AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE , 1996
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FOUNDATION BANCORP, INC.
(Exact name of registrant as specified in its charter)
OHIO 6036 31-1465239
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of Classification Code Number) identification
incorporation or organization) number)
25 GARFIELD PLACE CINCINNATI, OHIO 45202
(513) 721-0120
(Address, including Zip Code, and telephone number, including
area code, of registrant's principal executive offices)
LAIRD L. LAZELLE
FOUNDATION BANCORP, INC.
25 GARFIELD PLACE
CINCINNATI, OHIO 45202
(513) 721-0120
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
------------------------
WITH COPIES TO:
TERRI R. ABARE
RICK J. LANDRUM
Vorys, Sater, Seymour and Pease
Atrium Two, 221 East Fourth Street
Cincinnati, Ohio 45202
(513) 723-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (2) PRICE (2) FEE
Common shares, without par
value........................ 462,875 $10.00 $4,628,750 $1,596
(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 1 of pages. Index to Exhibits is on page .
CROSS REFERENCE SHEET
SHOWING THE LOCATION IN THE PROSPECTUS OF THE ITEMS OF FORM S-1
FORM S-1 ITEM AND CAPTION PROSPECTUS HEADING
- ------------------------------------------------------------------------ --------------------------------------------------
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus..................................... Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus...... Cover Page; Back Cover Page
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges................................................ Prospectus Summary; Risk Factors
4. Use of Proceeds.............................................. Use of Proceeds
5. Determination of Offering Price.............................. Cover Page; The Conversion -- Pricing and Number
of Common Shares to be Sold
6. Dilution..................................................... Not Applicable
7. Selling Security Holders..................................... Not Applicable
8. Plan of Distribution......................................... Cover Page; The Conversion -- General;
-- Subscription Offering;
-- Community Offering;
-- Plan of Distribution
9. Description of Securities to be Registered................... Description of Authorized Shares
10. Interest of Named Experts and Counsel........................ Not Applicable
11. Information with Respect to the Registrant...................
(a) Description of Business........................... The Business of the Bank
(b) Description of Property........................... The Business of the Bank -- Properties
(c) Legal Proceedings................................. The Business of the Bank -- Legal Proceedings
(d) Market Price and Dividends........................ Cover Page; Market for Common Shares; Dividend
Policy
(e) Financial Statements.............................. Financial Statements
(f) Selected Financial Data........................... Selected Financial Information and Other Data
(g) Supplementary Financial Information............... Not Applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure........................................ Not Applicable
(j) Directors and Executive Officers.................. Management
(k) Executive Compensation............................ Management -- Compensation; -- Defined
Contribution Plan; and -- Stock Benefit Plans
FORM S-1 ITEM AND CAPTION PROSPECTUS HEADING
- ------------------------------------------------------------------------ --------------------------------------------------
(l) Security Ownership of Certain Beneficial
Owners and Management............................. The Conversion -- Shares to be Purchased by
Management Pursuant to Subscription Rights
(m) Certain Relationships and Related
Transactions...................................... Not Applicable
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................... Not Applicable
PROSPECTUS UP TO 402,500 COMMON SHARES
$10 PURCHASE PRICE PER SHARE
FOUNDATION BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR FOUNDATION SAVINGS BANK)
CINCINNATI, OHIO
Foundation Bancorp, Inc., an Ohio corporation (the "Holding Company"), is
hereby offering for sale up to 402,500 common shares, without par value (the
"Common Shares"), in connection with its acquisition of all of the capital stock
to be issued by Foundation Savings Bank, an Ohio mutual savings and loan
association which has its principal office in Cincinnati, Ohio (the "Bank"),
upon the conversion of the Bank from a mutual savings and loan association to a
permanent capital stock savings and loan association incorporated under the laws
of the State of Ohio (the "Conversion"). The sale of the Common Shares is
subject to the approval of the Bank's Plan of Conversion (the "Plan") and the
adoption of the Amended Articles of Incorporation and Amended Constitution of
the Bank by the members of the Bank at a Special Meeting to be held at m.,
Eastern Time, on , 1996, at , Cincinnati, Ohio (the
"Special Meeting").
Based on an independent appraisal of the pro forma market value of the Bank,
as converted, as of May 14, 1996, the aggregate purchase price of the Common
Shares offered in connection with the Conversion ranges from a minimum of
$2,975,000 to a maximum of $4,025,000 (the "Valuation Range"), resulting in a
range of 297,500 to 402,500 Common Shares at $10 per share. See "THE CONVERSION
- -- Pricing and Number of Common Shares to be Sold." Applicable regulations
permit the Holding Company to offer additional Common Shares in an amount not to
exceed 15% above the maximum of the Valuation Range, which would permit the
issuance of up to 462,875 Common Shares with an aggregate purchase price of
$4,628,750. The actual number of Common Shares sold in connection with the
Conversion will be determined by the Boards of Directors of the Holding Company
and the Bank and will be based upon the final valuation of the Bank, as
determined by the independent appraiser upon the completion of this offering. If
the final valuation is greater than or equal to $2,975,000 and less than or
equal to $4,628,750, the number of Common Shares to be issued in connection with
the Conversion will not be less than 297,500, nor more than 462,875. If, due to
changing market conditions, the final valuation is less than $2,975,000 or more
than 462,875, subscribers will be given notice of such final valuation and a
resolicitation of subscribers will be conducted. See "THE CONVERSION -- Pricing
and Number of Common Shares to be Sold." Any upward or downward adjustment in
the number of Common Shares sold will have a corresponding effect on the
estimated net proceeds of the Conversion and the pro forma capitalization and
book value per share of the Holding Company. See "USE OF PROCEEDS,"
"CAPITALIZATION" and "PRO FORMA DATA."
(CONTINUED ON NEXT PAGE)
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION OF THE DEPARTMENT OF THE TREASURY (THE "OTS"), THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), THE OHIO DEPARTMENT OF COMMERCE, DIVISION OF
FINANCIAL INSTITUTIONS (THE "DIVISION"), OR THE SECURITIES COMMISSION OF ANY
STATE, NOR HAS THE SEC, THE OTS, THE FDIC, THE DIVISION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN RISKS.
FOR A DISCUSSION OF SUCH RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" ON PAGE 10.
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION INFORMATION
CENTER AT (513) - .
ESTIMATED EXPENSES
SUBSCRIPTION AND UNDERWRITING ESTIMATED NET
PRICE COMMISSIONS (1) PROCEEDS (2)
Per share Minimum..................................... $10 $0.84 $9.16
Per share Mid-point................................... $10 $0.72 $9.28
Per share Maximum..................................... $10 $0.62 $9.38
Per share Maximum, as adjusted (3).................... $10 $0.54 $9.46
Total Minimum......................................... $2,975,000 $251,000 $2,724,000
Total Mid-point....................................... $3,500,000 $251,000 $3,249,000
Total Maximum......................................... $4,025,000 $251,000 $3,774,000
Total Maximum, as adjusted (3)........................ $4,628,750 $251,000 $4,377,750
(1) Expenses of the Conversion payable by the Bank and the Holding Company
include legal, accounting, appraisal, printing, mailing and miscellaneous
expenses. Such expenses also include a financial advisory fee of $50,000,
payable to Charles Webb & Company ("Webb"). Such fee may be deemed to be
underwriting fees. See "THE CONVERSION -- Plan of Distribution." Actual
expenses may vary from the estimates.
(2) Includes the net proceeds from purchases intended to be made by the
Foundation Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP") with
funds borrowed by the ESOP from the Holding Company. See "PRO FORMA DATA"
and "MANAGEMENT -- Stock Benefit Plans -- Employee Stock Ownership Plan."
(3) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be offered without the resolicitation of
persons who subscribe for Common Shares in the Subscription Offering and the
Community Offering (collectively, the "Offering"). See "THE CONVERSION --
Pricing and Number of Common Shares to be Sold."
THE DATE OF THIS PROSPECTUS IS , 1996.
CHARLES WEBB & COMPANY
In accordance with the Plan, nontransferable subscription rights to purchase
Common Shares at a price of $10 per share are offered hereby in a subscription
offering (the "Subscription Offering"), subject to the rights and restrictions
established by the Plan, to (a) eligible depositors of the Bank as of May 31,
1995 (the "Eligibility Record Date"), (b) the ESOP and (c) members of the Bank
eligible to vote at the Special Meeting ("Other Eligible Members"). ALL
SUBSCRIPTION RIGHTS TO PURCHASE COMMON SHARES IN THE SUBSCRIPTION OFFERING ARE
NONTRANSFERABLE AND WILL EXPIRE AT .M., EASTERN TIME, ON ,
1996 (the "Subscription Expiration Date"). See "THE CONVERSION -- Subscription
Offering."
To the extent that all of the Common Shares are not subscribed for in the
Subscription Offering, the remaining Common Shares are hereby concurrently being
offered to the general public in a direct community offering in which preference
will be given to natural persons residing in Hamilton County, Ohio (the
"Community Offering"). See "THE CONVERSION -- Community Offering."
Subscribers will not be permitted to modify or cancel their subscriptions
unless the final valuation of the Bank, as converted, is less than $2,975,000 or
more than $4,628,750 or the Community Offering extends beyond , 1996
(45 days after the Subscription Expiration Date). See "THE CONVERSION -- Pricing
and Number of Common Shares to be Sold."
The minimum number of Common Shares any person may purchase in the Offering
is 25. Except for the ESOP, which may purchase up to 8% of the total Common
Shares sold in the Offering, (i) no Eligible Account Holder (hereinafter
defined), Supplemental Eligible Account Holder (hereinafter defined), if any, or
Other Eligible Member may purchase in the Offering more than 2.5% of the total
Common Shares sold in the Offering, (ii) no person, together with his or her
Associates (hereinafter defined) and other persons acting in concert with him or
her, may purchase in the Community Offering more than 2.5% of the total Common
Shares sold in the Offering, and (iii) no person, together with his or her
Associates and other persons acting in concert with him or her, may purchase
more than 5% of the total Common Shares sold in the Offering. In connection with
the exercise of subscription rights arising from a deposit account or a loan
account in which two or more persons have an interest, the aggregate maximum
number of Common Shares which the persons having an interest in such account may
purchase is 2.5% of the total Common Shares sold in the Offering. Subject to OTS
regulations, the maximum purchase limitation may be increased or decreased after
the commencement of the Offering in the sole discretion of the Boards of
Directors of the Holding Company and the Bank. If the maximum purchase
limitation is increased to more than 2.5% of the Common Shares, persons who have
subscribed for 2.5% of the Common Shares will be given the opportunity to
increase their subscriptions. See "THE CONVERSION -- Limitations on Purchases of
Common Shares."
Common Shares may be subscribed for in the Offering by returning the
accompanying Stock Order Form and Certification Form (the "Stock Order Form")
along with full payment of the purchase price per share for all shares for which
subscription is made, so that it is received by the Bank no later than
m., Eastern Time, , 1996. See "THE CONVERSION -- Use of Order
Forms." Payment may be made in cash, if delivered in person, or by check or
money order and will be held at the Bank in a segregated account insured by the
FDIC up to the applicable limits and earning interest at the Bank's then current
passbook savings account rate from the date of receipt until the completion of
the Conversion. Payment may also be made by authorized withdrawal from an
existing deposit account at the Bank, the amount of which will continue to earn
interest until completion of the Conversion at the rate normally in effect from
time to time for such account. Individual Retirement Accounts ("IRAs") and Keogh
accounts at the Bank may also be used to purchase Common Shares. The beneficial
owner of the account must direct the Bank to transfer the funds in the account
to a self-directed IRA or Keogh account. THIS CANNOT BE DONE THROUGH THE MAIL.
See "THE CONVERSION -- Payment for Common Shares." Upon the completion of the
Conversion, the funds on deposit with the Bank for the purchase of Common Shares
will be withdrawn and paid to the Holding Company in exchange for the Common
Shares. The Common Shares will not be insured by the FDIC.
THE CONVERSION OF THE BANK FROM A MUTUAL SAVINGS AND LOAN ASSOCIATION TO A
PERMANENT CAPITAL STOCK SAVINGS AND LOAN ASSOCIATION IS CONTINGENT UPON (I) THE
APPROVAL OF THE PLAN AND THE ADOPTION OF THE AMENDED ARTICLES OF INCORPORATION
AND THE AMENDED CONSTITUTION BY THE BANK'S VOTING MEMBERS, (II) THE SALE OF THE
REQUISITE NUMBER OF COMMON SHARES, AND (III) CERTAIN OTHER FACTORS. SEE "THE
CONVERSION."
2
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY THE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS.
FOUNDATION BANCORP, INC.
The Holding Company was incorporated under Ohio law in April 1996 at the
direction of the Bank for the purpose of purchasing all of the capital stock of
the Bank to be issued in connection with the Conversion. The Holding Company has
not conducted and will not conduct any business before the completion of the
Conversion other than business related to the Conversion. Upon the consummation
of the Conversion, the Holding Company will be a unitary savings and loan
holding company, the principal assets of which initially will be the capital
stock of the Bank, the investments made with the net proceeds retained from the
sale of Common Shares in connection with the Conversion and a loan to be made by
the Holding Company to the ESOP to facilitate the ESOP's purchase of Common
Shares in the Conversion. See "USE OF PROCEEDS."
The office of the Holding Company is located at 25 Garfield Place,
Cincinnati, Ohio 45202, and its telephone number is (513) 721-0120.
FOUNDATION SAVINGS BANK
The Bank is a mutual savings and loan association which was organized under
Ohio law in 1888. As an Ohio savings and loan association, the Bank is subject
to supervision and regulation by the OTS and the Division. The Bank is a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and the deposits of
the Bank are insured up to applicable limits by the FDIC in the Savings
Association Insurance Fund (the "SAIF"). See "REGULATION."
The Bank conducts business from its office at 25 Garfield Place in
Cincinnati, Ohio. The principal business of the Bank is the origination of
permanent mortgage loans secured by first mortgages on one- to four-family
residential real estate located in Hamilton County, Ohio and the contiguous Ohio
counties of Clermont, Butler and Warren and the Kentucky counties of Boone and
Kenton. The Bank also originates mortgage loans secured by multifamily real
estate (over four units) and nonresidential real estate in its primary market
area. See "THE BUSINESS OF THE BANK -- Lending Activities." In addition to real
estate lending, the Bank originates a limited number of secured and unsecured
consumer loans. For liquidity and interest rate risk management purposes, the
Bank invests in interest-bearing deposits in other financial institutions, U.S.
Government and agency obligations, mortgage-backed securities and other
investments permitted by applicable law. See "THE BUSINESS OF THE BANK --
Investment Activities." Funds for lending and other investment activities are
obtained primarily from savings deposits, which are insured up to applicable
limits by the FDIC, and principal repayments on loans. Advances from the FHLB of
Cincinnati are utilized from time to time when other sources of funds are
inadequate to fund loan demand. See "THE BUSINESS OF THE BANK -- Deposits and
Borrowings."
In 1994, the Bank changed its operating strategy to become less reliant on
retirement deposits and to increase its loan originations. The Bank now has a
full-time loan originator who solicits mortgage loan applications. Loans
originated by the Bank are underwritten in accordance with national secondary
mortgage market standards. Depending on market conditions, the Bank either sells
or portfolios its loans. The Bank attempts to maintain an adequate net interest
margin, control expenses and enhance earnings with fee income and gains on the
sale of loans. Although the Bank intends to pursue a policy of prudent growth in
assets and deposits, its downtown location is not conducive to attracting lower
cost deposits such as checking and passbook accounts. Some of the results of
this strategy are summarized as follows:
- MORTGAGE LENDING. Approximately 50% of the Bank's mortgage loan portfolio
at March 31, 1996, consists of loans originated during the period from
January 1, 1994, to March 31, 1996. During such period, the Bank increased
its total investment in mortgage loans from $18.5 million to $21.3
million, an increase of $2.8 million, or 15.2%. At March 31, 1996,
approximately $19.0 million, or 88.9%, of the Bank's total loans were
secured by one- to four-family real estate. See "THE BUSINESS OF THE BANK
-- Lending Activities -- Loans Secured by One- to Four-Family Real
Estate."
3
- ASSET QUALITY. Maintaining a high level of asset quality is a top priority
of the board and management of the Bank. The Bank's efforts to control
non-performing assets begin with prudent lending policies and stringent
underwriting standards. The Bank moves quickly to resolve delinquencies
and to dispose of real estate acquired through foreclosure. At April 30,
1996, the Bank had only one loan, with a principal balance of
approximately $2,000, delinquent in excess of sixty days and no real
estate owned acquired through foreclosure. See "THE BUSINESS OF THE BANK
-- Lending Activities -- Delinquent Loans, Nonperforming Assets and
Classified Assets."
- CAPITAL POSITION. At March 31, 1996, the Bank's equity to assets ratio was
8.73%. In addition, the Bank's ratio of tangible capital to total assets
and its risk-based capital ratio were 8.73% and 19.59%, respectively, both
of which substantially exceed the OTS requirements. See "REGULATION --
Office of Thrift Supervision -- Regulatory Capital Requirements."
- ASSET AND DEPOSIT GROWTH. From January 1, 1994, through March 31, 1996,
there was little or no change in the Bank's asset and deposit growth, with
assets remaining at approximately $31.7 million and deposits at
approximately $27.8 million. Although total assets and total deposits have
remained relatively constant over that period, the mix of the assets and
deposits has changed significantly as the Bank has focused on loan
originations. Cash and equivalents declined by $1.0 million, or 20.0%, and
mortgage-backed securities declined by $1.7 million, or 25.4%, with the
proceeds invested primarily in mortgage loans, which increased $2.8
million, or 15.2%. Retirement accounts, which totalled approximately 60%
of deposits at January 1, 1994, had been reduced to 40% of deposits at
March 31, 1996. During such period, capital increased $353,000, or 14.6%.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "THE BUSINESS OF THE BANK."
- PROFITABILITY. The Bank's return on assets was .62%, .41% and .28% for
fiscal 1994, fiscal 1995 and the nine months ended March 31, 1996,
respectively. Such ratios have been, on average, 33 basis points below the
Bank's peer group average, as compiled by the OTS. The Bank's return on
average equity for fiscal 1994, fiscal 1995 and the nine months ended
March 31, 1996, averaged 5.28%. The Bank's cost of deposits has been, on
average, 69 basis points higher than the Bank's peer group average. The
higher cost of deposits has been partially offset by general and
administrative expenses approximately 19 basis points lower than the peer
group. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
THE CONVERSION
GENERAL. The Boards of Directors of the Holding Company and the Bank have
unanimously approved the Plan. The Plan provides for the Conversion of the Bank
from a mutual savings and loan association to a permanent capital stock savings
and loan association incorporated under the laws of the State of Ohio. The OTS
and the Division have approved the Plan, subject to the approval of the Plan by
the Bank's voting members at the Special Meeting and the satisfaction of certain
other conditions. See "THE CONVERSION -- Conditions and Termination."
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion are the numerous
competitive disadvantages which the Bank faces if it maintains its mutual form.
These disadvantages relate to a variety of factors, including growth
opportunities, employee retention and regulatory uncertainty. The Conversion
will also provide the Bank with additional capital which will support future
growth. See "THE CONVERSION -- Reasons for the Conversion."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS. Pursuant to the Plan,
subscription rights to purchase Common Shares at a price of $10 per share are
hereby offered to (a) each account holder who has one or more deposit accounts
with an aggregate balance of $50 or more (a "Qualifying Deposit") with the Bank
at the close of business on the Eligibility Record Date (the "Eligible Account
Holders"), (b) the ESOP and (c) Other Eligible Members. See "THE CONVERSION --
Subscription Offering."
Concurrently with the Subscription Offering, the Common Shares not
subscribed for in the Subscription Offering are hereby offered to the general
public in the Community Offering, in which preference will
4
be given to natural persons residing in Hamilton County, Ohio. The Boards of
Directors of the Holding Company and the Bank have the right to reject, in whole
or in part, any subscription for Common Shares submitted in the Community
Offering. See "THE CONVERSION -- Community Offering."
The Plan authorizes the Boards of Directors of the Holding Company and the
Bank to establish limits on the amount of Common Shares which may be purchased
by various categories of persons. Pursuant to the Plan, the Boards of Directors
have set the preliminary limitation that (i) no Eligible Account Holder,
Supplemental Eligible Account Holder, if any, or Other Eligible Member may
purchase in the Offering more than 2.5% of the total Common Shares sold in the
Offering, (ii) no person, together with his or her Associates (hereinafter
defined) and other persons acting in concert with him or her, may purchase in
the Community Offering more than 2.5% of the total Common Shares sold in the
Offering, and (iii) no person, together with his or her Associates and other
persons acting in concert with him or her, may purchase more than 5% of the
total Common Shares sold in the Offering. In connection with the exercise of
subscription rights arising from a deposit account or a loan account in which
two or more persons have an interest, the aggregate maximum number of Common
Shares which the persons having an interest in such account may purchase is 2.5%
of the total Common Shares sold in the Offering. Such limitations do not apply
to the ESOP, which intends to purchase up to 8% of the Common Shares sold in the
Offering. Subject to applicable regulations, the purchase limitation may be
increased or decreased after the commencement of the Offering in the sole
discretion of the Boards of Directors. See "THE CONVERSION -- Limitations on
Purchases of Common Shares." In addition to the purchase limitations established
by the Plan, OTS regulations impose restrictions on the acquisition of more than
10% of the outstanding shares of the Bank by any person or company individually
or acting in concert with others. See "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY AND THE BANK." The sale of Common Shares pursuant to
subscriptions received in the Offering will be subject to the approval of the
Plan by the voting members of the Bank at the Special Meeting, to the
determination by the Boards of Directors of the Holding Company and the Bank of
the total number of Common Shares to be sold and to certain other conditions.
See "THE CONVERSION -- Subscription Offering; -- Community Offering; and --
Pricing and Number of Common Shares to be Sold."
The Subscription Offering will terminate and subscription rights will expire
if not exercised by .m., Eastern Time, on , 1996. The
Community Offering may be terminated at any time after orders for at least
462,875 shares have been received, but in no event later than ,
1996, unless extended. Any extension of the Community Offering beyond
, 1996, will require the consent of the OTS and the Division, and
persons who have subscribed for Common Shares in the Offering will be given
notice that they have the right to increase, decrease or rescind their
subscriptions for Common Shares. Persons who do not affirmatively elect to
continue their subscription or who elect to rescind their subscriptions during
any such extension will have all of their funds promptly refunded with interest.
Persons who elect to decrease their subscriptions will have the appropriate
portion of their funds promptly refunded with interest. See "THE CONVERSION --
Pricing and Number of Common Shares to be Sold."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. Federal and Ohio regulations
provide that subscription rights are non-transferable. OTS regulations
specifically prohibit any person from transferring or entering into any
agreement or understanding before the completion of the Conversion to transfer
the ownership of the subscription rights issued in the Conversion or the shares
to be issued upon the exercise of such subscription rights. Persons attempting
to violate such provision may lose their rights to purchase Common Shares in the
Conversion and may be subject to penalties imposed by the OTS. Each person
exercising subscription rights will be required to certify that a purchase of
Common Shares is solely for the subscriber's own account and that there is no
agreement or understanding regarding the sale or transfer of such Common Shares.
PARTICIPATION OF WEBB IN THE OFFERINGS. The Holding Company and the Bank
have retained Charles Webb & Company ("Webb") to consult, advise and assist in
the sale of the Common Shares in the Offering on a "best efforts" basis. Webb
will receive a financial advisory fee in the amount of $50,000. In addition, the
Holding Company will reimburse Webb for certain expenses, including reasonable
legal fees. Such expenses shall not exceed $30,000. If the Holding Company and
Webb deem necessary, Webb may enter into
5
agreements ("Selected Dealers Agreements") with other National Association of
Securities Dealers, Inc. ("NASD") member firms ("Selected Dealers") for
assistance in the sale of Common Shares. Selected Dealers will receive fees
equal to 4% of the purchase price of Common Shares sold, if any, pursuant to
Selected Dealer Agreements. Webb is not obligated to purchase any Common Shares.
PRICING OF THE COMMON SHARES. Keller & Company, Inc. ("Keller"), a
Columbus, Ohio, firm experienced in valuing thrift institutions, has prepared an
independent valuation of the estimated pro forma market value of the Bank, as
converted. Keller's valuation of the estimated pro forma market value of the
Bank, as converted, is $3,500,000 as of May 14, 1996 (the "Pro Forma Value").
Based on the Pro Forma Value of the Bank, the Valuation Range established in
accordance with the Plan is $2,975,000 to $4,025,000.
In the event that Keller determines at the close of the Offering that the
aggregate pro forma value of the Bank is higher or lower than the Pro Forma
Value, but is within the Valuation Range, the Holding Company will make an
appropriate adjustment by raising or lowering the total number of Common Shares
sold in the Conversion consistent with the final valuation. The total number of
Common Shares sold in the Conversion will be determined by the Board of
Directors consistent with the final valuation. If, due to changing market
conditions, the final valuation is outside the Valuation Range, subscribers will
be given notice of such final valuation and the right to increase, decrease or
rescind their subscriptions. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription before the date
specified in the notice will have all of his funds promptly refunded with
interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest. See "THE
CONVERSION -- Pricing and Number of Common Shares to be Sold."
USE OF PROCEEDS. The Holding Company will retain up to 50% of the net
proceeds from the sale of the Common Shares, estimated to be $1.62 million at
the midpoint of the Valuation Range. The balance of the net proceeds will be
used to purchase all of the capital stock to be issued by the Bank and will
increase the regulatory capital of the Bank. The Bank anticipates that the net
proceeds will initially be invested in short-term U.S. Government and agency
obligations and will be available for general corporate purposes, including loan
originations. See "USE OF PROCEEDS."
The funds retained by the Holding Company will be used by the Holding
Company to make a loan to the ESOP and will be available for general corporate
purposes, including the payment of dividends. The funds retained by the Holding
Company will be available for the repurchase of shares, although the Holding
Company has no current intentions to pursue stock repurchases. OTS regulations
generally prohibit stock repurchases in the first six months following the
completion of the Conversion without OTS prior approval. See "THE CONVERSION --
Restrictions on Repurchase of Common Shares."
TAX CONSEQUENCES
The consummation of the Conversion is expressly conditioned upon the receipt
by the Holding Company and the Bank of a private letter ruling from the Internal
Revenue Service or an opinion of counsel to the effect that the Conversion will
constitute a tax-free reorganization as defined in Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Holding Company and
the Bank intend to proceed with the Conversion based upon an opinion rendered by
Vorys, Sater, Seymour and Pease, special counsel to the Bank and the Holding
Company, that states, in part, that (1) no gain or loss will be recognized by
the Bank in connection with the Conversion or the receipt from the Holding
Company of proceeds from the sale of the Common Shares, and (2) assuming that
the subscription rights received by deposit account holders in connection with
the Conversion have no ascertainable fair market value, no gain or loss will be
recognized to the deposit account holders of the Bank upon issuance to them of
subscription rights or interests in the Liquidation Account (hereinafter
defined) and no taxable income will be realized by deposit account holders as a
result of their exercise of such subscription rights. Although the Internal
Revenue Service (the "IRS") could challenge the assumption that the subscription
rights have no ascertainable fair market value, the Holding Company and the Bank
have received an opinion from Keller supporting such assumption. See "THE
CONVERSION -- Principal Effects of the Conversion -- Tax Consequences."
6
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The existence of a
market in the Common Shares upon the completion of the Conversion will depend
upon the presence in the marketplace of both willing buyers and willing sellers
at any given time. It is expected that the Common Shares will be traded in the
over-the-counter market and will be quoted through brokers participating on the
Nation Daily Quotation Service (the "NDQS"). Because of the limited size of the
Offering, however, it is unlikely that an active market for the Common Shares
will develop after the completion of the Conversion or, if such market does
develop, that it will continue. See "RISK FACTORS -- Limited Market for the
Common Shares" and "MARKET FOR THE COMMON SHARES."
DIVIDEND POLICY
The declaration and payment of dividends by the Holding Company will be
subject to the discretion of the Board of Directors of the Holding Company, to
the earnings and financial condition of the Holding Company and to general
economic conditions. If the Board of Directors of the Holding Company determines
in the exercise of its discretion that the net income, capital and consolidated
financial condition of the Holding Company and the general economy justify the
declaration and payment of dividends by the Holding Company, the Board of
Directors of the Holding Company may authorize the payment of dividends on the
Common Shares, subject to the limitation under Ohio law that a corporation may
pay dividends only out of surplus. There can be no assurance that dividends will
be paid on the Common Shares or, if paid, will continue to be paid.
BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING
COMPANY AND THE BANK
GENERAL. Among the factors considered by the Board of Directors of the Bank
in making the decision to pursue the Conversion is the ability of the Holding
Company and the Bank to utilize various types of stock benefit plans to attract
and retain qualified directors and employees. See "THE CONVERSION -- Reasons for
the Conversion."
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the
Holding Company has established the ESOP, which intends to purchase 8.0% of the
Common Shares issued in the Conversion. All full-time employees of the Holding
Company and the Bank who meet certain age and years of service criteria will be
eligible to participate in the ESOP. See "MANAGEMENT -- Stock Benefit Plans --
Employee Stock Ownership Plan."
STOCK OPTION PLAN. After the Conversion, the Holding Company intends to
establish a stock option and incentive plan (the "Stock Option Plan"). Under OTS
regulations, the Stock Option Plan cannot be implemented for at least six months
after the completion of the Conversion. See "MANAGEMENT -- Stock Benefit Plans
- -- Stock Option Plan." The Board of Directors of the Holding Company anticipates
that a number of shares equal to 10% of the Common Shares issued in the
Conversion will be reserved for issuance to directors, officers and employees
under the Stock Option Plan. The Stock Option Plan will be administered by a
committee comprised of three directors who are not employees of the Holding
Company (the "Committee"). Persons eligible for Awards under the Stock Option
Plan will consist of directors and managerial and other key employees of the
Holding Company or the Bank who hold positions with significant responsibilities
or whose performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Holding Company or the Bank.
The Committee will consider the position, duties and responsibilities of the
directors and employees of the Holding Company and the Bank, the value of their
services to the Holding Company and the Bank and any other factors the Committee
may deem relevant. No determination has been made with respect to option
recipients.
Based on the purchase price of $10 per share in the Conversion, the
aggregate market value of shares which could be issued under the Stock Option
Plan would be between $297,500 and $462,875, based on the Valuation Range. Under
OTS regulations, if the Stock Option Plan is implemented during the first year
after the Conversion, the following restrictions will apply: (i) the number of
shares that may be awarded under the Stock Option Plan to directors who are not
full-time employees of the Holding Company or the Bank cannot
7
exceed 5% of the plan shares per person and 30% of the plan shares in the
aggregate, or $23,144 and $138,863, respectively, based on a per share value of
$10 and the adjusted maximum of the Valuation Range; (ii) the number of shares
that may be awarded to any individual who is a full-time employee of the Holding
Company or the Bank may not exceed 25% of the plan shares, or $115,720 based on
a per share value of $10 and the adjusted maximum of the Valuation Range; and
(iii) stock options must be awarded with an exercise price of at least fair
market value at the time of grant. The ultimate value of any option granted at
fair market value will depend on future appreciation in the fair market value of
the shares to which the option relates. No decision has been made as to
anticipated awards under the Stock Option Plan.
RECOGNITION AND RETENTION PLAN. The Bank intends to establish a recognition
and retention plan (the "RRP") after the Conversion. Under OTS regulations, the
RRP cannot be implemented for at least six months after the completion of the
Conversion. See "MANAGEMENT -- Stock Benefit Plans -- Recognition and Retention
Plan." The Board of Directors of the Bank anticipates that a number of shares
equal to 4.0% of the Common Shares sold in the Conversion will be purchased by
or issued to the RRP. Shares held in the RRP will be available for awards to
selected directors, officers and employees of the Bank. The RRP will be
administered by a committee comprised of three directors who are not employees
of the Bank (the "RRP Committee"). In selecting the directors and employees to
whom awards will be granted and the number of shares covered by such awards, the
RRP Committee will consider the position, duties and responsibilities of the
directors and employees, the value of their services to the Bank and any other
factors the RRP Committee may deem relevant. No determination has been made with
respect to RRP award recipients.
Assuming the purchase of a number of shares equal to 4.0% of the Common
Shares issued in the Conversion at a purchase price of $10 per share, the shares
available for distribution under the RRP would have an aggregate market value of
between $119,000 and $185,150, based on the Valuation Range. See "PRO FORMA
DATA" for a discussion of the impact of the RRP on pro forma earnings per share.
Under OTS regulations, if the RRP is implemented during the first year after
the Conversion, the number of shares that could be awarded under each plan to
directors who are not full-time employees of the Holding Company cannot exceed
5% of the plan shares per person and 30% of the plan shares in the aggregate, or
$9,258 and $55,545, respectively, based on a per share value of $10 at the
adjusted maximum of the Valuation Range, and the number of shares that could be
awarded to any individual who is a full-time employee of the Holding Company or
its subsidiaries could not exceed 25% of the plan shares, or $46,288 based on a
per share value of $10 at the adjusted maximum of the Valuation Range. No
decision has been made as to anticipated awards under the RRP.
EMPLOYMENT AGREEMENT. In connection with the Conversion, the Bank will
enter into an employment agreement with Laird L. Lazelle, the President of the
Bank. The employment agreement with Mr. Lazelle will be for a term of three
years, with a salary not less than his current salary, which is $65,000. The
employment agreement also will provide for severance payments if the agreement
is terminated prior to the expiration of the term upon a change of control of
the Bank or for any reason other than just cause, as defined therein. The
payment that would have been made to Mr. Lazelle pursuant to the proposed
employment agreement, assuming termination of his employment agreement at March
31, 1996, following a change of control of the Bank, would have been
approximately $195,000. See "MANAGEMENT -- Employment Agreement."
INVESTMENT RISKS
An investment in the Common Shares involves certain risks. Special attention
should be given to the matters discussed under "RISK FACTORS -- Interest Rate
Risk; -- Low Return on Assets and Return on Equity; -- Competition in Market
Area; -- Legislation and Regulation Which May Adversely Affect Operations and
Earnings; -- Potential Impact of Benefit Plans on Net Earnings and Shareholders'
Equity; -- Limited Market for the Common Shares; -- Anti-Takeover Provisions
Which May Discourage Sales of Common Shares for Premium Prices; and -- Reliance
on Key Personnel."
8
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the financial
condition, earnings and other data regarding the Bank at the dates and for the
periods indicated. Such information should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein.
AT MARCH 31, AT JUNE 30,
-------------------- -----------------------------------------------------
SELECTED FINANCIAL CONDITION AND OTHER DATA: 1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Total amount of:
Assets........................................ $ 31,738 $ 29,898 $ 31,849 $ 31,056 $ 31,635 $ 30,091 $ 27,470
Cash and equivalents.......................... 4,236 1,477 3,943 2,462 4,639 3,110 2,949
Investment securities......................... 674 1,406 1,310 2,691 1,644 1,242 248
Mortgage-backed securities.................... 4,957 5,843 5,532 6,593 5,303 3,167 1,132
Loans receivable, net......................... 21,359 20,670 20,511 18,794 19,550 22,038 22,663
Deposits...................................... 27,780 25,777 27,737 27,348 29,062 27,617 25,363
FHLB advances................................. 842 1,208 1,192 955 -- -- --
Retained earnings............................. 2,772 2,673 2,706 2,581 2,385 2,259 2,025
Number of full-service offices.................. 1 1 1 1 1 1 1
FOR THE NINE MONTHS
ENDED MARCH 31, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
SUMMARY OF EARNINGS: 1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
Interest income........................................ $ 1,783 $ 1,593 $ 2,162 $ 2,069 $ 2,297 $ 2,479 $ 2,446
Interest expense....................................... 1,207 988 1,368 1,339 1,499 1,713 1,855
--------- --------- --------- --------- --------- --------- ---------
Net interest income.................................... 576 605 794 730 798 766 591
Provision for loan losses.............................. 34 9 12 33 83 5 5
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan losses.... 542 596 782 697 715 761 586
Other income........................................... 52 47 70 204 136 135 86
General, administrative and other expense.............. 496 509 679 627 639 537 514
--------- --------- --------- --------- --------- --------- ---------
Net income before provision for income taxes........... 98 134 173 274 212 359 158
Provision for income taxes............................. 32 43 48 79 85 125 39
--------- --------- --------- --------- --------- --------- ---------
Net income........................................... $ 66 $ 91 $ 125 $ 195 $ 127 $ 234 $ 119
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
AT OR FOR THE NINE
MONTHS ENDED MARCH 31, AT OR FOR THE YEAR ENDED JUNE 30,
---------------------- ----------------------------------------------------------
SELECTED FINANCIAL RATIOS: 1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
Performance ratios:
Return on average assets................ 0.28% 0.41% 0.41% 0.62% 0.40% 0.81% 0.45%
Return on average equity................ 3.20 4.66 4.72 7.92 5.42 10.89 6.02
Interest rate spread.................... 2.00 2.33 2.25 2.02 2.22 2.27 1.75
Net interest margin..................... 2.47 2.73 2.66 2.35 2.57 2.69 2.28
Non-interest expense to average
assets................................. 2.08 2.25 2.23 1.99 2.03 1.85 1.96
Average equity to average assets........ 8.66 8.73 8.71 7.80 7.42 7.40 7.53
Equity to assets, end of period......... 8.73 8.94 8.50 8.32 7.54 7.51 7.37
Nonperforming assets to [average]
assets................................. 0.35 0.23 0.64 0.29 1.05 0.96 1.00
Nonperforming loans to total loans...... 0.52 0.34 0.95 0.49 1.70 0.98 1.16
Asset quality ratios:
Allowance for loan losses to [gross]
loans.................................. 0.48 0.47 0.47 0.38 0.51 0.07 0.04
Allowance for loan losses to
nonperforming loans.................... 93.69 140.00 50.52 77.42 30.33 6.98 3.44
Net (charge-offs) recoveries to average
loans.................................. (.18) .10 .07 (.32) .02 -- --
Average interest-earning assets to
average interest-bearing liabilities... 109.01 108.99 108.92 107.70 107.33 106.97 107.50
9
RISK FACTORS
INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE INVESTING,
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING MATTERS.
