securities Held-to- Maturity: Federal Agencies $1,465,002 $ (12,297) $1,452,705 Municipal Bonds 673,587 (69,693) 603,894 Mortgage-Backed Secur. 2,718,696 (195,829) 2,522,867 Total Held-to-Maturity 4,857,285 (277,819) 4,579,466 ---------- ------- ----------- ---------- Securities Available- for-Sale: Municipal Bonds 425,048 $7,548 432,596 Mortgage-Backed Secur. 2,458,068 (127,857) 2,330,211 ---------- ------- ----------- ---------- Total Available-for-Sale 2,883,116 7,548 (127,857) 2,762,807 ---------- ------- ----------- ---------- Federal Reserve & FHLB Stock 198,350 198,350 ---------- ------- ----------- ---------- Total All Securities $7,938,751 $7,548 $ (405,676) $7,540,623 ========== ======= =========== ==========
CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 INVESTMENT SECURITIES (Continued) The carrying amount of investment securities at December 31, 1995 and December 31, 1994 is: 1995 1994 ---- ---- Securities Held-to-Maturity (at Amortized Cost) $ 0 $4,857,285 Securities Available-for-Sale (at Approximate Fair Value) 4,868,597 2,762,807 Federal Reserve & FHLB Stock (at cost) 350,750 198,350 ---------- ---------- Total Carrying Value $5,219,347 $7,818,442 ========== ========== Securities carried at $461,151 at December 31, 1995 and $114,835 at December 31, 1994 were pledged to secure Treasury Tax and Loan deposits. Securities carried at $1,238,015 at December 31, 1995 and $370,000 at December 31, 1994 were pledged to federal funds sold of $2,775,000 at December 31, 1995 and $675,000 at December 31, 1994. In addition, FHLB has a blanket collateral agreement pledging the remaining mortgaged-backed securities, not pledged elsewhere, against the advances outstanding of $1,500,000. The maturities of investment debt securities (all available-for-sale) at December 31, 1995 were: Carrying Fair Amount Value ------ ----- Due from 1 to 5 Years $ 150,891 $ 150,891 Due from 5 to 10 Years 1,155,342 1,155,342 Mortgage-Backed Securities 3,562,364 3,562,364 ---------- ---------- Total Investment Securities $4,868,597 $4,868,597 ========== ========== During 1995, securities available-for-sale and held-to-maturity were sold and/or called for proceeds of $2,779,409 and $1,476,924, respectively, resulting in gross realized gains of approximately $4,294 and gross realized losses of approximately $348. Principal reduction was received on mortgage-backed securities of $491,390. During 1994, securities available-for-sale and held-to-maturity were sold and/or called for proceeds of $3,467,217 and $500,000, respectively, resulting in realized gains of approximately $4,256 and gross realized losses of approximately $75,243 on securities available-for-sale. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 3. LOANS AND LOSS ALLOWANCE Types of loans at December 31 (in thousands) are as follows: 1995 1994 ---- ---- (Dollars in thousands) Commercial & Industrial Loans $ 3,600 $ 3,841 Real Estate Loans (Includes $3,165 & $2,028 Secured by Farm Land) 26,449 17,366 Agricultural Production Financing & Other Loans to Farmers 1,596 1,290 Individuals' Loans for Household & Other Personal Expenditures 9,115 7,621 Other Loans 20 52 ------- ------- Total Loans $40,780 $30,170 ======= ======= Loan maturities and repricing information as of December 31, 1995 is presented below (in thousands):
3 Months 3 Months Over Or To 1 to Five Less 12 Months 5 Years Years Total ---- --------- ------- ----- ----- (Dollars in thousands) Fixed Rate Maturities $5,350 $16,752 $1,431 $ 0 $23,533 Floating Rate Repricing 3,407 4,454 8,419 967 17,247 ------ ------- ------ ---- ------- Totals $8,757 $21,206 $9,850 $967 $40,780 ====== ======= ====== ==== =======
An analysis of the Allowance for Loan Losses for each year follows (in thousands for 1993):
1995 1994 1993 ---- ---- ---- Balances, January 1 $ 335,738 $358,853 $ 316 Provision for Loan Losses 104,000 17,000 50 Recoveries on Loans 54,999 49,148 63 Loans Charged Off (146,944) (89,263) (70) --------- -------- ----- Balances, December 31 $ 347,793 $335,738 $ 359 ========= ======== =====
As of December 31, 1995 there were no impaired loans or loans upon which interest was not being accrued. Loans of $11,876,372 at December 31, 1995 serve as collateral for FHLB advances of $1,500,000. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 4. PREMISES AND EQUIPMENT 1995 1994 ---- ---- Cost at December 31: Land $ 187,000 $ 187,000 Buildings & Land Improvements 1,003,754 687,748 Furniture, Fixtures, Equipment & Vehicles 1,007,940 811,849 Leasehold Improvements 114,931 0 ---------- ----------- Total Cost 2,313,625 1,686,597 Accumulated Depreciation (910,024) (796,541) ---------- ----------- Net, Premises and Equipment $1,403,601 $ 890,056 ========== =========== Total fixed asset purchases for 1995 and 1994, respectively, were $641,004 and $149,523. Total depreciation expense for the years 1995, 1994, and 1993 was $127,460, $108,675, and $132,838, respectively. NOTE 5. INCOME TAXES The Bank adopted Statement of Financial Accounting Standards No. 109 on January 1, 1994. Under this accounting standard, future tax benefits, as well as expenses resulting from timing differences between recognition for financial reporting and tax reporting, are recorded as deferred tax assets and liabilities. The cumulative effect of applying SFAS No. 109 was an increase in equity of $85,761, which was reported as income in 1994. The components of federal income tax expense for the years ended December 31, 1995 and 1994 were as follows: 1995 1994 ---- ---- Current Tax Expense $ 160,399 $ 86,138 Deferred Tax Expense 5,887 8,246 ---------- ----------- Federal Income Tax Expense $ 166,286 $ 94,384 ========== =========== CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 INCOME TAXES (Continued) The provision for federal income taxes differs from that computed by applying federal statutory rates to income before federal income tax expense, as indicated in the following analysis for 1995 and 1994: 1995 1994 ---- ---- Expected Tax Provision at Statutory Rates of 34% $182,735 $122,973 Tax Effect of Exempt Income and Nondeductible Expenses (16,449) (28,589) Federal Income Tax Expenses $166,286 $ 94,384 -------- -------- Effective Tax Rate 31% 26% ======== ======== The components of state income tax expense for the years ended December 31, 1995 and 1994 were as follows: 1995 1994 ---- ---- Current Tax Expense $ 55,566 $ 28,706 Deferred Tax Expense 1,609 5,313 -------- ------- State Income Tax Expense $ 57,175 $ 34,019 The provision for state income taxes differs from that computed by applying state statutory rates to income before federal and state income tax expense, as indicated in the following analysis for 1995 and 1994: 1995 1994 ---- ---- Income Tax at Statutory Rates of 8.5% $ 50,725 $ 31,176 Refund of Prior Years Tax Effect of Exempt Income and Nondeductible Expenses 6,450 2,843 State Income Tax Expense $ 57,175 $ 34,019 -------- -------- Effective Tax Rate 10% 9% ======== ======== The reconciliation of federal statutory to actual tax expense for 1993, in thousands, is as follows: Federal Statutory Income Tax $ 125 Net Operating Loss Carryforward (Benefit) (66) ------ Actual Tax Expense $ 59 ====== CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 INCOME TAXES (Continued) In 1989, as a result of an ownership change of 91% of the corporate stock, for income tax purposes only, certain limitations were imposed on the net operating loss carryforwards available to the Bank for future use. At December 31, 1993, the Bank had no remaining net operating loss carryforwards. Deferred income tax assets and liabilities at December 31, 1995 and 1994 are as follows: 1995 1994 ---- ---- Federal Deferred Tax Assets: Provision for Loan Loss $80,404 $ 76,309 Unrealized Losses on Available- for-Sale Securities 8,617 37,428 ------- --------- Total Federal Deferred Tax Assets 89,021 113,737 ------- --------- Deferred Tax Liabilities: Depreciation of Fixed Assets 30,224 19,693 Franchise Tax Deferred 7,482 8,029 Total Federal Deferred Tax Liability 37,706 27,722 ------- --------- Net Federal Deferred Tax Assets $51,315 $ 86,015 ------- --------- State Deferred Tax Assets: Provision for Loan Loss $29,562 $ 28,538 Unrealized Losses on Available- for-Sale Securities 2,508 10,226 ------- --------- Total State Deferred Tax Assets 32,070 38,764 Deferred Tax Liabilities: Depreciation of Fixed Assets 7,556 4,923 ------- --------- Net State Deferred Tax Liabilities $24,514 $ 33,841 ======= ========= NOTE 6. FEDERAL HOME LOAN BANK ADVANCES The Bank entered into an agreement with the Federal Home Loan Bank of Indianapolis on November 18, 1993 to borrow funds against eligible collateral consisting of 1-4 family whole mortgage loans, government and agency securities, private mortgage-backed securities and Federal Home Loan Bank Deposits. The Board of Directors has authorized the borrowing of up to $5,000,000 under this agreement. There were $1,500,000 of FHLB advances outstanding at December 31, 1995 at 6.62% interest rate, due April 9, 1996. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 7. STOCKHOLDERS' EQUITY The Bank has 150,000 shares of common stock authorized and 126,037 shares issued and outstanding at December 31, 1995. The par value of the stock is $8/share. Without prior approval of the Comptroller of the Currency, the Bank is restricted by national banking laws as to the maximum amount of dividends it can pay in any calendar year from the Bank's retained net profits (as defined) for that year plus the two preceding years. As a practical matter, the Bank restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. There were no dividends paid in 1995 or 1994. The Bank is required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by banking regulation. At December 31, 1995, the Bank is required to have minimum Tier I and total capital ratios of 4.0% and 8.0%, respectively. The Bank's actual ratios at that date were 6.2% and 9.9%, respectively. The Bank's leverage ratio at December 31, 1995 was 6.2%. NOTE 8. RELATED PARTIES The Bank has entered into transactions with its directors and officers. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties at December 31, 1995 and 1994 was $285,972 and $441,062, respectively. During 1995, new loans to such related parties amounted to $80,990 and repayments amounted to $236,080. Related parties had $333,913 and $4,347,086 on deposit with the Bank at December 31, 1995 and 1994, respectively. In addition, during 1994, the Bank purchased land from its majority stockholder for its expansion project in Hanover at a price of $25,000. NOTE 9. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK In order to effectively service its customers, the Bank exposes itself to risk beyond the amount recorded on the Statement of Financial Condition through issuance of loan commitments. The Bank was exposed to additional credit loss to the extent of the notional principal amount of commitments outstanding at December 31, 1995. The Bank evaluates the recipients of CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK (Continued) commitments using the same criteria used to evaluate recipients of loans recorded on the Statement of Financial Condition. Commitments outstanding, including letters of credit and unused lines of credit, totalled $2,955,725 and $2,493,636 at December 31, 1995 and 1994, respectively, and at both dates such commitments included a mix of unsecured amounts as well as amounts secured by real estate, equipment, inventory and accounts receivable. The Bank is a Freddie Mac Approved Seller/Servicer and was servicing 478 loans at December 31, 1995 with an outstanding balance of $22,053,867. These loans have previously been sold to FHLMC. The Bank receives 1/4% interest on all outstanding balances as a servicing fee. The Bank originated and sold $5,636,592 of loans during 1995 and received an average of 1% loan origination fees for these loans. FHLMC has recourse against Citizens National Bank for any losses it incurs in collection of a problem loan if the Bank has not complied with all loan origination requirements. NOTE 10. CONCENTRATIONS OF CREDIT RISK Citizens National Bank grants various types of loans to individuals and businesses located, primarily, in Madison and surrounding counties in both Indiana and Kentucky. Although the Bank's customers have a somewhat diversified background, they are dependent, to some extent, on local industrial manufacturing companies and the agricultural sector of the local economy for the ability to repay their loans. NOTE 11. EMPLOYEE DEFINED CONTRIBUTION PLANS The Bank employees are allowed to participate in the Citizens National Bank of Madison 401K Plan if certain criteria are met regarding length of service and full-time employment status. The Bank has full discretion over contributions made by the Bank. The employees may elect to participate in a deferred or "CODA" arrangement. Under this arrangement, employees dedicate part of their wages as pre-tax contributions to their individual accounts. The Bank has elected to participate by matching part of the employee contribution. Total contributions made by the Bank in 1995, 1994 and 1993 were $25,829, $25,833 and $12,133, respectively. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 12. LEASE COMMITMENTS The Bank occupies a branch location in downtown Madison under a lease which has a term of twelve months from January 1, 1995 to December 31, 1995 with an option to renew the lease for an additional year. The monthly leaseobligation was $475 for 1995 and $500 if renewed for 1996. The minimum lease commitment under this lease is $6,000 for 1996. Total lease payments in 1995, 1994 and 1993 amounted to $5,700, $5,280 and $5,280, respectively. The Bank also leases an automobile. The lease was executed in December 1995 for 24 months. Monthly lease payments are $690. The minimum lease commitment for the next two years is $8,275 per year. The Bank entered into a lease agreement on September 23, 1994 with Wal-Mart to operate a banking facility in the Wal-Mart Supercenter located in Madison. The bank opened the facility in January of 1995. The lease term is for five years and provides for an option to renew the lease for two consecutive five-year terms. The minimum lease payments are $2,111.25 per month. A nonrefundable fee of $40,000 was paid upon execution of this lease for the right to operate the facility. The fee is being amortized over 15 years. NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of the Bank's financial instruments are as follows: Net Carrying Fair Market Value Value ------------ ----------- Financial Assets Cash & Due from Banks $ 2,348,509 $ 2,348,509 Federal Funds Sold 2,775,000 2,775,000 Interest-bearing Deposits 1,702,862 1,702,862 Investment Securities 5,219,347 5,219,347 Loans 40,431,945 40,453,945 Accrued Interest Receivable 451,917 451,917 ----------- ----------- Total Financial Assets $52,929,580 $52,951,580 =========== =========== Financial Liabilities Deposits $49,227,091 $49,264,091 FHLB Advances 1,500,000 1,500,000 Accrued Interest Payable 204,645 204,645 ----------- ----------- Total Financial Liabilities $50,931,736 $50,968,736 =========== =========== The carrying amounts in the preceding table are included in the Statement of Financial Condition under the applicable captions. CITIZENS NATIONAL BANK OF MADISON Notes to Financial Statements December 31, 1995, December 31, 1994 and December 31, 1993 NOTE 14. OWNERSHIP CHANGE On December 29, 1995, management was informed that Madison First Federal Savings & Loan Association, a mutual savings thrift located in Madison, had reached an agreement to purchase 95.5% of the Bank's stock from its major shareholder. Citizens National Bank of Madison STATEMENT OF FINANCIAL CONDITION June 30, 1996 (Unaudited) (In thousands) ASSETS Cash and cash equivalents Cash and due from banks $ 2,498 -------- Federal funds sold 100 Total cash and cash equivalents 2,598 Interest-bearing time deposits -- Investment securities: U.S. Government and agency obligations 3,512 Municipal bonds 1,119 Mortgage-backed investments 3,137 Federal Reserve stock 80 Federal Home Loan Bank stock 271 -------- Total investment securities 8,119 Loans: Loans, net of unearned interest 43,502 Less: allowance for loan losses 499 -------- Net loans 43,003 Premises and equipment, net 1,372 Accrued interest receivable 579 Deferred income tax asset 148 Other assets 366 -------- Total assets $ 56,185 ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand deposits $ 4,976 Savings and NOW accounts 18,800 Certificates of deposit over $100,000 5,741 Other time deposits 22,253 -------- Total deposits 51,770 Federal Home Loan Bank advances 500 Accrued interest payable 198 Other liabilities 269 -------- Total liabilities 52,737 STOCKHOLDERS' EQUITY Common stock ($8 par value, 150,000 shares authorized; 126,037 shares issued and outstanding) 1,008 Surplus 1,657 Undivided profits 883 Unrealized losses on investment securities available for sale, net of related tax effects (100) -------- Total stockholders' equity 3,448 -------- Total liabilities and stockholders' equity $ 56,185 ======== The accompanying notes are an integral part of this statement. Citizens National Bank of Madison STATEMENTS OF INCOME (Unaudited) (In thousands) Six months ended June 30, --------------------------- 1996 1995 ---- ---- Interest income: Interest and fees on loans $1,824 $1,437 Interest on investment securities: Investment securities - taxable 67 16 Investment securities - nontaxable 29 31 ------ ------ Total income on investment securities 96 47 Interest on federal funds sold 71 16 Interest on mortgage-backed securities 109 172 Interest on deposits with banks and other 56 8 ------ ------ Total interest income 2,156 1,680 Interest expense: Interest of deposits 1,100 755 Interest on other borrowed funds 34 21 ------ ------ Total interest expense 1,134 776 ------ ------ Net interest income 1,022 904 Less: provision for loan losses 180 24 ------ ------ Net interest income after provision for loan losses 842 880 Other income: Service charges on deposit accounts 108 79 Other service charges and fees 176 127 Gain on disposal of assets --- 4 Realized gains (losses) on investments (16) 4 Intangible tax refund --- 34 Other operating income 27 31 ------ ------ Total other income 295 279 Other expenses: Salaries and employee benefits 452 380 Premises and equipment expenses 156 125 Advertising 37 43 Business services 55 42 Office supplies and postage 48 41 FDIC and Comptroller assessment 20 52 Amortization - dealer reserve cost 31 26 Other operating expenses 137 146 ------ ------ Total other expenses 936 855 Net income before income tax 201 304 Income tax: State income tax 12 21 Federal income tax 55 87 ------ ------ Total income tax 67 108 ------ ------ NET INCOME $ 134 $ 196 ====== ====== The accompanying notes are an integral part of this statement. Citizens National Bank of Madison STATEMENTS OF INCOME (CONTINUED) (Unaudited) (In thousands) Six months ended June 30, ----------------------------- 1996 1995 ---- ---- EARNINGS PER SHARE Net income $1.06 $1.56 ======= ======= Average shares outstanding 126,037 126,037 ======= ======= The accompanying notes are an integral part of these statements. Citizens National Bank of Madison STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six months ended June 30, ----------------------------- 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 134 $ 196 Adjustments to reconcile net income to net cash provided by operating expenses: Provision for loan losses 180 24 Depreciation 32 50 Amortization - dealer reserve 16 (26) Premium amortization on investments (net of discount accretion) --- (26) Gain (loss) on sale of securities 16 (5) Gain on sale of fixed assets --- (4) Changes in assets and liabilities: Interest receivable (127) (62) Interest payable (7) 43 Other assets and liabilities (179) (95) Deferred tax assets (16) 31 ------- -------- Net cash provided by operating activities 49 126 Cash flows from investment activities: Net change in loans (2,767) (6,591) Purchases of premises and equipment --- (576) Proceeds from sale/ maturity of securities available for sale 2,849 4,559 Proceeds from maturity of securities held to maturity --- --- Purchase of securities and mortgage-backed securities available for sale (5,902) (1,326) Purchase of Federal Reserve Bank stock --- (153) ------- -------- Net cash used in investing activities (5,820) (4,087) Cash flows from financing activities: Proceeds from Federal Home Loan Bank advances 500 1,500 Payments on Federal Home Loan Bank advances (1,500) --- Net change in interest-bearing deposits 2,913 4,594 Net change in noninterest-bearing deposits (370) (245) ------- -------- Net cash provided by financing activities 1,543 5,849 ------- -------- Net increase (decrease) in cash and cash equivalents (4,228) 1,888 Cash and cash equivalents at beginning of period 6,826 2,192 ------- -------- Cash and cash equivalents at end of period $ 2,598 $ 4,080 ======= ======== Supplemental information: Interest paid $ 1,141 $ 733 ======= ======== Taxes paid $ 200 $ 79 ======= ========
The accompanying notes are an integral part of these statements. Citizens National Bank of Madison NOTES TO FINANCIAL STATEMENTS June 30, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation The accompanying unaudited financial statements were not prepared in accordance with generally accepted accounting principles and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto of Citizens National Bank of Madison's annual audited financial statements for the year ended December 31, 1995. However, all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the financial statements have been included. The results of operations for the six-month periods ended June 30, 1996 and 1995 are not necessarily indicative of the results which may be expected for the entire year. 2. Effects of Recent Accounting Pronouncements In October 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 entitled "Accounting for Stock-Based Compensation". SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation paid to employees. SFAS No. 123 recognizes the fair value of an award of stock or stock options on the grant date. Citizens adopted this Statement on January 1, 1996, without material effect on financial condition or results of operations. 3. Reclassifications Certain reclassifications have been made to the June 30, 1995 financial statements to conform to the June 30, 1996 presentation. [LEFT COLUMN BACK COVER] No person has been authorized to give any information or to make any representation other than as contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Holding Company or Madison First. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any security other than the shares Common Stock offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implication that information herein is correct as of any time subsequent to the date hereof. TABLE OF CONTENTS Page ---- Prospectus Summary................................... 5 Selected Consolidated Financial Data of Madison First Federal Savings and Loan Association and Subsidiaries...................... 17 Selected Financial Data of Citizens National Bank of Madison................................... 18 Risk Factors......................................... 25 River Valley Bancorp................................. 31 Madison First Federal Savings and Loan Association... 32 Citizens National Bank of Madison.................... 33 The Acquisition...................................... 34 Unaudited Pro Forma Condensed Combined Financial Statements.............................. 36 Market Area.......................................... 41 Use of Proceeds...................................... 41 Dividend Policy...................................... 42 Market for the Common Stock.......................... 43 Competition.......................................... 44 Anticipated Management Purchases..................... 45 Capitalization....................................... 46 Pro Forma Data....................................... 47 Management's Discussion and Analyis of Financial Condition and Results of Operations of Madison First Federal Savings and Loan Association 51 Business of Madison First............................ 63 Management's Discussion and Analyis of Financial Condition and Results of Operations of Citizens National Bank of Madison................. 82 Business of Citizens................................. 92 Management of the Holding Company.................... 107 Management of Madison First.......................... 107 Executive Compensation and Related Transactions of Madison First.................................. 109 Management of Citizens............................... 115 Executive Compensation and Related Transactions of Citizens.......................... 116 Regulation........................................... 119 Taxation............................................. 129 The Conversion....................................... 130 Restrictions on Acquisition of the Holding Company... 142 Description of Capital Stock......................... 147 Transfer Agent....................................... 148 Registration Requirements............................ 148 Legal and Tax Matters................................ 149 Experts.............................................. 149 Additional Information............................... 149 Index to Financial Statements........................ F-1 Until ________, 1997, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. [RIGHT COLUMN BACK COVER] Up to 1,035,000 Shares River Valley Bancorp (Proposed Holding Company for Madison First Federal Savings and Loan Association and Citizens National Bank of Madison) Common Stock (without par value) SUBSCRIPTION AND DIRECT COMMUNITY OFFERING PROSPECTUS Trident Securities, Inc. November ___, 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution(1). Blue Sky Legal Services and Registration Fees $ 20,000 OTS Filing Fees $ 8,400 NASD Filing Fee $ 1,691 Securities and Exchange Commission Registration Fee $ 4,104 NASDAQ Small Cap Market Listing Fee $ 6,191 Legal Services and Disbursements - Issuer's counsel $ 170,000 Auditing and Accounting Services $ 90,000 Appraisal fees and expenses $ 17,500 Business plan fees and expenses $ 5,000 Conversion agent fees and expenses $ 8,250 Printing costs (including desktop publishing of $25,000) $ 65,000 Postage and mailing $ 20,000 Commissions and other offering fees (2) $ 189,640 Expenses of Sales Agents (Including Counsel Fees and Disbursements) $ 47,000 Advertising $ 10,000 Transfer agent fees $ 2,000 Other expenses $ 2,224 --------- TOTAL (3) $ 667,000 ========= (1) Costs represented by salaries and wages of regular employees and officers of the Registrant are excluded. (2) Assumes that the Common Stock is sold for $9,000,000, the midpoint of the Estimated Valuation Range, that no shares of stock will be sold through brokers, that all shares are sold in the Subscription Offering, and that executive officers and directors of the Registrant and of Citizens National Bank of Madison and their Associates and the River Valley Bancorp Employee Stock Ownership Plan acquire 176,800 shares. (3) All the above items, except the Registration, OTS and NASD Filing Fees, are estimated. Item 14. Indemnification of Directors and Officers. Section 21 of the Indiana Business Corporation Law, as amended (the "BCL"), grants to each corporation broad powers to indemnify directors, officers, employees or agents against expenses incurred in certain proceedings if the conduct in question was found to be in good faith and was reasonably believed to be in the corporation's best interests. This statute provides, however, that this indemnification should not be deemed exclusive of any other indemnification rights provided by the articles of incorporation, by-laws, resolution or other authorization adopted by a majority vote of the voting shares then issued and outstanding. Section 10.05 and Article 13 of the Articles of Incorporation of the Registrant state as follows: Section 10.05. Limitation of Liability and Reliance on Corporate Records and Other Information. Clause 10.051. General Limitation. No Director, member of any committee of the Board of Directors, or of another committee appointed by the Board, Officer, employee or agent of the Corporation ("Corporate Person") shall be liable for any loss or damage if, in taking or omitting to take any action causing such loss or damage, either (1) such Corporate Person acted (A) in good faith, (B) with the care an ordinarily prudent person in a like position would have exercised under similar circumstances, and (C) in a manner such Corporate Person reasonably believed was in the best interests of the Corporation, or (2) such Corporate Person's breach of or failure to act in accordance with the standards of conduct set forth in Clause 10.051(1) above (the "Standards of Conduct") did not constitute willful misconduct or recklessness. Clause 10.052. Reliance on Corporate Records and Other Information. Any "Corporate Person" shall be fully protected, and shall be deemed to have complied with the Standards of Conduct, in relying in good faith, with respect to any information contained therein, upon (1) the Corporate Records, or (2) information, opinions, reports or statements (including financial statements and other financial data) prepared or presented by (A) one or more other Corporate Persons whom such Corporate Person reasonably believes to be competent in the matters presented, (B) legal counsel, public accountants or other persons as to matters that such Corporate Person reasonably believes are within such person's professional or expert competence, (C) a committee of the Board of Directors or other committee appointed by the Board of Directors, of which such Corporate Person is not a member, if such Corporate Person reasonably believes such committee of the Board of Directors or such appointed committee merits confidence, or (D) the Board of Directors, if such Corporate Person is not a Director and reasonably believes that the Board merits confidence. ARTICLE 13 Indemnification Section 13.01. General. The Corporation shall, to the fullest extent to which it is empowered to do so by the Act, or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that he is or was a Director, Officer, employee or agent of the Corporation, or who, while serving as such Director, Officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, whether for profit or not, against expenses (including counsel fees), judgments, settlements, penalties and fines (including excise taxes assessed with respect to employee benefit plans) actually or reasonably incurred by him in accordance with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, in the case of conduct in his official capacity, was in the best interest of the Corporation, and in all other cases, was not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the prescribed standard of conduct. Section 13.02. Authorization of Indemnification. To the extent that a Director, Officer, employee or agent of the Corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Section 13.01 of this Article, or in the defense of any claim, issue or matter therein, the Corporation shall indemnify such person against expenses (including counsel fees) actually and reasonably incurred by such person in connection therewith. Any other indemnification under Section 13.01 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case, upon a determination that indemnification of the Director, Officer, employee or agent is permissible in the circumstances because he has met the applicable standard of conduct. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not at the time parties to such action, suit or proceeding; or (2) if a quorum cannot be obtained under subdivision (1), by a majority vote of a committee duly designated by the Board of Directors (in which designation Directors who are parties may participate), consisting solely of two or more Directors not at the time parties to such action, suit or proceeding; or (3) by special legal counsel: (A) selected by the Board of Directors or its committee in the manner prescribed in subdivision (1) or (2), or (B) if a quorum of the Board of Directors cannot be obtained under subdivision (1) and a committee cannot be designated under subdivision (2), selected by a majority vote of the full Board of Directors (in which selection Directors who are parties may participate); or (4) by the Shareholders, but shares owned by or voted under the control of Directors who are at the time parties to such action, suit or proceeding may not be voted on the determination. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subsection (3) to select counsel. Section 13.03. Good Faith Defined. For purposes of any determination under Section 13.01 of this Article 13, a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 13.01 if his action is based on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (1) one or more Officers or employees of the Corporation or another enterprise whom he reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (3) a committee of the Board of Directors of the Corporation or another enterprise of which the person is not a member if he reasonably believes the committee merits confidence. The term "another enterprise" as used in this Section 13.03 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent. The provisions of this Section 13.03 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in Section 13.01 of this Article 13. Section 13.04. Payment of Expenses in Advance. Expenses incurred in connection with any civil or criminal action, suit or proceeding may be paid for or reimbursed by the Corporation in advance of the final disposition of such action, suit or proceeding, as authorized in the specific case in the same manner described in Section 13.02 of this Article, upon receipt of a written affirmation of the Director, Officer, employee or agent's good faith belief that he has met the standard of conduct described in Section 13.01 of this Article and upon receipt of a written undertaking by or on behalf of the Director, Officer, employee or agent to repay such amount if it shall ultimately be determined that he did not meet the standard of conduct set forth in this Article 13, and a determination is made that the facts then known to those making the determination would not preclude indemnification under this Article13. Section 13.05. Provisions Not Exclusive. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under these Articles of Incorporation, the Corporation's Code of By-Laws, any resolution of the Board of Directors or Shareholders, any other authorization, whenever adopted, after notice, by a majority vote of all Voting Stock then outstanding, or any contract, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, Officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 13.06. Vested Right to Indemnification. The right of any individual to indemnification under this Article shall vest at the time of occurrence or performance of any event, act or omission giving rise to any action, suit or proceeding of the nature referred to in Section 13.01 of this Article 13 and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions. Notwithstanding the foregoing, the indemnification afforded under this Article shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of this Article. To the extent such prior acts or omissions cannot be deemed to be covered by this Article 13, the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. Section 13.07. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a Director, Officer, employee or agent, whether or not the Corporation would have power to indemnify the individual against the same liability under this Article. Section 13.08. Additional Definitions. For purposes of this Article, references to "the Corporation" shall include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. For purposes of this Article, serving an employee benefit plan at the request of the Corporation shall include any service as a Director, Officer, employee or agent of the Corporation which imposes duties on, or involves services by such Director, Officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" referred to in this Article. For purposes of this Article, "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding, or who is threatened to be made a named defendant or respondent in any action, suit or proceeding. For purposes of this Article, "official capacity," when used with respect to a Director, shall mean the office of director of the Corporation; and when used with respect to an individual other than a Director, shall mean the office in the Corporation held by the Officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not. Section 13.09. Payments a Business Expense. Any payments made to any indemnified party under this Article under any other right to indemnification shall be deemed to be an ordinary and necessary business expense of the Corporation, and payment thereof shall not subject any person responsible for the payment, or the Board of Directors, to any action for corporate waste or to any similar action. Under the Act, an Indiana corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against any liability asserted against him or incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the Act. The Registrant has purchased insurance designed to protect and indemnify the Registrant and its officers and directors in case they are required to pay any amounts arising from certain claims, including claims under the Securities Act of 1933, which might be made against the officers and directors by reason of any actual or alleged act, error, omission, misstatement, misleading statement, neglect, or breach of duty while acting in their respective capacities as officers or directors of the Registrant. tem 15. Recent Sales of Unregistered Securities. Because the Registrant was only recently incorporated to act as a holding company upon the completion of the offering registered by means of this Registration Statement, the Registrant has not yet issued any shares of its capital stock or other securities. Item 16. Exhibits and Financial Statement Schedules. (a) The exhibits furnished with this Registration Statement are listed beginning on page E-l. (b) No financial statement schedules are required. Item 17. Undertakings. (1) The undersigned Registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table on the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (2) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of an action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Madison, State of Indiana, on October 30, 1996. RIVER VALLEY BANCORP By /s/ James E. Fritz James E. Fritz President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signatures Title Date - --------------------------------- ----------------------- ----------------- (1) Principal Executive Officer: /s/ James E. Fritz ) James E. Fritz President and ) Chief Executive Officer ) ) (2) Principal Financial and ) Accounting Officer: ) ) ) /s/ John Wayne Deveary Treasurer ) John Wayne Deveary ) ) October 30, 1996 ) (3) The Board of Directors: ) ) //s/ Robert W. Anger ) ROBERT W. ANGER Director ) ) CECIL L. DORTEN Director ) ) JAMES E. FRITZ Director ) ) MICHAEL J. HENSLEY Director ) ) EARL W. JOHANN Director ) ) FRED W. KOEHLER Director ) ) ) ) By: /s/ James E. Fritz James E. Fritz Attorney-in-fact EXHIBIT INDEX Exhibit No. Description Page - ------------- ------------------------------------------------- ----- 1 Form of Agency Agreement to be entered into among Registrant, Madison First Federal Savings and Loan Association, and Trident Securities, Inc. 2 Plan of Conversion * 3(1) Registrant's Articles of Incorporation * (2) Registrant's Code of By-Laws 4 Form of Stock Certificate * 5 Opinion of Barnes & Thornburg re legality of securities being registered * 8(1) Opinion of Barnes & Thornburg re tax matters (2) Opinion of Keller & Company, Inc. re economic value of Subscription Rights * 10(1) Letter Agreements entered into between Registrant and Keller & Company, Inc. relating to appraisal and business plan * (2) River Valley Bancorp Stock Option Plan (3) River Valley Bancorp Recognition and Retention Plan and Trust (4) River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement (5) Employment Agreement between Madison First Federal Savings and Loan Association and James E. Fritz (6) Proposed Employment Agreement between Citizens National Bank of Madison and Robert D. Hoban (7) Existing Employment Agreement between Citizens National Bank of Madison and Robert D. Hoban * (8) Director Deferred Compensation Master Agreement * (9) Director Deferred Compensation Joinder Agreement -- Jerry D. Allen * (10) Director Deferred Compensation Joinder Agreement -- Robert W. Anger * (11) Director Deferred Compensation Joinder Agreement -- Cecil L. Dorten * (12) Director Deferred Compensation Joinder Agreement -- Earl W. Johann * (13) Director Deferred Compensation Joinder Agreement -- Frederick W. Koehler * (14) Director Deferred Compensation Joinder Agreement -- James E. Fritz * (15) Director Deferred Compensation Joinder Agreement -- Michael Hensley * (16) Special Termination Agreement between Madison First Federal Savings and Loan Association and Traci A. Bridgford (17) Special Termination Agreement between Madison First Federal Savings and Loan Association and John Wayne Deveary (18) Special Termination Agreement between Madison First Federal Savings and Loan Association and Robert W. Anger. (19) Special Termination Agreement between Citizens National Bank of Madison and Carolyn Flowers (20) Special Termination Agreement between Citizens National Bank of Madison and Larry Fouse (21) Special Termination Agreement between Citizens National Bank of Madison and Mark Goley (22) Exempt Loan and Share Purchase Agreement between Trust under River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement and River Valley Bancorp (23) Amended and Restated Stock Purchase Agreement between Eloise A. Durocher and Madison First Federal Savings and Loan Association dated as of March 4, 1996 * 21 Subsidiaries of the Registrant * - ------------------- * Previously filed 23(1) Consent of Keller & Company, Inc. * (2) Consent of Grant Thornton LLP (3) Consent of Sherman, Barber & Mullikan (4) Consent of Alexander X. Kuhn & Co. (5) Consent of Barnes & Thornburg (included in Exhibit 5) * 24 Power of Attorney included on page S-6 of the Registration Statement * 99(1) Appraisal Report of Keller & Company, Inc. ** (2) Stock Order Form - ------------------- * Previously filed ** To be filed by amendment EX-1 2 SALES AGENCY AGREEMENT EXHIBIT 1 RIVER VALLEY BANCORP 765,000 to 1,035,000 Shares of COMMON STOCK (without par value) Subscription Price $10.00 Per Share SALES AGENCY AGREEMENT ________, 1996 Trident Securities, Inc. Suite 400 4601 Six Forks Road Raleigh, North Carolina 27609 Gentlemen: River Valley Bancorp, a corporation formed under the laws of Indiana (hereinafter referred to as the "Company"), and Madison First Federal Savings and Loan Association, a federal savings and loan association formed under the laws of the United States (hereinafter referred to as the "Association"), hereby confirm their respective agreements with Trident Securities, Inc., a corporation formed under the laws of North Carolina (hereinafter referred to as "Trident") as follows: 1. The Offering. The Company was incorporated on May 22, 1996, for the purpose of serving as a savings and loan holding company and a bank holding company which will own of record all of the shares of common stock to be issued by the Association in the conversion of the Association from the mutual form to the capital stock form of organization (hereinafter referred to as the "Conversion") pursuant to a Plan of Conversion adopted by the Board of Directors of the Association on March 5, 1996 (hereinafter referred to as the "Plan of Conversion"), and in accordance with the regulations of the Office of Thrift Supervision (hereinafter referred to as the "OTS"). As set forth in the Plan of Conversion, the Company intends to conduct a subscription offering in which a minimum of 765,000 and a maximum of 1,035,000 shares (subject to a possible increase to 1,190,250 shares) of common stock of the Company, without par value (hereinafter referred to as the "Shares"), will be offered to certain eligible subscribers at a purchase price of $10.00 per Share (hereinafter referred to as the "Subscription Offering") in accordance with the terms and subject to the conditions of the Plan of Conversion and the Prospectus (as hereinafter defined). Simultaneously with the Subscription Offering, the Company intends to offer the Shares to the public in a direct community offering (hereinafter referred to as the "Community Offering"). In a transaction which is currently expected to occur simultaneously with the consummation of the Conversion, the Company will acquire 120,429 shares of common stock, $8.00 par value per share, of Citizens National Bank of Madison ("Citizens"), a national banking association (the "Citizens Shares"), which constitute 95.6% of Citizens' issued and outstanding capital stock, pursuant to the terms of an Amended and Restated Stock Purchase Agreement dated March 4, 1996 ("Purchase Agreement"). The Company's acquisition of the Citizens Shares pursuant to the Purchase Agreement is hereinafter referred to as the "Acquisition." Upon consummation of the Acquisition, the Company will own of record the Citizens Shares and will act as the bank holding company of Citizens. The Association and Citizens are hereinafter referred to as the "Institutions." The Company has been advised by Trident that Trident will utilize its best efforts to assist the Company and the Association in the completion of the Conversion and to assist the Company and the Association with the sale of the Shares in the Subscription Offering and in the Community Offering. At the time of the execution of this Sales Agency Agreement (hereinafter referred to as this "Agreement"), the Company delivered to Trident the Prospectus for use in the Subscription Offering and in the Community Offering. The Prospectus contains information with respect to the Company, the Institutions and the Shares. 2. Representations and Warranties. The Company and the Association, jointly and severally, represent and warrant to Trident that: (a) The Company has filed with the Securities and Exchange Commission (hereinafter referred to as the "Commission") a Registration Statement on Form S-1 (Registration No. 333- 5121) and an amendment or amendments thereto, in respect of the registration of the Shares under the Securities Act of 1933, as amended (hereinafter referred to as the "Act"). The Registration Statement complies in all material respects with the Act and the Regulations (as hereinafter defined). The Registration Statement became effective under the Act on ___________________, and no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the Company, threatened by the Commission. Except as the context may otherwise require, such Registration Statement, as amended, on file with the Commission at the time the Registration Statement became effective, including the Prospectus, financial statements, schedules, exhibits and all other documents filed as part thereof, is herein referred to as the "Registration Statement" and the Prospectus on file with the Commission at the time the Registration Statement became effective is herein referred to as the "Prospectus"; provided, however, that if the prospectus filed by the Company with the Commission pursuant to Rule 424(b) of the rules and regulations of the Commission promulgated 2 under the Act (herein referred to as the "Regulations") differs from the form of Prospectus on file at the time the Registration Statement became effective, the term "Prospectus" shall refer to the Rule 424(b) prospectus from and after the time such prospectus is filed with or mailed for filing to the Commission and shall include any amendments or supplements thereto from and after their dates of effectiveness or use, respectively. (b) The Association has filed with the OTS an Application for Approval of Conversion on Form AC, including exhibits and amendments and/or supplements thereto (hereinafter referred to as the "Form AC"). The Form AC complies in all material respects with the rules and regulations of the OTS. The Form AC has been approved by the OTS and such approval is in full force and effect. The Proxy Statement, which is included in the Form AC as Form PS, and the Prospectus, which is included in the Form AC as Form OC, have been approved for use by the OTS and such approval is in full force and effect. No order has been issued by the OTS preventing or suspending the use of such Proxy Statement or the Prospectus. No action by or before the OTS revoking such approvals or orders of effectiveness is pending or, to the knowledge of the Association, threatened. (c) The Company has filed with the OTS an Application on Form H-(e)l-S, including exhibits and amendments and/or supplements thereto (hereinafter referred to as the "Form H-(e)l-S"), for approval of the acquisition of the common stock to be issued by the Association in connection with the Conversion. The Form H-(e)l-S complies in all material respects with the rules and regulations of the OTS. On the Closing Date (hereinafter defined), the Form H-(e)l-S and the acquisition by the Company of all of the common stock of the Association to be issued by the Association in connection with the Conversion will each have received the approval of the OTS. (d) The Company has filed with the Board of Governors of the Federal Reserve Board ("FRB") an Application To Form Holding Company on Form FR Y-3, including exhibits and amendments and/or supplements thereto (hereinafter referred to as the "Form FR Y-3"), to become a bank holding company and for approval of the acquisition of the Citizens Shares pursuant to the Purchase Agreement. The Form FR Y-3 complies in all material respects with the Bank Holding Company Act ("BHCA"), the rules and regulations promulgated thereunder or any other applicable rules or regulations of the FRB. On the Closing Date (hereinafter defined), the Form FR Y-3 and the acquisition by the Company of the Citizens Shares pursuant to the Purchase Agreement will each have received the approval of the FRB. No action by or before the FRB revoking such approvals or orders of effectiveness is pending or, to the knowledge of the Company, threatened. (e) As of the effective date, the Registration Statement (as amended or supplemented, if amended or supplemented) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the date of the Prospectus, the Prospectus (as amended or supplemented, if amended or supplemented) did not contain any untrue statement of a material fact or omit to state any material fact required to 3 be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Representations or warranties in this subparagraph (e) shall not apply to statements or omissions which relate to Trident and which were made in reliance upon and in conformity with written information furnished to the Company or the Association by or on behalf of Trident expressly for use in the Registration Statement and/or the Prospectus. (f) The Company is a corporation duly organized and validly existing under the laws of the State of Indiana with full power and authority to own its properties and conduct its business as set forth in the Prospectus. The Company has all necessary corporate power and authority to enter into this Agreement, to perform all of its obligations hereunder and to consummate the transactions contemplated hereby. The Company has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, all of which are in full force and effect, and the Company is in all material respects complying therewith. (g) The Association is a mutual savings association duly organized, validly existing and in good standing under the laws of the United States with full power and authority to own its properties and conduct its business as set forth in the Prospectus and is a member in good standing of the Federal Home Loan Bank of Indianapolis. The Association has all necessary corporate power and authority to enter into this Agreement, to perform all of its obligations hereunder and to consummate the transactions contemplated hereby. The deposit accounts of the Association are insured up to applicable limits by the Federal Deposit Insurance Corporation (hereinafter referred to as the "FDIC"). The Association has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, all of which are in full force and effect, and the Association is in all material respects complying therewith. (h) The Plan of Conversion has been adopted by the Boards of Directors of the Association and the Company and, before the Closing Date, will be adopted by the members of the Association. As of the date of this Agreement, no person has sought to obtain review of the final action of (i) the OTS in approving the Plan of Conversion, the Conversion or the Form H-(e)1-S pursuant to the Home Owners' Loan Act ("HOLA"), as amended, or any other statute or regulation or (ii) the FRB in approving the Company's application to acquire the Citizens Shares or the Form FR Y-3 pursuant to the BHCA or any other applicable rule or regulation. (i) Upon the effectiveness of the amendment of the Association's Charter and Bylaws in accordance with the rules and regulations of the OTS, and the completion of the sale by the Company of the Shares as contemplated by the Prospectus and the Plan of Conversion, (i) the Association will be converted pursuant to the Plan of Conversion to a capital stock savings and loan association duly organized, validly existing and in good standing under the laws of the United States with full power and authority to own its property and conduct its business as described in the Prospectus; (ii) all of the outstanding capital stock of the Association will be owned of record and beneficially by the Company, free and clear of all liens, charges, encumbrances or restrictions, and (iii) the Company will have no directly-owned wholly-owned subsidiaries other than the Association (and Citizens, if the Acquisition closes on the date of 4 consummation of the Conversion) and will own no equity securities in any entity or business enterprise other than the shares of the Association, the Citizens Shares and the shares of the Subsidiaries (as hereinafter defined) or as otherwise disclosed in the Prospectus. (j) Each of the Company and the Association is duly qualified and in good standing as a foreign corporation in all jurisdictions in which the conduct of its business requires such qualification or, if not so qualified and in good standing, failure to so qualify would not have any material adverse effect on either the Company or the Association. (k) The Subsidiaries (as hereinafter defined) are the wholly-owned direct or indirect subsidiaries of the Association. The Subsidiaries have been duly organized and are validly existing and in good standing under the laws of the State of Indiana with full power and authority to own their properties and conduct their businesses as described in the Prospectus, and the Subsidiaries are not required to be qualified to do business as foreign corporations in any jurisdiction where non-qualification would have a material adverse effect on the Association, the Subsidiaries and the Company taken as a whole. Each of the Subsidiaries hold all material licenses, certificates and permits from governmental authorities necessary for the conduct of its business as described in the Prospectus, and all such licenses, certificates and permits are in full force and effect and the Subsidiaries are in all material respects complying therewith. All of the outstanding stock of the Subsidiaries has been duly authorized and is fully paid and nonassessable, and such stock is owned directly or indirectly by the Association free and clear of any liens or encumbrances. The activities of the Subsidiaries are permitted to subsidiaries of a federally chartered savings association by virtue of the applicable rules and regulations of the OTS and Indiana law (except as to such specific exceptions as may have been granted by any of such agencies); provided, however, that the operations of the Subsidiaries may require divestiture as a result of the Holding Company's acquisition of the Citizens Shares. The Subsidiaries have good and marketable title to all assets material to their businesses and to those assets described in the Prospectus, if any, free and clear of all material liens, charges, encumbrances or restrictions. (l) Each of the Company and the Association has good, marketable and insurable title to all assets material to their respective businesses and to those assets described in the Prospectus as owned by the Company or the Association, free and clear of all material liens, charges, encumbrances or restrictions, except as set forth in the Prospectus. All of the leases and subleases material to the business of the Company and the Association under which any one of them holds properties, including those set forth in the Prospectus, are in full force and effect as described therein. (m) This Agreement has been duly and validly authorized, executed and delivered by each of the Company and the Association and constitutes the valid and legally binding obligation of each of the Company and the Association, enforceable against each of them in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship or other laws affecting creditors' rights generally and as may be limited by the exercise of judicial discretion in applying principles of equity and except as the 5 obligations of the Company and the Association under the indemnization and contribution provisions of Sections 7 and 8 hereof may be unenforceable or against public policy. (n) The Conversion will constitute a tax free reorganization under the Internal Revenue Code of 1986, as amended, and will not be a taxable transaction under the laws of Indiana to the Association or to persons receiving subscription rights in accordance with the Plan of Conversion. The Association and Trident have received the opinion of Barnes & Thornburg, special counsel to the Association, with respect to the federal and Indiana state tax consequences of the Conversion, a copy of which is included as Exhibit 8(1) to the Registration Statement. The facts relied upon by such counsel as set forth in such opinion are accurate and complete as of the date of such opinion. (o) Each of the Company and the Association has all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement and to carry out the terms and conditions hereof. Without limiting the generality of the foregoing sentence, the Company has the power, authority, authorizations, approvals and orders to issue and sell the Shares to be sold by the Company in accordance with this Agreement and the Association has the power, authority, authorizations, approvals and orders to issue and sell the shares of its capital stock to the Company as provided in the Plan of Conversion, subject to the issuance to the Association of an amended Charter in the form required for a federal stock savings and loan association (hereinafter referred to as the "Stock Charter"). The form of the Stock Charter has been approved by the OTS. (p) Each of the Company and the Association has all such power, authority, authorizations, approvals and orders as may be required to enter into the Purchase Agreement and to carry out the terms and conditions thereof. Without limiting the generality of the foregoing sentence, the Company and the Association have the power, authority, authorizations, approvals and orders to acquire the Citizens Shares in accordance with the Purchase Agreement and the Company has the power, authority, authorizations, approvals and orders to become the bank holding company for Citizens as provided in the Form FR Y-3. The obligations of the Purchase Agreement constitute a valid and legally binding obligation of each of the Company and the Association, enforceable against each of them in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship or other laws affecting creditors' rights generally and as may be limited by the exercise of judicial discretion in applying principles of equity. (q) Neither the Company nor the Association is in violation of any rule or regulation of the Commission, the OTS or the FDIC which might materially and adversely affect the condition (financial or otherwise), operations, businesses, assets or properties of the Company or the Association. The Association is not subject to any directive from the OTS or the FDIC (or their predecessors) to make any change in the method of conducting its business or affairs and has conducted its business in material compliance with all applicable statutes and regulations (including, without limitation, all regulations, decisions, directives and order of the FHLB of Indianapolis, the OTS and the FDIC, or their predecessors). Except as set forth in the 6 Prospectus, there is not pending or, to the knowledge of the Company or the Association, threatened any litigation, charge, investigation, action, suit or proceeding before or by any court, regulatory authority or governmental agency or body which, individually or in the aggregate, might affect the performance of the terms and conditions of this Agreement or the consummation of the transactions contemplated hereby or which, individually or in the aggregate, might result in any material adverse change in the condition (financial or otherwise), business, prospects or results of operations of the Company or the Institutions considered as one enterprise. (r) The financial statements of the Association which are included in the Registration Statement and are part of the Prospectus fairly present the statements of financial condition, statements of income, statements of changes in equity capital and statements of cash flows of the Association and its wholly-owned subsidiaries, Madison First Service Corporation and McCauley Insurance Agency, Inc. ("Subsidiaries") at the respective dates thereof and for the respective periods covered thereby and comply in all material respects with the applicable accounting requirements of the Commission and the OTS. Such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as specifically noted in such financial statements, and are true, complete and correct and fairly present the financial position of the Association. The tabular information in the Prospectus accurately presents the information purported to be shown thereby at the respective dates and for the respective periods covered thereby. (s) There has been no material adverse change in the condition (financial or otherwise) of the Company or the Association or in the assets, properties, operations, earnings or business prospects of the Company or the Association since the latest date as of which such condition is set forth in the Prospectus, except as referred to therein. The capitalization, assets, properties and business of each of the Company and the Association conform in all material respects to the descriptions thereof contained in the Prospectus as of the date specified and, since such date, there has been no material adverse change in either the condition (financial or otherwise) of the Company or the Association or in the assets, properties, operations, earnings or business prospects of the Company or the Association, except as referred to therein. Neither the Company nor the Association has any material contingent liabilities of any kind, except as set forth in the Prospectus. (t) No material default exists, and no event has occurred which, with notice or lapse of time, or both, would constitute a default, on the part of either the Company or the Association or, to their knowledge, on the part of any other party, including Citizens, in the due performance and observance of any term, covenant or condition of any agreement which is material to the condition (financial or otherwise) of the Company or the Association. Such agreements are in full force and effect, and no other party to any such agreement has instituted or, to their knowledge, threatened any action or proceeding wherein the Company or the Association would or might be alleged to be in default thereunder. (u) Neither the Company nor the Association is in violation of their respective charter, articles of incorporation, code of bylaws or bylaws or in default in any material respect in the 7 performance of any material obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness by which it is bound. The execution, delivery and fulfillment of the terms of this Agreement and the consummation of the transactions contemplated hereby do not and will not violate or conflict with the respective charter, articles of incorporation, code of bylaws or bylaws of the Company or the Association or, in any material respect, violate, conflict with or constitute a breach of, or default (or an event which, with notice or lapse of time, or both, would constitute a default) under any agreement, indenture or other instrument by which the Company or the Association is bound, or under any governmental license or permit or any law, administrative regulation or authorization, approval, order or court decree, injunction or order to which the Company or the Association is subject. (v) Subsequent to the respective dates as of which information is given in the Prospectus and prior to the Closing Date (hereinafter defined), except as otherwise may be indicated or contemplated therein, neither the Company nor the Association will issue any securities or incur any liability or obligation, direct or contingent, for borrowed money, except borrowings from the Federal Home Loan Bank of Indianapolis and other borrowings in the ordinary course of business, or enter into any other transaction not in the ordinary course of business which is material in light of the businesses and properties of the Company or the Institutions considered as one enterprise. (w) No equity or debt securities of the Company have ever been issued or are outstanding. Upon the consummation of the Conversion, the authorized, issued and outstanding equity capital of the Company shall be as set forth in the Prospectus under the caption "Capitalization," adjusted to give effect to the actual sale of the Shares. The offer, sale and issuance of the Shares have been duly authorized by all necessary action of the Company and approved by the OTS. When issued in accordance with the terms of the Plan of Conversion, the Shares will be validly issued, fully paid and nonassessable, will conform to the description thereof set forth in the Prospectus and will be issued in full compliance with all securities laws applicable to the Company or the Association. The issuance of the Shares is not subject to preemptive rights. Good title to the Shares will be transferred to the purchasers thereof upon issuance thereof against payment therefor, free and clear of all claims, encumbrances, security interests and liens created by the Company or the Association. The certificates evidencing the Shares will conform with the requirements of applicable laws and regulations. (x) No equity securities of the Association have ever been issued or are outstanding. The sale and issuance of the capital stock of the Association to the Company have been duly authorized by all necessary action of the Association and the Company and approved by the OTS. Immediately after the Closing Date, the authorized capital of the Association will consist of 1,000 shares of common stock, par value $.01 per share, 1,000 of which will be issued to and held of record by the Company, and 1,000,000 shares of preferred stock, par value $1.00 per share, none of which will be issued or outstanding. When issued to the Company in accordance with the terms of the Plan of Conversion, such shares of common stock will be validly issued, fully paid and nonassessable and will be issued in full compliance with all securities laws applicable to the Association or the Company. There are no preemptive rights 8 or rights to subscribe for or to purchase any securities of the Association. None of the shares of such capital stock will be issued in violation of any rights of any member of the Association. Good title to such capital stock will be transferred to the Company upon issuance thereof against the payment to the Association of all but 60% of the net proceeds of the sale of the Shares, after giving effect to the loan to be made by the Holding Company to its employee stock ownership plan (the "ESOP Loan"), in cash, free and clear of all claims, encumbrances, security interests and liens whatsoever. Upon the consummation of the Conversion, the liquidation account will be duly established in accordance with the requirements of the OTS and the Plan of Conversion. (y) At the Closing Date, the Company and the Association will have satisfied all conditions precedent to, and conducted the Conversion in all material respects in accordance with the Plan of Conversion, the Regulations and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and conditions precedent to the consummation of the transactions contemplated by the Plan of Conversion, the Acquisition, the approval of the Form AC and the Form H-(e)l-S imposed upon them by the OTS. (z) At the Closing Date, the Company and the Association will have satisfied all conditions precedent to, and conducted the Acquisition in all material respects in accordance with the Purchase Agreement, the Form FR Y-3, and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the consummation of the Acquisition and the approval of the Form FR Y-3 imposed upon them by the FRB. (aa) Upon consummation of the Acquisition, the purchase of the Citizens Shares by the Company, the authorized capital stock of Citizens will consist of 150,000 shares of common stock, par value $8.00 per share, 120,429 of which will be owned of record and held by the Company. When purchased by the Company in accordance with the terms of the Purchase Agreement, the Citizens Shares will be validly issued, fully paid and nonassessable and will be held by the Company in full compliance with all applicable securities laws. There are no preemptive rights or rights to subscribe for or to purchase any securities of Citizens. Good title to the Citizens Shares will be transferred to the Company upon issuance thereof against the payment pursuant to the Purchase Agreement of $3,010,715 of the gross proceeds of the sale of the Shares, in cash, free and clear of all claims, encumbrances, security interests and liens whatsoever. (bb) Appropriate arrangements for placing the funds received from subscriptions for Shares in special interest-bearing accounts with the Association until all Shares are sold and paid for (hereinafter referred to as the "Escrow Account") were made before the commencement of the Subscription Offering, with provision (i) for prompt refund to the subscribers if the minimum number of Shares is not sold within the period prescribed by the Plan of Conversion and Prospectus or if the transactions contemplated by the Prospectus and Plan of Conversion are otherwise not consummated or (ii) for delivery to the Company if the minimum number of Shares is sold and the transactions contemplated by the Prospectus and Plan of Conversion are consummated. 