INTEREST RATE RISK
The Bank's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. Like most
thrift institutions, the interest income and interest expense of the Bank change
as the interest rates on mortgages, securities and other assets and on deposits
and other liabilities change. Interest rates generally may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond the Bank's control. The interest rates on specific assets
and liabilities of the Bank will change or "reprice" in accordance with the
contractual terms of the asset or liability instrument and in accordance with
customer reaction to general economic trends.
In the event that interest rates rise from their recent low levels, the
Bank's net interest income could be expected to be negatively affected if the
Bank's liabilities reprice at a faster rate than its assets. Moreover, rising
interest rates could negatively affect the Bank's earnings due to diminished
loan demand. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Asset and Liability Management."
LOW RETURN ON ASSETS AND RETURN ON EQUITY
For the last five years, the Bank's return on assets has ranged from a high
of .81% in 1992 to a low of .41% for 1995, with a median of .45%, and its return
on equity has ranged from a high of 10.89% for 1992 to a low of 4.72% for 1995,
with a median of 6.02%. For the nine months ended March 31, 1996, the Bank's
return on assets declined even further, to .28%, and its return on equity
declined to 3.20%. These ratios are significantly lower than those of comparable
institutions. While different factors have contributed to the Bank's results
each year, the persistent challenge facing the Bank is its cost of funds.
Although the Bank has taken steps to lower its cost of funds by eliminating
adjustable-rate retirement accounts, the Bank still has nearly 90% of its
deposits in certificates of deposit. Certificates of deposit are typically more
expensive than passbook savings and transaction accounts, but the Bank has had
limited success attracting the lower cost account types because of the
limitations of its downtown location. Although the Conversion proceeds will
provide the Bank with a source of interest-earning assets without an attendant
carrying cost, there can be no assurance that the Bank's return on assets will
improve substantially after the Conversion. Moreover, the increased capital
resulting from the Conversion is expected to further reduce the Bank's return on
equity for a prolonged period after the Conversion, which may adversely affect
the market value of the Common Shares.
COMPETITION IN MARKET AREA
The Bank faces strong direct competition for deposits and loans from
commercial banks, other savings associations, credit unions and mortgage banking
companies. Mortgage banking companies and other non-FDIC insured providers of
financial services are not subject to the same degree of regulatory oversight as
savings associations and thus have greater operational flexibility, without the
costs and burdens associated with compliance with OTS and FDIC regulations. The
Bank is also at a competitive disadvantage due to its small size and single
office location, which result in limited marketing capability and restricted
ability to keep up with technological advancements.
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT OPERATIONS AND EARNINGS
The Bank is subject to extensive regulation by the OTS, the FDIC and the
Division and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan holding
company, the Holding Company will also be subject to regulation and examination
by the OTS. Such supervision and regulation of the Bank and the Holding Company
are intended primarily for the protection of depositors and not for the
maximization of shareholder value and may affect the ability of the
10
Holding Company to engage in various business activities. The assessments,
filing fees and other costs associated with reports, examinations and other
regulatory matters are significant and may have an adverse effect on the Holding
Company's net earnings. See "REGULATION."
The deposit accounts of the Bank and of other savings associations are
insured by the FDIC in the SAIF. The reserves of the SAIF are currently below
the level required by law, because of a higher than anticipated reduction in the
amount of SAIF deposits and because a significant portion of the assessments
paid into the fund are used to pay the principal and interest on bonds issued by
the Financing Corp. ("FICO") to pay the cost of resolving past thrift failures.
The deposit accounts of commercial banks are insured by the Bank Insurance Fund
(the "BIF") administered by the FDIC, except to the extent that such banks have
acquired SAIF deposits. The reserves of the BIF reached 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 by approximately $.19 per $100 in
deposits in late 1995 and will exceed such assessments by $.23 per $100 in
deposits in 1996. This premium disparity could have a negative competitive
impact on the Bank and other institutions with SAIF deposits.
Congress is considering legislation to recapitalize the SAIF and eliminate
the significant premium disparity. The pending recapitalization plan provides
for the payment of a special assessment of approximately $.85 per $100 of SAIF
deposits held at a date to be determined, in order to increase SAIF reserves to
the level required by law. SAIF assessments for healthy savings associations
would be set significantly below the current level after payment of the special
assessment is made by all SAIF institutions and could never be reduced below the
level imposed on BIF institutions. In addition, the FICO payments would be
shared by both the SAIF and the BIF. Contributions by BIF institutions to the
FICO payments might increase BIF assessments by $.02 to $.025 per $100 in
deposits. These projected assessment levels may change if commercial banks
holding SAIF deposits are provided some relief from the special assessment or
are allowed to transfer to the BIF.
The Bank had $25.8 million in deposits at March 31, 1995. If the special
assessment is $.85 per $100 in deposits, the Bank could pay an aggregate
additional assessment of approximately $219,000. Although the assessment should
be tax-deductible, it will reduce earnings and capital for the quarter in which
it is reported.
The recapitalization plan also provides for the merger of the SAIF and BIF
on January 1, 1998, and for the elimination of the federal thrift charter or of
the separate federal regulation of thrifts prior thereto. Under the legislation,
the OTS would cease to exist and the Bank would be regulated under federal law
as a bank and, as a result, would become subject to the more restrictive
activity limitations imposed on national banks. Proposed legislation would also
eliminate the deduction for income tax purposes of amounts designated as
reserved for bad debts. See Note 12 of the Notes to the Financial Statements.
Such legislation would require, generally, that bad debt reserves taken by such
savings associations after 1987 using the percentage of taxable income method
would be included in future taxable income of the Bank over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. No recapture would be required for
pre-1988 bad debt reserves. The requirement that the Bank convert to a bank
charter and the proposed tax legislation could have an adverse effect on the
Holding Company and the Bank, although until such proposals are acted upon by
Congress, the extent of such effect is uncertain.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. If the proposed legislation
is not adopted, SAIF premiums may increase and the disparity between BIF and
SAIF premiums may become more pronounced, which would negatively impact the
Bank. See "REGULATION -- Federal Deposit Insurance Corporation -- Deposit
Insurance."
POTENTIAL IMPACT OF BENEFIT PLANS ON NET EARNINGS AND SHAREHOLDERS' EQUITY
Statement of Position No. 93-6, "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6"), published by the American Institute of Certified
Public Accountants (the "AICPA") 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 the Common Shares
acquired by the
11
ESOP appreciate in value over time, the Holding Company may incur increased
compensation expense relating to the ESOP. In addition, SOP 93-6 requires that,
for the purpose of computing primary and fully diluted earnings per share, ESOP
shares that have not been committed to be released are not considered
outstanding. See "PRO FORMA DATA" for pro forma information which includes the
effects of SOP 93-6 on net earnings and shareholders' equity.
If the ESOP is unable to purchase all or part of the Common Shares for which
it subscribes, the ESOP may purchase Common Shares on the open market or may
purchase authorized but unissued shares of the Holding Company. If the ESOP
purchases authorized but unissued shares from the Holding Company, such
purchases could have a dilutive effect on the interests of the Holding Company's
shareholders. If the ESOP purchases authorized but unissued shares from the
Holding Company, such purchases would have a dilutive effect of up to
approximately 7.4% on the interests of the Holding Company's shareholders.
It is expected that, following the consummation of the Conversion, the
Holding Company will adopt the Stock Option Plan and the RRP. If adopted during
the first year after the Conversion, the Stock Option Plan and the RRP are
required to be approved by the Holding Company's shareholders prior to
implementation. Under the RRP, directors, officers and employees of the Bank
could be awarded an aggregate amount of shares equal to 4% of the Common Shares
issued in the Conversion. Under the Stock Option Plan, directors, officers and
employees could be granted options to purchase an aggregate amount of shares
equal to 10% of the Common Shares issued in the Conversion. See "MANAGEMENT --
Recognition and Retention Plan."
The shares issued to participants under the RRP could be newly issued shares
or shares purchased in the market. In the event the shares issued under the RRP
consist of newly issued common shares, the interests of existing shareholders
would be diluted. Shares issued pursuant to the exercise of options under the
Stock Option Plan will be authorized but unissued shares, unless the Holding
Company has treasury shares at the time of exercise and elects to use the
treasury shares. At the midpoint of the estimated Valuation Range, if all shares
under these plans were newly issued and the exercise price for the option shares
were equal to the $10 per share purchase price in the Conversion, the pro forma
book value per share of the outstanding common shares at March 31, 1996, would
decrease from $16.00 to $15.77. See "PRO FORMA DATA" and "MANAGEMENT -- Stock
Benefit Plans -- Stock Option Plan."
LIMITED MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The existence of a
market in the Common Shares upon the completion of the Conversion will depend
upon the presence in the marketplace of both willing buyers and willing sellers
at any given time. It is expected that the Common Shares will be traded in the
over-the-counter market and will be quoted through brokers participating on the
NDQS. Because of the limited size of the Offering, however, it is unlikely that
an active market for the common shares will develop after the completion of the
Conversion or, if such market does develop, that it will continue. Investors
should consider, therefore, the potentially illiquid and long-term nature of an
investment in the Common Shares.
The aggregate offering price for the Common Shares is based upon an
independent appraisal of the Bank. The appraisal is not a recommendation as to
the advisability of purchasing Common Shares. See "THE CONVERSION -- Pricing and
Number of Common Shares to be Sold." No assurance can be given that persons
purchasing Common Shares will thereafter be able to sell such shares at a price
at or above the offering price. The appraisal of the pro forma market value of
the Bank, as converted, does not represent Keller's opinion as to the price at
which the Common Shares may trade. There can be no assurance that the Common
Shares may later be resold at the price at which they are purchased in
connection with the Conversion.
ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM
PRICES
The Articles of Incorporation and Code of Regulations of the Holding Company
and the Amended Articles of Incorporation of the Bank contain certain provisions
that could deter or prohibit non-negotiated changes in the control of the
Holding Company and the Bank. Such provisions include a restriction on the
direct or indirect acquisition of more than 10% of the outstanding shares of the
Bank by any person during the five-year period following the effective date of
the Conversion, the ability to issue additional common
12
shares and a supermajority voting requirement for certain transactions. See
"DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY AND THE BANK."
The Articles of Incorporation of the Holding Company provide that if the
Board of Directors recommends that shareholders approve certain matters,
including mergers, acquisitions of a majority of the shares of the Holding
Company or the transfer of substantially all of the assets of the Holding
Company, the affirmative vote of the holders of only a majority of the voting
shares of the Holding Company is required to approve such matter. If, however,
the Board of Directors recommends against the approval of any such matter, the
affirmative vote of the holders of at least 75% of the voting shares of the
Holding Company is required to approve such matters. The existence of such 75%
provision in the Articles of Incorporation of the Holding Company may make more
difficult actions which certain shareholders may deem to be in their best
interests.
Officers and directors of the Holding Company are expected to purchase
approximately 21% of the shares issued in connection with the Conversion. In
addition, officers of the Holding Company will be able to vote shares allocated
to their accounts under the ESOP, which intends to purchase approximately 8% of
the shares issued in connection with the Conversion. The ESOP trustee must vote
shares allocated under the ESOP as directed by the participants to whom the
shares are allocated and vote unallocated shares in his sole discretion. The RRP
may acquire Common Shares in the open market or acquire authorized but unissued
common shares from the Holding Company following approval of the RRP by the
shareholders of the Holding Company in an amount equal to up to 4% of the Common
Shares issued in connection with the Conversion. The RRP trustees, who are
expected to be three directors of the Bank, will vote shares awarded but not
distributed under the RRP in their discretion.
In view of the various provisions of the Articles of Incorporation and the
stock benefit plans of the Holding Company and the Bank, the aggregate ownership
by the ESOP, the RRP and the directors and officers of the Holding Company and
the Bank may have the effect of facilitating the perpetuation of current
management and discouraging proxy contests and takeover attempts. Thus, officers
and directors, who are anticipated to be allocated or awarded shares under such
plans, will have a significant influence over the vote on any such transaction
and may be able to defeat such a proposal. The Boards of Directors of the
Holding Company and the Bank believe that such provisions will be in the best
interests of shareholders by encouraging prospective acquirors to negotiate a
proposed acquisition with the directors. Such provisions could, however,
adversely affect the market value of the Common Shares or deprive shareholders
of the opportunity to sell their shares for premium prices.
Federal law and Ohio law also restrict the acquisition of control of the
Holding Company and the Bank. Any or all of these provisions may facilitate the
perpetuation of current management and discourage proxy contests or takeover
attempts not first negotiated with the Board of Directors. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY AND THE BANK."
Regulations of the OTS also restrict the ability of any person to acquire
the beneficial ownership of more than 10% of any class of voting equity security
of the Bank or the Holding Company without the prior written approval of or lack
of objection by the OTS. Such restrictions could restrict the use of revocable
proxies. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK."
13
RELIANCE ON KEY PERSONNEL
The Bank depends to a considerable degree on a limited number of key
management personnel. In particular, the loss of the services of Laird L.
Lazelle, the President and Chief Executive Officer of the Bank, could adversely
impact the Bank. In order to minimize the likelihood of such negative impact,
the Bank intends to enter into an employment agreement with Mr. Lazelle. See
"MANAGEMENT -- Employment Agreement."
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from the
sale of the Common Shares in connection with the Conversion based on the
Valuation Range:
MINIMUM MID-POINT MAXIMUM MAXIMUM, AS ADJUSTED
------------ ------------ ------------ ---------------------
Gross proceeds................................... $ 2,975,000 $ 3,500,000 $ 4,025,000 $ 4,628,750
Less estimated expenses.......................... 251,000 251,000 251,000 251,000
------------ ------------ ------------ -----------
Total net proceeds............................... $ 2,724,000 $ 3,249,000 $ 3,774,000 $ 4,377,750
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
The net proceeds may vary depending upon financial and market conditions at
the time of the completion of the Offering. See "THE CONVERSION -- Pricing and
Number of Common Shares to be Sold." Actual expenses may be more or less than
estimated. See "THE CONVERSION -- Plan of Distribution ."
The Holding Company will retain 50% of the net proceeds from the sale of the
Common Shares, approximately $1.62 million at the mid-point of the Valuation
Range. Such proceeds will be used by the Holding Company to lend up to $370,300,
at the maximum, as adjusted, of the Valuation Range, to the ESOP to acquire
Common Shares in the Offering and for general corporate purposes, which may
include dividends, repurchases of Common Shares and acquisitions of other
financial institutions. The Holding Company presently has no plans or agreements
relating to any such acquisitions or repurchases. OTS regulations generally
prohibit stock repurchases in the six months following the completion of the
Conversion without the prior approval of the OTS. See "THE CONVERSION --
Restrictions on Repurchase of Common Shares."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $1.34 million at the mid-point of the Valuation Range,
will be invested by the Holding Company in the capital stock to be issued by the
Bank to the Holding Company as a result of the Conversion. Such investment will
increase the regulatory capital of the Bank and will permit the Bank to expand
its lending and investment activities and to enhance customer services. The Bank
anticipates that such net proceeds will be used to originate mortgage loans.
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The existence of a
market in the Common Shares upon the completion of the Conversion will depend
upon the presence in the marketplace of both willing buyers and willing sellers
at any given time. It is expected that the Common Shares will be traded in the
over-the-counter market and will be quoted through brokers participating on the
NDQS. Because of the limited size of the Offering, however, it is unlikely that
an active market for the common shares will develop after the completion of the
Conversion or, if such market does develop, that it will continue. Investors
should consider, therefore, the potentially illiquid and long-term nature of an
investment in the Common Shares. See "RISK FACTORS -- Limited Market for the
Common Shares."
The appraisal of the pro forma market value of the Bank, as converted, does
not represent Keller's opinion as to the price at which the Common Shares may
trade. There can be no assurance that the Common Shares may later be resold at
the price at which they are purchased in connection with the Conversion.
14
DIVIDEND POLICY
The declaration and payment of dividends by the Holding Company will be
subject to the discretion of the Board of Directors of the Holding Company, to
the earnings and financial condition of the Holding Company and to general
economic conditions. If the Board of Directors of the Holding Company determines
in the exercise of its discretion that the net income, capital and consolidated
financial condition of the Holding Company and the general economy justify the
declaration and payment of dividends by the Holding Company, the Board of
Directors of the Holding Company may authorize the payment of dividends on the
Common Shares, subject to the limitation under Ohio law that a corporation may
pay dividends only out of surplus. There can be no assurance that dividends will
be paid on the Common Shares or, if paid, will continue to be paid.
Other than earnings on the investment of the proceeds retained by the
Holding Company, the only source of income of the Holding Company will be
dividends periodically declared and paid by the Board of Directors of the Bank
on the common shares of the Bank held by the Holding Company. The declaration
and payment of dividends by the Bank to the Holding Company will be subject to
the discretion of the Board of Directors of the Bank, to the earnings and
financial condition of the Bank, to general economic conditions and to federal
and state restrictions on the payment of dividends by thrift institutions. Under
regulations of the OTS applicable to converted savings associations, the Bank
will not be permitted to pay a cash dividend on its capital stock after the
Conversion if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the Liquidation Account or
the applicable regulatory capital requirement prescribed by the OTS. See "THE
CONVERSION -- Principal Effects of the Conversion -- Liquidation Account" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources." The Bank may not pay a dividend
unless such dividend also complies with a regulation of the OTS limiting capital
distributions by savings associations. Capital distributions, for purposes of
such regulation, include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association. See "REGULATION -- Office of Thrift Supervision -- Limitations on
Capital Distributions."
15
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of the Bank at March 31, 1996, based on the receipt of 50% of the net
proceeds for the number of Common Shares indicated. Estimated expenses used in
determining the net proceeds are $251,000:
PRO FORMA CAPITAL AT MARCH 31, 1996, ASSUMING THE SALE OF:
------------------------------------------------------------------------------------------------------
297,500 COMMON SHARES 350,000 COMMON SHARES 402,500 COMMON SHARES
HISTORICAL AT MARCH 31, (OFFERING PRICE OF (OFFERING PRICE OF (OFFERING PRICE OF
1996 $10.00 PER SHARE) $10.00 PER SHARE) $10.00 PER SHARE)
------------------------ ------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Capital under generally
accepted accounting
principles, before
adjustments (1)........... $ 2,772 8.73% $ 4,134 12.40% $ 4,397 13.07% $ 4,659 13.72%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
Current tangible capital:
Capital level............ $ 2,772 8.73% $ 4,134 12.40% $ 4,397 13.07% $ 4,659 13.72%
Requirement (2).......... 476 1.50 500 1.50 505 1.50 509 1.50
----------- ----- ----------- ----- ----------- ----- ----------- -----
Excess................... $ 2,296 7.23% $ 3,634 10.90% $ 3,892 11.57% $ 4,150 12.22%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
Current core capital:
Capital level............ $ 2,772 8.73% $ 4,134 12.40% $ 4,397 13.07% $ 4,659 13.72%
Requirement (2).......... 952 3.00 1,000 3.00 1,009 3.00 1,018 3.00
----------- ----- ----------- ----- ----------- ----- ----------- -----
Excess................... $ 1,820 5.73% $ 3,134 9.40% $ 3,388 10.07% $ 3,641 10.72%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
Current risk-based
capital: (1)
Capital level (3)........ $ 2,868 19.59% $ 4,230 28.28% $ 4,493 29.91% $ 4,755 31.53%
Requirement (2).......... 1,171 8.00 1,197 8.00 1,202 8.00 1,207 8.00
----------- ----- ----------- ----- ----------- ----- ----------- -----
Excess................... $ 1,697 11.59% $ 3,033 20.28% $ 3,291 21.91% $ 3,548 23.53%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
462,875 COMMON SHARES
(OFFERING PRICE OF
$10.00 PER SHARE)
------------------------
AMOUNT PERCENT
----------- -----------
Capital under generally
accepted accounting
principles, before
adjustments (1)........... $ 4,961 14.46%
----------- -----
----------- -----
Current tangible capital:
Capital level............ $ 4,961 14.46%
Requirement (2).......... 514 1.50
----------- -----
Excess................... $ 4,447 12.96%
----------- -----
----------- -----
Current core capital:
Capital level............ $ 4,961 14.46%
Requirement (2).......... 1,029 3.00
----------- -----
Excess................... $ 3,932 11.46%
----------- -----
----------- -----
Current risk-based
capital: (1)
Capital level (3)........ $ 5,057 33.37%
Requirement (2).......... 1,212 8.00
----------- -----
Excess................... $ 3,845 25.37%
----------- -----
----------- -----
- ------------------------------
(1) Assumes that the net proceeds received by the Bank will be invested in
assets having a risk-weighting of 0%.
(2) Tangible and core capital are shown as a percent of adjusted total assets,
and risk-based capital levels are shown as a percent of risk-weighted
assets in accordance with OTS regulations. Reflects a reduction for
unearned ESOP and RRP shares equal to 8% and 4%, respectively, of the
Offering.
(3) Risk-weighted capital includes $96,000 of qualifying general loan loss
allowances.
16
CAPITALIZATION
Set forth below is the historical capitalization of the Bank at March 31,
1996, and the pro forma consolidated capitalization of the Holding Company as
adjusted to give effect to the sale of Common Shares based on the Valuation
Range and estimated expenses. See "USE OF PROCEEDS" and "THE CONVERSION --
Pricing and Number of Common Shares to be Sold."
PRO FORMA CAPITALIZATION OF THE HOLDING COMPANY
AT MARCH 31, 1996, ASSUMING THE SALE OF:
----------------------------------------------------------------------
HISTORICAL 297,500 COMMON 350,000 COMMON 402,500 COMMON 462,875 COMMON
CAPITALIZATION SHARES (OFFERING SHARES (OFFERING SHARES (OFFERING SHARES (OFFERING
OF THE BANK AT PRICE OF $10.00 PRICE OF $10.00 PRICE OF $10.00 PRICE OF $10.00
MARCH 31, 1996 PER SHARE) PER SHARE) PER SHARE) PER SHARE)
-------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
Deposits (1).................. $ 27,780 $ 27,780 $ 27,780 $ 27,780 $ 27,780
FHLB advances................. 842 842 842 842 842
------- ------- ------- ------- -------
Total deposits and borrowed
funds...................... $ 28,662 $ 28,662 $ 28,662 $ 28,662 $ 28,662
Capital and retained earnings:
Common Shares, no par value
per share:
authorized -- 1,000,000
shares; assumed outstanding
-- as shown (2).............. -- -- -- -- --
Additional paid-in capital
(3).......................... -- 2,724 3,249 3,774 4,378
Retained earnings............. 2,772 2,772 2,772 2,772 2,772
Less:
Common Shares acquired by the
ESOP (4)..................... -- (238) (280) (322) (370)
Common Shares acquired by
the RRP(5)................. -- (119) (140) (161) (185)
Total capital and retained
earnings................... $ 2,772 $ 5,139 $ 5,601 $ 6,063 $ 6,595
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ------------------------
(1) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Shares in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) The number of Common Shares to be issued will be determined on the basis of
the final valuation of the Bank. See "THE CONVERSION -- Pricing and Number
of Common Shares to be Sold." Common Shares assumed outstanding does not
reflect the issuance of any common shares which may be reserved for issuance
under the Stock Option Plan. See "MANAGEMENT -- Stock Benefit Plans -- Stock
Option Plan."
(3) Reflects receipt of the proceeds from the sale of the Common Shares, net of
estimated expenses, of approximately $2,724,000, $3,249,000, $3,774,000 and
$4,377,750 at the minimum, mid-point, maximum and maximum, as adjusted,
respectively, of the Valuation Range.
(4) Assumes that 8.0% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP with funds borrowed by the ESOP from
the Holding Company for a term of seven years at a rate of 6.11%. The ESOP
loan will be secured solely by the Common Shares purchased by the ESOP. The
Bank has agreed, however, to use its best efforts to fund the ESOP based on
future earnings, which
17
best efforts funding will reduce the Bank's total capital and retained
earnings, as reflected in the table. If the ESOP is unable to purchase all
or part of the Common Shares for which it subscribes, the ESOP may purchase
common shares on the open market or may purchase authorized but unissued
shares of the Holding Company. If the ESOP purchases authorized but unissued
shares from the Holding Company, such purchases would have a dilutive effect
of approximately 7.4% on the interests of the Holding Company's
shareholders. See "MANAGEMENT -- Stock Benefit Plans -- Employee Stock
Ownership Plan" and "RISK FACTORS -- Potential Impact of Benefit Plans on
Net Earnings and Shareholders' Equity."
(5) Assumes that 4.0% of the Common Shares will be acquired in the open market
by the RRP after the Conversion at a price of $10 per share. There can be no
assurance that the RRP will be implemented, that a sufficient number of
shares will be available for purchase by the RRP, that shares could be
purchased at a price of $10 per share or that the shareholders will approve
the RRP if it is implemented during the first year after the Conversion. A
higher price per share, assuming the purchase of the entire 4.0% of the
shares, would reduce pro forma net earnings and pro forma shareholders'
equity. The RRP may purchase shares in the open market or may purchase
authorized but unissued shares from the Holding Company. If authorized but
unissued shares are purchased, the interests of existing shareholders would
be diluted approximately 3.85%. See "MANAGEMENT -- Stock Benefit Plans --
Recognition and Retention Plan."
PRO FORMA DATA
Set forth below are the pro forma consolidated net income of the Holding
Company for the nine months ended March 31, 1996, and for the year ended June
30, 1995, and the pro forma consolidated shareholders' equity of the Holding
Company at March 31, 1996, and June 30, 1995, along with the related pro forma
earnings per share and pro forma shareholders' equity per share amounts, giving
effect to the sale of the Common Shares in connection with the Conversion. The
computations are based on the assumed issuance of 297,500 Common Shares (minimum
of the Valuation Range), 350,000 Common Shares (mid-point of the Valuation
Range), 402,500 Common Shares (maximum of the Valuation Range) and 462,875
Common Shares (15% above the maximum of the Valuation Range). See "THE
CONVERSION -- Pricing and Number of Common Shares to be Sold." The pro forma
data is based on the following assumptions: (i) the sale of the Common Shares
occurred at the beginning of the period and yielded the net proceeds indicated;
(ii) such net proceeds were invested at the beginning of the period to yield
annualized after-tax net returns of 3.60%; and (iii) no withdrawals from
existing deposit accounts were made to purchase the Common Shares. The assumed
returns are based on the one-year U.S. Treasury bill yield of 5.45% in effect at
March 31, 1996. This rate was used as an alternative to the arithmetic average
of the Banks' interest-earning assets and interest-bearing liabilities.
Management believes that the U.S. Treasury bill yield is more indicative of the
rate of return that can be achieved on the investment of the Conversion
proceeds. Actual yields may differ, however, from the assumed returns. The pro
forma consolidated net income amounts derived from the assumptions set forth
herein 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 period.
As the table demonstrates, pro forma consolidated earnings per share and pro
forma consolidated shareholders' equity per share decrease as the amount of
Common Shares sold moves from the minimum of the Valuation Range to the adjusted
maximum of the Valuation Range. Conversely, the offering price as a multiple of
pro forma earnings per share and as a percent of pro forma shareholders' equity
per share increase as the amount of Common Shares sold moves from the minimum of
the Valuation Range to the adjusted maximum of the Valuation Range.
THE PRO FORMA DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. THE PRO
FORMA DATA IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT PURPORT TO
REPRESENT WHAT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS
ACTUALLY WOULD HAVE BEEN HAD THE AFOREMENTIONED
18
TRANSACTIONS BEEN COMPLETED AS OF THE DATE OR AT THE BEGINNING OF THE PERIODS
INDICATED, OR TO PROJECT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF
OPERATIONS AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.
AT AND FOR THE NINE MONTHS ENDED MARCH 31, 1996, ASSUMING THE SALE OF:
--------------------------------------------------------------------------
297,500 350,000 402,500 462,875
COMMON SHARES COMMON SHARES COMMON SHARES COMMON SHARES
(OFFERING PRICE (OFFERING PRICE (OFFERING PRICE (OFFERING PRICE
OF OF OF OF
$10.00 PER SHARE) $10.00 PER SHARE) $10.00 PER SHARE) $10.00 PER SHARE)
----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds................................. $ 2,975 $ 3,500 $ 4,025 $ 4,629
Estimated expenses............................. (251) (251) (251) (251)
------ ------ ------ ------
Estimated net proceeds......................... 2,724 3,249 3,774 4,378
Less common stock acquired by the ESOP (1)..... (238) (280) (322) (370)
Less common stock acquired by the RRP (1)...... (119) (140) (161) (185)
------ ------ ------ ------
Net cash proceeds.............................. $ 2,367 $ 2,829 $ 3,291 $ 3,823
------ ------ ------ ------
------ ------ ------ ------
Net income:....................................
Historical..................................... $ 66 $ 66 $ 66 $ 66
Pro forma net income on net proceeds........... 64 76 89 102
Pro forma adjustment for the ESOP (1).......... (17) (20) (23) (27)
Pro forma adjustment for the RRP (2)........... (12) (14) (16) (19)
------ ------ ------ ------
Pro forma net income........................... $ 101 $ 108 $ 116 $ 122
------ ------ ------ ------
------ ------ ------ ------
Per share net income:
Historical..................................... $ 0.30 $ 0.25 $ 0.22 $ 0.20
Pro forma net income on net proceeds........... 0.29 0.29 0.29 0.29
Pro forma adjustment for the ESOP (1).......... (0.08) (0.08) (0.08) (0.08)
Pro forma adjustment for the RRP (2)........... (0.05) (0.05) (0.05) (0.06)
------ ------ ------ ------
Pro forma earnings per share (3)(4)............ $ 0.46 $ 0.41 $ 0.38 $ 0.35
------ ------ ------ ------
------ ------ ------ ------
Offering price as a multiple of pro forma
earnings per share............................ 20.52 22.71 24.22 25.84
Shareholders' equity (5):
Historical..................................... $ 2,772 $ 2,772 $ 2,772 $ 2,772
Estimated net proceeds from the sale of Common
Shares........................................ 2,724 3,249 3,774 4,378
Less unearned ESOP shares (1).................. (238) (280) (322) (370)
Less unearned RRP shares (2)................... (119) (140) (161) (185)
------ ------ ------ ------
Pro forma shareholders' equity................. $ 5,139 $ 5,601 $ 6,063 $ 6,595
------ ------ ------ ------
------ ------ ------ ------
Per share shareholders' equity:
Historical..................................... $ 9.32 $ 7.92 $ 6.89 $ 5.99
Estimated net proceeds......................... 9.16 9.29 9.38 9.46
Less unearned ESOP shares (1).................. (0.80) (0.80) (0.80) (0.80)
Less unearned RRP shares (2)................... (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma shareholders' equity per share (3)... $ 17.28 $ 16.00 $ 15.07 $ 14.25
------ ------ ------ ------
------ ------ ------ ------
Ratio of offering price to pro forma
shareholders' equity per share................ 57.89% 62.49% 66.39% 70.19%
------ ------ ------ ------
------ ------ ------ ------
- ------------------------
(Footnotes on page 22)
19
AT AND FOR THE YEAR ENDED JUNE 30, 1995, ASSUMING THE SALE OF:
--------------------------------------------------------------------------
297,500 350,000 402,500 462,875
COMMON SHARES COMMON SHARES COMMON SHARES COMMON SHARES
(OFFERING PRICE (OFFERING PRICE (OFFERING PRICE (OFFERING PRICE
OF OF OF OF
$10.00 PER SHARE) $10.00 PER SHARE) $10.00 PER SHARE) $10.00 PER SHARE)
----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds................................. $ 2,975 $ 3,500 $ 4,025 $ 4,629
Estimated expenses............................. (251) (251) (251) (251)
------ ------ ------ ------
Estimated net proceeds......................... 2,724 3,249 3,774 4,378
Less common stock acquired by the ESOP (1)..... (238) (280) (322) (370)
Less common stock acquired by the RRP (2)...... (119) (140) (161) (185)
------ ------ ------ ------
Net cash proceeds.............................. $ 2,367 $ 2,829 $ 3,291 $ 3,823
------ ------ ------ ------
------ ------ ------ ------
Net income:
Historical..................................... $ 125 $ 125 $ 125 $ 125
Pro forma net income on net proceeds........... 85 102 118 137
Pro forma adjustment for the ESOP (1).......... (22) (26) (30) (35)
Pro forma adjustment for the RRP (2)........... (16) (18) (21) (24)
------ ------ ------ ------
Pro forma net income........................... $ 172 $ 183 $ 192 $ 203
------ ------ ------ ------
------ ------ ------ ------
Per share net income:
Historical..................................... $ 0.42 $ 0.36 $ 0.31 $ 0.27
Pro forma net income on net proceeds........... 0.29 0.29 0.29 0.29
Pro forma adjustment for the ESOP (1).......... (0.08) (0.08) (0.08) (0.08)
Pro forma adjustment for the RRP (2)........... (0.05) (0.05) (0.05) (0.05)
------ ------ ------ ------
Pro forma earnings per share (3)(6)............ $ 0.58 $ 0.52 $ 0.47 $ 0.43
------ ------ ------ ------
------ ------ ------ ------
Offering price as a multiple of pro forma
earnings per share............................ 16.07 18.11 19.51 21.28
Shareholders' equity (5):
Historical..................................... $ 2,706 $ 2,706 $ 2,706 $ 2,706
Estimated net proceeds from the sale of Common
Shares........................................ 2,724 3,249 3,775 4,378
Less unearned ESOP shares (1).................. (238) (280) (322) (370)
Less unearned RRP shares (2)................... (119) (140) (161) (185)
------ ------ ------ ------
Pro forma shareholders' equity................. $ 5,073 $ 5,535 $ 5,998 $ 6,529
------ ------ ------ ------
------ ------ ------ ------
Per share shareholders' equity:
Historical..................................... $ 9.10 $ 7.73 $ 6.72 $ 5.85
Estimated net proceeds......................... 9.16 9.29 9.38 9.46
Less unearned ESOP shares (1).................. (0.80) (0.80) (0.80) (0.80)
Less unearned RRP shares (2)................... (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma shareholders' equity per share (3)... $ 17.06 $ 15.82 $ 14.90 $ 14.11
------ ------ ------ ------
------ ------ ------ ------
Ratio of offering price to pro forma
shareholders' equity per share................ 58.64% 63.23% 67.12% 70.90%
------ ------ ------ ------
------ ------ ------ ------
- ------------------------
(Footnotes on next page)
20
(1) Assumes that 8.0% of the Common Shares sold in connection with the
Conversion will be purchased by the ESOP and that the funds used to acquire
such shares will be borrowed by the Bank from the Holding Company with
repayment thereof secured solely by the Common Shares purchased by the ESOP.
The Bank has agreed, however, to use its best efforts to fund the ESOP based
on future earnings, which best efforts funding will reduce the income on the
equity raised in connection with the Conversion, as reflected in the table.
Assumes the level amortization of the ESOP loan over a period of seven
years, with assumed tax benefits of 34%. See "MANAGEMENT -- Employee Stock
Ownership Plan." The Board of Directors may elect to issue the ESOP shares
from authorized but unissued shares. The issuance of authorized but unissued
shares to the ESOP would have the effect of diluting the percentage interest
of existing shareholders by 7.41%.
(2) Assumes that 4.0% of the Common Shares sold in connection with the
Conversion will be purchased by the RRP after the Conversion at a price of
$10 per share and that one-fifth of the purchase price of the RRP shares
will be expensed in each of the first five years after the Conversion. If
the RRP is implemented in the first year after the completion of the
Conversion, it will be subject to various OTS requirements, including the
requirement that the RRP be approved by the shareholders of the Holding
Company. There can be no assurance that the RRP will be approved by the
shareholders, that a sufficient number of shares will be available for
purchase by the RRP or that the shares could be purchased at $10 per share.
A higher per share price, assuming the purchase of the entire 4.0% of the
shares, would reduce pro forma net earnings and pro forma shareholders'
equity. If an insufficient number of shares is available in the open market
to fund the RRP at the desired level, the Holding Company may issue
additional authorized shares. The issuance of authorized but unissued shares
in an amount equal to 4.0% of the Common Shares issued in the Conversion
would result in a 3.85% dilution in earnings per share and book value per
share on a pro forma basis. See "MANAGEMENT -- Recognition and Retention
Plan and Trust."
(3) No effect has been given to shares reserved for issuance upon the exercise
of options pursuant to the Stock Option Plan. See "MANAGEMENT -- Stock
Option Plan."
(4) Assumes that the ESOP holds 23,800 shares, 28,000 shares, 32,200 shares and
37,030 shares, at the minimum, mid-point, maximum and adjusted maximum of
the Valuation Range, respectively, for purposes of computing earnings per
share. Pursuant to SOP 93-6, only ESOP shares which will be allocated over
the period are included in the earnings per share calculation. Application
of SOP 93-6 to the nine months ended March 31, 1996, would result in an
earnings per share presentation of $.49, $.44, $.41 and $.39, reflecting
weighted average shares outstanding of 277,100 shares, 326,000 shares,
374,900 shares and 431,135 shares at the minimum, mid-point, maximum and
adjusted maximum of the Valuation Range, respectively. SOP 93-6 also
requires ESOP expense to be measured based on the fair value of the shares
to be allocated. The table reflects the ESOP cost at the $10 offering price
of the Common Shares in the Conversion, which may be more or less than the
fair value at which the shares are ultimately allocated.
(5) The effect of the Liquidation Account is not included in these computations.
For additional information concerning the Liquidation Account, see "THE
CONVERSION -- Principal Effects of the Conversion -- Liquidation Account."
The amounts shown do not reflect the federal income tax consequences of the
potential restoration of the bad debt reserves to income for tax purposes,
which would be required in the event of liquidation. See "TAXATION --
Federal Taxation."
(6) Assumes that ESOP shares of 23,800 shares, 28,000 shares, 32,200 shares and
37,030 shares, at the minimum, mid-point, maximum and adjusted maximum of
the Valuation Range, respectively, are outstanding for purposes of computing
earnings per share. Pursuant to SOP 93-6, only ESOP shares which will be
allocated over the period are included in the earnings per share
calculation. Application of SOP 93-6 to the year ended June 30, 1995, would
result in an earnings per share presentation of $.62, $.55, $.51 and $.47,
reflecting weighted average shares outstanding of 277,100 shares, 326,000
shares, 374,900 shares and 431,135 shares at the minimum, mid-point, maximum
and adjusted maximum of the Valuation Range, respectively. SOP 93-6 also
requires ESOP expense to be measured based on the fair value of the shares
to be allocated. The table reflects the ESOP cost at the $10 offering price
of the Common Shares in the Conversion, which may be more or less than the
fair value at which the shares are ultimately allocated.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank is primarily engaged in the business of attracting savings deposits
from the general public and investing such funds in mortgage loans secured by
one- to four-family residential real estate located in the Bank's primary market
area. The Bank also originates loans for the construction or improvement of one-
to four-family residential real estate, loans secured by multi-family
residential real estate (over four units) and nonresidential real estate and
consumer loans, and invests in U.S. Government and agency obligations,
interest-bearing deposits in other financial institutions, mortgage-backed
securities and other investments permitted by law.
Prior to 1994, Foundation's primary business activity was offering
retirement savings accounts, with those specialized accounts constituting as
much as 60% of total deposits. Lending activity was not pursued aggressively,
and the loans that were originated during that time did not conform to secondary
market underwriting and documentation standards.
In 1994, the Bank experienced a management change following the death of its
long-time managing officer. The Bank's business plan was revised and a new
course was charted to diversify the business of the Bank. In general, the new
business plan focused on the restructuring of the Bank's deposit liabilities,
primarily the discontinuation of short-term adjustable-rate individual
retirement accounts ("IRAs"), and the development of a lending program that
emphasized the active origination of loans.
The restructuring of the deposit liabilities occurred over a period of
approximately 18 months in 1994 and 1995. As existing accounts matured during
that period, the account holders were encouraged to transfer their retirement
accounts into more traditional fixed-rate time deposits. At March 31, 1996, the
Bank's deposits totalled $27.8 million, approximately 40% of which were IRAs
that were invested in the Bank's standard certificate of deposit products.
To increase its lending business, the Bank has become an approved
seller/servicer for the Federal National Mortgage Association ("FNMA") and has
established correspondent lending relationships with several national
institutional mortgage investors. Other enhancements to the lending function
include the addition to the Bank's staff of a loan originator and technological
improvements which enable the Bank to approve loans quickly, often within 24
hours of receipt of an application.
The principal determinants of the Bank's net income are the Bank's net
interest income and its operating expenses. As a result of its location in
downtown Cincinnati, the Bank generally has not attracted a significant number
of passbook and checking accounts, but has instead had to rely heavily on time
deposits. Moreover, the Bank has historically had to price its time deposits at
the top of the market to attract and retain accounts. These competitive
pressures have resulted in the Bank having a higher cost of funds than its peer
group. To some extent, the Bank has compensated for its lower than average net
interest income by maintaining expenses at levels below its peer group. Because
of its high concentration of certificate accounts, which are not as
labor-intensive as transaction accounts, and the automation of the lending
function, the Bank has approximately one-third fewer employees than its peer
group and a ratio of noninterest expense to assets that is approximately 50
basis points lower than its peer group average.
ANALYSIS OF FINANCIAL CONDITION
The Bank's assets totalled $31.7 million at March 31, 1996, a decrease in
total assets of $111,500, or 0.4%, from June 30, 1995, assets of $31.8 million.
The decrease in asset levels was attributable to the repayment of FHLB advances
in the amount of $350,000, resulting in a 29.3% reduction of total borrowings.
During the nine-month period ended March 31, 1996, investment securities
declined by $650,000, or 61.9%, as a result of maturities and prepayments, and
mortgage-backed securities balances decreased by $575,000, or 10.4%, as a result
of increased levels of repayments as the underlying mortgages were refinanced by
borrowers seeking lower interest rates. Also during the period, deposits
increased $43,000, or 0.2%, accrued expenses increased $22,000, or 18.9%, and
advances from borrowers for taxes and insurance increased $96,369, or 246.6%, as
a result of both a new loan policy requiring borrowers to maintain escrow
accounts and the timing of such tax and insurance payments.
22
The foregoing changes funded an increase in cash and interest bearing
accounts of $293,400, or 7.4%, an increase in loans receivable of $848,500, or
4.1%, and the repayment of FHLB advances of $350,000, or 29.3%. Retained
earnings increased $66,000, or 2.4%, as a result of equivalent net income for
the nine months ended March 31, 1996.
The Bank's allowance for losses on loans totalled $103,700 at March 31,
1996, as compared to $98,100 at June 30, 1995. The $5,600 increase in the
allowance during the nine-month period was the result of a $34,000 provision and
write-offs, net of recoveries, of $28,400.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1996
AND 1995
GENERAL. The Bank's net income totalled $66,000 for the nine months ended
March 31, 1996, a decrease of $25,500, or 27.9%, from the $91,500 in net
earnings for the same period in 1995. The decrease in earnings was the result of
a decrease in net interest income of $28,400, or 4.7%, and an increase in the
provision for losses on loans of $25,000, or 277.8%. These amounts were
partially offset by an increase in other income of $4,900, or 10.4%, a reduction
in general and administrative expense of $12,000, or 2.4%, and a decrease of
$11,000 in federal income taxes.
NET INTEREST INCOME. Total interest income for the nine months ended March
31, 1996, increased $190,200, or 11.9%, compared to the same period in the 1995
fiscal year, while interest expense increased $218,600, or 22.1%, resulting in a
decrease in net interest income of $28,400, or 4.7%. During the nine-month
period, which was a period of rising interest rates, the Bank's liabilities were
repricing more rapidly than its assets.
Interest income on loans increased $133,000, or 10.9%, for the nine months
ended March 31, 1996, as compared to the 1995 period. The increase resulted from
a higher portfolio balance and an increased weighted average yield. From July 1,
1995, to March 31, 1996, the weighted average yield on loans increased
approximately 30 basis points, despite borrowers refinancing to obtain lower
interest rates. Interest income on mortgage-backed securities decreased $8,700,
or 3.6%, due to lower portfolio balances, but aided by increased yields as the
adjustable rate securities repriced upward. From July 1, 1994, to March 31,
1996, the weighted average yield on the Bank's mortgage-backed securities
increased approximately 75 basis points. Interest on investments increased
$1,100, or 2.2%, and interest on interest-bearing deposits increased $64,800, or
86.2%, due to higher balances and higher interest rates. From July 1, 1995, to
March 31, 1996, the yield on interest-bearing deposits increased approximately
75 basis points.
Interest expense on deposits for the nine months ended March 31, 1996,
increased $220,800, or 23.3%, as a result of higher interest rates paid on
deposits. From June 30, 1994, to March 31, 1996, the weighted cost of deposits
increased 114 basis points. Interest on borrowings for the nine month period
decreased $2,200, or 5.3%, from 1995 to 1996 as the level of FHLB advances was
reduced.
Although both interest income and the cost of funds increased during the
nine months ended March 31, 1996, interest rates have been more volatile for
assets. The downward pressure on rates during the first quarter of 1996 was
greater in the 15 year to 30 year range than in the short end of the rate curve.
Consequently, mortgage loan rates dropped rapidly, resulting in higher yielding
mortgage loans being refinanced for lower rates. The Bank sold all of the
long-term, fixed-rate loans it originated during the period, which resulted in
an increase in lower-yielding cash and interest-bearing deposits. Rates then
stabilized in March 1996, effectively slowing the refinancing activity. The Bank
intends to reduce its cash balances by reinvesting in the mortgage market at
market rates which are currently 100 basis points higher than rates were in
February 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans totalled
$34,000 for the nine months ended March 31, 1996, an increase of $25,000, or
277.8%, when compared to the $9,000 provision for the same period in 1995.
Additions to the allowance for loan losses are generally predicated on past loss
experience, the level of nonperforming loans, charge-offs, the outstanding
portfolio balance and the inherent risk related to the lending function. After
giving effect to loan charge-offs of $28,000 incurred during the period, the
provision resulted in a net increase of approximately $5,600 in the allowance
for loan losses.
23
OTHER INCOME. Other income totalled $52,000 for the nine months ended March
31, 1996, an increase of $4,900, or 10.4%, from the $47,100 in other income for
the comparable 1995 period. The gain on sale of loans increased $4,800, or
177.0%, due to a higher volume of loan sales as loan rates declined to levels
below management's requirements for portfolio investment. Other operating income
increased $1,200, or 17.4%, which was offset by a decrease in net investment
property income of $1,100, or 2.7%, due to higher real estate taxes.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense decreased by $12,000, or 2.4%, for the nine months ended March 31,
1996, as compared to the same period in 1995. The decline resulted primarily
from a decrease in compensation, fees and benefits of $13,500, or 4.9%, which
was partially offset by an increase in franchise tax of $1,400, or 5.9%.
FEDERAL INCOME TAXES. The provision for federal income taxes totalled
$32,100 for the nine months ended March 31, 1996, a decrease of $11,000, or
25.4%, from the $43,100 provision for the comparable 1995 period, as a result of
a reduction of $38,300, or 28.45% in pretax earnings for the current period.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
GENERAL. The Bank's net income totalled $125,400 for the year ended June
30, 1995, a decrease of $69,900, or 35.8%, from the $195,300 in net earnings for
the 1994 fiscal year. The decrease was the result of an increase in general,
administrative and other expense of $51,200, or 8.2%, and the absence of a gain
on sale of investments of $132,400 which occurred during the 1994 fiscal year.
These decreases were partially offset by higher net interest income after
provision for loan losses of $85,000, or 12.2%, resulting from higher spreads.
NET INTEREST INCOME. Total interest income for the year ended June 30,
1995, increased $93,300, or 4.5%. The higher total interest income was partially
offset by an increase in the cost of funds of $29,000, or 2.2%, resulting in an
increase in net interest income of $64,400, or 8.8%.
Interest on loans for the year ended June 30, 1995, increased $61,000, or
3.8%, primarily as a result of a $1.7 million increase in loans receivable.
Interest on mortgage-backed securities increased $34,300, or 12.0%, which more
than offset the effects of a $1.1 million decrease in the portfolio as the
adjustable rate securities repriced upward. Interest on investment securities
increased $41,500, or 150.2%, as the securities were held for the full year in
1995, compared to 9.5 months in 1994. Interest on interest-bearing deposits
decreased $43,500, or 27.0%, as the average amount invested declined, due to
increased mortgage demand.
Interest paid on deposits for the year ended June 30, 1995, increased
$11,700, or 0.9%, the result of a larger portfolio balance and higher rates paid
for savings. Interest on borrowings increased $17,300, or 41.2%, due to a
$300,000 six month FHLB advance which was obtained in February 1995 and repaid
in September 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended
June 30, 1995, was $12,000, a decrease of $20,600, or 63.2%, from the 1994
provision. The decrease was predicated on the reduction in loans 90 or more days
delinquent and loans in foreclosure.
OTHER INCOME. Other income for the year ended June 30, 1995, was $69,700, a
decrease of $134,200 from 1994. In the 1995 period, other income included
$12,200 in gains on sale of loans. Prior to that time, the Bank had not sold
loans. Investment property income decreased $14,500, or 22.3%, due to a new
lease at a lower rental figure and higher real estate taxes. Other operating
income increased $1,700, or 30.7%, due to higher fees collected. Other income
for 1994 included nonrecurring gain on sale of equipment of $1,200 and a gain on
sale of investments of $132,400, resulting from the sale of Federal Home Loan
Mortgage Corporation ("FHLMC") stock.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased $51,200, or 8.2%, for the year ended June 30, 1995, as
compared to the 1994 fiscal year. The increase was principally the result of an
increase in compensation, fees and benefits totaling $72,400, or 24.8%, due to
the addition of one new employee and two new directors. Computer processing
expense increased $3,000, or
24
9.8%, and franchise taxes increased $500, or 1.7%. These increases were
partially offset by a decrease in deposit insurance expense of $3,600, or 5.5%,
and a decrease in other operating expense of $20,100, or 15.3%, resulting from
cost saving measures instituted by management.
FEDERAL INCOME TAXES. Federal income taxes for the year ended June 30,
1995, decreased by $30,600, or 39.0%, as a direct result of lower net earnings
for the 1995 fiscal year, compared to 1994.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1994 AND 1993
GENERAL. Net income for the year ended June 30, 1994, totalled $195,300, an
increase of $68,800, or 54.3%, as compared to the 1993 fiscal year. The increase
was the result of an increase in other income of $67,700, or 49.6%, a decrease
in general, administrative and other expense of $12,200, or 1.9%, and a decrease
in the provision for loan losses of $50,000, or 60.5%, which were partially
offset by a decrease in net interest income of $68,000, or 8.5%. During the
first half of the 1994 fiscal year, which was a time of significant refinancing
activity generally, the Bank experienced significant loan payoffs, but was
inactive with respect to loan originations. The higher volume of payoffs
resulted in increased levels of cash, interest-bearing deposits and
mortgage-backed securities. Total interest income for the year ended June 30,
1994, decreased $228,200, or 9.9%, primarily the result of decreased interest on
loans. The cost of funds also decreased $160,200, or 10.7%, due to lower deposit
levels and a declining weighted average cost as interest rates generally
declined.
NET INTEREST INCOME. Interest income on loans for the year ended June 30,
1994, decreased $288,200, or 15.3%, as the portfolio was reduced due to
refinancing by borrowers to obtain lower rates. Interest on mortgage-backed
securities increased $54,300, or 23.4%, due to increased portfolio balances as
funds generated by loan prepayments were used purchase mortgage-backed
securities. Interest on investment securities increased $14,700, or 113.3%, due
to increased portfolio balances, and interest on interest-bearing deposits
decreased $8,900, or 5.3%, as the average balance declined.
Interest expense on deposits for the year ended June 30, 1994, decreased
$202,200, or 13.5%, as the Bank experienced an outflow of deposits as depositors
sought higher-yielding investments in the declining rate environment. Interest
expense on borrowings increased $42,000 as FHLB advances were obtained for the
first time as an alternative source to replace the declining deposit levels.
PROVISION FOR LOSSES ON LOANS. The provision for loan losses for the year
ended June 30, 1994, decreased by $50,000, or 60.5%, as a result of the lower
level of nonaccrual loans.
OTHER INCOME. Other income for the year ended June 30, 1994, increased
$67,700, or 49.6%, resulting from an increase in the gain on sale of investment
securities of $71,100, or 116.1%, a nonrecurring gain on sale of equipment of
$1,200 and an increase in investment property income of $700, or 1.0%, which
were partially offset by a decrease of $5,300, or 49.7%, in other operating
income.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense for the year ended June 30, 1994, decreased $12,300, or 1.9%,
compared to the 1993 fiscal year resulting from a decrease in compensation, fees
and benefits of $14,200, or 4.6%, and a decrease in occupancy and equipment of
$6,600, or 7.9%, due to benefits paid in connection with the death of the Bank's
former managing officer in 1993. These amounts were partially offset by
increased deposit insurance costs of $5,300, or 8.9%, increased franchise tax of
$2,200, or 7.7%, and increased computer servicing costs of $1,700, or 6.2%.
FEDERAL INCOME TAXES. Federal income tax for the year ended June 30, 1994,
decreased $6,800, or 8.0%, due to changes in accounting for taxes.
The following table sets forth certain average balance sheet information,
including the average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the years indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. Average balances are derived from monthly balances, which
include nonaccruing loans in the loan portfolio.
25
NINE MONTHS ENDED MARCH 31, YEAR ENDED JUNE 30,
-------------------------------------------------------------------------- ------------------------
1996 1995 1995
------------------------------------ ------------------------------------ ------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID
----------- ----------- ---------- ----------- ----------- ---------- ----------- -----------
Interest-earning assets:
Interest-bearing
deposits................ $ 3,216 $ 140 5.80% $ 1,922 $ 75 5.20% $ 2,200 $ 117
Investment securities.... 1,164 51 5.84 1,302 51 5.22 1,304 69
Mortgage-backed
securities.............. 5,218 234 5.98 6,137 242 5.26 6,028 321
Loans receivable......... 21,608 1,358 8.38 20,231 1,225 8.07 20,318 1,655
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning
assets................ 31,206 1,783 7.62 29,592 1,593 7.18 29,850 2,162
Non-interest-earning
assets.................. 585 537 553
----------- ----------- -----------
Total assets........... $ 31,791 $ 30,128 $ 30,403
----------- ----------- -----------
----------- ----------- -----------
Interest-bearing
liabilities:
NOW and money market
accounts................ $ 2,055 $ 42 2.73% $ 3,076 $ 60 2.60 $ 2,964 $ 79
Passbook savings
accounts................ 1,189 25 2.80 1,613 35 2.89 1,539 45
Certificates of
deposit................. 24,452 1,100 6.00 21,467 851 5.29 21,858 1,185
----------- ----------- ----------- ----------- ----------- -----------
Total deposits......... 27,696 1,167 5.62 26,156 946 4.82 26,361 1,309
FHLB advances............ 931 39 5.59 995 42 5.63 1,046 59
----------- ----------- ---------- ----------- ----------- ---------- ----------- -----------
Total interest-bearing
liabilities........... 28,627 1,206 5.62 27,151 988 4.85 27,407 1,368
----------- ---------- ----------- ---------- -----------
Non-interest-bearing
liabilities............. 412 347 350
----------- ----------- -----------
Total liabilities...... 29,039 27,498 27,757
Retained earnings........ 2,752 2,631 2,646
----------- ----------- -----------
Total liabilities and
retained earnings..... $ 31,791 $ 30,128 $ 30,403
----------- ----------- -----------
----------- ----------- -----------
Net interest income...... $ 577 $ 605 $ 794
----------- ----------- -----------
----------- ----------- -----------
Interest rate spread..... 2.00% 2.33%
---------- ----------
---------- ----------
Net interest margin (net
interest income as a
percentage of average
interest-earning
assets)................. 2.47% 2.73%
---------- ----------
---------- ----------
Average interest-earning
assets to average
interest-bearing
liabilities............. 109.01% 108.99%
---------- ----------
---------- ----------
1994 1993
------------------------------------ ------------------------------------
AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
RATE BALANCE PAID RATE BALANCE PAID RATE
---------- ----------- ----------- ---------- ----------- ----------- ----------
Interest-earning assets:
Interest-bearing
deposits................ 5.32% $ 4,727 $ 161 3.41% $ 5,472 $ 170 3.11%
Investment securities.... 5.29 573 28 4.89 244 13 5.32
Mortgage-backed
securities.............. 5.33 6,478 286 4.41 4,268 232 5.44
Loans receivable......... 8.15 19,242 1,594 8.28 21,028 1,882 8.95
----------- ----------- ----------- -----------
Total interest-earning
assets................ 7.24 31,020 2,069 6.67 31,012 2,297 7.41
Non-interest-earning
assets.................. 543 561
----------- -----------
Total assets........... $ 31,563 $ 31,573
----------- -----------
----------- -----------
Interest-bearing
liabilities:
NOW and money market
accounts................ 2.67 $ 3,425 $ 99 2.89 $ 2,870 $ 96 3.34
Passbook savings
accounts................ 2.92 2,245 67 2.98 2,698 145 5.37
Certificates of
deposit................. 5.42 22,318 1,131 5.07 23,325 1,258 5.39
----------- ----------- ----------- -----------
Total deposits......... 4.97 27,988 1,297 4.63 28,893 1,499 5.19
FHLB advances............ 5.64 815 42 5.16 -- -- --
---------- ----------- ----------- ---------- ----------- ----------- ----------
Total interest-bearing
liabilities........... 4.99 28,803 1,339 4.65 28,893 1,499 5.19
---------- ----------- ---------- ----------- ----------
Non-interest-bearing
liabilities............. 296 337
----------- -----------
Total liabilities...... 29,099 29,230
Retained earnings........ 2,464 2,343
----------- -----------
Total liabilities and
retained earnings..... $ 31,563 $ 31,573
----------- -----------
----------- -----------
Net interest income...... $ 730 $ 798
----------- -----------
----------- -----------
Interest rate spread..... 2.25% 2.02% 2.22%
---------- ---------- ----------
---------- ---------- ----------
Net interest margin (net
interest income as a
percentage of average
interest-earning
assets)................. 2.66% 2.35% 2.57%
---------- ---------- ----------
---------- ---------- ----------
Average interest-earning
assets to average
interest-bearing
liabilities............. 108.92% 107.70% 107.33%
---------- ---------- ----------
---------- ---------- ----------
26
The following table sets forth, at the dates indicated, the weighted average
yields earned on the Bank's interest-earning assets, the weighted average
interest rates paid on interest-bearing liabilities and the interest rate spread
between the weighted average yields and rates at the dates presented.
AT JUNE 30,
AT MARCH 31, -------------------------------------
1996 1995 1994 1993
--------------- ----------- ----------- -----------
Weighted average yield on loans........................................ 8.14% 8.25% 7.80% 8.35%
Weighted average yield on investment securities portfolio.............. 6.33 5.72 4.99 5.30
Weighted average yield on mortgage-backed securities................... 5.41 4.52 5.06 5.30
Weighted average yield on interest-bearing deposits.................... 5.24 5.96 4.11 3.53
Weighted average yield on all interest-earning assets.................. 7.27 7.19 6.63 7.28
Weighted average rate paid on deposits................................. 5.58 5.62 4.40 4.88
Weighted average rate paid on FHLB advances............................ 5.51 5.85 5.50 --
Weighted average rate paid on all interest-bearing liabilities......... 5.58 5.57 4.48 4.88
Interest rate spread................................................... 1.69 1.62 2.15 2.40
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate:
NINE MONTHS ENDED MARCH 31, YEAR ENDED JUNE 30,
------------------------------------- -------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994 1994 VS. 1993
------------------------------------- ------------------------------------- ----------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO
---------------------- INCREASE ---------------------- INCREASE ----------------------
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
----------- --------- ------------- ----------- --------- ------------- ----------- ---------
Interest income attributable
to:
Interest-bearing
deposits.................. $ 55 $ 10 $ 65 $ (109) $ 65 $ (44) $ (24) $ 15
Investments................ (5) 5 -- 39 2 41 16 (1)
Mortgage-backed
securities.............. (39) 31 (8) (21) 56 35 104 (50)
Loans receivable........... 86 47 133 88 (27) 61 (154) (134)
--- --------- ----- ----- --------- ----- ----- ---------
Total interest income.... 97 93 190 (3) 96 93 (58) (170)
--- --------- ----- ----- --------- ----- ----- ---------
Interest-bearing liabilities
Deposits................... 58 163 221 (78) 90 12 (46) (156)
FHLB advances.............. (3) -- (3) (13) 4 17 21 21
--- --------- ----- ----- --------- ----- ----- ---------
Total interest expense... 55 163 218 (65) 94 29 (25) (135)
--- --------- ----- ----- --------- ----- ----- ---------
Increase (decrease) in net
interest income............. $ 42 $ (70) $ (28) $ (62) $ 2 $ 64 $ (33) $ (35)
--- --------- ----- ----- --------- ----- ----- ---------
--- --------- ----- ----- --------- ----- ----- ---------
TOTAL
INCREASE
(DECREASE)
-------------
Interest income attributable
to:
Interest-bearing
deposits.................. $ (9)
Investments................ 15
Mortgage-backed
securities.............. 54
Loans receivable........... (288)
-----
Total interest income.... (228)
-----
Interest-bearing liabilities
Deposits................... (202)
FHLB advances.............. 42
-----
Total interest expense... (160)
-----
Increase (decrease) in net
interest income............. $ (68)
-----
-----
ASSET AND LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, the Bank uses the "net portfolio value" ("NPV") methodology
recently adopted by the OTS as part of its capital regulations. Although the
Bank is not currently subject to the NPV regulation because such regulation does
not apply to institutions with less than $300 million in assets and risk-based
capital in excess of 12%, the application of the NPV methodology illustrates
certain aspects of the Bank's interest rate risk.
27
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates.
Presented below, as of December 31, 1995, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates. The table also
contains the policy limits set by the Board of Directors of the Bank as the
maximum change in NPV that the Board of Directors deems advisable in the event
of various changes in interest rates. Such limits have been established with
consideration of the dollar impact of various rate changes and the Bank's strong
capital position.
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment,
because the Bank has a significant amount of fixed-rate loans in its loan
portfolio, the amount of interest the Bank would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest the Bank would pay on its deposits would
increase rapidly because the Bank's deposits generally have shorter periods to
repricing. The assumptions used in calculating the amounts in this table are OTS
assumptions.
DECEMBER 31, 1995
-------------------------
CHANGE IN INTEREST RATE BOARD LIMIT % $ CHANGE % CHANGE IN
(BASIS POINTS) CHANGE IN NPV NPV
- ----------------------- -------------- --------- --------------
(DOLLARS IN THOUSANDS)
+400 (60)% $ (1,678) (64)%
+300 (50) (1,185) (45)
+200 (35) (717) (28)
+100 (20) (302) (12)
0 0 0 0
-100 20 118 5
-200 35 90 3
-300 50 94 4
-400 60 171 7
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of 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. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In a rising interest rate environment, the Bank's net interest income could
be expected to be negatively affected. Moreover, rising interest rates could
negatively affect the Bank's earnings due to diminished loan demand.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are deposits, loan and mortgage-backed
securities repayments, maturities of securities and other funds provided by
operations. The Bank also has the ability to borrow from the FHLB of Cincinnati.
See "REGULATION -- Federal Home Loan Banks." While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
and mortgage-backed securities prepayments are more influenced by interest
rates, general economic conditions and competition. The Bank maintains
investments in liquid assets based upon management's assessment of
28
(i) the need for funds, (ii) expected deposit flows, (iii) the yields available
on short-term liquid assets and (iv) the objectives of the asset/liability
management program. During fiscal 1995, the Bank was able to increase total
deposits through a combined strategy involving both advertising and deposit
pricing.
OTS regulations presently require the Bank to maintain an average daily
balance of investments in United States Treasury securities, federal agency
obligations and other investments having maturities of five years or less in an
amount equal to 5% of the sum of the Bank's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which the Bank may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At March 31, 1996, the
Bank's regulatory liquidity ratio was 15.7%. At such date, the Bank had
commitments to originate loans totaling approximately $726,000 and one
commitment to sell a loan in the amount of $71,000. The Bank considers its
liquidity and capital reserves sufficient to meet its outstanding short- and
long-term needs. At March 31, 1996, the Bank had no material commitments for
capital expenditures. See Notes 9 and 10 of the Notes to Consolidated Financial
Statements.
The Bank's liquidity, primarily represented by cash and cash equivalents, is
a result of the funds used in or provided by the Bank's operating, investing and
financing activities. These activities are summarized below for the nine months
ended March 31, 1996, and for the years ended June 30, 1995, 1994 and 1993.
YEAR ENDED JUNE 30,
NINE MONTHS ENDED -------------------------------
MARCH 31, 1996 1995 1994 1993
------------------- --------- --------- ---------
(IN THOUSANDS)
Net income....................................................... $ 66 $ 125 $ 195 $ 127
Adjustments to reconcile net income to net cash from operating
activities...................................................... 192 12 (95) (30)
------ --------- --------- ---------
Net cash from operating activities............................... 258 137 100 97
Net cash provided by (used in) investment activities............. 342 718 (1,518) (13)
Net cash provided by (used in) financing activities.............. (307) 626 (759) 1,445
------ --------- --------- ---------
Net change in cash and cash equivalents.......................... 293 1,481 (2,177) 1,529
Cash and cash equivalents at beginning of period................. 3,943 2,462 4,639 3,110
------ --------- --------- ---------
Cash and cash equivalents at end of period....................... $ 4,236 $ 3,943 $ 2,462 $ 4,639
------ --------- --------- ---------
------ --------- --------- ---------
The Bank is required by applicable law and regulation to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement. See "REGULATION -- OTS Regulations -- Regulatory Capital
Requirements."
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus any
intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of the association's total
assets. The OTS has proposed to increase such requirement to 4% to 5%, except
for those associations with the highest examination rating and acceptable levels
of risk. See "REGULATION -- OTS Regulations -- Regulatory Capital Requirements."
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of the Bank includes a general loan loss allowance of $96,000
at March 31, 1996.
29
The following table summarizes the Bank's regulatory capital requirements
and actual capital at March 31, 1996. See Note 9 of the Notes to Financial
Statements for a reconciliation of capital under generally accepted accounting
principles ("GAAP") and regulatory capital amounts.
EXCESS OF ACTUAL
CURRENT REQUIREMENT CAPITAL OVER CURRENT
ACTUAL CAPITAL REQUIREMENT
---------------------- ----------------------- ---------------------- APPLICABLE
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ASSET TOTAL
--------- ----------- --------- ------------ --------- ----------- -----------
(DOLLARS IN THOUSANDS)
MARCH 31, 1996
Tangible capital................ $ 2,772 8.7% $ 476 1.5% $ 2,296 7.2% $ 31,733
Core capital.................... 2,772 8.7 952 3.0 1,820 5.7 31,733
Risk-based capital.............. 2,868 19.6 1,171 8.0 1,697 11.6 14,640
JUNE 30, 1995
Tangible capital................ $ 2,706 8.5% $ 478 1.5% $ 2,228 7.0% $ 31,844
Core capital.................... 2,706 8.5 955 3.0 1,751 5.5 31,844
Risk-based capital.............. 2,776 19.3 1,153 8.0 1,623 11.3 14,418
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114"). Under the provisions of SFAS No.
114, a loan is considered 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. SFAS No. 114 requires
creditors to measure impairment of a loan based on the present value of expected
future cash flows, discounted at the loan's effective interest rate. If the
measure of the impaired loan is less than the recorded investment in the loan, a
creditor must recognize an impairment by recording a valuation allowance with a
corresponding charge to bad debt expense. SFAS No. 114 also applies to
restructured loans and eliminates the requirement to classify loans that are
in-substance foreclosures as foreclosed assets, except for loans where the
creditor has physical possession of the underlying collateral, but not legal
title. SFAS No. 114 applies to financial statements for fiscal years beginning
after December 15, 1994. In October 1994, the FASB issued SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" ("SFAS No. 118"), which amends SFAS No. 114 to allow a creditor to
use existing methods for recognizing interest income on impaired loans. The Bank
will be required to adopt SFAS No. 114 for the year ending June 30, 1996, and
does not anticipate that the implementation of SFAS No. 114 and its amendment,
SFAS No. 118, will have a material impact on its results of operations or
financial position.
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans" ("SOP 93-6"), which is effective for fiscal years beginning after
December 15, 1993. SOP 93-6 will apply to the Bank for its fiscal year beginning
July 1, 1996. SOP 93-6 requires the application of its guidance for shares
acquired by ESOPs after June 30, 1992, but not yet committed to be released as
of the beginning of the year SOP 93-6 is adopted. SOP 93-6 will, among other
things, change the measure of compensation expense recorded by employers for
leveraged ESOPs from the cost of ESOP shares to the fair value of ESOP shares.
Under SOP 93-6, the Company will recognize compensation cost equal to the fair
value of the ESOP shares during the periods in which they become committed to be
released. To the extent that the fair value of the Bank's ESOP shares differ
from the cost of such shares, this differential will be charged or credited to
equity. Employers with internally leveraged ESOPs such as the Holding Company
will not report the loan receivable from the ESOP as an asset and will not
report the ESOP debt from the employer as a liability. See "MANAGEMENT -- Stock
Benefit Plans -- Employee Stock Ownership Plan."
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Statements" ("SFAS No. 107"), which would require disclosure
of fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value.
30
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The Bank will be required to adopt
SFAS No. 107 for the year ended June 30, 1996. Management does not anticipate
that the implementation of SFAS No. 107 will have a material impact on the
results of operations or financial position of the Bank.
In October, 1994, the FASB issued SFAS No. 119 "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments" ("SFAS No. 119").
SFAS No. 119 requires disclosures about the amounts, nature and terms of
derivative financial instruments which do not result in off-balance-sheet risk
of accounting loss. It requires that a distinction be made between financial
instruments held or issued for trading purposes (including dealing and other
trading activities measured at fair value with gains and losses recognized in
earnings) and financial instruments held or issued for purposes other than
trading. SFAS No. 119 is effective for financial statements issued for fiscal
years ended after December 31, 1995. Management does not expect any material
impact from the adoption of SFAS 119.
In May 1993, the FASB issued SFAS No. 115. SFAS No. 115 requires that
investments be classified as "held to maturity," "available for sale" or
"trading securities." The statement defines investments in securities as "held
to maturity" based upon a positive intent and ability to hold those securities
to maturity. Investments held to maturity would be reported at amortized cost.
Debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as "trading securities" and
would be reported at fair value, with unrealized gains and losses included in
operations. Equity and debt securities not classified as "held to maturity" or
"trading securities" are classified as "available for sale" and would be
recorded at fair value, with unrealized gains and losses excluded from
operations and reported as a separate component of stockholders' equity. The
Bank adopted SFAS No. 115 effective July 1, 1995. The adoption of SFAS No. 115
did not have an impact on the Bank's results of operations or financial
position. The Bank holds all investments as "held to maturity" carried at
amortized cost.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained would allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans based on their relative fair value. Statement No.
122 is effective for fiscal years beginning after December 15, 1995. Management
does not expect an impact from the adoption of this standard.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The standard requires an impairment loss to be recognized when the
carrying amount of the asset exceeds the fair value of the asset. The fair value
of the asset is the amount at which the asset would be bought or sold in a
current transaction between willing parties, that is, other than in a forced
liquidation sale. An entity that recognizes an impairment loss shall disclose
additional information in the financial statements related to the impaired
asset. All long-lived assets and certain identifiable intangibles to be disposed
of and for which management has committed to a plan to dispose of the assets,
whether by sale or abandonment, shall be reported at the lower of the carrying
amount or fair value less cost to sell. Subsequent revisions in estimates of
fair value less cost to sell shall be reported as adjustments to the carrying
amount of assets to be disposed of, provided that the carrying amount of the
asset does not exceed the carrying amount of the asset before an adjustment was
made to reflect the decision to dispose of the asset. The statement requires
additional disclosure in the footnotes regarding assets to be disposed of.
31
In December 1994, the Accounting Standards Division of the AICPA approved
SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties." SOP 94-6
requires disclosure in the financial statements beyond those now being required
or generally made in the financial statements about the risks and uncertainties
existing as of the date of those financial statements in the following areas:
nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates, and current vulnerability due to
certain concentrations. The standard is effective for financial statements
issued for fiscal years ending after December 15, 1995.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995. Companies are required, however, to disclose information for awards
granted in their first fiscal year ending after December 15, 1994. Management
has not completed an analysis of the potential effects of SFAS No. 123 on its
financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with GAAP. GAAP requires the Bank to measure
financial position and operating results in terms of historical dollars. Changes
in the relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
THE BUSINESS OF THE BANK
GENERAL
The Bank is a mutual savings and loan association which was organized under
Ohio law in 1888 as "The Foundation Building and Loan Company." In February
1942, the name of the Bank was changed to "The Foundation Savings and Loan
Company" and in October 1990, the Bank adopted its present name. As an Ohio
savings and loan association, the Bank is subject to supervision and regulation
by the OTS, the Division and the FDIC. The Bank is a member of the FHLB of
Cincinnati, and the deposits of the Bank are insured up to applicable limits by
the FDIC in the SAIF. See "REGULATION."
The Bank conducts business from its office at 25 Garfield Place in
Cincinnati, Ohio. The principal business of the Bank is the origination of
permanent mortgage loans secured by first mortgages on one- to four-family
residential real estate located in Hamilton County, Ohio and the contiguous Ohio
counties of Clermont, Butler and Warren and the Kentucky counties of Boone and
Kenton. The Bank also originates mortgage loans secured by multifamily real
estate (over four units) and nonresidential real estate in its primary market
area. See "Lending Activities." In addition to real estate lending, the Bank
originates a limited number of secured and unsecured consumer loans. For
liquidity and interest rate risk management purposes, the Bank invests in
interest-bearing deposits in other financial institutions, U.S. Government and
agency obligations, mortgage-backed securities and other investments permitted
by applicable law. See "Investment Activities." Funds for lending and other
investment activities are obtained primarily from
32
savings deposits, which are insured up to applicable limits by the FDIC, and
principal repayments on loans. Advances from the FHLB of Cincinnati are utilized
from time to time when other sources of funds are inadequate to fund loan
demand. See "Deposits and Borrowings."