9 (cc) No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement or the issuance and sale of the Shares, except (i) the approval of the OTS and FRB, (ii) the declaration of effectiveness of any required post-effective amendment to the Registration Statement by the Commission and approval thereof by the OTS, (iii) the issuance to the Association of the Stock Charter by the OTS, (iv) the approval of the Form H-(e)1-S, (v) the approval by the National Association of Securities Dealers, Inc. (the "NASD") of the fairness of the compensation to be paid to Trident pursuant to this Agreement, (ii) the approval of the Form FR Y-3, (vii) the listing of the Shares on the NASDAQ Small Cap Market, and (viii) as may be otherwise required under the securities laws of various jurisdictions. (dd) All contracts and other documents required to be filed as exhibits to the Registration Statement, the Form AC, the Form H-(e)1-S and/or the Form FR Y-3 have been filed with the Commission, the OTS and/or the FRB. (ee) Grant Thornton LLP, the public accounting firm which has certified the financial statements and supporting schedules of the Association included in the Prospectus, are independent certified public accountants within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants ("AICPA") and 12 C.F.R. ss. 571.2(c)(3). Sherman, Barber & Mulliken and Alexander X. Kuhn & Co., the public accounting firms which have certified the financial statements and supporting schedules of Citizens included in the Prospectus, are independent certified public accountants within the meaning of the Code of Professional Ethics of the AICPA and 12 C.F.R. ss. 571.2(c)(3). (ff) Each of the Company and the Association has (i) timely filed all required federal, state and foreign tax returns and no deficiency has been asserted with respect to such returns by any taxing authorities, (ii) paid all taxes that have become due and (iii) made adequate reserves for similar future tax liabilities. (gg) The records of account holders, depositors, borrowers and other members of the Association delivered to Trident by the Association or its agent for use during the Conversion are reliable and accurate. (hh) The Association has not engaged in any transaction in connection with which the Association or the Company could be subject to either a civil penalty assessed pursuant to Section 502(i) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. No material liability to the Pension Benefit Guaranty Corporation has been or is expected by the Association to be incurred by the Company or the Association with respect to any pension plan subject to ERISA (a "Pension Plan"). There has been no "reportable event" (within the meaning of Section 4043(b) of ERISA) with respect to any Pension Plan and no event or condition which presents a material risk of the termination of any Pension Plan by the Pension Benefit Guaranty Corporation. Full payment has been made of all amounts which the Association is required, under the terms of any Pension Plan, to have paid as contributions to 10 such Pension Plan as of the date hereof, and no "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Pension Plan. (ii) Keller & Company, Inc. (the "Appraiser"), the corporation which prepared an appraisal of the estimated pro forma fair market value of the Company and the Association, has advised the Company, the Association and Citizens that the Appraiser is independent with respect to each of them within the meaning of the Conversion Regulations. (jj) The Company and the Association are in compliance with all laws, rules and regulations relating to environmental protection, and neither the Company nor the Association has any reason to believe that the Company or the Association is subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any similar law, except for violations which, if asserted, would not have a material adverse effect on the Company and the Association. There are no actions, suits, regulatory investigations or other proceedings pending or, to the best knowledge of the Company or the Association, threatened against the Company or the Association relating to environmental protection. No disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has been caused by the Company or the Association or, to their best knowledge, has occurred on, in, at or about any of the facilities or properties of the Company or the Association, except such disposal, release or discharge which, if discovered, would not have a material adverse effect on the Company and the Association. (kk) The seller of the Citizens Shares identified in the Purchase Agreement has good and marketable title to these shares and has authority to sell the Citizens Shares to the Company pursuant to the Purchase Agreement. (ll) All of the loans represented as assets of the Association on the most recent financial statements of the Association included in the Prospectus meet or are exempt from all requirements of federal, state or local law pertaining to lending, including without limitation truth in lending (including the requirements of 12 C.F.R. Part 226 ("Regulation Z")), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material adverse effect on the Company or the Association, taken as a whole. (mm) Neither the Company nor the Association nor any employee of the Company or the Association, has made any payment of funds of the Company or the Association prohibited by law, and no funds of the Company or the Association have been set aside to be used for any payment prohibited by law. (nn) No labor dispute with the employees of the Company or the Association exists or, to the actual knowledge of the Company or the Association, is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any 11 of its principal suppliers or contractors which might be expected to result in any material adverse change in the financial condition, results of operations or business of the Company and the Association, taken as a whole. (oo) The Company and the Association are in compliance in all material respects with the applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transaction Reporting Act of 1970, as amended, and the rules and regulations thereunder. (pp) The Company has received approval, subject to regulatory approval to consummate the Conversion and issue the Shares and subject to certain other standard conditions, to have the Shares quoted through the NASDAQ Small Cap Market effective on the Closing Date. 3. Retention of Trident. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Association hereby agree with Trident as follows: (a) Assistance with Conversion. The Association and the Company hereby retain Trident to assist the Association and the Company in the Conversion by (i) training and educating the Association's employees in respect of the mechanics and regulatory requirements of the conversion process; (ii) keeping records of all subscriptions for the Shares; and (iii) obtaining proxies from the Association's members for use at the Special Meeting of Members at which the Conversion is to be considered. (b) Assistance with Community Offering. The Association and the Company hereby retain Trident to act as the exclusive agent of the Association and the Company in assisting in the sale of the Shares in the Community Offering; provided, however, that the Association and the Company acknowledge and agree that Trident may offer to other NASD-registered broker dealers selected by the Association and Trident ("Selected Dealers") the opportunity to solicit subscriptions for the Shares to be sold in the Community Offering on a best efforts basis pursuant to the terms and conditions of Selected Dealer Agreements between Trident and such Selected Dealers. Trident and the Association will determine the Selected Dealers to assist the Association during the Community Offering. Preference in the Community Offering shall be given to residents of Jefferson County, Indiana. (c) Other Matters. Subscriptions shall be offered in the Subscription Offering only during the subscription period by means of Order Forms as described in the Prospectus and may be offered in the Community Offering by means of Order Forms or by solicitations of indications of interest from customers of Trident or Selected Dealers residing in those states in which the Shares may be qualified for offer and sale. The Association and the Company shall notify Trident promptly after the expiration of the Subscription Offering of the number of Shares sold in the Subscription Offering and the aggregate number of Shares remaining available to be sold in the Community Offering. The Association and the Company shall provide Trident with any 12 information (which shall be accurate and reliable) necessary to assist Trident in allocating the Shares in the event of an oversubscription. The Association and the Company, jointly and severally, shall indemnify and hold harmless each of Trident and the Selected Dealers against any losses, claims, damages or liabilities resulting from reliance under any records of depositors, borrowers and other members of the Association delivered to Trident by the Association or its agents for use during the Conversion. Trident agrees that any Selected Dealer Agreements between Trident and Selected Dealers will provide that Selected Dealers will solicit indications of interest from their customers to place orders for the purchase of Shares as of a certain date (the "Order Date") and, upon request by Trident, (i) submit orders to purchase Shares, for which they have previously received indications of interest from their customers, (ii) mail confirmations of receipt of orders to each subscriber confirming interest on the business day following the Order Date, (iii) debit accounts of such subscribers on the third business day from the Order Date ("Settlement Date"), and (iv) forward completed Order Forms together with such funds to the Association on the Settlement Date for deposit in a segregated account. (d) Fees and Expenses. (i) As compensation for Trident's services hereunder, the Company and the Association, jointly and severally, agree to pay Trident compensation and reimbursement as follows: (I) a management fee in the amount of one-half of one percent (0.5%) of the aggregate dollar amount of shares sold in the Subscription Offering and the Community Offering; (II) a commission equal to two percent (2.0%) of the aggregate dollar amount of shares sold in the Subscription Offering, excluding any Shares sold to the Association's or Citizens' directors, executive officers (including shares sold to "associates" as that term is defined in the Plan of Conversion) or employee stock ownership plan; and (III) a commission equal to two percent (2%) of the aggregate dollar amount of shares sold in the Community Offering, but excluding such shares sold by Selected Dealers. In connection with shares sold by Selected Dealers, the total commission shall not exceed four and one-half percent (4.5%). (ii) In addition to the fees described in subparagraph (i) of this Section 3(d), the Company and the Association jointly and severally, agree to reimburse Trident for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by Trident in connection with the Conversion, which expenses shall not exceed $47,000 (of which $10,000 has previously been paid to Trident as an advance) without the Association's consent; provided, however, that such $47,000 shall be exclusive of fees and disbursements of counsel and any expenses payable by the Association and the Company pursuant to subparagraph (iii) of this Section 3(d) to the extent incurred in the first instance by Trident. The expenses to be reimbursed hereunder, including fees and disbursements of Trident's counsel, shall be payable by the Association and the Company as they are 13 incurred by Trident and billed to the Association, and shall be payable whether or not the Closing occurs or this Agreement is terminated for any reason. (iii) Whether or not the Closing occurs or this Agreement is terminated for any reason, (I) the Company and the Association will pay all expenses incident to the performance of their obligations in connection with the Conversion, including, without limitation, all fees and disbursements of their counsel, all expenses incurred in the preparation, printing, filing and distribution of all documents relating to the Conversion, telephone charges, air freight, rental equipment, supplies, marketing materials, all fees and expenses of the Company's transfer agent and all transfer taxes payable with respect to the sale of the Shares, (II) the Company and the Association will reimburse Trident for all expenses required to be reimbursed pursuant to subparagraph (d)(ii) of this Section 3 and (III) the Company and the Association will reimburse Trident for any out-of-pocket accountable expenses (including fees and disbursements of counsel) incurred by them in connection with the matters referred to in Section 5(d) of this Agreement and the preparation of memoranda relating thereto and for any filing fees of the NASD relating to the Shares. The expenses to be reimbursed to Trident pursuant to subparagraph (d)(iii)(I) and (III) of this Section 3 shall be in addition to, and not subject to the limitations on, the expenses to be reimbursed to Trident pursuant to (ii) above. (e) Termination. The employment of Trident hereunder shall terminate upon the first to occur of the following: (i) the forty-fifth day after the expiration of the Subscription Offering, unless the Association and the Company, with the approval of the OTS, are permitted to extend such date; (ii) the Closing; or (iii) the termination of this Agreement pursuant to Section 10 hereof. 4. Closing. (a) Subject to the terms and upon the conditions of the Agreement, the closing of the purchase and sale of the Shares (herein referred to as the "Closing") shall take place at the offices of Barnes & Thornburg, 11 South Meridian Street, Indianapolis, Indiana, at 10:00 a.m., Indianapolis time, on a business day which is agreed upon by the parties hereto, but which is not later than the fifth business day after the date upon which the Association certifies to the OTS that at least the minimum number of Shares permitted to be sold in the Conversion has been sold against payment therefor (herein referred to as the "Closing Date"). (b) In accordance with the regulations of the OTS and the Regulations, before the commencement of the Subscription Offering, appropriate arrangements will be made for placing the funds received in payment for the shares of Common Stock in the Escrow Account until such shares are sold and paid for at the Closing. If the Closing does not occur within the time specified in Section 3(e)(i) of this Agreement, the Association will promptly refund all funds in the Escrow Account to the persons who have the beneficial interests therein. 14 (c) At the Closing, the Shares will be issued by the Company against payment of the purchase price therefor by wire transfer in immediately available funds from the Escrow Account. Certificates representing the Shares shall be prepared in definitive form and in such denominations and registered in such names as set forth in the Order Forms or, in the case of Shares not subscribed for pursuant to Order Forms, in such names as Trident (or Selected Dealers, if applicable) may request, upon at least two business days' prior notice to the Association, and shall be, (i) in the case of Shares subscribed for pursuant to Order Forms, delivered by the Company directly to the purchasers thereof as promptly as practicable following the Closing, and (ii) in the case of Shares not subscribed for pursuant to Order Forms, made available for checking and packaging at least one business day before the Closing at a location to be designated by Trident. 5. Further Agreements. The Company and the Association, jointly and severally, covenant and agree that: (a) The Company will deliver to Trident, from time to time, such number of copies of the Prospectus as Trident may reasonably require. The Company hereby authorizes and directs Trident to use the Prospectus in connection with the offer and sale of the Shares. (b) The Company will notify Trident immediately upon obtaining knowledge thereof, and confirm the notice in writing: (i) when any post-effective amendment to the Registration Statement becomes effective or when any supplement to the Prospectus has been filed with the Commission; (ii) of the issuance by the Commission of any stop order relating to the Registration Statement or of the initiation or the threat of any proceedings for such purpose; (iii) of the receipt of any notice with respect to the suspension of the qualification of the Shares for offering or sale in any jurisdiction; (iv) of the receipt of any comments from the staff of the Commission relating to the Registration Statement or from the staff of the OTS relating to the Form AC or the Form H-(e)1-S; and (v) of the receipt of any comments from the staff of the FRB relating to the Form FR Y-3. In the event the Commission enters a stop order relating to the Registration Statement at any time, the Company will make every reasonable effort to obtain the lifting of such order at the earliest possible moment. (c) During the time when a prospectus is required to be delivered under the Act, the Company will comply with all requirements of the Act, as now in effect and as hereafter amended, and with the Regulations, as from time to time in force, so far as necessary to permit the continuance of offers and sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If, during the period when the Prospectus is used in connection with the offer and sale of the Shares, any event relating to or affecting the Company, the Association or Citizens shall occur as a result of which it is necessary, in the opinion of counsel for the Company or counsel for Trident, to amend, or supplement the Prospectus in order to make the Prospectus not false or misleading in light of the circumstances existing at the time the Prospectus is delivered to a purchaser of the Shares, the Company shall forthwith prepare and 15 furnish to Trident a reasonable number of copies of an amendment or amendments or of a supplement or supplements to the Prospectus (in form and substance reasonably satisfactory to counsel for Trident) which shall amend or supplement the Prospectus so that, as amended or supplemented, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser of the Shares, not misleading. The Company will not file or use any amendment or supplement to the Registration Statement or the Prospectus of which Trident has not first been furnished a copy or as to which Trident shall reasonably object after having been furnished such copy. For the purposes of this subsection (c), the Company, the Association and Citizens shall furnish such information with respect to themselves as Trident from time to time reasonably may request. (d) The Company will take all reasonably necessary action as may be required to qualify or register the Shares for offer and sale by the Company under the securities or "blue sky" laws of such jurisdictions as Trident and the Company or its counsel may agree upon; provided, however, that the Company will not be obligated to qualify as a foreign corporation under the laws of any such jurisdiction. In each jurisdiction in which such qualification or registration will be effected, the Company, unless Trident agrees that such action is not necessary or advisable in connection with the distribution of the Shares, will file and make such statements or reports as are, or reasonably may be, required by the laws of such jurisdiction. (e) The liquidation account for the benefit of eligible account holders as of December 31, 1994 and supplemental eligible account holders as of [June 30, 1996], will be duly established and maintained in accordance with the requirements of the OTS and such eligible account holders and supplemental eligible account holders who continue to maintain their savings accounts in the Association will have an inchoate interest in their pro rata portion of the liquidation account which shall have a priority superior to that of the holders of the Shares in the event of a complete liquidation of the Association. (f) The Company will file a registration statement for the Shares under Section 12(g) of the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "Exchange Act"), upon completion of the Subscription Offering and the Community Offering pursuant to the Plan of Conversion and will request that such registration statement become effective upon the completion of the Conversion. The Company will maintain the effectiveness of such registration under Section 12(g) of the Exchange Act for not less than three (3) years or such shorter period as may be required by the OTS' approval of the Form AC. (g) For a period of three (3) years from the date of this Agreement, the Company will furnish the following to Trident: (i) As soon as publicly available after the end of each fiscal year, a copy of its Annual Report to Shareholders for such year; (ii) As soon as publicly available, a copy of each report or definitive proxy 16 statement of the Company filed with the Commission under the Exchange Act or mailed to shareholders; and (iii) From time to time, such other public information concerning the Company as Trident may reasonably request. (h) The Company will use the net proceeds from the sale of the Shares in the manner set forth in the Prospectus under the caption "Use of Proceeds." (i) The Company will not deliver the Shares until each and every condition set forth in Section 6 of this Agreement has been satisfied in full, unless such condition is waived in writing by Trident. (j) The Company will provide Trident with any information necessary to assist Trident in allocating the Shares in the event of an oversubscription. Such information will be accurate and reliable. The Company will indemnify and hold harmless Trident from and against any liability arising out of any records of account holders, other depositors, borrowers or other members of the Association delivered to Trident by the Company or the Association or their agents for use during the Conversion. (k) The Company and the Association will take such actions and furnish such information as are reasonably requested by Trident in order for Trident to ensure compliance with the NASD's "Interpretation Relating to Free Riding and Withholding." 6. Conditions of Trident's Obligations. The obligations of Trident set forth in this Agreement shall be subject to the accuracy of the representations and warranties contained in Section 2 of this Agreement as of the date hereof and as of the Closing Date, to the accuracy of the statements of officers and directors of the Company, the Association and Citizens made pursuant to the provisions hereof, to the performance by the Company and the Association of their obligations hereunder, and to the following additional conditions: (a) At the Closing Date, the Company and the Association will have satisfied the conditions precedent to, and will have conducted the Conversion in all material respects in accordance with the Plan of Conversion and all applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and conditions precedent to the Conversion imposed by, among other authorities, the OTS and/or the Commission. (b) At the Closing Date, the Company and the Association will have satisfied the conditions precedent to, and will have effected the Acquisition in all material respects in accordance with the Purchase Agreement and all applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and conditions precedent to the Acquisition imposed by, among other authorities, the FRB, the OTS and/or the Commission. (c) On the Closing Date, Trident shall receive an opinion of Barnes & Thornburg, special 17 counsel for the Company and the Association (hereinafter referred to as "Special Counsel"), dated as of the Closing Date, addressed to Trident, in form and substance reasonably satisfactory to counsel for Trident and to the effect that: (i) The Company is a corporation duly organized and validly existing under the laws of the State of Indiana with full power and authority to own its properties and conduct its business as set forth in the Prospectus. The Company has all necessary corporate power and authority to enter into this Agreement, to perform all of its obligations hereunder and to consummate the transactions contemplated hereby. To their knowledge, the Company has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, all of which are in full force and effect, and the Company is in all material respects complying therewith. (ii) The Association is a mutual savings association validly existing and in good standing under the laws of the United States with full power and authority to own its properties and conduct its business as set forth in the Prospectus and is a member in good standing of the Federal Home Loan Bank of Indianapolis. The Association has all necessary corporate power and authority to enter into this Agreement, to perform all of its obligations hereunder and to consummate the transactions contemplated hereby. The deposit accounts of the Association are insured up to applicable limits by the FDIC. To their knowledge, the Association has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, all of which are in full force and effect, and the Association is in all material respects complying therewith. (iii) The Company has all necessary corporate power and authority to enter into the Purchase Agreement, to perform all of its obligations thereunder and to consummate the Acquisition contemplated thereby. To their knowledge, the Company has obtained all licenses, permits and other governmental authorizations currently required for it to act as the holding company of Citizens, all of which are in full force and effect, and the Company is in all material respects complying therewith. (iv) The Plan of Conversion has been adopted by the Board of Directors and members of the Association and approved by the Board of Directors of the Company. As of the date of this Agreement, no person has sought to obtain review of the final action of the OTS in approving the Plan of Conversion, the Conversion or the Form H-(e)l-S pursuant to the HOLA, as amended, or any other statute or regulation. (v) The Purchase Agreement has been adopted and approved by the Board of Directors of the Company. As of the date of this Agreement, no person has sought to obtain review of the final action of the FRB in approving the Acquisition, the Company's application to become the bank holding company for Citizens or the Form FR Y-3 pursuant to the BHCA, as amended, or any other statute or regulation. 18 (vi) Upon the effectiveness of the amendment of the Association's Charter and Bylaws in accordance with the rules and regulations of the OTS and the completion of the sale by the Company of the Shares as contemplated by the Prospectus and the Plan of Conversion, (I) the Association will be converted pursuant to the Plan of Conversion to a capital stock savings association duly organized, validly existing and in good standing under the laws of the United States with full power and authority to own its property and conduct its business as described in the Prospectus; (II) all of the outstanding capital stock of the Association will be owned of record and beneficially by the Company; and (III) the Company will have no direct subsidiaries other than the Association and Citizens. (vii) Each of the Company and the Association is duly qualified and in good standing to do business as a foreign corporation in all jurisdictions in which the conduct of its business requires such qualification or, if not so qualified and in good standing, failure to so qualify would not have any material adverse effect on either the Company or the Association. (viii) Each of the Association and the Subsidiaries has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, except where the failure to obtain such licenses, permits and other governmental authorizations would not have a material adverse effect on its financial condition, business or results of its operations; and all such licenses, permits and other governmental authorizations are in full force and effect. (ix) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been fully and validly authorized by all necessary action on the part of each of the Company and the Association. This Agreement is a legal, valid and binding obligation of each of the Company and the Association, enforceable against each of them in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship or other laws affecting creditors' rights generally and as may be limited by the exercise of judicial discretion in applying principles of equity and except as the obligations of the Company and the Association under the indemnification and contribution provisions of Sections 7 and 8 hereof may be unenforceable or against public policy, as to which no opinion need be rendered. (x) Each of the Company and the Association has all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement and to carry out the terms and conditions hereof. Without limiting the generality of the foregoing sentence, the Company has the power, authority, authorizations, approvals and orders (I) to issue and sell the Shares to be sold by the Company in accordance with this Agreement, (II) upon consummation of the Acquisition, to hold the Citizens Shares as owner of record and (III) to become the bank holding company for Citizens. The Association has the power, authority, authorizations, approvals and orders to issue and 19 sell the shares of its capital stock to the Company as provided in the Plan of Conversion, subject to the issuance of an amended Charter in the form required for a federal stock savings and loan association (hereinafter referred to as the "Stock Charter"). The form of the Stock Charter has been approved by the OTS. (xi) To their knowledge, neither the Company nor the Association is in violation of any rule or regulation of the Commission or the OTS, which might materially and adversely affect the condition (financial or otherwise), operations, businesses, assets, or properties of the Company or the Association. To their knowledge, the Association is not subject to any written directive from the OTS or the FDIC (or their predecessors) to make any material change in the method of conducting its business or affairs and has conducted its business in material compliance with all applicable statutes and regulations (including, without limitation, all regulations, decisions, directives and orders of the FHLB of Indianapolis, the OTS, and the FDIC, or their predecessors). Except as set forth in the Prospectus, to their knowledge, there is not pending or threatened any litigation, charge, investigation, action, suit or proceeding before or by any court, regulatory authority or governmental agency or body which might affect the performance of the terms and conditions of this Agreement or the consummation of the transactions contemplated hereby or which might result in any material adverse change in the condition (financial or otherwise), business, prospects or results of operations of the Company or the Association. (xii) To their knowledge, no material default exists, and no event has occurred which, with notice or lapse of time, or both, would constitute a default, on the part of either the Company or the Association in the due performance and observance of any term, covenant or condition of any agreement which is material to the condition (financial or otherwise) of the Company or the Association. To their knowledge, such agreements are in full force and effect, and no other party to any such agreement has instituted or threatened any action or proceeding wherein the Company or the Association would or might be alleged to be in default thereunder. (xiii) To their knowledge, neither the Company nor the Association is in violation of their respective charter, articles of incorporation or bylaws or in default in any material respect in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness. The execution, delivery and fulfillment of the terms of this Agreement and the consummation of the transactions contemplated hereby do not and will not violate or conflict with the respective charter, articles of incorporation or bylaws of the Company or the Association or, in any material respect, violate, conflict with or constitute a breach of, or default (or an event which, with notice or lapse of time, or both, would constitute a default) under any material agreement, indenture or other instrument by which either the Company or the Association is bound, or under any governmental license or permit or any law, administrative regulation or authorization, approval or order, court decree, injunction or order to which the Company or the Association is subject. 20 (xiv) No equity or debt securities of the Company have ever been issued or are outstanding. Upon the consummation of the Conversion, the authorized, issued and outstanding equity capital of the Company shall be as set forth in the Prospectus under the caption "Capitalization," adjusted to give effect to the actual sale of the Shares. The offer, sale and issuance of the Shares have been duly authorized by all necessary action of the Company and approved by the OTS. When issued in accordance with the terms of the Plan of Conversion, the Shares will be validly issued, fully paid and nonassessable and will conform to the description thereof set forth in the Prospectus. The issuance of the Shares is not subject to preemptive rights. Good title to the Shares will be transferred to the purchasers thereof upon issuance thereof against payment therefor. The certificates evidencing the Shares will conform in all material respects with the requirements of applicable laws and regulations. (xv) No equity securities of the Association have ever been issued or are outstanding. The offer, sale and issuance of the capital stock of the Association to the Company have been duly authorized by all necessary action of the Association and the Company and approved by the OTS. Immediately after the Closing Date, the authorized capital of the Association will consist of 1,000 shares of common stock, par value $.01 per share, 1,000 of which will be issued to the Company, and 1,000,000 shares of preferred stock, par value $1.00 per share, none of which will be issued or outstanding. When issued in accordance with the terms of the Plan of Conversion, such common stock will be validly issued, fully paid and nonassessable. There are no preemptive rights or rights to subscribe for or to purchase any capital stock of the Association. None of the shares of such capital stock will be issued in violation of any rights of any member of the Association. Good title to such capital stock will be transferred to the Company upon issuance thereof against the payment to the Association of all but 60% of the net proceeds of the sale of the Shares, after giving effect to the ESOP Loan, in cash, free and clear of all claims, encumbrances, security interests and liens whatsoever. Upon the consummation of the Conversion, the liquidation account will be duly established in accordance with the requirements of the OTS and the Plan of Conversion. (xvi) At the Closing Date, the Company and the Association will have satisfied all material conditions precedent to, and conducted the Conversion in all material respects in accordance with, the Plan of Conversion, the Regulations and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the consummation of the transactions contemplated by the Plan of Conversion and the approval of the Form AC and the Form H-(e)l-S imposed upon them by the OTS. (xvii) No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement or the issuance and sale of the Shares, except (i) the approval of the OTS, (ii) the declaration of effectiveness of any required post-effective amendment to the Registration Statement by the Commission and approval thereof by the OTS, (iii) the issuance to the Association of the Stock 21 Charter by the OTS, (iv) the approval of the Form H-(e)1-S, (v) the approval of the NASD of the fairness of the compensation to be paid to Trident pursuant to this Agreement, (vi) the approval of the FRB, (vii) the listing of the Shares on the NASDAQ Small Cap Market, and (viii) as may be otherwise required under the securities laws of various jurisdictions. (xviii) The Company may offer, issue and sell the Shares in the Subscription Offering and, if necessary, in the Community Offering without registration of the Company or its directors, officers or employees as brokers, dealers, salesmen or investment advisors under the Exchange Act or the Investment Company Act of 1940. (xix) The statements in the Prospectus under the captions "Dividend Policy," "Capitalization," "Regulation," "Taxation," "The Conversion," "Restrictions on Acquisition of the Holding Company" and "Description of Capital Stock," insofar as they are, or refer to, statements of law or legal conclusions, have been prepared or reviewed by such Special Counsel and are correct in all material respects. (xx) The Form AC and the Form H-(e)1-S have been approved by the OTS and the Prospectus has been authorized by the OTS and the Commission. The Stock Charter has been approved by the OTS. The Registration Statement and any post-effective amendment thereto have been declared effective by the Commission. No proceedings are pending by or before the Commission or the OTS seeking to revoke or rescind the orders declaring the Registration Statement or the Prospectus effective nor, to their knowledge, are any such proceedings contemplated or threatened. (xxi) The Form AC, the Registration Statement and the Prospectus (in each case as amended or supplemented, if so amended or supplemented) comply as to form in all material respects with the requirements of the Act, and the applicable rules, regulations, and all written decisions and orders of the OTS and the Commission, as the case may be (except as to financial statements, notes to financial statements, financial tables and other financial and statistical data included therein as to which no opinion need be expressed). All documents and exhibits required to be filed with the Form AC and the Registration Statement (in each case as amended or supplemented, if so amended or supplemented) have been so filed, the description in the Form AC and the Registration Statement of such documents and exhibits is accurate in all material respects and presents fairly the information required to be shown. To their knowledge, there are no contracts or other documents of a character required to be described in the Registration Statement or the Prospectus which are not described and there are no statutes or regulations applicable to, certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by, or legal or governmental proceedings, past, pending or threatened, against the Company or the Association of a character required to be disclosed in the Form AC, the Registration Statement or the Prospectus which have not been so disclosed and properly described therein. 22 (xxii) In connection with the preparation of the Registration Statement and Prospectus, Special Counsel has participated in conferences with certain officers, employees and other representatives of, and certain representatives of the independent public accountants for the Company and the Association as well as reviewed various documents and other information deemed relevant thereto and, in connection therewith, nothing has come to the attention of Special Counsel that would lead them to believe (I) that the Registration Statement, as amended or supplemented, if amended or supplemented (except as to financial statements, notes to financial statements, financial tables and other financial and statistical data contained therein, as to which Special Counsel need not express an opinion), at the time it became effective, at the time any post-effective amendment thereto became effective and at the Closing Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein not misleading, or (II) that the Prospectus, as amended or supplemented, if amended or supplemented (except as to financial statements, notes to financial statements, financial tables and other financial and statistical data contained therein, as to which Special Counsel need not express an opinion), at the time the Registration Statement became effective or at the time any amendment or supplement to the Prospectus was filed with the Commission or transmitted to the Commission for filing, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In rendering such opinion, Special Counsel may state that they have not undertaken to verify independently the information in the Registration Statement or Prospectus and, therefore, do not assume any responsibility for the accuracy or completeness thereof. In giving such opinion, such counsel may rely as to certain matters of fact on certificates of officers and directors of the Company and the Association, and certificates of public officials delivered pursuant hereto and on the opinion of qualified local counsel, satisfactory to Trident, with respect to matters particularly within the knowledge and scope of representation of such counsel. Such opinion may be governed by, and interpreted in accordance with, the Legal Opinion Accord of the ABA Section of Business Law (1991). 23 (d) On the Closing Date, Trident shall have received such opinion of Thacher Proffitt & Wood, counsel for Trident, with respect to certain matters as Trident may reasonably request, and such counsel shall have received such documents, papers and records as they request for the purpose of enabling them to pass upon such matters. (e) Counsel for Trident shall have been furnished such documents as they reasonably may require for the purpose of enabling them to review or pass upon the matters required by Trident and for the purpose of evidencing the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained, including, but not limited to, resolutions of the Board of Directors of the Company and the Association regarding the authorization of this Agreement and the transactions contemplated hereby. (f) Prior to and at the Closing Date, in the reasonable opinion of Trident: (i) there shall have been no material adverse change in the financial or other condition of the Company or the Institutions considered as one enterprise from that as of the latest date as of which such condition is set forth in the Prospectus; (ii) there shall have been no material transaction entered into by the Company or the Institutions from the latest date as of which the financial condition of the Company or the Institutions is set forth in the Prospectus, other than transactions referred to or contemplated therein and transactions in the ordinary course of business; (iii) neither the Company nor the Association shall have received from the OTS any direction (oral or written) to make any material change in the method of conducting their respective businesses with which they have not complied (which direction, if any, shall have been disclosed to Trident) or which materially and adversely would affect the business, operations, financial condition or income of the Company or the Association; (iv) Citizens shall not have received from the OCC any direction (oral or written) to make any material change in the method of conducting its business with which it has not complied (which direction, if any, shall have been disclosed to Trident) or which materially and adversely would affect the business, operations, financial condition or income of Citizens; (v) no action, suit or proceeding, at law or in equity, or before or by any federal or state commission, board or other administrative agency, or before any arbitrator or arbitrators, shall be pending or threatened against the Company or the Institutions or affecting any of their respective assets wherein an unfavorable decision, ruling or finding materially and adversely would affect the business, operations, financial condition or income of the Company or the Institutions; and (vi) the Shares shall have been qualified or registered for offering and sale by the Company under the securities or "blue sky" laws of each jurisdiction upon which Trident and the Company shall have agreed. (g) At the Closing Date, Trident shall receive a certificate of the President and the Principal Financial Officer of each of the Company and the Association (hereinafter referred to as the "Officers"), dated the Closing Date, to the effect that: (i) the Officers have carefully examined the Prospectus and at the time the Prospectus became authorized for final use, the Prospectus did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the date the Prospectus became authorized for final use, no event has occurred which should have been set forth in an amendment or supplement to the 24 Prospectus which has not been so set forth, including, without limitation, any material adverse change in the business, financial condition, income or operations of the Company or the Association and the conditions set forth in clauses (ii) through (iv) inclusive of subsection (g) of this Section 6 have been satisfied; (iii) no order has been issued by the Commission, the OTS or the FRB to suspend the approval of the Acquisition, the effectiveness of the Prospectus or to terminate the Subscription Offering or the Community Offering and, to the best knowledge of the Officers, no action for such purposes has been instituted or threatened by the Commission, the OTS or the FRB; (iv) to the best knowledge of the Officers, no person has sought to obtain review of the final action of the OTS approving the Plan pursuant to Section 5(i)(2)(B) of the Home Owners' Loan Act of 1933, as amended; (v) to the best knowledge of the Officers, no person has sought to obtain review of the final action of the FRB approving the Acquisition and Purchase Agreement pursuant to the BHCA; and (vi) all of the representations and warranties contained in Section 2 of this Agreement are true and correct with the same force and effect as though expressly made on the Closing Date. (h) At the Closing Date, Trident shall receive a certificate of the President and the Principal Financial Officer of Citizens (hereinafter referred to as the "Citizens Officers"), in form and substance reasonably satisfactory to Trident, dated the Closing Date, to the effect that: (i) the consolidated financial statements and the related notes thereto included in the Registration Statement and the Prospectus present fairly the consolidated financial position of Citizens at the respective dates indicated and the results of operations, retained earnings and cash flows for the periods specified comply as to form in all material respects with the applicable accounting requirements of the Regulations and the Conversion Regulations; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules and tables included in the Registration Statement present fairly the information required to be stated therein; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein (A) there has been no material adverse change in the financial condition, results of operations or business affairs of Citizens, whether or not arising in the ordinary course of business, and (B) except for transactions specifically referred to or contemplated in the Prospectus, there have been no transactions entered into by Citizens other than those in the ordinary course of business, which are material with respect to Citizens; (iii) Citizens is a national banking association in stock form, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; Citizens has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, except where the failure to obtain such licenses, permits or other governmental authorizations would not have a material adverse effect on the financial condition, results of operations or business affairs of Citizens; all such licenses, permits and other governmental 25 authorizations are in full force and effect and Citizens is in all material respects in compliance therewith; Citizens has not received notice of any proceeding or action relating to the revocation or modification of any such license, permit or other governmental authorization which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the financial condition, results of operations or business affairs of Citizens; (iv) all acts or other proceedings required to be taken by or on the part of Citizens, including the consummation of the Acquisition, and the necessary approvals, consents, authorizations or notifications required to be taken to consummate the Acquisition, have been properly taken or obtained; neither the execution and delivery of the Purchase Agreement nor the consummation of the Acquisition, with or without the giving of notice or the lapse of time, or both, will: (I) violate any provision of the charter or bylaws of Citizens, or (II) violate, conflict with, result in the material breach or termination of, constitute a material default thereunder, accelerate the performance required by, or result in the creation of any material lien, charge or encumbrance upon any of the properties or assets of Citizens pursuant to any indenture, mortgage, deed of trust or other agreement or instrument to which Citizens is a party or which it or any of its properties or assets may be bound, or violate any statute, rule, or regulation applicable to Citizens, and to their knowledge, there exists no consent, approval, authorization, order, registration or qualification of or with any court, regulatory authority or other governmental body, other than as specifically contemplated under this Agreement or the Purchase Agreement or as is required for consummation of the Acquisition; (v) the deposit accounts of Citizens are insured to applicable limits by the FDIC; (vi) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Time, except as otherwise may be indicated or contemplated in the Prospectus, Citizens has not (A) issued any securities or incurred any material liability or obligation, direct or contingent, or borrowed money, except borrowings in the ordinary course of business from the same or similar sources indicated in the Prospectus, or (B) entered into any transaction or series of transactions which is material in light of Citizens' business, excluding transactions in the ordinary course of business and consistent with past practice or as otherwise indicated in the Prospectus; (vii) Citizens is not in violation of its charter or bylaws; and Citizens is not in default (nor has any event occurred which, with notice or lapse of time, or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which Citizens is a party or by which it may be bound, or to which any of its property or assets is subject, except for such defaults that would not, individually or in the aggregate, have a material adverse effect on the financial condition, results of operations or business of Citizens; 26 (viii) no labor dispute with the employees of Citizens exists or, to its knowledge, is imminent; (ix) Citizens has good and marketable title to all properties and assets for which ownership is material to its business and to those properties and assets described in the Prospectus as owned by Citizens free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material in relation to business; and all of the leases and subleases material to the business of Citizens under which it holds properties, including those described in the Prospectus, are valid and binding agreements of Citizens enforceable in accordance with their terms; (x) Citizens is not in violation of any rule or regulation of the Commission, the FRB or the OCC, which might materially and adversely affect the condition (financial or otherwise), operations, businesses, assets, or properties of Citizens or the consummation of the Acquisition. To their knowledge, Citizens is not subject to any written directive from the OCC or the FDIC (or their predecessors) to make any material change in the method of conducting its business or affairs and has conducted its business in material compliance with all applicable statutes and regulations (including, without limitation, all regulations, decisions, directives and orders of the OCC, and the FDIC, or their predecessors). (xi) Citizens is not in violation of any directive from the OCC to make any material changes in the method of conducting its business; Citizens has conducted and is conducting its business so as to comply in all material respects with all applicable statutes, regulations and administrative and court decrees (including, without limitation, all regulations, decisions, directives and orders of the OCC or the FDIC); (xii) there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of Citizens, threatened against or affecting Citizens which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might result in any material adverse change in the financial condition, results of operations or business affairs of Citizens, or which might materially and adversely affect the properties or assets thereof or which might materially and adversely affect the consummation of the Acquisition; all pending legal or governmental proceedings to which Citizens is a party or of which any of its property or assets is subject which are not described in the Registration Statement, including ordinary routine litigation incidental to its business, are considered in the aggregate not material. (xiii) all of the loans represented as assets on the most financial statements or selected financial information of Citizens included in the Prospectus meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulations Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement procedures, consumer credit 27 protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not result in a material adverse effect on the financial condition, results of operations or business of Citizens; (xiv) to the knowledge of Citizens, no employee of Citizens has made any payment of funds prohibited by law or set aside any funds for any payment prohibited by law; (xv) Citizens is in compliance in all material respects with the applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transaction Reporting Act of 1970, as amended, and the rules and regulations thereunder; (xvi) Citizens and any properties owned or operated by Citizens (I) are in compliance with all laws, rules and regulations relating to environmental protection, (II) Citizens has no reason to believe that it is subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any similar law, except for violations which, if asserted, would not have a material adverse effect on Citizen, (III) there are no actions, suits, regulatory investigations or other proceedings pending or, to the best knowledge of Citizens threatened against it relating to environmental protection, and (IV) no disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has been caused by Citizens or, to the best of its knowledge, has occurred on, in, at or about any of the facilities or properties of Citizens except such disposal, release or discharge which, if discovered, would not have a material adverse effect on Citizens; and (xvii) Citizens has filed all federal income and state and local franchise tax returns required to be filed and have made timely payments of all taxes shown as due and payable in respect of such returns, and no deficiency has been asserted with respect thereto by any taxing authority. (i) At the Closing Date, Trident shall receive, among other documents, (i) a copy of the letter from the OTS approving the Conversion and authorizing the use of the Prospectus, (ii) a copy of the order of the Commission declaring the Registration Statement effective; (iii) a copy of a letter from the OTS evidencing the good standing of the Association; (iv) a copy of a Certificate of Existence in respect of the Company from the Indiana Secretary of State; (v) a copy of the Company's articles of incorporation certified by the Indiana Secretary of State; (vi) a copy of the letter from the OTS approving the Association's Stock Charter; and (vii) a copy of the letter from the FRB approving the Acquisition. (j) As soon as available after the Closing Date, Trident shall receive a certified copy of the Association's Stock Charter executed by the OTS. (k) Concurrently with the execution of this Agreement, Trident shall have received letters from Grant Thornton LLP, independent certified public accountants, dated the date hereof and 28 addressed to Trident: (i) confirming that Grant Thornton LLP is a firm of independent public accountants within the meaning of the Act and the Regulations and 12 C.F.R. ss. 571.2(c)(3) and stating in effect that in Grant Thornton LLP's opinion the financial statements of the Association and the Subsidiaries as are included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Regulations and generally accepted accounting principles; (ii) stating in effect that, on the basis of certain agreed upon procedures (but not an audit examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim financial statements of the Association prepared by the Association, a reading of the minutes of the meetings of the Board of Directors of the Association, meetings of members of the Association and consultations with officers of the Association responsible for financial and accounting matters, nothing came to their attention which caused them to believe that: (A) such unaudited financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Prospectus; or (B) during the period from the date of the latest unaudited financial statements included in the Prospectus to a specified date not more than three business days prior to the date hereof, there was any material increase in borrowings, defined as advances from the FHLB of Indianapolis, securities sold under agreements to repurchase and any other form of debt other than deposits of the Association (increases in borrowings will not be deemed to be material if such increase in total borrowings outstanding does not exceed $1,000,000); (C) there was any decrease in retained earnings of the Association at the date of such letter as compared with amounts shown in the latest unaudited statement of condition included in the Prospectus; or (D) there was any decrease in net income or net interest income of the Association for the number of full months commencing immediately after the period covered by the latest unaudited income statement included in the Prospectus, and ended on the latest month end prior to the date of the Prospectus or of such letter as compared to the corresponding period in the preceding year; and (iii) stating that, in addition to the audit examination of the Association referred to in its opinion included in the Prospectus and the performance of the procedures referred to in clause (ii) of this subsection (l), they have compared with the general accounting records of the Association, which are subject to the internal controls of the Association, accounting system and other data prepared by the Association, directly from such accounting records, to the extent specified in such letter, such amounts and/or percentages set forth in the Prospectus as Trident may reasonably request; and they have found such amounts and percentages to be in agreement therewith (subject to rounding). (l) Concurrently with the execution of this Agreement, Trident shall have received a letter from Grant Thornton LLP, independent certified public accountants, dated the date hereof and addressed to Trident, stating in effect that: (i) on the basis of certain agreed upon procedures (but not an audit examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim financial statements of Citizens prepared by Citizens, a reading of the minutes of the meetings of the Board of Directors of Citizens, and consultations with officers of Citizens responsible for financial and accounting matters, nothing came to their attention which caused them to believe that: (A) during the period from the date of the latest unaudited financial statements included in the Prospectus to a specified 29 date not more than three business days prior to the date hereof, there was any material increase in borrowings, defined as advances from the FHLB of Indianapolis, securities sold under agreements to repurchase and any other form of debt other than deposits of Citizens (increases in borrowings will not be deemed to be material if such increase in total borrowings outstanding does not exceed $1,000,000); (B) there was any decrease in retained earnings of Citizens at the date of such letter as compared with amounts shown in the latest unaudited statement of condition included in the Prospectus; or (C) there was any decrease in net income or net interest income of Citizens for the number of full months commencing immediately after the period covered by the latest unaudited income statement included in the Prospectus, and ended on the latest month end prior to the date of the Prospectus or of such letter as compared to the corresponding period in the preceding year; and (ii) stating that, in addition to the performance of the procedures referred to in clause (i) of this subsection (m), they have compared with the general accounting records of Citizens, to the extent specified in such letter, such amounts and/or percentages set forth in the Prospectus as Trident may reasonably request; and they have found such amounts and percentages to be in agreement therewith (subject to rounding). (m) Concurrently with the execution of this Agreement, Trident shall have received letters from the public accounting firms of Sherman, Barber & Mulliken and Alexander X. Kuhn & Co., which shall confirm that: (i) each of Sherman Barber & Mulliken and Alexander X. Kuhn & Co. is a firm of independent public accountants within the meaning of the Act and the Regulations and 12 C.F.R. ss. 571.2(c)(3) and stating in effect that in each of their opinions the financial statements of Citizens as are included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Regulations and generally accepted accounting principles. Concurrently with the execution of this Agreement, Trident also shall have received a letter from Sherman, Barber & Mulliken stating in effect that, on the basis of certain agreed upon procedures (but not an audit examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim financial statements of Citizens prepared by Citizens, a reading of the minutes of the meetings of the Board of Directors of Citizens and consultations with officers of Citizens responsible for financial and accounting matters, nothing came to their attention which caused them to believe that such unaudited financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Prospectus. (n) At the Closing Date, Trident shall receive a letter in form and substance satisfactory to counsel for Trident from Grant Thornton LLP, independent certified public accountants, dated the Closing Date and addressed to Trident, confirming the statements made by them in the letter delivered by them pursuant to subsections (k) through (l) inclusive as of a specified date not more than five (5) business days prior to the Closing Date. (o) All corporate proceedings and action taken by the Company or the Association in connection with the issuance and sale of the Shares and the Acquisition as herein contemplated and all opinions and certificates mentioned above or elsewhere in this Agreement shall be reasonably satisfactory in form and substance to Trident and their counsel. 30 All such opinions, certificates, letters and documents prepared for Trident's reliance shall be in compliance with the provisions hereof only if they are, in the reasonable opinion of Trident and their counsel, satisfactory to Trident and their counsel. Any certificates signed by an officer or director of the Company, the Association or Citizens prepared for Trident's reliance and delivered to Trident or to counsel for Trident shall be deemed a representation and warranty by the Company, the Association and Citizens to Trident as to the statements made therein. If any condition to Trident's obligations hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled, Trident may terminate this Agreement or, if Trident so elects, may waive any such conditions which have not been fulfilled, or may extend the time of their fulfillment. If Trident terminates this Agreement in accordance with the foregoing, the Company or the Association shall reimburse Trident for its accountable expenses as provided in Section 3(d) of this Agreement. 7. Indemnification. The Company and the Association, jointly and severally, hereby agree to indemnify and hold harmless Trident, its officers, directors and employees and each person, if any, who controls Trident within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act: (a) Against any and all loss, liability, claim, damage and expense whatsoever, including, but not limited to, legal fees and expenses, reasonably incurred by Trident in investigating, preparing to defend or defending against any action, proceeding or claim (whether commenced or threatened) (i) arising out of any misrepresentation by the Company or the Association in this Agreement, including, but not limited to, the breach of any representation or warranty set forth in this Agreement, or any breach of warranty by the Company or the Association with respect to this Agreement or (ii) arising out of or based upon any untrue or alleged untrue statement of a material fact or the omission or alleged omission of a material fact required to be stated or necessary to make not misleading any statements contained in (I) the Registration Statement or the Prospectus or (II) any application (including, but not limited to, the Form AC) or other document or communication (hereinafter collectively referred to in this Section 7 as the "Applications") prepared or executed by or on behalf of the Company or the Association or based upon written information furnished by or on behalf of the Company or the Association with the consent of the Company or the Association to effect the Conversion, the Acquisition or qualify the Shares under the securities law of the United States or any state or filed with the Commission, the OTS or the FRB, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company or the Association with respect to Trident by or on behalf of Trident expressly for use in the Prospectus or any amendment or supplement thereof or in any Application. This indemnity shall be in addition to any liability the Company or the Association may have to Trident otherwise. (b) Against any and all loss, liability, claim, damage and expense whatsoever to the extent of the aggregate amount paid in settlement of any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company or the Association. 31 (c) Against any and all expenses whatsoever (including the fees and disbursements of counsel chosen by Trident) reasonably incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subsection (a) or (b) of this Section 7. (d) Trident hereby agrees to indemnify and hold harmless the Company and the Association, their respective officers, directors and employees and each person, if any, who controls the Company and the Association within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company and the Association to Trident, but only with respect to statements or omissions, if any, made in the Prospectus or any amendment or supplement thereof or in any Application in reliance upon, and in conformity with, written information furnished to the Company or the Association with respect to Trident by or on behalf of Trident expressly for use in the Prospectus or in any Application. (e) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying party of the commencement thereof; provided, however, that the omission to so notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 7. In case any such action is brought against any indemnified party, and the indemnified party notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that the indemnifying party may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than the reasonable cost of investigation, except as otherwise provided herein. In the event the indemnifying party elects to assume the defense of any such action and retain counsel acceptable to the indemnified party, the indemnified party may retain additional counsel, but shall bear the fees and expenses of such counsel unless (i) the indemnifying party shall have specifically authorized the indemnified party to retain such counsel or (ii) the parties to such suit include such indemnifying party and the indemnified party, and such indemnified party shall have been advised by counsel that one or more material legal defenses may be available to the indemnified party which may not be available to the indemnifying party, in which case the indemnifying party shall not be entitled to assume the defense of such suit notwithstanding the indemnifying party's obligation to bear the fees and expenses of such counsel. An indemnifying party against whom indemnity may be sought shall not be liable to indemnify an indemnified party under this Section 7 if any settlement of any such action is effected without such indemnifying party's consent. 32 8. Contribution. (a) In order to provide for just and equitable contribution in circumstances in which the indemnity provided for in Section 7 of this Agreement is for any reason held to be unavailable to Trident other than in accordance with its terms, the Company and/or the Association and Trident shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity incurred by the Company and/or the Association and Trident (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and/or the Association on the one hand and Trident on the other from the offering of the Shares or, (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and/or the Association on the one hand and Trident on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and/or the Association, on the one hand, and Trident, on the other, shall be deemed to be in the same proportions as the total proceeds from the Conversion (before deducting expenses) received by the Company and/or the Association bear to the total fees received by Trident under this Agreement. The relative fault of the Company and/or the Association on the one hand and Trident on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and/or the Association or by Trident, the relative intent of the parties, the knowledge of the parties, access to information, and opportunity to correct or prevent such statement or omission. (b) The Company and the Association and Trident agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, Trident shall not be required to contribute any amount in excess of the amount by which fees owed Trident pursuant to this Agreement exceed the amount of any damages which Trident has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section ll(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. 9. Survival of Agreements, Representations and Indemnities. The respective indemnities of the Company and the Association and Trident and the representations and warranties of the Company and the Association set forth in or made pursuant to this Agreement shall remain in full force and effect regardless of any termination or cancellation of this Agreement or any 33 investigation made by or on behalf of Trident or the Company or the Association or any controlling person or indemnified party referred to in Section 7 of this Agreement, and shall survive any termination of this Agreement and/or the issuance of the Shares. Any successor or assign of Trident, the Company or the Association, any such controlling person and any legal representative of Trident, the Company or the Association, and any such controlling person of Trident, the Company or the Association shall be entitled to the benefit of the respective agreements, indemnities, warranties and representations contained in this Agreement. 10. Termination. Trident may terminate this Agreement by giving notice at any time after this Agreement becomes effective, as follows: (a) If any domestic or international event or act or occurrence has materially disrupted the United States securities markets such as to make impracticable, in Trident's opinion, proceeding with the offering of the Shares; or if trading on the New York Stock Exchange shall have been suspended or if limits in prices or volumes or the manner of trading shall have been imposed by the New York Stock Exchange; or if the United States shall have become involved in a war or major hostilities; or if a general banking moratorium has been declared by a state or federal authority; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if there shall have been a material adverse change in the capitalization, condition or business of the Company, the Association or Citizens; or if the Company, the Association or Citizens shall have sustained a material or substantial loss by, but not limited to, fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not said loss shall have been insured; if there shall have been a material adverse change in the condition or prospects of the Company, the Association or Citizens, considered as one enterprise; or if Trident elects to terminate this Agreement under any other section of this Agreement. (b) If Trident elects to terminate this Agreement as provided in this Section 10, the Company and the Association shall be notified promptly by Trident by telephone or telegram, confirmed by letter. (c) If this Agreement is terminated by Trident for any of the reasons set forth in subsection (a) of this Section 10, the Company or the Association shall reimburse Trident for any expenses incurred by them and reimbursable in accordance with Section 3(d)(ii) and (iii) of this Agreement. 11. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and: If sent to Trident, shall be mailed, delivered or telegraphed and confirmed to: Trident Securities, Inc. 4601 Six Forks Road, Suite 400 Raleigh, North Carolina 27609 34 Attention: Mr. Timothy Lavelle with a copy to: Richard A. Schaberg, Esq. Thacher Proffitt & Wood 1500 K Street, N.W. Suite 200 Washington, D.C. 20005 If sent to the Company or the Association, shall be mailed, delivered or telegraphed and confirmed to: Madison First Federal Savings and Loan Association 303 Clifty Drive P.O. Box 626 Madison, Indiana 47250 Attention: James E. Fritz with a copy to: Claudia V. Swhier, Esq. Barnes & Thornburg 1313 Merchants Bank Building 11 South Meridian Street Indianapolis, Indiana 46204 12. Parties. The Company and the Association shall be entitled to act and rely on any request, notice, consent, waiver or agreement purportedly given on behalf of Trident when the same shall have been given by the undersigned. Trident shall be entitled to act and rely on any request, notice, consent, waiver or agreement purportedly given on behalf of the Company or the Association, when the same shall have been given by the undersigned or any other officer of the Company or the Association. This Agreement shall inure solely to the benefit of, and shall be binding upon, Trident, the Company, the Association and the controlling persons and indemnified parties referred to in Section 7 of this Agreement, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under, or in respect of, or by virtue of, this Agreement or any provision herein contained. 13. Closing. At the Closing, Trident shall submit a list of the persons subscribing for the Shares and the number of Shares so subscribed. The Company or the Association shall deliver to Trident in immediately available funds the fees, commissions and remaining expenses due and owing to Trident as set forth in Section 3(d) of this Agreement and the opinions and certificates required hereby and other documents deemed reasonably necessary by Trident shall be executed and delivered to effect the sale of the Shares as contemplated hereby and pursuant to the terms of the Prospectus. 35 14. Partial Invalidity. In the event that any term, provision or covenant of this Agreement or the application thereof to any circumstance or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of such term, provision or covenant to any other circumstance or situation shall not be affected thereby, and each term, provision or covenant of this Agreement shall be valid and enforceable to the full extent permitted by law. 15. Construction. This Agreement shall be construed in accordance with the substantive laws of the State of Indiana, except to the extent that federal law applies. 16. Counterparts. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute but one and the same instrument. If the foregoing correctly sets forth the understanding between Trident and the Company and the Association, please so indicate in the space provided below for that purpose, whereupon it shall constitute a binding agreement between Trident and the Company and the Association. Very truly yours, RIVER VALLEY BANCORP By: ------------------------------------- James E. Fritz President and Chief Executive Officer MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION 36 By: ------------------------------------- James E. Fritz President and Chief Executive Officer Accepted as of the date first above written. TRIDENT SECURITIES, INC. By: ------------------------ Timothy E. Lavelle President 37 EX-3.2 3 CODE OF BY-LAWS Exhibit 3(2) CODE OF BY-LAWS OF RIVER VALLEY BANCORP ARTICLE I Offices Section 1. Principal Office. The principal office (the "Principal Office") of River Valley Bancorp (the "Corporation") shall be at 303 Clifty Drive, P.O. Box 626, Madison, Indiana 47250, or such other place as shall be determined by resolution of the Board of Directors of the Corporation (the "Board"). Section 2. Other Offices. The Corporation may have such other offices at such other places within or without the State of Indiana as the Board may from time to time designate, or as the business of the Corporation may require. ARTICLE II Seal Section 1. Corporate Seal. The corporate seal of the Corporation (the "Seal") shall be circular in form and shall have inscribed thereon the words "River Valley Bancorp" and "INDIANA." In the center of the seal shall appear the word "Seal." Use of the Seal or an impression thereof shall not be required, and shall not affect the validity of any instrument whatsoever. ARTICLE III Shareholder Meetings Section 1. Place of Meeting. Every meeting of the shareholders of the Corporation (the "Shareholders") shall be held at the Principal Office, unless a different place is specified in the notice or waiver of notice of such meeting or by resolution of the Board or the Shareholders, in which event such meeting may be held at the place so specified, either within or without the State of Indiana. Section 2. Annual Meeting. The annual meeting of the Shareholders (the "Annual Meeting") shall be held each year at 3:00 o'clock P.M. on the third Wednesday in April (or, if such day is a legal holiday, on the next succeeding day not a legal holiday), for the purpose of electing directors of the Corporation ("Directors") and for the transaction of such other business as may legally come before the Annual Meeting. If for any reason the Annual Meeting shall not be held at the date and time herein provided, the same may be held at any time thereafter, or the business to be transacted at such Annual Meeting may be transacted at any special meeting of the Shareholders (a "Special Meeting") called for that purpose. Section 3. Notice of Annual Meeting. Written or printed notice of the Annual Meeting, stating the date, time and place thereof, shall be delivered or mailed by the Secretary or an Assistant Secretary to each Shareholder of record entitled to notice of such Meeting, at such address as appears on the records of the Corporation, at least ten and not more than sixty days before the date of such Meeting. Section 4. Special Meetings. Special Meetings, for any purpose or purposes (unless otherwise prescribed by law), may be called by only the Chairman of the Board of Directors (the "Chairman"), if any, or by the Board, pursuant to a resolution adopted by a majority of the total number of Directors of the Corporation, to vote on the business proposed to be transacted thereat. All requests for Special Meetings shall state the purpose or purposes thereof, and the business transacted at such Meeting shall be confined to the purposes stated in the call and matters germane thereto. -1- Section 5. Notice of Special Meetings. Written or printed notice of all Special Meetings, stating the date, time, place and purpose or purposes thereof, shall be delivered or mailed by the Secretary or the President or any Vice President calling the Meeting to each Shareholder of record entitled to notice of such Meeting, at such address as appears on the records of the Corporation, at least ten and not more than sixty days before the date of such Meeting. Section 6. Waiver of Notice of Meetings. Notice of any Annual or Special Meeting (a "Meeting") may be waived in writing by any Shareholder, before or after the date and time of the Meeting specified in the notice thereof, by a written waiver delivered to the Corporation for inclusion in the minutes or filing with the corporate records. A Shareholder's attendance at any Meeting in person or by proxy shall constitute a waiver of (a) notice of such Meeting, unless the Shareholder at the beginning of the Meeting objects to the holding of or the transaction of business at the Meeting, and (b) consideration at such Meeting of any business that is not within the purpose or purposes described in the Meeting notice, unless the Shareholder objects to considering the matter when it is presented. Section 7. Quorum. At any Meeting, the holders of a majority of the voting power of all shares of the Corporation (the "Shares") issued and outstanding and entitled to vote at such Meeting (after giving effect to the provisions in Article 11 of the Articles of Incorporation of the Corporation, as the same may, from time to time, be amended (the "Articles")), represented in person or by proxy, shall constitute a quorum for the election of Directors or for the transaction of other business, unless otherwise provided by law, the Articles or this Code of By-Laws, as the same may, from time to time, be amended (these "By-Laws"). If, however, a quorum shall not be present or represented at any Meeting, the Shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the Meeting from time to time, without notice other than announcement at the Meeting of the date, time and place of the adjourned Meeting, unless the date of the adjourned Meeting requires that the Board fix a new record date (the "Record Date") therefor, in which case notice of the adjourned Meeting shall be given. At such adjourned Meeting, if a quorum shall be present or represented, any business may be transacted that might have been transacted at the Meeting as originally scheduled. Section 8. Voting. At each Meeting, every Shareholder entitled to vote shall have one vote for each Share standing in his name on the books of the Corporation as of the Record Date fixed by the Board for such Meeting, except as otherwise provided by law or the Articles, and except that no Share shall be voted at any Meeting upon which any installment is due and unpaid and no share which is not entitled to vote pursuant to Article 11 of the Articles shall be voted at any Meeting. Voting for Directors and, upon the demand of any Shareholder, voting upon any question properly before a Meeting, shall be by ballot. A plurality vote shall be necessary to elect any Director, and on all other matters, the action or a question shall be approved if the number of votes cast thereon in favor of the action or question exceeds the number of votes cast opposing the action or question, except as otherwise provided by law or the Articles. Section 9. Shareholder List. The Secretary shall prepare before each Meeting a complete list of the Shareholders entitled to notice of such Meeting, arranged in alphabetical order by class of Shares (and each series within a class), and showing the address of, and the number of Shares entitled to vote held by, each Shareholder (the "Shareholder List"). Beginning five business days before the Meeting and continuing throughout the Meeting, the Shareholder List shall be on file at the Principal Office or at a place identified in the Meeting notice in the city where the Meeting will be held, and shall be available for inspection by any Shareholder entitled to vote at the Meeting. On written demand, made in good faith and for a proper purpose and describing with reasonable particularity the Shareholder's purpose, and if the Shareholder List is directly connected with the Shareholder's purpose, a Shareholder (or such Shareholder's agent or attorney authorized in writing) shall be entitled to inspect and to copy the Shareholder List, during regular business hours and at the Shareholder's expense, during the period the Shareholder List is available for inspection. The original stock register or transfer book (the "Stock Book"), or a duplicate thereof kept in the State of Indiana, shall be the only evidence as to who are the Shareholders entitled to examine the Shareholder List, or to notice of or to vote at any Meeting. -2- Section 10. Proxies. A Shareholder may vote either in person or by proxy executed in writing by the Shareholder or a duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless a shorter or longer time is expressly provided therein. Section 11. Notice of Shareholder Business. At an Annual Meeting of the Shareholders, only such business shall be conducted as shall have been properly brought before the Meeting. To be properly brought before an Annual Meeting, business must be (a) specified in the notice of Meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the Meeting by or at the direction of the Board, or (c) otherwise properly brought before the Meeting by a Shareholder. For business to be properly brought before an Annual Meeting by a Shareholder, the Shareholder must have the legal right and authority to make the Proposal for consideration at the Meeting and the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 120 days prior to the Meeting; provided, however, that in the event that less than 130 days' notice or prior public disclosure of the date of the Meeting is given or made to Shareholders (which notice or public disclosure shall include the date of the Annual Meeting specified in these By-Laws, if such By-Laws have been filed with the Securities and Exchange Commission and if the Annual Meeting is held on such date), notice by the Shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the Annual Meeting was mailed or such public disclosure was made. A Shareholder's notice to the Secretary shall set forth as to each matter the Shareholder proposes to bring before the Annual Meeting (a) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (b) the name and record address of the Shareholders proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the Shareholder, and (d) any material interest of the Shareholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an Annual Meeting except in accordance with the procedures set forth in this Section 11. The Chairman of an Annual Meeting shall, if the facts warrant, determine and declare to the Meeting that business was not properly brought before the Meeting and in accordance with the provisions of this Section 11, and if he should so determine, he shall so declare to the Meeting and any such business not properly brought before the Meeting shall not be transacted. At any Special Meeting of the Shareholders, only such business shall be conducted as shall have been brought before the Meeting by or at the direction of the Board of Directors. Section 12. Notice of Shareholder Nominees. Only persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible for election as Directors. Nominations of persons for election to the Board may be made at a Meeting of Shareholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any Shareholder of the Corporation entitled to vote for the election of Directors at the Meeting who complies with the notice procedures set forth in this Section 12. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days prior to the Meeting; provided, however, that in the event that less than 130 days' notice or prior public disclosure of the date of the Meeting is given or made to Shareholders (which notice or public disclosure shall include the date of the Annual Meeting specified in these By-Laws, if such By-Laws have been filed with the Securities and Exchange Commission and if the Annual Meeting is held on such date), notice by the Shareholders to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the Meeting was mailed or such public disclosure was made. Such Shareholder's notice shall set forth (a) as to each person whom the Shareholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be -3- disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under 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 (b) as to the Shareholder giving the notice (i) the name and record address of such Shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such Shareholder. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 12. The Chairman of the Meeting shall, if the facts warrant, determine and declare to the Meeting that a nomination was not made in accordance with the procedures prescribed by these By-Laws, and if he should so determine, he shall so declare to the Meeting and the defective nomination shall be disregarded. ARTICLE IV Board of Directors Section 1. Number. The business and affairs of the Corporation shall be managed by a Board of not less than five (5) nor more than fifteen (15) Directors, as may be specified from time to time by resolution adopted by a majority of the total number of the Corporation's Directors, divided into three classes as provided in the Articles. If and whenever the Board of Directors has not specified the number of Directors, the number shall be six. Directors (a) must have their primary domicile in either Jefferson County, Indiana or Trimble County, Kentucky, and (b) must have a loan or deposit relationship with Madison First Federal Savings & Loan Association which they have maintained for at least a continuous period of twelve (12) months immediately prior to their nomination to the Board. In addition, each Director who is not an employee of the Corporation or any of its subsidiaries must have served as a member of a civic or community organization based in Jefferson County, Indiana or Trimble County, Kentucky for at least a continuous period of twelve (12) months during the five (5) years prior to his or her nomination to the Board. The Board may elect or appoint, from among its members, a Chairman of the Board (the "Chairman"), who need not be an officer (an "Officer") or employee of the Corporation. The Chairman, if elected or appointed, shall preside at all Shareholder Meetings and Board Meetings and shall have such other powers and perform such other duties as are incident to such position and as may be assigned by the Board. Section 2. Vacancies and Removal. Any vacancy occurring in the Board shall be filled as provided in the Articles. Shareholders shall be notified of any increase in the number of Directors and the name, principal occupation and other pertinent information about any Director elected by the Board to fill any vacancy. Any Director, or the entire Board, may be removed from office only as provided in the Articles. Section 3. Powers and Duties. In addition to the powers and duties expressly conferred upon it by law, the Articles or these By-Laws, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not inconsistent with the law, the Articles or these By-Laws. Section 4. Annual Board Meeting. Unless otherwise determined by the Board, the Board shall meet each year immediately after the Annual Meeting, at the place where such Meeting has been held, for the purpose of organization, election of Officers of the Corporation (the "Officers") and consideration of any other business that may properly be brought before such annual meeting of the Board (the "Annual Board Meeting"). No notice shall be necessary for the holding of the Annual Board Meeting. If the Annual Board Meeting is not held as above provided, the election of Officers may be held at any subsequent duly constituted meeting of the Board (a "Board Meeting"). Section 5. Regular Board Meetings. Regular meetings of the Board ("Regular Board Meetings") may be held at stated times or from time to time, and at such place, either within or without the State of Indiana, as the Board may determine, without call and without notice. Section 6. Special Board Meetings. Special meetings of the Board ("Special Board Meetings") may be called at any time or from time to time, and shall be called on the written request of at least two Directors, by the -4- Chairman or the President, by causing the Secretary or any Assistant Secretary to give to each Director, either personally or by mail, telephone, telegraph, teletype or other form of wire or wireless communication at least two days' notice of the date, time and place of such Meeting. Special Board Meetings shall be held at the Principal Office or at such other place, within or without the State of Indiana, as shall be specified in the respective notices or waivers of notice thereof. Section 7. Waiver of Notice and Assent. A Director may waive notice of any Board Meeting before or after the date and time of the Board Meeting stated in the notice by a written waiver signed by the Director and filed with the minutes or corporate records. A Director's attendance at or participation in a Board Meeting shall constitute a waiver of notice of such Meeting and assent to any corporate action taken at such Meeting, unless (a) the Director at the beginning of such Meeting (or promptly upon his arrival) objects to holding of or transacting business at the Meeting and does not thereafter vote for or assent to action taken at the Meeting; (b) the Director's dissent or abstention from the action taken is entered in the minutes of such Meeting; or (c) the Director delivers written notice of his dissent or abstention to the presiding Director at such Meeting before its adjournment, or to the Secretary immediately after its adjournment. The right of dissent or abstention is not available to a Director who votes in favor of the action taken. Section 8. Quorum. At all Board Meetings, a majority of the number of Directors designated for the full Board (the "Full Board") shall be necessary to constitute a quorum for the transaction of any business, except (a) that for the purpose of filling of vacancies a majority of Directors then in office shall constitute a quorum, and (b) that a lesser number may adjourn the Meeting from time to time until a quorum is present. The act of a majority of the Board present at a Meeting at which a quorum is present shall be the act of the Board, unless the act of a greater number is required by law, the Articles or these By-Laws. Section 9. Audit and Other Committees of the Board. The Board shall, by resolution adopted by a majority of the Full Board, designate an Audit Committee comprised of two or more Directors, which shall have such authority and exercise such duties as shall be provided by resolution of the Board. The Board may, by resolution adopted by such majority, also designate other regular or special committees of the Board ("Committees"), in each case comprised of two or more Directors and to have such powers and exercise such duties as shall be provided by resolution of the Board. Section 10. Resignations. Any Director may resign at any time by giving written notice to the Board, The Chairman, the President or the Secretary. Any such resignation shall take effect when delivered unless the notice specifies a later effective date. Unless otherwise specified in the notice, the acceptance of such resignation shall not be necessary to make it effective. Section 11. Age Limitations. No person seventy (70) years of age or older shall be eligible for election, reelection, appointment, or reappointment to the Board. No Director shall serve as such beyond the Annual Meeting of the Corporation immediately following the Director becoming seventy (70) years of age. ARTICLE V Officers Section 1. Officers. The Officers shall be the President, one or more Vice Presidents, the Secretary and the Treasurer, and may include one or more Assistant Secretaries, one or more Assistant Treasurers, a Comptroller and one or more Assistant Comptrollers. Any two or more offices may be held by the same person. The Board may from time to time elect or appoint such other Officers as it shall deem necessary, who shall exercise such powers and perform such duties as may be prescribed from time to time by these By-Laws or, in the absence of a provision in these By-Laws in respect thereto, as may be prescribed from time to time by the Board. Section 2. Election of Officers. The Officers shall be elected by the Board at the Annual Board Meeting and shall hold office for one year or until their respective successors shall have been duly elected and shall have -5- qualified; provided, however, that the Board may at any time elect one or more persons to new or different offices and/or change the title, designation and duties and responsibilities of any of the Officers consistent with the law, the Articles and these By-Laws. Section 3. Vacancies; Removal. Any vacancy among the Officers may be filled for the unexpired term by the Board. Any Officer may be removed at any time by the affirmative vote of a majority of the Full Board. Section 4. Delegation of Duties. In the case of the absence, disability, death, resignation or removal from office of any Officer, or for any other reason that the Board shall deem sufficient, the Board may delegate, for the time being, any or all of the powers or duties of such Officer to any other Officer or to any Director. Section 5. President. The President shall be a Director and, subject to the control of the Board, shall have general charge of and supervision and authority over the business and affairs of the Corporation, and shall have such other powers and perform such other duties as are incident to this office and as may be assigned to him by the Board. In the case of the absence or disability of the Chairman or if no Chairman shall be elected or appointed by the Board, the President shall preside at all Shareholder Meetings and Board Meetings. Section 6. Vice Presidents. Each of the Vice Presidents shall have such powers and perform such duties as may be prescribed for him by the Board or delegated to him by the President. In the case of the absence, disability, death, resignation or removal from office of the President, the powers and duties of the President shall, for the time being, devolve upon and be exercised by the Executive Vice President, if there be one, and if not, then by such one of the Vice Presidents as the Board or the President may designate, or, if there be but one Vice President, then upon such Vice President; and he shall thereupon, during such period, exercise and perform all of the powers and duties of the President, except as may be otherwise provided by the Board. Section 7. Secretary. The Secretary shall have the custody and care of the Seal, records, minutes and the Stock Book of the Corporation; shall attend all Shareholder Meetings and Board Meetings, and duly record and keep the minutes of their proceedings in a book or books to be kept for that purpose; shall give or cause to be given notice of all Shareholder Meetings and Board Meetings when such notice shall be required; shall file and take charge of all papers and documents belonging to the Corporation; and shall have such other powers and perform such other duties as are incident to the office of secretary of a business corporation, subject at all times to the direction and control of the Board and the President. Section 8. Assistant Secretaries. Each of the Assistant Secretaries shall assist the Secretary in his duties and shall have such other powers and perform such other duties as may be prescribed for him by the Board or delegated to him by the President. In case of the absence, disability, death, resignation or removal from office of the Secretary, his powers and duties shall, for the time being, devolve upon such one of the Assistant Secretaries as the Board, the President or the Secretary may designate, or, if there be but one Assistant Secretary, then upon such Assistant Secretary; and he shall thereupon, during such period, exercise and perform all of the powers and duties of the Secretary, except as may be otherwise provided by the Board. Section 9. Treasurer. The Treasurer shall have control over all records of the Corporation pertaining to moneys and securities belonging to the Corporation; shall have charge of, and be responsible for, the collection, receipt, custody and disbursements of funds of the Corporation; shall have the custody of all securities belonging to the Corporation; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; and shall disburse the funds of the Corporation as may be ordered by the Board, taking proper receipts or making proper vouchers for such disbursements and preserving the same at all times during his term of office. When necessary or proper, he shall endorse on behalf of the Corporation all checks, notes or other obligations payable to the Corporation or coming into his possession for or on behalf of the Corporation, and shall deposit the funds arising therefrom, together with all other funds and valuable effects of the Corporation coming into his possession, in the name and the credit of the Corporation in such depositories as the Board from time to time shall direct, or in the absence of such action by the Board, as may be determined by the President or any Vice President. If the Board has not elected a Comptroller or an Assistant Comptroller, or in the absence or -6- disability of the Comptroller and each Assistant Comptroller or if, for any reason, a vacancy shall occur in such offices, then during such period the Treasurer shall have, exercise and perform all of the powers and duties of the Comptroller. The Treasurer shall also have such other powers and perform such other duties as are incident to the office of treasurer of a business corporation, subject at all times to the direction and control of the Board and the President. If required by the Board, the Treasurer shall give the Corporation a bond, in such an amount and with such surety or sureties as may be ordered by the Board, for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 10. Assistant Treasurers. Each of the Assistant Treasurers shall assist the Treasurer in his duties, and shall have such other powers and perform such other duties as may be prescribed for him by the Board or delegated to him by the President. In case of the absence, disability, death, resignation or removal from office of the Treasurer, his powers and duties shall, for the time being, devolve upon such one of the Assistant Treasurers as the Board, the President or the Treasurer may designate, or, if there be but one Assistant Treasurer, then upon such Assistant Treasurer; and he shall thereupon, during such period, exercise and perform all the powers and duties of the Treasurer except as may be otherwise provided by the Board. If required by the Board, each Assistant Treasurer shall likewise give the Corporation a bond, in such amount and with such surety or sureties as may be ordered by the Board, for the same purposes as the bond that may be required to be given by the Treasurer. Section 11. Comptroller. The Comptroller shall have direct control over all accounting records of the Corporation pertaining to moneys, properties, materials and supplies, including the bookkeeping and accounting departments; shall have direct supervision over the accounting records in all other departments pertaining to moneys, properties, materials and supplies; shall render to the President and the Board, at Regular Board Meetings or whenever the same shall be required, an account of all his transactions as Comptroller and of the financial condition of the Corporation; and shall have such other powers and perform such other duties as are incident to the office of comptroller of a business corporation, subject at all times to the direction and control of the Board and the President. Section 12. Assistant Comptrollers. Each of the Assistant Comptrollers shall assist the Comptroller in his duties, and shall have such other powers and perform such other duties as may be prescribed for him by the Board or delegated to him by the President. In case of the absence, disability, death, resignation or removal from office of the Comptroller, his powers and duties shall, for the time being, devolve upon such one of the Assistant Comptrollers as the Board, the President or the Comptroller may designate, or, if there be but one Assistant Comptroller, then upon such Assistant Comptroller; and he shall thereupon, during such period, exercise and perform all the powers and duties of the Comptroller, except as may be otherwise provided by the Board. Section 13. Age Limitations. No person seventy (70) years of age or older shall be eligible for election, reelection, appointment, or reappointment as an Officer of the Corporation. No Officer shall serve beyond the Annual Meeting of the Corporation immediately following the Officer becoming seventy (70) years of age. ARTICLE VI Certificates for Shares Section 1. Certificates. Certificates for Shares ("Certificates") shall be in such form, consistent with law and the Articles, as shall be approved by the Board. Certificates for each class, or series within a class, of Shares, shall be numbered consecutively as issued. Each Certificate shall state the name of the Corporation and that it is organized under the laws of the State of Indiana; the name of the registered holder; the number and class and the designation of the series, if any, of the Shares represented thereby; and a summary of the designations, -7- relative rights, preferences and limitations applicable to such class and, if applicable, the variations in rights, preferences and limitations determined for each series and the authority of the Board to determine such variations for future series; provided, however, that such summary may be omitted if the Certificate states conspicuously on its front or back that the Corporation will furnish the Shareholder such information upon written request and without charge. Each Certificate shall be signed (either manually or in facsimile) by (i) the President or a Vice President and (ii) the Secretary or an Assistant Secretary, or by any two or more Officers that may be designated by the Board, and may have affixed thereto the Seal, which may be a facsimile, engraved or printed. Section 2. Record of Certificates. Shares shall be entered in the Stock Book as they are issued, and shall be transferable on the Stock Book by the holder thereof in person, or by his attorney duly authorized thereto in writing, upon the surrender of the outstanding Certificate therefor properly endorsed. Section 3. Lost or Destroyed Certificates. Any person claiming a Certificate to be lost or destroyed shall make affidavit or affirmation of that fact and, if the Board or the President shall so require, shall give the Corporation and/or the transfer agents and registrars, if they shall so require, a bond of indemnity, in form and with one or more sureties satisfactory to the Board or the President and/or the transfer agents and registrars, in such amount as the Board or the President may direct and/or the transfer agents and registrars may require, whereupon a new Certificate may be issued of the same tenor and for the same number of Shares as the one alleged to be lost or destroyed. Section 4. Shareholder Addresses. Every Shareholder shall furnish the Secretary with an address to which notices of Meetings and all other notices may be served upon him or mailed to him, and in default thereof notices may be addressed to him at his last known address or at the Principal Office. ARTICLE VII Corporate Books and Records Section 1. Places of Keeping. Except as otherwise provided by law, the Articles or these By-Laws, the books and records of the Corporation (including the "Corporate Records," as defined in the Articles) may be kept at such place or places, within or without the State of Indiana, as the Board may from time to time by resolution determine or, in the absence of such determination by the Board, as shall be determined by the President. Section 2. Stock Book. The Corporation shall keep at the Principal Office the original Stock Book or a duplicate thereof, or, in case the Corporation employs a stock registrar or transfer agent within or without the State of Indiana, another record of the Shareholders in a form that permits preparation of a list of the names and addresses of all the Shareholders, in alphabetical order by class of Shares, stating the number and class of Shares held by each Shareholder (the "Record of Shareholders"). Section 3. Inspection of Corporate Records. Any Shareholder (or the Shareholder's agent or attorney authorized in writing) shall be entitled to inspect and copy at his expense, after giving the Corporation at least five business days' written notice of his demand to do so, the following Corporate Records: (1) the Articles; (2) these By-Laws; (3) minutes of all Shareholder Meetings and records of all actions taken by the Shareholders without a meeting (collectively, "Shareholders Minutes") for the prior three years; (4) all written communications by the Corporation to the Shareholders including the financial statements furnished by the Corporation to the Shareholders for the prior three years; (5) a list of the names and business addresses of the current Directors and the current Officers; and (6) the most recent Annual Report of the Corporation as filed with the Secretary of State of Indiana. Any Shareholder (or the Shareholder's agent or attorney authorized in writing) shall also be entitled to inspect and copy at his expense, after giving the Corporation at least five business days' written notice of his demand to do so, the following Corporate Records, if his demand is made in good faith and for a proper purpose and describes with reasonable particularity his purpose and the records he desires to inspect, and the records are directly connected with his purpose: (1) to the extent not subject to inspection under the previous sentence, Shareholders Minutes, excerpts from minutes of Board Meetings and of Committee meetings, and records of -8- any actions taken by the Board or any Committee without a meeting; (2) appropriate accounting records of the Corporation; and (3) the Record of Shareholders. Section 4. Record Date. The Board may, in its discretion, fix in advance a Record Date not more than seventy days before the date (a) of any Shareholder Meeting, (b) for the payment of any dividend or the making of any other distribution, (c) for the allotment of rights, or (d) when any change or conversion or exchange of Shares shall go into effect. If the Board fixes a Record Date, then only Shareholders who are Shareholders of record on such Record Date shall be entitled (a) to notice of and/or to vote at any such Meeting, (b) to receive any such dividend or other distribution, (c) to receive any such allotment of rights, or (d) to exercise the rights in respect of any such change, conversion or exchange of Shares, as the case may be, notwithstanding any transfer of Shares on the Stock Book after such Record Date. Section 5. Transfer Agents; Registrars. The Board may appoint one or more transfer agents and registrars for its Shares and may require all Certificates to bear the signature either of a transfer agent or of a registrar, or both. ARTICLE VIII Checks, Drafts, Deeds and Shares of Stock Section 1. Checks, Drafts, Notes, Etc. All checks, drafts, notes or orders for the payment of money of the Corporation shall, unless otherwise directed by the Board or otherwise required by law, be signed by one or more Officers as authorized in writing by the President. In addition, the President may authorize any one or more employees of the Corporation ("Employees") to sign checks, drafts and orders for the payment of money not to exceed specific maximum amounts as designated in writing by the President for any one check, draft or order. When so authorized by the President, the signature of any such Officer or Employee may be a facsimile signature. Section 2. Deeds, Notes, Bonds, Mortgages, Contracts, Etc. All deeds, notes, bonds and mortgages made by the Corporation, and all other written contracts and agreements, other than those executed in the ordinary course of corporate business, to which the Corporation shall be a party, shall be executed in its name by the President, a Vice President or any other Officer so authorized by the Board and, when necessary or required, the Secretary or an Assistant Secretary shall attest the execution thereof. All written contracts and agreements into which the Corporation enters in the ordinary course of corporate business shall be executed by any Officer or by any other Employee designated by the President or a Vice President to execute such contracts and agreements. Section 3. Sale or Transfer of Stock. Subject always to the further orders and directions of the Board, any share of stock issued by any corporation and owned by the Corporation (including reacquired Shares of the Corporation) may, for sale or transfer, be endorsed in the name of the Corporation by the President or a Vice President, and said endorsement shall be duly attested by the Secretary or an Assistant Secretary either with or without affixing thereto the Seal. Section 4. Voting of Stock of Other Corporations. Subject always to the further orders and directions of the Board, any share of stock issued by any other corporation and owned or controlled by the Corporation (an "Investment Share") may be voted at any shareholders' meeting of such other corporation by the President or by a Vice President. Whenever, in the judgment of the President, it is desirable for the Corporation to execute a proxy or give a shareholder's consent in respect of any Investment Share, such proxy or consent shall be executed in the name of the Corporation by the President or a Vice President, and, when necessary or required, -9- shall be attested by the Secretary or an Assistant Secretary either with or without affixing thereto the Seal. Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have full right, power and authority to vote an Investment Share the same as such Investment Share might be voted by the Corporation. ARTICLE IX Fiscal Year Section 1. Fiscal Year. The Corporation's fiscal year shall begin on January 1 of each year and end on December 31 of the same year. ARTICLE X Amendments Section 1. Amendments. These By-Laws may be altered, amended or repealed, in whole or in part, and new By-Laws may be adopted, at any Board Meeting by the affirmative vote of a majority of the Full Board. -10- EX-8 4 OPINION RE: TAX MATTERS EXHIBIT 8(1) October 30, 1996 Board of Directors Madison First Federal Savings and Loan Association 303 Clifty Drive Madison, Indiana 47250 Re: Federal Income Tax Opinion Relating to Conversion of Madison First Federal Savings and Loan Association ("Madison") from a Federally-Chartered Mutual to a Federally-Chartered Stock Organization Gentlemen: In accordance with your request, set forth hereinbelow is the opinion of this firm relating to the Federal income tax consequences of the proposed conversion (the "Conversion") of Madison from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association. Madison is a federally-chartered mutual savings and loan association. As a mutual savings and loan association, Madison has no authorized capital stock. Instead, Madison, in mutual form, has a unique equity structure. A depositor of Madison is entitled to interest on his account balance as declared and paid by Madison. A depositor has no right to a distribution of any earnings of Madison, but rather these amounts become retained earnings of Madison. A depositor, however, has a right to share pro rata, with respect to the withdrawal value of his respective account, in any liquidation proceeds distributed in the event Madison is ever liquidated. Voting rights in Madison are held by its members, i.e., depositors and borrowers. Each depositor is entitled to cast one vote for each $100 or a fraction thereof deposited in a deposit account, and borrower members are entitled to one vote each. No member may cast more than 1,000 votes. All of the interests held by a depositor in Madison cease when such depositor closes his accounts with Madison. The Board of Directors of Madison has decided that in order to stimulate the growth and expansion of Madison through the raising of additional capital, it would be advantageous for Madison to convert from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association and to form an Indiana corporation ("Holding Company") to own all of Madison's issued and outstanding capital stock. It is proposed pursuant to a plan of Conversion (the "Plan") that Madison's charter to operate as a mutual savings and loan association be amended and a new charter be acquired to allow it to continue its operations in the form of a Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 2 stock savings and loan association ("Converted Association"). Under the Plan, Madison will issue shares of its capital stock to Holding Company in exchange for all but 50% of the net proceeds derived from the sale of Holding Company's common stock, without par value ("Common Stock"), to members of Madison and certain members of the public through a subscription and direct community offering. The Plan must be approved by the Office of Thrift Supervision ("OTS") and by an affirmative vote of at least a majority of the total votes eligible to be cast at a meeting of Madison's members called to vote on the Plan. Following authorization, the Plan provides for the issuance of shares of Common Stock. The aggregate purchase price at which all shares of Common Stock will be offered and sold pursuant to the Plan will be equal to the estimated pro forma market value of Madison at the time of conversion. The estimated pro forma market value will be determined by an independent appraiser. Pursuant to the Plan, all such shares will be issued and sold at a uniform price per share. As required by OTS regulations, shares of Common Stock will be offered pursuant to non-transferable subscription rights on the basis of preference categories. No subscriber will be allowed to purchase fewer than 25 shares of Common Stock. Madison has established four preference categories under which shares of Common Stock may be purchased and a direct community offering category for the sale of shares not purchased under the preference categories. The first category of preference is reserved for Madison's eligible account holders. The Plan defines "eligible account holders" as any person holding a qualifying deposit. The Plan defines "qualifying deposit" as the aggregate balance of all savings and deposit accounts of an eligible account holder in Madison at the close of business on December 31, 1994, provided such aggregate balance is not less than $50.00. Once a Madison savings account holder qualifies as an eligible account holder, he will receive, without payment, non-transferable subscription rights to purchase Common Stock. Subject to certain limited exceptions, the maximum number of shares that each eligible account holder may subscribe for is 10,000 per deposit account held as of December 31, 1994, subject to a 20,000 maximum for each such account holder and his Associates (as defined in the Plan) or group of persons acting in concert. If there is an oversubscription, shares will 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 sufficient to make his total allocation equal to 100 shares. Any shares not then allocated shall be allocated among the subscribing eligible account holders in the proportion that their qualifying deposits bear to the total qualifying deposits of eligible account holders on the eligibility record date. Non-transferable subscription rights to purchase Common Stock received by officers and directors of Madison and their Associates based on their increased deposits in Madison in the one-year period preceding the eligibility record date shall be subordinated to all other subscriptions involving the exercise of nontransferable subscription rights to purchase shares of Common Stock under the first preference category. Notwithstanding the foregoing, shares of Common Stock in excess of the maximum of the valuation range of shares Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 3 offered in the Conversion may be sold to the second category of preference before fully satisfying the subscriptions of eligible account holders. The second category of preference is reserved for the Holding Company's employee stock ownership plan (the "ESOP") to be established at the time of the Conversion. This category may subscribe for up to 10% of the shares sold in the Conversion; provided that shares remain available after satisfying the subscription rights of eligible account holders up to the maximum of the valuation range of shares offered in the Conversion. It is anticipated that the ESOP will subscribe for 8% of the shares sold in the Conversion pursuant to this category of preference. The third category of preference is reserved for Madison's supplemental eligible account holders. These are persons holding savings and deposit accounts at Madison at the close of business on September 30, 1996, with an aggregate balance of not less than $50.00. If there is not subscription for all of the Common Stock in the first and second preference categories, supplemental eligible account holders will receive, without payment, non-transferable subscription rights to purchase Common Stock. Subject to certain limited exceptions, the maximum number of shares that each supplemental eligible account holder may subscribe for is 10,000 per deposit account held as of September 30, 1996, subject to a 20,000 maximum for each such accountholder and his Associates or group of persons acting in concert. Any subscription rights received by eligible account holders in accordance with the first category of preference will reduce to the extent thereof the subscription rights granted in this third category of preference. If there is an oversubscription, shares will be allocated among subscribing supplemental eligible account holders so as to permit each such account holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to 100 shares. Any shares not then allocated shall be allocated to supplemental eligible account holders in the proportion that their qualifying deposits bear to the qualifying deposits of all subscribing supplemental eligible account holders. If there is not subscription for all of the Common Stock in the first, second and third preference categories, the fourth preference category, consisting of members of Madison as of the record date for the special meeting of members at which the Plan will be submitted for approval who are not eligible account holders or supplemental eligible account holders ("Other Members"), will receive, without payment, non-transferable subscription rights entitling them to purchase Common Stock. Subject to certain limited exceptions, each Other Member shall receive subscription rights to purchase up to 10,000 shares of Common Stock per deposit account held or loan owed to Madison as of the record date for the special meeting of members at which the Plan will be submitted for approval, subject to a 20,000 maximum for each such member and his Associates or group of persons acting in concert, to the extent that such stock is available after satisfaction of the first, second and third preference categories. In the event of an oversubscription by Other Members, shares will be allocated pro rata in the same proportion that the number of shares subscribed for by each Other Member bears to the total number of shares subscribed for by all Other Members. Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 4 If there are shares of Common Stock available after the first, second, third and fourth preference categories have been exhausted, it is anticipated that they will be sold to members of the general public in a best efforts direct community offering, giving preference to residents of Jefferson County. The maximum number of shares which may be purchased in this Direct Community Offering by any person (including his Associates) or persons acting in concert is 10,000 shares of Common Stock. A person with subscription rights who, together with his Associates and persons acting in concert, has subscribed for shares in the Subscription Offering, may subscribe for additional shares in the Direct Community Offering that do not exceed the lesser of (i) 10,000 shares or (iii) the number of shares which, when added to the number of shares subscribed for by such person and his Associates and persons acting in concert would not exceed 20,000 shares. Madison's Board of Directors may increase the maximum purchase limitations in the Plan up to 9.99% of the shares of Common Stock offered in the Conversion, provided that orders for Common Stock exceeding 5% of the total offering may not exceed, in the aggregate, 10% of the total offering. Officers and directors of Madison and their Associates may not purchase in the aggregate more than 34% of the shares offered pursuant to the Plan. Directors of Madison will not be deemed Associates or a group acting in concert solely as a result of their membership on the Board of Directors of Madison. All of the shares of Common Stock purchased by officers and directors will be subject to certain restrictions on sale for a period of one year. In order to achieve the widest distribution of the stock in the Direct Community Offering, orders for stock shall be filled up to a maximum of 2% of the Common Stock and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled. The overall purchase limitation may be reduced to any number to a minimum of 1% of the shares sold in the Conversion, in the sole discretion of the Board of Directors of Madison. The Plan provides that no person will be issued any subscription rights or be permitted to purchase any Common Stock if such person resides in a foreign country or in a state of the United States with respect to which all of the following apply: (a) a small number of persons otherwise eligible to subscribe for shares under this Plan reside in such state; (b) the issuance of subscription rights or the offer or sale of the Common Stock to such persons would require Madison or the Holding Company or their respective officers or directors under the securities law of such state to register as a broker or dealer or to register or otherwise qualify its securities for sale in such state; and (c) such registration or qualification would be impracticable for reasons of cost or otherwise. The Plan also provides for the establishment of a liquidation account by Madison. The liquidation account will be equal in amount to the net worth of Madison near the time of conversion. The establishment of the liquidation account will not operate to restrict the use or application of any of the net worth accounts of Converted Association, except that Converted Association will not voluntarily reduce the net worth accounts if the result thereof would be to reduce its net worth below the amount required to maintain the liquidation account. The liquidation account will be for Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 5 the benefit of Madison's eligible account holders and supplemental eligible account holders who maintain accounts in Madison at the time of conversion. All such account holders, including those account holders not entitled to subscription rights for reasons of foreign or out-of-state residency (as described above), will have an interest in the liquidation account. The interest such account holder will have is a right to receive, in the event of a complete liquidation of Converted Association, a liquidating distribution from the liquidation account in the amount of the then current adjusted subaccount balances for deposit accounts then held, prior to any liquidation distribution being made with respect to capital stock. The initial subaccount balance for a deposit account held by an eligible account holder and 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 the qualifying deposit in the deposit account and the denominator is the total amount of qualifying deposits of all eligible account holders and supplemental eligible account holders in Madison. The initial subaccount balance will never be increased, but may be decreased if the deposit balance in any qualifying savings account of any eligible account holder or supplemental eligible account holder on any annual closing date subsequent to the eligibility record date or supplemental eligibility record date is less than the lesser of (1) the deposit balance in the savings account at the close of business on any other annual closing date subsequent to the eligibility record date or supplemental eligibility record date, or (2) the amount of the qualifying deposit in such deposit account. In such event, the subaccount balance for the deposit account will be adjusted by reducing each subaccount balance in an amount proportionate to the reduction in the deposit balance. Once decreased, the Plan provides that the subaccount balance may never be subsequently increased, and if the deposit account of an eligible account holder or supplemental eligible account holder is closed, the related subaccount balance in the liquidation account will be reduced to zero. Following the Conversion, voting rights with respect to Converted Association will rest with Holding Company, and with respect to Holding Company will rest exclusively with the holders of Common Stock. The Conversion will not interrupt the business of Madison, and its business will continue as usual by Converted Association. Each depositor will retain a withdrawable savings or deposit account or accounts equal in amount to the withdrawable account at the time of conversion. Mortgage loans of Madison will remain unchanged and retain their same characteristics in Converted Association after the conversion. The Converted Association will continue the membership of Madison in the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") and the Federal Home Loan Bank System, and will remain subject to the regulatory authority of the OTS and the FDIC. The Holding Company will, however, use approximately $3,000,000 of the net proceeds of the Conversion to acquire 95.6% of the outstanding shares of the Citizens National Bank of Madison, a national banking association based in Madison, Indiana. This transaction is expected to close on the same date or as soon as practicable after the Conversion closes. The Holding Company intends to contribute up to $1.5 million to Citizens following the Conversion. Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 6 Approximately six months following the Conversion, Holding Company will adopt a stock option plan and a "recognition and retention" plan and trust ("RRP"). A number of shares of Common Stock equal to four percent (4.0%) of the shares of Common Stock sold in the Conversion will be reserved to fund the RRP and a number of shares of Common Stock equal to 10% of the shares of Common Stock sold in the Conversion will be reserved for stock option grants under the stock option plan. In addition, the Converted Association will establish an employee stock ownership plan and trust for the benefit of its employees at the time of the Conversion. The stock option plan, RRP and employee stock ownership plan are referred to collectively herein as the "Employee Plans." Additionally, Holding Company will adopt certain "anti-takeover provisions" in its proposed Articles of Incorporation and Code of By-Laws. We have received, and are relying upon, certificates of certain officers of Madison to the effect that: a. Converted Association has no plan or intention to redeem or otherwise acquire any of its capital stock issued to Holding Company in connection with the Conversion. b. Immediately following consummation of the Conversion, Converted Association will possess the same assets and liabilities as Madison held immediately prior to the proposed transaction, plus all but 60% of the net proceeds from the sale of Common Stock (after providing for the loan to the ESOP). c. Converted Association has no plan or intention to sell or otherwise dispose of any of the assets of Madison acquired in the Conversion, except for dispositions in the ordinary course of business. d. Following the Conversion, Converted Association will continue to engage in the same business in substantially the same manner as engaged in by Madison before the Conversion. e. The aggregate fair market value of the qualifying deposits (as defined in the Plan) held by eligible account holders as of the close of business on December 31, 1994, and by supplemental eligible account holders on June 30, 1996, equaled or exceeded or will equal or exceed 99% of the aggregate fair market value of all savings accounts in Madison (including accounts of less than $50) at the close of business on such respective dates. f. No shares of Common Stock will be issued to or be purchased by Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 7 depositor-employees at a discount or as compensation in the Conversion, although shares may be purchased at fair market value by the RRP and the ESOP established in connection with the Conversion. g. No cash or property will be given to eligible account holders, supplemental eligible account holders or Other Members in lieu of (a) non-transferable subscription rights or (b) an interest in the liquidation account of Converted Association. h. Madison is not under the jurisdiction of a court in any Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). i. At the time of the Conversion the fair market value of the assets of Madison on a going concern basis will exceed the amount of its liabilities plus the amount of liabilities to which the assets are subject. All such liabilities were incurred in the ordinary course of business and are associated with the assets transferred. Immediately before the Conversion, Madison will have a positive net worth. j. Madison has received or will receive an opinion from Keller & Company, Inc. which concludes that the subscription rights to be received by eligible subscribers have no economic value at the date of distribution or the time of exercise whether or not a public offering takes place (the "Keller Financial Opinion"). The exercise price of the subscription rights will be approximately equal to the fair market value of the Common Stock at the time of the Conversion. k. Holding Company has no plan or intention to sell or otherwise dispose of the capital stock of Converted Association received by it in the proposed transaction, and there is no plan or intention for Converted Association to be liquidated or merged with another corporation following the transaction. l. The fair market value of the withdrawable deposit accounts in Converted Association (plus the related interest in the Converted Association liquidation account) to be constructively received under the Plan by the eligible account holders and supplemental eligible account holders of Madison will, in each instance, be approximately equal to the fair market value of Madison's deposit accounts (plus the related interest in the Madison liquidation account) surrendered in constructive exchange by them. All proprietary rights in Madison form an integral part of the withdrawable savings accounts being surrendered in the exchange. m. Madison utilizes a reserve for bad debts in accordance with Section 593 of the Code, Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 8 and following the Conversion, Converted Association shall likewise continue to utilize a reserve for bad debts in accordance with Section 593 of the Code. n. Holding Company, Madison and Converted Association are corporations within the meaning of Section 7701(a)(3) of the Code. Madison and Converted Association are domestic building and loan associations within the meaning of Section 7701(a)(19)(C) of the Code. o. Madison deposit account holders and Other Members will pay expenses of the Conversion solely attributable to them, if any. Madison and Holding Company will each pay its own expenses of the Conversion and will not pay any expenses solely attributable to the deposit account holders, Other Members or the holders of Common Stock. p. Immediately following the Conversion, the former depositors of Madison will own all of the outstanding interests in the Converted Association liquidation account and will own such interests solely by reason of their ownership of deposits at Madison (including the attendant rights to liquidation proceeds) immediately before the Conversion. q. Assets of Madison used to pay expenses of the Conversion (without reference to expenses of the offering or sale of the Common Stock) and to make distributions (other than regular, normal interest payments) will, in the aggregate, constitute less than 1% of the net assets of Madison. Any such expenses or distributions will be paid or reimbursed from proceeds of the sale of the Common Stock. r. At the time of the Conversion, Madison will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in Converted Association. s. No account holder of Madison who is eligible to receive an interest in the Converted Association liquidation account will be excluded from participation in the Converted Association liquidation account. t. Holding Company has no plan or intention to redeem or otherwise reacquire any of the Common Stock issued in the proposed transaction. u. Neither the Common Stock nor the stock of Converted Association issued pursuant to the proposed transactions will be callable or subject to a put option (except as required under any Employee Plan). Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 9 v. None of the compensation received by a Madison employee who is also an eligible account holder, supplemental eligible account holder, or Other Member will be separate consideration for, or allocable to, his or her status as eligible account holder, supplemental eligible account holder, or Other Member; none of the Common Stock or interests in the liquidation account of Converted Association received by any such employee will be separate consideration for, or allocable to, any employment agreement or arrangement (other than an Employee Plan); and the compensation paid to the employee will be for services actually rendered and will be commensurate with the compensation that would be paid to third parties bargaining at arm's length for similar services. w. There is no intercorporate indebtedness existing between Holding Company and Madison that was issued or acquired, or will be settled, at a discount. x. Holding Company is not an investment company as described in section 1.351-1(c) of the regulations under the Code. y. The principal amount, interest rate and maturity date of each deposit account in Converted Association received by a Madison eligible account holder or supplemental eligible account holder are identical to those of the corresponding Madison deposit account that was held by the account holder immediately prior to the Conversion. OPINION OF COUNSEL Based solely upon the foregoing information, including the Keller Financial Opinion, the provisions of the Code, the regulations thereunder and such other authorities as we have deemed appropriate to consider, all as in effect on the date hereof, our opinion is as follows: (1) The change in the form of Madison from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association, as described above, will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Code and no gain or loss will be recognized to either Madison or to Converted Association as a result of such Conversion (see Rev. Rul. 80-105, 1980-1 C.B. 78). Madison and Converted Association will each be a party to a reorganization within the meaning of Section 368(b) of the Code (Rev. Rul. 72-206, 1972-1 C.B. 105). (2) No gain or loss will be recognized by Converted Association on the receipt of money and other property, if any, from Holding Company in exchange for shares of Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 10 Converted Association's capital stock (Section 1032(a) of the Code). (3) No gain or loss will be recognized by Holding Company upon the receipt of money for Common Stock (Section 1032(a) of the Code). (4) The assets of Madison will have the same basis in the hands of Converted Association as in the hands of Madison immediately prior to the Conversion (Section 362(b) of the Code). (5) The holding period of the assets of Madison to be received by Converted Association will include the period during which the assets were held by Madison prior to the Conversion (Section 1223(2) of the Code). (6) Depositors will realize gain, if any, upon the constructive issuance to them of withdrawable deposit accounts of Converted Association, non-transferable subscription rights to purchase Common Stock, and/or interests in the liquidation account of Converted Association. Any gain resulting therefrom will be recognized, but only in an amount not in excess of the fair market value of the subscription rights and interests in the liquidation accounts received. The liquidation accounts will have nominal, if any, fair market value. See Paulsen v. Commissioner, 469 U.S. 131, 139 (1985), quoting Society for Savings v. Bowers, 349 U.S. 143 (1955); but see Rev. Rul. 69-3, 1969-1 C.B. 103 and Rev. Rul. 69-646, 1969-2 C.B. 54 (the interest received rises to the level of "stock" and thus, in some circumstances, Section 354 of the Code applies). Based solely on the accuracy of the conclusion reached in the Keller Financial Opinion, and our reliance on such opinion, that the subscription rights have no economic value at the time of distribution or exercise, no gain or loss will be required to be recognized by eligible account holders or supplemental eligible account holders upon receipt or distribution of subscription rights. (Section 1001 of the Code.) Similarly, based solely on the accuracy of the aforesaid conclusion reached in the Keller Financial Opinion, and our reliance thereon, we give the following opinions: (a) no taxable income will be recognized by the Other Members of Madison upon the distribution to them of subscription rights or upon the exercise of the subscription rights to acquire Common Stock at fair market value; (b) no taxable income will be realized by the depositors of Madison as a result of the exercise of the non-transferable subscription rights to purchase Common Stock at fair market value, Rev. Rul. 56-572, 1956-2 C.B. 182; and (c) no taxable income will be realized by Converted Association, Madison or Holding Company on the issuance or distribution of subscription rights to depositors and borrowers of Madison to purchase shares of Common Stock at fair market value. Section 311 of the Code. Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 11 (7) A depositor's basis in the deposits of Converted Association will be the same as the basis of such depositor's deposits in Madison. Section 1012 of the Code. The basis of the non-transferable subscription rights will be zero increased by the amount of gain, if any, recognized on their receipt. The basis of the interest in the liquidation account of Converted Association received by eligible account holders and supplemental eligible account holders will be equal to the cost of such property, i.e., the fair market value of the proprietary interest in Converted Association received in exchange for the proprietary interest in Madison, which in this transaction we assume to be zero. (8) The basis of the Holding Company Common Stock to its shareholders will be the purchase price thereof, plus, in the case of stock acquired by the exercise of subscription rights, the basis, if any, in the subscription rights exercised. Section 1012 of the Code. (9) A shareholder's holding period for Common Stock acquired through the exercise of the non-transferable subscription rights shall begin on the date on which the subscription rights are exercised. Section 1223(6) of the Code. The holding period of the Common Stock purchased pursuant to the Direct Community Offering will commence on the date following the date on which the stock is purchased. Rev. Rul. 70-598, 1970-2 C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190. (10) The part of the taxable year of Madison before the Conversion and the part of the taxable year of Converted Association after the Conversion will constitute a single taxable year of Converted Association. (See Rev. Rul. 57-276, 1957-1 C.B. 126). Consequently, Madison will not be required to file a federal income tax return for any short portion of such taxable year (Section 1.381(b)-1(a)(2) of the Income Tax Regulations). (11) Converted Association will succeed to and take into account the earnings and profits or deficit in earnings and profits of Madison as of the date or dates of Conversion. (Section 381(c)(2) of the Code and Section 1.381(c)(2)-1 of the Income Tax Regulations.) (12) Regardless of book entries made for the creation of the liquidation account, the Conversion will not diminish the accumulated earnings and profits of the Converted Association available for the subsequent distribution of dividends within the meaning of Section 316 of the Code (Sections 1.312-11(b) and (c) of the Income Tax Regulations). The creation of the liquidation account on the records of Converted Association will have no effect on its taxable income, deductions for addition to Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 12 reserve for bad debts under Section 593 of the Code, or distributions to shareholders under Section 593(e) of the Code (Rev. Rul. 68-475, 1968-2 C.B. 259). (13) Converted Association will succeed to and take into account, immediately after the Conversion, those accounts of Madison which represent bad debt reserves in respect of which Madison has taken a bad debt deduction for taxable years ending on or before the date of the Conversion. The bad debt reserves will not be required to be restored to the gross income of either Madison or Converted Association for the taxable year of the Conversion, and such bad debt reserves will have the same character in the hands of the Converted Association as they would have had in the hands of Madison if no distribution or Conversion had occurred. (Section 381(c)(4) of the Code and Section 1.381(c)(4)-1(a)(1)(ii) of the Income Tax Regulations.) No opinion is being expressed as to whether the bad debt reserves will be required to be restored to the gross income of either Madison or Converted Association for the taxable year of the transfer if Converted Association fails to meet the requirements of Section 593(a)(2) of the Code during such taxable year. (14) Inasmuch as the Conversion constitutes a tax-free reorganization for federal income tax purposes, Madison will not incur any liability for Indiana adjusted gross income tax, financial institutions tax, supplemental net income tax, county adjusted gross income tax or county option income tax as a result of the Conversion. Madison will not incur any Indiana gross income tax liability as a result of the Conversion. Amounts received by Holding Company in exchange for the issuance of Common Stock and amounts received by Converted Association in exchange for the issuance of its capital stock will constitute contributions to capital which are exempt from the gross income tax. (15) Assuming that the interests in the liquidation account and the subscription rights that will be constructively issued to them as a part of the Plan have nominal, if any, fair market value, depositors will incur no liability for Indiana gross income tax, adjusted gross income tax, financial institutions tax, county adjusted gross income tax or county option income tax as a result of the Conversion. (16) Following the Conversion, the Converted Association will continue to be subject to the Indiana financial institutions tax. Our opinion on the above issues is based on information and representations provided by officers of Madison on behalf of Madison and its members. Neither the Internal Revenue Service nor the Indiana Department of Revenue has ruled on these issues and our opinion is not binding on either agency. The Internal Revenue Service or the Indiana Department of Revenue could take a Board of Directors Madison First Federal Savings and Loan Association October 30, 1996 Page 13 position contrary to that expressed in this opinion on some or all of the above issues, and such a position if ultimately sustained could result in adverse tax consequences to Madison or its members. No opinion is provided as to possible tax consequences of the Conversion under any federal, state, local or foreign tax laws except as specifically provided above. Very truly yours, BARNES & THORNBURG EX-10.2 5 STOCK OPTION PLAN RIVER VALLEY BANCORP STOCK OPTION PLAN 1. Purpose. The purpose of the River Valley Bancorp Stock Option Plan (the "Plan") is to provide to directors, officers and other key employees of River Valley Bancorp (the "Holding Company") and its majority-owned and wholly-owned subsidiaries (individually a "Subsidiary" and collectively the "Subsidiaries"), including, but not limited to, Madison First Federal Savings and Loan Association ("Madison First Federal") and Citizens National Bank of Madison ("Citizens"), who are materially responsible for the management or operation of the business of the Holding Company or a Subsidiary and have provided valuable services to the Holding Company or a Subsidiary, a favorable opportunity to acquire Common Stock, without par value ("Common Stock"), of the Holding Company, thereby providing them with an increased incentive to work for the success of the Holding Company and its Subsidiaries and better enabling each such entity to attract and retain capable directors and executive personnel. 2. Administration of the Plan. The Plan shall be administered, construed and interpreted by a committee (the "Committee") consisting of at least two members of the Board of Directors of the Holding Company, each of whom is a "Non-Employee Director" within the meaning of the definition of that term contained in Reg. ss. 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The members of the Committee shall be designated from time to time by the Board of Directors of the Holding Company. The decision of a majority of the members of the Committee shall constitute the decision of the Committee, and the Committee may act either at a meeting at which a majority of the members of the Committee is present or by a written consent signed by all members of the Committee. The Committee shall have the sole, final and conclusive authority to determine, consistent with and subject to the provisions of the Plan: (a) the individuals (the "Optionees") to whom options or successive options shall be granted under the Plan; (b) the time when options shall be granted hereunder; (c) the number of shares of Common Stock to be covered under each option; (d) the option price to be paid upon the exercise of each option; (e) the period within which each such option may be exercised; (f) the extent to which an option is an incentive stock option or a non-qualified stock option; and (g) the terms and conditions of the respective agreements by which options granted shall be evidenced. The Committee shall also have authority to prescribe, amend, waive, and rescind rules and regulations relating to the Plan, to accelerate the vesting of any stock options granted hereunder (subject to Office of Thrift Supervision regulations), to make amendments or modifications in the terms and conditions (including exercisability) of the options relating to the effect of termination of employment of the optionee (subject to the last sentence of Section 9 hereof), to waive any restrictions or conditions applicable to any option or the exercise thereof, and to make all other determinations necessary or advisable in the administration of the Plan. 3. Eligibility. The Committee may, consistent with the purposes of the Plan, grant options to officers and other key employees of the Holding Company or of a Subsidiary and to directors of a Subsidiary -1- (other than non-employee directors of the Holding Company) who in the opinion of the Committee are from time to time materially responsible for the management or operation of the business of the Holding Company or of a Subsidiary and have provided valuable services to the Holding Company or a Subsidiary; provided, however, that in no event may any employee who owns (after application of the ownership rules in ss. 425(d) of the Internal Revenue Code of 1986, as amended (the "Code")) shares of stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Holding Company or any of its Subsidiaries be granted an incentive stock option hereunder unless at the time such option is granted the option price is at least 110% of the fair market value of the stock subject to the option and such option by its terms is not exercisable after the expiration of five (5) years from the date such option is granted. Directors of the Holding Company who are not employees of the Holding Company ("Outside Directors"), who are serving as such on the date Madison First Federal converts (the "Conversion") from mutual to stock form (the "Conversion Date") shall each be granted on the date of the Holding Company's first Shareholder Meeting following the Conversion which shall be held no earlier than six (6) months following the Conversion (the "First Shareholder Meeting Date"), assuming he or she is serving as an Outside Director on such date, a non-qualified option to purchase the number of whole shares of Common Stock of the Holding Company determined by multiplying the total number of shares issued by the Holding Company on the Conversion Date by the following percentages, and rounding down to the next whole share: Percentage of Shares Outside Director Issued In Conversion ---------------- -------------------- Fred W. Koehler .50% Michael J. Hensley .45% Cecil L. Dorten .45% Earl W. Johann .45% Jonnie L. Davis .30% Such options shall have an exercise price per share equal to the fair market value of a share of such Common Stock, as determined by the Committee, consistent with Treas. Req. ss. 20.2031-2, on the First Shareholder Meeting Date. Outside Directors are not entitled to receive any other awards under this Plan. Subject to the foregoing and the provisions of Section 7 hereof, an individual who has been granted an option under the Plan (an "Optionee"), if he is otherwise eligible, may be granted an additional option or options if the Committee shall so determine. 4. Stock Subject to the Plan. There shall be reserved for issuance upon the exercise of options granted under the Plan, shares of Common Stock of the Holding Company equal to 10% of the total number of shares of Common Stock issued by the Holding Company upon the conversion of Madison First Federal from mutual to stock form, which may be authorized but unissued shares or treasury shares of the Holding Company. Subject to Section 7 hereof, the shares for which options may be granted under the Plan shall not exceed that number. If any option shall expire or terminate or be surrendered for any reason without having been exercised in full, the unpurchased shares subject thereto shall (unless the Plan shall have terminated) become available for other options under the Plan. 5. Terms of Options. Each option granted under the Plan shall be subject to the following terms and conditions and to such other terms and conditions not inconsistent therewith as the Committee may deem appropriate in each case: (a) Option Price. The price to be paid for shares of stock upon the exercise of each option shall be determined by the Committee at the time such option is granted, but such price in no event shall be less than the fair market value, as determined by the Committee consistent with Treas. Reg. ss. 20.2031-2 and any requirements of ss. 422A of the Code, of such stock on the date on which such option is granted. (b) Period for Exercise of Option. An option shall not be exercisable after the expiration of such period as shall be fixed by the Committee at the time of the grant thereof, but such period in no event -2- shall exceed ten (10) years and one day from the date on which such option is granted; provided, that incentive stock options granted hereunder shall have terms not in excess of ten (10) years and options issued to Outside Directors shall be for a period of ten (10) years and one day from the date of grant thereof. Options shall be subject to earlier termination as hereinafter provided. (c) Exercise of Options. The option price of each share of stock purchased upon exercise of an option shall be paid in full at the time of such exercise. Payment may be in (i) cash, (ii) if the Optionee may do so in conformity with Regulation T (12 C.F.R. ss. 220.3(e)(4)) without violating ss. 16(b) or ss. 16(c)of the 1934 Act, pursuant to a broker's cashless exercise procedure, by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Holding Company the total option price in cash and, if desired, the amount of any taxes to be withheld from the Optionee's compensation as a result of any withholding tax obligation of the Holding Company or any of its Subsidiaries, as specified in such notice, or (iii) beginning on a date which is three years following Madison First Federal's conversion from mutual to stock form and with the approval of the Committee, by tendering whole shares of the Holding Company's Common Stock owned by the Optionee and cash having a fair market value equal to the cash exercise price of the shares with respect to which the option is being exercised. For this purpose, any shares so tendered by an Optionee shall be deemed to have a fair market value equal to the mean between the highest and lowest quoted selling prices for the shares on the date of exercise of the option (or if there were no sales on such date the weighted average of the means between the highest and lowest quoted selling prices for the shares on the nearest date before and the nearest date after the date of exercise of the option as prescribed by Treas. Reg. ss. 20.2031-2), as reported in The Wall Street Journal or a similar publication selected by the Committee. The Committee shall have the authority to grant options exercisable in full at any time during their term, or exercisable in such installments at such times during their term as the Committee may determine; provided, however, that options shall not be exercisable during the first six (6) months of their term, and provided further that, subject to the foregoing restriction, options shall become exercisable at the rate of 20% per year beginning on the anniversary of the date of grant of such options. Installments not purchased in earlier periods shall be cumulated and be available for purchase in later periods. Subject to the other provisions of this Plan, an option may be exercised at any time or from time to time during the term of the option as to any or all whole shares which have become subject to purchase pursuant to the terms of the option or the Plan, but not at any time as to fewer than one hundred (100) shares unless the remaining shares which have become subject to purchase are fewer than one hundred (100) shares. An option may be exercised only by written notice to the Holding Company, mailed to the attention of its Secretary, signed by the Optionee (or such other person or persons as shall demonstrate to the Holding Company his or their right to exercise the option), specifying the number of shares in respect of which it is being exercised, and accompanied by payment in full in either cash or by check in the amount of the aggregate purchase price therefor, by delivery of the irrevocable broker instructions referred to above, or, if the Committee has approved the use of the stock swap feature provided for above, followed as soon as practicable by the delivery of the option price for such shares. (d) Certificates. The certificate or certificates for the shares issuable upon an exercise of an option shall be issued as promptly as practicable after such exercise. An Optionee shall not have any rights of a shareholder in respect to the shares of stock subject to an option until the date of issuance of a stock certificate to him for such shares. In no case may a fraction of a share be purchased or issued under the Plan, but if, upon the exercise of an option, a fractional share would otherwise be issuable, the Holding Company shall pay cash in lieu thereof. (e) Termination of Option. If an Optionee (other than an Outside Director or a non-employee director of a Subsidiary ("Subsidiary Director")) ceases to be an employee of the Holding Company and the Subsidiaries for any reason other than retirement, permanent and total disability (within the -3- meaning of ss. 22(e)(3) of the Code), or death, any option granted to him shall forthwith terminate. Leave of absence approved by the Committee shall not constitute cessation of employment. If an Optionee (other than an Outside Director or a Subsidiary Director) ceases to be an employee of the Holding Company and the Subsidiaries by reason of retirement, any option granted to him may be exercised by him in whole or in part within three (3) years after the date of his retirement, to the extent the option was otherwise exercisable at the date of his retirement; provided, however, that if such employee remains a director or director emeritus of the Holding Company, the option granted to him may be exercised by him in whole or in part until the later of (a) three (3) years after the date of his retirement, or (b) six (6) months after his service as a director or director emeritus of the Holding Company terminates. (The term "retirement" as used herein means such termination of employment as shall entitle such individual to early or normal retirement benefits under any then existing pension plan of the Holding Company or a Subsidiary.) If an Optionee (other than an Outside Director or Subsidiary Director) ceases to be an employee of the Holding Company and the Subsidiaries by reason of permanent and total disability (within the meaning of ss. 22(e)(3) of the Code), any option granted to him may be exercised by him in whole or in part within one (1) year after the date of his termination of employment by reason of such disability whether or not the option was otherwise exercisable at the date of such termination. Options granted to Outside Directors or to Subsidiary Directors shall cease to be exercisable six (6) months after the date such Outside Director or Subsidiary Director is no longer a director of the Holding Company and the Subsidiaries for any reason other than death or disability. If an Optionee who is an Outside Director or Subsidiary Director ceases to be a director or director emeritus of the Holding Company and the Subsidiaries by reason of disability, any option granted to him may be exercised in whole or in part within one (1) year after the date the Optionee ceases to be a director or director emeritus by reason of such disability, whether or not the option was otherwise exercisable at such date. In the event of the death of an Optionee while in the employ or service as a director or director emeritus of the Holding Company or a Subsidiary, or, if the Optionee is not an Outside Director or Subsidiary Director, within three (3) years after the date of his retirement (or, if later, six months following his termination of service as a director or director emeritus of the Holding Company) or within one (1) year after the termination of his employment by reason of permanent and total disability (within the meaning of ss. 22(e)(3) of the Code), or, if the Optionee is an Outside Director or Subsidiary Director, within six (6) months after he is no longer a director or director emeritus of the Holding Company or the Subsidiaries for reasons other than disability or, within one (1) year after the termination of his service as such a director by reason of disability, any option granted to him may be exercised in whole or in part at any time within one (1) year after the date of such death by the executor or administrator of his estate or by the person or persons entitled to the option by will or by applicable laws of descent and distribution until the expiration of the option term as fixed by the Committee, whether or not the option was otherwise exercisable at the date of his death. Notwithstanding the foregoing provisions of this subsection (e), no option shall in any event be exercisable after the expiration of the period fixed by the Committee in accordance with subsection (b) above. (f) Nontransferability of Option. No option may be transferred by the Optionee otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and during the lifetime of the Optionee options shall be exercisable only by the Optionee or his guardian or legal representative. (g) No Right to Continued Service. Nothing in this Plan or in any agreement entered into pursuant hereto shall confer on any person any right to continue in the employ or service of the Holding Company or its Subsidiaries or affect any rights the Holding Company, a Subsidiary, or the shareholders of the Holding Company may have to terminate his service at any time. -4- (h) Maximum Incentive Stock Options. The aggregate fair market value of stock with respect to which incentive stock options (within the meaning of ss. 422A of the Code) are exercisable for the first time by an Optionee during any calendar year under the Plan or any other plan of the Holding Company or its Subsidiaries shall not exceed $100,000. For this purpose, the fair market value of such shares shall be determined as of the date the option is granted and shall be computed in such manner as shall be determined by the Committee, consistent with the requirements of ss. 422A of the Code. (i) Agreement. Each option shall be evidenced by an agreement between the Optionee and the Holding Company which shall provide, among other things, that, with respect to incentive stock options, the Optionee will advise the Holding Company immediately upon any sale or transfer of the shares of Common Stock received upon exercise of the option to the extent such sale or transfer takes place prior to the later of (a) two (2) years from the date of grant or (b) one (1) year from the date of exercise. (j) Investment Representations. Unless the shares subject to an option are registered under applicable federal and state securities laws, each Optionee by accepting an option shall be deemed to agree for himself and his legal representatives that any option granted to him and any and all shares of Common Stock purchased upon the exercise of the option shall be acquired for investment and not with a view to, or for the sale in connection with, any distribution thereof, and each notice of the exercise of any portion of an option shall be accompanied by a representation in writing, signed by the Optionee or his legal representatives, as the case may be, that the shares of Common Stock are being acquired in good faith for investment and not with a view to, or for sale in connection with, any distribution thereof (except in case of the Optionee's legal representatives for distribution, but not for sale, to his legal heirs, legatees and other testamentary beneficiaries). Any shares issued pursuant to an exercise of an option may bear a legend evidencing such representations and restrictions. 6. Incentive Stock Options and Non-Qualified Stock Options. Options granted under the Plan may be incentive stock options under ss. 422A of the Code or non-qualified stock options, provided, however, that Outside Directors shall be granted only non-qualified stock options. All options granted hereunder will be clearly identified as either incentive stock options or non-qualified stock options. In no event will the exercise of an incentive stock option affect the right to exercise any non-qualified stock option, nor shall the exercise of any non-qualified stock option affect the right to exercise any incentive stock option. Nothing in this Plan shall be construed to prohibit the grant of incentive stock options and non-qualified stock options to the same person, provided, further, that incentive stock options and non-qualified stock options shall not be granted in a manner whereby the exercise of one non-qualified stock option or incentive stock option affects the exercisability of the other. 7. Adjustment of Shares. In the event of any change after the effective date of the Plan in the outstanding stock of the Holding Company by reason of any reorganization, recapitalization, stock split, stock dividend, combination of shares, exchange of shares, merger or consolidation, liquidation, or any other change after the effective date of the Plan in the nature of the shares of stock of the Holding Company, the Committee shall determine what changes, if any, are appropriate in the number and kind of shares reserved under the Plan, and the Committee shall determine what changes, if any, are appropriate in the option price under and the number and kind of shares covered by outstanding options granted under the Plan. Any determination of the Committee hereunder shall be conclusive. 8. Tax Withholding. Whenever the Holding Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Holding Company shall have the right to require the Optionee or his or her legal representative to remit to the Holding Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares, and whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state and/or local withholding tax requirements. If permitted by the Committee and pursuant -5- to procedures established by the Committee, an Optionee who is not an Outside Director may make a written election to have shares of Common Stock having an aggregate fair market value, as determined by the Committee, consistent with the requirements of Treas. Reg. ss. 20.2031-2, sufficient to satisfy the applicable withholding taxes, withheld from the shares otherwise to be received upon the exercise of a non-qualified option. 9. Amendment. Subject to ss. 13 hereof, the Board of Directors of the Holding Company may amend the Plan from time to time and, with the consent of the Optionee, the terms and provisions of his option, except that without the approval of the holders of at least a majority of the shares of the Holding Company voting in person or by proxy at a duly constituted meeting or adjournment thereof: (a) the number of shares of stock which may be reserved for issuance under the Plan may not be increased except as provided in Section 7 hereof; (b) the period during which an option may be exercised may not be extended beyond ten (10) years and one day from the date on which such option was granted; and (c) the class of persons to whom options may be granted under the Plan shall not be modified materially. No amendment of the Plan, however, may, without the consent of the Optionees, make any changes in any outstanding options theretofore granted under the Plan which would adversely affect the rights of such Optionees. 10. Termination. The Board of Directors of the Holding Company may terminate the Plan at any time and no option shall be granted thereafter. Such termination, however, shall not affect the validity of any option theretofore granted under the Plan. In any event, no incentive stock option may be granted under the Plan after the date which is ten (10) years from the effective date of the Plan. 11. Successors. This Plan shall be binding upon the successors and assigns of the Holding Company. 12. Governing Law. The terms of any options granted hereunder and the rights and obligations hereunder of the Holding Company, the Optionees and their successors in interest shall, except to the extent governed by federal law, be governed by Indiana law. 13. Government and Other Regulations. The obligations of the Holding Company to issue or transfer and deliver shares under options granted under the Plan shall be subject to compliance with all applicable laws, governmental rules and regulations (including Office of Thrift Supervision regulations), and administrative action. In particular, grants of stock options under the Plan shall comply with the requirements of 12 C.F.R. ss.563b.3(g)(4)(vi) as long as those requirements are in effect. That regulation currently requires that no individual shall receive stock options for more than 25% of the shares reserved for issuance under the Plan and Outside Directors shall not receive stock options for more than 5% individually, or 30% in the aggregate, of the shares reserved for issuance under the Plan. 14. Effective Date. The Plan shall become effective on the date it is approved by the holders of at least a majority of the shares of the Holding Company entitled to vote at a duly constituted meeting or adjournment thereof. The options granted pursuant to the Plan may not be exercised until the Board of Directors of the Holding Company has been advised by counsel that such approval has been obtained and all other applicable legal requirements have been met. EX-10.3 6 RECOGNITION AND RETENTION PLAN AND TRUST RIVER VALLEY BANCORP RECOGNITION AND RETENTION PLAN AND TRUST ARTICLE I ESTABLISHMENT OF THE PLAN AND TRUST 1.01 River Valley Bancorp hereby establishes the Recognition and Retention Plan (the "Plan") and Trust (the "Trust") upon the terms and conditions hereinafter stated in this Recognition and Retention Plan and Trust Agreement (the "Agreement"). 1.02 The Trustee, which initially shall be First Bankers Trust Company, hereby accepts this Trust and agrees to hold the Trust assets existing on the date of this Agreement and all additions and accretions thereto upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to retain directors and executive officers in key positions by providing such persons with a proprietary interest in the Holding Company (as hereinafter defined) as compensation for their contributions to the Holding Company and to the Affiliates (as hereinafter defined) and as an incentive to make such contributions and to promote the Holding Company's and the Affiliates' growth and profitability in the future. ARTICLE III DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Affiliate" means the Thrift and Bank and such other subsidiaries or affiliates of the Holding Company which, with the consent of the Board, agree to participate in this Plan. 3.02 "Bank" shall mean Citizens National Bank of Madison. 3.03 "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any, or, if none, his estate. 3.04 "Board" means the Board of Directors of the Holding Company or of an Affiliate. 3.05 "Committee" means the Stock Compensation Committee of the Board of Directors of the Holding Company. At all times during its administration of this Plan, the Committee shall consist of two or more directors of the Holding Company, each of whom shall be a "Non-Employee Director" within the meaning of the definition of that term contained in Regulation 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). 3.06 "Common Stock" means shares of the common stock, without par value, of the Holding Company. 3.07 "Conversion" shall mean the conversion of the Thrift from the mutual to stock form of organization and the simultaneous acquisition of the Thrift by the Holding Company. -1- 3.08 "Director" means a member of the Board of Directors of an Affiliate or the Holding Company. 3.09 "Director Emeritus" shall mean an honorary non-voting member of the Board of Directors of an Affiliate or the Holding Company. 3.10 "Disability" means any physical or mental impairment which qualifies an Employee for disability benefits under the applicable long-term disability plan maintained by an Affiliate. 3.11 "Employee" means any person, including officers, who is currently employed by the the Holding Company or an Affiliate and shall also include the Secretary of the Thrift. 3.12 "Holding Company" shall mean River Valley Bancorp. 3.13 "Outside Director" means a member of the Board of Directors of the Holding Company, who is not also an Employee. 3.14 "Plan Shares" means shares of Common Stock held in the Trust and issued or issuable to a Recipient pursuant to the Plan. 3.15 "Plan Share Award" or "Award" means a right granted under this Plan to earn Plan Shares. 3.16 "Plan Share Reserve" means the shares of Common Stock held by the Trustee pursuant to Sections 5.03 and 5.04. 3.17 "Recipient" means an Employee or Director who receives a Plan Share Award under the Plan. 3.18 "Retirement" as to an Employee, means a termination of employment which constitutes a "retirement" under any applicable qualified pension benefit plan maintained by the Affiliate which employs the Recipient, or, if such plan is not applicable, which would constitute "retirement" under such plan were the Recipient covered by such plan and, as to a Director, means a retirement from service on the Board after attaining age 70. 3.19 "Subsidiary Director" shall mean a non-employee director of an Affiliate who is not an Outside Director. 3.20 "Thrift" shall mean Madison First Federal Savings and Loan Association. 3.21 "Trustee" means that person(s) or entity nominated by the Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets for the purposes set forth herein. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall have all of the powers allocated to it in this and other Sections of the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. If permitted by applicable law, the Committee, with the consent of Recipients may change the vesting schedule for Awards after the date of grant thereof. The Committee shall recommend to the Board one or more persons or entities to act as Trustee in accordance with the provisions of this Plan and Trust and the terms of Article VIII hereof. 4.02 Role of the Board. The members of the Committee and the Trustee shall be appointed or approved by, and will serve at the pleasure of, the Board of Directors of the Holding Company. The Board of Directors of the Holding Company may in its discretion from time to time remove members from, or add members to, the Committee, and may remove, replace or add Trustees. -2- 4.03 Limitation on Liability. Neither a Director nor the Committee nor the Trustee shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If a Director or the Committee or any Trustee 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, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Holding Company shall indemnify such person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Holding Company and its Affiliates and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe his conduct was unlawful. The indemnification of officers and directors of the Thrift pursuant to this Section 4.03 shall be subject to 12 C.F.R ss. 545.121. ARTICLE V CONTRIBUTION; PLAN SHARE RESERVE 5.01 Amount and Timing of Contributions. The Affiliates shall be permitted to contribute to the Trust an amount sufficient to purchase up to 4% of the shares of Common Stock issued by the Holding Company in connection with the Conversion. Such amounts shall be paid to the Trustee no later than the date required to purchase shares of Common Stock for Awards made under this Plan. No contributions by Employees or Directors shall be permitted. 5.02 Initial Investment. Any amounts held by the Trust until such amounts are invested in accordance with Section 5.03, shall be invested by the Trustee in such interest-bearing account or accounts at the Affiliates as the Trustee shall determine to be appropriate. 5.03 Investment of Trust Assets; Creation of Plan Share Reserve. As soon as practicable following the first shareholder meeting of the Holding Company following the Conversion, which shall be held no earlier than six (6) months following the Conversion ("First Shareholder Meeting Date"), the Trustee shall invest all of the Trust's assets exclusively in the number of shares of Common Stock designated by the Holding Company and the Affilitates as subject to Awards made under this Plan, which may be purchased directly from the Holding Company, on the open market, or from any other source; provided, however, that the Trust shall not invest in an amount of Common Stock greater than 4.0% of the shares of the Common Stock sold in the Conversion, which shall constitute the "Plan Share Reserve" and provided, further that if the Trustee is required to purchase such shares on the open market or from the Holding Company for an amount per share greater than the price per share at which shares were trading on the date the contributions therefor were made to the Trust, the Holding Company shall have the discretion to reduce the number of shares to be awarded and purchased. The Trust may hold cash in interest-bearing accounts pending investment in Common Stock for periods of not more than one year after deposit. The Trustee, in accordance with applicable rules and regulations and Section 5.01 hereof, shall purchase shares of Common Stock in the open market and/or shall purchase authorized but unissued shares of the Common Stock from the Holding Company sufficient to acquire the requisite percentage of shares. Any earnings received or distributions paid with respect to Common Stock held in the Plan Share Reserve shall be held in an interest-bearing account. Any earnings received or distributions paid with respect to Common Stock subject to a Plan Share Award shall be held in an interest-bearing account on behalf of the individual Recipient. 5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share Reserves. Upon the allocation of Plan Share Awards under Sections 6.02 and 6.03 after acquisition by the Trustee of such shares, or the decision of the Committee to return Plan Shares to the Holding Company, the Plan Share Reserve shall be reduced by the number of Plan Shares so allocated or returned. Any shares subject to an Award which may not be earned because of a forfeiture by the Recipient pursuant to Section 7.01 shall be returned (added) to the Plan Share Reserve. -3- ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 Eligibility. Employees and Subsidiary Directors are eligible to receive Plan Share Awards provided in Section 6.02. Outside Directors are eligible to receive Plan Share Awards provided for in Section 6.03. 6.02 Allocations. The Committee may determine which of the Employees and Subsidiary Directors referenced in Section 6.01 above will be granted Plan Share Awards and the number of Plan Shares covered by each Award, including grants effective upon the First Shareholder Meeting Date, provided, however, that the number of Plan Shares covered by such Awards may not exceed the number of Plan Shares in the Plan Share Reserve immediately prior to the grant of such Awards, and provided further, that in no event shall any Awards be made which will violate the Articles of Incorporation, Articles of Association, Charter, Bylaws or Plan of Conversion of the Holding Company or the Affiliates or any applicable federal or state law or regulation and provided further that Awards may not be granted at any time in which the Affiliates fail to meet their applicable minimum capital requirements. In the event Plan Shares are forfeited for any reason and unless the Committee decides to return the Plan Shares to the Holding Company, the Committee may, from time to time, determine which of the Employees or Subsidiary Directors referenced in Section 6.01 above will be granted additional Plan Share Awards to be awarded from forfeited Plan Shares. In selecting those Employees or Subsidiary Directors to whom Plan Share Awards will be granted and the number of Plan Shares covered by such Awards, the Committee shall consider the position and responsibilities of the eligible Employees and Subsidiary Directors, the length and value of their services to the Affiliates, the compensation paid to such Employees and Subsidiary Directors, and any other factors the Committee may deem relevant. 6.03 Allocations - Outside Directors. The following Outside Directors shall be awarded a Plan Share Award on the First Shareholder Meeting Date, assuming he or she is still serving as an Outside Director on such date, equal to the number of whole shares rounded down to the nearest whole number constituting the following percentage of the number of shares of Common Stock issued in the Conversion (the "Fixed Award"); provided, however, that the Affiliates shall have the discretion to reduce such percentages if the Trustee is required to purchase shares on the open market or from the Holding Company for an amount per share greater than the price per share at which shares are sold in the Conversion: Percentage of Shares Outside Director Issued in Conversion -------------------------------------------------------------- Fred W. Koehler .20% Michael J. Hensley .20% Cecil L. Dorten .20% Earl W. Johann .20% Jonnie L. Davis .15% 6.04 Form of Allocation. As promptly as practicable after a determination is made pursuant to Section 6.02 or 6.03 that a Plan Share Award is to be made, the Committee shall notify the Recipient in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the Award may be earned. The stock certificates for Plan Share Awards shall be registered in the name of the Recipient until forfeited or transferred by the Recipient after such Award has been earned. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.05 Allocations Not Required. Notwithstanding anything to the contrary in Sections 6.01 and 6.02, no Employee or Subsidiary Director shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee, nor shall the Employees or Subsidiary Directors as a group have such a right. No Outside Director shall have any right or entitlement to reserve a Plan Share Award hereunder, except as provided for in Section 6.03 hereof. The Committee may, with the approval of the Board (or, if so directed by the Board, shall) return all Common Stock in the Plan Share Reserve not yet allocated to the Holding Company at any time, and cease issuing Plan Share Awards. -4- 6.06. Distribution Election Before Plan Shares Are Earned. Notwithstanding anything contained in the Plan to the contrary, an Employee or a Director who has received an allocation of Plan Shares in accordance with Article VI may request in writing that the Committee authorize the distribution to him or her of all or a portion of the Plan Shares awarded before the date on which the Plan Shares become earned in accordance with Article VII. The decision as to whether to distribute to any Employee or Director who requests distribution shall be made by the Committee, in its sole discretion. In addition, the distribution shall be subject to the following parameters: (a) The Committee shall be required to make a separate determination for each request received by an Employee or Director for distribution. (b) Any Plan Shares awarded shall be required to have a legend on the Plan Shares confirming that the Plan Shares are subject to restriction and transfer in accordance with the terms set forth in the Plan. This legend may not be removed until the date that the Plan Shares become earned in accordance with Article VII. (c) The Plan Shares distributed shall be voted by the Trustee in accordance with Section 7.04 until the date that the Plan Shares are earned. (d) Any cash dividends or other cash distributions paid with respect to the Plan Shares before the date that the Plan Shares are earned shall be paid to the Trustee to be held for the Employee or Director, whichever is applicable, until the date that the Plan Shares are earned. (e) At the date on which the Plan Shares are earned, the Trustee may withhold from any cash dividends or other cash distributions held on behalf of such Employee or Director the amount needed to cover any applicable withholding and employment taxes arising at the time that the Plan Shares are earned. If the amount of such cash dividends or distributions is insufficient, the Trustee may require the Employee or Director to pay to the Trustee the amount required to be withheld as a condition of removing the legend on the Plan Shares. ARTICLE VII EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Earning Plan Shares; Forfeitures. (a) General Rules. Plan Shares subject to an Award shall be earned by a Recipient at the rate of twenty percent (20%) of the aggregate number of Shares covered by the Award at the end of each full twelve months of consecutive service with the Holding Company or the Affiliate after the date of grant of the Award. If the term of service of a Recipient terminates as an Employee, as a Director, and as a Director Emeritus prior to the fifth anniversary (or such later date as the Committee shall determine) of the date of grant of an Award for any reason (except as specifically provided in Subsection (b) below or in Section 4.01 hereof), the Recipient shall forfeit the right to earn any Shares subject to the Award which have not theretofore been earned. In determining the number of Plan Shares which are earned, fractional shares shall be rounded down to the nearest whole number, provided that such fractional shares shall be aggregated and earned, on the fifth anniversary of the date of grant. (b) Exception for Terminations due to Death and Disability. Notwithstanding the general rule contained in Section 7.01(a) above, all Plan Shares subject to a Plan Share Award held by a Recipient whose term of service as an Employee and as a Director or Director Emeritus with the Holding Company and -5- the Affiliates terminates due to death or Disability shall be deemed earned as of the Recipient's last day of service with the Holding Company and the Affiliates as a result of such death or Disability. If the recipient's service as an Employee and as a Director or Director Emeritus terminates due to Disability within one year of the effective date of the Conversion, the Shares earned by the Receipent may not be disposed of by the Recipient during the one-year period following the Conversion, and stock certificate legends to that effect may be placed on the stock certificates for any such shares. (c) Revocation for Misconduct. Notwithstanding anything hereinafter to the contrary, the Board may by resolution immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent Plan Shares have not been delivered thereunder to the Recipient, whether or not yet earned, in the case of an Employee who is discharged from the employ of the Holding Company or an Affiliate for cause (as hereinafter defined), or who is discovered after termination of employment to have engaged in conduct that would have justified termination for cause or, in the case of an Outside Director, Director Emeritus, or Subsidiary Director, who is removed from the Board of Directors of the Holding Company or an Affiliate for cause (as hereinafter defined), or who is discovered after termination of service as an Outside Director, Director Emeritus, or Subsidiary Director to have engaged in conduct which would have justified removal for cause. "Cause" is defined as personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or order which results in a loss to the Holding Company or any Affiliate or in a final cease and desist order. 7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be entitled to receive, with respect to each Plan Share paid, an amount equal to any cash dividends or cash distributions and a number of shares of Common Stock equal to any stock dividends, and any other asset distributions declared and paid with respect to a share of Common Stock between the date the Plan Shares are being distributed and the date the Plan Shares were granted. There shall also be distributed an appropriate amount of net earnings, if any, of the Trust with respect to any cash dividends or cash distributions so paid out. Until the Plan Shares are vested and distributed to any such Recipient or Beneficiary, such dividends, distributions and net earnings thereon, if any, shall be retained by the Trust. 7.03 Distribution of Plan Shares. (a) Timing of Distributions: General Rule. Except as provided in Subsection (b) below, Plan Shares shall be distributed to the Recipient or his Beneficiary, as the case may be, as soon as practicable after they have been earned. (b) Timing: Exception for 10% Stockholders. Notwithstanding Subsection (a) above, no Plan Shares may be distributed prior to the date which is five (5) years from the effective date of the Conversion to the extent the Recipient or Beneficiary, as the case may be, would after receipt of such shares own in excess of ten (10) percent of the issued and outstanding shares of Common Stock. Any Plan Shares remaining unpaid solely by reason of the operation of this Subsection (b) shall be paid to the Recipient or his Beneficiary on the date which is five (5) years from the effective date of the Conversion. (c) Form of Distribution. All Plan Shares, together with any shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned and payable. Payments representing accumulated cash dividends and cash or -6- other distributions (and earnings thereon) shall be made in cash or in the form of such non-cash distributions. (d) Withholding. The Trustee may withhold from any payment or distribution made under this Plan sufficient amounts of cash or shares of Common Stock to cover any applicable withholding and employment taxes, and if the amount of such payment is insufficient, the Trustee may require the Recipient or Beneficiary to pay to the Trustee the amount required to be withheld as a condition of delivering the Plan Shares. Alternatively, a Recipient may pay to the Trustee that amount of cash necessary to be withheld in taxes in lieu of any withholding of payments or distribution under the Plan. The Trustee shall pay over to the Holding Company, or the Affiliate which employs or employed such Recipient any such amount withheld from or paid by the Recipient or Beneficiary. (e) Cessation of Payment. The Trustee shall cease payment of benefits to Recipients or, if applicable, their Beneficiaries in the event of the Bank's insolvency. The Bank shall be considered insolvent for purposes of this RRP if the Bank is unable to pay its debts as they become due or if a receiver is appointed for the Bank under applicable law. If payments cease by reason of this subsection, payments will be resumed, with appropriate make-up payments, once the Bank ceases to be insolvent but only to the extent the payments were not made directly by the Bank or its Affiliates. 7.04 Voting of Plan Shares. All shares of Common Stock held by the Trust shall be voted by the Trustee, taking into account the best interests of the Plan Share Award recipients. ARTICLE VIII TRUST 8.01 Trust. The Trustee shall receive, hold, administer, invest and make distributions and disbursements from the Trust in accordance with the provisions of the Plan and Trust and the applicable directions, rules, regulations, procedures and policies established by the Committee pursuant to the Plan. 8.02 Management of Trust. It is the intent of this Plan and Trust that, subject to the provisions of this Plan, the Trustee shall have complete authority and discretion with respect to the management, control and investment of the Trust, and that the Trustee shall invest all assets of the Trust, except those attributable to cash dividends paid with respect to Plan Shares, in Common Stock to the fullest extent practicable, and except to the extent that the Trustee determines that the holding of monies in cash or cash equivalents is necessary to meet the obligation of the Trust. Neither the Holding Company nor any Affiliate shall exercise any direct or indirect control or influence over the time when, or the prices at which, the Trustee may purchase such shares, the number of shares to be purchased, the manner in which the shares are to be purchased, or the broker (if any) through whom the purchases may be executed. In performing its duties, the Trustee shall have the power to do all things and execute such instruments as may be deemed necessary or proper, including the following powers: (a) To invest up to one hundred percent (100%) of all Trust assets in Common Stock without regard to any law now or hereafter in force limiting investments for Trustees or other fiduciaries. The investment authorized herein and in paragraph (b) constitutes the only investment of the Trust, and in making such investment, the Trustee is authorized to purchase Common Stock from the Holding Company or an Affiliate or from any other source, and such Common Stock so purchased may be outstanding, newly issued, or treasury shares. (b) To invest any Trust assets not otherwise invested in accordance with (a) above in such deposit accounts, and certificates of deposit (including those issued by an Affiliate), securities of any open-end or closed-end management investment company or investment trust registered under the -7- Investment Company Act of 1940, whether or not the Trustee or any affiliate of the Trustee is being compensated for providing services to the investment company or trust as investment advisor or otherwise, obligations of the United States government or its agencies or such other investments as shall be considered the equivalent of cash. (c) To sell, exchange or otherwise dispose of any property at any time held or acquired by the Trust. (d) To cause stocks, bonds or other securities to be registered in the name of a nominee, without the addition of words indicating that such security is an asset of the Trust (but accurate records shall be maintained showing that such security is an asset of the Trust). (e) To hold cash without interest in such amounts as may be in the opinion of the Trustee reasonable for the proper operation of the Plan and Trust and to hold cash pending investment. (f) To employ brokers, agents, custodians, consultants and accountants. (g) To hire counsel to render advice with respect to their rights, duties and obligations hereunder, and such other legal services or representation as they may deem desirable. (h) To hold funds and securities representing the amounts to be distributed to a Recipient or his or her Beneficiary as a consequence of a dispute as to the disposition thereof, whether in a segregated account or held in common with other assets of the Trust. Notwithstanding anything herein contained to the contrary, the Trustee shall not be required to make any inventory, appraisal or settlement or report to any court, or to secure any order of court for the exercise of any power herein contained, or give bond. 8.03 Records and Accounts. The Trustee shall maintain accurate and detailed records and accounts of all transactions of the Trust, which shall be available at all reasonable times for inspection by any legally entitled person or entity to the extent required by applicable law, or any other person determined by the Committee. 8.04 Earnings. All earnings, gains and losses with respect to Trust assets shall be allocated, in accordance with a reasonable procedure adopted by the Committee, to bookkeeping accounts for Recipients or to the general account of the Trust, depending on the nature and allocation of the assets generating such earnings, gains and losses. In particular, any earnings on cash dividends or distributions received with respect to shares of Common Stock shall be allocated to accounts for Recipients, if such shares are the subject of outstanding Plan Share Awards, or otherwise to the Plan Share Reserve. Recipients (or their Beneficiaries) shall not be entitled to any such allocations until the Plan Share Awards to which they relate are vested and distributed to those Recipients (or their Beneficiaries). 8.05 Expenses. All costs and expenses incurred in the operation and administration of this Plan, including those incurred by the Trustee, shall be borne by the Affiliates or the Holding Company. 8.06 Indemnification. The Bank shall indemnify, defend and hold the Trustee harmless against all claims, expenses and liabilities arising out of or related to the exercise of the Trustee's powers and the discharge of its duties hereunder, unless the same shall be due to its negligence or willful misconduct. -8- ARTICLE IX MISCELLANEOUS 9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares available for issuance pursuant to the Plan Share Awards (which, as of the effective date of this Plan, shall not exceed, 4% of the shares of the Holding Company's Common Stock issued in the Conversion), and the number of shares to which any Plan Share Award relates shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the effective date of the Plan resulting from any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar capital adjustment, or other increase or decrease in such shares effected without receipt or payment of consideration, by the Committee. 9.02 Amendment and Termination of Plan. The Board may, by resolution, at any time amend or terminate the Plan. The power to amend or terminate shall include the power to direct the Trustee to return to the Holding Company all or any part of the assets of the Trust, including shares of Common Stock held in the Plan Share Reserve, as well as shares of Common Stock and other assets subject to Plan Share Awards but not yet earned by the Employees or Outside Directors or Subsidiary Directors to whom they are allocated. However, the termination of the Trust shall not affect a Recipient's right to the distribution of Common Stock relating to Plan Share Awards already earned, including earnings thereon, in accordance with the terms of this Plan and the grant by the Committee. 9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Recipient other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and during the lifetime of the Recipient, Plan Shares may only be earned by and paid to the Recipient who was notified in writing of the Award by the Committee pursuant to Section 6.04. The assets of the RRP, prior to the distribution of Plan Shares to a Recipient or his or her Beneficiary, shall be subject to the claims of creditors of the Bank and/or the Thrift. Unless Plan Shares are distributed in accordance with Section 6.06 or 7.03 to a Recipient or his or her Beneficiary, such Recipient or, if applicable, Beneficiary shall not have any right in or claim to any specific assets of the RRP or Trust and shall only be an unsecured creditor of the Bank and/or the Thrift, nor shall any Affiliate be subject to any claim for benefits hereunder. 9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee, the Committee or the Board in connection with the Plan shall create any right on the part of any Employee to continue in the employ of, or of any Director to continue in the service of, the Holding Company or any Affiliate thereof. 9.05 Voting and Dividend Rights. No Recipient shall have any voting or dividend rights or other rights of a stockholder in respect of any Plan Shares covered by a Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above, prior to the time said Plan Shares are actually distributed to him. 9.06 Governing Laws. The Plan and Trust shall be governed by the laws of the State of Indiana, except to the extent governed by federal law, including regulations of the Office of Thrift Supervision. In particular, grants of Plan Share Awards under the Plan shall comply with the requirements of 12 C.F.R. ss.563b.3(g)(4)(vi) as long as those requirements are in effect. That regulation currently requires that no individual shall receive more than 25% of the Plan Share Awards available for grant under the Plan and Outside Directors shall not receive Plan Share Awards for more than 5% individually, or 30% in the aggregate, of the Plan Share Awards available for grant under the Plan. 9.07 Effective Date. This Plan shall be effective as of the date of its approval by the shareholders of the Holding Company. -9- 9.08 Term of Plan. This Plan shall remain in effect until the earlier of (1) 21 years from its effective date, (2) termination by the Board, or (3) the distribution of all assets of the Trust. Termination of the Plan shall not affect any Plan Share Awards previously granted, and such Awards shall remain valid and in effect until they have been earned and paid, or by their terms expire or are forfeited. 9.09 Tax Status of Trust. It is intended that the trust established hereby be treated as a grantor trust of the Holding Company and the Affiliates under the provisions of Section 671, et seq., of the Internal Revenue Code of 1986, as amended. 9.10. Compensation. The Trustee shall be entitled to receive fair and reasonable compensation for its services hereunder, as agreed to by the Trustee and the Holding Company, and shall also be entitled to be reimbursed for all reasonable out-of-pocket expenses, including, but not by way of limitation, legal, actuarial and accounting expenses and all costs and expenses incurred in prosecuting or defending any action concerning the Plan or the Trust or the rights or responsibilities of any person hereunder, brought by or against the Trustee. Such reasonable compensation and expenses shall be paid by the Holding Company or the Affiliates. 9.11. Resignation of Trustee. The Trustee may resign at any time by giving sixty (60) calendar days' prior written notice to the Holding Company, and the Trustee may be removed, with or without cause, by the Holding Company on sixty (60) calendar days' prior written notice to the Trustee. Such prior written notice may be waived by the party entitled to receive it. Upon any such resignation or removal becoming effective, the Trustee shall render to the Holding Company a written account of its administration of the Plan and the Trust for the period since the last written accounting and shall do all necessary acts to transfer the assets of the Trust to the successor Trustee or Trustees. IN WITNESS WHEREOF, the Holding Company and the Bank and the Thrift have caused this Plan and Trust Agreement to be executed by their duly authorized officers as of the ___ day of ____________, 1996. River Valley Bancorp By ------------------------------- James E. Fritz, President and Chief Executive Officer Madison First Federal Savings and Loan Association By ------------------------------- James E. Fritz, President and Chief Executive Officer Citizens National Bank of Madison By ------------------------------- Robert D. Hoban, President -10- IN WITNESS WHEREOF, I, Carmen Walch, Trust Officer, execute this agreement for and on behalf of the Trustee, accepting and binding the Trustee to undertake and perform the obligations and duties of the Trustee hereunder and consenting to the foregoing Plan and Trust Agreement. First Bankers Trust Company By ------------------------------- Carmen Walch Trust Officer -11- EX-10.4 7 RIVER VALLEY BANCORP ESOP AND TRUST AGREEMENT Exhibit 10(4) RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE JANUARY 1, 1996) RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE JANUARY 1, 1996) TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.................................................1 Section 1.1. Accrued Company Contributions Benefit............................................1 Section 1.2. Act..................................................1 Section 1.3. Anniversary Date.....................................1 Section 1.4. Annual Addition......................................1 Section 1.5. Beneficiary..........................................2 Section 1.6. Code.................................................2 Section 1.7. Committee............................................2 Section 1.8. Company..............................................2 Section 1.9. Company Contributions Account........................2 Section 1.10. Compensation.........................................3 Section 1.11. Date of Employment...................................3 Section 1.12. Date of Separation...................................3 Section 1.13. Deferred Retirement..................................3 Section 1.14. Deferred Retirement Date.............................3 Section 1.15. Defined Benefit Fraction.............................3 Section 1.16. Defined Contribution Fraction........................4 Section 1.17. Effective Date.......................................4 Section 1.18. Employee.............................................4 Section 1.19. Exempt Loan..........................................5 Section 1.20. Fund.................................................5 Section 1.21. Highly Compensated Employee..........................5 Section 1.22. Holding Company......................................6 Section 1.23. Hour of Service......................................6 Section 1.24. Leave of Absence.....................................7 Section 1.25. Normal Retirement....................................7 Section 1.26. Normal Retirement Date...............................7 Section 1.27. One Year Service Break...............................8 Section 1.28. Participant..........................................8 Section 1.29. Period of Separation.................................8 Section 1.30. Period of Service....................................8 Section 1.31. Period of Severance..................................9 Section 1.32. Plan.................................................9 Section 1.33. Plan Year............................................9 Section 1.34. Reemployed Individual................................9 Section 1.35. Section 415 Compensation............................10 Section 1.36. Stock...............................................11 Section 1.37. Top Paid Group......................................11 Section 1.38. Total Disability....................................12 Section 1.39. Trust...............................................12 -i- Section 1.40. Trustee.............................................12 Section 1.41. Valuation Date......................................12 ARTICLE II ELIGIBILITY AND PARTICIPATION..............................12 Section 2.1. Eligibility.........................................12 Section 2.2. Entry Dates.........................................12 Section 2.3. Certification by Company............................13 Section 2.4. Deferred Retirement.................................13 ARTICLE III COMPANY CONTRIBUTIONS......................................13 Section 3.1. Company Contributions...............................13 Section 3.2. Form of Contributions...............................13 Section 3.3. Holding by Trustee..................................14 Section 3.4. Expenses............................................14 Section 3.5. No Company Liability for Benefits...................14 Section 3.6. No Rollover Contributions...........................14 ARTICLE IV ALLOCATION TO PARTICIPANTS' ACCOUNTS.......................14 Section 4.1. Company Contributions Accounts......................14 Section 4.2. Allocation of Company Contributions.....................................14 Section 4.3. Limitations on Annual Additions.....................15 Clause (a). Basic Limitations............................15 Clause (b). Participation in Other Plans.................16 Section 4.4. Effective Date of Allocations.......................16 Section 4.5. Cash Dividends......................................16 Section 4.6. Allocation of Forfeitures...........................17 Section 4.7. Special Allocation Rules............................17 ARTICLE V VALUATIONS AND ADJUSTMENTS.................................19 Section 5.1. Valuation of Fund...................................19 Clause (a). Valuations...................................19 Clause (b). Frequency....................................19 Clause (c). Records......................................19 Section 5.2. Adjustments.........................................20 Section 5.3. Amount of Adjustments...............................20 Section 5.4. Effective Date of Adjustments.......................20 Section 5.5. Notice to Participants..............................20 ARTICLE VI BENEFITS...................................................20 Part A. Retirement Benefits..............................................20 Section 6.1. Retirement..........................................20 Part B. Termination Benefits.............................................21 Section 6.2. Effect of Termination...............................21 Section 6.3. Vesting.............................................21 Section 6.4. Payment.............................................22 Part C. Death Benefits...................................................22 Section 6.5. Benefits upon Death.................................22 Section 6.6. Beneficiaries.......................................23 Section 6.7. Lack of Beneficiaries...............................23 Section 6.8. Termination or Retirement prior to Death.............................................23 -ii- Part D. General..........................................................23 Section 6.9. Date of Distribution................................23 Section 6.10. Form of Distribution................................24 Section 6.11. Liability...........................................24 Section 6.12. Put Options.........................................25 Section 6.13. Eligible Rollover Distributions.....................26 ARTICLE VII ADMINISTRATIVE COMMITTEE...................................27 Section 7.1. Establishment.......................................27 Section 7.2. Duties..............................................27 Section 7.3. Actions.............................................27 Section 7.4. Disqualification....................................27 Section 7.5. Powers..............................................28 Section 7.6. Discrimination Prohibited...........................28 Section 7.7. Statements and Forms................................28 Section 7.8. Liability...........................................28 Section 7.9. Determination of Right to Benefits..................29 Section 7.10. Investment Directions...............................29 Section 7.11. Voting Power........................................29 ARTICLE VIII THE TRUSTEE................................................29 Section 8.1. Assets Held in Trust................................29 Section 8.2. Investments.........................................29 Section 8.3. Directions of Committee.............................30 Section 8.4. Receipt of Additional Shares........................30 Section 8.5. Delivery of Materials to Committee..................30 Section 8.6. Powers..............................................31 Section 8.7. Loans to the Trust..................................32 Clause (a). Interest.....................................32 Clause (b). Use of Proceeds..............................32 Clause (c). Terms of Exempt Loan.........................32 Clause (d). Collateral...................................32 Clause (e). Limited Recourse.............................33 Clause (f). Repayment....................................33 Clause (g). Agreement by Companies.......................33 Clause (h). Release of Collateral........................33 Clause (i). Default......................................34 Clause (j). Termination of Plan..........................34 Section 8.8. Annual Accounting...................................34 Section 8.9. Audit...............................................34 Section 8.10. Uncertainty Concerning Payment of Benefits..........................................35 Section 8.11. Compensation........................................35 Section 8.12. Standard of Care....................................35 Section 8.13. Request for Instructions............................35 Section 8.14. Resignation of Trustee..............................36 Section 8.15. Vacancies in Trusteeship............................36 Section 8.16. Information to Be Furnished.........................36 Section 8.17. Voting Rights of Participants.......................36 Section 8.18. Delegation of Authority.............................37 -iii- Section 8.19. Diversification of Company Contributions Account.............................37 Section 8.20. Tender Offer........................................38 ARTICLE IX AMENDMENT, TERMINATION AND MERGER..........................38 Section 9.1. Amendment...........................................38 Section 9.2. Termination or Complete Discontinuance of Contributions...................39 Section 9.3. Determination by Internal Revenue Service...........................................40 Section 9.4. Nonreversion........................................40 Section 9.5. Merger..............................................41 ARTICLE X MISCELLANEOUS.............................................41 Section 10.1. Creation of Plan Voluntary..........................41 Section 10.2. No Employment Contract..............................41 Section 10.3. Limitation on Rights Created........................41 Section 10.4. Waiver of Claims....................................41 Section 10.5. Spendthrift Provision...............................42 Section 10.6. Payment of Benefits to Others.......................42 Section 10.7. Payments to Missing Persons.........................42 Section 10.8. Severability........................................43 Section 10.9. Captions............................................43 Section 10.10. Construction........................................43 Section 10.11. Counterparts........................................43 Section 10.12. Indemnification.....................................43 Section 10.13. Standards of Interpretation and Administration....................................43 Section 10.14. Governing Law.......................................44 Section 10.15. Successors and Assigns..............................44 Section 10.16. Adoption of Plan....................................44 Section 10.17. Withdrawal from Plan................................44 ARTICLE XI TEFRA TOP-HEAVY RULES.....................................44 Section 11.1. Application.........................................44 Section 11.2. Determination.......................................44 Section 11.3. Accrued Benefits....................................46 Section 11.4. Vesting Provisions..................................46 Section 11.5. Minimum Contribution................................47 -iv- RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE JANUARY 1, 1996) ARTICLE I DEFINITIONS Section 1.1. "Accrued Company Contributions Benefit" shall mean the balance of a Participant's Company Contributions Account as of the last preceding Valuation Date. Section 1.2. "Act" shall mean the Employee Retirement Income Security Act of 1974, as now in effect or hereafter amended, and shall also include all regulations promulgated thereunder. Section 1.3. "Anniversary Date" shall mean the last calendar day of any Plan Year. Section 1.4. "Annual Addition" shall mean, with respect to any Participant for any Plan Year and with respect to this Plan and to all other qualified defined contribution plans maintained by a Company, the sum of: (a) Company contributions credited to his Company Contributions Account for that Plan Year under this Plan; (b) that Participant's non-deductible contributions; (c) forfeitures; and (d) amounts allocated to an individual medical account as defined in Section 415(1)(2) of the Code which is part of a pension or annuity plan maintained by a Company shall be treated as Annual Additions to a qualified defined contribution plan, and amounts derived from Company contributions paid or accrued in taxable years ending after such date which are attributable to post-retirement medical benefits allocated to the separate account of a key employee as defined in Section 416 of the Code under a welfare benefit fund as defined in Section 419(e) of the Code maintained by a Company shall also be treated as Annual Additions to a qualified defined contribution plan. To the extent Company contributions and forfeitures are used in a Plan Year to repay an Exempt Loan and shares of Stock are released from a suspense account, the fair market value of the shares of Stock released and allocated to a Participant's Company Contributions Account, rather than the amount of Company contributions and forfeitures applied towards the Exempt Loan, shall be treated as an Annual Addition in such Plan Year but only if it would result in lesser Annual Additions in such Plan Year. Annual Additions shall not include any amounts allocated as income to a Participant's Company Contributions Account in accordance with Section 8.7(j). Section 1.5. "Beneficiary" shall mean the person(s) entitled under the provisions of Section 6.5 to receive benefits after the death of a Participant. Section 1.6. "Code" shall mean the Internal Revenue Code of 1986, as now in effect or hereafter amended, and shall also include all regulations promulgated thereunder. Section 1.7. "Committee" shall mean the administrative committee appointed and acting in accordance with the provisions of Article VII. The Committee shall be deemed to be the Plan Administrator for purposes of the Act. Section 1.8. "Company" shall mean the Holding Company, Madison First Federal Savings and Loan Association, any Company which becomes a participating employer pursuant to Section 10.16, and any successors thereto. The term "Company" shall also include the Citizens National Bank of Madison if it becomes a subsidiary of the Holding Company before January 1, 1997. Solely for the purpose of: (a) computing an Employee's Hours of Service and Period of Service to determine his eligibility to participate in and the vesting of his benefits under this Plan; (b) applying the limitations contained in Section 4.3; (c) determining whether this Plan is a Top Heavy Plan under Section 11.2 and, thus, subject to the provisions of Article XI; and (d) determining whether an Employee terminated his employment with the Companies, "Company" shall also include any entity which, together with a participating Company, constitutes a member of a controlled group of corporations, a member of a commonly controlled group of trades or businesses or a member of an affiliated service group within the meaning of Section 414(b), Section 414(c) or Section 414(m) of the Code or any entity which is required to be aggregated with a participating Company under Section 414(o) of the Code. Section 1.9. "Company Contributions Account" shall mean the account maintained for each Participant to which contributions made by the Companies shall be allocated. -2- Section 1.10. "Compensation" shall mean the total of all amounts paid or payable in cash by the Companies by reason of services performed by an Employee during any period, including bonuses, overtime, any other cash payments included on an Employee's W-2, amounts deferred by the Employee under any cash or deferred arrangement maintained by a Company under Section 401(k) of the Code and any salary reductions elected by the Employee pursuant to a salary reduction plan maintained by a Company under Section 125 of the Code but excluding, with respect to any Employee, any other amounts contributed by a Company for or on account of that Employee under this Plan or under any other employee benefit plan; provided, however, that Compensation in a Plan Year in excess of one hundred and fifty thousand ($150,000), as adjusted pursuant to Section 401(a)(17) of the Code, shall be disregarded; provided, further, that to the extent provided by Section 1.21(g) the Compensation limit shall be allocated among family members. Section 1.11. "Date of Employment" means any date on which an Employee first completes an Hour of Service. Section 1.12. "Date of Separation" means the earlier of: (a) the date an Employee's employment with the Companies terminates by reason of a quit, discharge, retirement (including disability retirement) or death; or (b) the first anniversary of the first date of a period in which the Employee remains absent from active employment with the Companies for some reason other than a quit, discharge, retirement, death, approved leave of absence or military service. Section 1.13. "Deferred Retirement" shall mean retirement after a Participant's Normal Retirement Date in accordance with Section 2.4. Section 1.14. "Deferred Retirement Date" shall mean the first (1st) calendar day of the month after a Participant's Normal Retirement Date as of which he retires or his employment with the Companies is terminated for any reason other than his death. Section 1.15. "Defined Benefit Fraction" shall mean for a given Plan Year a fraction: (a) the numerator of which is the projected annual benefit of a Participant under all qualified defined benefit plans maintained by a Company (determined as of the Anniversary Date of that Plan Year), and (b) the denominator of which is the lesser of: -3- (i) the product of one and twenty-five one hundredths (1.25) multiplied by ninety thousand dollars ($90,000), as adjusted pursuant to Section 415(b)(1) (A) and (d)(1) of the Code, or (ii) the product of one and four tenths (1.4) multiplied by one hundred percent (100%) of that Participant's average Section 415 Compensation for his three (3) consecutive highest paid Period of Service with the Companies. Section 1.16. "Defined Contribution Fraction" shall mean for a given Plan Year a fraction: (a) the numerator of which is the sum of the Annual Additions to a Participant's accounts under all qualified defined contribution plans maintained by a Company as of the Anniversary Date of that Plan Year, and (b) the denominator of which is the sum of the lesser of the following amounts determined for that Plan Year and for each prior year of service with the Companies: (i) the product of one and twenty-five one hundredths (1.25) multiplied by the dollar limit in effect for that Plan Year pursuant to Section 415(c)(1)(A) of the Code, or (ii) the product of one and four tenths (1.4) multiplied by twenty-five percent (25%) of that Participant's Section 415 Compensation for that Plan Year. Section 1.17. "Effective Date" shall mean January 1, 1996; provided, however, that if prior to December 31, 1996, Madison First Federal Savings and Loan Association shall not have completed its conversion from mutual to stock form, this Plan shall be null and void and any shares of Stock and other assets held hereunder shall be returned to the Companies. Section 1.18. "Employee" shall mean any person employed by a Company, and shall also include any individual deemed to be a leased employee (as defined below) of the Companies but only to the extent required by the Code. For purposes of this Plan, the term "leased employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one (1) year, and such services are of a type historically performed by employees in the business field of the recipient employer; provided, however, that a leased employee shall not be considered -4- an employee of the recipient if (a) such employee is covered by a money purchase pension plan providing a nonintegrated employer contribution rate of at least ten percent (10%) of Compensation, immediate participation and full and immediate vesting and (b) leased employees do not constitute more than twenty percent (20%) of the recipient's non-highly compensated workforce. A leased employee within the meaning of Section 414(n)(2) of the Code shall become a Participant in the Plan based on service as a leased employee only as provided in provisions of the Plan other than this Section. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. Section 1.19. "Exempt Loan" shall mean a loan made to this Plan by a party in interest or disqualified person or a loan to this Plan which is guaranteed by a party in interest or disqualified person, including a direct loan of cash, a purchase-money transaction and an assumption of any obligation of this Plan. For purposes of this definition, a guarantee shall include an unsecured guarantee and the use of assets of a party in interest or disqualified person as collateral for a loan even though the use of assets may not constitute a guarantee under any applicable State laws. Section 1.20. "Fund" shall mean all cash, investments and other properties held by the Trustee hereunder. Section 1.21. "Highly Compensated Employee" shall include for a Plan Year any Employee who during such Plan Year or in the immediately preceding Plan Year: (a) is at any time a five percent (5%) or more owner (as defined in Section 416(i)(1) of the Code) of a Company; (b) receives more than seventy-five thousand dollars ($75,000), as adjusted pursuant to Section 415(b)(1)(A) and (d)(1) of the Code, of Section 415 Compensation from the Companies; (c) receives more than fifty thousand dollars ($50,000), as adjusted pursuant to Section 415(b)(1)(A) and (d)(1) of the Code, of Section 415 Compensation from the Companies and is in the Top Paid Group in the same Plan Year; or (d) is at any time in either Plan Year an officer of a Company and whose Section 415 Compensation in the same Plan Year during which he is an officer is greater than fifty percent (50%) of the maximum dollar limitation under Section 415(b)(1)(A) of the Code currently in effect; provided, however, that no more than fifty (50) Employees or, if lesser, the greater of three (3) or ten -5- percent (10%) of a Company's Employees are to be treated as officers; provided, further, that if no officer has Section 415 Compensation greater than fifty percent (50%) of the maximum dollar limitation under Section 415(b)(1)(A) of the Code currently in effect, only the highest paid officer of that Company shall be deemed highly compensated pursuant to this Subsection (d). For purposes of determining whether an Employee is a Highly Compensated Employee and notwithstanding anything else contained in this Section 1.21, the following rules shall apply: (e) An Employee who has met the requirements contained in Subsections (b), (c) or (d) above for the Plan Year for which the determination of Highly Compensated Employees is being made but has not met such requirements for the immediately preceding Plan Year shall not be deemed to be a Highly Compensated Employee unless such Employee is among the one hundred (100) Employees who have received the greatest Section 415 Compensation from the Companies in such Plan Year. (f) A former Employee shall be treated as a Highly Compensated Employee if he was a Highly Compensated Employee in the Plan Year during which his employment with the Companies terminated or in any Plan Year during which occurs or commencing after his fifty-fifth (55th) birthday. (g) Any Employee who is one (1) of the ten (10) Employees receiving the greatest Section 415 Compensation from the Companies or who is a five percent (5%) owner of a Company as described in Subsection (a) above shall be deemed to have been paid the Section 415 Compensation which is paid to his spouse or to his lineal descendants who have yet attained age nineteen (19); provided, however, that any individual whose Section 415 Compensation is deemed to be paid to a family member of such individual shall not be considered a separate Employee for purposes of this Section 1.21. (h) For purposes of this Section, Section 415 Compensation shall include amounts deferred or redirected by an Employee pursuant to Sections 401(k) and 125 of the Code. (i) An Employee shall only be deemed to be a Highly Compensated Employee to the extent required by the Code. Section 1.22. "Holding Company" shall mean River Valley Bancorp. -6- Section 1.23. "Hour of Service" shall mean: (a) each hour for which an Employee is paid, or entitled to payment, for the performance of duties for a Company; these hours shall be credited to the Employee for the computation period or periods in which the duties are performed; and (b) each hour for which an Employee is paid, or entitled to payment, by a Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability but excluding payments made because of Total Disability under Section 6.3), layoff, jury duty, military duty or leave of absence; no more than five hundred and one (501) Hours of Service shall be credited under this Subsection (b) for any single continuous period (whether or not such period occurs in a single computation period); hours under this Subsection (b) shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Company; the same Hours of Service shall not be credited both under Subsection 1.23(a) or Subsection 1.23(b), as the case may be, and under this Subsection 1.23(c); these hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains, rather than to the computation period in which the award, agreement or payment is made. To the extent required under the Family and Medical Leave Act of 1993 ("FMLA") and solely for purposes of determining whether a One Year Service Break for participation and vesting purposes has occurred in any computation period, an individual who is absent from work on unpaid leave under the FMLA on or after August 5, 1993 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 of Service cannot be determined, eight (8) Hours of Service per each regularly scheduled work day of such absence. Hours of Service shall be determined in accordance with any method or methods permitted by the Act; provided, however, that such method or methods shall be used consistently, uniformly and in a non-discriminatory manner. -7- Any ambiguity arising in the interpretation of the above provisions shall be resolved in favor of crediting an Employee with Hours of Service. Section 1.24. "Leave of Absence" shall mean a leave granted by a Company, in accordance with rules uniformly applied to all Employees in a non-discriminatory manner, for reasons of health, public service or other satisfactory reasons. Section 1.25. "Normal Retirement" shall mean retirement on a Participant's Normal Retirement Date. Section 1.26. "Normal Retirement Date" shall mean the first (1st) calendar day of the month immediately following a Participant's sixty-fifth (65th) birthday. A Participant's benefits under this Plan shall be fully vested and non-forfeitable on and after the date he attains age sixty-five (65), which is deemed to be the normal retirement age under this Plan, regardless of his Period of Service and regardless of the vesting schedules in Section 6.3 and in Section 11.4. Section 1.27. "One Year Service Break" shall mean a consecutive twelve (12) month Period of Severance. Section 1.28. "Participant" shall mean any Employee who has commenced participation in this Plan pursuant to Section 2.2. Participation in this Plan shall continue until such time as the Participant has received all of the benefits to which he is entitled under the terms of this Plan. Section 1.29. "Period of Separation" means, for an Employee, the period of time commencing with the date such Employee separates from service with the Companies and ending with the date such Employee resumes his employment with the Companies. Section 1.30. "Period of Service" means, for an Employee, the period commencing on the later of the following dates: (a) such Employee's Date of Employment; or (b) the date on which such Employee's Employer is required to be aggregated with the Company under Code Section 414(b), (c), (m) or (o), whichever is applicable, and ending on the date a Period of Severance begins, including any Period of Separation of less than twelve (12) consecutive months; provided, however, that in the case of any person who terminates his employment with the Employers but later resumes his employment with the Companies, the Period of Service before such resumption of employment shall be aggregated only if that person is a Re-employed Individual. -8- Section 1.31. "Period of Severance" means, for an Employee, the period of time commencing with the earlier of: (a) the date on which such Employee terminates his employment with the Companies by reason of quitting, retirement, death or discharge, or (b) the date twelve (12) consecutive months after the date a person remains absent from service with the Companies (with or without pay) for any reason other than quitting, retirement, death or discharge, and ending, in the case of an Employee who terminates his employment with the Companies by reason other than death, with the date such Employee resumes his employment with the Companies. Solely for purposes of determining whether a One Year Service Break has occurred for participation and vesting purposes has occurred, an Employee who is absent from work for maternity or paternity reasons shall receive credit at least one (1) year. For purposes of this Section 1.31, an absence from work for maternity and paternity reasons means an absence: (d) by reason of the pregnancy of the Employee, (e) by reason of the birth of a child of the Employee, (f) by reason of the placement of a child with the Employee in connection with the adoption of that child by the Employee, or (g) for purposes of caring for such a child for the period beginning immediately following such birth or placement. Section 1.32. "Plan" shall mean the employee stock ownership plan and trust established pursuant to the provisions of this Agreement, as amended from time to time, which shall be known as the "River Valley Bancorp Employee Stock Ownership Plan." This Plan is intended to be an employee stock ownership plan under Section 4975(e)(7) of the Code and under Section 407(d)(6) of the Act. Section 1.33. "Plan Year" shall mean the calendar year. The Plan Year shall also be the limitation year for purposes of Section 415 of the Code for this Plan and for all other qualified retirement plans maintained by a Company. Section 1.34. "Re-employed Individual" shall mean a person who, after having terminated his employment with the Companies, resumes his employment with the Companies: (a) with any vested interest in his Company Contributions Account as provided in Section 6.3 or 11.4, or -9- (b) with no such vested interest but who resumes his employment with the Companies either: (i) before a One Year Service Break, (ii) after a One Year Service Break but before his latest Period of Severance equals or exceeds his Period of Service, or (iii) after a One Year Service Break but before the number of his consecutive One Year Service Breaks equals or exceeds the greater of five (5) or his Period of Service. Section 1.35. "Section 415 Compensation" shall mean with respect to any Plan Year and shall: (a) include amounts accrued to a Participant (regardless of whether he was a Participant during the entire Plan Year and regardless of whether in cash): (i) as wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of his employment with the Companies including but not limited to commissions, compensation for services on the basis of a percentage of profits and bonuses; (ii) for purposes of Subsection (a)(i) above, earned income from sources outside the United States (as defined in Section 911(b) of the Code), whether or not excludible from gross income under Section 911 of the Code or deductible under Section 913 of the Code; (iii) amounts described in Sections 104(a)(3), 105(a) and 115(h) of the Code but only to the extent that these amounts are includible in the gross income of that Participant; and (iv) amounts paid or reimbursed by the Companies for moving expenses incurred by that Participant, but only to the extent that these amounts are not deductible by that Participant under Section 217 of the Code; (b) not include: (i) notwithstanding Subsection (a) (i) above, there shall be excluded from S ection 415 Compensation amounts contributed to a plan as contributions to a -10- qualified cash or deferred plan under Section 401(k) of the Code; (ii) other contributions made by a Company to any plan of deferred compensation to the extent that, before the application of the Section 415 of the Code limitations to that plan, the contributions are not includible in the gross income of that Participant for the taxable year in which contributed; in addition, Company contributions made on behalf of that P articipant to a simplified employee pension plan described in Section 408(k) of the Code shall not be considered as Section 415 Compensation for the Plan Year in which contributed; additionally, any distributions from a plan of deferred compensation shall not be considered as Section 415 Compensation, regardless of whether such amounts are includible in the gross income of that Participant when distributed; however, any amounts received by that Participant pursuant to an unfunded nonqualified plan shall be considered as Section 415 Compensation in the Plan Year in which such amounts are includible in the gross income of that Participant; and (iii) other amounts which receive special federal income tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of that Participant). Section 1.36. "Stock" shall mean any duly-issued shares of common stock of the Holding Company which shares constitute employer securities under Section 409(1) and Section 4975(e)(8) of the Code. Section 1.37. "Top Paid Group" shall mean in a Plan Year and include the Employees who are in the top twenty percent (20%) of a Company's Employees in terms of Section 415 Compensation for such Plan Year; provided, however, that for purposes of determining the number of Employees to be included in the Top Paid Group, the following Employees shall be excluded: (a) Employees who have not completed six (6) months of service with the Companies; (b) Employees who normally work less than seventeen and one-half (17 1/2) hours per week or less than six (6) months during a Plan Year; (c) Employees who have not attained age twenty-one (21); -11- (d) except as provided by regulations promulgated under the Code, Employees who are covered by a collectively bargained agreement; and (e) Employees who are non-resident aliens and who receive no earned income (within the meaning of Section 911(d)(2) of the Code) from the Companies which constitutes income from sources in the United States (within the meaning of Section 861(a)(3) of the Code). Section 1.38. "Total Disability" shall mean a mental or physical condition which, in the judgment of the Committee based upon medical reports and other evidence satisfactory to the Committee, presumably permanently prevents a Participant from satisfactorily performing his usual duties for his employing Company or the duties of such other position or job which his employing Company makes available to that Participant and for which that Participant is qualified by reason of training, education or experience. Section 1.39. "Trust" shall mean the employee stock ownership trust established pursuant to the provisions of this Agreement, as amended from time to time, which shall be known as the "River Valley Bancorp Employee Stock Ownership Trust." Section 1.40. "Trustee" shall mean __________________________, and any successors thereto. Section 1.41. "Valuation Date" shall mean each December 31 and each other date as of which the Committee shall cause the Trustee to determine the value of the Trust assets as prescribed in Section 5.1. ARTICLE II ELIGIBILITY AND PARTICIPATION Section 2.1. Eligibility. Each Employee in the employ of a Company shall become eligible to participate in this Plan on the date on which his Period of Service is at least six (6) months. Section 2.2. Entry Dates. Each Employee who was eligible to participate under Section 2.1 on the Effective Date automatically became a Participant in this Plan as of the Effective Date. Each other Employee shall become a Participant in this Plan on the first day of January or July coincident with or next following the first (1st) date on which he meets the eligibility requirements of Section 2.1. A re-employed Employee whose Period of Service is at least six (6) months shall become (or, if formerly a Participant, be reinstated as) a Participant in this Plan on his re-employment date. -12- Section 2.3. Certification by Company. Not later than thirty (30) calendar days after an Employee shall become a Participant in this Plan, his employing Company shall certify such fact in writing to the Committee, together with such additional facts regarding such Participant as the Committee may request. Except as otherwise provided by the Act, each such certification shall be final and conclusive and the Committee shall be entitled to rely thereon without any investigation, but it may correct any errors discovered in any such certificate. Section 2.4. Deferred Retirement. A Participant who continues in the employment of a Company after his Normal Retirement Date shall continue to participate in this Plan, and contributions shall be allocated to his Company Contributions Account as otherwise provided in this Plan. Any such Participant who elects Deferred Retirement shall be entitled to benefits under this Plan payable at his Deferred Retirement Date in the same manner as if he had retired on his Normal Retirement Date; provided, however, that the deferral of benefit payments after a Participant's Normal Retirement Date shall be permitted only to the extent authorized by and in compliance with all requirements imposed under Section 2530.203-3 of the Department of Labor Regulations which are incorporated herein by reference. ARTICLE III COMPANY CONTRIBUTIONS Section 3.1. Company Contributions. For the initial Plan Year and for each Plan Year thereafter, the Companies shall make contributions to the Trust in one (1) or more installments in such amounts as the Board of Directors of the Holding Company may determine. If Company contributions are paid to the Trust by reason of a mistake in fact made in good faith or a mistake made in good faith in determining the deductibility of such Company contributions for federal income tax purposes under Section 404 of the Code, such Company contributions may, except as otherwise provided in Section 8.7, be returned to the Companies by the Trustee (upon the written direction of the Committee) within one (1) year after the payment to the Trust or after the date the federal income tax deduction is denied, whichever is applicable. Section 3.2. Form of Contributions. The Companies' contributions, if any, for each Plan Year shall be paid to the Trustee either in cash or in Stock valued at the fair market value thereof as of the date of the contribution (as determined consistent with Section 5.1(a)) and within such period as is provided for in Section 404 of the Code or any other statute of similar import or any rule or regulations thereunder. -13- Section 3.3. Holding by Trustee. All contributions made by the Companies under Section 3.1 shall be a part of the Fund and shall be held in trust by the Trustee until distributed as provided in this Plan. Section 3.4. Expenses. In addition to the contributions to be made under Section 3.1, the Companies shall pay all reasonable expenses incident to the operation of this Plan; in the event of any failure by the Companies to make such payment, the same shall be a charge against and paid from the Fund but only to the extent permitted under the Code and under the Act. Section 3.5. No Company Liability for Benefits. The benefits under this Plan shall be only such as can be provided by the Fund, and there shall be no liability or obligation on the part of the Company to make any further contributions or payments. Except as otherwise provided by the Act, no liability for the payment of benefits under this Plan shall be imposed upon the Companies or upon the officers, directors or shareholders of the Companies. Section 3.6. No Rollover Contributions. Rollover contributions (within the meaning of Section 402(a)(5) of the Code) shall not be permitted nor accepted. ARTICLE IV ALLOCATION TO PARTICIPANTS' ACCOUNTS Section 4.1. Company Contributions Accounts. F or purposes of allocating the Company contributions, the Committee shall establish and maintain a separate Company Contributions Account in the name of each Participant. Section 4.2. Allocation of Company Contributions. Except as provided in Section 4.7, the Company contributions for each Plan Year shall be allocated among the Company Contributions Accounts of all Employees who are still actively employed by a Company on the Anniversary Date of that Plan Year or whose employment with the Companies terminated during that Plan Year because of death, Total Disability, Deferred or Normal Retirement or after reaching age forty-five (45) with a Period of Service of at least five (5) years proportionately in the ratio that the Compensation (disregarding Compensation in excess of fifty thousand dollars ($50,000), as adjusted in the manner described below) paid to such Participant, if any, for that Plan Year or since becoming a Participant in this Plan if he became a Participant within that Plan Year bears to the aggregate Compensation (disregarding Compensation paid to any Participant in excess of fifty thousand dollars ($50,000), as adjusted in the manner described below) paid to all Participants for that Plan Year or since becoming Participants in this Plan if they became Participants within that Plan Year. The fifty thousand dollar ($50,000) limit described above shall be adjusted as of the -14- first (1st) day of each Plan Year beginning on January 1, 1997. The adjusted limit shall be determined by multiplying fifty thousand dollars ($50,000) by a fraction the numerator of which shall be the Bureau of Labor Statistics Wage Earners Index for the month of December preceding such January 1 adjustment date and the denominator of which shall be the Bureau of Labor Statistics Wage Earners Index for December, 1995, and rounding up or down to the nearest thousand dollar increment. To the extent cash dividends on allocated shares of Stock are applied to pay of an Exempt Loan under Section 4.5 and notwithstanding anything contained herein to the contrary, Company contributions shall first be applied towards crediting the Participant's Company Contributions Account to which the cash dividends would have been allocated before they are allocated under the preceding provisions of this Section. Section 4.3. Limitations on Annual Additions. Clause (a). Basic Limitations. Notwithstanding any other provision of this Plan, the maximum Annual Addition during any Plan Year for any Participant under this Plan and under any other qualified defined contribution plans maintained by the Companies shall in no event exceed the lesser of: (i) twenty-five percent (25%) of that Participant's Section 415 Compensation for that Plan Year, or (ii) thirty thousand dollars ($30,000), as adjusted from the total in accordance with Section 415 of the Code; provided, however, that such adjustments shall only apply to the Plan Years ending on or after the date in which the adjustment was made. Any Company contributions which are applied by the Trustee (not later than the due date, including extensions, for filing a Company's federal income tax return for that Plan Year) to pay interest on an Exempt Loan shall not be included as Annual Additions under this Section 4.3; provided, however, that the provisions of this Section shall be applicable only in Plan Years for which not more than one-third (1/3) of the Company contributions applied to pay principal and interest on an Exempt Loan are allocated among Highly Compensated Employees. The Committee may reallocate Company contributions in order to satisfy this special limitation. If due to a reasonable error in estimation of a Participant's Compensation or due to the allocation of forfeitures these maximum Annual Additions would be exceeded as to any Participant, any excess amount shall be used to reduce Company Contributions for that Participant in the next, and succeeding, Plan Years. If that Participant was not covered by this Plan at the Anniversary Date of that Plan Year, such excess shall be reallocated among the Company Contributions Accounts of the other Participants under Section 4.2 -15- to the fullest extent possible without exceeding the limitations with respect to any other Participant for that Plan Year. Any excess amount which cannot be so allocated to any Participant's Company Contributions Account by reason of these limitations shall be allocated under this Section 4.3(a) for the next succeeding Plan Years (prior to the allocation of Company Contributions for such succeeding Plan Years). Notwithstanding anything contained herein to the contrary, contributions made to the other defined contribution plans shall be reduced before contributions to this Plan are reduced, unless such other plan or plans provide otherwise. Clause (b). Participation in Other Plans. In any case in which an Employee is a participant in one (1) or more qualified defined contribution plans and in one (1) or more qualified defined benefit plans (as these terms are defined in Section 415(k) of the Code) maintained by a Company, the sum of the Defined Benefit Fraction and of the Defined Contribution Fraction, computed as of the Anniversary Date of that Plan Year, shall not exceed one (1.0). To the extent the fraction would exceed one (1.0), the benefit accrual under the defined benefit plan shall be reduced first. Section 4.4. Effective Date of Allocations. For all purposes of this Plan, allocations to the Participants' Company Contributions Accounts under this Article shall be deemed to have been made on the Anniversary Date to which they relate although they may actually be determined at some later date. The fact that such allocations are made, however, shall not vest in any Participant or in his spouse or other Beneficiary any right, title or interest in or to any part of the Fund except at the times, to the extent and on the terms and conditions specified in this Plan. Section 4.5. Cash Dividends. Any cash dividends or other cash distributions received by the Trustee on Stock allocated to the Company Contributions Accounts of Participants shall be credited to the applicable Participants' Company Contributions Accounts unless the Holding Company, 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 ninety (90) calendar days of the close of the Plan Year in which the cash dividends were paid by the Holding Company to the Fund. Notwithstanding anything contained in this Section to the contrary, the Holding Company may direct cash dividends, including dividends on non-allocated shares, be applied to repay an Exempt Loan, but only to the extent shares of Stock with an aggregate fair market value equal to the amount of dividends so applied are allocated to the Company Contributions Accounts 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 equal to the amount of the dividends which, but for the -16- repayment of the Exempt Loan, would have been allocated to Participants' Company Contributions Accounts shall be allocated to the Company Contributions Accounts of the affected Participants, and the remaining shares to be allocated shall be allocated among the Participants on the basis of Compensation. Section 4.6. Allocation of Forfeitures. The Trustee, shall, as soon as practicable following the Anniversary Date marking the close of each Plan Year, allocate the forfeitures which have occurred in that Plan Year first to reinstate any forfeitures of any reemployed Participant under Section 6.2 and second, if any forfeitures are remaining after the reinstatements described above are completed, among the Company Contributions Accounts of all Employees who were or became Participants on the Anniversary Date of that Plan Year or whose Period of Service terminated during that Plan Year because of death, Total Disability or Deferred or Normal Retirement. The forfeitures shall be allocated among such Accounts in the same manner provided for under Section 4.2. Section 4.7. Special Allocation Rules. Notwithstanding any other provision in this Plan to the contrary, no Stock acquired by this Plan in a sale to which Section 1042 of the Code applies may be allocated directly or indirectly under this Plan: (a) during the non-allocation period (as such term is defined below), for the benefit of: (i) any Participant who makes an election under Section 1042(a) of the Code with respect to Stock sold to this Plan, or (ii) any Participant who is related to the Participant making the election under Section 1042(a) of the Code or to the deceased Participant (within the meaning of Section 267(b) of the Code); provided, however, that this Subsection (a) (ii) shall not apply to any Participant who is a lineal descendent of a Participant as long as the aggregate amount allocated to the benefit of all such lineal descendants during the non-allocation period (as such term is defined below) does not exceed more than five percent (5%) of the Stock (or amounts allocated in lieu thereof) held by this Plan which are attributable to the sale to this Plan by any person related to such descendants (within the meaning of Section 267(c) (4)) in a transaction to which Section 1042 of the Code applies, or -17- (b) for the benefit of any Participant who owns (after the application of the attribution rules contained in Section 318(a) of the Code, but disregarding Section 318(a)(2)(B)(i) of the Code) more than twenty-five percent (25%) of: (i) any class of the outstanding stock of the Holding Company or of any other corporation which is a member of a controlled group of corporations (within the meaning of Section 409(1)(4) of the Code) which includes the Holding Company, or (ii) the total value of any class of outstanding stock of the Holding Company or of any other corporation which is a member of the controlled group of corporations (within the meaning of Section 409(1)(4) of the Code) which includes the Holding Company. For purposes of this Section 4.7, the "non-allocation period" shall mean a period beginning on the date of the sale of the stock to the Plan and ending on the later of: (c) the date which is ten (10) years after the sale of the Stock to this Plan to which Section 1042 of the Code applies, or (d) the date of the Plan allocation of Stock attributable to the final payment of any acquisition indebtedness incurred in connection with a sale of such Stock to this Plan to which Section 1042 of the Code applies. For purposes of this Section 4.7 a Participant shall be deemed to be a twenty-five percent (25%) or greater shareholder if such Participant owns more than twenty-five percent (25%) of the shares at any time during a one (1) year period ending: (e) on the date of a sale of the Stock to this Plan to which Section 1042 of the Code applies, or (f) on the date as of which the Stock sold to this Plan through a sale to which Section 1042 of the Code applies is allocated to Participants. The provisions contained in this Section 4.7 shall be interpreted consistent with and in accordance with Section 409(n) of the Code. -18- ARTICLE V VALUATIONS AND ADJUSTMENTS Section 5.1. Valuation of Fund. Clause (a). Valuations. The Committee shall provide the Trustee with a written valuation showing the fair market value of the Stock, upon which valuation the Trustee may fully rely. For all purposes of this Plan, fair market value shall be determined by an independent appraiser (as such term is defined in Treasury Regulations promulgated under Section 170(a)(1) of the Code) unless the Stock is readily tradeable on an established securities market at the date of valuation. The Committee shall also direct the Trustee to determine the fair market value of all other assets of the Fund on each Valuation Date. Clause (b). Frequency. The Fund shall be valued as soon as practical after the Anniversary Date of each Plan Year and as soon as practical after the removal or resignation of the Trustee on the basis of fair market values determined as of the Anniversary Date of the Plan Year or as of the effective date of the resignation or removal of the Trustee, respectively. The Committee may require valuation of the Fund on such other dates as it may prescribe. Clause (c). Records. Records of valuation of the Fund shall be prepared by the Trustee in such manner and within such time after each Valuation Date as may be prescribed in this Section 5.1, and such records shall be filed with the Committee, including a written statement reflecting the value of the assets and liabilities of the Fund and the receipts and disbursements of the Fund since the last previous statement filed with the Committee. As to the fair market value of Stock, the Trustee shall rely solely upon the most recent valuation furnished by the Committee as provided in Section 5.1(a). If information necessary to ascertain the fair market value of the Fund assets other than Stock is not readily available to the Trustee or if the Trustee is unable in its sole discretion fairly to determine the fair market value of the other Fund assets, the Trustee may request the Committee in writing to instruct the Trustee as to such values to be used for all purposes under this Plan; in such event, the values as determined by the Committee shall be binding and conclusive, except as otherwise provided by the Act. If the Committee shall fail or refuse to instruct the Trustee as to such values within a reasonable time after receipt of the Trustee's written request therefor, the Trustee may take such action as it deems necessary or advisable to ascertain such values. Except for the Trustee's negligence, willful misconduct or lack of good faith, upon the expiration of ninety (90) calendar days from the filing of such records and except as otherwise provided by the Act, the Trustee shall be forever released and discharged from all liability and accountability to anyone with respect to the propriety of its acts -19- or transactions as set forth in such records unless written objection is filed with the Trustee within the said ninety (90) calendar day period by the Committee or by the Holding Company. Section 5.2. Adjustments. As of each Valuation Date the Committee shall cause the Trustee to allocate to each Participant's Company Contributions Account, by credit thereto or deduction therefrom as the case may be, a proportion of the increase or decrease in the fair market value of the Fund since the last preceding Effective Date or Valuation Date. Such allocation shall be made in the proportion that each Participant's Company Contributions Account on such date bears to the total of all such Company Contributions Accounts on such date. Section 5.3. Amount of Adjustments. The increase or decrease in the Fund to be allocated shall be the difference between: (a) the fair market value of the Fund on the last preceding Effective Date or Valuation Date (excluding any amounts withdrawn from the Fund as of such Date for the payment of benefits hereunder), and (b) the fair market value of the Fund on the current Valuation Date (including any amounts to be withdrawn from the Fund as of such Date for the payment of benefits hereunder). Section 5.4. Effective Date of Adjustments. For all purposes of this Plan, allocations to the Participants' Company Contributions Accounts under this Article shall be deemed to have been made on the Effective Date or Valuation Date to which they relate although they may actually be determined at some later date. The fact that such allocations are made, however, shall not vest in any Participant or in his spouse or other Beneficiary any right, title or interest in or to any part of the Fund except at the times, to the extent and on the terms and conditions specified in this Plan. Section 5.5. Notice to Participants. Promptly after the allocations herein described shall be completed, the Committee shall advise each Participant in writing of the fair market value of the Stock and other Fund assets then credited to his Company Contributions Account. ARTICLE VI BENEFITS Part A. Retirement Benefits. Section 6.1. Retirement. Each Participant who retires on his Normal Retirement Date or Deferred Retirement Date shall be -20- entitled to receive the entire balance credited to his Company Contributions Account as of the Valuation Date coincidental with or immediately following such Retirement Date plus any Company contributions to which he is entitled pursuant to Section 4.2 for the Plan Year in which his Normal Retirement or Deferred Retirement occurs. Payment of such benefits shall be made in accordance with the provisions of Section 6.10. Part B. Termination Benefits. Section 6.2. Effect of Termination. If a Participant's employment with the Companies is terminated before his Normal Retirement Date for any reason other than his death, that Participant shall cease to be a Participant in this Plan and shall not be entitled to any benefits under this Plan except as expressly provided in this Part B. Section 6.3. Vesting. Any Participant whose employment with the Companies is terminated as set forth in Section 6.2 shall be entitled to a percentage (as determined below) of the entire balance credited to his Company Contributions Account as of the Valuation Date coincidental with or immediately following the date of termination of his employment. The percentage of his Company Contributions Account to which a terminated Participant is entitled shall be determined on the basis of his Period of Service on such date of termination of employment, as follows: Period of Service Vested Percentage ----------------- ----------------- Less than three (3) years 0 Three (3) years or more 100% Any portion of the terminated Participant's Company Contributions Account which is not vested shall be treated as a forfeiture; provided, however, that such forfeiture shall not be allocated to the other Plan Participants until the first (1st) to occur of the following: (a) that Participant's consecutive One Year Service Breaks are at least five (5); (b) that Participant's death; or (c) the date on which the Participant receives or is deemed to receive his Company Contribution Account; provided, further, that if that Participant is reemployed prior to his completion of five (5) consecutive One Year Service Breaks, the forfeited amount shall be reinstated as the beginning balance of that Participant's Company Contribution Account. A Participant whose vested percentage of his Company Contributions Account is -21- zero (0) at the date of his termination of employment shall be deemed to have received a distribution upon his termination of employment. In the case of any Participant whose consecutive One Year Service Breaks is at least five (5) years, that Participant's pre-break service shall count in vesting of his post-break Company Contributions Account balance only if either: (a) that Participant has any nonforfeitable interest in his Company Contributions Account balance at the time of his separation from service with the Companies; or (b) upon returning to service with a Company his consecutive One Year Service Breaks are less than five (5) or, if greater, less than his Period of Service completed prior to his first One Year Service Break. In the case of any Participant whose consecutive One Year Service Breaks are at least five (5) years, all service after such One Year Service Breaks shall be disregarded for the purpose of vesting the Company Contributions Account balance that accrued before such One Year Service Breaks. Separate sub-accounts shall be maintained for that Participant's pre-break and post-break Company Contributions Account. Both sub-accounts shall share in the earnings and losses of the Fund. Any Participant whose employment with the Companies is terminated because of his Total Disability shall be entitled to his entire Company Contributions Account balance and shall also be entitled to receive any Company contributions to which he is entitled pursuant to Section 4.2 for the Plan Year in which his employment is so terminated. Section 6.4. Payment. All benefits payable under Part B shall be paid in accordance with the provisions of Section 6.10. Part C. Death Benefits. Section 6.5. Benefits upon Death. If the death of any Employee occurs while he is still a Participant in this Plan and prior to his actual retirement or other termination of employment with the Companies, the entire balance credited to his Company Contributions Account as of the Valuation Date coincidental with or immediately preceding the date of his death plus any Company contributions to which he is entitled pursuant to Section 4.2 for the Plan Year in which his death occurs shall be paid to the Beneficiary of that deceased Participant in accordance with the provisions of Section 6.10. -22- Section 6.6. Beneficiaries. Each Participant shall notify the Committee in writing of one (1) or more primary and contingent Beneficiaries to receive on his death any benefits payable under this Part C. Each such Beneficiary designation may be revoked, amended or changed by a Participant by like notice in writing delivered to the Committee prior to his death. The Beneficiary designation of any Participant who is married at the date such a designation is made or changed shall be signed by that Participant's spouse and witnessed by the Committee or by a Notary Public if it results in a designation of a Beneficiary other than that Participant's spouse. Notwithstanding anything contained in this Section to the contrary, the Beneficiary of a married Participant shall be his spouse unless his spouse consents to the designation of a non-spouse Beneficiary in a writing witnessed by the Committee or by a Notary Public. Section 6.7. Lack of Beneficiaries. Any portion of the amounts payable under Section 6.5 which is undisposed of because all or some of the designated Beneficiaries have predeceased a Participant or because of a Participant's failure to designate a Beneficiary in writing prior to his death shall be paid to the deceased Participant's surviving spouse, if any, and, if none, to the deceased Participant's estate. Section 6.8. Termination or Retirement prior to Death. On and after the actual retirement of a Participant from the employ of the Companies or other termination of his employment, the rights of such Participant and his spouse or other Beneficiary to any benefits under this Part C shall cease and the benefits payable to such Participant or to any person claiming through or under him shall be limited to the benefits provided in Parts A or B of this Article. Part D. General. Section 6.9. Date of Distribution. Unless the Participant or, if deceased, his Beneficiary, surviving spouse or estate, as the case may be, otherwise elects, the payment of benefits to which any such person is entitled shall begin not later than sixty (60) calendar days after the latest of the Anniversary Date of the Plan Year in which: (a) the Participant attains age sixty-five (65), (b) occurs the tenth (10th) anniversary of the date on which the Participant initially became eligible to participate in this Plan, or (c) the Participant terminates his employment with the Companies; -23- provided, however, that the distribution of benefits to a Participant shall commence not later than April 1 of the calendar year following that Participant's taxable year in which that Participant attains age seventy and one-half (70 1/2). Section 6.10. Form of Distribution. The distributions provided under this Article VI shall be made by the Trustee, as directed by the Participant or, if deceased, his Beneficiary, in a single lump sum distribution of the amount to be paid to the Participant or, if deceased, to his Beneficiary; provided, however, that except as otherwise provided in Section 6.9, payment shall be made as soon as practicable after the Plan Year during which the employment of the Participant from the Companies terminated; provided, further, that in no event shall payments to a deceased Participant's estate or to any Beneficiary other than the surviving spouse of a deceased Participant extend more than five (5) years after the date of the Participant's death. Notwithstanding the above, a Participant whose Company Contributions Account at the initial distribution date or at any subsequent distribution date (when aggregated with other distributions) is greater than three thousand and five hundred dollars ($3,500), may elect to defer the commencement of the distribution of his Company Contributions Account to the date on which he attains age sixty-five (65). Distributions under this Section 6.10 shall be distributed in Stock with fractional share interests distributed in cash. If shares of Stock are distributed and the shares of Stock available for distribution consist of more than one (1) class of security, a distributee shall receive substantially the same proportion of each such class. If the Trust purchases shares of Stock from a Company shareholder who is eligible to elect and so elects nonrecognition of gain under Section 1042 of the Code in connection with such purchase and notwithstanding anything contained herein to the contrary, no distribution that would be made within three (3) years after the date of such purchase shall be made to a Participant before he incurs a One Year Service Break, unless his employment with the Companies terminates as a result of his Normal Retirement, Total Disability or death or unless the distribution is made pursuant to Section 8.19. Section 6.11. Liability. Any payment to a Participant or to that Participant's legal representative, Beneficiary, surviving spouse or estate, in accordance with the provisions of this Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Trustee, the Committee and the Companies, any of whom may require such Participant, legal representative, Beneficiary, surviving spouse or estate, as a condition precedent to such payment, to execute a receipt and release therefor in such form as shall be determined by the Trustee, the Committee or the Companies. The Companies do not guarantee the Trust, the Participants or, if deceased, their Beneficiaries, surviving -24- spouses or estates, as the case may be, against the loss of or depreciation in value of any right or benefit that any of them may acquire under the terms of this Plan. Section 6.12. Put Options. The Holding Company shall issue a put option to any Participant, Beneficiary, surviving spouse or estate of a deceased Participant, or any other person (including distributees of an estate) to whom shares of Stock distributed under this Plan may pass by reason of a Participant's death (herein collectively referred to as the "Recipient"). This put option shall permit the Recipient to sell such Stock to the Holding Company, at any time during two (2) option periods, at the then fair market value. The first put option period shall be a period of at least sixty (60) calendar days beginning on the actual date of distribution of such Stock to the Recipient. The second put option period shall be a period of at least sixty (60) calendar days beginning after the determination of the fair market value of such Stock is made by the Committee (and notice of same is given in writing to the Recipient) for the next succeeding Plan Year. Such Recipient shall be deemed to have a put option as herein provided with respect to the shares of Stock and may exercise this put option by delivering to the Holding Company a written notice of his election to sell such shares of Stock, or any portion thereof, together with the certificates representing the shares of Stock to be sold duly endorsed for transfer. The Holding Company shall be obligated to purchase the shares of Stock, or the designated portion thereof, at their fair market value at the date the put option is exercised; provided, however, that the Holding Company may grant the Trustee an option to assume on behalf of this Plan and Trust the Holding Company's rights and obligations with respect to the put option at the date the put option is actually exercised by the Recipient. Except as hereinafter provided, the Holding Company (or the Trustee, if it assumes the Holding Company's obligation) shall pay for the shares of Stock so sold to it by check within thirty (30) calendar days following the date of sale. Notwithstanding anything contained herein to the contrary, the Holding Company (or, if applicable, the Trustee) may pay the purchase price in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than thirty (30) calendar days after the exercise of the put option and not exceeding five (5) years as long as reasonable interest is paid on the unpaid amounts and adequate security is provided to the Recipient. If the Stock is readily tradeable on an established market on the date of distribution, the put option granted by this Section 6.13 shall not exist; provided, however, that if the Stock ceases to be publicly traded within either of the sixty (60) day calendar periods as provided herein, the Holding Company shall notify the Recipient in writing within a reasonable time after the Stock ceases to be so publicly traded that the Stock shall be subject to the put option for the remainder of the applicable sixty (60) day calendar period. If the date of actual written notice to the Recipient by the Holding Company is later than ten (10) -25- calendar days after the Stock ceases to be so publicly traded, the put option shall automatically be extended to the extent that the date on which written notice is actually given to the Recipient is more than ten (10) calendar days later. Section 6.13. Eligible Rollover Distributions. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section, the following terms shall have the meanings set forth below: (a) Eligible rollover distribution: 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: (1) 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 ten (10) years or more; (2) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) the portion of any distribution that is not includible in gross income. (b) Eligible retirement plan: 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. (c) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is an 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. -26- ARTICLE VII ADMINISTRATIVE COMMITTEE Section 7.1. Establishment. The Committee shall consist of at least three (3) members to be appointed by the Board of Directors of the Holding Company, and the members shall hold office at the pleasure of such Board of Directors. The members of the Committee shall be individuals and may, but need not, be officers, shareholders or Directors of the Holding Company, Participants or Beneficiaries. The Holding Company may, at its sole discretion, designate to serve as the Committee its Board of Directors as duly-constituted from time to time. Section 7.2. Duties. The Committee shall discharge its duties and powers in conformance with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. It shall have complete control of the administration of this Plan and shall have all powers necessary or convenient to enable it to exercise such control. In connection therewith, it may provide rules and regulations, not inconsistent with the provisions hereof or with requirements imposed under the Code or under the Act, for the administration of this Plan and may from time to time amend or rescind such rules and regulations. In addition, it may employ or appoint a secretary and such advisors, agents or representatives as it may deem desirable and may consult with and employ counsel (who may, but need not, be counsel to a Company or to the Trustee) or actuaries with regard to any questions arising in connection with this Plan. All reasonable expenses incurred by the Committee in connection with this Plan shall be paid as provided in Section 3.4. Section 7.3. Actions. The Committee may decide any questions hereunder and may take or authorize or direct the taking of any action hereunder with the approval of a majority of the members of the Committee. The approval of such members, expressed from time to time by a vote at a meeting or in writing without a meeting, shall constitute the action of the Committee and shall be valid and effective for all purposes of this Plan. The fact that any member of the Committee shall be a Participant, former Participant or Beneficiary shall not disqualify or debar him from participating in any action or decision affecting any class of Participants, former Participants or Beneficiaries, but he shall not participate in any action or decision affecting his own separate interest as a Participant, former Participant or Beneficiary. Section 7.4. Disqualification. The fact that any member of the Committee is a Director, shareholder or officer of a Company or a Participant or Beneficiary shall not disqualify him from doing any act or thing which this Plan authorizes or requires him to do as a member of the Committee (except as otherwise provided in -27- Section 7.3) or render him accountable for any allowance or distribution or other pecuniary or material profit or advantage received by him. Section 7.5. Powers. The Committee shall have the power to construe this Plan and to determine all questions of fact or law arising under it. It may correct any defect, supply any omission or reconcile any inconsistency in this Plan in such manner and to such extent as it may deem expedient and, except as otherwise provided by the Act, it shall be the sole and final judge of such expediency. Except as otherwise provided in Section 7.9, all acts and determinations of the Committee made in good faith within the scope of its authority shall be final and conclusive on all the parties hereto and on all Employees, Participants and their Beneficiaries, surviving spouses or estates hereunder and shall not be subject to appeal or review. Section 7.6. Discrimination Prohibited. The Committee shall not take any action or direct the Trustee to take any action with respect to any of the benefits provided hereunder or otherwise in pursuance of the powers conferred herein upon the Committee which would be discriminatory in favor of Employees who are officers, Directors, shareholders, persons whose principal duties consist of supervising the work of other Employees or Highly Compensated Employees or which would result in benefiting one (1) Participant or group of Participants at the expense of another or in discrimination as between Participants similarly situated or in the application of different rules to substantially-similar sets of facts. Section 7.7. Statements and Forms. The Committee shall be authorized to require of a Company and of any person claiming any rights hereunder a written statement of any information or the execution of any forms or instruments it may deem necessary or desirable for the administration of this Plan. Section 7.8. Liability. Except as otherwise provided by the Act, no member of the Committee shall be directly or indirectly responsible or under any liability by reason of any action or default by him as a member of the Committee or the exercise of or failure to exercise any power or discretion as such member except for his own fraud or bad faith shown in the exercise of or failure to exercise such power or discretion, and no member of the Committee shall be liable in any way for the acts or defaults of any other member. The Committee may consult with counsel (who may, but need not, be counsel to a Company or to the Trustee) or accountants selected by it and, except as otherwise provided by the Act, the opinion of such counsel or the recommendations of such accountants shall be full and complete authority and protection for any action or conduct pursued by the Committee in good faith and in accordance with such opinion or recommendations. -28- Section 7.9. Determination of Right to Benefits. The Committee shall make all determinations as to the right of any person to a benefit under the provisions of this Plan. Any denial by the Committee of a claim for benefits under this Plan by an Employee or, if deceased, by such Employee's spouse or other Beneficiary, shall be stated in writing by the Committee and delivered or mailed to the Employee, spouse or other Beneficiary, as the case may be, within ninety (90) calendar days after receipt of such benefit claim by the Committee. Such notice shall set forth the specific reasons for the denial and such additional information as is required under Section 503 of the Act, written to the best of the Committee's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Committee shall afford a reasonable opportunity to any Employee, spouse or other Beneficiary, as the case may be, whose claim for benefits has been denied, for a review of the decision denying the claim in accordance with Section 503 of the Act. Section 7.10. Investment Directions. The Committee may direct the investment of the Fund, by written directions to the Trustee, but such direction shall not be inconsistent with the provisions of this Plan, of the Act or of the Code. Section 7.11. Voting Power. Except as otherwise provided in Section 8.17, the Committee shall be authorized to vote, either in person or by proxy, the Stock or other securities which are held by the Trustee as part of the Fund. ARTICLE VIII THE TRUSTEE Section 8.1. Assets Held in Trust. The Trustee shall hold the Fund and shall accept and hold all contributions thereto and all investments and reinvestments thereof in trust for the persons ultimately entitled thereto under the terms of this Plan. Section 8.2. Investments. This Plan is designed to invest primarily in shares of Stock. Except as otherwise provided in this Plan, the Trustee shall invest the cash contributed or accruing to the Fund in Stock and shall not make any other investment for the Fund. There shall be no limit on the permissible investment in shares of Stock. The Trustee may purchase such shares of Stock from the Holding Company or from any other source, and such shares of Stock may be outstanding, newly-issued or treasury shares. All such purchases shall be made at fair market value (as determined consistent with Section 5.1(a)). If no shares of Stock are available for purchase, the Trustee may retain cash uninvested or may invest all or any part thereof in any other investment if such retention or investment is prudent under all the facts and circumstances then prevailing. The Trustee shall have the power at any time to enter into legally-binding agreements to purchase -29- shares of Stock from any person or entity, whether or not such person or entity shall own such shares of Stock at the date such purchase agreement is entered into, including but not limited to Participants in and Beneficiaries of this Plan, except as otherwise provided in the Act and in Treasury Regulations ss. 54.4975-11(a)(7). Except as otherwise required by Section 6.12, the purchase price set forth in any such purchase agreement shall be determined by the fair market value of such shares of Stock at the date of purchase (as determined consistent with Section 5.1(a)). Section 8.3. Directions of Committee. The powers granted to the Trustee under this Plan shall be exercised by the Trustee in its sole discretion. Except as provided in Section 8.20, the Committee may at any time and from time to time by written direction to the Trustee require the Trustee to invest in, to retain or to dispose of any security or other form of investment as may be specified in such direction, limited, however, to investments permitted under this Plan, under the Act and under the Code. Neither the Trustee nor any other person shall be under any duty to question any such written direction of the Committee, and the Trustee shall as promptly as possible comply with any such written direction. Any such direction may be of a continuing nature or otherwise and may be revoked in writing by the Committee at any time. The Trustee shall not be liable in any manner or for any reason for the making, retention or disposition of any investment pursuant to the lawful written direction of the Committee. Section 8.4. Receipt of Additional Shares. Any securities received by the Trustee as a stock split or a stock dividend or as a result of a reorganization or other recapitalization shall be allocated as of each Valuation Date in the same manner as the Stock to which it is attributable is then allocated. If any rights, warrants or options are issued on common shares or other securities held in the Fund, the Trustee shall exercise them for the acquisition of additional common shares or other securities to the extent that cash is then available. Any common shares or other securities acquired in this fashion shall be treated as common shares or other securities bought by the Trustee for the net price paid. Any rights, warrants or options on common shares or other securities which cannot be exercised for lack of cash may be sold by the Trustee with the proceeds thereof treated as a current cash dividend received on such common shares or other securities. Section 8.5. Delivery of Materials to Committee. Except as otherwise provided in Section 8.17 and Section 8.20, the Trustee shall deliver or cause to be delivered to the Committee copies of all notices, prospectuses and financial statements relating to investments held in the Fund. -30- Section 8.6. Powers. The Trustee shall have power with regard to all property in the Fund at any time and from time to time: (a) to sell, convey, transfer, mortgage, pledge, lease, exchange or otherwise dispose of the same, without the necessity of approval of any court therefor or notice to any person, natural or legal, thereof and without obligation on the part of any person dealing with the Trustee to see to the application of any money or property delivered to it; (b) except as otherwise provided in Section 7.11, Section 8.17 and Section 8.20, to exercise any and all rights or options pertaining to any share of Stock held as part of the assets of the Fund and to enter into agreements and consent to or oppose the reorganization, consolidation, merger, readjustment of financial structure or sale of assets of any corporation or organization, the securities of which are held in the Fund; (c) except as otherwise provided in Section 4.5, to collect the principal and income of such property as the same shall become due and payable and to give binding receipt therefor; (d) to take such action, whether by legal proceedings, compromise, abandonment or otherwise, as the Trustee, in its sole discretion, shall deem to be in the best interest of the Fund, but the Trustee shall be under no obligation to take any legal action unless it shall have been first indemnified by the Companies with respect to any expenses or losses to which it may be subjected through taking such action; (e) to register any securities and to hold any other property in the Fund in its own name or in the name of a nominee with or without the addition of words indicating that such securities or other property are held in a fiduciary capacity; (f) pending the selection or the purchase of suitable investments or the payment of expenses or the making of any other payment required or permitted under this Plan, to retain in or to convert to cash, without liability for interest or any other return thereon, such portion of the Fund as it shall deem reasonable under the circumstances, including, but not by way of limitation, the power to retain sufficient cash to permit the acquisition of large blocks of shares of Stock as the same may from time to time become available for purchase; -31- (g) to borrow from banks or similar lending institutions reasonable sums of money for the purchase of shares of Stock for the Company Contributions Accounts of Participants in accordance with the provisions of Section 8.7; provided, however, that the Trustee