Interest on loans and investments is the Bank's primary source of income.
The Bank's principal expense is interest paid on deposit accounts. Operating
results are dependent to a significant degree on the "net interest income" of
the Bank, which is the difference between interest income earned on loans,
mortgage-backed securities and other investments and interest paid on deposits
and borrowings. Like most thrift institutions, the Bank's interest income and
interest expense are significantly affected by general economic conditions and
by the policies of various regulatory authorities. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
MARKET AREA
The Bank conducts business from its office in Cincinnati, Ohio. The Bank's
primary market area for lending and deposit activity is Hamilton County, Ohio.
The Bank also frequently receives deposits from, and makes loans to, customers
in the contiguous Ohio counties of Clermont, Butler and Warren and the Kentucky
counties of Kenton and Boone.
LENDING ACTIVITIES
GENERAL. The Bank's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family homes located in
the Bank's primary market area. Loans secured by multifamily properties
containing five units or more and nonresidential properties are also offered by
the Bank. The Bank does not originate first mortgage loans insured by the
Federal Housing Authority or guaranteed by the Veterans Administration. In
addition to real estate lending, the Bank originates a limited number of
consumer loans, including loans secured by deposit accounts, automobile loans
and unsecured loans.
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the Bank's loan portfolio at the
dates indicated:
AT JUNE 30,
----------------------------------------------------------------------
AT MARCH 31, 1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT NET LOANS AMOUNT NET LOANS AMOUNT NET LOANS AMOUNT NET LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family............ $ 18,990 88.91% $ 18,300 89.22% $ 16,714 88.93% $ 17,305 88.52%
Nonresidential................. 1,302 6.09 1,124 5.48 882 4.69 1,030 5.27
Multifamily.................... 798 3.74 636 3.10 688 3.66 722 3.69
Commercial loans............... -- -- -- -- -- -- 2 0.01
Consumer loans:
Property improvement loans..... -- -- -- -- 14 0.07 19 0.10
Passbook loans................. 58 0.27 111 0.54 66 0.35 579 2.96
ther consumer loans............ 353 1.65 501 2.44 566 3.01 81 0.41
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total loans...................... $ 21,501 100.66% $ 20,672 100.78% $ 18,930 100.72% $ 19,738 100.96%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Less:
Loans in process............... 5 0.02 15 0.07 -- -- 5 0.02
Allowance for loan losses...... 104 0.49 98 0.48 72 0.38 101 0.52
Deferred loan fees............. 33 0.15 48 0.23 58 0.31 74 0.38
Unearned discounts............. -- -- -- -- 6 0.03 8 0.04
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net loans...................... $ 21,359 100.00% $ 20,511 100.00% $ 18,794 100.00% $ 19,550 100.00%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
33
LOAN MATURITY. The following table sets forth certain information as of
March 31, 1996, regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity. Demand loans and other
loans having no stated schedule of repayments or no stated maturity are reported
as due in one year or less.
DUE DURING THE YEAR ENDING
DUE 4-5 DUE 6-10 DUE 11-20 DUE MORE
MARCH 31, YEARS YEARS YEARS THAN 20
------------------------------- AFTER AFTER AFTER YEARS AFTER
1997 1998 1999 3/31/96 3/31/96 3/31/96 3/31/96
--------- --------- --------- --------- ----------- ----------- -----------
(IN THOUSANDS)
Real estate loans:
One- to four-family........................... $ 573 $ 669 $ 713 $ 1,578 $ 4,050 $ 3,992 $ 7,411
Nonresidential................................ 65 68 67 133 345 351 273
Multifamily................................... 30 33 36 78 221 284 116
--------- --------- --------- --------- ----------- ----------- -----------
Total real estate........................... $ 668 $ 770 $ 816 $ 1,788 $ 4,616 $ 4,627 $ 7,800
Consumer loans
Passbook loans................................ 52 212 58 31 -- -- --
Other consumer................................ 17 4 -- 37 -- -- --
--------- --------- --------- --------- ----------- ----------- -----------
Total....................................... $ 737 $ 986 $ 874 $ 1,856 $ 4,616 $ 4,627 $ 7,800
--------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- ----------- ----------- -----------
TOTAL
---------
Real estate loans:
One- to four-family........................... $ 18,985
Nonresidential................................ 1,302
Multifamily................................... 798
---------
Total real estate........................... $ 21,085
Consumer loans
Passbook loans................................ 353
Other consumer................................ 58
---------
Total....................................... $ 21,496
---------
---------
The next table sets forth the dollar amount of all loans due after one year
from March 31, 1996, which have predetermined interest rates and have floating
or adjustable interest rates:
DUE MORE THAN ONE YEAR
AFTER MARCH 31, 1996
---------------------------
(IN THOUSANDS)
Fixed rates of interest................................ $ 10,022
Adjustable rates of interest........................... 10,737
-------
$ 20,759
-------
-------
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of the Bank is the origination of permanent conventional loans secured
by one- to four-family residences, primarily single-family residences, located
within the Bank's primary market area. Each of such loans is secured by a first
mortgage on the underlying real estate and improvements thereon, if any. At
March 31, 1996, the Bank's one- to four-family residential real estate loan
portfolio was approximately $19.0 million, or 88.9% of total loans.
OTS regulations and Ohio law limit the amount which the Bank may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations and laws, the Bank
typically makes loans on owner-occupied one- to four-family residences of up to
80% of the value of the real estate and improvements (the "Loan-to-Value Ratio"
or "LTV") and also makes loans with higher LTVs. The Bank makes loans on
non-owner-occupied or investment properties with maximum LTVs of 75%. Since
1994, the Bank has required that the principal amount of any loan which exceeds
80% LTV at the time of origination be covered by private mortgage insurance at
the expense of the borrower.
Fixed-rate loans are offered by the Bank, currently for terms of up to 30
years. Adjustable-rate residential real estate loans ("ARMs") are also offered
by the Bank for terms of up to 30 years. The interest rate adjustment periods on
the ARMs are one and three years, with adjustments tied to the one-year and
three-year U.S. Treasury bill rate. In addition, the Bank offers loans on which
the interest rates remain fixed for a period of three, five, seven or ten years
and then adjust annually according to the one-year U.S. Treasury bill rate. The
new interest rate at each change date is determined by adding 2.5% to 3.0% to
the prevailing index. The maximum allowable adjustment at each adjustment date
is 2%, with a maximum adjustment of 6% over the term of the loan.
34
The initial rate on ARMs originated by the Bank is sometimes less than the
sum of the index at the time of origination plus the specified margin. Such
loans may be subject to greater risk of default as the interest rate adjusts to
the fully-indexed level. The Bank attempts to reduce the risks by underwriting
such loans on the basis of the payment amount the borrower will be required to
pay during the second year of the loan, assuming the maximum possible rate
increase.
Adjustable-rate loans decrease the Bank's interest rate risk but involve
other risks, primarily credit risk, because as interest rates rise the payment
by the borrower rises to the extent permitted by the terms of the loan, thereby
increasing the potential for default. At the same time, the marketability of the
underlying property may be adversely affected by higher interest rates. The Bank
believes that these risks have not had a material adverse effect on the Bank to
date.
The Bank makes a limited number of loans for the construction and
improvement of single-family houses. At March 31, 1996, the Bank's loan
portfolio included approximately $124,000 in improvement loans, .58% of total
loans, net of the total of $5,000 in undisbursed portions of such loans.
LOANS SECURED BY MULTIFAMILY REAL ESTATE. In addition to loans on one- to
four-family properties, the Bank originates loans secured by multifamily
properties containing over four units. Multifamily loans are offered with fixed
or adjustable rates for terms of up to 20 years and have a maximum LTV of 75%.
Multifamily lending is generally considered to involve a higher degree of
risk than one- to four-family residential lending because the borrower typically
depends upon income generated by the project to cover operating expenses and
debt service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. The Bank attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. The Bank requests that borrowers submit rent
rolls and financial statements annually to enable the Bank to monitor the loan.
At March 31, 1996, loans secured by multifamily properties totaled
approximately $798,000, or 3.7% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At March 31, 1996,
approximately $1.3 million, or 6.1%, of the Bank's total loans were secured by
permanent mortgages on nonresidential real estate. Such loans have both fixed
and adjustable rates, terms of up to 20 years and LTVs of up to 70%. Among the
properties securing nonresidential real estate loans are office buildings and
other non-residential properties located in the Bank's primary market area. For
the last five years, the amount of the Bank's nonresidential real estate loans
as a percent of total loans has ranged from a low of 4.7% at June 30, 1994, to a
high of 6.1% at March 31, 1996.
Although the loans secured by nonresidential real estate typically have
higher interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Bank has endeavored to reduce such
risk by limiting loan amounts and evaluating the credit history and past
performance of the borrower, the location of the real estate, the financial
condition of the borrower, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation and
by obtaining personal guarantees from borrowers.
COMMERCIAL LOANS. In prior years, the Bank has made commercial loans to
businesses in its primary market area. Such loans are typically secured by a
security interest in inventory, accounts receivable or other assets of the
borrower. At March 31, 1996, the Bank had no commercial loan portfolio.
CONSUMER LOANS. The Bank occasionally makes various types of consumer
loans, including loans made to depositors on the security of their deposit
accounts, automobile loans and other secured loans and
35
unsecured personal loans. Consumer loans are made at fixed rates of interest and
for terms of up to five years. At March 31, 1996, the Bank had approximately
$411,000, or 1.9% of total loans, invested in consumer loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by rapidly depreciating assets such as automobiles, may entail greater
risk than do residential real estate loans. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic conditions.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors and borrowers,
solicitations by the Bank's lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by a loan
originator. The Bank typically obtains a credit report, verification of
employment and other documentation concerning the creditworthiness of the
borrower. An appraisal of the fair market value of the real estate which will be
given as security for the loan is prepared by a fee appraiser approved by the
Board of Directors. Upon the completion of the appraisal and the receipt of
information on the credit history of the borrower, the application for a loan is
submitted for review in accordance with the Bank's underwriting guidelines.
Loans of amounts less than $250,000 and which meet secondary market standards
may be approved by management, while loans of amounts greater than $250,000 or
which do not meet secondary market standards must be submitted to the full Board
of Directors.
Under the Bank's loan guidelines, if a real estate loan application is
approved, title insurance is obtained on the real estate which will secure the
mortgage loan. Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name the Bank as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The Bank
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank has sold a limited number
of loans in the secondary market in recent years. The Bank sells loans in order
to improve its liquidity or to manage its interest rate risk. The Bank has
released the right to service virtually all of the loans it has sold.
36
The following table presents the Bank's loan origination, purchase and sale
activity for the periods indicated:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Loans receivable-beginning of period....................... $ 20,511 $ 18,794 $ 18,794 $ 19,550 $ 22,038
Loans originated:
One- to four-family residential.......................... 5,780 3,910 5,090 2,707 5,834
Nonresidential........................................... 268 210 370 -- 95
Multifamily residential.................................... 194 -- -- -- --
Consumer................................................. 53 49 127 201 435
Passbook................................................. 24 -- 50 54 14
--------- --------- --------- --------- ---------
Total loans originated................................. 6,319 4,169 5,637 2,962 6,378
Reductions:
Principal repayments....................................... 4,375 2,093 3,331 3,770 8,847
Loans sold................................................. 1,115 182 564 -- --
Total reductions........................................... 5,490 2,275 3,895 3,770 8,847
Other changes, net (1)..................................... 19 (18) (25) 52 (19)
Loans receivable, end of period............................ $ 21,359 $ 20,670 $ 20,511 $ 18,794 $ 19,550
- ------------------------
(1) Other items consist of loans in process, deferred loan fees and allowances
for loan losses
LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the aggregate
amount that a savings association may lend to any one borrower to an amount
equal to 15% of the association's unimpaired capital and unimpaired surplus
(collectively, "Unimpaired Capital"). A savings association may loan to one
borrower and certain related persons or entities an additional amount not to
exceed 10% of the association's Unimpaired Capital if the additional amount is
fully secured by certain forms of "readily marketable collateral." Real estate
is not considered "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated for
purposes of such limits. The level of unimpaired capital and surplus
notwithstanding, a savings association may lend up to $500,000 to any one
borrower or group of related borrowers. See "REGULATION - Office of Thrift
Supervision -- Lending Limit."
Based on such limits, the Bank was able to lend $500,000 to one borrower at
March 31, 1996. The largest amount the Bank had outstanding to one borrower and
related persons or entities at March 31, 1996, was approximately $456,000,
consisting of two loans, the largest of which was $306,075. Each of such loans
is secured by commercial real estate located in the Bank's primary market area
and is performing in accordance with its terms.
LOAN ORIGINATION AND OTHER FEES. The Bank realizes loan origination fee and
other fee income from its lending activities and also realizes income from late
payment charges, application fees and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The Bank
attempts to maintain a high level of asset quality through sound underwriting
policies and aggressive collection efforts.
Borrowers who become one to 30 days delinquent are not considered seriously
delinquent unless delinquency at such level continues for several months, in
which case a borrower is treated as chronically delinquent. Chronically
delinquent borrowers are referred to debt counseling, are advised to consider
selling
37
the subject property and, if such efforts are unsuccessful, foreclosure
proceedings are initiated. In the absence of chronic delinquency, borrowers who
are one to 30 days delinquent receive delinquency notices at the end of the
month. Borrowers who are 30 to 59 days delinquent for two consecutive months or
who are 60 to 89 days delinquent receive telephone calls or personalized
letters. Borrowers who become more than 90 days delinquent receive default
notices and, absent corrective action, foreclosure proceedings are instituted.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
AT JUNE 30,
-------------------------------------------------------
AT MARCH 31, 1996 1995 1994
------------------------------------------ ---------------------------------------- -------------
PERCENT PERCENT
OF TOTAL OF TOTAL
NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS NUMBER
--------------- ----------- ------------ ------------- ----------- ------------ -------------
(DOLLARS IN THOUSANDS)
Loans delinquent for:
30 - 59 days............. 4 $ 129 .60% 9 $ 468 2.26% 8
60 - 89 days............. 1 2 .01 3 48 .23 4
90 days and over......... 2 111 .52 4 194 .95 1
- -- --
----- --- ----- ---
Total delinquent
loans................. 7 $ 242 1.13% 16 $ 710 3.44% 13
- -- --
----- --- ----- ---
1993
----------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS NUMBER AMOUNT LOANS
----------- ------------ ------------- ----------- ------------
Loans delinquent for:
30 - 59 days............. $ 469 2.48% 4 $ 123 .62%
60 - 89 days............. 115 .61% 5 157 .80
90 days and over......... 93 .49 5 333 1.70
--
----- --- ----- ---
Total delinquent
loans................. $ 677 3.58% 14 $ 613 3.12%
--
----- --- ----- ---
Nonperforming assets include nonaccruing loans, accruing loans which are
delinquent 90 days or more, real estate acquired by foreclosure or by
deed-in-lieu thereof, in-substance foreclosures and repossessed assets. The Bank
ceases to accrue interest on real estate loans if the collateral value is not
adequate, in the opinion of management, to cover the outstanding principal and
interest.
The following table sets forth information with respect to the accrual and
nonaccrual status of the Bank's loans and other nonperforming assets at the
dates indicated:
AT MARCH 31, AT JUNE 30,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Accruing loans delinquent 90+ days................... $ 111 $ 70 $ 194 $ -- $ --
Loans accounted for on a nonaccrual basis:
Real estate
One- to four-family.............................. -- -- -- 93 333
Multifamily...................................... -- -- -- -- --
Nonresidential................................... -- -- -- -- --
Consumer........................................... -- -- -- -- --
----- ----------- ----------- ----------- -----------
Total nonaccrual loans........................... -- -- -- -- --
----- ----------- ----------- ----------- -----------
Total nonperforming loans........................ $ 111 $ 70 $ 194 $ 93 $ 333
----- ----------- ----------- ----------- -----------
----- ----------- ----------- ----------- -----------
Real estate owned.................................. -- -- -- -- --
----- ----------- ----------- ----------- -----------
Total nonperforming assets....................... $ 111 $ 70 $ 194 $ 93 $ 333
----- ----------- ----------- ----------- -----------
----- ----------- ----------- ----------- -----------
Allowance for loan losses........................ $ 104 $ 98 $ 98 $ 72 $ 101
----- ----------- ----------- ----------- -----------
----- ----------- ----------- ----------- -----------
Nonperforming assets as a percent of total
assets.......................................... .35% .23 % .61 % 0.30 % 1.05 %
Nonperforming loans as a percent of total
loans........................................... .52 % .34 % .95 % 0.49 % 1.70 %
Allowance for loan losses as a percent of
nonperforming loans............................. 93.69 % 140.00 % 50.52 % 77.42 % 30.33 %
For the quarter ended March 31, 1996, the Bank had no gross interest income
which would have been recorded had nonaccruing loans been current in accordance
with their original terms.
38
Real estate acquired by the Bank as a result of foreclosure proceedings is
classified as real estate owned ("REO") until it is sold. When property is so
acquired it is recorded by the Bank at the estimated fair value of the real
estate, less estimated selling expenses, at the date of acquisition, and any
write-down resulting therefrom is charged to the allowance for loan losses.
Interest accrual, if any, ceases no later than the date of acquisition of the
real estate, and all costs incurred from such date in maintaining the property
are expensed. Costs relating to the development and improvement of the property
are capitalized to the extent of fair value.
The Bank classifies its own assets on a quarterly basis in accordance with
federal regulations. Problem assets are classified as "substandard," "doubtful"
or "loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of the Bank is not
warranted.
The aggregate amounts of the Bank's classified assets at the dates indicated
were as follows:
AT MARCH 31, AT JUNE 30,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Classified assets:
Substandard............................................................. $ 431 $ 474 $ 441 $ 367 $ 516
Doubtful................................................................ -- -- -- -- --
Loss.................................................................... 6 4 28 -- 50
--------- --------- --------- --------- ---------
Total classified assets............................................... $ 437 $ 478 $ 469 $ 367 $ 566
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The Bank establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, the Bank must either establish a specific allowance for loss
in the amount of 100% of the portion of the asset classified loss or charge off
the amount of the loss classification. See "Allowance for Loan Losses."
Generally, the Bank has elected to charge off the portion of any real estate
loan deemed to be uncollectible.
The Bank analyzes each classified asset on a quarterly basis to determine
whether changes in the classifications are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of any
delinquency and the reasons for the delinquency, if any, the use of the real
estate securing the loan, the status of the borrower and the appraised value of
the real estate. As such factors change, the classification of the asset will
change accordingly.
ALLOWANCE FOR LOAN LOSSES. Management, with oversight by the Board, reviews
on a quarterly basis the allowance for loan losses as it relates to a number of
relevant factors, including but not limited to, trends in the level of
delinquent and nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a lesser
extent, management also considers loan concentrations to single borrowers and
changes in the composition of the loan portfolio. While management believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments, and net income
could be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
39
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
---------------------- ----------------------
1996 1995 1995 1994
--------- ----- ----- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.............................................. $ 98 $ 72 $ 72 $ 101
Charge-offs................................................................. (28) (1) (4) (96)
Recoveries.................................................................. -- 18 18 34
--------- --- --- ---------
Net (charge-offs) recoveries................................................ (28) 17 14 (62)
Provision for loan losses................................................... 34 9 12 33
--------- --- --- ---------
Balance at end of period.................................................... $ 104 $ 98 $ 98 $ 72
--------- --- --- ---------
--------- --- --- ---------
Ratio of net (charge-offs) recoveries to average loans outstanding during
the period................................................................. .13 .08 .07 .32
Ratio of allowance for loan losses to total loans........................... .48 .47 .47 .38
1993
---------
Balance at beginning of period.............................................. $ 15
Charge-offs.................................................................
Recoveries.................................................................. 3
---------
Net (charge-offs) recoveries................................................
Provision for loan losses................................................... 83
---------
Balance at end of period.................................................... $ 101
---------
---------
Ratio of net (charge-offs) recoveries to average loans outstanding during
the period................................................................. --
Ratio of allowance for loan losses to total loans........................... .51
Management does not allocate portions of the allowance to particular types
of loans.
INVESTMENT ACTIVITIES
Federal regulation and Ohio law permit the Bank to invest in various types
of investments, including interest-bearing deposits in other financial
institutions, U.S. Treasury and agency obligations, mortgage-backed securities
and certain other specified investments. The Board of Directors of the Bank has
adopted an investment policy which authorizes management, under the supervision
of the Investment Committee of the Board, to make investments in U.S. Government
and agency securities, deposits in the FHLB, certificates of deposit in
federally-insured financial institutions, banker's acceptances issued by major
U.S. banks, corporate debt securities rated by a major statistical rating firm
as at least "AA," or equivalent, and municipal or other tax free obligations.
Laird L. Lazelle, the Bank's President, Michael S. Schwartz, the Chairman of the
Board and Dianne K. Rabe, its Vice President, have primary responsibility for
implementation of the investment policy. The Bank's investment policy is
designed primarily to provide and maintain liquidity within regulatory
guidelines, to maintain a balance of high quality investments to minimize risk
and to maximize return without sacrificing liquidity and safety. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Analysis of Financial Condition, and -- Liquidity
and Capital Resources."
The following table sets forth the composition of the Bank's
interest-bearing deposits and investment securities at the dates indicated:
AT MARCH 31, AT JUNE 30,
---------------------- ----------------------------------------------------------------------
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
----------- --------- ----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Interest-bearing deposits.......... $ 85 $ 85 $ 786 $ 786 $ 1,827 $ 1,827 $ 3,477 $ 3,477
Certificates of deposit............ -- -- -- -- 1,400 1,400 1,400 1,400
Investment securities:
Federal funds.................... 4,136 4,136 3,100 3,100 575 575 500 500
U.S. Government obligations...... 400 393 1,050 1,035 1,050 1,004 233 233
FHLB stock....................... 274 274 260 260 241 241 11 155
Mortgage-backed securities....... 4,957 4,831 5,532 5,409 6,593 6,444 5,303 5,345
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total investments.............. $ 9,852 $ 9,719 $ 10,728 $ 10,590 $ 11,686 $ 11,491 $ 10,924 $ 11,110
----------- --------- ----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- --------- ----------- ---------
40
The maturities of the Bank's interest-bearing deposits and investment
securities at June 30, 1995, are indicated in the following table:
AT JUNE 30, 1995
------------------------------------------------------------------------------------------------------
AFTER ONE THROUGH FIVE AFTER FIVE THROUGH TEN
ONE YEAR OR LESS YEARS YEARS AFTER TEN YEARS
------------------------ ------------------------ ------------------------ ------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-bearing deposits... $ 786 5.95% $ -- -- % $ -- -- % $ -- -- %
Investment securities:
Federal funds............. 3,100 6.00 -- -- -- -- -- --
U.S. Government
obligations.............. 650 4.98 400 4.81 -- -- -- --
FHLB stock................ -- -- -- -- -- -- 260 6.50
Mortgage-backed
securities............... 131 3.28 91 7.25 146 6.92 5,164 5.83
----------- ----- ----- -----------
Total................... $ 4,667 5.77% $ 491 5.26% $ 146 6.92% $ 5,424 5.86%
----------- ----- ----- -----------
----------- ----- ----- -----------
TOTAL
--------------------------
CARRYING WEIGHTED
VALUE AVERAGE YIELD
----------- -------------
Interest-bearing deposits... $ 786 5.95%
Investment securities:
Federal funds............. 3,100 6.00%
U.S. Government
obligations.............. 1,050 4.92%
FHLB stock................ 260 6.50%
Mortgage-backed
securities............... 5,532 5.82%
-----------
Total................... $ 10,728 5.81%
-----------
-----------
The maturities of the Bank's interest-bearing deposits and investment
securities at March 31, 1996, are indicated in the following table:
AT MARCH 31, 1996
------------------------------------------------------------------------------------------------------
AFTER ONE THROUGH FIVE AFTER FIVE THROUGH TEN
ONE YEAR OR LESS YEARS YEARS AFTER TEN YEARS
------------------------ ------------------------ ------------------------ ------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-bearing deposits... $ 85 4.95% $ -- -- % $ -- -- % $ -- -- %
Investment securities:
Federal funds............. 4,136 5.25 -- -- -- -- -- --
U.S. Government
obligations.............. 250 5.75 150 6.06 -- -- -- --
FHLB stock................ -- -- -- -- -- -- 274 7.00
Mortgage-backed
securities............... 105 6.56 116 7.27 122 7.30 4,614 5.28
----------- ----- ----- -----------
Total................... $ 4,576 5.30% $ 266 6.59% $ 122 7.30% $ 4,888 5.38%
----------- ----- ----- -----------
----------- ----- ----- -----------
TOTAL
--------------------------
CARRYING WEIGHTED
VALUE AVERAGE YIELD
----------- -------------
Interest-bearing deposits... $ 85 4.95%
Investment securities:
Federal funds............. 4,136 5.25
U.S. Government
obligations.............. 400 5.87
FHLB stock................ 274 7.00
Mortgage-backed
securities............... 4,957 5.41
-----------
Total................... $ 9,852 5.40%
-----------
-----------
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the Bank's
funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal repayments
on loans and income on earning assets. Loan payments are a relatively stable
source of funds, while deposit inflows and outflows fluctuate more in response
to general interest rates and money market conditions. The Bank also utilizes
FHLB advances as an alternative source of funds. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
DEPOSITS. Deposits are attracted principally from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including NOW accounts, demand deposit accounts, money market accounts, regular
passbook savings accounts, term certificate accounts, IRAs and Keogh accounts.
Interest rates paid, maturity terms, service fees and withdrawal penalties for
the various types of accounts are established periodically by management of the
Bank based on the Bank's liquidity requirements, growth goals and interest rates
paid by competitors. The Bank does not use brokers to attract deposits. The
amount of deposits from outside the Bank's primary market area is not
significant.
At March 31, 1996, the Bank's certificates of deposit totaled $24.7, or
89.0% of total deposits. Of such amount, approximately $18.8 million in
certificates of deposit mature within one year. Based on past experience and the
Bank's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will be renewed with the Bank at maturity. If
there is a significant deviation from historical experience, the Bank can
utilize borrowings from the FHLB of Cincinnati as an alternative source of
funds.
41
The following table sets forth the dollar amount of deposits in the various
types of accounts offered by the Bank at the dates indicated:
AT JUNE 30,
----------------------------------------------------------------------
AT MARCH 31,
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Transaction accounts:
Passbook savings accounts
(1)..................... $ 1,085 3.91% $ 1,288 4.64% $ 1,835 6.71% 2,880 9.91%
NOW and money market
accounts (2)............ 1,962 7.06 2,507 9.04 3,306 12.09 3,313 11.40
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total transaction
accounts................ 3,047 10.97 3,795 13.68 5,141 18.80 6,193 21.31
Certificates of deposit
3.00% or less.......... 105 .38 425 1.53 250 .91 -- --
3.01 - 5.00%........... 1,593 5.73 4,157 14.99 18,975 69.38 6,550 22.54
5.01 - 7.00%........... 22,892 82.40 18,892 68.11 2,236 8.18 14,155 48.71
7.01 - 9.00%........... 143 .52 468 1.69 746 2.73 2,164 7.44
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total certificates of
deposit (3)............. 24,733 89.03 23,942 86.32 22,207 81.20 22,869 78.69
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total deposits........... $ 27,780 100.00% $ 27,737 100.00% $ 27,348 100.00% $ 29,062 100.00%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
- ------------------------
(1) The weighted average rate on passbook savings accounts was 2.52%, 2.87% and
2.84% at March 31, 1996 and at June 30, 1995 and 1994, respectively.
(2) The weighted average rate on NOW and money market accounts was 2.56%, 2.77%
and 2.81% at March 31, 1996 and at June 30, 1995 and 1994, respectively.
(3) The weighted average rate on all certificates of deposit was 5.96%, 6.01%
and 4.91% at March 31, 1996, and at June 30, 1995 and 1994, respectively.
The following table shows rate and maturity information for the Bank's
certificates of deposit at March 31, 1996:
AMOUNT DUE
-----------------------------------------------------------
OVER 2
UP TO ONE OVER 1 YEAR YEARS TO 3 OVER 3
RATE YEAR TO 2 YEARS YEARS YEARS TOTAL
- ------------------------------------------------------------- --------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
3.00% or less................................................ $ 105 $ -- $ -- $ -- $ 105
3.01% to 5.00%............................................... 1,280 78 161 74 $ 1,593
5.01% to 7.00%............................................... 17,226 4,514 646 506 $ 22,892
7.01% to 9.00%............................................... 143 -- -- -- $ 143
--------- ----------- ----- ----- ---------
Total certificates of deposit.............................. $ 18,754 $ 4,592 $ 807 $ 580 $ 24,733
--------- ----------- ----- ----- ---------
--------- ----------- ----- ----- ---------
42
The following table presents the amount of the Bank's certificates of
deposit of $100,000 or more by the time remaining until maturity at March 31,
1996:
MATURITY
- -------------------------------------------------------------------------- AMOUNT
---------------
(IN THOUSANDS)
Three months or less...................................................... $ 847
Over 3 months to 6 months................................................. 781
Over 6 months to 12 months................................................ 611
Over 12 months............................................................ 442
------
Total................................................................... $ 2,681
------
------
The following table sets forth the Bank's deposit account balance activity
for the periods indicated:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance.......................................... $ 27,737 $ 27,348 $ 27,348 $ 29,062 $ 27,617
Net increase(decrease) before interest credited............ (1,124) (2,517) (920) (3,011) (54)
Interest credited.......................................... 1,167 946 1,309 1,297 1,499
Ending balance............................................. 27,780 25,777 27,737 27,348 29,062
--------- --------- --------- --------- ---------
Net increase (decrease)................................ $ 43 $ (1,571) $ 389 $ (1,714) $ 1,445
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BORROWINGS. The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions. See
"REGULATION -- Federal Home Loan Banks." As a member in good standing of the
FHLB of Cincinnati, the Bank is authorized to apply for advances from the FHLB
of Cincinnati, provided certain standards of creditworthiness have been met.
Under current regulations, an association must meet certain qualifications to be
eligible for FHLB advances. The extent to which an association is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL Test"). See "REGULATION -- Office of Thrift Supervision -- Qualified
Thrift Lender Test." If an association meets the QTL Test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets. At March 31, 1996, the
Bank was in compliance with the QTL Test.
During fiscal 1995 the Bank obtained advances from the FHLB of Cincinnati as
indicated in the following table:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------------- ---------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- -----
(DOLLARS IN THOUSANDS)
Average balance outstanding.............................................. 931 995 1,046 815 --
Maximum amount outstanding at any month end during the period............ 1,186 1,213 1,213 1,000 --
Balance outstanding at end of period..................................... 842 1,208 1,192 955 --
Weighted average interest rate during the period......................... 6.02% 5.36% 5.64% 5.16% --
Weighted average interest rate at end of period.......................... 5.51% 5.84% 5.85% 5.50% --
COMPETITION
The Bank competes for deposits with other savings associations, savings
banks, commercial banks and credit unions and with the issuers of commercial
paper and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, the Bank competes with other savings banks,
savings associations, commercial
43
banks, mortgage brokers, consumer finance companies, credit unions, leasing
companies and other lenders. The Bank competes for loan originations primarily
through the interest rates and loan fees it charges and through the efficiency
and quality of services it provides to borrowers.
Competition in Hamilton County is intense due to the number of financial
institutions serving the area. 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 which are not readily
predictable. The Bank does not offer all of the products and services offered by
some of its competitors, particularly commercial banks. The Bank monitors the
product offerings of its competitors and adds new products when it can do so
competitively and cost effectively. The Bank's deposit market share in Hamilton
County is negligible.
The size of financial institutions competing with the Bank is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon the Bank.
PROPERTIES
The Bank leases the property at 25 Garfield Place where its office is
located.
EMPLOYEES
As of March 31, 1996, the Bank had eight full-time employees and no
part-time employees. The Bank provides health and long-term disability benefits,
life insurance, a 401(k) plan and a profit sharing plan for its employees. The
Bank believes that relations with its employees are excellent. None of the
employees of the Bank is represented by a collective bargaining unit.
LEGAL PROCEEDINGS
The Bank is not presently involved in any material legal proceedings. From
time to time, the Bank is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by the Bank.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE HOLDING COMPANY. The Board of Directors of the Holding Company consists
of seven members divided into two classes. Each of the directors of the Bank is
also a director of the Holding Company. The terms of Ms. Emden, Mr. Silverglade
and Mr. Silverman will expire in 1996 and the terms of Ms. Dickhaut, Mr.
Lazelle, Mr. Levitch and Mr. Schwartz will expire in 1997.
The executive officers of the Holding Company are Laird L. Lazelle,
President and Dianne K. Rabe, Secretary and Treasurer.
THE BANK. The Constitution of the Bank provides for a Board of Directors
consisting of not less than five nor more than seven directors, with the number
to be fixed or changed by the members by resolution at the annual meeting. The
Board of Directors currently consists of seven directors divided into three
classes. One class of directors is elected each year. Each director serves for a
three-year term. The Board of Directors met 27 times during fiscal 1995 for
regular and special meetings. No director attended fewer than 75% of the
aggregate of such meetings and all meetings of the committees of which such
director was a member.
44
The following table presents certain information with respect to the present
directors of the Bank, each of whom is also a director of the Holding Company,
and the executive officers of the Bank:
YEAR OF
COMMENCEMENT
POSITION(S) WITH THE OF TERM
NAME AGE(1) BANK DIRECTORSHIP EXPIRES
- ------------------------------ --------- ------------------------------ -------------- ---------
Mardelle Dickhaut 63 Director and Secretary 1989 1996
Ruth C. Emden 69 Director 1994 1997
Laird L. Lazelle 57 Director and President 1994 1997
Robert E. Levitch 62 Director 1963 1998
Margo A. Liebert 52 Treasurer -- --
Dianne K. Rabe 44 Vice President -- --
Michael S. Schwartz 51 Chairman of the Board 1963 1998
Paul L. Silverglade 70 Director 1988 1996
Ivan J. Silverman 55 Director 1992 1997
- ------------------------
(1) As of March 31, 1996.
MARDELLE DICKHAUT has served as Secretary of the Bank since 1979 and as a
director since 1989. Mrs. Dickhaut was employed at the Bank for 23 years prior
to her retirement in 1995.
RUTH C. EMDEN has served as a director of the Bank since 1994. Mrs. Emden is
the retired widow of Narvin I. Emden who served the Bank as President, Managing
Officer and Director for over 46 years. Mrs. Emden is active in community
service.
LAIRD L. LAZELLE is President and Chief Executive Officer of both the
Holding Company and the Bank and is the designated Managing Officer of the Bank.
Mr. Lazelle joined the Bank in January 1994. Mr. Lazelle has over 36 years of
financial institution experience, most recently as President and Chief Executive
Officer of The TriState Bancorp.
ROBERT E. LEVITCH has served as a director of the Bank since 1967. Mr.
Levitch has been a corrections officer with the Hamilton County Sheriff's
Department since 1980.
MARGO A. LIEBERT has served as Treasurer of the Bank since 1979 and is the
chief accounting officer for the Bank. Mrs. Liebert has been employed by the
Bank for 29 years.
DIANNE K. RABE is Vice President and is the chief operating officer of the
Bank and will also serve as Secretary/Treasurer of the Holding Company. Mrs.
Rabe is a Certified Public Accountant. Mrs. Rabe came to the Bank from another
Cincinnati thrift institution in 1992.
MICHAEL S. SCHWARTZ is an attorney at law practicing in Cincinnati, Ohio and
operates a title insurance agency. Mr. Schwartz is legal counsel to the Bank and
also provides title services for loans granted by the Bank. Mr. Schwartz has
served as a director of the Bank since 1967 and succeeded his father as Chairman
of the Board in 1993.
PAUL L. SILVERGLADE retired as the Corporate Office Personnel Director for
Federated Department Stores in 1981, after serving for 33 years. Mr. Silverglade
has been a director of the Bank since 1988 and serves as Chairman of the
Compensation Committee.
IVAN J. SILVERMAN is an investment consultant and Associate Vice President
with Gradison Division of McDonald & Company Securities, Inc. Mr. Silverman is
also the Mayor of the City of Montgomery, Ohio. Mr. Silverman has served as a
director of the Bank since 1992 and serves as Chairman of the Audit Committee.
COMMITTEES OF DIRECTORS
The Board of Directors of the Bank has an Audit Committee and a Compensation
Committee. The full Board of Directors serves as a nominating committee.
45
The members of the Audit Committee are Mr. Silverman, Ms. Emden, Mr. Levitch
and Mr. Silverglade. The Audit Committee is responsible for selecting and
recommending to the Board of Directors a firm to serve as auditors for the Bank.
The Audit Committee met one time during fiscal 1995.
The Compensation Committee is comprised of Mr. Silverglade, Mr. Silverman
and Mr. Schwartz. The function of the Compensation Committee is to determine
compensation for the Bank's employees and to make recommendations to the Board
of Directors regarding employee benefits and related matters. The Compensation
Committee met once during fiscal 1995.
COMPENSATION
Each director of the Bank currently receives a fee of $7,500 per year.
The following table presents certain information regarding the cash
compensation received by Laird L. Lazelle, President of the Bank. No other
executive officer of the Bank received compensation exceeding $100,000 during
fiscal 1995:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
- --------------------------------------------------------- --------- --------- --------- -----------------
Laird L. Lazelle 1995 $ 69,488 $ 5,200 $ 6,000
President and Chief Executive Officer
- ------------------------
(1) Consists of directors fees. Does not include amounts attributable to
miscellaneous benefits received by the named executive officer, the cost of
which was less than 10% of his annual salary and bonus.
DEFINED CONTRIBUTION PLAN
The Bank maintains a tax-qualified defined benefit plan (the "Pension Plan")
covering employees age 21 or older who have completed at least one year of
service to the Bank. Pursuant to the Pension Plan, a participant may elect to
allocate up to the lesser of 9% of his salary or $7,000 (multiplied by an
adjustment factor) to his account annually. The Bank makes a 50% matching
contribution and may also make additional discretionary contributions pursuant
to the Pension Plan. The Bank's contributions become vested at the rate of
one-fifth each year after two years of employment. The Bank's expense for
contributions to the Pension Plan for the nine months ended March 31, 1996, and
for the years ended June 30, 1995 and 1994, was $5,053, $10,585 and $10,167,
respectively.
STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. The Holding Company intends to establish the
ESOP for the benefit of employees of the Holding Company and its subsidiaries,
including the Bank, who are age 21 or older and who have completed at least one
year of service with the Holding Company and its subsidiaries. The ESOP will
provide an ownership interest in the Holding Company to all full-time employees
of the Holding Company. The Board of Directors of the Holding Company believes
that the ESOP will be in the best interests of the Holding Company and its
shareholders.
The ESOP trust intends to borrow funds from the Holding Company with which
to acquire up to 8.0% of the Common Shares sold in the Conversion. Such loan
will be secured by the Common Shares purchased with the proceeds, and will be
repaid by the ESOP over a period of approximately seven years with discretionary
contributions to the ESOP and earnings on ESOP assets. Common Shares purchased
with such loan proceeds 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 will
be allocated among participants on the basis of compensation. Except for
participants who retire, become disabled or die during the plan year, all other
participants must have completed at least 1,000 hours of service in order to
receive an allocation. Benefits become fully vested after five years of service.
Existing employees of the Holding Company and the Bank will be given credit for
years of service to the Bank prior to the effective date of the
46
ESOP for vesting purposes. Vesting will be accelerated upon retirement at or
after age 65, death, disability, termination of the ESOP or a change in control
of the Bank. Shares allocated to the account of a participant whose employment
by the Bank terminates prior to having satisfied the vesting requirement will be
forfeited. Forfeitures will be reallocated among remaining participating
employees. Benefits may be paid either in the Holding Company's common shares or
in cash. Benefits may be payable upon retirement, death, disability or
separation from service. Benefits payable under the ESOP cannot be estimated.
A Committee appointed by the Board of Directors of the Holding Company will
administer the ESOP. The Common Shares and other ESOP funds will be held and
invested by a trustee (the "ESOP Trustee"). The ESOP Committee may instruct the
ESOP Trustee regarding investments of funds contributed to the ESOP. The ESOP
Trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Shares for which employees do not
give instructions and unallocated shares will be voted by the ESOP Trustee.
The tax-qualified status of the ESOP and its purchase of the Common Shares
of the Holding Company are subject to the subsequent approval of the
Commissioner of the IRS (the "Commissioner"). The Holding Company will submit to
the Commissioner an application for approval of the ESOP. Although no assurances
can be given, the Holding Company expects that the ESOP will be approved by the
Commissioner.
STOCK OPTION PLAN. After the completion of the Conversion, the Board of
Directors of the Holding Company intends to adopt the Stock Option Plan, subject
to approval by the shareholders of the Holding Company. The purposes of the
Stock Option Plan include retaining and providing incentives to the directors,
officers and employees of the Holding Company and its subsidiaries by
facilitating their purchase of a stock interest in the Holding Company.
Options granted to the officers and key employees under the Stock Option
Plan may be "incentive stock options" within the meaning of Section 422 of the
Code (an "ISO"). Options granted under the Stock Option Plan to directors who
are not full-time employees of the Holding Company will not qualify under the
Code and thus will not be incentive stock options ("Non-qualified Options").
Although any eligible director, officer or employee of the Holding Company may
receive Non-qualified Options, it is anticipated that the non-employee directors
of the Holding Company will receive Non-qualified Options and other eligible
participants will receive ISOs.
The option exercise price shall be determined by the Committee at the time
of grant; provided, however, that the exercise price for an ISO or for any
option if the Stock Option Plan is implemented by the Holding Company during the
first year following the completion of the Conversion must not be less than 100%
of the fair market value of the shares on the date of the grant. No stock option
will be exercisable after the expiration of ten years from the date that it is
granted; provided, however, that in the case of an ISO granted to an employee
who owns more than 10% of the Bank's outstanding common shares at the time an
ISO is granted under the Stock Option Plan, the exercise price of the ISO may
not be less than 110% of the fair market value of the shares on the date of the
grant, and the ISO shall not be exercisable after the expiration of five years
from the date it is granted.
An option recipient cannot transfer or assign an option other than by will
or in accordance with the laws of descent and distribution. "Termination for
cause," as defined in the Stock Option Plan, will result in the annulment of any
outstanding options.
The Holding Company will receive no monetary consideration for the granting
of options under the Stock Option Plan. Upon the exercise of options, the
Holding Company will receive payment of cash, Holding Company common shares or a
combination of cash and common shares from option recipients in exchange for
shares issued.
The Committee may grant options under the Stock Option Plan at such times as
they deem most beneficial to the Holding Company on the basis of the individual
participant's responsibility, tenure and future potential to the Holding
Company.
47
A number of shares equal to 10% of the Common Shares to be issued in
connection with the Conversion is expected to be reserved for issuance by the
Holding Company upon the exercise of options to be granted to certain directors,
officers and employees of the Holding Company and its subsidiaries from time to
time under the Stock Option Plan. Assuming the issuance of 462,875 Common Shares
in the Conversion, 46,288 Common Shares will be reserved for issuance under the
Stock Option Plan. No determination has been made regarding the recipients of
awards under the Stock Option Plan or the number of shares to be awarded to
individual recipients.
In accordance with OTS regulations, if the Stock Option Plan is implemented
by the Holding Company during the first year following the completion of the
Conversion, the following restrictions will apply: (i) the Stock Option Plan
must be approved by the shareholders of the Holding Company at an annual or
special meeting of shareholders, in either case to be held no earlier than six
months after the completion of the Conversion; (ii) awards to directors who are
not full-time employees of the Holding Company or the Bank may not exceed 5% of
the plan shares per person and 30% of the plan shares in the aggregate of the
total number of shares reserved for issuance under the plan, (iii) awards to
directors or other persons who are full-time employees of the Holding Company or
the Bank may not exceed 25% of the plan shares per person, and (iv) options will
become exercisable at the rate of one-fifth per year commencing no earlier than
one year from the date the Stock Option Plan is approved by the shareholders,
subject to acceleration of vesting only in the event of the death or disability
of a participant.
RECOGNITION AND RETENTION PLAN. After the completion of the Conversion, the
Bank intends to adopt the RRP. The purpose of the RRP is to provide directors
and certain key employees of the Bank with an ownership interest in the Bank in
a manner designed to compensate such directors and key employees for services to
the Bank. The Bank expects to contribute sufficient funds to enable the RRP to
purchase up to 18,515 Common Shares, assuming the issuance of 462,875 Common
Shares in connection with the Conversion.
The RRP Committee will consist of three directors who are not employees of
the Bank. The RRP Committee will administer the RRP and determine the number of
shares to be granted to eligible participants. Prior to being earned, each
participant granted shares under the RRP will be entitled to the benefit of any
dividends or other distributions paid on such shares. Compensation expense in
the amount of the fair market value of the RRP shares will be recognized as the
shares are earned.
No determination has been made regarding recipients of RRP awards or the
number of shares to be awarded to individual recipients. In accordance with OTS
regulations, if the RRP is implemented during the first year following the
completion of the Conversion, the following restrictions will apply: (i) the RRP
must be approved by the shareholders of the Holding Company; (ii) awards to
directors who are not full-time employees of the Holding Company or the Bank may
not exceed 5% of the plan shares per person and 30% of the plan shares in the
aggregate of the total number of shares reserved for issuance under the plan;
(iii) awards to directors or other persons who are full-time employees of the
Holding Company or the Bank may not exceed 25% of the plan shares per person;
and (iv) RRP shares will be earned and nonforfeitable at the rate of one-fifth
per year on each of the first five anniversaries of the award, subject to
acceleration only in the event of the death or disability of a participant.
EMPLOYMENT AGREEMENT
The Bank currently has no employment agreements with any of its officers.
The Bank intends to enter into an employment agreement with Laird L. Lazelle
(the "Employment Agreement") upon the completion of the Conversion. The
Employment Agreement will provide for a term of three years and a salary and
performance review by the Board of Directors not less often than annually and
will provide for inclusion of Mr. Lazelle in any formally established employee
benefit, bonus, pension and profit-sharing plans for which senior management
personnel are eligible. The Employment Agreement will also provide for vacation
and sick leave in accordance with the Bank's prevailing policies.
The Employment Agreement will be terminable by the Bank at any time. In the
event of termination by the Bank for "just cause," as defined in the Employment
Agreement, Mr. Lazelle will have no right to
48
receive any compensation or other benefits for any period after such
termination. In the event of termination by the Bank other than for just cause,
at the end of the term of the Employment Agreement or in connection with a
"change of control," as defined in the Employment Agreement, Mr. Lazelle will be
entitled to a continuation of salary payments for a period of time equal to the
term of the Employment Agreement and a continuation of benefits substantially
equal to those being provided at the date of termination of employment until the
earliest to occur of the end of the term of the Employment Agreement or the date
Mr. Lazelle becomes employed full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence within one year of a "change of control" of (1) the termination of
employment of Mr. Lazelle for any reason other than just cause, retirement or
termination at the end of the term of the agreement, or (2) a constructive
termination resulting from change in the capacity or circumstances in which Mr.
Lazelle is employed or a material reduction in his responsibilities, authority,
compensation or other benefits provided under the Employment Agreement without
his written consent. In the event of any such occurrence, Mr. Lazelle will be
entitled to payment of an amount equal to three times his average annual
compensation for the three taxable years immediately preceding the termination
of employment. In addition, Mr. Lazelle would be entitled to continued coverage
under all benefit plans until the earliest of the end of the term of the
Employment Agreement or the date on which he is included in another employer's
benefit plans as a full-time employee. The maximum which Mr. Lazelle may
receive, however, is limited to an amount which will not result in the
imposition of a penalty tax pursuant to Section 280G(b)(3) of the Code.
"Control," as defined in the Employment Agreement, generally refers to the
acquisition by any person or entity of the ownership or power to vote 10% or
more of the voting stock of the Bank or the Holding Company, the control of the
election of a majority of the directors of the Bank or the Holding Company or
the exercise of a controlling influence over the management or policies of the
Bank or the Holding Company.
The aggregate payments that would have been made to Mr. Lazelle under the
Employment Agreement, assuming his termination at March 31, 1996, following a
change of control, would have been approximately $195,000.
CERTAIN TRANSACTIONS WITH THE BANK
In accordance with the OTS regulations, the Bank makes loans to executive
officers and directors of the Bank in the ordinary course of business and on the
same terms and conditions, including interest rates and collateral, as those of
comparable loans to other persons. Other than loans made to executive officers
and directors prior to 1989 for which closing costs were waived by the Bank, all
outstanding loans to executive officers and directors comply with such policy,
do not involve more than the normal risk of collectibility or present other
unfavorable features and are current in their payments. Loans to all directors
and executive officers of the Bank and their related interests totalled $247,127
at March 31, 1996. Such amount includes two loans, one in the amount of $66,642,
to a daughter of Ms. Emden, and the other in amount of $85,806, also to a
daughter of Ms. Emden.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio, the
Bank is subject to regulation, examination and oversight by the OTS and the
Superintendent of the Division (the "Ohio Superintendent"). Because the Bank's
deposits are insured by the FDIC, the Bank also is subject to general oversight
by the FDIC. The Bank must file periodic reports with the OTS, the Ohio
Superintendent and the FDIC concerning its activities and financial condition.
Examinations are conducted periodically by federal and state regulators to
determine whether the Bank is in compliance with various regulatory requirements
and is operating in a safe and sound manner. The Bank is a member of the FHLB of
Cincinnati.
The Holding Company will be a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently, the
Holding Company will be subject to
49
regulation, examination and oversight by the OTS and will be required to submit
periodic reports thereto. Because the Holding Company and the Bank are
corporations organized under Ohio law, they are also subject to the provisions
of the Ohio Revised Code applicable to corporations generally.
The United States Congress is considering legislation to recapitalize the
SAIF. See "-- Federal Deposit Insurance Corporation -- Assessments." In
connection with such legislation, Congress may eliminate the OTS and may require
that the Bank be regulated under federal law in the same fashion as banks. As a
result, the Bank may become subject to additional regulation, examination and
oversight by the FDIC. In addition, the Holding Company might become a bank
holding company, subject to examination, regulation and oversight by the Board
of Governors of the Federal Reserve ("FRB"), including greater activity and
capital requirements than imposed on it by the OTS.
OHIO SAVINGS AND LOAN LAW
The Ohio Superintendent is responsible for the regulation and supervision of
Ohio savings and loan associations in accordance with the laws of the State of
Ohio. Ohio law prescribes the permissible investments and activities of Ohio
savings and loan associations, including the types of lending that such
associations may engage in and the investments in real estate, subsidiaries and
corporate or government securities that such associations may make. The ability
of Ohio associations to engage in these state-authorized investments and
activities is subject to oversight and approval by the FDIC, if such investments
or activities are not permissible for a federally chartered savings and loan
association.
The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations. The
Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Ohio Superintendent may place an Ohio association in
conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of the Bank
approximately once a year. Such examinations are usually conducted jointly with
one or both federal regulators. The Ohio Superintendent imposes assessments on
Ohio associations based on their asset size to cover the cost of supervision and
examination.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally chartered
savings and loan associations and all other savings and loan associations the
deposits of which are insured by the FDIC. The OTS issues regulations governing
the operation of savings and loan associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the costs of this supervision and examination. The OTS also
may initiate enforcement actions against savings and loan associations and
certain persons affiliated with them for violations of laws or regulations or
for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings and loan
association.
REGULATORY CAPITAL REQUIREMENTS. The Bank is required by OTS regulations to
meet certain minimum capital requirements. For information regarding the Bank's
regulatory capital at March 31, 1996, and pro forma regulatory capital after
giving effect to the Conversion, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources" and "REGULATORY CAPITAL COMPLIANCE."
Current capital requirements call for tangible capital of 1.5% of adjusted
total assets, core capital (which for the Bank consists solely of tangible
capital) of 3.0% of adjusted total assets and risk-based capital (which for the
Bank consists of core capital and general valuation allowances) of 8.0% of
risk-weighted assets (assets, including certain off-balance sheet items, are
weighted at percentage levels ranging from 0% to 100% depending on the relative
risk).
The OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and an acceptable
level of risk will be required to maintain core capital
50
of from 4% to 5%, depending on the association's examination rating and overall
risk. The Bank does not anticipate that it will be adversely affected if the
core capital requirement regulation is amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and the association qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Asset and Liability Management."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (i) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (ii) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of 8%, core
risk-based capital (consisting only of items that qualify for inclusion in core
capital) of 4%, and core capital of 4% (except for associations receiving the
highest examination rating, in which case the level is 3%) but are not well-
capitalized; (iii) undercapitalized associations are those that do not meet
regulatory limits, but that are not significantly undercapitalized; (iv)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of less than 3% or core capital of less than 3%; and
(v) critically undercapitalized associations are those with core capital of less
than 2% of total assets. In addition, the OTS generally can downgrade an
association's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the association is deemed to be engaging in
an unsafe or unsound practice because it has not corrected deficiencies that
resulted in it receiving a less than satisfactory examination rating on matters
other than capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Undercapitalized associations
will be subject to increased monitoring and asset growth restrictions and will
be required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Critically undercapitalized institutions must be placed
in conservatorship or receivership within 90 days of reaching that
capitalization level, except under limited circumstances. The Bank's capital at
March 31, 1996, meets the standards for a well-capitalized institution.
Federal law prohibits a savings and loan association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (i) an amount equal to 50% of the association's total assets at
the time the association became undercapitalized or (ii) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
51
LIQUIDITY. OTS regulations require that savings associations maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of not less than 1% of the total of
its net withdrawable savings accounts and borrowings payable in one year or
less. Monetary penalties may be imposed upon member institutions failing to meet
liquidity requirements. The eligible liquidity of the Bank at March 31, 1996,
was approximately $4.6 million, or 15.69%, which exceeded the 5% liquidity
requirement by approximately $3.1 million. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
QUALIFIED THRIFT LENDER TEST. Savings and loan associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments. Such investments are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. The QTL test requires that 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) consist
of qualified thrift investments on a monthly average basis in 9 out of every 12
months. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings and loan association fails to meet the QTL Test, the
Bank and its holding company will be subject to certain operating restrictions.
A savings and loan association that fails to meet the QTL Test will not be
eligible for new FHLB advances. See "-- Federal Home Loan Banks." At March 31,
1996, the Bank had QTL investments in excess of 65% of its total portfolio
assets.
LENDING LIMIT. OTS regulations generally limit the aggregate amount that a
savings association can lend to one borrower or group of related borrowers to an
amount equal to 15% of the association's unimpaired capital, which is defined
for this purpose as total capital for regulatory purposes. A savings association
may loan to one borrower an additional amount not to exceed 10% of the
association's unimpaired capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Notwithstanding the level of unimpaired capital
and surplus, a savings association may lend up to $500,000 to any one borrower
or group of related borrowers. See "THE BUSINESS OF THE BANK -- Lending
Activities -- Loan Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to insiders are also
subject to Sections 22(g) and (h) of the Federal Reserve Act ("FRA"), which
place restrictions on loans to executive officers, directors and principal
shareholders and their related interests. Generally, such loans must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's unimpaired capital and surplus or 200%
of unimpaired capital and surplus for eligible adequately capitalized
institutions with less than $100 million in assets. See "-- Lending Limits."
Most loans to directors, executive officers and principal shareholders must be
approved in advance by a majority of the "disinterested" members of the board of
directors of the association with any "interested" director not participating.
All loans to directors, executive officers and principal shareholders must be
made on terms substantially the same as offered in comparable transactions with
the general public. Loans to executive officers are subject to additional
limits. The Bank was in compliance with such restrictions at March 31, 1996. See
"MANAGEMENT -- Certain Transactions with the Bank."
Savings associations must comply with Sections 23A and 23B of the FRA,
pertaining to transactions with affiliates. An affiliate of a savings
association is any company or entity that controls, is controlled by or is under
common control with the savings and loan association. The Holding Company will
be an affiliate of the Bank. Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which a savings and loan association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, (ii) limit the aggregate of
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase
52
of assets, issuance of a guarantee and other similar types of transactions. In
addition to the limits in Sections 23A and 23B, a savings association may not
make any loan or other extension of credit to an affiliate unless the affiliate
is engaged only in activities permissible for a bank holding company and may not
purchase or invest in securities of any affiliate except shares of a subsidiary.
The Bank was in compliance with these requirements and restrictions at March 31,
1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
according to ratings of associations based on their capital level and
supervisory condition. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases and certain
other acquisitions by an association of its shares and payments to stockholders
of another association in an acquisition of such other association.
For purposes of the capital distribution regulations, each institution is
categorized in one of three tiers. Tier 1 consists of associations that, before
and after the proposed capital distribution, meet their fully phased-in capital
requirement. Associations in this category may make capital distributions during
any calendar year equal to the greater of 100% of their net income, current
year-to-date, plus 50% of the amount by which the lesser of such association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a tier 2 association. Tier 2
consists of associations that, before and after the proposed capital
distribution, meet their current minimum, but not fully phased-in capital
requirement. Associations in this category may make capital distributions up to
75% of their net income over the most recent four quarters. Tier 3 associations
do not meet their current minimum capital requirement and must obtain OTS
approval of any capital distribution. A tier 1 association deemed to be in need
of more than normal supervision by the OTS may be downgraded to a tier 2 or tier
3 association.
The Bank meets the requirements for a tier 1 association and has not been
notified of any need for more than normal supervision. The Bank will also be
prohibited from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the net worth of the Bank would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the Conversion. In addition, as a subsidiary of the Holding
Company, the Bank will also be required to give the OTS 30 day's notice prior to
declaring any dividend on its stock. The OTS may object to the dividend during
that 30-day period based on safety and soundness concerns. Moreover, the OTS may
prohibit any capital distribution otherwise permitted by regulation if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, associations not owned by a holding
company with a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if they remain adequately capitalized,
as described above, after the distribution is made. Any other association
seeking to make a capital distribution that would not cause the association to
fall below the capital levels to qualify as adequately capitalized or better,
would have to provide notice to the OTS. Except under limited circumstances and
with OTS approval, no capital distributions would be permitted if it caused the
association to become undercapitalized or worse.
HOLDING COMPANY REGULATION. After the Conversion, the Holding Company will
be a savings and loan holding company within the meaning of the HOLA. As such,
the Holding Company will register with the OTS and will be subject to OTS
regulations, examination, supervision and reporting requirements, in addition to
the reporting requirements of the SEC. Congress is considering legislation which
may require that the Holding Company become a bank holding company regulated by
the FRB. Bank holding companies with more than $150 million in assets are
subject to capital requirements similar to those imposed on the Bank. They are
also subject to more restrictive activity and investment limits than savings and
loan holding companies, although they have more extensive interstate acquisition
authority than savings and loan holding companies. No assurances can be given
that such legislation will be enacted, and the Holding Company cannot be certain
of the impact such legislation may have on its future operations.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings and loan association or savings and loan holding
company, without prior approval of the OTS, or from
53
acquiring or retaining more than 5% of the voting shares of a savings and loan
association or holding company thereof, which is not a subsidiary. Under certain
circumstances, a savings and loan holding company is permitted to acquire, with
the approval of the OTS, up to 15% of the previously unissued voting shares of
an undercapitalized savings and loan association for cash without such savings
and loan association being deemed to be controlled by such holding company.
Except with the prior approval 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 Holding Company will be a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies, and such companies are the only
financial institution holding companies which may engage in commercial,
securities and insurance activities without limitation. The broad latitude under
current law is restricted if the OTS determines that there is reasonable cause
to believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings and loan association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings and loan association; (ii) transactions
between the savings and loan association and its affiliates; and (iii) any
activities of the savings and loan association that might create a serious risk
that the liabilities of the holding company and its affiliates may be imposed on
the savings and loan association. Notwithstanding the foregoing rules as to
permissible business activities of a unitary savings and loan holding company,
if the savings and loan association subsidiary of a holding company fails to
meet the QTL Test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. At March 31,
1996, the Bank met the QTL Test. See "-- Qualified Thrift Lender Test."
If the Holding Company were to acquire control of another savings
institution, other than through a merger or other business combination with the
Bank, or if the Bank failed to meet the QTL Test, the Holding Company would
become a multiple savings and loan holding company. Unless the acquisition is an
emergency thrift acquisition and each subsidiary savings and loan association
meets the QTL Test, the activities of the Holding Company and any of its
subsidiaries (other than the Bank or other subsidiary savings and loan
associations) would thereafter be subject to activity restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof that is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities previously directly authorized by federal regulation as of
March 5, 1987, to be engaged in by multiple holding companies; or (vii) those
activities authorized by the FRB as permissible for bank holding companies
[unless the OTS by regulation prohibits or limits such activities for savings
and loan holding companies] and which have been approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may approve an acquisition resulting in the formation of a multiple
savings and loan holding company that controls savings and loan associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings and loan association that 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). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings and
loan associations in more than one state in the case of certain emergency thrift
acquisitions.
54
No subsidiary savings and loan 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 OTS 30 days advance notice of such declaration and
payment. Any dividend declared during such period or without the giving of such
notice shall be invalid.
FEDERAL DEPOSIT INSURANCE CORPORATION
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 and
state savings banks and the SAIF for savings associations, state savings banks
that converted from savings associations and banks that have acquired deposits
from savings associations. The BIF and the SAIF are each required to maintain
designated levels of reserves. The FDIC has examination authority over all
insured depository institutions, including the Bank, and has authority to
initiate enforcement actions against federally insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The deposit accounts of the Bank and of other savings associations are
insured by the FDIC in the SAIF. The reserves of the SAIF are currently below
the level required by law, because of a higher than anticipated reduction in the
amount of SAIF deposits and because a significant portion of the assessments
paid into the fund are used to pay the principal and interest on bonds issued by
FICO to pay the cost of resolving past thrift failures. The deposit accounts of
commercial banks are insured by the BIF administered by the FDIC, except to the
extent that such banks have acquired SAIF deposits. The reserves of the BIF
reached the level required by law in May 1995.
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.
Because of the differing reserve levels of the SAIF and the BIF, deposit
insurance assessments paid by healthy commercial banks were recently reduced
significantly below the level paid by healthy savings associations. Assessments
paid by healthy savings associations exceeded those paid by healthy commercial
banks by approximately $.19 per $100 in deposits in late 1995 and will exceed
them by $.23 per $100 in deposits beginning in 1996. Such premium disparity
could have a negative competitive impact on the Bank and other institutions with
SAIF deposits.
55
Congress is considering legislation to recapitalize the SAIF and to
eliminate the significant premium disparity between the BIF and the SAIF.
Currently, the recapitalization plan provides for the payment of a special
assessment of approximately $.85 per $100 of SAIF deposits held at some date to
be determined, in order to increase SAIF reserves to the level required by law.
Certain banks holding SAIF insured deposits would pay a lower special
assessment. In addition, the cost of prior thrift failures would be shared by
both the SAIF and the BIF. Such cost sharing might increase BIF assessments by
$.02 to $.025 per $100 in deposits. SAIF assessments for healthy savings
associations would be set at a significantly lower level after the special
assessment is paid by all SAIF institutions and could never be reduced below the
level set for healthy BIF institutions.
The recapitalization plan also provides for the merger of the SAIF and BIF
on January 1, 1998. However, the SAIF recapitalization legislation currently
provides for an elimination of the federal thrift charter or of the separate
federal regulation of thrifts prior to the merger of the deposit insurance
funds. The Bank would be regulated under federal law as a bank, and, as a
result, would become subject to the more restrictive activity limitations
imposed on national banks. Under current tax laws, savings associations meeting
certain requirements have been able to deduct from income for tax purposes
amounts designated as reserved for bad debts. See Note 13 of the Notes to the
Financial Statements. Currently, upon the conversion of a savings association to
a bank, certain amounts of such association's bad debt reserve must be
recaptured as taxable income over a six-year period if the association has used
the percentage of taxable income method to compute its reserve. Congress is
considering legislation requiring, generally, that even if a savings association
does not convert to a bank, bad debt reserves taken after 1987 using the
percentage of taxable income method must be included in future taxable income of
the association over a six-year period, although a two-year delay may be
permitted for institutions meeting a residential mortgage loan origination test.
The requirement that the Bank convert to a bank charter and the proposed tax
legislation could have an adverse effect on the Holding Company, although until
such proposals are acted upon by Congress, the extent of such effect is
uncertain.
The Bank had $25.8 million in deposits at March 31, 1995. If the one-time
special assessment in the legislative proposal is enacted into law, the Bank
will pay an additional assessment of approximately $219,000, net of tax effects,
which will reduce capital and earnings for the quarter in which the special
assessment is recorded. However, it is expected that quarterly SAIF assessments
would be reduced significantly after such special assessment is paid.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the Holding
Company can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated and cannot be certain of the impact of its being
regulated as a bank holding company, the Bank being regulated as a bank or the
change in tax accounting for bad debt reserves until the legislation requiring
such change is enacted. If the proposed legislation is not enacted, SAIF
premiums may increase and the disparity between BIF and SAIF premiums may become
more pronounced, which would negatively impact the Bank.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain reserves
of 3% of net transaction accounts (primarily NOW accounts) up to $52.0 million
(subject to an exemption of $4.3 million) and of 10% of net transaction accounts
over $52.0 million. At March 31, 1996, the Bank was in compliance with the FRB's
reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See "THE
BUSINESS OF THE BANK -- Deposits and Borrowings." The Bank is a member of the
FHLB of Cincinnati and must maintain an investment in the capital stock of the
FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate
outstanding principal amount of the Bank's residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, and 5%
of its advances from the FHLB. The Bank is in compliance with this requirement
with an investment in stock of the FHLB of Cincinnati of $274,000 at March 31,
1996.
56
FHLB advances to members such as the Bank who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. At March 31, 1996, the Bank's
maximum limit on advances was approximately $5.48 million. The granting of
advances is subject also to the FHLB's collateral and credit underwriting
guidelines.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati
is required by law to obtain and maintain a security interest in collateral in
one or more of the following categories: fully disbursed, whole first mortgage
loans on improved residential property or securities representing a whole
interest in such loans; securities issued, insured or guaranteed by the U.S.
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the applicable FHLB, if such collateral has a readily ascertainable value and
the FHLB can perfect its security interest in the collateral.
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 Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. The Bank has not participated in such program.
TAXATION
FEDERAL TAXATION
The Holding Company is subject to the federal tax laws that apply to
corporations generally. With certain exceptions, the Bank is also subject to the
federal tax laws and regulations which apply to corporations generally. One such
exception permits thrift institutions such as the Bank which meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Code to establish a reserve for bad debts and to make annual
additions thereto which may, within specified limits, be taken as a deduction in
computing taxable income. Legislation pending in Congress, however, may
eliminate this bad debt reserve provision in 1996 and may require the recapture
of post-1987 bad debt reserves over a six-year period beginning in 1998. See
"REGULATION -- Federal Deposit Insurance Corporation -- Assessments."
For purposes of the bad debt reserve deduction, loans are categorized as
"qualifying real property loans," which generally include loans secured by
improved real estate, and "nonqualifying loans," which include all other types
of loans. The amount of the bad debt reserve deduction for "nonqualifying loans"
is computed under the experience method. A thrift institution may elect annually
to compute its allowable addition to its bad debt reserves for qualifying loans
under either the experience method or the percentage of taxable income method.
For 1995, 1994 and 1993, the Bank used the percentage of taxable income method.
Under the experience method, the bad debt deduction for an addition to the
reserve for "qualifying real property loans" or "nonqualifying loans" is an
amount determined under a formula based upon a moving average of the bad debts
actually sustained by a thrift institution over a period of years or an amount
necessary to maintain a minimum reserve level amount for a statutory base year.
The percentage of specially computed taxable income that is used to compute
the percentage bad debt deduction is 8%. The percentage bad debt deduction thus
computed is reduced by the amount permitted as a deduction for nonqualifying
loans under the experience method. The availability of the percentage of taxable
income method permits qualifying thrift institutions to be taxed at a lower
effective federal income
57
tax rate than that applicable to corporations generally. The effective maximum
federal income tax rate applicable to a qualifying thrift institution (exclusive
of any minimum tax or environmental tax), assuming the maximum percentage bad
debt deduction, is approximately 31.3%.
If less than 60% of the total dollar amount of an institution's assets (on a
tax basis) consist of specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain governmental
obligations), such institution may not deduct any addition to a bad debt reserve
and generally must include reserves in excess of that allowable under the
experience method in income over a six-year period. At March 31, 1996, at least
60% of the Bank's total assets were specified assets. No representation can be
made as to whether the Bank will meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year. Additionally, the total bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method and (ii)
the amount which, when added to the bad debt deduction for "nonqualifying
loans," equals the amount by which 12% of the amount comprising savings accounts
at year-end exceeds the sum of surplus, undivided profits and reserves at the
beginning of the year. At March 31, 1996, and for all prior years, the 6% and
12% limitations did not restrict the percentage bad debt deduction available to
the Bank. It is not expected that these limitations will be a limiting factor in
the foreseeable future.
In addition to the regular income tax, the Bank is subject to an alternative
minimum tax which is imposed at a minimum tax rate of 20% on "alternative
minimum taxable income" (which is the sum of a corporation's regular taxable
income, with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been allowable
based on actual experience and (ii) interest on certain tax-exempt bonds issued
after August 7, 1986. In addition, 75% of the amount by which a corporation's
"adjusted current earnings" exceeds its alternative minimum taxable income
computed without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. In addition,
for taxable years after 1986 and before 1996, the Bank is also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2.0 million.
To the extent earnings appropriated to a thrift institution's bad debt
reserves for qualifying real property loans and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method, and to the extent of the institution's supplemental reserves
for losses on loans (the "Excess"), such Excess may not, without adverse tax
consequences, be utilized for payment of cash dividends or other distributions
to a shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the Excess; and third, out of such other accounts as may be proper. As of March
31, 1996, the Bank's Excess for tax purposes totaled approximately $614,000. The
Bank believes it had approximately $1.9 million of accumulated earnings and
profits for tax purposes as of March 31, 1996, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. See "DIVIDEND POLICY." No representation can be
made as to whether the Bank will have current or accumulated earnings and
profits in subsequent periods.
The tax returns of the Bank have been closed by statute or audited through
1992. In the opinion of management, any examination of open returns would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Bank.
58
OHIO TAXATION
The Bank is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Bank's book
net worth determined in accordance with GAAP. As a "financial institution," the
Bank is not subject to any tax based upon net income or net profits imposed by
the State of Ohio.
The Holding Company is subject to the Ohio corporation franchise tax and a
special litter tax. The franchise tax, as applied to the Holding Company, is a
tax measured by both net earnings and net worth. The rate of tax is the greater
of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.9% of
computed Ohio taxable income in excess of $50,000 and (ii) 0.582% times taxable
net worth.
In computing its tax under the net worth method, the Holding Company may
exclude 100% of its investment in the capital stock of the Bank after the
Conversion, as reflected on the balance sheet of the Holding Company, as long as
it owns at least 25% of the issued and outstanding capital stock of the Bank.
The calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Holding Company may be entitled to various other deductions
in computing taxable net worth that are not generally available to operating
companies.
THE CONVERSION
THE OTS AND THE DIVISION HAVE APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF
THE PLAN BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS AND THE
DIVISION. OTS AND DIVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
GENERAL
The Board of Directors of the Bank has unanimously adopted the Plan and
recommends that the Voting Members of the Bank approve the Plan at the Special
Meeting. During and upon completion of the Conversion, the Bank will continue to
provide the services presently offered to depositors and borrowers, will
maintain its existing office and will retain its existing management and
employees.
Based on the current Valuation Range, between 297,500 and 402,500 Common
Shares are expected to be offered in the Subscription Offering and the
concurrent Community Offering at a price of $10 per share. The actual number of
shares sold in connection with the Conversion will be determined upon completion
of the Offering based on the final valuation of the Bank, as converted. See
"Pricing and Number of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering to the ESOP
and certain present and former depositors of the Bank. Any Common Shares not
subscribed for in the Subscription Offering may be sold to the general public in
the Community Offering in a manner which will seek to achieve the widest
distribution of the Common Shares, but which will give preference to natural
persons residing in Hamilton County, Ohio. Under OTS regulations, the Community
Offering must be completed within 45 days following the Subscription Expiration
Date, unless such period is extended by the Bank with the approval of the OTS
and the Division. If the Community Offering is determined not to be feasible, an
occurrence that is not currently anticipated, the Boards of Directors of the
Holding Company and the Bank will consult with the OTS and the Division to
determine an appropriate alternative method of selling unsubscribed Common
Shares up to the minimum of the Valuation Range. No alternative sales methods
are currently planned.
OTS and Ohio regulations require the completion of the Conversion within 24
months after the date of the approval of the Plan by the Voting Members of the
Bank. The commencement and completion of the Conversion will be subject to
market conditions and other factors beyond the Bank's control. Due to changing
economic and market conditions, no assurance can be given as to the length of
time that will be required to complete the sale of the Common Shares. If delays
are experienced, significant changes may occur in the estimated pro forma market
value of the Bank. In such circumstances, the Bank may also incur
59
substantial additional printing, legal and accounting expenses in completing the
Conversion. In the event the Conversion is not successfully completed, the Bank
will be required to charge all Conversion expenses against current earnings.
REASONS FOR THE CONVERSION
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion are the uncertain
future of the mutual form of ownership generally and the numerous competitive
disadvantages which the Bank faces if it continues in mutual form. These
disadvantages relate to a variety of factors, including growth opportunities,
employee retention and regulatory uncertainty.
If the Bank is to continue to grow and prosper, the mutual form of
organization is the least desirable form from a competitive standpoint. The
opportunities for a mutual to expand through mutual-to-mutual mergers or
acquisitions are limited because cash is the only form of consideration a mutual
institution can offer to another institution. Although the Bank does not have
any specific acquisitions planned at this time, the Conversion will position the
Bank to take advantage of any acquisition opportunities which may present
themselves. Because a conversion to stock form is a time-consuming and complex
process, the Bank cannot wait until an acquisition is imminent to embark on the
conversion process.