may not borrow from itself or from an affiliated institution even if the Trustee is a bank or similar lending institution except to the extent specifically permitted by the Act and by the Code; and (h) to do all other acts in its judgment necessary or desirable for the proper administration of the Trust and permissible under the Act and under the Code although the power to do such acts is not specifically set forth herein. Section 8.7. Loans to the Trust. The following conditions shall be met with respect to any Exempt Loan to the Trust: Clause (a). Interest. The rate of interest on any Exempt Loan shall not be in excess of a reasonable rate of interest. At the date an Exempt Loan is made, the interest rate for the Exempt Loan and the price of any shares of Stock to be purchased with the Exempt Loan proceeds shall not be such that the Plan assets might be drained off. Clause (b). Use of Proceeds. The proceeds of an Exempt Loan shall be used within a reasonable time after receipt by the Trustee for any or all of the following purposes: (i) to acquire Stock; (ii) to repay that Exempt Loan; or (iii) to repay a prior Exempt Loan. Except as otherwise provided in Section 6.12 and Section 6.13, no Stock acquired with Exempt Loan proceeds shall be subject to a put, call or other option or a buy-sell or similar arrangement while held by the Trustee and when distributed from this Plan. Clause (c). Terms of Exempt Loan. The terms of each Exempt Loan shall be, at the time that Exempt Loan is made, as favorable to this Plan as the terms of a comparable loan resulting from arm's-length negotiations between independent parties. Each Exempt Loan shall be for a specific term and shall not be payable at the demand of any person, except in the case of default. Clause (d). Collateral. Any collateral pledged to the lender by the Trustee shall consist only of Stock purchased with the borrowed funds or Stock that was used as collateral for a prior Exempt Loan repaid with the proceeds of the current Exempt Loan; -32- provided, however, that in addition to such collateral, the Companies may guarantee the repayment of an Exempt Loan. Clause (e). Limited Recourse. Under the terms of each Exempt Loan, the lender shall not have any recourse against the Fund or the Trust except with respect to the collateral. Clause (f). Repayment. No person entitled to payment under any Exempt Loan shall have any right to assets of the Fund or the Trust other than: (i) collateral given for that Exempt Loan; (ii) contributions (other than contributions of Stock) that are made by the Companies under this Plan to meet this Plan's obligations under that Exempt Loan; (iii) earnings attributable to such collateral and the investment of such contributions; and (iv) to the extent directed by the Holding Company under Section 4.5, cash dividends on allocated shares of Stock. Payments made with respect to an Exempt Loan by the Trustee during any Plan Year shall not exceed an amount equal to the sum of such contributions and earnings received during or prior to that Plan Year less such payments in prior Plan Years. Such contributions and earnings shall be accounted for separately in the books of account of this Plan and Trust until that Exempt Loan is repaid. Clause (g). Agreement by Companies. The Companies shall agree in writing with the Trustee to contribute to the Fund amounts sufficient to enable the Trustee to pay each installment of principal and interest on each Exempt Loan on or before the date such installment is due, even if no tax benefit to the Companies results from such contribution. Clause (h). Release of Collateral. All assets of the Fund acquired by this Plan and Trust with Exempt Loan proceeds and all collateral pledged to secure an Exempt Loan shall be held in a suspense account and considered encumbered by the Exempt Loan. For each Plan Year during the duration of an Exempt Loan, the number of assets to be released from encumbrance and withdrawn from the suspense account shall be based upon the ratio that the payment of principal and interest on that Exempt Loan for that Plan Year bears to the total projected payments of principal and interest over the duration of the Exempt Loan period. Assets released from encumbrance and withdrawn from the suspense account shall be allocated to the various Company Contributions Accounts in the Plan Year during which such portion is paid off and in the same manner -33- as if the assets had been obtained by the Trustee when no Exempt Loan was involved. Income with respect to shares of Stock acquired with Exempt Loan proceeds and held in the suspense account shall be allocated to Company Contributions Accounts along with other income earned by the Fund, except to the extent that such income is to be used to repay an Exempt Loan. Clause (i). Default. In the event of any default upon an Exempt Loan, the value of Trust assets transferred in satisfaction of that Exempt Loan shall not exceed the amount of the default. If the lender is a disqualified person within the meaning of Section 4975(e)(2) of the Code, the Exempt Loan shall provide for a transfer of Trust assets upon default only upon and to the extent of the failure of the Trustee to meet the payment schedule of that Exempt Loan; provided, however, that the making of a guarantee shall not make a person a lender within the meaning of this Clause (i). Clause (j). Termination of Plan. Upon a complete termination of the Plan but only to the extent permitted by the Code and the Act, any unallocated Stock shall be sold to the Corporation at a price no less than fair market value or on the open market. To the extent permitted by Code and the Act, the proceeds of such sale shall be used to satisfy any outstanding Exempt Loan and the balance of any funds remaining shall be allocated as income to each Participant's Company Contributions Account based on the proportion that the Participant's Company Contributions Account balance as of the immediately preceding Valuation Date bears to the aggregate Company Contributions Account balances of all Participants as of the immediately preceding Valuation Date. Section 8.8. Annual Accounting. At least annually the Trustee shall render to the Committee a written account of its administration of the Fund during the period since the establishment of this Plan or the last accounting thereafter. Pursuant to this requirement, Stock acquired by the Trustee shall be accounted for as provided in Treasury Regulations ss. 1.402(a)-1(b)(2)(ii). Unless written notice of disapproval is furnished to the Trustee by the Committee within ninety (90) calendar days after receipt of such account, such account shall be deemed to have been approved. Section 8.9. Audit. In the case of any disapproval as provided in Section 8.8 and unless a satisfactory corrected written account is furnished to the Committee, an audit of the Trustee's account shall be made by a certified public accountant selected jointly by the Holding Company and the Trustee, but at the expense of the Companies. Upon completion of any such audit, the inaccuracies in the Trustee's account, if any, shall be corrected to conform to such audit and a corrected written account shall be delivered to the Committee by the Trustee. Except as otherwise -34- provided by the Act, an approved account or an account corrected pursuant to such an audit shall be final and binding upon the Companies and upon all other persons who shall then or thereafter have any interest under this Plan. Section 8.10. Uncertainty Concerning Payment of Benefits. In the event of any dispute or uncertainty as to the person to whom payment of any funds or other property shall be made under this Plan, the Trustee may, in its sole discretion, withhold such payment or delivery until such dispute or uncertainty shall have been determined or resolved by a court of competent jurisdiction or otherwise settled by the parties concerned. Section 8.11. Compensation. The Trustee shall be entitled to receive fair and reasonable compensation for its services hereunder, taking into account the amount and nature of its services and the responsibilities involved, and shall also be entitled to be reimbursed for all reasonable out-of-pocket expenses, including, but not by way of limitation, legal, actuarial and accounting expenses and all costs and expenses incurred in prosecuting or defending any action concerning this Plan or the Trust or the rights or responsibilities of any person hereunder, brought by or against the Trustee. Such reasonable compensation and expenses shall be paid by the Companies as provided in Section 3.4. Section 8.12. Standard of Care. The Trustee shall use its best judgment in exercising any duties or powers or in taking any action hereunder and shall be bound at all times to act in good faith and in accordance with all requirements imposed under the Act and under the Code. Except as otherwise provided by the Act, the Trustee shall not incur any liability by reason of any error of judgment, mistake of law or fact or any act or omission hereunder of itself or of any agent, proxy or attorney so long as it has acted in good faith. The Trustee may act on any paper or document believed by it to be genuine and to have been signed and presented by the proper person. The Trustee may consult with counsel (who may, but need not, be counsel to a Company), accountants or actuaries selected by it and, except as otherwise provided by the Act, the written opinion of such counsel or the written recommendations of such accountants or actuaries shall be full and complete authority and protection for any action or conduct pursued by the Trustee in good faith and in accordance with such written opinion or recommendations. Except as otherwise provided by the Act, the Trustee shall not be liable for any action taken by it pursuant to the written direction of the Committee. Section 8.13. Request for Instructions. In addition to written instructions relating to valuation and except as otherwise provided in Section 8.20, at any time the Trustee may, by written request, seek written instructions from the Committee on any matter and may await such written instructions from the Committee without -35- incurring any liability whatsoever. If at any time the Committee should fail to give written directions to the Trustee, the Trustee may act, and shall be protected in acting, without such written directions, in such manner as in its sole discretion seems appropriate and advisable under the circumstances for carrying out the purposes of the Trust. Section 8.14. Resignation of Trustee. The Trustee may resign at any time by giving sixty (60) calendar days' prior written notice to the Holding Company, and the Trustee may be removed, with or without cause, by the Holding Company on sixty (60) calendar days' prior written notice to the Trustee. Such prior written notice may be waived by the party entitled to receive it. Upon any such resignation or removal becoming effective, the Trustee shall render to the Committee a written account of its administration of the Fund for the period since the last written accounting and shall do all necessary acts to transfer the assets of the Fund to the successor Trustee or Trustees. Section 8.15. Vacancies in Trusteeship. In the event of any vacancy in the trusteeship of the Trust hereby created, the Holding Company may designate and appoint a qualified successor Trustee or Trustees. Any such successor Trustee or Trustees shall have all the powers herein conferred upon the original Trustee. Section 8.16. Information to Be Furnished. The Companies shall furnish to the Trustee, and the Trustee shall furnish to the Companies, such information relevant to this Plan and Trust as may be required under the Code and under the Act. The Trustee shall keep such records, make such identification and file with the Internal Revenue Service and with the U.S. Department of Labor such returns and other information concerning this Plan and Trust as may be required of it under the Code and under the Act. The Companies shall fulfill any reporting and disclosure obligations imposed on it by the Act, and each Participant shall be given any reports required by the Act. To the extent that the Trustee assumes any such Company obligations, it may charge a reasonable fee for its services apart from its normal fee and its expenses as provided in Section 8.11. Section 8.17. Voting Rights of Participants. Each Participant (or, if applicable, his Beneficiary) shall have the right to direct the Trustee as to the manner in which voting rights of shares of Stock which are allocated to his Company Contributions Account are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transactions which may be prescribed by the Secretary of Treasury in regulations. Each Participant (or, if applicable, his Beneficiary) shall also have the right to direct the Trustee as to -36- the manner in which voting rights of shares of Stock which are allocated to his Company Contributions Account are to be exercised at any time the Holding Company has a class of securities that are required to be registered under Section 12 of the Securities Exchange Act of 1934 or that would be required to be so registered except for the exemption from registration provided by Section 12(g)(2)(H) of the Securities Exchange Act of 1934. In all other cases, the Committee shall be authorized to vote the Stock held by the Trustee as part of the Fund as provided in Section 7.11. Not less than thirty (30) calendar days prior to each annual or special meeting of shareholders of the Holding Company at which one (1) or more Participants are entitled to vote shares of Stock allocated to their Company Contributions Accounts under this Section 8.17, the Trustee shall cause to be prepared and delivered to each such Participant who has a Company Contributions Account as of the record date established by the Holding Company a copy of the notice of the meeting and form of proxy directing the Trustee as to how it shall vote at such meeting or at any adjournment thereof with respect to each issue. Upon receipt of such proxies, the Trustee shall vote or may grant the Committee a proxy to vote the shares of Stock in accordance with the proxies received by the Participants. The shares of Stock for which no direction is received by the Participant (or, if applicable, his Beneficiary) or held by the Trustee in any unallocated account shall be voted in proportion to the voting directions received by the Trustee with respect to the allocated shares of Stock. The Trustee shall take steps to keep a Participant's voting directions confidential and shall not provide them to the Companies. Section 8.18. Delegation of Authority. The Trustee may delegate any of its ministerial powers or duties under this Plan, including the signing of any checks drawn on the Fund, to any of its agents or employees. Section 8.19. Diversification of Company Contributions Account. Notwithstanding anything contained in Article VI to the contrary, a Participant who has attained age fifty-five (55) and who has completed at least ten (10) years of participation in this Plan shall be permitted to elect that during a six (6) year period beginning with the Plan Year during which he had obtained age fifty-five (55) or, if later, during which he completed his tenth (10th) year of participation in this Plan a portion of his vested Company Contribution Account be distributed. In the first (1st) Plan Year for which the Participant has an election under this Section 8.19, the Participant may elect a distribution of up to twenty-five percent (25%) of his vested Company Contribution Account as of the end of such Plan Year. In the second (2nd), third (3rd), fourth (4th) and fifth (5th) Plan Year for which the Participant has an election under this Section 8.19, the Participant may elect a distribution which, when aggregated to any earlier distributions made by reason of this Section 8.19, does not exceed twenty-five percent (25%) of the vested balance held in his -37- Company Contribution Account as of the end of the Plan Year for which the election is made. In the final Plan Year for which a Participant has an election under this Section 8.19, the Participant may elect a distribution of an amount which, when aggregated with any other distribution made by reason of this Section 8.19, does not exceed fifty percent (50%) of his vested Company Contribution Account balance as of the end of such Plan Year. The Trustee shall provide Participants eligible for an election under this Section 8.19 with information relating to the election before the end of the first (1st) Plan Year for which the election relates. A Participant electing a distribution under this Section 8.19 shall have until the ninetieth (90th) calendar day immediately following the end of the Plan Year for which the election is made to make his election. Any distribution made by reason of this Section 8.19 shall be in cash and shall be made within one hundred and eighty (180) calendar days after the end of the Plan Year for which the election is made. In lieu of the cash distributions provided for in this Section, the Company may instead offer to eligible Participants three (3) investment options under this Plan that meet the requirements set forth in Code Section 401(a)(28) and regulations promulgated thereunder to which the amounts subject to the diversification election could be transferred. Section 8.20. Tender Offer. Each Participant (or, if applicable, his Beneficiary) shall have the right to direct the Trustee as to whether the shares of Stock which are allocated to his Company Contributions Account are to be tendered pursuant to any tender offer made for the Stock of the Holding Company. The Trustee shall as soon as practical (and in no event later than five (5) calendar days) after its receipt of the tender offer documents shall cause to be prepared and delivered to each Participant (and, if applicable, his Beneficiary) who has a Company Contributions Account as of the date of the tender offer a copy of all relevant information as to the tender offer and a written election form which will direct the Trustee as to whether it should tender the shares of Stock held in such Participant's Company Contributions Account. The shares of Stock for which no direction is received by the Participant (or, if applicable, his Beneficiary) or held by the Trustee in any unallocated account shall be tendered in proportion to the tendering directions received by the Trustee with respect to the allocated shares of Stock. The Trustee shall take steps to keep a Participant's decision whether or not to tender shares of Stock confidential and shall not provide the information to the Companies. -38- ARTICLE IX AMENDMENT, TERMINATION AND MERGER Section 9.1. Amendment. Except for such amendments as are permitted under this Section 9.1 and as otherwise provided in Section 1.17 and Section 9.3, the Trust is irrevocable. The Holding Company reserves the right to amend this Plan, at any time and from time to time, in whole or in part, including without limitation, retroactive amendments necessary or advisable to qualify this Plan and the Trust under the provisions of Sections 401(a) and 501(a) of the Code or the corresponding provisions of any similar statute hereafter enacted. However, the Holding Company's right to amend this Plan shall remain at all times subject to the provisions of Section 9.4. Further, no amendment of this Plan shall: (a) alter, change or modify the duties, powers, or liabilities of the Trustee hereunder without their written consent; (b) permit any part of the Fund to be used to pay premiums or contributions of the Companies under any other employee benefit plan maintained by the Companies for the benefit of its Employees; (c) effect any discrimination among the Participants; (d) change the vesting schedule in Section 6.3 or, if applicable, in Section 11.4 unless each Participant whose Period of Service is three (3) or more years as of the effective date of the amendment is permitted to elect, within sixty (60) calendar days after he is notified by the Committee of his rights under this Subsection (d), to have his vested interest determined without regard to such amendment; (e) decrease the accrued benefit of any Participant unless the amendment is approved by the Department of Labor because of substantial business hardship; or (f) decrease a Participant's Company Contributions Account balance or eliminate an optional form of distribution for the accrued benefits of a Participant determined as of the date of the amendment. Section 9.2. Termination or Complete Discontinuance of Contributions. The Companies are not and shall not be under any obligation or liability whatsoever to continue their contributions pursuant to this Plan or to maintain this Plan for any given length of time, except as otherwise provided in Section 8.7. A Company may, in its sole discretion, discontinue Company contributions to this Plan completely, except as otherwise provided in Section 8.7, with or without notice, or partially or totally terminate this Plan in accordance with its provisions at any time without any liability whatsoever for such discontinuance or termination. If this Plan shall be partially or totally terminated or if contributions of a Company shall be completely discontinued, the rights of all -39- Participants directly affected by the partial or total termination or the complete discontinuance of contributions in their Company Contributions Accounts shall thereupon become fully vested and non-forfeitable notwithstanding any other provisions of this Plan. However, the Trust shall continue until all Participants' Company Contributions Accounts have been completely distributed to, or for the benefit of, the Participants in accordance with this Plan. Section 9.3. Determination by Internal Revenue Service. Notwithstanding any other provisions of this Plan, if the Internal Revenue Service shall fail or refuse to issue a favorable written determination or ruling with respect to the initial qualification of this Plan and the initial exemption of the Trust from tax under Sections 401(a) and 501(a) of the Code, the Trustee shall, within a reasonable time after receiving a written direction from the Committee to do so, return to the Companies the current value of all Company contributions theretofore made. As a condition to such repayment, the Companies shall execute, acknowledge and deliver to the Trustee its written undertaking, in form satisfactory to the Trustee, to indemnify, defend and hold the Trustee harmless from all claims, actions, demands, or liabilities arising in connection with such repayment. If for any reason the Key District Director of the Internal Revenue Service should at any time after initial qualification fail to approve any of the terms, conditions or amendments contained in or implied from this Plan and Trust for continuing qualification and tax exemption under Sections 401(a) and 501(a) of the Code, then the Holding Company shall make such modifications, alterations and amendments of this Plan as are necessary to retain such approval and such modifications, alterations and amendments shall be effective retroactively to the Effective Date or to such later date as is required to retain such approval. Section 9.4. Nonreversion. Except as otherwise provided in Section 3.1 and Section 9.3: (a) The Holding Company shall have no power to amend or to terminate this Plan in such a manner which would cause or permit any part of the Fund to be diverted to purposes other than for the exclusive benefit of Participants or, if deceased, of their spouse or other Beneficiaries or as would cause or permit any portion of the Fund to revert to or to become the property of the Companies, and (b) The Holding Company shall have no right to modify or to amend this Plan retroactively in such a manner as to deprive any Participants, or if deceased, their spouses or other Beneficiaries of any benefits to which they are entitled under this Plan by reason of contributions made by the Companies prior to the modification or amendment, unless such modification or amendment is necessary to -40- meet the qualification requirements of Sections 401(a) and 501(a) of the Code. Section 9.5. Merger. The Holding Company shall have the right, by action of its Board of Directors, to merge or to consolidate this Plan with, or to transfer the assets or liabilities of the Fund to, any other qualified retirement plan and trust at any time, except that no such merger, consolidation or transfer shall be authorized unless each Participant in this Plan would receive a benefit immediately after the merger, consolidation or transfer (if the merged, consolidated or transferred plan and trust then terminated) equal to or greater than the benefit to which he would have been entitled immediately before the merger, consolidation or transfer (if this Plan then terminated). ARTICLE X MISCELLANEOUS Section 10.1. Creation of Plan Voluntary. The Plan hereby created is purely voluntary on the part of the Companies and, except as otherwise provided in Section 8.7, any Company may suspend or discontinue payments hereunder at any time or from time to time as it may decide in accordance with Section 10.17, but no suspension or discontinuance shall operate retroactively with respect to the rights of any Participant hereunder or his spouse or other Beneficiary. Section 10.2. No Employment Contract. Except as may be required by the Act, no contributions or other payments under this Plan shall constitute any contract on the part of the Company to continue such contributions or other payments hereunder. Participation hereunder shall not give any Participant the right to be retained in the service of the Companies or any right or claim to any benefits hereunder unless the right to such benefits has accrued under this Plan. All Participants shall remain subject to assignment, reassignment, promotion, transfer, layoff, reduction, suspension and discharge by the Companies to the same extent as if this Plan had never been established. Section 10.3. Limitation on Rights Created. Nothing contained in this Plan or any modification of the same or act done in pursuance hereof shall be construed as giving any person whomsoever any legal or equitable right against the Companies, the Committee, the Trustee or the Fund, unless specifically provided herein or granted by the Act. Section 10.4. Waiver of Claims. Except as otherwise provided by the Act, no liability whatsoever shall attach to or be incurred by any shareholder, officer or Director, as such, of the Companies under or by reason of any provision of this Plan or any act with reference to this Plan, and any and all rights and claims thereof, -41- as such, whether arising at common law or in equity or created by statute, constitution or otherwise, are hereby expressly waived and released to the fullest extent permitted by law by every Participant and by his spouse or other Beneficiary as a condition of and as part of the consideration for the payments by the Companies under this Plan and for the receipt of benefits hereunder. Section 10.5. Spendthrift Provision. To the fullest extent permitted by law, none of the benefits, payments, accounts, funds or proceeds of any contract held hereunder shall be subject, voluntarily or involuntarily, to any claim of any creditor of any Participant or of his spouse or other Beneficiary, nor shall the same be subject to attachment, garnishment or other legal or equitable process by any creditor of a Participant or of his spouse or other Beneficiary, nor shall any Participant or his spouse or other Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any such benefits, payments, accounts, funds or proceeds of any such contract. The preceding sentence shall also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order as defined in Section 414(p) of the Code. It is the intention of the Companies that benefit payments hereunder shall be made only at the times, in the amounts and to the distributees as specified in this Plan regardless of any marital dissolution, bankruptcy or other legal proceedings to which such distributees may be a party to the fullest extent permitted by law. Section 10.6. Payment of Benefits to Others. If any person to whom benefit payments are due or payable under this Plan shall be unable to care for his affairs because of illness or accident, any such payment may be made (unless prior claim thereto shall have been made by a duly-qualified guardian or other legal representative) to the spouse, parent, brother, sister or other person deemed by the Committee, in its sole discretion, to have incurred expense for such person and on such terms as the Committee, in its sole discretion, may impose. Any such payment and any payment to a Participant or to his legal representative or, if deceased, to his spouse or other Beneficiary made pursuant to the provisions of this Plan shall to the extent thereof be in full satisfaction of all claims arising hereunder against this Plan, the Fund, the Committee, the Trustee and the Companies. Section 10.7. Payments to Missing Persons. If the Trustee is unable to effect delivery of any amounts payable under this Plan to the person entitled thereto or, upon such person's death, to such person's personal representative, they shall so advise the Committee in writing, and the Committee shall give written notice by certified mail to said person at the last known address of such person as shown in the Companies' records. If such person or the -42- personal representative thereof shall not have responded to the Committee within three (3) years from the date of mailing such certified notice, the Committee shall direct the Trustee to distribute such amount, including any amount thereafter becoming due to such person or the personal representative thereof, in the manner provided in Section 6.7 with respect to the death of a Participant when there is no valid designation of Beneficiary on file. Section 10.8. Severability. If any provisions of this Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining part of this Plan and it shall be construed and enforced as if such illegal or invalid provisions had never been inserted herein. Section 10.9. Captions. Titles of Articles, Sections and Clauses herein are for general information only and shall be ignored in any construction of the provisions hereof. Section 10.10. Construction. Words in the masculine gender shall be construed to include the feminine gender in all cases where appropriate, and words in the singular or plural shall be construed as being in the plural or singular where appropriate. Section 10.11. Counterparts. This Plan may be executed in any number of counterparts, each of which shall be deemed to be an original. All the counterparts shall constitute but one (1) and the same instrument and may be sufficiently evidenced by any one (1) counterpart. Section 10.12. Indemnification. The Companies shall indemnify and hold harmless each member of the Committee and any individual Trustee who is also an Employee of the Company from any and all claims, loss, damage, expense and liability arising from any act or omission of such member or Trustee, as the case may be, except when the same is judicially determined to be due to the fraud or bad faith of such member or Trustee, as the case may be, if possible. Section 10.13. Standards of Interpretation and Administration. This Plan and the Fund held hereunder shall be for the exclusive benefit of Employees of the Companies and their spouses or other Beneficiaries and defraying reasonable costs of administration. This Plan shall be interpreted and administered in a manner consistent with the requirements of the Code relating to qualified stock bonus plans and trusts and the requirements imposed by the Act. Wherever in this Plan discretionary powers are given to any party or wherever any interpretation may be necessary, such powers shall be exercised and such interpretation shall be made in a non-discriminatory manner and in conformity with the fiduciary duties imposed under Section 404 of the Act. -43- Section 10.14. Governing Law. Except as otherwise provided by the Act, this Plan shall be administered and construed and its validity determined under the laws of the State of Indiana. Section 10.15. Successors and Assigns. This Plan shall be binding upon the successors and assigns of the Companies and of the Trustee. Section 10.16. Adoption of Plan. Any corporation, who together with the Holding Company, constitutes a member of a controlled group of corporations under Section 414(b) of the Code, with the approval of the Board of Directors of the Holding Company may adopt this Plan and participate as a Company in this Plan by the execution of an instrument of adoption of this Plan which shall specify the Effective Date as to such party. A listing of the subsidiaries and affiliates who have adopted this Plan is shown as Appendix A. Section 10.17. Withdrawal from Plan. Any Company in this Plan may, by resolution of its Board of Directors or other governing body, withdraw from participation as a Company in this Plan. ARTICLE XI TEFRA TOP-HEAVY RULES Section 11.1. Application. The rules set forth in this Article XI shall be applicable with respect to any Plan Year beginning on or after the Effective Date in which this Plan is determined to be a Top-Heavy Plan. The provisions of this Article XI shall be applied only to the extent necessary to comply with Section 416 of the Code and in a manner consistent with all requirements imposed under Section 416 of the Code. Section 11.2. Determination. This Plan shall be considered a Top-Heavy Plan with respect to any Plan Year if as of the Anniversary Date of the immediately preceding Plan Year or, if the determination is to be made for this Plan's first (1st) Plan Year, the last calendar day of the first (1st) Plan Year (the "determination date"): (a) the present value of the Accrued Benefits (as such term is defined in Section 11.3) of Key Employees (as such term is defined below) exceeds sixty percent (60%) of the present value of the Accrued Benefits of all Employees and former Employees (other than former Key Employees (as such term is defined below)); provided, however, that the Accrued Benefits of any Participant who has not completed an Hour of Service for the C ompany during a five (5) year period ending on the determination date (as such term is defined above) shall be disregarded, or -44- (b) this Plan is part of a required aggregation group (as such term is defined below) and the required aggregation group is top-heavy; provided, however, that this Plan shall not be considered a Top-Heavy Plan with respect to any Plan Year in which this Plan is part of a required or permissive aggregation group (as such terms are defined below) which is not top-heavy. For purposes of this Article XI, the term "Key Employee" shall include for any Plan Year any Employee or former Employee who at any time during that Plan Year or any of the four (4) preceding Plan Years is: (c) an officer of a Company whose Section 415 Compensation from the Companies is greater than fifty percent (50%) of the maximum dollar limitation under Section 415(b)(1)(A) of the Code in effect for the calendar year in which the determination date (as such term is defined above) falls, (d) one (1) of the ten (10) Employees owning (or considered as owning within the meaning of Section 318 of the Code) the largest interest in a Company whose ownership interest in that Company is at least one-half of one percent (0.5%) and whose Section 415 Compensation from the Companies is equal to or greater than the maximum dollar limitation under Section 415(c)(1)(A) of the Code in effect for the calendar year in which the determination date (as such term is defined above) falls; provided, however, that if two (2) Employees have the same interest in a Company, the Employee whose annual Section 415 Compensation from the Companies is greater shall be treated as having a larger interest in the Company, (e) a five percent (5%) owner (determined without regard to Sections 414(b),(c) and (n) of the Code) of a Company, (f) a one percent (1%) owner (determined without regard to Sections 414(b),(c) and (n) of the Code) of a Company whose Section 415 Compensation from the Companies is in excess of one hundred and fifty thousand dollars ($150,000); provided, however, that the Beneficiary of any deceased Employee or of any deceased former Employee who was included as a Key Employee by reason of this Section 11.2 shall also be included as a Key Employee; provided, further, that an individual shall only be included as a Key Employee to the extent required by Section 416(i) of the Code. For purposes of this Article XI, "Non-Key Employee" is any Employee or former Employee who is not a Key Employee. For purposes of determining who is a key employee, Section 415 Compensation shall include amounts deferred or redirected by an Employee pursuant to Sections 401(k) and 125 of the Code. For -45- purposes of this Section 11.2, the term "required aggregation group" shall include: (g) all qualified retirement plans maintained by a Company in which a Key Employee (as such term is defined above) is a participant; provided, however, that the term "required aggregation group" shall also include all qualified retirement plans previously maintained by a Company but terminated within the five (5) year period ending on the determination date (as such term is defined above) in which a key employee (as such term is defined above) was a participant; and (h) any other qualified retirement plans maintained by a Company which enable any qualified retirement plan described in Subsection (g) above to meet the requirements of Section 401(a)(4) or of Section 410 of the Code. For purposes of this Section 11.2, the term "permissive aggregation group" shall include all qualified retirement plans that are part of a required aggregation group (as such term is defined above) and any other qualified retirement plans maintained by a Company if such group will continue to meet the requirements of Section 401(a)(4) and of Section 410 of the Code. Section 11.3. Accrued Benefits. For purposes of this Article XI, Accrued Benefits with respect to any Plan Year shall be determined as of the determination date (as such term is defined in Section 11.2) for that Plan Year based on the Company Contributions Account balances as of the most recent Valuation Date within a consecutive twelve (12) month period ending on such determination date; provided, however, that such Company Contributions Account balances shall be adjusted to the extent required by Section 416 of the Code to increase the Company Contributions Accounts balances by the amount of any Company Contributions made and allocated after the Valuation Date but on or before such determination date and by any distributions made to Participants prior to the Valuation Date during any of the five (5) consecutive Plan Years immediately preceding the Plan Year for which the determination as to whether this Plan is a Top-Heavy Plan is being made (including distributions from a terminated plan which if not terminated would have been part of a required aggregation group (as such term is defined in Section 11.7)) and to reduce the Company Contributions Account balances by any rollovers or plan to plan transfers made to this Plan before the Valuation Date which are initiated by a Participant from any qualified retirement plan maintained by an unrelated employer and by any deductible employee contributions. Section 11.4. Vesting Provisions. Notwithstanding the provisions of Section 6.3, with respect to any Plan Year in which this Plan is determined to be a Top-Heavy Plan, a Participant's -46- Accrued Benefit which is derived from Company Contributions shall vest in accordance with the following vesting schedule if it would result in a larger vested percentage than the percentage determined under Section 6.3: Period of Service Vested Percentage ----------------- ----------------- Less than three (3) years 0 Three (3) years or more 100% provided, however, that if this Plan becomes a Top-Heavy Plan and subsequently ceases to be such: (a) the vesting schedule shown above shall continue to apply but only with respect to Participants whose Period of Service is as least three (3) years as of the Anniversary Date of the final Top-Heavy Plan Year, (b) the vesting schedule shown above shall continue to apply but only with respect to the Accrued Benefits of all other Participants as of the Anniversary Date of the final Top-Heavy Plan Year, and (c) the vesting schedule in Section 6.3 shall apply to any additional Accrued Benefits of the Participants described in Subsection (b) above which accrue after the Anniversary Date of the final Top-Heavy Plan Year. Section 11.5. Minimum Contribution. Notwithstanding the provisions of Section 4.2, with respect to any Plan Year in which this Plan is a Top-Heavy Plan, the Company contributions for such Plan Year shall be allocated in the following order of priority: (a) first, among the Company Contributions Accounts of all eligible Participants who had not separated from service with the Companies as of the Anniversary Date of that Plan Year regardless of the number of Hours of Service completed by each such Participant during that Plan Year according to the ratio that each Participant's Compensation for that Plan Year bears to the total Compensation of all eligible Participants; provided, however, that the portion of the Company contributions to be allocated pursuant to this Subsection (a) shall not exceed three percent (3%) of the total Compensation of all eligible Participants for that Plan Year; (b) next, the remaining portion, if any, of the Company contributions for such Plan Year shall be allocated in accordance with Section 4.2; -47- provided, however, that if a Participant also participates in a top-heavy defined benefit plan, he shall receive the minimum benefit for such Plan Year under the defined benefit plan. -48- This Plan has been adopted by the Holding Company, Madison First Federal Savings and Loan Association and the Trustee on this ___________________ day of __________________, 1996, but is to be effective as of January 1, 1996. RIVER VALLEY BANCORP By: ------------------------------- Its: ------------------------------- Attest: By: ------------------------------- Its: ------------------------------- MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION By: ------------------------------- Its: ------------------------------- Attest: By: ------------------------------- Its: ------------------------------- [INSERT NAME OF TRUSTEE] By: ------------------------------- Its: ------------------------------- Attest: By: ------------------------------- Its: ------------------------------- -49- EX-10.5 8 MADISON FIRST FEDERAL EMPLOYMENT AGREEMENT Exhibit 10(5) EMPLOYMENT AGREEMENT THIS AGREEMENT entered into and effective this 23rd day of April, 1996, by and between Madison First Federal Savings and Loan Association (the "Bank") and James E. Fritz (the "Employee"). The parties agree, however, that the "Effective Date" of this Agreement shall be January 1, 1996. WHEREAS, the Employee has heretofore been employed by the Bank as its President and has performed valuable services for the Bank; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Bank and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment: The Employee is employed as the President of the Bank. The Employee shall render such administrative and management services for the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board of Directors (the "Board") of the Bank may from time to time reasonably direct, including normal duties as an officer of the Bank. 2. Base Compensation: The Bank agrees to pay the Employee during the term of this Agreement a salary at the rate of $65,000.00 per annum, payable in cash not less frequently than monthly, and shall be effective and calculated commencing January 1, 1996. The salary shall be reviewed annually by the Board of Directors of Madison First Federal Savings and Loan Association in February of each year commencing February of 1997 and any adjustment in the future on salary shall be effective on February 1st of each year. 3. Bonuses: The Employee shall participate in any year end bonus granted to other employees by the Board. The Employee shall further participate in an equitable manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4.(a) Participation in Retirement, Medical and Other Plans: During the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans: group hospitalization, disability, health, dental, sick leave, retirement, pension, and/or other present or future qualified plans provided by the Bank, generally, which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date, unless the continued operation of such plans would adversely affect the Bank's operating results or financial condition in a material way, the Bank's Board of Directors concludes that modifications to such plans are necessary to avoid such adverse effects and such modifications apply consistently to all employees of the Bank. (b) Employee Benefits: Expenses: The Employee shall be eligible to participate in any fringe benefits which are or may become available to the Bank's senior management employees, including, for example, any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement, upon substantiation of such expenses in accordance with the policies of the Bank. 5. Term: The Bank hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on January 1, 1996 and ending thirty six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective Date, the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date, provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. Only those members of the Board of Directors who have no personal interest in this Employment Agreement shall discuss and vote on the approval and subsequent review of this Agreement. 6. Loyalty; Noncompetition: (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, the Employee may serve on the Boards of Directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Bank or any of its subsidiaries or affiliates, or 2 unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Bank, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Bank, or, solely as a passive or minority investor, in any business. (c) While Employee is employed by the Bank and for a period of three years after termination of Employee's employment by the Bank or by the Employee for reasons other than those set forth in Section 9 (d) hereof, the Employee shall not directly or indirectly, engage in any bank or bank-related business which competes with the business of the Bank as conducted during Employee's employment by the Bank for any financial institution, including but not limited to banks, savings and loan associations, and credit unions within a forty mile radius of Madison, Indiana. 7. Standards: The Employee shall perform his duties under this Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Bank will provide Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 8. Vacation, Sick Leave and Disability: The Employee shall be entitled to twenty days vacation annually and shall be entitled to the same sick leave and disability leave as other employees of the Bank. The Employee shall not receive any additional compensation from the Bank on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board. In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. 3 9. Termination and Termination Pay: Subject to Section 11 hereof, the Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. (b) Disability. (1) The Bank may terminate the Employee's employment, should the Employee become disabled, in a manner consistent with the Bank's and the Employee's rights and obligations under the Americans With Disabilities Act or other applicable state and federal laws concerning disability. For the purpose of this Agreement, "Disability" means a physical or mental condition which substantially limits the employee's ability to perform the essential functions of his position, as established by this Agreement, and which results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan. (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Bank and, if able, shall make himself available to the Bank to undertake reasonable assignments consistent with his prior position and his physical and mental health. The Bank shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. (c) Just Cause: The Board may, by written notice to the Employee, immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee'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 offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, in the event of termination for Just Cause there shall be delivered to the Employee a copy of a resolution duly adopted 4 by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, he shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (d) Without Just Cause; Constructive Discharge: (1) The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs within the time period set forth in Section 11(b) hereof, in which event the benefits and compensation provided for in Section 11 shall apply): (i) the salary provided pursuant to Section 2 hereof, up to the date of termination of the term as provided in Section 5 hereof (including any renewal term) of this Agreement (the "Expiration Date"), plus said salary for an additional 12-month period, and (ii) at the Employee's election, either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits (excluding stock options) which the Employee would have been eligible to participate in through the Expiration Date, based upon the benefit levels substantially equal to those that the Bank provided for the Employee at the date of termination of employment, or (B) continued participation under such Bank benefit plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. (2) The Employee may voluntarily terminate his employment under this Agreement, and the Employee shall thereupon be entitled to receive the compensation and benefits payable under Section 9(d)(1) hereof, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing (unless such voluntary termination occurs within the time period set forth in Section 11(b) hereof, in which event the benefits and compensation provided for in Section 11 shall apply): (i) the requirement that the Employee move his personal residence, or 5 perform his principal executive functions, more than thirty (30) miles from his primary office; (ii) a material reduction in the Employee's base compensation, unless part of an institution-wide reduction; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him, unless part of an institution-wide reduction; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in Section 1; (v) a failure to elect or re-elect the Employee to the Board of Directors of the Bank; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (3) Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under clause (d)(1)(i) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the present value of the benefits payable under clauses (d)(1)(i) and (ii) hereof exceeds the limitation on severance benefits that is set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective Date. In the event that Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), becomes applicable to payments made under this Section 9(d), and the payments exceed the "Maximum Amount" as defined in Section 11(a)(1) hereof, the payments shall be reduced as provided by Section 11(a)(2) of this Agreement. (e) Termination or Suspension Under Federal Law. (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. 6 (3) All obligations under this Agreement shallent or terminate, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank; (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. (4) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank's obligations under this Agreement shall be suspended as of the date of such service, unless stayed 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 its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (f) Voluntary Termination by Employee: Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least ninety (90) days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination (unless such termination occurs pursuant to Section 9(d)(2) hereof, in which event the benefits and compensation provided for in section 9(d) shall apply). 10. No Mitigation: The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control: (a) Change in Control; Involuntary Termination: (1) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Bank, without the Employee's prior written consent and for a reason other than Just Cause, in connection with or within twelve (12) months after any Change in Control of the Bank, the Employee shall, subject to paragraph (2) of this Section 11(a), be paid an amount equal to the difference between 7 (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Code and regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the Change in Control. Said sum shall be paid in one lump sum within ten (10) days of such termination. This paragraph would not apply to a termination of employment due to death, disability or voluntary termination by the Employee. (2) In the event that the Employee and the Bank jointly determine and agree that the total parachute payments receivable under clauses (i) and (ii) of Section 11(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment procedure set forth in Section 11(a)(1) hereof, the Employee shall determine which and how much, if any, of the parachute payments to which he is entitled shall be eliminated or reduced so that the total parachute payments to be received by the Employee do not exceed the Maximum Amount. If the Employee does not make his determination within ten business days after receiving a written request from the Bank, the Bank may make such determination, and shall notify the Employee promptly thereof. Within five business days of the earlier of the Bank's receipt of the Employee's determination pursuant to this paragraph or the Bank's determination in lieu of a determination by the Employee, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. (3) As a result of uncertainty in application of Section 280G of the Code at the time of payment hereunder, it is possible that such payments will have been made by the Bank which should not have been made ("Overpayment") or that additional payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made under Section 11(a)(1) hereof. In the event that the Employee, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Employee believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Employee and the Bank determine, based upon controlling precedent or other substantial authority, that an Underpayment 8 has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. (4) The term "Change in Control" shall mean any one of the following events: If the Bank is in the "mutual" form of organization, a "Change of Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank before such transaction cease to constitute a majority of the Board of Directors of the Bank or any successor to the Bank; (ii) the Bank transfers substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Bank; (iii) The Bank sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty one percent (51%) of the outstanding proxies relating to the surviving or resulting corporation are given, in the aggregate, by the former members of the Bank. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to occur solely by reason of a transaction in which the Bank converts to the stock form of organization. If the Bank is in the "stock" form of organization, a "Change or Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or a holding company controlling the Bank before such transaction cease to constitute a majority of the Board of Directors of the Bank or such holding company or any successor thereof; 9 (ii) the Bank or a holding company controlling the Bank transfers substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Bank or such holding company; (iii) the Bank or a holding company controlling the Bank sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or a holding company controlling the Bank is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former stockholders of the Bank or of such holding company controlling the Bank. Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under Subsection(a) of this Section 11 shall be reduced to the extent that on the date of the Employee's termination of employment, the amount payable under Subsection(a) of this Section 11 exceeds the limitation on severance benefits that is set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective Date. (b) Change in Control; Voluntary Termination: Notwithstanding any other provision of this Agreement to the contrary, but subject to Section 11(a)(2) hereof, the Employee may voluntarily terminate his employment under this Agreement within twelve (12) months following a Change in Control of the Bank, as defined in paragraph (a)(4) of this Section 11, and the Employee shall thereupon be entitled to receive the payment described in Section 11(a)(1) of this Agreement, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing; (i) the requirement that the Employee perform his principal executive functions more than thirty (30) miles from his primary office as of the date of the Change in Control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the Change in Control or as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any employee benefit in 10 which the Employee is a participant at the time of the Change in Control, or the taking of any action which would materially reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the Change in Control, unless part of an institution-wide reduction; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or re-elect the Employee to the Board of Directors of the Bank, if the Employee is serving on the Board on the date of the Change in Control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (c) Compliance with 12 U.S.C. Section 1828(k): Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) Trust: (1) Within five business days before or after a Change in Control as defined in Section 11(a) of this Agreement which was not approved in advance by a resolution of a majority of the Continuing Directors of the Bank, the Bank shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust"), designed to conform with Revenue Procedure 93-64 (or any successor) and having a trustee independent of the Bank, an amount equal to 2.99 times the Employee's "base amount" as defined in Section 280G(b)(3) of the Code, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. (2) During the twelve (12) consecutive month period following the date on which the Bank makes the deposit referred to in the preceding paragraph, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to Section 11(a) or (b). Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Bank via overnight and registered mail, return receipt requested. On the tenth (10th) business day after mailing said notice to the association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Bank provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to 11 the Employee pursuant to Section 11(a) or (b) hereof, and the party responsible for the payment of the costs of such arbitration (which may include any reasonable legal fees and expenses incurred by the Employee) shall be determined by the arbitrator. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his or her determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Bank, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. (3) Upon the earlier of (i) any payment from the Trust to the Employee, or (ii) the date twelve (12) months after the date on which the Bank makes the deposit referred to in the first paragraph of this subsection (d)(1), the trustee of the Trust shall pay to the Bank the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust pursuant to this Agreement. (e) In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Bank, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee. Should the Employee fail to obtain a final judgment in favor of the Employee and a final judgment is entered in favor of the Bank, then the Bank shall be reimbursed for all costs and expenses, including reasonable Attorneys' fees arising from such dispute, proceedings or actions. Such reimbursement shall be paid within ten (10) days of the Bank furnishing to the Employee written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Bank. 12. Employer will permit Employee or his personal representative(s) or heirs, during a period of three months following Employee's termination of employment by Employer for the reasons set forth in Subsections 9(d) or 11(a), if such 12 termination follows a Change of Control, to require Employer, upon written request, to purchase all outstanding stock options previously granted to Employee under any stock option plan then in effect to the extent the options are vested at a cash purchase price equal to the amount by which the aggregate "fair market value" of the shares subject to such options exceeds the aggregate option price for such shares. For purposes of this Agreement, the term "fair market value" shall mean the higher of (1) the average of the highest asked prices for shares in the over-the-counter market as reported on the NASDAQ system or other exchange if the shares are traded on such system for the 30 business days preceding such termination, or (2) the average per share price actually paid for the most highly priced 1% of the shares acquired in connection with the Change of Control by any person or group acquiring such control. 13. Federal Income Tax Withholding: The Bank may withhold all federal and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. 14. Successors and Assigns: (a) Bank. This Agreement shall not be assignable by the Bank, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank. (b) Employee. Since the Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. 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 exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 13 15. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 16. Applicable Law. Except to the extent preempted by federal law, the laws of the State of Indiana shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 17. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 18. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION /s/ Lonnie D. Collins By:/s/ Fred W. Koehler - --------------------- -------------------------- Secretary Chairman of the Board WITNESS: /s/ Michael J. Hensley /s/ James E. Fritz - ---------------------- -------------------------- James E. Fritz 14 EX-10.6 9 EMPLOYMENT AGREEMENT BETWEEN CITIZENS AND R. HOBAN Exhibit 10(6) EMPLOYMENT AGREEMENT THIS AGREEMENT entered into and effective this _____ day of ________________, 1996, by and between Citizens National Bank (the "Bank") and Robert Hoban (the "Employee"). The parties agree, however, that the "Effective Date" of this Agreement shall be January 1, 1996. WHEREAS, the Employee has heretofore been employed by the Bank as its President and has performed valuable services for the Bank; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Bank and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is employed as the President of the Bank. The Employee shall render such administrative and management services for the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board of Directors (the "Board") of the Bank may from time to time reasonably direct, including normal duties as an officer of the Bank. 2. Base Compensation. The Bank agrees to pay the Employee during the term of this Agreement a salary at the rate of $100,000.00 per annum, payable in cash not less frequently than monthly, and shall be effective and calculated commencing January 1, 1996. The salary shall be reviewed annually by the Board of Directors of the Bank in February of each year commencing February of 1997 and any adjustment in the future on salary shall be effective on February 1st of each year. 3. Bonuses. The Employee shall participate in any year end bonus granted to other employees by the Board. The Employee shall further participate in an equitable manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. 4. (a) Participation in Retirement, Medical and Other Plans. During the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans: group hospitalization, disability, health, dental, sick leave, retirement, pension, and/or other present or future qualified plans provided by the Bank, generally, which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date, unless the continued operation of such plans would adversely affect the Bank's operating results or financial condition in a material way, the Bank's Board of Directors concludes that modifications to such plans are necessary to avoid such adverse effects and such modifications apply consistently to all employees of the Bank. (b) Employee Benefits; Expenses. The Employee shall be eligible to participate in any fringe benefits which are or may become available to the Bank's senior management employees, including, for example, any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement, upon substantiation of such expenses in accordance with the policies of the Bank. (c) The Bank shall provide and maintain an appropriate automobile at its expense for Employee's use. 5. Term. The Bank hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on January 1, 1996 and ending thirty six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective Date, the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date, provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. Only those members of the Board of Directors who have no personal interest in this Employment Agreement shall discuss and vote on the approval and subsequent review of this Agreement. 6. Loyalty; Noncompetition. (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, the Employee may serve on the Boards of Directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Bank or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Bank, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Bank, or, solely as a passive or minority investor, in any business. (c) While Employee is employed by the Bank and for a period of three years after termination of Employee's employment by the Bank or by the Employee for reasons other than 2 those set forth in Section 9 (d) hereof, the Employee shall not directly or indirectly, engage in any bank or bank-related business which competes with the business of the Bank as conducted during Employee's employment by the Bank for any financial institution, including but not limited to banks, savings and loan associations, and credit unions within a thirty-five mile radius of Madison, Indiana. 7. Standards. The Employee shall perform his duties under this Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Bank will provide Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 8. Vacation, Sick Leave and Disability. The Employee shall be entitled to ___________ days vacation annually and shall be entitled to the same sick leave and disability leave as other employees of the Bank. The Employee shall not receive any additional compensation from the Bank on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board; provided, however, that unused sick leave shall be accumulated from one fiscal year to the next and awarded to the Employee until such time as the Employee begins receiving payments under the Bank's disability plan. In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. 9. Termination and Termination Pay. Subject to Section 11 hereof, the Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. (b) Disability. (1) The Bank may terminate the Employee's employment, should the Employee become disabled, in a manner consistent with the Bank's and the Employee's rights and obligations under the Americans With Disabilities Act or other applicable state and federal laws concerning disability. For the purpose of this Agreement, "Disability" means a physical or mental condition which substantially limits the employee's ability to perform the essential functions of his position, as established by this Agreement, and which results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan. 3 (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Bank and, if able, shall make himself available to the Bank to undertake reasonable assignments consistent with his prior position and his physical and mental health. The Bank shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. (c) Just Cause. The Board may, by written notice to the Employee, immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, the Employee'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 offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, in the event of termination for Just Cause there shall be delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, he shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (d) Without Just Cause; Constructive Discharge. (1) The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs within the time period set forth in Section 11(b) hereof, in which event the benefits and compensation provided for in Section 11 shall apply): (i) the salary provided pursuant to Section 2 hereof, up to the date of termination of the term as provided in Section 5 hereof (including any renewal term) of this Agreement (the "Expiration Date"), plus said salary for an additional 12-month period, and (ii) at the Employee's election, either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits (excluding stock options) which the Employee would have been eligible to participate in through the Expiration Date, based upon the benefit levels substantially equal to those that the Bank provided for the Employee at the date of termination of employment, or (B) continued participation under such Bank benefit plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. 4 (2) The Employee may voluntarily terminate his employment under this Agreement, and the Employee shall thereupon be entitled to receive the compensation and benefits payable under Section 9(d)(1) hereof, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing (unless such voluntary termination occurs within the time period set forth in Section 11(b) hereof, in which event the benefits and compensation provided for in Section 11 shall apply): (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty (30) miles from his primary office; (ii) a material reduction in the Employee's base compensation, unless part of an institution-wide reduction; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him, unless part of an institution-wide reduction; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in Section 1; (v) a failure to elect or re-elect the Employee to the Board of Directors of the Bank; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (3) Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under clause (d)(1)(i) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the present value of the benefits payable under clauses (d)(1)(i) and (ii) hereof exceeds any limitation on severance benefits that is imposed by the Office of the Comptroller of the Currency (the "OCC") on such benefits. In the event that Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), becomes applicable to payments made under this Section 9(d), and the payments exceed the "Maximum Amount" as defined in Section 11(a)(1) hereof, the payments shall be reduced as provided by Section 11(a)(2) of this Agreement. (e) Termination or Suspension Under Federal Law. (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the 5 effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (3) All obligations under this Agreement shall terminate, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank; (i) by the OCC or its designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the OCC, or its designee, at the time that the OCC or its designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the OCC to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. (4) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank's obligations under this Agreement shall be suspended as of the date of such service, unless stayed 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 its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (f) Voluntary Termination by Employee. Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least ninety (90) days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination (unless such termination occurs pursuant to Section 9(d)(2) hereof, in which event the benefits and compensation provided for in section 9(d) shall apply). 10. No Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 11. Change in Control. (a) Change in Control; Involuntary Termination. (1) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Bank, without the Employee's prior written consent and for a reason other than Just Cause, in connection with or within twelve (12) months after any Change in Control of the Bank, the Employee shall, subject to paragraph (2) of this Section 11(a), be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Code and regulations promulgated thereunder (the "Maximum Amount"), and (ii) the sum 6 of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the Change in Control. Said sum shall be paid in one lump sum within ten (10) days of such termination. This paragraph would not apply to a termination of employment due to death, disability or voluntary termination by the Employee. (2) In the event that the Employee and the Bank jointly determine and agree that the total parachute payments receivable under clauses (i) and (ii) of Section 11(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment procedure set forth in Section 11(a)(1) hereof, the Employee shall determine which and how much, if any, of the parachute payments to which he is entitled shall be eliminated or reduced so that the total parachute payments to be received by the Employee do not exceed the Maximum Amount. If the Employee does not make his determination within ten business days after receiving a written request from the Bank, the Bank may make such determination, and shall notify the Employee promptly thereof. Within five business days of the earlier of the Bank's receipt of the Employee's determination pursuant to this paragraph or the Bank's determination in lieu of a determination by the Employee, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. (3) As a result of uncertainty in application of Section 280G of the Code at the time of payment hereunder, it is possible that such payments will have been made by the Bank which should not have been made ("Overpayment") or that additional payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made under Section 11(a)(1) hereof. In the event that the Employee, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Employee believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Employee and the Bank determine, based upon controlling precedent or other substantial authority, that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. (4) "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or a holding company controlling the Bank before such transaction cease to constitute a 8 majority of the Board of Directors of the Bank or such holding company or any successor thereto; (ii) the Bank or a holding company controlling the Bank transfers substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Bank or such holding company; (iii) the Bank or a holding company controlling the Bank sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or a holding company controlling the Bank is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former stockholders of the Bank or of such holding company controlling the Bank. Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under Subsection(a) of this Section 11 shall be reduced to the extent that on the date of the Employee's termination of employment, the amount payable under Subsection(a) of this Section 11 exceeds any limitation on severance benefits that is imposed by the OCC. (b) Change in Control; Voluntary Termination. Notwithstanding any other provision of this Agreement to the contrary, but subject to Section 11(a)(2) hereof, the Employee may voluntarily terminate his employment under this Agreement within twelve (12) months following a Change in Control of the Bank, as defined in paragraph (a)(4) of this Section 11, and the Employee shall thereupon be entitled to receive the payment described in Section 11(a)(1) of this Agreement, within ninety (90) days following the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing; (i) the requirement that the Employee perform his principal executive functions more than thirty (30) miles from his primary office as of the date of the Change in Control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the Change in Control or as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (iii) the failure by the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any employee benefit in which the Employee is a participant at the time of the Change in Control, or the taking of any action which would materially reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the Change in Control, unless part of an institution-wide reduction; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced at Section 1; (v) a failure to elect or re-elect the Employee to the Board of Directors of the Bank, if the Employee is serving on the Board on the date of the Change in Control; or (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank; or (vii) a material reduction in the secretarial or other administrative support of the Employee. 9 (c) Compliance with 12 U.S.C. Section 1828(k). Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (d) Trust. (1) Within five business days before or after a Change in Control as defined in Section 11(a) of this Agreement which was not approved in advance by a resolution of a majority of the Continuing Directors of the Bank, the Bank shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust"), designed to conform with Revenue Procedure 93-64 (or any successor) and having a trustee independent of the Bank, an amount equal to 2.99 times the Employee's "base amount" as defined in Section 280G(b)(3) of the Code, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. (2) During the twelve (12) consecutive month period following the date on which the Bank makes the deposit referred to in the preceding paragraph, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to Section 11(a) or (b). Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Bank via overnight and registered mail, return receipt requested. On the tenth (10th) business day after mailing said notice to the association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Bank provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to Section 11(a) or (b) hereof, and the party responsible for the payment of the costs of such arbitration (which may include any reasonable legal fees and expenses incurred by the Employee) shall be determined by the arbitrator. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his or her determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Bank, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. (3) Upon the earlier of (i) any payment from the Trust to the Employee, or (ii) the date twelve (12) months after the date on which the Bank makes the deposit referred to in the first paragraph of this subsection (d)(1), the trustee of the Trust shall pay to the Bank the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust pursuant to this Agreement. (e) In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Bank, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment by a court of competent jurisdiction in favor of the Employee. Such reimbursement shall be paid within ten (10) days of 10 Employee's furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee. Should the Employee fail to obtain a final judgment in favor of the Employee and a final judgment is entered in favor of the Bank, then the Bank shall be reimbursed for all costs and expenses, including reasonable Attorneys' fees arising from such dispute, proceedings or actions. Such reimbursement shall be paid within ten (10) days of the Bank furnishing to the Employee written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Bank. 12. Employer will permit Employee or his personal representative(s) or heirs, during a period of three months following Employee's termination of employment by Employer for the reasons set forth in Subsections 9(d) or 11(a), if such termination follows a Change of Control, to require Employer, upon written request, to purchase all outstanding stock options previously granted to Employee under any stock option plan then in effect to the extent the options are vested at a cash purchase price equal to the amount by which the aggregate "fair market value" of the shares subject to such options exceeds the aggregate option price for such shares. For purposes of this Agreement, the term "fair market value" shall mean the higher of (1) the average of the highest asked prices for shares in the over-the-counter market as reported on the NASDAQ system or other exchange if the shares are traded on such system for the 30 business days preceding such termination, or (2) the average per share price actually paid for the most highly priced 1% of the shares acquired in connection with the Change of Control by any person or group acquiring such control. 13. Federal Income Tax Withholding. The Bank may withhold all federal and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. 14. Successors and Assigns. (a) Bank. This Agreement shall not be assignable by the Bank, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank. (b) Employee. Since the Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his right or duties hereunder without first obtaining the written consent of the Bank; provided, however, that nothing in this paragraph shall preclude (i) the Employee from 11 designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. 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 exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 15. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 16. Applicable Law. Except to the extent preempted by federal law, the laws of the State of Indiana shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 17. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 18. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto and supersedes any other agreement between the parties hereto relating to the employment of the Employee. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: - ------------------------------------ ------------------------------------ Secretary Chairman of the Board WITNESS: - ------------------------------------ ------------------------------------ Robert Hoban 12 The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: -------------------------------------- James E. Fritz, President and Chief Executive Officer 13 EX-10.16 10 TERMINATION AGREEMENT BETWEEN MADISON & BRIDGFORD Exhibit 10(16) SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into as of this ____day of ______________, 1996, by and between Madison First Federal Savings and Loan Association, a federally chartered savings and loan association (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 11(a) hereof or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Traci A. Bridgford, whose residence address is _______________________ (the "Employee"). WHEREAS, the Employee is currently serving as a Vice President- Compliance/Operations of the Bank; and WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will convert to capital stock form as the subsidiary of River Valley Bancorp, an Indiana corporation (the "Holding Company") (the "Conversion"); and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Holding Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its shareholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to her assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 1 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is agreed as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date the Bank converts from mutual to stock form (the "Effective Date") and shall continue until February 1, 1998. Commencing on February 1, 1998, and continuing at each anniversary date thereafter, the Board of Directors shall review this Agreement and, in its discretion, may authorize extension thereof for an additional one-year period. 2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL. (a) Upon the occurrence of a change in control of the Bank or the Holding Company (as herein defined) during the term of the Employee's employment, followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment, other than for cause, as defined in Section 2(d) hereof, the provisions of Section 3 shall apply. (b) A "change in control" of the Bank or the Holding Company shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or the Holding Company before such transaction cease to constitute a majority of the Board of Directors of the Bank or the Holding Company or any successor thereof; (ii) the Bank or the Holding Company transfers substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Bank or the Holding Company; (iii) the Bank or the Holding Company sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or the Holding Company is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Bank or of the Holding Company. (c) The Employee's employment under this Agreement may be terminated at any time by the Board of Directors of the Bank. The terms "involuntary termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without her express written consent. In addition, a material diminution of or interference with the Employee's duties, responsibilities and benefits shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. By way of example and not by way of limitation, any of the following actions, if unreasonable and materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (1) the requirement that the Employee perform her principal executive functions more than thirty-five (35) miles from her primary office as of the date of the change in control; (2) a material reduction in the Employee's salary, perquisites, contingent benefits or vacation time as in effect on the date of the change in control as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (3) the assignment to the Employee of duties and responsibilities materially -2- different from those normally associated with her position as referenced in this Agreement; or (4) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with her employment with the Bank. (d) The Employee shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of, in the good faith determination of the Board of Directors of the Bank, the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than a law, rule or regulation relating to traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, she shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (e) If the Employee's employment is involuntarily terminated by the Bank, with or without cause, at any time after a date which is 18 months following the Conversion, and upon 90 days written notice to the Employee prior to the public announcement of a change in control of the Bank or the Holding Company, whether consummated or merely proposed at the time of such public announcement, the Employee shall not have any right, by virtue of such involuntary termination, to receive termination benefits under this Agreement. 3. TERMINATION BENEFITS. (a) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of the Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank, in either case, shall pay to the Employee in -3- a lump sum in cash within 25 business days after the date of severance of employment an amount equal to 100 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the Employee, upon an election pursuant to Section 3(c) hereof, such payment may be made, on a pro rata basis, semi-monthly during the twelve (12) months following the Employee's termination. (b) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of the Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement the Bank shall, in either case, cause to be continued life, health and disability coverage substantially identical to the coverage maintained by the Bank for the Employee prior to her severance. Subject to applicable federal and state laws, such coverage shall cease upon the earlier of the Employee's obtaining similar coverage by another employer or twelve (12) months from the date of the Employee's termination. In the event the Employee obtains new employment and receives less coverage for life, health or disability, the Bank shall provide coverage substantially identical to the coverage maintained by the Bank for the Employee prior to termination for a period of twelve (12) months. (c) On an annual basis the Employee shall elect whether, in the event amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 28OG of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 28OG of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 28OG(d)(4) of the Code. -4- (b) All determinations required to be made under this Section 4 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the date of termination of the Employee's employment by the Bank or the Holding Company resulting in benefit payments hereunder (the "Date of Termination"), or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on her federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 4. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon -5- controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. REQUIRED REGULATORY PROVISIONS. (a) The Bank may terminate the Employee's employment at any time, but any termination by the Bank, other than a termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall not have the right to receive compensation or other benefits for any period after a termination for cause as defined in Section 2(d) hereinabove. (b) 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 (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss. 1818 (e)(3) and (g)(1), the Bank's obligations under this 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 the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Employee is removed from office 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision (d) shall not affect any vested rights of the parties. (e) All obligations under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision (the "Director"), or his or her 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the Director, or his or her designee, at the time the Director or his or her 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 any such action. -6- 6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the "Notice") during the term of this Agreement and a change in control occurs, the Bank will assume its obligation to pay and the Employee will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Employee. 8. 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, the Employee, the Bank and their respective successors and assigns. 9. 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 be 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 or as to any act other than that specifically waived. 10. NO MITIGATION. Except as expressly provided herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 11. NO ASSIGNMENTS. -7- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 3 hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. -8- 16. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered an the arbitrator's award in any court having jurisdiction. 18. REIMBURSEMENT. In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. ATTEST: Madison First Federal Savings and Loan Association By: - -------------------------------- ------------------------------------ Secretary ------------------------------------ Traci A. Bridgford -9- The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: -------------------------------- James E. Fritz, President and Chief Executive Officer -10- EX-10.17 11 TERMINATION AGREEMENT BETWEEN MADISON & DEVEARY Exhibit 10(17) SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into as of this ____day of ______________, 1996, by and between Madison First Federal Savings and Loan Association, a federally chartered savings and loan association (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 11(a) hereof or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and John Wayne Deveary, whose residence address is _______________________ (the "Employee"). WHEREAS, the Employee is currently serving as a Vice President and Treasurer of the Bank; and WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will convert to capital stock form as the subsidiary of River Valley Bancorp, an Indiana corporation (the "Holding Company") (the "Conversion"); and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Holding Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its shareholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 1 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is agreed as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date the Bank converts from mutual to stock form (the "Effective Date") and shall continue until February 1, 1998. Commencing on February 1, 1998, and continuing at each anniversary date thereafter, the Board of Directors shall review this Agreement and, in its discretion, may authorize extension thereof for an additional one-year period. 2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL. (a) Upon the occurrence of a change in control of the Bank or the Holding Company (as herein defined) during the term of the Employee's employment, followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment, other than for cause, as defined in Section 2(d) hereof, the provisions of Section 3 shall apply. (b) A "change in control" of the Bank or the Holding Company shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or the Holding Company before such transaction cease to constitute a majority of the Board of Directors of the Bank or the Holding Company or any successor thereof; (ii) the Bank or the Holding Company transfers substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Bank or the Holding Company; (iii) the Bank or the Holding Company sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or the Holding Company is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Bank or of the Holding Company. (c) The Employee's employment under this Agreement may be terminated at any time by the Board of Directors of the Bank. The terms "involuntary termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. In addition, a material diminution of or interference with the Employee's duties, responsibilities and benefits shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. By way of example and not by way of limitation, any of the following actions, if unreasonable and materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (1) the requirement that the Employee perform his principal executive functions more than thirty-five (35) miles from his primary office as of the date of the change in control; (2) a material reduction in the Employee's salary, perquisites, contingent -2- benefits or vacation time as in effect on the date of the change in control as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (3) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in this Agreement; or (4) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (d) The Employee shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of, in the good faith determination of the Board of Directors of the Bank, the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than a law, rule or regulation relating to traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, he shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (e) If the Employee's employment is involuntarily terminated by the Bank, with or without cause, at any time after a date which is 18 months following the Conversion, and upon 90 days written notice to the Employee prior to the public announcement of a change in control of the Bank or the Holding Company, whether consummated or merely proposed at the time of such public announcement, the Employee shall not have any right, by virtue of such involuntary termination, to receive termination benefits under this Agreement. 3. TERMINATION BENEFITS. (a) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, pay to the Employee in -3- a lump sum in cash within 25 business days after the date of severance of employment an amount equal to 100 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the Employee, upon an election pursuant to Section 3(c) hereof, such payment may be made, on a pro rata basis, semi-monthly during the twelve (12) months following the Employee's termination. (b) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, cause to be continued life, health and disability coverage substantially identical to the coverage maintained by the Bank for the Employee prior to his severance. Subject to applicable federal and state laws, such coverage shall cease upon the earlier of the Employee's obtaining similar coverage by another employer or twelve (12) months from the date of the Employee's termination. In the event the Employee obtains new employment and receives less coverage for life, health or disability, the Bank shall provide coverage substantially identical to the coverage maintained by the Bank for the Employee prior to termination for a period of twelve (12) months. (c) On an annual basis the Employee shall elect whether, in the event amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 28OG of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 28OG(d)(4) of the Code. -4- (b) All determinations required to be made under this Section 4 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the date of termination of the Employee's employment by the Bank or the Holding Company resulting in benefit payments hereunder (the "Date of Termination"), or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on his federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 4. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon -5- controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. REQUIRED REGULATORY PROVISIONS. (a) The Bank may terminate the Employee's employment at any time, but any termination by the Bank, other than a termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall not have the right to receive compensation or other benefits for any period after a termination for cause as defined in Section 2(d) hereinabove. (b) 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 (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss. 1818 (e)(3) and (g)(1), the Bank's obligations under this 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 the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Employee is removed from office 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision (d) shall not affect any vested rights of the parties. (e) All obligations under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision (the "Director"), or his or her 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the Director, or his or her designee, at the time the Director or his or her 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 any such action. -6- 6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the "Notice") during the term of this Agreement and a change in control occurs, the Bank will assume its obligation to pay and the Employee will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Employee. 8. 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, the Employee, the Bank and their respective successors and assigns. 9. 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 be 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 or as to any act other than that specifically waived. 10. NO MITIGATION. Except as expressly provided herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 11. NO ASSIGNMENTS. -7- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 3 hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. -8- 16. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered an the arbitrator's award in any court having jurisdiction. 18. REIMBURSEMENT. In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. ATTEST: Madison First Federal Savings and Loan Association By: - -------------------------------- ------------------------------------ Secretary ------------------------------------ John Wayne Deveary The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: ------------------------------------ James E. Fritz, President and Chief Executive Officer -9- EX-10.18 12 TERMINATION AGREEMENT BETWEEN MADISON & ANGER Exhibit 10(18) SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into as of this ____day of ______________, 1996, by and between Madison First Federal Savings and Loan Association, a federally chartered savings and loan association (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 11(a) hereof or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Robert W. Anger, whose residence address is ___________________________ (the "Employee"). WHEREAS, the Employee is currently serving as a Vice President- Lending of the Bank; and WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will convert to capital stock form as the subsidiary of River Valley Bancorp, an Indiana corporation (the "Holding Company") (the "Conversion"); and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Holding Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its shareholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 1 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is agreed as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date the Bank converts from mutual to stock form (the "Effective Date") and shall continue until February 1, 1998. Commencing on February 1, 1998, and continuing at each anniversary date thereafter, the Board of Directors shall review this Agreement and, in its discretion, may authorize extension thereof for an additional one-year period. 2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL. (a) Upon the occurrence of a change in control of the Bank or the Holding Company (as herein defined) during the term of the Employee's employment, followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment, other than for cause, as defined in Section 2(d) hereof, the provisions of Section 3 shall apply. (b) A "change in control" of the Bank or the Holding Company shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or the Holding Company before such transaction cease to constitute a majority of the Board of Directors of the Bank or the Holding Company or any successor thereof; (ii) the Bank or the Holding Company transfers substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Bank or the Holding Company; (iii) the Bank or the Holding Company sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or the Holding Company is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Bank or of the Holding Company. (c) The Employee's employment under this Agreement may be terminated at any time by the Board of Directors of the Bank. The terms "involuntary termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. In addition, a material diminution of or interference with the Employee's duties, responsibilities and benefits shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. By way of example and not by way of limitation, any of the following actions, if unreasonable and materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (1) the requirement that the Employee perform his principal executive functions more than thirty-five (35) miles from his primary office as of the date of the change in control; (2) a material reduction in the Employee's salary, perquisites, contingent -2- benefits or vacation time as in effect on the date of the change in control as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (3) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in this Agreement; or (4) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (d) The Employee shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of, in the good faith determination of the Board of Directors of the Bank, the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than a law, rule or regulation relating to traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, he shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (e) If the Employee's employment is involuntarily terminated by the Bank, with or without cause, at any time after a date which is 18 months following the Conversion, and upon 90 days written notice to the Employee prior to the public announcement of a change in control of the Bank or the Holding Company, whether consummated or merely proposed at the time of such public announcement, the Employee shall not have any right, by virtue of such involuntary termination, to receive termination benefits under this Agreement. 3. TERMINATION BENEFITS. (a) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of Agreement, the Bank shall, in either case, pay to the Employee in a lump -3- sum in cash within 25 business days after the date of severance of employment an amount equal to 100 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the Employee, upon an election pursuant to Section 3(c) hereof, such payment may be made, on a pro rata basis, semi-monthly during the twelve (12) months following the Employee's termination. (b) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, cause to be continued life, health and disability coverage substantially identical to the coverage maintained by the Bank for the Employee prior to his severance. Subject to applicable federal and state laws, such coverage shall cease upon the earlier of the Employee's obtaining similar coverage by another employer or twelve (12) months from the date of the Employee's termination. In the event the Employee obtains new employment and receives less coverage for life, health or disability, the Bank shall provide coverage substantially identical to the coverage maintained by the Bank for the Employee prior to termination for a period of twelve (12) months. (c) On an annual basis the Employee shall elect whether, in the event amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. -4- (b) All determinations required to be made under this Section 4 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the date of termination of the Employee's employment by the Bank or the Holding Company resulting in benefit payments hereunder (the "Date of Termination"), or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on his federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 4. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon -5- controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. REQUIRED REGULATORY PROVISIONS. (a) The Bank may terminate the Employee's employment at any time, but any termination by the Bank, other than a termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall not have the right to receive compensation or other benefits for any period after a termination for cause as defined in Section 2(d) hereinabove. (b) 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 (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss. 1818 (e)(3) and (g)(1), the Bank's obligations under this 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 the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Employee is removed from office 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision (d) shall not affect any vested rights of the parties. (e) All obligations under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision (the "Director"), or his or her 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the Director, or his or her designee, at the time the Director or his or her 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 any such action. -6- 6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the "Notice") during the term of this Agreement and a change in control occurs, the Bank will assume its obligation to pay and the Employee will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Employee. 8. 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, the Employee, the Bank and their respective successors and assigns. 9. 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 be 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 or as to any act other than that specifically waived. 10. NO MITIGATION. Except as expressly provided herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 11. NO ASSIGNMENTS. -7- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 3 hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. -8- 16. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered an the arbitrator's award in any court having jurisdiction. 18. REIMBURSEMENT. In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. -9- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. ATTEST: Madison First Federal Savings and Loan Association By: - -------------------------------- ------------------------------------ Secretary ------------------------------------ Robert W. Anger The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: --------------------------------- James E. Fritz, President and Chief Executive Officer -10- EX-10.19 13 TERMINATION AGREEMENT BETWEEN CITIZENS AND FLOWERS Exhibit 10(19) SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into as of this ____ day of ___________, 1996, by and between Citizens National Bank of Madison, a national banking association (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 11(a) hereof or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Carolyn B. Flowers, whose residence address is _______________________________________ (the "Employee"). WHEREAS, the Employee is currently serving as a Vice President- Compliance/Operations of the Bank; and WHEREAS, 120,429 shares of common stock, $8.00 par value per share, of the Bank, or 95.6% of its outstanding shares, are to be acquired by River Valley Bancorp, an Indiana corporation (the "Holding Company") (the "Acquisition"); and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Holding Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its shareholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to her assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 1 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is agreed as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date of closing of the Acquisition (the "Effective Date") and shall continue until February 1, 1998. Commencing on February 1, 1998, and continuing at each anniversary date thereafter, the Board of Directors shall review this Agreement and, in its discretion, may authorize extension thereof for an additional one-year period. 2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL. (a) Upon the occurrence of a change in control of the Bank or the Holding Company (as herein defined) during the term of the Employee's employment, followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment, other than for cause, as defined in Section 2(d) hereof, the provisions of Section 3 shall apply. (b) A "change in control" of the Bank or the Holding Company shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or the Holding Company before such transaction cease to constitute a majority of the Board of Directors of the Bank or the Holding Company or any successor thereof; (ii) the Bank or the Holding Company transfers substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Bank or the Holding Company; (iii) the Bank or the Holding Company sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or the Holding Company is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Bank or of the Holding Company. (c) The Employee's employment under this Agreement may be terminated at any time by the Board of Directors of the Bank. The terms "involuntary termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without her express written consent. In addition, a material diminution of or interference with the Employee's duties, responsibilities and benefits shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. By way of example and not by way of limitation, any of the following actions, if unreasonable and materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (1) the requirement that the Employee perform her principal executive functions more than thirty-five (35) miles from her primary office as of the date of the change in control; (2) a material reduction in the Employee's salary, perquisites, contingent benefits or vacation time as in effect on the date of the change in control as the same may -2- be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (3) the assignment to the Employee of duties and responsibilities materially different from those normally associated with her position as referenced in this Agreement; or (4) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with her employment with the Bank. (d) The Employee shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of, in the good faith determination of the Board of Directors of the Bank, the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than a law, rule or regulation relating to traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, she shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (e) If the Employee's employment is involuntarily terminated by the Bank, with or without cause, at any time after a date which is 18 months following the Acquisition, and upon 90 days written notice to the Employee prior to the public announcement of a change in control of the Bank or the Holding Company, whether consummated or merely proposed at the time of such public announcement, the Employee shall not have any right, by virtue of such involuntary termination, to receive termination benefits under this Agreement. 3. TERMINATION BENEFITS. (a) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of the Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank, in either case, shall pay to the Employee in a lump sum in cash within 25 business days after the date of severance of employment an amount equal to 100 percent of the Employee's "base amount" of compensation, as defined -3- in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the Employee, upon an election pursuant to Section 3(c) hereof, such payment may be made, on a pro rata basis, semi-monthly during the twelve (12) months following the Employee's termination. (b) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of the Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement the Bank shall, in either case, cause to be continued life, health and disability coverage substantially identical to the coverage maintained by the Bank for the Employee prior to her severance. Subject to applicable federal and state laws, such coverage shall cease upon the earlier of the Employee's obtaining similar coverage by another employer or twelve (12) months from the date of the Employee's termination. In the event the Employee obtains new employment and receives less coverage for life, health or disability, the Bank shall provide coverage substantially identical to the coverage maintained by the Bank for the Employee prior to termination for a period of twelve (12) months. (c) On an annual basis the Employee shall elect whether, in the event amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 4 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if -4- applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the date of termination of the Employee's employment by the Bank or the Holding Company resulting in benefit payments hereunder (the "Date of Termination"), or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on her federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 4. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. -5- 5. REQUIRED REGULATORY PROVISIONS. (a) The Bank may terminate the Employee's employment at any time, but any termination by the Bank, other than a termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall not have the right to receive compensation or other benefits for any period after a termination for cause as defined in Section 2(d) hereinabove. (b) 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 (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss. 1818 (e)(3) and (g)(1), the Bank's obligations under this 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 the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Employee is removed from office 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision (d) shall not affect any vested rights of the parties. (e) All obligations under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Office of the Comptroller of the Currency (the "OCC"), or its 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the OCC, or its designee, at the time the OCC or its designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the OCC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. 6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the "Notice") during the term of this Agreement and a change in control occurs, the Bank will assume its obligation to pay and the Employee will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice. -6- 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Employee. 8. 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, the Employee, the Bank and their respective successors and assigns. 9. 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 be 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 or as to any act other than that specifically waived. 10. NO MITIGATION. Except as expressly provided herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 11. NO ASSIGNMENTS. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and -7- shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 3 hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered an the arbitrator's award in any court having jurisdiction. 18. REIMBURSEMENT. In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. -8- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. ATTEST: Citizens National Bank of Madison By: - -------------------------------- ------------------------------------ Secretary ------------------------------------ Carolyn B. Flowers The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: ------------------------------------ James E. Fritz, President and Chief Executive Officer -9- EX-10.20 14 TERMINATION AGREEMENT BETWEEN CITIZENS & FOUSE Exhibit 10(20) SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into as of this ____ day of ___________, 1996, by and between Citizens National Bank of Madison, a national banking association (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 11(a) hereof or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Larry C. Fouse, whose residence address is ________________________________ (the "Employee"). WHEREAS, the Employee is currently serving as Chief Financial Officer and Controller of the Bank; and WHEREAS, 120,429 shares of common stock, $8.00 par value per share, of the Bank, or 95.6% of its outstanding shares, are to be acquired by River Valley Bancorp, an Indiana corporation (the "Holding Company") (the "Acquisition"); and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Holding Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its shareholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 1 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is agreed as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date of closing of the Acquisition (the "Effective Date") and shall continue until February 1, 1998. Commencing on February 1, 1998, and continuing at each anniversary date thereafter, the Board of Directors shall review this Agreement and, in its discretion, may authorize extension thereof for an additional one-year period. 2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL. (a) Upon the occurrence of a change in control of the Bank or the Holding Company (as herein defined) during the term of the Employee's employment, followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment, other than for cause, as defined in Section 2(d) hereof, the provisions of Section 3 shall apply. (b) A "change in control" of the Bank or the Holding Company shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or the Holding Company before such transaction cease to constitute a majority of the Board of Directors of the Bank or the Holding Company or any successor thereof; (ii) the Bank or the Holding Company transfers substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Bank or the Holding Company; (iii) the Bank or the Holding Company sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or the Holding Company is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Bank or of the Holding Company. (c) The Employee's employment under this Agreement may be terminated at any time by the Board of Directors of the Bank. The terms "involuntary termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. In addition, a material diminution of or interference with the Employee's duties, responsibilities and benefits shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. By way of example and not by way of limitation, any of the following actions, if unreasonable and materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (1) the requirement that the Employee perform his principal executive functions more than thirty (30) miles from his primary office as of the date of the change in control; (2) a material reduction in the Employee's salary, perquisites, contingent benefits -2- or vacation time as in effect on the date of the change in control as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (3) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in this Agreement; or (4) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (d) The Employee shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of, in the good faith determination of the Board of Directors of the Bank, the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than a law, rule or regulation relating to traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, he shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (e) If the Employee's employment is involuntarily terminated by the Bank, with or without cause, at any time after a date which is 18 months following the Acquisition, and upon 90 days written notice to the Employee prior to the public announcement of a change in control of the Bank or the Holding Company, whether consummated or merely proposed at the time of such public announcement, the Employee shall not have any right, by virtue of such involuntary termination, to receive termination benefits under this Agreement. 3. TERMINATION BENEFITS. (a) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, pay to the Employee in -3- a lump sum in cash within 25 business days after the date of severance of employment an amount equal to 100 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the Employee, upon an election pursuant to Section 3(c) hereof, such payment may be made, on a pro rata basis, semi-monthly during the twelve (12) months following the Employee's termination. (b) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, cause to be continued life, health and disability coverage substantially identical to the coverage maintained by the Bank for the Employee prior to his severance. Subject to applicable federal and state laws, such coverage shall cease upon the earlier of the Employee's obtaining similar coverage by another employer or twelve (12) months from the date of the Employee's termination. In the event the Employee obtains new employment and receives less coverage for life, health or disability, the Bank shall provide coverage substantially identical to the coverage maintained by the Bank for the Employee prior to termination for a period of twelve (12) months. (c) On an annual basis the Employee shall elect whether, in the event amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. -4- (b) All determinations required to be made under this Section 4 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the date of termination of the Employee's employment by the Bank or the Holding Company resulting in benefit payments hereunder (the "Date of Termination"), or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on his federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 4. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon -5- controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. REQUIRED REGULATORY PROVISIONS. (a) The Bank may terminate the Employee's employment at any time, but any termination by the Bank, other than a termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall not have the right to receive compensation or other benefits for any period after a termination for cause as defined in Section 2(d) hereinabove. (b) 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 (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss. 1818 (e)(3) and (g)(1), the Bank's obligations under this 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 the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Employee is removed from office 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision (d) shall not affect any vested rights of the parties. (e) All obligations under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Office of the Comptroller of the Currency (the "OCC"), or its 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the OCC, or its designee, at the time the OCC or its designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the OCC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. -6- 6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the "Notice") during the term of this Agreement and a change in control occurs, the Bank will assume its obligation to pay and the Employee will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Employee. 8. 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, the Employee, the Bank and their respective successors and assigns. 9. 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 be 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 or as to any act other than that specifically waived. 10. NO MITIGATION. Except as expressly provided herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 11. NO ASSIGNMENTS. -7- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 3 hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. -8- 16. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered an the arbitrator's award in any court having jurisdiction. 18. REIMBURSEMENT. In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. ATTEST: Citizens National Bank of Madison By: - -------------------------------- ------------------------------------ Secretary ------------------------------------ Larry C. Fouse The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: ------------------------------------ James E. Fritz, President and Chief Executive Officer -9- EX-10.21 15 TERMINATION AGREEMENT BETWEEN CITIZENS AND GOLEY Exhibit 10(21) SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into as of this ____ day of ___________, 1996, by and between Citizens National Bank of Madison, a national banking association (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 11(a) hereof or which otherwise becomes bound by the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Mark A. Goley, whose residence address is ________________________________ (the "Employee"). WHEREAS, the Employee is currently serving as Vice President and Senior Loan Officer of the Bank; and WHEREAS, 120,429 shares of common stock, $8.00 par value per share, of the Bank, or 95.6% of its outstanding shares, are to be acquired by River Valley Bancorp, an Indiana corporation (the "Holding Company") (the "Acquisition"); and WHEREAS, the Board of Directors of the Bank recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Holding Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Bank, the Holding Company and its shareholders; and WHEREAS, the Board of Directors of the Bank believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Holding Company, although no such change is now contemplated; and WHEREAS, the Board of Directors of the Bank has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 1 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is agreed as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date of closing of the Acquisition (the "Effective Date") and shall continue until February 1, 1998. Commencing on February 1, 1998, and continuing at each anniversary date thereafter, the Board of Directors shall review this Agreement and, in its discretion, may authorize extension thereof for an additional one-year period. 2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL. (a) Upon the occurrence of a change in control of the Bank or the Holding Company (as herein defined) during the term of the Employee's employment, followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment, other than for cause, as defined in Section 2(d) hereof, the provisions of Section 3 shall apply. (b) A "change in control" of the Bank or the Holding Company shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Bank or the Holding Company before such transaction cease to constitute a majority of the Board of Directors of the Bank or the Holding Company or any successor thereof; (ii) the Bank or the Holding Company transfers substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Bank or the Holding Company; (iii) the Bank or the Holding Company sells substantially all of the assets of a subsidiary or affiliate which, at the time of such sale, is the principal employer of the Employee; or (iv) the Bank or the Holding Company is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Bank or of the Holding Company. (c) The Employee's employment under this Agreement may be terminated at any time by the Board of Directors of the Bank. The terms "involuntary termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. In addition, a material diminution of or interference with the Employee's duties, responsibilities and benefits shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. By way of example and not by way of limitation, any of the following actions, if unreasonable and materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (1) the requirement that the Employee perform his principal executive functions more than thirty (30) miles from his primary office as of the date of the change in control; (2) a material reduction in the Employee's salary, perquisites, contingent benefits -2- or vacation time as in effect on the date of the change in control as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction; (3) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in this Agreement; or (4) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank. (d) The Employee shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of, in the good faith determination of the Board of Directors of the Bank, the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than a law, rule or regulation relating to traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Bank at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), such meeting and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. If, following such meeting, the Employee is reinstated, he shall be entitled to receive back pay for the period following termination and continuing through reinstatement. (e) If the Employee's employment is involuntarily terminated by the Bank, with or without cause, at any time after a date which is 18 months following the Acquisition, and upon 90 days written notice to the Employee prior to the public announcement of a change in control of the Bank or the Holding Company, whether consummated or merely proposed at the time of such public announcement, the Employee shall not have any right, by virtue of such involuntary termination, to receive termination benefits under this Agreement. 3. TERMINATION BENEFITS. (a) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, pay to the Employee in -3- a lump sum in cash within 25 business days after the date of severance of employment an amount equal to 100 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). At the discretion of the Employee, upon an election pursuant to Section 3(c) hereof, such payment may be made, on a pro rata basis, semi-monthly during the twelve (12) months following the Employee's termination. (b) If (i) at any time during a period which begins on the Effective Date and ends 18 months thereafter, there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement or (ii) during the term of this Agreement there is a change in control, and within 12 months following such change in control there is an involuntary termination of the Employee's employment, other than for cause, whether or not such termination occurs during the term of this Agreement, the Bank shall, in either case, cause to be continued life, health and disability coverage substantially identical to the coverage maintained by the Bank for the Employee prior to his severance. Subject to applicable federal and state laws, such coverage shall cease upon the earlier of the Employee's obtaining similar coverage by another employer or twelve (12) months from the date of the Employee's termination. In the event the Employee obtains new employment and receives less coverage for life, health or disability, the Bank shall provide coverage substantially identical to the coverage maintained by the Bank for the Employee prior to termination for a period of twelve (12) months. (c) On an annual basis the Employee shall elect whether, in the event amounts are payable under Sections 3(a) hereof, such amounts shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4. CERTAIN REDUCTION OF PAYMENTS BY THE BANK. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Bank to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Bank for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such amounts payable or distributable pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Bank because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. -4- (b) All determinations required to be made under this Section 4 shall be made by the Bank's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the date of termination of the Employee's employment by the Bank or the Holding Company resulting in benefit payments hereunder (the "Date of Termination"), or at such earlier time as is requested by the Bank, provide to both the Bank and the Employee an opinion (and detailed supporting calculations) that the Bank has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on his federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Bank and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Bank shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Bank's receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement or (ii) the Bank's election in lieu of such determination, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Bank and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 4. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Bank which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Bank which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon -5- controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. REQUIRED REGULATORY PROVISIONS. (a) The Bank may terminate the Employee's employment at any time, but any termination by the Bank, other than a termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall not have the right to receive compensation or other benefits for any period after a termination for cause as defined in Section 2(d) hereinabove. (b) 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 (g)(1) of the Federal Deposit Insurance Act, 12 U.S. C. ss. 1818 (e)(3) and (g)(1), the Bank's obligations under this 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 the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Employee is removed from office 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) or (g)(1), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision (d) shall not affect any vested rights of the parties. (e) All obligations under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Office of the Comptroller of the Currency (the "OCC"), or its 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 Federal Deposit Insurance Act, 12 U.S.C. ss. 1823(c), or (ii) by the OCC, or its designee, at the time the OCC or its designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the OCC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. -6- 6. REINSTATEMENT OF BENEFITS UNDER SECTION 3. In the event the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 5(b) hereof (the "Notice") during the term of this Agreement and a change in control occurs, the Bank will assume its obligation to pay and the Employee will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Employee. 8. 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, the Employee, the Bank and their respective successors and assigns. 9. 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 be 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 or as to any act other than that specifically waived. 10. NO MITIGATION. Except as expressly provided herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the date of termination or otherwise. 11. NO ASSIGNMENTS. -7- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Bank in the same amount and on the same terms as the compensation pursuant to Section 3 hereof. For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. -8- 16. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Indiana. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered an the arbitrator's award in any court having jurisdiction. 18. REIMBURSEMENT. In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 17 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Bank has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. ATTEST: CITIZENS NATIONAL BANK OF MADISON By: - -------------------------------- ------------------------------------ Secretary ------------------------------------ Mark A. Goley The undersigned, River Valley Bancorp, sole shareholder of Bank, agrees that if it shall be determined for any reason that any obligation on the part of Bank to continue to make any payments due under this Agreement to Employee is unenforceable for any reason, River Valley Bancorp agrees to honor the terms of this Agreement and continue to make any such payments due hereunder to Employee or to satisfy any such obligation pursuant to the terms of this Agreement, as though it were the Bank hereunder. RIVER VALLEY BANCORP By: ------------------------------------ James E. Fritz, President and Chief Executive Officer -9- EX-10.22 16 EXEMPT LOAN AND SHARE PURCHASE AGREEMENT Exhibit 10(22) EXEMPT LOAN AND SHARE PURCHASE AGREEMENT between TRUST UNDER RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT and RIVER VALLEY BANCORP Dated December ___, 1996 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INTERPRETATION................................ 1 Section 1.1. General Interpretation...................... 1 Section 1.2. Certain Definitions......................... 2 ARTICLE II TRUST LOAN; TRUST NOTE; PAYMENTS.............................. 2 Section 2.1. Trust Loan.................................. 2 Section 2.2. Use of Trust Loan Proceeds.................. 2 Section 2.3. Trust Note.................................. 3 Section 2.4. Interest.................................... 3 Section 2.5. Payments.................................... 3 Section 2.6. Optional Prepayment......................... 3 Section 2.7. Place and Time of Payment................... 4 Section 2.8. Application of Certain Payments............. 4 Section 2.9 Due Date Extension.......................... 4 Section 2.10 Computations................................ 4 Section 2.11 Interest on Overdue Amounts................. 4 ARTICLE III SECURITY...................................................... 4 Section 3.1 Security.................................... 4 Section 3.2 Release of Shares........................... 5 ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS..................... 5 Section 4.1 Representations and Warranties of Trustee.................... 5 Section 4.2 Representations and Warranties of Company.................... 6 Section 4.3 Covenants of Company........................ 7 ARTICLE V CONDITIONS PRECEDENT.......................................... 8 Section 5.1 Documentation Satisfactory to Company....... 8 Section 5.2 Other Conditions Precedent to Company Obligations...................... 8 Section 5.3 Documentation Satisfactory to Trustee....... 8 Section 5.4 Other Conditions Precedent to Trustee's Obligation..................... 9 ARTICLE VI EVENTS OF DEFAULT AND THEIR EFFECT............................ 9 Section 6.1 Events of Default; Effect................... 9 i ARTICLE VII SHARE PURCHASES........................................... 9 Section 7.1 Purchase of Shares...................... 9 Section 7.2 Manner of Purchase...................... 9 Section 7.3 Readily Tradeable....................... 10 Section 7.4 No Prohibited Transactions.............. 10 Section 7.5 Maximum Number of Shares................ 10 ARTICLE VIII GENERAL.......................................... 10 Section 8.1 Waivers; Amendments..................... 10 Section 8.2 Confirmations; Information.............. 10 Section 8.3 Captions................................ 10 Section 8.4 Governing Law........................... 10 Section 8.5 Notices................................. 11 Section 8.6 Expenses................................ 11 Section 8.7 Reimbursement........................... 11 Section 8.8 Entire Agreement........................ 11 Section 8.9 Severability............................ 11 Section 8.10 No Assignment........................... 11 Section 8.11 Counterparts............................ 11 ARTICLE IX LIMITED RECOURSE.......................................... 11 Section 9.1 Limited Recourse........................ 11 Section 9.2 No Personal Recourse Against Trustee..................... 12 EXHIBITS Exhibit A - Trust Note Exhibit B - Share Pledge Agreement Exhibit C - Certificate of Trustee Exhibit D - Certificate of the Company ii EXEMPT LOAN AND SHARE PURCHASE AGREEMENT THIS EXEMPT LOAN AND SHARE PURCHASE AGREEMENT (this "Agreement" or "Loan Agreement"), dated December ___, 1996, between the Trust (the "Trust") established pursuant to the provisions of RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1996) (the "ESOP") by _________________________________, as Trustee (the "Trustee"), and RIVER VALLEY BANCORP, an Indiana corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company has duly established the ESOP in connection with which the Trust has been created; WHEREAS, pursuant to the ESOP and direction of the Company pursuant to Section 8.7 of the ESOP, the Trust desires to borrow from the Company, and the Company desires to lend to the Trust, an aggregate principal amount equal to up to Nine Hundred Fifty-Two Thousand Two Hundred Dollars ($952,200) (the "Trust Loan"), representing the cost of 8% of the shares of Common Stock, without par value, of the Company (the "Common Stock"), offered in the Subscription Offering and the Direct Community Offering of the Company's Common Stock being made in connection with the Company's acquisition of the common stock of Madison First Federal Savings and Loan Association (the "Association") upon conversion of the Association from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion"), on the terms and conditions hereof; WHEREAS, the parties hereto intend that the Trust Loan constitute an "exempt loan" within the meaning of Section 4975(d)(3) of the Code, Treasury Regulation ss. 54.4975-7(b), Section 408(b)(3) of ERISA, and Department of Labor Regulation ss. 2550.408b-3 (collectively, the "Exempt Loan Rules") and an "Exempt Loan" within the meaning of Sections 1.20 and 8.7 of the ESOP; WHEREAS, the parties intend that the Trustee will utilize the Trust Loan for the purpose of effecting purchases in the Subscription Offering and Direct Community Offering (collectively, the "Offering") or otherwise of shares of Company Common Stock, without par value ("Shares"), to be held in the Trust for participants in the ESOP. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which each party hereto respectively acknowledges by its execution hereof), the parties hereto intending legally to be bound do hereby agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.1. General Interpretation. This Agreement shall be construed and interpreted so as to maintain the status of the ESOP as a qualified leveraged employee stock ownership plan under Sections 401(a) and 4975(e)(7) of the Code, the Trust as exempt from taxation under Section 501(a) of the Code, and the Trust Loan as an "exempt loan" under the Exempt Loan Rules, and as an "Exempt Loan" under Section 8.7 of the ESOP (collectively, the "Required Status"). Section 1.2. Certain Definitions. In this Agreement, unless a clear contrary intention appears, the terms set forth below have the following meanings when used herein. Other terms are defined elsewhere herein. (a) "Business Day" means a day, other than a Saturday, Sunday or public holiday, on which commercial banks are open in Madison, Indiana for the purpose of conducting commercial banking business. (b) "Code" means the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder. (c) "Default" means an event or circumstance which, with notice or lapse of time or both, would constitute an Event of Default as defined in Section 6.1. (d) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder. (e) "Loan Documents" shall mean, collectively, this Agreement, the Trust Note, the Share Pledge Agreement and any other instruments or documents required to be delivered pursuant hereto or thereto, in each case as amended and in effect from time to time. ARTICLE II TRUST LOAN; TRUST NOTE; PAYMENTS Section 2.1. Trust Loan. Subject to the terms and conditions of this Agreement, the Company agrees to make available to the Trust, and the Trust may borrow from the Company, on the Closing Date (hereinafter defined), the Trust Loan under this Agreement in an amount up to Nine Hundred Fifty-Two Thousand Two Hundred Dollars ($952,200), representing the cost of 8% of the Shares offered in the Offering. The Company shall, upon fulfillment of the applicable conditions set forth in Article V, on the Closing Date make the Trust Loan up to such amount available to the Trustee in immediately available funds, at its principal office. Notwithstanding the foregoing, the Company shall not be obligated to make any portion of the Trust Loan available to the Trust if the Conversion is not consummated, or if the ESOP is not permitted to purchase any shares because of an oversubscription in the first category of eligible subscribers. The Closing of the Trust Loan (the "Closing") will occur at the offices of Barnes & Thornburg, 1313 Merchants Bank Building, 11 South Meridian Street, Indianapolis, Indiana 46204, on the same date that the Conversion closes, or such later date as the parties shall agree upon (the "Closing Date"). Section 2.2. Use of Trust Loan Proceeds. The Trust will use the proceeds of the Trust Loan to purchase Shares in the Offering, in accordance with Article VII hereof. 2 Section 2.3. Trust Note. The Trust Loan will be represented by a promissory note of the Trust (the "Trust Note"), substantially in the form of Exhibit A hereto, appropriately completed, dated the Closing Date, payable to the order of the Company in the original principal amount of the Trust Loan, or so much thereof as may at any time have been advanced hereunder and thereunder, on the maturity date thereof. Section 2.4. Interest. The portion of the Trust Loan principal outstanding at any time shall accrue and bear daily interest at a fixed rate per annum equal to the prime rate as published in "The Wall Street Journal" on the Closing Date (the "Interest Rate"), payable annually in accordance with Section 2.5. On any stated or accelerated maturity of the Trust Loan all accrued and unpaid interest thereon shall be forthwith due and payable. Section 2.5. Payments. The Trust shall pay the principal amount of the Trust Loan together with accrued interest as follows: (a) an initial principal installment of one-tenth (1/10) of the initial principal amount of the Trust Loan, shall be due and payable on December 31, 1997, together with all interest accrued on the Trust Loan from the Closing Date through and including December 31, 1997; and (b) thereafter, payments of principal and interest shall be made in annual installments due and payable on the last business day of December of each year, commencing on December 31, 1998, through and including December 31, 2006, which annual installments shall include a principal payment in the amount of one-tenth of the initial principal amount of the Trust Loan, plus all interest accrued on the Trust Loan through and including the date of such payment. The outstanding principal of the Trust Loan, together with all accrued and unpaid interest and any other obligations then outstanding, will in any event be due and payable in full on December 31, 2006. Section 2.6. Optional Prepayment. (a) Upon compliance with this Section 2.6, the Trust, at its option, may prepay the Trust Note at any time and from time to time, either in whole or in part, by payment of the principal amount of the Trust Note or portion thereof to be prepaid and accrued interest thereon to the date of such prepayment. (b) The Trustee will give notice of any prepayment of the Trust Note pursuant to this Section 2.6 to the Company not less than 3 days nor more than 60 days before the date fixed for such optional prepayment specifying (i) such date, (ii) that prepayment is to be made under Section 2.6 of this Agreement, (iii) the principal amount of the Trust Note to be prepaid on such date, and (iv) accrued interest applicable to the prepayment. Such notice of prepayment shall be signed by the Trustee. Notice of prepayment having been so given, the aggregate principal amount of the Trust Note specified in such notice, together with accrued interest thereon shall become due and payable on the prepayment date. 3 (c) Partial prepayments of the Trust Note made pursuant to this Section 2.6 shall be credited in each case against remaining scheduled payments on the Trust Note in the inverse order of the due dates of such payments. (d) No such prepayment shall, however, be permitted if such prepayment would adversely affect the Required Status. Section 2.7. Place and Time of Payment. All payments of principal of, or interest on, the Trust Note shall be made by the Trust to the Company in same day funds at Madison, Indiana, not later than 11:00 a.m. on the date due. Funds received after that hour shall be deemed to have been received on the next following Business Day. Section 2.8. Application of Certain Payments. If, and to the extent, Shares acquired with proceeds of the Trust Loan, held in the Trust and not yet allocated to participant accounts are sold, then, to the extent allowable by the Exempt Loan Rules and applicable law, the Trustee, at the direction of the ESOP committee administering the ESOP (the "Committee"), may apply the proceeds thereof toward the repayment of the Trust Loan. Dividends or other cash distributions paid on the Shares purchased with the proceeds of the Trust Loan (whether or not allocated to the accounts of Participants) shall be used by the Trustee, at the direction of the Committee, to the extent permissible to repay the Trust Loan in accordance with the provisions of Section 4.5 of the ESOP. Section 2.9. Due Date Extension. If any payment of principal of, or interest on, the Trust Note falls due on a day that is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension. Section 2.10. Computations. All computations of interest on the Trust Loan and other amounts due hereunder shall be based on a year of 360 days, comprising twelve 30-day months. Section 2.11. Interest on Overdue Amounts. If any payment of principal of, or interest on, the Trust Note is not made when due, interest shall accrue on the amount thereof, commencing on such due date through the date on which such amount is paid in full, at a rate per annum equal to the Interest Rate plus two percent (2%). ARTICLE III SECURITY Section 3.1. Security. Payment of the Trust Note and performance by the Trust of its obligations under this Agreement and the Trust Note will be secured by a pledge of, and the grant of a security interest in, the Shares by the Trustee on behalf of the Trust to and in favor of the Company under a Share Pledge Agreement, substantially in the form of Exhibit B hereto (the "Share Pledge Agreement"). Section 3.2. Release of Shares. Notwithstanding any provision of this Agreement or the Share Pledge Agreement to the contrary contained or implied, the Company will release from the 4 pledge and security interest under the Share Pledge Agreement, such Shares as must be allocated to ESOP participants under the ESOP pursuant to Section 8.7(h) of the ESOP and otherwise under the Code, the Exempt Loan Rules or other applicable law, provided that Section 8.7(h) of the ESOP shall not be amended without the Trustee's prior consent. ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS Section 4.1. Representations and Warranties of Trustee. To induce the Company to enter this Agreement and to make the Trust Loan, the Trustee represents and warrants to the Company as follows: (a) The Trustee has determined that the Trust Loan is primarily for the benefit of ESOP participants and their beneficiaries and bears interest at a rate not in excess of a reasonable rate and that the terms of the loan are at least as favorable to the Trust and the ESOP participants as the terms of a comparable loan resulting from arm's-length negotiations between completely independent parties; (b) [The Trustee is a national banking association, legally existing and in good standing under the laws of the United States of America, has corporate power and authority and is duly authorized to enter into and perform the Trust;] (c) The Trustee has full right, power and authority to execute, deliver and perform on behalf of the Trust under the Trust Agreement, the ESOP and otherwise the obligations set forth in the Loan Documents, and the execution and performance of such obligations will not conflict with or result in a breach of the terms of the ESOP or the Trust or result in a breach or violation of the Trustee's Articles of Incorporation or By-Laws or of any law or regulation, order, writ, injunction or decree of any court or governmental authority binding on the Trust or Trustee; (d) The ESOP (and related Trust) has been duly authorized by all necessary corporate action on the part of the Trustee, if any, has been duly executed by an authorized officer of the Trustee and delivered and constitutes a legal, valid and binding obligation of the Trustee and declaration of trust enforceable in accordance with its terms; (e) The Loan Documents have been duly authorized, executed and delivered by the Trustee and constitute legal, valid and binding obligations, contracts and agreements of the Trustee on behalf of the Trust, enforceable in accordance with their respective terms; (f) The execution, delivery and performance of the Loan Documents do not conflict with, or result in the creation or imposition of any lien or encumbrance upon any of the property of the Trustee (other than the Collateral, as defined in the Share Pledge Agreement) pursuant to the provisions of the ESOP (and related Trust) or any other agreement or other instrument to which the Trustee is a party or may be bound; and 5 (g) No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, Federal, state or local, is necessary in connection with the execution, delivery and performance by the Trustee of the Loan Documents. Section 4.2. Representations and Warranties of Company. To induce the Trust to enter this Agreement and undertake the obligations hereunder, the Company represents and warrants to the Trust as follows: (a) The Company is a corporation duly organized and validly existing under the laws of the State of Indiana, has corporate power and authority and is duly authorized to enter into and perform its obligations under this Agreement; (b) Neither the execution and delivery of this Agreement, nor the performance of the terms hereof nor the establishment of the ESOP or the Trust violates, conflicts with or constitutes a default under Company's Articles of Incorporation or By-Laws or any material agreement to which the Company is a party or by which the Company or any of its assets is bound, or violates any law, regulation, order or decree of any court, arbitration or governmental authority applicable to the Company, in any manner that would have a material adverse effect on the Trust, the ESOP, the Required Status or the Company; (c) The Company and the Bank have taken all actions required to be taken by it to establish the ESOP and the related Trust. The ESOP and related Trust are intended to, and the terms thereof have been drafted with the purpose to, comply with the requirements of Sections 401(a) and 501(a) of the Code, as applicable, with the requirements for treatment as a leveraged employee stock ownership plan, as that term is defined in Section 4975(e)(7) of the Code, and with other applicable laws; (d) The Bank has duly appointed the Trustee as trustee of the Trust and the Committee under the ESOP; (e) The Company has delivered to Trustee copies of its Articles of Incorporation and its By-Laws, the ESOP, and resolutions of its Board of Directors with respect to approval of this Agreement and entering into of the transactions and execution of all documents contemplated by this Agreement, in each case certified by the Secretary of the Company, which copies are true, correct and complete. None of such documents or resolutions has been amended or modified in any respect and such documents and resolutions remain in full force and in effect, in the form previously delivered to the Trustee; (f) Other than the Common Stock, the Company has no other classes of shares outstanding or treasury shares. (g) The Company's ability to honor put options (the "Put Options"), which would obligate the Company to repurchase shares of Common Stock distributed from time to time to ESOP participants and beneficiaries under Section 6.13 of the ESOP, is not presently restricted by the provisions of any law, rule or regulation in effect on the date hereof (except 6 for capital, liquidation account, requirements to obtain regulatory approval of material repurchase transactions, and similar constraints imposed by regulatory authorities on savings associations) or by the terms of any loan, financing or other agreement or instrument to which the Company is a party or by which the Company is or may be bound. (h) There are no actions, proceedings, or investigations pending or, to the Company's knowledge, threatened against or affecting the Company or any of its property or rights at law or in equity or before or by any court or tribunal that have not been disclosed to the Trustee and may have a material adverse effect on the value of the Common Stock. (i) All employee plans of the Bank and the Company are in compliance, in all material respects, with all applicable reporting, disclosure and filing requirements pertaining to employee benefit plans set forth in the Code and ERISA. (j) No consent, approval or other authorization or notice to any governmental authority or expiration of any government-imposed waiting period is required in connection with the execution or delivery of this Agreement, except such as has been obtained, given or expired. (k) The shares of Common Stock constitute "qualifying employer securities" within the meaning of Section 409(l) of the Code. Section 4.3. Covenants of Company. The Company covenants that: (a) The Company shall submit or cause to be submitted to the Internal Revenue Service within ninety (90) days following the Closing Date an application for a determination letter confirming that the ESOP, effective as of January 1, 1996, and the related Trust are qualified and exempt from taxation under Sections 401(a) and 501(a), respectively, of the Code and that the ESOP meets the requirements of Section 4975(e)(7) of the Code. (b) The Company and the Bank shall make all changes reasonably requested by the Internal Revenue Service as a condition of obtaining a determination letter from the Internal Revenue Service with respect to the ESOP, effective January 1, 1996. The Company and the Bank shall continue to do all things necessary to cause the ESOP and the Trust at all times to be operated and administered such that the ESOP remains qualified under Section 401(a) and remains an employee stock ownership plan under Section 4975(e)(7) of the Code and the Trust remains tax-exempt under Section 501(a) of the Code. (c) If at any time the ESOP is required, by applicable law, court order, or otherwise, to make distributions of Shares that otherwise would be in violation of Federal or state securities laws, the Company shall take all actions necessary to permit such required distributions to be made in full compliance with such laws. (d) The Company shall honor the Put Options if, and to the extent, required by Section 409(h) of the Code and regulations thereunder, and shall not permit its ability to honor such Options to be materially restricted in any way. 7 (e) The Company or the Bank shall provide to the Trustee all governmental filings relating to the ESOP and all ESOP amendments within sixty days of the date on which such filing or amendment is effected, and, on an annual basis, shall provide complete financial statements of the ESOP and the Company. ARTICLE V CONDITIONS PRECEDENT Section 5.1. Documentation Satisfactory to Company. The obligation of the Company to make the Trust Loan is, in addition to the conditions precedent contained in Section 5.2, subject to the condition precedent that the Company shall have received each of the following, duly executed and dated as of the Closing Date (or such earlier date as shall be satisfactory to the Company) and in form and substance satisfactory to the Company: (a) the Trust Note; (b) the Share Pledge Agreement; and (c) a certificate of the Trustee, substantially in the form of Exhibit C hereto, with such changes thereto as shall be acceptable to the Company and its counsel, and with respect to such other matters as the Company may reasonably request. Section 5.2. Other Conditions Precedent to Company Obligations. In addition to the condition precedent contained in Section 5.1, the obligation of the Company to make the Trust Loan available is subject to the conditions precedent that (i) the Conversion is consummated, (ii) the representations and warranties made by the Trustee herein shall be true and correct in all material respects on the Closing Date as if made on and as of the Closing Date; and (iii) the ESOP shall be permitted to purchase Shares in the Conversion. Section 5.3. Documentation Satisfactory to Trustee. The obligation of the Trust to enter into the Trust Loan is subject to the condition precedent that the Trustee shall have received each of the following, duly executed and dated as of the Closing Date (or such earlier date as shall be satisfactory to Trustee) and in form and substance satisfactory to Trustee: (a) The Share Pledge Agreement; and (b) A certificate of the Company, substantially in the form of Exhibit D hereto, with such changes thereto as shall be acceptable to the Trustee and its counsel, and with respect to such other matters as the Trustee may reasonably request. Section 5.4. Other Conditions Precedent to Trustee's Obligation. The obligation of the Trustee to enter into the Trust Loan is subject to the conditions precedent that (i) the Conversion is consummated, (ii) the representations and warranties made by the Company herein shall be true and correct in all material respects on the Closing Date as if made on and as of the Closing Date, and 8 (iii) no injunction or restraining order shall be in effect or litigation pending or threatened to forbid or enjoin the consummation of the transaction contemplated by this Agreement. ARTICLE VI EVENTS OF DEFAULT AND THEIR EFFECT Section 6.1. Events of Default; Effect. If default in the payment when due of any principal of, or default (and continuance thereof for 5 days) in the payment when due of interest on, the Trust Note (an "Event of Default") occurs, unless the effect thereof as an Event of Default has been waived in writing by the Company, then the Company may declare the Trust Note to be due and payable, whereupon the Trust Note shall become immediately due and payable, without presentment, demand, protest or notice to the Trust or other action by the Company of any kind whatsoever, all of which actions the Trust hereby waives to the maximum extent permitted by law. The Company shall promptly advise the Trust of any declaration of default, but failure to do so or delay in doing so shall not impair the effect of such declaration. Notwithstanding anything to the contrary herein or in the Trust Note or the Share Pledge Agreement contained or implied, if a Default or Event of Default occurs with respect to the Trust Loan by the Trust, the value of Trust assets transferred in satisfaction thereof shall not exceed the amount of such default. In addition, such a transfer of such Trust assets shall only occur upon and to the extent of the failure of the Trust to meet the payment schedule of the Trust Loan provided in Article II. ARTICLE VII SHARE PURCHASES Section 7.1. Purchase of Shares. The Company is making the Trust Loan available to the Trustee for the purpose of allowing the Trustee to purchase Shares in the Conversion. To the extent the ESOP is permitted to purchase up to 95,220 Shares in the Conversion, the Trustee agrees to use all of the proceeds of the Trust Loan to purchase Shares in accordance with this Article VII. Section 7.2. Manner of Purchase. The Trustee shall timely subscribe to purchase the Shares the ESOP is permitted to purchase in the Conversion pursuant to the Bank's Plan of Conversion. The Trustee shall draw upon the Trust Loan and use the proceeds thereof to purchase the number of Shares the ESOP may purchase in the Offering, simultaneously with consummation of the Conversion. Section 7.3. Readily Tradeable. The Company agrees to use reasonable efforts to cause the Shares to be, and to maintain the Shares' status as, "readily tradeable on an established securities market" within the meaning of Section 409(l)(1) of the Code. Section 7.4. No Prohibited Transactions. The Trustee in the performance of its obligations under this Agreement, shall observe its fiduciary obligations under Section 404 of ERISA, shall not engage in any transaction prohibited by ERISA or contrary to such fiduciary obligations, and, in acquiring Shares, shall not (and shall not be deemed obligated to) pay more than "adequate consideration", as defined in Section 3(18) of ERISA. 9 Section 7.5. Maximum Number of Shares. The Trust shall not purchase Shares with proceeds of the Trust Loan in excess of 8% of the outstanding Shares of the Company at the time of purchase. ARTICLE VIII GENERAL Section 8.1. Waivers; Amendments. No delay on the part of the Company, or the holder of the Trust Note in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement, the Trust Note or the Share Pledge Agreement shall in any event be effective unless the same shall be in writing and signed and delivered by the Company and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 8.2. Confirmations; Information. The Company and the Trust (or holder of the Trust Note) agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal balance then outstanding under the Trust Note and such other matters relating to the Trust Loan, the Trust, the ESOP or the purchase of Shares as may reasonably be the subject of inquiry. Section 8.3. Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. Section 8.4. Governing Law. To the extent not preempted by ERISA, this Agreement and the Trust Note shall be a contract made under and governed by the laws of the State of Indiana, without regard to conflict of laws principles. All obligations of the Trust and rights of the Company and other holder of the Trust Note expressed herein or in such Trust Note shall be in addition to and not in limitation of those provided by law. Section 8.5. Notices. All communications and notices hereunder shall be in writing and shall be deemed to be given when sent by registered or certified mail, postage prepaid, return receipt requested, or by telecopier, duly confirmed, and addressed to such party at the address indicated below or to such other address as such party may designate in writing pursuant to this Section 8.5. River Valley Bancorp 303 Clifty Drive P.O. Box 626 Madison, Indiana 47250 Attention: James E. Fritz, President and Chief Executive Officer [name and address of Trustee] 10 Section 8.6. Expenses. All expenses of the transaction contemplated by this Agreement shall be paid by the Company. Section 8.7. Reimbursement. If the Trustee uses proceeds from the Trust Loan to purchase Common Stock directly from the Company and it is subsequently determined by a court of competent jurisdiction that the Trustee paid in excess of "adequate consideration" within the meaning of ERISA for such shares, the Company shall, as soon as practicable following such judgment, reimburse the Trustee for the amount of the excess payment. Section 8.8. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties. Section 8.9. Severability. Should any clause, paragraph or part of this Agreement be held or declared to be void or illegal for any reason, all other clauses, paragraphs or parts of this Agreement which can be affected without such illegal clause, paragraph or part shall nevertheless remain in full force and effect. Section 8.10. No Assignment. This Agreement and the obligations of the parties herein may not be assigned or assumed by any other parties. Section 8.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which put together shall constitute one and the same instrument. ARTICLE IX LIMITED RECOURSE Section 9.1. Limited Recourse. Notwithstanding anything to the contrary herein or in the Trust Note, the Share Pledge Agreement or any other instrument, agreement or document contained or implied, the obligations of the Trust under this Agreement, the Trust Note and the Share Pledge Agreement (collectively, the "Trust Loan Obligations") shall be enforceable to the extent permitted under law, including (without limitation) the Exempt Loan Rules, only against the Trust to the extent of the Collateral (as defined in the Share Pledge Agreement) not theretofore released from the pledge and security interest under the Share Pledge Agreement as provided in Section 3.2 and contributions and other payments (other than contributions of employer securities) made to the Trust in accordance with the ESOP to enable the Trust to pay and satisfy the Trust Loan Obligations and from earnings attributable to the Shares purchased with Trust Loan proceeds and the investment of such contributions and payments (collectively, the "Trust Loan Collateral"). No recourse shall be had to or against the Trust or the assets thereof (other than the Trust Loan Collateral) for any deficiency judgment against the Trust for the purpose of obtaining payment or other satisfaction of the Trust Loan Obligations. 11 Section 9.2. No Personal Recourse Against Trustee. Without limiting the provisions of Section 9.1, the Trustee of the Trust shall have no personal liability for any of the Trust Loan Obligations. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their respective representatives thereunto duly authorized as of the date first above written. TRUST UNDER RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT By: By: Printed: Its: RIVER VALLEY BANCORP By: James E. Fritz Printed: James E. Fritz Its: President 12 EXHIBIT A TRUST NOTE $ December 31, 1996 -------------------------- Due: December 31, 2006 FOR VALUE RECEIVED, the undersigned, the Trust (the "Trust") established pursuant to the provisions of RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT, DATED AND EFFECTIVE AS OF JANUARY 1, 1996 (the "Plan") by _____________________________, as Trustee (the "Trustee"), promises to pay to the order of RIVER VALLEY BANCORP, an Indiana corporation (together with its successors, endorsees and assigns, the "Company"), at such place and in such other manner as the Company may direct in writing, and when required pursuant to the provisions of that certain Exempt Loan and Share Purchase Agreement, dated December ___, 1996 (the "Loan Agreement"), by and among the Trustee and the Company, the principal amount of Dollars ($ ), or so much thereof as may be advanced by the Company to the Trust hereunder and under the Loan Agreement, said amount being due and payable together with accrued interest in such installments and at such times as provided in the Loan Agreement, with the entire unpaid principal balance due and payable with accrued interest in full on December 31, 2006, as provided in the Loan Agreement. The principal balance hereof from time to time outstanding shall bear interest from the date of each disbursement of the Trust Loan evidenced by this Trust Note through and including the date on which such principal amount is paid in full, at the times provided in the Loan Agreement, at the Interest Rate, as defined in the Loan Agreement which is ____ percent (____%) per annum (or, in the case of overdue principal and, to the extent legally enforceable, overdue interest, at the Interest Rate plus two percent (2%) per annum). This Trust Note has been issued by the Trust in accordance with the terms of the Loan Agreement to evidence the Trust Loan made by the Company to the Trust under the Loan Agreement, to which reference is hereby made for the statement of the terms thereof. This Trust Note and the Company are entitled to the benefits of the Loan Agreement and the Company may enforce the agreements of the Trust contained therein and in the Loan Documents, and may exercise the respective remedies provided for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Trust Note which are not otherwise defined herein have the respective meanings assigned to them in the Loan Agreement. The Trust has the right to prepay the principal amount of this Trust Note without penalty on the terms and conditions specified in the Loan Agreement. If any Event of Default shall occur, the entire unpaid principal amount of this Trust Note and all of the accrued but unpaid interest thereon may become or be due and payable in the manner and with the effect provided in the Loan Agreement. The collection and enforcement of this Trust Note are subject to the provisions and limitations of Section 9.1 of the Loan Agreement. To the extent not preempted by ERISA, this Trust Note and the obligations of the Trust hereunder shall be governed by the laws of the State of Indiana without regard to principles of conflict of laws. All parties to this Trust Note, including endorsers, sureties and guarantors, if any, hereby waive presentment, demand, protest, notice, relief from valuation and appraisement laws and any and all other notices and demands in connection with the delivery, acceptance, performance and enforcement of this Trust Note and also hereby assent to extensions of the time of payment or forbearance or other indulgences without notice, and agree to remain bound until the principal, premium, if any, and interest are paid in full, notwithstanding any extensions of time for payment which may be granted, even though the period or periods of extension may be indefinite, and notwithstanding any inaction by, or failure to assert any legal rights available to, the holder of this Trust Note. IN WITNESS WHEREOF, the Trust has caused this instrument to be executed by the Trustee, the day and year first above written. TRUST UNDER RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT By: , Trustee By: 2 EXHIBIT B SHARE PLEDGE AGREEMENT between TRUST UNDER RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT and RIVER VALLEY BANCORP Dated: December ___, 1996 SHARE PLEDGE AGREEMENT THIS SHARE PLEDGE AGREEMENT (this "Agreement" or "Share Pledge Agreement"), dated as of December ___, 1996, between the Trust (the "Trust") established pursuant to the provisions of RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1996) (the "Plan") by ___________________________________________, as Trustee ("Trustee"), and RIVER VALLEY BANCORP, an Indiana corporation (the "Company"). WITNESSETH: WHEREAS, contemporaneously herewith, the Trust and the Company have entered into that certain Exempt Loan and Share Purchase Agreement (the "Loan Agreement"; definitions of terms appearing in which have the same meanings herein, unless a clear contrary intention appears), dated December ___, 1996, pursuant to which the Company has agreed to lend to the Trust, and the Trust has agreed to borrow from the Company, the Trust Loan, and the Trust, to evidence its indebtedness to the Company with respect to the Trust Loan, has executed and delivered the Trust Note to the Company; and WHEREAS, it is a condition precedent to the obligation of the Company to make the Trust Loan that, among other things, the Trust execute and deliver this Agreement to the Company, NOW, THEREFORE, in consideration of the Loan Agreement and the Trust Loan and other good and valuable consideration (the receipt, adequacy and sufficiency of which the Trust acknowledges by its execution hereof, the Trust intending to be legally bound does hereby covenant and agree with the Company as follows: Section 1. Pledge. To secure the due and punctual payment and performance of the obligations of the Trust hereunder and under the Loan Agreement and the Trust Note (collectively, the "Liabilities"), the Trustee on behalf of the Trust hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Company, its successors and assigns and hereby grants to the Company, its successors and assigns a security interest in: (a) All Shares of Company Common Stock purchased or to be purchased with the proceeds of the Trust Loan (collectively, the "Pledged Shares") and the certificates representing or evidencing the Pledged Shares, and, to the extent permitted by Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended, and Reg. ss. 54.4975-7(b)(5) promulgated thereunder, all cash, securities, interest, dividends, rights and other property at any time and from time to time received in respect of or in exchange for any or all of the Pledged Shares; and (b) all proceeds of all of the foregoing (all such Pledged Shares, certificates, cash, securities, interest, dividends, rights and other property, and proceeds thereof, other than as released, sold or otherwise applied by the Company pursuant to the' terms hereof, being herein collectively called the "Collateral"), TO HAVE AND TO HOLD such Collateral, together with all rights, titles, interests, privileges and preferences appertaining or incidental thereto, forever, subject, however, to the terms, covenants and conditions hereafter set forth. Section 2. Warranties and Covenants. (a) The Trust represents and warrants to the Company that the Trust is, or at the time of any future delivery, pledge, assignment or transfer will be, the lawful owner of the Collateral, free of all claims and liens other than the security interest hereunder, with full right to deliver, pledge, assign and transfer the Collateral to the Company as Collateral hereunder. (b) So long as any of the Liabilities remain outstanding, the Trust will, unless the Company shall otherwise consent in writing: (i) promptly deliver to the Company from time to time certificates representing Pledged Shares as the Trustee acquires them and, upon request of the Company, such stock powers and other documents, satisfactory in form and substance to the Company, with respect to the Collateral as the Company may reasonably request to preserve and protect, and to enable the Company to enforce, its rights and remedies hereunder; (ii) not create or suffer to exist any lien, security interest or other charge or encumbrance against, in or with respect to any of the Collateral except for the pledge hereunder and the security interest created hereby; (iii) not make or consent to any amendment or other modification or waiver with respect to any of the Collateral or enter into any agreement or permit to exist any restriction with respect to any of the Collateral other than pursuant hereto; and (iv) not take or fail to take any action which would in any manner impair the value or enforceability of the Company's security interest in any of the Collateral. Section 3. Care of Collateral. The Company shall be deemed to have exercised reasonable care with respect to the interest of the Trust in the custody and preservation of the Collateral if it takes such action for that purpose as the Trust shall request in writing or as it would with respect to similar assets of its own, but failure of the Company to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. Section 4. Certain Rights Regarding Collateral and Liabilities. (a) The Company may from time to time, whether before or after any of the Liabilities shall become due and payable, without notice to the Trust, to the extent otherwise permitted (i) retain or obtain a security interest in the Collateral, to secure payment and performance of any of the Liabilities, (ii) retain or obtain the primary or secondary liability of any party or parties, in addition to the Trust, with respect to any of the Liabilities, (iii) extend or renew for any period (whether or 2 not longer than the original period) or exchange any of the Liabilities or release or compromise any obligation of any nature of any party with respect thereto, and (iv) surrender, release or exchange all or any part of any property, in addition to the Collateral, securing payment and performance of any of the Liabilities, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect to any such property. (b) The Company shall have no right to vote the Pledged Shares prior to the occurrence of an Event of Default (hereinafter in Section 6(a) hereof defined). After the occurrence of an Event of Default, the Trust shall have the right to vote any and all of the Pledged Shares in accordance with the Plan unless and until it receives notice from the Company that such right has been terminated with respect to shares subject to execution as a result of the Default. Section 5. Dividends, etc. (a) So long as no Default or Event of Default, shall have occurred and be continuing, the Trust shall be entitled to receive any and all cash dividends on the Pledged Shares which it is otherwise entitled to receive, and to vote the Pledged Shares in accordance with the terms of the Plan and to give consents, waivers and ramifications in respect of the Pledged Shares, but any and all stock and/or liquidating dividends, distributions in property, returns of capital or other distributions made on or in respect of the Pledged Shares, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock of any issuer thereof or received in exchange for the Pledged Shares or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any issuer may be a party or otherwise, and any and all cash and other property received in exchange for any Collateral shall be, and become part of the Collateral pledged hereunder and, if received by the Trust, shall forthwith be delivered to the Company or its designated nominee (accompanied, if appropriate, by proper instruments of assignment and/or stock powers executed by the Trust in accordance with the Company's instructions) to be held subject to the terms of this Agreement and the Plan. (b) Upon the occurrence and during the continuance of an Event of Default, subject to the terms of Section 4(b) hereof, all rights of the Trust pursuant to Section 5(a) hereof shall cease and the Company shall have the sole and exclusive right and authority to receive and retain the dividends which the Trust would otherwise be authorized to retain and, to the extent permitted by law, to vote and give consents, waivers and ramifications pursuant to Section 5(a) hereof. Any and all money and other property paid over to or received by the Company pursuant to the provisions of this paragraph (b) shall be retained by the Company as additional Collateral hereunder and be applied in accordance with the provisions hereof. Section 6. Event of Default. (a) The occurrence of any of the following shall constitute an Event of Default hereunder nonpayment, when due, whether by acceleration or otherwise, of any amount payable on any of the Liabilities; an Event of Default as defined in the Loan Agreement; any representation or warranty of the Trust contained herein or given pursuant hereto being untrue in any material respect; or the Trust's failure to perform any covenant or agreement contained herein. 3 (b) Upon the occurrence of an Event of Default, (i) the Company may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code as in effect from time to time in Indiana or otherwise available to it, including, but not limited to, sale, assignment, or other disposal of the Pledged Shares in exchange for cash or credit, and (ii) the Company may, without demand or notice of any kind, but subject to Section 7, appropriate and apply toward the payment of such of the Liabilities, and in such order of application, as the Company may from time to time elect, any balances, credits, deposits, accounts or moneys of the Trust. If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if mailed at least five (5) days before such disposition, postage prepaid, addressed to the Trust, either at the address of the Trust shown below, or at any other address of the Trust appearing on the records of the Company. Any proceeds of any disposition of Collateral shall be applied as provided in Section 7 hereof. All rights and remedies of the Company expressed hereunder are in addition to all other rights and remedies possessed by it, including those under any other agreement or instrument relating to any of the Liabilities or security therefor. No delay on the part of the Company in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Company of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action of the Company permitted hereunder shall impair or affect the rights of the Company in and to the Collateral. (c) The Trust agrees that in any sale of any of the Collateral whenever an Event of Default hereunder shall have occurred and be continuing, the Company is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualification, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Trust further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Company be liable nor accountable to the Trust for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. (d) Notwithstanding anything to the contrary herein or in the Trust Note or the Loan Agreement contained or implied, if an Event of Default occurs with respect to the Trust Loan by the Trust, the value of Trust assets transferred in satisfaction thereof shall not exceed the amount of such default. In addition, such a transfer of such Trust assets shall only occur upon, and to the extent of the failure of, the Trust to meet the payment schedule of the Trust Loan provided in Article II of the Loan Agreement. Section 7. Application of Proceeds of Sale or Cash Held as Collateral. The proceeds of sale of Collateral sold pursuant to the terms of Section 6 hereof and/or, after an Event of Default, the cash held as Collateral hereunder, shall be applied by the Company, to the extent permitted by applicable law, as follows: 4 First: to payment of the costs and expenses of such sale, including the out-of-pocket costs and expenses of the Company and the reasonable fees and out-of-pocket costs and expenses of counsel employed in connection therewith, and to the payment of all advances made by the Company for the account of the Trust hereunder and the payment of all costs and expenses incurred by the Company in connection with the administration and enforcement of this Agreement, to the extent that such advances, costs and expenses shall not have been reimbursed to the Company; Second: to the payment in full of the Liabilities; and Third: the balance, if any, of such proceeds shall be paid to the Trust, its successors and assigns, or as a court of competent jurisdiction may direct. Section 8. Authority of Company. The Company shall have and be entitled to exercise all such powers hereunder as are specifically delegated to the Company by the terms hereof, together with such powers as are incidental thereto. The Company may execute any of its duties hereunder by or through agents or employees and shall be entitled to retain counsel and to act in reliance upon the advice of such counsel concerning all matters pertaining to its duties hereunder. Neither the Company, nor any director, officer or employee of the Company, shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or wilful misconduct. The Trust hereby agrees, to the extent permitted by applicable law, to reimburse the Company, on demand, for all costs and expenses incurred by the Company in connection with the enforcement of this Agreement (including costs and expenses incurred by any agent employed by the Company). Section 9. Termination. This Agreement shall terminate when all the Liabilities have been fully paid and performed, at which time the Company shall reassign and redeliver (or cause to be reassigned and redelivered) to the Trust, or to such person or persons as the Trust shall designate, against receipt, such of the Collateral (if any) as shall not have been theretofore released, sold or otherwise applied by the Company pursuant to the terms hereof and shall still be held by it hereunder, together with any appropriate instruments of reassignment and release. Any such reassignment shall be without recourse upon, or representation or warranty by, the Company. Section 10. Required Release of Collateral. Notwithstanding any provision of this Agreement or the Loan Agreement to the contrary, the Company from time to time will release from the pledge and security interest under the Loan Agreement, such Collateral as must be allocated to participants under the Plan pursuant to Section 8.7(h) of the Plan and otherwise under the Code, the Exempt Loan Rules or other applicable law. Section 11. Limited Recourse. Notwithstanding anything to the contrary herein or in the Trust Note, the Loan Agreement or any other instrument, agreement or document contained or implied, the Liabilities shall be enforceable to the extent permitted under applicable law, including, without limitation, the Exempt Loan Rules, only against the Trust to the extent of the Collateral not theretofore released from the pledge and security interest under this Agreement as provided herein and contributions (other than contributions of employer securities) made to the Trust in accordance with the Plan to enable the Trust to pay and satisfy the Liabilities and from earnings attributable to 5 the Shares and the investment of such contributions (collectively, the "'Trust Loan Collateral"). No recourse shall be had to or against the Trust or the assets thereof (other than the Trust Loan Collateral) for any deficiency judgment against the Trust for the purpose of obtaining payment or other satisfaction of the Liabilities. Without limiting the foregoing, the Trustee of the Trust shall have no personal liability for any of the Liabilities, other than as required by or arising under applicable law. Section 12. Notices. All communications and notices hereunder shall be in writing and, if mailed, shall be deemed to be given when sent by registered or certified mail, postage prepaid, return receipt requested, or by telecopier, duly confirmed, and addressed to such party at the address indicated below or to such other address as such party may designate in writing pursuant to this Section 12. RIVER VALLEY BANCORP 303 Clifty Drive P.O. Box 626 Madison, Indiana 47250 Attention: James E. Fritz, President and Chief Executive Officer [name and address of Trustee] Section 13. Binding Agreement Assignment. This Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, except the Trust shall not be permitted to assign this Agreement or any interest herein or in the Collateral, or any part thereof, or otherwise grant any option with respect to the Collateral, or any part thereof and the Company shall not assign any interest herein or in the Collateral unless such assignment is expressly made subject to the terms of the Loan Documents. Section 14. Miscellaneous Provisions. Neither this Agreement nor any provision hereof may be amended, modified, waived, discharged or terminated nor may any of the Collateral be released or the pledge or the security interest created hereby extended, except by an instrument in writing duly signed by or on behalf of the Company hereunder. The section headings used herein are for convenience of reference only and shall not define or limit the provisions of this Agreement. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Section 15. Governing Law; Interpretation. This Agreement has been made and delivered at Madison, Indiana, and, except to the extent preempted by ERISA, shall be governed by the internal laws of the State of Indiana, without regard to principles of conflict of laws. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid 6 under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Section 16. Filing as a Financing Statement. At the option of the Company, this Agreement, or a carbon, photographic or other reproduction of this Agreement or of any Uniform Commercial Code financing statement covering the Collateral or any portion thereof shall be sufficient as a Uniform Commercial Code financing statement and may be filed as such. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective representatives thereunto duly authorized as of the date first above written. TRUST UNDER RIVER VALLEY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT By: By: Printed: Its: RIVER VALLEY BANCORP By: Printed: James E. Fritz Its: President and Chief Executive Officer 7 Exhibit C CERTIFICATE OF TRUSTEE The undersigned, ______________________________, [a national banking association,] in its capacity as Trustee ("Trustee") of the Trust under the River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1996) (the "Trust") hereby certifies, pursuant to Section 5.1(c) of that certain Exempt Loan and Share Purchase Agreement between the Trust and River Valley Bancorp of even date herewith (the "Loan Agreement") that: (i) it has determined that the Trust Loan, as defined in the Loan Agreement, is primarily for the benefit of ESOP participants and their beneficiaries and bears interest at a rate not in excess of a reasonable rate and that the terms of the loan are at least as favorable to the Trust and the ESOP participants as the terms of a comparable loan resulting from arm's-length negotiations between completely independent parties; (ii) the other representations and warranties of the Trust contained in the Loan Agreement are true in all material respects as of the date of this Certificate; and (iii) the conditions set forth in Article V of the Loan Agreement, to the extent their satisfaction depends upon action on the part of the Trust or the Trustee, have been satisfied as of the date of this Certificate. EXECUTED this ____ day of ____________, 1996. ________________________________, as Trustee of the Trust under River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1996) By: Exhibit D CERTIFICATE OF THE COMPANY The undersigned, River Valley Bancorp, an Indiana corporation (the "Company"), pursuant to Section 5.3(b) of that certain Exempt Loan and Share Purchase Agreement between ________________________________, a national banking association, in its capacity as Trustee of the Trust under the River Valley Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1996) and the Company of even date herewith (the "Loan Agreement"), hereby certifies that the representations and warranties of the Company contained in the Loan Agreement are true and correct in all material respects, and the Company is in compliance with its covenants set forth in the Loan Agreement in all material respects, as of the date of this Certificate. EXECUTED this _____ day of ____________, 1996. RIVER VALLEY BANCORP By: James E. Fritz, President and Chief Executive Officer EX-23.2 17 ACCOUNTANT'S CONSENT Exhibit 23(2) ACCOUNTANT'S CONSENT We have issued our report dated January 19, 1996 (except for note K, as to which the date is September 30, 1996), accompanying the consolidated financial statements of Madison First Federal Savings and Loan Association contained in Amendment No. One to Forms S-1, AC and OC of River Valley Bancorp to be filed with the Securities and Exchange Commission and the Office of Thrift Supervision on or about October 31, 1996. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "experts." Grant Thornton LLP Cincinnati, Ohio October 30, 1996 EX-23.3 18 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23(3) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our report dated March 1, 1996 on the financial statements of Citizens National Bank of Madison and to reference made to us under the caption "Experts" in the Registration Statement on Form S-1 filed by River Valley Bancorp with the United States Securities and Exchange Commission and in the Form AC filed with the Office of Thrift Supervision. /s/ Sherman, Barber & Mullikin Sherman, Barber & Mullikin Madison, Indiana October 30, 1996 EX-23.4 19 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23(4) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use in the Form AC of Madison First Federal Savings and Loan Association of our report dated January 28, 1994, on the Financial Statements of Citizens National Bank of Madison, and in the Form S-1 filed by River Valley Bancorp with the SEC. /s/ Alexander X. Kuhn & Co. Alexander X. Kuhn & Co. Oakbrook Terrace, Illinois October 30, 1996 EX-99 20 STOCK ORDER FORM Exhibit 99(2) Madison First Stock Federal Savings Order and Loan Association Form ---------------------------------------- Note: Please read the Stock Order Form Instructions and Guide on the back as you complete this form. ---------------------------------------- DEADLINE: The Subscription Offering will expire at ____ p.m., local time, on December 11, 1996, unless extended. The Direct Community Offering may terminate as early as ___________, 1996, or at any time thereafter, but not later than __________, 1996, unless extended. - -------------------------------------------------------------------------------- (1) Number of Shares Purchase Price (2) Total Payment Due - -------------------- X $10.00 = --------------------- The minimum number of shares that may be subscribed for is 25 shares. Members of Madison First Federal Savings and Loan Association ("Madison") may subscribe in the Subscription Offering for a maximum of 10,000 shares per eligible account and/or eligible loan. Notwithstanding the foregoing sentence, the maximum number of shares which may be purchased in the Subscription Offering by any subscribing member (including wuch person's Associates) or group acting in concert is 20,000 shares. A member who, together with his/her Associates and persons acting in concert, has subscribed for shares in the Subscription Offering may subscribe for a number of additional shares in the Direct Community Offering that does not exceed the lesser of (i) 10,000 shares, or (ii) the number of shares which, when added to the number of shares subscribed for by the member in the Subscription Offering, would not exceed 20,000. The maximum number of shares which may be purchased in the Direct Community Offering by any person (including such person's Associates) or persons acting in concert is 10,000 in the aggregate. See the Stock Order Form Instructions and Guide on the back. Important Subscription Method of Payment Offering Information ----------------- -------------------- (3) |_| Enclosed is a check, bank (5) a |_|Eligible Account Holder -- Check draft or money order made here if you were a depositor of at payable to Madison First least $50.00 at Madison on December Federal Savings and Loan 31, 1994. Enter information below Association ("Madison") for all deposit accounts that you in the amount of: had at Madison on December 31, 1994. (5) b |_|Supplemental Eligible Account - ------------------ Cash can be used Holder -- Check here if you were $ only if presented a depositor of at least $50.00 at in person at one Madison on September 30, 1996, of Madison's but are not an Eligible Account offices. Holder. Enter information below - ------------------ for all deposit accounts that you had at Madison on September 30, 1996. (5) c |_|Other Member -- Check here if you (4) |_| The undersigned authorizes had a loan at Madison on November withdrawal from this (these) 1, 1996, or if you were a account(s) at Madison. depositor at Madison on November Please contact the Stock 1, 1996, but are not an Eligible Information Center if you Account Holder or Supplemental wish to use your IRA for Account Holder. stock purchase. Account Number Amount Account Title Deposit Loan Account (Names on Accounts) Account Account Number - ------------------------- ------------------------------------------------ $ [ ] [ ] $ [ ] [ ] $ [ ] [ ] Total Withdrawal $ [ ] [ ] Amount -------- ------------------------------------------------ There is no penalty for early withdrawals used for stock payment. Important Direct Community Offering Information (6) a [ ] Check here if you are a resident of Jefferson County, Indiana. Stock Registration (See back under Stock Ownership Guide) (7) Form of Stock Ownership: [ ] Individual [ ] Joint tenants with right of survivorship [ ] Tenants in common [ ] Uniform Gifts Transfer to Minors [ ] Fiduciary (i.e., trust estate, etc.) [ ] Corporation or Partnership [ ] Other __________________________________________________ - -------------------------------------------------------------------------------- (8) Name(s) in which your stock Social Security No. or Tax ID No. is to be registered (Please Print Clearly) - -------------------------------------------------------------------------------- Name(s) continued - -------------------------------------------------------------------------------- Street Address City County State Zip Code - -------------------------------------------------------------------------------- (9) Telephone Information Daytime Phone ( ) Evening Phone ( ) --------------------------------------------------- (10) NASD Affiliation. |_| Check here if you are a member of the National Association of Securities Dealers, Inc. ("NASD"), a person associated with a 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, (i) not to sell, transfer or hypothecate the stock for a period of three months following issuance, and (ii) to report this subscription in writing to the applicable NASD member within one day of payment therefor. (11) Acknowledgement. To be effective, this fully completed Stock Order Form must be actually received together with an executed from of certification, by Madison no later than December 11, 1996, otherwise this Stock Order Form and all subscription rights will be void. All Stock Order Forms submitted in the Subscription Offering must be actually received by Madison no later than _____ p.m., local time, on December 11, 1996, unless extended. All Stock Order Forms submitted in the Direct Community Offering shouldreceived by _____ p.m., local time, on December 11, 1996, because the Direct Community Offering is expected to terminate at that time, although it could terminate as late as January 25, 1997, unless extended. Completed Stock Order Forms, together with the required payment or withdrawal authorization and form of Certification, may be delivered to Madison or may be mailed to the Post Office Box indicated on the enclosed business reply envelope. ALL RIGHTS EXERCISABLE HEREUNDER ARE NOT TRANSFERABLE AND SHARES PURCHASED UPON EXERCISE OF SUCH RIGHTS MUST BE PURCHASED FOR THE ACCOUNT OF THE PERSON EXERCISING SUCH RIGHTS. It is understood that this Stock Order Form will be accepted in accordance with, and subject to, the terms and conditions of the Plan of Conversion ("Plan of Conversion") of Madison described in the accompanying Subscription and Direct Community Offering Prospectus dated November ___, 1996. The undersigned acknowledges receipt of such Prospectus. If the Plan of Conversion is not approved by the voting members of Madison at a Special Meeting to be held on December 18, 1996, or any adjournment thereof, all orders will be cancelled and funds received as payment, with accrued interest, will be returned promptly. The undersigned agrees that after receipt by Madison, this Stock Order Form may not be modified, withdrawn or cancelled (unless the conversion is not completed with 45 days of the completion of the Subscription Offering) without Madison's consent and if authorization to withdraw from deposit accounts at Madison has been given as payment for shares, the amount authorized for withdrawal shall not otherwise be available for withdrawal by the undersigned. Under penalty of perjury, the undersigned certifies that the Social Security or Tax ID Number and the information provided in this Stock Order Form are true, correct and complete, that he/she is not subject to back-up withholding and that he/she is purchasing for his/her own account and that there is no agreement or understanding regarding the transfer of his/her subscription rights or the sale or transfer of these shares. Applicable State and Federal regulations prohibit any person from transferring or entering into any agreement directly or indirectly to transfer the legal or beneficial ownership of subscription rights, or the underlying securities to the account of another. Madison 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. The undersigned acknowledges that the common stock offered is not a savings or deposit account and is not insured by the Savings Association Insurance Fund, the Bank Insurance Fund, the Federal Deposit Insurance Corporation, or any other government agency. A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED BELOW AND ACCOMPANIED BY A SIGNED AND DATED FORM OF CERTIFICATION. - -------------------------------------------------------------------------------- (12) Signature Date Signature Date - -------------------------------------------------------------------------------- FOR OFFICE USE ONLY STOCK INFORMATION CENTER - ------------------------------------- Madison First Federal Date Received ______/______/______ Savings and Loan 303 Clifty Drive Category _______________ P.O. Box 626 Madison, Indiana 47250 - ------------------------------------- (812)____________ Order #__________ Deposit __________ Batch #__________ Date Input ____/____/____ - -------------------------------------------------------------------------------- MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION ----------------------------------------------------------- SUBSCRIPTION AND DIRECT COMMUNITY OFFERING STOCK ORDER FORM INSTRUCTIONS AND GUIDE ------------------------------------------------------------ - --------------------- Stock Ownership Guide - --------------------- Individual Include the first name, middle initial and last name of the shareholder. Avoid the use of two initials. Please omit words that do not affect ownership rights, such as "Mrs.," "Mr.," "Dr.," "special account," "single person," etc. Joint Tenants with Right of Survivorship Joint tenants with right of survivorship may be specified to identify two or more owners. When stock is held by joint tenants with right of survivorship, ownership is intended to pass automatically to the surviving joint tenant(s) upon the death of any joint tenant. All parties must agree to the transfer or sale of shares held by joint tenants. Tenants in Common Tenants in common may also be specified to identify two or more owners. When stock is 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. Uniform Transfer to Minors Stock may be held in the name of a custodian for a minor under the Uniform Transfer to Minors Acts of each state. There may be only one custodian and one minor designated on a stock certificate. The standard abbreviation for Custodian is "CUST," while the Uniform Transfer to Minors Act is "Unif Tran Min Act." Standard U.S. Postal Service state abbreviation should be used to describe the appropriate state. For example, stock held by John Doe as custodian for Susan Doe under the Indiana Uniform Transfer to Minors Act will be abbreviated John Doe, CUST Susan Doe Unif Tran Min Act, IN (use minor's social security number). Fiduciaries Information provided with respect to stock to be held in a fiduciary capacity must contain the following: * The name(s) of the fiduciary. If an individual, list the first name, middle initial and last name. If a corporation, list the full corporate title (name). If an individual and a corporation list the corporation's title before the individual. * The fiduciary capacity, such as administrator, executor, personal representative, conservator, trustee, committee, etc. * A copy and description of the document governing the fiduciary relationship, such as living trust agreement or court order. Without documentation establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity. * The date of the document governing the relationship except that the date of a trust created by a will need not be included in the description. * The name of the maker, donor, or testator and the name of the beneficiary. An example of fiduciary ownership of stock in the case of a trust is: John Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe. You may mail your completed Stock Order Form in the envelope that has been provided, or you may deliver your Stock Order Form to Madison's offices. If you are purchasing in the Subscription Offering, your properly completed Stock Order Form and executed Certification, together with payment in full (or withdrawal authorization) at the Purchase Price, must be received by Madison no later than _____p.m. Madison, Indiana, time, on December 11, 1996. If you are purchasing in the Direct Community Offering, your properly completed Stock Order Form and executed Certification, together with payment in full (or withdrawal authorization) at the Purchase Price, must be received by Madison no later than _____ p.m., Madison, Indiana, time, on December 11, 1996, because the Direct Community Offering is expected to terminate at that time. However, the Direct Community Offering may terminate as late as January 25, 1997, unless extended. Stock Order Forms shall be deemed received only upon actual receipt at Madison's office. If you need further assistance, please call the Stock Information Center at (812)____________. We will be pleased to help you with the completion of your Stock Order Form or answer any questions you may have. Item 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 purchased by the Purchase Price of $10.00 per share. The minimum purchase is 25 shares. Members of Madison may subscribe in the Subscription Offering for a maximum of 10,000 shares per eligible account and/or eligible loan. Notwithstanding the foregoing sentence, the maximum number of shares which may be purchased in the Subscription Offering by any subscribing member (including wuch person's Associates) or group acting in concert is 20,000 shares. A member who, together with his/her Associates and persons acting in concert, has subscribed for shares in the Subscription Offering may subscribe for a number of additional shares in the Direct Community Offering that does not exceed the lesser of (i) 10,000 shares, or (ii) the number of shares which, when added to the number of shares subscribed for by the member in the Subscription Offering, would not exceed 20,000. The maximum number of shares which may be purchased in the Direct Community Offering by any person (including such person's Associates) or persons acting in concert is 10,000 in the aggregate. Madison reserves the right to reject any order received in the Community Offering, in whole or in part. Item 3 - Payment for shares may be made in cash (only if delivered by you in person) or by check, bank draft or money order made payable to Madison. Your funds will earn interest at Madison's possbook rate until the conversion is completed or terminated. DO NOT MAIL CASH TO PURCHASE STOCK! Please check this box if your method of payment is by cash, check , bank draft or money order. Item 4 - If you pay for your stock by a withdrawal from a Madison deposit account, insert the account number(s) and the amount of your withdrawal authorization for each account. The total amount withdrawn should equal the amount of your stock purchase. There will be no penalty assessed for early withdrawals from certificate accounts used for stock purchases. This form of payment may not be used if your account is an Individual Retirement Account. Please contact the Stock Information Center for information regarding purchases from an Individual Retirement Account. Item 5 - a. Please check this box if you are a depositor of Madison as of December 31, 1994 (Eligible Account Holder). You must list the full title and account numbers of all accounts you had at these dates in order to ensure proper identification of your subscription rights and to receive credit for your qualifying deposits. b. Please check this box if you are a depositor of Madison on September 30, 1996 (Supplemental Eligible Account Holder). You must list the name of all deposit accounts you had on this date in order to ensure proper identification of your subscription rights and to receive credit for your qualifying deposits. c. Please check this box if you had a loan at Madison on November 1, 1996, or if you were a depositor on November 1, 1996, but are not an Eligible Account Holder or Supplemental Eligible Account Holder. You must list the full title and account numbers of all accounts that you had on November 1, 1996, in order to ensure proper identification of your subscription rights. Item 6 - Please check the box if you are a resident of Jefferson County, Indiana. Items 7, 8 and 9 - The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of your common stock. Please complete items 6, 7 and 8 as fully and accurately as possible, and be certain to supply your social security number or tax identification number and your daytime and evening telephone number(s). If you have any questions or concerns regarding the registration of your stock, please consult your legal advisor. Stock ownership must be registered in one of the ways described under "Stock Ownership Guide." Item 10 - Please check this box if you are a member of the NASD or if this item otherwise applies to you. Items 11 and 12 - Please sign and date the Stock Order Form where indicated. Review the Stock Order form carefully before you sign, including the acknowledgement. Normally, one signature is required. An additional signature is required only when payment is to be made by withdrawal from a deposit account that requires multiple signatures to withdraw funds. If you have any remaining questions, or if you would like assistance in completing your Stock Order Form, you may call the Stock Information Center. The Stock Information Center phone number is (812)_________. The Stock Information Center is open between the hours of _____ a.m. and _____ p.m., Monday through Friday. A valid stock order form must be signed and dated on the front of this form. FORM OF CERTIFICATION I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR AN ACCOUNT AND IS NOT FEDERALLY INSURED, AND IS NOT GUARANTEED BY MADISON FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, OR BY THE FEDERAL GOVERNMENT. If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Office of Thrift Supervision Regional Director, Ronald N. Karr at (312) 565-5300. I further certify that, before purchasing the common stock, without par value, of River Valley Bancorp, I received an offering circular (also known as the prospectus). The offering circular that I received contains disclosure concerning the nature of the security being offered and describes the risks involved in the investment, including but not limited to: 1. Potential Impact of Changes in Interest Rates (page 25) 2. Divestiture of Hanover Branch (page 25) 3. Risks Relating to the Acquisition (page 26) 4. Commerical Lending (page 26) 5. Nonresidential Real Estate and Multi-Family Lending (page 26) 6. Decreasing Earnings and Impact on Return on Equity (page 27) 7. Existence of Minority Shares (page 27) 8. Possible Dilutive Effect of Future Stock Benefit Plans (page 27) 9. Potential Benefits to Management Upon and Subsequent to Conversion (page 28) 10. ESOP Compensation Expense (page 28) 11. No Prior Market for Common Stock (page 29) 12. Competition (page 29) 13. Geographic Concentration of Loans (page 29) 14. Risk of Delayed Offering (page 29) 15. Anti-Takeover Provisions (page 30) 16. Regulatory Oversight and Recent Legislation (page 30) 17. Income Tax Consequences of Subscription Rights (page 31) Signature:___________________________________________ Date: _______________________________________________ -----END PRIVACY-ENHANCED MESSAGE-----