As an increasing number of the Bank's competitors convert to stock form and
acquire the ability to use stock-based compensation programs, the Bank, in
mutual form, would be at a disadvantage when it comes to attracting and
retaining qualified management. The Bank believes that the ESOP for all
employees and the Stock Option Plan and the RRP for directors and management are
important tools in achieving such goals, even though the Bank will be required
to wait until after the Conversion to implement the Stock Option Plan and the
RRP. See "MANAGEMENT -- Stock Benefit Plans."
Another benefit of the Conversion will be an increase in capital.
Notwithstanding the Bank's current capital position, the importance of higher
levels of capital cannot be ignored in the current interest rate environment. As
has been amply demonstrated in the past, changing accounting principles,
interest rate shifts and changing regulations can threaten even well-capitalized
institutions. As a mutual institution, the Bank can only increase capital
through retained earnings or the issuance of subordinated debentures, which do
not count as tier 1 capital for regulatory capital purposes. Capital that may
seem unnecessary now may help the Bank withstand future threats to its capital.
See "REGULATION -- Office of Thrift Supervision -- Regulatory Capital
Requirements."
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Savings account holders and borrowers who are members of the
Bank in its mutual form will have no voting rights in the Bank as converted and
will not participate, therefore, in the election of directors or otherwise
control the Bank's affairs. Voting rights in the Holding Company will be held
exclusively by its shareholders, and voting rights in the Bank will be held
exclusively by the Holding Company. Each holder of the Holding Company's common
shares will be entitled to one vote for each share owned on any matter to be
considered by the Holding Company's shareholders. See "DESCRIPTION OF AUTHORIZED
SHARES."
SAVINGS ACCOUNTS AND LOANS. Savings accounts in the Bank, as converted,
will be equivalent in amount, interest rate and other terms to the present
savings accounts in the Bank, and the existing FDIC insurance on such deposits
will not be affected by the Conversion. The Conversion will not affect the terms
of loan accounts or the rights and obligations of borrowers under their
individual contractual arrangements with the Bank.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by the Bank of a private letter ruling from the Internal
Revenue Service or an opinion of counsel to the effect that
60
the Conversion will constitute a tax-free reorganization as defined in Section
368(a) of the Code. The Bank intends to proceed with the Conversion based upon
an opinion rendered by its special counsel, Vorys, Sater, Seymour and Pease, to
the following effect:
(1) The Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized by
the Bank in its mutual form or in its stock form as a result of the
Conversion. The Bank in its mutual form and the Bank in its stock form will
each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code;
(2) No gain or loss will be recognized by the Bank upon the receipt of
money from the Holding Company in exchange for the capital stock of the
Bank, as converted;
(3) The assets of the Bank will have the same basis in its hands
immediately after the Conversion as they had in its hands immediately prior
to the Conversion, and the holding period of the assets of the Bank after
the Conversion will include the period during which the assets were held by
the Bank before the Conversion;
(4) No gain or loss will be recognized by the deposit account holders of
the Bank upon the issuance to them, in exchange for their respective
withdrawable deposit accounts in the Bank immediately prior to the
Conversion, of withdrawable deposit accounts in the Bank immediately after
the Conversion, in the same dollar amount as their withdrawable deposit
accounts in the Bank immediately prior to the Conversion, plus, in the case
of Eligible Account Holders and Supplemental Eligible Account Holders
(hereinafter defined), the interests in the Liquidation Account of the Bank,
as described below;
(5) The basis of the withdrawable deposit accounts in the Bank held by
its deposit account holders immediately after the Conversion will be the
same as the basis of their deposit accounts in the Bank immediately prior to
the Conversion. The basis of the interests in the Liquidation Account
received by the Eligible Account Holders and Supplemental Eligible Account
Holders will be zero. The basis of the nontransferable subscription rights
received by Eligible Account Holders, Supplemental Eligible Account Holders
and Other Eligible Members will be zero (assuming that at distribution such
rights have no ascertainable fair market value);
(6) No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Eligible Members upon the
distribution to them of nontransferable subscription rights to purchase
Common Shares (assuming that at distribution such rights have no
ascertainable fair market value), and no taxable income will be realized by
such Eligible Account Holders, Supplemental Eligible Account Holders or
Other Eligible Members as a result of their exercise of such nontransferable
subscription rights;
(7) The basis of the Common Shares purchased by members of the Bank
pursuant to the exercise of subscription rights will be the purchase price
thereof (assuming that such rights have no ascertainable fair market value
and that the purchase price is not less than the fair market value of the
shares on the date of such exercise), and the holding period of such shares
will commence on the date of such exercise. The basis of the Common Shares
purchased other than by the exercise of subscription rights will be the
purchase price thereof (assuming in the case of the other subscribers that
the opportunity to buy in the Subscription Offering has no ascertainable
fair market value), and the holding period of such shares will commence on
the day after the date of the purchase;
(8) For purposes of Section 381 of the Code, the Bank will be treated as
if there had been no reorganization. The taxable year of the Bank will not
end on the effective date of the Conversion. Immediately after the
Conversion, the Bank in its stock form will succeed to and take into account
the tax attributes of the Bank in its mutual form immediately prior to the
Conversion, including the Bank's earnings and profits or deficit in earnings
and profits;
(9) The bad debt reserves of the Bank in its mutual form immediately
prior to the Conversion will not be required to be restored to the gross
income of the Bank in its stock form as a result of the
61
Conversion and immediately after the Conversion such bad debt reserves will
have the same character in the hands of the Bank in its stock form as they
would have had if there had been no Conversion. The Bank in its stock form
will succeed to and take into account the dollar amounts of those accounts
of the Bank in its mutual form which represent bad debt reserves in respect
of which the Bank in its mutual form has taken a bad debt deduction for
taxable years ending on or before the Conversion; and
(10) Regardless of book entries made for the creation of the Liquidation
Account, the Conversion will not diminish the accumulated earnings and
profits of the Bank available for the subsequent distribution of dividends
within the meaning of Section 316 of the Code. The creation of the
Liquidation Account on the records of the Bank will have no effect on its
taxable income, deductions for additions to reserves for bad debts under
Section 593 of the Code or distributions to stockholders under Section
593(e) of the Code.
For Ohio tax purposes, the tax consequences of the Conversion will be as
follows:
(1) The Bank is a "financial institution" for State of Ohio tax
purposes, and the Conversion will not change such status;
(2) The Bank is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Bank's equity capital determined in accordance with GAAP, and the Conversion
will not change such status;
(3) As a "financial institution," the Bank is not subject to any tax
based upon net income or net profit imposed by the State of Ohio, and the
Conversion will not change such status;
(4) The Conversion will not be a taxable transaction to the Bank in its
mutual or stock form for purposes of the Ohio corporate franchise tax. As a
consequence of the Conversion, however, the annual Ohio corporate franchise
tax liability of the Bank will increase if the taxable net worth of the Bank
(i.e., book net worth computed in accordance with GAAP at the close of the
Bank's taxable year for federal income tax purposes) increases thereby; and
(5) The Conversion will not be a taxable transaction to any deposit
account holder or borrower member of the Bank in its mutual or stock form
for purposes of the Ohio corporate franchise tax and the Ohio personal
income tax.
The Bank has received an opinion from Keller to the effect that the
subscription rights have no ascertainable fair market value because the rights
are received by specified persons at no cost, may not be transferred and are of
short duration. The IRS could challenge the assumption that the subscription
rights have no ascertainable fair market value.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the
Bank in its present mutual form, each depositor in the Bank would receive a pro
rata share of any assets of the Bank remaining after payment of the claims of
all creditors, including the claims of all depositors to the withdrawable value
of their savings accounts. A depositor's pro rata share of such remaining assets
would be the same proportion of such assets as the value of such depositor's
savings deposits bears to the total aggregate value of all savings deposits in
the Bank at the time of liquidation.
In the event of a complete liquidation of the Bank in its stock form after
the Conversion, each savings depositor would have a claim of the same general
priority as the claims of all other general creditors of the Bank. Except as
described below, each depositor's claim would be solely in the amount of the
balance in such depositor's savings account plus accrued interest. The depositor
would have no interest in the assets of the Bank above that amount. Such assets
would be distributed to the shareholders of the Bank.
For the purpose of granting a limited priority claim to the assets of the
Bank in the event of a complete liquidation thereof to Eligible Account Holders
and Supplemental Eligible Account Holders who continue to maintain savings
accounts at the Bank after the Conversion, the Bank will, at the time of
Conversion,
62
establish the Liquidation Account in an amount equal to the retained earnings of
the Bank as of March 31, 1996. The Liquidation Account will not operate to
restrict the use or application of any of the regulatory capital of the Bank.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date (hereinafter defined).
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date and the denominator of which is the total amount of all Qualifying
Deposits of Eligible Account Holders on the Eligibility Record Date or the
Supplemental Eligibility Record Date. The balance of each Subaccount may be
decreased but will never be increased. If, at the close of business on the last
day of any fiscal year subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date, the balance in the savings account to
which a Subaccount relates is less than the lesser of (i) the deposit balance in
such savings account at the close of business on any other annual closing date
subsequent to the Eligibility Record Date or the Supplemental Eligibility Record
Date or (ii) the amount of the Qualifying Deposit as of the Eligibility Record
Date or the Supplemental Eligibility Record Date, the balance of the Subaccount
for such savings account shall be adjusted proportionately to the reduction in
such savings account balance. In the event of any such downward adjustment, such
Subaccount balance shall not be subsequently increased notwithstanding any
increase in the deposit balance of the related savings account. If any savings
account is closed, its related Subaccount shall be reduced to zero upon such
closing.
In the event of a complete liquidation of the converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive from the Liquidation Account a distribution equal to the
current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to the shareholders of the Bank. Any assets
remaining after satisfaction of such liquidation rights and the claims of the
Bank's creditors would be distributed to the shareholders of the Bank. No
merger, consolidation, purchase of bulk assets or similar combination or
transaction with another financial institution, the deposits of which are
insured by the FDIC, will be deemed to be a complete liquidation for this
purpose and, in any such transaction, the Liquidation Account shall be assumed
by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE INSURED
BY THE FDIC. For a description of the characteristics of the Common Shares, see
"DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of the Holding Company and the Bank will be final. The Plan
may be amended by the Boards of Directors of the Holding Company and the Bank at
any time with the concurrence of the OTS and the Division. If the Bank
determines, upon advice of counsel and after consultation with the OTS and the
Division, that any such amendment is material, subscribers will be notified of
the amendment and will be provided the opportunity to increase, decrease or
cancel their subscriptions. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription before the date
specified in the notice will have all of his funds promptly refunded with
interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan by the
Voting Members of the Bank at the Special Meeting and completion of the sale of
the Common Shares within 24 months following the date of such approval. If these
conditions are not satisfied, the Plan will automatically terminate and the Bank
will continue its business in the mutual form of organization. The Plan may be
voluntarily terminated by the Board of Directors at any time before the Special
Meeting and at any time thereafter with the approval of the OTS and the
Division.
63
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT .M., EASTERN TIME, ON THE
"SUBSCRIPTION EXPIRATION DATE." SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE THE
SUBSCRIPTION EXPIRATION DATE WILL BE VOID, WHETHER OR NOT THE BANK HAS BEEN ABLE
TO LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. EACH PERSON SUBSCRIBING FOR COMMON SHARES MUST
REPRESENT TO THE BANK THAT HE OR SHE IS PURCHASING THE COMMON SHARES FOR HIS OR
HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY
OTHER PERSON FOR THE SALE OR TRANSFER OF THE COMMON SHARES. ANY PERSON WHO
ATTEMPTS TO TRANSFER HIS OR HER SUBSCRIPTION RIGHTS MAY BE SUBJECT TO PENALTIES
AND SANCTIONS, INCLUDING LOSS OF THE SUBSCRIPTION RIGHTS.
The number of Common Shares which a person who has subscription rights may
purchase will be determined, in part, by the total number of Common Shares to be
issued and the availability of Common Shares for purchase under the preference
categories set forth in the Plan and certain other limitations. See "Limitations
on Purchases of Common Shares." The sale of any Common Shares pursuant to
subscriptions received is contingent upon approval of the Plan by the Voting
Members of the Bank at the Special Meeting.
The preference categories and preliminary purchase limitations which have
been established by the Plan, in accordance with applicable regulations, for the
allocation of Common Shares are as follows:
(a) Each Eligible Account Holder shall receive, without payment
therefor, the nontransferable right to purchase in the Subscription Offering
up to 2.5% of the total Common Shares sold in the Offering. If the exercise
of subscription rights in this Category 1 results in an over-subscription,
Common Shares will be allocated among subscribing Eligible Account Holders
in a manner which will, to the extent possible, make the total allocation of
each subscriber equal 100 shares or the amount subscribed for, whichever is
less. Any Common Shares remaining after such allocation has been made will
be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion which the amount of their
respective Qualifying Deposits on the Eligibility Record Date bears to the
total Qualifying Deposits of all Eligible Account Holders on such date. For
purposes of this paragraph (a), increases in the Qualifying Deposits of
directors and executive officers of the Bank during the twelve months
preceding the Eligibility Record Date shall not be considered.
Notwithstanding the foregoing, Common Shares in excess of 402,500, the
maximum of the Valuation Range, may be sold to the ESOP before fully
satisfying the subscriptions of Eligible Account Holders. No fractional
shares will be issued.
(b) The ESOP shall receive, without payment therefor, the
nontransferable right to purchase in the Subscription Offering an aggregate
amount of up to 10% of the Common Shares sold in the Offering, provided that
shares remain available after satisfying the subscription rights of Eligible
Account Holders up to the maximum of the Valuation Range pursuant to
paragraph (a) above. Although the Plan and OTS regulations permit the ESOP
to purchase up to 10% of the Common Shares, the Holding Company anticipates
that the ESOP will purchase 8% of the Common Shares. If the ESOP is unable
to purchase all or part of the Common Shares for which it subscribes, the
ESOP may purchase Common Shares on the open market or may purchase
authorized but unissued shares of the Holding Company. If the ESOP purchases
authorized but unissued shares from the Holding Company, such purchases
could have a dilutive effect on the interests of the Holding Company's
shareholders. See "RISK FACTORS -- Potential Impact of Benefit Plans on Net
Earnings and Shareholders' Equity."
(c) If the Eligibility Record Date is more than 15 months prior to the
date of the latest amendment to the Bank's conversion application filed with
the OTS, each account holder who has a Qualifying Deposit at the Bank as of
June 30, 1996 (the "Supplemental Eligible Account Holders"), will receive,
without payment, the non-transferable right to purchase in the Subscription
Offering up to 2.5% of the total Common Shares sold in the Offering,
provided that shares remain available after satisfying the
64
subscription rights of Eligible Account Holders and the ESOP pursuant to
paragraphs (a) and (b) above. If the exercise of subscription rights by
Supplemental Eligible Account Holders results in an oversubscription, Common
Shares will be allocated among subscribing Supplemental Eligible Account
Holders in a manner which will, to the extent possible, make the total
allocation of each subscriber equal 100 shares or the amount subscribed for,
whichever is less. Any Common Shares remaining after such allocation has
been made will be allocated among the subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled in the proportion which
the amount of their respective Qualifying Deposits on June 30, 1996 (the
"Supplemental Eligibility Record Date"), bears to the total Qualifying
Deposits of all Supplemental Eligible Account Holders on such date. No
fractional shares will be issued.
Subscription rights received by Supplemental Eligible Account Holders will
be subordinate to the subscription rights of Eligible Account Holders and the
ESOP.
(d) Each Other Eligible Member, other than an Eligible Account Holder or
Supplemental Eligible Account Holder, shall receive, without payment
therefor, the nontransferable right to purchase in the Subscription Offering
up to 2.5% of the Common Shares to be sold in the Offering, provided that
shares remain available after satisfying the subscription rights of Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders pursuant
to paragraphs (a), (b) and (c) above. In the event of an oversubscription by
Other Eligible Members, the available Common Shares will be allocated among
subscribing Other Eligible Members in the same proportion that their
subscriptions bear to the total amount of subscriptions by all Other
Eligible Members.
The subscription rights granted under this Plan are nontransferable. Each
subscription right may be exercised only by the person to whom it is issued and
only for such person's own account. Each person exercising subscription rights
will be required to certify that such person is purchasing for such person's own
account and that such person has no agreement or understanding for the sale or
transfer of the Common Shares to which such person subscribes. The Bank will use
the information provided on the Order Form to ensure that those persons
subscribing in the Subscription Offering have subscription rights and that the
orders submitted do not exceed applicable purchase limitations. In order to
ensure proper identification of subscription rights and proper allocations in
the event of an oversubscription, it is the responsibility of each subscriber to
provide correct account verification information and the correct address of the
subscriber's primary residence.
The Bank will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons having subscription rights
reside. However, no such person will be offered or receive any Common Shares
under the Plan who resides in a foreign country or in a state of the United
States with respect to which each of the following apply: (i) under the
securities laws of such country or state, the granting of subscription rights or
the offer or sale of Common Shares to such persons would require the Holding
Company or its officers or directors to register as a broker or dealer or to
register or otherwise qualify its securities for sale in such country or state;
and (ii) such registration or qualification would be impracticable for reasons
of cost or otherwise.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, the Holding Company is hereby
offering Common Shares in the Community Offering, subject to the limitations set
forth below, to the extent such shares remain available after the satisfaction
of all orders received in the Subscription Offering. If subscriptions are
received in the Subscription Offering for at least 462,875 Common Shares, Common
Shares may not be available for purchase in the Community Offering. All sales of
Common Shares in the Community Offering will be at the same price per share as
in the Subscription Offering. THE COMMUNITY OFFERING MAY BE TERMINATED AT ANY
TIME AFTER ORDERS FOR AT LEAST 462,875 COMMON SHARES HAVE BEEN RECEIVED, BUT IN
NO EVENT LATER THAN , 1996 (THE "COMMUNITY EXPIRATION DATE"), WITHOUT THE
CONSENT OF THE OTS AND THE DIVISION.
65
In the event shares are available for the Community Offering, members of the
general public, each together with his or her Associates and other persons
acting in concert with him or her, may purchase up to 2.5% of the total Common
Shares sold in the Offering. If an insufficient number of Common Shares is
available to fill all of the orders received in the Community Offering, the
available Common Shares will be allocated in a manner to be determined by the
Boards of Directors of the Holding Company and the Bank, subject to the
following:
(i) Preference will be given to natural persons who are residents of
Hamilton County, Ohio, the county in which the office of the Bank is
located;
(ii) Orders received in the Community Offering will first be filled up
to the lesser of the number of shares subscribed for or 2% of the total
number of Common Shares offered, with any remaining shares allocated on an
equal number of shares per order basis until all orders have been filled;
and
(iii) The right of any person to purchase Common Shares in the Community
Offering is subject to the right of the Holding Company and the Bank to
accept or reject such purchases in whole or in part.
The term "resident", as used herein with respect to the Community Offering,
means any natural person who, on the date of submission of an Order Form,
maintained a bona fide residence within Hamilton County, Ohio.
LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon the
purchase of Common Shares. To the extent Common Shares are available, the
minimum number of Common Shares that may be purchased by any party is 25, or
$250. No fractional shares will be issued. Purchases in the Offering are further
subject to the limitations that (i) no Eligible Account Holder, Supplemental
Eligible Account Holder, if any, or Other Eligible Member may purchase in the
Offering more than 2.5% of the total Common Shares sold in the Offering, (ii) no
person, together with his or her Associates and other persons acting in concert
with him or her, may purchase in the Community Offering more than 2.5% of the
total Common Shares sold in the Offering, and (iii) no person, together with his
or her Associates and other persons acting in concert with him or her, may
purchase more than 5% of the total Common Shares sold in the Offering. In
connection with the exercise of subscription rights arising from a deposit
account or a loan account in which two or more persons have an interest, the
aggregate maximum number of Common Shares which the persons having an interest
in such account may purchase is 2.5% of the total Common Shares sold in the
Offering. Such limitation does not apply to the ESOP. Subject to applicable
regulations, the purchase limitation may be increased or decreased after the
commencement of the Offering by the Boards of Directors. A person's associates
consist of the following ("Associates"): (a) any corporation or organization
(other than the Bank) of which such person is an officer, partner or, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
securities; (b) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity; and (c) 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 the Bank.
Executive officers and directors of the Bank, together with their
Associates, may not purchase, in the aggregate, more than 35% of the total
Common Shares sold in the Offering. Shares acquired by the ESOP will not,
pursuant to regulations governing the Conversion, be aggregated with the shares
purchased by the directors, officers and employees of the Bank.
Purchases of Common Shares in the Offering are also subject to the change in
control regulations of the OTS which restrict direct and indirect purchases of
10% or more of the stock of any savings bank by any person or group of persons
acting in concert, under certain circumstances. See "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY AND THE BANK -- Federal Law and Regulation."
After the Conversion, Common Shares, except for shares purchased by
affiliates of the Bank, will be freely transferable, subject to OTS and Division
regulations.
66
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this Prospectus,
copies of which are available at the office of the Bank. Officers and directors
of the Bank will be available to answer questions about the Conversion and may
also hold informational meetings for interested persons. Such officers and
directors will not be permitted to make statements about the Holding Company or
the Bank unless such information is also set forth in this Prospectus, nor will
they render investment advice. No officer, director or employee of the Holding
Company or the Bank will be compensated, directly or indirectly, for any
activities in connection with the offer or sale of Common Shares issued in the
Conversion.
To assist the Holding Company and the Bank in marketing the Common Shares,
the Holding Company and the Bank have retained Webb, a broker-dealer registered
with the SEC and a member of the NASD. Webb will consult with and advise the
Bank and assist with the sale of the Common Shares in connection with the
Conversion. The services to be rendered by Webb include the following: (1)
assisting the Holding Company and the Bank in conducting the Subscription
Offering and the Community Offering; (2) training and educating Bank personnel
about the Conversion process; (3) organizing and conducting meetings to provide
information to prospective investors about the Conversion; (4) keeping records
of orders for Common Shares; and (5) assisting in the collection of proxies from
members for use at the Special Meeting.
For its services, Webb will receive a financial advisory fee in the amount
of $50,000. Selected Dealers will receive fees equal to 4% of the purchase price
of Common Shares sold, if any, pursuant to Selected Dealer Agreements. In
addition, the Holding Company will reimburse Webb for certain expenses,
including reasonable legal fees. Such expenses shall not exceed $30,000. Webb is
not obligated to purchase any Common Shares.
The Holding Company and the Bank have agreed to indemnify Webb and its
directors, officers, employees, agents and any controlling person against any
and all loss, liability, claim, damage or expense arising out of any untrue
statement, or alleged untrue statement, of a material fact contained in the
Summary Proxy Statement or the Prospectus, any application to regulatory
authorities, any "blue sky" application, or any other related document prepared
or executed by or on behalf of the Holding Company or the Bank with its consent
in connection with, or in contemplation of, the Conversion, or any omission
therefrom of a material fact required to be stated therein, unless such untrue
statement or omission, or alleged untrue statement or omission, was made in
reliance upon certain information furnished to the Bank by Webb expressly for
use in the Summary Proxy Statement or the Prospectus.
The Common Shares will be offered principally by the distribution of this
Prospectus and through activities conducted at the Conversion Information
Center, which will be located at the office of the Bank. The Conversion
Information Center will be staffed by one or more of Webb's employees, who will
be responsible for mailing materials relating to the Offering, responding to
questions regarding the Conversion and the Offering and processing stock orders.
A conspicuous legend that the Common Shares are not a federally-insured or
guaranteed deposit or account appears on all offering documents used in
connection with the Conversion and will appear on the certificates representing
the Common Shares. Any person purchasing Common Shares will be required to
execute the Stock Order Form certifying such person's knowledge that the Common
Shares are not federally-insured or guaranteed and that the purchaser has
received a Prospectus and understands the investment risk involved.
Sales of Common Shares will be made by registered representatives affiliated
with Webb. Management and the employees of the Bank may participate in the
Offering in clerical capacities, providing administrative support in effecting
sales transactions or answering questions relating to the proper execution of
the Stock Order Form. Management of the Bank may answer questions regarding the
business of the Bank. Other questions of prospective purchasers, including
questions as to the nature of the investment, will be directed to registered
representatives. Management and the employees of the Bank have been instructed
not to solicit offers to purchase Common Shares or to provide advice regarding
the purchase of Common Shares.
67
The Bank's personnel will assist in the above-described sales activities
pursuant to an exemption from registration as a broker or dealer provided by
Rule 3a4-1 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"). Rule 3a4-1 generally provides that an "associated person of an issuer" of
securities shall not be deemed a broker solely by reason of participation in the
sale of securities of such issuer if the associated person meets certain
conditions. Such conditions include, but are not limited to, that the associated
person participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that such person not be
associated with a broker or dealer and that such person observe certain
limitations on his participation in the sale of securities. For purposes of this
exemption, "associated person of an issuer" is defined to include any person who
is a director, officer or employee of the issuer or a company that controls, is
controlled by or is under common control with the issuer.
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond , 1996, persons who have
subscribed for Common Shares in the Subscription Offering or in the Community
Offering will receive a written notice that they have the right to increase,
decrease or rescind their subscriptions for Common Shares at any time prior to
20 days before the end of the extension period. Any person who does not
affirmatively elect to continue his subscription or elects to rescind his
subscription during any such extension will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription
during any such extension shall have the appropriate portion of his funds
promptly refunded with interest.
USE OF ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and the
Community Offering may be made only by completing and submitting a Stock Order
Form. Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to the Bank, by mail or in person, prior to
.m., Eastern Time, on , 1996, a properly executed and completed
Stock Order Form, together with full payment of the subscription price of $10
for each Common Share for which subscription is made. No facsimile or
photocopied Stock Order Forms will be accepted.
AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY THE BANK, MAY NOT BE
MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE BANK, UNLESS (I) THE
COMMUNITY OFFERING IS NOT COMPLETED BY , 1996, OR (II) THE FINAL VALUATION
OF THE BANK, AS CONVERTED, IS LESS THAN $2,975,000 OR MORE THAN $4,628,750. IF
EITHER OF THOSE EVENTS OCCURS, PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN
THE OFFERING WILL BE GIVEN A NOTICE THAT THEY HAVE A RIGHT TO INCREASE, DECREASE
OR RESCIND THEIR SUBSCRIPTIONS. ANY PERSON WHO DOES NOT AFFIRMATIVELY ELECT TO
CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS SUBSCRIPTION DURING ANY SUCH
EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST. ANY PERSON
WHO ELECTS TO DECREASE HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE
APPROPRIATE PORTION OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST. IN ADDITION,
IF THE MAXIMUM PURCHASE LIMITATION IS INCREASED TO MORE THAN 2.5% OF THE COMMON
SHARES, PERSONS WHO HAVE SUBSCRIBED FOR 2.5% OF THE COMMON SHARES WILL BE GIVEN
THE OPPORTUNITY TO INCREASE THEIR SUBSCRIPTIONS.
PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany a completed Order Form in order for such
subscription to be valid. Payment for Common Shares may be made (i) in cash, if
delivered in person, (ii) by check, bank draft or money order, or (iii) by
authorization of withdrawal from savings accounts in the Bank (other than
non-self-directed IRAs and Keogh Accounts). The Bank cannot lend money or
otherwise extend credit to any person to purchase Common Shares.
Payments made in cash or by check, bank draft or money order will be placed
in a segregated savings account insured by the FDIC up to applicable limits
until the Conversion is completed or terminated. Interest will be paid by the
Bank on such account at the then current passbook savings account rate, which is
currently % with an annual percentage yield of %, from the date payment is
received until the Conversion is completed or terminated. Payments made by check
will not be deemed to have been received until such check has cleared for
payment.
68
Instructions for authorizing withdrawals from savings accounts are provided
in the Order Form. Once a withdrawal has been authorized, none of the designated
withdrawal amount may be used by a subscriber for any purpose other than to
purchase Common Shares, unless the Conversion is terminated. All sums authorized
for withdrawal will continue to earn interest at the contract rate for such
account or certificate until the completion or termination of the Conversion.
Interest penalties for early withdrawal applicable to certificate accounts will
be waived in the case of withdrawals authorized for the purchase of Common
Shares. If a partial withdrawal from a certificate account results in a balance
less than the applicable minimum balance requirement, the certificate will be
cancelled and the remaining balance will earn interest at the Bank's passbook
rate subsequent to the withdrawal.
In order to utilize funds in an IRA or Keogh account maintained at the Bank,
the funds must be transferred to a self-directed IRA or Keogh account that
permits the funds to be invested in stock. The beneficial owner of the IRA or
Keogh account must direct the trustee of the account to use funds from such
account to purchase Common Shares in connection with the Conversion. This cannot
be done through the mail. Persons who are interested in utilizing IRAs or Keogh
accounts at the Bank to subscribe for Common Shares should contact the
Conversion Information Center at (513) - for instructions and assistance.
Subscriptions will not be filled by the Bank until subscriptions have been
received in the Offering for up to 297,500 Common Shares, the minimum point of
the Valuation Range. If the Conversion is terminated, all funds delivered to the
Bank for the purchase of Common Shares will be returned with interest, and all
charges to savings accounts will be rescinded. If subscriptions are received for
at least 297,500 Common Shares, subscribers and other purchasers will be
notified by mail, promptly on completion of the sale of the Common Shares, of
the number of shares for which their subscriptions have been accepted. The funds
on deposit with the Bank for the purchase of Common Shares will be withdrawn and
paid to the Holding Company in exchange for the Common Shares. Certificates
representing Common Shares will be delivered promptly thereafter. The Common
Shares will not be insured by the FDIC.
If the ESOP subscribes for Common Shares in the Subscription Offering, it
will not be required to pay for the shares subscribed for at the time it
subscribes but may pay for such Common Shares upon consummation of the
Conversion.
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of the Bank:
TOTAL PERCENT OF TOTAL AGGREGATE PURCHASE
NAME SHARES OFFERING (1) PRICE
- ------------------------------------------------- ----------- --------------------------- -----------------------
Mardelle Dickhaut................................ 3,500 1.00% $ 35,000
Ruth C. Emden.................................... 5,250 1.50 52,500
Laird L. Lazelle................................. 8,750 2.50 87,500
Robert E. Levitch................................ 7,000 2.00 70,000
Margo Liebert.................................... 2,500 0.71 25,000
Dianne K. Rabe................................... 3,500 1.00 35,000
Michael S. Schwartz.............................. 8,750 2.50 87,500
Paul L. Silverglade.............................. 8,750 2.50 87,500
Ivan J. Silverman................................ 8,750 2.50 87,500
All directors and executive
officers as a group (2)......................... 74,250 21.21% $ 742,500
- ------------------------
(1) Assumes that 350,000 Common Shares will be sold in the Offering at $10 per
share and that a sufficient number of Common Shares will be available to
satisfy the intended purchases by directors and executive officers. See
"Pricing and Number of Common Shares to be Sold."
(2) Includes intended purchases by Associates of directors and executive
officers, to the extent known.
All purchases by executive officers and directors of the Bank are being made
for investment purposes only and with no present intent to resell.
69
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares sold in the Offering will
be based on the pro forma market value of the shares as determined by an
independent appraisal of the Bank. Keller, a firm which evaluates and appraises
financial institutions, was retained by the Bank to prepare an appraisal of the
estimated pro forma market value of the Bank, as converted. Keller will receive
a fee of $15,000 for its appraisal and one update. Such amount includes
out-of-pocket expenses.
Keller was selected by the Board of Directors because it has extensive
experience in the valuation of thrift institutions, particularly in the
mutual-to-stock conversion context. The Board of Directors interviewed Keller's
principal, reviewed the credentials of Keller's appraisal personnel and obtained
references and recommendations from other companies which have engaged Keller.
Keller is certified by the OTS as a mutual-to-stock conversion appraiser. The
Bank and Keller have no relationships which would affect Keller's independence.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the present and projected operating results and financial condition of the Bank
and the economic and demographic conditions in the Bank's existing market area;
the quality and depth of the Bank's management and personnel; certain historical
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other thrift
institutions; the aggregate size of the Offering; the impact of the Conversion
on the Bank's regulatory capital and earnings potential; the trading market for
stock of comparable thrift institutions and thrift holding companies; and
general conditions in the markets for such stocks.
Three valuation methods were used by Keller: price to book value; price to
earnings; and price to assets. The most emphasis was placed on the price to book
value method. The price to book value method compares the pro forma book value
of the Bank, which takes into consideration the going concern value of a thrift
institution, to the book value of the comparable group. Upward and downward
adjustments are made, as appropriate, to account for variations between the Bank
and the comparable group on specific factors. The net Conversion proceeds are
included for purposes of determining the pro forma book value of the Bank. The
book value method focuses on the Bank's financial condition and does not give as
much consideration to earnings. The price to earnings method is used to
ascertain the multiple of earnings at which the Bank is likely to trade, based
on the multiple of earnings at which a comparable group of thrift institutions
trades. The comparable group consisted of ten thrift institutions located in the
Midwest which had similar operating and financial characteristics to the Bank.
In calculating the price to earnings ratio, Keller used the Bank's core earnings
for the 12 months ended March 31, 1996. The use of core earnings eliminates
items which are not generated by the principle business activities of the Bank.
The price to assets method does not consider the Bank's financial condition or
earnings. Consequently, it is not heavily relied on in valuing financial
institutions.
The Pro Forma Value of the Bank, as converted, determined by Keller, is
$3,500,000 as of May 14, 1996. The Valuation Range established in accordance
with the Plan is $2,975,000 to $4,025,000, which, based upon a per share
offering price of $10, will result in the sale of between 297,500 and 402,500
Common Shares. The total number of Common Shares sold in the Offering will be
determined in the discretion of the Board of Directors, based on the Valuation
Range. Pro forma shareholders' equity per share and pro forma earnings per share
decrease moving from the low end to the high end of the Valuation Range. See
"PRO FORMA DATA."
In the event that Keller determines at the close of the Conversion that the
aggregate pro forma value of the Bank is higher or lower than the Pro Forma
Value, but is nevertheless equal to or greater than $2,975,000 or equal to or
less than $4,628,750, the Holding Company will make an appropriate adjustment by
raising or lowering the total number of Common Shares sold in the Offering
consistent with the final valuation. The total number of Common Shares sold in
the Offering will be determined in the discretion of the Board of Directors
consistent with the final valuation. If, due to changing market conditions, the
final valuation is less than $2,975,000 or more than $4,628,750, subscribers
will be given notice of such final valuation and the right to affirm, increase,
decrease or rescind their subscriptions. Any person who does not affirmatively
elect to
70
continue his subscription or elects to rescind his subscription before the date
specified in the notice will have all of his funds promptly refunded with
interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest.
The appraisal by Keller is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing Common Shares or
voting to approve the Conversion. In preparing the valuation, Keller has relied
upon and assumed the accuracy and completeness of the audited financial
statements and statistical information provided by the Bank. Keller did not
independently verify the financial statements and other information provided by
the Bank, nor did Keller value independently the assets or liabilities of the
Bank. The valuation considers the Bank only as a going concern and should not be
considered as an indication of the liquidation value of the Bank. Moreover,
because such valuation is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing Common Shares will thereafter be
able to sell such shares at the Conversion purchase price.
A copy of the complete appraisal is on file and open for inspection at the
offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the Central
Regional Office of the OTS, 200 W. Madison Street, Suite 1300, Chicago, Illinois
60606, at the offices of the Division, 77 S. High Street, Columbus, Ohio 43215,
and at the offices of the Bank.
RESTRICTIONS ON REPURCHASE OF COMMON SHARES
Federal regulations generally prohibit the Holding Company from repurchasing
any of its capital stock for three years following the date of completion of the
Conversion, except as part of an open-market stock repurchase program during the
second and third years following the Conversion involving no more than 5% of the
Holding Company's outstanding capital stock during a twelve-month period. The
OTS has recently indicated, however, that it would permit repurchases beginning
after six months following the completion of the Conversion. In addition, after
such a repurchase, the Bank's regulatory capital must equal or exceed all
regulatory capital requirements. Before commencement of such a program, the
Holding Company must provide notice to the OTS, and the OTS may disapprove the
program if the OTS determines that it would adversely affect the financial
condition of the Bank or if it determines that there is no valid business
purpose for such repurchase. Such repurchase restrictions would not prohibit the
ESOP or the RRP from purchasing Common Shares during the first year following
the Conversion.
Ohio regulations prohibit the Holding Company from repurchasing shares
during the first year after the Conversion if the effect thereof would be the
failure of the Bank to meet its capital requirements.
RESTRICTIONS ON TRANSFERABILITY OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors and executive officers of the Holding
Company will be subject to the restriction that such shares may not be sold for
a period of one year following completion of the Conversion, except in the event
of the death of the shareholder. Common Shares issued by the Holding Company to
directors and executive officers will bear a legend giving appropriate notice of
the restriction imposed upon them. In addition, the Holding Company will give
appropriate instructions to the transfer agent (if any) for the Common Shares in
respect of the applicable restriction for transfer of any restricted shares. Any
shares issued as a stock dividend, stock split or otherwise in respect of
restricted shares will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following the
Conversion, no director or officer of the Holding Company or the Bank, or any of
their Associates, may purchase any common shares of the Holding Company without
the prior written approval of the OTS, except through a broker-dealer registered
with the SEC. This restriction will not apply, however, to negotiated
transactions involving more than 1% of a class of outstanding common shares of
the Holding Company or shares acquired by any stock benefit plan of the Holding
Company or the Bank.
The Common Shares, like the stock of most public companies, are subject to
the registration requirements of the Securities Act. Accordingly, the Common
Shares may be offered and sold only in compliance with such registration
requirements or pursuant to an applicable exemption from registration. Common
71
Shares received in the Conversion by persons who are not "affiliates" of the
Holding Company may be resold without registration. Common Shares received by
affiliates of the Holding Company will be subject to resale restrictions. An
"affiliate" of the Holding Company, for purposes of Rule 144, is a person who
directly, or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, the Holding Company. Rule 144
generally requires that there be publicly available certain information
concerning the Holding Company and that sales subject to Rule 144 be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of the Holding
Company or (ii) if the shares are admitted to trading on a national securities
exchange or reported through the automated quotation system of a registered
securities association, the average weekly reported volume of trading during the
four weeks preceding the sale.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK
GENERAL
Federal law and regulations, Ohio law, the Articles of Incorporation and
Code of Regulations of the Holding Company, the Amended Articles of
Incorporation and Amended Constitution of the Bank and certain employee benefit
plans to be adopted by the Holding Company and the Bank contain certain
provisions which may deter or prohibit a change of control of the Holding
Company and the Bank. Such provisions are intended to encourage any acquiror to
negotiate the terms of an acquisition with the Board of Directors of the Holding
Company, thereby reducing the vulnerability of the Holding Company to takeover
attempts and certain other transactions which have not been negotiated with and
approved by the Board of Directors.
Anti-takeover devices and provisions may, however, have the effect of
discouraging certain takeover attempts which are not approved by the Board of
Directors, even under circumstances in which shareholders may deem such
takeovers to be in their best interests or in which shareholders may 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 participate by virtue of such devices and provisions.
Such provisions may also benefit management by discouraging changes of control
in which incumbent management would be removed from office. The following is a
summary of certain provisions of such laws, regulations and documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The FDIA provides that no person, acting
directly or indirectly or in concert with one or more persons, shall acquire
control of any insured savings association or holding company unless 60 days'
prior written notice has been given to the OTS and the OTS has not issued a
notice disapproving the proposed acquisition. Control, for purposes of the FDIA,
means the power, directly or indirectly, to direct the management or policies of
an insured institution or to vote 25% or more of any class of securities of such
institution. This provision of the FDIA is implemented by the OTS in accordance
with the Regulations for Acquisition of Control of an Insured Institution, 12
C.F.R. Part 574 (the "Control Regulations"). Control, for purposes of the
Control Regulations, exists in situations in which the acquiring party has
direct or indirect voting control of at least 25% of the institution's voting
shares or controls in any manner the election of a majority of the directors of
such institution or the Director of the OTS determines that such person
exercises a controlling influence over the management or policies of such
institution. In addition, control is presumed to exist, subject to rebuttal, if
the acquiring party (which includes a group "acting in concert") has voting
control of at least 10% of the institution's voting stock and any of eight
control factors specified in the Control Regulations exists. There are also
rebuttable presumptions in the Control Regulations concerning whether a group
"acting in concert" exists, including presumed action in concert among members
of an "immediate family." With certain limited exceptions, the Control
Regulations, including the rebuttable presumptions, apply to acquisitions of
Common Shares in connection with the Conversion and to acquisitions after the
Conversion.
72
Change in Control of Converted Banks. A regulation of the OTS provides that,
for a period of three years after the date of the completion of the Conversion,
no person shall, directly or indirectly, offer to acquire or acquire beneficial
ownership of more than 10% of any class of equity security of the Holding
Company or the Bank without the prior written approval of the OTS. In addition
to the actual ownership of more than 10% of a class of equity securities, a
person shall be deemed to have acquired beneficial ownership of more than 10% of
the equity securities of the Holding Company or the Bank if the person holds any
combination of stock and revocable and/or irrevocable proxies of the Holding
Company under circumstances that give rise to a conclusive control determination
or rebuttable control determination under the Control Regulations. Such
circumstances include (i) holding any combination of voting shares and revocable
and/or irrevocable proxies representing more than 25% of any class of voting
stock of the Holding Company enabling the acquiror (a) to elect one-third or
more of the directors, (b) to cause the Holding Company or the Bank's
shareholders to approve the acquisition or corporate reorganization of the
Holding Company, or (c) to exert a controlling influence on a material aspect of
the business operations of the Holding Company or the Bank, and (ii) acquiring
any combination of voting shares and irrevocable proxies representing more than
25% of any class of voting shares.
Such three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to the Holding Company or the Bank or any
underwriter or selling group acting on behalf of the Holding Company or the
Bank, (ii) unless made applicable by the OTS by prior written advice, to any
offer or announcement of an offer which, if consummated, would result in the
acquisition by any person, together with all other acquisitions by any such
person of the same class of securities during the preceding 12-month period, of
not more than 1% of the class of securities, or (iii) to any offer to acquire or
the acquisition of beneficial ownership of more than 10% of any class of equity
security of the Holding Company or the Bank by a corporation whose ownership is
or will be substantially the same as the ownership of the Holding Company or the
Bank if made more than one year following the date of the Conversion. The
foregoing restriction does not apply to the acquisition of the capital stock of
the Holding Company or the Bank by one or more tax-qualified employee stock
benefit plans, provided that the plan or plans do not have the beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Holding Company or the Bank.
HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings and
loan holding 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, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary.
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 the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the Director of the OTS, no
director or officer of the savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's voting shares
may acquire control of any savings institution, other than a subsidiary
institution or any other savings and loan holding company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has a merger moratorium statute regulating
certain takeover bids affecting certain public corporations which have
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder") for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
73
After the initial three-year moratorium, such a business combination may not
occur unless (1) one of the exceptions referred to above applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation, under certain circumstances, may "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. The
statute still prohibits for 12 months, however, any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of the Holding Company do not opt out of the
protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33 1/3% or 50% of the outstanding voting securities of
the Holding Company (a "Control Share Acquisition") must be approved in advance
by the holders of at least a majority of the outstanding voting shares
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting,
excluding the voting shares owned by the acquiring shareholder. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
74
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating takeover
bids for any Ohio corporation. Such statute provides that no offeror may make a
takeover bid unless (i) at least 20 days prior thereto the offeror announces
publicly the terms of the proposed takeover bid and files with the Ohio Division
of Securities (the "Securities Division") and provides the target company with
certain information in respect of the offeror, his ownership of the company's
shares and his plans for the company, and (ii) within ten days following such
filing either (a) no hearing is required by the Securities Division, (b) a
hearing is requested by the target company within such time but the Securities
Division finds no cause for hearing exists, or (c) a hearing is ordered and upon
such hearing the Securities Division adjudicates that the offeror proposes to
make full, fair and effective disclosure to offerees of all information material
to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a takeover
bid if he owns 5% or more of the issued and outstanding equity securities of any
class of the target company, any of which were purchased within one year before
the proposed takeover bid, and the offeror, before making any such purchase,
failed to announce his intention to gain control of the target company or
otherwise failed to make full and fair disclosure of such intention to the
persons from whom he acquired such securities. The United States District Court
for the Southern District of Ohio has determined that the Ohio takeover bid
statute is preempted by federal regulation.
ARTICLES OF INCORPORATION OF THE HOLDING COMPANY
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The Articles
of Incorporation of the Holding Company permit the Board of Directors of the
Holding Company to issue additional common shares and preferred shares. The
ability of the Board of Directors to issue such additional shares may create
impediments to gaining, or otherwise discourage persons from attempting to gain,
control of the Holding Company.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Article Sixth of the Articles
of Incorporation of the Holding Company provides that, in the event the Board of
Directors recommends against the approval of any of the following matters, the
holders of at least 75% of the voting shares of the Holding Company are required
to approve any such matters:
(1) A proposed amendment to the Articles of Incorporation of the Holding
Company;
(2) A proposed Amendment to the Code of Regulations of the Holding Company;
(3) A proposal to change the number of directors by action of the
shareholders;
(4) An agreement of merger or consolidation providing for the proposed
merger or consolidation of the Holding Company with or into one or more
other corporations;
(5) A proposed combination or majority share acquisition involving the
issuance of shares of the Holding Company and requiring shareholder
approval;
(6) A proposal to sell, exchange, transfer or otherwise dispose of all, or
substantially all, of the assets, with or without the goodwill, of the
Holding Company; or
(7) A proposed dissolution of the Holding Company.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised Code
provides in substance and effect that shareholders of a for profit corporation
which is not a savings and loan association and which is incorporated under Ohio
law must initially be granted the right to cumulate votes in the election of
directors. The right to cumulate votes in the election of directors will exist
at a meeting of shareholders if notice in writing is given by any shareholder to
the President, a Vice President or the Secretary of an Ohio corporation, not
less than 48 hours before a meeting at which directors are to be elected, that
the shareholder desires that the voting for the election of directors shall be
cumulative and if an announcement of the giving of such notice is made upon the
convening of such meeting by the Chairman or Secretary or by or on
75
behalf of the shareholder giving such notice. If cumulative voting is invoked,
each shareholder would have a number of votes equal to the number of directors
to be elected, multiplied by the number of shares owned by him, and would be
entitled to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio corporation
may eliminate cumulative voting in the election of directors after the
expiration of 90 days after the date of initial incorporation by filing with the
Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of the Holding
Company will be amended prior to the consummation of the Conversion to eliminate
cumulative voting. The elimination of cumulative voting may make it more
difficult for shareholders to elect as directors persons whose election is not
supported by the Board of Directors.
EMPLOYEE BENEFIT PLANS
The Stock Option Plan, the ESOP and the RRP also may be deemed to have
certain anti-takeover effects. See "DESCRIPTION OF AUTHORIZED SHARES" and
"MANAGEMENT -- Stock Benefit Plans -- Employee Stock Ownership Plan; -- Stock
Option Plan; and -- Recognition and Retention Plan."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of the Holding Company authorize the issuance
of 2,000,000 common shares. The common shares authorized by the Holding
Company's Articles of Incorporation have no par value. Upon receipt by the
Holding Company of the purchase price therefor and subsequent issuance thereof,
each Common Share will be fully paid and nonassessable. The Common Shares of the
Holding Company will represent nonwithdrawable capital and will not and cannot
be insured by the FDIC. Each Common Share will have the same relative rights and
will be identical in all respects to every other Common Share.
The following is a summary description of the rights of the common shares of
the Holding Company, including the material express terms of such shares as set
forth in the Holding Company's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of the Holding
Company, the holders of the Common Shares will be entitled to receive all assets
of the Holding Company available for distribution, in cash or in kind, after
payment or provision for payment of (i) all debts and liabilities of the Holding
Company, (ii) any accrued dividend claims, and (iii) any interests in the
Liquidation Account. See "THE CONVERSION -- Liquidation Account."
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights in the
Holding Company, unless preferred shares are issued. Each holder of Common
Shares will be entitled to one vote for each share held of record on all matters
submitted to a vote of holders of common shares. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY AND THE BANK -- Articles of Incorporation of
the Holding Company -- Elimination of Cumulative Voting."
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state statutory
and regulatory restrictions. See "DIVIDEND POLICY," "REGULATION -- Office of
Thrift Supervision -- Limitations on Capital Distributions" and "TAXATION --
Federal Taxation" for a description of restrictions on the payment of cash
dividends.
76
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of the Holding
Company will have, as a matter of right, the preemptive right to purchase or
subscribe for shares of any class, now or hereafter authorized, or to purchase
or subscribe for securities or other obligations convertible into or
exchangeable for such shares or which by warrants or otherwise entitle the
holders thereof to subscribe for or purchase any such share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION -- Restrictions on Transferability of Common Shares by
Directors and Officers" for a description of certain restrictions on the
transferability of Common Shares purchased by officers and directors; and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK" for
information regarding regulatory restrictions on acquiring Common Shares.
REGISTRATION REQUIREMENTS
The Holding Company will register its common shares pursuant to Section
12(g) of the Exchange Act upon the completion of the Conversion. The proxy and
tender offer rules, insider trading restrictions, annual and periodic reporting
and other requirements of the Exchange Act will apply to the Holding Company.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal and
Ohio tax consequences of the Conversion will be passed upon for the Holding
Company and the Bank by Vorys, Sater, Seymour and Pease, 221 E. Fourth Street,
Cincinnati, Ohio 45202. Certain legal matters are being passed upon for Webb by
Keating, Muething & Klekamp ("KMK"), One East Fourth Street, Cincinnati, Ohio
45202. Certain members of KMK may subscribe for Common Shares in the Offering,
to the extent they are eligible under the Plan.
EXPERTS
Keller has consented to the publication herein of the summary of its letter
to the Bank setting forth its opinion as to the estimated pro forma market value
of the Bank as converted and to the use of its name and statements with respect
to it appearing herein. The financial statements of the Bank as of March 31,
1996 and 1995, and for each of the years in the three-year period ended June 30,
1995, have been included herein in reliance upon the report of Clark, Schaefer,
Hackett & Co., independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Bank has filed an Application for Approval of Conversion (the
"Application") with the OTS and the Division. This prospectus omits certain
information contained in the Application. The Application may be inspected at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the
Central Regional Office of the OTS, 200 W. Madison Street, Suite 1300, Chicago,
Illinois 60606 and at the offices of the Division, 77 S. High Street, Columbus,
Ohio 43215.
77
FOUNDATION SAVINGS BANK
TABLE OF CONTENTS
PAGE
------------
Independent Auditors' Report.............................. F-2
Financial Statements:
Statements of Financial Condition....................... F-3
Statements of Income.................................... F-4
Statements of Retained Earnings......................... F-5
Statements of Cash Flows................................ F-6 - F-7
Notes to Financial Statements........................... F-8 - F-20
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Foundation Savings Bank:
We have audited the statements of financial condition of Foundation Savings
Bank as of June 30, 1995 and 1994, and the related statements of income,
retained earnings, and cash flows for each of the three years in the period
ended June 30, 1995. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Foundation Savings Bank as
of June 30, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Savings Bank adopted
the provisions of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" at July 1, 1993 and Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" at July 1, 1994.
/s/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
July 19, 1995
F-2
FOUNDATION SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1995 AND 1994 AND MARCH 31, 1996 (UNAUDITED)
ASSETS
JUNE 30
----------------------------
1995 1994
MARCH 31, 1996 ------------- -------------
--------------
(UNAUDITED)
Cash............................................................... $ 15,202 57,374 59,309
Interest-bearing deposits in other financial institutions.......... 4,221,221 3,885,606 2,402,282
-------------- ------------- -------------
4,236,423 3,942,980 2,461,591
Certificates of deposit in other financial institutions............ -- -- 1,400,000
Investment securities -- at amortized cost (fair value of $393,338,
$1,034,812 and $1,004,188 at March 31, 1996 (unaudited) and June
30, 1995 and 1994 respectively)................................... 400,000 1,050,000 1,050,000
Mortgage-backed securities -- at amortized cost (fair value of
$4,831,501, $5,409,400 and $6,443,808 at March 31, 1996
(unaudited) and June 30, 1995 and 1994, respectively)............. 4,957,151 5,532,399 6,592,744
Loans receivable, net.............................................. 21,358,992 20,510,541 18,794,133
Accrued interest receivable:
Loans............................................................ 96,212 79,335 57,341
Investments and interest bearing deposits........................ 4,040 16,389 17,597
Mortgage-backed securities....................................... 39,469 41,522 44,183
Federal Home Loan Bank stock -- at cost............................ 274,100 260,400 241,200
Property and equipment, net........................................ 317,417 323,773 335,302
Refundable federal income tax...................................... -- 31,927 22,400
Prepaid expenses and other assets.................................. 53,926 60,050 39,670
-------------- ------------- -------------
$ 31,737,730 31,849,316 31,056,161
-------------- ------------- -------------
-------------- ------------- -------------
LIABILITIES AND RETAINED EARNINGS
Deposits........................................................... $ 27,780,306 27,737,204 27,348,162
Advances from Federal Home Loan Bank............................... 841,870 1,191,577 954,788
Advances by borrowers for taxes, insurance and other............... 135,445 39,076 21,614
Accrued expenses................................................... 136,441 114,747 108,049
Accrued federal income tax......................................... 8,063 -- --
Deferred federal income tax........................................ 63,500 60,600 42,800
-------------- ------------- -------------
28,965,625 29,143,204 28,475,413
Retained earnings, substantially restricted........................ 2,772,105 2,706,112 2,580,748
-------------- ------------- -------------
$ 31,737,730 31,849,316 31,056,161
-------------- ------------- -------------
-------------- ------------- -------------
See accompanying notes to financial statements.
F-3
FOUNDATION SAVINGS BANK
STATEMENTS OF INCOME
THREE YEARS ENDED JUNE 30, 1995 AND THE NINE MONTHS
ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
NINE MONTHS ENDED
MARCH 31, JUNE 30,
--------------------- -------------------------------
1996 1995 1995 1994 1993
---------- --------- --------- --------- ---------
(UNAUDITED)
Interest income:
Loans............................................... $1,358,303 1,225,328 1,655,223 1,594,174 1,882,392
Mortgage-backed securities.......................... 233,510 242,173 320,376 286,084 231,785
Investment securities............................... 51,505 50,415 69,104 27,620 12,951
Interest-bearing deposits........................... 139,921 75,150 117,309 160,799 169,711
---------- --------- --------- --------- ---------
Total interest income............................. 1,783,239 1,593,066 2,162,012 2,068,677 2,296,839
---------- --------- --------- --------- ---------
Interest expense:
Deposits............................................ 1,167,132 946,303 1,308,686 1,297,024 1,499,192
Borrowings.......................................... 39,490 41,717 59,265 41,966 --
---------- --------- --------- --------- ---------
Total interest expense............................ 1,206,622 988,020 1,367,951 1,338,990 1,499,192
---------- --------- --------- --------- ---------
Net interest income................................... 576,617 605,046 794,061 729,687 797,647
Provision for loan losses............................. 34,000 9,000 12,000 32,600 82,600
---------- --------- --------- --------- ---------
Net interest income after provision for loan
losses........................................... 542,617 596,046 782,061 697,087 715,047
---------- --------- --------- --------- ---------
Other income:
Gain on sale of investment securities............... -- -- -- 132,431 61,291
Gain on sale of loans............................... 7,484 2,702 12,179 -- --
Net investment property income...................... 36,736 37,773 50,446 64,926 64,271
Gain on sale of equipment........................... -- -- -- 1,164 --
Other operating income.............................. 7,776 6,625 7,051 5,395 10,725
---------- --------- --------- --------- ---------
Total other income................................ 51,996 47,100 69,676 203,916 136,287
---------- --------- --------- --------- ---------
General, administration and other expense:
Employee compensation and benefits.................. 260,076 273,558 364,607 292,230 306,457
Occupancy and equipment............................. 58,431 57,614 76,604 77,488 84,122
Deposit insurance................................... 46,284 46,752 61,911 65,527 60,197
Franchise tax....................................... 25,204 23,798 31,916 31,372 29,134
Computer processing costs........................... 23,439 24,016 32,268 29,387 27,678
Other operating expense............................. 83,059 82,780 111,267 131,386 132,057
---------- --------- --------- --------- ---------
Total general, administration and other operating
expense.......................................... 496,493 508,518 678,573 627,390 639,645
---------- --------- --------- --------- ---------
Income before income taxes........................ 98,120 134,628 173,164 273,613 211,689
---------- --------- --------- --------- ---------
Federal income taxes (credits):
Current............................................. 29,227 31,381 30,000 62,263 93,176
Deferred............................................ 2,900 11,700 17,800 16,100 (8,000)
---------- --------- --------- --------- ---------
32,127 43,081 47,800 78,363 85,176
---------- --------- --------- --------- ---------
Net income........................................ $ 65,993 91,547 125,364 195,250 126,513
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
See accompanying notes to financial statements.
F-4
FOUNDATION SAVINGS BANK
STATEMENTS OF RETAINED EARNINGS
THREE YEARS ENDED JUNE 30, 1995 AND THE
NINE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
Balance at June 30, 1992........................................................ $2,258,985
Net income for the year ended June 30, 1993................................... 126,513
----------
Balance at June 30, 1993........................................................ 2,385,498
Net income for the year ended June 30, 1994................................... 195,250
----------
Balance at June 30, 1994........................................................ 2,580,748
Net income for the year ended June 30, 1995................................... 125,364
----------
Balance at June 30, 1995........................................................ 2,706,112
Net income for the nine months ended March 31, 1996 (unaudited)............. 65,993
----------
Balance at March 31, 1996 (unaudited)........................................... $2,772,105
----------
----------
See accompanying notes to financial statements.
F-5
FOUNDATION SAVINGS BANK
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JUNE 30, 1995 AND THE NINE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED)
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operating activities:
Interest received................................ $1,774,495 1,584,429 2,145,841 2,065,169 2,267,264
Interest paid.................................... (1,204,903) (987,254) (1,365,659) (1,339,074) (1,500,248)
Cash paid to suppliers and employees............. (400,755) (465,902) (679,261) (648,076) (585,822)
Fees and commissions received.................... 27,298 30,195 7,051 6,332 19,211
Income taxes paid................................ 10,763 (23,527) (39,527) (67,463) (187,877)
Rental income received........................... 51,300 51,300 68,400 83,000 84,000
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities...... 258,198 189,241 136,845 99,888 96,528
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of mortgage-backed securities........... 82,714 -- -- (3,143,631) (3,048,520)
Repayments of mortgage-backed securities......... 471,651 728,932 1,029,624 1,798,427 887,113
Purchase of certificates of deposit.............. -- -- -- -- (400,000)
Maturities of certificates of deposit............ -- 1,300,000 1,400,000 -- --
Purchase of investment securities................ -- -- -- (1,050,000) --
Proceeds from sale of investment securities...... -- -- -- 143,272 66,712
Maturities of investment securities.............. 650,000 -- -- -- --
Loan disbursements............................... (6,319,728) (4,168,225) (5,637,576) (2,961,358) (6,377,791)
Loan principal repayments........................ 4,337,090 2,103,282 3,354,330 3,700,533 8,867,546
Proceeds from sale of loans...................... 1,123,109 184,202 576,584 -- --
Proceeds from sale of Federal Home Loan Bank
stock........................................... -- -- -- -- 2,900
Purchase of property and equipment............... (2,986) (3,869) (4,249) (5,526) (8,698)
Investment in foreclosed real estate............. -- -- -- -- (1,705)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities.................................... 341,850 144,322 718,713 (1,518,283) (12,443)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits.............. 43,102 (1,571,482) 389,042 (1,713,715) 1,444,933
Proceeds from Federal Home Loan Bank advances.... -- 300,000 300,000 1,000,000 --
Repayment of Federal Home Loan Bank advances..... (349,707) (47,086) (63,211) (45,212) --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... (306,605) (1,318,568) 625,831 (758,927) 1,444,933
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... 293,443 (985,005) 1,481,389 (2,177,322) 1,529,018
Cash and cash equivalents at beginning of period... 3,942,980 2,461,591 2,461,591 4,638,913 3,109,895
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period......... $4,236,423 1,476,586 3,942,980 2,461,591 4,638,913
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements.
F-6
FOUNDATION SAVINGS BANK
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JUNE 30, 1995 AND THE
NINE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
Net income................................................ $ 65,993 91,547 125,364 195,250 126,513
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of loans................................. (7,484) (2,702) (12,179) -- --
Gain on sale of investment securities................. -- -- -- (132,431) (61,291)
Depreciation and amortization......................... 9,342 11,797 15,778 16,497 22,960
Amortization of premiums and discounts on mortgage-
backed securities.................................... 20,883 21,194 30,721 55,881 24,574
Federal Home Loan Bank stock dividends................ (13,700) (15,000) (22,600) (11,300) (9,900)
Provision for loan losses............................. 34,000 9,000 12,000 32,600 82,600
Amortization of deferred loan fees.................... (11,388) (8,726) (9,567) (17,118) (27,438)
Increase in deferred loan fees........................ (4,050) 7,061 -- 937 7,804
Deferred federal income tax........................... -- -- 17,800 16,100 (8,000)
Effects of change in operating assets and liabilities:
Accrued interest receivable......................... (2,475) (3,618) (14,725) (30,971) (8,868)
Refundable federal income tax....................... 31,927 19,554 (9,527) (5,200) (17,200)
Prepaid expenses and other assets................... 6,124 (12,542) (20,380) 1,067 (16,072)
Advances by borrowers for taxes, insurance and
other.............................................. 96,369 71,651 17,462 (10,783) 4,941
Accrued expenses.................................... 21,694 25 6,698 (10,641) 53,405
Accrued federal income tax.......................... 10,963 -- -- -- (77,500)
--------- --------- --------- --------- ---------
Net cash provided by operating activities......... $ 258,198 189,241 136,845 99,888 96,528
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
The Savings Bank compensated the widow of the former managing officer with a
car with a net book value of $10,135 in 1994.
The Savings Bank sold foreclosed real estate and financed the transaction
with loans receivable totaling $67,900 in 1993.
See accompanying notes to financial statements.
F-7
FOUNDATION SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1995 AND THE NINE MONTHS
ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
ORGANIZATION
The Savings Bank is a state chartered savings and loan association and a
member of the Federal Home Loan Bank System and subject to regulation by the
Office of Thrift Supervision (OTS), an office of the U. S. Government Department
of the Treasury. As a member of this system, the Savings Bank maintains a
required investment in capital stock of the Federal Home Loan Bank of
Cincinnati.
Savings accounts are insured by the Savings Association Insurance Fund
(SAIF), administered by the Federal Deposit Insurance Corporation (FDIC), within
certain limitations. An annual premium is required by the SAIF for the insurance
of such savings accounts.
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements at March 31, 1996 and for the nine months
ended March 31, 1996 and 1995, reflect all adjustments, consisting solely of
normal recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the financial position, results of operations and
cash flows for such periods. The financial position at March 31, 1996 and
results of operations for the nine months then ended are not necessarily
indicative of the financial position that may be expected at June 30, 1996, or
the results of operations that may be expected for the year ended June 30, 1996.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, the Savings Bank considers all
highly liquid debt instruments with original maturity when purchased of three
months or less to be cash equivalents.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". This standard addresses the accounting and
reporting for securities based on management's intent and ability to hold such
securities to maturity. The Savings Bank adopted this standard on July 1, 1994.
Statement No. 115 requires the classification of investments in debt and equity
securities into three categories; held to maturity, trading, and available for
sale. Debt securities that the Savings Bank has the positive intent and ability
to hold to maturity are classified as held to maturity securities and reported
at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near-term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings. The Savings Bank has no trading securities. Debt and
equity securities not classified as either held to maturity securities or
trading securities are classified as available for sale securities and reported
at fair value, with unrealized gains or losses excluded from earnings and
reported as a separate component of stockholders' equity, net of deferred taxes.
At the date of implementation of Statement No. 115, the Savings Bank had not
identified any investment or mortgage-backed securities as available for sale.
Premiums and discounts on investment securities and mortgage-backed
securities are amortized and accreted using the interest method over the
expected lives of the related securities.
The Savings Bank presently holds all investment securities as held to
maturity carried at amortized cost.
F-8
LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees and costs, the allowance for loan
losses, and premiums and discounts on loans purchased. Premiums and discounts on
loans purchased are amortized and accreted to operations using the interest
method over the estimated life of the underlying loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan over the
contractual life of the loan.
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.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees and costs
are aggregated with the principal balances of the related loans. At March 31,
1996 and June 30, 1995 and 1994, the Savings Bank had not identified any loans
held for sale.
The Savings Bank will either sell the related servicing on loans or retain
the servicing on loans sold and agree to remit to the investor loan principal
and interest at agreed-upon rates. For loans where servicing is retained by the
Savings Bank, these rates can differ from the loan's contractual interest rate
resulting in a "yield differential". In addition to previously deferred loan
origination fees and cash gains, gains on sale of loans can represent the
present value of the future yield differential less a normal servicing fee,
capitalized over the estimated life of the loans sold. Normal servicing fees are
determined by reference to the stipulated minimum servicing fee set forth by the
government agencies to whom the loans are sold. Such servicing fees are
representative of the Savings Bank's normal servicing costs.
The resulting capitalized excess servicing fee is amortized to operations
over the life of the loans using the interest method. If prepayments are higher
than expected, an immediate charge to operations is made. if prepayments are
lower, then the related adjustments are made prospectively.
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level of
delinquent and problem loans, 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 the primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Savings Bank
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). The amount of actual
write-offs could differ from the estimate. Because of uncertainties inherent in
the estimation process, management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan". This standard amends Statement No. 5 to clarify that a creditor
should evaluate the collectibility of both contractual interest and contractual
principal on all loans when assessing the need for a loss accrual. In October,
1994, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan
- -- Income Recognition and Disclosure", which amends Statement No. 114 to allow a
creditor to use existing methods for recognizing interest income on impaired
loans. The statements were effective for the fiscal year beginning July 1, 1995.
The Savings Bank adopted the statement effective July 1, 1995, without material
effect on financial condition or results of operations.
F-9
For impairment recognized in accordance with SFAS No. 114, as amended, the
entire change in present value of expected cash flows is reported as bad debt
expense in the same manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be reported.
Interest on impaired loans is reported on the cash basis. Impaired loans are
loans that are considered to be permanently impaired in relation to principal or
interest based on the original contract. Impaired loans would be charged off in
the same manner as all loans subject to charge off. The Savings Bank considers
its investment in one to four family and multi-family residential loans,
non-residential loans and consumer loans to be homogeneous and therefore
excluded from separate identification for evaluation of impairment. For the nine
months ended March 31, 1996, the Savings Bank had no loans that were impaired as
described in the pronouncement and therefore no interest income was recognized
or received on impaired loans.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure results when property
collateralizing a loan is foreclosed upon or otherwise acquired by the
Association in satisfaction of the loan. Real estate acquired in settlement of
loans is recorded at the lower of the recorded investment in the loan satisfied
or the fair value of the assets received at the time of acquisition less
estimated costs to sell at the date of foreclosure. The fair value of the assets
received is based upon a current appraisal adjusted for estimated carrying and
selling costs. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment is provided by the straight-line method over the estimated useful
lives of the related classes of assets.
INCOME TAXES
Effective July 1, 1993, the Savings Bank adopted Financial Accounting
Standards Board Statement No. 109 (FAS 109), "Accounting for Income Taxes". The
adoption of FAS 109 changed the method of accounting for income taxes from the
deferred method to an asset and liability approach which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities. The impact of adopting this standard had no
material effect on the financial statements.
Under FAS 109, deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
ACCOUNTING ESTIMATES
The presentation 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosures About
Fair Value of Financial Statements", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of condition, for which it is practicable to estimate that value.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The Savings Bank will be required
to adopt Statement No. 107 for the year ending June 30, 1996.
F-10
In October, 1994, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments". This statement
requires disclosures about the amounts, nature and terms of derivative financial
instruments that are not subject to Statement No. 105, "Disclosures of
Information about Financial Instruments and Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", because they do not result in
off-balance-sheet risk of accounting loss.
It requires that a distinction be made between financial instruments held or
issued for trading purposes (including dealing and other trading activities
measured at fair value with gains and losses recognized in earnings) and
financial instruments held or issued for purposes other than trading. Statement
No. 119 is effective for financial statements issued for fiscal years ending
after December 15, 1995. Management does not expect an impact from the adoption
of this standard.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights". This statement requires that a mortgage banking enterprise recognize as
separate assets rights to service mortgage loans for others however those
servicing rights are acquired. A mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with servicing rights retained would
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans based on their relative fair value. Statement No. 122 is effective
for fiscal years beginning after December 31, 1995. Management has not evaluated
the impact of this pronouncement.
2. INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities are as follows:
MARCH 31, 1996
----------------------------------------------------
(UNAUDITED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Obligations of U.S. Government agencies............ $ 400,000 -- 6,662 393,338
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
JUNE 30, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Obligations of U.S. Government agencies............ $ 1,050,000 -- 15,189 1,034,812
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
JUNE 30, 1994
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Obligations of U.S. Government agencies............ $ 1,050,000 -- 45,812 1,004,188
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
F-11
The amortized cost and fair value of investment securities at June 30, 1995
and 1994 by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
JUNE 30, 1995
--------------------------
AMORTIZED
COST FAIR VALUE
------------ ------------
Due or callable in one year or less............................... $ 900,000 890,624
Due after one year through five years............................. 150,000 144,188
------------ ------------
$ 1,050,000 1,034,812
------------ ------------
------------ ------------
JUNE 30, 1994
--------------------------
AMORTIZED
COST FAIR VALUE
------------ ------------
Due or callable in one year or less............................... $ 900,000 855,688
Due after one year through five years............................. 150,000 148,500
------------ ------------
$ 1,050,000 1,004,188
------------ ------------
------------ ------------
The above investment securities as of March 31, 1996 are all due or callable
in one year or less.
3. MORTGAGE-BACKED SECURITIES:
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value of mortgage-backed securities are as follows:
MARCH 31, 1996
----------------------------------------------------
(UNAUDITED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Federal Home Loan Mortgage Corp.................... $ 2,305,249 434 55,672 2,250,011
Federal National Mortgage Association.............. 2,431,224 959 71,648 2,360,535
Government National Mortgage Association........... 220,678 277 -- 220,955
------------ ----- ----------- ------------
$ 4,957,151 1,670 127,320 4,831,501
------------ ----- ----------- ------------
------------ ----- ----------- ------------
JUNE 30, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Federal Home Loan Mortgage Corp.................... $ 2,641,753 -- 59,504 2,582,249
Federal National Mortgage Association.............. 2,658,239 -- 59,770 2,598,469
Government National Mortgage Association........... 232,407 -- 3,725 228,682
------------ ----------- ----------- ------------
$ 5,532,399 -- 122,999 5,409,400
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
JUNE 30, 1994
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
Federal Home Loan Mortgage Corp.................... $ 3,272,681 -- 65,808 3,206,873
Federal National Mortgage Association.............. 3,079,018 -- 70,410 3,008,608
Government National Mortgage Association........... 241,045 -- 12,718 228,327
------------ ----------- ----------- ------------
$ 6,592,744 -- 148,936 6,443,808
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
The maturity of the mortgage-backed securities is based on the repayment of
the underlying mortgages.
F-12
4. LOANS RECEIVABLE:
Loans receivable consists of the following:
JUNE 30
--------------------------
1995 1994
MARCH 31, 1996 ------------ ------------
--------------
(UNAUDITED)
Residential one to four family real estate........................... $ 18,989,394 18,299,896 16,713,603
Multi-family residential real estate................................. 797,771 636,068 688,065
Commercial real estate............................................... 1,302,591 1,124,131 882,603
Property improvement................................................. -- -- 14,175
Consumer............................................................. 353,098 500,643 565,873
Passbook............................................................. 57,814 111,282 66,229
-------------- ------------ ------------
21,500,668 20,672,020 18,930,548
Less:
Loans in process................................................... (5,000) (15,000) --
Allowance for loan losses.......................................... (103,773) (98,138) (72,107)
Deferred loan fees................................................. (32,903) (48,341) (57,908)
Unearned discounts................................................. -- -- (6,400)
-------------- ------------ ------------
$ 21,358,992 20,510,541 18,794,133
-------------- ------------ ------------
-------------- ------------ ------------
At March 31, 1996 (unaudited) and June 30, 1995, adjustable rate loans
approximated $9,456,000 and $10,862,000.
Activity in the allowance for loan losses are as follows:
NINE MONTHS ENDED
MARCH 31,
----------------------
YEAR ENDED JUNE 30,
(UNAUDITED) ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Beginning balance.................................... $ 98,138 72,107 72,107 100,725 14,625
Provision for loan losses............................ 34,000 9,000 12,000 32,600 82,600
Write-offs net of recoveries......................... (28,365) 16,476 14,031 (61,218) 3,500
---------- ---------- ---------- ---------- ----------
Ending balance....................................... $ 103,773 97,583 98,138 72,107 100,725
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Gross proceeds on sales of loans were $1,123,109, $184,202 and $576,584 for
the nine months ended March 31, 1996 and 1995 (unaudited) and the year ended
June 30, 1995, respectively. Gross realized gains on sales of loans were $7,484,
$2,702 and $12,179 for the nine months ended March 31, 1996 and 1995 (unaudited)
and the year ended June 30, 1995. Loans serviced for others as of March 31, 1996
and 1995 (unaudited), June 30, 1995, 1994 and 1993 were $251,902, $-0-,
$198,076, $-0-, and $-0-, respectively.
The Savings Bank grants first mortgages and other loans to customers located
primarily in the Metropolitan Cincinnati area. As such, a substantial portion of
its debtors' ability to honor their contracts is dependent upon the health of
the local economy and market.
At March 31, 1996 (unaudited) and June 30, 1995 and 1994, the Savings Bank
had non-accrual loans of $-0-, $-0-, and $92,965, respectively.
F-13
Loans to officers, directors and employees totalled approximately $94,896
and $100,142 at March 31, 1996 and 1995 (unaudited), respectively and $98,866
and $104,031 at June 30, 1995 and 1994, respectively. An analysis of loan
activity to such persons for the fiscal year ended June 30, 1995 and the nine
months ended March 31, 1996 (unaudited) is as follows:
NINE MONTHS
ENDED YEAR ENDED
MARCH 31, JUNE 30,
1996 1995
------------- -----------
(UNAUDITED)
Outstanding balance, beginning...................................... $ 98,866 104,031
New loans issued.................................................... -- --
Repayments.......................................................... 3,970 5,165
------------- -----------
Outstanding balance, ending......................................... $ 94,896 98,866
------------- -----------
------------- -----------
5. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
MARCH 31,
1996 1995 1994
----------- --------- ---------
(UNAUDITED)
Real estate owned -- investment property....................... $ 251,847 251,847 251,847
Furniture and equipment........................................ 153,264 154,913 150,665
Leasehold improvements......................................... 34,246 34,246 34,246
----------- --------- ---------
439,357 441,006 436,758
Less accumulated depreciation.................................. 121,940 117,233 101,456
----------- --------- ---------
$ 317,417 323,773 335,302
----------- --------- ---------
----------- --------- ---------
The Savings Bank leases its office facility under a ten year non-cancelable
lease which expires in March of 2001 with additional renewal options. Rent
expense was $40,017 and $40,017 for the nine months ended March 31, 1996 and
1995 (unaudited), respectively. Rent expense for the years ended June 30, 1995,
1994 and 1993 was $53,355, $53,355 and $53,305, respectively.
Minimum commitments under the term of the lease are as follows:
YEAR ENDED YEAR ENDED
MARCH 31, JUNE 30,
----------- -----------
(UNAUDITED)
1997...................... $ 51,628 1996 50,456
1998...................... 51,628 1997 51,628
1999...................... 51,628 1998 51,628
2000...................... 51,628 1999 51,628
Subsequent years.......... 51,628 Subsequent years.......... 90,350
----------- -----------
$ 258,140 295,690
----------- -----------
----------- -----------
6. INVESTMENT PROPERTY:
The Savings Bank acquired real estate at the southeast corner of Eighth and
Vine Streets in 1980. The Savings Bank has a lease agreement on the property as
a parking lot under a three year lease beginning July 1, 1994. The lease
payments will be $5,700 per month for the first two years and $6,100 per month
for the third year. Rent income for the nine months ended March 31, 1996 and
1995 (unaudited) was $51,300 and $51,300, respectively. Rent income for the
years ended June 30, 1995 and 1994 was $68,400 and $83,000 respectively.
F-14
7. DEPOSITS:
Deposits consist of the following:
JUNE 30
MARCH 31, 1996 ----------------------------------------------------
-------------------------
1995 1994
(UNAUDITED) ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------------- ---------- ------------- ---------- ------------- ----------
Passbook................................... 2.52% $1,085,461 2.87% $1,287,943 2.84% $1,834,533
NOW and money market accounts.............. 2.55 1,961,727 2.66 2,507,150 2.79 3,306,537
---------- ---------- ----------
2.54 3,047,188 2.77 3,795,093 2.81 5,141,070
---------- ---------- ----------
Certificates of deposit:
3 months................................. 4.29 368,147 4.42 203,356 3.38 483,701
6 months................................. 5.40 1,520,044 5.79 1,192,710 3.32 1,422,754
10/11 months............................. 2.65 44,047 6.31 4,900,236 -- --
12 months................................ 5.83 10,544,843 5.71 4,454,225 4.25 3,997,547
18 months................................ 6.41 5,639,480 6.19 8,514,317 5.17 11,403,901
2 years................................. 6.11 4,599,236 5.62 3,065,798 4.64 2,539,935
3 years................................. 5.84 830,643 5.53 556,922 5.35 505,082
4 years................................. 5.37 207,131 5.24 127,306 6.80 284,029
5 years................................. 5.79 979,547 6.56 927,241 6.55 1,570,143
---------- ---------- ----------
5.96 24,733,118 6.01 23,942,111 4.91 22,207,092
---------- ---------- ----------
5.58% $27,780,306 5.57% $27,737,204 4.52% $27,348,162
---------- ---------- ----------
---------- ---------- ----------
Maturities of outstanding certificates of deposit are summarized as follows:
JUNE 30,
--------------------
1995 1994
--------- ---------
MARCH 31,
1996
-----------
(UNAUDITED) (IN THOUSANDS)
One year or less................................................................ $ 18,756 15,647 15,634
1 - 2 years..................................................................... 4,591 7,445 5,363
2 - 3 years..................................................................... 807 549 276
Over 3 years.................................................................... 579 301 934
----------- --------- ---------
$ 24,733 23,942 22,207
----------- --------- ---------
----------- --------- ---------
Interest expense on deposits is summarized as follows:
NINE MONTHS ENDED MARCH
31, JUNE 30,
----------------------- ----------------------------------
1996 1995 1995 1994 1993
------------ --------- ---------- ---------- ----------
(UNAUDITED)
Passbook.......................................... $ 25,379 35,326 45,278 66,769 144,852
NOW and money market accounts..................... 41,711 60,477 79,124 98,787 96,553
Certificates of deposit........................... 1,100,042 850,500 1,184,284 1,131,468 1,257,787
------------ --------- ---------- ---------- ----------
$ 1,167,132 946,303 1,308,686 1,297,024 1,499,192
------------ --------- ---------- ---------- ----------
------------ --------- ---------- ---------- ----------
The aggregate amount of certificates of deposits in denominations of
$100,000 or more was $2,581,410 and $3,088,352 at March 31, 1996 (unaudited) and
June 30, 1995, respectively. Deposit accounts exceeding $100,000 are not
federally insured.
8. ADVANCES FROM FEDERAL HOME LOAN BANK:
The Savings Bank borrowed $1,000,000 in 1994 from the Federal Home Loan Bank
under a mortgage matched advance program. Interest is charged on the advance at
a weighted average rate of 5.50% and is due in 120 to 180 monthly installments
of $9,517 including interest. The Savings Bank borrowed an additional $300,000
in 1995. The note is an interest only bearing an interest rate of 6.85%. The
note matured September 1, 1995.
F-15
Future maturities on the advance are as follows:
YEAR ENDED MARCH 31,
- --------------------------------
(UNAUDITED) YEAR ENDED JUNE 30,
--------------------------------
1997............................ $ 69,496 1996............................ $ 366,730
1998............................ 73,366 1997............................ 70,445
1999............................ 77,450 1998............................ 74,366
2000............................ 81,764 1999............................ 78,506
2001............................ 86,316 2000............................ 82,878
2002 and subsequent............. 453,478 2001 and subsequent............. 518,652
----------- ------------
$ 841,870 $ 1,191,577
----------- ------------
----------- ------------
The advances are collateralized by a blanket agreement on residential
mortgage loans held by the Savings Bank. The Savings Bank has also pledged its
Federal Home Loan Bank stock and mortgage notes with unpaid principal balances
of approximately $1,275,000 for future advances.
9. CAPITAL REQUIREMENTS:
The Savings Bank is subject to minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). The 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 stockholders' equity 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. 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 Savings Bank multiplies the value of each
asset on its statement of financial condition by a defined risk-weighing factor,
e.g., one-to-four family residential loans carry a risk-weighted factor of 50%.
F-16
The Savings Bank's regulatory capital exceed all minimum capital
requirements as shown in the following table:
MARCH 31, 1996
----------------------------------------------
REGULATORY CAPITAL
RISK-
TANGIBLE CORE BASED
CAPITAL % CAPITAL % CAPITAL %
-------- ---- -------- ---- -------- ----
(IN THOUSANDS)
(UNAUDITED)
Capital under generally accepted accounting principles...... $ 2,772 $ 2,772 $ 2,772
General valuation allowances................................ -- -- 96
-------- -------- --------
Regulatory capital computed................................. 2,772 8.7 2,772 8.7 2,868 19.6
Minimum capital requirements................................ 476 1.5 952 3.0 1,171 8.0
-------- -------- --------
Regulatory capital-excess................................... $ 2,296 7.2 $ 1,820 5.7 $ 1,697 11.6
-------- -------- --------
-------- -------- --------
JUNE 30, 1995
----------------------------------------------
REGULATORY CAPITAL
RISK-
TANGIBLE CORE BASED
CAPITAL % CAPITAL % CAPITAL %
-------- ---- -------- ---- -------- ----
(IN THOUSANDS)
Capital under generally accepted accounting principles...... $ 2,706 $ 2,706 $ 2,706
General valuation allowances................................ -- -- 70
-------- -------- --------
Regulatory capital computed................................. 2,706 8.5 2,706 8.5 2,776 19.3
Minimum capital requirements................................ 478 1.5 955 3.0 1,153 8.0
-------- -------- --------
Regulatory capital-excess................................... $ 2,228 7.0 $ 1,751 5.5 $ 1,623 11.3
-------- -------- --------
-------- -------- --------
10. COMMITMENTS:
March 31, 1996, the Savings Bank had commitments to originate loans totaling
$726,005 (unaudited). The entire amount was for fixed rate residential loans. No
portion of these loans were disbursed prior to March 31, 1996, and the financial
statements do not reflect any liability for such commitments. Management
anticipates that all originations will be funded from existing liquidity and
normal monthly cash flows. Loan commitments as of June 30, 1995 and 1994 were
$411,000 and $628,000, respectively.
11. RETIREMENT PLAN:
The Savings Bank has a 401(K) Salary Savings Plan with the Ohio Savings and
Loan League. During the nine months ended March 31, 1996 and 1995 (unaudited)
and the years ended June 30, 1995, 1994, and 1993, respectively, retirement
expense amounted to $5,053, $9,074, $10,585, $10,167 and $10,952. The plan
covers all employees having completed one year of service and having attained
the age of twenty-one. The employee can contribute up to six percent with the
employer matching contribution of three percent and a discretionary three
percent employer matching contribution.
12. FEDERAL INCOME TAXES:
The Savings Bank has qualified under provisions of the Internal Revenue Code
which permits the Savings Bank to deduct from taxable income an allowance for
bad debts based on a percentage of taxable income before such deduction. The Tax
Reform Act of 1969 gradually reduced this reduction to 40% for years beginning
in 1979. The Tax Reform Act of 1986 reduced this deduction to 8% beginning in
1988.
Appropriated and unappropriated retained income at June 30, 1995 included
earnings of approximately $641,000, representing such bad debt deductions for
which no provision for federal income taxes has been made. In the future, if the
Savings Bank does not meet the federal income tax requirements necessary to
permit it to deduct an allowance for bad debts, the Savings Bank will be subject
to federal income tax at the then current corporate rate. Management does not
contemplate any action which would cause such cumulative bad debt deduction to
be subject to federal income taxes, although it is possible that changes in
legislation could, at a future date require recapture of all or part of this bad
debt deduction.
F-17
An analysis of income tax expense, setting forth the reasons for the
variations from the statutory rate is as follows:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Federal income taxes at the statutory rate of 34%..... $ 33,361 45,774 58,876 93,028 71,974
Bad debt deduction.................................... -- -- -- (13,300) 22,000
Other, primarily surtax exemptions.................... (1,234) (2,693) (11,076) (1,365) (8,798)
---------- ---------- ---------- ---------- ----------
$ 32,127 43,081 47,800 78,363 85,176
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
32.7% 32.0% 27.6% 28.6% 40.2%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
JUNE 30
------------------
1995 1994
MARCH 31, -------- --------
1996
------------
(UNAUDITED)
Deferred tax assets arising from:
Loan loss reserve......................................... $ 23,700 15,000 13,300
Deferred loan fees and costs.............................. 11,200 15,500 19,700
Basis of investments...................................... 2,000 2,000 2,000
------------ -------- --------
Total deferred tax assets............................... 36,900 32,500 35,000
------------ -------- --------
Deferred tax liabilities arising from:
Accrual to cash conversion................................ 33,600 30,300 19,500
Depreciation.............................................. 20,100 20,800 21,700
FHLB stock................................................ 46,700 42,000 36,600
------------ -------- --------
Total deferred tax liabilities.......................... (100,400 ) (93,100) (77,800)
------------ -------- --------
Net deferred tax liability.................................. $ 63,500 60,600 42,800
------------ -------- --------
------------ -------- --------
The Savings Bank has not recorded a valuation allowance, as the deferred tax
assets are presently considered to be realizable based on the level of
anticipated future taxable income. Net deferred tax liabilities and federal
income tax expense in future years can be significantly affected by changes in
enacted tax rates.
The components of deferred income tax expense (credit) are as follows:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Loan origination fees................................. $ 4,200 600 4,200 5,500 6,300
FHLB stock dividend................................... 4,700 5,100 5,400 3,900 3,000
Depreciation.......................................... (700) (700) (900) 200 2,000
Accrual to cash conversion............................ 3,500 6,300 10,800 19,800 (10,300)
Bad debt reserves and other........................... (8,800) 400 (1,700) (13,300) (9,000)
---------- ---------- ---------- ---------- ----------
$ 2,900 11,700 17,800 16,100 (8,000)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
13. CONTINGENCY -- SAIF RECAPITALIZATION:
The deposits of savings associations such as the Savings Bank are presently
insured by the SAIF, which together with the BIF, are the two insurance funds
administered by the FDIC. On November 14, 1995, the FDIC revised the premium
schedule for BIF-insured banks to provide a range of .00% to .27% (subject to a
F-18
$2,000 minimum) of deposits (as compared to the current range of .23% to .31% of
deposits for SAIF-insured institutions) due to the BIF achieving its statutory
reserve ratio. As a result, BIF members generally pay substantially lower
premiums than the SAIF members. It is anticipated that the SAIF will not be
adequately recapitalized until 2002, absent a substantial increase in premium
rates or the imposition of special assessments or other significant
developments, such as a merger of the SAIF and the BIF. As a result of this
disparity, SAIF members have been placed at a significant, competitive
disadvantage to BIF members due to higher costs for deposit insurance. A
recapitalization plan under consideration by the Treasury Department, the FDIC,
the OTS and the Congress reportedly provides for a one-time assessment of .80%
to .85% to be imposed on all deposits assessed at the SAIF rates in order to
recapitalize the SAIF and eliminate the disparity, and an eventual merger of the
SAIF and the BIF.
The Savings Bank currently is unable to predict the likelihood of
legislation effecting these changes, although a consensus appears to be
developing in this regard. If such an assessment was effected based on deposits
as of March 31, 1995, as proposed, the Savings Bank's pro rate share would
amount to approximately $136,100 to $144,600 after taxes, respectively, assuming
a 34% tax rate.
14. PLAN OF CONVERSION:
On May 31, 1996, the Savings Bank's Board of Directors adopted a Plan of
Conversion (the "Plan") to convert the Savings Bank from a state chartered
mutual savings bank to a state chartered stock savings bank, which will then
become a wholly owned subsidiary of a holding company formed in connection with
the Conversion. The holding company will issue common stock to be sold in the
conversion and will use a portion of the net proceeds thereof which it does not
retain to purchase the capital stock of the Savings Bank. The Plan is subject to
approval by the regulatory authorities and the members of the Savings Bank at a
special meeting.
At the time of conversion, the Savings Bank will establish a liquidation
account in an amount equal to its net worth as reflected in its latest balance
sheet used in its final conversion Prospectus. The liquidation account will be
maintained for the benefit of eligible deposit account holders who continue to
maintain their deposit accounts in the Savings Bank after conversion. Only in
the event of a complete liquidation will each deposit account holder be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance for deposit accounts then held
before any liquidation distribution may be made with respect to common stock.
Dividends paid by the Savings Bank subsequent to the conversion cannot be paid
from this liquidation account.
The Savings Bank may not declare or pay a cash dividend on or repurchase any
of its common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by the federal and state regulations.
No conversion costs had been incurred as of March 31, 1996. If the
conversion is ultimately successful, conversion costs will be accounted for as a
reduction of the stock proceeds. If the conversion is unsuccessful, conversion
costs will be charged to the Savings Bank's operations.
F-19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE HOLDING COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITY, OTHER THAN THE
COMMON SHARES 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 DELIVERY OF
THIS PROSPECTUS WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS TO ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUMMARY....................................................... 3
SELECTED FINANCIAL INFORMATION AND OTHER DATA............................ 9
RISK FACTORS............................................................. 10
USE OF PROCEEDS.......................................................... 14
MARKET FOR THE COMMON SHARES............................................. 14
DIVIDEND POLICY.......................................................... 15
REGULATORY CAPITAL COMPLIANCE............................................ 16
CAPITALIZATION........................................................... 17
PRO FORMA DATA........................................................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 22
THE BUSINESS OF THE BANK................................................. 32
MANAGEMENT............................................................... 44
REGULATION............................................................... 49
TAXATION................................................................. 57
THE CONVERSION........................................................... 59
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK.......... 72
DESCRIPTION OF AUTHORIZED SHARES......................................... 76
REGISTRATION REQUIREMENTS................................................ 77
LEGAL MATTERS............................................................ 77
EXPERTS.................................................................. 77
ADDITIONAL INFORMATION................................................... 77
FINANCIAL STATEMENTS..................................................... F-1
UP TO 402,500 COMMON SHARES
FOUNDATION BANCORP, INC.
---------------------
PROSPECTUS
---------------------
CHARLES WEBB & COMPANY
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
* Legal Fees and Expenses........................................................ $ 85,000
* Printing, Postage and Mailing.................................................. $ 25,000
* Appraisal Fees and Expenses.................................................... $ 15,000
* Accounting Fees and Expenses................................................... $ 25,000
* Filing Fees.................................................................... $ 11,000
* Conversion Agent Fees.......................................................... $ 5,000
* Other Expenses................................................................. $ 5,000
** Underwriting Fees and Expenses................................................. $ 80,000
---------
Total estimated expenses..................................................... $ 251,000
---------
---------
- ------------------------
* Estimated.
** The Holding Company and the Bank have retained Charles Webb & Company
("Webb") to consult, advise and assist in the sale of the Common Shares in
the Offering on a "best efforts" basis. Webb will receive a financial
advisory fee in the amount of $50,000. In addition, the Holding Company will
reimburse Webb for certain expenses, including reasonable legal fees, not to
exceed $30,000. If the Holding Company and Webb deem necessary, Webb may
enter into agreements ("Selected Dealers Agreements") with other National
Association of Securities Dealers, Inc., member firms ("Selected Dealers")
for assistance in the sale of Common Shares. Selected Dealers will receive
fees equal to 4% of the aggregate purchase price of Common Shares sold, if
any, pursuant to Selected Dealer Agreements.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) OHIO REVISED CODE
Division (E) of Section 1701.13 of the Ohio Revised Code governs
indemnification by a corporation and provides as follows:
(E)(1) A corporation may indemnify or agree to 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, other than an action by or in the right of the
corporation, by reason of the fact that he 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, trustee, officer, employee, or agent of another
corporation, domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust, or other enterprise, against expenses, including attorney's
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 or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had 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 act in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was or
is a party or is threatened to be made a party, to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he 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, trustee, officer, employee or agent of
another corporation, domestic or foreign, nonprofit or for profit, partnership,
joint venture, trust, or other enterprise, against expenses, including
attorney's fees, actually and
II-1
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is adjudged to
be liable for negligence or misconduct in the performance of his duty to the
corporation unless, and only to the extent that the court of common pleas or
the court in which such action or suit was brought determines upon
application that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses as the court of common pleas or such other
court shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, or agent has
been successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses, including attorney's fees, actually and reasonably incurred by him in
connection with the action, suit, or proceeding.
(4) Any indemnification under divisions (E)(1) and (2) of this section,
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,
trustee, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in divisions (E)(1) and (2)
of this section. Such determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this section is not
obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation or any person
to be indemnified within the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the court in which such action,
suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which action or suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses,
II-2
including attorney's fees, incurred by a director in defending the action, suit,
or proceeding shall be paid by the corporation as they are incurred, in advance
of the final disposition of the action, suit, or proceeding upon receipt of an
undertaking by or on behalf of the director in which he agrees to do both of the
following:
(i) Repay such amount if it is proved by clear and convincing evidence
in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or undertaken with reckless disregard for the best
interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the action,
suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director, trustee,
officer, employee, or agent in defending any action, suit, or proceeding
referred to in divisions (E)(1) and (2) of this section, may be paid by the
corporation as they are incurred, in advance of the final disposition of the
action, suit, or proceeding as authorized by the directors in the specific case
upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is determined
that he is not entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be exclusive
of, and shall be in addition to, any other rights granted to those seeking
indemnification under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, 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,
trustee, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including but not limited to trust funds, letters of credit, or
self-insurance, on behalf of or for 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, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or profit, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and 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 this section. Insurance may be purchased from
or maintained with a person in which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
divisions (E)(1) and (2) of this section does not limit the payment of expenses
as they are incurred, indemnification, insurance, or other protection that may
be provided pursuant to divisions (E)(5), (6), and (7) of this section.
Divisions (E)(1) and (2) of this section do not create any obligation to repay
or return payments made by the corporation pursuant to division (E)(5), (6), or
(7).
(9) As used in this division, references to "corporation" includes all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee, or
agent of such a constituent corporation, or is or was serving at the request of
such constituent corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
he would if he had served the new or surviving corporation in the same capacity.
(b) THE BANK'S AMENDED CONSTITUTION
Article Eight of the Amended Constitution of the Bank provides for
indemnification of officers and directors as follows:
SECTION 1. To the fullest extent permitted by applicable law, this Bank
shall indemnify or agree to 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,
other than an action by or in the right of this Bank, by reason of the fact that
he is or was a director or officer of this Bank, or is or was serving at the
request of this Bank as a director, trustee, officer, employee, or agent of
II-3
another corporation, domestic or foreign, nonprofit or for profit, partnership,
joint venture, trust, or other enterprise, against expenses, including
attorney's 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 or not
opposed to the best interests of this Bank and, with respect to any criminal
action or proceeding, had 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 act in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of this Bank and, with respect to any criminal action or proceeding,
he had reasonable cause to believe that his conduct was unlawful.
SECTION 2. This Bank shall indemnify or agree to indemnify any person who
was or is a party or is threatened to be made a party, to any threatened,
pending or completed action or suit by or in the right of this Bank to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of this Bank or is or was serving at the request of this Bank as a
director, trustee, officer, employee, or agent of another corporation, domestic
or foreign, nonprofit or for profit, partnership, joint venture, trust or other
enterprise, against expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of this Bank, except that no
indemnification shall be made in respect of any of the following:
(A) Any claim, issue or matter as to which such person is adjudged to be
liable for negligence or misconduct in the performance of his duty to this
Bank unless, and only to the extent that, the Court of Common Pleas of
Hamilton County, Ohio, or the court in which such action or suit was brought
determines upon application that, despite the adjudication of liability, but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the Court of Common
Pleas of Hamilton County, Ohio, or such other court shall deem proper;
(B) Any action or suit in which the only liability asserted against a
director is pursuant to 1701.95 of the Ohio Revised Code.
SECTION 3. To the extent that a director or officer has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Sections 1 or 2 of this Article Eight, or in defense of any claim, issue, or
matter therein, he shall be indemnified against expenses, including attorney's
fees, actually and reasonably incurred by him in connection with the action,
suit, or proceeding.
SECTION 4. Any indemnification under Sections 1 or 2 of this Article Eight,
unless ordered by a court, shall be made by this Bank only as authorized in the
specific case upon a determination that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 1 or 2 of this Article Eight. Such
determination shall be made as follows:
(A) By a majority vote of a quorum consisting of directors of this Bank
who were not and are not parties to or threatened with any such action,
suit, or proceeding;
(B) If the quorum described in Subsection (A) of this Section 4 is not
obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for this Bank or any person to be
indemnified within the past five years;
(C) By the shareholders;
(D) By the Court of Common Pleas of Hamilton County, Ohio, or the court
in which such action, suit, or proceeding was brought.
Any determination made by the disinterested directors under Subsection (A)
of this Section 4 or by independent legal counsel under Subsection (B) of this
Section 4 shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of this Bank under Section 2 of this
II-4
Article Eight, and within ten days after receipt of such notification, such
person shall have the right to petition the Court of Common Pleas of Hamilton
County, Ohio, or the court in which such action or suit was brought to review
the reasonableness of such determination.
SECTION 5.
(A) Expenses, including attorney's fees, incurred by a director in defending
the action, suit, or proceeding shall be paid by this Bank as they are incurred,
in advance of the final disposition of the action, suit, or proceeding upon
receipt of an undertaking by or on behalf of the director in which he agrees to
do both of the following:
(i) Repay such amount if it is proved by clear and convincing evidence
in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause
injury to this Bank or undertaken with reckless disregard for the best
interests of this Bank;
(ii) Reasonably cooperate with this Bank concerning the action, suit, or
proceeding.
(B) Expenses, including attorney's fees, incurred by a director, trustee,
officer, employee, or agent in defending any action, suit, or proceeding
referred to in Section 2 of this Article Eight, may be paid by this Bank as they
are incurred, in advance of the final disposition of the action, suit, or
proceeding as authorized by the directors in the specific case upon receipt of
an undertaking by or on behalf of the director, trustee, officer, employee, or
agent to repay such amount, if it ultimately is determined that he is not
entitled to be indemnified by this Bank.
SECTION 6. The indemnification authorized by this Article Eight shall not
be exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the Articles or the Constitution of this Bank or
any agreement, vote of shareholders or disinterested directors, or otherwise,
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 or officer and shall inure to the benefit of the heirs, executors,
and administrators of such a person.
SECTION 7. This Bank may purchase and maintain insurance or furnish similar
protection, including but not limited to trust funds, letters of credit, or
self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of this Bank, or is or was serving at the request of
this Bank as a director, trustee, officer, employee, or agent of another
corporation, domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust, or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not this Bank would have the power to indemnify him against such
liability under this section. Insurance may be purchased from or maintained with
a person in which this Bank has a financial interest.
SECTION 8. The authority of this Bank to indemnify persons pursuant to
Sections 1 or 2 of this Article Eight does not limit the payment of expenses as
they are incurred, indemnification, insurance, or other protection that may be
provided pursuant to Sections 5, 6 and 7 of this Article Eight. Sections 1 and 2
of this Article Eight do not create any obligation to repay or return payments
made by this Bank pursuant to Sections 5, 6 or 7 of this Article Eight.
SECTION 9. As used in this Article Eight, references to this Bank include
all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, shall stand in
the same position under this section with respect to the new or surviving
corporation as he would if he had served the new or surviving corporation in the
same capacity.
SECTION 10. Any action, suit or proceeding to determine a claim for
indemnification under this Article Eight may be maintained by the person
claiming such indemnification, or by the Bank, in the Court of
II-5
Common Pleas of Hamilton County, Ohio. This Bank and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Hamilton County, Ohio, in any
such action, suit or proceeding.
(c) THE HOLDING COMPANY'S CODE OF REGULATIONS
Article Five of the Holding Company's Code of Regulations provides for the
indemnification of officers and directors as follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall indemnify
any officer or director of the corporation 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
(including, without limitation, any action threatened or instituted by or in the
right of the corporation), by reason of the fact that he 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, trustee, officer, employee or agent of
another corporation (domestic or foreign, nonprofit or for profit), partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs), 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 or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, he had no reasonable cause to believe his conduct was unlawful. A
person claiming indemnification under this Section 5.01 shall be presumed, in
respect of any act or omission giving rise to such claim for indemnification, to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal matter, to have had no reasonable cause to believe his conduct was
unlawful, and 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, rebut such presumption.
SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted by or
in the right of the corporation to procure a judgment in its favor by reason
of the fact that he 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, trustee, officer, employee or agent of another corporation
(domestic or foreign, nonprofit or for profit), partnership, joint venture,
trust or other enterprise, in respect of any claim, issue or matter asserted
in such action or suit as to which he shall have been adjudged to be liable
for acting with reckless disregard for the best interests of the corporation
or misconduct (other than negligence) in the performance of his duty to the
corporation unless and only to the extent that the Court of Common Pleas of
Hamilton County, Ohio, or the court in which such action or suit was brought
shall determine upon application that, despite such adjudication of
liability, and in view of all the circumstances of the case, he is fairly
and reasonably entitled to such indemnity as such Court of Common Pleas or
such other court shall deem proper; and
(B) the corporation shall promptly make any such unpaid indemnification
as is determined by a court to be proper as contemplated by this Section
5.02.
SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding, to the extent that an
officer or director of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
SECTION 5.04 DETERMINATION REQUIRED. Any indemnification required under
Section 5.01 and not precluded under Section 5.02 shall be made by the
corporation only upon a determination that such indemnification of the officer
or director is proper in the circumstances because he has met the applicable
standard of
II-6
conduct set forth in Section 5.01. Such determination may be made only (A) by a
majority vote of a quorum consisting of directors of the corporation who were
not and are not parties to, or threatened with, any such action, suit or
proceeding, or (B) if such a quorum is not obtainable or if a majority of a
quorum of disinterested directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm having associated
with it an attorney, who has been retained by or who has performed services for
the corporation, or any person to be indemnified, within the past five years, or
(C) by the shareholders, or (D) by the Court of Common Pleas of Hamilton County,
Ohio, or (if the corporation is a party thereto) the court in which such action,
suit or proceeding was brought, if any; any such determination may be made by a
court under division (D) of this Section 5.04 at any time including, without
limitation, any time before, during or after the time when any such
determination may be requested of, be under consideration by or have been denied
or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04; and no failure for any reason to make any
such determination, and no decision for any reason to deny any such
determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04 shall be evidence in rebuttal of the
presumption recited in Section 5.01. Any determination made by the disinterested
directors under division (A) or by independent legal counsel under division (B)
of this Section 5.04 to make indemnification in respect of any claim, issue or
matter asserted in an action or suit threatened or brought by or in the right of
the corporation shall be promptly communicated to the person who threatened or
brought such action or suit, and within ten (10) days after receipt of such
notification such person shall have the right to petition the Court of Common
Pleas of Hamilton County, Ohio, or the court in which such action or suit was
brought, if any, to review the reasonableness of such determination.
SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs) incurred in defending any action, suit or proceeding referred to in
Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf of the officer or
director promptly as such expenses are incurred by him, but only if such officer
or director shall first agree, in writing, to repay all amounts so paid in
respect of any claim, issue or other matter asserted in such action, suit or
proceeding in defense of which he shall not have been successful on the merits
or otherwise:
(A) if it shall ultimately be determined as provided in Section 5.04
that he is not entitled to be indemnified by the corporation as provided
under Section 5.01; or
(B) if, in respect of any claim, issue or other matter asserted by or in
the right of the corporation in such action or suit, he shall have been
adjudged to be liable for acting with reckless disregard for the best
interests of the corporation or misconduct (other than negligence) in the
performance of his duty to the corporation, unless and only to the extent
that the Court of Common Pleas of Hamilton County, Ohio, or the court in
which such action or suit was brought shall determine upon application that,
despite such adjudication of liability, and in view of all the
circumstances, he is fairly and reasonably entitled to all or part of such
indemnification.
SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification provided by
this Article Five shall not be deemed exclusive of any other rights to which any
person seeking indemnification may be entitled under the Articles or the
Regulations or any agreement, vote of shareholders or disinterested directors,
or otherwise, 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 an officer or director of the corporation and shall inure
to the benefit of the heirs, executors, and administrators of such a person.
SECTION 5.07. 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 is or was serving at the request of the corporation
as a director, trustee, officer, employee, or agent of another corporation
(domestic or foreign, nonprofit or for profit), partnership, joint venture,
trust or other enterprise, against any
II-7
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
obligation or the power to indemnify him against such liability under the
provisions of this Article Five.
SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this Article Five, and
as examples and not by way of limitation:
(A) A person claiming indemnification under this Article 5 shall be
deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 5.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding
shall be terminated as to such person, with or without prejudice, without
the entry of a judgment or order against him, without a conviction of him,
without the imposition of a fine upon him and without his payment or
agreement to pay any amount in settlement thereof (whether or not any such
termination is based upon a judicial or other determination of the lack of
merit of the claims made against him or otherwise results in a vindication
of him); and
(B) References to an "other enterprise" shall include employee benefit
plans; references to a "fine" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving
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; and 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
interests of the corporation" within the meaning of that term as used in
this Article Five.
SECTION 5.09. VENUE. Any action, suit or proceeding to determine a claim
for indemnification under this Article Five may be maintained by the person
claiming such indemnification, or by the corporation, in the Court of Common
Pleas of Hamilton County, Ohio. The corporation and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Hamilton County, Ohio, in any
such action, suit or proceeding.
(c) INDEMNIFICATION AGREEMENTS
(i) AGREEMENT WITH KELLER & COMPANY, INC.
The Bank has agreed to indemnify Keller & Company, Inc. ("Keller"), the firm
retained by the Bank to provide the appraisal of the pro forma market value of
the Bank, as converted, in connection with certain matters related to the
appraisal. The Bank will indemnify Keller, its employees and affiliates, for
certain costs and expenses, including reasonable legal fees, in connection with
claims or litigation relating to the appraisal and arising out of any
misstatement or untrue statement of a material fact in information supplied to
Keller by the Bank or by an intentional omission by the Bank to state a material
fact in the information so provided, except where Keller has been negligent or
at fault.
(ii) AGREEMENT WITH WEBB
The Holding Company and the Bank have agreed to indemnify and hold Webb and
its directors, officers, employees, agents and any controlling person harmless
against any and all loss, liability, claim, damage or expense (including the
fees and disbursements of counsel reasonably incurred) arising out of any untrue
statement, or alleged untrue statement, of a material fact contained in the
Summary Proxy Statement or the Prospectus, any application to regulatory
authorities, any "blue sky" application, or any other related document prepared
or executed by or on behalf of the Bank with its consent in connection with, or
in contemplation of, the transactions contemplated by the Agency Agreement by
and among Webb, the Holding Company and the Bank, or any omission therefrom of a
material fact required to be stated therein, unless such untrue statement or
omission, or alleged untrue statement or omission, was made in reliance upon,
and in conformity with, written information regarding Webb furnished to the Bank
by Webb expressly for use in the Summary Proxy Statement or the Prospectus.
II-8
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Holding Company have been sold by the Holding Company
without registration pursuant to the Act, except as follows:
On April 16, 1996, in connection with the incorporation of the Holding
Company, 100 common shares, without par value, of the Holding Company (the
"Securities") were sold for an aggregate purchase price of $100 pursuant to
Section 4(2) of the Act in a transaction not involving any public offering. The
Securities were sold to Laird L. Lazelle, the President of the Holding Company,
who had access to all material information about the Holding Company. The
Securities were offered without the use of any form of general solicitation or
advertising. No underwriter was involved in the transaction, and no commission,
discount or other remuneration was paid or given in connection with the sale of
the Securities. Under the terms of the Subscription Agreement between the
Holding Company and Mr. Lazelle, the Securities will be repurchased by the
Holding Company for $100 on the effective date of the Conversion.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
*1 Form of Agency Agreement with Charles Webb & Company
2 Plan of Conversion
3.1 Articles of Incorporation of Foundation Bancorp, Inc.
3.2 Code of Regulations of Foundation Bancorp, Inc.
5 Opinion of Vorys, Sater, Seymour and Pease regarding legality of securities being
registered
8 Opinion of Vorys, Sater, Seymour and Pease regarding tax matters
10.1 Foundation Bancorp, Inc. 1997 Stock Option and Incentive Plan (proposed)
10.2 Foundation Savings Bank Recognition and Retention Plan and Trust Agreement (proposed)
*10.3 Foundation Bancorp, Inc. Employee Stock Ownership Plan (proposed)
*10.4 Employment Agreement between Foundation Savings Bank and Laird L. Lazelle (proposed)
10.5 Lease Agreement
23.1 Consent of Clark, Schaefer, Hackett & Co.
23.2 Consent of Keller & Company, Inc.
23.3 Consent of Vorys, Sater, Seymour and Pease
99.1 Summary Proxy Statement
99.2 Stock Order Form and Form of Certification
99.3 Form of Proxy
99.4 Solicitation and Marketing Material
99.5 Appraisal Agreement between Foundation Savings Bank and Keller & Company, Inc.
*99.6 Appraisal Report
- ------------------------
* To be filed supplementally or by amendment
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required information
is not applicable or is included in the financial statements of the Bank or
related notes.
II-9
ITEM 17. UNDERTAKINGS.
(a) The undersigned, Foundation Bancorp, Inc., hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of Foundation Bancorp,
Inc., pursuant to the foregoing provisions or otherwise, Foundation Bancorp,
Inc. 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 Foundation
Bancorp, Inc. of expenses incurred or paid by a director, officer or controlling
person of Foundation Bancorp, Inc. in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Foundation Bancorp, Inc. will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-10
REGISTRATION NO. 33-
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FOUNDATION BANCORP, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOUNDATION BANCORP, INC.
REGISTRATION STATEMENT ON FORM S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
*1 Agency Agreement with Charles Webb & Company
2 Plan of Conversion
3.1 Articles of Incorporation of Foundation Bancorp, Inc.
3.2 Code of Regulations of Foundation Bancorp, Inc.
5 Opinion of Vorys, Sater, Seymour and Pease regarding legality of securities being registered
8 Opinion of Vorys, Sater, Seymour and Pease regarding tax matters
10.1 Foundation Bancorp, Inc. 1997 Stock Option and Incentive Plan (proposed)
10.2 Foundation Savings Bank Recognition and Retention Plan and Trust (proposed)
*10.3 Foundation Bancorp, Inc. Employee Stock Ownership Plan (proposed)
*10.4 Employment Agreement between Foundation Savings Bank and Laird L. Lazelle (proposed)
10.5 Lease Agreement
23.1 Consent of Clark, Schaefer, Hackett & Co.
23.2 Consent of Keller & Company, Inc.
23.3 Consent of Vorys, Sater, Seymour and Pease
99.1 Summary Proxy Statement
99.2 Stock Order Form and Form of Certification
99.3 Form of Proxy
99.4 Solicitation and Marketing Material
99.5 Appraisal Agreement between Foundation Savings Bank and Keller & Company, Inc.
*99.6 Appraisal Report
- ------------------------
* To be filed supplementally or by amendment